POB 88 San Geronimo CA 94963-0088.
e: bassetti@edwards-magee.com.
web: www.edwards-magee.com
“Americans are by nature an open, gregarious and honest people. Our only native breed
of criminal is the congressman.” Mark Twain
AUGUST 2007 -- WHO’S AFRAID OF THE BIG BAD BEAR?
Not to go out on a limb (why go farther out on a limb when you live on a limb?) we take
laptop in hand and pen in pocket protector to make rash predictions and foolish forecasts.
(Remember we stand solidly and as far away from our forecasts as possible. Standing
behind them might get us rolled over, like that Greek guy, Sisyphus.)
It is a much lamented fact that the market goes up and then down. The up part causes
much joy in retail establishments and houses of ill repute (including Houses of Congress).
The down part is met with tears and gnashing of teeth. Recently (and also in the past)
we have created states of deep tranquility in our students by pointing out that this upwave
downwave behavior had been going on for many years, and would continue to go on for
probably forever. There is the side of light, and the dark side. Just accept it and manage
it. Once you have accepted this fact the management comes amazingly easy.
These words of what must be admitted to be eternal wisdom (not our fault or credit, just
what is) are written after the worst weeks in years in the market. Dow and S&P down 4
and 5% (m/l). We like the scurrying in all directions to “explain” the sell off. Chicken
Little behavior has always entertained us. We love human folly and fecklessness and the
human condition in general. It’s almost as much fun as politics and mud wrestling. The
market went up on good news and corporate earnings and sub prime loan woes. The
market went down on good news good corporate earnings and sub prime loan woes. No.
No. Let’s get this straight. The market goes up because investors are in a buying mood.
The market goes down because the longer the buying mood lasts the more nervous
investors get because they don’t want to be the greater fool and wind up holding (as
Keynes said) the Old Maid card.
This market has run 74.50 points (basis DIA) since its beginning September 2002.
Pretty good run. For downwaves we have had 5 of some significance. Less enlightened
people call downwaves “corrections”. It might help your digestion if you call them
downwaves. They are inevitable and come with the territory. The virtue of downwaves
which exhaust and resume in the bull direction is that they allow us to raise our stops and
lock in more profits. Remember. You are not supposed to capture the first wave or the
last wave of the bull market. You are only supposed to capture the middle third – when
there is one. (Light satire on market wisdom.)
There is a very excellent technique for marking wave bottoms which Magee wrote about
years ago in Technical Analysis of Stock Trends. We updated and elucidated the
procedure in the 9th edition and in our brilliant little ebook StairStops
www.edwards-magee.com/stairstops.html). Thus is answered, the perennial
question, How do you know when the bottom (wavelow) is in? Like everything in the
market you never know till later. Nonetheless the present downwave seems like a cry
wolf wave – designed to spook the lambs. (Don’t blame us if this is not so. Baa-aa.)
Another way to look at the present events is to use the Wyckoff Panic sell off model – but
more of that later. While the confirmed wavelow is not in yet we would be surprised,
distressed, disgusted irritated and stopped out if the market made a really significant
downwave. Looking at the attached chart the reader may see where the long term
trendfollower’s stop is placed. So while we would be surprised (and all those other
emotions) we would not be caught unprepared, which is much better than being surprised
and unprepared. Be Prepared. That’s the Boy Scout marching song.
Bottom line: Watch with tranquil interest to see if stop is hit, and try not to get hit
by any falling chickens, pieces of the sky or lamb kabobs.
W.H.C. Bassetti
Adjunct Professor Finance and Economics
Golden Gate University, San Francisco
Editor John Magee Investment Series
Editor Coauthor 8th Edition, Edwards and Magee's
Technical Analysis of Stock Trends
