A Pivot Point

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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.”

“Probably.”

“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.

Cheers

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.
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12 Comments on "A Pivot Point"

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Unpopular Truth
Guest

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

Ever heard of fractional reserve lending?

Pete
Guest

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.

Tim
Guest
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)… Read more »
rmk28
Guest
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… Read more »
appreciative reader
Guest

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.

Pete
Guest

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.

rmk28
Guest
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… Read more »
Greg Atkinson
Guest
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… Read more »
rmk28
Guest
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… Read more »
Greg Atkinson
Guest

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.

rmk28
Guest
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… Read more »
Pete
Guest
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… Read more »
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