View On Markets

SOX is Predicting NDX Decline

2012-02-27T21:44:00.002-05:00

Last year I posted numerous times about SOX diverging from NDX. All of those times were the best shorting opportunities of the year. Today it is happening again.

While NDX is continuing to drink AAPL Kool-Aid, SOX has topped and diverged from 2/17. Let's quickly pull up 4hr chart and look at how SOX rallied to the top of the channel and got rejected twice, broke the trendline from 12/19 low, backtested it and got rejected along with the 3rd rejection at the top of the channel, and formed head and shoulders in the process. It sold off 4.6% from the top, while NDX did not even blink. Break and close below the neckline @ 418.52 will send the price to projected target of 398.41, which is also just above the 396 - 398 support zone from 10/27 and 11/16 highs.
I expect NDX to follow SOX down.

click on chart to enlarge

Trading Ideas for Week of Feb 27, 2012

2012-02-25T21:29:00.003-05:00

Dow 13,000 watch continues. As I said before, it is not only meaningless but also dangerous zone for traders. Those who are long from lower levels are looking to dump on unsuspecting new longs, as they get sucked in by the media's excitement. Even if Dow closes above the milestone, it represents a fake buy signal, since there is no real technical signal at this level. I am looking to short on jubilation event. The biggest conviction to do so is the fact that Transports have not confirmed this latest leg higher by Industrials. According to Dow Theory, non-confirmation by averages creates one of the best contrarian indicators. It has worked beautifully all of last year. Why should this time be any different?

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I have been watching gold with amazement and deep respect. Yellow metal has been somehow able to once again hold its long-term trendline and muster a powerful rally. The inverted head and shoulders, which developed on the chart, has me scratching my head a bit. Can it be so easy? Projected target takes the price to a new high, just above $2,000. But where is the usual fakeout first? Necklines are a place of confusion at times. I suspect we will get some kind of shakeout pullback soon, as the right shoulder gets a little more time to consolidate.

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Gold's pullback will depend on the dollar, which has not done well lately. DXY has been neglected, as the risk rally around the world gained steam. It seems like everyone has now forgotten the notion that strong U.S. equities will result in strong dollar. Market quickly dispelled that myth. Traders dumped the king and turned it into a toad. Look at how Dollar Index and Dow correlated in the last five years. They almost always move opposite to each other. I highlighted the times when the two moved in tandem. As you see it happened very seldom, and not even 100% correlated on those occasions.
So I think that if risk rally comes to a halt, dollar will rise.

click on chart to enlarge

Another development which may rescue the dollar is LTRO on Wednesday of this coming week. I do not know if euro sells off on the fact, or it may just start getting weaker before the event. My notion is that more euros in the system should eventually bring the exchange rate lower. I am not crazy about the idea of shorting yet, because of euro's strength against other currencies lately. EUR/JPY and EUR/AUD are breaking out above resistance levels. These crosses may be the reason why EUR/USD has continued its upward direction. Another reason for continued euro rally could be the remaining huge short position (reported in COT). I would wait for LTRO results and see how the market interprets them first, before putting on a trade. My bias on EUR/USD is lower. It is approaching the area where I would like to start establishing a new short. In order for downtrend to resume, series of technical breakdowns have to occur: inverted head and shoulders has to fail when price meets resistance at laminate of 200 day ema and top of the channel, then laminate of 20 day sma with trendline from Jan. low has to break, then price has to move below 50 day sma. It would be prudent to add to established short position on these breaks. Projected distance below the head would take EUR/USD to 1.1925, which should coincide with bottom of the channel.

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Roadmap for Light Sweet Crude Oil

2012-02-23T22:51:00.003-05:00

With all the noise about crude oil in the last few days, I decided to show my roadmap for black gold.
I expect WTI to stair step higher, pause at $120 and $130, and then proceed to 2008 high. This development will not bode well for world economy. Eventually, demand destruction and double top will take care of the price. It will crash, just like in 2008, but should find support at long-term trendline, at around $100.

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Dow to Pull Back 4 - 5%??

2012-02-22T19:46:00.001-05:00

Dow Jones Industrial Average (DJIA) is trying to get above 13,000 on closing basis.
My mind is not set on this milestone, it is meaningless. While the media is hyping the development, traders are to be cautious and consider booking profits and/or going short. I think DJIA will have to pull back before another leg higher can take place.
To add some conviction to my statement above, let’s look at an interesting comparison between DJIA today vs. short-term top made on Nov. 5, 2010. It looks very similar on pattern and percentage basis. That rally resulted in 4.5% pullback.

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Trading Thoughts for Week of February 20

2012-02-19T20:24:00.011-05:00

Virtually uninterrupted stock market ascent from December 20th continues. Shorting this bull move on the premise of market being overbought seems to be a fool's game. I carefully waited for credible selling levels, identifying them as confluence zones of resistance. Combined with momentum divergence and pattern studies I pulled a trigger a few times. While a few scaleouts got filled, the remainders got stopped out. One has to be patient and let the market do its punishing, only to reverse in the face of those exuberant and unsuspecting ones. I will be less defiant if SPX can get above 1370 and stay there. Above that level reward to risk is greatly diminished, as the next resistance level is way above. Continuing to be wrong on the short-term direction of the market is both frustrating and humbling. Perhaps I am completely out of touch. I expected SPX to stay inside the wedge for the first part of 2012 and break out in the second. This said, it can return back into the wedge just like in October. S&P 500 is now trading at 13 times 2012 projected earnings.

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Chinese rulers (for the lack of better word) cut RRR again, even as CPI has climbed back up in January. Scared politburo is now ignoring its 4% consumer inflation target, while its is trying to revive slowing Chinese economy. With $3 trillion in their coffers, we have an absolute respect for Chinese leaders, as we expect them to save our Western civilization from all of our financial perils. I think it is likely that they will end up spending most of that money on domestic stimulus, to make sure less people die of hunger and neglect inside of their own country.
Let's look at what happened after the first cut of RRR on Nov 30, 2011. Shanghai Composite rejoiced the next trading session making a high at 2423 on Dec 1. It has not seen that price ever since. Even with a 10% rally from January 5th low, index closed at 2357 on Friday. The rally was in anticipation of second RRR cut. How long will investors celebrate this time? One is to be cautious, knowing what happened after the first time.

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European leaders are once again outdoing themselves with shenanigans of epic proportions. I talked about ECB bond swap previously, it finally came. Supreme institution is going to escape the bond carnage without a scar, at the same time as private investors are taking a 70% haircut. Investor outcry should be starting about now!! Furthermore, we are learning that over the weekend EU leaders are feverishly searching for new ways to restructure Greek debt in order to bring it to 120% of GDP in 2020. If this is not the most ludicrous condition of Greek bailout, then I do not know what is. What will these geniuses think of next? Perhaps European Union can suspend the principles of economics altogether by 2020? I suggest they finally think about how Greece is supposed to grow its GDP after a harsh austerity has been imposed on it.
Look for market to start punishing "me too" EZ struggling peripheral countries' debt not a minute later after the Greek bailout is announced. Euro short-covering rally (on the bailout announcement) will be brief and will be met with new wave of selling. There are way too many shorts now though, so the rally is much needed to reduce that amount. Use 20 dma as a guide and be patient.

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Based on last quarter's disappointing results and its weak forward outlook, I am wondering how AMZN is still trading at current level. It is known as a premium operation with innovative leader, the pioneer of online retailing. But declining growth rate and margins are going to hunt the stock going forward. It has underperformed in this recent tech rally (along with GOOG). My conviction on the downward direction will get a boost if the long-term trendline breaks, which also happens to be at head and shoulders neckline. One is not to overreact, this trendline has to break first.

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So I saved the best for last today. Bear with me through this last part, as there will be a trade of the year (related to this) at the end. And no, it is not to short U.S. Treasuries. We know what happened to that last year. Save your hard-earned money and stop fighting the Fed.
A few months ago I had a heated discussion (at a local bar) with another gentleman (not an investor) about America's sources of oil imports. While seemingly smart individual, he was completely ignorant to my arguments. So I finally pulled out my iPhone4 and showed him the facts, which immediately quieted him down (thank Gore for wireless internet). He was astonished to find out that U.S. gets more than half of its oil from Western Hemisphere, and a much smaller share from the Middle East. It is mind-boggling how misinformed the public is about this subject. So next time you want to win a bar bet, bring this subject up. Or better yet, the next time your elected politician says how "America relies on its enemies for oil", send him/her this chart.

But now on more serious note. With the above in mind, you have to wonder what Mr. Obama was thinking when he axed the Keystone XL pipeline. Canada is our closest ally, the friendliest of all oil sources. How many American jobs were not created because of the lost project? And finally the most important, what will we do when our gasoline possibly hits $4 and $5 per gallon this summer? Granted, that pipeline would have not helped this year, as it would take a while to complete, but the time to start was in 2010, when it was on the President's desk first! Endless delays are finally prompting Canada to ink the oil deal with China. Great!! Speaking of China, it is getting most of its oil from the Middle East and other "hot spots" around the world. It is recognizing the stability of Canadian oil supply and is ceasing the opportunity.

Today newswires are reporting that Iran is suspending its oil exports to UK and France. This will put even more strain on crude oil and gasoline supplies and boost the prices, just as Saudi Arabia reportedly reduced its oil exports.

So let's discuss the trade. I believe that this may become the best trade of the year. It actually already started for me, on December 29th, as I discussed in my post that day. But it gets better, or worse, depending on whether you are a trader or the consumer, which I am both. As the price of the gasoline hits $4 and $5 per gallon, retail sales are going to take a serious hit. So adding XRT short, as the price of gasoline continues to rise, makes this a more powerful trade. Interestingly, the two are usually moving opposite to each other, but have correlated in the same direction since depressed levels at the end of 2008. Look for that to break down as we near the $4 mark on retail gasoline. Obviously, the U.S. economy is going to slow down tremendously due to that development, because consumer spending is 70% of U.S. GDP. Hence SPX short would also work in this case. One important thing to remember is that at above $4 and surely at $5 per gallon the demand destraction will take care of gasoline price, and it will eventually start heading down, like in July of 2008 - by then retail sales were toast. So as soon as I start riding my bicycle and not my SUV to the grocery store, I will immediately announce the end of long RBOB trade here.

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GOOG Trade Update

2012-02-16T01:47:00.000-05:00

Let's quickly update the Google trade. Price got rejected at just below 50 dsma and multiple resistance levels in the same confluence zone. A head and shoulders pattern has developed. Right shoulder is finalizing right now. Projected distance is still low 500s. I am short...

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How Long Will Today's Stock Market Sell-Off Last?

2012-02-16T01:15:00.000-05:00

It looks like 55-day long channels may finally be ready to break down. There were quite a few bearish intra-day reversals today among the recent market leaders: AAPL, NDX, COMP, XLK, XLF, XHB and many more. DJT has broken below the rising wedge with multiple confirmation closes. SOX has backtested the break of the uptrend and got rejected. It has diverged from NDX since close on 2/9/2012. There are multiple open gaps below on stock index futures charts, which may need to be filled. It has been a parabolic move from the beginning of the year.

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But while the bears will be celebrating today's development, the bulls will be preparing their full forces to defend the support levels. It is important to note that while Nasdaq 100 (market leader) may look overextended to the upside, the 5th wave of the rally from March of 2009 may continue for some time. Look at the carbon copy of two sections on the following chart (highlighted in light blue). It is possible that after the sell-off which probably started today, there will be a lot more upside left. Charts have a tendency to repeat...

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Is Copper Going To Crash?

2012-02-14T14:40:00.000-05:00

As a trader I want to be ready for possible major moves in the market.
With this in mind I would like to share what I see in Copper Futures. In the last few weeks I have been waiting for a possible start of right shoulder formation, as a part of head and shoulders pattern on long-term chart. This possible development can lead to a pretty large move down.

Below is the weekly (on close) chart. It has a lot of information on it. But if you are familiar with charts it should be easy to digest. I am making a case for comparison to prior double-top (dt) pattern which led to projected distance (pd) sell-off once 31-month long neckline (nl) broke. Yes, it would be a dramatic plunge. I also understand that 2008 sell-off was a result of the GFC. I realize that fundamentals like improved U.S. new construction and insatiable Chinese demand will be going against my thesis here. But I am sorry, I am looking for a bearish case to take over soon, very soon, like right now! It is my chart, and I am the boss here... Just kidding... I can debate all of the fundamentals: while U.S. new construction has rebounded, it is still at very contracted level. Chinese copper imports fell in January (according to the latest import data), while stockpiles in China are only half of last year's level, making me believe that speculators and merchants are piling in (no pun intended) and are storing in preparation for continued demand, but China may have all it needs for now. I do not think that China can infinitely continue to build "ghost cities" just for the sake of employing its people.

click on chart to enlarge

To make things a little more convincing I also zoomed in on daily. You can see that it is conceivable that repeat of 2011 sell-off is about to ensue, which will lead to a larger sell-off that I am looking for.

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Market Thoughts for Week of Feb 13

2012-02-13T00:20:00.005-05:00

As I am typing the post, Greek austerity vote has passed. It is hard to believe that here we are two years into this crisis and yet European leaders are still in total denial. This time even some Greek politicians said enough is enough. Six resigned before the vote and 43 were thrown out by their own parties during the vote for opposing! Did this just happen in EU member country?!! I have been discussing the European debt crisis ever since I started this blog in June of 2011. I have been right many times and wrong very few. Let me say this again: Troika is beating a dead horse. Greece is not only going to default, but may also eventually leave the EU. But what I heard today is plain out scary. This is no longer just a financial market issue for me (and I am sure for other macro traders). This is how civil wars break out in small countries and suddenly engulf the whole continents. I am not predicting one, just reciting the European history (which I know all to well by being from Europe originally). When parliament members can not vote their conscience, therefore not being able to represent their constituents, there is no need for parliament, it becomes a totalitarian state. Public outcry will be resounding and prolonged, this is not the end. We are now witnessing violent protests on the streets of Athens. In Portugal over 100,000 people protested austerity measures over the weekend. This will only get worse, and unfortunately is all due to lack of growth in the region. Euro Area is going into recession at the worst possible time, with no pro-growth measures adopted by its deeply indebted governments. Especially hard hit are PIIGS. Unemployment rates there are skyrocketing and GDP growth is going into negative column - this is an equation for economic disaster and civil disobedience. I am afraid that European Spring has begun! Enough said...

Here at home, in U.S., most of the investors are now focusing on our ability to decouple from EU debt crisis and accelerate our growth going forward. I can see such happening currently, and much of the econodata released lately has been supporting this popular view. However, I would like to discuss two data series (coming out this week) which concern me greatly.

I have been watching the decline in U.S. Industrial Production (USIP) growth rate with trepidation. This report does not get enough attention. I am not sure why investors overlook this very important data. USIP is the most cyclical-based indicator for turns in the economy. Simply put, it is a factory output which depends on current business and consumer demand. Very interesting and extremely important is the fact that prolonged periods of decline in USIP growth rate have led U.S. stocks into bear markets and the economy into recessions. Well, USIP growth rate has peaked in the first part of 2010 and has been declining ever since. Watch the report on Wednesday.

