A pragmatic approach to the markets and to making money

Pragmatism was a philosophy that began to gain recognition in the late 19th century. Its focus was to consider thoughts as a means to predict and solve problems. It is about practicality not abstract theory about reality. Neoclassical technical analysis is a pragmatic approach to the markets. It’s is focused on supply and demand as seen on the charts and the use of that knowledge to predict near term price direction in a probabilistic manner. It seeks to solve the problem of how to make money without significant risk.

We live in a world of perpetual problems. Maybe that is historically different; maybe not. It is, however, reality. Issues abound and appear to be never ending. As a reader’s post to a recent article noted, corporate debt is at all-time highs as seen below.

Corporate Debt Levels

The problem when looking at such data is that just that about any point along this line was an all-time high at that time. Attempting to use this data to support an argument of an impending collapse could have been made in 1970, 1980 and most anywhere else along this line. Leveraging up has been going on for a long time. There’s nothing to say this can’t go on for another 5 or 10 or even 20 years - even at this exponential rate and this is just one data point. There are a myriad of these economic data points. Financial institutions are levered as well. Most countries are in the same boat. The quantitative easing programs around the world and currency devaluations are yet another set of data points of leveraging and market manipulations.

The problem, as we all know, is what does one do with such data points? Are they actionable? Is there a pragmatic methodology we can wrap around them? That’s what is important. I don’t need to know that the market should correct, I need to know when it will correct and short of that, I at least need to know when the potential for a correction of size has increased to a point that I should protect against it.

All last year the market only gave two or three hints of correction possibilities. Only once did it follow through with a pullback of size (June of 2013) and even then, within a few trading sessions it was at all-time highs again. When I look at the chart now, that hasn’t changed and I say that quite cognizant of the fact that most other commentators are, and have been telling you, that a large retrace or collapse is imminent.

Now maybe they are right, but I still can’t see it. Do you? Here’s a chart of the S&P 500 (^SPX) which, along with the Dow Jones Industrial Average (^DJI) which are the weakest of the major indexes. This chart doesn’t have anything in the way of a structure that would support a significant move lower.

S&P 500 - no bearish structure yet to speak of

Not only is there an unfinished bullish ABCD structure to the topside, there is now a corresponding range trade breakout that targets the same 1888 price area.

Now if price is to fall there, is still and untested retest and regenerate zone just below the range so even in that case there is a good possibility that a trade back down to test the bottom end of the range would push into that zone and regenerate higher.

Almost anywhere one looks, whether it be overseas markets, domestics markets and even major and minor sectors; they all show the same characteristic - no sellers. Anytime price dips the sellers disappear and buyers go to work again. It’s been this way for months now.

Sure it can change and eventually it will, but at the present time, the best that a bear can hope for is a push back to the lower end of the range just below all-time highs. In fact, if you look at the other indexes like the Russell 2000 or the NASDAQ Composite (NASDAQ), they are hanging at the highs which are above 2014 highs.

Now one can poetically wax about how the market hasn’t gone anywhere for a month and that’s reasonably true, but to get bearish there needs to be evidence of or at least a reasonably possibility of something more than a minor setback just around the bend. Yet the current structure looks like the same as it ever was.

Pragmatism begs for practicality, prediction and solutions. The near term prediction is that the most likely worst case scenario is for the market to trade back to the retest & regenerate zone then flip around and regenerate higher. That’s actionable. That’s practical and that’s what we should focus on as traders and investors. When something more ominous comes along or a reasonably possibility of that happening, then we will worry about it - but not before.


This article was originally published on MarketWatch on Jan. 22, 2014, 11:14 a.m. EST