Saturday, November 29, 2014

Why I'm So Confident


You might have noticed that I haven't posted in awhile.  Is there any reason to?  I lived in San Diego for awhile but having been born and raised in the Midwest, I could never really get my arms around the "forever the same" weather.  I could never understand what purpose the television weatherman had.  Nothing really changed - ever.

Totally bored with the lack of seasons, after two years, I returned to the North, where during the summer, it was hot and the winter cold.  In Chicago, where I grew up, there is a saying, "if you don't like the weather, wait 24 hours." 

As the chart above shows, for some 30+ days now, the market has done nothing but go up, almost every day.  We certainly hit new records in number of days above the 5-day moving average.  Many of the days appeared to be down days, but in the final minute or two, a big surge of volume would come in, probably more than the entire day's worth of volume, pushing the market back to the highs.

So, being as useless as a San Diego weatherman, with the market being 100% predictable, there is no need for commentary.  I was somewhat amazed (no not really), that despite the huge selloff in energy stocks, the Dow still managed to close at a record high.  Albeit, based on the final minute of activity.

Everyone who trades the market sees this.  I'm sure that the regulators see it too.  Don't they?  It seems to be a given that since many receive bonuses based on how stocks close out the year, one can expect that this pattern will continue through the end of the year so that the "players" and CEOs can maximize their bonuses.  And then of course, all of the new IRA money comes rolling in throughout January.  By then we will see that the economy is still weak.  Europe and Asia will probably be in depression, so Central Banks will continue printing money and goosing the markets ever higher.  It is the reality that we live in and the governments sit idly by, while the players game the markets.

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One thing that caught my interest today is a story about the Ponzi scheme that governments  are pulling off.  Well, if you didn't realize this, then this will be interesting reading.  If you are a market trader and are aware of how things work, well, it's an interesting story none-the-less.

http://cnsnews.com/mrctv-blog/terence-p-jeffrey/ponzi-treasury-issues-1t-new-debt-8-weeks-pay-old-debt

Ponzi: Treasury Issues $1T in New Debt in 8 Weeks—To Pay Old Debt

November 28, 2014 - 2:37 PM

Treasury Secretary Jacob Lew
Treasury Secretary Jacob Lew (AP Photo)

The Daily Treasury Statement that was released Wednesday afternoon as Americans were preparing to celebrate Thanksgiving revealed that the U.S. Treasury has been forced to issue $1,040,965,000,000 in new debt since fiscal 2015 started just eight weeks ago in order to raise the money to pay off Treasury securities that were maturing and to cover new deficit spending by the government.

During those eight weeks, Treasury took in $341,591,000,000 in revenues. That was a record for the period between Oct. 1 and Nov. 25. But that record $341,591,000,000 in revenues was not enough to finance ongoing government spending let alone pay off old debt that matured.
Record Revenue through Nov. 25, 2014

The Treasury also drew down its cash balance by $45.057 billion during the period, starting with $126,568,000,000 in cash and ending with $81,511,000,000.
 
The only way the Treasury could handle the $942,103,000,000 in old debt that matured during the period plus finance the new deficit spending the government engaged in was to roll over the old debt into new debt and issue enough additional new debt to cover the new deficit spending.
 
This mode of financing the federal government resembles what the Securities and Exchange Commission calls a Ponzi scheme. “A Ponzi scheme," says the Securities and Exchange Commission, “is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors,” says the Securities and Exchange Commission.
 
“With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue,” explains the SEC. “Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”
 
In testimony before the Senate Finance Committee in October 2013, Lew explained why he wanted the Congress to agree to increase the federal debt limit—and why the Treasury has no choice but to constantly issue new debt.

“Every week we roll over approximately $100 billion in U.S. bills,” Lew told the committee. “If U.S. bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance.”
 
“There is no plan other than raising the debt limit that permits us to meet all of our obligations,” Lew said.
 
“Let me remind everyone,” Lew said, “principal on the debt is not something we pay out of our cash flow of revenues. Principal on the debt is something that is a function of the markets rolling over.”
The vast amount of debt that the Treasury must roll over in such a short time frame is driven by the fact the Treasury has put most of the debt into short-term “bills” and mid-term “notes”—on which it can pay lower interest rates—rather than into long-term bonds, which demand significantly higher interest rates.
 
At the end of October, according to the Treasury’s Monthly Statement of the Public Debt, the total debt of the federal government was $17,937,160,000,000.
 
Of this, $5,080,104,000,000 was what the Treasury calls “intragovernmental” debt, which is money the Treasury has borrowed and spent out of trust funds theoretically set aside for other purposes—such as the Social Security Trust Fund.
 