Another very important report coming out this week is Retail Sales.

I have pulled up a long-term chart to show how retail sales growth rate tends to recover nicely after bear markets and recessions, but is unable to surpass prior recovery peaks, tops at lower peak levels and begins prolonged declines to much lower levels of growth. This speaks volumes about how overextended and "tired" consumers are. We may be witnessing such time currently. Retail sales growth rate hit a post-recession peak in March of 2011 and has been on a steady decline since. Let's not forget that consumer spending is 70% of U.S. GDP. Watch the report on Tuesday.

And now let's quickly discuss something which is going to be realized by the market very soon (if not already). President Obama is looking more and more likely to be reelected in November. I say this due to two reasons: Mr. Romney's inability to quickly clinch the GOP nomination, hence not energizing the party soon enough to rally for elections, therefore all the complications deriving from that, like lower republican turnouts and (to my opinion) his inability to eventually convert the independents.

And the second, and perhaps the most important reason is declining unemployment rate. I know that many folks are still unemployed, and U6 was still at astonishing 15.1% last month. Nonetheless, weekly claims are at the lowest level since Mr. Obama was sworn in January of 2009, and the official UE rate is now less than 1% higher. Watch for market to start its positioning due to this development accordingly. Weekly claims are out every Thursday.

Random Market Thoughts

2012-02-09T22:53:00.000-05:00

Investor sentiment has reached highest level in a long while. Quite frankly, I do not remember when I saw a reading over 50% the last time. This fact is not to be overlooked. All I hear on business networks and read in business publications is that raging bull is back. Folks, we are one bad headline away from selling off hard. We do not even need a headline. I am not calling for a crash, just a run-of-the-mill 4% to 6% pullback to 50 dsma. It is a normal process and is a part of any bull market. It punishes johnny-come-latelies and rewards patient investors. All that talk about parabolic rise to continue is ludicrous insanity. Nobody rings a bell at the top.

Parabolic moves end badly. AAPL is leading it. Many are calling for $600+ price target, justifying it mostly with fundamentals. I respect the company. It is practically in its own class. I own iPhone4 and I love it. But today's $16 move higher feels like a capitulation by shorts and chasing higher by late longs. I would stay away from that stock for now but would not short it, instead, I would short weaker tech co's. I used GOOG puts today to express my short-term bearishness, due to its enormous underperformance vs NDX. Something is wrong with it and AMZN for that matter as well.

Transports are going to lead the decline. They are now disembedded from daily buy mode and will influence all risk assets lower. This sector is one of my favorite leading market indicators. DJT is diverging from DJI. Dow Theorists are taking notice...

And now let's get one thing straight. I have been calling for market decline, to my total dismay, since I got stopped out at 1330 level on SPX. While not being short (hence not fighting), I have been patiently waiting for market to reach today's level to short. It is not the best move I could have made. I should have been long into 1350 level. I missed a move and did not want to chase, it was purely my choice. My outlook was flawed and did not let me think straight, I WAS WRONG.
That was then, and this is now... I am only as good as my next trade. But I am to learn from my own mistakes to be better the next time. My SPX short position (initiated today) is to remain until all scale-outs or stops have been reached. I am a trader. I am allowed to be wrong, but I am not allowed to be stupid or reckless!

10 Yr T-Note Buy Zone

2012-02-08T10:11:00.002-05:00

Treasury futures have pulled back to my buy zone. Equities may have a final song to sing first. Let the Greek saga reach the apex, and look for reversal during last push higher in risk.

click on chart to enlarge

Trade ideas ahead of Greek debt deals

2012-02-07T23:21:00.002-05:00

Investors are on a 24-hour watch for Greek PSI and Troika deals to be announced. Yet another Kool-Aid will be served to those riding on the train of central bank-induced "hopium", while they are pretending to avoid and completely ignore the inevitable outcome. Is this a baseless rant of mine? Hardly. The latest development is that ECB is about to get involved in "creative" Greek bond exchange using EFSF as a middle man. Can this pyramid madness ever stop?!! After all, who cares what EU institution holds worthless piece of paper? Greece can't repay any of it, ever. By the way, it is thought that the word pyramid is derived from the Greek word Pyramidos, which means "Fire in the middle". How funny... Many have been worried that ECB, which is buying PIIGS bonds hand over fist, may be bankrupt in the end.
With enormous cash infusion (through cheap loans) into some insolvent EU banks, which hold bonds of insolvent Eurozone governments, ECB has created the biggest and most clever financial ponzi scheme ever known to mankind. "LTRO is working", says the investment community. Of course it is! As Michael Farr once said about Fed's QE: "even a dead horse will get up and make a few laps around the race track, if you inject it with that much cash". The race will eventually come to an end, and somehow I think a few horses will not make it to the finish line... Place your bets wisely, ladies and gentlemen.

Warren Buffett once said that "successful investors go through long periods of inactivity". I realize that he meant those words in totally different context, but I would like to use them here for my own gain. I would like to argue that traders go through the same periods of inactivity. While obviously less lengthy, they occur in the time of trader's expectation for all parameters of the trade to be matched. I am currently in the middle of such time. The trade I am waiting for was originally based solely on technical parameters, but now is also dependent on Greek deal(s) announcement, as a contrarian signal. I will short trading vehicles of risk in the middle of ensuing jubilation, perhaps within 24-48 hours from now.

Here is my plan:

Wait for Greek deal(s)-based exhaustion push higher and short the following:

SPX
EUR
HG
GC
DAX
GOOG

Go long the following:

USD (against all risk currencies)
ZN

24-hour Greek headlines watch continues...

Is tomorrow the day?

2012-02-06T20:21:00.000-05:00

I am going to be on the lookout for a reversal during SPX cash session tomorrow. I am looking for 1350 - 1355 level to be short-term high of this latest bull move from 12/20/2011. It can overshoot by 5 points due to stop hunt. One has to expect that.

This is not a call for the end of bull market which started on Oct 4th, it is a technical reversal zone and nothing more than that. If I am wrong I will step aside and regroup. If I am right I will ride the sell-off to 50 dsma. Reward to risk ratio is great.

I will continue showing this chart until it becomes irrelevant. Once ES fills 2 gaps above, there are 8 gaps below to fill.

click on chart to enlarge

Trading Thoughts for Week of Feb 6

2012-02-04T23:36:00.002-05:00

Risk rally is going full steam ahead. I understand the underpinning behind it. I am not blind and I can see that stronger economic recovery is underway. This said, I continue to think that rally has gone too far too fast, and there are some rough seas ahead. There are still many obstacles which have not been resolved. And even if they were, market has an undeniable tendency to fool most people most of the time. It will start punishing late longs right after it stops out the last stubborn short. Based on this notion I would like to provide my near-term prediction for various assets which I trade.

(click on charts to enlarge them)

1. My outlook for stock market remains the same as last week - S&P 500 is overbought and will pull back. Short-term high around 1350 - 1355 will be reached sometime this coming week, the reversal will probably occur on Monday Feb 6 or Tuesday Feb 7. SPX rally is going to exhaust above upper daily bollinger band and will begin a multi-week decline to confluence support zone, consisting of: 50 dsma, lower daily bollinger band, trendline from Oct low, and horizontals @ 1293 and 1268.

2. Dollar will rally and make a run at highs (while equities decline), Euro will retest the low at 1.2625 and could breach it.

3. Copper will follow equities lower, even though it looks like rally is unstoppable. We surely have seen this before...

4. Gold is tricky (when is it not?)... I think it may start building a right shoulder of inverted H+S. If uptrend channel breaks, pullback will start, but will be limited by multiple supports: 150/100/50/200 dsma, backtest of broken trendline, and horizontals @ 1705, 1667, and 1644.

5. Oil is in a 93 - 103 range and will oscillate depending on Iran and equities.

6. Gasoline has disconnected from oil and is in its own world. Refinery problems will keep it up, even as demand has been very weak. I still think we will see $4 a gallon (retail) by Memorial Day.

7. Treasuries may cool off for a bit. What? Treasuries and equities down together? No QE3 = no "Tepper Trade".

8. DAX is going to pull back to 6200 - 6450 zone. It is up stunning 15% YTD. Trees do not grow to the sky. This would correspond with my SPX pullback expectation.

9. GOOG is going to run into overhead resistance just above 600 and will decline to low 500s.

I wish everyone a competitive Super Bowl weekend!

SPY Divergence

2012-02-03T11:36:00.000-05:00

Strong NFP report this morning got me thinking that my pullback outlook on SPY could be flawed. But just as I look at daily chart I return back to my original thought - it is way too overbought, divergence of price with volume and momentum is continuing, and laminate resistance of July 2011 high, upper bollinger band, and -23.6% fib is looming. I just can't go long here...

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Post NFP Trading Ideas

2012-02-03T10:10:00.000-05:00

It is amazing how many people got NFP numbers wrong. Huge upside surprise and lack of anything negative in the report is sending bond bulls for the exits. Along with them are gold and euro bulls fleeing their long positions which were built on QE3 expectation. I posted a chart yesterday, which depicted dollar's weakness against those three assets. Is this the time for reversal to occur and dollar to regain strength?

click on chart to enlarge

SPX short is history, some of it worked, some is stopped at b/e. I have to rethink my short-term stock market outlook, based on the fact that this is a second strong employment report in a row. Trend is important in economics...

One unintended consequence is going to be thrown at the market (as the dust settles) - has U.S. presidential election momentum shifted this morning? Mr. Obama will be on TV at every opportunity, asking if we are better off now than three years ago. He has every right to ask that question with unemployment numbers subsiding.

Market Thoughts on Feb 2, 2012

2012-02-02T11:11:00.000-05:00

Mr. Bernanke is on the Capitol Hill today, trying to persuade lawmakers that inflation is not to be worried about after FOMC "pedal to the metal" rate decision last week. I do not think congressmen are buying his notion, but more importantly, the market thinks that inflation is not going to stay subdued for too long. I compiled a chart to compare how various asset classes have performed since FOMC's 2-day meeting. You can see that precious metals are in heaven, and are adding some more as I type. Risk assets, in general, are up at the expense of the dollar. Treasuries are up due to Fed's continuing intervention and its grim economic outlook. Investment grade corporate bonds are up due to demand for yield, as the rates are going to stay at near 0% much longer.

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Copper and Euro

2012-01-31T13:51:00.005-05:00

On Jan 18, a few days before China shut down for one week, I posted copper and euro charts.
Let's revisit those charts. Both ran into their respective resistance.
Perhaps it is time to look for shorts somewhere here...

click on charts to enlarge

Weak EconoData

2012-01-31T10:39:00.007-05:00

Warning shots fired by some weak U.S. econodata (for a few weeks now) were correct. We are getting more of that this morning. Housing, Chicago PMI, and CB consumer confidence - all disappointed. Yesterday's weak consumer spending number confirms fatigued U.S. consumer.

One has to wonder what ISMs will come in like tomorrow and on Fri. I also would like to see productivity report and chain store comps on Thu. NFP is out on Fri. as well (Chicago PMI employment component was down 4.5 @ 54.7).

SPX short idea may be working for a while. Greek PSI deal could be a brief bounce to short into again. "Golden cross" is another nonsense negative against this trade. Biggest obstacle - ECB/Fed's sea of liquidity.

Good luck with your trading!

Trading Thoughts for Week of January 30

2012-01-29T13:00:00.010-05:00

Central bankers have once again decided to take matters into their own hands. They are getting ready to print more money, and it seems that there will be no end in sight. It is clear that they are afraid to let equities decline any further.

Did they know early?

I continue to think that RMBS-targeted QE3 is not a bad idea, because it is going to help ailing U.S. housing market. But what Fed did on Jan 25 was not that at all. FOMC further extended the "extended period of time" of "exceptionally low" rates, but more importantly, gave a grim economic outlook.

Fed chairman continued to provide more downbeat assessment at subsequent press conference, asserting that economy has not improved that much, to the chagrin of some arguing reporters.

Only two days later, preliminary 4Q2011 GDP report has revealed the reason for Fed's worries. If you do not like digging into economic numbers, I will provide a few highlights. Underlying data was much weaker than headline number (which slightly missed the expectations): inventory build accounted for 69.3% of total GDP growth, because of that real final GDP sales were the lowest since 1Q2011 and grew at only 0.8%, govt spending contracted severely by 7.2%.
Do you think a little birdy flew an early message to FOMC, just in time for their meeting on Tue-Wed? Or has Fed chairman developed an ability to see through walls, after totally missing Financial Armageddon, resulting from the "contained" sub-prime crisis? Everyone was shocked by FOMC's dovish statement - Fed obviously knew. Their interest rate decision cushioned the ultimate outcome of disappointing 4Q GDP.

Fighting this sea of liquidity is considered (by many) to be a money-losing proposition, but it really felt right this time, at this trendline resistance on SPX. Perhaps one has to take profit on this trade more often and earlier than usual, because it is so against the trend. This is not a suicide mission though, as the stop is already at break-even. There is no strong conviction on charts to support this trade. Daily and even weekly Stoch is now embedded in buy mode. Should they disembed and provide a further sell signal, adding to position would be prudent. One has to remember that in U.S. presidential election year equities typically oscillate the flat line by 5%, until it is clear who wins. At 1333, on Jan 26, SPX was up 6% YTD.

Across the pond, more central bank madness...

Things are getting worse in Europe, economically speaking.

In UK preliminary 4Q2011 GDP contracted 0.2% (worse than expected). BOE may need to do another round of QE to reignite the economy. That will put pressure on GBP.

In Spain unemployment has risen to mind-boggling 22.8%. This is prompting Spanish govt to ask EU for some easing of austerity measures (according to some officials).

The worst development may perhaps be occurring in Portugal. Its debt is now rated junk, unemployment is projected to reach 14.2% by 2013, GDP contraction forecast for this year has deteriorated to -3.2%, and debt to GDP will surpass 100% in 2012.
So it looks like market has found its new victim - Portugal's 10 Yr Bond Yield closed above 15% on Friday, and CDS blew out to historic highs.

But most of the news above are no worry to heroic ECB, which is now flooding EU banks with cheap liquidity. Another round of LTRO is scheduled for February, and rumors are that there will be more takers at that marvelous handout party. Banks will bring their worthless collateral - sovereign bonds of insolvent EZ govts, and get all the euros they need at 1%. Folks, there is one big problem with all of that - money will end up as deposits back at ECB or even worse - go into the same sovereign bonds of insolvent EZ govts, which are yielding a hefty carry over LTRO rate. What a nice ponzi scheme, Bernie would be proud!

Of course, ECB will make us believe that it is not so, and that this refinancing operation will improve lending in EZ, therefore returning the growth to recession-bound region. We will see, I say. In the meantime, loans to consumers and businesses in Euro Area have contracted the most on record in December of 2011.
Mr. Draghi (ECB president) himself said it is not certain that LTRO has resulted in any new lending by participating banks. You are correct sir, but we will give it some time, nonetheless. Somehow I think that LTRO is going to end up just like TARP in U.S.

All LTRO will do is alleviate bank liquidity problems, leaving the sovereign insolvency well in effect. It is only through new private lending, which will result in pickup of growth, that Eurozone can solve its debt crisis.

