Key Currency Decision Coming

Currencies are going to make a key decision over the next few days, as the Dollar is now at trendline support. This should have a big impact on Commodities and Commodity-based economies, as it will determine the next leg of the Dollar Carry Trade.

The US Dollar is at key support


The British Pound is at key resistance


UDN is the ETF that moves inverse to the US Dollar. It is effectively a weighted basket of several foreign currencies.

Here is a chart comparing UDN to China (FXI). China peaked in November on the Dubai default scare. The US Dollar bottomed a few days later as money looked to the Dollar for safety. The Dollar sold off and then rallied again in January/February on the Greece scare.

The Dollar has had a mild pullback, as stocks have gone higher over the past month. Now you have FXI and UDN testing the tops of their trends. A decision is near for the next leg up or down for Stocks, Commodities and Currencies.


Here is the ETF for Australia (EWA). You can see that price is little changed since October. But look at the trading pattern – a series of higher highs and lower lows. William O’Neil calls this “wide and loose”, others call it a Reverse Symmetrical Triangle. What it is is a lot of institutional indecision.

This pattern is the lowest common denominator entry point for trend reversals. EWA still has to hit a new high to set up the pattern, and then a sell has to trigger. The pattern may fail and EWA may break out from here, but the setup will be worthy of your attention if you own commodities or stocks.


That is the whole point of this blog. You can’t tell the future, but you can be ready in advance if the setups are there. You have to be! I actually hired a second consultant to help me simplify my money management. His job is to help me distill the market down to key leadership and see stuff like this as it is setting up.

I can’t keep track of 800 companies, but I can observe whether Large is outperforming Small or Domestic is outperforming International. And I can keep track of something as simple as this chart, because #4 was a key buy level and #3 was key short. I don’t need too many of those trades to make my year or miss too many blow my year.

You will see a different tone to this blog. It will be very mechanical – much more simplified. I will do a lot less trading in 2010. I will be waiting for setups like EWA or UDN/UUP and when they trigger, I will commit money with stop losses, in case the market tells me that I am wrong. A chart like EWA gives me a very clear idea of when I should be committing new capital and taking profits.

Here is a chart comparing UDN to Gold (GLD). You can see that Gold is the anti-Dollar. So a breakout in UDN will probably be good for Gold and a breakdown in UDN will probably be bad for Gold. We’ll see how it plays out. I would probably be focusing on GLD on a break above 112.5 if UND can break out. However, if UDN has another leg down, then I will be holding off on new Gold purchases.


The next crisis may be forming. It is a potential trade war with China over the valuation of their currency. Paul Krugman dropped a bombshell on Sunday when he wrote things like the following in the NY Times –

http://www.nytimes.com/2010/03/15/opinion/15krugman.html

“China’s policy of keeping its currency, the Renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.”

“Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.”

“It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.”

“The Peterson Institute for International Economics estimates that the Renminbi is undervalued by between 20 and 40 percent.”

“In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand. “

Now you can agree or disagree with Krugman’s logic. That is not the point. The point is that you are now getting key economic figures talking about a trade war with China, where the purpose of the war is to massively devalue the purchasing power of the US Dollar.

I know that the long run path of the US Dollar is lower, because it is the only way to get jobs back home and inflate our debt away. That said, my brother once told me that “markets go to the most logical place, in the most painful manner possible”. So keep an eye on UDN and commodities and stuff like EWA, because a big decision is coming very soon – one way or the other.

Lehman Repo 105

I don’t know if you have been following this, but the final report on Lehman Brothers’ bankruptcy was released this week and it pretty much affirms the fear that many people have that the banking system is effectively unregulated and banks are allowed to lie about the value of the assets they hold.

The Pawn Shop is Open
Repo 105 was an accounting device used by Lehman to manage its balance sheet, so that it appeared at each quarterly reporting that Lehman had a lower leverage ratio than was actually true. Basically what Lehman did was “sell” assets at the end of the quarter for more than they were actually worth, through complex accounting tricks and then promised to “buy” them back after the quarter closed to bring them back onto the balance sheet. It was done to make it look like they held fewer assets and more cash.

They did it a lot and they did it for years. They were cooking the books. Management got rich, by giving themselves bonuses based on the fraudulent numbers –


What were the regulators doing about it? Stress Tests
They kept running new less-stressful tests until Lehman qualified as a going concern.

These transactions were not disclosed on SEC filings and they were not called into question by Lehman’s auditor. These transactions were only done to misrepresent Lehman’s numbers to the markets.

