Sunday, December 7, 2008

Crash fractals - more bullish inferences from history

My current interest on a daily basis is trading to capture short-term profits in general stocks based on my prediction that a short-term rally has started that will last until spring. Though it will be choppy, since this is a correction of the dominant bearish trend in general stocks, profits can be had if one buys and sells at the right time.

See the chart below for an historical example of a crash-type chart on a weekly basis:

Now look at the two current weekly charts below and notice the striking similarities:

I currently hold some SSO (a double bullish S&P 500 ETF) and URE (a double bullish ETF on commercial real estate) for a short-term trade. I expect history to repeat itself, or at least rhyme, which is why I am going long right now on these instruments even though I am overall bearish on the stock market for at least the next year.

If history were to repeat, based on the continuation of the first chart I posted above on FCX (another short-term bullish trade I am in), this is what should happen next:

A buy and hold investor in FCX at this time would have watched the stock subsequently fall below 8 in early 1999, but a trader could have made a quick 30-40% in less than 4 months' time. There are two take home messages:

1) There's very little new in stock markets. Patterns repeat because they are based on human emotions, primarily greed and fear. Knowledge of past patterns is valuable as people's emotions haven't changed much over the past few centuries.

2) Stocks never go in the same direction forever. Countertrend rallies can be profitable trading opportunities and the coming rally should be no different, even if it takes another month or so to really get going. After a 30-90% crash in nearly all stocks over the past 6 months, a countertrend bounce is inevitable, even if stocks are eventually going to go much lower.

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