NB Charts

Financials at Potential Resistance

2011-01-06T15:19:00.001-08:00

Stocks were led higher since December 1st by Financials. The leveraged Financial ETF (FAS) is now at a pretty important price extension. The uptrend does not have to terminate but be on alert for at least a pause in the uptrend.

The inverse of FAZ is FAS. You can see the cluster of support here. If it fails, then support is at $6.65

More Market Games

2011-01-05T14:18:00.000-08:00

Here’s another example of how this market tries to actively trigger sell orders before moving higher.

On Dec 31st, it barely took out the low at the end of the day. You know guys got stopped out. It then ramped higher on the open Jan 3rd. The Dec 31 low was then marginally taken out yesterday (Orange Arrow). Again, you know people got stopped out.

There’s an investor conference call today to discuss the recent selloff and Cramer told you to buy the stock last night. In my opinion, that dip yesterday (price move, not Cramer) was designed to get people out of the stock. Period…

You Need to Keep Adapting

2011-01-05T07:22:00.000-08:00

You need to be able to adapt or will be eaten.

Take a look at Netflix (NFLX) and how it has been trading recently. It’s held the 50-day (Black Line) for months and has been holding a low at $175. Monday it broke below the 50-day and took out the $175 low. The next day it opened above the 50-day on an “upgrade” from a “analyst” and no doubt hosed a bunch of people who got stopped out the day before.

That is today’s market. There is no way that the breakdown was not manufactured. It did exactly the same thing in November and October, breaking support a few days before ripping to the upside.

Here is the chart that I am now using. On it, you can see that there was support at $173 and there was timing on Monday for a low. I did not sell the shakeout. I would have been very upset if I had. NFXL is by no means out of the woods. It needs to clear $182 and then $190 to get the trend back up.

The point of this is now whether NFLX will go up. The point is that you need to use what is working and change as the markets change. How many times now has IBD gone to “Market in Correction” the day the market has bottomed? You need to keep adapting or you will be eaten.

Treasury Top and Dollar Low?

2011-01-05T07:01:00.001-08:00

US Treasury Bonds (ZB H1-D) have been trying to find a low since they bottomed in mid-December. There is the potential that the last few weeks have only been a “two-step” rally into resistance and there is now timing for the downtrend to resume.

The currency markets have been moving in lock step with the US Bond market, because rising Interest Rates force money into US Dollars. The Euro (6E H1-D) has timing for a potential high. It needs to clear the 1.353 level to turn the trend back up.

The British Pound (6B H1-D) has a similar setup to the Euro. The 1.5362 needs to hold or another leg down may ensue.

The Canadian Dollar (6C H1-D) has been very strong and actually broke out of a 14-week base last week. It hit first resistance and is now retesting the breakout at 0.9989 Whoever would have thought of Canada as a safe haven currency… Sadly, it’s yielding 0.11%

An Important Week For Bonds

2010-12-20T11:59:00.001-08:00

Here is the weekly chart of the 30-year US Treasury (ZB #F-W). It has crashed in recent weeks. There was support at 122, but it was broken this week. Next support is 117’03. If that is broken, then next potential support is 114 and then 106 and 104. Price is very stretched right now on Bonds, so a bounce or pause in the decline cannot be ruled out.

This does look like a nasty Bear Market though, so bounces into resistance will get my attention. The flip side is that these downside levels do not have to be met and any rallied that break through resistance can reverse this pattern to bullish very quickly.

Here is the daily chart of the 30-year US Treasury. You can see where resistance is. If this resistance is cleared, then it votes for a resumption of the uptrend. The 15-minute chart has already turned bullish.

The Vanguard Short-Term Bond ETF (BSV) has hit support, so again, a bounce in bonds cannot be ruled out. A bounce can also turn into a bottom. Those price extension on the 30-year do not have to be met.

I have been saying all along that the Build America Bond (BAB) program would have to be extended. The Municipal Bond market has been hammered on the fact that the BAB extension was not included in the recent tax compromise, but things can reverse quickly in the markets these days.

http://www.bloomberg.com/news/2010-12-17/build-america-bond-program-poised-for-a-reincarnation-house-s-mica-says.html

Let’s see if BAB can break above the 20-day.

An Important Week For Commodities Too

2010-12-20T11:53:00.000-08:00

Just as this should be an important week for stocks, it should also be an important week for commodities.

Here is the weekly chart on Gold (GC #F-W). The last 3 major advances were 17, 21 and 20 weeks. Gold is now in week 21 off the last major low. There is a lot of support right below and price extensions above are listed. So far, two price extensions have been met on this rally.

If this is a more important high, then Gold may correct for a few more weeks. We’ll see how it shakes out. If the 20-day gets taken out it will start looking good again. If the 50-day fails, then the correction could get worse.

The daily chart of Gold shows that price is stuck between support and resistance. The 50-day is at 1,369 and the 20-day is at 1,382. Again, this is a very important week for Gold. There are setups in both directions, so expect some chopping around before the trend is established.

Crude Oil (CL G1-D) is in an 11-day trading range, sitting on top of support. Expect a decision soon on Crude Oil and Energy Stocks.

Here is a long-term weekly chart on the Euro (6E #F-W). It is in a downtrend, with support a few points below, but the Euro can get pretty nasty if they want to take it much lower. The Euro has been a good indicator of risk appetite, so I will be watching it closely.

An Important Week For Stocks

2010-12-20T11:48:00.001-08:00

Before I get into the events, here is the weekly chart of the S&P 500 ($SPX). You can see that prices are nearing extensions after a large move. These price levels do not have to be met and they do not have to offer resistance. There is significant timing the first part of January. An overbought market heading into early January would be of significant concern.

Near term, the markets have hit resistance. The NASDAQ 100 (NQ H1-D) has stalled out beneath a price extension the past 7 trading sessions. There is support not far below. The Mid Cap and Small Cap indexes are also sitting in similar trading ranges.

I want to look at the charts of some leading names. I will be doing more of this stalking of leadership next year.

Apple has been holding right above key support for over a week now. It needs to hold $318 or the next support is at $308.

Google has been stuck under a key price extension at $601 for a while. If this zone can be cleared, then things get pretty bullish. If not, then the low near $555 needs to hold.

Priceline has been stuck in a consolidation for several weeks. It needs to hold $389 to keep the uptrend intact. The 50-day is at $389. The 20-day needs to be cleared at $405 before anything good gets rolling.

Netflix is holding key support. There is timing for NFLX on Wednesday.

Amazon has had a shallow pullback into support. It is probably the strongest name right now.

Bank of America rallied into resistance and still remains in a nasty downtrend. Nothing good happens until $13.13 is cleared.

Baidu continues to fail, breaking through support after support. That is a pretty ugly chart.

Intel is camped out on top of key support.

You can see from these charts that this is a potentially significant week for stocks. Many leaders and key indexes are on top of support or stalling out at resistance. They face some pretty important decisions and will probably make them soon. I would love to see an overbought rally into early January to set up potential shorts.

Getting Near Upside Extensions

2010-12-15T06:35:00.000-08:00

Stocks are nearing price extensions – S&P 500 ($SPX and ES H1-D). They may or may not make it to these price levels. I continue to get more technical and have fewer opinions. Targets were hit on the daily chart, so a pause or pullback in price was expected. So far, it has only been a pause. We’ll see how the rest of the week plays itself out.

The NASDAQ 100 (NQ H1-D) has also hit price extensions and has now paused. Key support for the recent rally is 2,195.75 It needs to hold, or a deeper correction should be expected.

Gold (GC G1-D) has key support at the recent low near 1,369. Short term support is in the 1,383 range on the hourly chart. If that breaks, there is not much support for a while.

To go with Gold, the US Dollar (DX H1-D) has hit what looks to be meaningful support. A rally in the Dollar has been bad for risky assets and has been driven by falling Bond Prices / rising Bond Yields.

Bonds Take Out Key Support

2010-12-15T06:19:00.000-08:00

Bonds continue to crash. The setup was there for a potential low and it triggered and failed. Support that was broken today was pretty critical. Next support on the 30-year US Treasury (ZB H1-D) is now 117’22 and 117’01. You can see that the 121 level held for a few days, but it proved to only be a pause on the way lower.

Here is a longer term chart of the 30-year Treasury ($USB). You can see that it has reversed the breakout above 124 from last summer. Next support is in the 117 but a test of low of the trading range (near 114) seems very probably.

The selloff in bonds has not been limited to Treasuries. You can see that National Municipal Bonds (MUB) are in a full blow crash, as are California Municipal Bonds (MUC). This should be no surprise, as I have been writing about the crash in these bonds for several months now.

The flip side of the bond market crash is that by definition, Interest Rates are exploding higher! Shorter-term rates on US Treasuries have doubled in about a month. They still have a ways to go to get back to the highs of the year, but the yields are already much more compelling.

Long-term Treasury Yields have all gone up over 1% in the last month or two. A crash in the 30-year Treasury to this year’s low would drive the 30-year Treasury Yield into the 4.8% range.

Bond prices can reverse up at any time, but the next high probability setup would be at or about the 117 price level next week.

Potential for a Bounce in Bonds

2010-12-09T11:19:00.000-08:00

Bonds continue to implode (yields keep rocketing higher). Bonds keep breaking through support level after support level. You can see that timing comes in early next week (pink bars on the 30-year US Treasury ZB H1-D) and today is day 46 of the crash (crashes often reverse around days 45-49), so a bounce or bottom should not be a surprise.

I have included charts for US Treasuries of different maturities IEI (3-7 year), IEF (7-10) and TLT (20-year), as well as the Inflation-adjusted US Treasury (TIP). You can see that they have fallen to or below the key 200-day moving average. This is a level at which institutional investors tend to defend price.

The Investment Grade Corporate Bond index (LQD), the Aggregate Bond Index (AGG) and the Preferred Stock ETF (PFD) have also fallen to support.

Municipal Bonds (MUB), California Municipal Bonds (MUC) and Build America Bonds (BAB) are now testing the lows hit last month

Many are now saying that the Build America Bond program extension was not included in the new Tax Cut Proposal, because the Republicans want to make the big economic debate in 2011 centered around whether or not the US should bail out bankrupt states and their union workers. I still think that the plan will be extended. You can see the consequences to the Bond Market if it doesn’t.

http://blogs.reuters.com/james-pethokoukis/2010/12/07/secret-gop-plan-push-states-to-declare-bankruptcy-and-smash-unions/

Let’s see if bonds can put in a low over the next week or so. It may be a low over some serious consequence.

The Power of Timing

2010-12-03T14:22:00.001-08:00

I know some of this stuff seems like voodoo, but when computers are doing a significant majority of all trading, you need to use their rules when making decisions. One of the tools they are clearly using is cycle timing. This week, the Euro had several key time cycle dates on Wednesday and Thursday.

I wrote the following earlier this week –

“The Euro (6E Z0-D) has been hit very hard this month. Timing comes in Wednesday and Thursday this week, with the next support level not far below current price. Price does not have to reverse here, but I will be on alert, because this market has traded so technically this year.”

The Euro and risky assets reversed violently!

The S&P 500 (ES Z0-D) also had timing this week (pink bars below price) and has gone vertical after holding support on several occasions in the 1,170 range. The recent uptrend saw a decent correction that lasted a month, and the market is now back in rally mode.

IBD still shows “Market in Correction”, because there was not enough volume on Thursday to declare a “Follow Through Day”, but leadership is working and there has been plenty of Follow Through (significant accumulation by Institutional investors) in Gold, Oil, industrials and Transportation.

The next key resistance level is 1,239 and the longer term critical levels are around 1,263 and 1,300. If we hit those levels with longer-term timing, you know what I will be doing…

Crude Oil (CL F1-D) held support, with timing last week. That got me into Oil early. You can see the reversal pattern set up in Crude and the next potential resistance levels. The old adage is that stocks that go to $90 eventually go to $100. It will be interesting to see how Crude reacts if it gets to $91. Now I look for potential resistance levels and will make decisions if prices get to these levels.

The 30-year US Treasury (ZB H1-D) is in freefall. November was a rout for Municipal, Corporate and Treasury Bonds. Significant support is in the 122 range. I think that will translate to about $93 on the 20-year Treasury ETF (TLT). I will be looking for a potential reversal soon out of Treasuries. The key to the rally has been a selloff in the US Dollar. When it reverses back up, I expect Bond prices to also reverse back up. December should be yet another crazy month.

Gold had timing today and was at resistance for much of the morning at $1,405. It eventually blasted through this area and closed the day at $1,414.80! I am assuming that there were some shorts anticipating a reversal at $1,406 and they are now in the process of covering their shorts (buying). Next resistance is $1,452. Let’s see if prices can work their way up there. Next timing is next Friday.

Now I look to add on weak, low-volume pullbacks into obvious support. Like how Financials (XLF) pulled back into the old resistance level at $15.00 this morning. The breakout in November failed. Sometimes the second mouse gets the cheese…

50-day Held Today

2010-11-29T20:34:00.000-08:00

The markets took a nasty turn lower on November 4th. They are now at a logical level for support. Both the S&P 500 ($SPX) and the Dow Jones ($INDU) held their 50-day moving averages today (Black Lines). This is a normal level to expect the indexes to be defended and today did not disappoint.

You can see how persistent the selloff has been, both in US and Foreign markets. Financials (XLF), Hoe Builders (XHB) and Insurance (KIE) all stopped going down today. You can see how quickly these sectors have reversed up after selloffs have stopped over the past 6 months. We’ll see if it can happen yet again.

International markets have been hit pretty hard since the beginning of November. Developed International Economies (EFA), China (FXI) and India (IFN) have each broken their 50-day averages (not shown).

The Euro (6E Z0-D) has been hit very hard this month. Timing comes in Wednesday and Thursday this week, with the next support level not far below current price. Price does not have to reverse here, but I will be on alert, because this market has traded so technically this year.

The S&P 500 (ES Z0-D) is sitting right above significant support, with timing coming in tomorrow and Wednesday. Be alert for a reversal or a significant failure this week.

While many areas have been failing, there has been some leadership. Just note that more and more areas are failing, so you will have to be more and more selective when committing money. Metals/Mining (XME), Transportation (IYT) and Silver (SLV) have been holding up very well. They have not yet broken out, though.

Some leading names in Materials are SNP, BHP and RIO. Note how all three held their 50-day averages today.

Crude Oil held support and bounced sharply the last few days. Several Energy names have been holding well above their 50-day averages – BTU, APC and LINE. Again, none have broken out yet, but they are worth monitoring.

This has also been a rough month for Bonds. Junk Bonds (JNK), Municipal Bonds (MUB) and Emerging Market Bonds (PCY) have been hit hard, considering they are bond and not stock ETFs. Continue to expect violent swings up and down as asset classes fall into and out of favor.

The markets need to hold support here and at least bounce over the next few days. If you start to see the S&P 500 and the Dow break key support, then this selloff can accelerate quickly. This will be a very important week.

Daily Uptrends Broken

2010-11-17T06:31:00.001-08:00

The uptrend has been broken. You can see that the uptrend failed when the support levels around 1,200 were broken on the S&P 500 (ES Z0-D). The 34-day moving average held price today, but below that, meaningful support does not show up until 1,150 and 1,134. 1,134 would be similar to the August selloff.

None of these areas have to hold and price can reverse back up from anywhere, but this market has been very technical in how it has traded, so I will be watching for reversals from anticipated levels.

Here is the hourly S&P 500 (ES Z0-60 min) chart. On it, you can see that there is a ton of resistance above the current price. There was timing on the hourly chart for a reversal up yesterday, but the bounce has been very weak. Weak bounces into resistance, in a downtrend are normally not a bullish setup…

The Dow (YM Z0-D) has broken its uptrend and I have listed potential support levels.

The NASDAQ 100 (NQ Z0-D) has broken its uptrend and has already fallen to support.

I hope you were patient if you wanted to buy Gold (GC Z0-D). You can see that its uptrend is also broken and meaningful support comes in around 1,313 – 1,305.

The 120 minute chart on Gold (GC Z0-120min) is the same story as the S&P 500. There is substantial resistance above price here, and the trend is down for now.

The Euro (6E Z0-D) looks similar to Gold. The Euro has pretty meaningful support in here and had better hold, or it is going to make a serious retracement of the recent rally.

The 30-year US Treasury (ZB Z0-D0) has been massacred over the past couple weeks. It finally found support at the 168% extension zone and bounced hard up into resistance. The Treasury normally benefits as a safe haven trade during times of fear, so there may be money flowing out of Municipals and into Treasuries. Or it may simply be bouncing during a downtrend. We’ll see how it reacts at resistance.

All in all, risky markets broke their uptrends and are now correcting. Some are at or near daily support, and most are at hourly resistance. There is a lot of concern about Municipal Bonds being allowed to default be a Republican Congress (California, Harrisburg, Hamtramck) and the potential defaults by Ireland, Greece and Portugal. All the while, the Commodities exchanges are increasing margin requirements on risky assets. This should continue to be an interesting week. Watch the hourly charts for turns in the daily patterns.

Municipal Bonds Continue to Get Hammered

2010-11-15T22:06:00.000-08:00

Municipal Bonds have been annihilated the past 7 trading days. The pain was particularly bad today. I have stated on several occasions that the Republican takeover of Congress will not lead to the “blessed gridlock” of the Clinton years. The new Republican Congress will have no inclination to continue Obama’s mission of bailing out the Unions with taxpayer money.

The key beneficiaries of this money were the states, who were given several $100 billion so that they would not have to make layoffs - the vast majority of these potential layoffs being union jobs. If this money dries up, the states will be forced to make difficult fiscal decisions, like layoffs and cutting payments to municipalities. The markets are now starting to price in potential defaults in municipal bonds.

It turns out that the politicians in California lied about how bad its finances were, just a few weeks before the election. Now the real numbers are coming out and California is about $25 billion deeper in debt than was admitted in September (can we please throw these politicians in jail already!). This risk is being priced into California municipal bonds.

I know that it is written into the California Constitution that the state may not default on Muni bonds, but that does not preclude small municipalities from defaulting. There is a real risk that Harrisburg, PA will default in the very near future and that is also being priced in to municipal bonds.

Take a look at how some leveraged Municipal Closed End Funds have been trading recently (PIMCO and Nuveen top the list of pain) –

Silver Pounded, Stocks Holding Support

2010-11-10T06:31:00.001-08:00

Although yesterday was pretty brutal for commodities, the uptrend for the stock indexes remains intact. It does so until these support levels are broken. Here are the obvious support levels for the Russell 2000 (TF Z0-240min) and the Dow (YM Z0-240min). If support holds, the party continues, if support is broken, then we may be in for a more meaningful correction.

Here is the hourly chart for the NASDAQ 100 (NQ Z0-60min). If resistance can be cleared, then look for the rally to continue. If 2164 is taken out, then look for more pain.

On the daily chart, the 30-year US Treasury (ZB Z0-D) has hit the support level I have been looking for. There is the potential for a pretty meaningful reversal from right about here. It needs to trigger. If support here fails, then this correction in bonds could get real ugly, real fast.

The yield has already rallied from 3.5% to 4.3% since September 1st (the day QE2 was announced). A move to $120 would put yields in the 4.7% range. Remember what I have been writing, that under QE1, there was a spike higher in yields, followed by a narrow trading range. The trading range on the 30-year Treasury was about 12% last year, so if you bought them wrong, you have some serious pain. If you bought them right, you had a nice year.

Today’s auction of the 30-year and the POMO purchase schedule announcement will probably have a big impact on bonds today.

