Zak Mir and John Piper Talk Charts in August

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Zak: It is Friday 9th August. This is Zaks-TA.com's first webcast with acclaimed chartist, trader and author, John Piper and, as we speak, we see some of the markets going through quite key levels, particularly the FTSE.

John: Yes, very true, Zak. We've got the FTSE up above 4,300 today and it looks a fairly solid move. I said in my report this morning that, if it could move up from here, we could see a sharp third wave rally and it looks like that's coming in now.
Zak: I'm not a great expert on Elliot waves, as anybody who'd read my attempts to describe how it works would know. How do you know that this was not a ... I mean I thought the low down to 3,600 (approximately) was the third wave. Was that right? How does it work?
John: It's very easy to miscount waves and the whole theory I think is somewhat dubious. I do use it to an extent but I don't use it the way zealots do. I don't believe that every market has an exact wave count, I just try and use it when I think it's useful.
Zak: Just to interrupt you, I have a product called E-signal which automatically counts where it thinks the Elliot ... you know, gives you 1,2,3,4,5 on the chart and previously, the low at 3,600 was point number three and I suppose after that, then, the next high at 4,300 (the first time it went there) was point number four and as long as the market stayed below 4,300, then we would be heading down for a retest (or lower) of the July low. Is that a way of interpreting it, or not?
John: The problem with these things that label the waves is that they tend to change their labels when they get it wrong, which is quite frequently, I would suggest (I haven't studied that many of them, in fact. I don't want to blight E-signal. Maybe they're a lot more accurate.). But I think there's too much faith put in Elliot - as perhaps in many other indicators - and that you have to take all these things with a pinch of salt. They only work on a statistical basis and they don't work all the time. Basically, we're seeing quite a strong rally now. It's entering a dangerous phase, in a way, because it looks like it could just be an a-b-c corrective move, despite today's move and it's what happens next week that's fairly critical. If it moves up higher next week and then starts falling back sharply, I'd become quite concerned that we could in fact go to new lows.
Zak: Right. But wasn't it the case that while we were under 4,300, for instance, there was a chance of retesting the 3,700-3,600 low area and, now that we've broken that, we can say that that likelihood is at least delayed? That's what I normally write when I'm talking about the markets, I say, 'As long as something holds, or once something is broken, then we are in a different scenario.'
John: My own view is that the low we saw around 3,600 was quite a significant low. It's what I call an 'emotional low', where we had a capitulation type effect and in fact the weekend press before that was particularly negative and in my report at the weekend, that weekend, I mentioned that and said that I thought that a key low was pretty close now. Now, I feel that the rallies that come in bear a relationship to the declines that precede them and the pessimism and doom and gloom at that low I thought was quite severe, so I think this rally will be here to stay for quite some time. So my overall view is that we're going to go up now, probably into the autumn, maybe even the year end. However, I do look at the chart, obviously, and see what's happening and, as I said, if this rally starts to fade away a bit too early and we start seeing some sharp selling coming in, then I would change that view but, right now, it looks pretty solid.
Zak: Right. I suppose I didn't have great conviction about the strength of the last move from 3,900 which we've had - I suppose it's this month, really - which was the retest, I suppose, of the July low but, having been to a leading spread betting firm this week and finding out that all their punters are grievously short of the market, I felt that that was my sign, in a way, that in fact we could head higher and break 4,300, which obviously, maybe until about an hour ago (we're speaking at 5 o'clock), it didn't actually look like it would happen.
John: There's been a strong rally in the last hour or so.
Zak: So end-of-week close above a major resistance level is looking good. Is there any target you would have on the upside here?
John: If this is a corrective move, then a typical a-b-c relationship would be wave a and wave c are equal. Now wave a was about 700 points (a bit less), so about 4,600 would be a target for the move, if it's corrective. So even if it's a corrective move, then it still could have quite a long way to go. If it's impulsive, then we could see 5,000, I guess.
Zak: Right. Well, I suppose I'm taking the ... I'm going for 4,700, which I suppose is the 4,300 minus the 3,900 added onto the 4,300. So that's the way I'd be looking at it but I suppose that ties up.
