Daily Archives: August 24, 2010

The Turnaround Points That Make Sense

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Everything continues to line up nicely for the drop-into-the-900s that I've been waiting on for the past seventy-two years (OK, OK, not that long……….but it sure feels like it). Psychologically, I am being cautious not to jump the gun two steps ahead. What I mean by that isn't that I'm wrapped around just-how-great it will be once we get into the lower 900s. Instead, I am already "pre-chagrined" that the party will be over at that point.

I feel very much like Colonel Kilgore who, in Apocalypse Now, admonishes his soldiers that "some day this war is gonna end." You can tell by his demeanor he's pretty heartbroken about that prospect.

This is not to say that we're going to cycle into a bull market at that point (ha! bwa ha! pffttt!) But if I am to follow my 1937-1942 analog, what comes after a drop to 925 is a choppy rise back to around 1125 (spanning months, perhaps) and then we can go back into bear mode.

What on earth could push the market back to 1125? Well, our dear friends in D.C. will probably dream up yet another way to hasten the demise of our once-great republic with some cheesey giveaway; maybe Obama and Bernanke will carnally embrace in the Rose Garden, each give birth to live unicorns, and auction them off on national television to help bring down the deficit. I simply don't know, and it hardly matters.

Perhaps you think I'm a fatalist. I don't think so; and even if I was, what could I do about it?

But how low with the S&P get? As anyone conscious here knows, I've repeatedly called for 925, but there are other possibilities. Here's the graph, and beneath it is a brief discussion of each possibility:

0824-stopzones

MAGENTA ZONE: This is the area of "noise" that we hit early in July. Bulltards will be thumping their bibles and stating how this is the buy-zone, since it bounced there last time. We always fight our last battles, don't we? I don't think it's going to hold, and I think bulls are going to soil their pantaloons.

GREEN ZONE: This is the area just beneath, and frankly, in spite of my 925-is-coming declarations, this is where I officially will start getting nervous and tightening up my stops. To date, the market has made a series of slightly-lower-lows, and getting down to, say, the psychologically-important 1000 level and reversing would make a certain amount of sense. If we earnestly crack 1000, expect the darlings in D.C. to start thinking of creative new ways to whore themselves for the sake of Lloyd Blankfein.

YELLOW ZONE: This is where I strip naked and dance on top of a harpsichord. I've been aiming for this zone for almost a year now, and although I'll probably be tempted to hold on to my positions, I will push myself to cover my positions (or at least give them extremely tight stops).

GREY ZONE: This, to me, is the farthest the market could possibly fall this year. It represents a major Fibonacci level, plus it just so happens to be the measured target for that gorgeous head and shoulders pattern. If we drop beneath here, even Tim the Bear will be very, very puzzled and confused. I'm seriously not expecting us to get this far.

And there we have it! I am presently about 120% short………..and I sort of wish I was shorter………and have no long positions (I briefly bought BP and CBS late today, but I tossed them under the bus in short order). The rest of this month promises to be tres interesting.

Tale of Two Markets (by Mike Paulenoff)

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We're keeping an eye on Chinese ADRs, like Trina Solar (TSL), which we discussed yesterday, in view of the strong relative showing of the Shanghai Composite Index compared to the Cash S&P 500 (SPX). I have a thesis that the global equity markets are in a leadership transition from "West to East," or from the U.S. to China (reflective of the "real world," no doubt). Political, economic, financial transitions along the magnitude we are talking about are never completed without turbulence and chaos before the dust settles, after which a "new order" emerges.

Chinese companies are in a position to prosper during and after the transition. Perhaps the enclosed chart picture is reflective of the progressing divergence of the two equity markets. As the chart shows, it's a tale of two markets. On the one hand, we have the Shanghai Composite, which hit a significant reversal low on July 2 at 2320 and climbed sharply to its August 19 high at 2702 (+16.5%). Since the high, the SH Comp has pulled back to today's intraday low at 2615 (-3.2%), prior to turning up and closing higher today at 2650.31, which positions the benchmark China index just 2% beneath its August high and 14.2% above the July low. Let's also notice that today's action reversed off of the rising 20 & 50 day exponential moving averages, which is a very positive technical sign.

On the other hand, the cash SPX exhibits a considerably weaker technical picture in the aftermath of its 11.7% July-August upleg. With the cash index at the equivalent of 1060 at pre-open today (and much lower since), it is 6% beneath its August high, and has violated and sustained beneath both its trading moving averages and its July-August trendline (1067). At 1060, the SPX is poised to test its prior significant pivot low at 1056.88 from July 20, which if violated could trigger a downside press directly towards the July low at 1010.91. Only a sharp upside reversal and rally that propels the index above 1072 will establish initial signals that the SPX has put in a significant near-term low.

