Fin/Inv

by gmak

Here is a link to my post - which I put up early late last night. I am quite proud of this post and don’t want it to be missed, or mythed, if you want to say it with a lisp. THis is what happens when your beverage of choice isn’t de-caf as you expected.

http://evilspeculator.com/?p=14880

Here is a link to Mole’s subsequent post which is important in how it theorizes that there is AN ENDING to the current bear trap, in the works.

http://evilspeculator.com/?p=14897

Finish the rhyme. “The clock struck one”. Don’t be the one.

EQUITY

Read my last post first.

Asia is totally red, except for Japan. As we know, publiclly admitting that you’re going to thrash the currency is bullish for stocks. Europe is red - and the breadth is quite good. Around 75% of stocks are down. The DAX coninues a mild channel down from the Friday close. Ultimate support if the current level lets go (it is red after all) is around 5900. The breadth down is not convincing. Two sectors are solidl green (consumer staples and utilities). Health care keeps flipping between just green and just red. Info Tech is around 50% green, 50% red.

ES sold off about 5 points when Asia opened and pretty much stayed there all night, except for when Europe opened. I’m assuming that Daylight Savings Time is in effect there as well. There was probably some news aroun 4AM DST that gave the little pop up near the highs of the night. Since then ES has settled below the S1 pivot. For ESM0

• R2: 1157 = Same old, same old. Trying to take SPX back above that January High. This is OPEX, but SPX has failed to close up there. There isn’t any retail money or mutual fund money rushing in to push it over the top.
• R1: 1151.75 = Same story here.
• Neutral: 1146.75 = This was the peak on Friday at the close. Rebuffed, SPX is sulking below. There is a short term TD resistance point at 1145.50 - which was around the high point of the night.
• S1:  1141.75 = ES fell below this and the 9 and 34 pMA crossed bearish on the 5 minute chart. It was underthrown earlier in the night. IF ES doesn’t get back above here before the open, then there could be selling pressure and Monday on OPEX will go against the historic trend.
• S2: 1137 = A decent support level if SPX falls more at the open, and there is no interim move up. This was around the support levels from Thursday and Friday of last week. Breaking this would suggest more of a pullback.

FX

EUR fell with ES last night - but it fell a lot further after ES caught a bid. There is a greater volatility in EUR than SPX, it seems, so be aware of this if you are playing any possible correlation. Check out what I wrote about the EUR under “Is the trend your friend” section in last night’s post.

The daily chart shows EUR pulling back without testing the 50% FIB. It looks like someone threw a rock up and no one caught it. I’ve got overhead resistance at 1.3745 at the neutral pivot, and TD resistance at 1.3756 if EUR gets past the pivot. I’m hard pressed to see any bid under the EUR at the moment. I will say that there was some stop running at 5AM - but no follow through action. It’s like everyone is waiting for somehting to happen.

EUR is threatening to go below the magical 1.37 level. It looks like there is no one buying after the stops were tripped to go below 1.3720. The German gov;t says that there won’t be a decision on Greece aid today, and you know how the markets hate uncertainty.

I hear that the magical number for the CAD is around 1.0155. If you go short the CAD, put your stop below that. (the higher the price, the weaker the CAD, the stronger the USD).

NEWS

A lot of news about how Real Estate and Commercial Mortgage Debt are stronger. The FED is using the last of its TALF , TAF, QE, etc money to give the illusion of returning prosperity.

It’s OPEX week, which is the US market’s version of Hallowe’en. Expect to see the woman seeking attention wearing some wispy thing, and the guy in the beard dressed as a women.

DATA

As I mentioned in laste night’s late post, today is Empire mfg, Industrial Prodution, Capacity utilization, and TIC flows. These are important numbers in that the values suggest some slight weakness. Look for green shoots if, for some reason, they are higher than expected.

That’s about it, except I’m tired and cranky. I think that any civilization that insists on having a ridiculous out-moded practice such as Daylight Savings Time is doomed to fail from irrationality. It saves neither daylight nor time, nor money, and puts peoples lives at greater risk  - as shown time and time again by the increase in accidents at this time.

It was wonderful getting up at an early hour and seeing the sun. Now, I feel as though something has been taken away from me.

Rats.

Gmak didn’t want to go there - but of course Mole has no compunction about using a cheesy ‘Ides of March’ title. Before I jump into the sack I wanted to share Friday’s closing Zero chart with you rats:

Based on this developing pattern highlighted via the red line chances are bear trap 5.0 (I am counting since August 2009) is nearing its end. Maybe we see some follow through Monday morning but it seems participation is diverging from price.

Happy hunting to whoever is left

Cheers,

Mole

by gmak

Calling the post “The Ides of March” is a bit too obvious, and will probably be used by hundreds of bloggers. I’m a contrarian by nature, so I want to avoid any apocalyptic predictions today.

“As goes January, so goes the year”. “Invest ’til May, then go away”. ”The trend is your friend”. We’ve all heard these quoted at some time or another. Do these hold any water?

I crunched the SPX numbers from 1982 until now to check this out. I used the close from the last trading day of year(-1) to the close of the last trading day of year(0) for the annual returns. I used the last trading day in January to get the January returns (again from the last trading day of the previous year). I used from Sept 30 -> April 30 for the ‘invest until May’, and from April 30 -> Sept 30 for the ‘go away’.   In each case, the myth held true 20 / 26 times (the 27th data point is 2010 which is not complete yet). 

As Goes January…..

Notice in the table below, that January 2010 was a negative month. There are only 9 years out of 27 where this was the case. Half of them didn’t resolve, meaning that the myth works best for January with a positive return. Otherwise, it is a 50/50 proposition at best - which means a coin toss.

Invest ’til May….

When October - April inclusive has a gain, there are 3 / 17 years in which May - September inclusive is a greater gain. Note that there were only 3 years where May - Sept had a loss, when Oct - Apr had a gain. If Oct - Apr has a gain, it is worthwhile holding on, probability -wise.  So far, SPX has about a 100 point gain since the close on Sep. 30, 2009.

When Oct - Apr is a losing period, May - Oct outperforms 4 / 7 times - all of them with gains. So it is safe to say that the loss part of the ‘invest ’til May’ myth is a coin toss as well.

Is the trend your friend?  My response is: Which trend?

 Monthly shows a move up from October 2009 - off of a lower trend line that seems to begin back in 2005. EUR has closed above the 55 Monthly MA, and above the 61.8% FIB (Not shown but from the high at 1.6038 in July 2009, to the low at 1.2330 in Oct. 2009).
The 10 month MA has crossed above the 21 MA (happened in December) - but they are both sloped down if that really means anything on this scale. OVerall trend = bullish for the EUR.
Monthly EUR:
http://www.uploadgeek.com/share-7AF4_4B9C3AE6.html

On the weekly scale, however, EUR stayed within the channel. The 10 and 21 Week MAs are in a bearish pattern. But TD Pressure is showing a low risk BUY that triggered last week. The FIB situation is  the same for the monthly - here the label says 38.2% but it is the same line as the monthly 62.8%. This could be a possible turn up for EUR on a seekly basis - but a close above the channel is needed to confirm. As well, there is that pesky (red line) TD resistance between the latest bar and the 55 weekly MA. Looking back a ways to Dec 2008 and May 2009, it seems that if the 55 wMA acts as resistance - there is a sell off. If it is pierced and holds that this sets up the move up. Overall - could go either way.
Weekly EUR:
http://www.uploadgeek.com/share-1889_4B9C3CB6.html

Daily EUR has closed above the channel (is this some sort of scaling error?). As well, the 10 and 21 DMA have just crossed bullish - which is usually a sign for traders to go bullish. 1.3814 at the 50% FIB stands in the way of a continued move up - could there be a bounce down to re-test the channel top before moving up? Can anyone else see the wide and round J-Lo bottom forming? It’s usually a precursor to a move up.

But, TD pressure does look a little overbought and, unlike SPX, it does not stay up there long; usually 3 - 4 days max (occasionally as much as 8 days - but this is rare). The GS call for EUR = 1.45 is suspect in light of their analysis about a slowing Europe.
Daily EUR:
http://www.uploadgeek.com/share-A55B_4B9C3DCF.html

I found a chart at Jesses American cafe. It is the third one down the page. http://jessescrossroadscafe.blogspot.com/2010/0…

Inspired, I did my own Weekly and daily SPX chart. As you can see, weekly DXY bounced off of the 55 DMA and is still above the support level (dashed yellow line just below) from January. TD Pressure has signaled oversold, and when it crosses above - this can take place during the week - this will be a “low risk BUY” from the DeMark indicators.

Weekly DXY

http://www.uploadgeek.com/share-9CE2_4B9D5427.html

Within that context, I drew the same channel on the daily DXY and you can see that DXY put a pin below, came close to the purple “eyeball” support line. This support line has held up quite well over the last two months. As well, the 55DMA lies below at 79.12 with more support. The 10 and 21 DMA have just crossed bearish. Offsetting this is the TD Pressure that has (like the weekly) gone into oversold and it will only take a move back above the green line to signal a “low risk BUY”. This usually happens within 3 - 4 days max (like the EUR, who knew?).

Daily DXY

http://www.uploadgeek.com/share-4DDE_4B9D53B9.html 

Again, I ask: Which Trend?

Summary:
Possibly a move up Sunday overnight to test the 50% FIB - a little back and forth - testing the top of the channel again, and then on tho the 55 DMA (yellow line) over the rest of the week. If not, then the weekly bar should close back below is channel. Still a few weeks left in the month for it to put in a higher high on its chart. It’s easier to play long here - but looking for the reversal in the short term.
Sound fair or far-fetched?

I keep looking at that FIB at 1.3746. On a 30 min EUR chart, there was a test of this level off of the ramp ffrom overnight on Thursday /Friday. Is this considered solid support - going into a weekend? The drive up afterwards was muted. Does this level need to be retested on the daily chart?

The Broken Clock

Lehman Brothers. Ernst and Young. Dick Fuld. Tim Geithner. Prostate tickle in prison orange. Tick. Tock. Tick. Tock.

EQUITY

Friday’s SPX bar was a ‘43′. It followed a ‘35′. One has to remember that there are 25 possible bar shapes, so any 2 bar combination should occur 1 / 625 (25 x 25) times, which is only 16 bps (0.16%). My data sample has  7038 data points, more or less, which means that each combination should occur about 11 times. This is not the case, but it may just be due to the fact that the sample since 1982 is not large enough. I’m not going to speculate on this, yet.

Anyhow, the ‘35′ + ‘43′ combination has occured only 6 times - or less than half of what would be expected. In that time, there were 2 x ‘51′  = open near HOD, close near LOD; 2 x ‘15′ = open near LOD, close near HOD; 1 x ‘14′; and 1 x ‘25′. The odds favour a day where the close will be above the open. Note that this does not reflect on where the open will be relative to Friday’s close. Just note that the trend is up still.

To trade intra-day, this suggests going long at the open. There is no better feeling that going long at the open and having Geronimo kick a little while later. heh.

What about the inter-day trade?

I wouldn’t go short here for a longer trade. If you are already short you might want to hedge beyond OPEX. I have no idea what will happen in an OPEX week - but the odds are hgiher of SPX staying above the 55 DMA than they are of it going lower.

SPX has spent a full 10 days above the 55 DMA.  The SPX falls back below the DMA only 4% of the time in the next 4 days. Given that SPX has made it to 10 days, the odds are 4% / 40% =  10% that SPX will go below the 55DMA in the next week. The odds are  90% that SPX will stay above the 5DMA for longer. Please note that this does not necessarily mean the SPX will go up. It could go sideways and the 55DMA could come up to meet it, crossing from below.

