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Market analysis doesn't need to be too complicated to be good, and probably simpler is better. Heck, we have just spent the past 12 months listening to every analyst, commentator and pundit under the sun tell us why this market is the buy of the century, and when I look at the numbers, I note the S&P500 is up only 3.68% over the past 52 weeks. That's a lot of verbage for so little beef. If you have been holding the S&P500 for 52 weeks, you have made 3.68% on your money. That's a fact, not an opinion.

So what's the message here? Simply stated, a market that has gone nowhere for the past 52 weeks is at risk for lower prices. Just take a 52 week rate of change indicator and slap it on any chart and see what I am talking about. It really is that simple. Now this isn't meant to show you some "holy grail" type of indicator that will have you buying at the exact bottom tick. This isn't the purpose of my analysis. But the important point is this: once the 52 week rate of change turns negative - that is, your investment is underwater from a year ago - the 52 week rate of change tends to stay negative for a long while.

Figure 1 is a weekly chart of the S&P500 (symbol: $INX). The 52 week rate of change indicator is in the bottom panel. The current value is above the zero line. The thick vertical lines identify those times (in recent market history) when the 52 week rate of change turned negative. The dashed vertical lines identify times when the indicator got below 1% (but did not turn negative), and these were very good buying points during the bull market seen during the middle part of the decade.

Figure 1. $INX/ weekly

Once again, we aren't establishing a "buy signal" or "sell signal" but showing you that once the 52 week rate of change turns negative it tends to stay that way for awhile. But let's look at this notion a little more closely, and to do this I am going to introduce an indicator that counts the number of weeks that the 52 week rate of change is negative. This is the indicator in the lower panel of figure 2, a weekly chart. So when the 52 week rate of change first turns negative, the indicator changes from blue to red. Figure 2 is from 1987 to the present, and the indicator has turned from blue to red 5 times (see vertical bars on figure). What is surprising is that in 4 of those instances the indicator rose continuously for greater than 20 weeks.

Figure 2. $INX/ weekly

So what can we draw from these observations? Once a trend is started -i.e., lower prices in this case as the 52 rate of change has turned negative - it tends to persist.

Figure3 shows the S&P500 from 1966 to 1987, and our indicator is in the bottom panel. The indicator has gone from blue to red 8 times. In 6 instances, the persistence of the trend is noteworthy; the indicator continued to rise because prices went lower or sideways.

Figure 3. $INX/ weekly

So why is this relevant since the S&P500 is 3.68% above the zero line? Well let's look at some sector ETF charts, like the S&P Select Financial Spdr Fund (symbol: XLF) and the Semiconductor Holders (symbol: SMH) --everyone's two favorite proxies of market health. Figure 4 is a weekly chart of XLF with our indicator that looks at persistence of the down trend in the 52 week rate of change. Figure 5 is a weekly chart of SMH.

Figure 4. XLF/ weekly

Figure 5. SMH/ weekly

What we notice that the indicator in both SMH and XLF has started to rise as the 52 week rate of change has turned negative. For the most part, past instances, where the 52 week rate of change has turned lower, have persisted, and I don't see any reason why this time should be different.

So what's the message? Sometimes simpler is better. Trends tend to persist. Market tops are really about time.

Figure 1 is a weekly chart of the S&P Select SPDR Financial Fund (symbol: XLF). The red and black dots are on the price chart are key pivot points, which represent areas of buying (support) and selling (resistance).

Figure 1. XLF/ weekly

This is a widely followed ETF that correlates highly with the market. As the banks go, so goes the market. Currently, price is below the three most recent key pivots and there is only 1 interpretation for this finding: bear market. A weekly close below 13.76 would seal the deal. Support levels are at 12.38.

I last looked at the Shanghai Composite Index in May, 2010. (Click here and here.) My interest in the Chinese market is the possibility that it is a leading indicator for the US indices. Back in May with the Shanghai Composite off its highs by 17%, I stated "that US equity bulls should be concerned that the Chinese market has been diverging from the US indices. After all, the Shanghai Composite led the US markets off the bottom back in late 2008 and early 2009." So once again let's look at the technicals for this important market.

Figure 1 is a weekly chart of the Shanghai Composite Index. Key pivot points are shown with the black and red dots. 2660 remains resistance, and this is the level we identified back in May. 4 weeks ago this index closed at 2658; yesterday prices were hovering around 2600. A weekly close above 2660 would be bullish. Support comes in at the most recent key pivot at 2421. For now, the Shanghai composite remains in a tight 240 point, and prices currently are at the upper end of that range. It is my expectation that the lows of this price range will be tested.

Figure 1 Shanghai Composite/ weekly

"When the turn comes and inflation and rates rise, all the money in bonds will move into equities.

"At some point people won't want to be compensated at two percent in bonds, and will put money into stocks. Government bonds will not be a good investment for the next 10 years.""

in chicagotribune.com

Related ETFs: SPDR S&P 500 ETF (NYSE:SPY), SPDR Dow Jones Industrial Average ETF (NYSE:DIA), ProShares UltraShort 20+ Year Trea (ETF) (NYSE:TBT), iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSE:TLT)

Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.

Much has been made of the "Death Cross" that happened on July 2, 2010 in the S&P500. The "Death Cross" occurs when the 50 day moving average of price crosses below the 200 day moving average. Many interpret this technical "phenomena" bearishly, but as usual, folks are only reading the headlines and not critically looking at the numbers. There is more to this story. So what does the data say?

Let's design a study where we buy the S&P500 when the 50 day moving average crosses below the 200 day moving average. We sell our position when the 50 day moving average crosses back above the 200 day moving average. With this strategy, we want to see what happens to prices when they are under the "death cross". We will look at data going back to 1962, and commissions and slippage are not considered in the analysis.

Figure 1 is a daily chart of the S&P500 with 50 and 200 day moving averages; some of the buy and sell signals are noted on the chart. The "death cross" (labeled #1) led to a 6.48% gain (with minimal draw down) in the S&P500; the next "death cross" (labeled #2) was the 2007 to 2009 bear market leading to a 39.7% loss; the current "death cross" (labeled #3) would have had you buying the S&P500 almost at the lows of the current down swing suggesting so far that the "death cross" is a better buy signal then sell signal.

Figure 1. S&P500/ daily

So what is going on here?

To answer this question let's look at the maximum adverse excursion (MAE) graph for this strategy. See figure 2. The MAE graph assesses each trade from the strategy and determines how much a trade had to lose in percentage terms before being closed out for a winner or loser. You put on a trade and if you are like most traders the position will move against you. MAE measures how much you have to angst and squirm while you are in that position. As an example, look at the caret in figure 2 with the blue box around it. This one trade lost 9% (x-axis) before being closed out for a 14% winner (y-axis). We know this was a winning trade because it is a green caret.

Figure 2. MAE Graph

From this strategy, there have been 25 trades or "death crosses" since 1962. 17 trades were winners and 8 were losers yielding a negative 662 S&P500 points. So in general it is a good idea to avoid the death cross. Of course, the real truth lies in the details. Looking at the MAE graph, we note that 12 trades had a very acceptable draw down of less than 4%; two thirds of these trades gained more than 5%; these are the trades to the left of the blue line. Now look to the right of the red line. These 10 trades had draw downs in excess of 10%, and these are the trades that went on to have the big losses. In fact, if a trade had an MAE greater than 15% it was unlikely to recover and more likely to go on to a big loss.

So the MAE graph shows us that 12 out of 25 signals were actually good buying opportunities and 10 out of 25 were seriously hazardous to your bottom line. From this data, it is clear that the presence of a "death cross" doesn't necessarily mean the end of the world. Of course, this is all backwards looking data and the real concern is how should we interpret the current "death cross" going forward?

To answer this question we need to look at the this strategy's equity curve. See figure 3. As it turns out, the "death cross" was a good buying opportunity from the start of the bull market in 1982 to its end in 1999. The rest of the time 1962 to 1982 and 2000 to the present (i.e., secular bear markets) we can see that the "death cross" had very mixed results or led to continued selling (obvious as these are bear markets).

