Tuesday, May 31, 2005

Monthly Chart of Microsoft Posted by Hello


I want to take a look at Microsoft's monthly chart and see if I can guess some reasonable price targets for MSFT using divisions of the historical range and price boxes.

I've chosen to work with the divisions of the all time high of 54.81 since the only reasonable historical low in this stock is essentially 0 adjusted for splits. These divisions are displayed as blue lines on the monthly chart. The bull market boxes for MSFT are displayed in red and are 16.40 points high.

From its all time high of 54.81 in December 1999 MSFT dropped to 18.39 in December 2000, very near 1/3 of the all time high at 18.25. My rule in these situations is that the subsequent rally will typically carry to the corresponding 2/3 point which in this case is at 36.54. In the event MSFT managed to advance to a high of 34.79 in June 2001. The final phase of the 2000-2002 bear market in the broad averages then carried MSFT down to 18.93, a second low near the 1/3 division point, in July 2002.

Since that second low MSFT has traded in a narrow range whose highs have been very near 27.41 which is 1/2 the all time high. I am bullish on the broader averages and on the Nasdaq Composite so I expect MSFT to break above this 1/2 point soon. It has been 3 years since the July 2002 low so any such breakout should be followed by an extended upmove.

The next step up from the 2/3 division point which stopped the rally from the 2000 low is the 3/4 point at 41.11. Note also that the 1/2 point of the second box is at 43.00 and this is normally strong resistance. So as my target for MSFT over the next 6-9 months I choose the 41-43 range.

Monthly Chart of IBM Posted by Hello


I'd like to take a look at IBM and offer a guess about its likely trend for the next six months.

In 1993 IBM dropped to a low of 10.16 (adjusted for splits) and there ended a bear market drop of more than 75% from its top in 1987. From its 1993 low IBM rallied to a high of 139.19 in 1999 and then dropped 61% to a low in 2002 of 54.01.

After a price drop of more than 50% from a high the first thing I do is take a look at the market's historical range and divide it into halves, quarters and thirds. The price levels which mark these divisions will generally prove to be support and resistance levels as long as the market stays in that range. One also can often observe symmetries in the market's price behavior relative to these divisions that have predictive value.

In the case of IBM I shall analyze the 129.03 point range that is delimited by the 10.16 low and the 139.19 high. On the monthly chart above this post I have drawn in the divisions of this range in blue and the price boxes for the bull market that began in 2002 in red.

Let's start the analysis at the 54.01 low in 2002. Notice first that the 54 low occurred close to the 1/3 level (53.17) of the range. One symmetry rule I find useful is that drops which stop at the 1/3 level are often followed by advances to the 2/3 level (96.18). I next note that there were two big rallies in the bear market from 139 to 54. The first carried IBM up 45 points and the second 46 points. A rally of 45 points from 54 would end at 99, not far above the 2/3 level. Finally the first bull market box on the monthly chart had its top at 89.46 and its low at 73.17. The 1/2 point of the second box would then be at 97.06 and is typically a strong resistance level. So a conservative guess for a target for the second leg up which started from 73.17 in March 2003 would be the 96.18 to 99 range. In the event IBM rallied as high as 100.43 in February 2004.

In April of 2005 IBM dropped to a low of 71.85. Now I am still bullish on the stock market averages and believe that they will advance substantially during the next 6 months. IBM is a prominent and widely held stock and I think it unlikely that it will drop while the broader market is advancing. I next note that the 71.85 low is near the 1/2 point (74.68) of IBM's historical range and is also the next step up from the support level at the 1/3 point which marked the 2002 low. So I conclude that IBM will now head higher with the market and the question is how high.

Well, markets typically trace out what I like to think of as "staircase patterns" relative to support and resistance levels. This means that the market typically takes two or three steps in the longer term trend direction and then reacts a step or two against this trend. This is a bull market so IBM should be climbing a staircase. It rallied two steps (past the 1/2 level and stopping at the 2/3 level) from the 54 low and then reacted one step back to the 1/2level. On this basis we would expect the rally from 71.85 to carry the market up two steps: past the 2/3 level and stopping at the 3/4level at 106.93.

Two other calculations suggest a top near 106. First note that 108 is a 100% advance from the 54 low. Second note that 107.78 is a 50% advance from the 71.85 low.

All things considered I think that 106 is a reasonable target for the uptrend in IBM which I believe began from 71.85.

