The Week That Was — A Funnel, Bob Barker Sez, and a Crude Funeral Analogy

What a week!  I love a bit of the ol’ funnel of death now and again.

Huge sell-offs create huge opportunities, but just like all things market-related, you have to be there, and ready to take advantage.

I’ve been in cash the whole sell-off so I have a LOT of powder ready for the next move.  This is ideal, unlike those who have been caught flat-footed, and are now a deer in the headlights.

Not having the mental capital or physical capital to get heavily positioned when you need to is literally the death of the trader’s functional decision making process and overall success because it forces you to second-guess and chase.

It’s hard to get out of that hole, so don’t get in in the first place, and certainly don’t keep digging if you are.

This week is highly emblematic of a point I make often, which is that price action the is paramount variable of consideration, above any type of support / resistance argument, or consecutive weeks lower, or statistical construct of what the VIX (part 2) is doing.

Those studies have merit, but they are heuristics and frequently are in direct contradiction to one another.  A heuristic is a “rule of thumb” which can provide a useful backdrop for what price is doing, or has done in similar instances, but price itself has also been clearly negative.  CLEARLY NEGATIVE.  It just is.  It’s pointing straight down.

So who’s “right”?

I say the price is always right.

Will we bounce?  Yes.  But what good is that if you’ve been calling the bounce for even one, if not several weeks?

Like all things, don’t force the situation.

You see a cute girl at the store?  Go talk to her.  You see a cute girl at her beloved cats funeral?  Best to wait until at least after the funeral, if at all (true story).

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If you recall, in my most recent consecutive closes lower post, I made the point that *any* positive weekly close breaks the chain, it doesn’t necessarily have to be a close of any magnitude higher, .1% to 10%.

This week was .3% higher.  Click on the chart for annotated notes.

ZERO Instances of 5 Weeks Lower since 2009 Low

The TradeTimer, which measures changes in buying and selling across the entire market, is bearish on momentum following today’s selloff.

However, it’s worth noting that we are due for a time-based mean-reversion bounce.

In the following chart you can see that there have been no instance since June 2008 of more than 4 consecutive weeks lower, this week being currently the fifth.

The odds are ~80% that the next bar or two has a positive close.

Things to remember:

• A positive close could be 1 point, it doesn’t imply a move of magnitude, just that a based based mean-reversion is likely (Mid Aug 2008)
• Doesn’t mean you can close this week positive then resume lower, or resume the prior trend (see aug/sep 2008)
• Can also frequently end existing trends (see March 2008, March 2009, Feb 2010)
• At the minimum, every instance of consecutive weeks up caused some “chop” when due for a time based MR (look carefully at each bar)

I’ll wait for the TT to show a surge in momentum first.

Bounce or Not? Does it Even Matter? VIDEO!

The market is setting up to bounce for several reasons .

First and foremost, I’ve noticed that if you include an attractive lady or a funny photo that is somehow, no matter how far you’re reaching, tangentially related to the post, you get way more views/comments.

To further this goal, as well as pioneer the efficient frontier of creativity by addressing both concerns at the same time, here you go.

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In all seriousness, the market remains weak and we are still bearish. My stance on a bounce is this –> leave it to the millions of taking heads. It is easier to trade stocks when the market is actively going up, period. If it begins to do so, the TT will alert me/us. If not, you don’t buy into the depths of hell. The pullback could be over, or just getting started.

To this end I say who cares if we bounce.  I don’t want a or three days of bounce.  I want protracted up moves I can really make money on. In this vein the TT will always tell me what’s up.

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It can go three ways:

1. A bounce after all this tumult will be met with eager buyers who (per this theory) are buying their faves on discount right at the ___ moving average. IF this happens, the TT will tell us, momentum will persist, and the monies will be made on the top momentum names of the day.
2. Yeah, there’s a bounce, but it doesn’t follow through to the upside, leads nowhere, traps some, fools others, and is summer doldrums/distribution. In this scenario, the power of the bounce could flip the TT bullish, just to have it then reverse. Or not. We’d just have to wait and see. Either way, green would be green in that case, you do the best you can with what you know at the time. Green means look long on the best setups, and if the move is a fakeout then cross that bridge when you get there.
3. Or, the market looks oversold, remains weak, and drops further.

Right now, by saying “looks oversold” two out of three, or 66% of outcomes are bad.  By simply waiting for green you reduce this percentage to less than 50%, option 1 (good) or option 2 (possibly bad).

Here are my cases for a bounce:

For some reason, the whole video didn’t load on Youtube.  Here is chart.ly

[Don’t forget to watch in HD!]

[youtube:http://www.youtube.com/watch?v=IYw3fw_Xaz0&amp&hd=1%5D