Figure 3. Equity Curve

Conclusion: 1) most would agree that we are in a secular bear market; 2) "death crosses" in secular bull markets are buying opportunities; 3) "death crosses" in secular bear markets need to be respected.

From this perspective, the equity markets have a bearish look.

Figure 1 is a weekly chart of the S&P Depository Receipts (symbol: SPY). Key pivot points, which highlight areas of buying (support) and selling (resistance), are shown on the graph. Prices are currently below the most immediate key pivot point at 107.58. A weekly close above this level is constructive, but until that happens, the trend is most likely down.

Figure 1. SPY/ weekly

Figure 2 is a weekly chart of the Ultra Short S&P500 ProShares (symbol: SDS). This 2x leverage ETF moves inversely to the S&P500. With prices above the most recent pivot at 33.58 and above the 40 week moving average, this is a bullish looking chart. What is good for SDS is not good for the S&P500. A weekly close below support at 33.58 would turn this chart from up to down.

Figure 2. SDS/ weekly

Figure 3 is a weekly chart of the Power Shares QQQ Trust Series (symbol: QQQQ). Resistance remains at 45.01, and until this level is cleared on a weekly closing basis, the trend remains down.

Figure 3. QQQQ/ weekly

Figure 4 is a weekly chart of the Ultra Short QQQ ProShares (symbol: QID). This 2x leverage ETF moves inversely to the NASDAQ 100. QID closed last week at 18.47, which happens to be in the middle of our support zone, 18.39 to 18.49. At best, this puts QID at neutral. A weekly close above 18.49 would be bullish for QID, which is bearish for the NASDAQ 100.

Figure 4. QID/ weekly

So what is the state of the market? With the SPY and QQQQ both below resistance, this is bearish. With SDS bullish, this is bearish for equities. QID has yet to join the bullish camp (which is bearish for equities), but at best, QID is neutral. The consensus is bearish for equities.

Resistance levels are noted, and a weekly close above those levels would change the outlook. Support levels are also noted, and a weekly close below those levels would likely lead to a waterfall decline. Buying "should" materialize at current levels, but if it doesn't, then this would be a failed signal. Failed signals can lead to much lower prices, and likely cement a bear market.

The "fat pitch" that was looking good has fizzled into a stinky, foul ball. In all likelihood, we are looking at a bear market.

Tuesday's horrendous and high volume price action has led to a break below our key pivot points. A weekly close below these support levels represents a failed signal. Failed signals generally are a hallmark of a bear market. Thusly, there is significant downside risk.

So what is next? The most likely outcome is a bear market. Our support levels on the SPY (107.58) and on the QQQQ (45.01) are now resistance. For the intermediate term investor - not traders looking for a 3 day bounce -there are two instances in which I would go long this market:

1) if prices on the major indices close above resistance (old support) levels

2) investor sentiment becomes extremely bearish (i.e., bull signal), and within this context of another "fat pitch", I would consider the long side provided I had the necessary risk controls in place.

Over the short run, the market is oversold, and as we come into the quarter end and July 4th holiday, I would expect a bounce. Unless prices close above the mentioned resistance levels, I would look to unload any market correlated long positions into this lift.

In the next article, I will provide an alternative take on the technical dynamics in the market.

I have posted charts of the SPY and QQQQ below showing key pivot points (i.e., red dots) which are areas of support and resistance.

Figure 1. SPY/ weekly

Figure 2. QQQQ/ weekly

For several weeks now, I have argued that extremes in bearish sentiment are a "fat pitch". Why? Because market gains can be rather dynamic if the market reverses. The other factor that has made this a "fat pitch" environment has been the ability to define our risk. If the market did not reverse higher while investor sentiment was bearish (i.e., bull signal), then it was likely meaningful suggesting significant down side risk.

However, the market has forged a bottom here albeit a tenuous one. Admittedly, the price action, volume, and leadership has been rather weak, and whether we get follow through is still in question. Nonetheless, the bounce over the past 3 weeks has done one thing: it has helped to define our downside risk.

Figure 1 is a weekly chart of the S&P Depository Receipts (symbol: SPY) with key pivot points in red. Key pivot points are the most important areas of support (i.e., buying) and resistance (i.e., selling). The most recent key pivot point - as a result of the bounce - comes in at 107.58. With sentiment becoming bearish (i.e., bull signal), we would expect buying and this is what happened. This area (107.58) is support, and if prices close below this level on a weekly basis, there is a high likelihood of much lower prices.

Figure 1. SPY/ weekly

If we look at figure 1, we note that closes below prior key pivot points (i.e, price bars labeled A, D, E, and F) led to significant and abrupt losses. These are support levels and closes below these levels imply the start of a new trend. Of course, not all is perfect and nor is this method the holy grail. The break below the key pivot at point B didn't lead to significant downside and resulted in the reversal at point C.

But from this perspective and the important point of this article: a weekly close below a key pivot level should be respected.

The corresponding key pivot on the Power Shares QQQ Trust Series (symbol: QQQQ) comes in at 45.01. Figure 2 is a weekly chart of the QQQQ with key pivot points in red.

Figure 1. QQQQ/ weekly

Our trend following strategy that utilizes the 40 week moving average and a filter constructed from the trends in gold, crude oil, and yields on the 10 year Treasury has given a buy signal.

On Friday, prices on the S&P500 closed above their 40 week moving average. Our indicator constructed from the trends in gold, crude oil, and yields on the 10 year Treasury is favorable for equities. This indicator is shown in the bottom panel of figure 1, a weekly graph of the S&P500. The recent buy and sell signals from this strategy are also noted on the graph.

Reasons to liquidate this position include: 1) two consecutive weekly closes below the 40 week moving average; or 2) the indicator (i.e., filter) gets into the extreme zone.

Figure 1. S&P500/ weekly

I have reviewed this strategy in great detail, and if you would like to understand the trading characteristics of this trend following strategy with a fundamental filter (to weed out the bad signals), please go to the following articles:

Developing A Trading Strategy (Part 1)

Developing A Trading Strategy (Part 2)

Developing A Trading Strategy (Part 3)

Some observations in words and pictures on the equity markets.

Back on June 8, 2010, I presented some charts that offered up some technical signposts on the major indices. It was my feeling that we were getting some mixed signals that prevented me from making the call of a new bear market. In addition, my work showed that we were in the sweet spot for a turn around in prices, so until there was a price failure --i.e., a break of support while sentiment was bearish (i.e., bull signal) -- the best course of action was to way in on the bullish side of the ledger.

Figure 1 is a weekly chart of the Ultra Short S&P500 ProShares (symbol: SDS). SDS is a 2x leverage product that inversely tracks the S&P500, yet is long only. Looking at figure 1, we note the key pivots. As you know, key pivots are those areas where buying (support) and selling (resistance) are most likely to take place. The key pivot point at 33.58 is identified, and for the first time in 5 weeks, it appears we will get a close below this level. This is bearish for SDS but bullish for the S&P500.

Figure 1. SDS/ weekly

Figure 2 is is the UltraShort QQQ ProShares (symbol: QID). This is a 2x leveraged product that moves inversely to the Nasdaq 100. With prices below the key pivot level at 18.49, this is bearish for QID, which is bullish for the Nasdaq 100.

Figure 2. QID/ weekly

On May 27, 2010, I mentioned the potential head and shoulders top forming on the S&P500. This notion is still on target as you can see in figure 3, a weekly chart of the S&P500. If I may speculate: 1) I can see this right shoulder forming over the next couple of weeks; 2) the market sells off sometime in September violating the neckline of this head and shoulders top; 3) CNBC declares a bear market; 4) prices reverse higher to close above the neckline and trade to the April, 2010 highs by the end of the year. I am not saying it will happen, but I it seems like a nice story to me.

