Taking A Big Breath Before Heading Lower..

The charts above are a quick visual of what I'm seeing and thinking:

Gold Exchange Traded Fund (GLD) Trading Chart
The gold ETF trading fund is getting closer to completing its four-month correction and starting another rally if all goes well in the coming week or two. What I'm looking for is gold to hit resistance at $113 and then drop to the $110 level, which is a key support level.

S&P 500 Exchange Traded Fund (SPY) Trading Chart
Stocks have been on fire the past few months but this rally looks to be getting long in the teeth. After a rally this strong without any pullbacks one has to think that when a correction does start it will be a very sharp sell off. I will point out that a few years ago we saw this exact type of price action for the broad market and it continued higher for several more months before actually putting in a large correction. If we don’t see a large correction, then we'd see similar price movement, which we saw last November and December with the sideways choppy price action and slow rally higher.

In short, I think the market is ready to finally take a breather. What I'm looking for is another sell off, which will break the low for gold, silver, oil, and S&P 500 last week. If this happens, it will trigger panic, washing the market of all the traders who have been buying at these high levels (chasing prices).

Stocks have been very strong and new money continues to push prices higher so we could just see a relatively small pullback between 3% and 5% and then the rally could continue. This would work very well with gold, silver, and oil as they would be testing key support levels and should be ready for a another upward surge.

It doesn’t really matter what the market does as there will always be great opportunities. Waiting for quality setups requires discipline and focus because it's not very active. I see traders making all kinds of silly trades that chip away at their profits because they can't sit and watch when they should.

During slow times I actually focus on learning more about the markets -- going through charts, comparing inter-market analysis, etc. That kills a ton of time and helps make you a better trader in the long run. So if you don’t see a good trade, get out and do something fun or educational. Don’t just start trading the five-minute charts because you want to trade.

Ελλάδα Role in the Economic Domino Theory.

I am going to make a prediction: Greece will default unless they see a large portion of their debt forgiven outright. Shocking, right?

Here’s the simple story about Greece:

- They are very unfriendly towards business -- getting one started, keeping it open, the whole nine yards.

- The underground economy is massive (30%) because of the huge taxes they have there (VAT alone is 19+%) making it impossible to collect tax revenues accurately.

- Even if they could collect tax revenues accurately, they don't have the economic firepower to pull themselves out of their debt disaster, especially with an elevated euro.

- Fifty percent of GDP is government spending.

- Entitlements dwarf the current debt, making their situation all the more impossible.

I can hear the rebuttals now --“But Greece is only 2% of the Eurozone economy.”

True.., but let’s look at how that impacts the rest of the Eurozone.

1. Greece is a major importer of German goods.

2. Sixty percent of Greek debt issued in the last few years was bought by other European countries leading to massive mark downs if Greece defaults (mostly the French €73B, Swiss €59B, and Germans €39B; that is 3% of France’s GDP).

3. Fifty-one percent of Portuguese debt is owned by Spanish banks.

4. Thirty-two percent and 25% of Spanish debt is held by German and French banks respectively.

Can you say "economic domino theory"? Write-downs from losses in sovereign debt default will be a big negative for other countries, and investors will aim for Portugal and Spain (they already are if you look at Portugal’s CDSs) as the next stop for the default train.

Right now there are two prevailing scenarios:

1. Greece leaves the euro.

2. Germany leaves the euro.

Greece leaving the euro would actually mean a stronger euro, but it’s also possible that Portugal and Spain follow suit and cause real problems for the currency. Removing multiple Eurozone countries defeats the purpose of a common currency, so they might as well just go back to a free trade zone. On the surface, that doesn’t seem like the answer.

A German departure is much more interesting to me, and the more I look into it, the more I think this may be the best option if the currency is to survive. The Germans may be moving in this direction as well.

The Germans are the only adults in Europe and the people there have been quite loud about their dislike of bailing out the imprudent. If Germany leaves, they're likely to see lower interest rates and, of course, will have total control over their currency. This will leave the rest of Europe to toil with a weaker, less stable euro. But believe it or not, this isn't a bad thing. Many of the remaining nations are highly dependent on tourism as a major piece of their economy (this is especially true in Greece) and a cheaper currency makes it much easier for foreigners to take trips. (The big fix will have to come by creating a common tax system, but that appears to be far too complex with too many stepped-on toes to actually come to fruition.) Also, a weaker euro for Greece (and probably Spain and Portugal), even below parity with the dollar, is far preferable than a return to the drachma which would undoubtedly see a massive devaluation, possibly into the 500-600 drachs per dollar range. It was roughly 350 when Greece entered the euro in 2001. That would be devastating to the people of Greece.

