Stocks were flat to down a bit on very light volume. On the QQQQs momentum turned down from the overbought area, with the CCI still up and climbing over the positive 100 zone, which is still bullish. The three day pivot is still moving up and holding the lows. There wasn’t much of a divergence, except for a small micro-M pattern on the 5 period double stochastic, which is the white line in the middle sub-graph. This isn’t much to turn the rather persistent up trend around yet. This market could very easily have a shake out here. Also, the length of the current swing up is about the same as the previous swing up from the 8/16 low to 9/04 high. A small down move into the upper portion of the error band channel might set up a good entry point for the next swing, as long as that channel stays up and supports any sell off.
Regarding gold, the oversold reading in the double stochastic on the chart yesterday indicated this market was ready to go higher, and it was up around $10 today, most of it in the overnight and early morning session. The day session was about as choppy as I’ve ever seen it. This trade is getting very one sided. I can’t find a bear anywhere. During the bull market that blew off in early 1980 this gold move was dominated by gold bugs, with the public coming in only in the final days. The Wall Street establishment was very anti-gold back then. This time the establishment seems to be on board, as well as hedge funds and everybody else, and the public. It is probably the most one sided trade I’ve seen in 30 years. The same can be said for the dollar in it’s persistent downtrend. Every commentator and analyst talks about how to profit from the falling dollar. I’m getting junk mail every day telling me how to profit from gold going over $1000 and ounce, the dollar falling to zero, wheat going up to $20, oil going way over $100, etc. The Wall Street Journal had an article today explaining the grain move and how “this time its different.” One only needs to look at a long-term weekly or monthly chart book of any commodity to see that every market eventually reaches a high, and then goes the other way for a while. When markets seem to be in a one way movement, it always seems it will never stop.
I read this article in a book recently. Next time a market looks like it will never stop going in one direction, remember this article. It is a little simplistic, but it explains the ups and downs of markets better than any logical explanation I’ve seen anywhere else.
THE BANDWAGON THEORY: A GLIMPSE AT HOW THE MARKET REALLY WORKS
Imagine a bandwagon that is rolling forward at a quickened pace. Music
that is very pleasing to the ear is being played from speakers on each side
of this bandwagon, and a few people currently on the back of the wagon
are partying, having the time of their lives. The music, loud and clear,
starts to attract many other onlookers that happen to be idly standing on
the sidelines. These onlookers, unable to resist the sweet sounds being
played, run to join the party that seems to be going on. Progressively,
more and more onlookers jump on the back of this bandwagon, and
those few who were initially enjoying the first phase of the party begin to
leave. As the crowd of new party animals on this bandwagon grows
larger, the bandwagon finds it harder and harder to move forward at the
same pace. It slows, enabling more and more late onlookers, witnessing
the great fun, the chance to jump on. The crowd grows even larger.
Larger and larger this crowd grows, until the bandwagon, heavily laden
with the bodies of drunken party animals, can no longer move forward.
It finally comes to a complete stop. Now that the bandwagon is at a com-
plete standstill, more people jump on. And why not? At this point, joining
the fun is easy. Absolutely no work is required, for individuals wanting
to join the crowd no longer have to run to jump on board. But the nature
of the bandwagon is to move forward. Its motionless state is unnatural,
and therefore cannot last. It tries to move forward again, but can’t. The
crowd, piled on back, is much too large. It must free itself of the heavy
burden. And it does. It quickly shifts into reverse, and jolts backward,
knocking a few of the party animals off the back. The music stops. Puz-
zled faces from the crowd begin to emerge. Before anyone figures out
what’s going on, another backward jerk takes place, only this one is more
violent. Another large group of people gets thrown off the back. Now, re-
ality sets in. The fun has turned into a nightmare of epic proportions, and
panic begins to run rampant. Some decide to jump to their deaths. An-
other thrust backwards sends an even larger group of drunken, off-
balance people, hurling to the muddy ground. It doesn’t stop. The jolts
backward continue, each successive one more violent than the last. At
this point, only a few die-hard wagon dwellers are holding on, their very
lives hanging in the balance by a very thin thread. Failing to be com-
pletely free, the bandwagon angrily puts the pedal to the metal, and this
final thrust backward is so vicious that its front wheels lift high off the
ground, momentarily suspending the wagon in a perpendicular posi-
tion. The last of the hangers-on crash to the ground, broken and maimed
to no end. At this point, a new group of onlookers emerge from the
nearby woods. They are clean and serene. Each movement they make is
deliberate and powerfully energetic, for they did not take part in the
tragedy that just transpired. Or did they? A few of the dejected souls ly-
ing on the ground take a closer look, a look that reveals something very
interesting. This seemingly new group is not new at all. It is the same
group that was seen quietly exiting the party before it came to its violent
end. An even closer examination by a few more beaten-down onlookers
reveals something even more stunning. This group not only exited the
party early, they were the originators of it! “My God,” someone exclaims.
Paralyzed, and unable to move freely, all these dejected souls can do is
watch, as the masters of the game go to work, again. No sooner does the
bandwagon’s wheels hit the ground than this professional platoon bolts
for the wagon. In a flash they are on board. Easy. The bandwagon, now
free of the larger crowd, can move forward freely and gracefully, com-
fortably carrying the more astute group with it. Its pace quickens, and
before long a smooth elegant stride is in place. After a few miles of unin-
terrupted movement, someone from this masterful group flips on a
switch, and suddenly the loud sounds of entertaining music start again.
Someone yells, “OK everyone. Here they come. Let’s do it again.” Within
moments, those who were the former victims of the backward crash be-
come interested again. The music almost calling them from the grave.
And once more, the never-ending cycle repeats.
reference: Tools and Tactics for the Master DayTrader: Battle-Tested Techniques for Day, Swing, and Position Traders
by Oliver Velez, Greg Capra
NOTE: I have a link to this book on my Amazon store on the last page of the technical analysis section. Click the red lettered link on either the right or left side of this blog.