Sunday, February 28, 2010

S&P Update - Signs of Trend Change

Click on Chart to Enlarge

The stock indexes are at a make or break point right now in my mind. They have had the largest fastest decline since the March 09 lows. And now they have rallied back and are consolidating under the 50 day MA. The rally has also been slower than the decline.

So as a brief summary here are some signs of a larger trend change:

1) a decline that is larger and faster than any of several counter trend moves in the prior trend

2) oscillators overbought at lower highs than the last overbought signals

3) the rally attempt has consumed more time than the decline, but has not retraced all of the decline (the rally attempt was weaker)

Also see the notes on the chart for support and resistance, etc. Again, if the Feb lows are taken out, then things could drop fast for a little while to next support near 950 on the S&P. Also, remember that a 40 week cycle low is due in the March-early April time frame.

Now as far as intermarket relations go, I have a suspicion that things may decouple somewhat in the near future. A major issue is that the Fed is trapped in what it can do. On a fundamental level their strategy really is dependent on continuing to create new debt to buy a little more time to cover up insolvency. But the recent bond auctions are very weak - bond buyers know the US financial condition. So the Fed seems to have taken the first step in raising rates to entice bond buyers. And the trip down the rabbit hole begins. You can't tweak one area without it showing up in another.

So we'll see how this unfolds, but a few of my expectations are:

-US dollar index will consolidate or decline for a few weeks before resuming a larger uptrend
-oil and gold will largely trade with stocks (positive correlation)
-bonds prices are on the brink of a major decline (and may go through a large decline at the same time stocks decline)
-select few commodities may track the US dollar (positive correlation) because it seems that borrowed dollars (carry trade) were used to short those commodities already in major bear markets; those commodities had huge bear markets and may have much short-covering ahead

Sunday, February 21, 2010

S&P Update

Click on Chart to Enlarge

I have put several notes on the chart above. Basically the S&P is short-term overbought in an unclear larger trend. As of the end of this week, the hourly technicals were overbought with mild divergence. Also, cumulative intraday TICK readings are showing bearish divergence as of week's end.

The daily chart is at very mild overbought levels that will typically give back gains in a downtrend. If this is a move to new highs, expect it to just chop or explode higher with no multi-day declines. The price move up has retraced to 61.8% of the decline since January. I use that retracement level as a general guideline for whether a move is counter trend or not. If the retracement gets more than 61.8%, then it seems that most often it will end up retracing the whole prior move.

Click on Chart to Enlarge

The chart above is the VIX/VXV ratio which gauges short-term versus longer term volatility expectations. Right now the ratio has pulled back to the lower bollinger band after a sharp spike higher. I have highlighted a couple similar instances over the past couple years. Those both led to further declines over the next few weeks at least.

Part of the reason I am showing this is because it gives a mean reverting way to look at the VIX right now. Another way to look at it is the common method of seeing how far the VIX closes above or below its 10 day average. As of week's end, the VIX is about 15% below its 10 day average. More than 10% is used as a level to expect reversion to the mean. So, both of these suggest the VIX may be due to pop up a bit which would mean the market give should give back some gains almost immediately. Again, if it doesn't, then that would support the idea that the market will be moving to new highs.

Click on Chart to Enlarge

On a side note, in November I went into detail about how the US dollar versus other currencies may unfold moving forward. I noted the potential for a dramatic "short-covering"/carry trade unwinding rally on top of historically super bearish sentiment. Well, that has obviously unfolded since then. Based on how much potential unwinding is still left, I would say that the gains in the USD index are not over. However, Friday was a major news announcement with the FED raising discount rates. The USD index made a big gap up (expected), but then sold off the rest of the day. This is a belt hold candlestick. And these types of things often occur in conjunction with news event. So for daily time frame traders/holders of US dollar bull funds (UUP, EUO, etc), I would suggest that this is an exit point, unless you have a big profit cushion (you got in around Oct/Nov and believe this is a new major trend). I do believe it is most likely a major new trend up in the US dollar, but a few weeks worth of gains can disappear quickly if that is all you have to cushion yourself.

These cross currents make for an interesting and a little confusing situation right now as we have to wonder whether the major intermarket correlations the last couple years will continue to hold or decouple.

Tuesday, February 16, 2010

New Short-Term Trade - SPXU

Short-term is now clearly overbought. So I am going to post a new inverse ETF trade here.

New Trade:

Buy SPXU Wednesday with a market order. I will use the opening price for the entry.

