Tuesday August 10, 201
We discuss farrows methods to analyze where the markets are and where they are liable to go. We have used the parabolic stop and reverse, point and figure charts, and various internal breadth charts all across different time horizons to discern what is happening. Yet another methodology uses Fibonacci numbers. From the stockcharts glossary
The Fibonacci number sequence (1,2,3,5,8,13,21,34,55,89,144,…) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8 percent, which is a popular Fibonacci retracement number. The inverse of 61.8 percent is 38.2 percent, also used as a Fibonacci retracement number. It is the ratio of the Fibonacci sequence that is important and valuable, not the actual numbers in the sequence.
The ratio we are interested in today is 50%. The series of 38.2, 50, and 61.8 is so popular there is a tool to calculate retracements on this basis. But we are making a Big Picture Analogy today.
Think of a tray of cookies. As Gladwell says, there is a Tipping Point beyond which events take on a new life of their own. Once the tray is tilted far enough that first one then another and then whoosh, all the cookies fall off the tray. Now, continuing the metaphor, suppose some cookies are larger than others. The large cookies may have more surface area which has cooked them to the tray, they will be more stubborn, defying the tilt of gravity. And so we might expect the smaller cookies to fall first. That would be a method of examining the internal breadth of the cookie tray, who is leaving who is staying.
But another way of looking at our cookie tray is this. Most of the cookies will probably stay on the tray until 51% have fallen off, then we can reasonably expect the rest to follow.
Now let's compare the stock market to the cookie tray. We have larger cookies represented by the larger cap stocks like GE, Exxon, MSFT. They are more apt to stay on our tray and portfolio managers will sell them last. But in the overall, the market has to decide to own stocks or sell stocks. Those same stocks my be owned by more or fewer participants but the number of shares does not change much on our graph.
At 14,198 stocks were owned by the maximum number of participants. At Dow 6469.95 stocks were owned by the fewest number of participants. If we use absolute highs and lows we have
14,198.1 and 6469.95 with an average of 10,334.03
If we use close prices we have 13,930.01 and 7608.92 with an average of 10,769.465. The point is this, 10,769.465 is half way back to the top. If there are consistently more stock owners that want to sell, the averages will have a hard time vaulting past this half way area. If there are however, more that want to buy or add to portfolios, then stocks will move right on up indicating accumulation
past the half way point. If stocks cannot get past this half way area, the entire market is casting its vote as a seller not a buyer.
We posted this chart to make the cse that stocks have been dilly dallying with this half way area all year!
Dos the market want to own stocks or not, it cannot seem to make up its mind.
Thsi is why we look at numerous indicators like the market internals in an attempt to divine what the players are thinking and whether they are accumulating or divesting.
Our slowest moving Monthly SAR has stocks still in a sell mode since the April 26 high. Stocks would need a monthly close over 11,163,30.
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