A Talking Tape

As every trader knows, the stock market rarely does the obvious in the short term. That is why the deck is overwhelmingly stacked against active traders who feel the need to take part in the daily madness. Although it is far from random, the market has a way of taking the scenic route from time to time. It's healthy and quite necessary to shake the weak hands from the tape and to go against the grain of the market's zeitgeist. It is this very trait that makes administrating short term trading opinions so difficult and a fools game. You give enough opinions (Cramer), and you may be right half the time.

In any case, where this soap boxing leads me to is the formation of a broad market trading thesis for the first quarter of this year. I have been vacillating back and forth between expecting an immanent return of the bear market and the reality of how the market is trading. Like I have mentioned before, dogma can get you into trouble trading. It is why economists make such lousy traders.

With that said, I believe the stock market should make many new lows this year - I just think they will occur after the first quarter. As a trader, one of my greatest strengths is my memory of price and metric patters in the market and my ability to take a pattern in a previous time frame/horizon and apply it appropriately to the present. Lot's of traders keep a dairy. I mostly access it by memory and then go back to the appropriate time frame to utilize the chart as a guide. I suppose it could be called an informal use of fractal analysis, since I take a representative pattern in one time horizon (example-daily chart) and apply it to another (example-10 minute chart). To make it relevant to entering and exiting a trade, the trader has to remember the psychology and fundamentals of the market at that specific time. Like I've mentioned previously, I am not a pure technician - more like a hybrid trader that takes the pulse of the market both technically and fundamentally with armchair psychology to round things out.

So where does that leave us today?

What I have been seeing recently is a very resilient and stable (comparatively) stock market. The market came out of the November lows fairly rapidly and stalled throughout December. As expected, the fundamentals have deteriorated with each passing week - as well as consumer sentiment. Currency markets have remained volatile and full of inertia. I was initially waiting for the Euro to resume its terminal descent, but have recently put off that theory based on the actions of the Fed and the actions of other foreign central banks (primarily Japan). I believe in the short term (weeks) the Yen has room to weaken even further. Granted it is because of their telegraphed future intervention into both their currency and stock markets - but who's counting anyway? This is why I always mention trades are moving targets - especially when the markets are being manipulated by the Fed and foreign central banks.

I would put the inflection point for the current market's posture in mid December when Japan notified the markets of their intent to weaken the Yen and to even buy stocks in the Nikkei. This has worked in the short term - eventually it won't. A loose target for the Yen would be around 100.

From a technical perspective, the last three weeks remind me a great deal of the stock market's behavior coming out of the 2006 market correction. Granted I am compressing a great deal of tape into a much shorter time horizon, but that is the essence and application of fractal analysis. All of the market's emotions and behaviors are repetitive and represented on many different time horizons and scales. It is the market's DNA - its thumbprint - and it is captured in the charts. Getting back to 2006, the market bottomed in July and slowly crawled out of the fog into autumn. Housing markets had just peaked and the stock market appeared to be skating on very thin ice. Oil was screaming higher as well as gold. Henry Paulson was running towards the Treasury waving a Chinese flag and warning of protectionism. Many traders and research shops didn't see the catalyst for the final leg of that bull market until it was halfway past them. The market kept crawling higher - methodically - repetitively.


Unfortunately, the meat of this market's assent is probably over. But that does not mean it will fall out of bed tomorrow and test or make new lows next month. Here are two charts for comparison. The time horizon's and scales are vastly different, the price action and metric patterns are quite similar. Factoring for like sentiment and psychology; and the benefit of knowing how the 2006-2007 market resolved the impending structural, fundamental and technical problems - I would deem the chart useful as a fractal guide.










To review -

I am looking for the equity markets to make new highs over the coming weeks - followed by a test of price action similar or slightly higher than today's closing high - followed by a new marginal high. In essence - whipsaw, with highs in between.

After that, I expect the bear to continue its course.