Sunday, April 12, 2009

The coming crash

If you couldn't tell by the time stamp of my previous post, I was up very late Saturday. All was not lost as besides the beautiful song by Fink, I came across a fascinating piece by Tyler Durdan of Zero Hedge. It explains in technical detail the anatomy of recent market meltdowns and why another one is in our immediate future.

One characteristic of what I am labeling a "Wave 4" rally over the past month is that so much of the market movement from day to day has been taking place in aftermarket and Globex trading. Huge morning gaps make up most of the price movement, with little if any follow through during regular market trading. This article addresses the dynamics behind this kind of market movement, with a foreboding hypothesis as to where it is leading prices into the not-to-distant future.

The article is linked above, but here are some salient excerpts:

In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

Following on the circumstantial evidence track, as Zero Hedge pointed out previously, over the past month, the Volume Weighted Average Price of the SPY index indicates that the bulk of the upswing has been done through low volume buying on the margin and from overnight gaps in afterhours market trading. The VWAP of the SPY through yesterday indicated that the real price of the S&P 500 would be roughly 60 points lower, or about 782, if the low volume marginal transactions had been netted out.

What retail investors fail to acknowledge is that the quants close out a majority of their ultra-short term positions at the end of each trading day, meaning that the vanilla money is stuck as a hot potato bagholder to what can only be classified as an unprecedented ponzi scheme. As the overall market volume is substantially lower now than it has been in the recent past, this strategy has in fact been working and will likely continue to do so... until it fails and we witness a repeat of the August 2007 quant failure events... at which point the market, just like Madoff, will become the emperor revealing its utter lack of clothing.

When the quant deleveraging finally catches up with the market, the consequences will likely be unprecedented, with dramatic dislocations leading the market both higher and lower on record volatility. Furthermore, high convexity names such as double and triple negative ETFs, which are massively disbalanced with regard to underlying values after recent trading patterns, will see shifts which will make the November SRS jump to $250 seem like child's play.

At the end of the day, despite the pronouncements by the administration and more and more sell-side analysts that the market is merely chasing the rebound in fundamentals in what has all of a sudden become a V-shaped recovery, the "rally" could simply be explained by technical factor driven capital-liquidity aberrations, which will continue at most for mere weeks if not days.

So when will all this occur? The quant trader I spoke to would not commit himself to any specific time frame but noted that a date as early as next Monday could be a veritable D-day.

The solace taken in all this, the dire prognostications by Durden in his article, is that whatever the outcome, my tools described in great detail in Weekly Analytics, should capture most if not all of the ensuing price volatility.



Mike said...

fwiw...looks like Weekly Trade Signals from INX for period 3/24/08 to present...actually generated +580 points, (see 5/23 thru 9/4).

somebody's got to check your math....besides, who's to argue with another 60.

Thanks for the heads up.

srs +250...yikes

Anonymous said...

Hello Allan

I just came to know your blog is excellent work and it will help me for trading thanks for putting all charts. can you update your cycle chart this time is spx index? great work do you see this is the top?Thanks for all work and helping us trading.

Anonymous said...

I tried to read some of that stuff and it really didn't make sense to me.

I got long 1/3 of my position at 7273 and hoped to buy more on a pullback. That never happened. I'm exiting on the first close above 8200. There is resistance from 8108 to 8349. Likely 1 of primary 2 will end there. I'll look to rebuy a deep retracement.

I bought the DJAIG commodity index on Friday's close at 113.12. That's half my position. I'll buy more on a new low, or if the market closes above 115.

I agree the stock market is in trouble in the long run, but think primary 2 up has begun. It should push the Dow to 11,000 or so in the next year or two.

I just got a full-time job, so I doubt I'll be writing much.

All the best to everyone,

Allan said...

Re: I just got a full-time job


Good luck with that, anyway, will miss your perspective.

Allan said...

Mike: somebody's got to check your math

The job is yours.

Anonymous said...

Allan check this blog out : I thought you like this one

DreamIt Ventures said...

One of the interesting things about the quant quote "as early as next monday", is that it conincides with a predicted Armstrong turn date somewhere between 4/19 and 4/23 (depending on who is counting).

Anonymous said...


HYGS has moved above resistance -through the $0.50 level on high volume.

Would you be a buyer above the $0.50 level?

Harvey B.

Allan said...

Harvey: Thanks for the heads up on HYGS. I would only buy here if I wanted to double my money in the next few weeks or months.....or triple it.

Anonymous said...

cost me money again! I sold my positions with meager gains today because you scared me! I gotta stop reading your blog....if only your track record sucked!!!!

Allan said...

cost you money?

Where exactly did I tell you to do anything?

Choppy-sideways-a few more weeks then hard down. Where is there anything in my analysis that says take action Monday?

When I publish the "SELL NOW" post, you can start evaluating. Until then, I am as clueless as everyone else.

Anonymous said...

Allan, i wonder where would faz be until few more weeks?
got any comment on the latest decline?

Anonymous said...

I am holding FAZ at an average of 14.40
I will hold until the market crashes ...

Anonymous said...

Alan, pls dont be disturbed by the guy "cost me money". Really funny baseless reaction of him . And probably problems with self control. Most of us love your professional posts and opinions. Please, keep posting, its always pleasure to read your comments. Nobody in the world can make such fantastic personal reflections and comparisons of the nature and psychology of the markets as you do posting mosaik of technical interpretations, music, poem, pictures. Wherever the markets go , your insight is extremely valuable. In my eyes you are a very respected person. Thank you for everything you give us.

Allan said...


Thank you for that wonderful post. Those are some lofty expectations, but right up my alley. Keep reading, there is lots more to come.

Anonymous said...

Hey Allan,

This is the Thing... Fink

New discovery for me - thanks, Joe/NYC