The Day that Was - September 11th 2007

Hope is in the Price

Hope, that is what continues to move the market. Not fact. Today the markets made substantial gains and yet again it did it on low volume. The days that the markets go down the volume intensity is higher than on the days that the markets go up. This is backwards from what a healthy market will do.

The markets are moving on the hope that the FOMC will cut the Fed Funds rate and that will solve all the woes. And because of this hope the risk takers are buying up the market in the hope that the Feds will cut the rate and the markets will propel upwards. And all the time that the market is advancing on this weak volume the 'smart money' is cashing out, taking advantage of the hope of others. When you watch a stock and you see it advance on small trades and then a large share transaction goes through on a down tick and this is repeated over and over you see clearly what is happening. Those who are moving the largest amounts of money are for the most part dumping larger amounts of shares on the weaker advances. They are doing what all smart traders do, they sell into the strength (and hope) of others. So while others buy up the stock on smaller share increments they jump in with larger share sizes and sell down. These are key technical indications of the markets movements and why we still remain firm at this point that the market is setting up for a hard fall.

A successful technical analysis of a market is much more than just looking at one chart or one parameter and saying to yourself "we have returned to a bull market". That is nonsense and will lead a trader to disaster. The smart technical analysts and traders look at many things. You can not isolate yourself to just one or two parameters of a stock chart and think everything is OK. One must ALWAYS take into account as many technical indications of the chart movements, the volume, the buying vs selling, the sector charts, the foreign markets behavior, the movements of the dollar, and on and on. So today the market had the appearance of a strong bull rally, to the novice this is true. To the experienced and savvy trader who is keen to other indicators this was not a bull rally. It was a movement on hope without substance.

A good Doctor will evaluate a patient by thoroughly examining their patient before arriving at a diagnosis. A Doctor who makes a diagnosis without understanding everything will more times be wrong then he is right. Same with technical analysis, if you don't examine the market thoroughly then you will likely be trading in the wrong direction and set yourself up for a loss.

Today there was no significant news or financial events to offer the markets any substance. On the contrary the lack of any news today made the 'hope' factor go up. It was the lack of news which fueled those who are hoping on a rate cut to further think it is a "sure thing" and they continued to buy up the market. They are pricing into the markets that a rate cut is a done deal now.

But do we really know that a rate cut is a sure thing? Do we really know that the lack of news today meant the worst is over? Do we really think that the markets are all better now and it is time to go long? Hell no! If you can answer any of the above questions with a 'yes' and is based on factual proof then we are wrong. But there is no factual proof that a rate cut is "in the bag", there is no factual proof that no news today meant everything is behind us, there is no factual proof that everything is better and it is time to go long. There is more proof to say the opposite of all of those questions. And that is in the charts, it is in the economic indicators, it is in the credit spreads, it is in the down trend of discretionary spending, and on and on.

Today the broad markets tried to break above some key resistance levels but it failed. will it try again tomorrow? Can't say because we don't know if some news in the morning will dash the 'hopes' of those who have been moving the market. But from a technical analysis stand point there is not much room over head to move up without the markets hitting a wall. And as has been the case during this market situation every wall has been met with strong selling from those taking advantage of the weak buyers and selling them off. This is why we are not initiating long side swing trades. It is pointless to do so with so much overhead resistance and other indications that the advances have been weak and are prone to another sell off.

On the economic analysis side of things there are those who view that even with a rate cut from the Feds it will not provide the necessary 'fix' that is required to solve what is broken. And we have to agree with that. How we see the economic conditions, as they exist currently, a rate cut may only make the problems worse in the long term and our equity markets are going to suffer even greater losses. It has almost reached a point that the markets are dammed if they do and dammed if they don't cut rates. You need to realize that the markets are balancing on a tight rope, the slightest event will tip the market off the rope and send it falling. The market has a long way to go before we can safely say that it is off the rope and the risks off a large decline are minimized.

RebelTraders don't trade on hope for that would only be as good as placing a quarter in a slot machine. Smart traders don't gamble, they play when the odds are in their favor.