Calm and Calculating Amidst Financial Chaos ~ The Risk Averse Alert

Friday, September 26, 2008

Calm and Calculating Amidst Financial Chaos


Are you worried about the bailout? Do you fear nothing will get done in Congress this weekend and the warnings coming from those whose predictive powers are even worse than Cramer's will come to pass?

Well, relax...



Granted, things are more dire than the whole gaggle of monetarist monkeys appear willing to fathom.

Yet I will bet you anything that, even if Congress does nothing to rescue seized credit markets, the stock market will not be destroyed. Sell off some, maybe. Crash? No, not now.

It's probably a good thing this Risk Averse Alert provides some of the finest insights free of charge. With panic and outrage becoming quite rampant, you might be swept up in the emotion of it all — mesmerized by a media that could put Joseph Goebbels to shame. But you are better advised not to question the sanity of someone so sanguine, like myself!

Simply contrast my present demeanor to earlier this year when things really weren't looking so sparky.

You see, that's the nice thing about being an Elliott Wave Guy. It sharpens the analytical eye toward the fact that, to everything there is a season.

Certainly, the day will come when all options, save an earth-shattering smash, are extinguished. However, the hour is not now. Wall Street's bought-and-paid-for servants in Washington — slaves to the invisible hand — have an agenda to promote amidst this controlled chaos.

(Previous link to the Times of London brought to you by my "inner Henry C. Carey.")


$NYA

I have to be honest... If ever there were any hope the market might still melt up, then bottom set last Thursday (9.18.08) could be the base from which stocks rocket higher. Time will tell.

Now, don't get me wrong. I am not making a hard-and-fast forecast here. Rather, I am staying open to all possibilities the Elliott Wave Principle affords. A melt-up to record highs cannot be counted out.

This possibility likewise is in keeping with the fact nothing is set in stone. Call me a flip-flopper if you must. Such is the nature of the game whose prospects can change in an instant.

Bottom line ... just like yesterday and the day before ... I think the case for anticipating a rising market is fairly solid. I cannot say how soon this advance might get under way. Nor am I even certain how high indexes might rise.

Indeed, indexes could stall in the area they traded from July 15, 2008 - August 11, 2008, then subsequently sink to a new low. This has as much possibility as a melt-up. However, I believe the probability of this happening is rather less likely.

Just look at the above chart...

Price-RSI and price-MACD divergences, 9.18.08 versus 7.15.08, suggest bottom is in. These same measures diverged 3.17.08 versus 1.23.08, just prior to the best rally of the year commencing.

Volume spikes at tradable bottoms have been a trend over the past year, and you know what I always say... That's right, the trend is your friend.

(About this week's volume drop-off... Apparently this has to do with the short-sale ban. Funds trading financial issues that balance positions between the long and the short side have withdrawn from the market. So, per volume analysis, the impact of the short-sale ban has to be taken into account.)


Investors Intelligence

Investment newsletter writers still remain relatively bearish on balance. Curiously, though, the Bull/Bear Ratio is diverging from its July '08 low. I take this as a positive development. After all, someone has to buy for the market to rise. Apparently, more than was the case in July, some are being advised to do just that.


$NYAD

"Connect the dots" appearing above spikes in the NYSE Advance-Decline differential with the chart of the NYSE Composite. In every instance the index subsequently rose further than it had on the day the Advance-Decline differential spiked.

This was true even in the late-November '07 instance. Here, though, is a case where we have to remain alert to the possibility I mentioned above. Namely, indexes could trade up to the range traced from 7.15.08 - 8.11.08, then subsequently sink to a new low for the year. This, no doubt, is possible. However, it does not seem all too likely.

So, despite all the noise amidst credit market chaos, the above measure suggests the stock market is not about to fall apart.

And in support of the still living melt-up thesis ... there's the picture of capitulation I was anticipating in April and May ... bracing for in June and July ... and, finally, announcing on Monday, September 15, 2008 ... the day Lehman Brothers died. That day the NYSE Advance-Decline differential registered its worst reading since the market peaked in October '07. Combining this with the burst in the volume of shares traded and you have the makings of capitulation.

[UPDATE: VIX signals more chaotic days ahead ... suggesting some days will pass as the market forms a base from which it subsequently launches higher.]




Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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4 comments:

New wave historian said...

Elliott Wave reminiscences of a stock operator. The players may change but not the game.

A melt-up when both the good guys and the bad guys ride in on white horses to save the day. The EWave saw it coming. We didn't even need the white horses. And to think Cramer predicted the end of the world as we know it. Cramer is lacking even for entertainment purposes.

Cramer, it's time to over-react with good old irrational exuberance. It's time to buy not sell.

But wait...there's more. If you're one of the first 500 traders buying long on the melt up we'll throw in at no extra charge what advice Jessee Livermore gave to Ms. Cleo in a recent séance. You'll find out how that small investment can be leveraged into real money and whether you should be short or long regardless of what each contestant wins in the congressional game show deal or no deal.

What do the EWave, the big picture and history tell us? You'll have to be one of the first 500 traders to get the answer that Jesse gave to Ms. Cleo.

TC said...

The Elliott Wave "sees" nothing. Rather it isolates possibilities. Works fine for me. Unfortunately, I know nothing about Ms. Cleo's work. But it appears you do. You should have left a link...

sdmikev said...

Tom-
I assume you're watching the 5-min RSI divergence on basically every index since today's open (at least in the downtime amongst your very entertaining running commentary on the idiotic flailings of our honorable congresscritters). Looks like some strong evidence for your consolidation before melt-up theory.
-Mike

TC said...

Yes, Mike, I'm watching. However, what we're seeing is an improving 5-min RSI in a sideways trading market. This does not conclusively imply anything positive. The RSI divergence could simply be a function of a consolidation whose outcome might result in still further selling. Watch whether 5-min RSI darts to the buy-side (above 50), then holds this position. Then, we might have something conclusive to hang our hats on.