Range bound or Breakout

Here's the chart. See the falling volume and the weakness in the MFI and Stochastic RSI. I'm looking for a Turn-around Tuesday (I think today's close will be higher than open, but I still lost money).



Falling volume like this can mean that the price isn't supportable. Meaning price should go lower.

It was pointed out to me that we could play the SPY as though it were in an upchannel like this:



If this is the play, it shows great weakness having broken the channel on the downside on extremely light and decreasing volume. In which case, it seems we should go lower and perhaps look for support points.

I don't think the second scenario will play out. There's too little volume and too many plungers. IMHO it's likely we will stay range bound until, as Mutt says, the market vomits and we go one way or another.

Watchlist for Upward Bias

For my weekly work, I use a prescreener which eliminates a lot of possibilities for me because I don't trust them. I screen for stocks >$12 and <$120. I screen for a minimum of 500000 shares traded yesterday, and a minimum of 2M shares traded last week. This gives me confidence that the results of these screeners are less likely to be moved by HFT's or somebody with deep pockets. (this is not always true, but seems mostly true).

Within this set of constraints, here are the stocks that have pulled back the most the last several days:


CAVM DECK GT IOC

OPEN AKRX NAV SKX DMND BCO

VNO MOH BX

AFL ALKS AMLN BBG CEG CNX CTRP CY DFT ESI EW EXPE FCN FSLR GFI GMCR GT ICON IRM MAKO NRGY OPEN TZOO UNG VALE VALE.P VVUS WLP WSM

ACI ANR ATI AYR BAK BAS CAH CCJ CMC CROX DE DELL DWA ERF FCX GG GILD GNTX GTI HPQ ILMN IOC JCP LIFE POT PPO QCOR RIMM RRD SIMO SLW STLD TDS TIE VCI WLP


Here's the strongest stocks,
(from Friday, the list of the best revenue growth: AAPL AMZN QCOM PCLN JOY VTR)

ACC BIG CINF COST CPN DISH FDO JAH ORLY OVTI RGC VRSK

and somewhat less strength:

ITB ARUN ANN TSO SPR ATHN KRO RYL DISH CPN ARO GTLS OC ZUMZ MTH AEO CRR SCSS VLO JAH LEN CLNE DHI INSP OVTI ITMN VHC JOE


Now, do we believe the strongest stocks will continue their run, or do we believe the weakest stocks will turn around and pop the most?

Here's the trend: The market is advancing, but my favorite leading indicator is down.



In all the other times in the near-term past when the SPXA50 was headed down, the market was also falling. Not this time. This time it looks like time is doing the consolidation, and we've been in the 134-138 range since Feb 10.

I think we have a market that's wound tighter than a $3 watch. I will be playing the long side, staying in overnight with partial positions. Initially, I will be playing strength, and watching the weakness for signs of a confirmed turn-around, then move into those.

I don't anticipate any structural changes, but one never knows.

Silver and dollar

Mutt started me looking at silver. Here's a couple of charts that are interesting.



Both charts are the same time scale. You can pretty much see that UUP trend is the inverse of AGQ, a silver ETF. Right now, the Bernank wants to keep the dollar moving weaker, but additional liquidity in the Eurozone is trying to thwart these plans. If China adds liquidity as well, the Bucky is likely to grow stronger, hence pushing silver lower.

What's the probability that will happen?

Here's another chart. It's the daily AGQ. I think you can see a H&S forming, with the peak volume at the head.



The last H&S I followed didn't complete, and resolved to the upside. My thinking is the dollar will continue it's downward trend, and this chart will also not complete, resolving to the upside. That's based on my previous observation that the Bernank knows how to push the dollar down.

Overnight Market Pops and Snappers

The SEC keeps a list of authorized exchanges. See
http://www.sec.gov/divisions/marketreg/mrexchanges.shtml

This is not a complete list, it is simply a list of exchanges administered by and under the set of rules provided by the SEC.

I looked into the NSX. I can not find how or when they move their data into what Investopedia calls the "consolidated tape". For NYSE and NASDAQ, it's easy because nobody lists their stock on both. But NSX lists stocks concurrently listed on NYSE and NASDAQ.

Looking at NSX volume, their volume yesterday was about 14M shares NYSE, and 9M shares NASDAQ.

