Fin/Inv

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

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.

FX

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

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.

I didn’t have an opportunity to post during the session today but wanted to share a few thoughts with you ahead of tomorrow’s session.

Clearly the bears got burned today and that OPX gangsta style. The tape ramped all day and there was nothing but fear and short covering among the bears. NYSE A/D ratio closed at 4.7, the highest reading since November 10th. So, just looking at the momentum chances are we are already tracing out Minor 2 of Intermediate (1) - or worse

The ‘good news’ for the bears is that we should get confirmation very soon. I’m currently counting a zigzag followed by a flat. Look at that fib I painted from the bottom of my x wave. Traditionally the maximum length permitted for the c wave of a flat is 165% of its a wave. What’s really interesting about this Maginot line (look it up) is that I actually had drawn this fib during the session - way before we touched it at the close - funny how that works out sometimes.

If this is really some type of alternation (EWT speak for a combination of various corrective waves separated by an x wave) then it should stop in its track right now and here. If we push much higher chances are now increasingly pointing towards the Minor 2 scenario. Again, this is merely academic for anyone holding long term puts right now. Just so you know what you are dealing with: A Minor 2 wave can correct almost all the way to the prior high, which would be 1,150.41 - so theoretically we could push to 1,150.40 and the current count would be maintained. The second we run beyond that the entire Primary {3} scenario goes out of the window and it’s back to the drawing board for the bears yet again.

But it’s way too early to worry about that. The Dollar has been digging in its heels and conversely the Euro has been lagging the advance we’ve seen in equities. Therefore the odds still point to either Soylent Orange or Soylent Blue - pick your poison.

Early retracements can be violent and scare off the bears hoping to ride the wave down - and in the end lure them into giving up long term positions. This is part of the game and if you don’t have the brass balls to ride this out then you’re going to be left behind sooner or later.

But yes - we can’t keep running like this forever - would be good to see this thing slow down and that soon. Especially since the time cycle has now shifted downwards again - if we are starting to break away from that and there is follow through to this rally then the bears might be in trouble. I would have preferred to not see a new high for the year in the NYSE A/D department - that’s a bit concerning. Let’s keep that in mind as we run through the rest of OPX week.

Cheers,

Mole

Pressed for time this weekend - let’s get right to it. The battle of the titans looms as we have reached a fork in the road. And as the late Yogi Bera** put it so aptly:

When you get to a fork in the road - take it!

Arguments for the bears:

The Dollar bear squeeze has had the carry traders on the run. But it’s now reaching an inflection point where the Euro baby’s got decide what it wants to be once it grows up - become a bear (i.e. let this turn into a third wave), or grow some brass balls and turn into a raging bull (i.e. the drop we saw since December was a merely a-b-c retracement). Either way, I don’t think this thing is done yet as the divergence painted here on my Euro/Equities chart looks like an equity bull trap me.

Let’s zoom out of the actual Euro futures chart and for a second digest what’s been happening in the past few weeks. We basically retraced seven months of painstaking upside progress in a matter of two and half months. That’s quite a drop and it’s been quite violent. Yes, there is the possibility that it’s only a retracement but it sure ‘feels’ like something else.

Now let’s hear from the bulls:

If I drink my own kool aid I should be anticipating Minor wave 2 snapback in equities here, at least very soon based on the 10-day MA channel the CPCE painted over the past 10 months or so. This is the chart that should make the bears very nervous as the snap back will most likely be very violent. If it comes, let ‘er ride and don’t go short too early. However, once we drop towards the 0.55 range again get positioned for Minor 3 of Intermediate (1) of Primary {3} - it’ll be fun.

Nothing really sensational on my wave counts - everything is still in play. As I said last week - Minor 2 will be confirmed at 1,104.75 - the difference is only intellectual as theta burn and drops in volatility hurt one’s options either way

The orange scenario requires new lows and a drop through 1,045 - if we get it what follows could be very ugly for anyone holding long positions, so make sure you’re properly stopped/hedged.

Next week will be very important - it’s OPX week again plus we are rolling into a potentially bearish time cycle. Which is why I’m a bit skeptical about the bullish scenarios but felt it to be my duty to offer a counter perspective. Expect some volatility, headfakes, and general craziness until the tape decides upon a direction.

Just to remind you guys that Monday will be Presidents Day in the United States (originally dedicated to Lincoln’s Birthday but they have to honor every asshole these days - who’s that Washington dude anyway), so the cash markets will be closed. I think the futures might have an abbreviated session - not sure actually.

Bottom line: Chances are we will pull out of this limbo territory soon as it is now time for the real Slim Shady to stand up:

Cheers,

Mole

** He’s aliiiive - alliiiiiive I say!!!

Equities today seem to have turned themselves into the equivalent of a juvenile beer bonging crack snorting party animal. Start with Jaegermeister, sniff some glue, then comes the oxygen, pop some downers, some uppers, a venti shot of espresso, then home for some hot action play fueled by Ecstasy.