The remaining $12,857,056,000,000 was “debt held by the public.” This part of the debt included $517,029,000,000 “nonmarketable” Treasury securities (such as savings bonds) and $12,340,028,000,000 in “marketable” Treasury securities, including bills, notes, bonds and
Treasuring Inflation-Protected Securities.
 
But only $1,547,073,000,000 of the $12,857,056,000,000 in marketable debt was in long-term Treasury bonds that mature in 30 years. These bonds carried an average interest rate of 4.919 percent as of the end of October, according to the Treasury.
 
The largest share of the marketable debt--$8,192,466,000,000—was in notes that mature in 2,3,5,7 or 10 years, and which haf an average interest rate of 1.807 percent as of the end of October.
Another $1,412,388,000,000 of the marketable debt was in Treasury bills, which carry “maturities ranging from a few days to 52 weeks,” says the Treasury. These $1.4 trillion in short-term Treasury bills had an average interest rate of 0.056 percent as of the end of October, according to the Treasury.
The continual rolling over of these short-term, low-interest bills helped drive over the $1-trillion mark the new debt the Treasury had to issue in the first eight weeks of this fiscal year.
 
The Treasury has taken out what amounts to an adjustable-rate mortgage on our ever-growing national debt.
 
If the Treasury were forced to convert the $1.4 trillion in short-term bills (on which it now pays an average interest rate of 0.056 percent) into 30-year bonds at the average rate it is now paying on such bonds (4.919 percent) the interest on that $1.4 trillion in debt would increase 88-fold.

Saturday, November 22, 2014

China Rate Cut Sparks Market Rally


Another day, another Central Bank action somewhere in the world.  Weakness in China resulted in a rate reduction, but China's interest rate is well above rates in Europe and US so there is certainly more news out of China to come in the future as the race to devalue world currencies continues.

The S&P has gone up for five straight weeks now without a pause.  Friday marked the 26th consecutive day that the SP closed above its 5-day moving average.  This has only happened one other time since 1950.  There is no indication that the market will sell off next week as we approach the Thanksgiving holiday.  Trading activity will likely be slow enabling the market to rise ever so higher with little to no resistance.


The dramatic move up is illustrated also in the Standard deviation chart, with price going straight up after reaching oversold levels.  The last time S&P reached the -2 level, it also rallied back up to the +2 oversold level before finally regressing back to the mean.


Size, more commonly known as Band Width continued to rise but could possibly be meeting some resistance based on the downward trend.  The basic rule remains, when Size is rising, stay with the trend.

Finally, the rate of change in the moving average may also be reaching a resistance level.



I'm not sure that it's possible for the market to have any down move anymore that isn't interrupted with some Central Bank action or Federal Reserve comments which causes the computer programs to ramp up the market. 

I'm not sure what is going on in the market anymore.  Many suggest that Central Banks are actively buying stocks and that is troubling.  There appears to be an unlimited supply of money that can be directed towards the markets and at this point, few sellers.  Volume has been light and it would be interesting to see the actual volume of individuals as opposed to computer algos.  Not sure that it is a market that average people should be in.

Many people practically "harass" me as I refuse to have my 401(k) money in anything other than cash.  Everyone is so convinced that earnings are great, the Federal Reserve has their backs, there is no inflation, etc.  The power of the press I guess as they are by no means market experts.

I remain with large put positions having expected some retracement by now.  I had only a few November puts with the bulk of the position in the December series and some "recovery" spread positions to recoup my put investments should the market move drag on out until next year. 

Last week, it appeared that the market would run up to 207 based on the 4 week standard deviation.  It appeared at that time that a test of the STD high would bring the SPY to 207.  Looking at the 207 level, I saw that Size continued to be expanding so I bought some Dec 205 calls.  At this point, I'm going to let things ride until we see a reversal.  I'm not quite sure anymore how deep of a retracement we could get.  After six years of steadily rising prices without a 10% correction, it's my opinion that the market will probably go parabolic, perhaps even doubling from current prices before the move finally ends. 

One thing that I've learned from more than 35 years of market activity is that the market will find a way to take everyone's money.  I have yet to hear the cab drives, barbers or other neophytes telling me how much money they've made and how good they are in the market.  Well, I've heard some but not what one hears at market extremes.

Good luck.  It's OK to play the market to go up, but continue to buy protective puts.  While it might be money out the window at this moment, when the market finally cracks, there will be no short covering profits to be had as all of the short sellers will have been out of business.  It's going to be nasty.  But who knows when?  Not me.

Thursday, November 20, 2014

Another Day, Another Record High


The market pattern continues much the same as the last wave up.  Should the market replay exactly the timeline that it ran through last time, SPX should hit its final high on Wednesday, November 26, the day before Thanksgiving.

