Market Anthropology: Blowing Off

Thursday, December 22, 2011

Blowing Off

For the better part of the past two weeks I have been focused on calibrating and trading the analog study I developed in last Tuesday’s note. These studies can be powerfully profitable when there is acute replication; such as with the current market – and as noted in various times throughout the year here. Generally speaking, with the short term or hourly analogs – their replication is most acute closest to the greatest changes in volatility and loosens or audibles away from that emotion. Like a rock lobbed into a pond, the geometry will replicate with great congruency at the point of entry and dissipate as you move further away from the epicenter of disturbance.   

The basic thesis for this analog was that the market was moving towards the blowoff stage in the retracement rally from the October 3 low and it was being reflected in some of the momentum metrics that I follow – specifically the Stochastic indicator and the market’s own price structure. This idea was also reinforced by the post 1987 crash analog that I have been following for the better part of four months. 

What is interesting with today’s fractal, is the current market has strengthened its replication to the analog as we have come into the final push higher. The general pattern and momentum signature was always there – but it has been strengthening over the past week. This leads me to believe that we are moving towards a rapid rise in volatility as well.

These were the two charts mentioned in last Tuesday’s note. 

As with everything in the market – timing is paramount and the difference between a successfully executed series of trades and becoming the rodeo clown trampled in the dirt. For this kind of analog where the market would retrace a rally then reverse sharply – there were enough guideposts (basic Fibonacci levels & momentum metrics) along the way that I could reasonably step in and out of the market as it came into the analogs pivots. 

The respective momentum metrics colored my expectations for a slightly weaker market, hence a deeper pivot than the comparative analog. This difference is one of the primary reasons why I believe the market will have a lower proportional high than the comparative period in May. In May, the market exceeded the March high by approximately 2%. That comparison would roughly work out to a target high for this move to ~ 1318. I believe that will not be reached, with 1300 serving as the top of the range for this move. 
As I mentioned in the beginning of December (see Here), I did not consider the magnetic price levels around 1250 a mere coincidence with the previous traumas from 2008. That period was defined not only by a series of failures at financial institutions, but also the reliance on the respective monetary officials to belly up to the bazooka and fire off several hundred billion to the banks. 

I believe 1300 will serve as the upper limit of the markets range over the next two weeks – just as it did back in 2008. Of course the primary difference being the catalyst will be an external motive from overseas – rather than internal one.