Party on Wayne - but remember there might be a big hangover looming next week

Translation: Bearish wedge. Swing traders were having a field day.

Before I run here is a very ominous screen grab from the Slope:

Now T.K. was never known to be a ‘macho man’ so to say but this has clearly gown way too far. We are talking rose petals, un-manly cocktails, chocolates, ribbons - the works. We even got ourselves some ad banner flip flopping - obviously someone reserved the right to change his/her mind on EWT during a premenstrual cycle. Which leads me to assume that Tim has been either abducted by Goldman Sucks (so gay), the ACLU, or at least someone with horrible taste in interior decoration (a punishable offense in itself over here in the evil lair). I can guarantee you there are pink soap bars and cushy carpets being placed in Tim’s bathroom as I’m typing this.

Whoever you are - what have you done with Tim Knight, and what are your demands? We want our grumpy tasteless bear back!

On a completely different note - I absolutely loath Valentine’s Day - yuck!!

Enjoy your weekend, rats!

Cheers,

Mole

I keep telling you guys that the news don’t matter. Which doesn’t mean they can’t spike the tape for a few hours - but if you trade on that time scale you’re either a pro and have the inside track or chances are you usually find yourself on Lester’s side of the trade (don’t ask).

Let’s talk about the Dollar - as gmak pointed out this morning, its inverse correlation relative to equities is holding up well and although we don’t trade correlations it’s clear right now that a rising buck presents a headwind for bulltards. So, I wasn’t surprised to see a drop in the DXY this morning after the Greek bailout news made its rounds.

The chicken hawks are ready to buy the dip and the bears should look towards the DXY (or EURUSD) for clues as to whether this is just the completion of an Minuette c wave (i.e. Soylent Orange) or the beginning of a Minor 2 retracement (i.e. Soylent Blue). Well, let’s consult 2sweeties’ DXY oracle - as usual courtesy of retracementlevels.com - I recommend you go and check out the wide selection of statistical trading tools available.

Rule #1 is that we must not breach 78.45, which is the top of Minor wave 1, according to my current count. If we do then it’s back to the ole’ drawing board.

There was no daily long RL right above 78.45, which is why I cheated and set the 100% mark at 78.386. It’s not that I wouldn’t expect a bounce there - it’s just that I probably would not want to go long for more than a day as my wave count would not be clear. Again, if you don’t put any stock in EWT then just ignore this bias and trade what you see according to your own system.

As you can tell the odds are not too great until about 79.171, so it’s possible we drop into tomorrow - be cautious and set your stops if you go long at 79.656. Again, this is assuming you use stops - 2sweeties does not and instead adds positions on the next long RL. For more details I strongly recommend you go and peruse his tutorials - it’s a different trading system than what I’m doing. It’s working fine for 2sweeties and if you have the discipline and the capital it might work for you.

The frequency tab is a bit more accommodating. I see a high frequency of support starting at 79.65 all the way through 78.38. 16% is a strong reading and if you combine the roughly 80% odds at 79.171 with close to 16% frequency I’d say that it’s reasonable to assume a bounce there. IT BETTER! Because if it fails that mark the Dollar bulls (i.e. equity bears) could be in a world of hurt. I’m talking Soylent Green here - not Soylent Blue (see my Sunday analysis for details on this).

Alright - hope this helps my stainless steel rats - always remember that Rome wasn’t built in one day. Give it time - expect snap backs - follow your charts/systems. BE DISCIPLINED - don’t let your bias go in the way of your trading - I know it’s hard and I keep telling that myself on a daily basis.

Cheers,

Mole

P.S.: Thanks for gmak for whipping out a post this morning - really appreciate that considering you are fighting off the Hantavirus and H1N1 at the same time.

Equities remain bid challenged - all $NYMO divergences notwithstanding. A good lesson of not succumbing to recency bias? Maybe - meanwhile sit back and watch the market do its equivalent of Goofy’s Holler:

It’s not all just fun and games at the evil lair however - after all we busy working to separate pig faced bulltards from their ill gotten gains:

I love those Fib extensions in TOS charts (hint hint - T.K.) - if this is not an a-b-c (if it is we’re screwed) then we should be breaching the 1000 mark in a jiffy. Also shown on the chart is the monster divergence between the Euro and equities which developed in late 2009 and finally resolved in late January. I kept harping on that fact for weeks, pointing out that the bulltards could only ignore the Dollar bear squeeze for so long. Hey, I’m trying - not my fault if nobody listens.

This fine chart was posted by brother Jeff Kohler over at OptionAddict.com. Jeff rightly points out that we again are looking at a bullish divergence on the NYSE McClellan (a medium term trend indicator). He’s right - only question here is if the resolution will be the same as during the uptrend. However, I’m willing to consider the possibility, which is why I posted the chart on top. We need to get out of an a-b-c scenario and for that to happen we need to push past the 165% mark (which is how far a C wave ‘usually’ extends) which would occur at (drumrolls) 971.80. If we get past the 990 mark I believe we actually have a chance of getting past that point.

