Saturday, March 30, 2013

Easter Weekend Trading Notes

Stay Healthy
I have been fighting a stomach flu all week long. Professional traders know how difficult it is to concentrate on trading while they are sick. Some have a general rule to follow the market and monitor the existing positions, but refrain from putting any new positions on. Trading requires clear thinking, dedicated attention, and rigorous emotional work. It is practically impossible to entertain any of those while you are seriously ill. So if you thought I was cranky before, I will take it up a notch. Just kidding...

Divergence Galore
I want to be an optimist, for we are in a "secular bull market", or so they want us to believe (like they really know). I want to plug my ears and stop hearing that "we are going to have a correction", "it is inevitable", "this is the way all markets work", "just look at all of the divergences around SPX". But I myself joined the choir and said that this time will not be different. And yes, divergences not only continue, they now have widened and the amount of them has increased, even as S&P 500 hit all-time closing high on Thursday. If I showed all of them, this post would never end. So I will add some more to the ones I already showed in the past month. These are not just outside of SPX, some are important internal leading components, without which I cannot imagine much more upside before a short-term correction occurs (on this at the end of the post). Why do I concentrate my attention on divergences so much? Because they are usually a precursor of possible short-term reversal, which always comes when SPX is in a steep uptrend (on this at the end of the post as well).
Before the stubborn bulls discredit the following charts on the basis of "it has not mattered lately", I have a few words to say. It is perilous to stay perma-bull in market which is driven by sentiment about central bank liquidity, as it can reverse at some point. When long, I always look for an excuse to get out. The charts I am about to show are my excuse to trail and/or tighten my stop. Can SPX go higher from here? Sounds like a rhetorical question in current environment. I know what the stubborn bulls will say about these charts: "copper follows China", "euro follows Germany", "rates are manipulated by the Federal Reserve", "Google and GE are just taking a breather"... While I may somewhat agree with the premise of their argument, I strongly disagree on the eventual outcome of these divergences. I believe that SPX cannot make a solo move higher when it continues to lose more of its correlated assets, markets, and leading components, as the companies inside the index do not operate in a vacuum.

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Annoying Cliches
We constantly hear that corrections are healthy. Who are they healthy for? Talking heads say it as the market moves down, which may be right after they told the folks to buy the high.
Granted, it is not easy to see the correction until it is structurally visible (hence my lengthy discussion of divergences). Market climbs a wall of worry, then gets hit in the head by the brick of irrational exuberance, and falls down while being swallowed by the avalanche of mass exodus. Nobody really knows exactly when to buy and sell on fundamental basis, even though the saying that market is always right is supposed to guide the investing public. The truth is that market takes the underlying issues that underpin or worry it to the extremes. What exactly was the market looking at in 2007 and 2009? Where was it exactly right, at 1576 or 667 on SPX? Who is the market anyway? Those folks who gobbled them up at 1576 could be the same ones who puked them up at 667. And that is after they were told to average in all the way down. I get annoyed by all of these cliches. I do not know how to apply them to my trading. So charts help me navigate SPX trading. And the simplest instrument of the navigation is a channel. I said above that SPX builds a steep uptrend (like the one it is in now), lets nobody buy the pullback, and then breaks down catching late (chasing) bulls in awe and disbelief. I really think it is that simple. So I leave you with the chart of the index and its myriad of channels to trade. It certainly looks like just north of 1600 is achievable (top of two channels), with aforementioned correction coming shortly after.

Pick your entries and exits wisely, and have a blessed Easter!

click on chart to enlarge

Tuesday, March 26, 2013


Transports and Chips formed head and shoulders, or as I simply call it - shampoo.

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Sunday, March 24, 2013

Did Everything Change On March 20th?

Wednesday, March 20, was probably one of the most important days for stock market in some time. It was the day FOMC meeting concluded, and Chairman spoke at the presser. Unfortunately (for bulls), I think that it was not the main event to concentrate their attention on. Also on that day, two large-cap companies reported their earnings. Both FedEx and Oracle missed, and their stocks got hammered. Below are the charts I have been staring at ever since Wednesday night. If you followed me for a while, you know how essential the correlations are for my market view. It cannot be any more picture-perfect than these two stocks. Both are the leaders of their respective indexes - Dow Transports and Nasdaq 100. Traders, it is not looking good for bulls now! Protective stops and hedging should be their main focus in the coming days. Based on the charts below, stock market may now be looking closer to making a short-term top, even if it goes slightly higher from here in the next few days (in result of a quarter-end markup).

click on charts to enlarge

Tuesday, March 19, 2013

Just Remember How It All Ends

In the last four years all sell-offs ended the same way - Bernanke came and took them away. Do not get complacent here, look at your technicals to guide you out of the shorts before he speaks on Wed. afternoon. Take what HE gives you, because HE is the market. Trade with him and not against him. Take it from someone who tried to fade him and has some scars to show...
If you are too lazy to do the chart work, here is the link to my previous post on where to cover and why we are here

Monday, March 18, 2013

A Freakish Coincidence?

