Letter published in Barron's

My letter to the editor of Barron's was published this past weekend.  I wrote a response to Gene Epstein's article on the Fiscal Cliff identifying the 3 key points Congress should focus:

Link is here (need to be a subscriber) and it also is found in the Nov 26 issue on the back cover under "Mailbag"

New Role at ETFguide.com

WooHoo!!!  I have taken a new role as the Chief Market Strategist at ETFguide.com!

In my new role I will be publishing relevant market articles syndicated across Yahoo Finance, Nasdaq.com, BigCharts.com as well as other financial websites.  I will also write thought-provoking subscriber only articles published in our monthly newsletter, ETF Profit Strategy.  Every Sunday and Wednesday and often in between I will be writing the Technical Forecast for subscribers where I take a look at the short, medium, and longer term technicals and charts of the various markets and provide actionable trading commentary and suggestions on how to profit from that outlook.  


Typical asset classes followed are equities, government bonds, silver, gold, the euro, and others.  We also provide weekly ETF trading strategies using options and ETFs and ready to go portfolios which can help investors decide if their current portfolios are diversified correctly, how to identify risks, and areas to make  improvements.  The ready-to-go portfolios are great because we avoid the conflict of interests typically found in the financial industry where the suggestions often result in some sort of benefit to the user (such as increased commissions/trading fees).  

Our focus at ETFguide is obviously ETFs, but if you have any questions concerning the markets in general or specific stocks I will still be writing an occasional blog post here.  This blog provided the basis for the appropriate kind of analysis required in the financial markets, and I want to thank everyone who supported me and the blog.  Many of the themes I focused on in this blog are still very relevant and playing out today, and I will continue monitoring these themes in my new role.

Come join us at ETFguide and see how we can help you make money in these crazy markets!  The cost currently is $149/year (which is less than the cost of a stock trade each month).  It really is a good value considering you get actionable trading advice a few times a week and longer term actionable advice each month.  Most services like this just provide the newsletter (which is usually $199 or more) and never touch the technicals.  Anyways, enough with the sales pitch, thanks for your help over the years, and I look forward to seeing you all soon.

Here are some links to the first 5 articles I have done in my new role!  Take Care!

http://finance.yahoo.com/news/profit-europes-disarray-152219813.html
http://finance.yahoo.com/news/enjoy-upside-limited-downside-risk-161447006.html
http://finance.yahoo.com/news/silver-stuck-between-rock-hard-175742851.html
http://finance.yahoo.com/news/vix-telling-us-todays-market-191531943.html
http://finance.yahoo.com/news/p-500-second-quarter-road-162651947.html

Gold is bearish in the news, but bullish in the charts?

People in the mainstream media have started to become bearish of gold.  Perhaps it is because of the almost 1 year downtrend in its price?  Media is notorious for noticing trends nearer their turning points than nearer their onset.  I believe Gold may be a current example of this and actually be setting up a bullish signal versus a bearish one.

The chart below shows the price of gold over the last two years, including the seeming bull flag/triangle that is currently in formation.

Gold chart link

I see major support in the $1530 area, which once again today held.  This support zone allows a potentially good trading opportunity in gold.  With support just 2% below, a low risk higher reward buy opportunity may be presenting itself.  A purchase of gold here with a stop at $1520 (aggressive traders) or at $1470 (longer term traders) could be a good play as I am seeing bullish signs in the chart (in addition to the contrarian buy signal set by the media).

Besides the positive longer term divergence and solid support, a bullish flag/triangle looks to be forming with the red and black trendlines helping show points of recognition.  A break above the red downsloping line and then the black resistance line (notice the parallelism with the other black support line) would help solidify the bullish case.  A move beyond the recent high ($1900) would be a likely a target of such a breakout.

If all of this comes to fruition then it likely would mean a rally in equities as well, given the high correlations between gold and the equity markets.

Good Luck!

Siemens Stock

Siemens Stock Chart
I had a request to look at Siemens stock for a long entry.  Here is what I notice...

