A Pivot Point


Splat. That is the sound of selling the news after buying the rumour.

Tim Geithner unveiled some pieces of TARP II in New York today. But he still has no answer for the question everyone’s asking: how do you get the private sector to buy something it doesn’t want at a price it thinks is too high?

While you ponder that, ponder this as well. The Dow fell 4.6% today. The S&P, feeling competitive, fell 4.9%. Investors hated TARP II. If confidence was the name of the game, then this confidence game appears to be over, or at least stalled.

Here in Australia, the ASX/200 is at a technical pivot. Swarm Trader Gabriel Andre provides the chart below. In analysis he sent to Swarm readers earlier in the week he says the market may make a double bottom near 3,342.

ASX/200 at a Technical Pivot Point

In the early hours this morning we got on the Interwebs with Lord Swarm in Melbourne and asked him about the overnight action.

“Your level of 3,342 is just 146 points away. That’s only about 4.2%”

“Correct. Your math has improved on the Gold Coast.”

“Thank you. But with New York’s lead, isn’t it all but a certainty that the ASX/200 is going to challenge the old lows, and probably today.”


“And then what? If your chart is correct, it could be a powerful rebound…or a retreat to the 2003 lows.”

“Yes. It is possible. Both are possible. The ASX 200 will probably test the lows of last November. But if it holds there, the rebound that we expect after that will be quite generous. As explained yesterday in my comments, we are currently in a trading channel which is a consolidation phase. The future trend will depend on whether the price action will break this channel on the upside or on the downside.”

“Do all traders talk like this?”

“Yes. The only problem that may occur is if the Australian index breaks below the low of November during the next few days. The whole thing is on a technical pivot.”

“Well, at least from a trading standpoint, that’s pretty clear cut isn’t it? We either splash down at 3,342 or thereabouts and then commence a rebound. Or you have the very real chance for a new multi-year low. ”

“Yes but for traders that is useful information. If it’s a new low, there’s no point in punting on individual share rebounds (unless you have some compelling technical case, and the Swarm system is not showing this at the moment). If it’s not a new low, however, then there are likely to be some very good punts on the rebound, just as there were last November.”

After that, we broke for croissants and a latte.

Gabriel’s point is well taken. This is a trader’s market. And it’s at a turning point right now. One thing your editor has learned in the last eleven years of daily market observation is that when public sentiment reaches a point of maximum anxiety, it breaks like a wave crashing on the rocks.

This is not as bad as it sounds. What we mean is that though the general trend of the market is obvious-lower stock prices on a weak economy and a confused policy response to the crisis-you will often be surprised at when the rallies come and how high they go.

Gabriel’s technical indicators are useful for tipping you off. But intuition works as well. When you find yourself feverishly expecting the next bit of god-awful news, that’s when you get blindsided by a rally. It’s mostly likely because by the time you reach the point of maximum anxiety, most of the selling pressure in stocks has been exhausted. The order books are clear.

So, would we punt on it? Probably. Would we put the family silver on it? Of course not. Speaking of which, a note from a Kiwi reader about claims on gold versus actual gold.

Dear Dan,

I can’t help but notice that you’ve been harping on quite a lot about gold lately. How about sharing a cautionary tale from New Zealand with your readers?

We used to have a company that started out quite respectably as “Auckland Coin & Bullion”. Then, in the heydays of the ’80s, when it was fashionable for high-flying companies to be known as some sort of “_corp”, they changed their name to “Goldcorp”.

I remember going in to their offices one day, after the ’87 crash, to buy some gold. After paying over my money, the woman behind the counter then proceeded to write out what I thought was a receipt, which she then handed to me. “There you are” she said. “All done”.

“What’s this?” I asked.

“It’s your proof of ownership. You now own a portion of a much larger bar which we hold in our vault.”

“But this looks like a piece of paper to me. I said I wanted to buy gold.”

“Oh no. Nobody does that nowadays. It’s much too risky. We store all our customers’ gold in our vault. And it’s a free service”.

“Well not me. You can have your piece of paper back, and I’ll have some gold”

There followed a lengthy exchange where her supervisor was called in, and I was treated more like a criminal than a customer. But eventually I walked out of there with the gold in my pocket.

A few months later in 1988 it was all over the news that Goldcorp’s vault only held a small fraction of what they were supposed to be holding for customers. There was the inevitable rush from mum-and-dad-investors clamouring to redeem their paper certificates before Goldcorp collapsed. But the bank had got in first and already cleaned out what little gold there had been. So those mum-and-dad-investors were left empty handed.

