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!

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

Current Technical Viewpoint

This is a chart I did yesterday outlining the two major things I see in the market's technical structure. It is actually pretty exciting because trades like this don't come around that often. There are a few key places that stops can be set to help make this trade a 4x+ reward/risk!

1) In green we are consolidating after a very quick bull move in October. This triangle could be considered a bull flag with an expected move north once the triangle is complete. This should occur in the next few days/week, if so. A solid break above the green upper trendline would give more confidence in this count. We were very close today. Watch out for a potential trendline backtest if the breakout does occur.

2) The potential bearish head and shoulders set up is equally apparent on the chart. This expectation would take the probabilistic lead with a breakdown below the uptrend of the last few months (currently around $1240). Watch for a backtest here as well (of the lower trendline).

These two scenarios are basically polar opposites, but can still be taken advantage of. One way to do this is to sit on the sidelines until such break occurs (either up or down) out of the triangle. This should allow a potential 30 pts+ in expected profit. Another way is to buy a straddle (if you are into options). This will allow you to capitalize no matter which way the market goes (you just want to make sure that it in fact does move).

Of note too are the indicators at the bottom of the chart. Both of them are showing bullish signs by making higher highs (not highlighted, but apparent). A breakdown of this could help signal an upcoming trend change and preempt a break of the price trendline...just something to keep an eye on.

Finally, volume isn't on this chart, but it has been falling somewhat during this triangle period. That supports the triangle theory. However, volume has been heavier on the down days (such as Nov 8).

Good luck!

MTA webcast series summary: Intermarket Relationships

Below is an email summary I prepared of the latest MTA webcast presentation by John Murphy from October 19 2011.
__________________________________________________________________

Hey all. Today I attended a webcast presentation by John Murphy (of stockcharts.com & MTA). John has been around a long time and is famous for his intermarket relationships analysis (one of which is required reading for the CMT). http://en.wikipedia.org/wiki/John_Murphy_(economist)

If you are at all interested in the macro environment or economics and how it ties to the stock market, then his intermarkets book, may be for you. It is great at tying together the financial markets, business cycle, and technical analysis all together.
http://www.amazon.com/Intermarket-Analysis-Profiting-Relationships-Trading/dp/0471023299/ref=sr_1_1?ie=UTF8&qid=1319048257&sr=8-1

I have attached the slides, which are pretty self explanatory and an easy flip through to see what's going on with a lot of different markets (contact me to obtain). You likely have already recognized some of them, but it helps to put correlations in easy to read charts. Below is a short summary of the slides in pretty much order with the presentation...

Intro: "You have to go back to the 30's to find similar correlations as today". Most "traditional" relationships have broken down in the last decade (starting with the Asian Crisis). The reason behind this is the deflationary theme we are currently in compared to the primarily inflationary period of the past. He cites 3 major deflationary events recently, the Japanese bubble bursting (1989), the asian contagion, and the US property bubble burst.

Slides 4&5: There was a paradigm shift around the time of the Asian Crisis. Bond yields and stocks started to move together. He cites a deflationary environment as the primary reason. He doesn't expect this relationship to revert back to the "norm" until deflation is out of the picture. Slide 5 shows that same relationship in 2011. In august 2011, bond yields didn't confirm the rally, which gave a hint stocks would see new lows.

Slides 6&7: Stocks and Commodities are positively correlated (extremely). This has not occurred since the 1930s. There is no other real good example in history and is one of the reasons he sees us in a deflationary environment. Commodities, like yields, seem to be leading stocks. He comments simply that Bernanke wouldn't talk about it so much if it wasn't a concern and prevalent.
One of the most reliable inverse relationships is the dollar/commodities; Recently a similar relationship has occurred between the dollar and stocks.

Slides 11&12; Stocks peak when energy outperforms...This occurred through the summer 2011. Rotation into safety, also has occurred...too early to tell if rotation into safety is over and downturn is "complete", but that cycle is longer term. Stocks are in red on slide 11 and the business cycle is in green.

