Thursday, September 2, 2010

TEST THE HIGHS?

I have been expecting the daily cycle to bottom on last Friday's revision to GDP or possibly with Friday's jobs report. Yesterdays big rally more than likely confirmed the daily cycle low did come last Friday.

Now we have a test coming. If the market can break above the August highs it will complete a 1-2-3 reversal. That will confirm the trend change from down to up and the odds will be good that we will test the April highs.

 
Actually I expect we will probably test and at least marginally break to new highs even if we have entered another leg down in the secular bear market. I'll explain why.
 
Back in July I posted an article showing how big money runs technical levels in order to trick technical traders into puking up their shares. That allows big money to accumulate large positions without moving the market against themselves. Well the same thing happens at market tops and bottoms.
 
Both the `02 bottom and the `07 top occurred with a slight break of a significant technical level that immediately reversed.


 
 

 
My expectation is that if the market can complete the 1-2-3 reversal by rallying above the August highs we will probably see the April highs marginally broken. Now if that break is immediately sold there is pretty good odds that big money used the technical break to unload positions onto technical traders in preparation of the next leg down in the secular bear market.


23 comments:

  1. Get your crash helmet on Toby and STFU!

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  2. Brother I think you need to wake up and smell the cycle bottom. It's not like I haven't been trying to warn you.

    We have now had two 90% up volume days in less than a week. That isn't crash behavior it's bottoming behavior.

    You didn't listen in July. You didn't listen in Feb. when I warned the intermediate cycle correction would just be a profit taking correction. And you didn't listen when I warned gold was bottoming in late July.

    Are seriously going to do this four times in a row?

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  3. Thanks for the thoughts, it all helps. Nice blog. Very helpfull. Do you have a rough time line for the pump and then dump. Cheers.

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  4. The market is playing musical chairs here, and will pull out all the chairs very shortly...it could be right after Labor Day, or it could be mid September. New highs only will come in price if they do it quickly. If you play the market on the long or short side, have your semi-tight stops in place.

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  5. Doesn't look like musical chairs to me. The market is just putting in a cycle low above the last cycle low. Higher highs and higher lows. Defintion of an uptrend.

    That doesn't seem that hard to understand.

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  6. Jus look at TSX, just 2% or so below April high

    has been outperforming S&P since April

    Benny said he would not let prices drop, and what does TSX have, a bit of gold, a bit of oil, a bit of copper, some stuff

    and a bunch of banks that did not require bail out last time round

    if permas are right and this a bear, and if chief permas of EWI are right and it is all one market, then TSX should drop like a stone pretty soon, but it does not, somehow

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  7. You and your red lines are totally marketing bullshit. Anyone following your advise would have lost a bundle.

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  8. Hi Gary. I came to appreciate your postings, especially those pertaining to gold, which interests me in particular. I discovered affinity between your thinking and mine, and I am learning from you.
    However, on this particular point, re. the running of stops, I do not quite follow you. Let me briefly elaborate, since I would appreciate your feedback.
    If the stops are to be run on purpose, there would be a more ample movement bellow the technical levels in order to pay for the trouble, isn’t it. However, what we see is a drop slightly bellow the technical level. Which is to say, there isn't much profit to be made from such a move. Therefore, the critical things happen _above_ the critical technical levels.

    The rationale for "leaking" tops and bottoms, to my mind, has two aspects to it: on the one hand, in the anticipation of a reversal in a trend, the reasonable tendency would be to place the stops a bit displaced by a marginal amount in the direction opposite to that of the trend. At a top, expecting the reversal of the trend, I would place my limit order a bit lower than the technical level (since I do not want to risk to be left out of the movement). For example, in the case of gold, I observed that such differences range in three orders of magnitude: 0.75, 1.5 and 2 dollars. Anticipating a bit, the currently forming top in gold: the technical level was at 1255.670, the closing price on June 25th, the "gatekeeper" to the top, as it were. I observed the price action on a 1 min chart, since I was expecting this top for quite a while. The price movement stopped dead at 1254.824, interrupting the progression towards the Fib target, and triggered a series of confused price actions which lead, over the span of one hour, to an abrupt direction reversal. At that precise moment, I knew that a serious lot of early sell orders have been hit. In retrospect, that bulk of limit orders proved to be _the_ important factor which stopped the price movement. People who are not totally blind must know that if those orders were there, more are above… That price level has never been reached (as of Sept 03, 5 min before the London Fix time, as I write this, and I venture to affirm that that is the current top of gold). The distance is 0.746 (the prices I quote are spot prices, XAU/USD, as used as forex pair) [see bellow for continuation]

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  9. The purpose of running stops isn't to make money on the short side. It is to allow big money to take large positions without moving the market against themselves.

