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
1987
2007
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.