Due to these continuing negative developments, it is hard to believe that current euro rally is anything more than just a retrace in overall downtrend. Bears want to think that Wave 4 should be ending soon and a retest of lows will ensue. Market though is a discounting mechanism, with much of the bad news seemingly already priced in. The newly reported short interest, largest ever on record, may cause short covering last longer. Once this retrace is over, wave 5 down should begin and prevailing downtrend may continue. But it is hard to call for much lower levels below 1.2625 until monthly symmetrical triangle is broken on closing basis. With two trading days left in January, it looks like we would have to wait for February's close to tell us what happens on that particular front (chart below).

Gasoline Futures are on the move, again!

2012-01-27T13:21:00.000-05:00

On Dec 29 I filled my gas tank at just below $3 per gallon. I immediately thought that I would not see that price for a long time.

Today RBOB futures have reached 5-month high, on supply worries due to various refinery troubles and closures.

Technicals are confirming a possible move to $4 in the next few months. This will not bode well for U.S. GDP, which is 70% comprised of consumer spending.

click on chart to enlarge

GOOG Trade - Part II: Bounce and Sell-off Again

2012-01-26T19:46:00.000-05:00

Google is known for gapping after every earnings report. This phenomenon can be attributed to the fact that company does not provide any guidance. Analysts and traders end up guessing the numbers wrong, resulting in violent reaction.

On January 9th I was concerned about GOOG missing Q4 earnings, due to the price action. It did...

Price gapped down hard and continued below. It is now almost at laminate support of 200 dma and two gap fills. I expect a bounce in that area +/- 5 points. Subsequent rally to low 600 level will be met with overhead supply. I expect another sell-off to start there. It will send the price down to the low 500 level to fill more open gaps and pull back to long-term trendline.

Above scenario is depicted in the following chart. Stunning resemblance with prior sell-off in the beginning of the last year is highlighted.

Enjoy!

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SPX is at resistance

2012-01-25T16:26:00.001-05:00

Fed has given the "risk on" trade a green light today. Rates are to stay low forever...

I am not bullish though, due to Fed's downbeat outlook on U.S. economy. Why should one be buying S&P 500, which is already up 5.5% YTD, when in today's statement FOMC said: "growth in business fixed investment has slowed, and the housing sector remains depressed"?

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Charting AAPL - Part II: Time to Sell

2012-01-24T17:42:00.000-05:00

On Dec 22 I said that AAPL may reach $450 - 460 at the top of weekly channel. Well, it is at $452 in afterhours trading as I type (at 5:40 pm est.)

At this time I feel that trade objective has been met, and if AAPL opens between $450 and 460 tomorrow morning, it will run into upper trendline resistance and may start its pullback to the bottom of weekly channel.

Those who are long may want to sell some of their position and move the stop on the rest to just below the bottom of weekly channel. Congrats!!
Some brave souls may initiate a short at 450 - 460 level.

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DAX Futures Trade Idea

2012-01-24T10:06:00.000-05:00

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Trading Thoughts for Week of January 23

2012-01-22T11:26:00.009-05:00

Equity rally is long in the tooth. I think that longs need to prepare to bail and shorts should be ready to go to work very soon, even though there is nothing on the charts that says it is time to do so, yet.
Here are my technical and fundamental reasons for being cautious:

1. SPX is overbought. This can continue as long as daily stoch is in embedded mode (and it currently is). It has traded straight up in rising wedge (bearish reversal pattern) since 12/20, with no meaningful pullbacks. As the matter of fact, there have been no closes below 8 ema on daily since then. Once the gaps above get filled, there are 6 gaps on SPX futures below current level to shoot for, all the way down to 1153. When weakness develops, many longs will bail and shorts will initiate new positions. Have to wait for a signal!!

2. Increased dissemination of bull(ishness) by fund managers, appearing on business alphabet soup network, about how "everyone is missing the train" - is ludicrous and contrarian in nature. They sing the same song over and over: "stay invested", "you can't time the market", "don't fight the Fed", "stocks are undervalued". S&P 500 earnings are projected to be roughly $100 per share this year. Apply a 13 P/E multiple to that - you get 1300 for SPX. Let's assume the best case scenario - $105 (EPS) x 13 (P/E) = 1365. So we go up another 50 points, and then what? S&P 500 is at or just slightly below its fair value, considering U.S. GDP projected growth of 2 - 3% this year. What train are we missing? Train to nowhere...

3. Same fund managers say that "market deserves a higher multiple". I am tired of this argument, and do not get their main thesis behind it - "interest rates are at historic lows". There are many reasons for rates to stay this low, the main being that bond market does not believe liquidity-driven recovery in equities. Stocks do not trade in a vacuum. Expansion of P/E multiple can not happen until possible external macro shocks have been removed, some of which are:

a) Greek debt haircut talks could collapse, Spanish and Italian bond yields could spike to unsustainable levels - resulting in EU debt crisis spiraling out of control.
b) Eurozone recession could be deeper and last longer - resulting in much lower earnings by S&P 500 multinationals.
c) China could slow down tremendously - thus pulling the entire world economy down with it.
d) U.S. GDP could be revised downward due to that world-wide economic slowdown.

If that worrisome cocktail is not enough, let's add a few more important developments:

e) fresh Portugal default fears, as that country's debt is now rated junk by all three main credit rating agencies.
f) Iran's sabre-rattling in Strait of Hormuz threatening to block a flow of crude oil.
g) Absolutely no clarity on GOP candidate yet (with Santorum and Gingrich dealing a blow to Romney in primaries), not even talking about who will win U.S. presidential election in November.

Way too many uncertainties for market to advance without a meaningful pullback.
Taking all of the above into consideration, combined with the fact that SPX is up 22% from October 4th low, I am staying flat equities now and will be ready to short on a signal.

Is Chinese government making a yummy fudge?

2012-01-19T12:44:00.002-05:00

How do you keep your industrial production and GDP growing at 12.8% and 8.9% y/y (respectively), when you have an export-driven economy and two of your biggest export customers are canceling their orders? You fudge the numbers!!!

Euro, Copper, and China

2012-01-18T23:42:00.001-05:00

It looks like QE3 will come from Far East (well, sort of). Rumor is that capital requirements for Chinese lenders are about to be relaxed. But has this been anticipated? Chinese stock market is up 6% from Jan 5th low. This development may already be priced in.
I understand, govt has to reassure investors before one-week shutdown for Chinese New Year, that all will be well in Big Panda Land. After all, it is supposed to be a happy holiday, and a very special Black Water Dragon year. Let's hope that another very rare black water inhabitant does not show up in 2012...

I am tracking a few scenarios in Euro and Copper. Just wanted to share them with you.
In both cases there is an upside bias, but it looks like a retrace within overall downtrend, which is to resume shortly. Perhaps we may see that reversal during Chinese New Year one week vacation.

click on charts to enlarge

S&P 500 Futures at crossroads. Who will win - bulls or bears?

2012-01-18T12:28:00.002-05:00

Stock market has dueling scenarios developing. It is hard to predict exactly what it does at this juncture. But should the market move, we have gaps below and above to use as targets on ES.

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Market Thoughts Week of Jan 16

2012-01-16T21:24:00.012-05:00

With a lot of issues to discuss, this will be a slightly longer post.

To decouple, or not to decouple? That is NOT the question.
Simply put, EU-27 is the largest economy on the planet and is one of our largest trading partners. S&P 500, mostly through U.S. multinationals, gets more than 20% of its earnings from Europe. It is widely known that Eurozone is heading into recession. This will reduce S&P 500 earnings through multinationals. Further weight will be put on those companies' profits by higher dollar (through weaker euro).
Many U.S. banks have operations in Europe. If defaults occur (Greece comes to mind), there is going be a contagion across the entire financial system. Jamie Dimon (JPM's CEO) just disclosed that his bank has $15B exposure to PIIGS and could lose $5B of that. Europe accounted for 50% of total U.S. global foreign direct investment in 2010.
How can these facts be decoupled from U.S.? This decoupling talk is ludicrous!

S&P EU sovereign credit downgrades finally came.
Friday the 13th and MLK long weekend was the worst time to do this. But equity markets handled it fairly well. One just can't be too bearish equities when you see a respectable strength like this. Be careful and chose your entries wisely (on this a little later).
The most important downgrade for me was Italy. With two-notch downgrade it is now just three notches above junk. Can you say Greek debt multiplied by 5.5? Once Italy's credit rating is junk, it will be shut out of the bond market. ESM and EFSF together would not save Italy from default then.
So who will S&P downgrade next? My guess is another deeply indebted country in EU. Perhaps Mr. Baroin (French Fin Min) gave S&P their next downgrade idea, when he asked in dismay why UK's rating is still AAA?
Will UK decouple from EU too? Oh wait, it is in EU. Long-forgotten is Mr. Cameron's stance on abstaining from new "fiscal compact". Check out GBP chart, it is not looking too good lately.

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A warning shot?
On Thu we got some weak U.S. Econodata. Dec retail sales disappointed. I warned about this right after Thanksgiving, as XRT was not able to take out early Nov highs even with best Black Friday sales ever. I drove around every weekend after Thanksgiving, and my local mall traffic was down ever since. Combine this with last week's less than expected Non-Mfg ISM, and you have a weaker consumer. I am worried now!
Weekly jobless claims shot up. Are we to be surprised? Temp workers are being let go in droves, as holiday shopping season is over. We will have to see if the trend develops. Also, (very quietly) Philly Fed was revised down to 6.8 from 10.3 last week. Hmmm, nobody noticed? We get Jan # on Thu of this week, watch it...

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Doves are flying high.
Late last year economy picked up growth. If we are to believe that good economic data will continue (despite my doubts in the previous paragraph), no QE should be needed this year. 2012 GDP growth is projected at around 2 - 3% by economists. So why are the majority of Fed members pounding the table for QE3? Simple answer - our economic recovery is too fragile and can not be sustained without Fed's help. Let's not kid ourselves, training wheels came off at the end of QE1 and QE2, and we know what happened shortly after in both instances. So QE Light was put in place, and now QE3 may follow. Market fully anticipates this. 10 Yr T-Note futures just made new high, and much higher levels are still ahead, accompanied by record low yields. Whatever Fed's reasons are - high unemployment rate or slow housing recovery - they may hint about QE3 at their 2-day meeting in January (as they just whispered into CNBC's ear). By the way, I think that QE3 is not that bad of an idea, especially if directed at RMBS: equities will like it, bonds will like it, and more importantly - Fed will reflate the stagnant housing market. Housing stocks have gotten the message early in Oct. I believe that was about the time Fed started speaking about QE3 (via RMBS purchases) - I guess bear market plunge in S&P 500 did the trick.

click on chart to enlarge

But is housing really bottoming?
US govt is looking into wholesale disposal of FHA, Fannie, and Freddie-owned homes. Investors (mostly hedge funds and alike) will be buying these in bulk and renting them out. I have one major question - at what price? What do you think will be the bulk rate paid by those vultures? Can you imagine what it will do to comps in the neighborhoods where transactions will take place? Are we going to have another huge decline in prices due to that brilliant scheme? I say look for 25-30% discounts below CMV on those bulk transactions. Until now GSEs have been selling their properties on the avg of 5-7% below CMV to owner-occupants and small investors.
Home owners, who will see their equity evaporate and go into negative column on 25-30% hit due to comp sales in their neighborhood through this new program, will default on their mortgages in an instant. I am still yet to hear anyone explain how this vicious circle gets avoided. Until then, I will think that housing bottom is false and is about to drop out.

Technicals are flashing some possible changes ahead.
SPX is up against 1295 resistance again. Daily MACD is now negatively diverging from price. Daily Stoch is still embedded in buy, but once it crosses down below 80, we may have a bigger pullback than the one we saw on Fri. It is in rising wedge formation, a bearish reversal pattern. I wonder what may make traders pull the sell trigger: earnings, Europe, or just overly bullish sentiment, which is now flying high. We had a good run from Oct lows, pullback will not kill the trend.
VIX may help this possible bearish case. Divergence on daily inside of the falling wedge has developed and needs to be monitored. Higher volatility levels may be ahead.

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GOOG, AMZN, IBM, ORCL divergence vs NDX

2012-01-12T00:43:00.002-05:00

It is very hard to get bullish tech, when the most important tech companies are diverging from NDX. Whatever the reasons - earnings miss, lower margins, or weak demand - these four tech leaders are a drag at the moment. I would watch for this divergence (if it does not stop soon) to finally result in broader tech sell-off.

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10 Yr T-Note Futures Breakout?

2012-01-11T15:10:00.002-05:00

With equities on the rise, why is 10 Yr T-Note looking like it is about to breakout higher? Myriad of reasons may apply:

1. Fed has been speaking dovishly lately (with exception of very few). QE3 may be around the corner.
2. EU debt crisis is not resolved. LTRO did wonders on liquidity front. But solvency issues are far from being resolved.
3. Crawling DM and slowing EM GDP growth is weighing on investor sentiment towards the risk.

So we have possible conditions for ZN highs to be taken out.
Below is the chart of trend + momentum. It looks like bull flag is resolving in the direction of the trend. Bulls are buying breakout and possible o/n pullback to apex. The distance is 3 points. That would be one crazy move, resulting in new historical lows on yield.

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I am concerned about GOOG and IBM

2012-01-09T14:40:00.003-05:00

On the day when AAPL made a new all-time high, and SOX is trading up almost 2%, two of my favorite "generals" - GOOG and IBM - are trading down and are below their 2011 closing prices. I really do not think that NDX can continue to advance without these major heavyweights.

So I am going to prepare myself for the worst case scenario - GOOG and IBM missing their Q4 earnings, or guiding down Q1. Following charts are going to predict a dire outcome. They are merely a carbon copy of what has already happened with those stocks. But I am a strong believer of charts repeating again and again. This said, something pretty major would have to happen for this scenario to play out.

Two things would make me less worried:

1. GOOG's ability to turn around right here, at trendline, without closing below it even for a day.
2. IBM not closing below 173 on weekly basis.

click on charts to enlarge

Houston, we have a problem! Part II - China

2012-01-08T22:57:00.004-05:00

On Dec 23rd I said that my biggest worry is Italian 10-yr Bond Yield going back up towards the highs. It is just a matter of time (perhaps even this week) before new highs will be reached. While all market participants will be preoccupied with that "breaking" development, I would like to go one step further and talk about my second biggest worry - China.

China has an export-driven economy. EU is the largest customer of Chinese exporters. Therefore, health of Chinese economy revolves around the outcome of EU debt crisis. On top of European problems many other large customers for Chinese exports have fallen on hard times as well, as the world economy is grinding to a halt.

It is not surprise to many that Chinese GDP has been slowing down. Growth is expected to come in around 8% this year. While many countries would kill for that, it is considerable slowdown for Chinese juggernaut, and the trend is projected downward from here as well. Many economists are predicting further deceleration in GDP, with inflation still elevated above tolerable levels. Even China's Premier has spoken about the difficulty expected in the first quarter of this year.

