Bernanke Claims Investors Misunderstood "Tapir Talk"

The big news since last update is, of course, the surprise announcement from Bernanke that there will be no taper of the QE program.  This announcement came after months of "taper-talk" -- and burned investors who bet the market would decline as it was weaned off the Fed's bottle.  On Thursday, critics blasted Bernanke for his lack of clear communication.  Chris Low at FTN Financial was quoted as saying: "Despite Bernanke's effort yesterday in the press conference to paint the FOMC decision as entirely consistent with earlier communication from the FOMC, it was not...  the Fed's communications credibility is shredded."

My sources have provided us with an exclusive photo that helps explain the miscommunication.  The problem stemmed from the fact that the words "taper" and "tapir" are pronounced the same, but have entirely different meanings.  Bernanke communicated perfectly -- it was we who misunderstood. 

Taper means: diminish or reduce or cause to diminish or reduce in thickness toward one end.

Tapir means: a nocturnal hoofed mammal with a stout body, sturdy limbs, and a short flexible proboscis, native to the forests of tropical America and Malaysia. 

When Bernanke talked about how to handle the Tapir, anxious bears simply heard what they wanted to hear ("taper").  After seeing this photo, I have to disagree with Chris Low -- the Fed's communication credibility is, in fact, wholly intact.   

If it weren't for the discovery of this honest miscommunication, one might have started thinking the Fed was actually trying to bait bears with all its taper-talk.  Luckily there's no need to start any blindly speculative and completely unfounded conspiracy theories, since we now know that simply wasn't the case.

Where does all this leave the market?  Well, we're into territory where bears will need to make a stand fairly quickly.  If this wave begins to appear that it's subdividing into a larger five wave form, we'll have to start giving serious weight to my big picture bullish count from February and its long-term target in the 2100's. It's worth mentioning that the fourth waves we've had to date have been somewhat pathetic -- typically we'd have expected a bit more downwards movement than we've had each time, and a couple have caught me looking (to borrow a baseball term).  Welcome to the Fed's humbling New Normal, I suppose.  

The hourly chart shows more detail.  Frankly, it looks likely that there will be at least a bit more upside, but there are enough waves in place to count the last rally as complete.

The Philadelphia Bank Index (BKX) continues to look uninspired, and is still keeping me from jumping on the "rah rah, we're going to the moon" bandwagon.  A breakout over the key 65 zone could change all that, though. 

In conclusion, the intermediate term will hinge on how the market behaves in the directly upcoming sessions.  If the rally is a straightforward five-wave form, then it should be nearing completion.  If it instead subdivides, the market will be off to the races again and headed for the 1800's.  We'll have to see how the structure develops over the next few sessions.  Trade safe.

A Closer Look at the Big Picture

At times like this, it's easy to get lost in the day-to-day market nuttiness, and I've found it's sometimes helpful to take a step back away from the one-minute charts and look at the big picture.  So today we'll start off with the old reliable NYSE Composite (NYA).  NYA is a great representation of the broad market, since it contains all the common stocks on the New York Stock Exchange -- and it often tells a different story than the big-cap indices like the Dow Jones (INDU) and S&P 500 (SPX).

It's very interesting to note that NYA has still not made a new all-time-high.  The chart below is a weekly chart, and the notes contain most of my thoughts.  Just glancing at the chart, the main thing that jumps out is how quickly and effortlessly NYA plummeted back in 2008, versus how it has seemingly struggled to regain that ground.  This is especially noteworthy given the massive Fed money pumping that's occurred during the past five years.  The picture suggests that the fits-and-starts nature of the rally is caused by the fact that it's a correction to the last decline -- one of the ideas behind Elliott Wave analysis is that the market struggles when moving against the larger trend.

The Philadelphia Bank Index continues to lag.  So far, this isn't doing much to sell me on this rally as anything that will have legs for SPX.

Even if this rally is going to become an impulse and make a new all-time-high, it looks like it's very close to being a complete structure.  As I've noted previously, the main bullish hopes would lie in the idea that when this five-wave fractal completes, it will make up wave (i) of a still larger five-wave fractal.  Given NYA and BKX, I currently have to view that bullish option as lower probability.

In conclusion, I do not presently believe this is the start of a nosebleed rally -- to the contrary (while I think it's entirely possible SPX will push on to another high), I still believe the market is in a topping phase.  Trade safe. 

