Reminiscences on a Decade-Long (and Running) Distribution ~ The Risk Averse Alert

Friday, October 16, 2009

Reminiscences on a Decade-Long (and Running) Distribution

Another "like-from-like" view for your consideration...

NYSE weekly

Where to begin...

First, the contracting triangle (with a rising bias) formed from 1987-1994. This is the area to which an Elliott corrective wave that began October 2007 is expected to fall over the next couple years.

Drawn is the "worst case scenario" thought possible at the present moment. The general process depicted is formation of a bottom in a similar fashion as occurred from 2002-2003. Thus, a "like-from-like" form is seen developing. The present instance is for good reason — both fundamentally and technically speaking — feared potentially more volatile than the 2002-2003 period.

RSI's behavior is seen confirming the likelihood of a further gassing in the stock market, such as is depicted above. Over the past decade new NYSE Composite lows have been matched by RSI. This "technical confirmation" indicates weakness is building.

Some time ago I noted the different message RSI was sending following March '09 bottom versus March '03. Whereas fear was seen remaining intact as bottom formed from July 2002 - March 2003, it contrarily was rather quickly vanquished in the recent instance. Thus, March '09 bottom is considered less convincing, and so is suspect to being retested in the very least.

Given this distinction one might better judge, too, the current RSI similarity with its post-bottom, March '03 configuration. Thus new, NYSE highs are not likely this time around, as conditions instead are prime for a demonstration of the Elliott Wave's "Rule of Alternation," where in the present instance new, NYSE highs fail to materialize. Indeed, overwhelming evidence strongly supports this likelihood.

RSI's downward sloping bias since the late-1990s coinciding with an essentially sideways $NYA trade on notably elevated volume leaves one to conclude a transfer of shares from strong hands to weak — a distribution — has been occurring.

And look how far along in this process we have come. Thus, with so much time having already passed, and with unprecedented damage recently done, how strong, really, are strong hands these days? How might a market going on two years in which the greater bulk of counter-trend action has been delivered via short squeeze react when its downtrend is reasserted?

In this context, too, one ponders the wounded beast. Is this not among the most unpredictable and dangerous of creatures?

Exhibit A is Jamie Dimon according to Congresswoman Marcy Kaptur (D-OH). Is that political capital I smell burning? And what will come of increasing attacks on a Federal Reserve seen ducking accountability? (Even worse are reasonable charges of Fed treason.)

The point is with players on both sides of the balance willing to wage war (in the case of Dimon, stupidly so) ... and "strong hands" in the market having at their disposal only the technical means by which short squeezes are affected ... does this not set up for some shock — an outlier whose impact effectively traps forever the hope-filled majority who presently are holding shares rather than increasingly offering their grossly over-priced equity up for sale?

Fast Money
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