Siemens stock price currently is flirting with a very strong support zone in the $80-$85 area.  On the surface this gives the stock a low risk high reward buying opportunity.  Major recent support is at the $83 and $82 levels and 2 year support is in the $78-$80 zone (primarily 2010's consolidation period).  All of this makes for an excellent stop loss position at only $2-$7 below the current price levels.  $82-$83 should be used for aggressive and shorter term traders and $78 stops should be used for the longer term investors.

From a general trading perspective, the profit target of a trade should generally be at least 3x the stop loss level, so at a minimum we would want a $6-$21 profit target.  This seems doable given the previous price highs and thus resistance levels ( @ $108 and $105).  The 3x profit/loss rule helps overcome the inevitability of not always being right about a trade.  With a supposed 50% hit ratio, a 3x profit/loss requirement keeps a trader profitable.

More conservative traders would want to wait for, at a minimum, the downsloping red trendline to be broken by price before entering the trade (currently at $87 and falling).  However, as long as stops are used a portion of total capital could be deployed currently.  Positive divergences and the oversold RSI reading currently help the bull case as well.

Having said all of this, sticking to the stops is very important on this stock.  The reason is the huge potential head and shoulders pattern that could be forming with the 2010 churn the left shoulder, the head in 2011, and now forming the right shoulder with the slighly up sloping neckline currently at $82 and/or having already broken down.  Any break below $78 would seriously put this chart at risk.  A break below $78 would also likely imply that European markets are breaking down hard as well.  If price breaks below that level, look out below!

If the bullish scenario plays out, we can use trendlines (just as we are using the red lines now) to help decide when to take profits as well.  We should be able to connect the higher lows to help watch momentum on the upside and decide appropriate times to take profits.

Good Luck!

Costco breaks down from long term trend

Costco breaks down from long term trend linkable real-time version (may need stockcharts.com subscription to view)

Now this is a beautiful chart...albeit a little late.  A 3 year ending diagonal breakdown on Costco may spell doom for the company's stock.

It would be perfectly acceptable for the stock price to rally back to the underside of the lower trendline, but as of now and each day it postpones, the odds are looking less and less likely.  The one hailmary Costco may have is that its volume has not been that impressive on the downside, which means there are still a lot of long term holders of the company's stock that bought back in 2008 and 2009.

However, the amount of volume at the current prices leaves a lot of room to the downside if long term holders get scared.  Notice on the left side the volume by price analysis which shows the major support of buyers in the  $55 to $65 range.  Before reaching that level, the $78 dollar area is the next support zone.  After that is the 2008 high and 2010 lows around $68-71.

JNK Part 2

Linkable Real-time chart

It is not often I get to pat myself on the back, so I will take that rare opportunity now. The JNK and S&P 500 call in early April turned out to be spot on. The reason I bring it up is because right now it seems the disconnect is occurring again, except in the opposite direction.

Currently the S&P 500 looks extremely oversold compared to the JNK index. This is in contrast to early April where JNK was leading the markets lower. Today it seems JNK may be leading the markets higher. Please see the previous post on April 2nd for more information on the history of the two indices. JNK Part 1

The way to trade this is through a pairs trade. A pairs trade is similar to a hedge in which you initiate a long position as well as a short position with the hope of them converging. The beauty of a pairs trade is that it often lowers risk (since you are both long and short similar markets) as each entity acts a natural hedge of the other purchase.

Looking at the busy chart below, one can see the relationship between JNK and SPY in the middle graph.  It may be easiest to right click chart-->and open in a new tab to zoom in.  Most recently the disconnect between the two etfs is pretty apparent and what I am seeing as a potentially good pairs trade.  This is shown by the circles in the middle of the chart.  Also notice the 50 day correlations, usually hovering around 100 (other circles on the chart).  Today it seems that the junk bond market is not confirming the recent stock market weakness and can be viewed as being near term bullish stocks and/or bearish junk bonds.

