Up, down; up, down; one day looks powerfully bullish, the next day profoundly bearish. (NB: the ish suffix.) In the end, the equity markets head nowhere quickly -- despite Monday's tag of a new recovery high.

This sideways trading is indicative of congestion, an area pattern builds, and whether it will prove a base or top remains to be seen. However, the equity market's internal structure (the subtle clues, as I view them) weakens notably. (A string of extraordinarily positive days could reverse easily the negative leaning of the subtle clues, though.)

Craig Baird begins his book, "The Complete Guide to Investing in Index Funds" by offering definitions: definitions of Wall Street jargon, definitions of acronyms, definitions of concepts. And a lot of history of financial products. If Baird offered only the definitions and history, the book would qualify as a good volume for tyro investors.

With investing in index funds as his primary thesis, Baird should devote most of the book to definitions (check), history (check), how to invest in index funds (check), why to invest in index funds (um, no check). Baird sprinkles his book with many value judgments that are open to vociferous argument; his worst precept, though, is his contrast between "active" and index investors. Consider the three snippets below that illustrate this problem:
• "An effective way to understand active investors is to compare them to gamblers. Their style of investing often goes on a gut feeling. Most active investors believe they have a special understanding of the market that others lack, which gives them an edge over everyone else. No different than gambling, active investing can be a hectic ride for investors that [sic -- dmg] enjoy the feeling of excitement through risking it all on the chance of the stock market." (p 57)

A prolonged, uncontrolled decline in the dollar could reignite inflation in the U.S. and cripple the efforts of America’s trading partners to rev up their own economies

It’s not every day that Federal Reserve Chairman Ben Bernanke offers “an unusually strident defense of the dollar,” said Emily Kaiser in Reuters. Ordinarily, Fed chairmen “avoid the subject altogether,” letting the Treasury secretary handle currency issues. But these aren’t ordinary times. Over the past three years, the dollar has fallen 30 percent to 50 percent against most of the world’s major currencies, and it could fall even further, because trillions of greenbacks are sloshing around the globe as a result of the Fed’s efforts to fight the recession by putting a lot of money into circulation. A prolonged, uncontrolled decline in the dollar could reignite inflation in the U.S. and cripple the efforts of America’s trading partners to rev up their own economies. Bernanke’s comment during a speech this week that the Fed is “attentive to the implications of changes in the value of the dollar” was an attempt to reassure our trading partners that he understands their worries and won’t let the dollar fall too far.

In God We Trust…
To invest requires faith: faith that the markets are fair for all, faith that company executives do not abscond with corporate assets, faith that share prices, in general, trend higher over time. A breach of any one of these beliefs can cause a rupture in systemic confidence, and, as a result, share prices would tumble. This is one reason that, in the wake of The Great Panic of 2008, the balance sheets and income statements of all companies are more closely scrutinized than perhaps ever before, which represents a positive change.

… All Others Pay Cash
Global security, in the form of lessened societal risk (not increased surveillance) is of paramount importance today. With the fabric of global society frayed, financial investments play the important role of canary in the coal-mine, warbling of increased risk. To purchase shares as price approaches or touches the drawn line of price support remains a buying opportunity; until, that is, the market averages break down beneath the circumscribed crucial line of support.

Intra-trend volatility is the process of pricing in all known (current) and unknown (future) risk -- which notion includes financial markets woes such as declining earnings, high PEs, negative chart patterns, even exogenous events such as acts of terrorism, increased trade tariffs, or even World War III (as has been mooted elsewhere) -- until the moment the market averages and indices finally break out (up or down) from their high level consolidations. (Today's high level consolidation is now 12 years, and counting.) The news response syndrome would dictate financial market reaction: Buy on the rumor; sell on the fact. No market prediction inheres in that comment; certainly everyone is aware of the dire state of global affairs and financial markets.