If volume is any clue, perhaps we will again see a volume surge at the next high.  The Inside money knows exactly when to sell.


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Another View:  While it can continue to drift higher, is this worth buying here? 



Breaking through this channel which has persisted for years would be major major major. 

More likely that prices will eventually head down to 170 and 155.

However, another round of QE could push prices out of this channel.  Market would then go parabolic, perhaps even doubling.  So while I remain bearish, I will continue to hold a small number of call options - just in case . . .

Tuesday, November 18, 2014

Bears Throw in the Towel


After 8 days of sideways trading with SPY closing within a tight range between 203 and 204, price broke out to new highs closing at 205.55.

In many of the blogs I read, commenters are hugely bullish now and it seems that only a handful of Bears remain.

In reviewing the chart setup, price still remains within the broadening top formation so until it does I'm not sure that it's yet time to expect the market to go higher.  A break above the upper trend line should be followed up with a test of that trend line before going higher still.  While I did buy some calls last week considering the possibility that a continuation of this rally could unfold, I'm still not convinced.  I continue to hold December and January puts and will continue to add to my put portfolio, with a more distant expiration date, should I see overbought levels on my standard deviation charts.

But on the contrary, I've seen all of my indicators (on the daily basis) roll over.  So today's rally reminds me to some extent of the rally we saw just before the market dropped hard.

Much of what I have been reading has centered on the Central Banks world-wide, talking up stimulus measures.  But quite frankly, I'm starting to believe that this rally might be something different.  There could be some real cycles at play here that just happen to coincide with Central Bank activities.  I'm not quite sure but I'm starting to think that there is something more here at work and I will strive to find out.

I spent much of my flight time returning from Mexico today working on my data set, gearing it up to study the cycles.  One of the things that I want to investigate is the problems involved with capitalization-weighted indices.  Many cite that the Advance-Decline line is terrible.  Many more stocks have been below their 200 day moving averages so is the SP index really a good proxy for the market?  A decent move in just one or two of the top stocks in the SP could turn a big down day into one of these moderately up days that we've seen.

Lots of questions to answer.  I still am holding to my potential low day coming December 19.  Updates to come.

Monday, November 10, 2014

Is This the Top?


Cycle low expected on December 17 should the cycle repeat.


Wednesday, November 5, 2014

Was Today the TOP??? SPY Thoughts


Changing of the Guard.  Republicans gain enough seats in the Senate last night to now hold a majority.  The market could have gone much higher as the upper line indicates, but it didn't.    None-the-less, the market gapped up on the open.  SPY closed up 1.27 to close at a new all time high of 202.34.

While the market may not yet be exhausted, I certainly am.  I saw that it was up early in pre-market and saw the open, up some 12 points.  This rally has persisted for three weeks now and seeing the same thing, day after day, stocks up, gold getting dumped, it's lost its appeal.  Just downright boring.  My put positions are concentrated in the December 19th expiration with a growing position in the January 16th time frame. 

The chart above includes after hour trading and shows a three day topping formation.  While today's high was higher than the high of three days ago, looking at the daily movements on the standard deviation chart shows divergence.


You can see that today's standard deviation high was just a slight up.  Often this test of the high is just as valid as a price test.  With that in mind, I hold out hope that this might be a top.  Other momentum data shows continuing strength however so I am not so confident that the market will fall tomorrow.

But again, the move is really long-winded but if you look at the standard deviation chart, you can see that the last big move we had, off of the August lows, looks just as persistent.  The wave structure is very similar with a base and then four peaks before falling back.  So let's see what happens.

It took the market about six weeks to fall from the top last time.  If we follow a similar scenario, that would bring us right to the December 18th expiration date. 

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If I may steal a chart off of Lara's Elliott Wave page, one thing that she notes is that SPX broke a well established trend line at the 1914 level.  She suggests that this indicates a shift in trend.

Got to think that the market will quickly test this level, which comes in around 1940 now.  If it does break through this trend line, then a test of the lows would be the next stop and then the potential for a range of Fibonacci retracements that could go as low as the 145 SPY level.   My minimum objective is 170.

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This to me is sufficient reward potential to stand pat with my put positions.  As I discussed in a previous blog, I really don't feel too comfortable playing the market to go up.  Yes, here are many stimuli into the market, including possibly tomorrow with the ECB weighing in on the equation.  Some expect that the currency wars will continue as Japan went all in with the money printing, causing a dramatic drop in the Yen.  Will the ECB follow suit and attempt to do more stimulus?  Well, I wouldn't be surprised to wake up tomorrow and see the markets up sharply again on ECB stimulus.  It is a broken record here, playing the same track over and over and the market continues to react strongly on any positive word out of any Central Banker's mouth. 