In order to long the S&P500 and short the JNK, two etfs are readily available, the SPY (S&P 500) and the SJB (short junk bond). If one were to purchase both of these, an expectation of the stock market to rise and the Junk bond index to fall would occur. By purchasing these two etfs together one may be able to take advantage of the expected convergence and re-emergence of the high correlation of the two indices.  Once the convergence occurs a closing of both positions would lock in the trades and hopefully profits!  The risk is that the decoupling will now be permanent, and things indeed have changed, however, if thought rationally about the relationship between stocks and high yield debt, the debt prices should fall as equity prices fall and rise as equity prices rise as they both represent the same underlying companies.

Good Luck!

Market Warning Signs

As I've spoken of before, in this day and age, there are many many correlations between all the markets around the world. One of the more popular talking points in the media has been the "risk on/risk off" trades. One reason for the popularity is the extreme correlation between pretty much all assets denominated in dollars. One such extreme correlation is the S&P 500 to Junk Bond Index.

Looking at the below chart, it is easy to see the similarities...they basically do the same thing every day.



However, notice that in early March, the stock market was pushing new highs as JNK did not. This trend continues and I believe is a warning sign to market bulls. I fully expect these two to meet back with each other which would likely mean a market sell off.

Below is a more detailed chart showing the roll over action of JNK including Fibonacci resistance points between $39 and $40 as well as a forming head & shoulders pattern. Also notice the recent disconnect between the rising S&P500 (orange line) and the JNK index (candlesticks). This is a warning sign.



Good Luck!

Parabolas and Apple

Parabolic curves when it comes to the stock market NEVER last. Once a parabola occurs and then starts to fade, prices fall hard and fast. Commodities are the better known markets that have such parabolic booms and busts, but they do occur in stocks as well. The 1990s internet bubble crested in a parabolic manner as can be seen in this chart...


Once the bottom of 1998 occurred, it took 2 years before the market adjusted its rapid rise to a more appropriate amount of time as can be seen by the fibonacci arc on the chart above. This arc helps measure the relationship between price and time. However, even then (once the initial thrust occurred) the market never again reached the top arc, which is contrary to what is occurring below.

Notice as well that simple trendlines could have been used to help tell when the bubble was over. The 3 black trendlines could have helped investors know when the environment was changing and allowed for consolidation of gains depending on their timeframes (short, mid, longterm).

While the general stock market indices today are not yet at parabolic rises, certain darling stocks, are. When prices go vertical, there is reason to notice and a HUGE warning sign should be the result. Assuming 90 degrees is vertical, stock prices physically cannot move more than 90 degrees in time (that would be going back in time), and there needs to be a balance between price and time as time value of money, changing environments, profit taking, etc will eventually catch up to rising euphoria.

On the chart below I show Apple's recent price action...this does not look healthy and is cause for major concern. The stock is well over an 80 degree angle and well beyond any of the standard moving averages. It is tough to find another stock rising at such a rapid pace (CMG and CRM are examples). Using the longer term (pink) trendline, a pullback to $400 does not seem out of question. Similarly, shorter term trendlines can be used at different time frames to help show when the environment has changed.



The chart is pretty busy, but the 3 points at the top of it summarizes...
1) The rise from the 2009 low, was a lot more healthy than the current rise as support was found twice by the fibo arc.
2) The long term trendline sits around $400...I fully expect this trendline to be found again (likely sooner than later).
3) The latest rally can pretty much be classified as parabolic...price should fall hard to at least the middle fibonacci arc once 1-2 of the black trendlines break.

Although, it has yet to occur, I fully expect Apple to come back to earth. I will watch the black trendlines to help show me when that will occur.

Good luck!

Astronomy used to help trade the markets?

After Prechter's interview there was a discussion with a trader that uses astronomy to guide his investment decisions. I have absolutely no experience with this, but thought it was interesting. Most of what he said was Greek to me, but there are a few key themes.

He basically is calling for a sell off early/mid next week then a rally to finish the week and next week followed by a larger sell off.