Commodities had a very rough day yesterday, with several gold/silver stocks reversing 10% intraday. It was a news-driven event, as the futures exchange decided to raise the margin requirement for trading Silver. By definition, this sucks liquidity out of the system and lowers demand. The volume on the Silver ETF was about 25 times average! After a parabolic move, that is normally not a good sign. Commodities will have to be watched very closely here.

REITs also had a very ugly day yesterday and will need to be watched closely.

Updated Charts

2010-11-09T06:50:00.000-08:00

Here are support and resistance levels for Apple (AAPL) –

Here are support and resistance levels for Baidu (BIDU) –

With Financials breaking out, here are resistance levels for Bank of America (BAC). BAC has crashed and is now bouncing. Resistance has held the entire way down. A breakout would be bullish for one of the biggest laggards in Financials.

Here is the S&P 500 (ES Z0-D). You can see that it is a few percent above support, but as long as that support holds, the uptrend remains.

The Euro (6E Z0-D) is pulling back and testing support. The chart of the US Dollar looks like the chart of BAC. When the Euro finally corrects, I am assuming that that will adversely impact commodities and stocks, so I am watching the Euro closely.

US Treasuries (ZB Z0-D) have been in a multi-week trading range. The price of the 30-year has been hit pretty hard, when you consider that it is a bond and is normally owned by conservative investors looking for income and safety. Nothing seems to be safe anymore. Everything is volatile…

Support is very close to the current price. Let me just note that I am watching US Treasuries very closely.

POMO Is Important for Stock Market Performance

2010-11-01T09:21:00.001-07:00

POMO (Permanent Open Market Operations) does matter –

http://www.ritholtz.com/blog/wp-content/uploads/2010/10/pomostock1029101_big.gif

Today's POMO included the Fed buying back Treasuries that they issued only 2 WEEKS AGO! Bonds got creamed on the purchase, mainly the Fed only bought a small fraction of what was offered for sale by the Dealers.

Will Recent Trading Ranges Be Resolved This Week?

2010-11-01T08:17:00.000-07:00

This is a potentially critical week, with the Fed, the Election and many key markets in trading ranges, but holding above key support. If they want to correct the markets on news, they can do it from here. If they want to break the markets out to new highs, they can also do it from here.

The S&P 500 (ES Z0-D) continues to sit in a 13-day trading range. It is still above support. The trend is up until that support gets taken out.

Gold (GC Z0-D) is at resistance in the 1360-1362 range. This is an important decision for Gold. The $1305-1309 level is critical support for Gold.

The Euro (6E Z0-D) is stuck in a 19-day trading range. The movement of the Euro will indicate what the Dollar is doing. Expect the Euro to continue to move with the prices of risky assets, so it would probably be a bad thing if this trading range fails.

US Treasuries (ZB Z0-D) are now at the low end of a 13-week trading range. The key support level is in the 128.11 range. That would set up a potential reversal pattern.

Trading Ranges for Recent Leaders

2010-10-28T10:05:00.000-07:00

Corrections are healthy, because they allow you to rotate out of laggards and into leaders. Many leaders have been correcting here and are now sitting in trading ranges that will offer pretty defined entry points, if they trigger.

Silver (SLV) and Gold (GLD) have sold off since breaking their uptrend a 8-day trading ranges. I am assuming that the trading range will be resolved as a result of what the Fed will say next Wednesday. This is either a pause on the way higher or a retest of the highs before a meaningful correction.

Silver and Gold are not the only leaders that are pausing after recent gains. Apple (AAPL) is also in an 8-day trading rnage that follows the selling accompanying its earnings release. You can see that AAPL is falling below the trading range. I have also included the 120-minute chart to show support levels - $303.02 and $301.15 need to hold.

China (FXI) is looking like it topped. You can see that FXI traded sideways for 14 days and then sold off hard on Tuesday as the Dollar finally rallied. This trading range is now resistance. Watch FXI closely for failure from here.

China National Oil (CEO) has been a recent leader and been consolidating for much of October. A breakout will be obvious. The way CEO trades, if it is to extend this rally and not correct, it will most likely gap up to $214 -216 range the day it is broken out of this consolidation.

The US Dollar Carry Trade has been the key to the recent rally – where you borrow cheap US Treasuries and leverage the proceeds to buy risky assets. I think the Japanese Yen Carry Trade leading into 2008 amounted to over $800 billion in leverage. The Euro (EURUSD) has been a key beneficiary of this trade. You can see that the Euro has been in a 17-day trading range. It will either break out or break down and probably pretty soon. This will probably be the key driver for how recent consolidations of these leaders reconcile themselves.

Daily Support Holding Leadership Rotating

2010-10-28T06:50:00.001-07:00

Daily support continues to hold. S&P 500 ($SPX) is clearing holding -

The Russell 2000 (TF Z0-240-min) has been sitting in a 2-week trading range. I like setups like this, because they offer close stop losses to help me manage risk. Resistance must be cleared to get me interested.

The NASDAQ 100 (NQ Z0-240 min) will gap up this morning and open in the resistance area.

US Treasuries (ZB Z0-D) are now in a trading range and near support with timing coming in next week. This will be worth watching as the Fed announces some version of QE2 on Wednesday.

Many leaders have been pulling back the past 10 days. The money continues to rotate and that is very bullish. You can see that enough money flowed into Semiconductors to break them out above a 6-month trading range.

The Gold Stock ETF (GDX) has pulled back the old breakout level and has been holding the 50-day for the past few trading days. There are some pretty obvious stop loss levels here.

Fed Moderating QE2 Expectations

2010-10-27T06:39:00.000-07:00

Jon Hilsenrath at the Wall Street Journal has been the Fed’s leaker of trial balloon statements. This morning wrote the following –

“The Federal Reserve is close to embarking on another round of monetary stimulus next week, against the backdrop of a weak economy and low inflation—and despite doubts about the wisdom and efficacy of the policy among economists and some of the Fed's own decision makers.

The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.”

http://online.wsj.com/article/SB10001424052702303891804575576533845166848.html?mod=googlenews_wsj

That can’t be good. This entire rally has been on the back of an imploding Dollar, which has crashed because investors don’t want to hold the currency with the 2nd lowest Interest Rate on the planet and a Central Bank intent on printing enough money to drive the entire yield curve to zero if it is required.

If you read what Brian Sack of the NY Fed said about how the Fed buying bonds has had the benefit of propping up asset prices, then you know that the whole Quantitative Easing game has nothing to do with getting credit to the consumer and everything to do with making their mutual fund statements and housing price values look better.

Any way you slice it, there seems to be significant risk for Interest Rates right now. I say this because Interest Rates rallied sharply during the first part of QE1, as expectations for economic expansion drove people out of Bonds (see yesterday’s post). They have now rallied on expectations that the Fed will buy $100 billion of them a month until Inflation gets to 3-4% per year.

So if the Fed announces massive QE2, then expectations of growth impact Interest Rates and if QE2 is small then the lack of expected Fed demand for buying Treasuries hits bond prices, driving rates higher. Rising rates help currencies appreciate and a rising Dollar is not good for markets levered up on the Dollar Carry Trade.

http://www.ny.frb.org/newsevents/speeches/2010/sac101004.html

Gold, Silver, The Euro, The Brazilian Real and US Treasuries have all been telegraphing a potential pause or reversal in the vertical move for risky assets. Maybe we simply see extended prices revert back to their 50-day averages or maybe we get the hedge fund crowd to all run to the other side of the boat at the same time and take us back down as quickly as we just shot up.

The Fed has been horrible at anticipating and unwinding the bubbles they have caused. It is a matter of when and not if they mess up the unwinding of the Treasury/Commodity bubble they are now blowing.

I will keep a close watch on hourly support levels to see when real weakness finally starts to show up.

You can see that the indexes are right on top of significant support zones in the 240-minute charts –
S&P 500 (ES Z0 240-min), Dow (YM Z0 240-min) and NASDAQ 100 (NQ Z0 240-min)

Bonds Sold Off When QE1 Started

2010-10-26T10:50:00.001-07:00

I want to take a look at Bonds from a big picture level, because so much of the money flowing into risk has been the result of money being printed by the Fed. Here is a chart of the prices of US Treasuries of varying maturities – 30-year ($USB), 10-year ($UST) and 5-year ($USFV) –

What I want to show on this chart is how Treasuries performed during Quantitative Easing 1 (QE1). QE1 started in March 2009 (Green Line) and ended on April 1, 2010 (Red Line). You can see how Treasuries actually sold off as QE1 began, and then sat in a trading range for 11 months. I think this was the result of expectations of economic growth.

Treasuries literally bottomed on the day that QE1 ended. This tells me that the big boys knew that another round of QE would be needed to stave of economic weakness. You can see that Treasury prices shot straight up from April 1st until the next round of Quantitative Easing was announced (QE2) on September 1st.

So the obvious question is do Treasuries now sell off again on expectations of increasing economic activity?

The inverse of Bond Prices is Bond Yields (30-year ($TYX), 10-year ($TNX), 5-year ($FVX) calculate the yields by dividing these by 10). You can see how Bond yield spiked as QE1 started and then sat in a trading range. Yields then imploded as QE1 ended and now may be reversing back up. Past performance doesn’t guarantee future performance, but I am very would not be surprised to see yields rally on expectations or – a) economic growth or b) QE2 will not be as big as some hope it will be.

The US Treasury held an auction yesterday of the 4 ½ year TIP (Inflation-Adjusted Treasury) and the yield on the new TIP was -0.55%. That is right, it had a negative yield. This tells you that the bond market is anticipating Inflation that far outstrips the yield on the non-TIP Treasury with the same maturity.

It is the first time in history that the TIP has had a negative yield in an auction. With Bernanke now instructing the Fed to target 2% (more like 3-4%) Inflation, people are willing to take a loss to get better long-term yields. I think the negative yield is a bit of an overshoot and may mark a low point for yields.

Here is the daily chart of the US Treasury (ZB Z0-D) with support and resistance levels included. You can see that the Treasury has had a decent pullback. It is in a downtrend and testing support.

Support Levels

2010-10-25T09:44:00.000-07:00

Hourly resistance held and now it is time to looks for support levels to hold. This is the hourly S&P 500 chart (ES Z0-60min), showing failure at timing. Support shows up in the 1172-177 range.

Here is the S&P 500 daily chart (ES-Z0-D). Support is in the 1166-1172 range. As long as that support area holds, the rally remains intact. A break below 1155 is potentially a serious problem.

You can see that the Dow (YM Z0-240min) hit the 127% extension almost to the penny and has reversed back down. This occurred as other indexes were also hitting upside targets and had timing for a reversal.

I have listed the support levels for the Dow.

Overnight Bounce Stalling?

2010-10-25T08:01:00.001-07:00

There was a big spike higher in the futures that took the S&P 500 into upside targets (1189). This occurred with the daily chart for the S&P 500 (ES Z0) entering a timing zone. We have also entered a zone on the hourly chart (ES Z0-60min). You move to the lower timeframes to anticipate turns on the longer-term charts. So far, these daily timing zones have only led to small pullbacks or short pauses in the advance, but the rallies in risky assets are getting extended and some are starting to falter.

The collapsing Dollar is causing risky assets to go up. The Euro (6E Z0) has been a primary beneficiary. The Euro is stuck at the 1.40 resistance level. The overnight rally in the stalled and now the Euro is in pullback mode. Here are support levels. These need to hold, or they open up the possibility of a pretty nasty decline on the daily chart (levels posted on Friday). The Euro is a key indicator for how risky assets move.

Gold (YG Z0-D) bounced hard overnight and has held daily support in the $1,300 range. It needs to clear the $1,360 level to turn the trend back up and then the 127% extension is $1,407. I included the short term support levels below.

Baidu Resistance Levels

2010-10-22T07:24:00.001-07:00

Baidu (BIDU) is nearing its first resistance out of this 19-day trading range.

The Euro Needs To Hold

2010-10-22T07:20:00.001-07:00

Because virtually everything is tied to the Dollar, this daily chart of the Euro (6E Z0-D) makes me nervous. Significant support lies above -4% below the current price. A correction like we saw in August cannot be ruled out and may actually be the more likely path right now. The S&P 500 corrected -8% in August. So you know there is significant potential risk right now.

The S&P 500 (ES Z0-D) is still holding daily support.

Yesterday I noted that the S&P 500 broke out of a 7-day trading range but that it had the reversal pattern, so I expected it to pull back. It did pull back, but still remains above daily support. The first real risk of a correction occurs if the uptrend of the last 3-days fails (Pink Line). I know this is micro-managing, but you will see the markets start to fail on the lower time frames first and I don’t want to miss it.

Gold (GC Z0-D) has corrected sharply and is now at potential support. The 30-minute chart currently has Gold at resistance, with the 127% extension at $1,311. So that $1,310 range will need to hold.

You can see the reversal pattern setting up on the Gold Stocks ETF (GDX). Maybe the little 3-hour bounce is all GDX gets, or maybe it becomes something more significant. Regardless, you can clearly see how the uptrend (Blue Line) has broken and how the gap on Tuesday would have caused you to stop out with a -3.5% loss from Monday’s close. Gold seems to make most of its big moves over night, so you are very vulnerable to big losses below your stop losses on GLD and GDX.

I am still very nervously Bullish, but the Euro causes me great concern for a sharp correction at any time.

Gold Looks Very Suspect

2010-10-21T08:45:00.001-07:00

A few weeks ago I noted that a number of Gold Stocks were in narrow trading ranges and that I was interested in them if they broke out. I noted this, because the most efficient way to manage risk is to have defined levels, which are very close to your purchase price, where you can see supply taking over from demand.

The Gold Stock ETF (GDX) broke out on a long term chart to new weekly highs. It is now in pullback mode. It needs to hold the $54.25 level. Remember, some seriously large losses occur when stocks break out of trading ranges and then quickly reverse lower, through the old breakout point.

The largest holding in GDX is Barrick Gold (ABX), at 16.71%. You can clearly see how it broke out to new highs and then failed by falling back below $48. I got stopped out of ABX before Tuesday’s plunge. ABX now has a bearish wedge forming right below the 50-day (Black Line) – that is very ominous.

Newmont Mining is the 3rd largest holding in GDX, at 11.34%. You can see that it is right on critical support. It had better hold above $60!

Here are a couple “Junior” gold stocks. You can see how dangerous it is if you buy before they break above resistance. In parabolic moves, you still have to figure out how to manage risk!

Gold (GC Z0-D) broke support for the rally since August, so I now have to look at the June-July and December-February corrections to get support levels. I am now concerned that the correction in Gold will be more like what we saw in those multi-month corrections, so I expect this correction to at least take more time than it currently has.

Daily Support Held

2010-10-21T07:43:00.000-07:00

Daily support held for the S&P 500 (ES Z0-D). I mentioned earlier in the week that as long as that support zone held, the uptrend was still intact. Now the S&P has broken out of a 60day trading range. You can see on the hourly chart below that it has also set up the reversal pattern (in red), so a pullback to test support would not surprise me. The pullback could only last a few minutes or could take the better part of a day. 1,189 was the 127% target coming of Tuesday’s lows.

It Is ALL About The Dollar

2010-10-20T11:33:00.000-07:00

Here is the hourly chart comparing the US Dollar (UUP) with stocks ($NYA), Crude Oil (OIL) and Gold (GLD). It is pretty obvious that stocks, commodities and Gold all move inverse to the Dollar. Each Dollar rally has coincided with a pullback or pause in $NYA, OIL and GLD.

The Dollar (UUP) put in a low on 10/14 and the prices of $NYA, OIL and GLD have pulled back. Yesterday there was a big rally in the Dollar and Gold, Crude and stocks got hammered. Today the Dollar is getting pounded and Gold, Crude and Stocks are rallying sharply.

The Fed is in control. The more money they print, the weaker the Dollar gets and the higher asset prices go up. The goal of the Fed is to cause Inflation. Bernanke is a zealot on a mission and nothing is going to stop him from conducting his experiment.

S&P 500 Support Levels

2010-10-19T06:41:00.001-07:00

Daily Support Levels -

Gold Support Levels

2010-10-19T06:22:00.001-07:00

Here are daily support levels for Gold -

Apple Support Levels

2010-10-19T06:18:00.001-07:00

Here are the levels of support for Apple -

iPop?

2010-10-18T22:11:00.000-07:00

Apple did their usual, “beating” of expected Quarterly earnings and then lowering expectations for next quarter, only this time the market smoked them. You can see here that Apple rallied right up into resistance today. In after-hours trading it has fallen $18 to $300, so basically it has given up all of Friday’s gains.

The last resistance level was $292 and Apple had a mini “flash crash” off of that level. The event was later blamed on a “rumor”… On a side not, the S&P 500 ETF (SPY) had its own “flash crash” upon Apple’s earnings release, falling 10% in a matter of seconds. Over $500 million in orders were reversed –

http://www.bloomberg.com/news/2010-10-18/nyse-euronext-cancels-trades-of-s-p-500-etf-at-9-6-below-opening-price.html?cmpid=yhoo

IBM also ran too far too fast and is down $5 in after-hours trading.
Microsoft (MSFT) is down too, with a key executive deciding to leave.

My big concern with Apple is that Apple is over 20% of the weighting of the NASDAQ 100 Index and it could have a nasty effect on QQQQ. One day it will fail and it will blow up the market, because it will simply be owned by too many people who all want to sell at exactly the same time – see Intel, Cisco, Microsoft circa 2000.

Markets give clues when things change. Sometimes it is a process, where prices drop, rally back up, drop, rally back up… Markets tend to do this. Stocks and Sectors can literally top in a day. These days are normally the biggest down day ever in price, on the biggest day ever of volume, where price is significantly overbought. October 6th may have been one of those days for a key group – Cloud Computing.

Take a look at some of the leaders from the group – VMWare (VMW), Salesforce.com (CRM), Red Hat (RHT) – the patterns are now tops.

Other former leadershad similar days – F5 Networks (FFIV), Citrix (CTXS), Rackspace Hosting (RAX), Mercadolibre (MELI)

Markets top as leaders break, stock by stock and sector by sector. It is critical to watch how leading names are doing and how they react to earnings this month. On the chart below, I have listed critical support levels for the S&P 500 (ES Z0-D). As long as price holds above these levels, the uptrend remains intact. If price fails to hold these levels, then the possibility opens up for a more substantial correction or top.

Also keep a close eye on the US Dollar, because believe it or not, when Apple tanked this afternoon, the US Dollar spiked higher. Gold, The Euro and The S&P 500 all tanked in unison. It was amazing to watch. The bottom line it this, if Apple has topped, then money had better quickly rotate into other areas.

Fed Keep Pumping Money into Risk

2010-10-18T13:17:00.001-07:00

The markets are still rolling, much like the did the last time the Fed decided to print money and dump a bunch of it into the markets each week. This week they will buy Treasuries three times. They already bought $6.3 billion this morning and $4.7 billion last Friday. There will be two more purchases on Wednesday and Friday this week (POMO operations).

The goal of Bernanke is to inflate away the debt that is overhanging the markets. He gave a speech in 1999 where he discusses what monetary policies he would have used to get Japan out of its “lost decade”. There are now on their third “lost decade”. His goal is to give away money, print money and crash the Dollar to get Inflation.

In Bull Markets, whether induced my cheap money or by economic fundamentals, I like to buy leaders on pullbacks. It allows me to buy strength and manage risk.

