Chart Patterns

Other than a tendency to become self-fulfilling prophecies, price charts on stocks, commodities, etc. have been used for centuries by some astute traders.  I use them, for example, to help time entry points, and used them in a past life to set hedges in the Treasury market.

Of all chart patterns out there, the ones that help you keep from losing your shirt are among the most valuable.

Lately, I’ve been reading quite a bit about a classic “Three Peaks and a Domed House” pattern developing in the stock market.  This is one of the most bearish patterns around.

Part of why chart patterns work, by the way, is that they can reflect the herd’s emotional state in a fairly tight feedback loop.  Having said that, I don’t think they are all you need to follow, though I do know people who have made plenty of money following them.

So let’s play along, and try to guess what might lead us to a major decline in the market starting about now, and heading into the end of the year, since the charts say that is likely to happen.

My friend George Ure has been saying there’s a cataclysmic series of earthquakes and tsunamis coming as the “Great Alignment”comes around on the Winter Solstice this year.  (Just for accuracy, we should note that the alignment with the galactic center is off by over six degrees.)

Since I did some combinatoric math for George recently to show him that a predictive model needs to predict not just when an earthquake occurs, but also when there isn’t one, I’ll assume that won’t be the reason for a mini-crash down 15% or so before the end of the year.

On the other hand, I do have a potential reason for a near-term slide in the market, and I say it’s because Charlie Brown is getting ready to kick the field goal again (apologies to Charles Schultz).  Unfortunately, the designated Lucy holding the deficit reduction ball is Paul Ryan, a member of the Simpson-Bowles deficit reduction commission who voted against the releasing the report after being in the negotiations.

I hope not, but I believe people tell you who they are by what they do, not what they say.

I give a high probability that Mr. Ryan is leading the negotiations with the White House just so he can get whatever compromise he can, and then renege on his end of the deal.  It’s how to move the goalposts, and it’s worked like a charm for years, to the point that far-right policies like mandatory purchase of private health insurance and cap-and-trade markets to control pollution are no longer far-right.

So there you have it.  The charts say “downdraft” for the next few weeks.  Maybe we’ll have a bunch of Richter 8’s or even a Richter 10.0 to depress the market.  Or maybe “Lucy” Ryan will do exactly as he did in the past, and snatch the deal away just as the President approaches.  Then a pathetic emergency deal will be cut, and we’ll have a slight rally through the end of the year.

I’ve made my sacrifice to the market gods by buying December calls on SDS (the 2x levered negative S&P ETF).  Hopefully my money will be wasted on those calls, and negative bet on our 500 largest companies will be a bad bet.  But, if the target indicated by the “Three Peaks and Domed House” chart pattern holds, my options will return 500%.

We won’t be out of the woods even if a last-minute deal is cut for the impending “fiscal cliff.”  Washington can still mess us up a month or two later.

By February, we’ll be back where we were in mid-2011, when a group of hostage takers (want to guess who one of the ringleaders was?) held the credit rating of the United States of America hostage.  Here’s a graphic Ezra Klein of the Washington Post prepared to remind us how the economy reacted to that stunt:

I hope we don’t go down this path.  I really do.  But I have my hedge on.

hh

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4 Responses to Chart Patterns

  1. Frederick W.H Collins says:

    “…that far-right policies like mandatory purchase of private health insurance and cap-and-trade markets to control pollution are no longer far-right.” hh

    Howard, when did these type of policies become “far-right”?

    • hhill51 says:

      Glad you asked, Fred.

      Mandatory purchase of private health insurance was first proposed by the Heritage Foundation as an answer to the socialist desire to have a national health service provided by government. That’s why it was the centerpiece of Romneycare.

      Cap and trade was proposed by Federalist Society member and co-chairman (with Dick Armey) of FreedomWorks, C. Boyden Gray. Gray held appointed positions under Reagan and both Bushes. Smithsonian.com has a very good description of the political history of cap and trade. Subtitle of the article is “How an unlikely mix of environmentalists and free-market conservatives hammered out the strategy known as cap-and-trade.”

      Read more: http://www.smithsonianmag.com/science-nature/Presence-of-Mind-Blue-Sky-Thinking.html#ixzz2DRMO0tk4

  2. Dan says:

    Which specific SDS’s did you buy Howard??

    • hhill51 says:

      Dec $56 calls, Dan. FWIW, I’m trying (emphasis trying, no promises) to Tweet about it when I execute a trade. Twitter handle @hhill61

      BTW, don’t you think it’s funny that the symbol for betting against America is SDS?

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