No Fed Chairman? Must be Bullish

Futures are indicating a big gap up come Monday morning, so it looks like the market could blow through my 1695-1700 target.  This market somewhat reminds me of the reverse of the 2008-2009 bear market.  In 2008-2009, the market would bounce for a little while and get bulls hoping the bottom was finally in -- then it would collapse again to new lows.  The market didn't form a long-term bottom until bulls had all but given up entirely.  I recall in March 2009, investor sentiment was over 70% bears.

We may need to see that shoe on the other foot now, and I wonder if we aren't awfully close to the point where bears capitulate.  The ongoing challenge of speculating as if we were working within a "normal" market framework is that we have continued Fed money pumping -- and as the saying goes, "You can't keep a good printing press down."

Speaking of, the big news over the weekend was the voluntary withdrawal of Larry Summers from consideration as next Fed Chairman.  Summers notified Obama on Sunday first via phone call, then sent a letter soon after (the title I really wanted to use today was: "Summers Falls as Winter Approaches").  In response to Summers' withdrawal, Obama issued the following press statement via teleprompter:

"Larry was a critical member of my team as we faced down the worst economic crisis since the Great Depression [APPEAR CONCERNED], and it was in no small part because of his expertise, wisdom, and leadership that we wrestled the economy back to growth [GESTURE WILDLY AND FORCEFULLY, AS IF WRESTLING] and made the kind of progress we are seeing today [PAUSE FOR LAUGHTER]."

Many are speculating that Federal Reserve Vice Chair Janet Yellen is now the front-runner for the Fed Chairman position, since, among other things, her qualifications include having a last name that sounds like "yelling."  Yelling is considered an important skill for a Fed Chairman, because it's the only way they can be heard above the constant roar of the printing press.  (And now that I've brought that segue full circle, I can move on in good conscience.)

Anyway, I'm wondering if this bull market will just keep running, until we reach the point where everyone reflexively buys every dip and bears have completely capitulated.  If it behaves as the inverse of 2009, then when the real top comes, everyone will naturally assume it's just another pause.

Technically, the bear count won't be invalidated until the S&P 500 (SPX) trades back above the all-time high.  The market has shown the 1710 area as resistance, and it's tough to get too bullish near resistance (or too bearish near support).  Keep in mind that the market often likes to run just a bit farther than a key level to grab stops before reversing, and my original (but since abandoned) preferred count target for SPX was the mid-1700's.  Certain indices like the NYSE Composite (NYA) have been suggesting that a fifth wave up was still needed -- I noted those signals weeks ago; in hindsight, I probably should have given them more weight than I did.

NYA "should" make a new high here; and it will be interesting to see how SPX behaves after the opening gap. 

SPX suggests similar.  If the rally is developing into a five-wave impulsive structure, it will need to unwind at least a couple more fourth and fifth wave sequences:

Even if 1710 is claimed, in the bigger picture, we aren't presently talking about a blow-out rally.  Bulls will have to keep their fingers crossed that the pending potential impulse wave is only wave 1 of the larger red v.

In conclusion, the bearish wave count may be reset this week, but presently that doesn't put the bears out of the running.  If 1710 is broken, then we'll have to see the form of the next decline to help anticipate if this wave is indeed going to mark all of red v and lead to a protracted decline, or if it's only going to mark wave 1 of red v.  And if mere mention of a protracted decline makes you feel hopelessly frustrated, then we may actually be getting close.  Trade safe.

Does Your Fundamental Bias Cost You Money?

"... a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware." -- John Maynard Keynes

"To combat depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection- a procedure which can only lead to a much more severe crisis as soon as the credit expansion comes to an end." -- Fredrich Hayek, 1933

I think many traders feel that Bernanke's printing press has given new meaning to the term "bull" market.  Bears are tired.  It's like every bear on the planet has been waiting for the "real" market to emerge since at least 2010.

Personally, I've been quite bullish at times (early October 2011, and late 2012/early 2013 were probably my most bullish moments), but this market has felt, for lack of a better term, "unnatural" to me for a long time.  But maybe that's just my fundamental bias.

I try my best to stick to what I see in the charts, but I am a fundamental bear at heart.  I've learned that one of the psychological hurdles that creates for me is this:

I can forgive myself when I'm bearish and end up wrong -- but I have a much harder time forgiving myself when I'm bullish and end up wrong. 

If I'm bullish and wrong, that error eats away at me in a different way.  There's a self-chastisement of "you know better!" because it offends my core sense of what I believe to be True (with a capital T) about the world in general.

