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Andros on The Markets

April 27, 2007

The following editorial is an excerpt from "Tedbits: The Economic and Financial NO SPIN ZONE" weekly newsletter by Ty Andros, to view the rest of this commentary or to subscribe, go to its free.


Today's Tedbits will have a short piece from me and a guest essay from our occasional contributor Garrett Jones. I will be attending the Chicago Gold conference, and last weekend I met with some up and coming new trading talent which I find and manage for my clients, so my schedule has not permitted me to do the regular newsletter. I am sure you will enjoy Garrett's Work. Next week we will cover how the US is driving a stake through the hearts of its most productive citizens and now over 60% of Taxpayers pay virtually NO taxes, except the "bank" tax, which of course is the stealth tax you pay when financial authorities print money while your money sits in the bank. LOL.

The US has turned a corner from a nation primarily of hard working wealth generating producers to a nation of "Something for nothings", the middle class is on the edge of reverting to an underclass as the government has inflated their earnings away, slowly impoverishing them as non productive government spending priorities (reelection giveaways) eat at the value of their dollars purchasing power through the printing press. Implementing laws, taxes, and regulations that choke off future growth prospects, and generally dumbed down the population so as to deceive them with illusory rhetoric and instill in them the entitlement mentalities rampant in the developed world.

Special Quick alert on Stocks by Garrett Jones

Convergence, an energy point and exuberance ...
the Fed, funny money and parabolic advances ...
and, an interesting observation

About a week ago I wrote an Alert where I summarized that "the stock market has made a very impressive advance and seems to fend off negativity without effort." I then concluded with "Rather than being comforting, this is somewhat alarming as it is a very similar type of emotional market as 1987. That market rallied for 11 months prior to its crash. Next month, the current market will have rallied for 11 months. So, the message is to be very aware that a hard correction will be overdue at that time - if we haven't already had it. In the meantime, this market is making new highs and looks like it has further to go." The prior Alert was written April 17 (sent out on the 18th) when the DJIA closed at 12,773. At the close yesterday, one week after the prior Alert was sent, the DJIA closed at 13,089 - a move of 2.5%.

I then said "We should have a correction beginning very soon. The only safe way to play this is to buy dips. Stepping into this market in the middle of an advance is foolish on a risk to reward basis. I believe the volatility is likely to increase over the next month. Playing the very late stages of a move is very risky. I believe a very good shorting opportunity is approaching where positions can be taken in early May if things continue as they are. This should set up an excellent buying opportunity once the decline is complete. Oddly, we may have a similar situation to the one we had one year ago in May. It should be interesting to observe." So far, this seems to be playing out. Since this is a Quick Alert, I have two charts that I believe are meaningful. The first deals with the current market while the second looks down the road a couple of weeks. By the way, people who make predictions in this type of market probably need to get more rest - I am merely making some observations based on a few decades of experience (and I probably do need more rest).

This chart really captures my attention. It shows five sets of price channels all differentiated by color. Price channels define a range of price movement over a given period of time. Trend lines are valid when you have the most prices meeting a given line. A price channel is formed by drawing a parallel line to an established trend line. The dashed blue line comes off the October 2002 bear market low. The solid blue line begins at the test of the October 2002 low in March of 2003. The teal colored trend line begins with the October 2005 low and connects to the recent July low in 2006 that initiated this current rally. It is paralleled off the February 2004 peak (ending the first dynamic thrust of this current bull market). The upper red price channel is drawn off the two peaks just prior to the aforementioned July 2006 low. It is paralleled off the recent March 2007 low. This brings us to the most current price channel which begins with the July 2006 low to March 2007 trend line. This trend line is paralleled off the line defining the greatest number of highs in this advance. The beauty of this chart is that all of the upper price channel lines converge at basically the same point on this long term chart.

What does this imply? I look at it as defining what I call an energy point - a price range that, for whatever reason, prices are drawn to. Once that price is reached, for lack of a better analogy, the pent up energy can be relieved. In this case, it is merely a likely point for a reversal or correction. I believe it is very important to point out that 17 of the last 19 days have been up (see Special Note at the end of this Alert) and that the Advance/Decline line is at a new high. What does this mean? It means that advances almost never end with that type of strength. Generally, they will end their dynamic advance with a modest correction and then come back and most likely set higher highs with a lesser amount of buying pressure to create that final high. That sets up a divergence and opens the door for a much more meaningful correction.

