Into the Mind of the Composite Man

The Composite Man according to Richard D Wyckoff is supposed to be the all knowing market force, the big money or the truly all knowing market force that is the primary trend direction of the market.  He talks about how it is important to try to get inside the mind of the composite man in order to be able to get a good read on the true path of least resistance in the market.

I try to get into the mind of the composite man but admittedly it is not easy.  I look at my indicators, I look at the volume, the patterns, the tape action and individual stocks.  Then I try to weigh each element and add in a dose of my ‘6th sense’ to come to a final conclusion.

I continue to believe in the short side of the market.  The problem is that getting short too early can cause lots of indigestion as the market plays some major head games and tries to convince the shorts they made the wrong decision.  It was almost as if shorts were already declaring victory after yesterday’s drop.  But one day does not a trend make.

I recommend that trader’s focus on the action during the April 14, 2010 to May 3, 2010 time frame as an example of a topping trend that was very violent in both directions just before we had a 3 day 11% decline in the sp500.

In other words it took 7 to 11 days of violent discouraging (to the shorts) price action before the market finally ‘gave up’ and then collapsed almost 1000 DJIA points.  So the risk reward equation at that time was maybe 10 to 20 upside S&P points versus potentially 100 downside S&P points.

Right now we may have a similar dynamic taking place.  Maybe 10 to 20 potential upside S&P points north, versus potentially 100 downside S&P points.

There still is a point at which I think bears have to raise the white flag.  But right now I am not seeing it yet and I do not expect to see 30 to 40 point up move in the sp500 from current levels.

Shorting too early is probably one of the greatest trouble spots with regard to trading because if too early then one must go through the psychological battles of up down sideways or slightly upward action that places doubt in even the most resolute trader’s mind.

In some cases one must be able to sit tight through violent up down action before a big downward break.  I can tell you with zero doubt that this is not easy to do.  But this is my take on the action now… That we are in for possibly another 5 to 10 days of this up down violent struggle before the market eventually caves in.  I say 5 to 10 days but that is a guess.  It could be from 1 to 10 days.  Even on May 3rd 2010 there was a big one day rally that probably got the bears very discouraged.  Then the next 3 days were down 11%.

The summation index continues to roll over down slowly as the market shifts back and forth.  By election time and Fed QE2 time the market should be in full swing DOWN (9 trading days away).

I am sick and tired of hearing about QE2 and POMO.  I do not know why so many traders are obsessed with this.  Perhaps it has been pumped by CNBC and many still watch CNBC for their guidance.  My take is that market reaction to QE2 and POMO really has already occurred!  The market has already discounted this news and now will likely drop right into the dates of November 2 and 3rd.

The chart above I try to show that we did a bear kiss today of the broken up trendline and there are also two topping tails.  I do not know if we are going to rally right up alone the underside of the uptrendline like we did in April 2010 and move to perhaps 1090 before giving up.

But what I do know is that we busted down yesterday on the SPY with 270 million shares and today we reacted up with 200 million or 28% less.

Also AAPL yesterday slammed down on about 40 million shares and today only rallied with 26 million shares, tested yesterday’s high and then closed under it today. Bearish, and implies a further break down.  Same situation with IBM.  The rising wedges and false breakouts are plentiful.  So as each one of them rolls over into more defined selling patterns I expect this to pour into the averages and create a huge sell off spike at some point, possible near the November 2 or 3 time frame.  I just cannot figure out if a very large down move would instead wait until the Nov 2 and 3 time frame before a big down move.  My take is that we go into those dates for now.