Its going to get rough Part II

M

michaelscott

First, Im not trying to make predictions. Just observing whats obvious to me on the chart. I dont claim to be right. Make your own judgement.

By looking at the attached chart, I have noticed some distinct similiarities in the IWM between 2005 and the current time.

In 2005, there was a deep correction lasting 8 months, Jan-August.

The drop was 15% and the pop back up was 21%.

Then followed a smaller cup or handle like formation. This retraced about 2/3 the height of the previous cup.

The duration was about 4 months, Aug-Dec.

The drop was 11% and pop was 13%.

Then there was a small pullback lasting 4 weeks of 3-4% before an amazing pop to the upside above resistance. The pullback retraced about 1/3 of the height of previous structure.

The advance after the breakout was roughly 14% and lasted 5 months until May 2006.

In 2006, there was a deep correction lasting 6 months.

The drop was 17% and the pop was 25%.

Then there was another structure on the chart looking like a smaller cup or handle.

The duration was about 2 months.

The drop was 9.8% and the pop was 11%

The retracement was about 1/2 of the previous cups height.

Then we have another pullback that we are currently in right now. The pullback so far is about 3.79% at the intraday low of the IWM. It came within .78% of the 20 day moving average before bouncing. Intraday there was a rough double bottom. So far the pullback has retraced a little over 1/3 of the previous cup.

This bottom seems to be solid to me, however, it didnt fully retrace to the middle Bollinger Band or to half the previous cups height which I suspect it might do.

In any event, the similiarities between 2005 and the present time are uncanny. The structures, the formations and even the magic RSI indicator seems to be at roughly the same levels.

Conclusion-

Assuming the IWM can make it over the resistance, we should have 15-16% up room probably lasting 6 months with our next correction in the 3-4th quarters most probably being 9-10% in quality.

I expect for the rest of this week for there to be one of two things.

1) Chop-chop to down with a full retracement to the 20 day average at 79.51 and half the previous cups height.

OR

2) A breakout to the upside over resistance producing a 6 month 15-16% rally and then a 10% correction.
 

Attachments

By the way, here is an article for thought.

In 2005, Bill Gross was calling for a recession and thinks the fed would have to cut rates in 2006. After this letter, the IWM dumped down.

Notice how Bill predicts that the home asset bubble will pop by the end of 2005 and some other gloom/doom predictions.

When this article was written the IWM was at roughly 66. Here we are over a year and 26% later.

****
PIMCO's Bill Gross Warns of Recession in 2006
Posted on Sep 7th, 2005

From Bill Gross' latest Investment Outlook:


If the home asset bubble stops expanding, deflates, or pops any time soon (and I suspect we are only a few short months from at least the first of these three) then the potential for Greenspan’s "debt liquidation" follow-on is something that investors must begin to prepare for.

Debt liquidation, as opposed to loan growth, slows an economy or sinks it into recession, generating the higher risk premiums that the Chairman warns us lie ahead. What should an anticipatory bond manager do with the possibility of such circumstances drawing closer by the day? Cut the fat from his portfolio that’s what... That means a focus on high-quality investments with anticipation for an eventual Fed easing at some point in 2006. I believe that 4% will cap this Fed Chairman’s last bear market tightening and that his successor will quickly be confronted with the necessity to lower rates once again. A bullish orientation towards the front-end of the curve therefore should begin to dominate bond strategies, combined with an avoidance of anything that carries those low-risk premiums that Greenspan finally diagnosed. Those assets include real estate, equities, high yield, corporate, and some areas of emerging market debt. They also include, by the way, long-term Treasuries or any longer-dated government paper that has been lowered in yield in the past by Greenspan’s own "measured" transparency over the past 16 months. That is not to say that long government bonds won’t go up in price if the "system" suffers some elimination, slower growth, or to be frank, a recession in 2006. It’s just to acknowledge that the better duration-weighted paper lies at the front-end of the curve, especially now that it provides similar yields to longer maturities
*******

Now lets fast forward. In February, Greenspan gets into the fold. Right after Greenspan says this, the market dumps:


Greenspan fears recession - report
Former Fed chief warns that U.S. economy nearing end of growth period.
February 26 2007: 9:06 AM EST


NEW YORK (CNNMoney.com) -- Former Federal Reserve Chairman Alan Greenspan warned Monday that the economy may fall into recession by the end of 2007, according to a published report.

Greenspan told a business conference that it's difficult to forecast the timing of recessions but that it was "possible" that one could occur later this year, the Wall Street Journal reported.


Former Fed chief Alan Greenspan
The former Fed chief, who spoke to the conference by satellite link, said the U.S. economy has been growing since 2001 and that the economy cycle is nearing an end, according to the newspaper.