We all know that this stuff is going on. Think of what Greece was doing, using Goldman to create accounting tricks to make it appear that they were not spending as much as they actually were. Think about states like California, where they are using accounting tricks like pulling revenue in from next year by making you pay 80% of this year’s taxes by June 30th (close of the fiscal year) and pushing spending out until July 1st.

From CNBC last week –

http://www.cnbc.com/id/35768105

“Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they'd all be insolvent.

That's why the Obama Administration has created this kind of shell game in the first place.

I stole that shell game idea from housing consultant Howard Glaser: "We're spending tens of billions of dollars on a tax credit to get people to purchase homes, we're spending federal money to keep them in their homes through the modification program, and now we're going to pay them to move out of their homes. This is not a sustainable system for the housing market. It's a shell game. Bernie Madoff could have created this system," Glaser told me today.”

How many other banks are pulling this stuff? How many states and countries are using accounting tricks to appear to be solvent?

The only reason Lehman finally blew up is because they finally ran out of good assets to promise. They literally got to a point where they were using assets as collateral with other banks and the banks told them that the collateral had no value. Lehman was asked to promise other securities as collateral and when they could not offer any, there was a run on Lehman and they collapsed.

Heralded author Brian Ritholtz had this to say –

“All in all, the entire system failed. The situation is utterly disgusting, and if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me . . .”

Let’s see if anybody actually goes to jail or has to repay bonuses over this.

Gold Priced in Euros at New High, Not Priced in Dollars

Here is a chart comparing the movement of the price of Gold in Euros (Top Chart) and in US Dollars (Bottom Chart). I want to point out a couple things that I see –

Gold moves in fits and starts. It consolidated for much of 2003 – 2004 and then went parabolic in 2005. It sat around for a lot of 2006 and 2007, then had a sharp rally into early 2008. It then had a series of consolidations for much of 2008 and 2009, before going parabolic again into December 2009.

I bought most of my Gold via GLD at about $84 and again at about $88. I sold a third a day before the top (educated luck) and then sold the remainder on the counter-rally towards $115. Some thought that I was nuts for selling, but I sold because I know how gold trades and I didn’t want to be stuck with 30% of my money in an asset stuck in a violent 12 to 18 month trading range.

Now back to the chart –
The Euro has imploded since the Dubai crisis started on December 1st 2009. It gathered steam as it has become clear that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) need to be bailed out by Germany and France.

The flight from the Euro has caused Gold, as price in Euros, to hit an all time high in price. See how the chart has that wedgy, vertical move so far in 2010? Now compare that to how orderly the consolidation has been for Gold priced in US Dollars. The consolidation in the first half of 2009 was also very orderly for Gold.

2010 has been a very difficult environment in which to make money. Normally, in times like these, I would have a lot of money in safe stuff, earning 5% with no risk. But with the Fed holding safe rates at effectively zero, it is not possible right now to get a decent yield on cash.

Now, with all of that said, Gold is at key resistance. Stocks are also at key resistance. There is a cluster of time cycles from March 3 – 9. So you once again have a market at resistance and time at a place where the boys love to reverse trends.

There has been a Follow-Through Day this week for the NASDAQ, but it barely qualified and volume continues to be crappy. I took note that the Follow-Through Day was right at the beginning of these time cycles and right as price was getting into the meat of resistance. Would it surprise anybody to see them suck you in right before they take price down? I also noted that key risk indicators, like Australian Dollar, are not confirming the last two weeks of the rally.

I think the resolution to Greece will force a lot of money back out of the Dollar and Gold and back into the Euro. I also think that the IMF will have to bail out the PIIGS. This is just naked monetization and should be another driver for risky assets.

I am interested in Gold if it can break out of this consolidation, because it is a pretty easy pattern to see and should attract the herd. Any purchase will be a trade only, as it looks like Wave 5 off of the October 2008 bottom. I am tired of using the word “trade”, but I have to, because risk is higher than at any time in my 19 year career.

Futures-Driven Romp from Key Support Levels

It is clear that the computers rule the Markets and the little guy is simply along for the ride.

The Markets got hammered overnight, opened way down, then caught a bid around mid day and finished things off relatively flat.

Fading rumors and key moving averages was the name of the game today.

Apple is going to split – maybe…

China is going to buy all the Gold being sold by the IMF – maybe…

The Apple rumor was the excuse to start buying SPX Futures. They light up like a pinball machine. There was $9 billion in purchases in ten minutes. The odd thing is that there was no buying of the SPY ETF to justify the massive Futures activity. But that has been the norm recently. The same thing happened yesterday morning at the beginning of Bernanke’s testimony – I guess nobody thought he was going to keep Interest Rates low…


The Fed knows how to play the Markets at key technical levels. Greenspan was a master at trading the technicals. There were several key technical levels hit this morning on SPX (SPX is the key index to watch for this stuff). Almost to the penny, SPX tagged the 38.2% retracement (1,086.52 versus today’s low of 1,086.02) from the February 5th low to the February 19th high - .

