Monty Hall Market

The market gave investors three doors to choose from this morning (big drop, small drop, no drop), and in best Monty Hall style, teased us by showing one door not to choose at the open (no drop). Investors who were betting on the big drop may have felt confirmed in their position, but an understanding of the The Monty Hall Problem would have clarified that the odds favored the other door. 

This problem is well studied but little understood. In the game, behind one door is a cool prize, and behind the others is a goat or similar joke prize. Contestants can choose one of three doors with no information, creating odds of 1/3 for any choice. Then the game show host opens one of the two unchosen doors to show a goat, and asks the contestant if they would like to change their choice. Oddly enough, most contestants hang onto their initial choice, when switching is a 2:1 favorite. 

Many people - including PhD's in stats - get confused by this. They think that after the goat has been shown, the odds shift to 50:50 as to which door the prize is behind, so why not just stick with the first choice, stubbornly? Not so: before the pick, the odds the prize was in the other doors was 2/3, and after the goat is shown, the odds are still 2/3 - but now in only one other door. The 50:50 odds would have been correct of Monty Hall were to pick the other door randomly, revealing the prize 1/3 of the time; but the host has superior information, and only picks the goat. 

Being stubborn as a goat makes you the goat!

After the market broke below Sp1170, the bottom of the trading range "plateau", it was as if Monty had opened one of the doors to show the goat was behind all the wave counts that meant a continued correction. The choice was down, but which door? Big or small drop? The market trended down on lessening breadth and volume, and began to come back almost immediately That was the "tell" to watch, according to yesterday's STU. 

Today we finished a little wave v to end a wave 1 down from May13. Today's special STU adds that we hit the lower trendline of the drop and bounced, confirmation of the pattern. This chart from EWTrends captures the action and gives targets for this wave 2, which normally should run at least 50% back up (Sp1107), and may go 62% (Sp1122):

 

Fascinating to me is how quickly some wavers now count the whole Flash Crash and after as but a correction in a continuing Hope Rally, an ABC flat that just ended this morning. By breaking the Feb5 level (Sp1045) and the February Bifurcation Point at Sp1063 on Feb16 (which marked the moment when the market shot back up above the congestion around the bottom), the market has confirmed a longer and deeper correction than that. 

This wave 2 is a great setup to take a short position, and may come quickly - the end of this week or early next. There is a gap way back at 1115 which will likely be closed, so the bet is for a robust bounce back to the Sp1120 area. 

Comments

[Paul]

The current pattern is similar to what we saw back in 07. This decline is an ABC pattern. I say we make one last high in the next couple months.

http://i214.photobucket.com/albums/cc152/asusenior/spx2.png

[Roger D.]

Hi Mark,

http://www.screencast.com/users/parisgnome/folders/Default/media/24dcddcd-0722-41df-ab97-3879bf9c8902

Roger D.

[marketman]

Roger,

What is it that you are posting?
It has absolutely nothing to do with Yelnick's post, let alone the post by the previous poster.

[Roger D.]

Marketman I don't like you, SSTFU

http://www.screencast.com/users/parisgnome/folders/Default/media/d537f5f2-89ee-44fb-9eff-a8f035909d09

[trendlines]

Hi yelnick,

Here's my view for the S&P500:
http://trendlines618.blogspot.com/2010/05/s-short-term-rebound-towards-1150.html

[Molecool]

With all due respect, Mr Y - I was expecting a correction in the near future and let the door open for a final drop. So today's tape did not surprise me at all.

[Hank Wernicki]

Monday 31st 2010 = 1930

[robert]

Sorry if this is considered OT but I have been reading about gold topping "late in May or early in June." As gold and silver seem to be rising in synch with the market since yesterday (and seem to be generally up more than down, in sympathy with equities during this decline) maybe there is something coincident in this equities rebound and gold completing a top (interim or otherwise). I still don't understand why gold and silver are going up with stocks though. If the metals are supposed to be a safe haven against systemic risk why are they rising in tandem with risk assets? Are investors buying precious metals because they believe in an inflationary outcome or the end of the world? A rising stock/commodity complex would not signal deflation or the end of the world so I have trouble seeing the metals current price action as representing fear of deflation or financial Armageddon.