I can't buy into that.  It's not real.  It's computers reading headlines and entering orders, manipulating the prices higher and higher.  There is no intrinsic value here.  It's all air.  Free money buying massive positions.  As we saw last time, there is no risk for these entities to borrow as much money as they can and buy as many risk assets as possible.  Heads they win, tails, they don't lose, they get bailed out.

But since the 2008 crisis, nothing has changed.  In fact, it has gotten worse.  more and more credit in the system.  How can the system stay afloat?  It is truly a Ponzi scheme, continually borrowed money props up the market.  If an entity is close to default, they just borrow more money.  The worst junk on the market now trades as a virtual risk-free asset.  In fact some government securities put out by countries in far worse shape than the US pay lower interest rates than the "risk-free" US Treasuries.

So my money will continue to be on the downside because there is far more profit potential on the down side, in the long run, then on the upside.  At least that is how I perceive things.  This could change, if the system finally gets cleansed.  But for that to happen, we will have to go through lots of pain.

I worked in the financial industry in 2000 and 2008 and the market melt-downs always resulted in my getting laid off.  And the worst thing about it was that I was even calling the market correctly.  So I should have been buying puts then to hedge my income.  The way I see it now, as long as the market continues to rise, I have very good financial security with my professional position.  Should the market again crash, my job security could be in jeopardy.  So quite frankly, I'm not so concerned if I'm wrong right now with my put positions.  I won't be worried even if they expire worthless.  I will keep adding to my position in further expiration dates. 

Should the market again crash hard, I'll be the one shouting out, "Looking good, Billy Ray!"

Saturday, November 1, 2014

Central Banks Distort World Financial Markets


Unbelievable!  In a mere 12 business days, the S&P along with other major markets skyrocketed back to the highs without even taking a breath.

Those who have been following it know that the recent move down to 1820 quickly reversed when a Fed Governor suggested that QE 3 should not be terminated, but extended.  That was in light of the fact that much of the economic news had been played up in a positive light.  None-the-less, that was the signal to go all-in.  I for one couldn't believe it even though my own system hinted that the downside momentum was shifting.

The rally continued to surge, despite the Federal Reserve Bank ending QE 3.  Many thought that the end of the QE would result in market weakness as it has each other time the Fed stopped a stimulus program.  But Nope.  The market kept going up and up and up.

Finally, on Friday, we awoke with the news that Japan's Central Bank is going "all in" on stimulating their economy by buying huge sums of their own government bonds.  Also, they will be buying Exchange Traded funds not only in the Japanese market but also in foreign markets.

Truly, how can anyone believe that stocks have any true value when they are propped up with money that is created liberally, without limits.  For us, money has a cost and the cost is high.  For banks and other financial institutions, the cost of money is virtually free.  They can borrow limitless sums of money and buy stocks, continually pushing up the prices.  Central banks as well can literally create money and buy limitless amounts of stocks. 

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It's not only the Central Banks and their army of investment banks that are roiling the markets, we also have to look at what is happening with the computerized High Frequency Trading and other Computer Algo trading.  On Thursday, some Japanese headline (an old one at that) hit the wires and the computers grabbed it with huge buy orders.


Notice the craziness of trading that occurred after 1 pm on Thursday.  A huge e mini S&P futures trade of over 15,000 contracts hit the market in just one second causing the market order system to literally break down.  The markets continued trading even though bid/ask information was not accurate.  No doubt, someone made billions on this SNAFU.  My quote system was down and I was unable to do any trades.  It's a bit scary if you ask me.

We similarly had a "Flash Crash" in May of 2010 when the Dow fell 1,000 points in just a few minutes.  It was at that point that I personally got out of advising people as for sure, this is not a market for us mere mortals.  When it breaks, those who are smiling as the markets continue to soar, will be outraged as their life savings will disappear.

Even for me, I am solidly positioned in the Bearish camp convinced that the risk of a market meltdown are high.  But I have seen time and time again, that those who position themselves right often don't benefit from being right.  Should the market collapse, it would probably close and instead of letting prices fall, no trading would occur and my puts, that could possibly have made me fabulously rich, will probably not be allowed to be closed out profitably, most likely because some banks that did not have actual collateral to sell these instruments to me could not back up their losses. 

It's happened before and it will happen again.  It's hard to see anyone getting out of this intact.  The Bulls will get destroyed but so will the Bears.  How does one protect themselves?  My long term though has always been buy buying physical gold and silver.  You would think that with the continued amounts of fiat currency being created around the globe, that gold and silver would catch a bid.  After all, in India, China, Russia and all across the world, common folks (and rich ones too) are buying massive quantities of gold and silver.  Even here in the US, record numbers of US Gold and Silver Eagle 1 ounce coins have been sold again this year.  The demand is incredible but the price continues to plummet.


