All the Pieces Were There to Move The Markets Higher

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

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

The Markets were extended and brushing right up against significant resistance

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

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

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


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


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

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


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

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


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


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

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


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

Wedging into a Ceiling?

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

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

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

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

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

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


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

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

Momentum (RSI14) continues to diverge with Price.



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

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

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

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

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

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

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

You’d Better Know How to Play Defense Real Soon

I have a feeling that there is some pretty significant pain coming in the not too distant future. I haven’t seen much of anything actually break down yet, but it has been a heck of a rally since the lows and prices are approaching key technical levels.

Upper Channel Line
“You should sell if a stock goes though its up channel line after a huge run-up.” How to Make Money in Stocks 4th Edition, page 264 (William O’Neil). A number of Indexes are breaking out above the tops of their trading channels.

Emerging Markets (EEM) broke out today.

The S&P 500 (SPY) broke out a few weeks ago and then failed hard (Red Arrow). It is now trying to break out again.

The S&P 500 Equal-Weight Index (RSP) is breaking out above the Channel Line again and is also breaking out above a four-week trading range. I probably should have bought it today…

I wrote the following when the indexes were breaking above their Channel Lines in September –

“Moves through the top of the trading channel are often the final blow off moves before an extended consolidation. Note how I wrote consolidation and not Bear Market or Crash. The breakout above the channel in 2003 extended to a 9% rally over the next 5 weeks. Price then sat around for 9 months.

I would expect the next consolidation to last a couple months and be more of a period of rotation from former leaders into new leaders rather than a Market Top and selloff. I’ll let you know if things change, but for now there simply isn’t much that is breaking down.”

That said, the major indexes are fast approaching critical resistance levels and the consolidation could take the form of a 15% correction –

Dow Jones ($INDU) – It is great that the Dow has recaptured 10,000. Now it only has to rally another 44% to get back to it old highs… There is significant resistance at 10,350

The S&P 500 ($SPX) has significant resistance at 1,122

I started taking some money off the table today (Buy points were where price crossed above the Blue Lines)–

VMW broke out of a one-month consolidation and is getting extended.

STAR was bought out by Cisco yesterday for $35 per share in cash! I missed the breakout at $26, but bought it at $28.

FFIV also broke out of a 1-month consolidation and it has gone parabolic on the hourly chart.

There are several others that I am watching closely –

Canadian Dollar (FXC)
I bought the breakout for more conservative accounts and expect FXC to hit resistance soon.

CREE has been one of the stronger Technology stocks. It is now in day 3 of its consolidation above its recent breakout.

I have been patient with ASIA, having held it through the recent market consolidation. Today the buyers showed up and I got paid!

CEO broke out this week, stopping me in and it is now pulling away from the breakout. This is about as bullish of a chart as you can hope to see.

China (FXI) broke support (Red Circle), then gapped up and after running for about 13%, has now broken out of it recent trading range. I told you that they big boys could ramp Chinese stocks if they chose not to crack them in September.

Singapore (EWS) has been in a boring trading range for many weeks and finally broke out today.

Intel (INTC) broke out of a nice base and beat earnings estimates last night. If Intel cracks in the next few days, then you know that the big boys are selling the news and you will need to be cautious.

I have been adding to my positions in Gold (GLD) for many months. Here are two entry points. The break above $100 was a major breakout from an 18-month consolidation.

To recap, there is a lot of stuff breaking out of bases and a lot of other stuff that is getting extended. The markets are within a few percentage points of obvious, significant resistance.

The markets are still being driven by a cratering US Dollar, and I figured that the Dollar would bottom about the same time that stocks topped. I am very concerned about the $SPX 1,122 area and am watching the US Dollar closely in here! I would not be surprised to see a meaningful bottom in the Dollar, accompanied by a correction in Stocks, Gold and Commodities.