The latest setup to trigger today was Baidu (BIDU) breaking out of a 17-day consolidation –

Last week there were breakouts in McDonalds (MCD), Oracle (ORCL), Consolidated Edison (ED), Linn Energy (LINE), Insurance (KIE), REITs (IYR) and the NASDAQ 100 (QQQQ). Analog Devices (ADI) and Barrick Gold (ABX) broke back below their breakout levels and stopped me out. I am still interested in them though.

Insurance (KIE) and REITS (IYR) sat around for three week before breaking out and are not both in narrow 4-day trading ranges as they consolidate the gains of last week.

Here is the daily chart of the S&P 500 (ES Z0-D). You can see that there is significant support right below here. If support is violated, then I will be on the lookout for a potentially larger correction. Otherwise, 127% of the April – July selloff is 1,264.

I think Financials are very important to the extension of the current move. If they can join in, then the rally continues to broaden out and get more bullish. But not everything is going to work. You can see that Financials (IYF) tried to break out last week and failed, falling almost 4% in two days. I am watching Financials closely. I will not buy anything extended, because there is simply too much risk here for a quick, sharp selloff.

Bernanke Told You What He Would Do in 1999

2010-10-18T12:01:00.000-07:00

In December 1999, Ben Bernanke wrote an essay that discusses the mistakes made in Japanese monetary policy that led to an asset bubble, an asset price crash and then 20 years of deflation and anemic growth. The essay is important, because it goes deep into the thinkings of Bernanke and how he wants to solve the problems now faced by the US economy.

http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf

According to Bernanke, Japan made a series of “important monetary policy mistakes” –

1) The failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”

2) The apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash

3) The failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously.

“(I)f the Japanese monetary policy after 1985 had focused on stabilizing aggregate demand and inflation, rather than being distracted by the exchange rate or asset prices, the results would have been much better.”

That the key sentence to Bernanke. He is about “Aggregate Demand”. It is all about inflating away debt.

There are many scary parallels between what occurred in Japan 20 years ago and what has been going on in the US since 2008 –

There has been a crash in Asset Prices (namely Real Estate)
Banks are not lending, because their balance sheets are stuffed with defaulting debts
The Fed has dropped the Fed Funds Rate to basically zero
There is Deflation in a number of areas of the economy
Demand is flat and GDP is flat or down
Money Supply growth is weak, as Banks sit on massive piles of cash

Since the early 1980’s, the US has been able to drive growth by lowing Interest Rates and buying on Credit. Consumer Credit has been contracting since 2008 and Interest Rates have very little room left to fall. Rising Credit is essential to keeping the economy growing and falling Interest Rates are required to drive Asset Prices higher.

We now face a new economic reality and Bernanke has his proposals for how the Government can rescue the economy –

“Commitment to Zero Rate – with and inflation target”
First you announce “that the zero rate will be maintained for some time to come.” This has been done already by the Fed. Then you announce that you will print enough money to have achieve some target level of inflation –

“In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ (Bank of Japan) is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the “price-level gap” created by eight years of zero or negative inflation.

Further, setting a quantitative inflation target now would ease the ultimate transition of Japanese monetary policy into a formal inflation-targeting framework—-a framework that would have avoided many of the current troubles, I believe, if it had been in place earlier.”

The Fed is now talking about targeting a 1-2% inflation rate. The goal of this is to get the anticipated inflation built into prices and make up for the lack of growth in Real Estate prices over the past decade.

“Depreciation of the Yen”
“I believe that a policy of aggressive depreciation of the yen would by itself probably suffice to get the Japanese economy moving again.”

“(T)he BOJ should attempt to achieve substantial depreciation of the yen, ideally through large open-market sales of yen. Through its effects on import-price inflation (which has been sharply negative in recent years), on the demand for Japanese goods, and on expectations, a significant yen depreciation would go a long way toward jump-starting the reflationary process in Japan.”

“In short, there is a strong presumption that vigorous intervention by the BOJ, together with appropriate announcements to influence market expectations, could drive down the value of the yen significantly. Further, there seems little reason not to try this strategy. The “worst” that could happen would be that the BOJ would greatly increase its holdings of reserve assets.”

“Money-financed transfers”
This is how Bernanke got the name “Helicopter Ben” –

“Suppose that the yen depreciation strategy is tried but fails to raise aggregate demand and prices sufficiently, perhaps because at some point Japan’s trading partners do object to further falls in the yen.

An alternative strategy, which does not rely at all on trade diversion, is money-financed transfers to domestic households—-the real-life equivalent of that hoary thought experiment, the “helicopter drop” of newly printed money. I think most economists would agree that a large enough helicopter drop must raise the price level.”

“Surely at some point the public would attempt to convert its increased real wealth into goods and services, spending that would increase aggregate demand and prices. Conversion of the public’s money wealth into other assets would also be beneficial, if it raised the prices of other assets.”

“Money-financed transfers do have a resource cost, which is the inflation tax.” In Bernanke’s mind, Inflation is the goal and not a cost…

“Nonstandard open-market operations”
“A number of observers have suggested that the BOJ expand its open market operations to a wider range of assets, such as long-term government bonds or corporate bonds; and indeed, the BOJ has modest plans to purchase commercial paper, corporate bonds, and asset-backed securities under repurchase agreements, or to lend allowing these assets as collateral (Ueda, 1999, p. 3). I am not so sure that this alternative is even needed, given the other options that the BOJ has, but I would like to make a few brief analytical points about them.

In thinking about nonstandard open-market operations, it is useful to separate those that have some fiscal component from those that do not. By a fiscal component I mean some implicit subsidy, such as would arise if the BOJ purchased nonperforming bank loans at face value, for example (this is of course equivalent to a fiscal bailout of the banks, financed by the central bank). This sort of money-financed “gift” to the private sector would expand aggregate demand for the same reasons that any money-financed transfer does.”

Bernanke actually defines the purchase of “nonperforming bank loans” as a “’gift’ to the private sector”.

“A nonstandard open-market operation without a fiscal component, in contrast, is the purchase of some asset by the central bank (long-term government bonds, for example) at fair market value. The object of such purchases would be to raise asset prices, which in turn would stimulate spending”.

Where We Are Now
The US Government has already –

Dropped short-term Interest Rates to effectively zero
Bought worthless bonds at 100% of their original value
Substantially weakened the US Dollar
Handed out $800 billion in “stimulus”
Told us that low rates are here for a “extended period”
Told us that here is a “inflation target”

So they are following Bernanke’s playbook. The Fed has clearly bought into Bernanke’s game and will print as much money as they have to to create Inflation. They will also use Gold as a lever to force China to unpeg with the Dollar.

Rally Broadens Further

2010-10-13T21:06:00.000-07:00

The rally continues to broaden out, with lagging groups now participating.

Financials and Insurance have been lagging on this move, but they are very important. A move above $54 on Financials (IYF) would be an important turn in the opinion of market. Insurance (KIE) has stalled after breaking out, which is bullish.

Berkshire Hathaway (BRK/B) has been stalled out at old highs for several weeks.

Crude Oil (OIL) has been stuck underneath its 200-day average for the past five months. A break above would tell you that the sentiment has changed from Bearish to Bullish.

Keep in mind that many breakouts fail and these failures often turn into vicious losses over a very short period, so committing money is a process, which requires constant monitoring. But this is the first time stuff has been working like this for many months.

Treasuries have broken bullish symmetry and look to have a deeper correction. That could be the start of money flowing from bonds into stocks, which would be even more bullish.

Some Gold Stocks Consolidating

2010-10-11T07:41:00.001-07:00

Gold has been on a tear as the Fed is now printing the Dollar into oblivion. However, while Gold has gone parabolic, many Gold stocks have not followed.

Barrick Gold (ABX) has just broken out of an 11-month base. Harmony Gold (HMY) is trying to do the same.

The “Junior” Gold and Silver stocks have been performing much better than their larger counterparts. Some of this have been the result of M&A activity and some is the result of the larger companies using hedges for future deliveries. As you can see, a lot of the Juniors have stalled out over the past few weeks (similar to the NASDAQ 100).

These are the setups you want to see in leading areas – narrow trading ranges in an uptrend. If prices fail here (like they did in a lot of leading NASDAQ names last week), then I will look for support near the 50-day averages (Black Lines).

Stalled and Consolidating

2010-10-11T07:00:00.000-07:00

The NASDAQ 100 (QQQQ) has been the leader. It has now been in a narrow trading range for about 15 trading days. While the index has stalled, many of its key components and leading names have also stalled and consolidated. They are now in a position where the big boys can break them out and run them again or hit them hard. This trading range gives me a chance to manage risk.

There are many other leaders that look very similar.

Growth Leaders Got Hammered

2010-10-07T06:56:00.000-07:00

This market has been feast or famine, where things move up quickly and then implode with equal speed. That has made it a very risky market.

Many leaders have stalled out over the past few days and they got hit yesterday on massive volume, causing them to break trendlines and moving averages. William O’Neil (IBD) teaches that massive selloffs on massive volume normally mark the end of a rally.

Cloud Computing
You know when Microsoft wants in that the move is probably over (at least temporarily). Take a look at some of the names related to the space –

F5 Networks (FFIV), Salesforce.com (CRM), VMware (VMW), Citrix (CTXS), NetApp (NTAP)

Apple was hit last week with some massive selling early one day. It was attributed to a “rumor”, but after seeing the pounding some leaders too yesterday, it was probably some real institutional distribution.

Other leaders that got hit hard –

Riverbed (RVBD), TIBCO Software (TIBX), Open Table (OPEN), Red Hat (RHT), Rackspace (RAX), Acme Packet (APKT), CTrip (CTRP) and a whole bunch of others were down 4% or more.

Now obviously, the way the market has been trading lately, these stocks can all recapture all of yesterday’s losses and move to new highs, but yesterday’s action was at least a warning shot and shows you the dangers of buying extended stocks.

All of this damage went on while the Dow and was up some yesterday. The key will be if money flows out of leaders into the less risky stuff. That may mark the second phase of the topping process for the recent rally.

Corn
Here is another example of how much you can get hit if you buy at the wrong time. Corn (ZC Z0) was down over 14% in a week!

Which brings me to Gold (GLD)
Gold has now broken above its uptrend and has now gone parabolic. It did the same thing last November and got crushed. It is either now in a parabolic Bull move like the NASDAQ did in late 1999/ early 2000 or it will soon regress violently back towards the 50-day (Black Line).

After looking at Corn and some of the hot stocks, you can see how potentially risky it is to buy Gold here. There are some Gold Stocks that offer at least a stop loss, like Barrick Gold (ABX) -

This move off the lows has all been about a crashing Dollar. The Dollar is now at some pretty significant support, so a bounce would not surprise me and it would not be good for risky assets. Remember, the S&P is still at significant daily resistance, with timing.

Stalled At Resistance

2010-10-04T08:05:00.001-07:00

There was timing last Monday and since then, the S&P 500 (ES Z0-D) has basically stalled out at resistance. It is now in a very narrow 5-day trading range. There is also timing today, so expect this narrow trading range to resolve itself shortly. Key support is the 1133 – 1126 range. If that is broken, then it opens up the potential for a more significant correction.

The move off the August lows is very similar to the July rally. If this is a “two-step” rally pattern, then the potential downside is always 127% of the move, which would be 956 for the S&P 500 (that is how the $1309 target for Gold was devised). I’m not saying that it is going to happen. I am just saying that we are at a key decision and if the market wants to turn lower, this is a logical place and time from which to do so. Don’t just go throwing your money into high-beta stocks, hoping that prices go higher.

There are a number of leaders that are sitting in narrow, multi-day trading ranges. I will list those later today. I was stopped into and out of Oracle in a number of minutes on Friday. I am very nervous about them rolling this thing lower from here, but know what I want to own if they break prices higher.

Gold has gone parabolic. It can pull back to 1296 and still not violate the uptrend. It hit the 1309 target and just keeps grinding higher. There is nothing to do with Gold until it pulls back or goes further into this parabola and sets up a short. There is timing early this week for Gold.

Gold Stocks (GDX) have stalled out in their advance and are now sitting in a 13-day trading range. GDX is also sitting right above the out breakout point of $54. A pullback into the $54 range coupled with a shallow correction in Gold would be ideal.

The “Junior” Gold Stocks (GDXJ) have been trading more like Silver than Gold. There have been some mergers and several Canadian Gold stocks have gone parabolic. You can see the consolidation on GDXJ. It can break either way. I am watching it closely.

US Treasuries (ZB Z0-D) are in an uptrend and have recently held daily support. The ideal technical target (it obviously does not have to be reached) is the 127.2% extension at 137.11 Many of the Bond ETFs have a similar pattern.

Everything still comes down to the crashing US Dollar. You do not see Gold, Stocks and Treasuries all rally at the same time unless it is simply a result of money being printed – which is where we are. What the Yen closely this week to see if they will fight China, who has been intervening to strengthen the Yen and help Chinese exports. The Yen is very stretched.

Weakness at Resistance

2010-09-27T20:56:00.000-07:00

The markets were due for a pullback and we may be starting one. This could either be a pause that lets the markets work off overbought technicals or it could be yet another top in this brutal trading range.

The choppy trading range has ground down the confidence of many investors and driven volume down so low that several banks are now making layoffs to offset significant declines in revenue.

There is pretty significant divergence between a handful of leading names and virtually everything else. This is how major tops form. The laggards had better start seeing some buying or…

Here are some key economically-sensitive areas. You can see how they are still stuck in trading ranges –

Metals (XME), Transportation (IYT), Financials (XLF), Homebuilders (XHB). The markets will be much better off if these areas can join the party. A breakout after a shallow multi-day pullback would get me interested.

I will begin to post support levels as the week progresses.

There is leadership. You can see how Latin America (ILF) is trying to break out of a 1-year trading range and South Africa (EZA) has already broken out.

Both of these are heavily focused on resources and benefit greatly from a falling US Dollar. This afternoon, Brazil’s Finance Minister, Guido Mantega, became the first international leader to admit what we all know already –

“We’re in the midst of an international currency war, a general weakening of currency.”

Brazil, South Korea, Japan, Taiwan and several other countries have been buying US Dollars to try and make their own currencies more competitive for international trade. When the US Dollar finally implodes, these countries will have some major social dislocation to deal with, as it becomes competitive for Americans to actually build and manufacture the stuff it consumes…

Hourly Reversal Patterns?

2010-09-27T08:19:00.001-07:00

Potential reversal patterns on the hourly charts with the daily charts at time and price resistance.

Resistance Again

2010-09-24T11:38:00.001-07:00

We head into the weekend at resistance, with timing for The S&P 500 (ES Z0-D), The Dow ($INDU-D), The NASDAQ 100 ($NDX-D), Apple (now over 20% of The NASDAQ) and Gold (YG Z0-D). Prices don’t have to reverse, but the set up is forming.

I’m looking for a pause or a top early next week or early the following week. You can’t predict what is going to happen, but you can anticipate setups and then be ready if prices react.

I am seeing a number of serious divergences in the markets. Several key sectors are not going along for the ride and Small/Mid Caps are significantly underperforming the leaders. That said, there are a number of areas on the verge of major breakouts, so if these areas can get going, then this rally could go on for a while. QE 2.0 may be in full swing behind the scenes…

FYI, the purple lines below the charts are time cycles. The bigger the bar, the more important the date.

Indian Summer Update

2010-09-22T23:21:00.001-07:00

Last year I called this market the “HeyIdiot.com 2.0” market, because it so closely mirrored the 1996 -2000 parabolic ascent in technology stocks, where the market was driven by cheap money from the Fed being leveraged into stocks with horrible fundamentals and impossible-to-sustain valuations.

A couple weeks ago, Bernanke said that The Fed would do whatever it takes to make sure that economic weakness does not turn into full-blown deflation. He then told how things were simply slow in the economy and that there was no chance of a “Double Dip”. Yesterday The Fed said that they are now prepared to pull the trigger when needed on Quantitative Easing 2.0 (isn’t this the third time they have now said this?).

The Fed is already monetizing about $30 billion a month (printing money) to prop up the price of US Treasuries and hold Interest Rates down. So doesn’t that by definition mean that there is material weakness right now? Otherwise, why would the Fed be printing so much money? Did you see that they printed $5 billion an hour before Obama’s ridiculous “town hall meeting” on CNBC? Stocks ramped over 1% in about 8 minutes that morning.

$5 billion leveraged at 30 to 1 buys a hell of a lot of Apple stock. Which brings me to my next point –

80% of the volume in the US Stock markets is in 122 securities
60-70% of all trading volume is computerized

So the Stock Market is now basically a bunch of computers front running each other with Flash Trades and Quote Stuffing in 122 holdings…

For the last 20 consecutive weeks, money has flowed out of US Stock mutual funds –

YTD outflows from US Stock funds is -$68 billion
YTD outflows from US Stock ETFs is -$16.8 billion

Yet the markets are hanging in there. Do you wonder why 86% of investors think the markets are rigged? Stocks are dead. However, Gold will have a Bull Market this decade that will rival any stock market rally you have seen in your lifetime – mark my word.

Jefferies saw Principal trading volume fall by 80% from Q2 to Q3. The CEO called the trading “painfully slow”. Take a look at the charts of Morgan Stanley (MS) and Goldman Sachs (GS) and you can see that the market is not pricing in a rosy quarter.

Bank of America fired 5% of its Capital Markets group because people just aren’t investing like they used to.

The Fed is not alone in printing money and having it flow through its primary dealers into the stock market. Microsoft is selling bonds and using the proceeds to buy back stock. The 3-year bonds are supposed to issue yielding 0.875%! Borrow for free, buy company stock with the money, inflating your share price and use the inflated shares as currency to buy other companies and give your shareholders the appearance of “growth”.

This will be the game into 2011. Expect there then to be another massive round of layoffs as companies consolidate and move what is left our middle class to Asia…

The Fed is also not alone in printing money to hold down Interest Rates. The ECB and the IMF are regularly buying bonds of Ireland, Portugal and Greece to keep these countries from running out of cash. Microsoft is paying 0.875% to borrow and Ireland, Portugal and Greece are paying over 6% to borrow for ten years.

Brazil is now selling bonds and using the proceeds to weaken its currency versus the US Dollar. Japan intervened to weaken the Yen. Earlier in the year, Switzerland lost something like $20 billion trying to hold down the value of the Swiss Franc. We are now at the stage of overt currency manipulation to prop up exports.

BRETON WOODS IS DEAD! The political party that figures this out and tells the citizens that it will rebuild the middle class and stop those nasty foreigners from cheating us at every turn, will lead the country for a generation. The Democrats had it (and promised it) under Obama, but Barack proved to be just another greedy politician.

BREATON WOODS IS DEAD! All of this leads back to the one currency that can’t be created in a printing press – Gold. Gold stocks are on the verge of breaking out of a multi-year base. At some point, the markets will lose faith in paper money and Gold and Gold Stocks will go parabolic (like Tech from 1998 – 2000 and Gold in the last 1970’s). When it happens, the charts will look just like they do now and prices will break out on massive volume.

Is this the time? Maybe, maybe not. But it is coming and I am monitoring it closely.

Potential Price and Time Resistance

2010-09-21T10:00:00.001-07:00

The markets are nearing another technical decision. You know how technically the markets have been trading, so this bears watching. There is timing today for a potential reversal. The first level of meaningful resistance for the S&P 500 (ES Z0-D) was 1,140. It was barely taken out yesterday, but is now resistance again. 1,146 and 1,162 are the next areas that really stand out.