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  10. [continuation of the above]

    The reciprocal also holds true. If the trend is down, and I wait for the reversal, I would not place my limit order right at the technical level, but a bit above it (even though this might sound counter-intuitive). For example, looking at the bottom of July 27 (gold): I do not know what your measurements were, but according to mine, the technical level was 1154.700, while the maximum of the bottom occurred at 1156.72: 2 $ above.

    It is precisely these early, ahead of time and technically correct orders which determine the reversal of the market. They represent early signals, for who has they eyes to see, that the sellers/buyers came in. And not any sellers/buyers, but those with foresight and whose action was strategically planned and designed in anticipation of the events, and not merely as a momentary response to whatever is happening “now”. They are those that halt the movement, while the overshooting of the technical levels is determined by the stampede of decerebrated buying/selling – which is the second aspect of the phenomenon we discuss. It is the inertia of the price action provoked by indiscriminate market operators which determines the “leaking” bottoms/tops. There are also the least aware those which determine the anatomy of tops/bottoms, where it is not unusual to have a second high/low, removed by a small amount from the first (that which is conventionally called “testing support/resistance”. The least aware do not grasp that if there was a first bulk of orders there, stopping the movement of the price, more will exist at a little higher/lower levels.

    To summarize, it is the less smart and the more emotional money which runs the stops. All they can see, is “higher, higher, higher”, or “lower, lower, lower”, whichever is the case. But their eyes are injected by the secretions of their limbic systems…

    The issue of “running stops” occurs only if the call is dead wrong and, instead of a top/bottom, there is a temporary consolidation after which the prevailing trend resumes. In such a case, smart people would want to have their continuation orders (or stops) placed safely outside of the range of emotional price movement, and other smart people would know that. Only a fool or a swindler would think of trying to run them on purpose to another fool or swindler. It is not “smart money” playing tricks on “dumb money”, but the “smarter money” reigning in the dumbest, until the not-so-smart-but-neither-dumb get the point. I, for one, feel more comfortable with such an image of the things. If the market is rational, which I do believe with conviction, then it should be rational in the details as well. Otherwise, governments and their servants, irrationalist intellectuals and academics, can have it their way…

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  11. Toby said...

    "The purpose of running stops isn't to make money on the short side. It is to allow big money to take large positions without moving the market against themselves."

    Sorry, Gary, but this is not an explanation. I argued that "the running of the stops" does not make sense, whatever the reason. To me, this is another market legend which aims at rationalizing or justifying whatever shortcomings of the trader. While perpetrating this legend, in spite of the argumentation to the contrary, nurtures an unnecessary level of fear , especially in the novice traders.
    Specifically regarding the purpose of "running the stops", well, all of us love to buy cheaper, don't we. Running the stops for a measly 2 dollars or even less (see figures in the post above) seems to me to little gain for too convoluted a theory. In philosophy, there is something which is called "Okham's Razor": do not introduce in your explanations un-necessary hypotheses. The "running of the stops" is just such an unwarranted hypothesis, when everything can be explained rationally without it.

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  12. Actually it makes perfect sense.

    Let's say a big money player wants to take a 500 million dollar position in the gold opr silver market. He can't just hit the buy button like you or I would. If he did his order would send the price rocketing higher (too much demand not enough supply)

    In order to get the kind of liquidity he needs to make his buy he needs a bunch of sellers to come into the market all at once so he can place his buy order into a very liquid market.

    The way to do that is to sell the market down past an obvious stop loss level.

    When that happens a ton of technical traders hit the sell button all at once giving the big player the liquidity he needs to get his big order filled without moving the market against himself.

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  13. There was actually twice normal volumn on that day in both GLD and GDX and that doesn't include what transpired in the futures markets.

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  14. Gary, I would expect you to see yourself the shortcomings of the argument you propose. The little 2 $ dip on small volume bellow the technical level hardly qualifies as "a lot of sellers" and generator of liquidity! That little blip on the chart probably represents the - few - last confused, scared out of their wits, sellers! If they sell at that point, they have no business trading, and the market will select them out no matter what. If this dip bellow occurs at all: for gold, the July 27 bottom came 2 dollars above the technical level; the current top in progress took shape 2 dollars bellow the technical top.
    Sticking to your example, "the large number of sellers" that the big buyer wants to induce to sell never come in the market all at once, but during a drop which may take days to take place. The big seller does exactly what I do, and you do: sell as much as they can while the price goes down, and buy pyramiding while the price goes up. It is true, though, that the impact of the big trader on the market is larger: what the retail investors achieve by numbers, the big seller may achieve by size. However, if I were a "big" trader, I would be very, very careful setting my mind against the number of smart retail traders around (recall the small dynos in Jurassic Park II, how vicious they were). Being "big" is no guarantee of having it your way if you are stupid! The point is that everybody, large or small, has to pay attention to the technical landmarks on the chart. That's why they work!

