THE
PERFECT STORM... IN THE LAND OF OZ
by Anthony
M. Cherniawski
May 18, 2005
Wall Street is
using every device known to man to squeeze out the shorts and to keep
the longs comfortable in their positions.
It has even engineered a “breakout rally” that is attracting
new money to the ailing Nasdaq. Nevertheless,
the bigger picture is one of declining tops and declining bottoms.
The final rally this week is the piece de resistance.
In the name of “sector rotation,” Wall Street has managed to
take our attention from the declining transports and blue chips by
creating some excitement with the battered tech stocks.
Wizard of Oz: “Pay no attention to that man behind the curtain.”.
Meanwhile, the talking heads on CNBC constantly discuss the Goldilocks Economy and a healthy housing market. Stocks are described as being in “a healthy correction.” Jim Cramer is now recommending that his subscribers to go long in technology stocks. Meanwhile, the bears are sitting uncomfortably, wondering about the wisdom of their positions. Who will be right?
Scarecrow: “I don’t know…but some people without brains do an awful lot of talking…don’t they?”
All of this attempts to hide the fact that the markets are in a huge distribution pattern. The lower highs and lower lows give it away. Overlap in the rallies give away their corrective nature while the impulsive declines tell us in no uncertain terms that the trend is down. The expanding triangles (or megaphone formations) are shouting that the market is “out of control and unusually emotional.” (Source: Technical Analysis of the Futures Markets, by John J. Murphy, p.150) “Because this pattern also represents an unusual amount of public participation, it most often occurs at market tops. The expanding pattern, therefore, is usually a bearish formation.”
The expanding pattern in the SPX suggests that all will not end well.
The Standard & Poors 500 index has already given warning of its intentions in April. The evidence is a prior expanding triangle pattern that failed in a swift decline. The pattern is now repeating itself, in a higher degree. A failure of this magnitude suggests a decline to the August 2004 low (1060), at a minimum. Support below that level lies at the 9-11 low of 965.8 in the S&P 500 index. The bearishness of this pattern might be negated at 1191.8, the April high.
The Elliott Wave perspective suggests that we have completed two 1-2 waves at different degrees of trend. The alternate count suggests a single completed wave down with a second wave nearing completion. Either count implies a strong decline is expected, straight ahead.
Dorothy: “Lions and tigers and bears! Oh, my!”
Meanwhile, the NDX is correcting in three degrees of trend.
The flashy rally in the Nasdaq 100 (NDX) has created a very difficult environment for the shorts at this point. A leading market analyst confided in me today that he had lost all the profits in his short positions. In fact, the action in the market today is more indicative of short covering than of any real participation by any of the big players. Having said that, a reversal down from here would be extremely dangerous for the longs. The larger trend is still down.
In summary, the recent positives in the market have yet to overcome the larger trend, which is negative. We are experiencing one of the most emotional, news-driven markets in history. Carl Icahn, Kirk Kerkorian and a host of other names being whispered or shouted in the streets cannot change the nature of the market. The fact that the overwhelming number of participants in the market can make buying or selling decisions based on news or rumor substantiates the proposition that price is now totally divorced from value. In that environment, a financial accident is waiting to happen.
Wicked Witch of the West: “Well, my pretty, I can cause accidents, too!”
© 2004 Anthony Cherniawski
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INFORMATION
Anthony M. Cherniawski
President and CIO
The Practical Investor, LLC
East Lansing, MI USA
Email
The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
