A Breakdown or a Bear Trap? Will There Be a Rally on Wednesday?

There have been many things that one could describe as "remarkable" the past 2 years... I've lost count. But for the technical crowd, one thing I read over and over is how astounded people are by the reversals we have been seeing once any support is broken. If you live on a grassy knoll, you might say "large forces with a huge stake in creating the appearance of prosperity" are no dummies, and have their own set of technicians letting them know where it is most important to provide support. That's a whole different discussion.

What cannot be argued is we don't seem to have consolidation and gentle rebounds once a support is broken. I've gone back the past 3 months and looked at every break of the 20 day moving average... Monday marks the 4th episode. Again I cannot stress how vicious this market has been to bears - you expect a break of support to give you some downside action (at best) or some sideways consolidation (at worst). Instead of either of those scenarios, all bears have received the past few months on these breaks are things not fit for print.

Notice the exact same pattern - a break of the 20 day moving average (marked with green arrows)... then within 2 sessions *without fail*; not just a rebound but an incredibly steep rebound. Which of course is then followed by shorts scattering like dust in the wind, and a furious multi-session rally. Just random chance we see the same pattern over and over, you say? That would seem doubtful - the invisible hand seems to be quite active these days. [Jan 9, 2008: An Amazing Blunt Commentary on the Plunge Protection Team]

We spoke Friday of a (potential) change in character ("sell the news") - but surely in each of those earlier episodes the past 3 months, the same "hopeful" songs were sung by bears. It is a dangerous spot for both bulls and bears here... mostly because the rules seem to be quite different now than what those of us with experience are used to. So if the same vicious reversal pattern in 2 days happens, the dollar should be sheared into pieces Wednesday, and we'll rock and roll as if this selloff never happened...

Can it really be that pathetically predictable? If not, we want to see a break of that 50 day moving average, and bulls to have fear for the first time in a long time. But until a pattern breaks - and this is a quite obvious one - you have to respect it and assume it continues to work. Confident buyers will circle the wagons on any weakness from here, with the expectation that bear hides are to be strung by the end of the week. Of course, eventually that will be incorrect and we'll see bull horns as trophies rather than bear hides. But there is really no reason to be predictive here unless you have very tight stops and even shorter time horizons. The next 48 hours should be interesting.

Comments

[Per:]

The initial action today speaks for a pullback. How strong we'll see.

Oct 27 10:02 AM

[cyclingscholar:]

20 day MA...what baloney. Look at the trendline in the daily chart connecting connecting the March low, July and early October selloffs. If that line breaks take prudent actions (trim longs, overbought stocks, etc). Don't be in a hissy fit to go short until other technical indicators confirm the selloff.

Oct 27 10:16 AM

[Mad Hedge F...:]

xft In view of today’s dreadful market performance yesterday, I am repeating my GLOBAL RISK ALERT issued on October 14. Every asset class, including stocks, Treasury bonds, currencies, commodities, and precious metals, got slaughtered across the board today. The liquidity surge may be taking a pause. Keep in mind that if you are running big longs here, you are swimming at the deep end of the pool.When everything is working, and my portfolio is firing on all 12 cylinders, I pinch myself and ask “Is this real? What can go wrong?” I’m reminded of the slave whose task it was to remind conquering Roman generals “All glory is fleeting.” Virtually all of my recommended core longs in gold, silver, Canadian, New Zealand, and Australian dollars, Brazil, Russia, India, South Korea, Taiwan, Vietnam, and junk bonds are at or near highs for the year. I called the bottom in Natural Gas within 40 cents, and mercifully baled on my one short in US government bonds, the TBT. What we are seeing is a global surge in liquidity as cash emerges from the bomb shelter, squints at the day light, and then rushes to buy the first thing it can find. Everything is going up, regardless of fundamentals. It is the proverbial tide that is lifting all boats. You can make a lot of money in these conditions, but there is no way of knowing if this will last for one week, or another year. But they can go on much longer than you think. In the last two liquidity driven markets I traded, Japan in the eighties and NASDAQ in the nineties, fundamental analysts railed against the tide for years, claiming that stocks were overvalued, each call getting their office moved ever closer to the elevator and men’s bathroom. When someone finally did throw the switch on these markets, it got dark amazingly fast. Tokyo went out at an all time high on the last day of 1989, and then dropped a staggering 45% in January. NASDAQ plunged just as fast from its 2000 top. The one thing we can all be certain about is that the survivors have vastly improved their risk control after our recent crash. Make hay while the sun shines, but keep your finger hovering over that mouse. The level of risk now is definitely much higher than it was in March. When the next real downturn starts, it could resemble a flash fire in a movie theater.

Oct 27 11:06 AM

[TraderMark:]

A nice little gap under 1060 to boot, would fill at 1058

let's see if that can be done sooner rather than later.

Oct 27 11:08 AM

[montyman:]

Let me put my money where my mouth is as I write this on Tuesday. Since TraderMark is expecting an upside or downside event to happen on Wednesday or thereabouts, I believe that it will be a significant downside event.

My reasoning is thus: stimulus is petering out, and the markets need another shot soon. A downside event will prompt more stimulus. And then we're off to the races again. We'll know by the end of the week ;)

Oct 27 04:36 PM

[untrusting ...:]

Mark,
Good analysis of exactly what has been happening. Doesn't make any sense, but it has been happening. Obviously the prop trading desks have been massively supporting the up moves and preventing any type of correction. But one has to remember that their only objective is maximize ST profits and they have had the Fed liquidiy to do it so far. But when they determine that shorting is more profitable, then there is little doubt that they will take that route and a pretty big downside will be in order. The only question is when. Don't we all want to know the answer to that one. It is starting to look very very shaky now. Guess we will all find out this week.

Oct 27 09:07 PM

[Roger Knights:]

What would have a big effect would be some bad economic numbers this week. (About half the time Da Boyz seem to get wind of these a bit early.) The market has been sensitive to bad reports in the recent past, indicating many participants are jumpy and that a decline, when it comes, could be sharp.

"the invisible hand seems to be quite active these days. [Jan 9, 2008: An Amazing Blunt Commentary on the Plunge Protection Team]"

I call it the invisible THUMB.
(On the scale.)

"Notice the exact same pattern - a break of the 20 day moving average (marked with green arrows)... then within 2 sessions *without fail*; not just a rebound but an incredibly steep rebound."

It's like a pogo stick or a bunny bounce. If one looks at it from right to left, in reverse, it's like a Slinky going down a flight of stairs.

Oct 28 03:52 AM

[HunterGVL:]

My vote...Bought ANOTHER 100 shares of SDS

Oct 28 02:15 PM

[BullnBear:]

To answer the title of your story…NO! Isn’t hindsight great? This is Thursday and here’s your rally.

Oct 29 05:11 PM

[TraderMark:]

I know, if I had a crystal ball I could do 1 trade a year and then sit on the beach with fruity drinks all day

The rally was 1 day later, Thursday not Wednesday

but more importantly the trend is dead. No spike high this time around - major change in character

Inside, I'm smiling.


On Oct 29 05:11 PM BullnBear wrote:

> To answer the title of your story…NO! Isn’t hindsight great? This
> is Thursday and here’s your rally.

Oct 30 04:34 PM