I'm not sure if I can explain this in a way that makes sense, but I'll try: our beliefs represent what we stand for in this world.  And what we stand for in turn represents who we are, in a meaningful sense.  At least, it has meaning to us on a personal level.  Our beliefs generally represent the core foundations from which we build our enduring life principles -- so beliefs translate into action.  As a result, we all associate "who we are" with our beliefs to a greater or lesser extent, depending on the depth and strength of the belief.  This is why religion and politics are such heated forums -- people feel criticized on a deeply personal level when those beliefs are challenged.  They feel you are attacking not simply their ideology, but actually attacking them as individuals. 

Anyway, I think this human tendency is one of the challenges that makes it so incredibly hard to get away from our fundamental bias.  It's much easier to forgive ourselves when we err on the side of our fundamental bias, because that error is in line with our self-image -- it's "who we are" to some extent. And we can forgive ourselves for "being ourselves" (we do it all day long!).  Conversely, that same psychology causes us to criticize ourselves much more harshly when we err against our fundamental bias.  Which in turn causes us to make more errors toward the side of our bias.

It's worth examining.  We all have a fundamental bias -- and I suspect it costs every one of us money at times.

Moving on to the charts, the market has followed Wednesday's near-term projection quite well, and the market has now moved into "close enough" territory for the target zone:

The big picture is essentially unchanged since last month.  The alternate intermediate count sees the possibility that 1627 was it for the decline, and that the market is headed on to new highs.  I'm presently still inclined to favor the bears (but maybe that's just my bias speaking!).  There is both a bullish and bearish interpretation of the intermediate pattern -- the bull interpretation is called an “expanded flat,” and I discussed it at length last month.  

In conclusion, if this is indeed the wave ii/B rally the preferred count believes it is, then it should be nearing completion.  If the S&P 500 moves above 1709 instead, then bears have their wave count reset and we’ll have to start calculating new upside targets, beyond the current 1695-1700 zone.  Trade safe.

   

Cloudy with a Chance of Meatballs

Regular readers know I talk about the Philadelphia Bank Index (BKX) a lot.  Well, not out here in the real world I don't.  People don't exactly consider you a brilliant raconteur if you start off a lot of conversations with:

"So... how 'bout them banks in the Philadelphia Bank Index, huh???"
or: "Did you see BKX today?  Wowzers!"

You'll find their eyes rapidly glaze over (and sometimes they suddenly remember they have an appointment to get to) if you attempt to use random factoids about BKX as "ice-breakers" at dinner parties.  Believe me, I've tried.

Anyway, the chart below is a performance comparison chart of BKX, the S&P 500 (SPX), and the Dow Jones Industrial Average (INDU), going back to the 2009 low.  SPX and INDU have performed similarly, while we can see BKX has pretty consistently led the broad market higher since '09 -- except in 2011, when BKX peaked with a lower high and led the broad market down into the mini-crash.  So my theory is if BKX starts making lower highs again, then trouble is probably brewing.  BKX is lagging the current SPX rally by a small margin, so I think it's wise to observe whether that continues.  Plus this stuff makes a great ice-breaker!

The market is pretty fractured right now.  NDX has soared to new highs (validating my concerns about that pattern from back in August); SPX has cleared the 1670 zone, but is still a ways from new highs; the NYSE Composite (NYA) is somewhere in-between; and BKX is lagging.  BKX has just barely cleared its first resistance zone, as seen below:

 
SPX looks like it may do some backing and filling, but the pattern suggests it will chop higher over the next few sessions.  The big inflection point will come when it's formed a cleaner ABC rally.  I'm presently leaning toward the bears winning the battle at that next inflection point, but the market's picture has definitely changed somewhat with this week's breakout.

I would be remiss not to make mention of today being 9/11, though I'm unable to think of much to say which wouldn't come off as sounding trite.  I'll simply keep those of you who lost loved ones in my thoughts and prayers today.

In conclusion, bulls have reclaimed the first important resistance levels, and the pattern suggests further upside bias over the near-term.  A test of the 1695-1700 zone looks reasonably likely, and from there, I'm presently modestly inclined to favor the bears will take over.  The market reserves the right to change my mind, so we'll see how the pattern looks over the next few sessions.  Trade safe. 

Market Stops in Whipsaw City

Friday was a pretty wild session, with a dramatic intraday reversal.  The S&P 500 (SPX) has been Whipsaw City (which is near Chicago) since 1627 -- and so far, the failure to break below that level has kept alive the alternate count that 1627 marked a significant bottom.  The market is compressing now, and preparing for a sustained directional move.