Here are my thoughts: Assuming that social mood and people's feelings drive the market prices, if lunar activity can affect us, then perhaps completely dismissing a strategy based on astronomy may be inappropriate. There are many scientists who agree that sunspots and other lunar phenomena can affect our world, so maybe there is something here. A famous trader, GANN, also used astronomy to help him trade. He was extremely successful and is still today studied intensely. I am interested in GANN and a lot of this sounds like some of Gann's teachings.

___________________________________________________________________
A summary of Tim, the Astro guy's interview on 1190am dallas

number of things happening next week...bearish in nature
Feb 6-9 Clustering of Planetary Stations (3 in 60 hours)...pretty tight clusteringMonday Mercury/Mars
Short term cycle culmination...lunar cycle full moon (trend change) Tuesday 7th
-Pretty hard to ignore when 3 clusters aligned as such...can anticipate a radical change in trend
-A couple of planetary conjunction...not necessarily bearish themselves but act as a focal point (Sun/Mercury conjunction) begins to define market trend when occurs
-Venus/Uranus conjunction (interesting planetary phenomenom)...usually see a bullish trend after that (this could occur on Thursday)
-A pullback beginning of week and rally thurs/Fri
-50% up Monday...not really expecting much
-Tuesday=key day to turn down
-May see push toward fresh resistance Monday
-Sun/Jupiter dynamics 1352 resistance
-Mercury/Venus 8th harmonic have been very important intraday...if that continues on Monday 1348 resistance...may see a little push
-would be very surprised if resistance there doesnt hold monday
-looking for short term pullback, rally then feb 20th sell off period as new configurations come into play
-Great for short term traders and nerve wracking for longer term players
-if adventurous buy some short term puts...longer term covered calls
-This coming week is reactivation of cardinal climax...line up of planets along 0 degrees of cardinal signs of zodiac (4 seasons)..."extra power points"
-Hades hits 0 degree of Cancer point and following day Venus hits 0 degree of other
-need to pay attention because may see seismic activity/other things outside the market that may provide fundamental short term shift
-in addition the massive solar flares that are occurring
-all this adds to the reason for expected volatilityf
-Still remain bullish on gold
-a lot of this may impact the dollar with expectations for dollar weakening/euro rally/gold rally
-when saturn retrogrades people usually get very conservative and tighten up on finances (sell)

www.financialcyclesweekly.com
box on website with free astro traders tip o the week

Robert Prechter on the radio - Summary

Today Prechter was on the radio which I captured below. Most of it is the same ole same ole, however his comments at the end struck me as interesting. He said that making finance the center of a family's life may be the biggest social mistake humans have made in a long time. He suggests not following the markets 24/7, to step back, take breaks, don't focus on your family's finances all the time...basically don't get burned out in the markets. He also makes reference to the markets practically being 24 hours a day with a lot of movement lately overnight (which I have noticed recently). The rest of his conversation was basically his same ole same ole. He admits to being early on this rally but is sticking to his guns expecting a big selloff.

Summary Notes on the fly:

