“Pick your poison.” That little saying refers to, well — you figure it out. But here I’m going to relate it to market analysis, where the two main schools of thought are fundamental and technical. The fundamental people look at developments in the economy, federal spending, interest rates, company management, earnings, and a bizillion other things that help them divine whether a stock, commodity, currency, or whatever is headed higher or lower. Technical folk look, on the other hand, at charts, trends, and market formations, using the idea that all of the fundamental information is reflected in those things, which in turn tell us where a particular market is headed.
Whichever “school” floats your boat, there are some big downsides to your choice. The fundamentalists tell us what should happen, but have a tough time identifying when. So their baggage includes predicting that such-and-such is going to happen — but they’re 3 or 9 or 24 months too early! And during those intervening months, the market can ignore what it “should” do long enough to bankrupt the fundamentalists. Not to mention that sometimes fundamentalists get it wrong, believing something “needs” to happen when, by golly, it really doesn’t after all; ya got it all wrong!
Technicians, on the other hand, interpret what the market itself says is going to happen. An easier row to hoe, right? Sure, except that the markets, via the charts technicians rely on, do not always speak truth, or speak it in ways that only the most astute can interpret correctly. So we get things like the 70% chance that such and such will happen, only to find that it doesn’t happen three times in a row — enough to, you guessed it — bankrupt the technicians.
[Related: Craig Johnson: A Hop, a Drop and a Pop in 2014]
So, you pick your poison. I’m primarily a technician, and I accept my place in the universe, fully cognizant of the shortcomings of my chosen “poison.” As a technician, I believe that "ours is not to reason why; ours is but to sell and buy.” Last week it was fears about a slowing Chinese economy that had world markets freaked out. Who knew? Who cares! The message for the last two months, here at least, was that the market might well peak in the last week of 2013 or the first week or 2014 — and so it did, on December 31st, if that’s not putting too fine a point on it. The “why” part is for others to wrangle over, but is irrelevant. If it weren’t China, it would’ve been something else. But the reason doesn’t matter. Says the technician…
The stock market crashed last week, with the Dow down 500 points between Thursday and Friday. Dow Theory Letter readers could hardly have been taken by surprise, whatever the raison du jour may have been. This basic chart of the Dow Industrials shows the action in recent months, and the mini-meltdown of last week that broke below the upward trendline. There’s good support around 15,750, as shown by the slightly finer, horizontal blue line, and then around 15,500, where the 200-day MA and the finest blue line comes in. But for now, for the short-term, the bears are in charge.
As suggested last week, this could (should) be the start of the first real correction in over a year. It MAY be the beginning of the end, the start of a new bear market. But the latter lies mostly in the purview of “the sky is falling!” folk, those who constantly assure us that the markets and civilization as we know it are on the precipice of irreversible collapse. Someday they’ll be right, but “someday” can be a long time off…
The above content was an excerpt of Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
