A financial blog on investing in stocks, commodities and the gold bull market.
Sunday, November 16, 2008
Those pesky patterns
I noted some time ago that Trading patterns was becoming too popular. I'm becoming even more convinced that it is going to get harder to succeed in the markets by TA alone. By that I not only mean pattern recognition but levels of support and resistance are not going to mean much during this bear market.
I suspect this bear is going to take away almost every tool that investors use to try and get an edge in the market before it's over. And yes that may mean the COT reports go out the window also.
I've included a recent example of what I'm talking about.
In the first chart we see a nice triangle consolidation forming. Often these are continuation patterns. Since the market had been falling apart it seemed reasonable to assume that it was going to continue to fall apart. The pattern breakdown suggested this was likely the case.
However moving on to the second chart we see the market quickly negating the triangle breakdown. A negation of the triangle should have been a very positive sign. A V shaped rally at this point would not be unexpected.
Umm not so fast with the rally. The triangle negation got negated. Whew is anyone else getting dizzy?
Granted this is just one example. But I think this kind of TA will only get worse as this bear market continues. I also expect levels of support and resistance to regularly fail only to quickly reverse course as this bear wears on.
One example that I think will be tested at some point is the 1200 level on the S&P. If we get the large rally that I think will separate the 1st and 2nd phase of the bear market it seems logical to expect the 1200 level to be tested. That was a major breakdown point. I'm guessing there will be many a bear that will go heavily short at that level.
I also suspect the market will likely push right through that level and take all the bears to the cleaners before reversing at a higher level and dealing out the same beating to all the bulls who will view a move above 1200 as proof the bear is dead.
I'm afraid this is going to be one tricky market to negotiate in the next couple of years. The extreme left translation of the current 4 year cycle suggests that the ultimate bottom when it does arrive is going to be much lower than anyone thinks or can even imagine at this point. However the road to that end is going to be anything but straight.
I'll elaborate in more detail in the weekend report.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.