The most important problem may be inside China itself. Domestic real estate has been crashing down and perhaps may lead to the biggest bailout yet. Speculators have bid up the prices to unreachable levels for vast population, which is unable to afford these lavish (by their standards) properties.
There are endless amounts of municipalities, which have been built in anticipation of growth and migration from poor rural areas. This urbanization of Chinese population has been the biggest reason behind the fast growth of second largest economy in the world. It resulted in enormous purchases of commodities and subsequent hoarding of them in local warehouses.
But how do you move 1.35B folks around the country without major dislocations and unfilled voids? At the end of this post I have provided a documentary about "ghost cities" inside China. Watch it, you will be amazed. How do you feel after seeing that? The most important takeaway (for me at least) came from the phrase by the interviewed analyst: "it's the quality and not the quantity of GDP that matters".

Since the beginning of post-Financial Armageddon recovery in March of 2009, investing community has developed a thesis that emerging world economies will lead the way. China, undoubtedly, has been the leader in the first phase, but now it may become the laggard, and I expect it to drag the world economy down if it does not bottom and turn around very soon. Many other emerging markets, like Brazil and India, have also been hit hard.

I decided to show a chart of Shanghai Comp over S&P 500 and CRB Commodity Index. While Shanghai Comp outperformed in 2009, it has deteriorated from there and has really accelerated its decline in the second part of 2011. More increasing divergence has developed over the last few months. Shanghai Comp Index has now completely disconnected from the risk trade. This, for sure, can not continue for too much longer.

Here is my conclusion. China has amassed $3T of reserves in its coffers. While everyone has assumed that they will bail out EU, China itself will probably need an enormous bailout to prevent hard landing at home. This fact may keep the risk trade in check, since there will be less money thrown by them at everything else around the world. I do not really know if we see this play out now or later in 2012, but we are heading for some turbulent times in Big Panda's backyard. Keep your eyes on Shanghai Comp.

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NFP Friday Trade Idea

2012-01-05T19:55:00.000-05:00

A trade may be setting up for NFP Friday. This development is very interesting - while today NDX broke out above Jan 3rd high, DOW and SPX did not. Deja vu? Is this going to be yet another unconfirmed b/o of tech, just like many times last year? Almost all of those led to steep declines.

So we will get NFP @ 8:30 am est. If the report is less than perfect (if you know what I mean), stock index futures will sell off and may fill gaps below. Obviously, there could be a stop run just above the highs and the reversal to follow. Hourly close above those levels will constitute a breakout (in my book).

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DAX Futures Projected Targets

2012-01-04T11:02:00.000-05:00

A quick look at our European leading counterpart shows that it has a horizontal hurdle to jump over. While the price has broken out of the wedge, it is butting up against 6200.
Market continues to be on the lookout for possible S&P EU sovereign rating downgrades, as well as continued EU banking system stress. I am not sure DAX futures can take out this 6200 resistance if downgrades come and further cash hoarding by European banks prevents a flow of liquidity in overnight lending market. Perhaps DAX pulls back to test the wedge apex @ 5850.

Should the news flow improve, DAX futures may be successful in overtaking 6200 resistance, and the next resistance would come @ 6450.

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Financial Market Mid-day Report

2012-01-03T12:52:00.001-05:00

Market participants have decided to concentrate on positives versus negatives today.
Much better than expected Econodata from around the world has trumped worries about Iran and EU debt crisis.

Most PMI numbers absolutely blew passed expectations (table below), with some climbing back into expansion territory. Was Dec surge one-off due to Holiday sales demand?? Across the board strength like this can not be discounted. We need to keep an eye on next month's reports for a developing trend.

On the other side of this, Iran is flexing its military muscle. WTI has gone above $100 and is breaking out. This is not going to help consumers at all. I knew a week ago it would be a while before we see sub-$3 a gallon gas again.

In EU the spread between 10 Yr French and German bonds is widening again. This is, no doubt, due to expectation of French AAA rating downgrade. Let's get it over with already, S&P!!

click on charts to enlarge

European Bank Stress Continues

2012-01-03T00:36:00.004-05:00

Today I saw the news headline on Reuters that EURIBOR went down sharply. While I do not want to rain on their parade, this fact could just be merely a byproduct of ECB's half of trillion euros LTRO operation in Dec.

I decided to pull up EURIBOR chart and compare it with LIBOR-OIS Spread and TED Spread. You can clearly see that while EURIBOR has declined in Dec in anticipation of LTRO and after it, LIBOR-OIS and TED spreads did not confirm the decline.

Here is the reason why: LTRO resulted in enormous deposits by participants back with ECB, money never left ECB's coffers, it just got reshuffled, no overnight bank-to-bank lending is being done in EU. Also I think that dollars are still tight and remain in high demand, even after Big 6 CB's 50 bps reduction of swap rate (more than a month ago). Hence EU banking system-wide stress continues today.

I purposely pulled up 5 yr charts to show that we are at elevated levels and broke out above 2010 highs. But even with this development in progress, we are nowhere near the levels reached during the Lehman's collapse. So while we need to be concerned, it is not the time to get extremely alarmed just yet.

We need to monitor and see what transpires in the next few weeks...

click on charts to enlarge

Update on Jan 3 @ 11:40 pm

One more gauge of EU bank stress, EURIBOR - EONIA Spread shows elevated levels and possible breakout coming.

SPX in 2012 and beyond...

2011-12-30T01:26:00.001-05:00

Tomorrow is the last trading day of the year, and it is time for me to write the last post of 2011.

I am continuing to digest all of the 2012 predictions I heard from various (respectable) market participants. I have noticed that increasingly the bear case is tipping the scale, with many saying that 2012 will be a difficult year, and 2013 will be even worse. I understand all of the worries, and have outlined some of mine here as well. But I am a trader with open mind and two sharp eyes. I pulled up S&P 500 monthly chart and I saw a completely different picture. This is exactly the case when I have to say: "trade what you see".

I would like to wish all of my readers a very Happy New Year!!

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2011 Performance Comparison Chart

2011-12-30T00:02:00.000-05:00

A quick look back on the year that was (via comparison chart) shows how 2011 has been a year of two halves. First half (prior to July 25 week) consisted of fairly close performance by bonds and equities, but after that investors went on a rout. You can see that long-end US treasuries outperformed by the widest margin, while corporate bonds and dividend-paying large caps beat the broad stock indexes as well.

Many say that market made no sense in 2011, with correlations at nearly 1 on everything, clearly seen on the chart below. But I think that financial market is not broken at all. It had to deal with many unexpected obstacles in realm of risk-on/off environment, combined with Fed's treasury market intervention, and occasional shenanigans of HFT. In the beginning of October I became more constructive on the market and disconnected from the bear crowd, which is still stuck in "2008 all over again" scenario. Corporate bonds and dividend-paying large caps have recovered nicely, with DJU, DVY, and LQD now above where they traded before the rout began at the end of July. This is very different from what happened in 2008, when everything corporate related got demolished due to much weaker balance sheets.

If you want to share your views on what may happen in 2012, do not hesitate to write your comment here.

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I am sorry to be the bearer of bad news

2011-12-29T01:20:00.002-05:00

It is after midnight on Dec 29th 2011. I am driving back home with my family from a very pleasant and festive party. A corner of my eye catches a bright gas station sign "$2.93 per gallon for unleaded gasoline". I do not hesitate for a second, full tank please!
While filling the tank I immediately recall what was just discussed at the party: Iran, Hormuz, $200 oil, $5 gasoline, bicycling to work, etc...
So I said to myself: "when I get home I will write a late night post about gasoline and crude oil, and where I see them going.
Folks, here it is. Bull flags and symmetrical triangles almost always result in the direction of the trend. Sorry, but I see much higher crude oil and gasoline prices ahead. Get that sub $3 per gallon gasoline, while you can. At least you will not be mad at me if I am wrong...

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Is GLD ready to bottom?

2011-12-28T02:29:00.047-05:00

On Dec. 15th I posted a chart of Gold futures' long-term support. GLD is now approaching that buy zone on a second test. I am patiently waiting for price to enter a confluence of supports: trendlines, horizontals, and bollinger bands.

This trade has a very high R/R ratio. I am projecting approximately 15-point bounce to the upside, or roughly 10% move, with a stop 2 points below the buy zone.

click on charts to enlarge

GLD weekly

GLD daily

Update on Dec 28 @ 5:00 pm

Trade was initiated at close. I am using GLD Feb call spread. Will update the progress here...

Update on Jan 3 @ 10:50 am
Sold 2/3 of position. Stop to b/e.

Update on Jan 4 @ 12:15 pm
Out last 1/3.

Most Important Stocks To Watch In 2012

2011-12-26T16:18:00.004-05:00

With only 4 trading sessions left in 2011, all gurus are out there throwing their predictions for 2012.
I am not going to downplay their ability to foretell the exact level of S&P 500 at the end of 2012, but I would not put any money on their subjective opinion. Traders can see minutes, hours, days, weeks, maybe a few months out, but if you hear (from anyone) the exact number for an index or a stock one year out - it is just a guess.

So I decided to let my followers know what I think about 2012. I am still not sure what the exact outlook should be, due to enormous uncertainties facing the stock market in the next year. Rather I would like to focus on what I see, not what I think. Next year may be as volatile as this, it could just be range bound all the way. I am way too realistic, practical, and humble to predict more than a few months out.

The biggest thing for next year (in my opinion) is to concentrate on what will lead and what may lag, and just go with that. I am going to watch the next two stocks as my best guide for trading DOW and NDX. These companies have the biggest weighting in their respective indexes. They are the leaders in their space, which also happens to be the biggest weighted in S&P 500. So if we know where these two stocks will go, we will be able to predict the direction, albeit not the exact percentage of the stock market's move. They by far have outperformed their peers, and their indexes - not surprising, they are the leaders.

So here they are compared to their indexes. I will not be surprised that we will get the same picture at the end of the next year, whichever way they go, up or down. Once again, we just want to be correct on the direction.

This is my very modest prediction - IBM and AAPL will dramatically influence the outcome of where DOW and NDX trade in 2012.

click on chart to enlarge

Houston, we have a problem!

2011-12-23T18:16:00.001-05:00

While stock markets in Europe and US are rising (albeit not skyrocketing), one thing is being grossly overlooked. I have pointed this out two weeks ago. This is my biggest worry and should occupy (had to use it for the lack of better word) traders' minds over the 3-day weekend.

Here it is in a pictorial and undeniable way. This is the scariest chart of them all.

Treasury Futures Trade

2011-12-23T16:18:00.017-05:00

With equity market grinding higher into the end of the year, treasuries are on the defensive. This, by all means, is merely a retracement in a stubborn bull market in treasuries. I see a possible further weakness in 10-yr T-note futures down to 129'09 level.

While this weakness is due to Eurozone debt crisis relief equity rally and also some unwanted supply at auctions during the week, it will take more than just a two-point T-note futures sell-off to convince me that risk is out of the woods.

There is a laminate of 50/100 dsma a few ticks away from current price. Stop scoop will give traders an extra reason to drive the price down below to my projected target.
You can see from the chart below that price is traveling inside the channel, head and shoulders has developed, and box extensions are near perfect. Do not get carried away though, this bull is not dead yet.

click on chart to enlarge

Charting AAPL

2011-12-22T22:26:00.005-05:00

In light of trepidation in tech land due to ORCL's surprising miss, I wanted to look closer at one of my favorite "generals" of the market - AAPL. I realize that it is in a completely different segment of tech, and parallels are not to be drawn here at all. Nonetheless, if the whole tech sector is to crumble under the weight of possible enterprise spending slowdown/cutbacks/freeze, AAPL (with 12% index weighting) may become a make or break stock for NDX, by either smoothing or exaggerating the ensuing decline.

In order to understand how strong this amazing stock has been, one has to pull up the weekly chart (shown below). You can clearly see that price has respected boundaries of an uptrend channel (with 75-point width) for almost 3 years now. 50-week simple moving average has been a very good guide and support. A double-top head and shoulders with triple bottom neck and a distance of 73 points has now developed (but not fully completed due to right shoulder still being in progress).

I see two scenarios for this universally loved stock:

1. Right shoulder does not materialize, price breaks above $410 and keeps on going to challenge the highs, eventually making new highs at the top of the channel, somewhere around $450 - $460.
2. Price runs into $410 resistance and gets rejected, right shoulder develops, price breaks down below bottom of the channel, below 50 wsma, and eventually below the neck at $353 and keeps on going down to projected targets. Ultimate target is 73 points (h+s distance) below the neck = $280. Possible support on the way to $280 would be $319, $310, and 75-point extension from channel breakdown (not known yet).

My first scenario is more likely because it is supported by direction of the trend and AAPL's very strong fundamentals, like enormous cash on balance sheet, fast growth, and reasonable valuation. But my second scenario is not to be totally dismissed until price decisively breaks above $410, especially if something goes terribly wrong with the company, its sector, or the entire stock market.

click on chart to enlarge

Is ORCL giving NDX heads up?

2011-12-21T14:11:00.000-05:00

Tech is in a cloud today (pun totally intended). ORCL missed earnings and has cast doubt on robust tech spending. Big cap tech is getting pounded.

I decided to look at how ORCL compares to NDX. Obviously it is a huge component and will weigh on the index. You can see (from comparison chart below) how closely correlated the two are. ORCL is now completing its head and shoulders objective, with a little more to go (just like earlier in the year). NDX is not there at all yet. I would say that for NDX to follow ORCL down more, we would have to see more companies confirm what ORCL told us, which would let us know that this was not just a one-off event. If we get another high-profile warning or miss in the space, watch out below, October and August NDX lows would come into play fast.

click on chart to enlarge

BAC - retest of 2009 low coming?

2011-12-21T13:18:00.000-05:00

On August 25th Warren Buffett invested in BAC. I was skeptical. Today the stock is struggling to hold $5 and looks more and more like it will head for the retest of 2009 low.

If stock market is to bottom, financials have to at least stop sliding. Will BAC retest of lows coincide with a lower low and a bottom on SPX in the beginning of 2012, just like in 2009??
Keep your eyes on BAC...

click on chart to enlarge

Could Dollar Index Be Ready To Sell Off Hard?

2011-12-20T17:28:00.000-05:00

click on chart to enlarge

Stock Market Moves in Mysterious Ways

2011-12-20T14:32:00.001-05:00

For a week now I have been stalking this move higher. It was lurking out there in a maze of negative European news. Today we finally get that long-awaited Santa Claus rally. This, folks, is all we may get, a move from just below 1200 on March S&P futures contract to just about 1250 at the highest point sometime before this week is over. You better use this opportunity to cut your losers, take profits on your winners, and just go flat and enjoy your holidays. Why do I say this? Simple and systematic approach to what many may view as schizophrenic market moves. But in reality, there were endless amounts of open gaps on various indices and important individual stocks that needed to be closed. They were all filled yesterday, and therefore gave the bulls an extra might to carry the prices higher and punish the late shorts. I view today's move as a gift in problematic and puzzled market, which will be just as hard to read in the beginning of 2012. I will not even dare try to guess when the S&P downgrade of EU AAA countries comes. We could be within days if not just hours (as I thought earlier last week) from a swift EU debt crisis-driven equity slide, which will take so many by surprise, again.