John: I think these things always have to be flexible. You're never going to ... But the big worry right now, I think, is Nasdaq. Do you want to switch to -
Zak: Yes, I think the only thing is (a final thing on this), is there a chance that we wake up on Monday or Tuesday and find that this was just a suckers' rally and we didn't actually make it higher than 4,350 and that was it? Is a bull trap possible?
John: I think the key thing here is what you mentioned about the spread betters all being short. What these rallies do is they force people to sell out, or get out of their positions and this rally will stop when people have all stopped being short and they've all gone long. So, if these people are short and that's a good representation of the market, then this rally's here to stay until that happens and some people are very stubborn and it's when that last person has taken his short off and perhaps gone long that the market will reverse.
Zak: And it's not a case that everybody's looking at the same chart and saying, 'Right. Above 4,300 now. We've closed there. It's time to go long and that's it.' Why don't they do it earlier?
John: It's difficult to say. A lot of people trade emotionally. My book is about people who trade emotionally and taking decisions not based on logic but based on their own feelings. I mean most decisions we make, we make emotionally, like buying a car -
Zak: Or I suppose, in some sense, they just don't want to lose the money that they're heading for losing. You know, they might have sold at 4,100, or 4,200, or 3,900 and they just don't want to get out and realise a loss. That's probably the more -
John: It's very difficult because, once you miss the opportunity and you're stuck in a trade and your profits are being eroded, you want that profit back and every time the market starts to blip down again, you think, 'Oh, good, it's going down again. I'll stay with it.' Every time it blips up again, you think, 'Oh, it's just a correction. I'll still stay with it,' and it's like you're frozen and people are in this situation all the time. I've been through it myself - it's not a 'holier than thou' thing. I've been there myself and you're paralysed. It's like the market has become a cobra and it's -
Zak: A rabbit in the headlights.
John: That's right. Exactly right. So you only get out when the pain gets too great.
Zak: OK. Well, let's look at the Nasdaq and see if that's actually improved since the last time I looked at it, which is about an hour ago.
John: It didn't look too good this morning. This is the Nasdaq 100, I have to mention.
Zak: Right.
John: But the rally here's been pretty feeble at the moment. That's an hourly chart, but it made a low on Monday - a new low, I think (let me just make sure). Here we are - a new low on Monday. It's only seen four up days and it hasn't achieved a great deal. Now the FTSE's quite a good structure - it's taken out that intermediate high today -
Zak: So this is like the equivalent ... It's about 50 points behind, really.
John: Well, it's a week or so behind. It just doesn't look anything like as good.
Zak: But would you say that it might ... In the old days, I seem to remember that the Nasdaq and the Techmark used to almost be leading indicators - they'd move first, in the good times, then the old economy indices would then follow through.
John: Well, they might still be leading. It may be that the bigger stocks are getting a bit ahead of themselves and that the Nasdaq is still giving us a clearer signal. I think Nasdaq is a leading indicator and it is not looking too hot right now. Nor is the Nikkei, incidentally. The Nikkei now looks very negative, to me and the Nikkei, you could say it's been leading the way for the last twelve years but that's probably a bit of an exaggeration.

Zak: Well, I have actually said that. I had a fight with an Oxford Don in, I think, '89 or '90, just before the Nikkei finally bit the dust and I did actually dare to say that the Japanese model could be a leading indicator, economically and in the sense that, if the Japanese economy failed, that would drag other economies down and could drag other markets down but I suppose what's happened is that the Nikkei index has actually been a fantastic role model for the Nasdaq and I suppose, possibly, even the Japanese economy could be a role model for the US one, in some ways.
John: I can't comment on the economy as such - I'm not an economist - but certainly I think all markets do this all the time. They go up too far and they go down too far and it's happened again and again and again throughout history. I mean there's the South Sea Bubble - the '29 experience and it always happens that markets go up too far and they go down too far and the actual characteristic of this is that, as it goes up and up and up, it drags more and more people in to get the maximum exposure and now we've got ... In the '50s you would never have put your pension money into stocks. Now it's unheard of not to have your pension money in stocks, almost.