Figure 3. S&P500/ weekly

There really is a lot of bad news out there, and a lot of uninspiring price action most of the time. It is hard to understand why there has been a persistent push higher over the past 2 weeks in the market. Short covering? Traders scooping up bargains? Investors previously on the side lines forced to chase prices higher? Wall of worry nonsense? All are possible. While the sell off that preceded the recent bounce was fast and furious, I contend that the damage done really didn't do much damage as major support levels were never really breached. In other words, investors really didn't dump their positions.

Looking at some aspects of the Rydex asset data - particularly the amount of money that left the market to the safety of the Rydex Money Market fund - we note that it really wasn't that great. In fact, the amount of funds in the Rydex Money Market never exceeded the levels seen in February, 2010. To me there just doesn't seem to be too much fuel on the sidelines to propel this rally higher. In essence, this fits in with my notion of a right shoulder forming as opposed to new highs being made. Of course, time will tell.

When I listen to financial commentators, I sometimes get the impression that the floundering US economic recovery has nothing to do with the issues facing this country (i.e., unemployment, deficits, lack of leadership, etc.). Rather, these commentators are quick to lay the blame on Europe as if the sovereign default risks in that part of the world are the only threat to our economic recovery. If the problems in Europe just go away, everything in the US will be fine. I doubt it is that simple, but then again people like to craft simple explanations to explain this complex beast known as the market. So if we can extrapolate, a rising Euro must mean only thing: a strong Europe. A strong Europe must be good for the US economy because if it wasn't for "them", we would have that economic recovery by now. And an economic recovery that is back on track can only mean one thing: buy stocks. While a cynical view, this is what is working now.

So it does appear that the Euro is reversing from its lows, but by no means does this represent a sustainable reversal. Figure 1 is a weekly chart of the EURUSD cross rate; I have shown this chart several times over the past months. Key pivot points are identified with the black dots, and positive divergence bars are identified in red.

Figure 1. EURUSD/ weekly

As expected, price is bouncing from the 1.16 to 1.19 support zone. The highs of the most recent positive divergence bar (red arrow) should serve as resistance; this coincides with resistance from the key pivot point at 1.25674. I can see the EURUSD trading to this level. Of course, what is good for the Euro is going to be good for US stocks, so it appears that equities are catching a bid and will likely run some more.

Figure 2 is a daily chart of the Currency Shares US Trust (symbol: FXE). Key pivot points are identified by the black dots. With today's price action, FXE is trading above the most recent resistance level at 122.29. FXE should trade to the next level of resistance at 126.12. This happens to coincide with the area where the down trend in the Euro accelerated or "fell out of the channel". This would be a likely area of selling, once again.

Figure 2. FXE/ daily

In summary, the Euro is bouncing. US equities are the beneficiary as all of the problems in Europe (and in this country too) have gone away. I suspect the Euro will run into trouble at the resistance levels I have identified. US equities may stall at these levels too as commentators look for other reasons why stocks should charge higher.

Lastly, I would be remiss in my analysis if I did not mention the US Dollar. What is good for the Euro is bad for the US Dollar. The Dollar is off its highs over the past week, and while I will save the details for another article, I view the current down draft as nothing more than a pullback within a longer term up trend.

If not gold and silver, you will be better off with equities. Stocks are unlikely to revisit the lows set in March 2009. They may not go up a lot, but they will adjust to money printers at central banks.

in Business Week

Related Exchange Traded Funds: SPDR Gold Trust (ETF) (Public, NYSE:GLD), iShares Silver Trust (ETF) (Public, NYSE:SLV), iShares MSCI Emerging Markets Indx (ETF) (Public, NYSE:EEM), SPDR S&P 500 ETF (Public, NYSE:SPY)

Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.

A dynamic market environment with the potential for big gains is only half of the story. Getting into the market and protecting your capital if you are wrong is the rest of the story.

Looking at a weekly chart of the S&P Depository Receipts (see figure 1), we note the positive divergence bars, which are the pink labeled price bars inside the gray ovals. The divergence we note is between the value charts oscillator (which measures price and is moving higher) and price itself, which is moving lower. I write a lot about negative divergence bars, and positive divergence bars imply the same price dynamics. The presence of a positive divergence bar implies slowing downside momentum. Positive divergence bars generally appear at market bottoms, but their presence does not guarantee a market bottom. More importantly, the highs and lows of the divergence bar tend to serve as a range for prices. A break above the highs implies higher prices - as in the bottom is in. A break below the lows often leads to an acceleration of prices lower as traders who are long in anticipation of a bounce must unwind their losing positions. (Of note, these were the same price dynamics occurring in the Dollar Index in 2009 and that I wrote about extensively.)

Figure 1. SPY/ weekly

So the high of the current positive divergence bar for the SPY is 110.8; a break above these levels is bullish. The low is 104.38; a weekly close below these levels is bearish, and as I have been stating, this is a failed signal especially within the context of bearish sentiment (i.e., bull signal). Generally such price failures imply the beginning of a down trend.

So what would make me throw in the towel? A weekly close below 104.38 on the SPY.

In this article, I will utilize some daily charts to pinpoint buy and sell points on the ETF's that represent the major indices. These pivot points can be used as road signs to help navigate this hostile market environment.

Figure 1 is a daily chart of the S&P Depository Receipts (symbol: SPY). Key pivot points or areas of most intense buying (support) and selling (resistance) are identified with the black dots. If prices close above this recent pivot at 107.22, then there is a good possibility of higher prices. A stop loss can be placed at 106.04 as this would be the next key pivot formed. (Of note, this has not happened yet but in anticipation of higher prices and a close over 107.22, the next key pivot will be at 106.04, and this would become support.) A close below 106.04 is reason enough to move to the sidelines. For the record, the February low pivot comes in at 106.29, and the November, 2009 low pivot is at 104.05.

Figure 1. SPY/ daily

Figure 2 is a daily chart of the PowerShares QQQ Trust (symbol: QQQQ). The breakout last week above 45.70 was a failed signal and the key pivot at 44.32 is the new support/ resistance zone in play. 45.70 is the next level of resistance. A close above 44.32 is reason enough to get long. Although the next pivot has not formed yet, it does appear that it should be at 44.17. Therefore, a close below these levels would be reason enough to move to the sidelines.

Figure 2. QQQQ/ daily

Figure 3 is a daily chart of the i-Shares Russell 2000 Index (symbol: IWM). IWM is well below its 200 day moving average and the most recent key pivot or resistance level (at 63.91). A close above 63.91 would be the signal to go long IWM. The key pivot from the February lows comes in at 58.93.

Figure 3. IWM/ daily

Note: as I write this article (3 pm EST), none of the 3 ETF's are above their key pivots.

In this article, I will take a look at some of the key price levels on the major indices to help determine our future course of action.

As we all know and would expect, investor sentiment has turned bearish over the past month. In my world, this is a bullish signal. As I have painstakingly pointed out over the past couple of weeks, the presence of bearish sentiment is not a reason for the market to go magically higher, but it is in this type of environment that we get the accelerated price moves if the market does reverse higher. Thus, reward and risk is skewed in my favor (most of the time) and by adhering to my buy and sell points, I can navigate a relatively hostile environment more comfortably as I have a plan.

This is what the technicals are for. The technicals will get you in to participate in the market (if there is upside) and they will get you out if the market continues lower. I will let someone else determine why the market does what it wants to do.

Once again, I view this environment as a "fat pitch" and currently we are in the "sweet spot" when a market turn should develop. This does not mean that it will come at these levels, but now would be the most likely time. I am willing to stress my thesis that a turn in the market is at hand. I will let someone else determine why the market does what it wants to do.

The first figure I want to show is a weekly chart of the Ultra Short S&P500 ProShares (symbol: SDS); see figure 1. SDS is a 2x leverage product that inversely tracks the S&P500, yet is long only. Looking at figure 1, we note the key pivots. As you know, key pivots are those areas where buying (support) and selling (resistance) are most likely to take place. The key pivot point at 33.58 is identified, and this is the 4th week in a row that prices are above this level. This has to be considered bullish for SDS, which is bearish for the S&P500.