Slides 14+; US stocks outperform foreign stocks when the dollar rises; however, they both fall. The Euro is something like 56% of the US Dollar Index and the majority of the 5 components.

Euro stocks are leading the US stocks right now

Ratio charts are a great way to see what is really happening and driving prices (I agree).

Q&A session...
-A China revaluation would result in inflation in America & decline of the dollar

-Use the 10 year bond when comparing across countries because most others don't have 30 year bonds.

-Expects "deflationary environment to continue until proven otherwise". Will look at bond/stock relationship to help tell.

Take care everyone and good luck! Let me know if you have any questions.
Chad

The S&P Currency Ratio Charts

After my posting yesterday I was thinking again about how much currency affects stock prices (answer: a great deal much!). To prove the effect, I came up with the attached chart which measures the performance since the October 2007 top of the S&P500 as well as its performance based in other marketable goods other than the US Dollar. The way to think about the chart is the conventional S&P 500 measurement is 1 S&P500 priced in $1 US Dollar or $SPX/$1. But, you can swap out the denominator in the equation to compare the $SPX in other liquid assets such as 1 canadian dollar, or one euro, or one barrel of oil, etc.

The reason this is relevant is because the markets are global. People from all over the world invest in the United States and vice versa. As such, people like me in the United States are affected by currency fluctuations. As a net importer most of the products purchased are from other countries (oil, electronics, many others). The exchange rate affects us more than we likely even know as a result. A truly localized economy wouldn't be affected by such things and would have a rather constant exchange rate, but that just isn't the world we live in.

In the attached chart I show the S&P500 in solid blue which is the S&P chart most people are familiar with. However, all the other line charts are also the S&P500! But, how can that be?!?!?!



The difference between the blue line and the 5 others is the blue line is the S&P500 as measured in US Dollars, the typical view found everywhere. The dashed lines are the S&P500 measured in other currencies (Red=Euro, Pink=Yen, Purple=Canada), an atypical view rarely if ever viewed or talked about. The thin black line is the market priced in a barrel of Oil and the Gold line is the market priced in an ounce of Gold. As you can see there are some major differences in price when the measurement tool is swapped out.

From a currency standpoint, the market priced in Yen (purple dashed) is only up about 20% since the March 2009 $730 equivalent level. Compare this to the S&P in dollars (blue line) which is up over 50% since then and sits at over $1200. The S&P/1 Canadian Dollar is fairing a little better, but still below the US Dollar priced S&P. The Euro is most similar to the USD based S&P, just slightly below, which means the Euro since then has behaved similarly to the US Dollar.

The S&P priced in oil is the outlyer of the group with wild swings. From the October 2007 high, the S&P priced in Oil is also lower at around $1075 from $1350...so still down around 20% which is similar to the S&P priced in dollars.

The final line in gold is the S&P priced in gold. This is currently making a new low below that of March 2009. Another way to think about it is this is how much 1 S&P500 is worth per 1 ounce of gold. This is very telling and means that Gold has significantly outperformed the US Market since the 2007 high and that priced in gold equivalent the S&P 500 is actually lower than it was in 2009. The next chart (below) is even more telling and shows that ratio since the year 2000 top.

There are many inferences one can draw from these graphs, but the primary theme is that a major reason the stock market is even as high as it is, is because of the weakening US Dollar and as a result a significant decline in the purchasing power of the American consumer. So, the stock market is up, but the American consumer's purchasing power has fallen, thus leaving them with less money at the end of the day. Just because the S&P is at a certain level, that same level doesn't buy you near what it used to and doesn't mean things are "better".

Another way to look at this is from a constant dollar perspective. The market's are quoted at current currency rates, but an investor who invests in the year 2000 invests in year 2000 dollars and is then at the mercy of both the numerator (stock performance) and the denominator (currency) over time. Therefore performance could and should be measured on a constant dollar basis (also known as purchasing power).