Many New Zealanders, who had lost their money via the share market (which deep down they had known was risky) were puzzled as to why any investor who chose to put their money into a ‘safe haven’ like gold, would then be foolish enough to trust that gold into somebody else’s care. A generation of New Zealanders were permanently put off investing in gold. The moral here is to take physical possession. Always.


That’s it for today.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. On the gold story at the end.. you think banks are any different to that?

    Ever heard of fractional reserve lending?

    Unpopular Truth
    February 11, 2009
  2. I like the gold story.

    As for Gabriel’s investigations…who cares? Technical analysis of a system in a downward chaotic spiral?

    Have a look at Gabriel’s other articles he posted last year and see how good his analysis was then. From what I can see he was only okay on the Oil game.

    “Gabriel’s technical indicators are useful for tipping you off. But intuition works as well.” – We’ll see won’t we.

    I do like your point about the rallies with maximum anxiety…that is quite clever and appears to make sense.

  3. Dan,
    Thanks for the real life story from New Zealand.
    It reminded me of a story about money on youtube that explains the story of money and banking in simple, easy to understand terms.
    The link to the story is: http://www.youtube.com/watch?v=cy-fD78zyvI
    There a few segments to view the whole story.
    A part of the story is called The Goldsmith’s Tale, which describes the same ripoff that happened to the New Zealanders when they bought gold.
    Peter Schiff is a strong advocate of buying gold at the Perth Mint, in order to avoid the potential (as in the 1st Great Depression) of gold confiscation in the US during this 2nd Great Depression.
    Given the Goldsmith’s Tale, how reliable/trustworthy do you think the Australian government’s Perth Mint would be, if Australia goes into a serious recession/depression?
    Taking physical possession is the only sure way of being able to utilize the gold when the need arises.

  4. So what would you suggest Pete in the current environment? Pure fundamental analysis? Ha! At the very best publicly available news (ie. fundamentals) explain 50% of price variation (Cutler, Porterba & Summers. 1989.). So what’s the missing? Try excess volatility, momentum, contagion and financial herding. Also, human beings (of which markets are made up of in case you weren’t aware) have a far greater propensity to avert a loss than they have an appetite to make a gain. Given the seriousness of current market and economic conditions I would suggest that excess volatility, momentum, financial herding and contagion would explain more than the residual 50% of price activity Cutler, Porterba and Summers allude to. And how do you measure these variables? Not with fundamental analysis…

  5. Just like to write a quick note of thanks for your insightful views on the world of economics…. The mainstream media in Australia is horrible and under further ‘Tabloidization’ in order to keep the lemmings in a dazed tidy tax paying tow. Was in Korea recently and even there they have a bloody fantastic English language newspaper!

    Have spent over 10 years now in China and really appreciate your view on markets.

    appreciative reader
    February 13, 2009
  6. rmk28 – why are you quoting studies done in 1989? I have no problem with the past, but when markets are stable, sure things can be analysed as such. When markets are volatile like now with huge external factors in play, how can technical indicators be worth considering at all?

    I can’t see the value.

  7. Pete – I am pretty sure that excess volatility, momentum, contagion, herding etc. are not unique to 1989. If the study was done in 1989, 1999 or 2009 these factors are still drivers of at least half of price action in ANY period. Given that right now ‘fear’ is heightened by current conditions then the proportion is probably more closer to 90. What part of any fundamental analysis would suggest that the price of oil was worth $147? Probably about the same that says it is worth a hundred dollars less six months later. The fact that price and values are so clearly out of sync in the market is good reason to employ technical indicators because it is excess volatiltity, momentum etc. pushing prices everywhere but what long-term fundamentals would suggest (vis-a-vis commodities). Your last comment, “When markets are volatile like now with huge external factors in play, how can technical indicators be worth considering at all?”, is nothing more than an oxymoron. Technical analysis (TA) is what measures these “external factors”. I don’t think you understand what TA does. Crudely speaking it measures ‘the herd’.

    And a word on what you describe as the past and stability being sound grounds for analysis. Do you think Goldmans, Lehmans, Bear Sterns etc. think that the past and low volatility time periods provided sound data for assessing their risk exposure? Tools such VaR which employ statistical tools and techniques for doing such tasks weren’t worth a dime when in August 2007 the head of Goldmans risk said they were seeing events which were 25 standard deviations from the mean, three days straight! Point is, stable price action provides no better conditions for analysis than does volatility. If anything it just increases your tolerance of risk and leads bad investment decision making. If you think that this is not the case then how about you go ask anyone who bought a house in California circa 2005/6. I bet they would not trust one bit of that ‘stable’ data now. Why do you think the biggest financial institutions in the world are now practically insolvent? Stable data (maybe you should read some literature on the ‘Great Moderation’, most of it is post-1989) coupled with low interest rates and risk-premiums, along with the Credit Bubble economy model of the USA (see Doug Noland of Prudent Bear.com, he is definately still writing so there’s sure to be stuff there well after 1989) have us siting where we are now.