Maybe using the two positive slopes (based on the last 10 closes), is getting too ‘cute’.  If only the DMA slope being positive is considered, then there is a 19% chance that the SPX wll go below the 55DMA next week. There is an 80% chance that the SPX will stay above the 55 DMA beyond next week. Given that it has been there for 10 days already, there is a 77% chance that this will not happen for at least 10 trading days (2 more weeks). There is a 58% chance that SPX will not go below the 55DMA for at least another 20 trading days. This is based on data since 1961.

The piece de resistance is that there is a 39% probability that SPX will stay above the 55DMA for more than 40 more trading days. You can make of that what you will. That is a pretty fat tail. Too bad that being ‘above’ doesn’t mean that SPX is necessarily going up that whole time.

 OVERNIGHT

DATA

Empire manufacturing; TIC flows; Industrial production, and Capacity Utilization. These are numbers that might just raise big money’s hair on the back of their necks if they don’t come in as expected. Notice that most of this data is expected to be unchanged. The TIC flows are expected to decline to $47.5 billion from $60.3 billion in December.

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

FX

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

Living Inside a Broken Clock

China inflation and industriasl production have accelerated more than expected. It’s becoming more and more obvious (in the fairy tale .gov data world, anyway) that the taps need to be turned off.  The USA budget deficit has hit a record and a 17 month drive to the abyss. Meanwhile, interest paid on that debt has been shrinking. How tight can you wind a clock’s spring before it explodes?

Europe wants to ban Naked CDS trading - you can read all about this evil in many, many posts over the last 2 years at Market Ticker. There is doubt that this will succeed without Obama support - and it is very warm and cozy in the banker’s vest pocket.

The strikes resume in Greece, and some prognosticators believe that the country will miss their already-low GDP target.  Yet the world’s watchmen keep turning that key and the spring is getting more and more tightly coiled -and not in a good way

Get the popcorn ready, because Greenspan is scheduled to testify before the Financial Crisis Inquiry Commission in April.

Tick. Tock. Sproing!

EQUITY

Gatopeich is taking the analysis I’m doing and is running with it. The guy never sleeps. Check out his comment on the previous post.

My own analysis says that yesterday was a ‘15′ and the SPX slope was positive. The highest probability for today’s bar shape is: ‘72′ which means open at the HOD and close down near the LOD. The next highest probability is open near the LOD and close near the HOD. Now, wasn’t that helpful? I don’t think so either. BUT, the first half hour might indicate what sort of day it will be - and if it looks like range trading, then the bar is likely to be a decent size.

This is based on data since April 1982. If I take that percentage and apply it against 1140 (a typical value for SPX), I get the following bar size distribution for our current environment.

That says that there is a high probability of the High - Low being between 6 and 23. (each ‘bin’ is from the label number to the next one. i.e. ‘6′ means between 6 and 9). That’s a pretty decent size for intra-day trading given that the majority of bars open near the LOD or HOD and close near the other end.

I played EUR long overnight and put on a short ES hedge this morning. The market took me out of the EUR, but I’m still short ES. I have put a stop on now that the “hedge” is off.

Asia was mixed iwth Emerging in the red along with Oz, Taiwan, and S.Korea. Everything else was green - but not by much (japan was up 0.8%).  Europe is red, except for Germany, Iceland, and Ireland. Germany is pretty close to flat. Breadth for the red is between 60 - 80% if compnaies down.

The DAX recovered off of a dip at the open.  50/50 on the green / red sectors. Those in the green are strongly so. Those in the red - the breadth is evenly divided. This looks like a market that wants to go higher - but is either afraid to (or is seeing distribution into the demand).

The ES sold off as Asia fully opened and the China news came out, but has formed what looks like a failed cup and handle - the handle failed to launch (sorry Matthew and Jessica but this smells better than that movie).  Pivots:

• R2: 1154 = same deal as yesterday. Looks like a little TA wishful thinking to see the Jan high get taken out. Today is jobless claims and trade balance. I don’t think that this is rocket-launch news. Maybe if some new liquidity program is announced - but with the implications of China needing to cool off…..
• R1: 1150 = Same deal as R2. The mood is not euphoric. There is some fear. What would you feel if your hand was in a buried candly jar and you couldn’t let go of the loot? What if something was coming up behind to whack you and you still couldn’t let go to escape? Welcome to the IB world right now.
• Neutral: 1144 = This is the current level of resistance that was support before the Asia-induced sell off at 8 - 10 PM EST last night.
• S1: 1140 = This provided support in the small sell off. It would likely do so again on dips. Overnight, though, does not give an indication of the degree of support. BUT, this level has been both support and resistance over the last few days.
• S2: 1133.75 = This was the area of support before the ramp on Tuesday that began at 8AMish (post-data?).

DATA

8:30 AM = Trade balance (IF this has shrunk then be aware that it gives FCBs less USD to put into treasuries and shows strengthening pressure on the USD)

Jobless claims = Pinocchio would be proud. 460K expected vs 469K prior. How can they be that precise? It’s easy when you have a birth /death model.

Noon = Feds Flow of Funds. This should be good for the doom and gloom crowd.

Stay nimble. Did you know that the ‘24′ , ‘15′  bars of the last two days has only occured once before, since April 1982? I wonder if it means anything….

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

by gmak

The Chief Economist for the SEC has resigned when, after finding that short selling increased when stock prices went UP, the SEC imposed rules to hobble those evil speculators (heh) anyway. At the same time, the market was goosed yesterday by rumours, innuendo, and rumours about rumours. Cash at fund managers is at one of the lowest levels ever - yet in the absence of sellers, it appears that the market will drift up like a dandelion seed on the breeze.

Cisco announces the next generation of the internet - as if it will make any difference when the fat files won’t squeeze through the small pipe into my house. I guess Algos are more gullible that J6P, now, as the bid under that stock intensified.

China is thinking of raising interest rates. Japan’s machine orders fell 3.7% MoM. This is certainly a dirty finger in the eye of the economic recovery.

Meanwhile, closer to home, occupants of 32 story condo towers in Florida are tired of living alone in the building and want out. Maybe Fannie and Freddie can take them over, securitize them, and use the Treasury to sell them to the same clowns who will be rushing in to scoop up Citi, Fannie and Freddie shares that supposedly the .gov now wants to unload within 3 months. They know what will happen when the slosh dries up. Three months, boys and girls, three months. http://www.youtube.com/watch?v=u2mqqCMu-LM

[Hint: When will the middle class awake from their slumber to find all the wealth is sitting in the commodes of Wall Street and their masters, Alex.]

“The smallest movement in the price of a security”. ”Oral communication between human beings”. “A small blood-sucking arachnid”. “An abbreviation for Theory of Constraints”.

EQUITY

SPX, overbought pastiche of a fading economic empire, has left another interesting symbol on my doorstep called a “bar”.  I have labeled my daily SPX chart with the bar codes. Note that I changed the divisions along the bar (expressd as a ratio to the high minus low)  to 0% - 8% - 38.2% - 50% - 62.8% - 76.4% - 92% - 100%; each interval still numbered from 1 to 7. The number is expressd as Open - Close, so a ‘17′ means opened at the low and closed at the high.

Here is the frequency distribution:

As one can see, the most frequent bar type is where the open and close are at opposite ends of the bar, with the bullish bar being more frequent than the bearish bar. This is no surprise since the data history begins in 1982 when the FED first discovered how to use the liquidity faucet.

Yesterday was a ‘24″.  The highest probability is that today would be either a 16, 17 or 71. Again, no surprise given the above table.  This is somewhat disconcerting as it indicates that it would not be easy to play intraday on the assumption that direction doesn’t matter - i.e. that both the high and the low would be far enough from the open to permit an “agnostic” trade and still make money within the high - low range.

The best setup for this would be an open in the 3 - 5 levels on the bar. yet this only happens 28% of the time. For now, pending further analysis, the agostiic trade does not have good odds.

In other probability news, SPX has been above the 55 DMA for 6 days, not counting the one where it crossed over. The highest probability is that SPX crosses back below the DMA by the end of the 10th day. There are only 4 days left counting today. Given the average move of the daily SPX, it is still feasible. If we don’t get there, the probability goes up that there will be more than another week before the cross below would occur (assuming that it occurs at all in the short term).

 Asia was mixed, with emerging mainly red, and developed mainly green (Japan and Australia were red - does this mean the risk trade is on or off? It’s hard to keep track anymore). Europe is mainly green but barely and without breadth. The DAX did not gap today and is stuck in a narrow range peaking around 5900.  Materials, Utilities, Financials, Telecomm are green. Seems like a kind of conservative trade based on inflation expectations, no?

ES was stuck in a tight range overnight, as well. The neutral pivot at 1139 was a solid floor and the range was no more than 3 - 4 points, most happening at the Europe open forward.  There is what appears to be strong TD resistance at 1142.75 and it has been there all night (price exhaustion for those keeping score).  Volumes in ES have been declining since the peak in theJan / Feb sell off.  ES Pivots:

• R2: 1152.75 = Would be a new high. I still think this needs to wait for OPEX week.
• R1: 1146.50 = This could be a perceived base camp for the assault on the Jan. high.  It is within striking distance. The longer SPX stays above the 55 DMA, the more likely it could be.
• Neutral: 1139 = The floor right now, with an underthrow around the Europe open.
• S1: 1133 = Would be nice for the bears. Without the ramp into the close yesterday, this would be the target for today.
• S2: 1125.50 = Always a bridesmaid…..

FX

The EUR was tightly range bound all night until into the Europe open (my P/L thanks the EUR profusely). The floor until then was the neutral pivot at 1.3591.  It bounced off of the S1 pivot at 1.3548 amid rumours of CB bids starting to stack up below that. Right now, the R1 pivot at 1.3646 does not look like it will be in play, given the offers between here and there (for the time being).

The CAD is still holding its strength, although flat since midnight. The JPY is weaker, and above 90 again. This should be no surprise given the BoJ jawboning about underpinning the currency trade again. The GBP is weaker since midnight (hey, we need a point of reference in a 24 hour market). 

I really have become partial to the bollinger play on the EUR. I also like the agnostic play  = pick a spot in the middle of the volatility and a “coin toss” direction - probably best if it is in the direction of the broad trend. Put on the trade. Even if it goes against you, the EUR always seems to come back to that middle point and go the other way at least once in a 12 hour period.

NEWS

Greece  crisis is over. It must be true. Prodi says so (former EC president). He’s gotta be impartial, right? Global confidence dips due to Greece. Guess the sheep aren’t falling in line anymore. Emerging Market stocks are now in the green for 2010. Buyout firms can’t find anything to buy with $503 bb of Investor cash burning a whole in their collective pockets. Hint: the FED wants to sell Citi, Fannie, and Freddie crap.

Mfg in the UK “unexpectedly” plunges. Pundits are so deaf and blind. Do they wake up a find their spouses “unexpectedly” beside them in bed? Sex ends at 70 for most Americans due to poor health. Clearly the researchers didn’t interview couples with newborns.

DATA

MBA morgage applications were up 0.5%. Maybe those lonely Florida condo residents will get some company. If they plan it right, the two sets of lit windows can look like eyes on the building.

10AM = WHolesale inventories - this is an important number given all the attention to GDP growth. This should show what is driving it decisively and possibly reveal that the emperor has no clothes.

Cheers.

UPDATE:

The comments from DIsqus are NOT loading for me, so I am unable to present additional information, nor respond to comments. Suffice to say, the chart above is basic. The left hand column shows where the open is on the High - Low range. The top row shows where the Close is on the High - low range. An open and close at the low and high of the day would be a 17. The values in each cell show the percent occurence of that bar in the data series.