Trading anything but the edges of the range can be dangerous in a market like this, because patterns that form within the range are often worthless noise, and typically fail.  The "job" of a pattern like this is to continue whipsawing both bulls and bears until one side throws in the towel -- at which point, they trend strongly away from the pattern.

Trading these, I try to stay away from the middle of the pattern.  The main way I've had success with this type of pattern is to buy the breakdowns and sell the breakouts, which is the opposite of what one normally does.  And those are risky trades, because you're basically playing for a rather direct whipsaw -- and meanwhile, there typically isn't a clear stop level.  In fact, you're essentially taking the opposite end of the trade from the people who just got stopped out. 

And that only works until it doesn't.  At some point, the compression reaches a crescendo, and the market either launches or collapses strongly.  The only reasonably clear levels which indicate much of anything (beyond the next five minutes) are outside of the noise zone: 1627 and 1670.

The fractal in the Nasdaq Composite bears similarity to the pattern from May and June -- it will be interesting to see if it reaches a similar resolution:

Contrasted with Nasdaq, which is flirting with the summer highs, the Philadelphia Bank Index (BKX) is presently still stuck below its topping pattern:

Bulls Throw a Wrench in the Mix

As traders, our toughest opponent, and the hardest one to beat, is ourselves.  We all know that humans have a rational side (or like to think we do) and an emotional side.  And most of us like to think that we're rational beings, and that we make well-reasoned decisions.  But the reality is different.   

I was a pretty successful sales manager and trainer in a prior life, and one of the things I used to teach my reps was that people justify their actions with logic/rational thinking -- but what actually motivates people to take action in the first place is emotion.  When a person makes a purchase, be it a house or a car or a new watch, they usually have a list of the "reasons" they're doing it ("It's a good value; it will save us money in the long run; it's safer; it's better for the environment; it gets good gas mileage..." etc.), and some people actually believe that's why they're buying something.  But the reality is that -- outside of the basic necessities -- people buy things for only one reason: because they want them.

Don't believe it?  Ask yourself how many times you've walked away from a purchase that you knew made perfect sense on every level, including financially -- and then ask yourself how many times you've bought things that made no sense at all.  If we were truly rational beings, neither situation would ever happen.  Our purchases would be logical and consistent, and we'd own a house full of useful and practical items that Mr. Spock would buy (Vulcan Q-Tips and such), not the bunch of useless junk we actually own, much of which was purchased on a whim (are you ever going to actually WEAR that shirt?  Why?). 

As humans in our "natural state," what drives us to take action, or to remain paralyzed, is emotion.  If we don't actually want something, a salesperson can make all the logical and practical arguments they can imagine -- and those can be good arguments; arguments which make all the sense in the world -- but in the end, we ain't breaking out the credit card unless we feel the product fills an emotional need (security, safety, pride, whatever).

The point is:  Despite what many of us like to believe about ourselves, the vast majority of our actions are driven, first and foremost, by emotion.  And this is one of the factors that makes trading so difficult.  Money controls almost every aspect of our lives, so decisions that involves fair sums of money are almost always laced with heavy emotion.  This is why discipline is such an important part of successful trading -- left to our own natural devices, we'd jump in and out of the market almost at random, based on how we felt on the spur of the moment. 

These same emotions are hurdles faced by analysts as well.  Reading a chart is as much an art-form as it is a formula, and there are times it's hard to sort out the legitimate gut instinct/subconscious-warnings (that something is amiss) from the typical fear and greed-type thoughts.  That's essentially what happened to me yesterday, and I actually wrote about the fact that I felt the market had behaved "too well" and it bothered me -- but in the end, I chalked this concern up to normal worry... instead of listening to my gut.

Meanwhile, the market promptly broke above Tuesday's high, which keeps the bulls, and the alternate count that i/A is complete at 1627, alive.  There's nothing new to add for this chart, except to note that the S&P 500 (SPX) has reached the upper red down-trend line.  Bears can tolerate a quick trip outside of that line, but sustained trade above it would strengthen the bull case.

At this point, the pattern could be a number of different things, and there's simply nothing obvious that jumps out as "oh yeah, this is what's happening."  I'm somewhat inclined to favor the near-term pattern shown in blue below, but I wouldn't get married to that expectation.  At times like this, I'll  take quick stabs at a play if the market gives me a good low-risk entry -- if not, I'll sit on the sidelines until things clarify.

On the Dow Jones Industrials (INDU), I've detailed the bearish and bullish resolutions to the pattern.  As noted, I'm somewhat inclined to favor the blue path, but I'm not married to it -- if bulls can reclaim noted resistance, then that would open up the game for them considerably.