Market Showing How Suckers Sell Low and Buy High ~ The Risk Averse Alert

Friday, March 27, 2009

Market Showing How Suckers Sell Low and Buy High

The score as I see it remains Crowd 0, Me 0. The consensus continues expecting a further pullback. The market has risen "too far, too fast," they say.

Yet one only need go back to the September - October '08 period to find an instance when the market had fallen as much as it has risen since March 10th. Lo and behold no interim recovery was forthcoming then. The market continued its collapse. My, how soon we forget. Or is it the crowd simply is consumed by the fright of it?

I have said this before and I will say it again. In the framework of the Elliott Wave Principle third waves typically are the most dynamic. The market's decline last September - October was a third wave (wave 3 of c of an a-b-c that began October 2007). Likewise, the market's advance since March 10th is seen a third wave (wave c of an a-b-c that began November 21, 2008). Up next is wave 3 of five waves forming either wave (1) of c or wave c itself.

That's the foundation of my basis for suspecting a 10% move higher could unfold stat. Although this did not happen Friday as I thought it might, Monday is another day.

There is just no denying measures of the stock market's underlying technical condition are strong, and have room for further strengthening. Likewise, what few first signs of any building weakness exist, these are seen reflecting consensus belief ... being fed ... and set up for disappointment. Let me show you what I mean...


Seems to me increasing propensity to sell as NASDAQ moves higher (seen via the Composite's Advance-Decline Differential) reflects conditions defining Chicken Little's failed investment philosophy: sell low and buy high.

I believe weak hands are being set up. Why? Let's zero in on this week's trading at the Pump and Dump...

NASDAQ 5-min

Monday's (3.23.09) gap open higher went ... unfilled. And Thursday's (3.26.09) ... the same. Gains are being defended. This is the work of strong hands.

Consider RSI. Monday's closing surge to a buy-side extreme made forecasting a day or two of weakness a reasonable probability. Still, buy-side RSI extremes confirm an Elliott third wave up is forming. Rather than raising serious concern (as would typically be the case), their occurrence now quite stands to reason.

(We saw the flip side as the market fell throughout January and February '09, with 5-minute RSI registering sell-side extremes on a number of occasions. Again, an Elliott third wave [down] was forming.)

Now look how RSI tightened like a wound spring over the course of this week's trading ... and this, no less, while the market was rising. I contend this combination suggests underlying strength is building.

Where's the profit taking? It's AWOL. So far, suckers are selling this rally. See for yourself...


Alas, the trend is your friend. Notably weaker volume on down days in a rising market is the trend. Your friend (if, like me, you are long) is that, likelihood the market will rise farther still finds substantiation in this trend.

We probably will know a top is near when volume markedly increases on a down day. This has yet to happen. Every instance of selling thus far since March 10th appears largely a function of buyers stepping aside.

One might suppose strong hands are testing the resolve of short interest. They must be satisfied. Shorts are not putting up the volume of shares necessary to drive the market lower in favor of their position. What little they sell, strong hands absorb. Chances are, then, the market will be driven still higher before any pullback of consequence materializes.

I like how RSI is flattening out, too, presenting a picture of balance between both sides of the trade. This suggests the trend higher is sustainable (much as was similarly demonstrated during declining periods over the past six months).

Fast Money
* * * * *

© 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.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!