I'll just keep an eye on the EUROs for now.

Rolling Over to Bear Status?

The support levels on the charts pointed to the possibility of a bounce and the markets obliged us with one.

My main concern is the visible difference in intensity and passion of the reactive buyers. Friday’s sellers seemed to be more driven and intense than the buyers yesterday and today.

Any deterioration in the market coupled with an inability of the markets to reach recent highs would be worrisome technical development!

Over the course of the last week, the markets witnessed several signs of extreme complacency. Put-Call ratio of 0.32 was registered on April 14, which is the lowest since August 2000. Before Friday’s decline, the S&P 500 and Dow had strung together a 40-day streak of consecutive closes above 10-day Simple Moving Average, which is also a historic statistical rarity.

Both these events show the skew of sentiment toward the bullish extreme.

August 2000 doesn’t conjure an optimistic image -- it was, after all, the beginning of the 2000-2002 bear market. So, does this mean this market could be imminently rolling over to a bear status?

It’s usually prudent to see the whole picture and not simply rely on any one point of comparison. In 2000, we had several negative divergences in place such as:

1. S&P 500 was unable to exceed the highs made in April 2000.

2. The Non-confirmation from NASDAQ, Russell 2000, and Semis, which remained dramatically lower in August 2000 compared to April 2000 peak.

3. Divergence in numerous market-health indicators. Currently, we haven’t seen any such important divergences. (I will continue to monitor such divergences).

As the chart above shows, short-term support exists around the 20-day MA (currently 1186) and between 1140 and 1150 (breakout point from lateral consolidation and vicinity of 50-day moving average).

In absence of any major divergence, this market seems to be setting up for a normal correction and I would use any deterioration following a weak bounce as an excuse to trim my positions.

Exsqueeze Me?

The stock market just keeps walking higher and while it might be taking everyone with it, it certainly seems to be taking remaining shorts and bears out of it.

One of the main forces that has fueled the 18-month-long rally has been liquidity. First there’s the one with the capital “L” of more than a trillion dollars provided by the government in the form stimulus and bailout packages; then there’s the more plebeian kind created by the traditional investment community which comes in two forms -- the (possibly mythical) money that’s waiting on the sidelines or hiding in bond funds, and then all the shares sold short by bears, which represents embedded buyers.

It’s hard to gauge the amount of the former or when or at what velocity it will flow back into equities. As far as the latter, recent data suggests that a lot of embedded buying has been squeezed out of the market. It wasn’t too long ago that the list of hard-to-borrow stocks and even ETFs ran into the triple digits.

But bears can take solace; if you haven’t already been taken out and shot, now may be a good time to peek out of your cave and sniff out some shorting opportunities as the likelihood of a further squeeze has been greatly diminished.

The table above uses data from ShortSqueeze.com to show the current short interest ratio (shares short/float) and the percentage change from 30 days earlier. I looked at some of the most widely traded ETFs, some popular big capitalization stocks, and a few of the favorites among bears that usually carry a large short interest.

My belief is that much of the short selling in the ETFs had been a form of hedging by money managers against their generally long portfolios. The decline in short interest suggests those hedges have now been removed. The reasons might be a combination of complacency in a market that keeps working steadily higher and the need to chase performance by those that have been slow or cautious to fully embrace the bull market.

Whatever the case, if the market does start to drop -- and this is not a prediction -- it means there will a stampede to reduce risk by shedding shares and shorting index products to gain protection and downside exposure. And that could give the bears plenty of fresh juice.

The 10 Ominous Signs.

Ten warning signs for another correction or even a major top like 2007:

1. Rising oil and gold prices are pressuring bonds and pushing interest rates higher. This could spell trouble for both the economy and the stock market.

2. The Weekly Full Stochastic is topping, warning that prices are high and could reverse at any time.

3. Like 2007, the weekly MACD is curling over from extreme overbought levels.

4. The S&P 500 is fast approaching its declining 200-week moving averages (1225) as well as the 0.618 Fibonacci retracement (1227) of the entire collapse.

5. Cash is at the lowest levels since 1987 and 2007 at 3.5%. This means mutual funds are all in and they will have little ammunition to support the next series of dips or severe market correction.