Zak: And very soon it'll be back to the '50s model again.
John: I think that's probably where we're going to go. I think this decline will finally be over when people are not interested in stocks and not listening to our broadcasts, Zak.
Zak: I can't believe that anybody would not listen to our broadcasts! But we're not talking about stocks, are we, so it's all right. But it was just really the point that, is the Nikkei ever going to come back? If it's been ten years and it's not come back, is the Nasdaq and the Techmark ... are they in the same boat? Will it take ten years for them to come back?
John: Well, historical precedents go all the way, if you like. If you look at the '29 experience on Wall Street, it came back although everybody thought that the economy was over. I think the same in London in the early '70s - people thought that NatWest was going to go bust, I understand. They thought that the economy was over. Now, in those cases, we came back and we went higher. I think the same happened to the Holy Roman Empire - it didn't come back. Now, I'm not that pessimistic at all. I think we're seeing a situation here where we will go further down, we will see a big correction and we will see stocks becoming of less interest to the majority of people.
Zak: So you think that we'll get up to 4,600 on the FTSE and then we're back down to 3,600 in eighteen months' time and it just keeps going on like that?
John: I think we've seen the first leg down, basically. We've probably seen the low of the first leg down. We've got a substantial rally now. Now, whether it peaks this autumn or at the end of this year and where it goes, I wouldn't like to be too specific on that but certainly 5,000 is going to be a fairly key level for it. Maybe it'll blip above 5,000 and everybody will say, 'It's OK now, the bear's gone away,' it'll be over-confidence again and set the scene for the next leg down. These things always start from over-confidence, as the rallies start from fear and depression, as we saw just two or three weeks ago.
Zak: But the Dow took, what, ten years to come back from the 1929 crash, is that right?
John: I think it could have been twenty-five years, I'm not absolutely sure but certainly, yes, some of these declines do take a long time to recover from.
Zak: Well, we're still young. We can wait.
John: Oh, yes. No problem at all. But some of the stocks don't actually survive, which is another problem and they don't make the index.
Zak: So are you, overall, bearish, then? After this initial six month period of improvement.
John: As a trader, I've learnt not to become bullish or bearish. I try and just look at it with an open mind because if you have a view on the market, you tend to get wiped out quite quickly. I think it's critical to be quite clear-headed about these things. So, at the moment, I'm long of the market and I'll intend to stay that way until I see some evidence that the thing has changed.
Zak: OK. Are there any other markets you use to gauge where the indices are going?
John: I believe in what I call the global trend. I think that all markets follow the global trend. It's more obvious these days, with all the markets moving in harmony. Currently, we've got the FTSE leading the pack, to an extent, with the DAX not too far behind (let's have a quick look at the DAX while we're here). The DAX has seen quite a good rally, although it did go a bit further down than FTSE but the US markets are currently lagging a bit. Even the S&P has not got such a nice pattern on it and such a good recovery as FTSE has and the Nikkei looks sick, to my eye. So, at the moment, the global trend - it's not absolutely clear it's up at this point because the US markets are lagging a bit.

Zak: But, looking at the DAX, don't you think that, for the DAX, it broke its equivalent of 4,300, I suppose, twenty-four hours ago, something like that. Its equivalent is 3,650-3,620, something like that.
John: This is only in the last four days. The key level here is really up here somewhere.
Zak: Right. OK. So it's behind the FTSE, then?
John: Yes. The difference is that FTSE ... the low it made this week was a higher low. With the DAX, it wasn't a higher low.
Zak: Quite a nasty move down there.
John: Yes. It's a nice double-spike bottom. I do a lot of trading on price spikes and if you look at these spikes on the DAX below 3,500, there's quite a lot of support there. Every time it's gone down, it's come back pretty sharply, so that's an area of key support.