Also, the 20-day moving average for SPX was 1,087.4 and the 38.2% retracement of the January 19th high to the February 5th low is 1,084.95

So today was simply a short-term oversold Market at critical support levels being reversed hard by a bunch of computer models. Does anybody else see the danger to this when all of the computers decide to SELL at the same time?


At the same time this was going on domestically, the S&P 100 Global Index gapped down to open below the 200-day average and then spent the rest of the day going straight up.


Does anybody still think that the Markets aren’t being manipulated with intent… Asset Price Appreciation as a policy tool. Keep the rich happy with their stock prices going up, keep the poor happy by extending their unemployment to infinity and stick our kids and their kids with the bill, all while looting the US Treasury for the most politically connect “contributors”.

Markets are still in Correction, but the retest of the February 5th lows is in process and my have ended this morning. I noticed that three sectors broke out of multi-month consolidations today and will be looking to start building positions soon if I get the green light.

Lower Prices Today on Higher Volume

I wrote the following on Friday –

“You can see that SPX is now entering the meat of resistance and that there are some time cycles on Feb 23 and 24. The January 11th high is a pivotal high, because it coincided with a combination of weekly time and price levels. So now you should be looking for a failed retest of the 1,150 range.”

“There is now the potential for a reversal down next week. A reversal down would set up a lower high on the chart and probably set us up for at least a retest of the early February low. We will see if this voodoo triggers. I will look to sell weak areas if it does and then try and add to strength into any Follow-Through Day.”

“Be very careful in here. Many of the pieces are in place for the Markets to reverse lower from here. We will see how things trade, but the setup is there to take prices lower.”

The selling showed up right on cue. Volume increased with today’s selling. The NASDAQ saw its volume increase 22%. Not what you want to see when the selling picks up.

I want to walk you through a couple key stocks, sectors and country-specific ETFs.

Google (GOOG) had a pathetic rally attempt. It hugged the 150-day (Blue Line) and sold off on rising volume today.


Amazon (AMZN) could not even bounce. The best it could do is sit in a narrow trading range. You know what happens if the bottom of the range gets taken out on big volume…


Critical support on Apple (AAPL) is obvious. The $188 range has been tested four times since October. All Apple has been able to do is rally up into the 50-day (Black Line) and then sell off today on increasing volume (Red Arrow).


Goldman Sachs (GS) is stuck below ALL key moving averages. The 50-day is now below the 200-day! That is the definition of a Bear market. Notice how GS has been stuck below the 200-day EMA (Orange Line) and is now in a bearish pattern. Today’s reversal was on big volume (Red Arrow). If that green trendline gets taken out, then really bad things could happen for Goldman.


JPMorgan (JPM) is another very important Financial stock. You can see how it has rallied up into old resistance.


Semiconductors were hit hard today. KLA Tencor (KLAC) is a good example of just how bad things look for some of the stocks in this sector. KLAC looks broken and sold off on big volume today. That ain’t grandma selling. That was the big boys getting out today.


China (FXI) looks like a top too. It is stuck below the 200-day EMA (Orange Line) and the 50-day is about to cross below the 200-day. Yikes! Look at the volume on the last two down days (Red Arrows).


Nothing I have shown you is bullish or justifies purchasing anything risky. Markets are still in Correction and there has not been a Follow-Through Day. The next time cycles are around March 5th, so we could be in for another week or so of weakness.

Still No Follow Through Day

I think there can be no mistake about the fact that this entire rally off of the March 2009 lows has been a liquidity event – namely that all it has been is speculative money chasing its tail all the way up, on little to no fundamental footing.

Now The Fed has started to remove liquidity. That should start to change the calculus.

There was no Follow-Through Day on the rally that started in early February. That means that the big boys were not committing serious capital to the rally. Consider it more of a trade than an investment. Bull moves don’t start without Follow-Through Days.

S&P 500 Resistance and Time Cycles
You can see that SPX is now entering the meat of resistance and that there are some time cycles on Feb 23 and 24. The January 11th high is a pivotal high, because it coincided with a combination of weekly time and price levels. So now you should be looking for a failed retest of the 1,150 range.

What this means in English is that there is now the potential for a reversal down next week. A reversal down would set up a lower high on the chart and probably set us up for at least a retest of the early February low. We will see if this voodoo triggers. I will look to sell weak areas if it does and then try and add to strength on any Follow-Through Day.