Monday, May 30, 2005

Daily Chart of Google Posted by Hello

Google' Next Reaction

In a previous post I projected a 376 target for Google by the end of 2005. I think that public sentiment towards GOOG has been warming up but the speculative pot has definitely not yet come to the boil. Since I expect the Nasdaq and the S&P to rise quite a bit by the end of the year my 376 target for GOOG may well prove too conservative.

In any case how does one "handle" a stock like GOOG that is moving dynamically upward but is still far from a reasonable price target? In this kind of situation I want to be long and normally would not touch a long position in a stock like GOOG unless I've got good evidence that the uptrend from the IPO price of 85 is over.

But some people can't resist showing the world how smart they are and will try to sell part of their long position when a reaction seems imminent and buy it back when the reaction appears complete. How could one implement this tactic in GOOG?

The daily chart above shows my estimate of the 40 point price boxes in GOOG. The first thing to observe is that GOOG has already had two reactions on the way up one of 40 points and one of 44 points. So the next time GOOG drops about 40 points I would say that it is a strong buy. In fact, since the market is in an acceleration phase I might not even wait for the full 40 point reaction to develop but would look for a more aggressive entry after a reaction has carried 30 points and reached the 1/2 point or the top or bottom of a box.

Where might the next reaction start? Frankly, this is the hardest question to answer in speculation and I get this wrong as often as I get it right. This is why I don't like to disturb investment positions if my longer term target is still far away and if the broader market is still headed higher. In any case, let me take a stab at an answer for GOOG.

The biggest reaction in GOOG so far was 44 points from 216 to 172. The preceding move up in GOOG was 131 points from 85 to 216. If we add 131 points to the low of that reaction at 172 we get a target of 303. Notice that 302 is the 1/2 point of a price box and that the last reaction carried from one such 1/2 point to another. So my guess is that this pattern will continue and that the next reaction will start near 302 and perhaps carry as far as 262.

There is one other pattern which suggests that resistance will be found near 300. Note that 212 is 2 1/2 times the offering price of 85 and that the biggest reaction so far started from a level 4 points higher. If the next reaction starts from a level 4 points above the price which is 3 1/2 times the offering price it will begin from 301.

Friday, May 27, 2005

Nasdaq Intermediate Term Trend Projection

I'd like to make a few more comments on the weekly chart of the Nasdaq Composite index you see below.

In April 2005 the index made a low at the 1890 level and in my view another bull market upswing has begun from 1890. How far might it carry? 'There are three previous upswings in the current bull market that can be used as precedents for the current move up. The first carried the index up 37.3% from the bear market low of 1108 in October 2002 to the 1521 level two months later. The biggest of the three upswings carried the index up 71.8% from the March 2003 low of 1253 to the January 2004 high of 2153. The last upswing carried the market up 25.2% from the 1750 low in August 2004 to the 2191 high in January 2005.

If we add these percentage gains to the 1890 low of April 2005 we get upside targets of 2593, 3245 and 2365 respectively. The third target based on the percentage gain of 25.2% I think can be disregarded because the corresponding upswing was actually part of a trading range and I think the market has begun a breakout move. The first two targets correspond nicely to the targets of 2567 (50% of the 2000 high) and 3120 (1/2 point of the 1108 - 5133 range) that I cited in my last post. So I conclude that the upswing which began from the April 2005 low will in all likelihood end the bull market and terminate very near one of these two targets (probably the higher one).

Weekly Chart of Nasdaq Composite Posted by Hello

Bull Market Boxes for the Nasdaq Composite

The weekly chart above shows the action of the Nasdaq Composite index since the bull market began in October 2002. In this post I'd like to guess how far up the index will go before this bull market ends.

The essential first step in making any forecast is to find an appropriate analogy for the current market situation. In my opinion, it is the 1929-1932 bear market in the Dow that is the closest analogy to the 2000-2002 bear market in the Nasdaq. Why? Well, the 1929-1932 bear market lasted 34 months and dropped the Dow Industrials almost 90%. The 2000-2002 bear market in the Nasdaq lasted 31 months and dropped the composite 78%.

In September 1929 the Dow industrials established a high at 381 and fell to 41 in July 1932. There were two important bull market tops during the 15 years which followed the 1932 low. The first occurred at the 195 level in the Dow in March 1937 and the second at 212 in May 1946. The significant observation here is that 195 is almost exactly 50% of the bull market top at 381 while 212 is almost exactly the 1/2 point of the range 41 - 381 of the bear market.

