I was asked last night, whether the time is right to buy US Stocks? My short answer - I DON"T KNOW.
Let's take a look at the Dow Daily Chart as at 11 November 2008. What do you see?
- A Sideways Pattern supported by a Flat Short Term S
MA20 (Red Line in the Middle of 2 Outer Red Lines, i.e. the Bollinger Bands)? - Price almost in the middle of the two Bollinger Bands?
- The Downward pressure of the Long Term SMA200 (Green Line) and the Medium Term SMA50 (Blue Line)?
- MACD which is still on the Uptrend, but looks like it is flattening into another downturn?
- Stochastics which had crossed down, but looks like it is about to crossover upwards once again?
Frankly, I don't use Technical Analysis to forecast when I trade. I let the Price tell me what to do, and I don't trade unless I can see a Winning Edge Trading Setup. On that basis, I do not need to fully understand the market at all times, and I don't claim to be able to do so.
The state of Technology Advancement in Technical Analysis would also suggest that the ability to understand the market at all times is IMPOSSIBLE as at today; maybe one day, but not today.
Having said that, if I were to take my best guess, the Dow is in a Sideways Consolidation Pattern Formation Mode (SCPF), as far as I can figure out.
However, the SMA20, and Short Term Direction of the market is always fickle minded, and changes its mind more often than we change our underwear!
Why? Because, every day, there are new announcements that may affect the market. Without knowing what news will be coming out tomorrow, and how the market will adjust in relation to the news and its present expectations, how can we "forecast" with any degree of accuracy and reliability?
It is important to understand that even Long Term Trend Followers like the Legendary Wall Street Turtles achieved Win Rates of approximately 30% only, i.e. they are wrong 70% of the time. It is the Reward / Risk Ratio (R/R) of 4 to 10 times that yield them a High Expectancy, Long Term Profitability. If the Turtles can't get it right most of the while with a Longer Term View, what makes us think we can do better?
Having made the above qualification to our analysis, we need to note some important High Probability Observations.
First, the Long Term Direction (3 Months to a Year) is bleak for the Bulls.
NEVER argue with a Long Term Trend (SMA200 Green Line) that is sloping downwards - That's one of my most important trading rules. The odds are against us if we do so, although, like everything in life, there are always exceptions. BUT, trading is about having the odds in our favor.
Second, the Short Term (3 Days to 3 Weeks) Direction (SMA20 Middle Red Line) is Flattish, and although this is not likely to remain so for long, as it is the nature of SMA20 to be trending rather than flat, the most likely continuation from this observation is what I call a Sideways Consolidation Pattern Formation (SCPF). It doesn't matter what patterns will emerge; just that some pattern will form .... eventually.
This is barring any significant news that will influence the Dow. If there isn't any major news, the Dow is likely to trading in a Calmer, Progressively Narrowing Trading Range. For a market that is highly agitated and nervous from extremely volatile trading, this is the medicine it needs if it is to have any chance of recovery - a Time for Healing.
The Bollinger Bands seem to be narrowing as well, and if we can get a period of "No News is Good News" narrow Bollinger Band like that experienced in August 2008 (see Dow Daily Chart), this would be good news for the Investors, at least for the time being.
What would be the Medium Term (3 Weeks to 3 Months) Direction of the Dow?
There are two schools of thought on a Sideways Consolidation Pattern (SCPF). The Traditional School argues that a SCPF is a Trend Continuation Pattern, and therefore, the Probability is Higher that the Dow will continue its Downtrend after the market has made up its mind.
The Scenario Planning School of Thought argues that a SCPF is just a reflection of market indecision. The situation is too confusing for the market to form an opinion TODAY. The market will eventually form an opinion, but let's not preempt what the market will think tomorrow, because it is UNDECIDED. So how can we know what the market will be doing tomorrow when the market itself doesn't know?
