Since When Do Nervous Nellys Make Strong Hands? ~ The Risk Averse Alert

Tuesday, October 07, 2008

Since When Do Nervous Nellys Make Strong Hands?


Guess what? Bottom is here!

Look, you really have to see today's decline within the context of yesterday's. Truth is indexes did not fall much lower today than they fell yesterday intra-day.

Being you are someone who watches closely, you already know this. So, have some confidence in this fact. You have an edge over the Mom and Pops who do not watch closely. Rather, they get their intell from the news and see today's decline on top of yesterday's decline on top of last Monday's decline and say, "Oh my! This might never end!"

Trust me, the kitchen sink was thrown in yesterday prior to the market's bounce going into the close. Today saw nervous Nellys coming unglued. They gave up their shares at precisely the wrong moment, just as they always do.

The market is moments away from a solid bottom from which the best bounce in over a year probably will unfold.

I cannot stress this enough: too many people are paying attention to the wrong things here. The market's travails are all over the news ... CNBC is doing special programming called, "Wall St. in Crisis, Is Your Money Safe?" ... Politicians are talking about the stock market killing 401(k)s.

Forget about it! These monetarist monkeys are as behind the curve as ever. Some things never change. This is one of them.

It's time to put on a brave face. Of course, one should do so within proper context. We have been given a taste of an environment conducive to Dow 3600. However, that does not mean this objective must be met right away. Liquidity abounds! The fearful are ripe to be squeezed.

Surely, too, once that's done they'll be ripe to be fleeced. That's just the way this game works.


$NYA

There's my preferred view right now for all you Elliott Wave geeks. Wave c of (b) of (2) is shaping up to be 1.618 the length of wave a of (b) of (2). This is a typical Fibonacci relationship between an "a" wave and a "c" wave.

Wave b of (b) of (2) is a 3-3-5 "running correction." The first "3" (i.e. wave a) is an "irregular flat." The second "3" (i.e. wave b) is a zig-zag. This satisfies "the Rule of Alternation." Wave c of b of (b) of (2) is five waves up. Since a "c" wave is a third wave, the move typically is the most powerful of all Elliott Waves. And in the case of wave c of b of (b) of (2), that's a big "10-4." In other words ... Check!

Ditto wave c of (b) of (2). This sharply declining wave began unfolding intra-day on Friday, September 19, 2008 and is just about over. Let's take a closer look...


$NYA

Wave c of (b) of (2) is sub-dividing in typical 5-wave fashion. It is also channeling nicely.

One objection to this view might be diminished volume accompanying the market's decline since 9.19.08. Remember, though, this probably has everything to do with the short-selling ban in over 800 financial issues.

Still, despite diminished volume of shares traded over the past couple weeks (this relative to what was registered in mid-September around the time Lehman Brothers took a dirt nap), we see volume accompanying wave c of (b) of (2) is stronger than volume accompanying wave a of (b) of (2) (May-July '08). This serves to confirm my Elliott Wave count (since according to the Elliott Wave Principle a third wave ... in this case wave c ... typically is more "dynamic" than a first wave ... i.e. wave a).

Were it not for the short-selling ban, I might suggest diminishing volume (now versus mid-September) is indicative of selling exhaustion. And who knows? Maybe it is.


$NYAD

Also confirming my Elliott Wave count for the fives waves forming wave c of (b) of (2) is the NYSE Advance-Decline differential. You see how the worst reading occurred during the formation of wave 3 of c and how readings during the present formation of wave 5 of c are diverging. Likewise, A-D differential registered during the formation of wave 4 of c is better than what registered during the formation of wave 2 of c. This suggests buying interest is, indeed, growing as the NYSE Composite sinks lower. It is precisely the sort of thing you want to see and confirms the wave count I have assigned. (I use RSI in a similar way to confirm the structure of 5-wave move.)

Don't know about this Elliot Wave stuff? Get the book. I've had mine since '86. Trust me, you won't regret it.

Listen, I'm not here to defend Prechter's thinking about the Elliott Wave Principle. All I know is for the sake of competent analysis there is nothing like it. (If you hadn't noticed, the reader who left me that Miss Cleo comment tweaked me a bit.)

Now, about the ban on short-selling in financials ... it's ending following Wednesday's trading. So, all the long-short funds that have vacated their operations since the ban went into effect will be back in business. The bid this market has been desperately seeking could return, then. Thus, volume should pick up and an explosive rally could subsequently unfold. Just a theory...

That said, I wonder what song Cramer will be singing as stocks (including tech) embark on their biggest bounce in over a year? Don't get me wrong. I think his analysis today is credible. However, I believe his timing will prove terrible.


Food For Dow 3600
Fast Money Poll (10.6.08): "Should you get out of stocks altogether?"
  • 28% Yes
  • 72% No

Fast Money

Chartology
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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.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


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5 comments:

sdmikev said...

Tom-

How are you planning to play the bottom you're predicting? SSO and QLD? Are you planning to feather in after the gap down at the open that the futures seem to be pointing to with no small degree of panic?

I have to say that looking at the charts and the strongly negative futures reaction to the rate cuts, the thought of going long right now makes me extremely queasy. Fear and indigestion are good contrary indicators, I suppose, but wow is my hand going to tremble over that "send order" button this morning. Thanks as always for the well-written commentary.

-Mike

TC said...

I will be spreading half my account across the entire stock market, buying the following ProShares Ultra ETFs:

DDM - Dow 30
SSO - S&P 500
QLD - QQQ
UWM - Russell 2000
MVV - Mid Cap 400
SAA - Small Cap 600

I don't see the necessity to try picking "the" bottom. First look for the sort of 5-min RSI divergences I have detailed from time to time. Likewise, you might wait until 5-min RSI shoots up to the buy-side (above 50) before doing anything. This should help give you greater confidence executing the trade.

Anonymous said...

From Tim Knight (Founder of Prophet charts): I can't sleep on a night like this. I have dusted off my copy of Prechter's 2002 book Conquer the Crash. He was five years too early, but the things he wrote about are pretty amazing. On page 129 he writes:

One can imagine a scenario in which the Fed, beginning soon after the onset of deflation, trades banknotes for portfolios of bad loans, replacing a sea of bad debt with an equal ocean of banknotes, thus smoothly monetizing all defaults in the system....Only a government mandate triggered by crisis could compel such an action.

Yeah. One could imagine that.

sdmikev said...

Tom-

Still in hold mode? Do you think we'll get one more plunge before a liftoff, or was 12:30ish today the floor? I'm a bit nervous about the buy-side near-extremes we've been hitting on the 5-min RSI (see circa 1:15 today). I'm guessing that's a sign that we get one more retest of the bottom or even establishment of a new floor?

Another, non-technical factor is Dr. Evil's speech scheduled for 3:00. At least they aren't trotting out the Bernanke/Chimp double feature today. Mr. Market no likey that yesterday. Today looks to me like consolidation. You still thinking one more dip (possibly extending into tomorrow) to form the base for a solid bounce?

TC said...

Still in hold mode. Regardless of how much time must pass before a decisive move higher unfolds, I think any trip down to today's low is a safe ETF buy, because you should be able to set tight stops with relative confidence your position won't get stopped out. (And if it does, then I might be wrong about this being bottom.)

Contrarily, there might not be another trip down to today's low.

I will assume there will be, though ... expecting additional technical divergences to develop and more gnashing of teeth from the analyst and commentator community.