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#1 Entropy3.0

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Posted 16 August 2007 - 12:56 AM

I've managed to remain disciplined and not post to message boards for some considerable time, well, at least about the market. I did say in my last post that I would update my forecast

for a bear market to begin sometime in 2007, and that is the reason for this post., that and to mention an interesting price setup. Probably my posting is a great contrarian indicator !



last post - http://www.traders-t...showtopic=58221
"****forecast of 2006 -
===>"Long Term (month-year)- Not expecting a severe bear market this year, possible correction aka 1994....but looking to 2007-2008 for major bear market."
"


Bear market = at least a 20% drop in the Dow and Spx before new highs are possible. I don't say that drop needs to occur all now.



Before I rant and rave about that, I was looking at some studiesat Sentimentrader. They narrowed down the instance of markets which showed similar characteristics to the current decline of -

a. Sharp decline to extreme oversold readings on breadth.volume from a multi year yearly high etc

b. a consolidation



In most cases the market resolved higher, except for 1998, 1987 and bear markets of 1970's.

I don't have daily charts to hand of 1970's tonight, but I do of the 1998 and 1987 instance, and with todays drop through consolidation zone and loss of 200ma, it gives POTENTIAL for tomorrow or fri/mon to be large 'washout' days, or crashettte. There is an amazing similarity with the curent price pattern, interesting if nothing else:- I dare say others have noted similar patterns, but I have not seen this particular setup mentioned, so here it is -





1998

Posted Image



1987

Posted Image



2007

Posted Image





Why do I expect a bear market to begin? I'll list the reason in no particular order of importance.



My expectation was to set it up was for price to - 'look like the move coming out of the 1994 correction, because so much focus was being given (wrongly) to the behaviour of the VIX. That reveals humans unfailing pattern matching behavior of looking for the last 'similar pattern', and extrapolating it. This is what in fractal analysis gives rise to the rule of alternation, where patterns always inverse there last 'obvious' pattern, because, after all, markets never do the obvious especially when most bet on it.



That brings us to now, and the major reasons -

1. Because the downward price pattern from the last high is IMPULSIVE, and now a corrective response from it, followed by a new impulse. This means another large downwave is imminent. By itself that this does not dictate a 'bear market'. however, the market is sitting at bull market support levels. The next move down will break those levels, 1380 being the first key level, and 1350 the death toll if/when breached.



I keep reading the refrain of my avatar regarding the price damage so far, aka 'tis but a scratch', yes indeed, and that is why so many are comfortable right now, the large price damage usually comes in a few days as a bottom is carved out ( as per cahrts above) - when the refrain becomes 'geez look at the price damage'.

The other refrain is 'and look how fearful everyone else is...not me, because i'm smarter than them'.



That brings us to sentiment...



2. Because sentiment supports the price pattern.

Sentiment is at least as difficult to analyse as price patterns. Of course there are measures that can be interpretated as showing 'great fear' - let talk VIX.

It does NOT measure fear as is widely espoused, it measures PRICE VOLATILITY AND fear/greed.. IF you wished to extract a 'fear/greed' measure from it, you would need to first removed the volatiliy portion. Such a measure I have but ironically is completely useless for prediction, such is the perversity of market timing illogic.



The VIX by itself is very predictive, but not because it shows fear or greed, who knows why infact, the only reason 'anything works' ( albeit temporarily in most cases) is by my best guess because a large number of market players key off it, the perversion being that whenever 'too many' key off it it fails with unerring consistencty never found in any indicator, if you catch my meaning.

So contrary to the fear theory, the VIX behaviour is EXTREMELY BEARISH, and the same folks looking bullishly at 1994 might want to re-examine the charts for why and what happened when this occured after the 1994 low VIX....though, not that its necessarily predictive, at least for consistency sake.

The biggest failing as analysts is to look for measures that agree with the outcome we consiously ( or subconsiously) desire - the old 'when holding a hammer, you see nails' . So I try to look at as many indicators as possible. In the case of sentiment, there are at least 10 very reliable measures, many which disagree at any point in time.



For example, currently the ODD LOT BUYER's are giving a strong, reliable bearish signal. Rydex traders have failed to generate a buy signal are per previous declines of this size. Sentiment surveys are strangely universally apathetic. Overall the picture I get of sentiment is people talking up fear, especially that 'the other guy is panicked'.... and betting on being close to a bottom, or the old 'slope of hope' that bear markets are made of. The FF sentiment position polls have been most illuminating in this regard, and are again tonight.