So, we have quite a bit to go until we can pop the Cristal - but thus far I’m liking the ride

BTW, the Dollar is on a tear - so far the retracement levels on the DXY are working like a charm. We are now near a 14% short RL which is 80.7 - either cash out here or wait for 81.7.

I see some dip buyers jumping in - it’s long overdue - if this mark doesn’t hold right now we are looking at some EOD nastiness.

Cheers,

Mole

I really like the developing wave patterns on the currency side of things. The DXY is right on track of tracing out an almost textbook third motive. Admittedly that’s a very early assessment but the first and second waves, as well as the currently evolving third wave look very nice in terms of form, sub-divisions, angle, and velocity. I know this doesn’t look like much to most equity traders, but let me assure you that a bunch of dollar bears are sweating bullets right now.

Where do we go from here? I think it’s up - at least until the 80/81 cluster. But let’s consult our DXY retracement calculator - courtesy of 2sweeties from retracementlevels.com:

As you know I always start with the odds and considering that this may be a third wave I am extra conservative and have placed my 100% mark at 83.44. Based on that the odds for a meaningful reversal are 75.73% at 80.7 and 87.45% one handle further up at 81.75. Now under regular circumstances I’d say that 75.73 would be a decent spot to get positioned for some short side. But again - we might be dealing with a third wave here and if I was planning to go short (which I don’t - only playing the long side) I would wait until at least 81.75. Please bear in mind that this bias is predicated on me having faith in EWT and its wave counts in the first place - if you don’t, then just fade my comment and focus on the odds.

The frequency tab tells a bit of a different story. There seems to be a a cluster of reversals around 80.7 and even a stronger one at 80.06. The next two above (81.75 and 83.44) also have respectable frequency readings above 10%. What to do - what to do?

I think at the current stage of the wave count trading the short side might not be the most profitable endeavor. The main trend seems to have switched to the long side and thus it is here where you should expect to see some nasty surprises - the bucky bear squeeze is on! If you are long since 77, then either take profits at 80 or hold to see 81.7 or 83. The wave count appears to be progressing nicely and we should not fall into the trap of over trading.

If you simply look at the chart it’s quite clear where the resistance clusters will slow the Dollar’s run. Bundle in the odds I proposed and the long side is promising right now. Also, once we get a reversal in the form of another sub-division we might push up hard in a third-of-a-third type scenario. This is the money trade we should be looking to get positioned for. I will keep you guys posted when we are getting close.

BTW, if you’re interested in trading currencies like the pros by facilitating statistical odds head over to retracementlevels.com and pick among various daily calculators:

• EUR/USD
• GBP/USD
• USD/CHF
• USD/JPY
• AUD/USD
• UUP
• UDN

If currencies aren’t your thing then 2sweeties’ got your back:

• Gold COMEX (GC)
• Hang Seng Index (HSI)
• Nasdaq 100 Index (NDX)
• Oil (CL)
• PowerShares QQQ Trust (QQQQ)
• Russell 2000 Index (RUT)
• S&P 500 Index (SPX)
• SPDRs (SPY)
• S&P/TSX Composite Index (TSX)

And those are just the daily indicators. I personally use 2sweetie’s hourly E-Mini S&P 500 (ES) and I wouldn’t even thinking about touching a contract without checking the odds first.

UPDATE 4:00pm EDT: PRSGuitars is back with a vengeance - I’m posting his very interesting chart without commentary as I’m not following this particular pattern.

I would however love to see it play out But again - this is one of those ‘exotic ones’ (at least in my book) I leave to others to follow. But I must point out that the resolution does coincide with my own wave count - so we shall see.

Cheers,

Mole

Obama finds that the tides don’t listen to his beautiful speaking voice.  Foreclosures are being forecast to reach 3 mm in 2010 vs 282 mm in 2009 - remembering that banks are doing whatever they can NOT to foreclose and have to mark to market.  .Gov assistance programs are ending.  Debt loads remain high, and unemployment continues to take a toll. Delinquencies are rising sharply. Meanwhile, Moody’s says that the economy will die if .gov measures are withdrawn too quickly (read “at all” into that). I’m getting awfully tired of all these apocryptic warnings. Can’t “they” see the economic wasteland that is already all around us?

Meanwhile, the AIG hearings are showing that apparently no one was in charge even though Financial Armageddon was the expected outcome. Further, the mysterious NY FED was the source of an email lamenting that they would be unable to keep things secret from Congress due to the sheer number of fingers in the pie. TIck. Tock. Tick. Tock.

EQUITY

Asia was red. Europe is GREEN *(except for Switzerland - how’s that CHF doing? Looks stronger. We have a correlation!) .  The DAX is putting in a floor with apparent overhead resistance at 5600.  All sectors are green except Telecom. This suggests an up day initially for the SPX. The green is between 1% and 2%, so not too shabby.