What are the corresponding levels for the Nasdaq Composite? This average established its bull market top in March 2000 at the 5133 level and dropped to 1108 in October 2002. We see then that 50% of the high at 5133 is 2567 and I've drawn this level as the solid black line across the chart. The 1/2 point of the 1108 - 5133 range is 3120 and this level is the solid blue line across the chart.

From this simple calculation I am willing to surmise that the bull market from the 1108 level will end either near 2567 or near 3120. My own preference is the 3120 target and I have three reasons for this. First, the 2000-2002 bear market was a smaller percentage drop in the Nasdaq than the 1929-1932 bear market was in the Dow. Second, the Nasdaq is more volatile than the Dow or S&P and I think the 3120 target is more in line with the projections I have for these other two averages. Finally, I see so much bearishness among the public that it is hard to imagine that a move only to 2567 could induce even the modest amount of bullishness that I expect to see near the bull market top.

The red lines drawn on the chart above are the bull market boxes in the average. These are 413 points high. In January of 2004 the composite bounced off of the 1/2 point of the third box and reacted to the 1/2 point of the second. In January 2005 the average again bounced off of the 1/2 point of the third box but this time dropped only to the bottom of the third box. This is a bullish sign and portends a move above the January 2005 top.

I also want to observe that the Nasdaq composite has traded sideways for more than a year now. An upside breakout from this range is likely to carry the market a long way and this is another reason for favoring the 3120 level as the target for the bull market. Note that the top of the fifth bull market box is at 3173.

The Nasdaq composite appears poised to break out above its year long trading range and this breakout should mark the start of the second phase of the 2002-2005 bull market. My best guess is that by the end of this year or early in 2006 the composite will have risen to the 3120 level.

Thursday, May 26, 2005

Hourly Chart of T-bonds Posted by Hello

Hourly Chart of 10 Year Notes Posted by Hello

Bond and Note Update

In my last post on the bonds and notes I said that both markets would probably react to the 1/2 points of the next lowest box before heading higher once more.

The bonds stopped at 117-07, the 1/2 point of the 116-16 to 117-30 box, so a drop of a full box from there would bring the market down to 115-25, the 1/2 point of the next lower box.

The notes went a bit further than we expected, stopping at 113-13, the 3/4 point of their 112-16 to 113-23 box. So a drop of a full box from there would bring the notes down to the 3/4 point of the next lower box at 112-06 which is now my target for the reaction in the notes.

As I have said often in previous posts both markets have further to go on the upside. My 2005 bond market forecast predicted a bond market top for August 2005.

Wednesday, May 25, 2005

Is There a Real Estate Bubble?

Is there a real estate bubble in the US? Beats me! But I think it is possible to draw some conclusions from the fact that so many people are worrying about one.

First of all let's get our history straight. I know of no "bubble" that has burst while so many experts were telling people how inflated the bubble was and how the bubble was doomed to burst sooner rather than later.

But today the New York Times ran a page 1 story above the fold with the headline "Steep Rise in Prices for Homes Adds to Worry About a Bubble". A few days ago the Wall Street Journal ran a story in the "Capital" column by David Wessel with the headline "The Fed Starts to Show Concern At Signs of a Bubble in Housing". The May 30 issue of Fortune had as its cover story "Real Estate Gold Rush".

What I find so interesting about this phenomenon is that the word "bubble" nowadays has a very negative connotation, one that has resulted from the recent collapse of the dot com and telecommunication bubble stocks during 2000-2002. The word "bubble" is like the "bloody shirt" that tabloid newspapers used to wave to arouse war sentiment among the public. In my view the constant use of this term is a reflection of underlying negative attitudes, not just towards real estate but also towards financial assets. People just want to be scared. And the press satisfies popular demand by scaring its readers with the constant references to the real estate "bubble".

I draw two conclusions from this phenomenon.

First, real estate prices are not going to stop going up anytime soon. My best guess is that the (temporary) peak in real estate prices will occur just about the time the US economy starts to slip into its next recession. My 2005 stock market forecast predicts a stock market top for late this year, so I would expect the economy to peak around mid-2006.

Second, bearish attitudes towards financial assets are so prevalent that I doubt that the next bear market (in 2006) will be very severe. Probably it won't drop stock prices more than 25%. And the subsequent bull market will almost surely send the stock market averages to new all time highs by a substantial margin.