Remember how the market bottomed for the near term the day IBD went to “Market in Correction” in their Big Picture section? The setup is now there to get everybody all excited about a “breakout” above 1,131. Just in time to reverse things down hard and trap a lot of new Bulls… I see the conical reversal pattern showing up yet again.

Meaningful resistance on the Dow ($INDU) is in the 10,860 – 11,000 range. Like SPX, there are lots of key dates next week and in early October to be aware of.

The same goes for the NASDAQ 100 ($NDX). You can see the potential reversal pattern and that price is getting into resistance at key dates.

Because Apple ($AAPL) is now over 20% of the weighting of the NASDAQ, you need to watch it to see what the market is doing. Another way of saying it is if Obama wants to game the markets higher into the election, all he needs to do is buy the crap out of Apple. Key resistance on Apple is $292, with the key dates coming in over the next few days.

Here is the chart of the Banking Index ($BKX). You can see that all it has done is bounced within a downtrend. It is now at meaningful resistance. If it rolls over from here, then the 127.2% extension of the move is always the technical target at about 41. I'm not saying short $BKX and cover at 41. I'm just saying that I am wary of this rally and if you buy wrong, then the downside is potentially pretty nasty.

Crude Oil (CL V0-D) is still in a downtrend, with potential out of this pattern in the 66.80 range. I have been watching this pattern for the last few months and it can’t be good for the economy if Crude puts in lower lows. $70 has been heavily defended.

The Russell 2000 (TF Z0-D) Small Cap index is also at resistance with key dates being 9/27 – 9/28.

While stocks have been ramping higher the last few weeks, US Treasuries have been in a pretty orderly pullback. All maturities I watch (5-year, 7-year, 10-year and 30-year)have held above their 50-day averages. You can see how the 30-year (ZB Z0-D) is going to make a key decision soon as it is stuck between support and resistance.

Gold (YG Z0-D) has been moving nicely and is now approaching a significant decision. The target all along has been $1,300 – remember how Goldman came out with a $1,300 target a few days after I produced this chart... They didn’t see my chart. They simply are running the same calculations for technical support and resistance levels.

You can see where support comes in here for Gold in the $1,262 -1,258 range. Key dates are today and early next week. The 120-minute chart shows you more detailed levels of support for Gold. A move below $1,272 probably opens Gold up for a more meaningful correction.

Silver (SI Z0-D) hit its first few targets in the $20.20 – 20.80 range. You can see the next levels of resistance. I assume that Silver will move in unison with Gold, so if Gold breaks $1,272, then I will be looking for weakness out of Silver. I expect that weakness into September 27 will be buyable or strength into the 27th will be sellable.

To sum things up, the markets are within a week or so of making a critical decision as they rally into strong resistance. Each of the rallies in the recent trading range have failed in set ups like this. If this one is different, then I will know it is meaningful and be ready. This goes for Stocks and Metals. Bonds have a significant support decision to make as well. The October 4-6 range comes up a lot in the indexes.

There is massive Quantitative Easing going on, with the Fed buying about $30 billion a month of Treasuries and the ECB buying at least a Billion a week in Irish and Greek debt. This money flows right into risk. The move yesterday morning coincided with the Fed buy $5 billion in Treasuries. There will also be purchases of about $3 billion tomorrow and Friday.

During the vertical moonshot from March 2009 – March 2010, the Fed was buying about $130 billion a month in US Agency debt. They are now buying about $30 billion a month. So figure that the markets will have a vertical grind higher with about 1/4 the magnitude of last year’s rally, until the $280 billion is exhausted.

The Fed meets today and will either add to or hold steady on QE 2.0

ECB Buying Irish Bonds

2010-09-21T05:48:00.000-07:00

Ireland is so bad, that investors are not buying their bonds. On Friday, the ECB (European Central Bank) had to buy Irish bonds to prevent yet another financial meltdown. One day it’s Ireland, the next day it’s Greece, then Portugal, then Spain, then back to Ireland… Ireland is back on the docket this week as it issues another $2 billion in bonds. I’m guessing that the ECB made a few phone calls and that this week’s auction will go smoothly.

http://www.zerohedge.com/article/ecb-stepped-rescue-ireland

You can see how the yields on Irish Bonds have gone through the roof recently. On a related note, things are so bad in Greece, that the ECB will not run a “Stress Test” on Greek banks ahead of their next round of bond sales. Again, no sane investor would buy something when they thought that important facts were being withheld, so the Government will step in with taxpayer money to buy whatever is left over.

From Mohamed El-Erian, chief executive and co-chief investment officer at PIMCO-

http://ftalphaville.ft.com/blog/2010/09/19/346446/guest-post-el-erian-on-an-interesting-week-ahead/

“Market measures of risk for peripheral European countries (Greece, Ireland, Portugal and Spain) are at or near danger levels… despite exceptional support from the ECB, EU and IMF, and despite the implementation of adjustment measures on the part of some.

The failure to reduce risk spreads means that the public sector bailout is not working. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.

This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries (e.g., Greece) have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion.”

To summarize what I have been saying all along, the Government is using our money to buy the crappy assets from the banks at artificially high prices. The bankers are collecting their bonuses on the sales of these bonds at inflated prices. They then make huge campaign contributions to the politicians and hire the regulators who are supposed to be protecting the citizens, to be million-dollar lobbyists. And EVERYBODY KNOWS IT IS HAPPENING.

Good stuff…

Bank of America Mortgage Pushbacks

2010-09-15T07:43:00.000-07:00

I couldn’t figure out why Bank of America’s (Symbol BAC) stock was acting so poorly, with the stock failing each time it rallied into the 50-day average.

It is now becoming clear why the stock has been acting so poorly –

http://www.bloomberg.com/news/2010-09-13/bofa-may-owe-20-billion-in-mortgage-buybacks-insurers-say.html

That’s right, the investors who are stuck with a bunch of the junk mortgages BofA and Countrywide (BofA bought them) originated are now trying to give them back to BofA, claiming that the original mortgages were fraudulently created with bogus numbers for such things like the income of the home buyer.

At this point, the amount of mortgages that BofA may have to eat is $20 billion. I think BofA “earned” $3 billion last quarter, so $20 billion is of material significance.

The key point here, is that stocks price in information long before it is known to the public. That is why I look at charts, because they show me what the big boys are doing with their money. You simply can't hide wide spread selling.

Precious Metals at Resistance

2010-09-15T06:41:00.000-07:00

I used to look at the world like this, because it used to work –

The Euro was in a narrow trading range for a few weeks and has now broken out.
Buy the breakout was my old mindset…

Now I see this –

The Euro (6E Z0-D) is in a potential two-step rally into significant daily resistance at a key today. There is no way I would buy here, I would wait for a pullback into logical support and look for an entry.

Asset classes are now so closely correlated that the movement of the Euro has a material impact on other assets.

The S&P 500 (ES Z0-D) is now retesting the key Time/Price High of August 5th. This is a potentially bearish setup forming, with prices stuck here at either a double top or a move to 1,146 setting up a reversal pattern. Next Monday and the 25th look like key dates.

Silver (SLV) is now at critical resistance. It was a nice move off the breakout above $18.25

And Gold (YG Z0) has hit its first upside target. It looks like the date is September 29th

Gold Stock ETF (GDX) broke above critical resistance today. Again, I used to be interested in buying the breakout, but you can see how the price was driven higher right as the underlying commodities are running into upside targets. The magnitude of any pullback will dictate my next actions. A weak pullback will be bullish.

Investors Think The Markets Are Rigged

2010-09-15T06:24:00.000-07:00

CNBC released a poll today showing that 86% of investors think the markets are rigged. The average investor feels that the markets are designed to benefit the big bank and are structured to intentionally disadvantage the small investor. Regarding the regulators, the average investor believes something between they are incompetent and they are on the take.

http://www.cnbc.com/id/39154764

I told you this was going to happen. The markets are rigged. The regulators are on the take, choosing to look the other way and hoping to later get employed by big banks. Americans aren’t stupid. And they are voting with their feet, as they flee Stocks for Bonds. I will post on the Bond Bubble later today – buyer beware in your Bond holdings.

High Frequency Trading Fraud (HFT)
FINRA has finally fined somebody over the practices of “Quote Stuffing”, “Flash Trading” and entering incredibly large volumes of orders with the intent of manipulating stock prices. I have been cranky about this for years, because I keep getting Limit Orders filled on the mysterious price spikes right before the markets ramp in the direction of my original position.

People won’t be comfortable with the markets until the criminals are not allowed to profit by messing with price, with the intention of screwing the little guy to their benefit. Now the conversation has to shift from speculation that prices are manipulated by computerized trading to the fact that we now can prove the computers are manipulating prices.

I expect a whole mess of “Whistle Blowers” coming out of the woodwork now that FINRA has issued a $2.26 million fine. How much money do you think a guy could make if he proved that Goldman, or some other bank were manipulating stock prices…

http://www.finra.org/Newsroom/NewsReleases/2010/P121951

Anticipation and Preparation

2010-09-03T11:53:00.001-07:00

It is all about anticipation and preparation.

This rally was anticipated because of the technicals. It was well documented. It was a trade and nothing more for stocks. I sold 10 minutes into trading this morning.

Now we will see if the big boys want to buy next week or sell. They will most likely be doing whatever they are doing with some serious volume.

Some commentary I received earlier this week tracks what occurred and gives you an idea of how gamed the markets were this week, because again, the moves and the drivers for them were anticipated and defined before they occurred –

8/30
“It is a long Holiday weekend coming up and many professionals will get out of town on Thursday, but it is a week full of economic reports. The liquidity will be thin, so it is a good time for the (Obama) Administration to see that a few of these reports are rigged to the upside. The key reports are obviously the initial jobless claims on Thursday and the jobs report on Friday in addition to the unemployment rate. That is preceded by an ISM report on Wednesday. Any mysterious positive turnaround in these reports this week will be b---s---.”

8/31
“Today we got one of the most “magic mystery moves” I have seen in quite some time, on essentially nonsense news coming out of Europe. The market in Europe was trading on the highs with the old “better than expected” PMI report, although it was the lowest in 7 months, and some “stronger asian growth reports”. This sent the S&P 500 futures higher, the Euro higher and US Dollar lower. The SPX futures were of course up big in Globex (Overnight Trading), and this accelerated the big gap up NYSE opening in the major indexes etc.

Today was probably the most manipulated price action I have seen in some time, and it was forced from Europe as the PPT (the Fed) might have been accelerating the SPX futures in Globex, and then held them all day in the US. What in the hell else could have flatlined the SPX all day at essentially one level, without even a hint of a pullback after the two negative days we had on Mon and Tues.

It is significant to note that the S&P 500 is in a Below-the-Line status, with the 200DEMA>50>20>8, and all the EMA`s are declining, so that is another reason why the highest probability is for the SPX to turn down again after this rally loses steam.

9/1
The jobs report tomorrow should under normal reporting disappoint expectations, but the BLS (Bureau of Labor Statistics) will overstate the Birth/Death rate adjustment to soften the blow, or even surprise to the better, which will be all it needs for the “gang” to take the futures higher. In the benchmark revision for March 2009, and published in 2010, BLS understated actual jobs loss by about 1,000,000 jobs. The BLS is doing the same thing again this year so any positive hype numbers tomorrow is just not true.

I will hang around for the jobs report tomorrow, and the opening period if it is a premium opening accelerated by the futures because of any overstated jobs report, and ready to take a partial SPX short position.”

CNBC this morning was already talking about how the threat of a “Double Dip” was over because of how great the economic numbers were this week. Judging from how on target the commentary I received this week was before each economic data release, I am still on the side that the numbers are actually terrible and that they will be revised lower, just as so many numbers have been revised lower over the last 18 months.

After the Jobs Report was issued this morning, the ECRI Leading Indicator Index was released and it hit the level it normally hits in a recession (below -10% versus today’s -10.1% reading) and the ISM (Institute of Supply Management) Non-Manufacturing Index (thing Services) was released, missing estimates in New Orders, Employment and Business Activity. Employment actually contracted for the first time since January 2010…

Here are some observations from David Rosenberg on Wednesday’s ISM Number that got the rally going –

http://www.zerohedge.com/article/rosenberg-explains-why-yesterdays-ism-was-likely-wrong-and-will-likely-be-revised-lower-soon

“Most of the regional reports were very poor in August. Either they are collectively all wrong or the ISM is.”

“ Looking at five decades worth of data, the share of the time in which we see orders, backlogs and vendor deliveries all decline in tandem, and the headline ISM index rise, is the grand total of 1%. No wonder equities rallied so much — we just witnessed a 1-in-100 event! Bring your camera.”

“Suffice it to say that in the past 30 years, with eleven observations, ISM dropped to 47x in the three months after such a decline in the orders/inventory ratio to such a low level as is the case today. That is the average, the median, and the mode. The highest ISM reading three months hence was 51.9, so if past is prescient, today's data was likely a huge headfake.”

Or more likely, today’s numbers were a flat out lie…

Silver Leadership?

2010-08-29T21:22:00.000-07:00

Silver (SLV) broke out of a multi-month triangle, after holding support at the uptrend line from the 2008 lows. The Junior Gold Miner Index ($HUI) is either going to break down from here or break out. I expect either move to be violent. So far, so good for the Bulls. I want to see a weak pullback at some point over the next few days that holds support.

We Were Expecting a Potential Bottom

2010-08-29T20:56:00.001-07:00

I wrote the following last week as I waited for the markets to try and bottom in the 1,040 or 1029 range –

“I think the computers algos have been set up to cause overshoots in signals like IBD to get people making buy and sell decisions and then the markets are reversed – causing a massive squeeze as the newly entered orders are covered and reversed.”

If you believe in a “Plunge Protection Team”, then Friday was a perfect example of what you think is market manipulation, as Intel preannounced terrible numbers and then reversed up 11% in 4 minutes, just as the S&P 500 broke critical support at 1,040 and then went vertical over the next 10 minutes.

Whatever it was, the reversal was anticipated. I have no doubt that the markets are manipulated, especially with Greenspan saying the other day that a stock market rally would do far more to stimulate the economy than any new Quantitative Easing.

The markets are retesting the key July 2010 low, with timing and now have a potential double bottom at 1,040. Resistance that now must be cleared is in the 1,069 – 1,081 area. 1,029 is support.

Expect a meaningful trend to finally be established after the summer holiday season ends next week. Then we will know if the big boys are willing to commit new funds or if they will simply pull their money off the table at what they consider to be artificially inflated prices.

Two-Step Symmetry

2010-08-25T09:07:00.000-07:00

Here is how technical the markets have become.

The S&P 500 hit a high of approximately 1,130 and has so far had what is called a “two-step” pullback, where the first leg down equals the second leg down.

Leg 1 from 1130 to 1070 = 60 points
Leg 2 from 1100 to 1040 = 60 points

The first leg down retraced 50% of the rally
The second leg so far has terminated at the 76.4% retracement level

These are all key levels and patterns used by computers to make buy and sell decisions. The computers have clearly taken over the markets. I am also assuming that many of the 20-something hedge fund managers are using these same models. There are a bunch of key decisions here for stocks, Treasuries and the Euro here, so I am looking for a potential reversal.

Investors Business Daily went to “Market in Correction” last night. The old ways of making money are having a rough go lately. I think the computers algos have been set up to cause overshoots in signals like IBD to get people making buy and sell decisions and then the markets are reversed – causing a massive squeeze as the newly entered orders are covered and reversed.

This is why I continue to get incredibly technical in my communications and decision making.

Blessed Gridlock?

2010-08-25T07:37:00.000-07:00

Cutting spending of any kind during a depression is a bad idea. It simply slows an already slow economy down further.

European Austerity
http://uk.reuters.com/article/idUKTRE67M4OM20100823

Moody’s is telling us that fiscal tightening actually harms the long term economic outlook for European economies.

Ireland
http://www.zerohedge.com/article/europe-prepares-bloodbath-open-after-ireland-lowered-sp-aa-aa-outlook-negative

Ireland had its credit rating cut by S&P because it had to put another $20-something billion of new capital into propping up its insolvent banks. Now 10% of Ireland’s GDP is going to picking up the cost of its banking system.

US Tax Increases
There is no way that increasing taxes here will help the economy. By definition, it will slow down growth.

Post-Election Gridlock
If the Republicans do as expected and gain control of the House and more than 40 seats in the Senate, then they will slow down government spending. This too will hurt the economy and push us closer to Hoover 2.0

Borrow from Tomorrow
The old system is broken. When you are forced to argue that you need to worsen your current finances in order to not worsen your economic outlook, you start to realize that the system fueled by debt needs debt to keep from collapsing.

There is no good outcome. The goal is simply to protect purchasing power from a falling Dollar and future Inflation.

Real Estate Made Simple

2010-08-24T13:50:00.000-07:00

These three charts from Econompicdata tell the story of housing –

Falling yields over the past 30 years…

Have lowered monthly mortgage payments…

This has inflated housing prices…

If you think about what Quantitative Easing is, it is simply the Government buying Bonds to keep Interest Rates low. This props up housing prices. I thought the goal of the Government was to make housing “affordable” to all Americans. But it is clear that artificially forcing Interest Rates lower makes housing prices more expensive.

I almost forgot this great testimony from Kansas City Fed President Thomas Hoenig from the other day -

http://www.businessinsider.com/fed-president-hoenig-the-deleveraging-of-this-country-has-to-take-place-2010-8

"If the American people are looking for the housing market to be their investment opportunity, I think they're making a mistake."

"The facts are, we have an excess supply. And we created that by providing financing and leverage that was almost nonsense. So, now we have to adjust from that. Housing may eventually start to rise again as other assets across the country begin to rise again. But it is not something that I think that the American Consumer should be speculating on, in terms of their investments."

Holy ****! Did he really say that "(HOUSING) IS NOT SOMETHING THAT I THINK THE AMERICAN CONSUMER SHOULD BE SPECULATING ON"!?!? The President of a US Federal Reserve Bank?!?!

Does anybody still want to buy a house for investing purposes?

Gap Down Open With Reversal?

2010-08-24T06:24:00.000-07:00

There is a lot going on in the daily chart for the SPX Futures (ES U0-D) (I started to use the Futures charts because so much significant price activity is taking place while the US markets are closed and that is having an adverse effect on the accuracy of the cash charts).

All you need to look at on the chart is the cluster of key dates on 8/5 and the key price zone at about 1,130, which gave you time and price for the 1,130 high. There is now a cluster of dates in the 8/24 – 8/26 zone, so I am looking for a potential reversal this week in stocks. You can also see that there is support in the 1,055 – 1,040 range. A trade below 1,050 would trigger the potential reversal pattern (low so far this morning is 1,051.50).

I would expect any rally to only be a bounce into Labor Day, but anything can happen, so I am on alert.

The flip side to when you see a bunch of dates all clustered together is that sometimes they lead to big, fast moves in the direction of the current trend, which would mean a big selloff in stocks, so you can’t just blindly buy and expect prices to go higher out of this zone. You have to also manage your risk.

US Treasuries (ZB U0-D) have taken out three resistance levels and are now at a point where a pullback would not be a surprise. Here are the support levels I will be looking at. A pullback in Treasuries would by definition fuel a reallocation into stocks.

Gold (GC Z0-D) has had a nice rally over the past few weeks. There were key dates last week and the key resistance was 1,239.18. Critical support was 1,218.70, with today’s low so far at 1,211.7
I will update this chart today with new support levels.

Again, potential support and resistance levels get breeched all the time. That is why there is more to this than picking a level and hoping that it holds. My goal it to show you how I think and what I see and not tell you what to do.