It broke though key support levels and is dropping like a rock.  For me, it's a buy.  Many are calling for it to fall even down to the $600 levels but I still recommend buying it on a regular basis.  Silver is even a better value.

In the good old days, the Silver/Gold ratio used to be something around 15 ounces of silver equal 1 ounce of gold.  This is the approximate ratio of silver that is produced for each ounce of gold in the mining process.  But now, the silver gold ratio is 72 ounces of silver to 1 ounce of gold.  And what's more, silver is an important metal in the manufacturing sector.  One would think if the economy was really doing well, silver would be strong along with other industrial metals.  But nope.  Not happening.


If this chart is any indication of the strength of our manufacturing economy, then we are surely in trouble.

Conversely, what is strong is the US Dollar.


This strength is expected to continue for a long time to come, which is good for me, as I spend a lot of time in Mexico where my dollar will be buying more pesos.  Similarly, it will be buying more silver and gold coins and perhaps real estate as well.  It's important to diversify into hard assets if you haven't already done so.


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To me it's all quite clear what the eventual outcome will be.  All the Central Banks in the world have been printing massive amounts of money in an attempt to stimulate their economies so that they can have inflation.  Unfortunately, the world may be in a cyclical phenomenon that even the Central Banks can't eliminate.  Here in the US, many are carrying too much debt or into the 2008 cycle carried too much debt, wound up losing their jobs and now either have no credit available to them or no longer chose to use credit.  Many have the luxuries they desire and don't need to frivolous things anymore.  How many large screen tvs can one own?  The only thing that seems to fly off the shelves are the new Smart Phones. 

The younger generation now is coming out of college already saddled with a huge debt burden with limited job opportunities.  The Fed longs for wage growth to signal inflation but corporations continue to consolidate and lay off.   It's hard to see how this is all going to turn around.

Yet the market continues to soar.  The wealthy continue to get wealthier while the middle class gets extinguished.  It is a very scary scenario.

The last thing the economy needs is a stock market melt down and the Federal Reserve will do all that it can to prevent it.  Chances are, they will have to once again do another stimulus program and continue to print more money.  This will go on until the game is over and the true value of the dollar is revealed.  The true value of the dollar of course is derived from the taxing ability of the US Government.  Ummmm, elections on Tuesday?  How will that play out in the markets?

Stay tuned.  Chances are the markets will hold up through Tuesday, election day.  But then what?  If Republicans rule the day, will the markets be spooked?  Will the Fed ever get audited?  So many questions to be answered. 

So while it is not the correct and timely call to make, I myself continue to purchase puts along with gold and silver coins.  Well, I'm always early but I have my convictions and understandings of the current situation.  The great thing about buying the gold and silver is that I never look at my treasure chest and say, um, gold is at $X,XXX today and I have $XXXXX.  No, it's I have X ounces of this, X ounces of that, X of this, etc.  It is a store of wealth, not a productive asset, a store of wealth.

Good luck on your trading and investing.

Thursday, October 30, 2014

SPY on Life Support


After a sharp, persistent bounce from the lows at the 182 level, SPY appears to be running out of steam at the 198.50 level.

This three-bar test of the high, albeit in premarket trading, may signal the end of the move, at least for now.

There has been much debate whether this move up is just a correction in an ultimately much larger move down, or the start of a new move up.


While there continue to be some bullish factors present, such as the end of the month "window dressing", my expectation is that next week, we will head lower in an attempt to test the three-week low closing price.

Support at this level would be the perfect setup for the three-month test of the high, which I had expected to occur at the end of November.



A failure to close out the month with new highs would present us with a major sell signal.  Keep in mind that such a signal has become quite rare in the age of QE as every dip has been aggressively bought.

This last dip has been no different. 

Without the QE sugar though, can the new highs continue? 

The Fed has put itself in a difficult position now, having said that the economy is looking good and thus, there is no reason to continue with the QE program.  The reality could be that the Fed now holds a considerable portion of available bonds, especially in the 10-year tranche, causing a liquidity problem in the bond market.  Many believe that the Fed's QE actions have done little more than boost asset prices, as was their intention.  However, this wealth effect has not stimulated the economy as it had when house prices were skyrocketing some 7-8 years ago.  At that time, the average guy, who owned a home, was able to benefit from the rising equity values.  That no longer is the case as many homes remain under water with mortgages and the job market, while "improving" has not resulting in rising average wages.  Additionally, inflation in areas not counted by the government has soaked up excess consumer liquidity really putting a damper on even the little luxuries such as dining out and retail shopping.