On that same chart from 2000 (below) that shows the S&P500 priced in gold, I also track the USD's trade weighted performance.

In March 2000 the trade weighted dollar index was around 106. Today it is around 74. Suppose that someone bought at the top in March 2000 when the S&P was at $1500 and the dollar was at 106. Now suppose that person sold today at S&P $1200. That would be a loss of $300 or 20% on the S&P...not that horrible on the surface. So that person cashes out and now wants to buy something with his $1200 cash, but he finds that his $1200 is not near what it was in 2000. In fact, on an average basis it now buys 30% less (106-74=32/106=30%) than it did in the year 2000. So in reality that investor has likely actually lost around 50% in their purchasing power over the 11 year period. They would have been much better off buying something that held its value better, however, they lost on both fronts.

This is best shown on that same chart with the S&P priced in Gold. That ratio has fallen a staggering 87% from a ratio of 5.3 S&P's per 1 oz Gold in March 2000 to only .66 S&P's for 1 ounce of gold today. Assuming Gold is a good measurement of purchasing power (which I do not totally agree with, but I think directionally it provides a good starting point), this shows that investing in the stock market since 2000 has actually set you back SIGNIFICANTLY...a lot more than the surface 20% decline implies!

Current Elliott Wave Count and Japan 1989 Comparison

Well, it looks like it is finally here. The next leg of the biggest bear market in most people's lifetime may finally be upon us. However, for most investors the probabilities are not yet high enough to justify a short position...not yet, anyways...there should be plenty of opportunities.

Attached is the latest wave count I am following. Encroachment into the Flash Crash territory of 2010 killed a lot of the bulls's hope of this being a new bull market up from the March 2009 lows. However, I would like to see a monthly close below $1190 to give even more probability to this count being correct from a longer term perspective. A new low around or below $1100 is needed before I can fully get excited about the new leg down. Once that occurs we should see a big rally back to where we are around now. At that time will be a good spot to get short and close longs. The market will have revealed more cards to us by then.

From a near term perspective I equate August's action to that of January 2008. Both of these months saw "hammer" candlesticks and ended big moves down from multi-year highs in the indices which subsequently rebounded some of that move. They also both occurred 4 months after the respective recent price highs. The first and last weeks of February of 2008 were strongly down with the culmination of that move down occurring March of 2008. If things are playing out similarly, then I expect September to be pretty volatile as well.

Linkable Real Time Chart : http://stockcharts.com/h-sc/ui?s=$SPX&p=M&yr=5&mn=0&dy=0&id=p72172925866&a=242864511



Finally, I would like to use Japan's last 3 decades as a roadmap to our current situation (some of the reasons I lay out on the chart below). Japan is the only major example of a deflationary environment in recent history and its size, importance, etc mimic the US's situation fairly well with some supporting arguments on the chart.





The key to me in the whole deflationary scenario is the country's currency situation. Just like the United States, Japan's stock market exploded as its currency declined in the 1980's...this makes sense as I have laid out in other postings about the $USD (see list of $USD labels to the right). Also, Japan's market peaked roughly when their currency bottomed. Since then, the market has declined significantly, deflation has taken hold, and its currency recently made new highs near all time stock market lows. Boiling it down to one point, I expect the US dollar to rally for the distant future keeping a lid on stock prices, supporting the deflation and low interest rates argument, and behaving similarly as Japan did the last few decades.

Keep in mind, one days volume on the foreign exchange markets is around $4 trillion...it absolutely trumps the stock market.

Why this "downdraft" can get worse

The put call ratio is a contrarian indicator often used to help mark extremes in sentiment. The thought is that when people buy more puts than usual (and more calls than usual) then sentiment may be at an extreme. Right now a lot of people are looking at the spike up in put buying and concluding that the market's selloff may be extreme. They also may conclude as a result that the selloff will soon be over. However, I have other thoughts.