Figure 1. SDS/ weekly

Yet, why didn't I make the call of a bear market, which this technical set up implies, 4 weeks ago? I did not have confirmation from the S&P Depository Receipts (symbol: SPY). See figure 2 a weekly chart. The key pivot for the SPY comes in at 106.70, and price has yet to close below these levels on a weekly basis. It should be noted that back in July, 2007 SDS closed above a key pivot point while the SPY continued in a range. It wasn't until January, 2008 did SPY break down (i.e., close below a key pivot point) thus confirming the bear market.

Figure 2. SPY/ weekly

So what information can we draw from these two charts? SDS is bullish and SPY is "almost" bearish. A weekly close below SPY 106.70 is reason for caution, and this level now becomes resistance. A weekly close back above this level is reason enough to go long. Those are the signposts as I see them on the S&P500. This week - which is the sweet spot - will be telling.

Figure 3 is the PowerShares QQQ Trust Series (symbol: QQQQ). Key pivots are identified. The next key pivot is at 42.33. Prices are below the 40 week moving average for the first time in over a year.

Figure 3. QQQQ/ weekly

The flip side to the QQQQ is the UltraShort QQQ ProShares (symbol: QID). This is a 2x leveraged product that moves inversely to the Nasdaq 100. This chart is bullish as prices are definitively above the key pivot at 18.49.

Figure 4. QID/ weekly

So another set of bullish and bearish charts that has me cautious (i.e., paying attention to risk) despite my belief that we are in an environment that could see accelerated gains.

To summarize, the S&P500 is on the cusp of a failed signal, which has the potential to lead to further losses and an extended downtrend. The Nasday 100 remains above support levels.

In part 2, I will break out the daily charts and try to pin point some key pivot points that may get you into the market sooner with less risk.

Is that a head and shoulders top I see on the S&P500?

Figure 1 is a weekly chart of the S&P500. Prices have probed the support zone between 1066 and 1072, and so far we have yet to close on a weekly basis below this "key" support level. From a point of having market participants express grave concern that the world is coming to an end, it would certainly be nice to have prices close below these levels. It's bad enough that prices are already below the 40 week moving average on the S&P500. (For the record, the NASDAQ 100 and Russell 2000 are above the 40 week moving average - thank god for that too!).

Figure 1. S&P500/ weekly

In any case, "they" - and whoever "they" is - just won't let the market fall apart. So I guess we go higher, but from this perspective, going higher without having the "decks all cleared" of market participants first will likely lead to more bouts of abrupt selling in the future.

So we go higher to make what appears to be the right shoulder of a head and shoulders topping pattern. What happens after that is pure speculation. What I would like to see happen is 1) a break below the neck line of that head and shoulders top; 2) a "puke" by the bulls; 3) CNBC calling the correction a bear market. Then we can make a better bottom.

All this will take time and play out through the summer and likely come to fruition in the fall. By that time, everyone and their brother will know about the head and shoulders top.

Since the start of the year, the Shanghai Composite Index is down about 12%. But this composite peaked back in August, 2009, and it is down about 17% from those highs. We can debate the reasons why the Chinese market is down, but there is no doubt that US equity bulls should be concerned that the Chinese market has been diverging from the US indices. After all, the Shanghai Composite led the US markets off the bottom back in late 2008 and early 2009. US Equity bulls appear to be ignoring the fact (or just living in a vacuum) that the stock market of one of the world's leading economies has not made a high in over 8 months.

Figure 1 is a weekly chart of the Shanghai Composite Index. Key pivot points are identified by the black dots. Support comes in at 2675 or some 200 points or 7% lower.

Figure 1. Shanghai Composite Index/ weekly

Figure 2 is a daily chart of the Shanghai Composite Index. Key pivot points are identified by the black dots. Resistance is at 2936 and support comes in at 2669.

Figure 2. Shanghai Composite Index/ daily

I would look for the Shanghai Composite to bottom around 2675 and this might be a signal that the burgeoning sell off in US equities has run its course as well.

For the longest while, my mind set has been to expect higher yields accompanied by higher equity prices. After all, wouldn't higher yields be a sign that the economy is expanding and on the track to recovery? Or to put the relationship between bonds and equity prices in another light: if the equity markets would ever sell off, wouldn't bonds catch a bid as there is a flight to safety? But the technicals have me rethinking these relationships. Is it possible that we could have higher yields and lower equities?

Let's start by giving you some background. I have been bullish on Treasury bonds for some time. I was betting with the "smart money" and against the "dumb money", and after much consternation, I felt this was the correct play. I had identified key support levels, and although Treasury bonds could not breakout higher, support was holding. I was becoming increasingly bearish on equities, so I thought that it was only a matter of time before bonds caught a bid. Equities would fall and bonds would move higher at they are seen as a safe haven.

But I don't think it is going to work out that way. I still remain bearish on equities, but it is becoming increasingly difficult to remain bullish on bonds. In fact, the technicals now have me bearish on bonds.

Figure 1 is a weekly chart of the 30 year Treasury Bond Interest Rate (symbol: $TYX.X). Key pivot points are identified with the yellow dots, and these are areas of support and resistance. Negative divergence bars, which tend to act as inflection points as well, are the pink labeled price bars. We note that there is a cluster of 2 negative divergence bars (inside the gray oval). It appears that the 30 year yield will close over 3 key pivots at 46.91 and above the cluster of negative divergence bars. This is very bullish for higher yields, and in all likelihood, this could be strong move higher - think short covering with closes above negative divergence bars -that could see yields on the 30 year Treasury eventually reach 5.282%.

Figure 1. $TYX.X/ weekly

Let's look at this from another perspective. Figure 2 is a weekly chart of the i-Shares Lehman 20 + Year Treasury Bond Fund (symbol: TLT). This is a bond fund that moves opposite to yields. Key pivot points are in yellow; the pink labeled price bars are positive divergence bars. The important area of support is formed by the key pivot point at 89.38 and the low of the positive divergence bar (see price bar with red arrows) at 89.19. A weekly close below these levels, which seems likely, should lead to a much lower TLT. Once again, closes above or below divergence bars tend to lead to accelerated price moves.

Figure 2. TLT/ weekly

For now, TLT has breached support rather convincingly. However, the fake out or reversal needs to be considered. A weekly close back above the high of the positive divergence at 90.65 would be a sign that TLT is going higher (yields lower).

Now let's take a look at the daily chart for TLT. See figure 3. Key pivot points are in red, and today's closing price is below 3 consecutive pivots, and this is bearish. Price has yet to close below the lowest key pivot at 88.64, but this is a couple of cents away.

Figure 3. TLT/ daily

How about the daily chart for Ultra Short Lehman 20 plus Year Fund (symbol: TBT). This is a 2x leverage product that tracks yields or is inverse to TLT. Key pivot points are in red, and a close above 3 key pivots is bullish; TBT is now breaking out and has a price target of $55.

Figure 4. TBT/ daily

Let's address several things before wrapping this up.

Could this be a fakeout? Absolutely. TBT and TLT have been very tricky. Just last week I wrote that TLT was my best looking position - it looked poised to move meaningfully higher. So we have our points where I will be wrong again - if I am wrong again!

Why are yields moving higher? Most would agree that deflation, not inflation, is in our immediate future. How about higher yields and better economic growth? The data doesn't really support it. My belief is that is has to do with debt issuance and supply and demand. I believe Moody's downgrade of Portugal's debt reminded the markets that the coming year is going to filled with a lot of sovereign debt offerings. Who is going to buy that debt? Which debt is going to be the most attractive? Higher yields seems inevitable.

Lastly, does this mean equities will rise? After all, aren't rising yields a sign of economic expansion? In this instance, this is not the case; this is all about supply and demand. Furthermore, extreme bullish sentiment plus yield pressures is a bad combination for equities. See "Danger, Danger Will Robinson".

It’s been one big bullish love fest but this thing is officially getting out of hand now. Remember, when your shoe shine boy is giving you stock tips it’s time to get out of the market.

