Excerpts from the Avid’s Live Chat Room…

In all fairness, there is no way of determining the longer term outcome of recent events which occurred over the past month. There are no doubt long term effects that should result from the credit squeeze which has occurred, sum good and sum very bad but on a purely technical basis the probability of seeing further appreciable price erosion of equities has diminished greatly from the chart action which was engineered this week. The boys did what they had to do in conjunction with the FED and on paper this week.  They fixed a lot of apparent leaks and painted a price chart that now looks more bullish than bearish. Whether it is sufficient to stem further erosion later in the year remains to be seen, but for now it appears that further equity value declines have been rendered moot.  We’ll begin to see whether the general public buys it once all the folks who went off to sunbath in the Hampton Beaches begin to trickle back into their work cubicles this week.

From the technical chart perspective, we now have developed and enormous “irresistible tail” on the daily and weekly charts that most likely generates an incentive to buy rather than to sell going forward. My interpretation is that we shall travel back up to the approximate area where the PSAR last gave it’s sell signal which is approximately the 1500 SPX mark where the battle will begin anew. That being the case, some bears who are currently sitting on some sizable profits, if they are short from higher up, should book’em Danno and await the inevitable retracement IMO.

Excerpts from the Avid’s Live Chat Room…

What does the future hold? My bet is ~1300 SPX in the fairly near future. Then most likely new highs after that. But I reserve the right to change that forecast. : ) It is certainly interesting, and confirms suspicions about the nature of the selling, that as soon as the NYSE closes, the futures rebound somewhat. Often it is the futures that push the market around. But not in the past couple of weeks. Institutional selling becomes a fundamental piece of information for the Futures camp, there is nothing you can sell that cant be sold.

The present situation is not exactly ‘business-as-usual’. But my current judgment is that there will not be a huge impact on the aggregate economy from what is happening. I.E. we will not see two consecutive down quarters in real GDP. The Federal Reserve was created for the very reason that an institution like the Fed was required to stabilize things when discontinuities like the present happen. There had been so many of theses kinds of events in the 1800s, which did have fairly serious economic ramifications, that finally in the 1913 (?) they created the Fed precisely for the present type of situation.

So, I expect us to weather this without a problem in aggregate GDP, but clearly there are a lot of entities that currently are short of cash and need to liquidate assets to raise cash. How long the liquidation will last is anyone’s guess. But SPX ~1300 seems like a sensible number to me. Although I have to say that my degree of conviction about GDP in the immediate coming quarters is appreciably less than it would be without the present ‘mess’. But my point is that it depends on who it is that is selling that explains PREM. Or if you like, PREM gives some information about who it is that is selling. This time it is not the futures people who are applying the selling pressure. Let’s put it this way, if the Fed wants a recession it would have no trouble getting one going. But if the Fed doesn’t want a recession then all the gods in the universe combined would have their time cut out trying to create one. IMO

Excerpts from the Avid’s Live Chat Room…

Friday’s drop satisfied the unfilled 1442.93 target from 8/6. The next lower targets are 1402.96, 1357.91 and 1330.11. There is more than one possible scenario for Monday; therefore there is no official call. However, there are two possibilities which are more likely than others. The first is that we made a double bottom and are going higher. Also, we recovered from a deep pit to close positive. The problem I have with this possibility is that the positive close is an illusion. Other indices besides SPX closed negative. After the close, futures tanked, not only going under fair value but going under cash as well. The second possibility involves a little fundamental analysis (which I rarely use) and Elliott wave theory (which I rarely use).

Friday the Fed poured cash into the system an unprecedented three times. (They bought illiquid mortgages; its cash finds its way into the market and props up prices temporarily.) With just minutes left to trade SPX was safely in the black, the market was rallying and usually no one wants to fade a strong move going into the weekend. Instead of biding its time, the market sold off sharply. In an environment where only professionals were left to trade, people wanted out at any price. The implication is that a huge in pouring of funds was insufficient to keep the market up. If Friday’s rally were due to the Fed pouring in funds, it should be rejected immediately with a strong gap down, ideally undercutting all of Friday’s recovery. In such an event, the market likely would not recover as it did Thursday and Friday; it would drop and keep dropping. And dropping.

Here is where I try my hand at Elliott wave theory on a 5 minute chart. If wave 1 down went from the 8/8 high to the 8/10 low, then wave 1(iii) goes from 1487.06 to 1431.32. Wave 1(i) is 50% of this wave and wave 1(v) just misses being 23.6%. Countertrend wave 2 up has a nice A=C pattern and wave 2 itself is 50% of wave 1(iii). It is easy to count 5 waves down from the top of wave 2; this would be wave 3(i). Countertrend wave 3(ii) has printed and we are about to start wave 3(iii), which can be vicious its rate of descent. If wave 3 is 161.8% of wave 1, then we hit 1371.83. Betting on a crash is a low percentage bet. Just because the conditions for a crash are present does not obligate a crash to occur. But every now and then conditions are right for a crash; and they are right for a crash on Monday. The patterns are projected forward not backward.

For example in the chart posted above I wanted to see what type of pattern we had for June. So the pattern recognition software took all SPX daily data prior to Monday May 28th going back years and crunches looking for pattern recognition. When it finds a pattern depending on how well it recognized it, it generates a probability for that pattern playing out given previous similar patterns and forecasts.In this case it picked up a pattern with 69%+ probability. You can see the projected forecast for June and July going into August was impressive. If you wanted to go back then I would pick say SPX data prior to January 2007 and see what projection for the months you mentioned. Problem is that previous forecasts have had low probabilities below 60%. It was the one I posted that had a more than usual probability well above the 60% that I thought was worth a post. THE ABOVE CHART IS JUST AN EXAMPLE. PLEASE DO NOT TRADE THIS!