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  15. LOL the problem is of course one will eventually go broke expecting technicals to give one an edge. At best they will work maybe 50-60% of the time.

    At major turning points you need different tools than technicals.

    At bottoms and tops technicals will just confirm the trend.

    ne must use cycles, sentiment and money flows to spot trend changes.

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  16. This conversation about running the stops DOES make sense. It is described also by other technitions as a "SHAKEOUT"...when volume at times floods in at the very bottom, the move is 'exhausted' and the last sellers are saken out of their positions ( often a panic below a certain level)when SMARTER ones start buying, and the trend changes as buying increases and sellers are left behind. If the doubter needs an 'explaination' to rationalise it...remember that many machines now do the largest volume of trading...they are "PROGRAMMED" to sell at tech levels. This is called your 'stop limit' or 'limit order'. If the big boys drop price below stops at a technical point...the 'sell ' orders are triggered automatically and large volume results as machines PROGRAMMED to sell offer large amts of shares to the bottom fisher.THX for your reports Toby...Robert

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  17. Gary, I feel that the point of my initial posting has been lost on you, and I am sorry for that. I do not mean to get into a polemics on marginal aspects, least of all, on the value of "technical analysis"! I am not a "technician" (on G, I readily acknowledge that I am a novice in that respect, and I understand why pure "technicians" make an object of mockery). I am even sorry I used the word: I look at the chart like at a map, and just use my contrarian/dissident biases in order to make sense of the geometry of it, and the markings on it. The markings meaning "how is it going to happen that which must happen while driven by people most of whom only vaguely understand why it is happening".
    For the rest, all I meant to say is that the activity at the top and at the bottom has a rationality which can be comprehended without invoking intentionality of singular actors, be they governments, banks or "big traders". This is the beauty and the element of liberty, but also of order, in the markets: it’s vastness and decentralization makes it so that no individual entity is capable to rig it to the point of disrupting its rationality. If one gets this right, then one can proceed to understand the detailed aspects of this order, such as to make one’s action in it more successful. I believe that the theory of the “big trader” does not help, and I thought that I can propose something better which you eventually would elaborate on. I may be wrong. To each, his/her wisdom ;) Enjoy your long weekend.

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  18. I find a huge hole in the arguement that a big buyer actually sells to break a technical stop level. If that were the case, this would also happen nearly everyday to get people stopped out so a bigger intraday or swing trader could buy the market once a support level was broken. This doesn't happen on a daily basis, as support rarely happens unless a warning signal is issued first. It this were such a normal buying pattern for the big guys, smaller big guys would use this method on a daily basis. It can't work in just one instance. Must like people don't believe in patterns or fibanocci number...they are incorrect as they happen over and over again.

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  19. The only times a big player will be trying to break a support level will be at intermediate cycle lows like in February and July.

    Certainly they aren't going to try to force a few stops to trigger on an intraday basis. That would accomplish nothing.

    They need to break through a major line of support at a point when the market is already starting to panic. That will only happen at a big obvious supoort level with a ton of stop orders right below it.

    You are missing the point. These aren't technical traders these are value investors trying to enter large positions at levels they deem "too cheap". They need lots of liquidity to enter in size without moving the market against themselves.

    I'm trying to show you how they do it by taking advantage of the technical traders.

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  20. I understand, but the same would be true of big day traders and swing traders if that were the case. They know where the most daily stops are, so they could trigger them and buy right below them. Same thing, you can't have it both ways. Also the Feb. lows broke no support, as they stopped right at the 200 day EMA. the July lows would have had to be a 3 day event, and there should be huge volume to accompany your thesis the day after the bottom. So I question how this really works. I think it is people panicing and getting out...and of course there are smart people on the other end that can buy there, but they too have to have a stop in place.

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  21. I give up. If you can't understand the difference between a value invstor and a trader then I just can't make you understand.

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  23. Guys... Read EWI to get the bearish calls on everything and use it for just the exact fib levels on the markets. But bet against all of their bearish calls on gold and silver. Always underline the parts where it says "any movement above these levels and this call will be negated". Their stuff is well written and convincing but do not be convinced. Gold and silver have officially arrived and it is very foolish to bet against them at this time. Here's the best investment advice you'll ever get.... Buy a safe. A big safe. Then fill up the safe with gold and silver. That's it! Put down your newsletters. Stop arguing with Toby. It is over. Only gold and silver can save you. Everyone.... Please now put forth on this post here whether or not you hold any gold or silver, physically. If the answer is no, then you should pick up the phone on Tuesday morning and get started with a huge physical silver purchase along with some gold to join our club. We will still welcome you with open arms. We really care about you and we don't want you to pay too much as things start to really heat up here. You mark my words. I am right.

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