Rearranging the Deck Chairs on the Titanic?

The Candlestick price bar in the NASDAQ Composite on Thursday was  double-barreled bearish, in that it was a combination of two patterns in one – the “Doji” and the “Hanging Man.”  A “Doji” occurs when the opening price and the closing price are the same, or nearly so.  A “Hanging Man” occurs at the top of a long advance in prices when the range of prices between the open and the close is very small, and that range is near the top of the total range of prices of the period.  The “Hanging Man” requires a lower closing in the next period as “confirmation” of its bearishness.  In this particular example (last Thursday’s price bar), the impact is attenuated because the pattern appeared other than at the top of a long advance in prices.

At any rate, we did get the lower close yesterday (Friday), so the bearish intimations of the Hanging Man have been “confirmed.”  The patterns in the NASDAQ 100 were quite similar

Now what?  We don’t know which way the NASDAQs (or the rest of the market, for that matter) will head from this point.  It could be that the market is now consolidating, in preparation for a higher push into the Dow 10000 range (or even higher), which could happen; or it could be that the Rally is over, the tops are in, and that prices will generally decline from this point forward.  It could also be that prices will just muddle along sideways for quite a while.

We don’t spend a lot of time contemplating all of the reasons why the markets should continue higher, or why they should not.  We have been Long since right after the markets turned up on July 13; we have trailed the insistent price rise since then with trailing safety sell-stops; and if the markets do turn lower our pro.fit will be locked away in Cash by stop-outs.  When and if that happens, then we will think about what to do next.

However, there are many observers who do spend a huge amount of time arguing one way or the other about it.  We here tend to stand off on the sidelines, watching the fray with some bit of detached amusement, on the basis that the argumentation seems to consist of a good deal of sound and fury signifying not much.  If the market goes up, we are happy with our Long position; if it goes down, our accumulated unrealized pro.fit turns into Cash.  Not bad.

I would like to invite your attention to a new article by Richard Graham in the publication “Seeking Alpha” on the question of the direction of the market.  It’s at http://seekingalpha.com/article/155933-why-this-rally-will-continue?source=article_sb_popular/  The article has generated PLENTY of comment on the state of the recovery and the likely direction of the market, pro and con, which follows right after the article itself.  I have a short comment of my own in there, too, writing as “candleman.”

The article contains the comment that “When the front cover of Newsweek says that the recovery will be sluggish, it is safe to say that everyone knows the recovery will be sluggish…”.  That is true.  When a major popular sentiment is enshrined on the cover of a national newsmagazine, “everybody knows” it.  We are then very late in the cycle, too.  Financial author Paul Macrae Montgomery brings this phenomenon to life in his “Magazine Cover Index,” which holds that when popular sentiment rises to the point at which “everyone knows” something to be so obviously true that it is honored on the cover of a national newsmagazine, “everyone” is probably wrong.

If that thesis holds true this time, that means that – since “everyone knows” that the recovery will be sluggish – it will NOT be sluggish. 

Unless – unless – the underlying premise of both sides of the argument is wrong, and the recovery is ALREADY over, in which case the tiff between the pro’s and the con’s is like rearranging the deck chairs on the Titanic.

William Kurtz

August 15, 2009

info@candlewave.com