Don't let yourself be frightened by the bubble bogeyman!

Daily Chart of December 05 Eurodollars Posted by Hello

Eurodollar Boxes

I'd like to update the box situation in the December 2005 Eurodollar futures.

The daily bar chart above shows the bear market boxes in the Eurodollar futures. They are each 48 ticks from top to bottom. I want to point out an interesting feature of these boxes which is relevant to longer term box analysis in futures contracts.

The boxes you see were originally defined in the December 2003 contract by the initial drop from the bull market top at 99.09 on June 16, 2003 to the low at 98.61 on August 1, 2003. The December 2003 contract was the active contract at the time which is why we used it to define boxes. To calculate boxes for all subsequent contracts we used this box size and position defined by this initial drop in the December 2003 contract.

The March 2005 low occurred at the 3/4 point (95.61) of the eighth box down from the 99.09 top. The subsequent rally stalled at the top of the seventh box down. But the reaction from the top of that box has held several times at the 1/2 point of the box at 95.97. I think this market will make a stab at the 1/4 point (96.33) of the sixth box down before the bear market resumes.

Daily Chart of Google Boxes Posted by Hello

Google on May 25

The daily chart above depicts my estimates of the boxes in Google (GOOG). Note that I have revised my estimates of their positions compared to those I made in my last post on this subject. Now I think that the box with high at 201.60 and low at 161.31 defines a box 40.29 points in height.

The 1/2 point of the third box in this sequence is 262.04. Google has been acting much better than the market and this morning the reaction from that 1/2 point has dropped GOOG to just a bit below the 1/4 point of the third box near 252. My best guess is that buyers will step in here to move the market up to the 3/4 point at 272 but if I am wrong GOOG will still be a strong buy at the bottom of the third boxe near 242.

I am very bullish on GOOG longer term and in a previous post projected a price target of 376 by the end of 2005.

Chart of Daily Eurocurrency Boxes  Posted by Hello

Eurocurrency Boxes

The daily chart above this post depicts the bear market boxes for the Eurocurrency futures. These boxes are 9.52 points wide and begin from the bull market top at 136.87.

The market is trading in the second box of the sequence and should drop close to the 1/2 point of this box at 122.59 before a substantial rally sets in . The next rally probably won't be as big as the first which extended a bit more than 3/4 of a box size. Instead I think that any rally that starts near the 122.59 level will carry no more than to the top of this second box which stands at 127.35.

I think this bear market in the Eurocurrency will probably carry the market below 100.

Tuesday, May 24, 2005

S&P update

Above you will see an hourly chart showing the short term boxes in the June S&P futures. The market bounced off of the top of the second box at 1197 as expected but only made it down (so far) to the 3/4 point of the same box at 1190 instead of the 1/2 point of the box at 1182. Since I am very bullish on this market I think the big risk here is missing the upmove so I think one must presume that the market is now headed for the 1/2 point of the third box at 1212.

If my assessment is wrong and the market breaks first then I still think it is a buy near the 1/2 point of its second box at 1182.

Hourly Chart of the S&P Posted by Hello

Hourly Bond Boxes on the Close Posted by Hello

Hourly Chart of Note Boxes on the Close Posted by Hello

Bonds and Notes at the close on May 24

Just a quick update to this morning's bond and note post.

The hourly charts for the bonds and 10 year notes you see above are updated through today's close. During the day the yield curve steepened visibly (i.e. the notes went up more than in proportion to the bonds). Consequently it is now likely that we saw the top of the bonds this morning at the 1/2 point of their box at 107-07 and that the notes will also stop at the 1/2 point of their box at 113-03. My best guess is that the upcoming reaction will carry both markets down to the 1/2 point of the next lower box.

Chart of Hourly T-note Boxes Posted by Hello

Chart of Hourly Bond Boxes Posted by Hello

Bonds and T-notes on May 24

I want to update the hourly box picture for the bond and 10 year note futures.

The bonds have reached the 1/2 point at 117-07 of another 46 tick box and this suggests yet another reaction ahead. The 10 year notes have proven stronger than I had expected yesterday and are now approaching the 1/2 point of their box at 113-03. My best guess for today is that the bonds will move above their 1/2 point and break a tad above the 117-12 level, the February 9 high in the March '05 contract while the notes rally close to 113-03.