That said, the US$ finds itself at a critical juncture. From an investor’s perspective, a continued decline could usher in an increasing investment preference for big-cap consumer companies with a multi-national, international, or global bias. I note the increasing strength of institutional blue chips such as Coca-Cola (KO), Colgate-Palmolive (CL), McDonalds (MCD), etc. For these companies’ shares, a lower US$ value equals potential and probable higher earnings; thus, a rising share price. As global buyers of last resort, American consumers receive the windfall benefit of lower prices via the greater purchasing power of a rising US$. (Americans who travel abroad would realize cheaper prices as well.)

Unfortunately, a falling US$, especially should that decline become precipitous, has the potential to create global financial havoc.

Support and Resistance
Think of share price fluctuations as a skirmish between buyers (bulls) and sellers (bears). The price at which bears and bulls reach a consensus and a trade takes place is the clearing price. There is a level at which bulls think the price will move up and which bears are not willing to sell. From that point, below which bears won’t sell and bulls are willing to buy, the purchases are the kinetic energy that generates higher prices, and trend. And, of course, vice-versa.

Thus, support levels indicate the price where the majority of investors believe that prices will move higher, and resistance levels indicate the price at which a majority of investors feel prices will move lower. Resistance is the opposite of support. It’s the point at which sellers take control of prices and prevent them from rising higher.

Electronic Communication Networks (ECNs) now account for approximately one-third of all NASDAQ trading, especially with the advent many years ago of deep-discount commissions via on-line transactions. A battle back then began to brew between the buy-side (pension and mutual funds) and the sell-side (old-line wirehouses such as Merrill Lynch). When the buy-side began demanding drastically reduced commissions on executions and the sell-side tired of caving in, the sell-side began to whisper to those who might listen, “Hey lesser commissions are great; but really, just how good is the quality of your execution?” Terms such as slippage, the concession over the current market quote to buy or sell the investment, gained greater currency. In time, both sides commissioned academic studies to support their argument. Ultimately, a consensus was reached that was perceived as elegant, but which, in practice, is anything but.

The theory now widely accepted is a default strategy wherein a variety of techniques will be employed to average the acquisition or disposition of assets, thereby ensuring there would be no bad executions. Of course, the Law of Unintended Consequences dictates the inverse: No bad executions means no good executions. The most commonly utilized of these strategies is VWAP, or Volume Weighted Average Price.

Despite the recent upsurge in prices, the market remains in its seasonal (summer) doldrums; that is, the market continues to oscillate within its base.

Yes, base. I realize most market commentators call repeatedly for a resumption of the bear market -- a plunge back to the lows, if not a sustained breakdown beneath those lows. But the bears have been wrong for 10 months now, as the market increasingly betrays its true direction, its winning hand.

Not!

See charts below...

[click on all charts to enlarge]

... and your first cogent thought is, "Keep away!" The thoughts that got you there include, "Sheesh, in near 2 years, all this stock has done is oscillate wildly (~$50 to $66), and got nowhere fast." And, "The stock appears to be breaking down, as it trades beneath its 50 and 200 day simple moving averages." And, finally, "Hey, the 50 day sma points down..." which all lead you to, "Keep away!"

Reader Patrick McGahren writes...

While I appreciate Mr. Buffet's challenge to Congress, I do not believe he would bet his money that this institution will meet the challenge. How to protect assets from currency depreciation may be headline news two or three years hence.

I begin with the end: Reading Minds and Markets, by Jack Ablin (with Suzanne McGee), is worthy of your time and money; for it, unlike many investment books, captures especially ably the dynamic nature of the investment markets.

In sharing his story, Jack Ablin attempts a Warren Buffett-ish folksy manner, not altogether successfully. From his view "30,000 feet from the ground," he shares his insights regarding investing and investments. Rather than provide a simple list of investment rules, Jack takes his readers on a schematicized journey through his investment career; along the way, he subtly disabuses this or that methodology, fundamental, technical analysis, valuation, and Nassim Taleb's Black Swan included. What worked, what did not work, what methodologies he disposed of and why, and which methodologies he retains to this day.