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

by gmak

China makes noises about reducing gold purchases due to price pressure. Gata continues to protest rigged market (join the club). I don’t get it. If the Gold price is being artificially kept low, why aren’t they buying more and more? If someone was offering me an asset at what I believed was fire sale prices, I would be leveraged to the hilt on zero-cost fiat paper and stacking physical next to my tuna stash. Could it be that the gold bugs are already all in and, because of their book, now want an apocalypse of sorts?

The FED is just about finished with the MBS purchase program, including a lot of junk from Freddie and Fannie, the evil twins. Now, the B/S is expected to contract slowly as principal on all those mortgages is repaid over time. This has the effect of reducing liquidity in the financial system - but in a controlled manner. There has been no mention of what happens to the junk that doesn’t repay.

At the same time, the FED has drafted money market funds, apparently, into becoming reverse repo dealers. I guess if GS and company won’t take back the junk, even with clothespin on nose, there is always the American taxpayer  retail suckers to take up the slack.

Meanwhile, Europe has some heavyweight IBs from the list of underwriters for debt issuance. I guess they want to remove any hint that there might be off-B/S shenanigans in the future.  I wonder how many first born are going temporarily disappear over this one?

Welcome to the broken clock.

EQUITY

SPX surprised many, yesterday, by putting in a red candle (closing below the previous day’s close).  the previous day had been what I call a ‘17′ bar (open at the low, close at the high). Yesterday was more of a cross, a ‘33′ given the location of the open and close to the high - low. 

If the second number is higher than the first, the close was higher than the open, and vice versa. The bar is divided into 7 segments 0% - 4% - 23.6% - 38.2% - 62.8% - 76.4% - 96% - 100%.

Of the 444 ‘17′ bars that have occurred since April 21, 1982 [when SPX high low data is available], 10% of the time it is a cross type bar. ie the close is within 4% of of the open, based on the high-low.

I don’t know what this says, but it’s a beginning. The cross-type series (22, 33, 44, 55, 66) are most often followed by a ‘16′ or a ‘17′ which indicates that there is a higher prob of today being a day with the close higher than the open. This can be traded intra-day - but I don’t have all the probabilities nailed down yet - so it is difficult to manage the risk in a winning way over a large number of trades.

As well, given the probability of SPX crossing back below the 55 DMA by the 10th day over, today could be a down day. NOTE however, that the close could still be higher than the open, just lower than yesterday’s close. Got it? Good.

 ES fell after the Europe open, but has found support at S2 = 1132. Pivots:

• R2: 1143 = Like we’re going to near the Jan. high when it’s NOT an opex week.
• R1: 1140 = Do-able. ES got here on Monday to put a scare in the perma-bears.
• Neutral: 1137.50 = pretty tight pivots after yesterday. This is just above interim TD resistance which was already tested just before the Europe open. Sure smells like reindeer games.
• S1: 1134.50 = Already rejected an attempt from below after the Europe open. Looks like resistance for now.
• S2: 1132 = Support for now.

I’m running late - so that’s about it. I’m scalping EUR before the open, and I am seriously considering playing ES long from the open - but with very small money  - depending on how far below yesterday’s close it gaps down. If there is enough room to make money with a gap close then I’ll probably hold my nose and try it.

Cheers.

I was supposed to be out of town today but my first flight was delayed which caused me to miss my connecting flight. All I can tell you guys is that if you’re planning to connect in San Francisco - make sure you get there at least two hours ahead. That airport is a nightmare, especially during winter or early spring (which means rainy season in CA).

Anyway, the tape is meandering around today with a slight drift towards the upside. I thought while we’re being theta squeezed I might as well share some Geronimo charts I generated over the weekend:

That’s the profit graph since January 1st 2010. I cannot backtest much further as I don’t have realistic tick data going much further. As some of you might remember Eric took over the feed a few months ago due to some empty alert problems we experienced. Now that NinjaTrader 7 is in late beta I now have started to run Geronimo on my end again and thus far after one week not a single empty alert which is very encouraging.

That’s the weekly profit graph - as you can see there was only one slight down week since January 1st.

And here we have the summary with all the stats for you nerdy rats. For what it’s worth - I have never seen a Sharpe Ratio beyond 3, so I’m not sure what to make of a 16.5 reading - seems insanely high. But even if Geronimo has a few down weeks I’m fairly confident that we can keep it around 3 - 4. That is the type of strategy fund managers have moist dreams about

I will be a lot more verbose on the Geronimo front going forward - expect weekly performance updates, charts, etc. If you’re interested in giving Geronimo a shot then head over to the Geronimo page or directly go here to sign-up.

Cheers,

Mole

by gmak

China has hung out to dry any banks lending to cities and regions. Iceland has said “Hell, NO!” to everyone going into debt to bail out the banks. Dubai World is asking banks for a delay on repayment of $26 bb in debt. US banks facing write-downs after FDIC action. Guess the bag-holders in all cases will be the American taxpayer, courtesy of Ben and Timmay, and the European taxpayers. Tick. Tock. Tick. Tock.

EQUITY

My post on the weekend is a beginning of trying to get a handle on the frequency of occurences. As an intra-day trader, though, I find that I am more interested in what will happen during the day.  I mean, from the open, how often does SPX have both a high and a low above and below the open? If there is a high probability that SPX will move above and below the open, then the trader can be agnostic as to the broader trend - if trading intra-day. I’m looking at codifying the bar shape and identifying ratios of the open, close, high, and low, that can give me a picture. If I throw in rising or falling slope, and relationship to (say) the 55 DMA - I may be able to slice and dice the data down to high probability of having that “T” shape sideways, off of the open.

Asia is green. Europe is mixed - but mainly rd. Sweden, Italy, Greece, and Spain are green - but the breadth isn’t very good (usually less than 50% of stocks in green).  The DAX is flat and down off of the initial (very small) gap.  German Ind. production came in lower than expected - but still positive. The EUR experienced some weakness off of this data point (my P/L thanks you). Half of the sectors are green and half red. The breadth is not good suggesting the possibility of further weakness. Green are Consumer staples, financials, telecom, Utilities.

Myt analysis from yesterday (which was posted) says that there is a high probability that SPX will fall back below the 55 DMA by Friday. But, if it doesn’t, then it is likely to stay above for quite a while. SPX is 2.6% above the 55 DMA, and I also posted the probabilities of SPX falling 2.6% within 1 - 15 days.

My instinct says that SPX should retest the “since Aug 17″ trend line, but that there is no way of knowing if it is still relevant - so this is not something to be traded.  I have major resistance (TD and the Jan high) at SPX = 1150. As I said yesterday, that is < 4% above the 55 DMA - and certainly NOT a “stretched elastic” in any sense.

Given the DAX,  I expect a soft day. It could be a minor down or up, without much movement on the SPX. I haven’t decided how I’m going to trade this, yet - but I am currently long the EUR for a quick trade - so I may hedge by going short ES.

ES  moved up slowly off of the open last night, but sold off with the Europe open. It saw quite a range, and now TD has a resistance point at 1138.50 above, and a support at 1134 beow. The pivots are quite wide - so I am having a hard time believing that they will be in pay today. Looks like a “between the lines” type of day. Pivots:

• R2: 1149.50 = SPX will be pushing the Jan high if this happens. I think that this is a low probability event for today. If we go a few more days above the 55 DMA, then this becomes more likely.
• R1: 1143 = Just a whistle stop on the way to the Jan high if the market is going to move that way.
• Neutral: 1132.25 = Looks like this was some support on Friday after the overnight ramp. It is below the TD support, so ikely to come into play if SPX sold off today - but I’m not expecting that.
• S1: 1125.745 = This has been resistance on any intra-day push up for a while. It would likely be solid support.
• S2: 1115 = This was a floor for most of last week. Need I say more?

FX

Not much to say here.  My EUR long (quick grab) just closed for a profit. Forexlive.com reported earlier that there was buying at these levels (when Asia was open).  There were offers stacked from 1.37 to 1.375 and when the EUR reached there, apparently there were hedge funds selling some more.

My opinion on this is that IF there are heavily shorting hedge funds (and the numbers indicate that it is only about 1 - 2% of the total EUR market), that they are hedging any move up with other futures and options. I think the short squeezes is coming from those less sophisticated, or more extended smaller players, so I’m not looking for any monster ramp - just surges in both directions (especially when stops are run). I like this time of action intra-day because it suits my style and helps me divorce my trading from any bias beyond the current trade.

NEWS

Nothing major beyond what I wrote about in the first paragraph.

DATA

See briefing.com for more, but there is no “official” data out of the US today. TOmorrow are optimism and confidence measures. Wednesday is mortgage, and wholesale inventories - big number for side bets on the direction of the economy - and the monthly Budget statement.

Cheers.

by gmak

I’ve spent this weekend crunching numbers. This is to address the fact that most traders say they put on a higher probability trade, but very very few can say what the probability of another 1% move in the same trend might be. Yet, they claim to have an edge. If they are regularly profitable, I would agree with that - but it is not because they are able to identify high probability trades necessarily.

I’ve taken as my base, the 55 DMA (55 is a FIB number), because EVERYONE looks at the even numbers for moving averages - and if everyone is doing it, it is hard to come up with insights that might give one an edge.

The data history is the daily open, close, high, and low back to 1960. I began my analysis Jan. 3, 1961 to give enough trailing data to put in moving averages as I expand my analyses. I have even come up with a coding technique to identify the shape of a bar - hopefully to find relationships between trends, relationships to moving averages, and the shape of the bar in order to know how the next day might behave (the bar shape) within a certain probability. However, that is more involved and for another time.

What I have done is looked at how far away from the previous day’s DMA, the current day’s SPX close can get. It is like an elastic and at some point the forces to move back are stronger than the forces to move away. I have broken this information down by groups based on whether or not the SPX and DMA are widening (based on the slope from the least squares fit of 10 days of closes for each); and whether or not the slopes are positive or negative.  I have looked at the behaviour when SPX crosses the DMA in either direction, and I have also grouped this by the same characteristics.

I have already published my results for part of this research and was met with a virtual wall of silence which suggests that either no one understands the significance, or no one cares. Since I have changed my base date, here is that same data again.

Why is this important? It shows the odds of the SPX reaching certain levels. Note that the -10% in the table means all the values that are <= -10%. The value beside -7% is the proportion of days that SPX was > -10% but <=-7% below the DMA.  The more means > 10% for SPX above the DMA.

On Monday, March 1st, the SPX crossed over the 55 DMA. As of Friday’s close, it is 2.6% above the 55 DMA. The total history of the data suggests that there is a 32% chance of SPX going higher and moving further away from the DMA.

If I refine this and choose some somwhat arbitrary indicators such as widening or narrowing gap, positive or negative slope (10 data points) for SPX and DMA, I get a “111″ = [widening gap, SPX +tive slope, DMA +tive slope]. Running the same analysis on just this condition suggests that there is really a 58% chance of SPX going higher. This is quite different and suggests that a short trade is marginally a better probability. Note that this does not refer to the next day, but until the “111″ conditions changes - meaning SPX starts to move towards DMA, or its 10 day slope goes negative, or even DMA goes negative.

The SPX crossed above the 55 DMA on Monday, and has been there for 5 trading days. The data for how long before it crosses back below the 55 DMA is interesting. Of the 12,376 trading days in the sample, SPX has crossed over the 55 DMA from below  only 50 times [there are a total of 725 crossovers, not counting this latest, from either direction] - when both the DMA and the SPX are rising.