While many corporations have been buying back stock and engaging in financial engineering to boost earnings per share, the gains are illusory and one day, when interest rates rise, balance sheets will be damaged and then we will face the true process of deleveraging, this time in the corporate sector.

So all in all, I remain negative on the market over the long term and look for an eventual cleansing of the system.  Not that I want to be negative, on the contrary, the business cycle must be allowed to go through the motions to clean out bad banks, bad loans and other weak and inefficient players.  While the Federal Reserve has tried and tried for many years now to control this cycle, eventually it must occur.  It should not be looked upon as a bad thing.  It will eventually make the economies stronger.

Sunday, October 19, 2014

Large Caps Fall, Small Caps Gain in Wild Week


SPY, the ETF proxy for the Standard & Poor's 500 index, fell more than 1% this past week, a week that for the second week in a row, saw wild gyrations both up and down.  In the end, SPY closed down 2.07 to 188.47

There were some bright sides though.  Small and Micro Cap stocks gained, with the Micro Cap ETF (IWC) advancing 3.2% to 68.62


The Slow Stochastics indicator on both charts indicate that a bottom may be forming but further investigation shows that IWC merely rallied to it's 4 week moving average, and is likely to resume it's decline next week.

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SPY WEEKLY VIEW
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Despite a big rally from the bottom, which came in around 182 (and closed at 188.+), the weekly close chart still appears in free fall.  The 4 week average crossed the 10 week average.  This momentum increased this past week. 

One way I measure this momentum is with my Size indicator.


This chart illustrates Size based on both the 4 week and 10 week moving averages.  In simple terms, this shows me that Price continues to move away from the moving average Faster than the moving average is moving down.  As long as this persists, and increases, I've got to play this market to go down.

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SPY DAILY VIEW
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While the weekly data indicates that we can expect the down trend to continue, the daily chart shows that price is turning up.

We can see a few areas of resistance.  The first one would be the 191 level.  Should price manage to rally above this level, Serious resistance would appear at the 20-day moving average, currently at 193.83.  The moving average is moving down rapidly, currently at an average of 0.48 over the past 10 days. 


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During the week I began accumulating SPY December puts, anticipating a decline down to 170.  I will continue accumulating on any subsequent rallies, should they occur. 



Thursday, October 16, 2014

Fed-Speak Saves Markets From Further Decline


(Source:  http://danericselliottwaves.blogspot.com/ )

The market opened sharply lower this morning and looked on target to meet my 181.46 objective.  Instead of letting the markets play out their natural course, once again,

"Remarks from St. Louis Fed President James Bullard also helped perk up stocks. In an interview with Bloomberg TV, Bullard said that the Federal Reserve should consider putting off winding down its monthly bond purchases this month as planned."
Source: (http://finance.yahoo.com/news/asia-stocks-sag-us-fears-europe-stabilizes-080429350--finance.html_

The Fed can't but help themselves in trying to manage the market.  But the effects were less than what could have been in the past, OR TOMORROW, when Janet Yellen speaks.

It should be obvious that there is little effect that more QE could provide, other than to continue to make the market rise.

I'll just post Daneric's chart from today as it is similar to my thoughts on the market.  I sold some November calls accumulate yesterday and bought some November 185 puts in anticipation of a move to the 170s.  Daneric marks this level as (V).

My view:


I see some definite trade ranges and expect that before the down move is completed, we will move to the bottom range and possibly even lower, to the 163-164 level.

Wednesday, October 15, 2014

Some SPY Views to Consider

The market was all over the place today but after being down significantly, SPY closed at 186.43, down just 1.27.  The final results can't describe the intense volatility that took place today.

Some feel that the rise from 181.92 to the close at 186.43 indicates that a bottom might have been found and that the bulls are starting to take control.  This may be true and I also "nibbled" on some November calls this afternoon as it appeared that the market had made its final low.  But I'm not sure.

THREE DAY TEST OF THE LOW

Although a new low in price was made today, the Standard Deviation, a measurement that the price is away from the moving average, might be making such a pattern.


Here is a chart of the standard deviation with to possible test of the low drawn in.  Like most of the charts that I look at, when I see a support hold, a rebound usually follows.  I don't expect this to be any different.

For the standard deviation to reach this level though, price will need to fall back down to today's low and hold.  The exact price for SPY to reach -2.51 on the standard deviation is 181.46.

The price chart would look like this:


Ugly!  But that is what it looked like inter-day today so the market would not be too shocked to see it again.

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Some other views I've been looking at.  Comments welcome.


I had been looking for a head and shoulders setup and here is that view.  As we have already broken through the neck line, not sure if this is still something to be considered. 

