Fresh from Phil's Stock World

Playing the Patterns

I know you don’t want to hear this. You don’t want to believe that the markets are being manipulated and you don’t want to think you can’t rely on your charts or numbers you read in the papers (or the articles for that matter) as it might prove that you have as little ability to predict the markets as a soap-opera viewer had of predicting who will be the next character to have an affair. Like a soap-opera, the stock market is written for television, has a regular cast of writers (the MSM) and makes little sense to people who come in late to the game.

We, at Philstockworld, do not care if the game is rigged. As long as we can figure out HOW it’s rigged, we know where to place our bets and we can make money from it. So don’t take this as me being down on the market - we love this stuff!

Another conspiracy we drone on and on about is the good old "stick save." Perhaps it’s not a conspiracy aimed at propping up the markets on low volume, perhaps it’s a natural phenomenon of the markets that makes it move up 3 out of 5 afternoons per week but we like to call it a stick save and we like to play it at 2:30 on any low-volume day. You can buy a DIA call that is about $2 in the money, like the Sept $94 calls (now $2.05) and they will gain 70 cents for every $1 the DIA moves up (the delta). Had you made this trade at 2:30 every day and sold at the close for the past week, you’d be up net 50% on that trade. When we see a pattern, we label it and follow it - is that complicated?

Market movement doesn’t matter. Fundamentals matter. If you haven’t learned that when the Dow was up at 14,000 or down at 6,500 or back at 9,500, all in less than 2 years - then I don’t know what I can say to convince you. Good companies bounced back, bad companies failed. The charts betrayed the pattern-watchers over and over again but the fundamentalists, including "doomsayers" like Whitney and Roubini were right when they said the markets were overbought and we were right at the bottom when we said they were oversold. Now that the markets have drifted into a middle zone, I’ve been willing to watch the charts and we set our levels every day (and RUT 577 kept us from being bearish early in the day yesterday, thank goodness).

Just because we set levels, doesn’t mean we’re believing the market action - it’s just a rational acceptance of the fact that "you can’t fight the tape" because there are so many of you out there who consider yourselves technical traders. As we saw in the last, failed "head and shoulders" event in early July, these patterns have become traps for the TA crowd and it was that sell-off that drew in the short speculators and the subsequent short-squeeze that followed, that gave the markets 2/3 of their current gains. The question that faces us now is - can this level (Dow 9,500, S&P 1,000) be sustained when the volume picks up in the fall?

Reading the Fed’s latest Beige Book, I would say clearly the fundamentals do not support the current market levels. As I parsed out the text for my 2:30 Alert to Members, I decided to highlight positive indicators in green and negative ones in red. Needless to say, the report was a sea of red, very similar to our negative reading of the Fed minutes last week. The Fed minutes were long on optimistic outlook but very short on actual improvements in the economy. The key is that those minutes were from a meeting that took place on August 11th and the data compiled was through July at best.

We’ve seen a clear deterioration in our "recovery" since then and the Beige Book, which covers the period through the end of August, contains little evidence of a bouncing economy. This is fine with us, it’s what we expected and the only question we are really wrestling with at the moment is: Should we raise the mid-point of our trading range from 8,650 to 9,100 or is this stretch to 9,500 the new "normal." We set our 8,650 Dow target way back in November and it has guided us through the ups and downs of the market - helping us to be, as Warren Buffett advises "Fearful when others are greedy and greedy when others are fearful" and we’ve gotten some great bargains along the way by sticking to our fundamental guns.

Has the global economic climate changed enough for us to raise our targets 5%? The mood certainly has but there are still many risk factors that leave us cautious. This does not mean we need to sit out the market and it does not even mean we have to bet bearish (in fact, we have very few bearish bets in place at the moment, something that will change into the weekend). What it does mean is that we will play cautiously, taking small gains quickly off the table and stockpiling cash for the next buying opportunity if we do get a real sell-off. I would love to see a big-volume move down to 9,100 and see it hold up so we can feel more comfortable raising our targets. The Dow NEEDS to finish the year at 9,700 to post a 10% gain, which is what we’re going to need to get enough investors off the sidelines to keep things interesting next year.

We’re not there yet. All we have so far is the biggest rally on the lowest volume ever recorded and there is AMPLE evidence that up to 80% of that volume is coming from 5 trading firms that have a strongly vested interest in getting the markets up and over that 10% mark - otherwise, where are the people going to come from to pay their fees? Only by being able to print those shiny brochures with all the charts and graphs that show you how much better off you’d be if you let them have all your money can "THEY" make their Billions in fees and Billions in bonuses for the next decade. As the first decade of the 21st century draws to a close, just try to keep that in mind.

In another clockwork trade this morning, the dollar (9am) is now at 91.8 Yen and $1.46 to the Euro and $1.664 to the pound. You could have made millions trading off my very cynical 7am prediction at the top of this post but we don’t mess around with currencies other than a couple of ETFs as they are just too crazy - even for us option traders! Still, a guy like me shouldn’t be able to predict the movement of the Dollar that easily, especially when I had no fundamental reason for it, just theory that "THEY" push the dollar down in order to boost commodities and the markets artificially so they can reel in the suckers for another round of market manipulation.

We’re going to be very happy to start buying when we see a clear break over our break-out levels (doesn’t that make sense?). As I said earlier this week, is the global economy really back to just 1/3 off the highs, even with 10% of the global population unemployed? If so, I suppose we must have been way UNDERVALUED at the top as we didn’t even need 10% of our customers in order to make 66% of our profits - that’s pretty incredible - as in: NOT credible.

As the Abe Lincoln once warned (quoting PT Barnum) in the face of shenanigans that were being played by his opponents: "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time." Like Goldman Sachs, the great George Bush the second also seized on Lincoln’s words and he said (and I kid you not): "You can fool some of the people all of the time and those are the ones you want to concentrate on."

Let’s just be careful out there and try not to be one of "those" people. As my favorite band says: "We won’t get fooled again!"

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