It seems that there's a lot of trading activity at the end of the day. That's when the ETF's make their trades, and when the broker-to-broker trades are settled. I suspect that's when the other exchanges' trades get rolled up, but I haven't confirmed that suspicion. The rollup function is provided by clearing and settlement companies, and after they are all done, they report the price for the next trading activity. For a deeper understanding, see

http://www.tradersmagazine.com/news/102263-1.html

This article talks about the settlement activity, and that NASDAQ would be setting up their own settlement operation.

So at settlement time, the price may change. Dramatically.

Suppose broker A has a buy order of stock that it doesn't have. Broker A goes to the settlement house to get the stock. The settlement house may have to go to broker B who has the stock. Broker B may decide that the stock is worth more than the closing price, and transfers it to the settlement house, who sends it off to broker A at the new, higher price. The consolidated tape then reflects the higher price. There is no volume registered for this trade, because the trade volume was already reported during the day. This is just a settlement of that volume.

Now, how does that affect your broker, TDAmeritrade, for example? You bought the stock at a low price during the day, and overnight it pops up. The brokerage house (TDAmeritrade) has to come up with the money to settle the stock, so it's out the delta from when you bought it to the settlement price.

So now you can see how "snappers" happen. A stock who's relative strength compared to the index may be negative, but somebody thinks it's a deal and buys a lot of shares. Overnight, it pops up because of the settlement. In the morning, we all see the pop, and know this one is really weak, so we may short the stock because overnight nothing changed, it's still weak. Maybe it will become strong this quarter or maybe not. But the stock then trades lower, usually back to it's yesterday's trading point. If it's relative strength is negative, it will usually end up being lower than the delta of the index move.

If there's enough "snappers", then the market index "pops".

Don't worry about TDAmeritrade. There will be a Broker C going back to TDA to buy a stock, and TDA will raise the price so it covers it's original loss on your stock. I think it's a zero-sum game, because brokers continue to be in business.

An interesting study would be to screen for stocks that traded over 10X their average daily volume, and see what happens to price overnight.

Just so you guys don't get chart-starved, here's my chart I'm watching:



As you can see, my favorite leading indicator is looking down. Sometimes being oversold is resolved by time, and sometimes it's price. Which one will this be?

Market Forces

Remember the chart I put up that showed we were heading for a 2000 point gain in the DOW (DIA)? And remember the direction change caused by the structural movement of the unified central banks?

That shows the importance of structurals. Anybody trying to time the cycles or count inflection points will be unable to rely on the periodicity of the structural inputs from governments (eg “thou shalt take a bond haircut”) and central banks (eg LTRO’s, TARPs, simultaneous announcements), and the market direction caused by them. That’s why DeMark blew his prediction.

Remember, it’s hard to short a market where the structurals keep popping it higher. That may also be why we see substantially lower volumes, with no one shorting and covering because the overwhelming structural pressure is up.

I decided to look at the SPY from this viewpoint. Here it is:


It’s hard to see, but there’s a black line centered in the ranges, and vertical on a pop to the new range.

As you can see, we operate in a range for a number of days, then Pop to a new range. For the last month or so, we’ve operated in 3 ranges, of 11 days, 9 days and (so far) 6 days. So it appears as though we’re nearing the end of this day-cycle. Looks like a couple more days in this range before we get a pop. Let’s see, what’s happening in a couple of days in the Structurals? Why, the next LTRO, of course.

And we all know why this is happening, right? It’s simply a move by the financial community to take a more firm hold over the actions and direction of governments. Look at Greece: they are ceding their sovereignty in return for money to keep their government jobs. This is an interesting trend. Future governmental financial policy will be contractionary. How will the financial community best make money in that environment? Answer this question correctly, and you will make a lot of money.

So how will I trade this market? Well, as I said, the financial community wants the Bucky to devalue, so I moved a lot of money into the RMB. It’s made me quite a lot since I started this activity. But what about risk assets? As I said above, the market pressure is up. So I will buy dips and sell blips.

But also, I want to look at the depressed sectors. Here are a few charts (weekly) of my herds list that are depressed: Now, I’m not saying these are good investments, and will likely rise. I think we have to answer the above question: how will the financial sector make money in a governmental contractionary environment?

I removed the charts. If anybody wants them back, let me know.

But here's a chart. It's the one I referred to in the top paragraph. It's amazing, we're absolutely on-track.

15 Minute H&S

I'll be interested to see where this goes.

Good volume at the head. Would like to see increasing volume on the right shoulder, but don't see it yet.