The flip side of that thesis is that the Dollar cracks and foreigners run for the hills, forcing asset prices down as well. There doesn’t seem to be much for the argument of prices going much higher from here after this current rally plays itself out. I can change very quickly if the big boys keep buying, but that is my thesis for now.

You had better know how to play defense. If you are thinking about moving accounts to those who understand how to defend your money, then get off your ass and get the paperwork in, before you are making decisions under duress.

Deconstructing the CREE Trade

Lots of people refer to Technical Analysis as “voodoo” or worse…

For me, Technical Analysis is about reading pictures of historical price and volume patterns. Charts are series of trends and consolidations. There are a fairly small number of chart patterns that consolidations will follow. The key then is to identify where to buy as the stock is attempting to break out of the consolidation – within the context of whether or not volume is confirming the breakout.

Here is a chart of Cree Research (CREE). Cree has been a leading stock with strong Earnings Growth. The pattern in the Blue Circle is a classic pullback. Cree broke out of the pattern on two big days. It then sat around at the previous high ($33-ish) for a few days, before gapping up and running to $39.

The current consolidation looks identical to the one in the Blue Circle. I had stops in to buy it at $37 - $37.10 (Green Arrow). The buyers showed up on Friday and Cree pooped +5.36%! It may now sit around at the old highs again before deciding what to do after earnings are released.

Here is how CREE looked on the 1-minute chart. Look at the move it made in the first few minutes of trading on Friday! I wish every trade worked so well…

Charts aren’t voodoo. They are used to better time entries and identify support levels.

A Bad Day For The Dollar

Let’s run down the headlines today –

Geithner boasts about how the US Government has successfully used Taxpayer money to refinance 500,000 mortgages.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0VZEj.oK9Wg

Word comes out that the Federal Housing Administration may need at least $50 Billion to remain solvent. The FHA insures mortgages (think Freddie, Fannie and Geithner’s new masterpiece). At least 27% of the mortgages insured by FHA that were written in 2007 are now seriously delinquent or worse. 20% of the 2008 originated mortgages are now seriously delinquent… or worse.

http://dealbook.blogs.nytimes.com/2009/10/08/is-fha-the-next-shoe-to-drop/

Mortgage Application Up +18.2% last week as the Fed buys mortgages to artificially force down interest rates. The money used to buy these Mortgages was created by taking TARP money and levering it up 10 to 1 at the NY Fed - $30 billion at Freddie and $30 billion buys $600 billion in mortgages for the US Taxpayer.

http://www.mortgagebankers.org/NewsandMedia/PressCenter/70556.htm

Mortgages are the Red and Green blobs –

I told you that they would raise the taxes on those with jobs to raise the entitlements of the unemployed. Democrats extend Unemployment Benefits to (infinity and beyond) and propose to raise taxes on Health Insurance companies.

http://hotair.com/archives/2009/10/08/pelosi-wants-windfall-profits-tax-on-insurance-companies/

http://www.marketwatch.com/story/democrats-unveil-plan-to-extend-jobless-benefits-2009-10-08-171800

The Fed is worried that owners of Commercial Real Estate will not be able to refinance their debt when it comes due in the next 18 months, because so much of this property is under water.

http://www.businessinsider.com/fed-starting-to-freak-out-over-commercial-real-estate-2009-10

Oh yeah, and the Democrats are now talking about Stimulus 2.0. When the first $1 trillion was so successful, why not print up another $1 trillion and flush it down the toilet too...

http://apnews.myway.com/article/20091008/D9B76AUO0.html

What do all of these headlines have in common? They all tell how the US Taxpayer is either subsidizing prices or subsidizing Interest Rates – we can only execute these programs by printing money.

The Result
The Dollar was getting creamed last night and Gold is breaking out of a gigantic trading base. Apparently the Central Banks of Asia hit the panic button and started to sell the currencies of South Korea, Hong Kong, Taiwan, Thailand, the Philippines and maybe Indonesia to buy Dollars. I think the Dollar was on the brink of crashing and these guys decided to prop it up for a little while longer.

http://www.cnbc.com/id/33233199


I’ve been telling you ever since Paulson and his cronies decided to screw the US Taxpayer and use Inflation to bail out the banks, that this was the only possible outcome. The Dollar will crater, because those in charge do not want to do what is required to fix the real problems in our economy.