The bulls enjoyed a huge run as I warned about over a month ago when Mr. VIX started to slowly shuffle down its lower BB line. I can’t find that post anymore but I referred to it a week or two later here. Now the 2.0 BB on Mr. VIX is starting to compress and that will most likely result in a push to the outside in the next few days. Which would be a first step towards an equities sell signal – emphasis on first step as the tape can keep melting up higher with utter disregard to silly indicators or clueless opinions.

If you’ve been long for the past few weeks – congrats to you. But it’s now time to take profits and let the last sucker turn out the lights.

UPDATE: Since the mentally challenged among you can’t read a chart I am forced to be verbose by pointing out that the VIX has not pushed outside its BB just yet. Which is why it says ‘look out for push outside BB’ on the bloody chart. Now you wankers better stop bitching at me otherwise I might just take you out of your misery by offering your rectum the X-large Mole boot.

While I’m in a bitchy mood I might as well share my mental wave masturbations. As you can see we are looking at a textbook inverse H&S which might just getting warmed up to eat bears for breakfast. The current third wave up may extend a bit higher but there will be a correction as indicated in my VIX musings above.

More long term: The bearish scenario is in the bullpen as of now – look at that cluster of support – the bears have no balls and most likely will fail pushing through it. Maybe yet another dip buying opportunity – if we breach I might entertain more bearishness – but as of now the trend is the trend and all we are looking at is a mild correction.

Cheers,

Mole

Irrespective of today’s news induced volatility we are now looking at some pretty top heavy tape. As I have retained a distinct and horrifying memory of summer 2009 I would be foolish to suggest a major reversal being in the works – but I do think that the market is now over extended enough to justify at least a short term correction.

This RSI_EMA chart has treated me pretty well in the past year. Usually a reading above 85 means that we looking at a correction in which an overbought situation relieves itself so that new buyers are able to step in (yes, Mole actually just said that). If you look a bit deeper you also realize that the degree of optimism does not seem to matter much. Case in point – last summer we hit the 85 mark and after that it took a few more days for the tape to reverse lower – not by a huge amount but it was definitely a nice trading opportunity, especially if you sold low vega close to the top.

What’s also interesting is that channel to the downside which is highlighted on the RSI_EMA panel above. About three weeks ago we had reached the upper range of that channel and it first seemed that a downside correction was in the works (i.e. the drop lower). But equities recovered quickly and the RSI_EMA kept pushing higher – at which point I basically told you guys that Soylent Blue was pretty much in the toilet.

This chart and many others I am not showing currently is why I have become a bit quiet as of late. It’s not that I’m giving up – but I need to see more tape before I venture into any type of predictions. What I feel comfortable saying is that we’ll see a correction in the next week to ten days. Right – you rats don’t need me to figure that one out – granted. But where I’m a bit soft right now is the big picture. The tape right now needs to resolve itself so that the long term trend can be firmly established. We are at an inflection point right now and if we don’t see any strong downside and instead will be presented with tape not unsimilar to what we saw last summer then I fear that I will have to change my tune as to when P3 is expected to appear on our radar. But as of right now I don’t know anything – yet – and I seem to be among the few analysts who are comfortable admitting this.

Quite frankly – we are in such uncharted territory in such a narrowly traded market that making any predictions is tantamount to predicting today’s volatile swings. It’s simply impossible and I will have to reserve judgement until I see more evidence. Now the market has produced a lot of bullish evidence all last year – and that’s the trend right now and right here. After the looming correction we will be able to identify what’s next – until then I will simply focus on trading the short term (i.e. Geronimo, Rammstein, and the Zero).

Stick with what works right now – which is trading intra-day and perhaps some discretionary setups. Everything else is just talk and if someone shows you their chart from a few months ago which predicted where we were going he (and perhaps especially she) doesn’t show you all the charts that pointed in the opposite direction

Enough said.

Cheers,

Mole

This is the best 4 minutes you will spend today. Thanks to ComicFx at the SoH for bringing this to my attention

http://www.youtube.com/watch?v=GEkz1XK75XE

There are sharks in the water, things in the shadows, and doubts in the trader’s head. In spite of the, the market will go up and it will go down within any time frame you care to choose. You do not have to be right, just successful.

The market is not going to put in a top and reverse simply because you decide to go all in short, hang the consequences. The market is not going to fall because of fundamentals. The market is not going to fall because you have insight into the way the financial world works and it must. The market is not going to fall because your money and cause is more noble than the scittering creatures who are robbing the treasury. The market will rise and fall anyway, within any time frame you care to choose.
A trader can fight the current, picking up pennies in front of the roller coaster. A trader can ride the coat tails of wherever the big money wants to go. It can be warm beneath the dragon’s wing. It can be warm inside a broken clock.

EQUITY

SPX went higher than a line drawn on a chart. Now everyone believes that 1200 is coming up. I don’t care. I don’t worship at the altar of Theta. And I’m certainly not going to leave my money sitting in the market, based on a bias, so some other trader can have that nice Swiss chalet.

I’m still working on my statistical analysis and the first improvement is to go from 7 sections on a bar to 5 (following Gatopeich’s footsteps). There is too much noise with 7 sections. 5 may still be too many , but we’ll see. I’ve changed the numbers on the SPX daily chart.

For intra-day trading, the most attractive bars are those where the open and the close are not at either end, and they are close to each other. So 23, 34, 33, 44 are all GREAT bars. The segments are 0 - 20% - 40% - 60% - 80% - 100%, nothing fancy. A ‘23′ would mean that the bar opened between 20% and 40% of the HOD - LOD, and closed within 40% - 60% of the HOD - LOD. Intra-day trading, IMO is best when there is movement above and below the open.

On this scale, yesterday was a ‘35′. I was expecting the close to be below the open, based on the probabilities and other stuff. I let a bias influence my trading in ES. I still made money - but that bias was there whispering in my ear.

A ‘35′ in a positive trend SPX, is most often followd by a ‘15′ or a ‘51′. Notice that ‘52′ is next. But, the probability of being 31, 32, 41, 42 (i.e. a mainly down day) and the reverse 13, 23, 14, 24 (a mainly up day) are about the same. When SPX is in an up trend, and the bar took a ‘35′ shape, the probability of CLOSE being above OPEN was only 39%. The probability of the Close being BELOW the open is 52%. The probability of CLose and Open being in the same bar segment is 9%. That is tradeable.

Developed Asia was green excpet for Hong Kong. Emerging Asia was all red. Hard to interpret this except risk takers weren’t. Europe is solidly green following the Januaryt industrial production data this AM. Then, a major IB put a 1.45 target on the EUR, with stops at 1.33 - looks like a good bet. EUR took off at 5 AM, and dragged the ES a bit along. Notice that the ES is not ramping big time - which is what you would expect after the HOY was taken out.

I think that caution is the order of the day. I’ll pay the Geronimo calls as appropriate. I’ll play the expectation of a greater chance of the close being below the low. This means to fade any move above the open - using appropriate TA and rsk management OF COURSE.

ESM0 Pivots:

R2: 1154 = This isn’t that far away, anymore. But ES is sluggish behind the EUR move. I would fade this, depending on momentum and volume when attained.
R1: 1150 = Just overhead. SPX has already beat the JAN. high, but it hasn’t closed there officially. This could be a decent base camp for an assault on 1200. But it needs to close here and maintain next week.
Neutral: 1142 = There is TD rsupport between ESM0 and this level, at 1146.50 and 1145. I would expect any move down to hesitate there, maybe even revers once or twice before getting to the pivot. In other words - choppy trading which is never fun if you use tight stops.
S1: 1138 = Certainly would be a surprise to many - especially the bulls. I guess that it would be interpreted as a small pullback for consolidation. I would see it as failed distribution.
S2: 1130 = Not likely today. Given that next week is OPEX, maybe but not a high probability.

