LET HISTORY BE OUR GUIDE
Here is a perspective on where we are versus the 1987 scenario. Just to restate why I think this is so similar. First, we had very strong stock prices, virtually no corrections, and at the same time sharply declining Bond prices. Then we began a minor trend break. I have marked where I think we are in this cycle, in the initial downward move. There was also a great amount of optimism back in 1987 and a general complacency as we have now. Brokers during that time reflect the same type of feeling they do now. They were surprised at how far it had gone, and had given up trying to short it having gotten their butts kicked trying to do so. Wondered how far it could keep going and when it was going to end. They watched clients doing all the wrong things and still make money doing it because of how strong the market was. Also kinda like 2000 now that I think about it. Sound familiar?
Fast forward in time to today. I am not going to get into the subjective part much other than to say that the general feeling in the brokerage community is exactly the same even though publicly they are not stating it. It is heresy to publicly state "sell." They make their money on the long side. I am a believer and my historical studies tell me that the largest moves do come when the least number of the general public is looking for them. That would tell us a GOLD, OIL, and STOCK decline is coming and a DOLLAR rally is coming. Will they happen, who knows. Do not get carried away being too much of a wise guy just constantly taking the divergent view. The public is almost always right in the middle and end of moves, so timing is awfully important being contrarian. Often moves go basically until the very last skeptic fighting them capitulates including the last contrarian. Once the very last player is left to pile on, the moves reverse.
Timing that is impossible unless you have incredibly deep pockets. The Elliott Wave people have been off now on the short side for more than 2,000 Dow points, that requires incredibly deep pockets. They no doubt will come out and say I told you so if we really rollover here, but you can hardly take credit for being off by that much. Getting back to the above example, your timing did not really have to be that great to dodge the wipe out of the famous crash of 1987. No matter how you look at that chart, the trend had turned down when the crash came for all other than long term holders. Today, the trend on a daily chart is without question now down, the weekly has not broken yet. If you are a long term player and we do happen to see a rally develop over a few weeks like what happened in 1987, you can just move your stops up to below the lows it launched from. If they were to then break, the trend on all time frames would have changed. If they were to hold, then the longer term trend will have held up. Pretty simple from that larger time frame perspective.
What are the odds that we have a similar type of drop to October of 1987? On a percentage basis I think they are slim, on a points basis a lock. Prices are so much higher now that massive down day was only 500 some points, we have seen several of those in recent years. The main thing to focus on is that we have a market that was incredibly overextended on the upside. Now we are getting the reversion that is long overdue. We were able to find a very similar technical situation that served as our guide as to what tho expect, and it delivered. Whether or not we will overshoot on the downside I don't know. We have far more intervention in the futures markets now by the government than we had back then, since Bernanke is a day trader now. This influence should temper the fall. You can bet your ass the Fed's books will never get opened if a big drop occurs. You can think through why I state that on your own.
For now, we are in a sell the bounce mode until proven otherwise. I for one hope we don't see a wipe out, but the play is in the playbook now. It has been for about a year, but the game conditions were not setup in a way that it could happen. They are now. Know your style, follow your rules. As long as you do that and have decent rules, even if we go down big, you will be ok. That would mean you have stops set on longs to get you out if we really roll down here. We are short term very oversold here now, so a bounce should be imminent, however I expect today to be a down close based on the reversal yesterday. They tend to get undone the next day when we close in the middle of a large range like that.
Here is a 5 min chart of the pit session for the SP 500 yesterday. This is not an obvious PPT save to me. When we have huge gaps down like that many day traders will buy those opens. The PPT generally operates either in the night session, or during the end of the day periods where we are down and volume is light. Neither of those seemed to be in place yesterday. We will never know if the PPT was the buyer on the open, but I doubt it. Natural market forces worked yesterday...oh wait a minute, they cannot be trusted to work haven't we learned that recently? We cannot take the risk that they won't work. We are supposed to intervene and bail things out aren't we?
The last chart for today is that of the British Pound. Most of the currencies are setup for a decline here, this is one of the weaker ones where shorts should be done on any bounces.
Take you pick in the currencies they all look basically the same although the Swiss seems to be the flight to quality spot right now so maybe pass on shorts there, even though there is a nice trap pattern setup there today.