So I say: take profits on 1/2 right here @ 1234, move stops to b/e, take profits on all ESH2 @ 1250, reduce your risk in illiquid market, and rest through first trading day in January. It would be 16 points short of what I thought we would do, but good enough for confused market conditions.

Spend time with your family and friends. Reward yourself for hard work during the year. Celebrate your achievements. Be safe, be wise, be flat soon...

Zoom Out and Relax

2011-12-19T13:23:00.001-05:00

It was Sunday afternoon in US. I was doing my weekend reading. The doomsday predictions about how EU is about to disintegrate were dominating the headlines. Why does the media hype these kinds of cataclysmic events (like Y2K world-wide computer system failures), only to forget about them when they never happen? It is their job and they are good at it, this sells their content and pays big bucks in advertising.

And we, the traders, are to do our job that pays us - look at charts. So with heart rate accelerating, and all kinds of worries about the eventual Financial Armageddon II going through our heads, let's zoom out and look at EUR/USD, which many are saying will either go to parity or plain out disappear into oblivion.

Below is the monthly chart. You can clearly see that EUR/USD is trading 1200 pips above the low made in 2010, when Greece was about to fall off the face of the earth, and 700 pips above the low in 2008, made during Financial Armageddon I. Many say that this is a function of Dollar devaluation and relentless Asian and Middle Eastern diversification into Euro. Whether those are true or not, something is keeping this pair from collapsing.

I want to draw your attention to symmetrical triangle that has formed on monthly chart. There are potentially two more years left inside the symmetrical triangle before price gets to the apex. I will not be surprised if EUR/USD just trades inside of it and marks time for EU debt crisis to be solved and Fed's QE3 to go by. I say this pair is range bound at worst, and somewhat biased towards upside move in the short term at best.

click on chart to enlarge

Weekend trading thoughts

2011-12-17T19:32:00.000-05:00

It is practically impossible to write here all the thoughts that go through my mind. As a macro trader I have a lot to worry about over the weekend. Due to some time constraints I will discuss just a few points.

My favorite "general", the one by whom I gauge my SPY target, has been under pressure last 5 trading sessions. Time to worry? No, not yet. IBM has a distinctive pattern of making new highs and breaking down below steep uptrend, only to retreat down to and bounce off the longer term trendline. It does that time and time again, punishing late longs and letting more patient ones in. Following is the chart, a picture is worth a thousand words. My mid-January target is $207.

click on chart to enlarge

On Friday multiple sovereign rating downgrades and negative Eurozone-related news sent many longs for the exits. Weighing heavily on their minds was a possible French AAA rating downgrade by S&P after the close of trading. It did not let them think clearly in order to embrace Santa, who is coming to town next week. Well, if France is about to lose its AAA rating, then why is the 10 Yr OAT (French bond) yield not skyrocketing? Chart, please!!

click on chart to enlarge

No recession in US

2011-12-16T09:47:00.000-05:00

The economic data released over the last few days showed that recessionary risk in US is non-existent. All of those domestic slowdown worries during tumultuous summer months should now be abating. But why is there still so much strong buying of US treasuries? Two reasons: European debt crisis and world-wide economic slowdown. Traders are worried that good US data will not be enough to offset those huge underlying negative themes. So they grab the safety and send the yields down day after day.

Following is the TNX chart. I would like to see it bottom before I can say that risk can rally in sustainable way.

click on chart to expand

Gold long-term support

2011-12-15T12:00:00.000-05:00

click on chart to enlarge

Can SOX give us a signal, again?

2011-12-14T23:51:00.000-05:00

On Dec. 9th I suggested that we have to watch SOX for clues in this market. It gave us a perfect heads up on what was coming - vicious 3-day sell-off. Now that we have sold off to support levels, I would like to bring your attention to this important development. After the close tonight there was a deal in the semiconductor space. LRCX is buying NVLS in $3.3B transaction, which is 28% premium over NVLS closing price. The deal (all-stock, but nonetheless) is going to ignite some interest in the chip equipment space tomorrow. I expect this to get the SOX turnaround going and spill over to NDX, and eventually the entire market.
A $3.3B all-stock deal in chip equipment space will turn the whole market around? Folks, crazier things have happened...

Let's look at the chart.

click on chart to enlarge

S&P 500 Futures entered my buy zone

2011-12-14T19:35:00.002-05:00

click on chart to enlarge

Charting VIX

2011-12-14T02:14:00.000-05:00

click on chart to enlarge

Let's Update The Charts

2011-12-13T23:01:00.011-05:00

click on charts to enlarge

Update on Dec 14 @ 1:45 pm

Out of gold at -80. That was a bad trade. Have to follow my plan. Close below 1600 triggers a sell.

Update on Dec 14 @ 1:50 pm

Closed all AMZN puts today. Came 5 points short of 1 remaining gap, but it is way oversold here. Nice trade. Need to look for cheap calls now.

Update on Dec 14 @ 2:00 pm

Copper (and all other commodities) is selling off hard. FCX lowered sales due to strike, and JOY warned on lower commodities demand. It is right at apex here, just closed the 3.28 gap. I still think copper is going to bounce higher.

S&P 500 futures buy zone?

2011-12-12T23:51:00.001-05:00

Instead of going too much into the details of today's sell-off (Intel, China, India, etc), and also running around in full-fledged panic over a possible S&P's downgrade of AAA sovereigns in EU, I would like to be prepared for what will happen just after the actual event. I expect the downgrades (if they are coming) to happen within 24-48 hours.

Near perfect inverted head and shoulders has now formed on S&P 500 futures. Following is the chart of ES. It looks that by the end of trading on Friday of this quadruple witching week, S&P 500 futures will either break down below 1200, or (my prediction) will be trading above 1266. Price is forming a more pronounced right shoulder. It is also in a well-defined bull flag. As long as 1200 holds and price breaks above the bull flag, we will see higher levels ahead.

click on chart to expand

A few quick trading notes

2011-12-12T00:05:00.051-05:00

It is Sunday night, Asian session. Illiquid nature of year end is making some trading vehicles speed towards the abyss, only to stop short of a total collapse. I expect this type of trading to be detrimental to many traders who will wrap their heads around just one direction on the road to Dec 31. This will definitely be (in my opinion) a two-way market for the next few weeks. I think that traders will be looking for confluence zones to enter and exit their positions.

1. Take a look at what is going on with gold tonight, for example. It has done everything I expected it to do. Since it topped at 1767 on 12/2, it has declined to retest lower trendlines. Tonight 50 dsma stop hunt was brutal. A quick whoosh of 23 points in a matter of 3 minutes has returned the precious below 1700. There is a laminate of 150 dsma, prior low, daily BB, and 11-month trendline @ 1670. Do you think there will be a few buyers at that level? I will be one of them.

click on chart to expand

2. I think that SPX is another trading vehicle many players are looking to buy on a pullback. They may get the opportunity this coming week, again. Inverted head and shoulders, which has formed on daily, would preclude that from happening under normal circumstances. But quadruple expiration week may just do the trick to deceive the most. There is a laminate of 50 dsma and well-defined horizontal support to buy against. I am a bidder at 1220.

click on chart to expand

Rally, and then what?

2011-12-10T17:24:00.010-05:00

With the year end quickly approaching, I have been trying to put together an outlook for first half of 2012. I would like to express a few concerns about my outlook, which is still a work in progress.

We have started a possible relief rally into the end of the year. Relief from constant worries about European financial system collapsing and taking the whole world down with it. While underperforming fund managers grab every pullback on the way to Dec 31, a much bigger question arises - what happens after this year-end rally is over? Here are some of my worries.

1. The "new fiscal agreement" in EU is a plan but not a certainty. There are already a handful of problems I see. Ratification of changes will need to undergo parliamentary scrutiny in many countries, with nothing less than a referendum in some. That will take a long time, much longer than this market wants to wait. Also the enforcement of new fiscal covenants will be very questionable due to outside-of-treaty nature of this new non-EU27 agreement. Great Britain may have done a great deal of damage to Merkozy by abstaining. I would not be surprised if more countries decide that yesterday's pact is a bit more than they signed for in the original EU27 treaty, and keep their sovereign independence intact.
So these possible obstacles may finally catch up with EU sovereign bond investors and send them running for the exits again. Let's also not escape the fact that while Italian 10-yr bond yield pulled back from highs, it still closed @ 6.5% on Fri, well above the sustainable borrowing rate level for Italy's declining economy in 2012.

click on chart to enlarge

2. Eurozone is in recession, yes it is already, just watch for EU PMI reports next week, they will be ugly. With 20% of S&P 500 earnings coming from there it will be practically impossible for us to decouple from their mess. Do not listen to TV pundits telling you we have already decoupled, they said the same thing after Japanese tsunami and Fukushima nuclear plant accident.

3. Our things here in US are not looking too rosy either. I am starting to worry about a few items, some of which have shown up in the last few days:

a) SOX is going to be under pressure. I posted my detailed thoughts about this yesterday - ailing SOX = ailing NDX = ailing market. I am expecting more semiconductor companies to cut their guidance, and/or preannounce and warn in January. That will be a detrimental affect on Nasdaq.

b) RLX is not acting like it is supposed to around strong holiday shopping season. It is in a wedge with a series of lower highs since October. It needs to break out or a test of lower trendline inside the triangle would come soon. What exactly is going on? I may have more questions than answers here. There are signs of much lower sales post Thanksgiving. While this is usually the fact, and shopping picks back up a few weeks before Christmas, I am worried about some internals. Various shopping traffic counters are reporting lower shopper counts compared to last year. Also the promotional sales are quite heavy and will weigh on the bottom line, as margins compress. That will be the worst possible outcome and will send the affected retailers' shares plummeting in January of 2012. A quick peek inside the index reveals a troublesome picture. While shopping numbers at brick-and-mortar retailers were setting records on Black Friday, the only shares making new highs lately are of the heavy discounters, off-price, and dollar stores: TJX, ROST, FDO, DG, and DLTR - all at the expense of DDS, JWN, TIF, KSS, LTD, GPS, JCP, SHLD, WMT, and TGT. Also internet has taken a huge toll on BBY, RSH, ODP, and SPLS. Folks, that kind of internal performance among the retail index components will not set the world on fire. Even during these times when consumers are shopping for mostly necessities, food and drug stores are not able to keep the margins from declining due to underlying rising costs.

click on chart to enlarge

And speaking of internet, AMZN is not acting well either. Why is the stock slumping when internet shopping was the strongest ever on Cyber Monday? Declining margins? It is in 5-wave downtrend, I think. Let the chart do its magic.

c) We have fiscal issues of our own. We have not resolved our debt problems. We also have a lame duck congress which has been very ineffective. Our lawmakers are playing a stalemate game with tax cut extensions, which are very vital for our fledgling economic recovery.
As I noted in my post before, 4th year of Presidential cycle is historically very positive for stock market. But our president has been unfriendly to markets, due to his policies lacking any pro-growth measures. He is the incumbent, and way too many way too early have already written him off.
These political uncertainties will weigh heavily on investors' minds in 1st half of election year.

Year 2012 will be an interesting balancing act for stock market, which does have some positives going for it as well, like lack of recession, accelerating GDP growth, very reasonable valuations, strong corporate balance sheets, and extremely high accumulated investors' cash on the sidelines.

Update on Dec 12 @ 9:10 am
Intel warns!! Are you going to watch SOX index now??

Update on Dec 13 @ 4:00 pm
November retail sales disappointed today. Retail index is down 3%.

Update on Dec 14 @ 7:40 pm
Retail index is quickly approaching lower trendline of triangle. I expect that support to hold.

Update on Dec 23 @ 6:25 pm
Italian 10 Yr Bond Yield closed at 6.98% today. This can not be good, and is clearly a vote of no confidence by the debt market in all current measures to solve the crisis in EU.

Watch this index!!!

2011-12-09T11:11:00.000-05:00

This morning I would like to discuss something extremely important. No, it is not Europe, well, at least not directly. It is SOX - Philly Semiconductor Index. Those of you who follow me, know that I have been using SOX to predict market's direction all of this year. This is the backbone of Nasdaq, guts of all tech products, and it is lagging today. Last night and this morning TXN, ALTR, and LSCC - all cut their guidance due to weak orders from customers across the board. Folks, we are in 4th quarter!! To add insult to injury, DD, the unlikely source of tech news, warned on its quarter and said that it was due to weakness in electronics.
Why is this so important? Like I said above, SOX is the leader, it has led NDX all of this year, and has been impeccable at that.
Following is the chart. Price ran into resistance @ 150 dma, broke below 50 dma, and is currently supported by 100 dma. There are 2 gaps below. Watch SOX, it may be telling us something here.

SOX may fill 2 gaps below

DAX is the main chart

2011-12-08T17:48:00.000-05:00

In this market, where everything is so closely correlated, traders need to find what market leads, and just follow it.

Below is the chart of today's trading session. On it I display SPX and DAX futures side by side, starting from the time DAX cash market opened. You can clearly see how closely they trade.

Our stock market problems are mostly Europe related at this moment. ES wanted to rally and got ahead of DAX a few times during the session, but DAX was like the anchor, keeping ES in check. So until DAX bottoms and reverses, this US equities sell-off will not be completed.

ES vs DAX

New Section

2011-12-07T20:24:00.001-05:00

Today I started a new section on my site - Charts. In it I will share some of my charts. I will try to put an explanation next to or on the charts I post.
Chart is the best depiction of collective action by market participants over a particular period of time. Very often a chart is all a trader needs to make an educated decision on a security he/she trades. If you are a starting trader - do yourself a great favor - do not place a single trade until you have perfected your charting skills.

Quick market thoughts

2011-12-06T23:59:00.004-05:00

Futures and forex are 24 hr markets. But really, the main events will take place in Europe in the next 48-72 hrs. I expect some kind of movement during upcoming European session, judging by the way all charts are setting up. I will be taking cues from DAX. Quick observation across the asset classes shows one underlying theme - breakouts everywhere are about to occur:

1. US equity index futures are about to breakout higher. Buy stops need to be in place, these things just take out stops and go higher overnight with European markets. There is a 3rd test of overhead resistance setting up just 5 ES points higher from here.
2. EUR/USD is trying to break out of the falling wedge. A quick move above 20 dsma may be all this thing needs to take on a life of its own, and wipe out 700 pips of stops overhead. Buy stops have to be placed here as well. This is definitely not a sure trade, but could be a bear frying event that lasts weeks. One tricky part is ECB on Thu.
3. Treasuries are in a bear flag on short-term charts, and looking to break down, IF equities move higher, and most importantly, European resolution finalizes. What a huge move down this could be. Gauge this possible short by TNX break out of the wedge, and gap fills @ 22.50 and 24.
4. Gold is looking like it is trying to build on a daily hammer. I am a bit skeptical until break out of the symmetrical triangle. This said, I covered my short and will observe the action. Plenty of room to the upside if breakout occurs.
5. CAD is looking to break out of its triangle as well. This commodity currency has to get back into pretty close correlation with oil, which has been moving higher. BOC upgraded their view of Canadian economy today. This is going to help my view that CAD has to catch up with oil.

Good luck!

Update on Dec 7 @ 8:20 am
DAX did not break out. All risk assets will have to wait for that fact to take place. I will provide the chart with levels to watch shortly.