Do you ever feel worried when things go as expected, but much faster than you thought? As I expected, Cyprus was brushed off by the market. But I did not expect it to be done in one trading session. I also expected the gap fill, but not the one we got today. I thought that market would use this Cyprus fiasco to sell off (and reset) to the SPY gap fill below. Instead, it filled the one above from Friday close. But who am I to argue? Yet I have a feeling something is not exactly right for bulls here. Quick intraday reversal crushed new bears, but may have new bulls sucked in as well.
Today's filled gap leaves no unfinished business above, and perhaps makes the road down even smoother than I thought. It now may even look exactly like the sell-off at the end of February, which culminated with Italian election snafu, but may be progressing much faster this time. I should also note how that sell-off ended. Bernanke checked live SPX quote (his measurement of U.S. economic recovery) on his QuoTrek right before he was to give a two-day testimony to congressional banking committees, and crapped his pants. So he said nothing about scaling back QEInfinity any time soon.
If ES follows that scenario, this sell-off may not be done yet, as there may be a few more days of this left. By a freakish coincidence, there is a two-day FOMC meeting this week, with Chairman speaking at the presser right after the rate decision. He will undoubtedly fight the new European dragon, and behead it with his inaction, despite how oxymoronic that sounds.
Let's dive into the short-term charts to digest the technicals.

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Sunday, March 17, 2013

Cyprus? Where is that? Oh $#!+... Weekend Trading Notes

A curse of the third week of March. If market needed a reason to sell off - it has one now. Time for the bears to take a victory lap, albeit a short one (pun totally intended).

Just when you thought it was safe to go back in the water... For months they told us that Europe was fixed. And now they drop this bomb on us. Unbelievable to many, but not surprising to some. If you knew anything about Cyprus, it has served as a money laundering heaven for many years. While "funny money" will treat the 10% levy as a fee for "doing business", the other depositors who had nothing to do with money laundering will lose a hefty part of their hard-earned savings, as the little honest guy (with deposits less than E100,000) gets hit with 6.75% levy (now maybe 3% as I write). Most interesting is the fact that absent the criticized bailout, many of the banks in Cyprus would be defunct, resulting in much bigger depositor losses. Still, the unintended consequences (a little different perspective on this later in the post) will add fuel to the fire already engulfing the dysfunctional continent. Regular folks will revolt against local banks in Cyprus at first via old-fashioned bank run, but then will proceed to give it to the central planners who assessed the levy in the first place. (Hence the scared politicians are walking back the levy now.)

One should face the reality, this has been going on for a while - the emotional and financial suffering of the regular folk, I mean. Portugal, Ireland, Italy, Greece, and Spain have seen their fare share of austerity brought upon the people who cannot bear any of it at all - far greater than 3% pay cuts, retirement age increases, layoffs, and social program reductions. The ensuing revolt, peaceful demonstrations along with violent unrests, resulted in quick market corrections, steep at first, but mostly shallow ones at best now. If you think that Cyprus will bring this bull market down, think again. Just three weeks ago, a government election snafu in Italy, which is the largest source of perpetual Eurogeddon fear due to its ginormous sovereign bond market, eked out a 3% pullback on SPX. So let's give Cyprus a 2% market pullback possibility, not because of its measly E70B total bank deposits, but based on the aroused fear of cascading peripheral Eurozone bank run, which I think will subside in days. This takes Dow Jones Industrials back to 14,200 for a backtest of the breakout above the former all-time high, which I fully expect to hold, as discussed here. This does the trick of the gap fill on SPY, as discussed here. I expect a bounce on SPX at that point with aim for 1600 - 1611, as discussed here. Let's look for something else that has a bit more weight on the market sometime in April. This leads me to the concluding part of my weekend trading notes.

