Friday, November 21, 2008

Fear Louise Yamada

Louise Yamada has been one of the technicians to nail this downturn (certainly, best technician on the planet pound for pound); she appeared on Fast Money last evening and if we continue to follow her calls, we have nothing to fear but... everything. Actually her S&P 600 target does coincide with a lot of potential things I can see; what is troubling is the call for a potential move to S&P 400.

Again this does not mean next week or next month but eventually. With fundamentals meaning absolutely nothing and the rise of the machines on Wall Street, I think technical analysis has really taken the reigns - and it is something that becomes a self fulfilling prophecy. When people ask me about technical analysis I give an example - if you saw a trend that every time it was 90 degrees in Miami sweater sales jumped 40%, and you were a sweater salesman what would you do? Scoff? Or respect the trend while scratching your head, and get out there selling sweaters. Essentially technical analysis is the latter in my eyes - and the more people who follow it, the more it self fulfills.

I'm simplifying it, and true technicians would counter argument that there is so much more to it than that. But I think it's actually that simple - yesterday morning on our initial free fall in the morning we bounced right off the exact low of 2002 - random chance? Nah... everyone was looking for that level as support so... magically... it self fulfilled as support (at least for a few hours). The same parallel could be applied to almost all of technical analysis. I did not follow this stuff the first half decade of investing in individual equities, so I realize for many readers it seems arcane - but even if you dismiss it, just realize many of the people who control a lot of the money do use it. So you need to at least be aware of it.


Considering the S&P [.SPX 752.44 -54.14 (-6.71%) ] settled below 776, a critical threshold, it could mean that the so-called bull of '02 to '07 was just one, giant bear market rally amid the sell-off that began in 2000 after the tech bubble burst.

5 minute video

Dream World

Freud said that we resolve conflicts in our dreams. Perhaps the stock market is no different. Maybe it’s actually working out conflicts left in the wake of the excesses of the '80s and '90s.

We’re talking inflated home values, excessive risk taking, shadowy derivatives, and self-destructive lending. All of which can be linked back to low interest rates.

The previous five years were great for investors living in a dream world, but with this market experiencing the fourth worst decline in the last 80 years the real question is, is the nightmare now beginning?

A Nightmare on Wall Street?

Unfortunately, the short answer is yes, according to technical analyst Louise Yamada. She says, “I think the charts have been forewarning us that the markets are deteriorating.”

"The 2002 lows are very vulnerable and chances are good they are going to be broken," she tells the traders, grimly.

If you look at the chart below you see a massive double top with a critical 10 year support at 2002, she says. “And we're breaking that support.”

In other words, not only has the S&P fallen below its 2002 lows, but it will likely continue lower from there.

Sound far-fetched? Maybe but Yamada is one of the most celebrated technicians on the Street, winning the award for best chart analyst 4 years in a row from 2001 to 2004.

She has a 600 target on the S&P 500 and a 6,000 target for the Dow. That's where she thinks we're heading.

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