Makes sense? But let's just add one more argument, just to make sure that EVERYONE is confused. The argument is that people tend to make the same directional decisions they made in the past, when they are confused, simply because there are no new, sufficiently solid arguments to compel them to change their minds. All things being equal, it is always easier to maintain the status quo. Makes sense as well right?
This is why my answer to the Medium Term Market Outlook is I DON"T KNOW. The MARKET doesn't know either, and anyone who claim to the contrary is really GUESSING.
Will there be a "Climb Back to Health Scenario" as experienced in the period of between mid December 1929 to mid April 1930, after the Dow crashed in October to November 1929?
Or will it be a Sideways Consolidation that is likely to resume its Trend Continuation?
To answer the above question is to study the Dow History over the last 70 years from the period 1929 to 1999.
I found three situations that clearly resembles the current Price Pattern, i.e. the Dow Crash of August 1946, Steep Dowturn of June & July 1969, and the famous October 1987 Black Monday Crash.
In both the 1946 and 1969 situations, there were no happy endings, as the Sideways Pattern eventually moved sideways, closer and closer to a downward trending SMA200, and when it got near, the Dow went down again.
However, in the 1987 Crash, the Dow went sideways, but with a Upward bias, and eventually, it limped its way back above the SMA200 Green Line.
From my studies of Dow Crashes and Steep Downturns (resembling a crash in terms of percentage loss but spreaded over a slightly longer duration), the chance of a Medium Term Wave "Climb Back to Health" turning into a resumption of the Primary Uptrend is SLIM.
Based on my studies of the Dow history of 70 years, my trading system avoids taking a trade when market is in price pattern formation mode, as is the case here. What I am waiting for, is a clearer picture of what is happening, and until I can get a Winning Edge Scenario, I will just sta
y away, and look at other markets.
Also, the only Scenario where I would consider taking a trade against a Downward Sloping SMA200, is a "Climb Back to Health Scenario" as depicted in the period between December 1929 to April 1930. However, this scenario seems to be slipping away, with each passing day. The 1948, 1969 and 1987 Scenarios do not instill much confidence for me to take a Long Position because of the continued volatility of the market.
CONCLUSION
The Medium Term Outlook for a "steady, well behaved, Climb Back to Health" Scenario is fast fading away, into a more sober, continued volatile, and difficult trading conditions of the 1948, 1969 Medium Term Correction Wave Scenario. This is the most consistent outlook with the Short Term Sideways Consolidation, and Long Term Bearish Outlooks, based on the price pattern movements today.
Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)
Best wishes,
Ooi
© Copyright of Praesciens.blogspot.com, 2008
The state of Technology Advancement in Technical Analysis would also suggest that the ability to understand the market at all times is IMPOSSIBLE as at today; maybe one day, but not today.
Having said that, if I were to take my best guess, the Dow is in a Sideways Consolidation Pattern Formation Mode (SCPF), as far as I can figure out.
However, the SMA20, and Short Term Direction of the market is always fickle minded, and changes its mind more often than we change our underwear!
Why? Because, every day, there are new announcements that may affect the market. Without knowing what news will be coming out tomorrow, and how the market will adjust in relation to the news and its present expectations, how can we "forecast" with any degree of accuracy and reliability?
It is important to understand that even Long Term Trend Followers like the Legendary Wall Street Turtles achieved Win Rates of approximately 30% only, i.e. they are wrong 70% of the time. It is the Reward / Risk Ratio (R/R) of 4 to 10 times that yield them a High Expectancy, Long Term Profitability. If the Turtles can't get it right most of the while with a Longer Term View, what makes us think we can do better?
Having made the above qualification to our analysis, we need to note some important High Probability Observations.
First, the Long Term Direction (3 Months to a Year) is bleak for the Bulls.
NEVER argue with a Long Term Trend (SMA200 Green Line) that is sloping downwards - That's one of my most important trading rules. The odds are against us if we do so, although, like everything in life, there are always exceptions. BUT, trading is about having the odds in our favor.
