It all was a little too easy

November 3, 2014 03:46 AM

Markets have survived to get back to their September highs and even beyond. I’d be the first one to tell you this was the lower probability. First of all I have to clear up something. When we hit the low on Oct. 15 I analyzed it this way:

There were Fibonacci calculations to support the turn on the intraday E-mini charts. So we told everyone to expect a trading leg up which would retest the ‘explosion technology’ sequence from Oct. 7-9 (see chart below). From looking at hundreds of charts in all degrees of trend, that is usually the kind of sequence that puts a lid on the pattern. Not just this pattern, but any pattern. If you study these sequences yourself, you’ll see it is so. At the same time, I made mention of someone who went on CNBC who was ‘pinching himself’ over the fact he saw a potential rotation out of bonds and back into equities.

We don’t usually see that kind of behavior the day after an important stock market bottom. As everyone knows there is blood in the streets after serious corrections and the only buyers around for at least several days are the bears that cover their shorts. That being said, I told people the higher probability was for a trading range and not a new leg up. I would do it again because out of every 10 bottoms with similar conditions, that will be the case most of the time. This is a business where nobody has a crystal ball and the best we do is manage risk and uncertainty. There’s only one guy who got it right all the time over the past 20 years and his name is Bernie Madoff.

 I know there are those who went short because they thought the bottom was too complacent. I thought the bottom was too complacent.  Psychology is one thing and it is supportive of the charts. But your trading decisions should be based on what you see on the chart. It sometimes takes a while for psychology to kick in. I’m sure you realize the market can remain irrational much longer than you can remain solvent.

Our Oct. 7-9 sequence did not repel the action. As much as I thought the behavior of market participants was highly irrational, at no time did I suggest there was a justification to be short. As we came off the low I suggested it was time to experiment with longs, albeit cautiously. As time kept going it became apparent people needed to be long. This is a lesson to a lot of people the price action pattern is the final arbiter of markets. It’s a lesson I learned many years ago but some people are just learning this lesson right now.

So now we have a situation where we did get a bottom with the VIX hitting over 30, which is important. However we now have a VIX back in the historically complacent area. So while we did have the biggest correction since 2011 which came right on schedule in October, the correction did not accomplish what it needed to. Corrections are corrections because they correct excesses in the market. You can argue we may even be more bullish now than at the Alibaba top. It’s very rare to have the kind of correction we just did and end the very same month without even washing out the extreme sentiment. What that means is we still need another correction.

One of the problems aside from the VIX is all the programmers who believe they can predict the next move in the market 12-24 hours out with near certainty. Sure they can do it when one mistakes a bull market for brains. I guarantee you nobody was making such predictions on Oct. 8 and 9. But we came close.  Here’s the point. I’ve seen this script before and these programmers along with the historically low VIX are going to have to be washed out of this market eventually. If not now, some time in the future.

Complacency where it is again, these things have a way of ending badly. But you must follow what happens on the chart. Right now is a major retest of resistance. There is no breakout on the major averages while Europe is still way off their highs.

Can a correction still be now? We are still in the big time window. November marks the back end of the big 987/144 month window to the 1932 and 2002 bottoms. Now we have another window coming up, it’s the 161-week window to the 2011 correction bottom. The beginning of it hits this week.

So here’s the situation, coming into this time window which is huge (3 months long), the SPX is sitting at a double top. We also have the big election coming up this week.

Here’s my election coverage. I’m no pollster but what I hear is the GOP is getting the Senate. Wall Street is used to gridlock so they’ll welcome a GOP win. We might get momentary euphoria on such a victory which could present itself as a top. We don’t do politics here but it has to be tough on Obama if he has to take criticism from Jimmy Carter of all people. That being said if for some reason the Dems keep the Senate, the market would have a huge sell off. The disappointment in many circles would be too much to take.

Conversely speaking, I also think the market can sell off for two reasons if the GOP wins the Senate. First of all, what is unspoken right now is they may already be buying the rumor so they could sell the news. The other reason I just mentioned is the potential for a euphoria peak on a GOP Senate win. The time windows support it. Sentiment as a contrary indicator also supports it. People might very well use it as an excuse to start taking profits. 

About the Author

Jeff Greenblatt is the author of Breakthrough Strategies For Predicting Any Market, editor of the Fibonacci Forecaster, director of Lucas Wave International, LLC. and a private trader for the past eight years.