SO CLOSE!!!!!!

AUSSIE DOLLAR NEAR A HIGH

Of course the typical knee-jerk reaction is that the AUD is headed higher on the rate hike.
I suspect just the opposite, as deflation slowly takes grip and the deleveraging follows suit a drop in commodity prices should see a swift move to the downside in the AUD.

HOME BUILDERS & CONSTRUCTION

Looking at these charts they have a distinctively bearish appearance. There is not yet a clear 5 waves down and that is because I think we have witnessed a series of 1-2's.

PRIVATEER

Reading today the Privateer published over the weekend I remain bearish. The one thing I came to realize some time ago is that one cannot trade according to Austrian Economics. At best it acts as an economic moral compass and most certainly is a logical starting point.

BULLS EYE RESISTANCE

This chart of Westfield hit the 38.2% Fibonacci mark with a bulls eye. Secondly there is a GANN line that caught the 4^th quarter 08 bounce spot on. There is another GANN line which corresponds with a Fibonacci line just above where the bulls eye hit (I am hoping that was close enough) and lastly there is a Fibonacci Arc that has only been pierced for a day at the bulls eye.

Sticking to my Guns

The reversal last night still gives me confidence for my Uber bearish wave count. Surprises on the downside.

6's & 7's

On reading the blogs today even ardent EW bears are favouring a new recovery high.

One thing I learnt when there is a change in trend it comes from nowhere.

I am holding out for a strong down day today, which will place the bears at 6’s and 7’s.

 

I think this surprise rally is needed to create a 3^rd of a 3^rd wave to the downside.

 

BEARISH COUNT

If I take a bearish look at this chart I can count a 3rd of a 3rd of a 3rd.
Expect Fireworks

FEELINGS

The subject of Behavioural Finance is becoming extremely well known in finance and investing circles; however, there remains a common misconception as to the role feelings play in our investment decision making process. Superficially it appears that our feelings cause us to make irrational decisions in situations of uncertainty and therefore the best cure for our attack on our feelings bias’s is to cut them out completely. Until recent advancements in neuroscience this mistaken assumption would have been acceptable thinking; going forward far more comprehensive models will be required to outsmart our own smarts.

Allow me to take you on a journey of philosophical thinking before providing you with some scientific proof. Importantly these ideas and a lot of the words have been taken from an excellent book by neuroscientist Jonah Lehrer called, The Decisive Moment.

The question of how we make decisions has been puzzling philosophers throughout the ages. Plato was one of the 1^st to tackle the subject and used the now famous analogy of a charioteer being pulled by 2 horses. The charioteer being the rational brain and one horse representing good and the other bad combining to represent our feelings. Plato wrote of the bad horse, ‘He is of an ignoble breed. He has a short bull-neck, a pug nose, black skin, and bloodshot white eyes; companion to wild boasts and indecency, he is shaggy around the ears – deaf as a post – and just barely yields to horsewhip and goad combined’.  What Plato was putting across is that the human job as charioteer is to keep going forward by keeping both horses under control and in so doing he pioneered the thought of the mind being separated into 2 spheres; reason and emotion as became accepted by western culture.

René Descartes a leader of the Enlightenment era took a similar view and separated man into a soul representing the reasoning part of man, and a body full of ‘mechanical passions’. His objective was to advance man as an entity that could triumph reason over emotion, with the Cartersian faith forming the basis of modern philosophy. Francis Bacon and Auguste Comte took this rational approach to society further as did Thomas Jefferson with his hope for America been governed by reason alone. Immanuel Kant took it a step further with the imperative that morality was rationality. Freud to embraced Plato’s style of thinking by describing the mind as divided into a series of conflicting parts (id, ego) with the survival of modern society incumbent on man sacrificing the id (pleasure principle) for the sake of greater good.

Then with the increasingly scientific approach of mapping the cortex of the brain modern science became uncomfortable with a lot of the theory surrounding human thought. It lead to the belief that the mind behaved like a computer and therefore scientists such as Marvin Minsky (the pioneer of artificial intelligence) thought the programming of computers could replicate the human mind as one driven by rational thought. Cognitive psychologists followed this line of rational thinking taking it through to the field of our interest Behavioural Finance.

To summarize; the line of thinking Plato and his followers supported was a utopia whereby man could use his reasoning sphere of the mind to completely shut out the emotional side, which after all was the cause of all mistakes throughout the ages. As Lehrer in his book puts it, ‘the truth is far more interesting’. Science proves to us that in fact both sides are mutually dependent upon each other and without emotions reason wouldn’t exist at all. Talk about turning accepted philosophy on its head. In the story that follows Lehrer presents a case study where we learn how important emotions are in our decision making process.