Commodities
I have seen lots of potential Bearish Wedges, where prices have rallied over the last few weeks on lower and lower volume.

I have also seen lots of the choppy, panicky up and down action that is commonly referred to as “Wide and Loose” and is often indicative of a top.

Make no mistake, when Commodities top, this Bull Market is over.

Look at how the Metal’s ETF (XME) has rallied on imploding volume –


The broad markets have the same issue ($SPX) –


International Markets
There are many International Markets that have had this – sell on heavy volume, then rally up on light volume, over the last few weeks –

EAFE – Developed Europe, Australasia, Far East (EFA)
Hong Kong (EWH)
Australia (EWA)
Brazil (EWZ)
Austria (EWO)
South Korea (EWY)
Emerging Markets (EEM)
South Africa (EZA)
to name a few…

Be very careful in here. Many of the pieces are in place for the Markets to reverse lower from here. We will see how things trade, but the setup is there to take prices lower.

Apple (AAPL)
Take a look at the chart of Apple (AAPL). That has the potential to be a perfect Top. Look at how the weak rally has been on declining volume and has left a Doji Star at the 50-day. A break of $190 on significant volume would be very bearish for Apple!

Elizabeth Warren on the War Path

Elizabeth Warren was on CNBC today. Elizabeth Warren is the head of the TARP Oversight Panel.

http://www.cnbc.com/id/15840232?video=1410657604&play=1

First she talked about the Commercial Real Estate Market and how 50% of the Mortgages on Commercial Real Estate are now under water. 50%!

She then goes on to talk about how we need to be taking action now to prevent this from causing another systemic catastrophe in a few years. She says that shareholders and bond holders should be forced to eat the losses.

She says that most of these loans were written by small and community banks. That means as these banks eat their losses, they will have less capital to lend to small businesses. These banks represent 40% of our banking system.

She then has to defend her recent Wall Street Journal Op Ed from the GE-employed stooges at CNBC –

http://online.wsj.com/article/SB10001424052748703630404575053514188773400.html?mod=rss_Today%27s_Most_Popular

“Banking is based on trust. The banks get our paychecks and hold our savings; they know where we spend our money and they keep it private. If we don't trust them, the whole system breaks down. Yet for years, Wall Street CEOs have thrown away customer trust like so much worthless trash.

Banks and brokers have sold deceptive mortgages for more than a decade. Financial wizards made billions by packaging and repackaging those loans into securities. And federal regulators played the role of lookout at a bank robbery, holding back anyone who tried to stop the massive looting from middle-class families. When they weren't selling deceptive mortgages, Wall Street invented new credit card tricks and clever overdraft fees.”

“The same Wall Street CEOs who brought the economy to its knees have spent more than a year and hundreds of millions of dollars furiously lobbying Washington to kill the president's proposal for a Consumer Financial Protection Agency (CFPA).

So far, Wall Street CEOs seem determined to stop any kind of watchdog. They seem to think that they can run their businesses forever without our trust. This is a bad calculation.”

“The reputations of Wall Street's most storied institutions are evaporating as the lack of meaningful consumer rules has set off a race to the bottom to develop new ways to trick customers. Wall Street executives explain privately that they cannot get rid of fine print, deceptive pricing, and buried tricks unilaterally without losing market share.

This generation of Wall Street CEOs could be the ones to forfeit America's trust. When the history of the Great Recession is written, they can be singled out as the bonus babies who were so short-sighted that they put the economy at risk and contributed to the destruction of their own companies. Or they can acknowledge how Americans' trust has been lost and take the first steps to earn it back.”

Holy cow. She is calling bank CEOs a bunch of lying crooks. She flat out names Jamie Diamond.

CNBC goes after her and she tells them that credit card companies make $100 billion per year in bogus fees and that the credit card companies continue to devise new tricks to steal money from their customers.

“If the only way to make money off of your customers is to trick them… then you shouldn’t be in business.”

Credit Card companies are now borrowing at 0% Interest from the Government and then raising rates on their customers who are paying on time by 8% to 16%!

Eventually, the CNBC commentators go quiet and let Ms Warren say her peace. They know that by trying to defend the banks, they are pissing off their viewers and it is a losing battle.

Banks are a monopoly blessed by our representatives – the government. They were created to allow for the efficient creation and transfer of capital. They now tell us that if we restrict them in certain areas, then they simply won’t lend.

F*** them. If they don’t lend or do offer products that are by definition designed to hurt the American Public, then we can shut them down tomorrow – simply don’t allow that bank to borrow from the Fed. Pull their license and create a new bank out of thin air that will lend. That CAN lend. That will create products that are transparent and productive.