Saturday, October 24, 2009

All the Pieces Were There to Move The Markets Higher

Friday morning I fired up the computer at 5:30 am, knowing the following 2 facts –

Microsoft had blown away their earnings estimates, with the accompanying CNBC buy everything that moves fan faire

The Markets were extended and brushing right up against significant resistance

My only question was who would win Friday’s trading – buyers or sellers? It was strange to see the Futures for the NASDAQ up big, but the Futures of the Dow and S&P 500 only marginally up. I also noted that many stocks were trading down big in the pre-market trading.

Buying Bad News is Bullish and selling Good News is Bullish. Today the Good News was sold.

Leader Agruim (AGU) really caught my eye, because it was down over -4% before trading started. So I figured that maybe Tech would try and be strong, but Commodities would weigh on things. Agrium gapped down hard on the day and ultimately got smoked for -7.05%!

But in the big picture, all Agruim did was pull back to its breakout point and near it rising 50-day (Black Line). I will be watching this leader closely to see when to buy it.

I’ve have known for over a week that the markets were stretched and that a pullback was highly probable, so I have been taking money off the table. I have missed some things, but the markets have seen a lot of selling from the Big Boys and I would rather sell into some strength and capture a lot of the gains, then sell into weakness and take my chances. I am now flush with cash to buy the likes of Agruim…

Juniper (JNPR) gapped up big and then was immediately sold off hard. While doing my homework on Thursday night, I noticed the chart of Juniper and listed $28.30 as a stop buy. However, knowing the position of the market relative to resistance, I chose to not enter the order right away and see how things traded in the early going.

For those who wonder why charts are used to better time entries, Juniper is a perfect example of how the Big Boys trade off of key levels. When you pull up a chart, it is a blank slate. You are responsible for adding the lines that show the important data. In the last 19 years, I have read a lot and figured out what levels and indicators are important.

The chart you pull up on CNBC or Yahoo Finance would look something like this. About the only information you can take from this chart is that Juniper is trading above its 50-day and it was sold off a big volume today.

Here is the chart I have created. You can see that on each of Juniper’s the four pullbacks in October, the -1 Standard Deviation Band has served as support (Red Arrows). You can also see that the +2 Standard Deviation Band has served as resistance (Green Arrows). It isn’t mom and pop moving JNPR off of these levels, it is the big boys pumping through 20 million shares of volume today. They have certain indicators that they use and you need to know what they are.

The Summation Index has broken below 1,140 and now sits at 1,032. The Accumulation / Distribution reading from Investors Business Daily has fallen to the grade of “C” – which means that the big boys are no longer net buyers.

Transportation stocks got smoked today. That is never a good thing. I am nearly certain that the printing of money will cause the price of Oil to get so high that it will strangle the economy. That will lead to the next Bear Market. I don’t think that we are there just yet.

My list of leaders in bases is starting to get long again. My > ADX(15) List is now up to 390 names, where as two weeks ago it only had 40 names. So corrective work has been taking place under the surface, while the markets have held up. Normally you see the markets play catch up to the downside, as they make violent moves lower during the last part of the correction. We’ll see how this one plays out.

Tuesday, October 20, 2009

Wedging into a Ceiling?

Here is another big chart. Sorry, but there is a lot going on and I want to point a few things out.

The 50% retracement (Black Line and Arrow) of the Bear Market sits right above here at 1,120 (versus today’s 1,091 close). That is a key technical level and may lead some traders to lock in some profits.

Over the last few weeks I have been pointing out how moves tend to be over when price jumps up through the Upper Channel Line (Green Line). If the line holds again, then the next move down to the 50-day (Purple Line) will be a critical test for the uptrend.

As if that weren’t enough, $SPX is now 20% above the 200-day (Red Line). The markets have only been this “overbought” 6 times over something ridiculous like the last 30 or 50 years. I forget which, but the point is that this is a rare occurrence…

So you have a Market that is historically overbought, compressed up against a critical Fibonacci Level and its upper trendline.

But it gets better still. You also have a divergence between Price and two critical indicators of overall Market health – Bullish Percent ($BPSPX) and The Summation Index ($NYSI). That means that as Price is going to higher highs, fewer stocks are powering the market higher.

The rally off the March lows has seen virtually everything go up – over 92% of stocks are now above their 200-day. You are starting to see deterioration in the Technicals and some divergences between Price and key Indicators.

Summation Index ($NYSI) is essentially a longer-term method for measuring the Accumulation and Distribution of stocks. Bull Markets have historically topped out when the indicator gets near 1,600. You can see that 1,140 is a key level for $NYSI. A break below 1140 on the Summation Index would probably be a pretty Bearish event.

Momentum (RSI14) continues to diverge with Price.

As the Bull Market matures over the next few months, I expect to see fewer companies leading the markets higher – I will refer to this as the rally “narrowing”. That will mean fewer sectors going up and fewer stocks leading things higher. Stock and Sector selection will become more and more important as the Bull Market matures and fewer Sectors and Stocks are going up.

Emerging Market Currencies versus the US Dollar
Brazil rocked the markets today, when they announced that they will start taxing new Foreign Capital flowing into Brazil at a rate of 2%. It is a pretty novel idea. The issue Brazil, and the rest of Emerging Markets have, is that they need to raise Interest Rates to slow down their economies. But they know that when they raise Rates, that hot money will flow into their economies, creating Asset Bubbles.

This is the old Carry Trade, where you borrow in US Dollars at effectively 0% and lever up to buy Brazilian Bonds at a substantially higher yield than 0%. Money pours into the economy with higher rates, chasing Yield and sending Asset Prices vertical.

I think this new tax is pretty smart. It gives Brazil the ability to raise Interest Rates by at least 2%, without the threat of a bunch of hot money flowing into the economy overnight.

The ETF for Brazil (EWZ) was down on gigantic volume today (Red Box). Today’s tax appears to be a game changer for Brazil, at these for the near term. Huge volume down days, late in a trend, are often very bearish signs. Hot money will probably now look elsewhere – maybe China, or Australia.

My understanding is that there are a lot of bets right now for Emerging Market Currencies and against the US Dollar. That could be unwound in a hurry. I will continue to watch the Dollar closely for a potential bottom.

All of that said, there are still potentially Bullish setups. I will continue to sell extended and buy breakouts, with tight stops.