How Traders and Investors Were Fooled in the 1930 to 1932 Panic

Investors and traders lost money in this great panic because they listened to other people who knew less about the market than they did and who were simply guessing. many so-called wise economists said that the bottoms in November 1929, would not be broken and that this decline had corrected all the weak spots in the market and that the bull market would be resumed. They said the same thing about the breaks in 1930, 1931, and 1932. When the market actually reached bottom they did not know what to say because they had been fooled for so long. They had not studied past history enough to know that after the greatest advance in history and culminated in 1929, the greatest panic in history must follow and that it would require a long time to liquidate stocks.

Every time stocks made a bottom, the newspapers, government officials and economists said that it was the last bottom, but stocks when down, down, down, until people lost faith and hope in everything. They went lower than anybody dreamed they could go. That is what happens when everybody decides that stocks cannot go down or that they cannot go up- they always do the opposite. The public is always wrong because they follow no well-defined rule and are not organized. People believed that the government purchases of cotton, wheat, and loaning money could stop the depression, but when once a cycle is up and prices are due to decline, nothing can stop them until it has run its course. The same is when the main trend turns up, neither government interference nor anything else can stop the advance until it runs its course.

-W.D. Gann
New Stock Trend Detector, 1936

USD/JPY 500 Pip Rally

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This position is risky for 2 reasons.

1) Weakening stock market could drag USD/JPY lower.
2) It is possible that wave 4 has already been completed, thus no additional wave C of 4 is required.

$95.36 is the long term target for the forecasted rally. From the most recent USD/JPY low, wave count would indicate that this rally is corrective in nature. The only wave formation up for discussion is whether the decline from the 50% retracement has been wave 5 lower OR an X wave. If it is an X wave then this corrective rally is expected to extend further up to 95.36

a-b-c (A), >Completed at 50% retracement<
X, >Completed at 89.12<
a,b,c (C) >Began 27/01/2010<

Oats Daily (CBOT)

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* Oats (CBOT)- Currently $226

* The price of Oats has dropped precipitously over the past 6 trading sessions. Peak to trough it has dropped $58.75 on massive trading volume. To find a day with higher trading volume, you will have to look back to June 16, 2009. The only red flag I can find which pointed to this decline, occurred between November 23/09 and December 4/09. During this period we witnessed open interest decline by 2846 contracts (14,230,000 bushels).

* Open interest declines when long positions are sold out or when short positions are bought back. Amazingly, the November and December trades didn’t have as large of impact as its OI changes would warrant on prices. At the time it would be difficult to determine that the floor was being taken out of the market. However, OI changes in Oats Futures positions indicated that institutions were quietly and discreetly exiting their positions during the end of November 09.

* Long term prospects for Oats remains mixed with bullish potential if prices remain above $188.25 and bearish potential is prices remain below $281. This hundred dollar price range will serve as a great price region for sellers and buyers to establish short term positions.

* Current support targets include $221-$225 with the possibility of traveling as low as $217 before prices rebound.

* If $217 is broken, then next downside target is $203.5

* The first minimum upside target is $251.5

Wheat Weekly (CBOT)

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* Wheat (CBOT)- Currently $500.50

* Over the past 7 trading days, we have seen wheat prices plummet $78.5 peak to trough. Remarkably, there is no indication of this being from longs liquidating positions. This drop can be credited to short hedging by processors and producers, along with new short sales by money managers. Short positions for managed money expanded rapidly by 11.09%.

* Long term prospects for wheat continue to look bleak with the possibility of dropping as low as $375 over the next year. Certainly the amount of institutional hedging we have seen over the past several sessions would hint at lower prices going forward as well.

* There are two major support levels that prices will have to break before going below the October, 09 low of $439.25.

* The first area where support for prices could appear occurs between $493-$496.55

* Second support level is $471 - $473.25

* If either of these price regions hold as support, the long term upside target is $632.75 – $635.5

Soybeans (CBOT)

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* Soybeans (CBOT)- Currently $963.5

* The selloff in soybeans which began January 5, 2009 appears as though there is still more downside potential. The selling pressure was initiated by managed futures funds increasing short positions by a stunning 62.87%. Money managers began unwinding profitable long positions and initiating new short positions totalling 73,820,000 bushels for sale. The selling was met with modest buying from producers and processors.

