The Power of Timing

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

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

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

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

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

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

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.