Most people have seen this picture in a high-school or college psychology class. The answer is any perceived difference in length is totally an optical illusion and both lines are the same. The eye - brain combination is very complex, what we perceive is not just based on what is real but based also on experience. When you watch the moon rise over the ocean or when you see it low in the sky it looks really-really big. Most people think there must be some type of magnification from the atmosphere but in fact it is all being magnified in your brain. Your brain's experience is that items on the horizontal are close, like a door or a tree, (this is why distances over the water are il-perceived) and items in the sky are far away. When you see the moon on the horizon you brain brings it in closer and when you see it an hour later in the sky it looks so much smaller. Take a photo of a moonrise and then a hour or two later and the moon will appear the same size. Weird.
I was thinking about this after looking at tonight's charts. That last bar sitting there all alone looks so big! We perceive it without a bar to the right and we have these little bars to the left. The upper tail doesn't help. Naturally we want to look at that bar and draw a line down that bottom is just sitting there.
Reality is that the $SPX had a 2% down day today. It was a strange day that was ready to sell-off at the opening, reacted to recession ending news to the upside and then just sold-sold-sold. High to low because of the strange news rally was greater than 2% but the fact is we had a 2% down day.
Since the bull run which started March 9th we have had 10 other 2% down days.
These bars are highlighted in Yellow. I put a red arrow above the next day bar if it closed lower than the -2% bar and a gray arrow if the next day's close was positive. Out of the 10 previous -2% days we had 7 next day's greener closes and 2 red closes.
On the two occasions that we closed lower the next day, the 2% bar started a correction period that lasted from 12 and 24 days, so tomorrow's close is important for showing us the way.
Watching CNBC today, I hate to do that, if was full of people shaking their heads saying I knew this was going to happen and we are going lower.. much.. much.. lower. We had rumors of bank closures, we had Doug Kass reminding us why his current short position is correct and passing on bank failure rumors to reinforce his call. We here that main-street is hurting and that unemployment is going through the roof.
Note* on the Main Street disconnect. There is a reason that Main Street hates Wall Street and it is simply because of the perceived disconnect (which is actually a time shift). Wall Street precedes Main Street's pain during recessions and Wall Street failure when the market dives is perceived on Main Street as the cause of its failures. On the upside the opposite is true. Wall Street is a forecasting machine its gains precede the gains of Main Street so it is simply two dance partners that will never be on the same beat or on the same page.
As a technical analyst I can not find an example when so many indicators were pinned into oversold for so long that the market just turned and sold down. I understand the fundamental analysis and the economic analysis but technically I don't see it.
The orange line in the lower pane of our chart above is our % of NYSE stocks trading above their 40 day moving average indicator. We used this crossing of the 19 day moving average on Friday to trigger our sell signal. Monday and today we confirmed the sell I don't have a good buy signal yet from this indicator.
I want to look at how extreme the indicator is currently and how it has behaved over a 20 year time period:
You can see that in the last 20 yeas we have arrived at this extreme 5 times before.
This was a blast off thrust in January 1991 that took the index up to 90+%.. Check out how the indicator worked its way out of its extreme values while the market continued to work higher. Move volatile and some good corrections, but the upward trend continued.
This is a picture of the 2003 bull market recovery after the Tech Bubble crash. The thrust off the bottom in March drove our indicator up to the levels we see today. That summer of 2000 the market basically moved sideways while the extreme indicator bleed off some of it excess only to turn around and rally again up to the extremes. Note that the market top was made with a lower indicator reading showing us under-lying weakness in the that rally.
This indicator suggest that after this correction we should attempt a new high, if we fail or we make a new high at a lower indicator value we should begin to suspect. Currently the values are just simply too high historically to fall off the cliff. That does not stop news from effecting the outcome. Remember news trumps everything. A terror attack, hostilities can become large momentum changers.. (this morning we had a car bomb at the Athens Stock Market).
Today we watch for the close to see if we are going to resume our upward rally or contract even further. Watch or New High 52 week highs today too. All three market indices (NYSE, NASDAQ, RUT) closed with higher values of stocks making 52 week new highs. The NYSE closed 62 new 52 week highs today, beating the previous day's 60. Our magic number today to turn the indicator is still a daunting 96 but tomorrow's number moves down to 75. This is much closer to the 62 from yesterday. Anything less than 20 in the first half hour puts the day in suspect.
Our Dave Fulkerson inspired 10 day hi-lo indicator is another value to watch real-time today. Yesterday 30% of all the Russell 3000 stocks made new 10 day lows, only 292 of the same universe made 10 day highs giving us a difference of -1038 for the end of the day. Any slowing here will show a bottom in place, acceleration to the downside triggers further weakness. If you are not able to be in the room than follow Tom and me on twitter (http://twitter.com/tomandprisha and http://twitter.com/redliontrader). We will be updating all day long.
I almost forgot.. news.. news.. news.. Today we will have lots of news that will either confirm the recover and turn the market around, or confirm the recovery and sold off (bad.. that would be very bad) or confirm the Bear's stance too much too so or mixed to neutral which will leave us flat. That gives us a 25% chance of rallying off the news.
We are primed for a pull-back correction [not-crash] but we do not want to get trapped by a sudden Bull stampede either, which could be triggered at any level here. Look for double bottoms forming over multi-hour time frames. If they hold that has lately seemed a trigger for a stampede.
Happy trails
-RLT