The uptrend in the Euro (6E U0-D) is broken. This is not good for Commodities and Commodity stocks. I will be looking for a potential low later this week. This morning’s low for the Euro is 125.88

Crude Oil (CL Y0-D) has broken key support at about $73.5 and now has me looking for a total breakdown. I have been saying for weeks that a break of $70 would signal a new recession. That now seems like the most probable scenario after a potential bounce. I am interested in Oil and Energy Stocks if Crude gets into the $66 range (or worse?).

I am looking for the opening weakness to take prices to emotional extremes and then will be looking for potential reversal patterns at key levels.

Weakness Continues

2010-08-13T15:39:00.000-07:00

A plunge like Wednesday should be followed by a better bounce than we have seen. But nobody seems willing to buy, which means that they are probably looking to sell bounces.

The risk indexes were sold pretty hard yet again today – the Russell 2000 -1.21% today and the NASDAQ -0.73% today.

This is the hourly of the S&P 500. The S&P 500 is now below all key moving averages. It has spent the last 2 days in a very narrow range right below the 50-day. This is a really bearish setup and I expect one of two things to occur – a nasty selloff or a nasty short squeeze. The potential is there for both.

Any hard selling early next week will have me looking for a bounce. I will not short a sharp gap down open on Monday. If there is a huge gap up open on Monday, it will be interesting to see if it is immediately sold.

Semiconductors are a critical group and they broke down from a multi-month trading range this week. Disk Drives look horrible and even closed below yesterday’s low today. Yuck. Semis and Disk Drives lead the markets. Financials and Retail are acting poorly as well.

Gold (GLD) has been sitting right above its 50-day (Black Line) for the past two days, in a narrow trading range. Like most everything else, Gold has a critical decision to make in the very near future.

A Weak Bounce Today

2010-08-12T16:26:00.001-07:00

Here is the big picture chart of the Dow Jones. That looks like a top and not like a bottom to me.

On a side note, there is a lot of talk right now about how this high looks very much like the top which preceded the 1987 Crash. There is also some mystical planetary alignment right now that is similar to (worse than) 1987. I don’t follow that stuff, but I’m sure that CNBC will parade some gypsy around the TV studio tomorrow talking about it, because tomorrow is Friday the 13th…

Back to business. One decision at a time…

Here are the updated daily and 120-minute support charts on SPX. If the 1,085 range cannot be broken then I look for a possible bounce in the 1,065 range and then the 1,050 range. The trend is now down, so I am not interested in buying dips for the time being.

The NASDAQ 100 hit a key support level and it has held so far. The same goes for The Euro. Europe is falling apart. The “stress test” was a bunch of bs. Ireland and several parts of Span cannot find buyers for their bonds and the EU is being forced to finance their debt auctions this week. Credit Default Swaps for the PIIGS are going parabolic again.

On the 15-minute chart, you can see that the Euro has a big decision at 1.282. If that level holds, then I would love to see a rally up above 1.293 to set up the reversal pattern. I expect some resolution overnight on this pattern in the Euro and will deal with what exists in the morning.

A Quick Bounce

2010-08-12T07:19:00.000-07:00

I put this chart together for the NASDAQ 100 last night. It was setting up with that reversal pattern into the 1,810 range.

Look where the NDX opened today and how it traded in the first 40 minutes today. The low this morning was 1,807! That is nice 27 point rally (1.5%) in 40 minutes…

The Semiconductor Index ($SOX) broke its key support level this morning, but the way the markets have been trading lately, it could recover the 330 level today, causing this morning’s plunge to simply be an exercise in shacking out some stop loss orders.

A weak rally into 330 over the next few days would be very ominous.

Fed + 1 Fireworks

2010-08-11T20:20:00.001-07:00

First, for anybody who thinks investing right now is easy, they are nuts. The S&P 500 spent 7 days coiling below the 1,130 level and then overnight it imploded – after the Fed started another round of Quantitative Easing no less. Volume is non existent and mysterious ramps in the futures market can drive the Dow up 100+ point in a matter of minutes.

Yesterday, the setup was there to try a short the SPX ETF (SPY) below $113, but the market gapped down about 1% and gave you no reasonable entry point. This morning, SPY gapped down about -1.5%. How many times in the last few weeks has the market opened trading well above or below the close of the previous day, only to reverse sharply and end the day flat?

There was no way to entry shorts today. Very frustrating…

SPX simply blew through support levels and now has turned the trend back down. Here is the hourly chart showing how the gap took price right through the uptrend line and gave you no manageable entry point. I would love to see a rally back into the 15-hour MA (Green Line) that fails.

The next meaningful support is at 1,080 for SPX. That level was hit tonight in the futures market (thanks Cisco) and so far has held. This market has to be taken decision to decision and right now I have to wait for an hourly set up. Remember, these levels get blown through all the time. The idea is to look for reversal patterns are key levels, not take action and hope.

Small Caps, Mid Caps and Equal Weight got absolutely smashed today (-4% was the norm). Here is the chart of the Russell 2000. It is pretty ugly. There isn’t much support below here.

The NASDAQ 100 also had a bad day. Here are the support levels. 1,812 was tested tonight. You can see a little Reverse Triangle pattern set up here with the move below 1,825. I am looking for a reversal from 1,810. I will not buy it, but a weak rally would get me interested.

Semiconductors ($SOX) are on the brink of breaking down. This is the 5th test of the 325 area. The chart has the looks of a 1,2,3 Lower Top. Semiconductors lead the markets. A breakdown here needs to be watched very closely.

Here is the chart of Crude Oil. It did a two-set pattern up into resistance and has failed. The normal move out of that pattern is to see price extend at least -162% in the other direction. I have been saying for some time now that if Crude breaks $70, then we are in a recession. We should find out very soon if the recession talk is for real.

Gold held up well today. The obvious question about gold is whether or not it will be a risk aversion play here or a victim of deflation? I am hopeful but have my stops in place.

The Euro got smoked today. 1.283 was hit tonight and so far has held.

Here is the hourly on the Euro ETF (FXE). It put in the reversal pattern and rallied back into the middle of it, like I would expect it to. But how are you supposed to enter it? The high was hit on Friday. Then on Monday, the uptrend held. You would like to short FXE breaking the uptrend line, but that was unrealistic when FXE gapped down Tuesday morning over 1% below Monday’s close. Today, it gapped down 1.8% below yesterday’s close. A perfect set up if you can trade futures at 2 am…

I want to see bounces. The weaker they are, the more ominous the tone for the markets. I just hope that the bounces haven’t exhausted themselves by the time the markets open tomorrow morning.

Structured Products

2010-08-10T09:29:00.001-07:00

During the last Bull Market, a lot of money was invested into what were called “Auction Rate Preferred Funds”. These funds offered high Interest Rates and monthly liquidity and were sold as alternatives to Money Market Funds. They worked great until the Financial Crisis hit in 2007 and then their flaws were exposed.

The Financial Crisis revealed that one could only sell these funds each month if there were a buyer on the other side of the trade and that buyer actually turned out to be the brokerage firm that sold the funds. When the banks stopped buying these funds, you could not sell them.

The reason the banks stopped buying these funds back was that a little county in Florida froze its version of an “Auction Rate Fund” that they set up to manage cash holdings for other towns and counties. This Florida fund held a bunch of subprime loans and was pricing them at 100 cents on the dollar. This intentional mispricing made the value of the fund look larger than it actually was and by definition inflated the share price to more than it could be worth. When Lehman blew up, people understood that the fund’s holdings were mispriced too high and there was a run on the fund. The fund realized that it would have a negative net worth if everybody tried to sell, so they froze the fund and would not let anybody else take their money out.

The banks saw this and stopped offering to buy back their Auction Rate funds, because they know the holdings were mispriced and when the pricing became accurate, they did not want to take the losses – better that the client get hit instead…

The holders of these securities were then told that they would get their money back when the securities matured (in 30 years), or they could sell them back to the banks at a discount (say at a 20% loss) and get access to their money immediately.

There were lots of lawsuits and eventually many banks ended up writing some very large checks to their now former clients.

According to Chris Whalen, there is a product class that is being sold to investors, desperate for higher yields, which is the next “Auction Rate Preferred” debacle. That product class goes by the name of “Structured Products” -

http://us1.institutionalriskanalytics.com/pub/iramain.asp

“Even as the big banks make a public show for the media of implementing the new Dodd-Frank law with respect to limits on own account trading and spinning off private equity investments, these same firms are busily creating the next investment bubble on Wall Street -- this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all -- that is, pure derivatives. Like the subprime deals where residential mortgages provided the basis, these transactions are being sold to all manner of investors, both institutional and retail.”

“One risk manager close to the action describes how the securities affiliates of some of the most prominent and well-respected U.S. (Bank Holding Companies) are selling five-year structured transactions to retail investors. These deals promise enhanced yields that go well into double digits, but like the subprime debt and auction rate securities which have already caused hundreds of billions of dollars in losses to bank shareholders, the FDIC and the U.S. taxpayer, these securities are completely illiquid and often come with only minimal disclosure.

The dirty little secret of the Dodd-Frank legislation is that by failing to curtail the worst abuses of the OTC (Over The Counter) market in structured assets and derivatives, a financial ghetto that even today remains virtually unregulated, the Congress and the Fed are effectively even encouraging securities firms to act as de facto exchanges and thereby commit financial fraud. Allowing securities firms to originate complex structured securities without requiring SEC registration, is a vast loophole that Senator Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA) deliberately left open for their campaign contributors on Wall Street.”

“Of course retail investors love the higher yields on complex structured assets. Who can blame them for trying to get a higher yield than available on treasuries, while the Fed keeps rates at historic lows to, among other things, re-capitalize the zombie banks. The only trouble is that the firms originating these securities, as was the case of auction rate municipal securities, have no obligation to make markets in these OTC structured assets or even show clients a low-ball bid. And because of the bilateral nature of the OTC market, only the firm which originates the security will even provide an indicative valuation because the structures and models behind them are entirely opaque.

In fact, we already know of two hedge funds that are being established specifically to buy this crap from distressed retail investors as and when rates start to rise. The sponsors expect to make returns in high double digits by making a market for the clients of large (Bank Holding Companies) who want to get out of these illiquid assets.”

Yet another asset class that cannot be priced and cannot be sold. Fantastic. Structured Product sales to Individual Investors are up 72% versus last year (as of July). Equally fantastic. Know what you own! Structured Products are a combination of derivatives betting on stock prices and Interest Rates. How could that possibly have a bad outcome?

The rules of investing changed when Lehman started to unravel in 2007. I became clear then that you could not own Limited Partnerships, Hedge Funds, Real Estate Partnerships or any other asset class where the fund manager had the discretion to price the holdings in the fund and the ability to deny future redemptions if the fund holdings were not trading at a price the fund manager liked.

After reading what Whalen had to say, it becomes clear that these funds blow up if Interest Rates rise. Interest Rates will finally rise when foreign investors become no longer willing to buy Treasuries at these low yields. That is when the Inflation wave will hit us, because then the Fed will simply be printing money to pay the bills of the US Government.

The other thought I have is that the Mortgage Securitization machine caused massive distortions in the economy, as money chased rising real estate prices that were fueled by the money created as investors chased yield in stuff like Auction Rate Preferred funds. Is the next bubble going to be money chases these “Structured Notes” which then turn around and buy dividend paying stocks and high-yield bonds?

Fed Day Today

2010-08-10T06:49:00.000-07:00

It’s Fed Day today and many key markets face critical decisions. The hope being built into the markets is that the Fed will announce that they will start buying at least $250 billion in bonds and will ultimately purchase another $1 trillion to up to $5 trillion of new bonds over the next few years.

I want to start with the Euro (chart below), because so much of the leverage that is driving risky assets up and down is a result of currency Carry Trades. The uptrend in the Euro is now at day 44. Vertical moves like this tend to reverse (or at least pause) in the 45 – 49 day range. I have included resistance levels used by technical traders (and no doubt computer models). The inverse of The Euro is the US Dollar.

Here is the chart of the S&P 500. Key resistance is at 1,140. The setup is there for a reversal and the most bearish scenario would be a break above 1,140 that quickly fails and takes out the 20-day averages at 1,115 and 1,096. If that happens, I will update the chart with support levels.

If key resistance is broken, then the downtrend reverses and technicians start to look at 1,276 and 1,349. We should have a pretty good idea of whether or not 1,140 will hold over the next few days.

US Treasuries have been rallying since the first batch of Quantitative Easing (money printing) ended at the end of March. The 30-year Treasury now faces another set of potential resistance.

Gold has managed to hold support at $1,150 and has now reversed its downtrend from June. Key resistance is the $1,220 – 1,228 range. I will fine tune my support levels later this week.

Conclusion is that the decision of the Fed will impact Stocks, Bonds, Currencies and Commodities. That is the world in which we now live, because there is too much production capacity and vacant real estate, so the only money keeping the economy from contracting is money printed by the government – look at how bad the economic numbers have been since March ended (and Quantitative Easing ended).

Last week, Greenspan said that a rising stock market would do more to improve the economy than any additional stimulus or bond purchases by the Fed. Rising asset prices is a policy tool so expect them to keep spending money they don’t have until the Bond Market revolts and forces them to stop.

S(tuff) Off The Bottom

2010-07-28T11:40:00.000-07:00

The general rule is that when the laggards stop falling, the markets can bounce. Laggards have been Retail, Housing, Energy, Financials, Materials and Biotech to name a few. The junk has bounced and now we are entering another one of those times for a potential reversal of trend.

A move above 1,130 by SPX sets up another one of those triangle patterns that have worked so well in Energy in June and SPX in July. SPX is now about 2% below that 1,130 -1,140 zone. The key over the next few days is a pop into the 1,130 – 1,140 range for SPX.

If the SPX consolidates in this 1094 – 1115 zone for the next 5-8 days and works off any Short Term -Overbought condition, then it is possible that the SPX could trade higher into the Sept period before a significant reversal, but that is the least likely scenario.

The potential reversal pattern is setting up for the S&P 500, Dow Jones Industrial Average, S&P Mid Cap 400, Russell 2000 Small Cap indexes. It has already set up for Transports (IYT), Materials (IYM), REITs (IYR) and Consumer Staples.

GE, JPMorgan and Wells Fargo also have the setup forming.

I am not telling you that the market has topped. I am not telling you to go sell or short a bunch of anything. I am simply showing you what I see and what I look for.

Here is resistance and support, with key dates on the S&P 500 Futures. Resistance clusters in the 1,122 – 1,134 range.

I mentioned a few weeks ago that it looked like Gold was topping. Gold, Gold Stocks and Silver have all had a rough few days, but Gold is now into support ranging from 1,156 – 1,133. Maybe we are setting up for a Long Gold/ Short Stocks trade. We’ll see how things turn out.

European "Stress Test", Basel III and Euribor

2010-07-28T07:49:00.001-07:00

We all know by now that the European “Stress Test” was a scam of the highest order. This is obvious because a few days after the release of the “results”, the Basel III Accord was rewritten to lower the capital requirements for banks.

No Sovereign Debt Default Calculations
First, the entire reason for fear in the European Banks was exposure by the banks to the debts of countries who may default. So the stress test did not take into consideration the possibility that a country could default. Sovereign Debt was not even used in the calculations of the Stress Test. Amazing…

Clearly if the Stress Test affirmed the fact that a Euro Country could default, then the Euro is by definition defunct. So we all pretend that they are infinitely solvent… until the next crisis arises.

Hold to Maturity at Par
Have you ever wondered why banks are so reluctant to foreclose on properties? It is because the rules were rewritten last year so that a bank would not have to realize a loss on a Mortgage Bond until there was a material event like a foreclosure that forced them to do so.

The rules made it so that the banks can price nonperforming loans at 100% of their maturity value as long as they can expect these Mortgages to one day get repaid. This was the whole “Marked to Market” pricing discussion of last year. The banks use these mispriced Mortgage Bonds in their calculations for how much “Capital” they have and for how much they can pay out in bonuses. The higher the values, the higher the bonuses and the less Capital the banks need to go raise through stock and bond offerings.

These accounting rule changes have allowed banks to lower the reserves they have to keep for nonperforming loans. The decrease in these reserves are added directly to the Net Income the banks show at the end of each Quarter and have been used to pad their Earnings numbers.

It Gets Better
The series of Basel Accords were put in place to standardize the rules and laws of international banking, focusing a significant amount of time on accounting practices and Capital Requirements. The Basel III Accord was set to increase Capital requirements by the end of 2012 and the banks were terrified that it would force them to raise more Capital and lower their Profits, by lowering their leverage – with the definition of leverage being how many times you can relend the same Dollar over and over and over again.

The European Stress Test was run with the assumption that the net Capital Banks needed to hold would have to be 6% of the value of their good assets (Level I). Under this test, 7 banks failed. However, under the new Basel III rules, the minimum requirement for banks would have been 8% and under that standard, 39 European Banks would have failed the “Stress Test”.

If the rules had gone unchanged, then the estimate from Credit Suisse is that European Banks would have to raise another $1.3 trillion in new Capital. That money simply does not exist. So the rules were rewritten and released yesterday to great Bullish fanfare on the stock exchanges.

Capital Ratio Requirements were lowered, some down to 3%. More assets are now going to be allowed to move “Off Balance Sheet” (think Enron) to Level II and Level III. And the newly watered down, but stricter Net Capital Requirements will not go into effect until at least 2018.
Remember how Lehman actually failed?
One day, one of the banks Lehman was borrowing money from came back to Lehman and told them that the Collateral Lehman gave them was not worth enough to back the loan. Lehman came back to the bank and told them that they had no more Collateral of any value. The bank pulled the loan, word got out that Lehman had no more Collateral of value and 4 days later, Lehman was out of business.

The same thing is going on again. Banks are reluctant to lend to one another because they know that the bank that is borrowing from them is lying about the value of their collateral they would use to back the loan. So very little lending is getting done.

You can see this via the Euribor Rate (the Interest Rate at which European Banks lend to one another). The 3-month Euribor has continued to climb, even after the stress test results were released. My fear is that banks know the guys on the other side of the loan are insolvent and that they will one day not be able to repay their loans with mispriced Collateral.

The same thing is happening here. New home starts are at their lowest level since 1963 (when the data started). There are over 18 million vacant homes in the USA (versus 111 million households). 51 million of those homes currently have mortgages on them. How many of those mortgages are underwater and how many are delinquent?

What happens if there is another leg down in Real Estate prices? Asset prices have fallen substantially and the economy seemed to grind to a halt once the Fed’s Quantitative Easing program ended in March. The prospect of another leg down in housing prices (and Commercial Real Estate for that matter) has Bernanke talking about another round of Quantitative Easing. I think it is a given that it will occur and that the markets are currently vacillating between the fear that it won’t (Europe says they won’t do it) and the hope that they will (Bernanke’s testimony last week).

Financials and Retail

2010-07-18T20:46:00.001-07:00

Financials
GE is the mother of all lenders, so let’s start here. GE had a low-volume rally (a wedge) into old support (now resistance) at $15 and imploded on Friday on heavy volume (Red Arrow). Bank of America (BAC) rallied into its 50-day on weak volume at got creamed for -9.2% on Friday – also on massive volume. That is not the action of a Bull Market…

Credit Cards
You have to wonder how much of the selloff in Financials on Friday was the result of the new Financial Reform Bill. MasterCard (MA) and Visa (V) have both found significant support right below their current prices on 3 previous occasions and those levels had better hold here.