And who says that I am cynical… I just read too much.

Economist On Why We Need A Weaker Dollar

For over a year now, I have been ranting about the need to weaken the Dollar. I know that it has made some of your stomachs turn. However, my logic has simply been that a weaker Dollar makes US Labor more competitive and will lead to the creation of new domestic Manufacturing Jobs.

Former World Bank chief economist and Nobel Laureate Joseph Stiglitz had this to say on the topic -

“One way of looking at it is that the U.S. has turned to exporting T-bills instead of automobiles or other commodities. Global demand for dollars has supplanted demand for manufactured goods and services, resulting in multilateral trade deficits and loss of jobs at home.”

From MIT Economics Professor Simon Johnson today -

http://www.thedailybeast.com/blogs-and-stories/2009-10-06/obamas-secret-jobs-plan/?cid=hp:mainpromo2

“…think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.”

He also when into the mechanics of a “Carry Trade” –

“If you can borrow in dollars and buy Australian (or Korean or Chinese, etc) government debt, you are in what is known as a positive “carry trade”—because of low interest rates here, you pay close to zero to borrow the dollars and you can invest in Australia at more than 3 percent interest (or you can plunge into speculative Chinese automotive stocks, as Goldman is now doing).

And if you think interest rates will rise in the rest of the world before they do in the United States, because the dollar is on its way down, then this carry trade becomes a one-way bet: You make money on the carry, you hold foreign currency while the dollar falls, and then you pay back your loan in depreciated dollars.”

This is what they did with the Yen over the last Business Cycle. Now it is the “Dollar Carry Trade”.

I did this post to show that I am not some raving lunatic, hell bent on killing the Dollar and redistributing the wealth of the US to the rest of the World. I posted this to show you that the end game has to be a declining US Dollar. It is the only way to bring Manufacturing Jobs back.

The weakening Dollar has obvious investment consequences – the most important of which is that if you want to maintain your Standard of Living relative to the rest of the World, then you need to position assets to protect yourself against a falling Dollar.

The Charts Are Set Up

There are lots of charts that have the same pattern. Most are orderly pullbacks into moving averages and now the downtrends are being tested. The markets are setting up for yet another fast move. Will this one be up or down?

Mid Cap 400 (MDY)
MDY got overbought on September 17th (Red Arrow) and has been consolidating ever since. It has gone from being stretched 3 Standard Deviations above the 20-day to closing today right below the 20-day (Black Arrow). Guess where my stop buy order is?

Here is the daily chart for MDY. It pulled back to the 50-day and is now set to make a big decision. If buyers show up, then I am in. If they don’t, then I will look to buy MDY at lower levels.

Austria is the gateway to Eastern Europe and the Austrian ETF (EWO) serves as a proxy for much of Eastern Europe.

Singapore is still sitting in its trading range.

Commercial Real Estate has also pulled back into its 50-day. That’s a pretty orderly pullback, don’t you think?

Apple broke out of its trading range today. Nice goal line save, UBS Analyst. I hope you get a nice bonus from our TARP Money. Or maybe it’s bonuses from our Tax Cheats…

China National Offshore Oil (CEO) closes Friday being below the 50-day and then gaps up two straight days (a $9 rally in 7 hours) to now be testing resistance. I’d love to see a breakout above this 3-month trading range. At some point, the mystery bids and Futures-driven rallies will cease or fail and the markets will get hammered. Until then, I play the breakouts.

Several High Growth Leaders are set up. Several others have already broken out. All in all, I think that things are pretty constructive. For disclosure purposes, I can have orders in to buy all or none of these. And I can change my opinion without letting you know.