1929 - tag category postings

The SPY slammed down through first trendline support today on substantial volume and once again confirmed the bear case that I have been talking about this week.  It was really bearish action today and the dip buying that used to work so well in recent months clearly failed this time.

Right now I am thinking that we will probably come to a ‘resting point’ at 1010 on the SP500 as soon as tomorrow, or maybe by Monday.  That level should hold for some kind of reactive rally to the upside.  This is what happened on the previous touch of support about 4 trading days ago.  It led to a very low volume bounce that led to the severe decline we are in now.  So my thinking is that I will close out the TZA position at roughly 1010 on the SP500 and then wait for a multi day bounce and get prepared to go long the TZA again and find other ways to short the market at that time.

I am also thinking that I would like to hold a core position of TZA throughout this entire decline because I think we have plenty of room on the downside.

I have already said many times that it is still somewhat of a mystery to me what the speed of this decline will be.  When I first started reading BAMInvestors posts on twitter it opened up my mind to the possibility that this could be a very fast and sharp decline. I hate to use the word crash, but it might resemble that type of pattern at least on the weekly price charts.  Up until this point I have been assuming that this decline will be orderly and somewhat slow as it was during the 1975 period after that similar huge automatic rally that occurred. 

But then I started thinking about market psychology, the nature of rising and falling wedges and I have come around a little bit to the camp that at least considers a rapid down price move as at least a decent possibility.

From a psychological perspective think about the average investor or even the pro investor who has been in the market for the last few years.  They have had to endure a huge severe bear market decline in 2008 that was fast, vicious and relentless in its price decline.  If you look at the 2008 bear market on the monthly or quarterly charts it clearly looks like a crash.  If we start to get rapid price decline peoples memory may trigger and cause them to be a bit faster on the sell button this time as compared to last.

But still, I think 1010 is a possible resting point for this market as soon as tomorrow and then a reversal for several days, maybe a week in the form of a low volume bounce.  The leg down after that should be able to break the long term uptrendline in force since the March time period.

By the way there is a full moon this Sunday, so a bounce occurring either tomorrow or Monday at 1010 on the Sp500 seems quite probable.  The closing arms ( indicator which points out extreme oversold and overbought levels) today hit 3.6 which adds to the idea we are ready for a bounce in the next couple of days.

Today’s action in the SP500 has decisively turned the weekly MACD signal line down and closer to a convergence point.  So the longer term bearish picture remains intact and I suspect we are looking at LEAST 1 to 2 full months of downside price action here.

If we do pull back to near 1010 tomorrow on the SP500 it would possibly set us up for a somewhat small head and shoulders topping pattern with the head portion completed either tomorrow or Monday.

Automatic Rallies

Ever since the BAMInvestors talk about a crash I have become interested in the automatic rally concept.   If the rally from the March lows of this year actually is a true automatic rally then it does not bode well for the follow price action after this automatic rally is over which appears to be the case in the next week or two.

I have seen a few automatic rallies in the past.  Some of them have been in individual stocks and the most famous one was during the 1929 crash period.  Here are a few charts that depict what I believe to be automatic rallies and the end result of them (click on chart for full size):

After you have an extensive price advance that peaks in a significant climax, price moves into a fast price decline move that marks the bear market leg or ‘crash’ if you will.  But price gets so extended to the downside that just the simple forces of physics cause an ‘automatic rally’ to occur.  This automatic rally is an expression of the extreme bullishness that marked the price climax and the automatic rally can be EXTREMELY persistent. 

I think we can say that the rally that has occurred since the March lows has been extremely persistent.  I believe there have only been two other times in market history since the late 1800’s where there existed 7 straight monthly up closings.

And I should add that this automatic rally in the SP500 has been on lighter and lighter volume right into the top of the rising wedge which is not a good sign.  You had a very severe price decline into the March 2009 lows that was on huge huge volume, then this automatic rally on lighter and lighter volume…

The volume that comes in on the down leg in the months ahead is going to be the clue as to whether this is going to be a really severe decline that gets enough momentum to smash us to the March lows.  Or whether it will be a decline that eventually finds support in the 900 to 950 area before eventually resuming higher in a longer term bull run.

By the way I should mention that even if we do get a downward reaction in the current market similar to what happened in 1929, it should be noted that it will probably take plenty of time to unfold.  We are talking many weeks here.  I doubt very much that we are looking at a 1 to 3 week severe plunge.

Stay tuned! The month of October is going to be a potentially wild month in the market!

We are living through unprecedented financial history right now.  It almost seems surreal because I remember having heard so many times about how bad the markets were in 1929 and 1974 but I had never lived through one of them.

But now we are right in the middle of one right now and the cold hard reality of it all is truly eye opening.  Looking carefully at the price charts it really does look like we are doing a bull market in reverse.  If you flip the charts upside down it will look like a persistent bull market. 

But what style of bear market are we in now? Are we in a 1929 bear market that will see the Dow Jones Industrial Average ultimately decline 90% as well ?  The 1929 bear market saw the Dow do about an 89% decline from ultimate peak to final low. If we were to decline 90% from our peak in 2007 it would put the Dow at roughly 1500.  What is intriguing about that level is that it is close to long term 15 year support we had during the 70’s of the 1000 level.

What is my prediction? Well my own take right now is that we will have a 1974 style bear market where inflation start to kick in severely and inflates everything in sight, including the stock market.  In that scenario we could see a sharp and dramatic reversal to the upside in the stock market that catches people by surprise and rallies all the way back above 10,000 on the Dow.

Given all the current negativity everywhere it seems unconscionable to think the Dow could actually get such a sharp rally going.  Marc Faber pointed out a few years ago that inflationary periods in market history can lead to very large, fast and violent moves in markets.  This makes sense and it is very notable.  It makes sense because what you have is a market confronted with so many fast changing variables that it cannot make up its mind which way to turn. It is like a stock market that has attention deficit disorder.

So it is very likely that we will be seeing huge violent swings not only on the daily and weekly time frame charts. But also on the monthly and quarterly charts as well!

In fact that is exactly what happened in the 1974 bear market. It was the end of the world down there and then it turned on a dime and never looked back.

So again, my own take right now is that we are in the 1974 style bear.

But is there a better tool we can use to determine if we will be in a 1929 or 1974 bear going forward? Yes!

Simply focus on the three charts below (which by the way I will be updating over time and alerting you. Interested in email updates of new posts here? click here).

I think the trick in determining which type of bear market we are in can be done quite simply by drawing a down trend line along the lower highs of each bear market.

In the case of 1974 you can see that eventually the market was able to create an upside reaction that decisively broke up and through the down trend line and signaled thereafter that there would be trading range markets and more complex trading patterns in the indices.

In the case of 1929 you can see that the Dow Jones Industrial Average was never able to break above the down trend line until it finally bottomed 90% down in 1933.  This is a key observation because it shows that in 1929 there was extreme trend persistence in the bear market and price was never able to exceed it’s own yellow down trend line.

So what about the current market?  Well it boils down to either scenario A or B. Scenario A is that we continue down a bit more into May or June of this year and then get a rally going that brings us back up to touch the yellow down trend line.  Then, we fail and break down again similar to the 1929 style.

But Scenario B is that after a bit more down move into middle of this year we get a violent upside reaction rally that is able to PIERCE the yellow downtrendline. If this happens, then it will in my opinion invalidate the 1929 scenario.

The fate of our country and perhaps the rest of the world rests on a simple yellow downtrend line! Amazing!