Why Play?

  • August 31, 2001
  • Gary Kaltbaum

It
has been quite a tough week. But if you have been letting the charts
work for you, it shouldn’t have been. The charts have been working quite well.
To put it bluntly, breaking support on heavy volume and bouncing up on light
volume does not make market bottoms…and I can’t begin to tell you how many
pundits have been calling for one.

Lately, I have not included any breakouts in this report. There is a method to
my madness. More than 50% of breakouts have failed…so why play? I don’t
believe in luck when it comes to the markets. I want the wind at my back and I
don’t want to continually be looking over my shoulders. Until I feel more
comfortable, I take a step back. I gather you understand where I am coming from.
I have recently included one-year daily charts of the major indices in this report. Once
again, the charts have not failed me as the majors continue to gag — in the
nastiest way possible.

Today, I  want to do something
different. I want to show you the Big Picture. I want to show you weekly five-year
charts. There is a real story being told. The Nasdaq and Nasdaq 100 charts
remind me of skiing down Vail Mountain.


Print these charts because this is historic. It is a rare occurrence when you
have charts that look like the Eiffel Tower…but pictures don’t lie. Do you
want to know why they can’t get going? Do you want to know why every rally gets
hit with a big bout of selling? I can’t tell you. But I can tell you that this
type of carnage does not resolve itself in short order. This type of chart is
the worst possible. Nothing but wedges and then nothing but major drops. I try
not to predict, I try not to guess…but if I had to, I would suggest several
more quarters of retesting the lows, repairing the damage and working off the
excesses…at the minimum …but one problem. We still have not seen a strong
bottom. A strong bottom occurs over time and at the same levels. This process
has not started yet.

Now, we move on to the S&P 500. Do you see anything you like? I don’t. This,
most important index is back to where it was in May 1998 and is now down over 25%
from the highs. You can also see a series of lower highs since the top in
September, 2000…and this is the second-best index. Odds favor testing
the March 2001 lows. But instead of going further than that, I will reevaluate
when it gets there. Thrilling!

 


The Dow is now starting to play catch-up. I don’t perceive the Dow or S&P
ever doing what the Nasdaq has done because of their make-up. Shhhhh! But
the Dow is now at the low end of the trading range going back to April 99.
Simply put, the Dow is at a critical juncture. Dropping back into the mid 9000’s
will only make things worse: 10,000 would then become resistance…and I have my
suspicions about whether it will be easy the next time it tries to rally back
up.

Lastly, a little sentiment talk. There are always going to be better sentiment
numbers as the markets plunge. The bottom line is that investors become scared.
Here are a few tidbits.

  1. There are no more books coming out
    like Dow 100,000 or Dow 36,000. The latest books are called “Value
    Investing For Dummies,”     and “Surviving
    The Bear Market.” 

  2. No longer can you go to a bar and
    watch CNBC. It’s back to ESPN and other sports shows.

  3. My father stopped calling me to buy
    stocks.

  4. Put/call numbers are spiking up.

  5. The ARMS Index has spiked big time
    over the past week to numbers not seen in years.

These sentiment numbers are a start.
But that’s it. Sentiment is secondary to stock price action. Until the market’s
turn…and I mean really turn, you must respect what has happened and may
continue to happen. I have no preconceived notion that things could or could not
change for the better but I will definitively wait until better action 
happens. I am not a permabear but I am a technician…and every technical fiber
in my body tells me to just hang out at this juncture.

Lastly, if you have not seen Jon
Najarian’s WEBFN show this week, I urge you to. It is a classic piece of
streaming video. Goran was an absolute panic. I laughed my head off but at the
same time recognized that he made a ton of sense…serious sense.

The whole Kaltbaum family wish each and every one of you the safest and happiest
of holidays!