Im not that concerned about the put call from a bear perspective for a few reasons...

1) We aren't near 2008 panic levels from both an actual and a moving average standpoint. The 75 day Moving Average (blue MA line) is at .71 and it peaked above .8 during 2008 a few times. It stayed above .71 for over a year then. The actual put/call of 1.11 and 1.08 thus far was seen back in 08 and peaked even higher at 1.35, 1.18, 1.16 then in April and December of 2008. Notice the recent spikes were even higher than the Flash Crash telling me this is something worse.
2) The rise of the ratio has been faster than in '08, but our starting point was a lot lower (complacency a lot higher it seems). Also, the fall in stocks over the past month was extremely fast...much faster than the kickoff after 2007's top. The fact that the put/call ratio was so low in the first place were warning signs that bulls were getting too comfortable.
3) Some of the highest put/call ratio readings were actually nearer to the highs than the lows. Maybe this hints at some major smart money bets as some have discussed yesterday/today.
4) Where we are currently from a moving average perspective is mid 2009 as well as all of 2007, so not that high. The point being we may be extreme from a short term perspective because of the quick rise and very low starting point, but it doesn't look so bad to me on a longer term and leads me to think that the Moving Averages of this ratio could stay here (and likely go higher) for quite some time. This would imply a high vix and continued stock sell off.

I would like to see this index come back down below .5 a few times before I would get comfortable being a bull. Notice that in all of 2008 and most of 2009 this index never went below .5...fear was present the whole time.

Good Luck.

Time to Overweight Bonds?

This chart helps show good times to change weightings between stocks and bonds. Right now the markets are at a critical juncture and if the downtrend line gets broken to the top then that would be a confirmation signal that treasuries should be overweighted and stocks underweighted. This would be set until a confirmed trend can be established at which another trendline could be used to help show the next flip flop.

Good luck! Click on the title above to see a live updated chart.

S&P500 apparent 18 month cycle

I did this chart after the late 2004 vertical line (cycle low). The vertical lines are all the exact time distance apart (roughly 18 months) and are created by connecting previous market turning points like the 97 and 98 lows and the 99 high. These 3 points are all the exact distance apart and we can use that knowledge looking forward to predict when potential market turning points will be. So basically I use the charting program that overlays equidistance vertical lines with the length of time I decide.

After bringing the chart forward to today's date, incredibly the cycles are still working well and have aligned directionally with the 07, 09, and 2010 lows. All I did to this chart is update the time range and the charting program projects the cycles outward. The next cycle point based on this will be 18 months from June 2010, or December 2011.

The market will let us know if it is likely a high or a low.

Click on the title heading to see an updated chart.

Good luck!

Bear case losing ground...again.

The bear scenario laid out in the previous blog post (in blue) is day by day losing it's probability of occuring. After today's move we are at a do or die point (which actually makes for the best trading opportunities). A straddle at today's close would help capture either one of these scenarios which both call for significant moves in the upcoming weeks.

Bottomline is a downturn must occur as soon as possible (tomorrow or Monday). Any significant move up will likely put the bear case to bed and result in new highs. Right now it is up in the air if the market will continue up to new highs in a final 5th wave or if the bear market will finally begin again (yes, I have been waiting for it for awhile).

The other option (not on the chart) is that this move down and now smaller move up is an A,B of an A,B,C which would suggest eventually the market moves lower (but only in a corrective mode before moving on to new highs).

Good Luck

Where I think we are in the grand scheme of things

Well, the rally from the March 2009 lows has certainly been impressive. I think it has taken many "bears" by surprise, including me. The top in April 2010 was definitely a spot the market could have turned south (as it did thruout the summer). However, after the August decline, which could have easily been the start of our next major move down, the market did not continue down further. It decided we needed another elongated move up. This was about the time of QE2, which may or may not have had a positive impact on the stock market and "worked" from that perspective.

