How to Think Like a Thief ~ The Risk Averse Alert

Monday, January 12, 2009

How to Think Like a Thief

Vote this leading stock market expert at FeedTheBullHo-hum, things still look a lot like early-April '08 ... and that's a double-edge sword. Fortunately, both sides work in our favor.

One, because we're expecting a near-term melt-up. And two, because we suspect November 21, 2008 was not bottom to the bear market that began October 2007.

In an e-mail sent out late Sunday night to those of you receiving real-time Trade Notification I said, "a day or two of seemingly threatening trading might be in store as the correction of the past three trading days grinds to form a bottom."


NYSE 5-min

Five-minute RSI registered a sell-side extreme this morning (below 20), then proceeded to diverge from the NYSE Composite for the remainder of the day. That's the picture of an index forming bottom.

Anytime you see RSI reach an extreme it's a red flag. It demonstrates an imbalance between buying and selling interests. Such disparities typically are exploited ... eventually.

In addition to today's sell-side RSI extreme ... over the last ten days we have seen a number of instances when a selling imbalance was revealed by the relative steepness of RSI's decline from the buy-side (above 50) to the sell-side (below 50). Contrarily, buying interest — be it during the market's push higher through last Tuesday, or during corrective periods over the past four days' decline — evidently has been more balanced.

If ever there were a technical condition one could assume coincides with strong hands accumulating shares, might this be it? (Bear in mind, though, we are looking at a very short-term view here. So, just how long strong hands intend holding shares remains an open question.)


Now, I will be the first to admit the depth of today's selling was somewhat greater than I originally suspected likely. Yet the fact is the present moment appears strikingly similar to April '08.

I am to alert to RSI's slight degradation from late-December '08. This provides first-sight of a top on the horizon. It suggests underlying buying interest has reached the zenith of its power to push prices higher over some indeterminate period.

That's not to say buying interest has exhausted. Rather, it only is to suggest RSI degradation appears similar to circumstances early-May '08, relative to late-April, just prior to the NYSE Composite making its final charge higher into its peak on May 19, 2008.


The NYSE Bullish Percent Index reveals a strong underlying technical condition — the best in over a year. Indeed, what subtle weakness was revealed by today's slight degradation of NYSE Composite RSI (mentioned above), the Bullish Percent Index by no means confirms it.

Now, you might wonder whether present similarity to conditions at the May 19, 2008 top should be a concern here. Well, yes, it should be. We'll definitely keep an eye on this. Yet consider...

Given the relatively stronger position the Bullish Percent Index presently finds itself in ... and given that last May the Elliott Wave outlook was forecasting a market capitulation (rather than a recovery, like now) ... it seems reasonable to suspect RSI on the NYSE Bullish Percent Index, itself, might register its best reading in over a year before the market's advance (since late-November '08) reaches its end. In as much as the Bullish Percent Index's present similarity to last May bears watching, this does, too...

NYSE McClellan

You can see with your own eyes how the NYSE McClellan Oscillator is painting a considerably brighter picture than was the case last April. Not only is underlying strength showing itself greater now, it also is affecting the various measures with greater power.

So, the stage is set for an exceptionally powerful advance it seems...


I made this same point Friday and it bears repeating. The CBOE Put/Call Ratio is showing the face of irrational fear. It's revealed by greater Put buying at today's higher lows in major market indexes.

Does the market ever accommodate a growing majority? Only rarely, bear.

And now that a growing majority is looking south? Well, let's talk about this post's headline...

Think about this. In just one week President-elect Obama will be inaugurated. You'd have to be totally glued to Fox not to realize change is in the air. There is a lot of expectation. Not only that, but a great willingness to act is being displayed with considerable regularity by parties who will be shaping policy (and this on both sides of the aisle).

If you were a market maker choking on shares offered up for sale the week Lehman Brothers took a dirt nap, what might you be scheming, leading up to the big day when "change" becomes quite real?

How about manufacturing a positive atmosphere playing into spirits sure to be uplifted by the political transition? Expectations for decisive action are already being engendered, so why not position yourself to take full advantage of this?

How, you wonder?

By affecting a short squeeze of extraordinary proportion.

Invigorate animal spirits while the political beast appears most potent. Surely, technical conditions are rather well-poised to coincide with such an event at this particular moment in time...

Fast Money
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benjamin said...

With all due respect, it looks as if a yawning chasm is opening under the market. We have terrible earnings coming in, dividend cuts, more financial firm failures and restructuring, The stock market has been in major denial about this for months and is finally getting its wake up call. Plus the Fed and Treasury soft shoe is getting old, even if they pull a rabbit out of the hat again, the audience knows its fakery.

There are times when fundamentals trump technicals, and this seems to be one of them. I had been short and am now long and very wrong.

TC said...

I don't see a yawning chasm. Rather, I see a move to the low end of a consolidation that has been unfolding over the past month.

You can ignore the market's improving technical background and instead focus on fundamentals all you like. This, however, will not stop a melt-up from unfolding.

You may feel more comfortable short here, yet the question soon will become whether you will be just as comfortable when the market is 25% higher than where it stood when you went short, much as I am with the market standing 5% below where it was when I went long.

I am not worried about my position. And I say this with no sense of bravado.

Per fundamentals trumping technicals ... how was it the market bottomed in July 1932 while the Great Depression lingered for another nine years? During the interim the market more than doubled. Yet historians say we were in a Depression until our entry into WWII. So, how do you explain the stock market's ignoring this fundamental reality?

I'm not suggesting the unsustainable measure of leverage that brought us to this point has fully unwound ... and in the process impacted the stock market as much as it ever will. Indeed, we remain trapped in the same game as existed before the credit crisis broke out (the game called "Inflate or Die").

We probably agree that, what has been accomplished thus far is little more than the rearrangement of deck chairs on the Titanic, this in an attempt to keep the system of globalization afloat. Yet consider. The dynamics of an underlying fundamental reality we agree is fraught with danger may be -- just may be -- positioned to promote what might be the greatest ruse thus far concocted in the post-Bretton Woods arrangement.

The way I see it is, if the ruse of our being a wealthy nation (despite a massive, securities-based debt bubble being built up) could be perpetuated for as long as it has been, then the ruse of our ability to solve the present problem within the confines of status quo thinking can likewise be affected.

The market's underlying technical condition in light of this simply suggests the means are in place to affect a brief period of relative stability. And at this point in said dynamic process there's basis (Elliott Wave-related) to suppose the market is, right now, on the verge of melting up...