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Commentary

SUNDAY NIGHT, OCT 20, 2002:

For now, both the Daily model and the 15-min Intraday model are long as of Friday.  The upper Attractor is at 24.40, which we could easily hit within a day with the Average True Range now being just over 1 point.

From the chart, you can see that the sjh_DMA crossed over, giving us a buy signal.  Price was above the moving average, and in fact closed on the high of the bar.  A very strong sign.

On the overlapping cycles chart, below, you can see that we still have some time left before the cycle begins to crest and then the upward momentum will wane.  For the time being, we are riding a strong wave up, so let's stay with it.

If I make the chart bars closer together, you can see what happened last cycle when the smaller cycle began to crest.  Note that at the end of December prices began to lose upward momentum and by January the smaller cycle was pulling prices down a bit.  However, the larger cycle kicked back in and pulled prices even higher until the crest of the larger cycle, at which time the market started down and has kept up the downward motion until recently.

Note that no single indicator or cycle analysis or breakout analysis or whatever has all the answers.  As in forensics, we are looking for the preponderance of the evidence to give us some clue as to what might happen in the future.  It's really anyone's guess, but with years of observation of price action, we begin to see patterns emerging.

Usually, when price breaks above resistance, whether it be a horizontal line, or a sloping line, a neckline, or a Bollinger line, when it breaks out it usually comes back to test that same price from the other direction.  So, with the new breakout on the QQQs downsloping trendline, we can expect there to be a re-test.  That is, price will quite possibly come back down into the 22.20 range, where the trendline is currently, and then one of two things will happen.  Either (a) price will bounce off the trendline and head sharply back upward, or (b) we will find more sellers living down there and price will continue on down.

I got criticized the other day for giving both view points, saying either it will go up or it will go down.  But, that's what is true, and as a trader (rather than an investor) you must be nimble, at the alert and ready to spring into action depending on which scenario shows up on your charts.  If it continues on up, stay with your long position until it shows weakness.  If it goes down, and breaks the line, get short and take profits from that side.  That's the beauty of being a trader--we can profit no matter which direction it goes, as long as we are nimble and prepared.

QQQs

I called the Attractor at 23.68 sometime last week.  Friday, the market formed a pennant whose top came in at 23.75.  Another one of those preponderance of the evidence things.  Because of the formation of the pennant, we'll have a stop at 23.38 on the bottom side and watch for prices to keep on breaking to the upside until we get closer to the double cycle crest.

We are still seeing the same thing happening that I have been discussing for weeks--digging a foundation for our bottoming formation.  Will we ever again see 120 on the QQQs?  Probably, but maybe not in my trading lifetime. 

We saw the recovery from the 1987 crash that everyone thought was the end of the world didn't we?  But it took until 1991 for prices to test and retest the high of 1987 before finally stretching out above the high and choosing a direction.  That's the kind of thing we are looking at again.  Of course business will come back and the next generation of traders, investors and the baby-boomers grandkids will create an economy.  But it might take a few more years for it to happen.  While we are looking at the long-term chart of the Dow, look how the high of 1987 formed a horizontal line (an Attractor) that was poked at 8 times (a Fibonacci number) on the monthly chart before actually breaking above it on a closing basis.  Then the market tried from the other side.  Resistance becomes support and support becomes resistance.  We poked at the line twice before breaking below it.  Then it became resistance again and we poked at the line from underneath for a while before breaking above.  And THEN, we sat on the line going sideways for 10 long months. 

That where the buy-and-hold philosophy gets you.  Nowhere fast.  However, if you had been a trader, rather than an investor during that time, you had plenty of opportunity to get in and out and in and out and make lots of money.

If you look at the same chart on a semi-log scale it doesn't look so ominous.  The prices show up as percentage dollars, relative to the time and what they were worth at that time.  The thousand point move down in 1987 looks much worse that the 1,000 point move down that began in December 1999.  Since then we have continued and continued and continued to get the air kicked out of us.  Now that's a real bear market.  If you'll look at the cyan horizontal line on the next chart, you'll see that we have just now bounced off of an important horizontal line at -- what I call an Attractor, because of the number of times the market touched the line without going below it.

Let's hope it holds and we can begin the months long process of climbing a wall of worry.

For You IntraDay Traders:

Tomorrow is an important day.  If we head for 24.40 on the QQQs, we are showing strong positive signs that the bottom may be in and that we are now processing the potentially long bottoming formation.  If that's the case, then we become range traders for a few months as the market goes back and forth between an oscillator high and an oscillator low.

However, if we drop back down in a show of weakness, then we will probably re-test the downsloping trending line and continue shorting for a longer ride down.  It's akin to the Ground Hog Day adage.  If he sees his shadow we have 6 more weeks of winter ahead. (Or is it the other way around?)

Exit all longs if we touch 22.20 on a closing bar basis.  Otherwise I'm staying long until I see something that compels me to issue an Alert and give you notice of a change in market behavior.

How Did We Do?
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