I guess that my opinion is being coloured by the probability of SPX staying above tthe 55 DMA. If it doesn’t close below next week, then we have at least 5 - 10 trading days of winter (SPX above the 55 DMA) beyond that, minimum.

http://www.uploadgeek.com/share-3790_4B9A3500.html

EUR is touted to get to 1.45. On the weekly chart, it has not yet broken out of the channel. The 10 and 21 week MAs are bearish still. On the daily chart, EUR has poked its head above the channel but hasn’t tested the 50% non-channel FIB (horizontal) at 1.3814. Give where TD Pressure is, it is not a given that EUR is about to run up. There is the bullish cross on the 10 and 21 DMA, just two days ago. This is often used by traders and Algos to change a bias. Still, the rule of disappointment suggests that we would see a retest of the channel top before moving higher. If EUR closes above, then the chances of moving up strong go up.

Weekly

http://www.uploadgeek.com/share-802C_4B9A3298.html

Daily

http://www.uploadgeek.com/share-2B88_4B9A32B1.html

I’m short and underwater. My EUR gains from this week cushioned the fall - as they were supposed to in my trading style. I’m looking for a squaring of positions to take the EUR down into the close. The ramp came from weak short covering and stop running, IMO. The big shorts are apparently hedged by calls and they will just sit on their positions until this wave passes. At some point, if sentiment shifts, I would expect them to cash in the calls and short some more - if the conviction is still there.

Notice that I’m not sure of the time frame for the 1.45 target - it could be months, it could be weeks.

Bottom line: I’m going to intra-day trade ESM0. I’m going to watch the EUR for my own exit. I’m going to be aware of the sharks in the water and that they need to unload their positions to someone. What if you threw a party and nobody came?

http://www.youtube.com/watch?v=j3vXPrEWTVk

Cheers.

The injury to the bears was a 100 handle ramp up since the 1,044.50 low a month ago. The insult is the theta burn they’ll now put any remaining bears through before pushing the tape to new highs and triggering a boat load of stops.

The wave count is close to reducing itself to at least short term bullish - maybe even long term bullish. I have not made up my mind completely on that - although the jig is pretty much up on Soylent Blue there are signs on the horizon that this ramp up may have been a final fuck you to anyone daring to short this tape for the last six months. Similarly however I am being as objective as I can and if we don’t see a rapid reversal soon after making new highs even the long term bearish outlook may be in the toilet. Emphasis on may be - so to your mentally unstable: Please don’t freak out on me, I just work here.

Not much else to add - the tape is what it is. Mr. Zero briefly dipped into the red early this morning but as that’s now illegal the situation was quickly remedied thanks to our equities slinging friends over at the Fed and their primary dealer cronies.

I’m not a betting man - and there is s till a theoretical chance that we drop right here and don’t look back. But I frankly feel pretty ridiculous even writing that sentence - who am I kidding? Have the bears given us any indication they are capable of stemming the flood of easy money that’s been pushing this turd back up to whence we came earlier this year? Pussy Central - that’s all I have to say.

But lamenting traders are usually losing traders - so, let’s cut that crap right now and here. Sentiment among you guys has been pretty lousy as of late - I read the comment section and you guys are getting reamed, I can tell. But I keep pointing toward the light - which IMNSHO is Geronimo. Remember - it’s only for ‘entertainment purposes’ - but at least on my end entertainment pays

Yes, the truth hurts - embrace the pain.

Cheers,

Mole

Last night I came home quite late and finally the ISE had updated their latest ISEE chart. So I was up until 2:00am importing the updated data into my Exel chart so that I could start looking for new patterns (the JS chart the ISE offers gives me a headache).

So, as you can see we closed at a record reading of 253 in equities only yesterday. That is quite insane and on the surface you’d expect some kind of reversal soon.

However, I am also looking at the 10-day MA of the equities only ISEE and based on what I’m seeing long term reversals only occur when both a record reading in the raw data and a new high in the 10-day MA coincide. I have taken the liberty to highlight such occurrences on both charts. Whenever we only get a fast spike up we might go down day or two but it does not assure that a big reversal is coming.

Quite apparent from the 10-day MA chart plotted against the SPX above is that we are not even close to new a new high. What’s even worse is careful analysis of what happened during the first half of the recent run up. As you can see the ISEE kept dropping as retail traders were trading the downside, just as proposed in one of my updates a few weeks back. Many retail bears assumed that we were merely correcting and thus started ’selling the rip’.

What has now ensued is the exact opposite. Retail bears got violently manhandled and squeezed out of their positions (again) as equities continued their short squeeze to the upside (again). Suddenly everyone is going long which might present us with a short term reversals but based on the 10-day MA reading in correlation with some of the other charts I have shared in the past few days I simply do not see the bearish case here. My December puts would love to see me being proven wrong - but thus far I unfortunately am being proven right.

Bottom Line: I am not surprised about today’s tape after yesterday’s 253 reading in the ISEE equities only chart. Based on recent history record readings precede a drop by a few days. I now expect a quick reversal followed by a final ramp up to new 2010 highs, as this third wave continues to sub-divide.

Console yourselves by the fact that life is a bitch and then you die. Feel better now?

UPDATE: You guys ought to take a look at this guy’s take on the ISEE reading - quite fascinating - great work. Hat tip to Royal With Cheese for that link.

I have updated the ISEE chart to reflect the 2007 SPX high. Note that we are several hundred points below that historic reading and we are now pushing into record territory. Now, I agree with him that we probably bust a big higher first before we roll over. That would throw all the remaining bears a huge curve ball - yes, the market is a cruel mistress.

Finally - here is the updated 10-day MA chart correlated with the SPX. Fascinating picture - let’s see if we get this dog all the way up to the 210 mark.

Cheers,

Mole

I finally had some time to update my BAA-TYX spread chart this afternoon and, like many of my other indicators, the results are not very inspiring for any remaining bears:

As you can see we had a promising upswing during the drop but since the ramp up any loss of appetite for corporate junk bonds has quickly faded. Risk is still in and bearish sentiment is out.

For the noobs: Bonds are generally classified into two groups - “investment grade” bonds and “junk” bonds. Investment grade bonds include those assigned to the top four quality categories by either Standard & Poor’s (AAA, AA, A, BBB) or Moody’s (Aaa, Aa, A, Baa).

The term “junk” is reserved for all bonds with Standard & Poor’s ratings below BBB and/or Moody’s ratings below Baa. Investment grade bonds are generally legal for purchase by banks; junk bonds are not.

The specific definitions assigned to junk bond ratings by the services help define the magnitude of the risk associated with them. Because Standard & Poor’s definitions are somewhat more comprehensive, they are quoted here:

BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.

BB: Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.

B: Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal.

Because a B rating is the single most common rating found in a junk bond portfolio, Moody’s definition of its B rating follows:

Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

To resume with Standard & Poor’s:

CCC: Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal.

D: Debt rated D is in payment default.

I guess I should explain how this affects us equities/options traders.The BAA-TYX chart measures the yield spread between bonds rated one step above junk versus the yield of the supposedly most reliable and safe bond there is, the U.S. 30-year treasury bond. In the past it has been observed that a narrowing of the spread often precedes a rise in equities and inversely that a widening of the spread may be a sign of trouble ahead. Is a big drop in equities always preceded by a widening of the BAA-TYX spread? Well - sometimes it is - but if you parse through this chart you’ll also notice that it doesn’t always pan out this way and that it sometimes lags behind a little. Still, it’s something we want to be on the lookout for in case it does occur.

What does it all mean? What it means is that QE sponsored bullishness continued unmitigated and in full blast. Bond traders are usually a lot smarter than equity traders (let’s face it - most of us are small timers without much of a clue) and I do not see any indication that this trend is about to change any time soon. The BAA-TYX spread keeps narrowing further and further and it’s a visual representation of how quantitative easing is attempting to re-inflate our credit bubble just one last time.

Let’s have one for the road, shall we? Tomorrow we all dine in hell.

Cheers,

Mole

One of the frustrating aspects about this market environment is that all assets look like the same trade. Betting on equities is a bet against bonds or vice a versa, betting on bonds is a bet against equities. It is that simple. Consequently, using a tactical asset allocation strategy makes it hard to diversify away my risk as I end up being all in on essentially what has become the same trade.