-Most extreme Optimism in NAII, extremes in put/call, Not necessarily a signal of the top, but a warning
-"Don't want to listen to people telling you good earnings, europe is fixed, unemployment, etc"
-"We are bearish...However, I have been thinking short for last 50 s&p points, so I may not be the right person to talk to right now chuckle....metals may have ended their rally this morning...91% daily sentiment bulls on gold"
-deflationary...central banks continue to struggle keeping bad debt available...conquer the crash called it yaddy yadda...bond run has gone on so long though def want to stay on short end of the curve...so close to switchover in bond yields
-bonds should be good for intial decline of stock market but will be bad once it gets going...
-Volker years completely different environment today...yields at opposite extremes
-Despite optimism the last 3 years, borrowers still havent come out of woodwork=deflationary
-Deflationary drop Prechter sees is larger than the one most others are expecting...a little early to be talking about bull market on other side
-Socionomics... waves of social mood direct societal actions and thus news
-Europe in late 90's form union, was not a cause, but was a result of the extreme positive social mood of the 80s/90s...always thought it would fail b/c it was a result of not the cause of social moods therefore when social mood falls EU will fail as a result
-Asia is starting to show similar social changes...relatively extreme optimism in the 2000's
-If we were at an extreme bottom already we would see extreme pessimism...but we are at the opposite end of the spectrum
-Bottom will be like 1942 or 1972?...that's what we will loook for
-A lot of things/companies wont be standing (junk bonds/companies fail)...wait til people are disgusted and dont want to talk about the markets anymore...great buying opp
-Between now and that bottom expect riots and protests to continue and get worse...there will be hotbeds that trouble will come from...incidents will increase in volume and intensity....unsure where it will occur, just need to watch those areas that pick up
-Very difficult to predict in 1920s where WW2 spark would have come from...similar to today...easier to see in the 30s...unsure where to pinpoint hotbeds
-"Im a broken record...short term debt, Swiss govt, New Zealand, Singapore....stay away from Junk/munis/stocks...not a commodity buyer....2008 was high....62% correction (fibo)" cash is good too
-Time to buy latin america is when they are in trouble not when things seem rosy, thats when prices are highest
-Weve done a lot of studies on elections...as stock market goes, incumbent will remain in power...right now looking good for Obama...if market falls (is more likely) then he might be in trouble
-"Be safe, be worried, dont let the markets wear you out"
-Running finance into the center of everyones life I think is one of the worst things our society has done
If would have done that in the 20s and waited had it much better....cant do that at these price levels.

I missed a few things due to bad internet connection, but got most of it above...one thing seems for sure, they are very good at not being scared out of positions.

What is up with Volume?

There has been a lot of discussion on lower volumes in the media and elsewhere. I too am seeing lower volumes recently. Clicking on the link above or looking at the first chart below there are a few key things to notice. Also, Blogger changed its format so it may be best to right click on charts and open in new tabs or screens...pain in the butt, I know!



1) The volume coming out of the '09 bottom was the highest of any of the major up moves at well over 3B shares/day (averaging around 4B). The volume coming out of the 2010 lows was around 3B shares/day. The volume coming out of Oct 2011's lows has steadily declined from around 3B to now well below it. This looks like classic waning volume as prices rise and is bearish longer term. Technical Analysis 101 states that rising prices with lowering volume is a bear sign whereas rising price and volume (such as early 2009) is bullish.

2) Volume on selloffs is significantly higher than volume on advancements. I am not sure what this guy with his CFA is talking about. He must be looking at something different than me. Financial Sense Volume Article

3) The 50 day volume moving average is now clearly in a downtrend since the October lows. That means volume is falling as price has risen. The volume 50 day moving average is now lower than it has been in the past few years at well below 3B shares/day. Zero Hedge put out an article about that as well. Zero Hedge Article

4) On top of volume we have a price momentum indicator (MACD) showing big divergence with October's price highs. Even though price has made a higher high above October, momentum indicators are showing warning signs about the last month's moves.

5) Price is setting up a classic rising wedge pattern. Typically these break down. The pattern has a lot of overlap and moves at a slower rate than the previous trend (which was August's down move). Watch the red dotted trendline for a breakdown. If so, get out.

6) Below I also have a longer term volume chart with a few different indices. You can see on everyone that they are all falling in volume (as prices rise) and currently sit at multi year lows. This chart is on a weekly basis with the volume lines (yellow) the 6 month moving average (26 weeks).


I think the point can easily be made that something is up with volume, especially when compared to recent history. Looking at the second chart, some volume is back to late 90's levels!!!

I saw this interview today which I found interesting for a few reasons. 1) The man has been in the game as long as anyone. 2) I have studied his On Balance Volume Indicator and found it interesting to hear him talk about it. 3) He agrees that volume is not supporting price and we should be falling soon as a result. Joe Granville Interview