When the SPX crosses the DMA from below, and both are rising at the time, the SPX remains above the DMA for a max of 10 days for 60%  of the time. IF I do a back of the envelope calculation, and say that it takes twice as long to go up as fall down (I haven’t crunched the numbers so this is just a guesstimate), then SPX should turn down for a trend between Monday and Wednesday of this coming week - 66% of the time. I chose the 5 day threshold, because anything less is a headfake. So, IMO, this is not a headfake over the 55 DMA (even if this is stating the obvious in hindsight - it sure helps to have some numbers to back up the gut feeling). As well, what is the probability of a 2.6% down day? (SPX is 2.6% above the 55 DMA).

A more interesting point is that if SPX stays above for 15 days - then it will be up for more than 20 days - guaranteed based on the historical data. There are no 16 - 20 day occurrences of the SPX being above the DMA when it crossed with both slopes positive. So either it takes SPX more than 5 days to get back below the DMA, or it keeps moving higher. Here is the data:

Is this tradeable?  I have a 58% chance of SPX going higher from here. I have a 60% chance that SPX will stay above the DMA for up to 10 days, and it has already been there for 5 days. I have a low probability of a 2.6% decline in 3 days or less (guestimate), but a higher probability of this happening in 5 days.

SPX could still turn down on Monday and continue down to cross below the 55 DMA. If SPX stays above the DMA for 10 days, then there is a high probability that it will stay above for 20 - 30 days - and may run. It could also come down and parallel the DMA for a while before going below.

So you see, even knowing the probabilities does not give an edge by itself. If this is put together with TA, then perhaps it could be more insightful.

Here is the return data since the beginning of 2007 - since volatility has gone up. You can see Taleb’s fatter tails that he bets on.

Here are the probabilities of a more than a 2.6% or 5% drop over various terms. I’m not a statistician, so I don’t know how to do the cumulative probability of these possibilities.  If SPX were to be 5% above the 55 DMA - assuming that the DMA move is small, it would be at about 1165. Once the SPX crossed the 55 DMA with both having positive slopes, the odds of reaching this level is 28.2%. I don’t know if that has increased by virtue of SPX reaching a level 2.6% above the DMA. Statistically-inclined persons please feel free to chime in. I took dta from the beginning of 2007 on.

I can say, from the TA, that SPX has crossed above the “since Aug 17″ trend line. IF THIS TREND LINE is still valid, then I would expect a re-test before moving up more, within a day or two. If it’s not valid, then the TD resistance happens to be at what I’ve labeled the “Point of NO Return for the Bears”, which is SPX = 1150ish. This also happens to be the high from January.

Let’s say that getting there moves the 55DMA up by about a point. SPX would be 1150 / 1111, approx., which is 3.5% above the DMA - hardly the stuff of legends and eminently do-able based on the odds.  The 5% level at 1165 (more or less) is where the odds of  a turn begin to improve to tradeable levels.

Cheers.

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

by gmak

China is quite concerned about importing inflation. Those commodity prices are a bitch - especially when your Ag co-ops are stockpiling copper in storage facilities usually reserved for grains and soy.  China is worried about “latent risk” in their banks and intends to crackdown on property. This is really the irony fist in the velvet glove. China itself has been stockpiling commodities for years now. Their loose money policies have led to the property bubble, empty cities and shopping malls, and likely put the risk on the banks’ B/Sheets. Somehow, in all of this, they intend to continue their expansionary monetary policy.

Russia may scrap the Ruble and create a ‘zakistan’ common currency. If you follow the Austrian economic school of though at all, this Plan B should be no surprise - as it is one of the solutions after the infamous “Crack up Boom”.  (First you boom, then you crack up - the currency gets destroyed - see Brazil as an example).

The Greece bond sale went well with a lot being taken by Europeans. Meanwhile Merkel is saying today’s talks have nothing to do with aid. Other EURO-officials are saying that there would be aid. German mfg orders jump well above expectations. It’s the golden rule, I guess. She who has the gold, rules.

Welcome to the broken clock.

EQUITY

My opinion is that the Gartley pattern is dead, as posted last night. The “C” level did not get low enough.  Meanwhile, SPX is running into that dashed yellow line I drew to represent the beginning of a possible range for the “D” point in a Gartley pattern. Stranger and stranger - but it is no doubt just a coincidence. I will note that this area is around the 76% FIB  from the 1150 high and the 1044.50 low lie (X and A in  the imagined Gartley pattern).  It is alsow the 50% FIB (1121) from the all time high (1550+ and the 666 low).

There are always two alternatives: After all, the market can only go up or down. If the current moves are consolidation on that 50% long term pivot (or under the 76% Gartely pivot), that the next level is likely 1150 - no surprise there for fearful bears - and a double top possibility).

If this is SPX running out of steam, then the retrace could be to 1110 (the Gartley 62% FIB), 1097.50 (the Gartley 50% FIB), and our old friend around 1086 - which has been support, and is close to the 38% Gartley FIB.

Whether it is consoidation or retrace, may be identified from the volume. It is gradually declining, even as SPX moves more or less sideways. The direction of the next move will depend on whether the volume increases, and if it does, if the volume increase wants to hit the bid or ask. TD pressure suggests that a move down is more probable - but there is still room for the overbought condition to increase - it has touched 100 (the highest) and backed off. However, there is no “Low risk SELL” signal yet, and (as we all know), overbought can continue. Noteworthy is that SPX is having a hard time moving up with this overbought condition. This reinforces a higher probability of the next material move being down.

Asia was srongly green. Europe is green.  The DAX gapped up. Quelle surprise! and has been trending up at about the same angle as since Tuesday. It is having a hard time getting past the highs of Wednesday - at around 5830 or so. There is still that juicy gap open from 5600 to 5650 - but that is a long ways away.  Breadth is strong with only consumer staples and utilities in the red - looks like the risk trade is on. The green sectors are 80% - 100% green members.

ES has been marching up on a consistent basis since the lock-up. The 9 pMA and the 34 pMA are in a bullish cross, but ES has run into TD resistance levels and seems to be trying to work through them at the present time. Pivots:

• R2: 1129025 = Possible. Especially given the news heavy day. it may not matter, but there is always a market response of some kind or another depending on what short-term bets have been put in place.
• R1: 1126 = This is currently the floor as ES tries to wear down the ask volumes.
• Neutral: 1119 = This was resistance and then support yesterday.
• S1: 1116.50 = This was a strong support level for most of this week. I don’t imagine that this would have changed - and any “sell the news” fall would likely land here at it’s worst, IMO.
• S2: 1110.50 = Looks like a resistance level from the 3rd week of February. This would be more support, based on that. It seems to be an important point to someone’s money, anyhow.

FX

I’m indirectly playing a weaker SPX / ES through a DXY short. This is more based on the weekend and the amount of EUR shorts.  I’m more interested in how much late money there is in EUR short, because the early big money is likely protected by calls, other futures, and so forth. It is not likely that they would panic into any push up for EUR.

Eur 3 min is running in a channel, but having a hard time getting off of the bottom at the present time. If the channel breaches down, there is TD support at 1.3574.  Whether it holds or not depends on where the stops are located (stop running is a big phenomenon in short term FX trading). Stop running leads to a big candle in one direction - and often a slower retrace back down to the old level unless money piles in in the stop running direction.

If the market moves against me, I’m still undecided if I will hedge my DXY with a short EUR or a long ES position, or get out completely.

NEWS

German mfg order up much more than expected.  Even though Merkel has rebuffed Greece, other EU officials are said to be considering aid plans. I think that this schism is more of a risk to Euroland than is Greece itself. Looks like the snow in February (who coud have seen that coming?) may have affected unemployment as it created shutdowns. Watch out for that nasty rain in April and May.

Ichimoku technical analysis (not mine) says that te USD may read  a 15 year low of 84.83 against the Yen. In the face of announced Japanese printing press start up?  The key level is 87.50 and it needs to be breached decisively for the fall to continue.

DATA

8:30

Non-farm payrolls (NFP); unemployment rate, change in mfg payrolls, avg hourly earning MoM and YoY - critical data for credit contraction / inflation war of words; Weekly hours worked.

15:00 EST Consumer credit, expected: -4.5bb  prior of -1.7 bb - looks like a contraction to me.

Disqus seems to be having some problems, so a more colourful comment will follow if the internet permits.

by gmak

I was surprised today to see this, especially since it made me question my own work (which is a very good thing - believe me):

http://slopeofhope.com/2010/03/fujisan-and-the-gartley-pattern.html

This suggests that the Gartley pattern is still valid. So, I did some more reading on the Gartley proportions.  Long story short - I thought I messed up in my computations. I found this explanation here (which I liked because it has some time proportions which help lay out the pattern based on the initial X-A segment.

http://www.fx360.com/techAnalysis/chartPatterns/bearish/gartley-pattern.aspx

The bearish Gartley Pattern Rules

I found this which suggests that there are many possibilities for the ratios. It is from a bullish pattern, but I would imagine that these proportions could be applied to the bearish pattern (for a topping reversal) as well. This suggests that

http://www.harmonictiming.com/free_articles/gartleyarticle.html

Characteristics of the “Gartley 222” Reversal Pattern

1. The swing from Point A will terminate at Point D. This will be at the 0.618 or 0.786 retracement level of Swing XA 75% of the time. The other 25% of the time the retracements will be 0.362, 0.50, or 0.707. A 0.50 retracement is a strong pattern. There have been books and trading systems written about and designed around 0.50 divisions of swings in time and price.
2. There “should” be an CD = AB pattern observed in the move from A to D. At times CD may equal 0.618, 0.707, or 0.786 of AB. At times CD may equal 1.272 of AB.  
3.  The BC move will typically be 0.618 or 0.786 of AB. In strongly trending markets expect only a 0.382 or 0.50 retracement.
4. Analyze the time frames from Point X to A and A to D. These time frames will also be in ratio and proportion. For example, assume that the number of time bars from Point X to A is equal to 17 bars and the time bars from A to D is equal to 11. Eleven is approximately 0.618 of seventeen.
5. There will be a few instances where the CD = AB move will give a price objective at Point X. This will be a true double bottom or double top formation.
6. If Point X is exceeded the trend will continue to move to at least 1.272 or 1.618 of the X to A move.

And I looked here:

http://www.investopedia.com/articles/trading/05/040405.asp

I cannot see anywhere where the BC segment is a shallow one. It seems that it should fall 61.8% of the AB rising segment (in a bearish pattern). Am I missing something or is the Fujisan drawing and the Slopes overlay of SPY valid?

The diagram seems clear to me. Point B should be 38% of the XA segment length added to the price at point A, or 62% of the XA distance subtacted from the price at point X. Point C should be 38% of the AB segment price change added to point A, or 62% of the AB segment subracted from point B. At least that is how I interpret it.

Given the above, I don’t see how this can be a valid Gartley pattern due to the fact that the BC leg did not get deep enough .  The second point is that AB is 61% (8 bars) of the 13 bars from X to A. The above Gartley information suggests that this would be the number of bars for A-D.

Although I really, really want it to be a valid Gartley pattern - wouldn’t that make life easy - there seems to be too many strikes against it being so, in the shallowness of the BC wave, in the time length of the implied A-D move.

X = 1150.45

A = 1044.50

B = 1112.42

C = 1086.02

My original Gartley computations were:

Here are the numbers I get for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (Feb 19, 22) - Perhaps one can make allowances for 3 points divergence of reality from the prediction of the pattern - especially that some interpretations suggest different possible lengths of some of the segments.
C = 1058.50 - 1069.50 (projected range) -This is where reality differs from what a Gartley pattern should be.
D = 1124 - 1135 (projected range) Go short here if the pattern holds

If any of the smart people who frequent this blog would care to provide their input on this, it may help us all resolve probable resistance and support levels for a turn. In the end, it may turn out that there is no fool like an old fool - if it turns out that I have misinterpreted something critical.