Second, the Short Term (3 Days to 3 Weeks) Direction (SMA20 Middle Red Line) is Flattish, and although this is not likely to remain so for long, as it is the nature of SMA20 to be trending rather than flat, the most likely continuation from this observation is what I call a Sideways Consolidation Pattern Formation (SCPF). It doesn't matter what patterns will emerge; just that some pattern will form .... eventually.
This is barring any significant news that will influence the Dow. If there isn't any major news, the Dow is likely to trading in a Calmer, Progressively Narrowing Trading Range. For a market that is highly agitated and nervous from extremely volatile trading, this is the medicine it needs if it is to have any chance of recovery - a Time for Healing.
The Bollinger Bands seem to be narrowing as well, and if we can get a period of "No News is Good News" narrow Bollinger Band like that experienced in August 2008 (see Dow Daily Chart), this would be good news for the Investors, at least for the time being.
What would be the Medium Term (3 Weeks to 3 Months) Direction of the Dow?
There are two schools of thought on a Sideways Consolidation Pattern (SCPF). The Traditional School argues that a SCPF is a Trend Continuation Pattern, and therefore, the Probability is Higher that the Dow will continue its Downtrend after the market has made up its mind.
The Scenario Planning School of Thought argues that a SCPF is just a reflection of market indecision. The situation is too confusing for the market to form an opinion TODAY. The market will eventually form an opinion, but let's not preempt what the market will think tomorrow, because it is UNDECIDED. So how can we know what the market will be doing tomorrow when the market itself doesn't know?
Makes sense? But let's just add one more argument, just to make sure that EVERYONE is confused. The argument is that people tend to make the same directional decisions they made in the past, when they are confused, simply because there are no new, sufficiently solid arguments to compel them to change their minds. All things being equal, it is always easier to maintain the status quo. Makes sense as well right?
This is why my answer to the Medium Term Market Outlook is I DON"T KNOW. The MARKET doesn't know either, and anyone who claim to the contrary is really GUESSING.
Will there be a "Climb Back to Health Scenario" as experienced in the period of between mid December 1929 to mid April 1930, after the Dow crashed in October to November 1929?
Or will it be a Sideways Consolidation that is likely to resume its Trend Continuation?
To answer the above question is to study the Dow History over the last 70 years from the period 1929 to 1999.
I found three situations that clearly resembles the current Price Pattern, i.e. the Dow Crash of August 1946, Steep Dowturn of June & July 1969, and the famous October 1987 Black Monday Crash.
In both the 1946 and 1969 situations, there were no happy endings, as the Sideways Pattern eventually moved sideways, closer and closer to a downward trending SMA200, and when it got near, the Dow went down again.
However, in the 1987 Crash, the Dow went sideways, but with a Upward bias, and eventually, it limped its way back above the SMA200 Green Line.
From my studies of Dow Crashes and Steep Downturns (resembling a crash in terms of percentage loss but spreaded over a slightly longer duration), the chance of a Medium Term Wave "Climb Back to Health" turning into a resumption of the Primary Uptrend is SLIM.
Based on my studies of the Dow history of 70 years, my trading system avoids taking a trade when market is in price pattern formation mode, as is the case here. What I am waiting for, is a clearer picture of what is happening, and until I can get a Winning Edge Scenario, I will just sta
y away, and look at other markets.Also, the only Scenario where I would consider taking a trade against a Downward Sloping SMA200, is a "Climb Back to Health Scenario" as depicted in the period between December 1929 to April 1930. However, this scenario seems to be slipping away, with each passing day. The 1948, 1969 and 1987 Scenarios do not instill much confidence for me to take a Long Position because of the continued volatility of the market.
CONCLUSION
The Medium Term Outlook for a "steady, well behaved, Climb Back to Health" Scenario is fast fading away, into a more sober, continued volatile, and difficult trading conditions of the 1948, 1969 Medium Term Correction Wave Scenario. This is the most consistent outlook with the Short Term Sideways Consolidation, and Long Term Bearish Outlooks, based on the price pattern movements today.
Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)
Best wishes,
Ooi
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