As promised above, a little different perspective on unintended consequences. Here, stateside, Fed is pressing $85B print button monthly. As the geniuses sitting on FOMC blow bubbles out of a thin air in the stock market and housing (while trying to juice the economy), they are punishing the depositors by lowering the savings rate down ever closer to nonexistent. How many people think of keeping their money in U.S. bank for the purpose of earning the interest any more? Banks here have pretty much become safety deposit boxes. Since U.S. banking system is considered the safest and most stable in the world (never mind the fresh memories of the Great Financial Crisis), one cannot possibly imagine Cyprus-like levy here. But when U.S. savings accounts earn annual interest of close to 0% (and that is compared to the ones in Cyprus at up to 11% on some long-term CDs, of course that 11% sounded too good to be true, and now will be trimmed quite a bit through account balance shrinkage), it will not take a lot to send the depositors running for the exits, as the incentive to keep their money here is nil. One has to wonder what could set off such an event. It seems that Fed figured out the exact details of possible banking crisis in its latest stress test, with the results hurting the pride of the best domestic bank - JPMorgan Chase. How ironic... It was J.P. Morgan himself, who was involved with inception of the Fed in 1907, resulting from the bank runs back then. Later it was Fed's inappropriate monetary policy that was a part of the Great Depression from which the worst bank runs in history of U.S. resulted. We are still yet to find out what the outcome of Fed's unprecedented QEInfinity will be. Will Fed cause the next financial Armageddon? Many investors think so, yours truly among them.
Two-day FOMC meeting is on Tue. and Wed. of this coming week. Do you think scared central bankers are going to say anything about a remote possibility of scaling back QEInfinity (due to improved U.S. economic data) just two days after Cyprus fiasco elevated stock market risk? Not a chance, as it is all about keeping the stock market up. Bernanke is walking around with QuoTrek in the palm of his hand. He is the modern Paul Tudor Jones. He is the manager of the biggest hedge fund in the world. He is a trader. He is one of us. LOL!!

Friday, March 15, 2013

SPY Gap To Fill

Some wishful thinking for bears or those who want a pullback to get long or longer. There is a SPY gap to fill below. Also it happens to be in the area of horizontal breakout backtest, combined with lower trendline of rising wedge. Now, the latter one better hold, or...

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March Mystery

There is something magical about the third week of March. It marked a turn in the stock market in 11 out of the last 13 years.

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Thursday, March 14, 2013

Quick Trading Notes

My three visual observations on stock market tonight:

1. Dude, where is that great rotation out of bonds into stocks?
2. Some bears are now in bull's clothing (yours truly included).
3. S&P 500 futures are in a bearish rising wedge, but still within a bullish rising channel.

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SPX Then and Now

It looks like SPX is trading the beginning of last year's daily chart scenario. The price is lagging 2012 advance by 1.8% currently. Can you believe this? Everyone is worried about how overbought SPX is (including yours truly), and it is not even on par with last year's advance on this date. It looks like it is going to hit a speed bump around 1565, if it is to match last year's blue bar. Projected 2% pullback will take it to 1534. After that SPX may push much higher in the last leg of the rally, in order to make up the rest of last year's 13% advance. So I would estimate 1611 for a target, which may be reached sometime in April. That's where SPX may finally pause and find ample amount of sellers for its first correction of the year.

click on chart to enlarge

Wednesday, March 13, 2013

Can This Really Happen?

Just a month ago it was very easy for me to assume the most likely scenario due to my bias. But a very close look at a long-term chart, combined with realization of rapidly changing data, persuaded me to stifle my stubborn skepticism and reconsider my stance towards the stock market.

I will use Dow Jones Industrials weekly chart for this example. At 14,198 it looked like a double top would be in place, which would result in a nasty sell-off. I was leaning that way and thought that inevitable correction was coming. Well, the price is king, and it is telling me that I was wrong. While a simple backtest of the breakout could still occur, it is going to be well-supported and should result in further rally. It is very easy to get bullish when the price is going up. As the matter of fact, I am scared of being bullish up here, when many other market players are also bullish, and very few bears are left. It feels as if I am scared of heights, because this territory of all-time highs is unprecedented. So to calm myself down and build a likely scenario, I went back to the prior time when a double top was blown through in 2006. I am not saying that this is the only way things will transpire from here, but I think that it is one of the most likely scenarios, due to Fed not exiting until the end of 2014 (based on unemployment projections). A bear market in stocks will probably begin when Fed is done, but it may be almost two years from now. This ultra bullish case takes Dow Jones Industrials to 18,600 by the end of 2014 (with four corrections on the way). Based on equal percentage calculation S&P 500 target would be 2,018.

Now, most of you will probably think that this is crazy. But I say that crazier things have happened. After all, this may be the super bull scenario I was looking for, and stock market gains of 22% and 16% per annum have certainly been achieved before.

click on chart to enlarge

Monday, March 11, 2013

SPX Super Bull Scenario Returns

After a brief snafu inside of my brain, I am back to normal state of mind.
On December 23rd, I posted this super bull scenario in which I said that it is possible for S&P 500 to trade at 1680 at the end of 2013. With convincing help from the market, I now firmly believe in my own prediction. Let's look at how it may play out. The chart below incorporates my view that this may be the second year in a row in which S&P 500 will not trade below the last year's close. But there may also be two bumps on the road - 7% and 9% pullbacks.

click on chart to enlarge

Sunday, March 10, 2013

Quick Look @ S&P 500 Futures Bullish Scenario

On to the June contract we go...