The reaction which follows will carry both markets at least to the bottom of the box they are in now and quite possibly to the 1/2 point of the next box below. I think that the uptrend which began from the late March lows in these markets is not yet complete. So this reaction will present another buying opportunity.

Monday, May 23, 2005

Hourly Chart of Ten Year T-note Boxes Posted by Hello

10 year T-note Boxes on May 23

The hourly chart above depicts my estimate of the boxes in the June 2005 ten year note contract. The boxes were defined by the reaction on April 2 of 39 ticks from a high of 110-02 to the low of 108-27.

The market is making a second try to move into the fourth box in the uptrend but I think this attempt will fail and that we will see another reaction down to 111-28, the 1/2 point of the third box or to 111-09 the bottom of the third box.

The uptrend from the March low at 107-25 is not over yet and I think this market will probably get into the 115-116 range before the upmove ends.

Chart of S&P Hourly Boxes Posted by Hello

S&P Hourly Boxes

The chart above depicts my short term box analysis for the June S&P futures. In a previous post I said that the market should soon reach the top of the second box at 1197. As of Friday's close the market had rallied as far as 1192.70 and had been stalling near the 3/4 point of the box at 1190 for the better part of three days.

I am not a fortune teller so I can't say what the market's action today will be. But I do want to point out that the move up from the last low at 1147 to 1192.70 was 45.70 points, just a tad more that 1 1/2 the box size of 30 points. In my experience anytime a market moves a multiple or a multiple plus a half of the box size from an extreme and starts to stall it is likely to reverse course temporarily.

So now I think the market's next move of 10 or more points from Friday's close will be downward. A drop of half a box (15 points) from 1192.70 or from whatever high it reaches in the next couple of days would be normal. Keep in mind that the bigger trend is upward so if this break materializes it will present a buying opportunity.

Friday, May 20, 2005

Daily Chart Bull Market Boxes for Gold Posted by Hello

Weekly gold boxes Posted by Hello

Gold Bull Markets Posted by Hello

Is the Bull Market in Gold Over?

Is the bull market in gold over? At the moment my best guess is that the top near 458 last November did not mark the end of the gold bull market that started from the 252 level in August of 1999. Why? I have to admit that the explanation I am about to give illustrates that forecasting is more art than science.

The first chart above this post is a monthly bar chart of the London gold fixing over the past 30 years. There were two gold bull markets in the 1980's. One carried from 297 to 509 (71.4 %) while the other carried from 284 to 500 (76.1%). On this basis one would reasonably expect the current bull market in gold from the 252 level to stop between 432 and 444.

The second chart above this post, a weekly chart, shows that the first time the market made it into the 432-444 range in the spring of 2004 it broke $60. But that break was actually a smaller percentage break that the previous big break during the bull market. Moreover, gold then recovered to move to new bull market highs.

From this I conclude that this bull market is going to be visibly bigger that the two bull market precedents in the 1980's. The fact that the upmove from the 1999 low had lasted more than 5 years by the time the late 2004 top at 454 was established also points to the same conclusion. For this bull market has already lasted quite a bit longer than the previous four bull markets on the monthly chart, thus showing that a very long term cycle has turned upward.

My experience tells me that because gold didn't stop in the 432-444 range and has already broken above the 1996 top at 414 it will next break above the two tops of the mid-1980's bull markets at 500 and 509.

To make a more precise estimate of the likely bull market target take a look at the weekly and daily gold charts above. I have drawn in the bull market boxes for the move up from 252. These boxes are $75 high. Gold is currently reacting downward to the bottom of its third box at 402.50. From there I estimate that it will rally at least to the 1/2 point of its fourth box at 515 and possibly as high as the 3/4 point of that same box at 534.

How Far Will This Bull Run?

The art of forecasting lies in finding the correct historical analogy to the current market situation. I'd like to illustrate this principle by explaining how one can estimate a reasonable price target for the bull market that began from the S&P 768 level in October 2002.

The basic idea is very simple. This bull market will probably travel about as far as previous bull markets that developed in a similar situation.

The closest analogy I can find for the current bull market is the bull market in the Dow Industrials which carried that average from 570 in December 1974 to 1026 in September 1976, a move upward of 80%. The reason this is the best analogy is that the Dow had previously dropped from a high of 1067 in January 1973 to its 570 low, a move downward of 46.6%. The drop during that 1974-74 bear market was nearly as big as the 50.5% drop from 1553 to 768 during the 2000-2002 bear market. So I would expect the move up from 768 to approximate in length the move up from the 1974 low at 570. Calculating 80% of 768 we get a target of 1382 for the bull market which began from 768.

