Let's see what happened before the Judgment Day


Autumn Equinox proved to be a powerful anchoring point from Gann's perspective. After Sep 23 when INDU hit 2009 High (9855), it dropped almost 500 points in literally 9 trading days, and made a come back after bouncing off 50 Day Moving Average (the dynamic support).

I raised this question in my blog a week ago, whether the history will repeat. Someone asked me what happened on Oct 11, 2007? It seems to me that we have a short term memory and the Lehman Brothers and AIG collapse becomes forgettable. Well, that was the day when INDU made the all time high before it made a U-turn till March 2009. Oct 11, 2009 is a Sunday and therefore it won't be a trading day.

All indicators I have here are telling me that there is no reason for INDU will fall:

1. 10, 20, 30, 50 Simple Moving Average are still going up (although SMA is a laggard as we all know).
2. INDU is trading above 50SMA and 200 SMA.
3. 13,34 SMA (John Murphy's favourite) has not shown a bearish crossover.
4. We are still in the 20-week bullish cycle (if you have been following Tom Gentile and Jay Kappael)
...
and many more

On the other hand, when almost everyone is bullish on the market, I have to be extremely careful. On Oct 9, 2009, when INDU closed above 9800 for the second time, the volume was lower than the average volume (NYSE 988, vs. closing avg of 1227; Nasdaq 1929, vs. 2269). Based on my sector analysis, it appeared to me that the last run from the Oct 2 low till Oct 9 high was a result of USD weakness and this in turn helped Crude Oil to rebound like nobody business. The market is also cooking an early recovery story when the Reserve Bank of Australia raised the interest rate by 25 basis point, causing AUD, NZD and CAD hitting 2009 High against the weaker USD. The picture seems to be rosy to the public, and yet the issue is that the market participation is skewed to one or two sectors.


This is a SPX performance chart showing what happened over the last 10 trading days, which represented what happened in the market from Oct 2 low. The lack of participation by the Financials and Semiconductors sectors raised an alarm to me.

Using John Murphy's intermarket analysis, we need to see these two sectors to participate and clearly it was the case. When everyone is still going long on commodity sectors - oil, metal, gold etc, Kathy Lien from GFT Forex made the comment on Oct 9 that in the latest CFTC report, "forex positioning in the futures market is nearing extreme levels.". This raised the issue as to whether the story of dollar weakness will likely come to an end. If this happens, what we saw in the strength in AUD, NZD and CAD over the last few trading sessions should come to an end. How about oil? It will likely behave in the same way.

From my reading of the weekly FX charts, GBP remained weak for 2 weeks already and did not really participate in the bullish move. England perhaps is still in trouble based on the Manufacturing Production Index announced on 5 Oct. EUR has been in the range for a few months already and the weekly chart looks slightly neutral to bearish to me.

So, there are signs that the market strength may come to a pause (I won't call it an end to be fair and remain objective). I am not sure whether the market will turn to the downside during the Oct expiration week. However, that said according to Stock Trader's Almanac 2009, Oct 12 (the Columbus Day) has been more likely than not an "UP" day (23 times out of the last 28 but 2007 had been the one and only one exception in 7 years - and that was the day when the market decisively made the U-turn). Oct expiration week also marked a "down" day for INDU.

This Gann chart I posted above will be updated after Oct expiration. In the meantime, I closed out most of my bullish positions for a profit or loss or whatever it is. When I see the anchoring point on the chart, as I told my students, it's an alert, and alert telling me that I have to be extra careful.

Interesting, Gann chart has not disappointed me so far since I learnt from my Ultimate Gann Course. There is nothing right or wrong here. Like I chit-chat in Facebook with my friends, some don't believe Gann stuff. It's perfectly fine. Yet, I respected Gann's analysis, so much so that I am committed to drill into Gann stuff at a higher level than where I was a year ago. So, if you respect me, respect by agreeing not to disagree or to believe Gann stuff. Just leave me alone, and we will stay in a peaceful community.

Till then, have a good trading weekend ahead.