I will drive myself crazy if I tried to figure out all the possible reasons for the elongation of our cyclical bull in our secular (11 years now) bear. All we need to know at this point is it happened, so what's the next move? Keep in mind that it took 25 years for the market to make new highs above its 1929 price and Japan is still trying to get there after 21+ years now.

After 9 months of seemingly unabated uptrend, the market is once again at a turning point. The real question now is, are we in a 4th wave correction or was the Egypt and then Libya conflicts the topping point?

The attached chart shows my current expectations in blue with a close alternate in red. The next few days and weeks will let me know. Any break below $1220 on the $SPX really raises the probability of a continued, larger move down. The alternative is that the move up from the July 2010 lows was not impulsive and was an A wave of a larger A,B,C (with the C needing 5 waves for completion - shown in Red).

This is a lot of technical jargon to swallow, so the key takeaways are drawn on the chart. In blue, the market has topped and is just starting its long, hard fall. This expectation assumes most other asset classes will also fall (as the dollar rallies) since markets almost always are interrelated. Also, there are numerous technical factors supporting this including volume, momentum, and the fact that we haven't had a good sized pullback in almost a year.

The alternative which I will look at as viable until disproved is shown in red and assumes at least a new moderate high is made before a decent decline.

The $1220 area remains key. If it is breached then the likelihood of a continued decline raises significantly. If it holds then the red alternative becomes my primary expectation.

Good Luck.

Why the Dollar Matters Most

In the attached chart you will see how the dollar and the stock market are tied at the hip. Except for the late 90's (an anomaly in so many ways), the dollar and the stock market lead each other inversely.

Even more than the stock market, the dollar is tied to the debt market (which also leads stocks). The reason is interest rate parity, or lack thereof.

When a country has a high interest rate, other people in countries with lesser rates will park money in the higher rate country. This raises the price of that currency (demand up) and thus lowers the rate of their home currency (demand down). When the lesser rate country returns the money back home, its fx rate is now weaker and it wins on both accounts (higher int. rate and gain in currency). If you are familiar with the carry trade that was so popular in the 2000s, then that is similar. This market "arbitrage" also goes against the interest rate parity theory that states that countries with higher interest rates must have lower future currency rates to offset that gain.

People flock to currencies with high interest rates and that is why the dollar hit its peak in the early 80s (as interest rates peaked) and is now at an all time low (as interest rates are at an all time low). During the early 80's stocks rallied hard (the 80's bull was actually bigger than the 90's as the dollar fell 30-40%). The chart above explains why, and I will explain in an example as well.

Most items are sold "in US Dollar terms". This means that the price (denominator) is the dollar. The toy you buy your kid for xmas can be translated as toys per dollars to come up with what it will cost you to purchase it. If you could trade a blanket for that toy it would be denominated as toys per blankets to come up with its value. The same is true for the stock market.

If the stock market's earnings in 1985 were $10/year and people were willing to pay 10x for those earnings then it is priced at $100s per 1 S&P500. This can be translated as $100/1 USD (with the "1" meaning 1 US Dollar which happens to be trading at an all time high of $1.65). Assuming earnings and multiples stay the same, if the $USD then weakens to $1.00 (which it did), then the real value of your stocks just jumped 39% (translating $1.65 down to $1.00), and in order to remain whole and offset that change, the S&P500 would go to $139, just by updating the reporting unit!

An easier way to think about this is thru inflation. When the value of the dollar falls, one way to conceptualize this is to think about there being more of them out there representing the same one thing, aka now worth less per dollar. This is basically inflation. If the denominator falls, the numerator is now instantly worth more (going from 10 toys/2 blankets=5 unit cost down to 10 toys for 1 blanket=10 unit cost).