Update on Dec 7 @ 4:10 pm
Series of frantic news had failed to ignite sustained breakouts. Keep your powder dry until DAX tells us where to go (imho). Treasuries and VIX have spiked in a bid to provide some security for longs. This may mean that traders are still long but are buying protection.

DAX futures is a guide for b/o.

AMZN is in 5th wave down

2011-12-06T17:28:00.001-05:00

Techs were weak all day today, not participating in rally. The most notable laggard has been AMZN. This is a very surprising development, because the holiday season is usually Amazon's strongest time of the year. I am not going to argue with the market though.
Ever since it hit 2011 high on Oct 17, AMZN has been in a downtrend. I believe that 5th wave down has started, and will possibly take the price down to fill 3 open gaps.

Following is the chart. You can see a broadening rising formation, which was a bearish signal. There are multiple trendlines which were broken, leaving the price vulnerable to drop down to supports beneath. AMZN ran into 200 dsma (red) and gap fill, and has sold off hard. I highlighted possible targets below (in yellow). Price is traveling down in a falling wedge pattern, which I think will eventually become a bullish reversal signal, on the break of the downtrend. In order for this 5th wave to be negated, price has to get above 200 dsma.

AMZN 5-Wave Sell-off
(click on chart to enlarge)

Gauging SPY rally with IBM

2011-12-05T16:45:00.002-05:00

In Saturday's post I said that I will buy the weakness in SPY (hopefully we are about to get that due to S&P EU credit downgrades worries this afternoon) to ride the rally into the year end. I also would like to gauge where this SPY rally may culminate. For this task I decided to use the bluest of the blue chips - IBM. This stock has correctly predicted all the bottoms and tops in SPY since November of 2008.

Below is the chart that shows the correlation between IBM and SPY. You can clearly see how IBM holds the ground on SPY sell-offs and leads SPY on the rallies. When IBM tops, SPY follows on the sell-off.
Also I show (on another chart) how IBM likes to extend its fib to 78.6% and sell off at that level.

This is what I am expecting to happen at this time as well. IBM is making new highs and is getting ready to take SPY along with it. After hitting a double top on Buffett's purchase announcement, the stock has been weak and filled open gap @ 177, predicting a severe weakness in SPY. Gap fill has served as a buy signal, and strong rally of last week took it to historic highs today. SPY is lagging a bit, but should break through the downtrend soon (just like previous times, shown on correlation chart).
IBM likes to rally into the earnings. So sometime in the middle of January IBM should hit $207, which is 78.6% fib ext. I intend to use that catalyst as a final target for SPY rally.

(click on charts to enlarge)

IBM vs SPY

IBM fib ext

CAD vs OIL - correlation broke down

2011-12-04T23:59:00.005-05:00

There is almost 100% correlation between all risk assets in this market. But one of them has broken down. Canadian dollar and Oil have not been moving in lockstep, like they did since March of 2009. Near perfect correlation broke down at the end of October.

I am probably not smart enough to figure out exactly what is going on. But my main reason would be the fact that Canadian economy has been cooling a bit. Economic reports have been coming in weaker than expected. Carney, Flaherty, and even Harper have all been talking down CAD, by making remarks about how European debt crisis is weighing on Canadian economy.

It is not clear if this broken correlation continues much longer. Below are the charts which show in detail what is going on. Oil has broken above September highs and has taken out $100. CAD has been unable to trade above Sep highs and stays in the downtrend, with parity becoming a resistance. There is a symmetrical triangle on CAD which will break out soon (like in 2010). Keep your eyes on this development, as CAD has also been closely correlated with SPX.

(click on charts to enlarge)

CAD vs OIL

OIL

CAD

Update on Dec 7 @ 2:25 am

It is clear that CAD wants to catch up with oil.

BOC upgraded economic view on Tue.

Watch parity as the first target.

EUR/USD - Two Big Moves Coming?

2011-12-03T19:19:00.001-05:00

I would like to bring your attention to a pattern, which I think may play out in EUR/USD in the coming days.

Following is the daily chart. The most important thing is to identify that price is in a severe downtrend. It is impossible to trade from the long side but for a very short period of time and with a reduced (if not minuscule) size. So until this pair makes it above 20 dma (dark blue) and stays there for two consecutive closes, it will probably continue downward to its 2011 lows, and perhaps slightly below.
You can identify the "twin" pattern on chart (highlighted by red dashed lines), and see how the current picture may unfold. This is obviously not a cast in stone, but a very similar price action up to this point.

Those of you who follow me know that I like falling wedge pattern to predict a sharp bullish reversal. It is clear from the previous twin pattern that once this possible (last) move down finalizes, we then may get a reversal and a sharp breakout to the upside. If that happens, massive short covering may take the price back to the upper trendlines.

One thing is certain, the price looks like it will not stay put at this level for too long. Use the double wedge trendlines and 20 dma to guide you in this trade. It is inconceivable that we are going to get such a huge whipsaw move at the end of the year, when FX desks wind down their activities. But perhaps it is the illiquid year-end market nature and uncertain European debt news-driven environment that will actually fuel such a move.

Let's see what happens...

EUR/USD
(click on chart to enlarge)

Generals Held Supports

2011-12-03T15:05:00.031-05:00

In my Nov 17 post I showed how the "generals" of stock market were finally coming under pressure, foretelling a sell-off. I also pointed out that they would have to hold their supports for year-end rally to begin. That is exactly what happened. The confluence of open gaps and moving averages has served as a magnet, but also became a launch pad for bulls. Following are the updated charts of those pivotal market leaders. Nov 17 is highlighted in blue.

It is very important to identify that at this juncture these stocks are ready to breakout to higher levels. This said, I think that a minor pullback will occur in the first part of next week. I will use this opportunity to reestablish long positions in the market. My ultimate goal is to buy SPX @ 50 dsma. But market may not want to let many in, as underperforming fund managers will chase into the end of the year. So I will scale into my positions on weakness, using short-term charts' support levels.

(click on charts to enlarge)

IBM

GOOG

AAPL

Out, out, out...

2011-12-02T09:30:00.001-05:00

We are up 100 SPX points since last Friday. I would like to use today's strong open to get out of all remaining equity positions. It has been a good and very satisfying rally.
Trading gods are to be thanked. A very humble trader says: "take what market gives you".
Looking to reload SPX at 50 dsma.

TNX is ready to break out

2011-12-01T21:09:00.002-05:00

With tomorrow being NFP day, I decided to discuss a 10-yr T-Note short trade.
I have been literally stalking TNX to the apex of its wedge. I think it is getting ready to break out to the upside, just like in 2010. My targets are 22.50 and 24.00

TNX is ready to break out
(click on chart to enlarge)

Update on Dec 2 @ 4:20 pm

Definitely no breakout. Price got to the upper trendline and reversed hard. Equities sold off and contributed to treasuries' strength. We will have to see what happens next week. Price is now resting on 50 dsma. If no hold here, next support comes in @ 19.96, which is an open gap from Nov 29. Patience will be the virtue here, wait for it to break out.

Gold Fakeout Coming?

2011-11-30T19:53:00.092-05:00

Gold is advancing higher on central bank liquidity-induced rally.
But what central banks did was not QE at all. It was a way to improve existing liquidity flow within the system, but did not add extra liquidity into it. Bottom line - no new dollars were infused into the system. Hence gold rally is highly suspect here. I would like to share my view on possible fakeout that may occur at upper trendline of the wedge, which gold is in.

Following is the daily chart. You can quickly identify (highlighted) twin pattern within this strong bull. I am not calling for the top on gold, even though one was clearly put in this year. What I would like to do is catch a short-term reversal at upper trendline of the wedge, and travel the distance of the entire triangle down to lower trendline (just like at the end of June), which is also @ 150 dsma, a long-term support and a magnet for 3 yrs.
If I am wrong, I want to quickly stop myself out just above 1800. Gold is a wild beast...

Here is my play:

Short   - 1765 & 1775 & 1785 (blended 1775)
Target - 1675 & 1685 & 1695 (blended 1685)
Stop   -  1801

Result:

Rwrd -  90 (blended)
Risk   - 26 (blended)
R/R    - 3.4

Gold may fake breakout
(click on chart to enlarge)

Update on Dec 2 @ 4:25 pm

Partial (1/3) fill @ 1765.

Update on Dec 5 @ 9:25 am
Since I was only able to get 1/3 filled, I will use 33.2 oz mini to lock in profit on 1/3 of this position @ +$25. Moving stop on 2/3 to b/e.

Update on Dec 5 @ 2:25 pm
Further reducing position by another 1/3 @ +$40. Stop on remaining 1/3 goes to 1753.

Update on Dec 5 @ 11:55 pm
Moving stop down to 1737.

Update on Dec 6 @ 1:15 am
I would like to lock in the profit on the last 1/3 here. Out @ +$47.

Trade results: +25 +40 +47 on 1/3 original position size. Not a bad trade, unfortunately 1/3 size.

Trail Your Stops

2011-11-30T10:14:00.002-05:00

If you are long SPX, this is the time to take additional profits and trail your stops to just below 50 dsma. You can also get out altogether and buy the pullback. It all depends on your style.

This morning is all about liquidity. Central banks realized that there will be no tomorrow if dollars are tight. Use this opportunity to cut your losers, and trail the stops on your winners. Today is not the end of the crisis, today is a good day to celebrate the existence of Fed (if you are long).

Short covering en masse...

Update on Nov 30 @ 11:20 am
I should add that today we got yet another proof of the fact that US is not in recession and is not going into one any time soon. ADP, Chicago PMI, Pending Home Sales, and Retail Sales over the Thanksgiving weekend, all confirmed what I have said in the past month or so - no US recession yet. Rally should continue, expect a pullback, but use it to get longer, I say...

Why Is Everyone So Bearish?

2011-11-29T23:26:00.017-05:00

Following is the chart which answers the question.
Many traders believe that the market is about to take an enormous dive.
I have an opposing view.
Only time will tell...

SPX Weekly
(click on chart to enlarge)

Dr. Copper Update

2011-11-29T16:43:00.033-05:00

As I mentioned last week, Dr. Copper bounced off very important support @ 3.21

Price ran into 50 dsma and is closing right on it. Just as everyone has their eyes on the economically important barometer, and a leader of entire (risk-on) commodity sector, I wanted to show how it struggled many times at 50 dsma ever since it peaked in February of this year.

Note how except for July, the price would bounce off, or close above 50 dsma (highlighted in yellow) for a few sessions and reverse. Also there is a twin pattern within the entire sell-off, which is now culminating at the apex (highlighted in blue).

If we are to witness a sell-off on European / geopolitical worries, it will send Dr. Copper testing 3.21 support again, with open gap @ 3.28 on the way there.

Dr. Copper
(click on chart to enlarge)

Update on Nov 30 @ 11:55 am

Well, Dr. Copper is leaping into the sky. First China cut RRR, and then Big 6 central banks infused extra liquidity in money market via swap rate cut. Price is now well above the 50 dsma and upper trendline of symmetrical triangle. Bulls will be buying the apex backtest. HG/SPX is near 100% correlation here.

What To Prepare For?

2011-11-29T12:25:00.001-05:00

While I spelled out my bullish case in Nov 28 weekly outlook, I want to prepare for a possible European debacle-induced last sell-off of 2011. It is not going to be telegraphed, it will come from nowhere, and could happen in the next few days or so. The main reason - lack of credible European debt crisis solution. I am also a little worried about geopolitical issues creeping into the market, which is shown in oil chart.
This possible sell-off will not totally negate the whole rally from Oct 4 low. But I think that it will go below last week's lows and stop a lot of longs out (me included). To prepare for this, I am scaling out of more of my longs right here @ SPX 1200, and moving my stops to my entry levels, and will await 50 dsma test or will be stopped out on my last remaining portion. As I said yesterday, there is absolutely nothing wrong with taking profits. If I am wrong on this possible sell-off, I will participate in rally above 50 dsma on SPX with my remaining portion of longs.

In my Nov 28 weekly outlook I included twin charts of SOX and XLF, which are 2011/ 2010 carbon copies, and showed a support zone below last week's lows on both. In this post I would like to show one more - DJT (Dow Jones Transportation Average). This is my favorite cyclical indicator. It has led this entire year. I will use it to gauge where the possible sell-off may end. Resemblance with 2010 is stunning! I will reenter my longs (if stopped out) at those support levels and ride them into the end of 2011.

DJT has many supports below
Inverted Head & Shoulders Bottom forming?

EUR/USD Trade Idea

2011-11-29T01:24:00.004-05:00

It has been a while since I looked at EUR/USD. The reason is there were better and easier setups somewhere else. This said, I may be warming up to a very quick long if my desired trade conditions are met.

This trade is against the grain, so exert caution and small size.

I would like to enter on a reaction to a possible weak Italian and Belgian bond/bill auctions overnight, especially if we get a "stop scoop" to gap fill or below last week's low. There is an open gap @ 1.3240 and last week's low is 1.3213

Here is my play:

Entry   - 1.3240 & 1.3213 (blended 1.3227)
Target - 1.3500 & 1.3530 (blended 1.3515)
Stop    - 1.3140

Result:

Rwrd - blended 0.0288
Risk   - blended 0.0087
R/R    - 3.3

Good luck!!

Update on Nov 29 @ 9:20 am est
Both auctions had a good demand. There was a reason - the rates were very high. Italian 3s and 10s are inverted - very bad. Since there was no trigger in London session, I am going to cancel the trade. Price came 57 pips within my 1st target. I do not like that it spiked above YH, and for my entry it would now have to be below YL, therefore daily candle would be somewhat bearish inverted hammer. I say somewhat, because inverted hammer at the bottom of the range is not as bad as at the top (shooting star), and shows that shorts are starting to cover. So I will continue to monitor the developments and will update you if something changes.

Take Profits

2011-11-28T11:50:00.000-05:00

There is absolutely nothing wrong with taking profits. When you are correct on the direction of your trade, you are wise to scale out and trail your stops. This strategy reduces your overall risk and makes you stay alert while your trade progresses. I have seen way too many times how traders get complacent and turn a winner into a loser.

While I am not teaching you how to trade, and respect everyone's style, my notion of taking profits comes from a deep respect of market's ability to fool most traders most of the time.

Let's look at possible scenarios of where "fooling around" will take place.
SPX has traveled the distance of entire air pocket, which lies between 1156 (gap fill) and 1195 resistance. Oil has ran into the $100 resistance. AUD/USD has unsuccessfully tried to take out the parity level. And EUR/USD has fiddled with 1.34 and failed.

Perhaps this is just a pause and late-day rally takes those levels out. You will still have the remaining portion of your original position to capitalize. Perhaps I do not know a thing about trading. Perhaps I am a trading genius, and just want to show off. It all does not matter. What matters is the fact that @ 11:50 am on Monday, after the worst Thanksgiving week since 1932, we are up 3% in a schizophrenic market environment, where an article from little-known Italian newspaper can be a culprit for world-wide short covering. You wanna guess when the next rumor article comes out?

Take partial profits and trail your stops!!