* A short term low will be put in place after price reaches $923 - $927.

* Short-covering is expected to help price travel up to minimum target of $981 - $984.75

Goldman/Sachs Commodity Index (Update 2)

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Previous forecast wave count indicated a move higher up to $539 (Gann) or $540 (Fib Ext). The price support held and the GSCI rallied to a high of 548.88 only to close the week of 1/03/10 out at 543.22

The following week of 1/10/10 price hit a high of 550.37 then sold off to close the week out at 520.37

Wave count indicates wave v of (5) completed. Following this completion price returns to the place were wave 4 ended. The downside targets include $450 and between $419-$423. These lower targets should be met with considerable ease if price can break below the crucial support level of $472.

Saskatchewan Potash Corp Update 2

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In the previous post, I was calling for 4 sequential price moves in advance of them occurring. They are as follows-

1) Rally from 119.46 to 126.67

2) Decline from 126.67 to 108.68

3)A failed rally from 108.68 which would would test the 126.67 highs.

4)A decline from the failed rally high resulting in large price decline ending at $84.81

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Here are the results-

1)Rally from 119.46 occurred with actual mid-week high coming in at 130. However price failed to sustain at this height and closed the week of 11/29/09 at 123.98. The following week of 12/06/09 Potash gapped higher for the Monday open at 126.5. The stock rallied and put in a weekly high again at 130 but closed the week out at 125.49. The weekly opening and closing prices highlighted the importance and relevance of the calculated resistance target of 126.67. This cleared the way for the second move (lower) to occur.

2)Decline from 126.67 occurred with actual low coming in at 112. My target of 108.68 which was a 61.8% retracement value was never met. Price failed to break below the 50% retracement value located at $112.04

3) Rally from the 112 low (inflection target now moved up to 112.04) occurred with price rallying all the way back up to 130.68. It was noted that this move higher would be a failed rally and would be retraced with subsequent selling pressure. Price has steadily declined since the 130.68 high has been put in place and currently resides at 115.30. Only time will tell if the 4th forecast will come true with price traveling all the way down to $84.76 by February 9th 2010. The time forecast may not be accurate anymore as it is calling for a 26.5% move lower in the next 12 trading days.

AAV Oil and Gas (TSX) Update 2

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Since my previous AAV post, price has increased as much as 20.94% but is currently up only 10.2%. Strength in the U.S. Dollar has caused commodity related equities to give back some gains. Some energy related names will temporarily shrug off broad market weakness and it appears that AAV could be one of those name. If price can remain above the previous swing low of $6.80, the first minimum upside target (derived from RSI) is $7.78. The Fibonacci targets in extension of $7.78 remain active targets if resistance is not met at $7.78

A move below $6.80 would result in additional selling pressure carrying the equity down to at least $6.46

EUR/GBP Update 2

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Sentiment Analysis on Current Market Conditions

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Time Magazine is the cover we will review. On the December 2009 cover, the Federal Reserve Chairman, Ben Bernanke is named “Person of the Year”. He is credited with saving the U.S. economy through buying “toxic assets” from the troubled U.S. banks and implementing a massive Wall Street financial bailout. His picture (on the cover) is placed in front of what appears to be a dollar bill, a spot reserved for American Presidents. This clearly marks an extreme in societal sentiment and hints at the possibility of a short term market peak (the cover is not included in this posting due to the possibility of copyright infringement).

The AAII survey for the week of Jan 8th, 2010 shows the bulls decreased from 49% to 41% and the bears increased slightly from 23% to 26%. What is most interesting last week from the AAII survey is not the sentiment data but the shift in asset allocation. Amazingly, the average AAII investor increased their exposure to the stock market by +15% points to 64%. That is the highest level since, October 2007. The rest is equally divided between cash and bonds.

The chart included in this posting shows a weekly chart of the Dow Jones Industrial Average. I have indicated on the chart were the index value was during the previous and current Asset Allocation Extremes. It is truly remarkable to see that the asset allocation extreme in October 2007 occurred right at the market peak. When the buyers are "all in" who is left to push prices higher? Naturally institutions and hedge funds will still continue to push some equities higher but they will be selective in their choosing. This leaves the inexperienced stock picker at a real disadvantage. This asset allocation extreme indicates the possibility of a major market top.