Markets plunge: It is the technicals stupid

As some of the first wire stories on Thursday’s market plunge began to come across my desk I was struck by one in particular. The headline said, "Geithner stays and the market tanks".

 I have to admit I found that amusing. You see, I had just posted a chart on our web site indicating how some significant technical support areas had been breached on the Dow Jones Industrial Average. I had been having a conversation with one of our contributors about this and he had indicated earlier in the week that the market could be facing a turning point.

Jeff Greenblatt (aka Fibonacciman) had noted on Monday, “Last week, it appeared we could be setting up for an inversion of the 610 trading day cycle to the March 2009 Haines Bottom. That window kicks in at the end of this week….  I remarked to my client base that we started getting that ‘end of world’ feel to things. It seemed like we were having a smaller version of 2008 all over again. … there has always been and now can’t be ruled out a chance we could have a market top as a result of all this on day 610.”

Actually it looks like the market topped on July 21 when it failed to take out a top from two weeks earlier and began its current slide. A slide that pushed the indexes up against significant trendlines that were subsequently breached. The point being there was some significant technical validation in yesterday’s move.

However what amused me harkens back to Geithner’s nomination. Jeff is an ardent technician who has pointed out in articles in Futures and at numerous conferences, that most important market reversals can be predicted through the study of technicals, more specifically market cycles.

He has pointed out that often we look to the newswires for reasons but even when the reason seems legitimate, like the Lehman Bros. bankruptcy, TARP vote, Japanese tsunami etc. there is a corresponding technical cyclical reason for a major price reversal.

Sometimes the news event seems paramount and at other times it seems a stretch as when in November of 2008 the pundits attributed a market bottom and subsequent rally to President Elect Obama naming Timothy Geithner Treasury Secretary. Really; that is what turned around the market?

At the time, Greenblatt had detected a significant technical top in the U.S. dollar, which he attributed to setting a floor in equities. The dollar and equities have been negatively correlated (look at yesterday’s action) especially in the last decade.

The Geithner story from 2008 illustrated just how silly the business media can be in trying to tie a market move to a particular item in the news. Now yesterday’s story was partly tongue in cheek but I guess it is only fair to blame yesterday’s carnage on the chance Tim Geithner will be staying at Treasury.

The scary thing is just how easily some of us can accept such dubious cause/affect assumptions. I am sure over the weekend you will hear blame being tossed around for what happened in the markets. It was the Tea Party? It was the President. It was the failure to extract deeper budget cuts. It was the cuts.

Perhaps it was technical.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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