3. Technicals

Being 'oversold' is a buy signal in a bull market.

If instead what you get is a big rally that fails, with the oversold condition relieved, then it signals a change of trend. That is what we've had, and a break of the lows on a daily closing basis will confirm this sell signal.



4. Fundamentals

Fundamentals have no relevance to day-trading, swing trading but it does come into play in the larger cycles such as 4 year and above, as markets anticipated recessions at this cycle( kitchin).

I mentioned a special condition at the outset, and this is where is exists as I see it.

I do not intend to write an enormous economic piece, I've done that in the past, and a search of the previous posts will find some of it 'lord save us all'. I called for a top in housing about a year ago, and predicted a large decline after extensive mathematical analysis due to the extreme deviation for mean prices that in all previous cases led to reversion to mean or worse reversion to extreme.



There were very few takers for the idea of a national price drop at the time, as per this thread, April 2006 calling for a top in housing -

http://www.traders-t...?...=51664&st=0



All I want to add is this, I am not comparing this economy to the past, or any potential price

decline to 1998, or 1970's. In my view what we are living through is an a GRAND EXPERIMENT IN ECONOMICS like nothing that has gone before, the phrase 'house of cards' comes to mind, it exists on three levels -

1. Globalized monetary transfers - the ability to literally move entire financial economies out of one

country and into another in a few hours or days. This ability exists also due to 2.

2. The automation ( software) of human decision, via 'rules' - and the assumption in those rules are the breaking point of the system, and trust me, there are always assumptions and so breaking points. Therefore there is clearly hhigher potential for what euphemistically called 'dislocations', hmm, like the financial equivalent of dislocating your manhood, not a pretty picture.

3. The longest, largest attempt to use credit creation to prevent the natural cycles.

Because politicians have learned 'its the economy stupid', the pressure on Central banks to ensure the 4 year cycle intensified over time, such that the fear of any kind of recession became unthinkable, because it might not be possible to recover in time for the election.



Over the last decade this disease of 'popularly contest politics' or 'giving people what they want', instead of 'being honest and telling people what they need to hear' ( never popular, but what democracy is based on infact..thats called leadership)...has led to in this end game to the 'too big to fail economy'.



After LTCM in 1998, then technology bust of 2000-2002, and Sept11 ...each 'panic' required a bigger creation of fake reality ( or credit ) to maintain the illusion of a 'sound economy' - I ask,

what kind of 'sound economy' requires such enormous infusion of credit to prevent a depression?



Again, we are back 'at it', with the latest crises, predictable to anyone with objectively in the

housing area. The desperation and pleas of the 'financial matrix' are deafening aren't they, what are they so scared if our economy is so sound.?



What is 'different' this time, is that 'all the eggs are in one basket', we've had a stock bubble, and when that crashed we used a housing bubble to maintain the illusion, but now thats' cracked, its

the end game - you cannot reinflate bubble until its deflated first, but it seems some need reminding that despite the omnipotent FED ( that's sarcasm in case you don't recognise it), the

nasdaq fell 90% and remains 7 years later miles away from its high.



So whilst the FED can try to avoid crashes, and boy have they had they're hands full since 1998 of their own making ( think Greek plates spinning on poles, banks running around trying to keep them spinning), their ability to avoid the inevitable is very limited. It is limited to trying to create a bubble elsewhere, perhaps they can restart the stock bubble! oh and don't think they wouldn't if they could, because these folks are desperately fearful, only madmen or fearful men act with such desperation and short sighteness as they have for a decade, or perhaps they know of an end of the world event sometime in the next 10 years so they figure what the heck? I do wonder sometimes.



Housing 'is the consumer', and this time there will be no avoiding the inevitable. The FED has infact created the ideal sentiment, because they're previous creation of bubbles and bailouts now leads most market participants to EXPECT that, the classic moral hazzard, at least that is my impression for my travels across business press and message boards.



Does this mean a crash?