The practical way to think about this is to replace the $USD with something more tangible like milk, or a house, or a gold bar! Why measure wealth in the $USD anyways? The $USD is only as good as its purchasing power, so why not replace it with something of more consistent purchasing power? If you replace the denominator with the more tangible asset like the price of gold (which many people do), you will see that stocks have actually lost a ton of "real" value since the 2000 top. At that top stocks were worth about 5.6x an ounce of gold. Today they are worth less than 1 ounce. Chart attached below. So basically you used to be able to sell your stocks for 5.6 ounces of gold but now it will only buy less than 1 ounce of gold. Assuming an ounce of gold today has the same utility as an ounce of gold in 2000, stocks have fallen in value significantly. You can do the same with oil, commodities, water, shelter, or any other valuable, measurable necessity. Most of them will show a decline in the value of stocks over the last decade. Chart of the S&P priced in Gold, below.



The key takeaway is that stock prices are only one component of their worth (numerator). Don't forget the denominator piece (the US Dollar) as that is just as important in establishing a stock's true value. Thus, if you can get a sense of where the dollar is heading then you are 50% of the way to finding out what your stock's true value is. Another takeaway is that as long as the dollar is falling, then items priced in dollars should be going up in price, stocks included...and viceversa.

Supple this to my previous blog post on the bottoming US Dollar and we might be in for a beating in the stock market depending on the size of the move. There haven't been that many periods since the early 80s where the dollar has risen in value (except the bubble 90's where everything went up - stocks, bonds, dollar), but there are many when the dollar has fallen hard...and most of those times saw stocks rally. We got a glimpse of what a dollar rally can do to stocks in the early 2000s as well as 2008. We also know that the dollar rallied with interest rates in the 70's and early 80's when stocks were flat to down. In 2005 the dollar rallied and stocks stayed relatively flat (compared to surrounding years when the dollar fell hard and stocks rallied hard). The math also works to support this thesis. Right now (previous blog post), the dollar is looking ripe for a rally. It will be interesting to see what effect that has on stocks.

Pay close attention to that dollar!

$USD - Very Interesting Right Now

The US Dollar right now is the center of the world! Bearishness seems to be at an ultimate extreme. Everyone keeps talking about how the dollar is doomed, how the spending in Washington is never ending, how the Fed is determined to monetize the debt (thru inflation) yet there is one glaring piece of evidence that I continue to look at and maintain contrarian and at least a little bullish...

Why is the price of the $USD not at an all time low? You would think with the demise of America as we know it that people would be dumping the dollar more than ever. But, the price today is $77.82 (up 1.61%) which is higher than last year's low after the QE1 announcement of $74 which is higher still than the 2008 low as the stock market started to tank of $71 and before all QE. That is still over 10% away from where we are now. That is a HUGE percent in the largest market in the world (currency).

From a charting perspective we are at a very interesting point. There looks to be a potential triangle forming (which would be longer term bearish) but there are issues with that triangle. There are 5 wave moves within the triangle, which is typically a no no. Plus the extreme bearishness isn't indicative of another move in the same direction. However if this is a triangle the final E move up of the A-B-C-D-E pattern should last at least a few months which will likely ease any bearishness. There also exists a potential that the move down from June is impulsive and that high was the top of a corrective flat pattern except there exists structural issues with that pattern as well (no new low at the end of 09, for one).

The other side of the coin has this baby in a potential bull move. The rising trend from the 08 low is still in tact and if nothing else we should get a bounce here (which looks to be already occurring). The final key to this would be to take out the 09 high of $90. If that happens, jump on the rally.

How we know where to place our bets...
1) If the price exceeds $90 then the triangle is invalid and the wave count I have labeled is the most likely (3rd wave beginning now).
2) If price drops below the triangle and breaks $74 then the likelihood is that the triangle (or flat correction counts) were correct and we should see new lows (potentially a huge move down if the triangle measurement is confirmed -19 points from the breakout point which will put the dollar in the 50's).
3) In the meantime, prices are rallying, this is either the E wave of the triangle, the 2 wave of the new move down (flat correction), or the mega 3rd wave of the new bull market that started in early 2008.

