Short Term Chop

I sincerely hope everybody had a wonderful holiday. Mine was full of family and good times. I am well on the way to thoroughly spoiling my grandson. I know what Gampas are for!

So for trading, we’re still inside the pennant. Here’s the SPY



I expect the pennant to complete. No new news to break us in either direction, but I feel that when we do break, it will be a significant tradable trend.

What I’m doing is watching the very short term trends and playing very small. The last time we got this kind of chop, I didn’t adjust my plays, and ended up losing money. So this time I’ll be smarter and just hold back, getting out overnight.

Today I expect a move up, the job numbers are likely to be “better than expected”, so I think we’ll get a partial retrace, but that’s likely to be a head-fake. So I’ll play a little toward the upside and then get out.

Crawling Into Resistance: Another Pennant.

Well, we saw what happened the last pennant we got.



To me, this one looks like the breakout will be to the upside. But that’s technicals. The problem is the dollar and it’s path. As the Euro weakens, the dollar goes up and our market tempers. I don’t think we’ll be hearing anything from the Eurozone PMs in the next week or so, so I kind of expect the market to wiggle around inside the pennant.

We did hear that the ECB wants Greek bondholders to take a bigger haircut than 50%, but the haircut is “voluntary”. I wonder how voluntary that is, because if a bank holds Greek bonds and refuses the haircut, the ECB might just not put them on the “Free Money” list. If the bank’s not real solid with not much Italian and greek bonds, they may refuse the haircut. But I think banks are hedging their bets WRT eurozone bond values.

Here’s one of my favorite indicators, the 3LB of the number of stocks above the 50 day MA. As you can see, we’re still stuck in that vertical bar which we hit as a result of the Central Banks’ statement of the obvious. But it’s higher than midpoint right now at 322.



I hate those huge moves. It throws all my indicators out of whack and I have to read the headlines. Today I learned not to steal gas from pipelines.


I actually wrote some code again. I’ve almost forgotten how to C. Anyway, I automated my herd’s relative strength versus the S&P, which saves me about 2 hours’ time. For the move up, here’s the latest herds report:


DIG : 7%
TAN: 5% (believe it or not)
CUZ XHB XES KRE ITB KBE XOP USO 3% (yes I know CUZ isn’t a true herd)
OIH SMH KCE 2%

SKF –11%
IGV – 5%
SLV –4%
GDX –3% (Ron Paul’s really taking this one on the chin)
IAU GLD IYZ –2%


Anyway, have a great Christmas season and new year.

Tuesday Open Thread

A Warm Summer Day

Break the Resistance line?

It's a foregone conclusion.

The Euro will destruct. The path to destruction is not a foregone conclusion: could be a new treaty where members are kicked out, could be a dissolution, could be a reformation which might include Turkey. "Will See". In any case, it will take time, and the Eurozone will be in our sights for awhile on the psychological side of the market because any solution will take a long time. Same as with our debt resolution.

In the short term, EuroBanks are in serious liquidity trouble, and will sell assets. Will they sell price-depressed assets? Or valuable ones? Like Gold? Is that why gold’s falling? Again, that's not clear but in order to re-capitalize, they will have to raise capital on their own. That model is formed by Merkle. So during this liquidity problem I think we'll see the U$D will strengthen, and the Euro will grow weaker. Putting pressure down on the market.

I will trade this by buying SKF on pullbacks. The reasoning behind this is that US banks are swapping assets with foreign banks, and we know what’s happening in Europe.

Here’s the Stockcharts.com $SPYA50, the number of stocks trading above their 50 day MA.



Notice the chart is at a high, but in actuality, the number is lower than the chart indicates because of the market’s volatility. The current value is dislpayed in the middle and is 245. Just slightly less than half. So we’re seeing yet another turnaround. It’s so fast, the 3LB can’t keep up. And because we’re in the middle, there’s more room to go downward.

Finally, here’s the SPY. I’ve drawn a retracement, (ignoring the bear trap) and it’s interesting how many times we’ve hit the line labeled support/resistance (see the red lines), and how it aligns with the 38% fibo retracement of our latest big move.