Nearing Short-Term Overbought

Click on Chart to Enlarge

The chart above is an hourly chart of SPY. I have drawn in a triangle type pattern containing the recent sideways action. Triangles can end complex corrections. I am basically putting this there to show from a charting perspective that bulls have benefit of the doubt as long as prices remain above the apex level of that triangle.

On the flip side, notice the hourly RSI is nearly overbought. Also a daily chart 3 period RSI is overbought as well. In a downtrend, the market will typically not have much upside left by this time. Also note the unfilled gap down at 109.80 on SPY. It looks right now that that gap will be filled soon. I will be watching that gap to see if there is a close above that gap or if it becomes resistance.

I'm going to hold off on anything new here. But my preference is still to look to bet against strength for the time being. Unless/until there is a pullback to a higher low with some short-term oversold readings, I'll treat the trend as down.

Thursday, February 11, 2010

New Inverse ETF Trade Order - SPXU

Today's gains have basically put the short-term models in overbought position. Because this is below intermediate moving averages and still in what I believe is most likely to be a larger correction or bear market under development, I am going to post a new bearish ETF trade here.

New Trade Order:

Place a "day only" limit order to buy SPXU at 38.50 for Friday, Feb 12.

Another strategy may be to enter a half-sized position at that limit price and another half-sized position at 37.50 which would fill a recent gap on SPXU.

Quick S&P Update

Click on Chart to Enlarge

The chart above shows that as of today the current correction would be as long in time as the June-July correction. The pink box shows how low this correction would have to go to be 20% bigger than the June-July correction. I have talked about this concept before and that is why I am bringing it up here. The concept is that when a trend is mature, you look for a larger % and more time consuming correction to give you a great clue that the trend has changed. As of now, the current correction still "fits" in with the other corrections since March. But further declines below Friday's low would make it longer and larger and be better evidence of a larger trend change.

Other factors to watch on any continuation of this rally are the 50 and 80 day MA's above current prices (1100-1110). Those were support on the rally and may be resistance if this is a new downtrend. Also, there is an unfilled gap down on SPY at 109.80 which may attract and/or resist price. As of right now, the short-term model is nearing overbought levels and I will almost certainly post a trade if it gets there today or tomorrow.

Monday, February 8, 2010

Quick Tidbit

I have heard Steve Nison (the candlestick king) say that in his research about 60% of the time after a hammer candlestick, the market will come down to the lower half of the lower shadow before truly reversing to the upside. So today's decline just puts the market near the middle of Friday's lower shadow, and may be par for the course. However, I just want to reiterate that the market could be in an extremely weak position if there is a close below Friday's low.

SPXU Limit Filled

The limit order to exit SPXU was hit this morning and should have been filled right around 40.76.

I'll be watching the next couple days to see if the market gets short-term overbought again. As long as it occurs below the last overbought level, I will look to enter another inverse ETF trade.

Sunday, February 7, 2010

SPXU Limit Order

Because of the details in the last post, I am suggesting to place an order to exit SPXU Monday.

New Trade Action:

Place a "day only" limit order to sell SPXU at 40.76 or better.

Saturday, February 6, 2010

General Market Update

Click on Chart to Enlarge

I am going to touch on a few fundamental things that I've hit on quite a bit over the past several months, but it is now starting to become very visible. First off the chart above from The Market Ticker blog shows US revolving credit (credit cards, etc) and non-revolving credit (auto loans, student loans, business loans, etc). Notice that both are pointed down now. Also notice that the revolving credit has exploded and not turned down for 4 decades or more until now.

What I've said in the past is that we are in a fundamentally deflationary economic period right now. And that is because the expansion of credit cannot continue. Now I know that most have been worried more about inflation because the Fed is "printing" money. But as I've said before, that logic involves a great deal of ignorance regarding our monetary system. The amount of "money" in terms of physical bills, is tiny compared to the aggregate value of credit. So trying to look at the "printing" or monetization aspect is like trying to predict the temperature by how many people have light bulbs turned on while disregarding the sun (hmmmm that sounds kind of like the logic of global warming too....). The point to realize is that the credit portion of money is greater by a factor of around 100 or 1000 by what I understand. And deflations are deflations of credit. And people by and large don't understand money as credit/debt, and so historically (and still today) most people will be blindsided by deflations. They just don't understand money as a system and all the component parts.

Also, the chart above does not reflect the mortgage component of credit. The mortgage component is ENORMOUS. So when you factor that in, no one should have too much trouble realizing the situation now.

