Gravity

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The Russell 2000 – like so many indexes – is all the way back up to its 50% retracement level. Let's take a look, below, and take note of the tinted area particularly:

0914-rut

As you can see, the Russell's fall in early October 2008 was very fast. It dropped 25% in just four trading sessions. (Excuse me a moment while I dab a tear from my eye.……..) It cut through the blue tinted area in just a couple of days.

People understand that markets can fall swiftly. In the case of a lot of indexes, there's a very substantial "air pocket" like the one you see tinted here.

What's puzzling to me is that people assume that there will be a Melt Up in such an air pocket, just like there are Melt Downs in areas with little support.

I'm afraid people are applying the laws of physics to the laws of technical analysis/psychology, and I don't think it works that way.

Let's say you were trying to assess how easily a spacecraft could move through the atmosphere. And let's go on to say that, for whatever reason, the area between 10 miles and 15 miles in the atmosphere was an empty vacuum (OK, go with me on this……..)

The spacecraft, pushing hard against all the air for the first ten miles of the journey upward, would fly dramatically faster during that five miles of emptiness. So the emptiness would make going up easier. By the same token, on its return journey to Earth, as it descends to the 15 mile mark, it would likewise move very quickly (and dangerously………..) through the five miles of curious emptiness which my little example has provided.

That works with friction, but it doesn't work with people. The reason markets fall swiftly with there is very little support is because there is a huge mass of people who, when suddenly confronted with a position in the red, want to get the hell out. There simply aren't any owners at those lower levels to prop things up. The Russell, in this example, collapsed swiftly because there had been no buyers at those levels for years, and the overwhelming majority of money was invested at higher prices. People don't like losses, so they sold quickly.

But it doesn't work like that in the other direction. It's not like those who have been buying at lower levels notice the mass of owners at higher prices and make it their life's mission to get prices back up that level for the greater good. Yes, prices MIGHT climb through the air pocket, but they do not do so BECAUSE of the air pocket. I would hasten to add that, once the air pocket is filled, you have a mountain of overhead supply.

Anyway, that's all for me today, I think. I'm just weary of reading about how "there's nothing but air" for the next couple hundred points on the S&P, and thus it is a foregone conclusion that it will be filled. Maybe it will, maybe it won't; but it won't get filled simply based on the fact that there's empty space on the chart.

Phew. I've had enough. I'll see you – and those retail numbers – in the morning.

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