First I will rant about my pet peeve and then I will follow up on the current cyclical structure in the stock market.
Financial natural selection
The bears are being cut to pieces as stop after stop is hit, not only that but each time we surge a little higher, new pressure points prod the ones without stops to end the pain and cover as well. Fear drives out greed in the bears and greed drives out fear in the bulls.
At the same time the fund managers that sold out on the lows, fearing for their jobs, jump back in on the long side as the market hits new pressure points.
At the same time the media starts finding reasons for optimism. It is a movie I have seen many times before and the script never changes. Human nature and the need to follow the crowd gives the Fats Boys the victims they continually need to fill their coffers. It is almost a perfect system, where the strong take from the weak. It is natural selection in the financial world.
The Fat Boys gobble up the crowd again
Once again a high price is being paid by those that followed the crowd. When will investors and traders learn the one simple rule that never fails. The majority is usually wrong. There is a simple reason and it is this. When most people are selling someone is buying. That somebody has all the money, they have deep pockets. When they have taken every last share that is available for sale they simply start increasing their bid and the rally begins.
Stay away from crowds
The loose money era that preceded today's volatile market place created a population of potential victims, ill equipped to venture into the current investment environment. Know thyself is the best thing any of us can do. We need to know what we know, and more important, what we don't know.
If after looking inward you come to the conclusion that you have no skills, then you are metaphorically, financially blind. You are the perfect victim. Avoid crowds at all costs.
Follow the leader
How are you to know whether the people you are listening to and who's advice you may be acting on have vision either. If you are blind, the last person you want to be coat-tailing is another blind man.
There is a simple way to know. Let the market price measure their performance and be their judge, there is no other measure.
It has been my experience that when all the theories, all the rhetoric, all the drum beating has been striped away and we stand naked before the gods of profit, it is market price that is our judge and jury.
What are the cycles telling us now?
Lets look at the current situation in the stock market. Clearly the bears have their feet in the fire and everyone was a bear a month ago. Can this rally turn into a new leg up? Can the cycles give us a few clues? Lets take a look.
In the chart below I have created a cyclical model. I have drawn in the dominant 4 month trading cycle's envelope in blue. It should contain the price if the sum of all trends larger than 4 months (represented by the orange channel) is still following the path it confirmed when we made the last 4 month low July 1st. You will notice that we have been going up for over 2 1/2 months, we are pasted the neutral point and are heading toward late translation (red L). That is a bullish sign but it can be negated by a sharp drop starting now. We are at a key point in the cyclical model and what we do here will give clues as to the sustainability of the rally. There is a smaller 1 month low due at the end of the month, how far we fall into it and how we bounce will show us the way forward.
If you read my last FSN article Are stock bears doomed, in it I warned that a big stock squeeze was coming when we were at 105.00. Now I expect the market to struggle and fall back into the end of October. The 4 month cycle is a strong, consistent cycle and if the model is valid then we are near the end of the up run.
Notice the market has rallied strongly for a number of days, this is normal in a short squeeze but it has created an interesting dynamic. It caused the 1 month cycle to go into late translation mode (green arrow). In other words we only have a few days to go down and make the next 1 month low. It should come in before the end of September. Remember late translation is a sign of strength.
If the market can push higher out of the up coming 1 month low, that will suggest that the orange envelope may have started to turn back up and that will mean a new leg up has started. The ultimate confirmation will come at the end of October.
I will be watching the coming sell off with interest.
Scared stupid
I hope you will put up with my ranting and raving about the perils of following the crowd. I do it because I care and I want to keep as many readers as possible out of the Fat Boys clutches. Investors tend to find their way to my door after they have been beaten and bloodied. Occasionally I get there first and snatch a victim from their gaping maw and it feels good.
I have created a series of videos that give traders and investors the skills they need to follow the Fat Boys and prosper in these markets. There is not one indicator in the whole 8 hours of videos. If you have been trading for a while, you know indicators don't work. Please go to my blog to learn more.
Don't let the crowd's shrieking and wailing scare you stupid. The Fat Boys will grab you up. Remember if you are not with them, you are a victim.