Thanks.

by gmak

I am not going to write about the markets today, but about trading. I can tell you that the SPX price will move up and down over the day. The bar can only have 3 characteristics. It can open at the HOD, go down, and close at the LOD.  It can do the reverse (LOD to HOD). It can open, move up and down and close at some point neither at the HOD nor LOD.  Thinking about this, I wonder if their is a relationship between the shapes of the bars. I know the DeMark indicators use a related theme - but more from the relationship between open and close and high and low. Now that I have a truckload of SPX data and that I am looking at relationships to the 50 DMA, this might be a feasible project as well. The closing price data difference from the 50 DMA parses out as follows. -4% means that the difference is between -3% and -4%. My next project is to try to observe the behaviour of SPX prices when the 50 DMA is crossed.

These are some of the gears inside the broken clock.

Today, the market will go up, and it will go down. The same for currencies.  Looking at the last two days, my best guess is a close down from the open. I don’t know where it will be in relation to yesterday’s close.  I just see an SPX that cannot hold the HOD and closes near the open for the day.  I see a mainly red Asia, and a mixed Europe (more green than red). I see a DAX that gapped down at the open but has been marching up in a regular steady channel since then Yesterdays high was around 5830 - and this would be the barrier of choice for today.  It seems like the gap might close and then sell off. These are just opinions and guesses. What I really am coming to believe is that it is possible to play a particular direction on any given day and make some money. I’m talking about living money, not island buying money.

I’ve been thinking about the so-called Trader’s Edge that it is generally accepted that a Trader needs to be successful. I’m curious about what this would be. I’ve seen proprietary trading signals, and different combinations of TA - some of it arcane. I’ve heard traders talk about (and I’m guilty of this too) a higher probabiity trade. Sometimes this means that the expected reward is greater than the expected loss. Sometimes this means that there is a higher likelihood of a particular price behaviour.

All of this seems to depend on an expectation of movement in a particular direction.  This suggests some form of prediction. And yet, we all know that the markets are not predictable. For example. Look at any security. Tell me if the next trade will hit the bid or the ask. And the next one? And the next one? This is the issue with prediction. It is like predicting the toss of a coin. However, Algos manage to play the assumption of a trend for pennies - but they have advance warning of what volume is coming down the pipe at what price. I suppose it is not too far a stretch to assume that some TA gives an indication of probably volume exhaustion in a particular direction. I imagine it would be along the lines of “There have been 15 heads in a row. The odds for 16 heads are so small that….”. Playing the odds would lead one to bet tails - or to look for a reversal.

Can TA provide this sort of information? Perhaps. I have seen and traded TA that indicates those levels where a turning point is more likely. Proper money management - where the loss times probability of being wrong is less than the gain times probability of being right - can make this pay off. 

Back to the trader’s edge. Does anyone really believe that they have the secret combination to insight that will let them win over and over? Probably. I think that it is that belief that is the trader’s edge. If one really believes there is a secret formula, then they are more willing to take an interim loss for the eventual gain. We have all seen the trader whose capital erodes steadily with occasional gains. They show a lack of confidence in their own trade and are too quick to pull the plug - leading to many more losses from exits and smaller gains - hence the eroding capital. Although it may be heresy in the traders’ world, I’m looking at the idea that stop-losses are really ensure-losses. I’m thinking that maybe the stop should be set far enough away to protect against a black swan event but to allow the trade to occur. Geronimo is a case in point. The upside is limited, and the stop-loss is quite far away. I’ve been using this in trading DXY - where the gain is smaller than the portential loss. I find that the wide stop gives the trade time to work. In other words, FCBs can run the stops in the wrong direction. So long as the daily price movement from high to low is wide enough, my price is the trade direction has a good chance of being hit. This is where not being greedy comes in. I also find it helps if I don’t watch the trade - the moves against can be nerve wracking.

This type of tactic is not possible without 1) the confidence that it will work (or a belief in an edge); 2) a sufficient capital cushion to absorb the interm moves against the trade; 3) the ability to supress emotion - I find thatit helps in dealing with risk capital = money that can be lost and not affect your physical or mental well-being into the future. i.e. money you can afford to lose and still feel just as wealthy as before.

While I’m at it, let me lecture you about black swans. They are NOT, as everyone seems to think, events that you cannot imagine happening, actually happening. They are low probability price movements that actually occur more ffrequently that the so-called normal distribution would indicate. This is what “fat tails” mean. If, based on statistics, there is a 1 in a million chance of 10 down days of more than 3% each in a row (as an example), then it is a black swan even if it occurs. Taleb’s trading tactic is based on this.

The fund buys OTM options where the price is, according to their math, not reflective of the actual proability of that price movement occuring. So if the cost is $1 for a $1 mm gain for the OTM option, and the Taleb probability is actually such that the event occurs every 10 years on average, then the fund would parse the capital over the ten years in amounts that would ensure a  usurious profit on the starting capital for when the pay off occurs.

The risk is the “on average” part. Suppose the event doesn’t happen for 20 years and then happens 3 years in a row? Taleb’s fund would be out of business based on the 10 year horizon on average. The successfu funds are those lucky enough to have a black swan even occur sooner in the time expected - which provides an much larger capital base to play the same game and yet hold some in reserve.

I’m continuing to play in DXY, looking for moderate returns on each trade. I’ve been through some wild swings in price relative to the profit being sought - but this is with extreme risk money that has no bearing on my future. I can take these chances. The missing part of the puzzle is proper protection against black swan events, since DXY seems to follow a  defined range on any day - and the near 24 hour trading means that there are no gaps.

It is very liberating to not worry about the outcome of any trade. To just set an exit price - no stop - and walk away. This may end in an empty account - but it’s not THE account.

watch?v=J0y2dDlFmLg

Cheers.

by gmak

ZH has an interesting post that says that there is a low probabiity of SPX going more than 5% below the 50 DMA.  Here:  http://www.zerohedge.com/article/guest-post-5-solution

I ran the numbers for SPX going back to March of 1960. Of the 12,605 trading days in that range, about 6.4% (811) were ones where the SPX close was 5% or more below the 50 DMA (I used both the one for that day, and the one from the previous day to be sure). By that, I mean that [SPX / 50DMA - 1] was <=-5% for 811 of the 12.605 trading days.  This suggests that when the SPX price moves near or over that threshhold, that there is a high probabiity of a move up. I havent’t done the analysis of how long SPX stays below the 5% threshhold - I will do my best to have an answer in a post this week.

Needless to say, SPX was 5% or  more above the 50 DMA for almost 10% of the trading days (1,264). I would conclude that moves up last longer than moves down from this data.

Now you have one more indicator to help you live inside a broken clock.
EQUITY

What can I say? The trend is up.  The “Since Aug 17″ trend line is the next major level of resistance on the daily SPX chart.  SPX is above the 50 DMA, which is at 1108.99. 5% above that is around SPX = 1164. Thre is 90% probability (based on data back to the start of 1960) that it doesn’t close above this today. Do you feel lucky?

In a similar vein, the close on Feb 8 was at 1056.74. The 50 DMA from the previous day was 1112. SPX was 4.9% below the 50DMA at the close (which was the low for the day). The previous day (Feb 5), the low was THE low for the latest wave down. It was SPX = 1044ish. It was about 6.1% below the 50 DMA (the one from the previous day at the close). So in this one case, going beyond that 5% threshold was enough to cause a pullback and a higher close (note the next day was a red candle). I hope this helps.

Asia was totally green, with the exception of Indonesia, Malaysia, and Thailand (anyone remember the heady days of 1997?) but mildly so. Europe is mainly red with the exception of some more nordic countries.  The DAX surprised by opening around yesterdays close and then drifting sideways. This is either classic topping or consolidation for another move higher - neither of which helps in a trading decision. You might as well flip a coin and manage the stops - changing the trade if proven wrong. The DAX is effectively flat, and only Health care, Industrials, and Financials are green - but only 50% of the members  I would suggest that there is a bit of fear of what will happen regarding the meetings over Greece, today.

ES was effectively flat all night, trading is a slow range between 1115 and 1118.  I currently have TD resistance around that level (1118). Pivots:

• R2: 1127.50 = Certainly would be an aggressive bullish indicator, no?  This would put SPX around 1129.  The 50 DMA is at 1109. I think it would be interesting to have probabilities for how far SPX can move off of the 50 DMA in any one day - both the close, and the high.
• R1: 1122.50 = Above the highs from yesterday. This looks like there was support here back before the top in January and the subsequent waterfall. This means that it could now be resistance. The reasoning is that those who went long previously at this level may be “trapped” by the Jan sell off and the emotional pain will lead most of them to sell at or about the break even point, IMO.
• Neutral: 1117.75 = ES has been back and forth over this like Canadians on a parity shopping spree.  As mentioned, there is TD resistance just above at 1118.50 which has been the general area for two retracements down overnight.
• S1: 1112.75 =  This was support for the overnight yesterday. It could still be support for the regular hours - but it is hard to say.
• S2: 1107.75 = A general support and resistance area from Mar 1 and Feb 26.  This level seems to have meaning. It was the S1 pivot yesterday, more or less.

FX

Not much to say here, except that there are a large number of shorts in the EUR. They’ve been talking their book - my guess would be to draw in trades on their side in order to exit, or to draw attention away from their “real” target which might be the GBP. Either way, I wouldn’t be fooled. When hedge funds reveal their positions (especially talking about “generational” trades) - they are doing so for a reason = to make money, which is probably your money in this zero sum game.

NEWS

Greece continues with the deficit cuts. Bonds rally and the GBP snaps back, probably with a bit of a short squeeze on the late nervous money. AAPL has decided to get in a phone patent fight with Taiwan’s HTC. Korea is aglow with Oympic medals and want to outperform the world economy (don’t we all?).

DATA

MBA mortgage applications were up 14.6% vs -8.5% prior (week of Feb 26 for current data point). Challenger job cuts YoY were -77.4% vs -70.4% ( I don’t know if this means more or less i.e. improvement).

8:15 is the ADP employment change which is a much-watched data point. There will be bets on this and short term volatility.

14:00 Fed’s beige book. By the way, the last of the TAF money rolls over again on March 12th, I beleive.

Cheers.

GS Setups Short (off the October 2009 top)

Michael Davey/CD here…

Since the cat is away, the rats will play. I haven’t seen Mole’s name on the AP wire, so I assume he’s having a great time in the desert.

Like always, nothing I post is a recommendation. Think of this post as a demonstration.

If I can roughly define my potential loss and I consider my potential gain to be twice, thrice or better than the loss, I’ll flip a coin even against the wind to take that trade. And while the better entry occurred in January, a decent door-prize set-up exists now with bellwether Goldman Sachs (GS).

Since I don’t have a lot of time (ever the case these days, sorry), I’m going to just spit out my thinking. First, a mainly O’Neilian way of looking at attacking shorts:

-Big winners in a bull cycle often present the best short selling opportunities in the ensuing bear cycle. But…
-Look first for a break off the top, occurring on major volume, and then wait wait wait.
-Waiting 3-6 months for the optimal entry significantly increases ones positive expectation value (bullish sentiment will usually prevail for some time off the top, since investors and fund managers are psychologically fixated on the previous highs. Many refused buying on the way up, but are “comfortable” now to take positions on the way down. Meanwhile if the stock is indeed going to be a great short candidate, we’ll see clear distribution during this period ((selling on large volume, buying on smaller volume)) as the supply of stock is transferred to newer hands; hands who have a higher cost-basis, making overhead supply more relevant).
-If the stock manages higher-highs after this correction, then being patient saved getting beaten up shorting too soon (a famously common mistake, especially all the way up).
-Look for a break of the 50-day (on major volume) and then 3-to-4 rallies temporarily back above that (now downward trending) 50-day level.

