Alternation

This evening, I want to talk about the principle of alternation.

Alternation simply means that the market will not repeat the same corrective action in a row. If the previous correction or reaction to the dominant trend was simple, then the next correction or reaction to the dominant trend should be long and complex. The idea works because everyone is always looking in the rear view mirror to divine the future. But the future is never a carbon copy of the past.

A better strategy is to assume that the market will attempt to trip up the most people. Since thousands of traders and investors are looking at the same pattern every day, the finance community is prone to drawing the same conclusions from a recent correction. What do I mean? Since the last significant correction against the down trend was sharp and quick (May 25 to May 31), there is a natural tendency to presume the next correction against the down trend should be sharp and quick as well.

Actually, the probabilities are greater that the correction up ahead would be different; i.e. long and complex. If you review any daily chart of the S&P 500 Index for several months, you will notice that the corrections to the dominant trend tend to alternate, contrary to the presumptions of the crowd.

As a result, Club Members, I believe that we will be looking at a long and complex correction, sideways in nature, for the next two weeks. The range should be within the 1258 to 1294 level. This outcome is most likely to frustrate traders and investors who are looking for a repeat of the May 25 to May 31 experience. The down trend is still strong, however, markets tend to blow hot and cold. I anticipate a cold spell ahead with lessening volatility.

On to market conditions today....

Today was a bearish day. The market gapped up, then traded down to the 1269 level before closing @1271.50. This action was bearish for several reasons. First, whenever a gap up in the morning cannot hold up until the close, then this indicates late day selling. Remember that the open is dominated by amateurs. Late day trading is dominated by professionals.

Second, I saw an odd thing that reminded me of the market action on June 21, 2010. June 21 was a Monday. I expected the retail crowd to be out in force at the start of the trading day. But I recall in the first hour of the trading day that, while the price was going upwards to 1131, the stochastics was pointing down!!! This behavior was odd indeed and suggested lower prices ahead. And as it turned out, 1131 was the high of the move in late June 2010. Today, I saw the same odd occurrence. While the price was drifting up to 1279 in early trading, the daily stochastics was heading down. Odd indeed! This picture wasn't right. Something will have to give over the coming days. I suspect it will be the price action.

Finally, the media coverage is too bearish right now for immediate downward price action. Yesterday, I heard a NPR radio show about the Greece Debt Crisis and the bad consequences that might befall the Western World should Greece default on its debt. These bad things may well happen but broadcasting the consequences to the world is almost a guarantee that the market will not be falling right away.

C'est la vie. C'est la Contrary Opinion and the Fear Factor.

Well, that's all for this evening. It has been an interesting week. Ultimately, we are in a down trend. The principle of alternation provides a road map for the coming weeks.

Have a Great Weekend!

Your market newsletter writer,

Wink

Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.