Next let's focus on some finer detail. Can we find analogies to the upmove which I believe started from the 1136 level in the S&P 500 in April 2005? My first guess is that the move up from 1136 will be approximately as long as previous upswings in the bull market that began from the 768 low. By my reckoning there were four previous upswings: from 768 to 954 (24.2%), from 788 to 1015 (28.8%), from 958 to 1063 (21.4%), and from 1060 to 1229 ( 15.9%).

The shortest of these upswings carried the market upward 15.9% and a rally that big from the 1136 level would stop at 1316. On the other hand, if we discard the smallest and the largest of these four upswings and average the remaining two we can calculate a target of 1395, not far from the 1382 target for the bull market itself. In my judgment this higher target is a more likely stopping point for the move up from 1136 because of the extreme levels of bearishness I think I see currently.

Thursday, May 19, 2005

So You Want to be a Market Timer

Speculators who try to buy and sell so as to catch the important swings in the stock market averages are called market timers. Market timing became unpopular during the stock market boom led by the dot com and tech stocks in the 1990's. But I think market timing is making a comeback now and will become steadily more popular during the next 10 years.

Should you try to be a market timer? If you are reading this blog you probably have some interest in timing. But I don't believe most people have any idea how difficult it is to successfully time the swings in the market averages.

My argument is really a simple observation about how probabilities work. To be a successful market timer you have to make two consecutive good calls (i.e. two good calls in a row). You have to make a decision to sell and then another decision to buy so that your selling price is higher than your buying price. (I am ignoring issues which have to do with risk reduction since they only complicate my argument while not changing my conclusion.)

What are the odds that you can make two good calls in a row? Let's do a little thought experiment. Suppose the probability that you make a good call does not depend on whether your last call was a good one or not. As a baseline, suppose your are a novice market timer who makes good calls 50% of the time. What is the probability that you make two good calls in a row? It is just 50% of 50% - only 25% ! So a novice timer has only a 1 in 4 chance of making himself better off compared to a buy-and-hold strategy !

These are lousy odds and clearly someone who makes correct calls only 50% of the time shouldn't try to time the market. But suppose you are better than this. Suppose you make correct market calls 70% of the time. Well, the probability that you make two good calls in a row is then 70% of 70% or 49%. Still less than a 50 - 50 bet! Again, it makes no sense to try to time the market even if you make good calls 70% of the time!

Well, suppose you have improved your skills to the point where you make correct calls 80% of the time. I'll tell you right now that not many market timers will claim to achieve this level of skill. But even now, the probability of making two good calls in a row is 80% of 80% or 64%. This is still less than a 2 out of 3 chance!

I think my little thought experiment actually overestimates the success probability of market timing. I don't believe that the probability of making a good call is independent of whether or not your last call was good. In fact I believe that the fact that you made a good call last time makes it even more likely that your next call will be a bad one. People like to observe that the market is always changing the key to its lock, so the insight that leads you to make a good call probably won't work the next time you try it!

This explains why even famous market timers rarely have winning streaks more than 4 to 5 years in length. This is just the length of the average stock market cycle during the past 50 years.

So if you want to time the market you must recognize that the odds are stacked against you. Don't bet your retirement money on it!

Chart of bull market boxes in the S&P Posted by Hello

Bull Market Boxes in the S&P

The weekly chart you see above depicts my estimates for the bull market boxes in the cash S&P 500 index. These boxes are 185.65 points high. The solid lines denote the positions of the top of each successive box and are found at 768.63, 954.28, 1139.93, 1325.58 and 1511.23. The dashed lines are the 1/2 points of each box.

The market has just bounced off of the top of the second box at 1139.93. The logical upside target now is the top of the third box at 1325.58. Given the level of bearishness that has built up over the past year I would not be surprised to see the market move up even more than that, perhaps to the 1/4 level of the fourth box at 1371.99 or even to the 1/2 point of that fourth box at 1418.40.

Wednesday, May 18, 2005

Markets and Imagination

Over the years I have come around to the view that a good speculator is really an artist. He or she tries to imagine events which haven't yet happened and market conditions and prices which are quite different from those which now prevail. And the speculator hopes to profit from the journey the market will make to a price which at the moment exists only in his imagination.