But I had been looking at a head and shoulders with a declining neck line.


Well, looking at it, while I was looking at it from a head and shoulders standpoint, it could also be labeled a broadening top, wedge or a reverse symmetrical triangle.

http://thepatternsite.com/EWRevSymmetrical.html

According to this site, price would be expected to again go to a high to complete the formation. 

One thing though, price broke through the support level but rallied back but may currently be failing to break above resistance.

Whatever happens, we can see channel lines below and I suspect that sooner, rather than later, we are going to test these lower levels.

Saturday, October 11, 2014

SPY Weekend Update for 10-10-14

SPY, the ETF proxy for the Standard and Poor's 500 Index, fell sharply this week after riding a roller-coaster of highs and lows.


When it was all over with, SPY found itself down nearly 6 full points to 190.54.  Price broke below the -2 standard deviation level on the 20 week moving average for the first time since May 29, 2012!

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Right now, from my anecdotal findings, the Bulls that I know have been shrugging off the downturn, proudly proclaiming, "I'm buying more here on the dip."  I had to chuckle the other day when one well-known economic prognosticator commented on CNBC that he felt that the market was now going to start going down until people start to puke.  So where are we now?


The weekly chart looks a bit different than the daily chart that I usually post.  On the daily chart, we were able to see a well-defined, long-term, area of support and resistance at the 190.5 level.  It appeared the be a very good setup for a head and shoulders top formation which has likely been discussed in a previous commentary here.

The weekly chart though shows a declining neckline but still a head and shoulders possible set-up.

It's been quite a long time since we had a decline so I went back to see how the previous decline, back in June, 2011, played out.  I was surprised to see quite a few similarities.


Last time, which we will call P2, we can see a top formation that also resembled a head and shoulders with a declining neckline.  We can observe that price broke through the 20 week moving average to go to an oversold level (at the #40 marker), then rallied back up to form the right shoulder of the formation, then dropped down dramatically.

In both cases, we see that the Standard Deviation level of price went to an oversold -2 level but this oversold level came rapidly because for the previous period of time, volatility had been shrinking.


This chart shows the current picture of 20-week volatility.  One would probably scratch his/her head to see volatility so low when we've had so much daily volatility but based on weekly data over an intermediate period of time, we have been relatively flat.

What is interesting though is to go back and look what was happening back when the market made its last series of lows.




The arrow shows the relative position to where we are today.  You can see that the last time the market started to go down, volatility was also very slow.  This causes the market to be oversold quickly and often can result in the oversold bounce that we saw in P2, resulting in the Right Shoulder.



What happened next in for P2 Standard Deviation was quite dramatic.  Standard deviation fell to nearly a -3!

I often use Standard Deviation as the emotion indicator.  When I used to train futures traders at a bank in Mexico City, one of my first exercises was to allow the new trader to trade freely without any guidance or restrictions.  At the end of the day, we would review the trades, now analyzing the trades with my standard deviation tool.  Almost always, we would see that the trader was buying when there was euphoria, at the +2 standard deviation and generally, the trader was selling at the -2 level, when there was panic.  These emotions cannot be avoided, even for the most experienced trader.  That is why I use this tool as my guide.  It's hard to be buying when the news is horrible just as it is hard to sell when everything looks great and there is no apparent reason to sell.

There's more though.  While the +2/-2 (easily viewed using Bollinger Bands) works as a great buy and sell signal on hourly or daily time frames, when we start getting into longer time frames, we then move to volatility measurements.  This is where I use the rule, when the volatility is rising, especially after a weekly positive or negative 2 reading, you stay with the trend until the volatility turns and begins to decline. 

If I look at a shorter time frame though, the 4-week and 10-week readings, I can see that Volatility is skyrocketing!





This is the weekly chart with the four and ten week moving averages. 

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So quite a bit going on here.  The setup looks very similar to the P2 time frame, starting with a potential head and shoulders top with a declining neckline, declining volatility on the long-term measurements, and a quick oversold condition.  Other levels of support seen on a daily chart are the 200-day moving average and the daily head and shoulders neckline.

On the short-term weekly chart, with expanding volatility, one could expect the market to continue free-falling.  On the longer-term weekly chart, one could expect a similar setup to P2.

As for me, I closed all of my October puts and most of the November ones as we approached 190.55 on Friday as that was the previous SPY daily low.  I am still holding some Nov 190 puts and some Oct 24 and 31 calls, just in case we get some pop. 

Wednesday, October 1, 2014

World Stocks Fall

Stocks across the globe fell today with US stocks declining about 1.4%.  SPY, the ETF proxy for the Standard and Poor's 500 fell 2.67 to 914.35 (-1.36%) while DIA, the ETF proxy for the Dow Industrial Average, fell 2.39 to 167.78 (-1.41%).  The biggest loser in my ETF universe was Brazil (EWZ) which fell 3.54% to 41.91.