It is certainly possible, and unlike 1987, I believe it would be a kick off like 1929 more than an end point - remember, rule of inversion, that is, if we do crash everyone and his brother will pull

up charts of 1987, or 1998 and show the bottom, with logic and arguement so convincing even

Prechter will turn bullish, ok, I'm kidding of course, about Pretcher :-)





But more likely is pattern different to anything previous, defying best attempts at historical comparison, because, the fundamental drivers are unique. I would not rule out one more marginal high on some indexes into the early fall, but that's the best I can see here, and the risk/reward on the longer timeframe of months are heavily to the downside as I see it .



Rant over.



I realize this is short on analysis and justification, not because there isn't any, but because

its not my intension to convince anyone of what I say - i'm simply stating my viewpoint for the record.

That's my nonsense for the day...I don't have the need to argue and wrestle every point to the ground, but if something I said needs clarification then I will obligue. Failing that i'll go back to my

happy quiet mode.



Good luck trading to bulls, bears and traders.



Mark.










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#2 Entropy3.0

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Posted 16 August 2007 - 11:15 AM

Crashette pattern is now on,. Here are two charts showing the measured move to 1350 Spx ( may or maynot be in a crashette as per charts above)...



Example SPX measured move and Sterling currently just finishing same pattern( all markets are all now highly correlated, which is warning of systemic problems)



Posted Image



Posted Image




* I am looking for a closing TRIN above 3 to signal the washout, though judging from past occurance its is still best to wait for the open before looking for the reversal, right now trin is staying very low compared to the 'carnage' and so everything seems very orderly with no panic right now.

Mark

Edited by entropy, 16 August 2007 - 11:24 AM.

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#3 stocks

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Posted 16 August 2007 - 12:51 PM

Mark, If your view is still commodities up and stocks and real estate down over the long term, then I'm with you. Would you agree that physical gold is the best (and maybe only real) protection available for a time horizon of 5 years? mike

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#4 Entropy3.0

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Posted 17 August 2007 - 11:02 AM

Mark,
If your view is still commodities up and stocks and real estate down over the long term, then I'm with you.
Would you agree that physical gold is the best (and maybe only real) protection
available for a time horizon of 5 years?

mike



Hi Mike,

Yes, my view is the same as posted before - commodities have begun a secular bull market, but that when economic recessions hit ( as I believe we are entering now), they will have CYCLICAL bear markets - so I look to oil and commodities as confirmations of recession i.e. like stock market, they should give a heads up, and I believe are doing so.

Real estate - no change they're, I did ton of resaarch on historical data of valuations and reversion to mean which led to my post a year ago for a top..and it was just a question to me of how we corrected, either a crash or a 10-20 year slow decline back to normal prices.

Gold, sure owning a physical asset that is recognised as monetary protects you in a way nothing else can.

But if you mean gold shares, that's not so clear, in a true crises they may well get sold off, its happened before because of the need to raise cash and a 'sell all paper' mindset.


Mark.

Edited by entropy, 17 August 2007 - 11:05 AM.

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#5 Entropy3.0

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Posted 17 August 2007 - 11:40 AM

Ah the market, got to love it. Well the last few trading hours have certainly been interesing. Without a doubt yesterday was on the crashette path the charts/setup suggest, we were down nearly 400dow points before the 'miraculous' rally started midday, and now we know why this path differered to the previous two, as usual insiders were given a heads up. The FED are certainly doing their job to 'stabilize the markets', no issue with that, but if you believe in free markets or an even playing field for trading then yet again the FED have just stabbed faith in markets in the heart by literally handing billions to insiders over the little guy. Particularly because it produced a 5% rally in 2 trading hours leading into an options expiration where for once the shorts were in the money. Though I suspect, had the crash continued yesterday as it would have without intervention, the many counterparties could not have paid up on options, and the entire derivatives beast was about to explode. So, I can understand the reason it was done, but as I say there will be a price in further erosion of already low confidence in the 'freeness' of the US market. This now confirms the degree of crises that prompted my post a couple of days ago. We now have confirmation of absolute panic in the halls of 'leadership', similar to LTCM debarcle. The confirmation this panic intervention worked will be a swift impulse move to new highs on SPX ala 1998. What is clear is if we CLOSE BELOW the intervention low around 1370 on SPX, then it has failed, and that will be the confirmation signal of a bear market from here. That is based on historical comparison to all previous similar events, yes this could be different as I said myself, but no so different I believe. Will it work? no is my view, this is more like the first rate cut of 2000 than 1998. It worked in 1998 because the root problem was LTCM and it was dealt with, it didn't work in 2000 because that was result of burst bubble, just like this time in real estate, or more accurately, mortgage paper, and the scale of this problem is higher than any crises weve had, as per my initial post above. Teh dgree of intervention is confirmed by comparing price action in FTSE, DAX and NIKK with US markets, those markets show what would have occured without this, and I can't find a similar divergance in last 30 years so it will be interesting to see how that resolves, will those markets follow us higher with faith in our FED? or will they require their own interventions as occured in 1998. Then every central bank began slashing rates and ordering banks to 'lend to anyone with a pulse, and a pulse is optional', that cannot occur now because banks have already done that, so this is why this isn't 1998. Maybe this buys 3-6months of 'relief' like the choppy rise in 2000 after the intial drop, until the real drop began in the fall, but I doubt it. Again, the FED are sowing a moral hazard, as bullish players have come to expect and now recive these frequent bail outs, producing almost euhporia and wrongly believe in the ability to the FED to solve all problems, short memories of 2000-2002. Next week will be a better read on which way the winds blow, when the dust has settled, expiration games are over etc. Mark.