This chart is so important because the dollar is involved in all asset classes. Stocks, Bonds, and Commodities all have dollar denominators. So, if the dollar rallies, expect stocks and commodities to fall (especially commodities) ceterus paribus. The dollar is the daddy and leads all other asset tops and bottoms. It also trumps all the other markets in the world. People need to remember that the dollar is 100% RELATIVE in a fiat currency world. It will go up in price if it is better than the alternative (Europe, England, Japan, other major nations). So it can be easy to justify a dollar rally, especially if Europe continues to have problems and Japan decides the Yen is way too strong (which Im sure they already are saying).

Good Luck. This chart is very important and will be very telling.

Do fundamentals really matter? Convince me after seeing this chart...

The price of oil is the line and the price of the S&P500 are the candlesticks, but it doesn't really matter cuz they are so alike!

This one chart should be all that I need to convince people that technical analysis really does matter. The only explanation I can think of to explain this chart from a fundamental standpoint is that oil prices and the stock market must be driven by about 90% the exact same fundamentals. So somehow stock price earnings, cash flows, and oil prices are driven by the same thing to the tune of 90%? The $USD obviously is the denominator for both of these, so is that the answer? Maybe it's just the discount rate that matters. In that case, macro analysis is all that should be needed. I don't know, but this chart alone convinces me that knowing the P/E or forward earnings or dividend payouts of the S&P right now doesn't mean *!#^!

If so then how does that translate to the price of oil, because they are obviously driven by the same thing. Technical analysis would say that they are driven by emotions and/or something other than fundamentals, or it would at least attempt to capitalize on the correlation regardless of the reasons. Oil and stocks have rallied almost the exact same percent since their March 09 lows. What are the odds of that?

The other answer I will get is that they are driven by fundamentals over the long run, not the short run...well if this is a "bull market" and all is right in the world then shouldn't we be "in the long run" right now? That is to say if things mean revert, then shouldn't we be on the positive side of that reversion since we are in a "bull market"? Even if we aren't and things aren't "right" right now, then obviously fundamentals aren't working right now, nor over the last 1.5 years and that is what we care about...making money right now.

I have a bet with a friend of mine that says oil will reach $40/barrel before it reaches $100. I might as well add that the $SPX will need to make new significant highs for oil to reach $100, at least while they are tied at the hip as they have been the last 1.5.

I love this chart.

5 wave structure turned out to be just a correction - 2, not 3 waves down; The Fed's Open Market Activities in September

And the wait continues...The five wave move I blogged about on the 30th did in fact pan out with another five wave move down 2 days later as expected. Unfortunately, we did not get a 3rd 5 wave down to confirm a more bearish trend has started. Now we must wait for this larger 2nd wave from August to continue to frustrate more bears and do the most damage to the most people.

By looking at the chart above you can see that by Monday's close, things looked ripe for a final fifth wave down. This would have kicked off a much larger correction down and potentially confirm the top. However, the market wasn't ready for some reason, so we march along and I continue to feel the pain.

I read an interesting piece today about the Fed's Open Market Operations not to mention the Bank of Japan's statement that they will start buying etfs and other assets the Fed has yet to purchase. Supposedly the Fed has been buying 5-10 year treasuries about twice/week between $550MM and $5B throughout September. This theory suggests that almost each day the Fed was buying treasuries the market was up and those days it did not, the market was flat or down. Those days that saw $3-$5B of treasury purchases the markets were up significantly (props to Lighthouse Capital). These purchases are now supposedly finished until at least October 13th. So, the next few days will no doubt be interesting.

The Fed so far has not been purchasing stocks, but the theory is that the primary brokers of the Fed then use this knowledge to buy stocks. I am not sure if the treasuries are bought thru the primary dealers or not, but nevertheless someone has seen a correlation between the Fed's purchases and market up days.

I continue to wait for this most painful top!