From here on I will stay more focused on the price and less concentrated on why one or the other reason is behind virtually uninterrupted rally. It's useless to object to it, as self-inflicted wounds are just too demoralizing. No need to be a hero here. I get it, I really do...

So we have a similar structure to follow on 4 hr. This scenario may take us significantly higher. I am not sure if we just explode higher from here and run all the stops above 1576 on cash, or we come down to 1520 - 25 on futures first (green line) to backtest the latest breakout and then go back up to take out the all-time high on cash. That high is the magnet, since we are so close to it now. Rising 4 hr 50 period sma may also support the price. Top of the channel coincides with the target.

click on chart to enlarge

Saturday, March 9, 2013

Weekend Market Update

I feel that this is the most important chart right now. I first showed it two months ago. Let's update it. SPY waited for nothing and took charge out of its wedge. Bond market is being reluctantly dragged along. The wedges on TLT and TNX have not been broken yet. But if they do, blue horizontal lines of support/resistance will act as magnets.
The most interesting fact is that usually these bearish rising and bullish falling wedges result in reversals. That has not been the case here, yet.

click on chart to enlarge

Thursday, March 7, 2013

What is the message?

Excuse my little rant in the previous post. To be clear, central planners are not the reason for my bad trade. I was simply on the wrong side of the market - that's all.

Back to today's message of the market... I am looking for interpretation of today's developments in forex and treasuries. So I was going to write another one of my long market updates, but decided to refrain from sounding my biased opinion, and just go with the charts. I am sure there will be no objections here.

Euro bounced off of the long-term support, aided by Draghi's flawless performance. All problems in Europe are fixed, and the Earth is square. Inverted head and shoulders with successful backtest of 150 day sma may prove to be a good long entry.
U.S. Treasuries are at trendline support inside the massive rising channel. Yet another bull flag has formed. You have to be brave to buy them here, but Bernanke & Co. are on your side with $85B of help each month.

click on charts to enlarge

Tuesday, March 5, 2013

Stock Market Note on March 5, 2013

I owe it to my followers to write once in a while, even though it hurts to be on the wrong side of the market.

It is very obvious that bears like me are back in their caves. We are hiding from the wrath of bulls, who have once again driven their horns into our hungry bellies, just as we came out of hibernation craving for a sell-off. We were not able to knock the market off its feet, and produced only a whimper of a pullback, which was promptly erased by central planners around the world. But you will hear how it is all about the improving U.S. economic numbers now, and not Bernanke's infinite QE, because miraculously our economy turned around and will grow at robust 2.2% instead of the measly 1.9% predicted earlier (pardon my sarcasm).
And to be fair, I do recognize the better-than-expected numbers, as I am not blind nor ignorant to the data spewed on unsuspecting public, which has no idea that real earnings growth is actually decelerating rapidly, and will probably even shrink in 2013. Buy! Buy! Buy! We are going to the new high! CNBC is airing the special tonight: "Dow is at record high", or something like that, in which the talking heads will tell us how we are in the beginning stages of a new secular bull market. It is not my intention to argue with their thesis now, but merely to state the fact that we are climbing higher on the basis of dividend increases, cost-cutting, increased share buybacks, and other financial shenanigans of the S&P 500 companies, whose revenues are not growing at the rate suggesting the expansion which is now fully priced into their respective stocks. Fed is pumping $85B into the markets monthly, in the heroic act of life support. It is my intention to follow the price lower when it breaks down, well before the negative news flow begins to trickle in, and before most of the traders realize how false the whole premise of the bulls' thesis was.

I am not complaining about today's developments, but I look at them with scepticism. I am a student of the market and the price, which is always right. I stepped aside, but plan to reshort again soon. I am not convinced that this is the super bull scenario, which I described at the end of last year, due to two reasons: my expectation of lower corporate profits, as Q1 earnings guidance was lackluster, and the absence of widely-expected rotation trade, as bond fund flows are still positive. If that's the case, the market is ripe for a major sell-off to shake out the "chasing" bulls. It will come, but probably at a time when most traders expect it the least. It is becoming increasingly impossible to short, as the bears are pushed out of the market with new liquidity coming from every corner of the world. I was humbled by the market which is right at the moment. My silence has been deafening. I have been quiet (out of respect for those who bought the dip, yet again) as my flawed market analysis led me to be on the wrong side.