This is the last trading day of the month, but portfolio window-dressing is already done. Today could be a low volume tug-of-war, it seems. Volumes on the ES have been accelerating since the start of the year and are up around 3.0 mm per day (24 hour less lock up).  SPX volumes remain subdued.

Yesterday, the SPX put a pin down through the 1086 floor - and closed blow it.  TD Pressure says that today should be an up day as it crosses back above the oversold signal line. I’m more interested in the 5 DMA and how it has pushed SPX down. IMO, for an up day to hold and mean something, SPX would need to close above the 5 DMA - which right now is at 1092.55. The “Since AUg 17″ trend line is overhead at 1104ish, and the 50 DMA is still tracking flat at around 1114 - 1114.50 (our upper resistance level from eye-balling the chart).

ES gentle wound its way down until around 1 AM and has since, gently, retraced its way back up to the highs of the session. It looks like a “normal” overnight market with sellers dominating earlier, and buyers coming back in later - but no reindeer games. In this type of market, cyclic TA seems to work well, and we have a bullish cross on the 9 and 34 pMA on the 5 min ES chart. TD pressure has indicated a low risk buy at these levels, with pre-cautionary stop around 1079. I notice that this is just below the 34 pMA and a TD support level at 1080ish. If 1079 is penetrated decisively, then price exhaustion would become active down to 1074.50.  Given the bullish cross, and TD pressure - that is a big IF. Pivots:

• R2: 1115 = would put SPX above the 1114 ceiling. Not impossible, but not likely, IMO.
• R1: 1097 = Certainly would put SPX above the 5 DMA. Looks like it’s in the area of a lot of “peaking” activity over the last 5 trading days.
• Neutral: 1085.75 = Put a stop to the rally into the close yesterday. Looks like ES wants to make it a base camp for an assault on R1. Not there yet though - and there is good resistance at this level. This is also above a lower trend line on the 4hr ES chart, beginning Aug 18 (With a touch Nov 2nd and 3rd, a near touch Oct 2nd, Sep 2nd).  So far that trend line is holding, unlike the one on the daily chart.
• S1: 1068 = Site of the turnaround of the dip from late Nomember. Was also resistance back in the second half of September.
• S2: 1056.50 = The gates to the abyss?

FX

Not much to say here. DXY is moving up, CAD is neutral, JPY, EUR, GBP are mildly weaker. Financial leaders in Europe are still telling us that a strong USD is in the best interests of everyone (who wants toilet paper in their wallet), and that Greece is not an issue. That’s twice they’ve denied it. Third time, and……. I’d worry more about California’s debt.

NEWS

1. Bernanke hearing gets past cloture. Does the icy pain of betrayal by one’s elected officials ever grow numb?
2. The PBOC is worried about inflation - now that they have let it out of the cage, it refuse to behave and they are finding it difficult to “manage the economy”. Who knew?
3. Bankers are bitter at the absence of their annual wine-tasting in Davos and plot long sober hours on how to bring .gov back to heel.
4. US GDP is expected to be driven by factory output, even as commodities are expected to fall.
5. Greek bond yields come back in showing an improvement in confidence that there will be no bailout.
6. The Gates-es do some more good and pledge $10 bb for vaccines for the poorest nations. Future consumers have to come from somewhere, he said cynically.

DATA

Here is the European data from this AM:

http://www.forexfactory.com/

Today is GDP and all the attendant sub-data at 8:30AM EST. 4.7% is expected vs 2.2% prior. Do you know why the saying is ” Buy the rumour, Sell the news”? It’s because traders /gamblers take a position based on their expectations of what the data point will show. When the data comes out, they close their position for a gain or loss. There is a built-in bias to the upside on the saying as well.

Note that Personal consumption is expected to be down to 1.8% from 2.8% prior (and yet GDP is supposed to double? - sure looks like a lot of inventory building is expected).

We also have these two little sleeper items:

• 08:15 FRB Vice Chair Kohn on bank interest rate exposure
• 10:30 Fed agency purchase (Oct 18, 2016 to Jul 15, 2032)

I got an email from the FED saying that they bought $12 bb of MBS in the last week, $12.5 bb gross - which suggests pre-payments of about $0.5 bb in the week. Not yet at the levels expected by the zero hedge article - but something nonetheless. I have seen about $2 bb difference between net and gross in previous months.

On the trading side, I see ES is leveling off its move upward. The 9 pMA is turning down - and is close enough to the 34 pMA to cross over in a bearish cross. However, it looks like flat slow waves into the data. Nothing left now but the white knuckles and grinding teeth of those betting on the numbers. The TA shows more downside support than overhead resistance, all in all, on the 5 min ES chart. It sure looks like a consolidation before a move up. Swim with the current if you’re gambling.  Watch out for the volatility in this news. I’m sitting on my hands until afterwards.

