Babak's Journal

Two things:

1] Please keep personal matters and irrelevant stuff off this thread as a favour to me. I thank you in advance.

2] Perhaps I should have been a bit more descriptive when I started this journal. It is not my intention to have a journal like others giving specific entry/exit and securities but rather to talk about the market as a whole and identify inflection points (significant in a long term time horizon -- weeks and months). I will take specific positions but I may not mention them.

You may interpret this as a 'cop-out' or you may interpret it as what I've stated above. Simply that I'm writing about the market and talking about TA as it happens. If this is not to your liking, then by all means, skip over the thread to another journal that does mention those specifics you seek -- there are many. I don't mind. But if instead, it is to your liking, then stick around and maybe critique or add something of your own.

 

I actually agree with you, that we are in some type of topping mode.

But, I feel the S&P will rise to 950 before such process can begin.

That's why I joined "your" thread.

Any other noise is just noise.

 

The recent action in the market is reminiscent of March 2002 when in similar fashion the VIX was screaming lower everyday in a clear downtrend and in contrast, the Dow just tread water.

These two specific market behaviours are very alarming as it means that the usual relationship between volatility and the market have decoupled. When this happens traders must sit up and take notice, or else....

 

Yes, but your solicitude in offering Babak advice on how to trade was arrogant and counterproductive. A tone adjustment would be nice and strict focus on substance would go a long way.

Expand on why you think 950 will be the upper end.

 

you're back in high school , teaching err moderating a class, and I'm a student?

Well, this is not high school, and you are not a teacher. Wake up, dude.

 

What a day! Yeee-ha! (as candle might say)

Simply breathtaking! I tip my hat to the longs (surfer and others) and hope they profited handsomely from the bullish convictions expressed beforehand.

From the bull's point of view, things are hunky dory. The market broke to the upside after a congestion period with all the subtlety of a rhinoceros in rutting season. It's above its long term moving averages, the BP aren't high at all and finally the PC ratio is high.

Now the nasty part of taking a hard look at the market from the short's point of view. Well, first lets remember that even after the recent "breakout" there is a generous dollop of resistance. To 8900 for the Dow, 940-950 for the SPX and the Nasdaq is sitting at the 1500 line. Similar "breakouts" in the past (in SPX) on 12/5/01 or 9/1/00 failed miserably because other indicators were screaming SELL. Can it happen again with this breakout?

Second, long term MA have no real significance when it comes to timing the market. And some key BP numbers are crawling ever so unnoticed to rather alarming levels. The transports is at 75 after its hyper move today. The Nasdaq is at 53 within easy reach of the hallowed 55 mark. And the NDX at 73, again within spitting distance of its historical high of 80.

Finally the PC ratio (21MA) is at 0.77 not as low as I would like it but hey, can't ask for everything!!

As you probably guessed by now, I am still bearish and with this new surge ratcheting up my conviction a couple notches. Is this thick-headedness? is it an inability to observe and analyse new information?

Well to make sure that that isn't the case lets haul the market to the autopsy table and strap it down to take a clinical look at the internals of this rally. Lets take a look at NYSE new highs relative to NYSE new lows (and Nasdaq highs/lows) and express this as a ratio.

The graph looks like a heart monitor, with occasional 'blips' interrupting a horizontal line. Interestingly enough these 'blips' occur at market tops. That is to say a relatively high number appears, pointing to a high number of new highs relative to new lows. This makes logical and intuitive sense because you would expect the market to get stretched when it is producing a predominant ratio of new highs to every new low.

And sometimes this appears in the form of a spike which can be quite high (relative to its norm). The spike can be interpreted as a massive number of new highs relative to one new low in a short period of time. In the recent past this number has been as high as 92! (as it appeared in mid May 2001 for the NYSE data or as high as 36 as it appeared in the beginning of January 2002 for the Nasdaq data).

Well, thanks to today's market action we have a new spike! For the NYSE new high/new low it comes in at a whopping 57.33 and for the Nasdaq new high/new low it comes in at a respectable 14.4 One must realize that both those numbers are high for their respective markets (don't compare apples to oranges).

Just to make sure we all are on the same page, this means that today for NYSE stocks there were 57 stocks reaching new highs for every one stock reaching a new low. And for Nasdaq stocks, there were almost 15 stocks reaching new highs for every one stock reaching a new low.

For the Nasdaq numbers, it only spiked higher, in recent history, on Jan 2002. And for NYSE numbers, it only spiked higher on Feb 2001 and mid May 2001. Needless to say, all of those dates were significant tops.

The chink in the armour is that, this is only pointing to an extreme condition, and as we all know, extreme conditions have a nasty tendency to become more extreme with an uncanny ability to stop us or bleed us out of a trade.

So how to play it? I can offer several suggestions that I'm following myself. Commit capital in stages, rely on TA for specific stocks/sector indices, use options, and use your intuition or borrow an ounce from someone else.

ps I mentioned the confirmation of the Dow with the Transports in a previous message. Well, it seems from the sage himself that its a non event. Russell says "the question of whether the Dow will confirm by bettering the March 21 peak of 8,521.97 has become less important in my mind. As the days and weeks go by, the importance of a confirmation becomes weaker."

So who am I to question the Oracle of the Dow?

 

And here is the Nasdaq graph showing the 'blip' marking extreme market conditions:

 

I try not to make predictions, particularly longer term. However, I think it's worth noting that the market has managed to just reach the top of a big trading range, despite the war success, low rates, encouraging earnings news, a big drop in oil prices, a tax cut that appears in the bag and the apparent survival of a couple of sectors like telcom and energy trading that looked likely to devastate banks with bad credit losses.

Now we are entering a period of negative seasonality for the market. The dollar is at four year lows against the euro and shows no signs of reversing. We don't know how SARS or N. Korea will play out. By all accounts stocks, particularly tech, are pricey. Unless we actually believe it's bubble time again, it seems reasonable to expect a pullback.

On the other hand, my breadth model is showing a pattern that in the past has frequently produced several strong up days.

 

Hehe... nice thread Brother Babak... keep up the good work...

P.S. yeeeeeeeeeeeeehhhhhhhhaaaaaaaaa!!!