We see a very dramatic move here in the past month.  Will the US equity market follow this pattern?

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 While the drop seemed quite dramatic, it was not unexpected.  I illustrated this chart over the weekend and mentioned that the 194 level, the bottom of this well-defined channel, would present some formidable support.  Sure enough, prices appeared to want to collapse even further at the end of the day but managed to stay within the constraints of the lower channel line.

I had been looking for the three-day test of the low yesterday and prices held firm.  But I didn't want to broadcast a buy signal as I had read that there was something like $400 billion in Federal Reverse Repos, whereby banks can get their hands on short-term cash to pump up the markets at the end of each quarter to make their portfolios look good.  I thought that if the investment banks really had this much ammo and the market still closed down, had the Fed money not been available (at negative interest rates mind you where the Fed was paying the banks to take the money), the market might have really tanked.

Sure enough, this morning the market opened down and continued down taking out several areas of support.  Another key area of support was the 196 range which is the 20 week moving average.  This has held firm over the past two years but today, the market cracked through.


I mentioned over the weekend that I thought that it might be possible for the market to first hit the bottom of the channel early in the week, then rebound to maintain the 20 week moving average. 

Tomorrow, Mario Draghi, the head of Europe's ECB, will be making news about Europe's QE activity.  Like in the US, they also are expected to be buying bonds, adding liquidity to the markets.  Thus far, this hasn't had much effect on Europe's economy, but they really don't know what else they can do I guess.  The bottom line is that whenever a Central Bank announces something, pretty much anything these days, the computers kick in and start doing program buying.  Will that happen tomorrow?  Or will they do a switcheroo and tank the markets?

When I look at the daily standard deviation chart of SPY, I see a higher low pattern forming.


And although it appears that the Standard Deviation is poised to rise, it might not make a difference because of the Size chart.


Size, or volatility, is rising now so it's possible for the market to continue lower if size continues to expand, even if standard deviation begins to rise.

To illustrate this better, you can look at a daily chart with the Bollinger Bands included and you will see that the bands are now widening.  This is represented by Size.

As I mentioned before, one of my rules is that you stay with the trend when Size is rising.  It is, so this is an argument for holding bear positions for the market.

I am not yet seeing the 20 week Size expand yet.  It would take a move to 188 or lower for the 20-week size to begin expanding.  If that were to happen, I think that we all know that that would signal still lower prices to come.

I can get a better idea of what the future could bring by looking at the short term weekly charts.  Keep in mind though that there are still two days left before the actual weekly number gets posted.  It's just to give me some early perspective on where we are on a short term weekly view.


This chart appears much more bearish than the 20 week view.  We can see that price has moved decidedly through the 10 week average after finding resistance at the four week average.  The four week average should be crossing the 10 week in another week so we would normally expect price to rally to test that junction.  If it failed to rally above the junction, a serious sell signal would be in play.


Further supporting this bear scenario is a Size chart showing both the 4 week Size and the 10 week Size.  Both are rising so with my rule in play, on the short term weekly outlook, you would expect further downside.

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Still two more days to go with an ECB announcement tomorrow.  Who knows, the bulls could wind up carrying the week.  Anything could happen and that's why we love doing this.  Despite the best of ideas, in the end, it's all a crap shoot.  But we do our best to try to solve the puzzle.

Monday, September 29, 2014

Stocks Tread Water . . .

As expected, despite a quite volatile day, set off by political turmoil in Hong Kong, S&P gapped down on the open but managed to move back up, closing down just 0.36 on SPY, finishing at 197.54.


I mentioned yesterday that I expected the market to possibly rise today in a set-up for tomorrow's three-day test of the low. 

The price target is 196.34.  Should SPY test this level and hold, then we can expect a bounce.  Not quite certain though that it will hold the low.


Size (volatility measurement) continues to rise, supporting my expectation that the move down will continue.

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Jumping ahead, a long term view of SPY:

Should SPY break below 194, I expect it to drop to the last low, around 190 and bounce back up before heading on down to the bottom of this long-term channel, at 170.

Notice early in the chart, when price broke below the trend line, it rallied back up to try to break above that trend line.  When it failed, it sold off quickly and dramatically.

This downtrend has yet to be confirmed and tomorrow's test is very important.  In addition to it being a three-day test of the low, the 196 level is also the value of the 20 week moving average, discussed and illustrated in yesterday's weekend report.  The 20-week moving average has been a key support level for more than 2 years now so breaking through will be a significant accomplishment for the bears.