HERE IS A LINK TO MOLE’s POST FROM LAST NIGHT:

http://evilspeculator.com/?p=14397

In times of crisis, leaders often look for an enemy to distract the great unwashed from the growing problems. The President of the US has decided that it should be the Legislature. Bernanke, it seems, has been lobbying senators to keep his job.  The great contradiction yesterday was Geithner saying he had nothing to do with the AIG decision, and a later witness (I forget the name) saying that he signed off on all the AIG transactions.

In the meantime, it’s official: The FED has declared that we are in a recovery. It must be. Ford was profitable in accounting-world. More importantly, this means that lquidity backstops and MBS purchases shoud be on the way out. In my opinion, the risk market has only risen due to that “rising tide”.

China tells the world that there is NO inflation in its country. Clearly, their Central Bank is cloned from Greenspan and the FED who cannot see a bubble when it’s coming out their noses. It seems in Greece that on top of death and taxes, the only other certainty is bribes. Businesses are making decisions to avoid or minimize the amount of payoffs they need to make to do business there. Irony of irones, a judge in Ireland tells a debtor, “But you will appreciate that when parties enter a legal arrangement, if someone loans you money, you have to pay it back.”  German unemployment increase was less than expected. Consumer confidence remains at its previous levels (low, if there are any doubts).

It’s just another day watching the hands of time tell lies. Welcome to the broken clock.

EQUITY

The world is green. Only Canada and Latam are showing red on the Wheel of Fortune. Even the PIIGS are getting a bid this AM. Obama may not be much - but he sure can give a speech! The DAX gapped up at the open, but has been selling off since and almost closed the gap. It looks like a bearish flag being put in.  The current level, around 5660 looks to have been support all th way back to September. It must be the DAX equivalent of SPX = 1086. Industrials, Health Care, and Utilities are the only RED. Materials and Financials are leading.

SPX put a pin through 1086 yesterday, which seems to have lit a fire under the buttocks. It went on a tear upward, to be stopped at the 5 DMA. So far it is looking like a small gap up at the open, but the lying Durable goods number comes out this AM, along with jobless claims. You can be sure that there are a number of gamblers with money on one side or the other - and the low volumes make the swings particularly dangerous.

Today, the “Since Aug 17″ trend line is overhead at around SPX = 1103. The 50 DMA is overhead at the visual resistance point of SPX = 1114. SPX = 1086 has held again (For the 6th time, more or less, since going above on November 9th).

If you look back to SPX daily in 2003 - 2004, you will see that after the ramp off of the bottom, there was a period of sideways range-bound activity from around January 2004 until October 2004, with the TA indicating on each down leg that it migh head lower. My expectation is for similar action for the next few months until liqididty begins to be taken out of the market. One of the reasons is that I believe that the big money has to do distribution - and what better way than to bring in the SHORTS and sell to their panic covering?

One final note on the big picture: On a weekly basis, the trend lines have been clearly broken. TD has a technical support line at 1069.30. If the trend line is to be re-tested (and they don’t have to be before a drop), then SPX = 1121 could be a possibility.

ES rose overnight on Obama’s eloquence, and began a slow sell-off when the silver spoon turned back at midnight. TD has a technical support level (and it was the base for the overnight rise) at ES = 1096. The resistance level is at ES = 1102 (SPX = 1106ish, I believe).  Looks like range-bound trading until 8:30AM EST, to me.

• R2: 1107.50 = Also the potential target for any momentum, since TD has a price exhaustion level there on the 5 min chart.
• R1: 1101 = Moving above this and retesting from above would activate the 1107.50 price exhaustion level and make it an active target.
• Neutral: 1089.75 = Site of some noise into the close yesterday. Looks like it was resistance and support both over the last week or so.
• S1: 1083.25 = ES analog to SPX = 1086, more or less. Definitely not the Maginot line.
• S2: 1072 = Looks like this was the area for a lonely pin at the end of November. It was also resistance on the way up in the second half of September. If SPX = 1086 is breached at some point in the future, I believe that this would be where the bulls would come in to force short covering. (remember Jan - Oct 2004!).

FX

Looks like DXY is going to get a bit of a rest after avoiding the double top.  The 50 DMA at 76.82 looks like a solid longer-term support level, and TD technical support is there as well. The EUR is resisting falling below 1.40 - money is on there being some option bets around that level.  On the 30 min chart, DXY found some support at the pivot at 78.63 - but it hasn’t been able to hold above the last high at 78.814. Lower support is at the pivot at DXY = 78.41.

CAD and GBP are stronger. EUR is flat (more or less), JPY is weaker. Yet the DXY is up. Is it the mightly CHF?  It is weakening. Are those the BIS footprints at the crime scene?

NEWS

Economic recovery is underway in the USA. There is no inflation in China. Russia says that it doesn’t expect country issues in Europe to have an effect on the Euro. Japan says that it won’t suffer a double dip in the first calendar quarter. I can hold my breath for an hour.