So technically speaking if we see a break of this support/resistance line, and we see some significant rise in volume, we could easily have a bear flag formation, and some capitulation down to WolfStreet’s 120 or lower. But volume is the key. Volume will tell us there’s more short money entering. I said before I didn’t think we’d see 120 or below. I still believe that, and will be waiting the next Policy Manager’s statement to halt the market downturn. However, if we don’t get a PM statement soon, well it’s to 120 and below we go.

The next statement may come from S&P. I heard that a French sov debt downgrade is imminent.

Resistance

Thoughts for a Saturday Morning

Almost every trade lately has either broken even or lost money. It seems when I get a setup, the trade goes in my favor but suddenly the market reverses and I get stopped out.

Maybe my stops are too tight because of my fear of headlines. The headlines now don't affect sectors or stocks, they affect the entire market because of the newsreaders’ tie to the computer algos. I'm going to analyze my last few trades, but I can't archive the newsfeed so it's hard to coordinate the market moves with the headlines for analysis purposes.

For awhile there I was doing well with the ETF's, but not the last 1.5 weeks.

I'm still looking for the maybe S&P 1280-1300 at Christmas time, because of the light volume and traders on vacation. But after the trading desks get repopulated when the holidays are over, I agree with a pullback. We have only 10 days until Christmas, so it’s not inconceivable we can stay right around 124-126 and chop the heck out of my setups/trades.

Wolfstreet said: “* S&P500 facing down trendline resistance around 1260/1270, as is daily RSI.
* Daily stochastics show overbuying

”So my bet is we go lower from here, to revisit the 1200.”

In support of this, there is a triple top on the 60 minute chart at 1269, with some fairly significant volume. The volume is low, but for these tops, it’s higher than the usual low.

If the pullback goes all the way to 1200, a) that'll be good for me, finally a trend I can follow, and b)I'll probably be looking for a 130 in spring as opposed to the 140.

If it goes to the 130 in spring, that will be low enough and give time enough for a pullback then rally higher into Nov 8.

Here’s the 60 minute chart, witth the regression channel drawn in by TDAmeritrade’s algo. The vertical bars are drawn at the 60 minute price peaks. Follow them down to the volume line, and you’ll see larger than usual volume there. Chart courtesy of TDAmeritrade Strategy Desk.



My opinion is that we won’t see 1200, not because the chart doesn’t support it, but the PMs will release news headlines on the start of any significant drop, causing the autonewsreaders to feed the algocomputers a positive signal, and poof up we go.

This may be our new Plunger team. I think the PM's got this one figured out, and they don't even have to use the Fed's cash or loans to banks to make it happen.

Yet Another Herds Report

Bloomberg reported today that healthcare is on the move up.

They mis-spoke.

Healthcare is down compared to the S&P by 2% or so. I think maybe the market reporters easily confuse instantaneous performance with where you ought to be putting your money.

Last week, I didn’t see much sector rotation going on. All the reports I've read is that the Beta (individuals tracking the market) is very high. The last herds report show this, that only 2 of the 60 or so herds I follow were over 3% different from the S&P. One standard deviation is quite small, at a little less than 1%.. There are only 5 of my 60 herds which are above two standard deviations for the herds that are better than S&P, and only 3 of my 60 herds which are above two standard deviations for the herds that are worse than S&P..(standard deviation is always positive, so that really means that only 3 of my herds are under the S&P by 2 or more SD’s).

This week is notably different. The SD of advances is 1.7%, and decliners is 1.3%. and there’s lots more herds that fall int the greater than 2 SD’s. Here’s the list; all the caveats are still in place, meaning this is the cumulative 5-day performance compared to the S&P 500

First the top performers:
DIG 6.80% Falling
SLX 5.60% rising
XME 4.80% Flat
$BKX 4.00% rising
$HGX.X 3.90% rising
XES 3.80% Flat
KCE 3.70% rising
XLF 3.70% rising
KOL 3.60% flat
XHB 3.60% Flat
UCC 3.30% rising
KRE 3.10% rising
KBE 3.00% rising
XOP 2.90% Falling
$DJTFVS 2.80% Rising
IAK 2.50% rising
IGV 1.90% rising

Next the worst of the bunch:
VHT -1.90% Falling
SLV -2.00% flat
XLV -2.10% Falling
IBB -2.30% Flat
RTH -2.30% Falling
UTH -2.50% Flat
XLP -2.60% Flat
XLU -2.60% Flat
BBH -2.70% Flat
$DJTFOB -3.10% Falling
USO -4.00% Falling
GLD -4.40% Flat
DBA -5.50% Flat



I’ve been trading long DIG and XME ever since the Internet Monday, (I forget what it’s called exactly) and made some good money only because of the big Tuesday jump. Nothing since then, I made $2 today. Cup o’noodles tonite.

