-Caveat Lector- from: http://www.pei-intl.com/TOPICS/OPENTRAD.HTM <A HREF="http://www.pei-intl.com/TOPICS/OPENTRAD.HTM">The Trade Nobody can Do - Copyright Princeton </A> ----- The Trade Nobody can Do By Martin A. Armstrong Copyright April 8th, 1999 Princeton Economic Institute ------------------------------------------------------------------------ There are many ways to look at a market but perhaps the one perspective that has been the most overlooked is none other than a study of market openings. For decades, data service companies use to save the closing prices and actually threw away the open, high and low in order to save disk space. Even Lotus spread sheets reflect the inherent bias against looking at opening data. The Lotus chart function looks for a high-low-close sequence and if you want the open it should be in column four - not the first. At Princeton, we have been saving opening data from day one, even before computers in the good old days of recording global market prices by hand in entry books for posterity. We have even gathered price information on individual stocks of importance stretching back to inception, which in cases like Homestake Mining is the middle of the 19th century. While many have often believed we had a screw lose somewhere, since settlement prices were based ONLY on closings, our belief has been that since anything is possible, you better have as much information as possible. Of course, looking at a chart of Homestake for 100 years or a recreated Dow Jones back to 1790 displays something far more important than mere trading patterns. The common denominator behind any chart of a traded item remains none other than human nature. When you have the insane amount of data found in the archives of PEI, it is possible to come up with a few hard facts about HOW free markets actually work while providing some insight into human nature itself. The one rule we have found pertaining to the opening price action flies in the face of what the vast majority would believe to be correct - The market, more often than not, normally opens in the opposite direction of the overall trend! All strong bull markets have a tendency to actually open LOWER and close higher as the majority trading pattern. Corrections, more often than not , begin from days that open HIGHER. If we consider what is actually taking place, the behavior pattern becomes quite interesting. During a bull market, the bias is to the upside. A market closes strong leaving the majority quite comfortable that new highs will appear again tomorrow and hence short-term longs have the courage to carry their position overnight. If the market opens lower, they panic and quickly sell, often giving you that early morning "false sell-off" quickly followed by strong rally into the close. On days that close LOWER, shorts feel warm and fuzzy having the confidence to carry their position overnight looking for a quick break to new lows in the morning. Hence, downtrends are often marked by days that open slightly HIGHER and then finish lower. The reason once again is human behavior. Short-term bears are scared out early in the morning by the higher open. They rush to cover positions only to find the market collapse once again into the close. Our above illustration covers the period of July 10th into December 24th of last year. The bars are color coded to reflect the direction of the open relative to the previous day's close. Note that pink bars mean that the opening was lower than the previous close while yellow bars reflect a higher opening. White bars indicate an unchanged open relative to the previous close. You will note that during the decline between July 20th and September 1st, there are very few pink bars and those are largely days that moved sideways. More than 2/3rds of the trading days all opened HIGHER despite closing sharply LOWER. Now look at the vast majority of the recovery. You will see PINK bars suggesting that the ma rket opened LOWER and then rallied higher. Our second illustration covers the current period from early October to the present. Note immediately that about 85% of this rally was marked by days that opened LOWER. This is a reflection of failed attempts to both short the market as well as weak longs that lacked the courage to hold a losing position in the morning. Even when we looked at the Crash of 1929, of the 51 days down to the first thrust low, ONLY 9 days opened LOWER! The vast majority opened HIGHER and then collapsed for the close. There do appear to be some exceptional periods, such as the Crash of 1987. The vast majority of that Panic took place over the course of merely 12 days. In that case, the collapse was so rapid that the market often gapped lower and kept on ticking. This appears to be a function of time. If the decline is extremely quick, then a true panic and meltdown is in motion. In the case of 1929, that first thrust low took 51 days from the top and many tried to support the market all the way down. Another interesting aspect about the opening and closing patterns around important tops is that the vast majority of the final days of a rally actually close HIGHER and may often close near the high of the day. This pattern appears to be the hallmark of a lack of shorts and a concentration of longs. This has been the pattern here for April 8th. This was even true of both 1929 and 1987. The point of this exercise is simple. STRONG closings should NOT necessarily give you a warm fuzzy feeling. The market itself is a master at pulling off the opposite of what the majority expects - EVERY time! In order to get those swings back and forth; the majority ALWAYS must be caught. The gyrations inevitably become the movements of the weak players back and forth. If April 8th proves to be a significant turning point or a directional change (breakout to another leg up) will depend upon the fate of the dollar in combination with the desire to buy bonds or equities, which could be affected by a change in global geopolitical conditions involving Russia. The volume is also a key factor. Volume in 1929 tended to peak several weeks BEFORE the high as has been the case at most major turning points. The markets do NOT reach a major high with simultaneous record new buying. Everyone that is thinking about buying has more often than not already bought. As the number of NEW buyers begins to decline - so does the volume! The decline in volume and the net capital inflows into mutual funds are both warning that something is not quite right. Volume for the current rally reached its peak during the second week of March and it too has been gradually declining despite marginal new highs. Our models show that THIS week could prove to be an important high, but the volatility begins to appear NEXT week - NOT THIS WEEK! As Helen said to the Trojans - "Beware Greeks baring gifts," we too must beware the STRONG opening. A strong open for Friday or even Monday may leave April 8th as the highest close or could even leave this week as the highest weekly close. This target date of April 8th can still shape up to be a directional change (beginning of a breakout) rather than a major high. In order for a directional change to develop we must see a SURGE of new buying next week that restores VOLUME and the breadth. Lacking a white knight, this week will shape up to be at least a temporary high and could prove to be something more important in the broader scope of financial chaos. In any event, the likelihood of this rally moving beyond 1999 without a major correction appears as a very dim glow on the horizon. Nonetheless, the likelihood of scoring NEW record highs in the future appears very strong for 2003 and 2007. This warns that while a serious correction is in the wings, this ain't no Great Depression. ------------------------------------------------------------------------ ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance�not soapboxing! 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