Ben Bernanke Stars as Arthur Ponzirelli in the New Happy Days ~ The Risk Averse Alert

Tuesday, December 16, 2008

Ben Bernanke Stars as Arthur Ponzirelli in the New Happy Days

Ehhh. My bike likes a liquidity spike even more than it likes Ike.

Well, this is one of those moments when a picture is worth a thousand words. Let's just say Ben Bernanke took a commanding lead over his Monetarist Monkey friend at Treasury for the coveted "Ponzirelli" Award.

I think if I were Ron Gettelmember over at the UAW, I'd walk out tomorrow and demand a tripling of wages starting next week ... and continuing every week thereafter. Of course, I am being facetious. Yet there's also a note of truth in my lame satire.

Someone is pulling the wool over someone's eyes. The target is labor. One way or the other, gutting wages is on the radar.

Last week's attempt in the Senate failed. So, this week we see an end-around.

Inflation is a most insidious thief. Today, it might be easy enough to deny the likelihood we're on the cusp of a hyperinflationary blowout ... what with a deep pool of network men who do more to embarrass apes insinuating a genetic linkage, than they do to uplift the intellect of their own kind. Tomorrow, somehow, these men might just find some way to blame the usual scapegoats.

The question, right now, is with the Fed moving aggressively to remove impaired assets from the banking system (which includes the leveraged, speculating community), where will "animal spirits" be asserted? Things "paper?" This hardly seems wise. That's why presuming a return to anything resembling the past two decades probably is a futile exercise.

On the other hand, projecting volatility and chaos for as far as the eye can see ... here we enter a realm of higher probability. And so, at this point a melt-up becomes a most reasonable possibility...


The simple markup drawn across the S&P 100 from late-November isolates a "neckline" to a so-called "inverse head and shoulders" pattern. This one steals back to days of old when I was a virgin technical analyst, weaning on an investment classic written by Edwards and Magee titled, "Technical Analysis of Stock Trends."

One critical element about the formation of an inverse head and shoulders pattern is the volume accompanying its components. This often is overlooked. It is particularly relevant to the inverse head and shoulders, because this pattern is a bottom formation. During the pattern's rising phases — particularly those forming the head and right shoulder — volume should notably increase.

There's a Wall Street adage saying, "It takes buying to put stocks up, but they can fall of their own weight." So, being a bottom formation portending a subsequent rising trend, you should expect an inverse head and shoulders to be accompanied by volume indicative of increased buying interest capable of driving prices up to, and through, the minimum price objective the pattern portends.

We certainly saw volume swell once the rising phase of the head took shape beginning on November 21st. So, that's a good start.

Yet whether the downward sloping neckline is accurate at first seems questionable. That's because volume did not really expand much when the neckline was penetrated last Monday (12.8.08). But in truth it was greater than anything registered during the formation of the right shoulder (12.1.08 - 12.5.08) ... so, the entire pattern indeed possesses the volume characteristics one should expect.

Furthermore the S&P 100 did gap above the neckline last Monday, and this, too, has to be seen as positive evidence suggesting the inverse head and shoulders pattern is legitimate. Technically speaking, buying interest appears present to the degree it should be.

Finally, following the penetration of the neckline there has been a typical retracement back to the neckline. So, it looks like the stage is set for the full value of this particularly useful technical pattern to become manifest. To whit, a head and shoulders pattern portends a minimum price objective. This is computed taking the distance from the neckline to the head, and extending this distance above the neckline at the point the neckline is penetrated.

Thus, the S&P 100's inverse head and shoulders pattern portends a minimum price objective in the range of 500-520. (The reason the objective is between 500-520 accounts for computations done on an arithmetically-scaled versus a logarithmically-scaled chart of the S&P 100.)

This is the first time I have written about the head and shoulders pattern. In my experience they are fairly rare, particularly in light of volume considerations laid out by Edwards and Magee.

OEX 5-min

As you can see, a fairly well-defined support/resistance line appears in place. So, any pullback on Wednesday should not be feared. In fact, at this point a pullback might be rather expected, given the post-Ponzirelli, RSI surge.

This touches on something I mentioned yesterday, pointing to daily RSI performance in the current period versus July. You see this (in reverse) comparing strongly surging, 5-minute RSI, late-yesterday and today, versus the more gradual, balanced RSI strengthening coinciding with the S&P 100's advance Friday - Monday (12.5.08 - 12.8.08).

Pre-Ponzirelli trading today had the affect of bringing RSI into "balance." So, we should expect something similar on Wednesday before the next leg higher commences.

NYSE 5-min
NASDAQ 5-min

Much the same story presented by Composite Indexes tracking both U.S. stock exchanges. Curiously enough, NASDAQ has some catching up to do if it is to display its typical leadership in both directions. There's plenty of upside remaining for NASDAQ to lead during the current leg higher.

Listen to Fast Money's Guy Adami. He and I agree on the market's likely course straight ahead...

Fast Money
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