Trading thoughts for week of Nov 28

2011-11-25T17:38:00.306-05:00

Next week will be the most important one before the end of the year.
Market closed just above crucial levels on many indexes and individual stocks that I follow.
S&P 500 will have to hold these support levels and rally strong to get above 50 dsma soon, in order to avoid a retest of 2011 lows.
And that is exactly what I am expecting the market to do. I expect a hold of 1120 - 1156 support zone on SPX, which will later progress into a year-end rally, with SPX target of 1320 - 1350.

Following are detailed charts, which I think will support my view. It is a make or break time for bulls! Yes, I am a short-term bull. (Stop chuckling). As I said before, long-term bears are allowed to be short-term bulls. To be honest, I turned neutral on SPX in the intermediate term. It is just too hard to be a bear at these levels, due to strong US corporate fundamentals, exuberant US consumers, and lack of US recession. I was a bear @ 1340, I am not a bear @ 1158. In a worst-case scenario, SPX will trade in a range all year in 2012, albeit somewhat higher from here (imho). But lets get through the end of 2011 first.

Without further ado, let's look at charts.

(click on images to enlarge)

GOOG is just above major confluence of supports

AAPL is @ 200 dsma

SPX is just above major Support Zone 1120 - 1156

SPX Weekly Support Zone

XLF 2011 Twin Pattern (of 2010) may try to form a Double Bottom
or Inverted Head and Shoulders

RLX is coming down to support
Thanksgiving Sales will tell us if it holds
This chart indirectly represents 70% of US GDP

SOX 2011 Twin Pattern (of 2010) is at broken trendline backtest
Break will send it testing the lows
I am expecting a bounce
Probably the most predictive chart of 2011

S&P 500 Futures

2011-11-24T12:20:00.002-05:00

click on image to enlarge

S&P futures have finally closed 1156 gap in today's abbreviated session. Also price has come back to a confluence of 61.8% fib with broken trendline backtest.

This is an interesting prelude to tomorrow's cash session.

Dr. Copper

2011-11-23T22:26:00.001-05:00

click on image to enlarge

Metal with Ph.D. in economics has just bounced off 3.21 support, which I mentioned in my last night's post.

Watch this development very closely - HG/SPX correlation is very high.

Deer in the headlights

2011-11-23T01:47:00.001-05:00

This market just can not get out of its own way. There will be no peace until all of the issues hunting it (pun intended) are put to rest.

Vulnerability to anything coming from Europe has reached a level of monumental proportions. Tonight's latest news is that Dexia bailout may get undone. Well, Dexia bailout put 1075 SPX bottom in. If you are long, better have your stops in and be ready to buy SPX way below current levels, if this story is true. Rudolph The Reindeer may need to survive the car encounter first, before we see any Santa Claus rally.

On top of this cheery news, China PMI has come in below 50 tonight. Welcome to slowdown world! Watch copper @ 3.21 for possible support, or it will breakdown to 2011 lows. This is going to let us know if SPX holds 1156 gap fill area or not.

And what about Fitch US rating downgrade? They are the only ones who have not said a word after 12 apostles had their last burnt turkey supper. (I mean Super Committee failed) Will we get an unpleasant holiday surprise by Fitch?

Lastly, has FED gone absolutely mad? I almost fell off my chair when I was reading the scenarios of the latest stress test (announced after the close today). How about making our banks prepared for possible event of Moon colliding with Earth? If XLF does not hold 11.83 on daily closing basis, we will see new 2011 lows on it next week.

Well, this pretty much sums up all of the issues. Illiquid holiday trading will exaggerate anything even remotely resembling what I just discussed.

Happy Thanksgiving! (to my US readers)

Update Nov 23 @ 5:10 pm est

Add a failed German Bond (Bund) auction, 5.9 magnitude quake near Fukushima Dai-ichi nuclear power plant, and State Dept telling US citizens to get out of Syria, to all of the above.

NASDAQ 100 HFT Buy Zone Triggered Today

2011-11-21T16:20:00.008-05:00

NDX is in 2184 - 2228 HFT Buy Zone, described in my Saturday post.

NDX
HFT Buy Zone
2184 - 2228
(click on images to enlarge)

To succeed in trading you have to think like HFT

2011-11-19T16:42:00.011-05:00

Every experienced trader knows by now that HFT (high frequency traders) have taken over the markets. It is widely documented that super computer-generated trading contributes to roughly 70-75% of daily stock market volume. So how are small individual traders like us supposed to keep up with these powerful machines? Let me try to answer this very important question asked by so many traders today.

"A man can fail many times, but he isn't a failure until he begins to blame somebody else."
- John Burroughs

Traders complain that these evil computers are impossible to beat, and pretty soon will displace humans out of the trading biz altogether. Investors complain that HFTs are killing the market, and very soon there will not be any investors left on the planet, and how it will all be super computers duking it out between intra-day support and resistance levels, with no human interaction and real fundamental investing involved. Influential market players are also complaining that what used to be investing has already been replaced by trading for pennies, with no long-term holding period in mind, which jeopardizes the primary purpose of stock markets - business capital generation.
While I agree with everything said above, I refuse to join the crowd in this blame game. I refuse to lay my arms down and stop fighting for my place to participate in financial markets. So I have done my part to adjust to the shenanigans of HFT. My trading is now solely swing and position. I realized that I can not be going after 4-5 SPX points during the day, when I am merely a fly on elephant's back. I extended my holding periods, widened my stops and profit targets, and methodically scale into and out of all of my trades. But I want to go further and try to use HFT for my gain. I want to use HFT for entries on my swing positions at correct levels. Following is my thinking in detail.

"If you can't beat them, join them."

What is HFT? These are quant super computers. They process enormous amounts of data very quickly, which is impossible for humans to do. But these computers are programmed by humans. These are people like you and I, who input the data into the machine, which then acts on occurrence of that data and generates a trade signal. So if we know what data is inside the machine, we can join it on the trade. The problem is these highly guarded algos are impossible to get, unless you want to end up in jail. Therefore we are left guessing what is inside the HFT machine. So here is my educated guess.

My idea is that algos are nothing more than a confluence of different indicators, support and resistance levels, volume, correlation between various asset classes, and as silly as time of the day generated signals. You do not have to have Ph.D. in mathematics to program your trading to do the same. This is something a well-educated trader can do on his own. The only advantage these machines have (or more correctly, their owners) is that they have 30 milliseconds to see our orders before they get executed. I do not know how to fight against that. I will leave that part to SEC and CFTC to deal with.

And now that I have a rough draft of what these HFT firms do, I will lay out the case where this market is going to go in the near future. My idea has always been - follow the leader. The leader of the market has been NDX. While many have said (myself included) that it is lagging in the last few weeks or so, I now think it is actually leading the market to a pullback. It is not letting SPX and Dow go where they want to go - up. Once NDX does what it has to do (described in detail in the next paragraph), it will then lead the market on the turnaround and year-end rally. This NDX weakness can be attributed to many reasons. AAPL and AMZN have been underperforming. Overall tech is weak due to some year-end related selling and cash raising by fund managers. If you can't sell losers you sell what you can - winners in this case are tech and gold. Also this past week we got some pretty crappy tech earnings-related performance from NTAP, DELL, CRM, and AMAT. But the most important reason for all of this weakness is - HFT can not do anything when the index is stuck in no man's land, where I think NDX is currently. With HFT being over 70% of trading volume and not generating any buying interest for a breakout to higher levels, NDX is drifting lower. This notion is being confirmed by anemic volume in the last few weeks. HFT are waiting for a signal to buy.

So now lets look at what HFT will do with NDX and therefore the whole market. While entire investing community is glued to SPX levels, I strongly think that we will get the buy signal from NDX. Following is my assessment of where HFT will possibly buy NDX and send it significantly higher. I am expecting that strong rally will last between Thanksgiving and Christmas and will take NDX to new 2011 high. SPX and Dow will come for the ride. In my previous post I described why am watching "4 Generals of Tech" (AAPL, AMZN, GOOG, and IBM), which have heaviest weighting on NDX (and one of them on Dow), for possible culmination of this market pullback. They all have gaps to fill, which are also laminated with major moving averages, where in my opinion HFT will be buying those stocks.
Now back to NDX itself. There is a Buy Zone between 2184 and 2228 where in my opinion HFT will come in strong. Remember I said confluence? Here is the breakdown:

1. 2184 is 61.8% fib of rally from Oct 4 low to Oct 27 high
2. 2188 is a double bottom from March and June
3. 2203 is an open gap from Oct 7, which has not been filled
4. 2218 is flat on the year
5. 2228 is 50% fib of rally from Oct 4 low to Oct 27 high
6. Formerly broken trendline (from 2011 high) backtest is also located in this buy zone
7. Buy zone is further supported on weekly chart by lower trendline of Bull Flag

So with all of the above parameters, here are the resulting charts:

NDX
HFT buy zone
(click on images to enlarge)

Charts, charts, charts...

2011-11-17T15:06:00.012-05:00

Today I would like to share a few charts that I am watching. They are a visual representation of current market conditions. I strongly believe that while charts show us where we came from, they also tell us where we will go in the near future. I suspect that my long-awaited pullback in SPX to 50 dsma is finally coming to fruition. I am going to build a case here through other trading vehicles that are closely correlated with SPX, which will show confirmation of this risk-off move, but also keep the overall bullish year-end direction in equities intact, with major support levels underneath.

First lets look at what many traders call "Dr. Copper". It is a metal with Ph.D. in economics. Copper represents world's economic growth, because of its wide applications in construction and manufacturing. This is my go-to commodity chart, with current highest emphasis on fast-growing emerging countries. Last week I pointed out that when 3.46 broke, the next support below would come in around lower trendline (currently @ 3.18).

Copper Futures
(click on image to enlarge)

Australian Dollar just came 10 pips short of my 0.9970 target, which I also pointed out in the same post last week. Aussie can not rally without copper. It is too dependent on commodity exports to China and other growing economies. AUD/USD will now try to stay above 0.9930, and will do its best to scoop the stops in preparation for possible inverted head and shoulders bottom. This currency is the ultimate risk-on among majors. We will see money flow back into it as the equities try to bottom.

AUD/USD
(click on image to enlarge)

Probably my best conviction on how this pullback culminates, is in the following 4 charts. These are the "generals" of US stock market. These companies are cash rich, big part of fastest growing market segment, blue chips of technology sector, heaviest-weighted on NDX and Dow. Fund managers have their resting orders to buy these stocks at confluence of gap fills and major daily moving averages. This, in my opinion, is how the year-end rally will have to begin.

AAPL
(click on image to enlarge)

GOOG
(click on image to enlarge)

AMZN
(click on image to enlarge)

IBM
(click on image to enlarge)

Trading Thoughts on Nov 15

2011-11-15T12:13:00.003-05:00

1. EUR/USD is weak again. Multitude of the same reasons: problematic peripheral debt (spreading to core now), and slow growth to compound that. It looks like Q4 EZ GDP growth is going to be negative. Traders are positioning themselves ahead of possible and final whoosh of the 2011. Or maybe it will be a slow sliding like the last two days. Who knows? Just take profits, trail your stops, and reload at higher levels if stopped out. Should be 2/3 out by now, with stop at just above 50dsma, and trailing.

2. "Buffett bounce" IBM short is working. Time to take 1/3 off and trail the stop down to your entry. Easy, and very low risk trade it was - double top with open gaps below. Thank you, Oracle of Omaha.

3. October US Retail sales did not disappoint. How could they? I do my usual weekend driving around my local malls and shopping centers. Past weekend I saw a lot of traffic everywhere. Granted, the seasonal strength is expected. But still, BIG, TJX, ROST, BBBY, KSS, DDS, DSW, PLCE, DG, DLTR, WMT, TGT, and GME were the ones I visited, which were all at full capacity. Amazing? Not really, I say. I attribute this strength to a few unorthodox reasons:

a) More women are employed than men at this time. Hence they are out there shopping more and men are at home watching their big screen TVs. No wonder I saw less traffic at BBY, HGG, and RSH. There was also a big screen "mom-and-pop" TV dealer, which was entirely empty - not a customer. Bummer!
b) Speaking of homes, less folks are paying their mortgages lately. Banks are not foreclosing on all of them, just can't keep up. So disposable cash ends up in the retail store. Simple and very wrong, but it's true. (I am going to get some angry comments now :))

Even with all of this bullish data, RLX is trying its hardest not to double top. There is an open gap 5.5% below @ 512. My view is if price does not take out Oct 24 high, we may see that gap filled soon. In order for that to happen, price would have to slice through 50 and 200 dsma on the way there. Final fakeout of 2011??
Should this happen, SPX will follow RLX down, without a doubt in my mind.

Update Nov 15 @ 11:20 pm
EUR/USD - too far too fast? It is @ 1.3460 as I type. At this session's low, we have fallen 374 pips from Monday's high. I am very satisfied with this trade. I am now trailing my stop down to just above the hourly 8 ema. Do not want to give any of this significant profit back at all :)
Higher levels for yet another short may present themselves.

EUR/USD Trade Update

2011-11-14T15:15:00.001-05:00

Those who used Fri bounce to short should take 1/3 off and bring their stops to just above today's high. Nobody ever went broke taking profits. Resistance now comes in at 50dsma. It is all about quick and emotionless trading here. Do not fall in love with your positions and take what market gives you. I still see a trip to 1.3150 in the next month or so. This said, EUR/USD has been anything but predictable, so take your profits and thank trading gods for this quick trade. If we get stopped out on some "breakthrough technocrat promise", we will use those higher levels to sell again. Overnight we will see what EZ Q3 GDP looks like. Anyone wants to take a guess?? LOL

Update on Nov 15 9:30 am
Time to take another third off and bring your stops to just above 50dsma and trail it.

Buffett - Bathtub Again?

2011-11-14T13:44:00.000-05:00

Traders are having a field day with Buffett's latest love - IBM. Oracle of Omaha discovered another hidden gem under his bathtub, and bought a few shares :)

Like I said, traders are loving his play as well - to the downside. Sorry Mr. Buffett, we do not fall in love, we date and break up. Reason? Double top @ 190. Close enough for unfilled gap @ 190.53 (incidentally all-time high), and now open gaps below @ 183.35 and 177.24 remain.

I am not going to bet against the smartest investor on the face of the earth in a long term. But his picks are usually stinkers in the short term. "Buffett bounce" is a short for a swing trade (days to few weeks), especially when the chart says so. Reward to risk ratio here is so great, imho.

EUR/USD Rally is Suspect

2011-11-11T14:13:00.001-05:00

I understand the whole risk-on trade today. I am not fighting it, but have to say that out of all risky assets Euro rally makes no sense. It will be weighed down by austerity and recession. Why is it going up? Massive short positioning amongst the hedge funds is my answer. They are covering their shorts today I bet. Other than that, I see nothing else that would make EUR/USD go up this big. Lets look at fundamentals and technicals:

1. EZ growth is slowing to a crawling pace. EZ commission projects GDP to grow paltry 0.5% in 2012. This is a rounding error for annual GDP for that huge economy on any given day. EZ is in recession already, some top economists say.

