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The Signals That Will Tell Us A Stock Market Reversal Is Imminent

The "Get out now!" warning signs
Tuesday, July 1, 2014, 9:38 AM

Executive Summary

  • Understanding the importance of the 'Smith Market Uncertainty Principle'
  • Technical analysis techniques for identifying the arrival of a market reversal
    • Bollinger bands
    • volatility
    • moving averages
  • Using the above indicators to know when to sell

If you have not yet read The Approaching Inevitable Market Reversal, available free to all readers, please click here to read it first.

In Part 1, we reviewed the case for the Fed-enforced New Normal of “no more downturns” and the case for a trend reversal in the stock market.

In this Part 2, we consider signs that a trend reversal has taken hold.

The Mechanics of Manipulation

Let’s briefly review the mechanics of stock market manipulation.  It’s easiest to manipulate a low-volatility, low-volume market, as low volatility (i.e. complacency) lowers the risk premium in index options, and a low-volume market is influenced by the purchase of relatively modest blocks of index options.  As a result, the Fed or its proxies can prop up the markets with large purchases of index options that cost very little in comparison to the overall size of the market.  (Recall each option leverages 100 shares of the index or stock.)

The other way to manipulate the market is to intervene at the critical technical levels that money managers and trading computers are watching.  Every well-known technical system has been programmed into the trading bots, the majority of which appear to be trend-followers: if the market reverses at key technical levels (due to massive blocks of index options buying, for example), then the bots start buying the uptrend.

Since the vast majority of trading is now done by machines, this greatly simplifies the process of manipulation:  the manipulator need only defend key technical levels with mass purchases of leveraged index options and the trading bots will jump in and buy the uptick.

Experienced traders have seen this sort of activity countless times in the past five years. It has become predictable that... » Read more