Edited by entropy, 17 August 2007 - 11:55 AM.

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#6 PorkLoin

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Posted 17 August 2007 - 01:11 PM

Mark, I love reading your posts. Thank you thank you thank you. Even with intervention, manipulation, etc., I dig this stuff. Best, Doug

#7 stocks

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Posted 17 August 2007 - 06:42 PM

Maybe this buys 3-6months of 'relief' like the choppy rise in 2000 after the intial drop, until the real drop began in the fall, but I doubt it.


Love it when someone more literate than me writes what I'm thinking.
I think we have 2 weeks of relief.

Salivating at the prospect of buying some uranium in a few months.

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#8 PorkLoin

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Posted 17 August 2007 - 10:58 PM

Stocks: Salivating at the prospect of buying some uranium in a few months.


Stocks, certainly something to keep an eye on, IMO.

My wife and I have places in Ohio and Georgia but for some time have been discussing getting a really big place, like to retire in, have family reunions at, etc. I've been hesitant, due in large measure to stubbornness and reluctance to "buy high."

Seemed like darn real estate would never quit going up, though, and darn it all....

Now, though prices have not really backed off significantly, that I've seen, the numbers of unsold places on the market has risen like a huge, mega-big dog. I bet we get some real price declines in the not-too-far future, and I'm digging it.


Best,

Doug

#9 Entropy3.0

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Posted 19 August 2007 - 01:53 PM

Thanks for the kind words.

I don't want to get back in the habit of talking about the short term, too distracting for me, but here's a couple of my more reliable indicators for next week which is obviously an extremely important week.

First one says :
1. that the move off the low is very high odds going to be retested in the next week or so.
2. that there is more rally to come before the retest, at least time wise.

2nd one says:
1. the open Monday is important, if we gap down, it must be quickely reversed, or a sell is generated, i've market with a purple dot the kind of quick pullback needed to avoid a sell.
2. that high odds the rally is about 2/3rds done in time and price.

* I don't know how well these charts will show, they are huge on my screen so its hard to shrink thesem without losing detail.

Posted Image



Posted Image



FWIW My read ( and looking at a bunch of other indicators), is we get get a small pullback(10-20 spx points) monday, perhaps a gap down or decline shortly after open monday, but then more rally for a day, or two, with little price progression and testing 1450-1470 before getting rejected and a more significant pullback of at least Fib retrace > 50%. off the move off 1370.

If we do ever get a retest, I can't predict if it fails or succeeds until I see my indicators at the time. Having looked at alot of similar setups in last 30 years, usually the rally lasts 2-3weeks or longer before the 'real' retest, but then nothing is usual right now so such historical statistical analysis is not reliable is my view, for example the decline broke many historical precedents.


Mark.

Edited by entropy, 19 August 2007 - 02:00 PM.

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#10 Entropy3.0

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Posted 20 August 2007 - 01:11 PM

2:11pm just an update on those indicators and pattern, Spx so far down 15pts in the 10-20pts range I expected above, however there is 'danger Will Robinson' because my indicators are now moving to sell, if 1430 is broken ...which I now believe it will be today..then were going down to test critical support at 1418-1422, any move below there or a close at the days lows of any amount then I believe the retest is coming in a hurry. Mark.

Edited by entropy, 20 August 2007 - 01:12 PM.

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