A Prediction

Hi!

Let me ask you a couple of questions with regards to prices and timing…

1. Do you mean to say that the time-frame for a crash is around 2 months?
2. What do you think the magnitude of the crash will be?

If you wish to decline to answer these questions, that’s understandable because the risk of being wrong is stacked up against anyone attempting to answer them. Personally, I don’t know the answers to these questions. Marc Faber, one of the most provocative contrarian bears once declined to answer such kinds of questions (in an interview) because he commented that for a person making such predictions, it is only a matter of time before he/she gets either the timing or price wrong. So, he smiled at the reporter and declined to answer those questions.

For those who wants to bet on a crash, you may want to read up on How to profit from a stock market crash?. It explains a subtlety that many people missed and teaches how to overcome the problem that such a subtlety introduces.

Good luck for those who wants to take advantage of a possible stock market crash!

I’ll be more specific. We just had a big up movement today with some short covering in the financial/homebuilders industry, so already I’ve proved that although my prediction may hold truth, its tough to profit in a real world where shorts need to have reasonable stops

When I say 2 months, I mean I think the market will slide for around 2 months before resuming more balancing. What happens in the market is essentially a two way auction; both sides vying and deciding on a fair price for all. This is the value zone, where both participants have decided that this area is a place that has a fair value. Of course, price bounces between different points, as the realities of finance and inventory (I like thinking of future contracts as inventory, accumulation and liquidating is what institutions do).

Once someone gets defeated, they must change their notion of fair value. In this case, if the ‘bulls’ lose to the bears, who drive price far below this value zone, then the bulls almost always move out of the way, allowing price to drop sharply (of course, vice versa applies when the price breaks out). The bulls will wait on the sidelines, till they find an ideal place to enter. The bears will ever wait till a good place to cover shorts comes; as has very recently. Then we re-establish value, and the process continues.

Unfortunately (or fortunately, if you can read the chart and volume levels), this process is extremely sloppy and sometimes hard to identify. The theory is merely based on the natural instincts of institutions and floor traders. The more volume behind a move, the more validity it has.

Now, when I make a prediction, its because I saw that the value area, ie where everyone thought price was, is much much lower then where price ACTUALLY was, according to the chart. Price is objective; yahoo finance can tell you what the price is. Value is subjective, and based on measuring volume and participation. What I see is a lowering of volume, which usually indicates a tank is about to occur.

Do not confuse tank with crash. A tank is more like a fender bender for a car crash, while a crash is well, a crash. A tank is usually a lot more predictable, because the market tanks (or breaks out, in the case of upward movement) quite often. Just a quick glance at the chart , you’ll notice its common. Now a crash usually starts as a tank. But a crash is a lot more unpredictable; like you’ve said, its a black swan type thing. Predicting black swans is extremely difficult, if not impossible. Luckily, predicting tanks and break outs alone will turn you into a millionare alone (if only it were that easy!).

I think the market will tank. I see all the trends coming. The media will probably go crazy. I make that prediction now, because the media is talking bullishly lately. I want to prove that ‘technical analysis’ (its more like quantitative statistics for me, but whatever) can see what others do not.

As for profiting, thats easy for me. I trade E-mini contracts. I crave volatility, in any direction. Crashes are volatility beehives, by definition. I profit like a hedge fund profits, off mis pricing, not off value investing. Its difficult to use value investing ideas to profit off a crash. People say put your money in consumer staples etc… guys, everyone will get wiped out, just some stocks less then others. Put it in gold? If gold’s already been piled on due to uncertainity (which I think it is right now, but I’m not a commodity trader), you won’t make all that much, and you’ll subject yourself to different factors which aren’t as simple as business.

Wow, this became long. I hope you understand me a little more now