Here's the Stockcharts.com SPXA50. As you can see, it's nearing the top (on the daily chart). Because of the volatility, the weekly chart hasn't turned around yet, but as you can see, we have completed the turnaround. Now we have to see how long we go up up and away!

The Poo Hits the Fan

I was asked my opinion of the potential of a 2000 point rally in the DOW. I think it’s possible, and here’s why

First, I asked some financial people who are lots smarter than me. They explained the liquidity provisions put into place by the central banks. This liquidity puts the US in some short-term jeopardy, but likely removes a significant amount of long-term harm. Basically, no one wants Euros now. One person told me that in Israel, they are trading Euros for pennies on the dollar, and no one is sure what value it will have. In the short term, therefore, the Euro has no value.

You can’t get yourself out of debt if you have no value. Also if you’re in recession because you have no value, you can’t exit that either. And Eurozone recession does definitely spill over to the US. Like it or not.

So the swaps that are arranged allow the Euro to have some basic value, defined by the swap dollar price. This lets banks trade valueless euros for valued dollars, and lets them continue to finance the Eurozone debt. Short term, we hold valueless Euros, and have exposure should the Euro get dissolved.

The Euro won’t get dissolved. Germany and France won’t let it. Germany and France will permit some really troubled countries to exit the Euro so they can inflate and pay off their debt. They won’t be allowed to exit the Euro until they put austerity measures in place. Once they have their locusts under control they will be permitted to exit.

Long term, the Euro will get its value back. The Euros we hold after the swaps with the Fed will have some value. IMHO the value will be less than the swap price, but the Fed intends to continue to devalue the dollar, so the effect may not be too large.

So if you’ve read Peter’s post from Thanksgiving, you could expect to see a significant price drop in the market. That’s if all things are held constant. The liquidity injection threw poo at the fan, and from this chart, you can see the pattern has been violated to the upside:



Basically, this week’s close is above the MA, or if you want to draw the regression channel, it violates the latest downward channel.

Here’s my chart on the short-term fibo levels. I expect to see a pullback to around 122.50 before we start to move up again. I doubt you’ll see a 120.10, but of course, Rock’s been wrong before..



I’m sorry the colors aren’t so vivid, but I think it’s clear enough so you get the idea. We’ve violated the upchannel today (price broke below the moving average). So short term, Rock’s bearish, but long term, I’m full of bull. The only question in my mind is how long it’s going to take for the increase in liquidity in Eurozone to have an effect. That will determine how much of a retracement we will see.

Just for fun, I took the 60 minute chart and removed all the overnight pops. See if you can guess where the support line falls for a pullback on this chart:



So now we have a feeling of several aspects of the market: The PM’s won’t allow the Euro to fail (structurals), the economy is getting better and we’ve taken steps to stop the recession in Europe (psychologicals), earnings have never been better and the SPY is trading around 12/1, well below it’s historical average (fundamentals), so that leaves only the technicals. Well, here’s the chart. Read it carefully.



First note the relatively equally spaced vertical lines. Notice the last one is around June/July 2012. Notice that each relatively evenly spaced line defines an upcycle or a downcycle. Isn’t it interesting that they are so evenly spaced?

Second, notice the regression channel. Note the upper line on the channel comes back to the highest volume point in 2008.

Third notice the red line, where it crosses the center of the regression channel. To make a 2000 point run, we need to get only slightly higher than the center of that regression channel. Target time: June/July 2012.

Yes, I feel we could see a 2000 point run.

Depending on what Timmy and the boys cook up, as you can see by the channel it could go higher. I’m sure they’ll try to move that last black vertical line to the right, say to November 9 or so……

So it comes as no surprise that Timmy will attend the Eurozone conference next week. China’s not coming. Interesting.

All charts are courtesy of TDAmeritrade's StrategyDesk.