"When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign, for example in the U.S., profit margins ... have begun to stabilize, which is an early sign we are in the later stages of a cycle," the Journal reported him as saying.

Greenspan also said the global economy looks to be stable and that both the U.S. and world economies are more resilient than before, according to the report.
*****
 
Now here is the put/call ratio chart. Notice how during the previous handle in late 2005, the puts skyrocket in the same way as they did in February 2007 and then relax back. Then notice before the breakout in January 2006, there are two white candlesticks representing an uptick in puts.

This time around, there are far more puts being employed then in 2005.

Here are the ISEE sentiment numbers for the last two weeks which represent that uptick in puts and then the two weeks in January that represent the puts:

121
4/30/2007

136
4/27/2007

123
4/26/2007

138
4/25/2007

154
4/24/2007

133
4/23/2007

125
4/20/2007

124
4/19/2007

132
4/18/2007

147
4/17/2007

103
4/16/2007

172
1/13/2006

148
1/12/2006

192
1/11/2006

160
1/10/2006

190
1/9/2006

154
1/6/2006

194
1/5/2006

191
1/4/2006

153
1/3/2006


My guess is that the market is more short and has more puts now then late 2005-early 2006 which will magnify any breakout to the upside.
 

Attachments

Here is a chart of the VIX. Notice how the handle in 2005 showed elevated Vix levels as the price decreased and then lowered VIX levels as the price increased. Then there was an uptick in the VIX right before the breakout to the upside. I circled the two candlesticks that are most pertinent.

I also looked at oil prices. Oil was at 65 dollars back then, today its at 65 dollars.

The Nikkei was at about 17000, its still at the same level today. The other foreign indexes are of course much higher today.

The ten year yield was in the 4.6s in January 2006, the ten year yield is in the same range today.

Gold is much higher today.

The dollar is much weaker today.

The Nasdaq and NYSE bullish percent indicators are at the same levels as they were in January 2006.
 

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I would be a real trader if I had just held the 5500 shares of the DJ.

Now I am just a bitter man, a very grumpy bitter man. Oh woah is me, 110 grand missed opportunity. Im going to take my meds now and lie down to think about this. Oh the pain, oh the excruciating pain.

How about you? Where is your trade tickets?

http://www.elitetrader.com/vb/attachment.php?s=&postid=1437257

Quote from Duncan Doughnut:

Are you a real trader or just someone who knows a lot of information?
More...
 
Michael,

That was an interesting observation. I wanted to confirm it and also go back and see if I could find a contradicting case.
Lo and behold, I didn't have to go far at all. If you go back to the wedge period, before the two you identified, it has almost identical periodic and structural characteristics as well. The enclosed graph shows the outcome of superimposing the older patterns. The most interesting observation is both give exact opposite outputs! Therefore, we can't really conclude greater than 50/50 chance of either outcome based on this pattern analysis. Interestingly, the 1st period with the breakdown pattern looks more like the current one IMO.

BTW: I meant to say falling three methods pattern at end of wedges I and III.

Just another reason why I'm liking mandelbrot's thinking more and more
with each pattern analysis.
----------------------------------------------
Mandelbrot: Patterns are the fool's gold of financial markets. They are the inevitable consequence of the human need to find patterns in the patternless.
 

Attachments

When did you have the position and when did you cover? Tell me you didnt cover today before the rip. Heartbreaking if you did.

Quote from michaelscott:

I would be a real trader if I had just held the 5500 shares of the DJ.

Now I am just a bitter man, a very grumpy bitter man. Oh woah is me, 110 grand missed opportunity. Im going to take my meds now and lie down to think about this. Oh the pain, oh the excruciating pain.

How about you? Where is your trade tickets?

http://www.elitetrader.com/vb/attachment.php?s=&postid=1437257
More...
 
I had a LONG position of 5500 shares about two weeks ago right during the earnings call.

I know your one of the guys from the peanut gallery who logged on here with a different id to harass me. Lets see your P/L. I showed you my ticket, where is yours?

The only heartbreaking thing is looking at your account balance. However, I dont even think you have an account balance.

Why dont you come on here with your real id and address me? Coward.


Quote from Duncan Doughnut:

When did you have the position and when did you cover? Tell me you didnt cover today before the rip. Heartbreaking if you did.
More...
 
damn dude, you had 200k on DJ. I guess you don't fuck around with your trades. Do you typically go that high or did you felt safe with DJ since it's more a less a value stock. I noticed you made 19k on SOLF - what made you so sure to play a large amount on the solar stuff.
 
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