Triparty Repo Market is Failing

While I've been resting, I am doing some research on our financial system, and how MF Global failed. So I thought I’d put together a post about that for your perusal, as we see what the market brings us today.

MF Global’s failure is basically due to risk-taking by lenders (typically banks) on the permitted re-lending of borrowed assets. And the market in which this is done is failing, according to the Fed. In a lead article by Michael S Derby, Dow Jones Newswires, you will find some of the quoted excerpts below. Some are my thoughts.

First, read an eye-opening article about the Repo construct.

http://soberlook.com/2012/02/increase-in-triparty-repo-usage-and.html

Now we understand why the FED buys RMBS's. A bank-owned RMBS can be relent to other banks (less the prescribed haircut) and therefore it's worth becomes greater, due to the relending leverage. If the mortgage backing the RMBS fails, this leverage comes crashing down.

Remember, the Fed has bought RMBSs and will hold them to maturity (or until the troubled asset packed into the security is repurchased by leveraged buyout (Private Equity) or by foreclosure). If the income from the security is not adequate to pay the interest, the Fed can simply issue liquidity (print money) to pay the interest, keeping the system afloat.

In the long run, the Fed can be the winner, because the RMBS will mature, all the properties under the RMBS will mature, the interest will be paid. And there’s the reason for inflation, it’s hoped that with enough inflation, (2% minimum per year) there will be enough appreciation so the RMBS is not retired at 0 worth, but at full value worth. (That's (simply) why Bernank said deflation is our greatest enemy.

If you’ve got deep enough pockets, and a long enough time, and the ability to create inflation, you will be the winner. The Fed has all these. Albeit some trouble on inflation….

Today, the NY Fed said the triparty repo market is failing.

Because fixing RMBSs doesn’t fix the problem. The problem is that originally, only Treasuries were “Repo-able”. But that didn’t fit bank’s requirements for profits, so regulators (not the law) changed the rules so that basically any AAA rated security (or other not so high rated securities) can be repo-ed. As long as you can find a buyer, you can repo it. A repo is simply a financial product created to make money. In other words, it makes money out of money. It does not create wealth, it creates liquidity. Liquidity (like debt) can create the appearance of wealth. But true wealth only comes from productivity funded by capital. There’s no productivity in a repo.

So here’s the problem: the Banksters have created liquidity, funded by the 0% interest rate they can get from the Fed, and profits of money which they dole out as bonuses to their salesmen selling these created repos on their trading desks. These Wall Street guys are simply used car salesmen, with an Earl Scheib repainted rustbucket they put lipstick on and sell.

Today, Mr. Derby’s article said that “At issue is the state of the triparty repo market….And because the market is dominated by short-term activity, a loss of confidence in a particular firm can kill its access to credit and potentially kill the institution, which can, in turn, create problems for the broader functioning of financial markets…...The effort to repair the market came to a head Wednesday with the release of a report by the Tri-Party Repo Infrastructure Reform Task Force, a private industry group operating with the support of the New York Fed. The report was to offer the group's final recommendations,” but the NY Fed said “ … the amount of intraday credit provided by clearing banks has not yet been meaningfully reduced, and therefore, the systemic risk associated with this market remains unchanged,"

Simply put, there are too many Earl Scheib rustbuckets, too few Used car salesmen, and even fewer tire-kickers.

Mr. Derby continues “As a result, the bank (The NY Fed) said it "will intensify its direct oversight" of the triparty repo market.”.

Are you frightened? You oughta be. Because direct oversight will not eliminate rustbuckets, hire qualified salesmen, and drum up customers, It will only get in the way, and make things worse.

The systemic risk with this market remains unchanged. What is the market? Sovereign debt. Treasuries. Bonds. Corporate stocks. Anything the worthless rating agencies rate AAA. The liquidity of the system depends on this market, and it can be brought down by any participant. That’s exactly what happened to MFGlobal.

If somebody looks cross-eyed at the wrong CEO, the system is toast. We’re toast. We will take the haircuts as the banks fail, as did the customers of MFGlobal.

Somebody didn’t like Corzine. That’s the cause of the MFGlobal failure. That’s the cause of the investors losing their retirements.

The other thing that can bring down the system, as I explained about the RMBS above, is the reduced value of any of the repo'ed securities. Like sovereign debt. I mean, that could never lose value, right?

You oughta be scared.