The potentially bullish side is that the 50% retracements of the recent Bull Market sit just below the breakdown points, so a shakeout on a price break and then a rapid rally back up above support would not surprise me. The same thing happened recently on Semiconductors (SMH). Just more computerized fleecing of the average investor by the con artist on Wall Street.

Retail
Retail is an absolute train wreck. Take a look at the charts of Wal-Mart (WMT), Macy’s (M), Sears Holdings (SHLD), Best Buy( BBY), Nordstrom (JWN), Bed Bath & Beyond (BBBY), Costco (COST), Tiffany (TIF), JC Penny (JCP), Target (TGT), Saks (SKS), Overstock (OSTK)…

There are a lot of horrible looking charts in Retail. That can’t same much good about the Consumer.

Education – The “Wedge” Pattern

2010-07-18T20:41:00.000-07:00

People ask me what do I mean by a “wedge” and why they should even bother looking at a chart.

Markets move in trends. During these trends, price moves too far and becomes extended. Extended would be defined as stretched away from key moving averages (the 50-day and the 200-day). Pullbacks are needed to regress price back towards these key moving averages. These pullbacks take the form of a “wedge” – a narrow spike counter to the prevailing trend.

You can see that during the Bull Phase last year, when prices became overbought, they were capped by a line (Upper Green Line) that paralleled the 200-day (Lower Green Line). Several sharp pullbacks can be seen taking price back down into the rising 50-day and the 200-day averages. The sharp pullbacks are the “wedges” and are defined by the Blue Lines.

The opposite is true during the recent Bear Phase, where price extends significantly below the 50-day and then sharply regresses back into the 50-day and the 200-day. The trend is defined by the parallel Black Lines. Wedges are rallies into a now declining 50-day average.

See how the last moves on the S&P 500 have been selloffs that extend below the 50-day and then sharp rallies (wedges) that take price back up into the 50-day? That is the definition of a Bearish Phase. It should be of great concern that seven days of gains were wiped out in just a few hours of trading on Friday.

See the pattern of a downtrend, with sharp counter-rallies into the trendline? The pattern is apparent for Homebuilders (XHB), Retail (XRT) and Energy (XLE).

Financials (XLF) and Materials (IYM) have bearish wedges, but they are in a trading range, with support (Red Line) holding so far for each Sector.

Remember, Financials and Retail topped in early 2007, so they will need to be watched closely as a leading indicator for a potential market top. A market rally that does not include Financials and Retail would be very ominous. I am going to do some detailed charts of the Financial and Retail sectors later this evening.

Has Gold Topped For Now?

2010-07-18T18:41:00.000-07:00

Gold was been wedging up towards $1,250 over the past few years. It overshot the top of the uptrend in June, and that is often what happens at a top and a reversal of trend. Gold got sold off to close out June and has now tested and failed to break back above the 50-day (Black Line). It now sits on the support line (Blue Line) of the entire multi-year rally. With all the commercials on the radio about buying Gold, you have to wonder if there is any money available to drive prices higher right now.

It is not just the metal Gold, it is also the Gold Mining companies (GDX) that are testing their multi-year uptrend. GDX failed to break above obvious resistance (Red Line) and have now not only failed on a rally into the 50-day, but has also failed to hold support from the February 2010 lows (Green Line). The uptrend from 2008 looks very suspect at this moment.

The same goes for Silver. It failed to break out last month and has now failed at the 50-day (Black Arrow). Support is obvious.

All of this is important for Precious Metals, because in Bear Markets price rallies into declining 50-day averages and then collapses. It is also important, because big money had a chance to break prices out to new highs and they failed to do so. It still could happen, but as of right now, there is not enough new money or conviction to move prices higher.

Nice Bounce, But Where Is The Volume?

2010-07-13T09:22:00.001-07:00

Last Tuesday I sent an email out with the following -

“(F)rom a technical perspective the highest probability is a reversal in the next couple of days.”

“Will this simply be an oversold relief bounce or something more? …Will the bounce be strong, or merely a weak bounce into moving averages that can be shorted?”

Volume on the rally has been terrible and now the Market Averages are at key resistance. That is the trait of a Bear Market. The S&P 500 ($SPX) has made a vertical move into resistance on declining volume (Red Line). The same goes for the NASDAQ ($COMPQ).

Here are some important sectors. Consumer Discretionary (XLY) and Financials (XLF) have both bounced for the fourth time in recent months. Each of these bounces has been on declining volume into resistance. Maybe this time is different…

Retail (XRT) and Home Builders (XHB) have both had weak bounces on imploding volume and look like they are just consolidating before another leg lower in a sustained downtrend. Trends are trends until they break, and they usually go a lot farther than you think they can go.

These are important sectors. They tend to top out early and serve as an early warning sign for economic weakness and Bear Markets. They peaked in 2006 and 2007 and led the whole way down last time.

Here are some key stocks. These stocks are a huge percentage weighting of the Market Indexes and very important to the economy. All Microsoft (MSFT) has done is get stretched too far below its 50-day average (Black Line and Arrow) and bounce – again, on weak volume. That is the definition of a Bear Market! The same goes for Walmart (WMT).

General Electric (GE) held $15 for nine months and then broke below it in June. It bounced on very light volume and could only get above $15 by gapping above it at the open today – probably to try and trigger a short squeeze. But a failure here would be really, really, really bearish.

Chevron (CVX) has also simply bounced into resistance on horrible volume.

Volume is critical, because it tells you what the big boys are doing with their money. Weak volume means that they aren’t buying and that they are more likely simply moving prices higher, so they can unload more shares. That is the definition of distribution.

Before you get into Bear Markets, the big boys sell for months. They sell just enough to not break prices down completely. Prices sit in narrow ranges, until one day they break and then a flood of selling starts. Prices regress back to moving averages and then another leg of selling starts.

That is what has me so concerned about what is going on with the S&P 500. Nine months of a trading range that sees rallies into the 50-day on weak volume and then support gets broken, followed by a rally on weak volume.

This is yet another make or break point for the markets. A pullback that tests 1,010 and holds gets me excited again. A pullback that breaks 1,010 and next support is 950. Pretty sobering stuff.

Technology Leadership

2010-07-05T15:54:00.000-07:00

There are so many components to Technology and so much going on in the group, that I need to break it up into a couple of pieces. I want to start with the names everybody knows, because people tend to like to buy what they know, even though it may not be a great place to be investing.

Here are a couple pairs of current leaders versus past leaders. You tell me which ones the institutions are selling and which ones they are adding to – Apple (AAPL)/Research In Motion (RIMM), BIDU (BIDU)/ Google (GOOG). RIMM is almost at its Bear Market lows! Google’s decision to take on China has been a windfall for BIDU.

What do you think Priceline (PCLN) and Amazon (AMZN) both breaking down together tells you about online consumer spending? EBAY looks worse!

SanDisk (SNDK) makes the “flash” memory for mobile devices, while Seagate (STX) has always focused on Hard Disk Drives for computers and servers. You can see that the mobile devices are where the growth is.

For semiconductors that go into phones, the key is to be a supplier of Apple and not a competitor. Cirrus Logic (CRUS) has chips in iPhones, while Nokia (NOK) devices are clearly not popular at the present time.

Will these trends of outperformance continue? I do not know, but the ability to determine what is leading and what is lagging is a critical skill for investors.

Also keep in mind that although these leaders have held up so far, they often get hit hard too when the markets correct.

Financial Sector Internals

2010-07-05T15:18:00.000-07:00

The Financial Index ETF (XLF) looks like it is holding up well. But what is really going on inside the Financial Sector?

Broker Dealers ($XBD), Regional Banks (RKH) and Asset Managers (DJUSAG) have failed to hold key support and bellwether GE has also failed at support.

Broker Dealers
Take a look at the charts of Morgan Stanley (MS) and Goldman Sachs (GS). Nothing bullish here, with price < 50-day < 200-day. Those are Bear Markets.

Regional Banks
The charts of Bank of America (BAC), JPMorgan (JPM) and Wells Fargo (WFC) have broken key support.
Smaller regional banks like BB&T (BBT), Regions Financial (RF), Keycorp (KEY) and Suntrust (STI) have broken support.
PNC Financial (PNC), Fifth Third Bancorp (FITB) and Huntington Bancshares (HBAN) are holding on for dear life.

Asset Managers
Look at the charts of T Rowe Price (TROW), Janus (JNS), Franklin Funds (BEN), Federated Investors (FII), Waddell & Reed (WDR), Eaton Vance (EV) and Cohen & Steers (CNS). What do you think they are telling you about future fees in the Asset Management business?

Discount Brokers
The charts of Charles Schwab (SCHW), Ameritrade (AMTD), E*Trade (ETFC) and Stifel (SF) are all telling me that the markets are expecting trading volume to diminish significantly. I assume that most people like for buy long, so that would not be a bullish indicator for the markets.

I don’t know how to categorize these, but look at the charts of State Street (STT) and Northern Trust (NTRS). State Street peaked last October and Northern Trust is actually at the lows of the Bear Market!

Why are the banks important? Because every single one of them has the capacity to blow up the entire financial system with their exposure to derivatives. I haven’t posted this chart in a long time, but it is clear that the Derivative nightmare has never been address and may still come back to haunt us.

Very Oversold

2010-07-05T15:06:00.001-07:00

I’m going to make this post an overview of different markets and sectors. I will then follow it up with a series of emails about key sectors so that you will be able to see the real damage that has been done within the components of the markets.

First, I want to show you are chart that I posted a few weeks ago. It is of the Energy ETF (XLE). I posted about how XLE had a classic reversal pattern and that I would not have been surprised by a bounce. In a bullish market, this bounce would probably have led to new highs, but the fact that the bounce failed into the 200-day (Green Line) shows you how the institutions were using the bounce to sell. This action is the definition of a Bear Market.

I bring this up, because the S&P 500 ($SPX) is very oversold and has the same potential pattern setting up. $SPX actually has two of the same pattern (Blue and Orange triangles), and the pattern low is right on the 38% retracement at 1,008.

I am not telling you that the market has bottomed. I am not telling you to go buy a bunch of anything. I am simply showing you what I see and what I look for. I have to keep looking at what is and making decisions off of what I see. The fact that two Follow Through Days have now failed concerns me greatly.

Here is the hourly S&P 500 futures chart. You can see that it is a downtrend made up of sharp plunges and shallow consolidations. Price seems set to make a sharp move very soon. Will it be up or down? A break of 1,010 would be a significant failure, as it would indicate that the potential bounce lasted all of a few days where most traders were out of town and that the bounce was sold hard. If there is a rally from here, then is it merely an opportunity to short the bounce?

Here are some of the sectors I will be deconstructing today.

Financials (XLF) are holding right on support. Failure from here would not be bullish. This chart looks like a goal line save, but wait until you see how some of the subsectors of Financials look…

Semiconductors have held support four times in recent weeks. Support had better hold or you know the big boys have been selling the bounces. Semiconductors are normally a leading indicator for stocks. It would be very bad it they break critical support.

The 30-year Treasury Yield is on the brink of breaking down. This would be very bullish for Treasury Bonds and give you a clear picture of just how bad things are for the economy.

Crude Oil ($WTIC) has held support and bounced weakly into the 200-day average. If price breaks support, then what does that say for the economy – especially if it happens with a breakdown in some of these other indexes and the 30-day Treasury Yield?

Social Security “Means Test” and "Two-Tiered" Pensions

2010-07-02T09:46:00.000-07:00

http://blog.lifecourse.com/2010/02/californias-fourth-turning/

“The very political coalitions that tend to prosper during (expansion) - those which win by outbidding the others on how much they can distribute pleasure, borrow from the future, and undermine institutional barriers—guarantee that the whole system has to be smashed to smithereens before it can be rebuilt. Right now, we have politicians in power whose entire political careers have been built around the wrong logic for a (crisis).”

Here is a recent interview of House Minority Leader John Boehner –

http://link.brightcove.com/services/player/bcpid1886260998?bctid=104611069001

“I think raising the retirement age, going out 20 years – not affecting anyone close to retirement, and eventually getting the Retirement Age close to 70 is a step that needs to be taken.

I think secondly, instead of using the Wage Inflator, that increases in Social Security should be based on the CPI (Consumer Price Index). I think it is a more accurate reflection. Over time, it will have a significant impact on the “actuarial soundness” of the program.

And thirdly, I think we need to look at the American People and explain to them that we are broke and that if you have substantial non-Social Security income while you are retired (pause) why are “we paying you” at a time when we are broke? “

This guy is the Republican leader? No wonder the stock markets are tanking...

We all know that the CPI was altered in 1994 and is now a bogus measure of the Cost of Living, designed to significantly underperform inflation, thus keeping the annual COLA lower than it should be to maintain the purchasing power of your Social Security check.

For younger Americans who have to pay into Social Security every month, but know that we will never see a penny of the money, the natural question to ask of Boehner is “if the system is by definition broke, then why the hell are we being made to pay into it?”

Everybody has to sacrifice except for a few select social cows – think AARP and Public Employee Unions.

I’m going write this for the millionth time, at some point society will choose to finance the needs of the youth over the needs of the old – the needs of the future student over the needs of the retired teacher. We clearly haven’t reached that stage yet, but the battle lines are being drawn and the old are going to lose, because society ALWAYS sides with the youth.

If you are retired, then your benefits are going to get cut. Period. You will have to rely more on self-financing more of your retirement than you thought you would have to be.

http://www.governing.com/columns/public-money/Generational-Battle-Brews-Over.html

“Generation X and Gen Y are getting fed up and might not take much more. That's what I'm hearing from a number of younger public employees who responded to my column last month on the incumbent employee conundrum. The gist of their feedback was this: They don't appreciate bearing the brunt of pay cuts and benefits reductions -- the ones imposed by employers who try to balance the books on their pension and retiree medical plans by slashing compensation for younger employees and new hires. They'd like to see their elders share in the pain -- or at least pay their share.”

“Senior public employees who are vested in the retirement plans with ten or more years of service tend to consider themselves untouchable. So if Baby Boomer benefits can't be cut, the conventional approach to benefit rollbacks is to "tier" the retirement plan with reductions for new hires. This line of thinking leaves the next generation to pay for the mistakes and delusional thinking the Baby Boom negotiators -- on both sides of the collective bargaining table -- have had in the past decade.

There's no question that public-sector retirement benefits need reform, and in many cases this will mean a rollback that trims the benefits for new hires -- and thus younger workers -- disproportionately. But unless the burdens are shared more equally, a backlash could start to brew. We'll likely see it first in union halls: Younger workers will demand more seats on the bargaining committees and reject contracts that fail to share burdens of benefits reform more fairly.”

http://www.slate.com/blogs/blogs/kausfiles/archive/2010/02/16/does-the-uaw-even-want-more-members.aspx

“(T)he UAW has basically cut a deal with GM that protects its existing members in their $28 an hour (plus benefits) jobs, but give new, future hires a much worse deal: $15 an hour jobs. If those new workers are UAW members, they will be able to lobby within the union (and, more significantly, vote) to equalize the pay of the old-timers and newcomers at some intermediate level-- say $22 an hour. Why would existing UAW members want that? Better to keep the newbies out and exploit them for all they are worth in order to subsidize the cushy, unsustainable deal the UAW veterans enjoy. ... It would almost be as if the existing UAW members had become the profit-seeking owners of the company!”

“The union becomes just another quasi-shareholder representing a limited number of old-time members. Eventually, as those members retire and expire, the union ceases to exist.”

The battle lines are being drawn between the haves of the have-nots of the benefits wealth-distribution gravy train. Obamacare was simply a rouse to get the Taxpayer to pick up the healthcare benefit that was promised to union workers (both private and public), but whose funds were never set aside. But Obamacare will never end up being funded and may simply be the last great promise before Social Contracts are rewritten en masse.

Promised future pensions are so large that they have bankrupted the airlines and the auto makers and are now in the process of bankrupting states and municipalities (do you own any Municipal Bonds?).

Eventually, states and municipalities will be ruled by voters who do not benefit in any way from these pensions and they will change the payouts. They will either go to court and argue that the rights of the taxpayer were never represented in the negotiation of these benefits or they will put massive excise taxes on pension incomes. Either way, the pensioner will see a significant decrease in their take-home pension check and this will take a tremendous burden off the rest of the economy.

The Great 2011 Tax Hike

2010-07-02T08:37:00.000-07:00

Marginal Income Tax Rate will rise -

The 10% bracket rises to an expanded 15%
The 25% bracket rises to 28%
The 28% bracket rises to 31%
The 33% bracket rises to 36%
The 35% bracket rises to 39.6%

The “Marriage Penalty” will return.

The “Child Tax Credit” will be cut in half.

The “Death Tax” will reset to up to 55% and the exclusion will return to $1,000,000 per person.

The Capital Gains tax rate will rise from 15% to 20% and the Dividends will be taxed at your Ordinary Income rate, instead of 15%. Both of these will rise another 3.8% in 2013.

The number of families who will fall under the AMT (Alternate Minimum Tax) calculation will rise from 4 million to 28 million next year!

There are many more taxes that are going up and deductions that are going down.

I'm am certain this is having an impact on stocks.

Have the markets been putting in a big 9-month top?

2010-06-29T07:30:00.000-07:00

This is starting to look more and more like a broad-based Bear Market. Rallies are failing into the 50-day or 200-day averages and key leadership groups like Financials, Retail, Consumer Staples and Transports are getting blasted.

The markets are on their second Follow Through Day in as many months and there is a lot of distribution. You have never had a Bull Market without a Follow Through Day, but not all Follow Through Days lead to Bull Markets. Failures are indicative of Institutions selling into strength and are not a Bullish trait.

This feels more like the topping process of 2008 and less like the basing process of 2005-2007. That is no doubt a result of the fact that taxes policies and economic policies were much more pro-growth in 2005-2007 than they are today.

Critical support is obvious.

Financials
A couple weeks ago, I wrote about how Financials were at critical support and needed to see the big boys come in and buy them, or they were going to take the rest of the markets down with them.

The Regional Banks ETF (RKH) and General Electric (GE) are at critical support (GE just broke it this morning). GE had better make a stand soon, because so many Mutual Funds, ETFs and Indexes of many industries have significant holdings in GE. New 52-week lows were recently seen in Blackrock (BLK), Morgan Stanley (MS), Charles Schwab (SCHW) and Ameritrade (AMTD). Many others look horrible. Remember, Financials led the way lower in the last Bear Market, topping in 2006. I will be watching them closely here.

Retail
The Retail ETF (RTH) blew right threw the 200-day.

The Consumer Discretionary Index (XLY) just broke a triple bottom and the 200-day.

Walmart (WMT) has broken down on a rally into the 200-day.
Amazon (AMZN) has broken key support.

Target (TGT), Macy’s (M), Bed Bath and Beyond (BBBY) and Tiffany’s (TIF) have broken triple bottoms and are now below their 200-day averages.

Remember how so many were saying that the high-end consumer was holding up? With Tiffany’s blowing through support, the rich may be putting their wallets back in their pockets.

I am not making predictions on anything, I am simply showing you what is going on in the Retail Sector and it is clear that the big boys have been selling retail. Last week, lot of these companies are at levels where the big boys were historically willing to come in and defend price. They are now selling with abandon.

Technology
Tech has been a leader, but you have to wonder where things are going when you see key stocks like Cisco, Microsoft and Google breaking long term support.

Homebuilders
Some are holding on for dear life (NVR, Beazer (BZH)) while others have been blasted (Ryland (RYL), Pulte (PHM), KB Homes (KBH)).