In my prior Alert I mentioned that I had a convergence of price targets in the mid May time period. That is when I would expect this second high (assuming things play out in the manner I have stated). I was looking at my charts last night and discovered something quite interesting. It is, in fact, the basis for this Alert. First of all, note that the chart is broken down into three price channels that define the price action.

of this entire bull market advance. The first advance into early 2004 is at a fairly steep angle of ascent. The next channel still has a nice advance, but at a much more modest degree. The current advance is back at a robust angle of price appreciation. Here is what I find interesting -- the current channel is at the exact degree of advance of the initial price channel. In fact, the channel lines for the initial and most recent advance are interchangeable. I find that rather remarkable - but it doesn't end there. The first channel from the blue arrow to the red arrow is 52 weeks i.e. 52 weekly bars. The next channel measured from top to top consists of 104 weekly bars (from red arrow to red arrow) - exactly twice as long as the first channel. This final segment has the exact angle of ascent as the first segment and is in its 50th week. What does this mean? It may prove to mean absolutely nothing, but what it does do is get my attention. Why? Because I am looking for a mid May top and this falls precisely into that time period.

Please be aware that this market is in what can be defined as a parabolic rise. Parabolic rises take price levels to a point where they appear almost vertical on a chart. This translates to the maximum degree of bullishness that a market can provide as prices cannot advance at a higher rate than vertical. Common sense will tell you that such a time is probably not the smartest time to mortgage the house completely and put it all into short term call options in the stock market. This is so critical I just had to add one more chart:

This shows "parabolic" in its true light. I could have used the NASDAQ for an example, but I don't like to make people ill early in the morning (I began writing this at 5:00AM). This shows the remarkable parabolic advance culminating with the market top in 2000. Please note the correction that follows. The correction that followed the ultra robust NASDAQ 100 advance after 2000 was 83.5% from high to low.

The yellow line represents the current parabolic. Please be aware that it may have a long way to go. I am expecting a top in early 2008, so after a decent correction soon, I would expect to see higher highs ultimately. Please note that almost all arithmetic charts that rise over a period of time have a tendency to appear parabolic. Parabolic charts just get my attention as they have defined many classic tops throughout history (as in 2000). The yellow arc is certainly not a classic parabolic.

Many of you are completely amazed at how this market can make new highs while there is so much news that cannot be rated as anything other than "bad". I won't even list examples as I have done this many times in the past and the list is getting far too long. I would like to point out that Mr. Bernanke is a student of the Great Depression. He is well aware that keeping funds tight caused that depression. Due to this awareness, Mr. Bernanke has no intention of keeping money tight - as we have all been able to see. Uh, correction … that isn't entirely true - we really haven't been able to "see" it because the Federal Reserve stopped publishing M3 numbers. Here is something from the Federal Reserve Bank of New York: In March 2006, the Federal Reserve Board of Governors ceased publication of the M3 monetary aggregate. M3 did not appear to convey any additional information about economic activity that was not already embodied in M2. Consequently, the Board judged that the costs of collecting the data and publishing M3 outweigh the benefits.

Apparently, the Federal Reserve has hired some "creative" writers. Basically, my view is that the Fed chose to say the above as it sounds much better than "Hey, let's face it … we're between a rock (Iraq?) and a hard place; we have no choice but to flood the market with mass quantities of dollars and hope that somehow it will buy us some time to figure out what to do next." Just imagine how high this market can go if your dollar becomes totally worthless.

I am a real nit picker about these things as I had counted the days just last night as I was thinking about writing this Alert. Peter, bless his heart, is even more of a nit picker than I am - he went all the way back to 1928 to confirm that if the DJIA closes higher today, it will be a first. Peter quickly adds that he assumes it will be the first time in history as he "only" went back to January of 1928 as opposed to the Dow's inception in 1897. Now, here's where Peter earns his stripes as a champion nit picker. He went back and checked the S&P and found that it HAD been up 18 out of 20 days! It happened on both September 28th and 29th of 1954 - which, by the way, means it has also been up 19 out of 21 days. He notes that the '18 out of 20 days' happened again on July 8th and 11th of 1955. Now, here's the fun part: It happened for 4 consecutive trading days, July 3, 5, 6, and 8 -- in guess what year? 1929

Is there any significance that 47 trading days later, the Dow reached one of its most important tops, if not its most important top, in history? You tell me.

What I can tell you is that between July 3, the first of the 18 out of 20 up sequences, and September 3, the ultimate high in the Dow, the Dow advanced 11.5% and the S&P was up 12.9%. See how much fun you can have being a nit picker ……… by the way, Peter likes to refer to it as data mining. Technically, I guess he's a data miner … but he'll always be a nit picker to me.

Thought provoking commentary and technical analysis by Garrett Jones, Garrett can be reached at [email protected]

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