“A premonition, portent, or clear indication, especially of failure or disaster.”
There is so much on the geopolitical stage to be weary of I don’t know where to start. Four global military powers are converging in Syria, with a strange mixture of common and opposing objectives, aggressive and dangerous ambitions, and enough fire power to scorch not only Syria but the entire Middle East. Oh yea, that fifth great military power that I left out above: Israel. We may as well call it five, because if history is any indication, it’s only a matter of time before maybe the most dangerous of them all is dragged into the conflict.
On the economic front, the world is in a deep recession. Central banks, who in the past has served as the catcher in the rye of failing economies by lowering interest rates and flooding the world with cheap capital has already emptied the vault. Interest rates have been at zero so long that the Fed and its international proxies have reached clinical impotency with no Viagra or Cialis left on the shelf.
Despite a 400 point DJIA reversal from low to high on Friday, the bear market is unfolding much the way bear markets do, slipping, sliding, bouncing, then ultimately reaching for new lows in the middle of the night. As the calendar turns into the 4th quarter, typically a period where significant lows present significant buying opportunities, vigilance is warranted. The same methodology that got us Short in the 3rd quarter, will work to get us Long in the 4th quarter, but only if price trends turn up, in ernest, first. Calendar or not, vigilant or not, virtually every stock and index we follow is in a downtrend and for now it is just a time to be Short, end of story.
The chart above illustrates the Long Term Trend of the stock market going back almost ten years. Our trend model caught the top in 2008 ( a few weeks after the absolute top), the bottom in 2009 (a few weeks after the low tick), followed by a mostly Long trend, interrupted by a couple of brief whipsaws in 2010 and 2011, ending with a 3-year bull trend into the summer of 2015. A fresh Long Term Sell Signal was generated on August 17, 2015 and the market has cascaded lower for the past six weeks.
TLT REVERSES LONG
STOCK TRADING MODELS
The reason I focus so much on the Dow Jones Industrial Average is that it IS the stock market. At the end of the day the lead reference to that day’s stock market action is ALWAYS a quote of the performance of the DJIA. Every financial news outlet, every national news outlet and just about every other public reference begins with a description of the performance of the Dow. It is the observation of this index that most reflects day-to-day social mood and from which we can gauge, or try to gauge, the trend, not of not only the Dow, but of the stock market in general.
Sir Isaac Newton hypothesized that for every action there is an equal and opposite reaction. R.N. Elliott expanded on that theory in application to the stock market. His premise was that for every primary directional move there is a reaction, not equal but partial, and based upon The Golden Ratio, from which is derived the Fibonacci sequence.
Ergo, the chart below of the Dow Jones Industrial Average embedded with the Fibonacci sequence. As is illustrated on the chart, the Dow has fallen just shy of 3,000 points, from high to low since its all time high in May. Last week it recovered about 1,000 points before turning back down, which represented a touch above a Fibonacci 38.2% recovery. Retracement theory allows for a 38-62% retracement before calling into question the initial trend down. Since the Dow has already touched the minimum retracement level and turned down, we must be on guard that the entire retracement has been completed, although it can still rise further to the 50% or 62% levels. Adding to shorts here is riskier than adding to shorts at a 50% retracement, which is riskier than adding to shorts at the 62% retracement.
I can’t tell you where to add to your shorts because I don’t know. I don’t know where the retracement will end (if it hasn’t already), nor do I know how short everyone already is. What I do know is that we WILL be adding to shorts. A couple of days, or a few hundred points of rally, does not change the direction of the primary trend and from a Newtonian-Elliott perspective, almost confirms it.