Manipulation And Technical Analysis
It is no secret that the markets are manipulated. Periodically, the question is asked if the Dow theory, cycles or any other technical methods can remain valid in a world of extreme manipulation. The short answer is, Yes. While manipulation can have a temporary effect on the market by stretching a cycle, it cannot fix the underlying problem or negate the natural cyclical rhythm of the economy or the market. In fact, history clearly shows that it is not nice to mess with Mother Nature in that the inevitable cyclical ebb and flow will have its way. So, yes, the natural cyclical forces of the market can be extended through manipulative practices, but ultimately such manipulation only serves to make matters much worse in the end. Thus, the efforts to manipulate, control the market and the economy and even the belief that they can be controlled is a cycle in itself.
I think we can all agree that every known influence, be it positive or negative, false or real, fundamentally sound or not, big or small, founded or unfounded, manipulative or not, all impacts price. In other words, price is a function that is based on everything known or believed to be known to all market participants. That said, understand that the very basis of technical analysis is that everything is discounted into price. So, if every influence known to man and the market is reflected in price and technical analysis is a study of price, then absolutely the Dow theory, technical and certainly known cyclical and statistical methods are just as valid today as they have ever been and the manipulative efforts to “fix” things don’t really matter. The only variable that I see in technical analysis, like anything else, is that one person will see the data to mean one thing, while another person may see it to mean something different. We should all be able to relate to that. Therefore, opinions may vary, but still everything is discounted into price and it all boils down to the technician, his methods and the proper interpretation. Because my methods incorporate the use of quantitative analysis, the research and resulting opinion is much less subjective. I must also add that more often than not, the quantitative based findings often prove to be very much contrary to public opinion.
With this all said, I am fully aware of the fact that most averages are at or near all time highs. Furthermore, 99.9999% of the people you talk to will tell you that we are in a bull market. I mean, come on. Isn’t that “obvious?” Well, let me say this. Things aren’t always as they appear. Please refer to the It’s Not As It Appears article for those details. Anyone who has not read that article should stop here and read it for background information and then come back to this article.
From my seat, the underlying technical picture and the associated statistics tell me that this liquidity induced advance is an absolute disaster waiting to happen. While many think the manipulation has saved the world, that it has created a bull market and that the money masters have made everything okay, probability suggests that the unprecedented manipulation and the advance that has resulted will, once again, only make matters worse. For example, as the advance out of the 2002 low began to stretch in light of the liquidity driven manipulation during the advance in 2005, 2006 and into the 2007 top, the statistics began to tell me that these practices were only making matters worse, which proved correct. But, look what has continued to take place in association with the current advance. Even more of the same insane liquidity driven practices that created the worst financial disaster since The Great Depression. As a result, these manipulative practices have stretched this cycle into the longest, since the inception of the Dow Jones Averages in 1896. When I look at underlying technical data and the statistics associated with this very extended advance, I find the potential for the downturn of this cycle truly horrifying. When I say horrifying, I don’t just mean financially. This time around, I also see the potential social and political implications. Based on the data, there is no question in my mind that this rally has not been what it appears. This is a giant trap and like the old saying, “there is always free cheese in the mouse trap.”
Manipulation is nothing new. It has occurred since the very existence of markets. By the same token, cycles have existed since the inception of the markets as well. In one respect, cycles and manipulation go hand in hand. It is generally the downside in which the manipulation is typically targeted in an effort to prevent the natural downturn. There is no doubt that the various manipulative practices of the varying manipulative degrees may have managed to stretch and in some cases distort the natural ebb and flow of the cycle. But, in the end, the manipulation cannot prevent the inevitable forces of Mother Nature and the cycle will have its way. The thing that the manipulators never seem to understand is that their very efforts to prevent the downside portion of the cycle by extending the upside, only serves to make the reversion to the mean even worse. Thus, this is in and of itself a cycle.
So, my point here is that the manipulative efforts by the powers that be have fixed nothing and while their efforts have indeed stretched the cycle, the reversion to the mean with the downturn of the cycle is coming. When we combine the basic facts outlined in the It’s Not As It Appears article, along with the ongoing manipulative efforts that have created this situation, I’m telling you, when the cycle turns down it is going to be hell for anyone caught in the aftermath. In addition to the historical observations of manipulation and stretched cycles, Dow theory, the associated cyclical statistics and my DNA Markers all tell me that this is an extended cycle advance that is not going to end well. I identified a set of common denominators that have been seen at every major top since the inception of the Dow Jones Industrial Average in 1896. Those DNA Markers allowed me to identify the 2000 top in the Industrials as well as the 2007 top, the housing top and the commodity top in 2008 and the 2011 9-year cycle top in gold. I can tell you with certainty that manipulation is nothing new. I can also tell you that all efforts in the past to manipulate any market have ALL failed and the cyclical forces have always had their way. Probability suggests that this time is no different. The DNA Markers will appear, the setup will happen and it will be proven once again that the cycles cannot be manipulated without consequence. Something will come along, it will all fall in place and when it does, the trap will be sprung and the free cheese will suddenly appear differently. For those that think the markets can be manipulated without consequence, please take heed to these warnings!
The following text on Manipulation was taken from Robert Rhea’s book, The Dow Theory.
“Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.
Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.
The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:
‘A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.’ (Nov. 29, 1908)
‘Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.’ (Feb.26, 1909)
‘…the market itself is bigger than all the ‘pools’ and ‘insiders’ put together.’ (May 8, 1922)
‘One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, ‘Between the Chains,’ in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.’ (The Stock Market Barometer) ‘…no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.’ (April 27, 1923)
‘The average amateur trader believes the stock market is guided in its trends by a certain mysterious ‘power,’ this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.’
‘It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or ‘manipulating’ the market for a short period. The professional speculator is always ready to help the movement along by ‘placing his line’ while the little fellow timidly ‘lays out’ a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time---the ‘technical situation’ so dear to the hearts of financial news reporters.’
‘Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!’
If you are interested in following the underlying technical developments associated with this rally, as well as the research and identification of the DNA Markers that should appear in association with this top, that material is available by subscription, in my research letters at www.cyclesman.com