Zak: Isn't it the case that if you're lucky enough to see a chart where you have spikes like that just before you look at it for the first time, that's a great weapon. I think you echoed that in your book - that you can see the trail of stop-losses being hit and the devastation behind you, so you know that whatever comes after that is not going to be so difficult. Basically, the DAX is saying there, at 3,250, 'I'm trying to make sure that anybody who's long of me will be stopped out, therefore I'm going to be going up quite a long way.' Market's try and remove all the people who are right first and then remove all the people who are wrong - the people who are short are now going to be hit there. Basically, you would not have expected ... I don't think any other market created a new low this month, after last month's low. Is that right? The DAX is quite strange in that way.
John: I think the Nasdaq as well, which, as I say, is of concern, as a leading indicator. The Nasdaq and the DAX are doing very similar things. The DAX has much nicer spikes in it than the Nasdaq does. There's not quite the same degree of enthusiasm for buying below 900. You've got two or three closes, I think, down there. There are not those nice spikes which there are on the DAX, so the Nasdaq looks particularly feeble, I think.
Zak: Yes, you can't really see it's rallied at all. You wouldn't really say there's been any rally apart from the May one.
John: On the daily chart, there's just not much happening, really. I mean look at FTSE on a similar daily chart - it's quite a nice move. It stands out. It's a substantial rally.
Zak: Would you describe it as an inverted head-and-shoulders, or ... ?
John: You could do.
Zak: People throw these things at me all the time, saying, 'I'm seeing this,' and, 'I'm seeing that.' It's like reading the tea leaves, really. But I think what I noticed, or what I thought would be a possibility before it happened, was the retest of the 3,900 level, which was just before the final sell-off at 3,625. So I did guess that it would be symmetrical in that way and I was expecting another point, just on this side. We didn't go quite as low as that and I think 3,850 was the first of those three lows.
John: Certainly I'd say there is an inverted head-and-shoulders there and in fact the target is 5,000 because the distance from the head to the neck is 700 and.
Zak: But then why did it spend ...That was one thing, I suppose, one of the things before the FTSE actually fell: I didn't feel that it was necessarily doomed to break 5,000. The nine months it spent above that level - people said, 'It's in a downtrend, it's just going down,' but I actually thought it made a lot of effort not to go down. I think there was a lot of pressure to stay up.
John: It did break to the upside. There certainly was quite a nice break to the upside -
Zak: In February, yes.
John: March?
Zak: Yes.
John: And it then just petered out and then it came back down again. I suppose what we saw was we had a false break to the upside and it couldn't go up, so it went down, as we know.
Zak: Here, I suppose, one of the scenarios is that it'll just go back up to the September low area, a low close of 4,450, something like that and then just peter out from there. I suppose that's what I was ... Now, since we've had the mixture of news and fundamentals and everything else, I'm actually much more ... I've heard of bears getting squeezed, I'm rather more bullish about the FTSE going further than, say, old support becoming new resistance.
John: The key thing, probably, is, 'What are we correcting?' if you like. If this is a bear market correction, which is how I treat it, then I think we may well have seen the low of the first leg down, so we could be correcting the whole thing. Now the whole thing on FTSE was, I think, about 48% down, so it could in fact go above 5,000. It's difficult to know ... It's what, a 3,000-plus fall, isn't it? So 1,000 points back is probably a minimum, if this is the key low. It's interesting, on the S&P, that the low was actually almost exactly 50% of the high - within, I think, 70 cents, so within less than a full point on the S&P, it was 50% retracement and that's where the bounce came in.
Zak: Right. And what about all these Doomsday predictors who say ... most chartists, apart from me (I said 4,700 by the end of the year), most people were saying 3,600 or 3,800. You've got people going for 3,000 and 2,500 and stuff like that. Do you think they'll just suddenly go quiet and they'll just say, 'Well, it's just not quite going to ...'?
John: It's like sticking a tail on a donkey, really. I mean I suppose you guys have to do this and I guess people like to read about it but I think it's too changeable.
Zak: David Linton's big headline-grabbing thing was the head-and-shoulders on the S&P will take it to 400 - the count from equal and opposite ... from 1,200 to 800 then 800 to 400, that sort of thing. Is that something that -
John: Sorry, is that FTSE?
Zak: On the S&P.
