Saturday, October 31, 2009

Harlloween Dollar Rally Spooks Stocks.





It got pretty ugly out there on Friday, or downright spooky (lame Halloween joke).
The S&P 500 got whacked today by -2.82% to 1036 finishing right at the low for the day, and the low for the week.
The biggest culprit today was the dollar as the green back rallied 0.73% against the Euro today.
Keep an eye on EURUSD. Not just because it is by far the biggest weighting in the DXY (The Dollar Index) , but because it is testing its uptrend dating back to March (again)(chart abpve).
The double bottom in DXY that was setting up early this month did not materialize, however it seemingly broke its downtrend line on Monday. My weekly work has been choppy but still positive since late last month, and as of today, my monthly turned positive as well. That being said, we really need to see EURUSD break its uptrend to confirm the aggregate shift in dollar trend.
If DXY can hold above 75.80 and EURUSD breaks below 146.50, things could start getting interesting for it on the upside.
Side Note: Can you think of a more crowded trade right now than being short dollar (for the carry or otherwise)?
We began the week talking about the change in tone of the market, the dollar rally certainly suggest something is afoot.
Some thoughts on the S&P 500 (analysis usding TD Sequentials- 1st chart above):
We're finally arrived at the point where the bullish percent indicators are suggesting supply has overtaken demand, and today sets up an important day via DeMark indicators as well. Looking at SPZ9, a close below 1050.05 would set up potential qualification of TD Propulsion Momentum Down. What would then be needed is a lower open Monday and at least one tick below the open to qualify that level. The Propulsion Down Exhaustion level is 1001.60. As well, the TDST Down level is nearby at 1046.50 This would potentially be qualified as well if the open restriction is met on Monday.
This would be the first break of a TDST Down level since the rally began in March.
The close should be interesting because the TD Range Projections are suggesting the close will be within the range of 1050.10 to 1075.50 since the tolerance level high (1061.04) and tolerance level low (1055.96) have both been exceeded. Obviously, if the range projected close is correct we will not get a potential qualification of those breaks.
Spooky...spooky...! Interests rates going up.. Stocks likely to crash...Bonds too..VIX above 30s!

Saturday, October 17, 2009

Do It Again..






The DJIA has crossed 10,000 maybe 50 times since first breaching it in 1999.
Is the market in another liquidity bubble like it was in 2003?
Bubbles don’t breathe, they don’t inhale, they just expand until they explode.
Is the market mirroring the relatively short-lived panics in 1987 or 1907, or is something more pernicious growing?
After the Long Term Capital Management debacle in 1998 caused a bailout and injection of nearly $4 billion on September 23 to avoid a wider collapse in the financial markets, another equity bubble emerged with a top 17 months later.
Are we doing it again?
It's noteworthy that on the decennial cycle, the September 1998 fiasco was followed by the Lehman debacle 10 years later in September 2008. It may be well worth watching the behavior in the first quarter of 2010 -- specifically March 2010, which will be 10 years from the March 2000 peak and 17 months from the October 2008 "internal low".
Are we doing it again?
And, if we are, what will the silver bullet be? Although sentiment has been fluffed up profoundly, what concerns me is that it may be a lot of smoke and little roast.
What if the current situation more closely mirrors the situation after the Crash in 1929?
If we turn down again and the crisis has a second wind, where will the full faith and credit come from?
Has moral hazard been hazed in return for a semester or two of stock pranks, Bluto? Did the failure to save Lehman for $50 billion, which instead cost trillions to save the world financial system from imploding, create another bubble?
While the popular indices are far from their record highs, some stocks have made the return trip. It reminds me somewhat of the test failure of the March highs as September 2000 began with some of the leaders making all-time highs above their March record highs, leading many on the Street to conclude that all was well in market.
The Market: I always assumed the Big Gap from last year's Lehman Deluge would be filled -- just not here and now. I expected a deep correction, first with a higher low and then another rally back that exceeded the gap and made a higher high in the first quarter last year. That's what the cycles suggested. So much for scenarios. But now what, what happens now that the gap has been filled? Will the other indices follow the NAZ, which filled its gap from 2008 and immediately extended? Anything is possible.
If the Ascending Wedge on the S&P isn't bearish and the crash of 2008 was an isolated event and huge buying opportunity like 1987, what should be expected from the price action from here? What should we be looking for in the charts?
First of all it's worth mentioning that one year after the crash in 1987 the market was up just over 25%. It took 20 to 21 months for a 50% rally to unfold. Currently the S&P is up more than 50% in just seven months.
However, as to the price action, it may be worth watching for an overthrow, which is seen as a breakout by the bulls and a failure of the bearish pattern (point A) followed quickly by an undercut of the wedge, which is embraced by a confirmation of the bearish pattern by the bears. The third move was the genuine bias as the market moved higher with many in both the bear and bull camp being dislodged and scratching their heads. Kind of a big picture cha-cha-cha. 1987 style.

Thursday, October 1, 2009

How to spot tops.



Here are just a few simple and reliable signs of a top:

First, insiders are selling at a furious pace and insider-buying has abated. The insiders are the smart money so this is a sign that stocks are high and ready for a reversal.

Next, the Volatility Index (the VIX, on the left of this page ) has collapsed from a high of 89 to the low 20s (recently). This means that fear has turned to complacency right as we approach the often dreaded month of October.

Finally, the record number of 72% bears hit in the AAII in March 2009 has turned into a high and rising number of bulls in the various investor polling services. The market psychology has gone from a depression in March to near euphoria as we close out September.

A manic market is about as healthy as a manic mental patient so be extremely careful in here. After the 47% rally in early 1930, people were singing “Happy days are here again.” That was right before the market plunged another 86% to hit the 1932 bottom.

Technical analysis can also be very helpful in spotting and timing market tops. The two best patterns to watch for are the head-and-shoulder tops and my favorite, the double tops.

Let's look at a couple recent double tops so we can be ready for the next one.

On May 2, 2008, the Dow Jones Industrial Average (DJIA) closed at 13,058 and then dipped to 12,745. On May 19, 2008, the DJIA went back up and touched the highs but closed at a lower low of 13,028, putting in a double top.

From there the market collapsed to 6626.94 at the March 2009 bottom. This was the 49% slow motion repeat crash that had a near identical price pattern to the famous 1929 48% crash.

As a side note, we've also just completed the near 50% (a favorate GANN number!) multi-month rally that happened in early 1930 right before an 86% plunge.

The most famous double top was Nasdaq 2000 at 5000. Nasdaq collapsed 35% in just two months after the double top was completed. In my next piece, I'll show some famous head-and-shoulder tops as that may be developing as I write.

In summary, it's not time to be a hero on the long side of the market. Yes, a close above 1065 on the S&P 500 would target 1120, the 50% retracement of the entire 2007-09 collapse. That's only about 5% upside from here versus the 86% potential downside if we continue to repeat the 1929-32 depression era move in stocks.

Some other warning signs of an imminent top are oil topping, copper topping, China topping, the Baltic dry index weakening, gold spiking and the fact that almost every talking head on TV is bullish! Remember, if your sell list is getting longer than your buy list, it's time to get shorter!