Also, the debt to GDP ratio this past year was in the 350-400% realm which was last seen at the peak prior to the Great Depression. We have essentially the same monetary system now. And debt and excess credit expansion is still the same drain on production and economic activity now.

Click on Chart to Enlarge

Now the fundamental flip side to this is that as outstanding credit contracts, the relative value of the currency increases. So from that perspective, the US dollar will strengthen in relative value as our US debt declines. Another way to think of this is that when people have debt, what do they need to pay it down? Dollars. Or do they? Well, no they don't. In terms of supply and demand you can think of it in that there is a demand for dollars to pay down the debt. That will increase the value/price of the dollar. However, what actually happens is that credit which was outstanding is now paid down, or in many cases it never will be and may default and disappear, and the total amount of credit is thus diminished.

To complicate the equation though, most major currencies "float" against other currencies. So the value is not just intrinsic to our currency, it also depends on how the dynamics of other currencies strengthen or weaken relative to ours. The chart above makes that abundantly evident. Many European countries are now having debt issues come to the forefront and confidence in the Euro is waning. This has increased the relative value of other countries' currency versus the Euro.

The above chart shows the FXE (Euro ETF) at a support area and it is oversold. The blue boxes show that the move down since the bear flag a few weeks ago, is now equal in percent to the initial move down off the highs. From a qualitative/wave form perspective this may be an ABC zig-zag. Based on all that, I think we are likely to see a rebound pretty soon here. I have also drawn a descending pink channel on that chart. Even in the weakest of rebounds, I would expect the price to rise back to that channel line. So this is not a prediction, but just an expectation.

Click on Chart to Enlarge

This is a daily chart of the S&P 500. The decline is now as large as the June-July decline and took less time, providing initial price confirmation of a trend change. Friday's session created a hammer candlestick on heavy volume. I find this to be a pretty reliable short term reversal pattern. On the flip side though, if the market closes below Friday's low, then the market could really tank for a bit. In most charts I can recall, when a reversal that "should" stick doesn't, the market is very weak and can fall very hard and fast to the next support. So my bias right now is for a short term rebound, but if it fails to hold, then lookout below.

Click on Chart to Enlarge

The McClellan Oscillator shows a bullish divergence on the new lows this past week. So this is another suggestion from breadth that the decline is weakening. As noted on the chart, in the event of a rebound, it will be instructive to watch whether the oscillator spikes back up and moves above zero, or if it forms a more complex overlapping structure at or below zero.

Click on Chart to Enlarge

If we step back and look at the weekly chart, however, we see that we may be in the early stages of a new weekly downtrend/decline. So unless the market strengthens substantially to prove this wrong, then I view the intermediate trend as down now.

Thursday, February 4, 2010

S&P Update

Click on Chart to Enlarge

The current trades are going basically as planned right now. The next step I will be looking to do is to move the stop on DXD to a breakeven point. Depending on what tomorrow brings I may opt for doing the same with SPXU and holding it. As I've noted several times in recent months, I expect the initial move down from the highs to be sharp. I wouldn't expect the highs of the last day or two to be exceeded prior to the break of next support. That is 3-4% lower on the S&P which is about another 10% gain down from today's levels on SPXU.

Now tomorrow is the monthly payroll/jobs data. There is a contrary element to these reports. More weakness will likely be ahead if the market gaps up tomorrow. But there is some decent chance of a rebound if the market gaps down.

The chart above shows boxes around the June-July and the current corrections which are on a log scale. One thing I always say is to look for a larger and faster correction than any prior counter trend move. These often start new trends. By this measure, a move below 1045 in the next trading week will create such a situation. Also when considering that volatility (VIX) was 50% lower on the start of this decline than the June-July decline, such a decline would be very significant.

Also, I still am suggesting that the market may move back down to the June high/July low region in the next month or two.

Click on Chart to Enlarge

The action in gold today appears to me to confirm a new leg down in gold, which does not support the idea that there may be another major inflationary leg up, at least not beginning real soon. However, on a breakdown move like this prices should typically not close back above the breakdown point if the decline is to continue. This is all the more important as it is now oversold on the daily oscillators.

Wednesday, February 3, 2010

New Short-Term Trade

Market is short-term overbought without a reliable bottoming pattern in place.

New Trade:

Buy SPXU with a market order today. Current price is 37.14 which will be the blog entry price.

No other changes.