From my perspective, one of the best places to park my money would be in Treasury bonds as the reward to risk is greatest. This can be seen in figure 1 a weekly chart of the i-shares Lehman 20 + Year Treasury Bond Fund (symbol: TLT). The key pivot point at 89.38 is support, and a weekly close below this level would be lights out for TLT - expect much lower Treasury bond prices or higher yields. In addition to being close to support levels, the "smart money" or commercial traders from the Commitment of Traders data is bullish on bonds, and the "dumb money" or Market Vane Bullish Consensus is extremely bearish. It is within this context - low (and quantifiable) risk and betting with the "smart money" and against the "dumb money" - that I see this as the "better" trade. Despite the resistance overhead, I believe that TLT could make it to $98.

Figure 1. TLT/ weekly

The flip side to Treasury bond trade has become the equity trade. As we have chronicled over the past couple of weeks, this is the crowded trade. There are too many bulls. In addition, there are headwinds in the form of strong trends in 10 year Treasury yields, gold, and crude oil. In essence, to bet with the equity bulls, you have to ignore risks and jump into the market while holding your nose. You are buying high to sell higher. In my opinion, the best case scenario for the bulls would be a persistence of the trading range that we have been in for the past 5 months.

Only time will tell as the story unfolds, but from this perspective, the safer and better reward to risk trade is with Treasury bonds. We should have our answer soon enough.

I leave town for a few days and not only do you guys let the market go completely out of control - you even let a troll pollute the airwaves for several days. Glad I decided to come back early - it’s time for Mole’s iron broom to scare out the cockroaches.

Boy, my wave count is not looking pretty - this is either going to get really really ugly for the bears or it’s going to be an ass whopping of biblical proportions for the bulltards. Yes, we all hope for the latter but we may have to face reality in a few handles from now. Remember what I said two weeks back about the third wave to the downside which suddenly turns out to be a c wave? Well, thus far that very nightmare scenario seems to be playing out - to the chagrin of anyone holding long term puts (yours truly included).

Soylent Blue is barely hanging on and the wave count on green now points towards a very massive third wave developing - not a pretty picture if you’re short.

Also remember what I said about Mr. VIX? How the 20 day 2.0 BB was starting to expand to the downside as the bears missed one opportunity after the other to reign in the bulls? And how we might have to watch the VIX stroll down the lower boundary day after day without ever pushing to the outside? That’s exactly what happened and consequently Vaseline jars are flying off the shelves faster than Ben Bernanke can print coin to actually pay for them. Hey, if you live in West Hollywood you might actually enjoy a good anal plowing - for the rest of the bears it’s been nothing but pain and frustration.

UPDATE: After posting this Mr. VIX actually dropped through that support line like a hot knife through butter. We are now approaching the January 11 lows - if those don’t hold the bears are in a world of hurt.

Meanwhile I’m watching the Euro futures not catching much of a break and I can’t help but think: What is going to happen when the Euro is actually starting to rally? Shudder…

Mr. Zero is solidly bullish and NYSE A/D ratio today is probably going to close above 4.5. The McClellan is still climbing - not much of a divergence here - what I saw last week has been reversed.

My CPCE chart is also looking pretty scary - all that upside progress in equities and we barely dropped - there is a LOT of space leading to a bottom - it’s looking bad for the bears, folks.

My ADV/DEC ratio chart points towards a possible short term reversal next week - might be an opportunity to scale out of short term puts if you’re holding those.

Not sure what to tell you boys and girls - but I’m not seeing a market ready to turn. I hope I’m wrong - I really do - because I’d be rather wrong and rich than right and stopped out. In case you want to know - my stop for my long term puts is the 1,150.45 high - after that it’s Soylent Green all the way.

Bottom line: Equities need to turn right now and here - once we breach that 1,140 mark it’s game over for the bears.

Good news: Geronimo is doing very well lately. We got stopped out three days ago after being one tick away from our target. So, I’m thinking of adding a special filter which accounts for a rare case in which the trade was right but the target was wrong. When we are so close to the target and then turn it’s obvious that the big boys took their profits and the trade is over - in which case it’s smart to not force it and get out at break even (or slightly above). Otherwise Geronimo has been kicking ass and taking numbers - I will probably post some charts over the weekend.

Cheers,

Mole

I know - two posts in one day - almost feels like the good ole’ days (when the bears were banking coin). Anyway, I was looking at my VIX chart and suddenly had an epiphany*:

See, if you want to understand how the market works you need to look behind the scenes - and once you look at that you must try to look at what’s underneath. From there you simply forget everything you’ve seen and flip a coin.

Now seriously - look at the chart above. It’s a left/correlation chart between the SPX and the VIX for the past two years. What I noticed is that the VIX seems to become more ‘volatile’ during trend change periods. For instance: Mr. VIX basically pushed straight up during the meat of Primary {1} and then started to flail around sideways right before we got that last leg to the downside. Inversely we’ve seen a straight downward pattern for over six months which then stalled late last year. Since then we have been fluctuating between the 20 and 30 mark, only briefly dipping below 20.

Now also look at that potential fractal right before the ‘oh shit moment’ in August 2008. Mmmmh - does that pattern look familiar to you?

Yes we might get more upside before the pain stops but it seems to me that LONG TERM equities are screwed royally. BTW, did I ever mention to you rats to think long term? Right - I think I might have forgotten…

Enjoy your weekend - and don’t fret about the past two weeks. Think ‘Revenge of the Nerds’… or if you’re the macho type - think Sparta - whatever floats your boat.

Before you run off - here’ s a little supri-iiiise! More evil tees in the works - and more mediums this time. Who would have thought you rats all hit the gym? That’s the spirit - my mean lean army of rat warriors ready to take on the trading establishment.

UPDATE: I just heard that the tees are now live - you guys can place orders as of right now - just click on the image or simply go here. Remember that I don’t make a penny on those - it’s your way of supporting the spirit of Evil Speculator. BTW, there are more colors - poke around.

UPDATE 3:50pm EDT: Hindyomen just brought this to our attention:

Remember three weeks ago when I posted about Jeff Kohler’s warning that there was a bullish McClellan divergence? Well, we’re now on the opposite side of that coin. Plus if you imagine a channel from the top left to where we are now it is reasonable to assume a turning point is coming soon.

Cheers,

Mole

* Look it up

The breach of 1,106.42 on the SPX this morning is something I hoped would not happen:

This event shifts things around a little bit. The immediate downside scenario has lost a lot of credibility. It’s possible we are completing a Minuette (b) wave but the prior wave looks like a textbook (a)-(b)-(c), so let’s not kid ourselves. Chances now are we push into 1,127 at which point the bears better put up a fight - if not we might be talking Soylent Green. Not before reeling in a few more bears of course - just to squeeze them a few handles after (how many bear traps have we been enduring now since March 2009?).

On Wednesday I said this:

“….This would be followed by Minor B, the first half of which would look
to the bears like the onset of Minor 3 to the downside. Which would be
tantamount to a bear trap clusterfuck of death star like proportions. Not
a pretty picture.”

Trading is pretty easy actually - just imagine the scenario that will hurt most market participants and it’s almost guaranteed to play out. At least since the prop desk monkeys at Goldman Sucks are running the show that is. Which in itself was the genesis of Geronimo - but that’s a different story.

I wanted to visualize the full extent of the drop in the Euro for you rats. We’re roughly talking a 50% retracement since the late November highs. That’s quite a drop in one quarter. Compare that with the tiny correction we have seen in equities and you wonder - who’s right? Currency traders or whoever is continously putting an emergency floor underneath the tape the second buying volume is drying up?

Seems to me that we are destined to revisit that red diagonal trend line which should now pose as resistance. This also roughly correlates with the target zone for gmak’s Gartley count. If we don’t reverse there I am afraid it’s green all the way. Monday will be an important day for both the bears and the bulls.