Let’s look at the optimal set-up of GS, which occurred January 21st, the morning of their quarterly earnings report:

Click to enlarge and then click again ^^

-GS had broken-down off the top on October 15th on heavy, rising volume.
-Read above why 3-6 months is optimal for attacking a former leader short.
-GS rallied above the 50-day for the 4th time on January 21st, THIS WAS THE OPTIMAL MOMENT TO SHORT GS (169-171 on the morning of the 21st).
-Head and shoulders neckline is broken later on the January 21st session.

Let’s look at the Door-prize entry for GS now today:

-While GS has consolidated some lately, everything above still applies and GS is now at potential strong resistance, making it a fresh set-up short on any stab at the 50-day.
-The 50-day on GS has crossed the 200-day - the Black Cross is in affect.
-Using the 50 or 200-day moving averages (on a closing basis) provides a good, tight stop, since we know the stock should fail at or about this level if the name is to remain a winning short.
-Tuesday’s high (today, March 2nd) was 159.75 and the 50-day is trending lower, now ~160.70 (close enough to enter short in my book, since a failure of the test of the 50-day can come before the stock reaches the level).
-A close** above 161 on rising volume would indicate being stopped-out in my book; while any close above the 200-day would equate to the same, regardless of volume (GS 200-day is currently 163.10 and slowly rising).
-Thus, I’m looking at 4 or 5 points of risk to attack a name which should test previous lows or perhaps better, following a return to the trend lower.
-I’m not saying GS tests its lows now (or better) - I’m demonstrating that I can risk less than I stand to gain for something I’ve decided is more likely to happen than not.

**A note about closing basis - I will blow-out a position before the close if volume is strong enough and well before the close if volume is extreme (>2x’s normal for large-cap and >4x’s for smaller-cap). Otherwise, I am looking at the close, if it is going to be close, or the final hour of the session if it is clearly above my benchmark.

Hope that’s helpful. Good trading!

Previously in this series:
A Trader’s Guide to Cross Training (Part I to Individual Shorts)
A Trader’s Guide to Hedging Strategies - Part III
A Trader’s Guide to Hedging Strategies - Part II
A Trader’s Guide to Hedging Strategies - Part 1
A Trader’s Guide to Contractions
A Trader’s Guide to Sipping Kool Aid
Losing Like a Winner: A Trader’s Guide
A Trader’s Guide to Secondary Offerings (Part 2)
A Trader’s Guide to Secondary Offerings (Part 1)
A Trader’s Guide (Introduction)
A Trader’s Guide to Chasing Ambulances
A Trader’s Guide to Exhaustion

by gmak

Tick. Tock. Tick. Tock. Now, on to something more relevant.

EQUITY

SPX daily shows clearly that the Gartley pattern is not the valid one for a topping action. TD Waves says that SPX is still in a B wave of an ABC correction (on a bullish trend), or in wave 2 of the start of 5 waves down. SPX did close above the 1114 number and TD Pressure is not above the red oversold line, yet. This suggests continued upward momentum - even if it is on declining volume.  The next possible resistance leel is the trend line “Since Aug 17″ which is around 1128 for today, and 1129 for tomorrow. 

If for some reason, this market continues up for a 76% retrace of the X - A segment, then that value would be around SPX = 1125.45. If the trend line is in play, then this number is nonsense, and vice versa. If the FIB is in play, then the trend line will not be reached.

The High was at 1150.45, and there is a TD resistance point there. TD support comes in at SPX = 1046.50. These are both levels that need to be breached and re-tested from above /below for the the trend to continue in that particular direction.

Asia was green except for small isolated pockets. IN fact, most of the world is green over the last 24 hours.  Only Portugal and Austria are in the rd - and just barely.  The big news is that the DAX didn’t gap up, but continued a 45 degree steady trend line up and has put a pin above 4750 - looking for support and consolidation. There is that big juicy gap fro 5600 to 5650 - but the DAX has put in a higher low and a higher high (this is the game that the Gartley pattern is based on, and it brings in the last of the momentum players at a top  - and leads to distribution, followed by the road down).

ES was as flat as Olive Oyl, until 6 AM and then it pushed through one resistance pivot to test R2 - failing for now. PIvots:

• R2: 1122.75 = The high point for ES overnight. TD has put in a local 5 wave up, or C wave in an ABC correction on a down trend. There is a TD resistance level above at 1125.50 suggesting that is where any aggressive upward action might be turned back.  This level was also the TD resistance point through the first half of December, and the high level of consolidation at that point before the next ramp up.
• R1: 1118.75 =  ES cut through this over the last hour without hesitation. It looks like this level could come back as support for today.
• Neutral: 1111.50 = Was below support on the overnight. Note that ES got lifted by a push from the 9 pMA on the 4 hour chart and on the 5 min chart. Volume began to grow just before the AM ramp, eased off - and then came the pop.
• S1: 1107.50 = Quite far down given the sentiment.
• S2: 1100 = Don’t even think about it. There isn’t any news that would be tradeable today - so the bets are likely one-directional.

FX

I can’t say it any better than forexlive.com, from yesterday:

The market should get a short-term lift from the Greek news but it may soon go hunting for another target like Portugal or Spain, putting the EU to the test. A move above 1.3700 will take the immediate downside pressure off of EUR/USD and open the way for a rebound to the 1.3850 area. 1.3585 is the next hurdle EUR/USD needs to overcome in the near-term.

ON the 3 min chart, there is a pivot and resistance at 1.3562 for the short term. Howver, it looks like EUR is being bid up steadily. CAD is a lot stronger - by about 70 bps since midnight.

Looking at the EUR daily chart, the currency put another pin through the 62% FIB since midnight. You know the drill - if it has enough holes in it, the support will tear and the security will fall through. TD support resides below at 1.3369. Overhead reisistance in the channel at FIB (50%) - not to be confused with the High - Low FIB, is at around 1.3575. The channel FIB below is at 1.35. IF there is range trading, this is where it will happen. Look for breaches of either for a mood shift, as it seems the market is awaiting a positive resolution to the Greece situation.

As I type, EUR is making an assault on bot the neutral pivot and the TD resistance at 1.3565. A shift in sentiment on the EUR would be indicated by the pivot becoming support and consolidation beginning. Pay attention because it seems the EUR might be a leading indicator today for the SPX. (but like CO2 and warming, the causality direction is confusing).

NEWS

More tungsten in gold. See ZH for the German video.  EM stocks have reached a 5 week high - who says there are no risk-takers left. Australia raised their bank rate. Canada is really toying with the housing bubble fate as they are rumoured to keep the lending rate at the lowly 0.25% but jawbone the market that an increase will be coming later on. That can sure gets kicked a lot, lately.

DATA

Nothing until 17:00 EST = ABC consumer confidence. Domestic vehicle sales, total vehicle sales.

I’m short the DXY and not for a day trade. I keep looking at the record oversold condition on the EUR. I know the market can remain…. blah blah blah. I’m looking at using ES as an indirect hedge on the postiion. If DXY shows signs of consistent strength - ie not gaming - then I might put on an ES short to offset the losses. The plan would be to ride ES down, and either close out the DXY, or the ES if it looks like there would be another wave up for it - and ride the remaining security in the trade.

Cheers.

by gmak

Just time for a quick post today.

EQUITY

Gartley is still a valid pattern - although SPX daily is insisting on running along the upper trend line ‘for the nonce’. A close above SPX = 1114 would definitely suggest a nascent bullish trend.  Just as a refresher:

Here are the numbers I get for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (Feb 19, 22)
C = 1058.50 - 1069.50 (projected range)
D = 1124 - 1135 (projected range) Go short here if the pattern holds

Asia was green with the Hang Seng up over 2%. Only Karachi was red in all the markets of the region. Europe is gren with only Spain in the red.  Breadth across individual markets is weak.  The DAX gapped open and now looks weak - like it will try to close that gap. The gap goes from about 5600 up to 5650. This is interesting in that the EUR is being beaten badly in spite of supposed agency buying at 1.36 and again at 1.3580 /90. I guess that it’s the hedge funds against the CBs.

DAX leadership is across the board and most stocks are green. This was a fundamental lift - looking for distribution here if there are any commentors with volume insight. Once again we are faced with the potential of SPX opening up (driven by ES) with a strong USD. When correlations shift, they really do a 180.

ES moved up from the Asia open for most of the night, and then sold off post the Europe open to put in a new LOD reently - paralleling the EUR drop, which is what one would expect from the standard correlation. Pivots:

• R2: 1114 = This would put SPX into a different topping pattern (if not a bullish one, yet). Fujisan at SoH has some ideas about other patterns. My own opinion is that trying to fit a topping pattern over and over is symptomatic of trading with bias. I’m going to try to empty my mind of this (not as hard as it sounds given the relatively uncluttered and empty space up there).
• R1: 1108.75 = ES was comfortably above this most of the night. Some support was noticed before the drop through - so this could be resistance on any rally back up.
• Neutral: 1102.50 = This was a support level at the close on Friday. It was local resistance before that, so the level has some meaning.
• S1: 1097.25 =  ES touched this level briefly on Friday. This also looks like it was support and resistance for the second half of last week.
• S2: 1091 = This was support last week, at times.

I really don’t know what to say about what we are saying, except I remain vigilant for signs of distribution.  Volumes were higher on Friday and the closing price was near the opening price for SPX - usually a sign. More confirmation is needed but that’s a start.

FX

DXY is back within its local channel. There must have been some news from Europe this AM because it went from sideways action and bottoming to a nice 2 hour rocket move. It looks like each move up in EUR is being met by selling. Give a man a fish and he eats for a day. Give a hedge fund zero-cost money and it eats everyone’s lunch.

Every currncy is weak against the USD suggesting that this is the currency of last resort under the present emotional context of th market. This is quite a switch from Friday, no?

EUR is testing the 62% FIB within the channel that began at the start of December.  IF the TA on the chart is correct, I would expect upward pressure to come in around here - with the long run FIB of 62% just below at 13483.  There are some TD indicators on the daily chart that suggest that a material move up could happen - TD methodology suggests that if this doesn’t happen within the next 2 days (up to and including Wednesday) that the BUY set up and countdown are just whistle stops on the way further down.

If FIBs have any meaning and aren’t just random lines that work much the same as horoscopes (we see the times that FIBs are support or resistance and ignore those where it isn’t), then this general locale is as good a spot as any for support to come in. Part of it depends on how badly China needs a strong EUR- but not at the expense of the JPY.

NEWS

I got nothing. SOme tidbits: The financial world is abuzz about the AIG Asian unit purchase by Prudential. The GBP is falling. Corporate bonds are rallying on the “Greece plan” - wish I knew what that was. APparently there is an expectation that the 10 mm people in Greece will not stifle economic growth in the world. 

DATA

See briefing.com for more.

8:30 = Personal income, spending, and PCE . How bad off is the consumer?

10AM = ISM manufacturing and Construction spending MoM.

Cheers.

I decided to head out to the Californian wilderness and let the market churn on its own for a little while. Clarity is needed and a little vacation was long overdue. Besides, it’s been raining in the desert all winter and that means spring flowers at Joshua Tree - my camera is locked and loaded.

I should be back next weekend - unless of course some UFO decides to beam me up

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

by gmak.

