Why the Rear View Mirror is Dangerous

I have jokingly referred to Joel's rear view mirror but I am very serious about the point.

Every night, millions of investors and traders around the globe look at the same chart patterns. We see that the market is in an uptrend since July 1. If we believe in the Elliott Wave approach, we see a beautiful Wave I, Wave II, Wave III, Wave IV and (cresting?) Wave V. If we are trend followers, we see that the 13-day moving average is above the 50-day moving average and the 50-day moving average is above the 200-day moving average. If we are technical traders, the negative divergence between the Relative Strength Index (RSI) and the price action is a constant reminder that there will be a price to be paid for rampant bullishness. Who knows when but the price will be paid.

A chart of the S&P 500 Index is simply a snapshot in time of the past. It is history. Because we are human, we have a natural tendency to look at the past and try to fit it into the future. You know you do it. If you are bullish, you look at the price action in early September and try to envision if the December price action is a repeat performance. If you conclude that the past will repeat itself, then you are hoping and anticipating a non-stop bullish December, just like September. The problem is the rule of alternation. The market never exactly repeats itself. If it did, then everyone would game the patterns and get rich. In fact, I would think December will unfold unlike September because of the alternation rule.

If you bought the S&P 500 Index today @ 1240, then I was selling to you, my friend. Now, someone will be right. Someone will be wrong. The odds are against December repeating the past month of September if for no other reason than millions of investors and traders are drawing the same conclusions from the same chart. See my point? The market will do what it can to hurt the most people, not accommodate the most people.

Throw away the rear view mirror. You will not see the road up ahead. You will only see the past.

Try this experiment. If you were looking in the rear view mirror on June 21 would you have anticipated the drop into July 1? No. You might have foreseen a slight correction but not a non-stop drop into July 1. That drop was not in your rear view mirror on June 21. Your rear view mirror showed a constant market rise as if the market were levitating. I recall June 21. I was astonished how the market continued to rise in the first hour of the trading day even though there was negative divergence between the stochastic reading and the price action up to 1131 on a daily chart. The rear view mirror failed me. Or, what about July 1 when the stochastics embedded for a third consecutive day? Seemingly, we were positioned for a sharp drop if we looked in the rear view mirror over the previous 9 days. Instead, we got a busted chart pattern and a powerful start of Wave I. What about August 27 when the S&P 500 Index dipped below 1140? I was afraid and I was bullish! A glance in the rear view mirror showed nothing but three weeks of declining prices. And you know what? That was the birth of this powerful rally and a wonderful September!

Tonight, the Bulls look in the rear view mirror. They see seven days of consecutive gains, including today's close at the highs of the day. The rear view mirror, if projected into the future, says higher prices are ahead. I am more sober. I look at the road ahead and what do I see? I see resistance @1240. I see multiyear resistance @ 1257. I see a suspicious Friday close @ a round number, 1240. It is easy for the retail investor to project 1240 into 1250 and 1260. Didn't the JP Morgan guy say that we are headed to 1425? LOL. Didn't Cramer say "you ain't seen nothing yet!" LOL.

When I look at the road up ahead, I see storm clouds. That's your edge. Be in the tiny club of investors and traders who are watching the road ahead, not the price action receding in the distance.

Have a good evening!

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