2. ECB started to cut rates. What used to be a somewhat attractive and fairly safe spread between the euro and the dollar in the last few years, has now become more risky carry trade with EZ debt problems and now a lower spread due to 1st rate cut by ECB to reverse many prior hikes. Also ECB is buying more PIIGS bonds in the open market and is potentially getting ready to do it unsterilized (not mopping up the extra liquidity) to prevent Italy from becoming Greece, therefore further diluting the Euro's value.

3. Technicals do not look too hot. EUR/USD is in a well-defined downtrend from May 4th. It is in a consolidation mode, currently backtesting 50 dsma from below, to which it has been kind of glued the last week or so. All moving averages are pointing down. Unless EUR/USD breaks above 200 dsma and stays up there for more than 2 days, I would say sell all rallies - they are a gift.

Conclusion: I understand that market has to clean up some of the late shorts. It is undoubtedly painful process and will come to the end in a very near term. Those shorts who have a little more conviction and a better entry will win in the longer term. My idea is to keep selling into rallies with a target of 2011 low around 1.3150 or so.

TNX is on the rise

2011-11-10T14:01:00.003-05:00

Is there something brewing in bond land? Today we got a second weak bond auction of the week. Is this a fear of Super Committee not coming up with enough cuts? Or is this simply the fact that risk appetite is getting better and is about to rise further? This could also be the fact that rates are very low and are unattractive to investors. We are to watch this development closely. If TNX goes up, it will take all risk with it. Not going to do any good for my long-awaited SPX pullback to 50 dsma.

Technically speaking, TNX is above its 50 dsma as I type. There are open gaps above which will provide some magnetic draw. They are @:

21.75
23.06
23.95

There have been no daily closes above 100 dsma since 4/15/2011. 100 dsma is currently @ 23.53 and is laminated with upper daily BB. Daily Stoch is oversold, and showing a little bias towards crossing into a buy (not there yet though). Will be a good signal, if happens.
Bernanke sounded somewhat dovish in his speech today, and overall Fed tone is pro-QE3 lately. This will be an interesting TNX rally, if it happens. Probably because it is so unexpected by many. Keep your eyes on it...

Market Thoughts and Technicals on Nov 10

2011-11-10T12:18:00.002-05:00

Sometimes traders just have to tune all the noise out, and look at charts to see the message. As the matter of fact, when noise gets really loud, like it did the last few days, this is the only thing I can do to gauge where the markets are going.

1. Gold is not on "treasure stop hunt", it is on demolition derby assignment. This latest stop scoop is going to test a resolve of quite a few bulls. There was really no major resistance at 1800, but this thing just became weak and weaker. I am going to say this - if you are a bull, you better have a helmet on if we get a daily close below 1730. In reality, it has broken out of symmetrical triangle to the upside and is now backtesting the apex. Remember what I said earlier in the week? Symmetrical triangles are the biggest fakes lately. Thought to be a trend continuation, they sometimes lure the bulls in, only to dump on them on breakout and reverse hard below the apex. Watch it!!

2. Copper is having a bit of a tough time last few sessions. Not sure if this is China related or overall world growth slowdown weighing on the Ph. D. metal. Now that bull flag and 3.46 support is broken, it has about 6% to fall from here (3.35 as I type) before the trendline and lower BB @ 3.15, where the next support comes in. This will not sit well with equity and FX bulls.

3. So due to copper and risk-off environment, AUD is very weak. Yesterday it broke below the box, and on confirmation bears jumped in. I have a projected 0.9970 target, sorry mate.

4. I have a theory how this pullback in equities may end. Let me spell this one out. Technology has become the laggard here. It is definitely not acting well and the "generals" are leading the underperformance. So I will use the tech to see where possible bottom of this p/b comes in.
Lets look at the generals and where their supports are. I have a strong feeling that gaps below are the "unfinished business" magnets, and once filled, may provide support and reignite new bulls' interest. What is even more interesting is that those gaps are laminated with major daily moving averages.
Here they are:

AAPL - 369.80 (trendline and 7 points above 200 dsma)
AMZN - 198.40 (200 dsma)
GOOG - 577.20, 558.99 (50/200 dsma), and a "scary" gap @ 515.12
IBM - 177.24 (50 dsma)

5. So what gets us to those levels? Now that it looks like EZ debt problem is subsiding somewhat (on technocrat govts in Greece and Italy), I think it will be home-grown problem that takes us to 50 dsma on SPX. Super Committee is about to decide what we need to do not to become Greece and Italy (I am exaggerating). But really, this is one of the biggest reasons why we took a dive in August.
Let this not escape your radar. Only days left before the crunch time for them.

Market Thoughts on Nov 9, 2011

2011-11-09T13:58:00.001-05:00

I am patiently observing this long-awaited pullback in SPX. What I really do not want to see is many traders and fund managers wanting to buy a dip below 1200. If they all want to do the same thing it will not happen. I sure hope they all get really scared by Italian govt collapse. Way too many started to feel comfortable above 1250, lets wash them out. Healthy pullback to 50 dsma is much needed (shhhhhh, do not tell anyone).

Speaking of collapse... Remember what I said just short 6 days ago, when Greek govt was on the verge of collapse due to parties bickering? - "Can you folks imagine what would happen in Italy if Berlusconi is gone?" - Well, we are seeing a total uncontrollable havoc in EZ today.
Due to this, EUR/USD has cratered to the bottom of its 260 pip range. As the matter of fact, it broke it and is backtesting from below as I type. There is also a broken 160 pip channel extension. Watch a rejection in 1.36 area and a trip to 1.3450 - 1.3350 or so.
BTW, on this EUR and SPX weakness, AUD/USD is now below its 240 pip range as well. So keep your eyes on the possible AUD range extension, it backtested and got rejected, (just like EUR).

With all of this, why is gold not flying to the moon? Your guess is as good as mine. 1800 is a major psychological level, but I see no major technical resistance here. I am not doing anything with it, too complicated above 1775 (which was my target from Oct 25th). Could just be a short-term consolidation and "treasure stop hunt" before yet another move to 1840 or so. Watching...

And finally, oil. I have been quiet about it lately. Very frankly, I am dumbfounded why it is up here @ $97 on WTI. I am not arguing with market. I am the one who said earlier in the year that "geopolitics will come to forefront" sometime later in the year. This could be the only time I do not want to be right.

Big Guys Make Big Mistakes

2011-11-09T10:50:00.003-05:00

Small traders are always envious of big traders. They say that if they had the money, information, and resources that are available at big trading houses - they would succeed for sure. "This is not a level playing field", "the game is rigged", "it is a loosing proposition to trade against the big guys" - are some of the small traders' remarks about this business.

I have a saying - big guys make big mistakes. Other than that, they are no different than us, small traders. They have stops, targets, make stupid mistakes and brilliant trades as well.

Read this article to understand and realize what I just said is very true. http://www.bloomberg.com/news/2011-11-09/goldman-sachs-traders-lost-money-21-days-in-third-quarter-most-since-08.html

SPX Update

2011-11-08T17:18:00.001-05:00

I would like to reiterate my view that this upside symmetrical triangle breakout in SPX is yet another head fake. With so many this year, why should this be any different? I am not sure on the timing, perhaps tomorrow, or on Thursday, but I think that reversal - possibly due to ES failure to take out WR1 - is coming. No reason to fight this though, as this thing can just rip higher like nuts. Just waiting for my pullback to 50 dsma.

This said, I still think that market is in bullish mode into the end of 2011, just needs to come back for more big longs to join. My intention is to reload with them at lower levels: at 50 dsma and just below that on the stop scoop. Lets see what happens...

Update on Nov 9 @ 11:50 am
So head fake it was. Price sliced through triangle apex, and is backtesting from below as I type. It will take some time to sink the decline in, but it is bound to continue should the close below SPX 1250 occur. Next level of support is 1230, followed by 1215. Helmets on!

Market Update on Nov 7

2011-11-07T15:35:00.007-05:00

1. In never-ending EZ saga, we went from Greek govt collapse to Italy's possible govt collapse in a matter of days. This is just another one of many gifts for those who will be buying every SPX pullback on the way to 1320 - 1350 (in my view). Simple fact is that more monopoly money, which gets printed to reverse EZ political imbeciles' mistakes, will make stocks go up in the end. Even a slight hint of EZ debt crisis resolution will give the final push to the upside break out of the trading range on all risky assets.

2. Speaking of which, there are quite a few ranges in FX to discuss. Practically sideways box (for the last 4 sessions) has developed.

EUR/USD - 260 pips
AUD/USD - 240 pips
USD/CAD - 175 pips
GBP/USD - 200 pips

Box is one of my favorite plays, which extends by the same (inside the box) amount on breakout. Wait for confirmation of the breakout though, fakes are aplenty in this case.

3. Speaking of fakes, stock index futures are in symmetrical triangle. This chart formation creates the most confusion on breakouts. It is a sure nail-biter to the very apex, resulting in powerful move, but one to really wait for and not anticipate. Absolutely no idea where this thing goes yet. If I were to be guessing, whichever way we will break out of the triangle will not be the way we go, it will be a fake. There, you got an educated guess out of me :)

4. Gold is breaking above 1775 (my target from Oct 25th). Germany said that it will not touch its gold reserves for any bailouts in foreseeable future. I guess we are to believe them, GC is up 36 as I type. You want to trail this baby, because it can crater back to 1775 overnight, as it often does on "treasure stop hunt", as I call it.

5. And the last interesting topic for this post...
I am getting some ridiculous comments, probably from those who disagree with my view on markets. I respect everyone's opinion, and will publish comments from those who disagree with mine. This said, angry, idiotic, incoherent, unconstructive, abusive, non-market-related, and personally-directed comments WILL NOT GET PUBLISHED. It is that simple and I hope very understandable. Lets remember that this is my blog, in which I express my view on markets that I trade, and it is my duty to keep this place sane and clean. This means that I have to moderate and, unfortunately (or maybe fortunately), censor all of the comments. I would love to hear from other traders who would like to interact with me, even if they disagree with my view. But this is not a venue for fights between bears and bulls, not a place of hate, and definitely not a bashing wall for utter nonsensical remarks by those who perhaps lost their money and have nothing else to do but complain. We all trade at our own risk. This profession is not for everyone. Taking a stab at me will not help anyone's pain. Study and trade smart, or find something else to do!
I hope this clears up any misunderstanding.

Update on Nov 8 @ 10:05 am
We have an upside break out of symmetrical triangle on stock index futures. It is not a surprise for many, I guess, since symmetrical triangle is supposed to be a trend continuation pattern. But somehow I think in this uncertain environment it will be a fake. I think we see a failure and a turnaround in the 1270 - 75 area on ES, followed by a plunge below 1250, 1230, 1215, and eventually 1200. Just another one of my wild educated guess outlooks :)
I will be buying with both hands below 1200.

Oh Canada! What happened??

2011-11-04T10:34:00.002-04:00

NHL season began in October, so many Canadians are glued to their TVs until the wee hours of the night, and are not coming to work next morning. Jokes aside, what a crappy Canadian employment report this morning!

Manufacturing and construction employment took the biggest hit. It is not going to get any better, judging by -4.9% drop in building permits, and lower-than-expected Ivey PMI, both reported this morning as well.

This very poor data explains why Carney is on the wires on daily basis chastising EU for the world economic mess they created. Look for some dovish comments from him in the next few days. Canada's GDP is gonna take a hit I bet.

Lets also remember that RBA cut rates earlier in the week. Australian economy, commodity-driven just like Canadian, was revised downward in the latest RBA's growth outlook (released last night).

I say USD/CAD is to be watched closely for possible trip to 1.0335 on this bad economic data. But first it will need to get though 1.0220 though.

Update on Nov 9 @ 4:20 pm
It is very interesting that with today's sell-off in risk, with EUR and AUD breaking below their established boxes (ranges), USD/CAD is still in the box, and refuses to break above 1.0220
Of course just as I say this, sucker will rip higher :)
Still looking for USD/CAD 1.0335 or so before the end of this week.

Gold Trade Update

2011-11-03T22:27:00.000-04:00

On October 25th I wrote about why and where Gold is going.
http://viewonmarkets.blogspot.com/2011/10/gold-has-its-magical-powers-back.html

This week's central bank meetings added more conviction for precious.
Today ECB started its easing campaign (just as I predicted).
RBA also joined the central bank feud earlier in the week with its own rate cut.
At FOMC meeting Bernanke has done his part to ground the hawks and let the doves fly high. In the statement and at his presser he hinted more on QE3.

It looks like my 1775 target will be reached tomorrow.

Mid-day Thoughts on November 3

2011-11-03T12:36:00.003-04:00

Do not know where to begin.

I am amazed at what mess EU is in. Just when you think they have everything under control, they collapse in a matter of days. I think the biggest problem (which I am still not hearing many people talk about) is that it is inter-country dispute between parties in Greece which can derail the whole EU. Can you folks imagine what would happen in Italy if Berlusconi is gone? The most interesting thing is that PASOK was the party for bailout and steeper austerity, and opposition party was against. Now the opposition party leader is for austerity and bailout. This is so convoluted, to say the least. One can go absolutely insane following this saga.

I welcome Mario Draghi's decision to cut the rates. I know that he is taking a bit of a gamble, since EU inflation is at 3% or so. He did say that it will subside and will average about 2% in 2012. And the most important comment in his presser was the R word. Mr. Draghi said that EU is heading into a mild recession. Brave man!
Gold is now in heaven due to ECB rate cut.

In US the Chain Same-Store Sales for October were up 3.9%, which was a bit lower than 4.5% expected. We do need to monitor and see if usual October and weather-related weakness is to be blamed for the miss by more than half of the stores reporting. One of the reasons for the miss in October could be the fact that real personal income has fallen for the past 3 months. FOMC did not even mention this in the statement yesterday. Why?

Speaking of FOMC, I wanted to express my view on yesterday's decision. I strongly think that the fact of a single dissenter on the dovish side tells us QE3 is near. There were 3 hawk dissenters at previous meeting - and 0 now. Bernanke all but hailed the notion at his presser, going out of his way to explain why he would buy more MBS. We get it sir, we know, all we have to do is look around us and see empty and abandoned homes.
Once again, gold has a bid underneath due to QE3 in the air.

And my last thought of the day is what I already said in the last few days (including last night) - be greedy when everyone is fearful. The European debacle is far from over, but it has reached a controlled state again. Last night Merkozy told Greek leaders to clean up or leave the EU. So bulls got the gift again. Market wants to go up.

Be Greedy When Everyone Is Fearful - Part II

2011-11-02T21:24:00.001-04:00

We are going to get some seriously bearish headlines in the next 24 - 48 hours. I am already reading some commentaries on how we are going to hell in a hand basket due to Greek default. Folks, we survived 2008, we will survive 2011.

This said, we can't dive in blindly. Know your levels and place some silly bids beneath. Market will sniff the bottom when all bears are in. Remain calm, do not let those, who's business it is to scare you out, take full control of your actions. But again, do not just place a market order, thinking G-20 will bail you out. If they had a solution, they would have presented it already. I think that members just want to defend their own turf, and special self-interests are precluding them from acting together.

I am remaining in bullish camp into the end of 2011. October 4th was the bottom, now we go down to wipe out easy 20% in 18 sessions money. Listen to yourself and find your comfort level. Do not overreact, be patient, wait for market to come to you, it will.
I am ready for this. Are you??