Sales of floating-rate corporate bonds are falling off, suggesting that there is less of a worry by investors about inflation. The market seems to believe that rates are going to stay low for a while. Don’t they understand that the FED has been buying Treasuries and that when liquidity is withdrawn, rates will ramp?

Brace for more useless spending as Obama is making jobs his top priority (what was it before?). Nokia shares surge 16% - let’s party like it’s 1999.

DATA

8:30AM EST = Durable goods (remember the fudging last time) at 20% expected versus the adjustment to -0.7% prior.  If I were going to fudge, I would make a statistical adjustment because not many would notice the downward movement that would make the next period positive. Watch out for low-flying reindeer games.

Also, Jobless claims and continuing claims - which has become a bit of a snore-er. 450K expected vs 482K previous. Expect a thrilling appearance by the Birth /Deaths model that attempts to simulate small business activity.

ES is coming up to the top of its overnight range. I like the idea of swing trading between 1102 and 1096.  I would put a stop just above ES = 1103, and look to come back in short around 1107.50;

If we get down to 1096, depending on TA at the time, a trade going long with a stop below 1095 looks like a decent risk /reward trade - with upside around 1101. BTW, the 9 pMA has crossed the 34 pMA on the 5 min chart indicating a bullish cross - even as ES bumps against the pivot at 1101 with TD technical resistance just above at 1102.

Now we’re getting somewhere - I love the sight of red candles in the morning. Anyway, I have to run out for an hour but didn’t want to leave without posting this warning:

Mr. VIX is now pushing outside its 2.0 Bollinger. If it closes that far out, meaning equities don’t retrace before the bell, then we are one leg into a VIX buy signal. Which means that there will be push back from the bulls. Hey, you didn’t think it’ll be straight down from here, did ya? Don’t let greed get the better of you - if you are trading short term hedge yourself now.

Full disclosure - I just grabbed a few ITM February calls to balance out my truck loads of OTM December puts. If we push back inside the 2.0 BB before the bell I will kick them to the curb where they belong.

I’m sure you rats have heard of Ivan Petrovich Pavlov - if you didn’t have the luxury of a formal education let me enlighten you:

While Ivan Pavlov worked to unveil the secrets of the digestive system, he also studied what signals triggered related phenomena, such as the secretion of saliva. When a dog encounters food, saliva starts to pour from the salivary glands located in the back of its oral cavity. This saliva is needed in order to make the food easier to swallow. The fluid also contains enzymes that break down certain compounds in the food. In humans, for example, saliva contains the enzyme amylase, an effective processor of starch.

Pavlov became interested in studying reflexes when he saw that the dogs drooled without the proper stimulus. Although no food was in sight, their saliva still dribbled. It turned out that the dogs were reacting to lab coats. Every time the dogs were served food, the person who served the food was wearing a lab coat. Therefore, the dogs reacted as if food was on its way whenever they saw a lab coat.

In a series of experiments, Pavlov then tried to figure out how these phenomena were linked. For example, he struck a bell when the dogs were fed. If the bell was sounded in close association with their meal, the dogs learned to associate the sound of the bell with food. After a while, at the mere sound of the bell, they responded by drooling.

Now, don’t believe for a second that mental triggers are limited solely to the animal kingdom. Don’t believe me - think you’re purely rational? Alright, let’s do a little experiment:

Think about biting into a juicy lemon!

See what just happened? I personally felt a sour sensation on my tongue and there’s no lemon in sight. The same phenomenon occurs all the time and in various situations. Even when it comes to investing or trading the markets - no matter how smart you think you are. We are all creatures of habit and if we encounter a certain situation for long enough we eventually will get used to it and incorporate it into our mental framework. Case in point? Even we bears have become almost complacent in our anticipation of even higher tape - we’ve been burned so many times that we simply don’t want to touch that hot oven top even one more time. Every time we did - we got burned! So, going short equals pain - right? Of course not - timing if everything. But this type of mental predisposition is exactly what Curtis Faith refers to as one of the cognitive biases - in this case we are talking about a mixture of ‘recency bias’ and ‘loss aversion’.

Some will even miss a stimulus (no pun intended) once it’s gone - which probably explains some of the addict like behavior many traders exhibit once a long term trend turns in its tracks and takes out most or even all of the gains accumulated on the way up. And that is exactly what’s about to happen again - maybe not next week but most likely within this first quarter of 2010:

Yes, Pavlov’s dogs are drooling again

I have not bothered with the wave count for almost a month now - and the simple reason for that was that there was nothing to talk about (plus I was very busy). We needed a strong reversal to place some labels on our map and that came with Friday’s sharp drop to the downside. I’m sure that a bunch of folks betting on an expiry at 1150 still feel the sting today.