John: Oh, the S&P, sorry.
Zak: Is that something which is just postponed, or how do we know whether that's going to come back?
John: What was he saying? Could you just repeat that?
Zak: Basically that, if you look on a three year chart of the S&P, the highs of (I don't know) two years ago or something like that were ... yes ... 1,500 are down to (I think you would probably have to go further back than that on the chart) but basically, something like between 1,500 and 1,00 and then, once 1,00 broke, then we were looking at 500. Something like that. So just a massive head-and-shoulders pattern on the S&P.

John: I think these things, again ... the retracement was almost exactly 50% going down to that low a week or so ago. Yes, sometimes it is, sometimes it isn't. Things only work with that position, unfortunately, otherwise it would be good for us traders - we'd know just what to do but we don't. We work in a world of uncertainty.
Zak: So you think nobody can really do that. You would have to say, 'Well, as long as it's below a certain level, then the chances are that it'll go down to ... ' It's all probability.
John: It's all probability and it's what I call 'Lucky Monkey Syndrome'. You've got 100 analysts and they all say different things. One of them will be right and it won't be because he's any clever than the other ones, it'll just be pure luck. Out of 100 analysts, one of them is bound to be right. Or maybe even two. And people have built very successful careers on this. They've been right once because of the Lucky Monkey Syndrome and they've gone on to make a fortune because they were that lucky monkey on that occasion. That's not to say that what we do is not useful because I think what we do is we try and give a range of probabilities and we look at the opportunities, which is what I do as a trader, which is look for opportunities rather than anything else. But to predict it too far in advance, to an extent, is like trying to call the weather in six months' time. It's just not something you can really do because a lot happens.
Zak: The good thing about that sort of prediction was that people did start talking about charting and did start talking about head-and-shoulders things and just the idea that ... you know, I enjoy it just because the fundamental analysts have taken a total bath, obviously, in the last two or three years and this strange horoscope type profession of being a chartist actually has, I think, had rather more credibility over the last year or six months or something like that, in the sense that chartists were the only people who at least warned that the markets were not looking healthy and also said ... I mean everybody said that a break of 5,000 would mean that the market would fall quite swiftly, so I think that's contributed something to to world of investment and hopefully will mean that, when things get ... if we are in a bull market again, people will still listen to chartists and see that there's another view because I think the whole point of this activity, really, is to give another angle on investment and what you can achieve with it.
John: That's certainly the case. Technical analysis has its place, as do all forms of analysis. It just depends on what's best for the individual trader or analyst. I think it's each to his own. You've got to go with the one that suits you best. One of the funds I'm involved with is a purely mechanical trading system on commodities and that has produced very good returns over the last four years and that's purely a question of putting together various analysis techniques in a sort of black box and it churns out the signals and it's averaged over 40% per annum over the last three and a half years or so.
Zak: And do you think that's because it's a non-human making decisions on investments? Is that one of the things that makes the market much more difficult to trade for anybody doing it manually?
John: There are basically three stages of trading. There's emotional trading, which is what most people do and most people get wiped out (certainly in futures or options) within a year or so. The next stage is the mechanical trading, which takes out the emotion and that's a big step forward. And the third stage is intuitive trading, where you've gone beyond the emotional and you've learnt how to trade intuitively and not emotionally and that can be quite a subtle difference.
Zak: So you don't actually have to think about it, basically.
John: It's like riding a bicycle. When you first start to learn to ride a bicycle, you fall off, totter around. When you know how to do it, you don't think about it, you just do it.
Zak: OK. Well, you'll have to teach me that over the next few months, John, because I'm not quite up to that stage yet. Thank you very much for speaking to me and we'll have a little chat next month.
John: I look forward to it. It's been my pleasure. Thank you.
Zak: Thanks a lot.

John Piper is the publisher of a bi-monthly newsletter, The Technical Trader which costs £98 for an annual subscription and can be ordered from the Zaks-TA.com bookstore.

John is also the author of the best-selling book, The Way to Trade which normally retails for £24.99 but is available for just £21.24 in the Zaks-TA.com bookstore.