I’m off today a feeling a touch maudlin. It must be the weather and cabin fever. It has come to this. The MSM and the FED are blaming the weather for the poor economic data points in the USA. To top it all off, I expect the word “unexpectedly” to be the most frequently used by all these figuratively deaf, dumb, and blind shills for a grasping financial system.

California has passed a bill to delay payments to programs, including schools, to avoid running out of cash. Must be the weather. US jobless claims rise, “unexpectedly”. Curse the weather with tiny impotent raised fists and squeaky voices. Equipment demand slows. Darn rain clouds. Home sales hit record lows. Who shops in the rain or snow? Economic indicators rise less than expected. Begone vile storms! At least Obama has decided to outlaw foreclosures without approval by the .gov. Then he will persuade the consumer to spend. Finally, he intends to bend the tides to his will. After that, perhaps the weather.

Japan sees consumer prices fall 1.3%. Is there anyone left in the world who still thinks that a CB can automatically reflate an economy in the face of a credit contraction? Thirty years. Thirty years. Thirty years. That’s some weather. Protests grow in Greece, Portugal, and Spain. If only the weather had been better, their leaders would NEVER have overspent and encouraged wanton and wasteful consumption. But, goods news in that sharks disguised as squids are willing to help Greece sell off assets to meet its debt obligations. Live by the leverage, die by the leverage. And there will always be the scavengers to feed on the corpse. Yet, the UK plows ahead undaunted in its own race to the bottom and insists that its QE will be the best ever. What do those Japanese know anyway?

Thank goodness that I have this broken clock to live in or surely all this weather would do me in.

EQUITY

Quite a day that caught me a bit off guard and showed me that pre-conceived notions are the same as bias.  There is nothing more dangerous than a trader with a straight edge. heh.  I just watched a Swedish men’s curling team that pretty much owned Canada in the game  but let it all slip away. I understand their dismay and want to avoid that fate. I remain on the sidelines until I get my wits and detachment back - even if the damage was not that severe to me. WHen you slip into telling the market what to do instead of following the TA trail…..

The EUR just put in a 30 pips rocket in 3 minutes (at 7 PM EST).  I guess that stop running remains an all-season sport. Those cwazy weindeewr.

SPX daily put in a red candle - but bounced off the the 1086 support line that has been around for months now. The Gartley pattern remains intact. I have no clue what will happen tomorrow. Most expectations seem to be for a green candle (close higher than today’s close). Most expectations tend to be disappointed. Just ask all the economists. Whatever we think, the SPX = 1086 level remains decent support - if only as a parameter in a skynet program. Ignore it at your peril.

On Thursday, the ES climbed the 9 pMA on the 5 minute chart, an amazing exercise in control - Jack and the beanstalk. This continues post-lockup. Volumes are low as those mystery traders that are responsible for most of the SPX gains in the last while continue to have their way with the futures market. Overbought conditions are relieved by gentle sideways action. This is a thing of mathematical beauty that in no way ressembles loose and sloppy reality. The lesson in all this is play the market you are given, not the one you want to be. The market is headed up on the 9 pMA magic carpet ride. Hop on!  The downside risk is very well defined by a near-parallel tracking 34 pMA.

FX

The Washington Post has an article about how many many hedge funds are trying to use the EUR short as a generational wealth trade. Oink me. The EUR strength is no surpise as there are likely to be many forced short coverings before all this is done. It’s a race between Greece and Greed.

Looking at the daily DXY, I see it running into wave 3 up resistance and a sideways consolidation beginning. Wave 4 is underway and wave 5 a plausible future - according to the TD wave count. There is a 38% FIB at 80.07 which appears to be interim support. Below, there is a long time “eyeball” line of support at 79.63. This defines the risk for being long. Overhead, the 50% FIB is at 81.90 - this defines the short term reward. TD pressure suggests that there may be some more downside, but that DXY should rise from the ashes like the phoenix, when the TD pressure goes below and crosses back above the oversold signal line and indicates a Low risk buy again.

NEWS

 Obama may ban all foreclosures without review by loan-modification program; Japan Production climbs most since May. Retail sales rebound. Deflation continues. Bernanke says GS deals with Greece will be examined. I know I will sleep better. Clinton calls US record deficit and debt a growing national security concern. She knows that it’s a war.

 DATA

8:30 AM = GDP; Personal Consumption.

9:45AM = Chicago Purchasing Manager; U of Michigan Confidence

10AM = Existing home sales; NAPM Milwaukee.

This is why I believe that inflation is unlikely. You can’t spend what isn’t there. Of course, everyone is entitled to their own opinion.

MORNING UPDATE

Asia pretty much stayed the same all night. Green except for China. Europe is green except for a few minor markets (Franfurt? How did that happen?).  The DAX gapped up (yawn) and is putting in a slightly upsloping sideways wave. The gap is from around 5532 to 5560. Given that this is the weekend, one would expect that to close - but read the comments below because there are a lot of DAX voyeurs in the mix. The green in the DAX is across all sectors except health care, and pretty much beteween 85% and100% of the stocks in the index (mainly 100%). Even so - the DAX is not running away with itself. Keep an eye on the gap, it might be a good play today with clearly defined stops to the upside.

As it did up to midnight, The ES pretty much rode the 9 pMA all night. Volume was low except around the Europe open - which put a bid under the ES as it bounced off of the TD support level I mentioned last night. Pivots:

• R2: 1115.75 = Plausible if stop running is in vogue.
• R1: 1109 = Possible. I don’t think that this would violate the Gartley pattern - but then again, it’s just a pattern.  I note that ES did not get near this pivot overnight (relatively speaking).
• Neutral: 1095.75 = Possible support level if GDP scares the longs
• S1: 1090 = This was suport on Feb 23rd off the bottom of the waterfall.
• S2: 1077.75 = Not today (I know I said that yesterday for the S2 as well, but I’m just playing the odds). This will be reached if Gartley is valid, in the next 2 weeks.

EUR was goosed up all the way to 1.363ish with ECBs rumoured to be the goosers. RIght now, it is testing support at 1.3579 which is one of the levels for the ramp off the bottom at the Europe open. I expect that there was some short covering here, and that nervous stops were run most of the night - with no sellers available to challenge. That should change with the NY open, assuming that hedge funds have any powder left.

I’ll be in and out all day but not doing much action. I am sitting on a DXY long (with money that I can afford to lose, and a good cushion for the reindeer games). Let’s see how this plays out.

Greece is in dire straits. California cancels $2 billion offering and moves closer to solvency. Everyone knows CRE is a falling domino except those pumping the stocks.  There is roughly $800 billion in high yield securities (lesser credits) maturing between now and 2014.  Indirects continue to shrink in the Treasury auctions. Bloomberg holds the mirror to the corpse’s mouth and sees the end. Can sovereign defaults be far away?

http://www.bloomberg.com/insight/america-tied-up-by-record-debt.html

Welcome to the broken clock.

EQUITY

The market seems to have thrown everyone a head fake yesterday (except here).  Zero Hedge suspects skynet.

http://www.zerohedge.com/article/guest-post-spy-getting-jump-key-levels-quant-algo

The main culprits are the usual squids:

http://www.zerohedge.com/article/goldman-and-jpmorgan-spy-holdings-double-over-prior-quarter-and-other-spdr-observations

What I see is a market that is remarkably consistent with its patterns, if one ignores the outside world.  Today, just looking back a few months, I would expect a bar inside (or close to it) of yesterday’s - likely red since I don’t believe (opinion) that SPX will go above yesterday’s close. The Gartley pattern is still intact, and would remain so unless the most recent high is exceeded on a close. As always,

Here are the numbers I get for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (Feb 19, 22)
C = 1058.50 - 1069.50 (projected range)
D = 1124 - 1135 (projected range) Go short here if the pattern holds

Asia is red. Emerging Asia is mainly green. This seems like another version of the risk trade, except Europe is red except for Sweden (the men made it through to the finals in curling).  It looks  like the DAX gapped DOWN at the open and then spent the time since in clawing its way up - now looking like the DAX is running in an upward sloping channel along with yesterday, currently on the down wave. More sectors are gren - but just barely so. Telecom, Industrial, and Utilities are red (so is consumer discretionary - shhhhhh). Materials are very green. Financials barely so.

ES fell off a cliff (slowly) overnight as Asia opened and bottomed just around midnight (we’re gonna let it all hang out). Right now it looks like a long range-bound trade with 1095.50 at the bottom and 1100.50 at the top. 5 point swing trades. Yum. Pivots:

• R2:  1113.50 = Not today.
• R1: 1108.50 =  was resistance before the pop on Feb 23rd that led to the sell off during the day. I cannot see ES reaching here today - especially after the fade-out yesterday.
• Neutral: 1100.50 = This is the range top. It’s been a resistance level in the past.
• S1: 1095.50 = This is the range bottom. It’s been suport in the past and just above an “eyeball” support line at 1094.50ish.
• S2: 1087.50 = Not Today, IMO.

FX

DXY has been sitting on top of the 38% FIB (low = 74.17; high = 89.624).  I think that the major portion of the USD short squeeze is over and DXY is going to consolidate at this level. I see support around 79.50; and 79.00 on a TD basis.  I don’t think that I would want to be the USD if California officially goes bankrupt. I am playing a small short trade this AM. Please note that I have a sufficient capital risk base that I can go through the stop running and hold my positions until they correct back.

The EUR has been channeling upwards overnight and is presently consolidating on the S1 pivot at 1.3485. The TA is mixed. MACD is trying to cross bullish. Ichimoku says neutral with base and conversion lines on top of one another. As I type, EUR is getting sold and DXY is running up.  I’m looking to TD Pressure to go oversold and cross back - and then I’ll know that EUR is headed back up. Overhead resistance seems to come in around 1.35ish.

NEWS

Greece is having its problems with a population in revolt against austerity. Unfortunately, there is really no choice - please refer to countless TV shows on debt management.  Wheat has seen a bumper crop this year and Russia plans to release from their stockpile.

Canada leaves no doubt in their domination of the Russian men’s hockey team.

DATA

8:30AM

Durable goods; Initial jobless claims.

10AM

House price index MoM

That’s pretty much it as I sit on a semi-foolish DXY short - looking for some strength in the EUR off of a bottom - but this doesn’t look likely.  I’ve got my point of “scrap this trade”, and I continue to prudently manage my risk. Trading bias gets you slaughtered. Stick to the TA and know the point where you are wrong.

Cheers.

Charting is a bit like playing chess. Every technical analyst commands a particular repertoire of technical patterns, instruments, momentum indicators, resistance/support lines, trend biases, trading tools, etc. In the end we all somehow try to anticipate what will happen next - or at least attempt to consider various scenarios of what could happen at what stage if x happens or y will not. From there you plan your next move - and you better anticipate how the market will react to it. If you get married to a particular idea it’s checkmate in three moves or less. Which happens when you fall in love with a particular wave count and refuse to consider other scenarios.

Good analysts know that in many cases they will be wrong and if they somehow manage to survive for more than a few years the lesson learned is not how often you’re right but what you do when you turn out to be wrong (which will happen regularly - get used to it).

When looking at the current chart in the context of all my complementary tools I have very little confidence in proposing what’s next. Frankly - at this stage it seems we are stuck in complete limbo - or what I call ‘end of second wave limbo’. Let me explain:

As you can see there are various ways of how we could count this pain in the ass of a tape. Maybe we completed Minor 2 yesterday (blue) or will do so after a push into 1,128 (light blue). We all know what should come next and it would make any put holders very happy. However, life and especially trading is usually not that easy. If we push higher from here it’s also very resasonable to count the advance as a motive, which would suggest that we are completing Minute {i} of Minor A (green). 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.