Nothing against gold but I would be more confident about its price direction and value if I better understood why it is being acquired with such apparent enthusiasm at levels which, call me heretical or naive, seem rather toppy.

[Semaj]

Y,

Enjoy your posts, read your blog first every morning.

I added to my goat door before the 10:30 Rydex cutoff.

[?]

Hank,

Too bad Monday 31st 2010 is Memorial Day and the US cash equity markets will be closed....

[Would You Like Fries with that Shake???]

SSTFU = So Shut The F--k Up?

[Yodaman]

When is one day equal to one year?

When Hank says so...

Monday 31st 2010 = 1930

[Mamma Boom Boom]

Hank, that's the 2nd time you've made that prediction. I respect your work, but I really hope your wrong. Because I am solidly on a buy signal, good for several months. While the May 6th low did not hold, it's still a classic bottoming process. I have not backed the truck up, yet, but have been nibbling.

[Molecool]

Mamma: I'm curious - what in this market is giving you a buy signal?

[anonymous]

S&P now at 1090 and no one here can get themselves to play the long side. Now watch everyone pin their hopes on a Wave ii retracement, shorting it all the way up. Meanwhile, stocks have had a huge swing move since yesterday's low, and the 2PM Eastern low. Classic.

[Mamma Boom Boom]

>Mamma: I'm curious - what in this market is giving you a buy signal?<

Late last week I told you that I had 4 solid buy signals. One of those has been reinforced since then. I don't divulge those, since they are part of my proprietary technical program, but they are nothing to sneeze at. As I said twice, this environment is very similar to Aug 07.

[Mamma Boom Boom]

On the 'very short term' we're a little over-cooked. But that should right itself fairly quickly. At this point, I want to be long going into the weekend.

[Michael]

CLF still running strong.
Now about 6 points off yesterday's low.
:)

[Michael]

Make that 8 points off yesterday's low.
ACI, BTU, RIG, continue to rally.
Anyone trading the energy names?

[GLN]

You are kidding yourself my friend.
There are NO TRADERS on this blog.

[Pointless waste of time]

You are kidding yourself my friend.
There are NO TRADERS on this blog.

I think the first million times this was discussed were sufficient, no?

[Mr. Panic]

Stock market is wasting all this beautiful breadth on a flat day. Of course, by the end of the day there might not be any more beautiful positive breadth.

P.S. That really is an ugly five waves down count by most of the e-wavers. Waves 1 3 5 totally out of proportion to each other.

[Account Deleted]

DOW JONES INVERTED HEAD AND SHOULDERS PATTERN IN DAILY CHART

http://niftychartsandpatterns.blogspot.com/2010/05/dow-jones-inverted-head-and-shoulders.html

Thank you

[waver]

Looks like some asset-allocation ended with the bond close at 3PM.

[waver]

Mr. Panic,

There is an entire market of stocks and sectors that couldn't care less what the market breadth is. What are you trading right now?

[Hank Wernicki]

Thursday :

http://www.elliottfractals.com/Fractal___closing_5_26_10_email-1605867_24.jpg

Hank

[Mr. Panic]

I am trading NRP and taking about a 10k hit since I followed you in your recommendation.

[Steven_737]

Hank, are you projecting to 970~980 ?

[da bear]

Mr. Panic,

I am counting the heart of the decline that includes the May 6th panic crash as the wave 3. the bounce that filled the gap was the wave 4. So either we are still in wave 5 down or wave 5 is over.

The major, panicky portion of all the famous crashes are five's.

da bear

[Account Deleted]

S & P 500 30 MINUTES CHART TRIANGLE

http://niftychartsandpatterns.blogspot.com/2010/05/s-30-minutes-triangle.html

Thank you

[Mamma Boom Boom]

>On the 'very short term' we're a little over-cooked. But that should right itself fairly quickly.<

About 3:30 that junk-yard dog came around the corner and bit some of those young boys in the ass.

[waver]

"I am trading NRP and taking about a 10k hit since I followed you in your recommendation."

Posted by: Mr. Panic | Wednesday, May 26, 2010 at 12:36 PM

You obviously have no idea what you are doing or talking about.
And now that you have made the comment that you have, it is CLEAR that you are nothing but yet another college kid playing on the Internet, fantasizing about being something more than a "paper-trader".

