David Nichols de hoje July 30, 2003
Enviado: 30/7/2003 17:14WEDNESDAY a.m.
July 30, 2003
Energy Cascades
by David Nichols
Yesterday the market treated those few participants who actually wanted to play to a nice, cleansing "whoop-de-doo" intraday roller-coaster ride. "Consumer confidence stinks -- sell!!! Wait, we nabbed Saddam -- buy!!!! Oh, never mind...."
It's just so much noise right now. There's no other way to spin it. The market has been narrowing into a break one way or the other, and most people are simply waiting to see which way it's going to go.
If you're interested in chaos theory and how it applies to the market, then this is an interesting moment, theoretically speaking. The markets have worked themselves into such a standstill, that the merest puff in either direction could trigger a massive energy cascade in that particular direction. But we can't really determine which way that energy is going to be released. Once released, we can have a pretty good idea of how it will play out, as that's how chaotic systems work. They are both predictable and unpredictable at the same time.
The "pile-on" effect of the break out of this congestion period should be quick and sharp, as there is a lot of managed money with a short-term time horizon now. And the only thing that matters in the short-term is the price action itself. So the break up or down out of this current range should be turbocharged by this long congestion period.
Of course, as I've been outlining for some time, the break should be down. Sentiment is outrageously bullish, and free markets are designed to allocate money away from the majority towards the minority. This is the only way they can function. But these days, you never know. The Fed is directly trying to engineer financial markets as a tool to resuscitate the overall economy -- a flawed policy, to be sure -- but their super-stimulus has been having an effect these past few months. Of course, nothing can ultimately stop the flow of money from majority to minority -- it can only be postponed.
Here's a chart that I've personally been watching closely. It's a 30-minute chart of the S&P 500 "e-mini" futures, with the harmonic fibonacci retracement levels overlayed.
Since that initial drop off the highs at 1015, the market has been ricocheting off these quantum levels like a pinball machine on tilt. It's enough to scramble the brain of any trend-chaser. The only guys making money are ace traders like our own Mohan at 21st Century Futures, who by the way has been cleaning up during this period, as usual. But for most market participants, this is pure frustration.
This chart does offer some important clues. It shows that the quick move down was the "impulsive", swift leg -- implying that it holds sway on the trend -- and the zig-zagging since has been the slower, congesting counter-move. This idea is re-inforced by the fact that the S&P 500 can't get back over the crucial 61.8% retracement level over at 1000 -- even though it's had plenty of chances to do so.
A break down below the bottom of the range, down there at 977 on the S&P 500 futures, should trigger a much bigger slide. It should be surprisingly swift if it happens, as that's not going to be taking too many people by surprise. That's an "action zone" for a whole lot of money at this point, and a lot of bullish bets that have already been made.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled 0.3 points to 0.7% full of negative sentiment.
SHORT-TERM: Neutral.
MID-TERM: Progressed 3 points to 54% on the Advance side with a low Confidence Diffusion Index reading of 1 (out of 7).
LONG-TERM: Unchanged from prior day's 98% on the Advance side but with a neutral CDI.
BOTTOM LINE: What slight momentum of sentiment there is, is in the Advance Phase direction, but with the tank virtually empty the best way to describe the overall sentiment picture is neutral-to-dangerous as the SPX continues to consolidate within the range established in early June.
We'll have to let the market tell US which way it wants to break. Until then, we can just marvel at its behavior. E.g., SPX has had no response to the rise in 10-yr Treasury yields from 3.1% to 4.4%, the market has behaved non-normally relative to the precipitous fall in the VIX, and the Put/Call Ratio's 20-dma has gone flat at a high level. Finally, there has been minimal volatility DURING the Earnings Binge weeks and the SPX's HISTORICAL VOLATILITY on a 20-day basis has been held between 14 and 17 (a very low level) since mid May. Normally volatility itself fluctuates from high to low -- from 5-15 in quiet environments and from 10-35 in noisier times. But for volatility to hold in a 3-point range for 2 ½ months is extremely unusual, and probably accounts for the unnervingly low VIX.