Home Depot (HD) and Lowes (LOW) are now both trading below their 200-day averages. That puts them into Bear Markets.

This weakness is clearly a result of the ending of the housing tax credit. Housing never bottomed. It was simply propped up by a temporary government subsidy. If housing prices start to go lower again, then the consumer will feel a lot more pressure.

Commodities
Commodity-based economies like Australia (EWA) and Brazil (EWZ) have wedged up into their 200-day averages. That is a very Bearish setup. The reversal pattern I noted a few weeks ago may have played itself out.

Crude Oil (OIL) has wedged up into the old breakdown point and the 50-day average. Again, this is very Bearish.

Energy stocks as measured by the ETFs OIH and XLE are now in a Bear Market.

Agriculture stocks MOO (think Fertilizer and land movers) are now in a Bear Market.

EAFE is now in a Bear Market. EAFE represents non-US Developed markets. That is bad news…

These are a lot of ugly charts. These are very important sectors and stocks. This is how markets top, with key leadership groups breaking down first. I am not saying that we are in a Bear Market, but at best we are now in a split market where there are winners and losers. So at a minimum, you need to be very selective.

Another Big Decision

2010-06-15T07:18:00.001-07:00

I’m going to make this real simple. The markets have the potential of topping right here, with the S&P at 1,106

The top could be a pause for a day or two and then a breakout above this trading range, or it could be a high that sets up a retest of the 1,040 lows.

The other option is that price clears blast through this 1,106 range.

You can see how important 6/14 is on this chart. Upside resistance above 1,106 are 1,128 1,143 1,173 and 1,260

Downside support is 1,040 1,010 960 and 910

One way or the other, when price breaks out of this range, there is a heck of a lot of money to be made. The Bulls have their shot right here to make things happen. If they fail, then the Bears will get another crack at it.

There is really nothing to predict. All you can do is watch what is happening, anticipate potential outcomes and react to them.

It's Still All About The Euro

2010-06-13T20:58:00.000-07:00

The last trading days, the Euro has been rallying. It has now touched the old breakdown point at about 1.215

The Euro has that classic reversal pattern on the hourly chart, so a reversal down from here would not be unexpected.

Let’s see what The Euro does in the morning, because it has controlled the course of risky assets since it started to implode in April. A break above 1.215 that sticks and the lows for the correction may be confirmed.

I am by no means suggesting that The Euro is out of the woods. It has a lot of work to do to undo all the damage it has sustained.

New $50 Billion "Stimulus"

2010-06-13T20:57:00.001-07:00

Back on May 26th, Larry Summers (Senior Economic Advisors to Obama) started to talk about the need for a $200 billion “Second Stimulus”. This package would be specifically designed as a gift to states so that they would not have to go through a massive round of public employee (think unions) layoffs to balance their budgets.

Yesterday –

“President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid "massive layoffs of teachers, police and firefighters" and to support the still-fragile economic recovery.”

http://www.washingtonpost.com/wp-dyn/content/article/2010/06/12/AR2010061204152.html

I am assuming that this will not be a bad thing for Municipal Bonds, but I am wondering if they have already priced this in.

This new money should allow the Unemployment Rate to remain artificially low into the election and help Democrats for the time being. The game of borrow from your kids to maintain your lifestyle of excess continues. Keynes may be dead in Europe, but he is alive and well in Washington…

Here is the chart that best shows what the Fed, the NYFRB and Washington are doing with our money. It shows who borrowed how much new money in Q1 2010 (annualized). You can see that the big borrowing has been done by the Federal Government. They borrowed an extra $1.446 trillion, while the banking sector saw its borrowing shrink by $1.336 trillion.

The Federal Government is stepping into to fill in the whole left as Wall Street deleverages (risk passed from bank shareholder to taxpayer). The two numbers show you that the Government is more concerned about holding the status quo than seeing massive economic expansion. Obama begging for $50 billion to prop up the payrolls of the states is simply a mechanism for maintaining employment, rather than actually creating productive new jobs. Think of this as Corporate Welfare, where Government is the Corporation.

Clearly Obama was terrified by the horrible Employment Report from a few days ago.

A Potential Double Bottom or Wash Out

2010-06-09T21:48:00.001-07:00

I keep looking at the Line of Death charts and recognize that the markets are at a very key level. Yesterday, the SPX touched 1,042 held (actually it went up 1.53% in about 30 minutes). Somebody (the FED?) is defending price right there.

The line at 1,060 is important, because it gives you a visual reference for where the equilibrium is between buyers and sellers. One camp will win out and the markets will make their next big move, either up or down.

SPX 1,040 is important because it was the low of February and the low for the November 2009 rally.

SPX 1,100 is important because it is where the 200-day average is and this is the average that drives the decisions of so many market timers (price above = buy and hold, price below = sell and hold cash). The powers that be understand that a move below 1,040 forces still more money in these models out of stocks and into cash.

This is only my opinion, but as long as the lows of May hold, prices have a chance at bottoming here. If the lows fail, then I become focused on the 38% retracement level (SPX 1,010) and the 50% retracement level (SPX 960). I think the markets will either find their footing here and rally or fail here and find their footing at either of these two lower levels.

So I have to treat this as if it may be a bottom. The old saying goes – you have to buy a bottom, because you are not certain as to whether or not it will turn into THE bottom. If the markets do bottom here and I miss putting some money to work then I will be forced to chase it and make emotional decisions. If they fail here, then I run the potential of taking a small loss and trying again at lower levels.

Nobody can tell the future, but they can prepare to look for bottoming patterns at obvious support levels. This is potentially one of them. There is a time cycle next week around June 14 – 16. The markets have been very technical, so I will be on alert for any plunges or reversals up.

Equal Weight, Mid Cap and Small Cap have been holding up the best. They will be my areas of focus. The great thing about corrections is that they let you sell what is failing and move your money into leadership.

Here is a chart of how potentially volatile the current markets are. This is the Reverse Symmetric Triangle pattern. It is one of the best potential reversal patterns. This chart is the Large US Energy stock ETF (symbol XLE). The trigger is a close above the high of the low day, but that would have gotten you in at $54, so the trade was not taken.

XLE has been consolidating for 14 days in a triangle. It can break up or down. I don’t know the direction of the break. I only know that I expect it to be a violent move on way or the other. My entry point today was a move above the 20-day near $53.30. Price failed to get there, telling me that the big boys were not yet ready to move the price of XLE out of the consolidation.

If XLE breaks down from here, then I look for another potential entry at lower levels.

Financials (XLF) are extremely important to the markets. You can see that $13.90 has been tested three times in the past few weeks and a break below will probably test support at $13.50. That $13.50 level had better hold, for if it breached, then prices had better snap back above it very quickly, or the markets will probably be in very deep trouble.

Semiconductors (SMH) need to hold $26. It has held here on numerous occasions since the beginning of May. Semiconductors lead, they do not follow and if they fail here, that just adds to the evidence that the Economy is in big trouble.

Prices aren’t all at risk of breaking support, the US Treasury 7-10 year ETF (IEF) is on the verge of breaking out to new highs. Or it may be setting up a double top.

Natural Gas (UNG) may have finally found a bottom, with Crude now on the Government’s hit list.

Here is an energy company that is actually on the brink of new highs! VQ doesn’t have much volume, but it is in the IBD Top 100. Just be ready for the potential of a 40% drop in about three weeks. I am not recommending anybody buy it, I am simply showing a pretty picture.

Here is a Gold stock that looks like a Cup & Handle. Again, I think it is a pretty picture and I am not recommending you do anything with it.

So, the next few days may see a resumption of a violent trend. The only question is will the trend be up or down?

One last thing. I want to show the charts of some High Yield bond funds. They have pulled back with stocks and may be an early warning of a reversal or validate any future weakness. I will be watching them closely.

Line of Death Charts

2010-06-06T20:08:00.000-07:00

The S&P 500 and the Dow Jones Industrial Average are at support and had better hold -

These are the charts at critical support. In my opinion, they had better hold here, or there will be that much more pressure on the Indexes.

Financials, Regional Banks, Brokers

Materials

Technology

Consumer Staples

Emerging Markets, Singapore, South Africa, Latin America

Cisco, Hewlett Packard, Dell, IBM, Intel
Who says that this market isn’t technical? Cisco is sitting in a Bear Flag, right on top of the 38.2% retracement level. Next big volume move wins –either a potential retest of recent highs, or the NASDAQ breaks into a Bear Market.

Bank of America, JPMorgan, Travelers

United Technologies

Lower Tops

2010-06-06T20:05:00.001-07:00

As Bull Markets mature, leadership narrows. What this means is that parts of the market top before others and those which top end up in a series of lower highs and lows, while the markets put in higher highs and lows.

First, I want to show the areas that are failing. The first to top tend to be the ones that get hit hardest in the next Bear Market. The first to top in 2006 were the Real Estate Finance companies and the Home Builders.

Healthcare

Utilities

Energy

Taiwan

The UK

Microsoft
That is one potentially huge top. The 38.2% retracement level (MSFT $24.90) has held and this retest of it needs to hold over the next few days, or else a large component of the S&P 500, DJIA and NASDAQ is going to be working against the market.

Others include Austria (EWO – the proxy for Eastern Europe), Australia (EWA), Netherlands (EWN), Global 100 (IOO), American Express (AXP), Mastercard (MA), Visa (V), Alcoa (AA), 3M (MMM), Chevron (CVX), Exxon (XOM), JNJ, Merck (MRK), AT&T (T)

Heavy Selling on Follow Through Day +2

2010-06-06T19:26:00.000-07:00

First off, John Wooden passed away yesterday at 99. He was an amazing man and had deep roots in my community. I will stick with some of his thoughts today –

“If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes” – seems to be fitting these days.

“Failure is not fatal, but failure to change might be” – seems to fit going forward.

We had a Follow Through Day this week on the NASDAQ, but most of the strength that day was the result of Obama saying that the Job creation numbers for Friday would be great. Biden echoed his thoughts. You can see the move here –

The real numbers were released yesterday and they stunk, so the markets gave back all of Wednesday’s gains. You can see that the SPX made a new closing low for this move, but is stuck in a 12-day trading range. The trading range is right below the 200-day averages. A recovery above 1,067 followed by a reversal down, probably gets a lot of the asset allocation strategies out of stocks. A break above 1,103 will probably force the allocation models back into stocks –

Leadership has been in US Small/Mid Cap. They played catch up to the downside yesterday. Being on a Follow Through Day, these were the areas I wanted to buy and the setups were there, but did not trigger. Here is the chart of the Small Cap 600 ($SML). The trigger was a move above the 20-day (Blue Arrow). Mid Caps and Equal Weight (RSP) had similar setups and they failed to trigger as well.

If 1,068 is not retaken early next week, then the next set of key levels below here are SPX 1,010 and 950. Again, the average decline after a move similar to the one off the March 2009 low takes SPX down to 964. That would mean that SPX has made 60% of its average decline (about -150 points) and still has another 40% to go (about -100 points). This is not a prediction. Nobody knows the future! It is just looking at the averages of what has occurred in the past.

Technically, the markets are on a Follow Through Day, but distribution a few days after the Follow Through Day are the best way to kill a rally. It simply means that the big boys are using rallies to sell.

My goals now are –

If the markets hold these levels and the rally starts, then I want to know where I get stopped back into holdings.

If the markets take another leg down from here, then I want to know where the key levels are to anticipate a reversal and look for patterns that would get me in at these levels.

There were a lot of rumors on Friday. They all revolve around insolvent European nations defaulting on their debt (Hungary is the newest example) and the banks which hold that debt going out of business. There were rumors that a large European bank would pull a Lehman this weekend and blow up.

They call it “the slope of hope”, because you spend the whole decline hoping that somebody will save your stock market holdings from imploding. The G20 met over the weekend and Germany and the EU told Geithner and the Keynesians that they were not going to print more money and were going to cut spending. This was yet another hope potentially dashed. Things are starting to sound like a replay of 1937!

I will be posting a lot of charts tonight. I will break them down into three categories –

Leadership (holding the 200-day)
Line of Death (holding onto support for dear life)
Broken (rising wedges from lower lows)

Another Big Decision Has Arrived

2010-06-02T09:57:00.001-07:00

There was clearly intervention yesterday morning in The Euro. The Euro (FXE) needs to hold the $121 level that has been serving as support since May 18th. It has either found support and building for a breakout, or it has had a horribly weak bounce and will resume its implosion. A decision of major consequence seems to be coming in the very near future.

In the end, there are only two choices for Greece and the other countries in a similar debt situation, which was to devalue their currency or default on their debt. Because of the Euro, those countries can`t devalue their currencies, so default is inevitable for some of them. It just doesn’t have to be this week…

We are obviously at a critical juncture. The S&P 500 has been consolidating between the 200-day EMA (1,101) and the low of the flash crash (about 1,040). A close below 1,068 opens the door to testing the 38% retracement level at 1,008 and the 50% retracement level near 943. The most Bullish scenario is a retest of the 1,040 low that puts in a higher bottom. Then a break above 1,103 would make the trend higher and force a lot of Market Timing money into stocks.

Here is the hourly chart of the SPX. You can see that it is in a 3-day consolidation. A breakout from here has obvious consequences, with 1,103 so close. You also have key support at the closing low for this move near 1,070. A break above 1,103 today on strong volume would potentially be a Follow Through Day, so anything can happen. The NYSE, Russell 2000, Dow, NASDAQ, Mid Cap 400, Emerging Markets and EAFE all have the same hourly pattern.

This may end up being the retest of that Reverse Symmetry Triangle I showed last week for The NYSE.

Also, the Percent of Stocks Above their 50-day is trying to put in a higher bottom here at 12.9% versus 10% last week.

One more thing – are Semiconductors replaying the last correction?

Australia Resource Tax Reversal

2010-05-26T08:15:00.000-07:00

http://www.thestreet.com/story/10767515/1/aussie-rallies-on-talk-of-super-tax-retreat.html?cm_ven=GOOGLEN

This was probably the single stupidest tax ever proposed, and in my opinion it had a big roll in the recent market crash. Markets always seem to get blasted when politicians talk about things the harm business profits (see Barney Frank from yesterday).

Lots of News

2010-05-26T08:08:00.000-07:00

Yesterday the markets opened down hard and then reversed during the course the day. They ended mostly flat, after the Dow traded down almost 300 near the open. They shook off a litany of bad news.

Volume was heavy, coming in over 40% higher than yesterday.

There were several news items yesterday which are new and could have forced some money back in to cover shorts –

ECB Rumor
There was a rumor this morning that the ECB would cut their version of the Fed Funds Rate by 0.50%
That rumor came out early in trading and at the very least did not hurt things. So far it has proven to be unfounded.

The rumor has now morphed into the Fed lowering the swap rate it charges for Europeans borrowing from the Fed from 1% to 0.5%.

Geithner In Europe
Tim Geithner is supposedly telling Europe that they need to run a “Stress Test” to get confidence back into the markets. The goal of the stress test was to drive institutional investors back into banks. The TARP was used to finance the purchases of bank shares. Now that Europe has this $1 trillion facility set up, the money is there to start the next round of capital raises for European banks.

Remember, German has the least capitalized banking system in Europe. It is becoming clear that they made shorting illegal to protect their banks from extinction. Spain was not so smart and has seen a lot of turmoil in their banks this week, as about 9% of their banking system has merged in the last few days.

Now we are being told that Spanish bank Banco Bilbao (BBVA) was unable to renew $1 billion in commercial paper in the US. That probably explains a lot of the plunge in European Financial stocks this month. BBVA is down over 35% in recent weeks, but is only down -2.5% today. So maybe a lot of news is already baked into BBVA.

It is clear that a major capital raise must come soon for European Banks. If you have lamented the fact that you did not buy US Banks on the cheap last year, then you may get another chance with cheap European banks – or they may just all implode…

Barney Frank
If you don’t think some of the recent selling is the result of attempts to regulate US Banks, then look at how the market bottomed yesterday when Barney Frank said that banks and their customers should be able to use Derivatives to trade and hedge positions.

Larry Summers (senior economic advisor to Obama)
Larry started to talk about a Second Stimulus today. He specifically talked about aiding States, so that they would not have to lay off Union workers. I’ll be watching Muni Bonds closely to see if they start pricing in another free gift from US Taxpayers.

Most of the stuff listed above is new and all has the capability to turn the markets higher. Will they? Are we currently in the “slope of hope”? Or have we put in a real bottom?

VIX
The VIX measures the Volatility reading that is used for the pricing of Options. The higher the VIX reading, the more you have to pay to protect your portfolio with Options. The VIX is now near levels that rival LTCM, 9/11, Worldcom and the beginning of the Iraq War 2.0. There is a lot of fear right now.

Currently only 10.25% of the stock on The NYSE are above their 50-day. That is an extreme reading, and tells you how oversold things are right now. Oversold can become more oversold, so this is a secondary indicator. But it is one of the first readings to tell you when a possible turn is occurring, so it is worth watching.

The Euro Standard
Europe has to run structural Deficits to keep its economies from imploding. But the Euro Agreement mandates that countries can only run a 3% deficit. With The Euro in place, countries cannot turn on the printing presses to inflate away their debt and devalue their currency (like the US, UK and Japan can). So the weak countries are potentially trapped in Deflation as the strong countries have low inflation.

Something has to give. The PIIGS were spending well above this 3% deficit bogie and had turned their Financial Sectors into de facto money printing presses. Now the game is up. The banks can’t print anymore and European countries have to reduce their deficits.

How bad is the problem?
The average European country is running a 6% structural deficit for FY 2011. So if they all follow the Euro mandate, then they have to cut spending in Europe by 3% across the board.

To give you an idea, the US is running an -8.2% structural deficit! This allows the politicians to claim that GDP is growing by 4% this year. Our Debt to GDP ratio will hit 100% in 2011.

I am not writing about the merits of Deficit Spending. I think it makes future Taxpayers have to pay for current consumption and think it is unfair. But what is is, and with Geithner in Europe, you know that he is telling them they need to do what we are doing – print money and use taxation to transfer wealth from the strong to the weak to maintain civil order.

I am waiting for a Follow Through Day to tell me that this will happen sooner, rather than later. So far, the European politician have been very disappointing in their actions…

Bearish News Weighing Heavily

2010-05-24T22:00:00.000-07:00

The markets got sold hard in the last few minutes today and are down hard overnight.

Some news items that could have impacted stock prices since right before the close today –

Spanish Banks
Spain has a network of enormous savings banks. These banks are run by local politicians and dole out money to their cronies. As one can imagine, these banks ended up making ill-advised loans and are now going insolvent.

Spain took over one this weekend with something like $16 billion in assets. Tonight, 4 others are merging in some sort of bailout. This new bank will have $135 billion in assets!

http://www.nytimes.com/2010/05/25/business/global/25peseta.html?src=busln

The German banks are the least capitalized banks in Euro. Are they next?

Congress
The Collins Amendment to the Financial Reform bill would remove Preferred Bank Stock from Tier One Capital. This asset class represents 13% of the assets for Citibank, B of A, JPM Chase and Wells Fargo (over $108 billion).

This amendment would destroy the banking system in one shot, because so many little banks have loaded with this stuff on their balance sheets. I know I wrote about this in late 2008, because the truth was that if any of the large banks went under, they would take down a huge block of small banks whose balance sheets were loaded up with the Preferred Shares.