    Funny stuff that stable, low volatilty time period stuff. Two, three years ago it said everything was all good and we were sweet as with our wealth sitting in a portfolio of non-productive bricks ‘n mortar and current account deficit of 8-9% of GDP (New Zealand but I also think the US has the same issues. You might want to read a bit on Supply-side-economics/Reaganomics etc and it’s implications. But that all happened before 1989 so you probably would not be interested).

    Apologies for spelling and gramatical errors, it’s late here in Wellington and I need to sleep.


  8. The old endless quest to predict the future. Some use tea leaves, some gaze at the stars and some use technical analysis :) I recall reading a few studies some years ago that proved that technical analysis does not provide investors with any great insight into how the market will perform. We just have to accept that we make at best, educated guesses and we are all often wrong. I always find it curious however that the so called (or self titled) “expert traders” take the time out from their busy schedules to write books for us mere mortals….of course you need to pay for the books, CD’s and a flashy training course etc. (couldn’t be for the money could it?)

    Don’t get me wrong, I glance at the technical trading charts etc. as well but I have to say as a person with an engineering background I would hardly call most this analysis “technical”. Of course charts are useful but I am not sure why in the world of investing it is considered to be so technical if you draw a few lines on them. (you don’t call working with charts or data in science or engineering “technical analysis”)

    Finally the problem I have with making comparisons back to 1989 etc. is that we have no baseline. Comparing the economy today to the economy 20 years ago (or further back) disregards the fact that the world today is vastly different. For example think of the role of the internet today in terms of online trading, research available to investors,day trading etc. and it’s impact on the global economy as whole such as the growth in the service based industries & offshore outsourcing. On top of this we have had the explosion of margin lending, short trading, hedge funds, sovereign wealth funds the list goes on. Of course economists will say these things are taken care of in their models but what is the accuracy of economic forecasts churned out by these models? Not very good I would suggest otherwise we would not be in this situation now. Look at the IMF for example, they do all sorts of lovely analysis but have spent the last 12 month revising their forecasts down to reflect the downturn in the global economy. (all they are doing now is trying to guess how deep the global slump will be)

    What is my point? Well simply this..that none of us can predict the future of the markets with any great accuracy no matter what software, data or charts we use even if we have lots of letters after our names. The best we can do is try and make some assumptions based on the data we have on hand using our experience, training and knowledge. None of us have all the answers and no single stock picking or investing method works all the time. Sometimes the technical guys will triumph over the fundamental guys, sometimes it will be the other way around. It is a funny old world.

    So hang on everybody and remember; the chances are one of us will be right and be able to write a book one day. (not me though, I only like books with pictures) Oh by the way if I ever do find the secret to being able to read the market I won’t be telling anyone :)

  9. Greg – no one is making comparisons TO 1989, the point was that the principles of excess volatility, momentum, etc. hold for all periods. Why is that? Markets are made up of interacting humans. Catalaxy, the science of exchange (ie. markets) is a sub-topic of praxeology, human action. Therefore, market activity is not derived and explained by concrete constructs of natural scientific techniques (eg. micro-economic optimisation models used by organisations such the IMF and the many global central banks), but is a function of the millions of agents acting to obtain thier desired end. This principle transcends time and needs no base period. Please get over the 1989 ‘reference period’, it was never intended to be such.

    There is no value in debating the virtues of technical analysis versus the rest, right or wrong we are better served to get on with it and use what we think works best. I personaly believe a blend of fundamental and technical analysis to be better, using the former to identify potentially good opportunites (and identifying bad ones! ie. Fletcher Building) by ascertaining some kind of market mis-pricing (price never equals value). The latter can be used to “try” and determine ‘timing’ and look for signals of buying/selling momentum etc. However, right or wrong it is up to each to, as Scott Pape would say, tread their own path.

    I do not believe either approach to be the ultimate, I am also no trader and not a staunch defender of TA. What I do take exeception to is coments which do not stack up and therefore felt compelled to respond. From Pete’s initial (and later) comment it appeared that he had little or no understanding of technicals.