July 30, 2003
Energy Cascades
by David Nichols
Yesterday the market treated those few participants who actually wanted to play to a nice, cleansing "whoop-de-doo" intraday roller-coaster ride. "Consumer confidence stinks -- sell!!! Wait, we nabbed Saddam -- buy!!!! Oh, never mind...."
It's just so much noise right now. There's no other way to spin it. The market has been narrowing into a break one way or the other, and most people are simply waiting to see which way it's going to go.
If you're interested in chaos theory and how it applies to the market, then this is an interesting moment, theoretically speaking. The markets have worked themselves into such a standstill, that the merest puff in either direction could trigger a massive energy cascade in that particular direction. But we can't really determine which way that energy is going to be released. Once released, we can have a pretty good idea of how it will play out, as that's how chaotic systems work. They are both predictable and unpredictable at the same time.
The "pile-on" effect of the break out of this congestion period should be quick and sharp, as there is a lot of managed money with a short-term time horizon now. And the only thing that matters in the short-term is the price action itself. So the break up or down out of this current range should be turbocharged by this long congestion period.
Of course, as I've been outlining for some time, the break should be down. Sentiment is outrageously bullish, and free markets are designed to allocate money away from the majority towards the minority. This is the only way they can function. But these days, you never know. The Fed is directly trying to engineer financial markets as a tool to resuscitate the overall economy -- a flawed policy, to be sure -- but their super-stimulus has been having an effect these past few months. Of course, nothing can ultimately stop the flow of money from majority to minority -- it can only be postponed.
Here's a chart that I've personally been watching closely. It's a 30-minute chart of the S&P 500 "e-mini" futures, with the harmonic fibonacci retracement levels overlayed.
Since that initial drop off the highs at 1015, the market has been ricocheting off these quantum levels like a pinball machine on tilt. It's enough to scramble the brain of any trend-chaser. The only guys making money are ace traders like our own Mohan at 21st Century Futures, who by the way has been cleaning up during this period, as usual. But for most market participants, this is pure frustration.
This chart does offer some important clues. It shows that the quick move down was the "impulsive", swift leg -- implying that it holds sway on the trend -- and the zig-zagging since has been the slower, congesting counter-move. This idea is re-inforced by the fact that the S&P 500 can't get back over the crucial 61.8% retracement level over at 1000 -- even though it's had plenty of chances to do so.
A break down below the bottom of the range, down there at 977 on the S&P 500 futures, should trigger a much bigger slide. It should be surprisingly swift if it happens, as that's not going to be taking too many people by surprise. That's an "action zone" for a whole lot of money at this point, and a lot of bullish bets that have already been made.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled 0.3 points to 0.7% full of negative sentiment.
SHORT-TERM: Neutral.
MID-TERM: Progressed 3 points to 54% on the Advance side with a low Confidence Diffusion Index reading of 1 (out of 7).
LONG-TERM: Unchanged from prior day's 98% on the Advance side but with a neutral CDI.
BOTTOM LINE: What slight momentum of sentiment there is, is in the Advance Phase direction, but with the tank virtually empty the best way to describe the overall sentiment picture is neutral-to-dangerous as the SPX continues to consolidate within the range established in early June.
We'll have to let the market tell US which way it wants to break. Until then, we can just marvel at its behavior. E.g., SPX has had no response to the rise in 10-yr Treasury yields from 3.1% to 4.4%, the market has behaved non-normally relative to the precipitous fall in the VIX, and the Put/Call Ratio's 20-dma has gone flat at a high level. Finally, there has been minimal volatility DURING the Earnings Binge weeks and the SPX's HISTORICAL VOLATILITY on a 20-day basis has been held between 14 and 17 (a very low level) since mid May. Normally volatility itself fluctuates from high to low -- from 5-15 in quiet environments and from 10-35 in noisier times. But for volatility to hold in a 3-point range for 2 ½ months is extremely unusual, and probably accounts for the unnervingly low VIX.