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Originally published on MPTrader.com.

Long Opportunity Coming Up (by Springheel Jack)

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Well ES didn't even make a retest of 1084.5 ES yesterday before falling
again and closing the day down. That clarifies my expectations for the
next week, which are that we will fall into a short term low on
Wednesday or Thursday that will lead to a relief rally lasting three or
four days.

The key question is where we will make that low of course, and I
still have the same two targets that I posted last week, though I'm
leaning slightly more now towards the higher of my two targets as I'm
not expecting big down moves today or tomorrow. Obviously I could be
mistaken however.

The lower target is a hit of the very important support level at 1037 ES
today or tomorrow. I have a fairly high quality declining channel from
the July high with the lower trendline in the right area. If that target
is hit then it may well be that the subsequent rally would be capped at
the 1074.5 area, where the upper trendline of this short term declining
channel will be by then:

100824_ES_60min_Declining_Channel

I've switched to the SPX chart to show the higher of my two targets, and
that target would be at 1055 SPX, at the neckline of a potential head
and shoulder pattern where this low would be finishing the head, and the
relief rally would be making the right shoulder. In this event I would
expect a retest of the strong resistance level at 1085 for the right
shoulder, and if broken, I would expect a test of 1100 SPX as that is
the same level as the left shoulder, and that is a level I would be very
surprised to see broken, so it should go no higher. It is worth noting
that RSI, MACD and the 5,3,3 stochs are all showing positive divergence
now, which is an indication that we may well be close to a short term
swing low. You can see the RSI on this chart:

100824_SPX_60min_Possible_HS_Pattern

Looking at forex overnight EURUSD and GBPUSD have made new lows, and
AUDUSD has broken the very important support level at 88.56, which it
has been testing in recent days. I'm seeing the next target for AUDUSD
in the 87.4 to 87.5 area.

The big forex news overnight though was on CADUSD, which broke a twenty
month rising channel with a lot of conviction. I have two strong pattern
targets for the short term downside and have marked them on the daily
chart. I haven't marked it up yet, but I am considering the possibility that we have a very big H&S on CADUSD with the neckline in the 93 area and a target at 85.5. If so CADUSD may find some support at the neckline:

100824_CADUSD_Daily_Rising_Channel_Broken

I haven't reviewed the flight to safety trades on gold, bonds and yen
for a few days so I thought I'd review those quickly today. Gold,
technically the strongest of the three in my view, is still rising
within a two year old rising channel and may be falling in the very
short term towards an internal support trendline in the 1205 – 1210 area.
There is a possible head and shoulder pattern forming but it has too much
sideways action on the head to make a good pattern really, and to finish
the right shoulder it would have to break down through the lower
trendline of the main rising channel in the 1180 area, at which point I
would start to take it much more seriously. As gold is still close to
the bottom of the rising channel the upside targets are the 1320 area
for the significant interior trendline, and 1410 for the upper trendline
of the rising channel :

100824_Gold_Daily_Rising_Channel

Of these three flight to safety trades, gold is the only one that can't
be printed in vast quantities by profligate central bankers, which gives
it a distinct advantage over the other two IMO. The second, thirty year
treasuries, seems undaunted however by the ever swelling supply, and
has been in a strong uptrend for months now. I'm uncertain as to whether
this is a rising wedge or a rising channel and I'm leaning towards the
latter, If it is a rising wedge then we have been topping in the short
term for the last few days, and if it is a rising channel then I have a
target slightly under 136:

100824_T30Yr_Daily_Rising_Channel_or_Wedge

The flight to safety trade that I find hardest to understand however is
the yen, as interest rates are slim even with deflation taken into
account, and in solvency terms Japan looks like a dead man walking, with
a public debt of almost 200% of GDP, disastrous demographics, a
recession that has lasted on and off for twenty years, and one in three
yen spent by the government being borrowed. Suspending my disbelief
however I've charted this using USDJPY rather than JPYUSD as most people
prefer the former, and it appears to be in a large falling wedge. I say
appears as the criss-crossing between the trendlines is choppier than I
would like.

The RSI on the JPYUSD hourly chart is in oversold territory and the RSI
on the daily chart is developing clear positive divergence as well. On
the 60min chart it has hit a significant support level overnight and
there is a significant probability that it will reverse there. On the
daily chart though, 82.9 still looks an attractive target and this still
looks like a risky long. On a break of the upper trendline of the
falling wedge this will look a very attractive long and I'll be watching
for that in the coming weeks:

100824_USDJPY_Daily_Falling_Wedge

I've got a very busy week offline this week and won't be around much
though I'll be doing my daily posts every day. I'll be away on Friday in
a location with unreliable internet access, but I'll be doing the
morning post unless it fails altogether.