In 1982, a patient named Elliot walked into the office of neurologist Antonio Damasio. A few months earlier, a small tumor had been cut out of Elliot’s cortex, near the frontal lobe of his brain. Before surgery Elliot had been a model father and husband and held an important management job. But the operation changed everything. Although Elliot’s IQ stayed the same he now exhibited one psychological flaw: he was incapable of making a decision. This made normal life impossible, routine tasks that would take minutes now took hours, with endless deliberation over irrelevant details. Damasio realized while in conversation with Elliot and later confirmed it with scientific brain testing that Elliot no longer had feelings.

At that time neuroscience believed human emotions were irrational and therefore not having feelings should make for better decisions. ‘The charioteer should have complete control’. What we now know is that a brain that cannot feel cannot make up its mind.

To bring some closure to this journey it is worth understanding how the emotional brain system works according to neuroscience. ‘The orbitofrontal cortex (OFC) is responsible for integrating visceral emotions into the decision-making process. It connects the feelings generated by the primitive brain – areas like the brain stem and the amygdala, which is in the limbic system – to the stream of conscious thought’. To say this in English the brain only feels comfortable making decisions when it experiences positive stimuli along with its rational calculations. The field of neuroscience is scientifically able to demonstrate how certain stimuli trigger emotions and their involvement in brain computation making the field of Behavioural Finance and Neuroscience mutually dependent on one another.


I would therefore like to suggest that in order to advance our ability to make decisions under uncertainty a two pronged approach is necessary, i.e. the study of our behavioural biases along with the influence neuroscience has to offer. To negate feelings just because we are scared of the biases they may represent is a one dimensional approach to the teachings of Behavioural Finance and is perhaps a misdirected objective - much like the philosophy taught by Plato and his followers.

NEW SOFTWARE

I am just trying out an interesting piece of new software

EWI and their 2000 HIGH

It still doesn't sit well the count that EWI have as their all time high in the Blue Chip Indices, i.e. 2000 the top with the 2003 bottom as wave A and 2007 as the wave B high, if this is the case one would then need to label the 2009 March low as wave C; I just don't get how they have labelled it only Primary wave 1 of C.

I need to check this again, but I have time as we are so overbought that we are due a proper correction. Also so far we have only had an ABC so perhaps there is a more complex correction at play.

Who knows, I am tired and now it is time to get some shut eye. This same problem doesn't exist thankfully in my markets, at least not the way I am counting from the 2007 high.

Paul Macrae Montgomery

I have only recently been reading some of his work, the man is a genius. I am not sure how his trading performance stacks up but the guy can sure write.

ANGRY

Today I felt angry with the markets as the whole process is actually quite ridiculous. In hindsight I should have expected more positiveness to come from the stimulus, even if it was just a band aid.

ANECDOTE

I am starting to pickup a lot of anecdotal nervousness from retail money. Questions like I think it is time to cash in. This rally is nuts is also what I am hearing.

MONTH END

I hate trading on month end it is a lottery and I don't like gambling.

STILL NO ANSWERS

Unfortunately we still cannot tell whether the top is definitively in. Month end today so there is always the chance for window dressing.

Still not Sure the Top is in

 reiterating my comments on the chart.

A CATALYST

Ran into someone today who proceeded to explain to me how the markets work.

He said along with many others one of the most annoying things to a reverse causality believer. He said to me that the market will only turn on the back of a catalyst. Something must trigger the reversal.

Markets simply reverse direction due to exhaustion of the underlying trend. The reason could be from a myriad of different sources the point is simply that more buyers or sellers dominate the previous trend.

I know I can do better in terms of explaining this but I simply had to place on record my disagreement that there has to be a catalyst. A catalyst is what so called experts assign to a reversal after the event, it is amazing that none of them seem to anticipate the catalyst in advance although one is able to make probabilistic forecasts on future direction.

MISTAKE

Last night I probably made a mistake buy closing out the 15 IYR 44 calls I had for Oct. I should have rather sold 46 calls or something like that as the market direction today is a 50:50 probability based on the wave count.

I suppose that is what happens when you wake up at 3am to trade after an exhausting day without fully rehearsing a game plan

TIM SENTIMENT INDEX

TIM Sentiment Index (TSI): Market sentiment among institutional brokers worldwide continued to fall
this week. The TSI Worldwide Index five day trailing average was in bearish territory at 47.58 on
September 24, 2009, down 5.14 points from the week before. Over 50 is bullish; 50 is neutral; under
50 is bearish. By region, UK sentiment fell a steep 9.07 points, to an even more bearish 41.61, while
North American sentiment was off 1.74 points, to a slightly bullish 51.05. Among the 10 sectors we
group trade ideas, seven were in bearish territory, three in bullish.
Long / Short Idea Trend: Total new long ideas (as a percentage of all new ideas sent this past week
to investment managers in real time through the Trade Idea Monitor) dropped 6.31 points to a
somewhat bullish 62.05%. September to date, the percentage of long ideas is 66.28%; year to date, it
is 60.15%. Idea volume was down 11.8% week over week.