Who are these idiots running our country? Can’t they read a 10-K or a Balance Sheet?

http://www.zerohedge.com/article/collins-amendment-will-eliminate-108-billion-bank-holdco-regulatory-capital-will-reduce-big-

They now want to quadruple the tax on a barrel of oil.

http://www.breitbart.com/article.php?id=D9FTDV7O1&show_article=1

They also are proposing having the US Taxpayer bail out Union pension Plans to the tune of $165 billion. It is bad enough that we just got stuck with their Healthcare expenses…

http://www.foxbusiness.com/personal-finance/2010/05/24/lawmaker-introduces-b-union-pension-bailout/

California wants to raise taxes by $4.9 billion.

http://www.reuters.com/assets/print?aid=USN2427330520100524

Korea
Kim Jung II is threatening war.

http://globaleconomicanalysis.blogspot.com/

Euro Panic

2010-05-24T10:58:00.000-07:00

IBD wrote the following late last week –

“While the losses in the indexes have been significant since they marked their highs in April, they aren't unusual.

Rebounds from history's nastiest bear markets have involved a huge move up of 50% to 100%, then a significant correction, and finally a second leg up. The average correction was about 21%, the median 19%.

So if this correction proves typical, it may have a bit more to go before the indexes find a bottom, turn up and deliver a follow-through day.

Historically, the second leg up offers a much smaller percentage gain than the first leg. The median gain was 27%.”

O’Neil lays out an idea of how bad things can get. Do they get that bad? Nobody knows for sure, but you can start to be proactive by looking into the internals of the market and identifying what is working and what is not. When you get into periods of weakness, you are better able to see areas of strength.

You can also anticipate key zones and see how markets act in those areas.

Oversold
The Percent of Companies trading above their 50-day MA has fallen to 12%. This is an extreme reading and tells you that the markets can bounce higher at any moment. In the last Bull Market, these extreme readings were buying opportunities and led to nice rallies. However, in the last Bear Market, they only led to bounces or pauses that allowed the markets to work off their oversold conditions before falling to new lower lows.

The obvious question now is does this oversold condition lead to a strong rally or a weak bounce?

The markets are clearly narrowing, with the Bullish Percent now below 50 (Red Arrow), so fewer than half of the NYSE stocks are trading in uptrends. Boy this spike down sure looks like the first Lehman panic in the Summer of 2007…

Strength
Remember, as Bull Markets mature, there are areas of the market that lift prices higher and other areas that hang on for the ride up. Things may be different this time, but history has taught you to focus on the leaders.

Several areas of the market are still holding above their 200-day EMA (Exponential Moving Average). This is the line used by trading services, like Mutual Fund asset allocation newsletters, to determine if stocks are in Bull Markets (Above the Line) or Bear Markets (Below the Line).

The indexes for Small Caps, Mid Caps, The NASDAQ and the S&P 500 Equal Weight are all above their 200-day EMAs.

Sectors like Industrials (XLI), REITS (IYR), Semiconductors (SMH), Retail (RTH), Consumer Staples (XLP) and Consumer Discretionary (XLY) are all above their 200-day EMAs.

Obviously, breaking these levels from here would be very bearish.

Line of Death
The following are barely holding on at support and need to get defended soon or they will put some serious pressure on the Indexes.

The S&P 500, The DJIA, Large Cap Technology (XLK), Basic Materials (XLB) and South Africa (EZA) all have very important support right below current prices. They are below their 200-day EMAs and underperforming leading areas.

Potential Reversal Patterns
I noted the following pattern for Silver (SLV) a few weeks ago –

“Here is the daily chart of Silver (SLV). I have highlighted the expanding price volatility pattern. It looks like a cone. This tells you there is significant indecision in the Institutional Investor camp. Again, this is one of the best reversal entry patterns there are.”

There was an overshoot on the upside, but the pattern played out, with SLV having a nasty correction over the past 7 trading days.

The reason I bring up this pattern, is that it is potentially setting up in many markets, sectors, countries and commodities. They may all fail, but it is worth noting that a very good potential reversal pattern is in place for lots of key stuff.

Keep in mind, than the pattern does not always play out like what occurred with SLV. Sometimes it fails completely, other times the reversal is simply a small bounce or a pause in the current trend. That is why I also wrote the following about SLV that day –

“I would like to see Silver reverse lower from here and give me an entry point near $17.75. If it shows up I may take. If it doesn’t then I will buy pullbacks from higher levels.”

Failures of this pattern have often led to some pretty extreme trends.

Areas with this pattern are The NYSE ($NYA), Energy (XLE), Australia (EWA), Emerging Markets (EEM) and South Korea (EWY).

Potential Tops
As the Bull Market matured in 2006 and 2007, key leadership sectors began to top out and roll over. When the markets would rally to new highs, these areas would not. When the markets would correct, these areas would put in lower bottoms. The following areas look pretty nasty –

Healthcare (XLV), Biotech (IBB), Utilities (XLU), International Developed (EFA), The EU Zone (EZU), Latin America (ILF), Taiwan (EWT), China (FXI) and Brazil (EWZ). The commodities have rolled over with China and those stupid tax laws proposed in Australia, but that could change on any day, and all it would take would be a policy change inside of China to allow for more leverage or some new “stimulus”. So be watching these areas closely for new policy decisions.

Is a 123 Lower Top now in place for Latin America (ILF)? Brazil (EWZ), Europe (EZU, EFA) and Taiwan (EWT) look worse.

Leadership
There are still leading stocks that look great, but they are getting fewer and farther between and their price volatility is incredible.

There are also a number of past leaders that are failing – Google (GOOG), Priceline (PCLN) and Green Mountain Coffee (GMCR) come to mind.

Conclusion
The market fear is similar to the “Panic of 2008. Foreign credit and equity markets are under stress. There has been intervention in the Euro market, and also some short covering, but the US equity market needs all the help it can get from a rebound in the Euro.

It was not a system error when the market tanked last week. The SPX 1055.69 low Fri took out the 2/8/10 1056.51 low close, so that is obviously technical damage, and this is not a normal correction in a bull cycle, but it is a “Euro Zone” panic that is taking the US market along with it.

If the SPX and INDU don`t reverse and hold their 200DEMA`s on the next rally, the market timers and many hedge funds will be forced to reduce allocations even more, which will accelerate the selling and, then the SPX 38.2% Retracement at 1,010 and 50% Retracement 943 will be in play SPX. The bearish hype by the media will snowball it the SPX declines -20% or more, which is the 975 level.

Keep in mind that the June 2009 correction only was 23.6% of the uptrend and the January 2010 correction was 38.2% of its previous uptrend.

SPX 1,174 Is The Key

2010-05-18T07:05:00.000-07:00

I am of course making the assumption that SPX will get back to 1,174.

The 20-day, 50-day and the high of last week are all at 1,174 (Black Arrow). That makes it critical resistance. It is also the top of this little 8-day trading range.

Notice how the 150-day (Blue Arrows) served as support for both the February panic and this most recent panic (so far).

Barring something nasty, I am going to operate as if the low is in. If there is a high-volume Follow Through Day in the next week or so, I will stop focusing solely on the Index proxies (QQQQ, SPY) and start to focus on high-growth leaders on pullbacks or breakouts.

We Got Our Pullback...

2010-05-16T20:11:00.001-07:00

I wrote the following on Wednesday –

“Prices are now back to the 20-day and 50-day averages. These may offer some short term resistance. Also, 1,160 has been a key price level for SPX. The cycle date is May 15, so there could be a pull back or pause into Friday or early next week.”

The Euro tanked as it became clear that the EU does not want to undertake QE. Instead, they simply want to buy debt from banks, but not increase the overall supply of liquidity. They are truly stupid. The markets don’t like it. This all appears to simply be a power grab designed to make the EU superior to the individual democracies of Europe.

From Ambrose – Evans Pritchard

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100005678/europes-fiscal-fascism-brings-british-withdrawal-ever-closer/

“Fonctionnaires and EU finance ministers will pass judgement on the British (or Dutch, or Danish, or French) budgets before the elected bodies of these ancient and sovereign nations have seen the proposals. Did we not we not fight the English Civil War and kill a king over such a prerogative?

Yet again we are discovering the trick played on our democracies by Europe’s insiders when they charged ahead with EMU, brushing aside warnings by their own staff economists that monetary union was unworkable without fiscal union. Jacques Delors knew perfectly well that this would lead inevitably to a crisis, but it would be the “beneficial crisis” that would force sovereign parliaments to submit to demands that they would never otherwise accept.”

“This is the Gold Bloc fallacy of Continental Europe from 1931 to 1936, the policy that led to Bruning’s destruction of Weimar, Laval’s near destruction of the Third Republic in France with his deflation decrees. It was a precursor to Laval’s fateful role as the Nazi enforcer of Vichy. He was later executed by firing squad, vomitting from a botched suicide with cynanide.

The reactionary character of the EU system is astonishing to behold. Mr Barroso … is becoming a serious danger to civil society and the survival of European democracy. Señor Barroso, a decent man, needs to step back and ask himself what on earth is going to be achieved by imposing a deflation death spiral on a large swathe of Europe.”

The Euro
The Euro has fallen from 133 to 123 in just 11 trading days! This is a big-time currency. That is a huge hit. There is a lot of talk that there will be intervention if price falls to the 122 range. 121 is a 50% retracement of the 2000 – 2008 Euro bull market.

The Euro is crashing in a panic, on par with its 2008 crash. The EU has now attained more power than the sovereign nations it represents. If the ECB does not act quickly to calm the panic, then all the power they have attained will be for naught. They will need to step in immediately to calm things down, or all hell will break loose.

You can see here that daily targets have been reached in price.

Gold
Gold has been the panic safe haven. It is running into lots of technical time cycles and has significant resistance less than 3% above here. Funny how all the panic news always seems to happen around key time cycles and price levels, isn’t it…

SPX
The S&P 500 is right above critical support levels. The two main levels are 1,125 and 1,100. I expect those to be heavily defended the next few days. My goal is to always be buying at these key prices, within a few days of these key time cycles. The setup is there. They do not always work. We could go into a full blown crash next week, but I am not so sure how likely that is with the Euro down so much the last few weeks. This is option expiration and should be one crazy week.

Will Today Be A Follow-Through Day?

2010-05-12T11:33:00.000-07:00

I wrote the following on Monday –

“I wanted to see how today traded before committing all of my money. I took a large position in a US Index proxy (I bought QQQQ) at the open today and will scale into stuff as it breaks out.”

I took another large position (SPY) on the pullback yesterday afternoon. I didn’t sleep well last night, because overnight, the S&P Futures (SPX) kept testing the breakdown point at 1,140. However, when I walked in this morning, SPX was trading at 1,158 and it now trades at 1,170. So I am feeling much better (only tired).

Prices are now back to the 20-day and 50-day averages. These may offer some short term resistance. Also, 1,160 has been a key price level for SPX. The cycle date is May 15, so there could be a pull back or pauseinto Friday or early next week.

I may have jumped the gun by a few days, but this market has not paid you to wait for all of the confirmations you normally want to see. I now have some decent cushion in the QQQQ position and that gives me some flexibility. My biggest fear was that the 4% gap up on Monday would be followed by another one on Wednesday and I would be left in the dust, with no way to make money without taking huge risk, so I took a 20% position in QQQQ at the open on Monday.

Financials (XLF)
This looks like the pullback in January / February – the last Euro Panic. I am not saying that this will rally exactly the same way, but the setup is there if the big boys want to break Financials out and ramp them higher again. The new Euro Bailout was designed to save the banks, so that should bode well for Financials.

Retail (RTH)
Has the same pattern as Financials. That is one incredible chart though. It shows you how volatile price swings are when governments get involved with policies designed to inflate stock prices.

QQQQ has a very similar chart. Let’s see if they can break it out on this move.

Here is the leveraged Gold and Silver Miners CEF (GGN). It has a pretty constructive chart and pays a pretty fat yield. It might file a K-1 (I am not sure) and that may irritate some, but if it makes money while managing risk, then I am willing to put up with a little paperwork…

Gold (GLD) is the talk of the town right now. It is a store of value during inflation and a panic trade haven. The panic trade now is that Germany will leave The Euro… I traded Gold a week ago. Gold is in a buying panic. Here is a chart of Gold versus The Euro. You can see that Gold has broken above the top of the uptrend line from 2008. This is one of my favorite sell signals. Gold may overshoot for a few days or weeks, but the last two corrections were pretty nasty.

Here is the daily chart of Silver (SLV). I have highlighted the expanding price volatility pattern. It looks like a cone. This tells you there is significant indecision in the Institutional Investor camp. Again, this is one of the best reversal entry patterns there are. I would like to see Silver reverse lower from here and give me an entry point near $17.75. It is show up I may take. If it doesn’t then I will buy pullbacks from higher levels.

Finally, here is what my consultant sent me last night –

“The socialist countries will be kept on life support for a while, but there is no intention that they will pay back the debt, so the EU and IMF are really bailing out the banks, which means we are too because the US is a significant part of the IMF funding. This is exactly what our Fed did in 1998 when it got criticized for bailing out the LTCM hedge fund, but it was in reality bailing out the banks without mentioning them by name.

By bailing out LTCM, it was no different than what just happened with AIG, which is not a bank, but it owed the banks big time, so a bailout of AIG was really a back-door bailout of the banks like GS and C etc.

The US is also on a fast track to a debt collapse because our Government [Democrats or Republicans] continue to borrow to cover the exploding deficit and growing entitlements, which end up unfunded, and it has no intention or plan right now to change this death spiral.

A current example of this is the so called financial reform bill which I think will do more harm then good. I mean, how can you not make reforming Fannie Mae and Freddie Mac, and getting it out of the hands of Congress a top priority? Or how about the simple step of restoring the Glass-Steagel Act, repealed at the urging of Bob Rubin, which has proved to be a disaster.

It is all political, and not about what is right for the country. The civil unrest has already started.”

So, my educated guess is that Short Term trends probably favor US Stocks, European Banks, Technology and risk in general, Intermediate Term trends favor Gold, Silver the US Dollar and US Treasuries and Long Term trends favor Gold and Silver.

What A Day

2010-05-10T14:11:00.000-07:00

It was obvious that the European Banks who were loaded up on Greek Debt would be the ones to most benefit from the European Bailout. The only variables were when and how low would share prices fall before it happened?

Here is a list of which country’s banks own how much of the outstanding Greek Debt -

France 25%
Switzerland 20%
Germany 15%
US 5%

The CAC (the French version of the S&P 500) was up over 9% today. We were on the brink of the market imploding. To give you an idea of how bad last week was, the CAC is now trading slightly above last Tuesday’ close.

The European Bailout is effectively a mechanism by which the EU and the IMF will print money and use that money to buy the debt of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) owned by European Banks. This is the same game played in the US last year, where the FRBNY created money and used it to buy mortgages from US Banks.

Now the European Taxpayer will be left holding the bag. Make no mistake that this was a monumental crisis. I have to believe that if the EU hadn’t stepped up over the weekend, then next weekend we would be waiting to see which European Banks would end up getting nationalized. The markets are telling you that we were that close to falling into the abyss.

Now if any of the PIIGS default, then the Banking System will not feel a thing. I can’t wait to see how big the bonuses will be next quarter at the European Banks…

I wanted to see how today traded before committing all of my money. I took a large position in a US Index proxy at the open today and will scale into stuff as it breaks out.

I really think that this decision by The EU is a game changer. They will buy $1 trillion of this debt. If you figure that the average bank is leveraged 20 to 1 on assets, then you can see just how much buying power $1 trillion creates. The question now is does the US underperform, as money leaves the safe haven in search of risk? Does Gold underperform with diminished fear, or outperform on increasing Inflation expectations?

I wrote the following last Thursday –

“Everybody knows that the banks of the US and Europe are insolvent and that the only thing keeping them propped up is bs accounting and Government support via the taxpayers purchasing of bad loans. They also know that the only reason asset prices are going up is because of Government-funded leverage and Government-sponsored manipulation of asset prices. It is simply a matter of when, not if asset prices collapse again.

So the EU is left with a couple options, if it does not want a full scale collapse of the Euro Zone Economy –

Start Quantitative Easing. This is when the EU will ultimately print about $2.5 trillion in money to buy these bad loans off the books of the European Banks.”

Here are some performance numbers today for some European Banks. They gapped up to these levels (or higher) overnight, so I was unable to buy them. Don’t get upset that you were not in them on Friday, because if the EU doesn’t blink, then these banks gap DOWN the same percentages this morning.

Some of these I may end up owning.

ING +23%
STD +23%
BBVA +19%
BCS +18%
DB +11%
CS +7%

More to come later today.

What Can You Do...

2010-05-10T05:28:00.000-07:00

Credit Suiss (CS) is currently up +10%
Deutsche Bank (DB) is currently up +13.5% pre-market
EAFE (EFA) is up +7% pre-market

I knew what to buy and there isn't a thing I can do about it.

EU and IMF Go QE in Europe

2010-05-09T21:41:00.000-07:00

Europe blinked and did what I figured they would. The EU and the IMF are now promising to make loans and buy almost $1 trillion in sovereign European debt.

That is the EU starting the process of moving the crappy debt on the balance sheets of European banks onto the balance sheets of the European Taxpayer. That is a potential huge win for the shareholders of these banks. Without the bailout, they are out of business - with the bailout, they sell a bunch of worthless Greek debt for Par (100 cents on the Dollar).

Stock Market Futures are up a little over 2% around the World. I will not look a gift horse in the mouth. It used to be that you would buy strength on dips, but now it seems that the crappier the fundamentals and technicals of your holdings, the higher they bounce.

European Banks move to the top of my list - Credit Suisse (CS) and Deutsche Bank (DB)seem to be closest to obvious support.

I am assuming that they bid will come back quickly to Commodities, as $1 trillion is a huge sum of money and it will need to get levered up 5 or 6 to 1 in the near term by these banks, as they start to trade their own accounts with taxpayer money (sound familiar).

Illiquid Plunge

2010-05-06T23:36:00.001-07:00

I just got back home from a trip and today was one for the ages. It reminded me of the Long Term Capital crash in 1998.

Basically what happened today is Liquidity vanished as the computers took over.

What we know –

The Euro was down below 126
US Treasuries have gone parabolic in a flight to safety
Japan intervened to weaken the Yen
The EU will not undertake Quantitative Easing – they will not buy the bonds og Greece, Spain…
Bid/Ask spreads on some large stocks blew up – I saw one with a Bid of 1 cent and an Ask of $60 at the same time
Many Brokerage Firms were so overwhelmed with orders today that their online systems crashed – It was a Panic today!

What can be speculated –

Some guy at Citi actually put in an order to sell $15 billion of PG, not the $15 million he intended – Citi denies this trade
The Fed stepped in to buy Futures and stop the Crash – the President’s Working Group on Capital Markets was set up after the 1987 Crash to buy Futures if the Market is Crashing and prevent a full-scale panic
Washington will vote to stop the banks from speculating with Taxpayer money

Conclusions
We know that the markets are terrified that Greece will default and that will wipe out the Capital of several major European banks. These banks have seen their stocks crash in recent days. The entire Greek Rescue is designed to prevent these same banks from going insolvent.

The markets were down today and then the Dow fell about 700 points in about 10 minutes. There was no liquidity during this move, so when somebody wanted to sell, the sale price simply imploded. A large part of the trading today was computers trading with each other. That has been the game the whole way up, where stocks have risen on low volume, as computers have bought and there have been no shares to sell, so prices simply melt up. The fantasy melt up in prices came back to haunt the markets today.

The Eu leadership had better figure out a way to stabilize the PIIGS or the $6 trillion spent by Obama and The Fed to prop up asset prices will be worth jack ****.