If you’re holding long term puts - do you yourself a favor and don’t even look at them. Yes, that’s right - Mr. VIX has dropped below 20 yet once more. It seems to be slowly riding down that lower border of its 2.0 Bollinger - exactly what I was warning about a week ago.

Damn - I hate to be right sometimes…

Cheers,

Mole

Boy, are the bears getting burned again during OPX - I think we should simply call this a regularly scheduled occasion as we have a year of precedence at this point. Okay, I’m not going to beat around the bush with this but the fucking P3 scenario is starting to lose credibility UNLESS we are topping with the next few handles. Let me show you what I see:

When it quacks like a duck and runs like a duck you oughta think about calling it a duck. Now, the P3 scenario is not dead by any means but it’s starting to look a bit iffy based on the breadth I’m seeing, which is weaker than a day or two ago but sustained. We could be dealing with a blow off top situation in which we perhaps push into 1,120ish and then turn. BUT - look at that little gap I pointed out - that’s usually the hallmark of a third wave in process and it’s right where it should be. So, the form of this wave is starting to resemble a motive wave and that would most likely indicate that green is in session. We better reverse within the next five handles or so, otherwise it’s time for the bears to start embracing the notion of yet another huge disappointment. We are now sitting at some resistance and if that breaks 1,020 is almost guaranteed - again, this is a line the bears want to defend fervently.

If we turn then this was some extended flat - the confirmation point for hat would be a drop through 1,056, and we’re far away from that. Sorry for being the bearer of bad news but the tape is what it is and the wave counts leave only so much wiggle room. Friday will most likely be key in determining on what the real trend is going to be for the coming weeks.

Okay, now that I ruined your day here are some bearish counter arguments:

Screen grab of the current zero. As you can see Tuesday was quite intense but then we kept melting up despite vastly reduced participation/momentum. This points towards retail trader greed fueling this - but it also could mean nothing unless we start seeing some negative readings on the Zero Lite and that soon. I have seen these patterns happen before and sometimes this indicates that we are about to turn. But the inflection point for that is usually a drop with a strong negative reading and we’re not seeing that. Keep It Simple Stupid - as long as the Zero Lite hovers above the zero mark we probably continue our march up.

And then there’s that monster divergence between the Euro and the SPX. Obviously the currencies are lagging equities by far and it’s again the SPX that’s defying gravity (for now). I still believe that as long as this situation maintains itself Soylent Green is merely the alternate scenario - but if we see a sharp run up in the Euro I suggest to start hedging or closing our bearish positions. Keep an eye on that chart.

Also, let’s not forget Mr. VIX - as you can see the 2.0 BB is now pointing up and we are very close to touching or even pushing outside the lower border. If you fade your current emotions and look at this chart a reasonable perspective may be that yet one more day up might be the best thing that could happen to the bears. Hey, in this racket you got to think contrarian and always consider what would hurt the most amount of market participants. Clearly fear is fading fast and any remaining dip buyers are now jumping into the fray - so, a VIX sell signal may be just what the doctor ordered.

Finally, as you can imagine Geronimo has been on a tear all week. Has more than made up for the punishment in my long term puts

Cheers,

Mole

There will now be a committee set up to identify and deal with systemic risk in the financial system in the USA. Somehow, an audit would hinder the FED in its ability to do its job, but a committee of political hacks is beneficial? Welcom to the broken clock.

EQUITY

Thursday in OPEX. Is there a more predictable day for trading? Some would argue not. The sequence for quite a while has been a high probability of an up Monday and a down Thursday, leading to adequate profits by going long on Fridays near the close, and closing the position on Wednesdays. Today seems to be favouring that higher probability scenario.

SPX Daily continues to put in time towards the “B” point of the Gartley pattern. Here is a reminder of the numbers for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (projected)
C = 1058.50 - 1069.50 (projected range)
D = 1124 - 1135 (projected range) Go short here if the pattern holds

If the current market patterns are maintained, SPX should be there by Wednesday of next week. What is interesting is that the TD wave count is lining up with the Gartley pattern. SPX daily is in the process of laying down either wave B of ABC following a 5 wave up sequence, or is putting in wave 2 of a 5 wave down sequence. EIther way, the next wave is down - whenever this one ends.

TA does NOT drive the market. The market DOES NOT CARE what you think, nor how cleverly you draw lines on a chart. Waves are obvious. The market never goes straight up nor straight down. Hence, it will go up then go down. Thinking that a ratio taken from the spiral of sunflower seeds can predict where this will happen is nonsense. If SPX gets to point “B” and then heads down - it will be a coincidence and nothing more. The numbers merely give traders a point to aim for.

Asia was red, except for Japan (the JPY was weaker). Europe is all green. The DAX gapped up at open and seems to be trending sideways within a 20 point range. Smack! Range trading. Is there any easier way to pick up some cash? Utilities and Consumer Discretionary are the only red sectors. The broad-based move, the range bound sideways move after a gap - this adds up to distribution in my mind. The game is on.

ES overnight traded in a rane between the pivot at 1094.75 and somwhere around 1099. It faded off of the lock up and trended sideways until falling some more into the Europe open. The DAX gap up did some good and ES rose from its slepp to test the highs of the night again. The action looked quite well behaved and suggests that the AH market shenanigans are not as prevalent as they have been in the past. With additional liquidity drying up, its hard to play reindeer games. Pivots:

R2: 1105 = Puts SPX up near the Gartley “B” point. I doubt this will happen on OPEX Thursday.
R1: 1102 = Notice how thight the pivots are to each other. Low volume and diminished volatility. While not exciting, these are great markets to play the swings in the range and pick up a few points with lower risk. This level was around the resistance from Jan 27th and Feb 2nd - before the Feb waterfall.
Neutral: 1097.25 = This is the TD resistance level from the waterfall. ES is running along this at the present time, with minor deviations to either side. I would expect a downward move at some point to the S1 pivot - but only based on OPEX Thursday lore.
S1: 1094.75 = This has already been tested once in the overnight. It’s a likely place for ES to close heading into OPEX tomorrow, IMHO.
S2: 1090 = Looks like the resistance level from Feb 16th. The 34 DMA is above this point so reaching it today would be a surprise to me.

Here is some data and news regarding the EUR, courtesy of Forexlive.com:

Swiss trade balance +2419 mln in January, up from revised +1362 in December

BOJ’s Shirakawa: Must ensure market trust in fiscal rebuilding

German engineering sector in NRW agrees salary increase of 2.7% for workers from April 2011

Russia CBank seen buying $1.4 bln in forex market interventions on Thursday as rouble keeps firming

BOE’s Barker: UK recovery hesistant

UK January PSNB £4.339 bln, PSNCR -£11.770 bln

Swiss ZEW investor sentiment 52.5 in February, down from 56.2 in January

The IMF has announced 191 metric tonnes of gold for sale. A metric tonne is about 2,200 pounds. At 16 ozs in a pound and $1100 per ounce, that comes to around $7.4 billion. The price is down - no surpise and that would soak up a bit of USD.

DXY is up. CAD and JPY are stronger. EUR and GBP are weaker. ES is slightly down. See the pattern? I played DXY long and short on swings yesterday. Right now, I am DXY short - playing off of the upward trend in EUR that I see on the 3 minute chart.

EUR hit a nine month low. It think its time for a relief rally and consolidation before the next move up or down.

NEWS

IMF gold sales (seemed to matter to the price of gold. heh.). SEC may give investors more say on board of BofA. UK tax receipt woes leads to “first” January budget deficit. FED sets goal of “eventual” exit from housing finance. NOTE that even if the FED does nothing, their MBS holdings will diminish steadily over time due to principal repayment. ZH computed approximately $10 - $12 bb per month going forward - but I haven’t confirmed this yet. Obama is going to meet the Dalai Lama and spit in China’s tea. rut-roh.

DATA

8:30

PPI; Jobless claims;

9:00

RPY composite

10:00

Philly Fed; Leading Indicators from January. (remember that these include the equity market so it is almost a self-fulfilling prophecy. Only works if you believe that SPX really REALLY discounts the future at the present time.

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