I hate second waves - especially in the past year or so - because more often than not they have turned into A waves which were followed by long and painful short covering C waves a few weeks later. Even if you bulked up at the very top (like yours truly) you still suffered from theta burn by the time you figured out you were on the wrong side of the trade. As I said - not a pretty picture.

So, what to do?

Play it long term. You can’t win this one. News do not matter. Good economic news might actually tank this market while bad news might rally it. Too cynical for you? I really can’t blame you - but read this first. The magic word is quantitative easing (i.e. money for nothing and chicks for free) and it’s what has kept this turd of a market melting up and now holding up in the face of a tumbling Euro (and rallying Dollar).

TA does not matter either. I can post all the wave counts I want - it won’t really help you negotiate the mind fucks they’ll throw at you in between. Come on - how many postings and opinions and comments have you digested in the past few months? Did any of them lead to a successful trade? Rarely - and you know one when you see one as the setup is often too sweet to pass up.

Play it long term. You can’t win this one. They will fake you out if you play the small moves. It’s quite simple: Either we’re wrong with Primary {3} or we’re right. If we’re right we’ll bank a shit load of coin as we are among a small minority. Yes, doesn’t feel like it here, but we all exist in our respective monkey spheres. Trust me - 99% of all market participants think the bull market is back - we are crazy to think otherwise. Or are we?

Play it long term - especially if you trade options and hope for P3. If we’re wrong - well, we’ll know soon enough. It might take a few more weeks to get out of second wave limbo but we will. One way or the other. Once we get verification it’ll be too late to jump into the game as things will move rapidly and you won’t be able to get positioned. The pain you are going through right now is the price of admission - deal with it.

Play it long term.

Cheers,

Mole

P.S.: Did I mention to play it long term?

P.P.S.: OR - play it very short term. Ever heard of Geronimo? No? Your loss…

Pay attention to the $200 billion just handed over to the FED by congress and the treasury. It’s not what it seems.  I saw a piece on ZH, that has since disappeared, that seemed to imply that the $200 billion was a vehicle for removing liquidity from the market. This warrants further investigation, and could be how the FED “persuades” congress to ease off on the audit and provide more QE - with an equity market push-down no less. Tick. Tock. Tick. Tock.

 EQUITY

I expect today to be green. This means that SPX will close above yesterday’s close at 1094.60. I have no overarching reason for this other than the fact that 3 red days in a row is a rare occurence - usually reserved for waterfalls in this market. I expect SPX to bounce off of the short-term trend line that was resistance from Feb 8th - and should now be support, IMO. However, the GARTLEY pattern is still valid.  I’m still looking for a general down trend to the 1058.50 - 1069.50 range.

Here are the numbers I get for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (Feb 19, 22)
C = 1058.50 - 1069.50 (projected range)
D = 1124 - 1135 (projected range) Go short here if the pattern holds.

In summary, the short term trend is down, but today could be an up day if recent market behaviour continues. In this environment, I would still feel more comfortable with the risks in a short trade, than with a long trade - because MY dominant trend is down. That being said, I believe that there will be a few swing trade opportunities today.

Developed Asia was red.  Emerging Asia was mixed with China, Malaysia, Vietnam, and Sri Lanka being green. Europe is mixed withi France, Germany and Austria, The PIGS, and the nethrlands in red. Italy is green oddly enough. However, the breadth is tepid and countries keep flipping back and forth. Short term scalping seems to be the order of the day.

The DAX fell at the open. The gap from Feb 17th has been closed. The close from the 16th ( around 5590) appears to be the interim support level and we have a mild bounce. Sector performance is split, with Utilities, Consumer staples, Consumer Discretionary, and Materials all in the red.  The green sectors have good breadth with most stocks in the green.  The index is essentially flat.

ES moved up after the bell yesterday and held that level all night until Europe opened. It got a bid at the support line at 1094ish at 5AM and moved up off of that.  It appears that traders were motivated in their actions by the stronger-than-expected Euro Industrial orders data. (does this count as news?).

• R2: 1122.50 = Not today.
• R1: 1110 =  Level of the start of the waterfall yeseterday. This market looks too tired to re-test that level
• Neutral: 1100 = Looks like the roof for today, IMO
• S1: 1087.50 = In low volume, its possible that nervous sellers could push ES down to here. I would expect a bounce, though. My opinion is that there is enough technical support above this pivot to slow the fal.
• S2: 1077.75 = Not today, IMO. But this will need to be breached over the next week IF the Gartley pattern continues to be valid.

FX‘

Eurozone industrial orders were better than expected and this put a bid under the EUR.  The data was released at 5AM EST.  Forexlive.com thinks that there are Asian CBs that put a bid in around 1.3540 /50 overnight. This still seems to be a support level.

EUR is still running in a broad downward channel that began Feb 9th. There have been big pops out of it - but overall the slope remains constant and down.  The action overnight was in a tight range until the Euo-news at 5AM. This gave a pop to the HOD. Support, as mentioned, seems to continue at 1.3540 /50.  The trend is up since yesterday - but zooming in makes EUR look like it is in a sloppy bear flag. I don’t like sloppy - too much room for interpretation and wishful thinking. The EUR will NOT do what I want it to based on TA. Remember that.

NEWS

EURO Industrial orders. Bernanke to testify. How do you know when he is lying (even by omission)? Because his lips are moving.

DATA

MBA Mortgage applications were -8.5% (week ending Feb 19) vs -2.1% prior;

10AM = New Home sales.

Michael Davey/CD… with a brief look at bellwether Goldman Sachs (GS)

A picture tells the story. The 200-day crossed the 50-day on GS at mid-month, suggesting any emotional rise a reasonable short-term trading opportunity for attacking short. With a head-tail developing on the day, a GS short entry, with the above moving averages as closing-basis benchmarks, looks rather textbook.

That means you’ll lose money trying to short this, I’m sure enough…so don’t try this at home. But for the sake of selling textbooks I think it is worth noting/following.

Regards

Mole here: Michael alerted me to some very interesting developments today in interest rates - in particular on the 3-month IRX which ramped up 35% today. Now by accident I pulled it up on my $VIX chart which dons a 2.0 BB and what I saw is well worth sharing:

It’s almost scary how faithful the IRX has become to snapping back inside its 2.0 BB. Based on that we should see a drop in the coming days - unless of course this is some type of third wave developing and that BB is about climb higher. Keeping my eye on this one - very interesting (pun intended).

Cheers,

Mole

It seems the FDIC wants Americans to do their patriotic duty and open savings accounts at banks.  The administration, no hypocrite, continues to borrow record amounts to keep pace with their desire to see all consumers become even bigger slaves to interest rates.

Greece isn’t alone. GS reveals that other countries like swapping as well. Guess they all sit around and the MinFins throw their keys in a big bowl for the IBs to select. Meanwhile, the IMF shows up in Greece. The fourth horseman of the financial apocalypse stands revealed. There is enough worry that the World Gold Council says:

“The volume of total identifiable gold demand during 2009 was down 11% on 2008 levels at 3,385.8 tonnes. In $US value terms, the two years were broadly on par. Tonnage demand in Q4 was down 24% on Q4 2008, equivalent to a 5% rise in $US value terms. If we add the less visible side of investment, total tonnage demand in 2009 enjoyed an 11% rise over 2008 levels.”

Looks like the fear trade is still on. Demand has increased in the face of rising prices. 

Meanwhile, although Canada is said to have NO housing bubble, recent sales in my neck of the woods are at ABOVE asking price.

Welcome to the broken clock.

EQUITY

In my opinion, the Gartley pattern is still valid. SPX daily put in a red candle yesterday by closing lower than Friday.  It looks like SPX = 1114 is still the line in the sand for any attempt at a run up. I was hoping for higher volumes yesterday to point to distribution - but it is what it is. The Gartley numbers are:

Here are the numbers I get for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (Feb 19, 22)
C = 1058.50 - 1069.50 (projected range)
D = 1124 - 1135 (projected range) Go short here if the pattern holds.

A pattern is just that - it is NOT a prediction. It is just a structure overlaid on the Market. It is a simple elegant mathematical construct based on historic occurrences that is trying to make sense of MESSY, SLOPPY, UNPREDICTABLE reality.

In my opinion, the SPX = 1086 line (dashed green line) is now support again. SPX = 1114 is the overhead resistance. Looks like a solid risk /reward to go short here. Maximum overhead run would likely be to the trend line “Since Aug 17” which is up around SPX = 1121.

TD Pressure has curved down and desperately wants to cross below the Overbought signal line – which would indicate a LOW RISK SELL.

Meanwhile, I just want to point out that Monday was NOT an up day - even though the blogosphere has been full of the expectation that it would be - just because it has been. My opinion is that these “common knowledge” statements, once they are prolific on the internet, are an indication that they wil NOT happen.

Asia was mixed with Developing all red, except for Malaysia, Indonesia, and Thailand - sort of a reverse 1997 crisis. Developed Asia was green except for Japan, where the BoJ is apparently worried about sovereign risk in its holdings.  The DAX gapped up (AGAIN!) and then sold off to find support just below 5650. I guess 5640 is THE number to watch again. There is still that GAP to fill from Feb 17th which began at 5590ish. As goes the DAX, so goes the SPX, usually.  Every sector is red except consumer staples (back to this old chestnut).

ES was pretty much flat overnight, wxcept for a bump up into the Europe open, with a selloff to the Low overnight along with the DAX. Pivots:

• R2: 1117.25 = Not a chance, IMO.  This was last resistance back in October / November. If 1114 is closed above, then the Gartley pattern is off, IMO.
• R1: 1112.25 =  Altready twice hit at the open yesterday and at the Europe open today. Looks like it will hold to me.
• Neutral: 1108 = Was overnight resistance. Give the bearish cross about to happen on the 9 and 34 pMA, it could be again.
• S1: 1103 = THis is where ES has bounced from overnight, including recently. I note though that each time is a lower low.
• S2: 1098.75 = When the levee breaks. TD has a retace level for the mini wave 3 it ses on the 5 min chart, at around 1097.75. 1099 looks like a good target and where a bounce would likely take place.

I’m just curious how all the monkeys with their hands in buried jars are going to get out without letting go of the peanuts. Distribution is a bitch if no one shows up at the party.

FX

The EUR was sold and ridden hard all night.  Looks like someone has had enough and it bounced at the bottom of the downward channel on th 3 min chart - around the S1 pivot - to break above that declining channel and clear some TD resistance. I’m playing that it will reverse back down, through a DXY long.  I see the upper Bollinger, and TD price exhaustion, a TD pressure that has gone into overbought (note that it was there once earlier, fell down, but came back up to overbought righ away).  Apparently there was some weak data earlier but someone is trying to put in a floor.

JPY is stronger since midnight, CAD is weaker, and so is GBP.

NEWS

Nothing. But doesn’t matter anyway, unless you’re betting on it.

Well, German business confidence was down. Hence the DAX plunge and USD strength. The FED wants to keep bank oversight as one of its powers - even though its useless as…. [pick the  analogy of your choice]. Apparently an AIG doument shows that the NY FED kept secret, shows that GS created most toxic CDs (NO!).

DATA

9 AM EST = Case Shiller home index. 10AM = Richmond FED mfg index; consumer confidence. 17:00 = ABC consumer confidence. Ho Hum.

I remain opportunistic. Since I am playing the Gartley pattern, I remain more receptive to short trades today (ES) than long trades. Again, I look for a number of TA indicators and trends to line up - with a clear stop level that is less of a loss than the potential gain. In the meantime, I scalp DXY as a less leveraged way to play the EUR.

Cheers.