And although we might see a snap back on Monday or later this week the wave form in combination with various sentiment indicators dictates that this vapor rally is either over and done, or at least in its last throws. Yes, yes - that’s what I thought back in October and we got served a cold platter of kick ass. But the writing is now on the wall in the form of a looming withdrawal of the Fed IV drip that has kept this market on life support over the last year. Plus consider that avalanche of Alt-A mortgage resets ready to kick Wall Street in its collective groin all through 2010 and 2011. I’m sure you guys remember that mortgage reset chart behind my long term S&P outlook I posted a few months ago.

There is only one question you need to ask yourself today: Where is the real risk here, right now? Is it to the upside or is it to the downside?

Exactly.

Of course the slaughter scheduled for U.S. equities will not transpire in a matter of days or weeks. It will take months to play out - and thus we need to be clever and take into account how we can position ourselves with only minimum amount of risk and with a main focus on the medium and long term. Why? Because by the end of this year I expect the SPX to trade below the March 2009 low of 667. And by summer of 2011 we should be closer to 300, if not lower. An corrective third wave of the magnitude that lies ahead later this year has not been seen in over 80 years - it won’t be pretty and it will ruin the fortunes of many - unfortunately most of them innocent of the unmitigated greed and corruption that has afflicted Washington and Wall Street alike in the past decade. But that’s life - like in war economic crisis mostly affect the working class while the rulers and their cohorts sit things out in relative safety and luxury after having enriched themselves at the detriment of the majority. Is it fair? No, but unfortunately life is not fair - all you can do is to pay attention and push the odds in your favor a little. Which is what we do here - on a daily basis.

Short term we might see some flailing around on Monday or later in the week. Soylent Green is still a possibility and don’t fool yourself into believing that Soylent Orange is a ’shoe in’ - look how far we have come and how little we have dropped last Friday. Yes, it felt like a big victory - but it was nothing but a little drop into the bucket after a ten month long bullish rave party. There is a chance the bulls blow their load and push this thing into 1180. Doesn’t have to happen but if you’re short term oriented - be cautious and make sure you don’t trade the big picture with short term options that drain blood (i.e. theta) faster than bull with a matador’s sword in his heart. Which btw, will be my job all this year

The Investor Intelligence bull/bear ratio closed at 3.36 on January 12th - a new record for the past decade. Again, do you expect this ratio to push towards 3.5 or 3.8 before we turn? Possible - yes - but I keep pointing towards the long term here. I mean - wouldn’t now be a great time to think about hedging yourself to the downside? Option premiums are dirt cheap again and should we experience a correction to the downside the ensuing rip in volatility will be extremely profitable on the horizontal side of the option chain grid. Do I love long term options? No - actually I rarely trade them - but we are now finding ourselves in a very unique moment in time and each battle requires efficient weapons to come out the other end as victors.

I will talk about the Dollar tomorrow - running out of time here. But generally I don’t see anything in the way of the long term uptrend I have ben proposing for the old greenback for months now. It’s been a long time coming but thus far the developing wave form fits this general outlook.

As stated on this Euro/SPX correlation chart - equities can only ignore the dying Dollar carry trade for so long. The thing about a reversing currency carry trade is that it’s all about leverage - at the very tail end a lot of leverage is required to sqeeze profits out of the short end of your trade. When it turns you don’t want to be the last one rushing for the door out. Expect more strength in the Dollar in the months to come - and that will add to the headwind - or should I say shitstorm - that equity traders will encounter all year long.

Before I go a piece of bad news. On Friday afternoon Bloomberg sent me a cease and desist letter in regards to the charts gmak has been posting in the past few weeks. Now, before you bitch and moan about Bloomberg let me point out that this is a very reasonable request and that I was under the impression that gmak had received permission from Bloomberg to post his charts here. It’s quite possible that they are only looking out for their intellectual property and eventually agree that gmak’s posts only serve as advertising of their professional services. As a matter of fact he had been in touch with Bloomberg about this - but as I understand it only on a verbal basis and no written permission was given. So give me a few days to get in touch with their representatives and sort this thing out. Gmak is of course free to post any of his commentary or any of his personal charts. But until further notice you will have to do without gmak’s early morning caffeine boost - sorry - that’s life.

Let me make it also clear that our website, our activities, our products and/or our services have neither been authorized nor endorsed by Bloomberg or any entity otherwise affiliated with Bloomberg.

Cheers,

Mole

Apparently something funny happened on the way to the Fed discount window this morning:

Apparently some genius (bless your soul whoever you are) fat fingered the CCI numbers over at Bloomberg. Frankly based on the reports I’m seeing everyone is still confused as to what was originally reported and what the numbers really are - not that anyone on Wall Street really cares. Take this for what it’s worth, but IMNSHO the day the economy actually shows signs of real recovery is when you will see equities tank hard and long (yes, ladies - expect no less).