NRP is trading $21.30 a few minutes before the close.
Am still profitable on the core investment.
But leave it to you to claim otherwise.

[Pointless waste of time]

Yelnick,

For the love of God, can you set up a section where Mr. "REAL TRADER" can post to himself!!!!!!!???????????

PLEASE, I can't f*cking take it any more.

[DG's Dad]

My apologies.
My "paper-trading" son has escaped Bellevue Psychiatric Hospital once again.
If you have seen him, please notify the authorities.

[Roger D.]

As I stated at yesterdays close....

"Some charts show this as a c up of a ABC. Last chance to get out, this relief rally had the same charachter of previous rallies, will be retraced starting sometime tomorrow. Watch out below."

Sometimes I'm glad I trade for Real,lol.

Roger D.

[Papertraders-R-us]

What WAVE are we in???
That is waaaaaay more important than trying to make money.

[GlennLoserNeely]

"PLEASE, I can't f*cking take it any more."

Posted by: Pointless waste of time | Wednesday, May 26, 2010 at 01:00 PM

Then leave.
No one is forcing you to come to this blog.

[NeelytheGuru]

Great Call Roger..

[Sad to see a good blog succumb to the dregs of society]

Yelnick,

Your comments section has become ridiculous. Everything is "paper-trader" this and "paper-trader" that.

Meanwhile, Mr. REAL TRADER has NEVER ONCE provided ANY evidence that he's anything BUT a "paper-trader".

[Please Teach Me How To Make MOney]

As I stated at yesterdays close....

"Some charts show this as a c up of a ABC. Last chance to get out, this relief rally had the same charachter of previous rallies, will be retraced starting sometime tomorrow. Watch out below."

Sometimes I'm glad I trade for Real,lol.

Roger D.

Roger, can I subscribe to your newsletter???
How much is it? Do you accept PayPal?

I just love the way that you "pat yourself on the back" here in anonymous internet land.
Too bad they still don't have Wall Street Week with Louis Rukeyser. You are the BEST!!!

[I'll leave when I damn well please, douchebag]

Then leave.
No one is forcing you to come to this blog.

Because I'd rather see Yelnick boot you.

[DG's Dad]

DG is that you???
Please come out from hiding my Son.
I'm sorry that your new job at Taco Bell did not last.
Your Mom and I are very worried about your well being.
Please come home.

[Julie]

When was the last time a bear market got underway with both the A/D line and the new highs confirming at the price peak? The answer is never.

The breadth answer is once in 1976. These are not the kind of odds bears should be betting against.

When was the last time a bear market got underway with both the A/D line and the new highs confirming at the price peak? The answer is:

.....never

[Friend of DG]

DG's Dad,

DG wants to know where he can meet you in person and thank you personally for all the things you've done for him. He'd LOVE to talk this all out face-to-face and not like strangers behind computer screens.

He told me to tell you that if you don't tell him, it's probably because you're just a "college-kid paper-trader" who doesn't want to be found out. I'm not sure what that means, but he said you'd know.

[Pot. Kettle. Black.]

I just love the way that you "pat yourself on the back" here in anonymous internet land.

Wait, are you saying that only you should be allowed to "pat yourself on the back", which you do EVERY F-ING TIME an energy stock you CLAIM (no evidence, of course) to have bought is up a penny?

[GlennLoserNeely Papertraders-R-us DG's Dad Pointless waste of time GLNWould You Like Fries with that Shake???]

My mom just kicked me out of her basement. Anyone have a cardboard box they can spare?

[Roger D.]

"Roger, can I subscribe to your newsletter???
How much is it? Do you accept PayPal?"

Like the high maintenance bimbette says...

You can't afford me lol

Roger D.

[yelnick]

Sad to see - we miss DG

[upstart]

Hi Yelnick,

I believe you're incorrect about the Monte Hall problem. Once you reveal new information, that the probability of door 3 having a goat is 100%, you pose a new problem with different initial conditions. Then you simply have 2 doors, a prize, and a goat; and the probabilities are simply 50:50.

Regards,
upstart

[Guido]

Like the high maintenance bimbette says...

You can't afford me lol

Yo, Is this a reference to Boom Boom?

With those gazongas, it's probably true so fugetaboutit...