    Also I would not get too hung up on the term ‘technical analysis’, I would think it is just a name. TA uses price, volume and time; nothing else. While this may fly in the face of advocates of statistical estimation methods (best, linear, unbisaed blah blah..) it has to be asked ‘what are agents which the behaviour of is being observed?’ Given that human behaviour is inherently different from the agents in the natural sciences, applying natural science techniques may not be ideal. Perhaps instead of ‘glancing’ at human behaviour analysis you might want to have a more thorough understanding of what it is that is being articulated. Whether the subject matter be TA or Mises, Lachmann etc. is trivial.

    Also, not in any part of my previous comment have I made any comparison of 1989 economic growth to 2009 growth, what I was discussing was the low volatility in output and prices, but since you have brought up the topic of non-comparison of growth across time and the lack of ‘baseline’ I will add this. Real GDP estimates (used here as an indicator for a country’s economic growth, whether that is right or wrong is another discussion) are effectively volume indexes of economic activity. These volumes indexes are essentially nominal values (current price) adjusted for inflation using price indexes which hold volume AND quality constant. Therefore, there is a ‘baseline’, or base period, and 1989 economic growth is comaparible to 2009 growth as these quality adjustments and structural changes in the economy are recognised and accounted for. There is a significant amount of work which goes into making sure that this is the case. Go check out the ‘basket of goods’ for the 2008 CPI and see how many cassette tapes the Australian Bureau of Statistics priced-up.

    GDP growth aside, my point is that fundamentals explain at best around half of price activity. The rest is human behaviour which exhibits characteristics of fear and greed. Maybe then it might be of interest to understand what the herd is doing at a point in time, try some technical analysis possibly. Maybe it might be of interest to understand the herd, try some Austrian theory perhaps.

  10. rmk28 my only comment is that the old CPI “basket of goods” has a number of well known flaws such as “substitution bias”. (I believe the ABS uses the fixed basket approach…correct?) However I do see logic in what you say and if there are lessons to be learned by studying some Austrian theory then we should not ignore these. Anyway I was not intending to get into the debate between yourself and Pete so I will get back in my box.

  11. Greg – I think the ABS will use a Fisher ideal price index approach up to a point whereby current price data is unavailable and the last few periods (quarters) will have what is called a laspeyres tail which exhibits the substitution bias you refer to. I am not a hundred on this but ‘pretty sure’ that this is the case. So correct, the basket will have a bias for the tail where it is fixed. But overall, price movement and thus economic growth should be should be comparable over longer time periods.

    In general I think I am partial to the Austrian School, as one of the essays on this site points out the princicples of inflation, credit cycles, business cycles etc. are exactly the same now as they have been for every civilisation and society which has ever taken part in exchange and credit over time. Therefore the Austrian view should be relevant for any period. Regarding technical analysis it has been referred to reading tea leaves, star gazing and the rest by many critics. While I am by no means a trader (I do not have the resource or desire to commit myself to pouring over charts and charts of data), I believe the approach has some virtues which are worth exploring do not wish force it onto others, sorry if it came across that way. If it’s not your thing then fine, but one should at least know what it is trying measure before they criticise it.

    Anyway I should also get back into my box, the more you say the more likely you are to be wrong – and as always I have ended up saying too much!!

    All the best and enjoy the events which unfold over the next twelve months, they’re likely to be bloody intriguing and as you rightly said none of us can predict the future with any great accuracy.


  12. rmk28 – Those are some pretty long posts.

    I’ll get to my points:
    1) I think technical analysis is only useful as an ‘indicator’ when a fairly long-term trend is found. Based on some kind of probability, the probability of the Dow rising over the last 10 years was pretty high. Well, until 2008 that is.
    2) For the most part, my point was that I think technical analysis is fairly useless, and that a better analysis to use would be to look at the current economic climate, its drivers, etc.
    3) I think taking any trend from the past and projecting it into the future is what we call an ‘assumption’ and we all know what happens to those. This kind of prediction is the type that gamblers use to win their money back.
    4) Cycle theory is nice, BUT I believe it is very flawed if not considered entirely for the environment that such cycles affected by. It is very important to consider that cyclical trends may be part of larger secular trends and can be finite. Houses don’t always double in price every 10 years do they? (okay bad example for Austrian economics)
    I think when it comes down to it, cycles seem to be based on mass human psychology – ie human behaviour can often be predictable.
    5) I really do think we are arguing the same things for the most part, there has just been a misunderstanding.


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