In any case - what does the chart above show us lowly rats? First up I see a nice solid and clean -2.0 OPX surprise signal to the downside. Not bad, not bad - but nothing to get too excited about - it’s only a good start. What’s much more important to me is the gap down followed by eight consecutive red five minute bars. If you think that’s entertaining then you will have a fun time in 2010. What this shows, my dear ladies and leeches, is how fragile this market really is. A fast drop like that is exactly what happens when there is nobody left with short positions in the market. Nobody left to take profits on the way down. It sucks if you want to get out of the market and there’s no bid - except the Fed of course - the bid of last resort. One sided markets eventually break under their own weight and what we saw this morning is a delicious little appetizer of what’s to come later this year.

Will the big drop happen today or tomorrow? Probably not - these things flail about for a while to shake out over eager weak hands before a trend change finally establishes itself. If you were short last night - congrats - you just banked some royal coin. Take profits now and wait for a snap back which will come - eventually - most likely Monday.

It would not be unreasonable to assume that Mole will relinquish his weekend duties at the local strip bar and will instead  be parsing for short victims a good part of his weekend. Think long term, rats - think long term.

12:52pm EDT: Surprise!!! And I’m not talking about the market

Get them here while they’re hot. BTW, just for the record - I don’t make a penny on those. Decided to have -273 produce them and retain all profits to keep the price low - I know how cheap you damn rats are

In other news - call holders desperately looking for anyone offering a bid. Fed spike monkeys on extended lunch break.

I dedicate this vid to piers over at -273 for putting together those awesome Evil T-s. Move over Pistols - those shirts are more punk than Sid Vicious.

1:33pm EDT: First price goes to Tim L. for buying the very first Evil T. Second consolation price goes to Chris P. Hope you guy wear it with price

I like what I see in the Dollar right now - and I also enjoy equities steadfastly ignoring what looks like the onset of a multi month reversal in the old greenback - at their own peril I might add. Let’s again consult our tea leafs courtesty of 2sweeties over at retracementlevels.com:

Knowing Ben and his growing gang of carry trading Dollar foes I decided to be arch-conservative here and set the 100% mark at 75.35 - very close to the EOY 2009 low. And what do you know - the next two long RLs show quite promising odds at this stage. Me like

Now let’s look at frequency: Yes, we’re currently at the last high frequency RL - everything lower than that is pretty much unprecedented.

Finally, let’s correlate odds and frequency on the DXY chart fitted with an old fashioned fib retracement scale. I don’t know about you but I like those odds right now and the next line of defense isn’t that far off. If you’re long the Euro I would take notice and if you’re short the Dollar - well - good luck!

BTW, if you didn’t get my short call right before the close yesterday then you might want to follow my twitters as there’s more goodness to come in the coming weeks/months. In that context - I too short term profits half an hour ago and might dip into more puts at the EOD. Will let you know over twitter again.

Cheers,

Mole

Actually it’s quite balmy here - wonderful sunny Las Vegas winter day actually. I arrived in Vegas last night all bright eyed and bushy tailed - ready to kick ass after months of preparation. Ony to wake up this morning with quite a nasty cold - no idea how that happened. Maybe getting three lap dances by that coughing stripper with the D-cups was a bad idea. Anyway, I decided to stay in my hotel room for a day and to just rest it out - hopefully I’m back to normal tomorrow.

As I’m completely useless today I might as well put a quick chart for you poor Mole deprived stainless steel rats. The market is doing its best to instill a sense of hopelessness in anyone crazy enough to even look at a put option chain but behind the scenes there are signs of a looming reversal:

You’ve seen this chart before and it usually has treated us very well - here are the correlations painted on the chart I have available outside my evil den of doom:

As you can see - readings over 230 are ‘eventually’ followed by a retracement but the real magic happens after readings above 240. And especially in irrationally exuberant tape like this you better make sure you have the odds on your side before even thinking to go against the trend. Which has remained to the upside - no matter what anyone thinks it should be doing.

That’s pretty much all I have in me - and not being able to see the 20 screens with various charts deep down in the murky depths of my evil lair it’s all I feel comfortable sharing. But I wanted to put it on your radar - keep checking that ISEE equities only reading. If it pushes above 240 then start looking for some overbought issues then wait a few days. If nothing happens after about 5-6 trading days then cut your losses and always make sure you employ sound capital committment guidelines plus set reasonable stops (not that it helps much in ramp & camp tape like this). And don’t go crazy either - just take out a few positions and see what happens - if you’re bullish then maybe at least hedge yourself until you can be sure it’s a false alarm.

Again, I will be back next Monday - can’t promise I’ll be jumping head in first right away (need to catch up quite a bit) but you’ll definitely feel my presence again

Before I run - I have a little sin to confess: After my announcement of Rammstein I was so busy preparing for Vegas that I simply didn’t have the time to implement the notification module. So - no, nobody (but me) is getting alerts. But have no worries - the testing period will be quite extensive and you’ll all be able to resubscribe for free at least twice if your current one runs out.

Cheers,

Mole