Jack's investment methodology is atypical of most investment managers, due to its humility...

For the past 11 years or so, I have viewed the market to be in a high level consolidation, described often on this blog, and most recently Sunday in the post, Da parvis grandis acervus erit. In fact, readers and other investors should recall my frequent mention of the 1966-1982 'bear' market as my template for the current market environment.

The surprising, startling market rally of the past 9 months neither surprises nor startles me; I expected it. (Which does not mean the market plummet did not frighten me, as it did you.) So the news that journalists and other investors now, finally, see what I have seen all this time -- or at least one portion of it -- is gratifying.

The chains of habit are too weak to be felt until they are too strong to be broken.
-- Samuel Johnson

While there are many tactical methods to make money when investing, there are only two primary strategic methods: top-down and bottom-up.

Stephen T. McClellan, the author of Full of Bull (Updated Edition): Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio, was a Wall Street investment analyst for 32 years, covering high-tech stocks as a supervisory analyst. He was a First Vice President at Merrill Lynch for 18 years until 2003, and ranked on the annual Institutional Investor All-America Research Team 19 consecutive times.

And so on. No doubt about it: Stephen enjoyed a storied career. I obtained first-hand knowledge of Stephen's research while he and I were concurrently at Merrill Lynch in the early 1980s. Stephen's analyses were renowned for being in-depth, thorough, lengthy, and exhaustive. Some readers found fault in those qualities, others did not; I was among Stephen's fans. (I believe it better to have too much information than not enough.)

No, that is not my analysis, but the bears' constant growls. C'mon, we all know the refrain by now: for the past 5 months, with each new uptick, the bears stated flatly that the market was one step closer to resuming its plummet; with each new down tick, the bears stated flatly and gleefully that disaster was upon us. All their failed chart and technical analysis: the trend line breaks that spelled disaster but did not follow through; the negative channels, the waves, the failure patterns (my favorite was the recent head and shoulders top that everyone saw), etc, etc, ad infinitum.

So you have an investment that defies the so-called experts, and just keeps rising in a profoundly powerful up trend. What do you do?

Well, first pat yourself on the back: your initial step -- to buy and hold proves correct. Now you wonder, whence the ideal moment to sell? When does a trend of extreme strength become the moment of obscene strength? Consider the various constituencies:
1) Short-sellers must cover in a capitulative, melt-up run;
2) Short term longs (such as Louis Navallier) who buy and sell, buy and sell, buy and sell, now finally buy and hold, which also gooses the stock short term;
3) Long term longs (such as me) begin to sell their holdings, phasing out quietly.

The micropsia sequence of posts was not really fair, mostly because I revealed few items, if any [click links for posts, in order]. But now has come the moment to reveal several items. First, the companies (in order of presentation)...
1) BioDelivery Sciences (BDSI)
2) Spectrum Pharmaceuticals (SPPI)
3) OncoGenex Pharmaceuticals (OGXI)
4) Vion Pharmaceuticals (VION)
5) Isis Pharmaceuticals (ISIS)
6) Johnson & Johnson (JNJ)
7) Volcano (VOLC)
8) Thoratec (THOR)

You will discern rather quickly my second 'revelation' -- the obvious fact that all eight companies derive from one key market sector, health care. I selected eight companies from various groups from that leading sector, but with different chart patterns.

Price equals risk, I state often; I am not alone in that sentiment. Alas, with so many methods to measure price, they amount as too many. Two technical measures of price (action) include:
1) Price measured from a breakout, whether short, intermediate, or long term;
2) Price measured from a low, whether primary, secondary, or tertiary.

The two simple items above count as six (6) distinct measures -- and do not even begin to scratch the surface. To reduce to the irreducible, the two crucial perceptions are subjective and objective. And while the subject of this post is not Green Mountain Coffee Roasters (GMCR), it does qualify as an excellent example.

[Position update below]

Green Mountain Coffee Roasters (GMCR) reported earnings Wednesday after the close. The following comments re that earnings report are from Briefing.com...