Like a talented painter or musician, a talented speculator cannot afford to give his imagination completely free rein. Instead his artistic conception of the future arises from a mysterious combination of intuition and technical skill.

The speculator's tools (e.g. charts, computers, market models, etc.) serve to discipline his imagination. These tools guide his insights into channels that have been carved out by historically observed correlations among events.

In the same way a painter's brush technique and use of color allows his artistic muse to express his vision in a way known to be most effective by past generations of painters.

I think that the amateur speculator's biggest problem is a lack of imagination, not a lack of tools. This problem usually shows up in his very short term outlook on markets. I belong to a number of market discussion groups and am always struck by the focus on what will happen tomorrow or next week as opposed to what the market's trend will be over the next six months or a year.

Why this extremely short term focus? Well, one reason is the ease with which people nowadays can track markets tick by tick. Only 25 years ago it was very expensive to monitor markets during trading hours so most people had to content themselves with knowing the daily high-low-close. Markets seemed then to move at a slower pace (only an illusion of course!).

But I think there is a second reason for this short term focus, a reason which reflects a fundamental misunderstanding of the way markets move. Amateur speculators seem to think that price changes are somehow more predictable over short time frames than over long time frames.

From a statistical point of view this belief is complete nonsense. In fact the volatility of price changes (measured by the standard deviation, for example) decreases as the length of time over which the price change is measured increases. Put another way, price changes are much more random in the very short run than they are in the long run!

I believe that it is much harder to forecast what the market will do today or tomorrow than it its to forecast what it will do over the next year! Moreover, even if you want to profit from short term price fluctuations, it is much easier to do this if you have a reliable estimate of what the market will be doing over a longer time frame, one which will include several of your shorter term trades.

So pick your forecasting methods so that they give you as much information as possible about the market's longer term trend. If you get this right it is much, much easier to take advantage of the short term price fluctuations which occur as the market progresses towards your more certain longer term target.

Bond boxes on May 18 Posted by Hello

Short term bond boxes on May 18

The hourly chart above depicts the short term boxes in the June 2005 bond futures. These boxes are each 46 ticks wide.

Note that the market has reached my temporary short term target at the top of a box at 116-16. I still think the move up from the 109 low of late March has further to go (probably into the 118-120 range). At this juncture I would expect a reaction down to the 1/2 point of the box near 115-24 or the 1/4 point of the box near 115-10.

Google Boxes on May 18 Posted by Hello

Google on May 18

I've been following Google's stock (GOOG) with great interest since Google went public last August. I think the progress of Google is a textbook study in the use of contrary opinion. Ive posted on this here, here and here.

The daily bar chart you see above depicts my estimates of the price boxes in GOOG. These boxes are 36.33 points high. The market is nearing the top of the second box at 237.90. From there a reaction to the 1/2 point of this second box at 219.75 would be normal. However, GOOG is acting much stronger than the market so I think a reaction from 237.90 will only be 1/4 of a box (about 9 points) instead of 1/2 a box (about 18 points). Moreover, I think a move to the 1/2 point of the second box at 256 is likely before we see any reaction of as much as 20 points in GOOG.

Short  Posted by Hello

Long term Dollar Index Boxes Posted by Hello

Short Term Dollar Outlook

As you know I am bullish on the US dollar. The charts you see above depict my estimates of both the long term and the short term dollar boxes in a daily continuation chart of the dollar index futures.

The first thing to note in the chart of the long term dollar boxes is that the dollar bear market ended (in my opinion) at the bottom of the fourth long term box down from the 2001 high at 121.29. These boxes are 9.94 points wide and the bottom of the fourth box was 81.53 vs. an actually low of 80.48. The market is in the process of rallying back to the top of the fourth box which stands at 91.47.

On a short term basis we see that a box of 4.98 points was established on the first extended rally from the 80.48 low. The top of this first box is 85.46 while the top of the second short term box should therefore be at 90.44.

So we conclude that the next important resistance level on the way up will be in the 90.44 to 91.47 range. The market should hesitate for few days on the way to this target when it reaches the 87.95 level which is the 1/2 point of the second short term box.

After the dollar index makes it to the 90.44 to 91.47 zone we should see a normal reaction that will probably carry down to the top of the first short term box (85.46) or the 1/2 point of the fourth long term box (86.50).