6. Recent sentiment surveys are showing that bears are becoming an extinct breed on Wall Street. Investors Intelligence showed only 20% bears last week. The bulls are certainly running wild on Wall Street.

7. The Volatility Index (on yr left)is at the very low and dangerous level of 16.78 now and is warning that investor complacency is very high. A low VIX isn't a good timing indicator but simply another warning sign that a significant top could be approaching. We're now at the exact same VIX reading that we had in early October 2007, right at the top.

8. The Dow Jones Industrial Average is forming a possible right shoulder on the monthly chart. This could be the mother of all head-and-shoulder tops. Giant head-and-shoulder tops are also forming in the Russell 2000, the Wilshire 5000, and other global markets on the monthly charts. These are textbook head-and-shoulder tops if completed.

9. The market leading index, NASDAQ, is now at the exact same RSI reading as in early October 2007 of 74.42. The RSI then went to an extreme low reading of 21.95 on the daily chart in October of 2008 and 29.79 at the March 2009 lows. The RSI can go a lot higher and you only have to look at the 86.74 RSI reading in early 2000 for evidence of that. However, this is a high and potentially dangerous level on the RSI just like it was in October of 2007.

10. And finally, the old Wall Street saying may hold up well given all these early warning signs: “Sell in May and go away”. - Tonite, 14/4/2010,may just be the key-reversal day that I've been waiting for!

In summary, there are many additional warning signs of a imminent top. High oil prices have historically led to recessions so prepare for the possibility of a double dip. When the Fed is forced by the bond market to hike short-term rates, tighten up the chin strap on your crash helmet. Put on all your other crash protection gear as stocks will likely reverse violently once the Fed starts jacking up interest rates. Get ready to hedge your long positions as the roller coaster approaches another peak. This next ride down could be the wildest ride since the one from the top in 2007! Strap in bud!

Are We Ignoring Greece ?

I have been reading many reports, buttressed by personal testimonies, of a major bank run going on in Greece -- domestic banks and even foreign banks domiciled in Greece.

It seems to me that this development increases the likelihood that the crisis has reached a terminal stage.

The loss of funding of banks causes them not only to deny credit but to have to retract/eliminate credit lines. The resulting spike in internal interest rates and monetary astringency can cause a swift collapse in economic activity, which will make it completely impossible for the government to meet its revenue collection targets.

Massive external intervention is now required to salvage the situation. First, the ECB must provide unlimited funding to replace the withdrawn deposits. Second, the EU must provide the necessary loans/guarantees, with a comfortable margin for shortfalls in revenues.

If this doesn't happen very quickly, a severe Greek crisis will be irreversible. The situation may drag on for a while. For example, EU countries may announce loans/guarantees at any moment. But each day that passes, the final outcome is increasingly irreversible.

Again, the key is that the collapse in internal economic activity, if not reversed dramatically and immediately, will make it impossible to meet revenue collection targets.

It is my opinion that financial markets have become complacent about the Greek issue. Most today are saying, “who cares.” This is a mistake.

If Greece goes down, this is a big deal. It'll be Financial Crisis 2.0!

Wake Up To Crude Reality.

Larger-than-forecast inventory gains caused crude oil to drop two days in a row, however, there are plenty of reasons to suggest that the highly sought-after commodity is likely to appreciate and potentially hit the century mark.

Over the past six months, black gold has been oscillating back and forth in the $70-$85 range and according to an analyst at Lind-Waldock, the commodity is at the uppermost point of its range. To take it a step further, crude’s pattern suggests that it will break away from its high point and could potentially add an additional $15 per barrel.

On the supply side, the recent increases in crude stockpiles will likely dissipate in the coming months. The driving force behind this is relatively flat production. When the global financial meltdown put a damper on demand for crude, OPEC cut production levels to reach an economic equilibrium point. Now that both developing and developed nations have emerged from the Great Recession and expected growth in global GDP is set to reach 4.5%, the demand for crude will likely be bolstered, resulting in a supply-and-demand imbalance that will slowly eat away at excess inventories.

Granted, exploration and production companies have the ability to increase the amount of usable crude, solving the anticipated supply-and-demand imbalance that is expected to be seen later in the year, but the time lag between discovery and delivery to the pump is so large that a short-term impact on prices is likely undisputable.

Lastly, the US dollar is expected to remain weak and unstable, which will likely support the price of crude oil. Crude is traded in dollars, and as the dollar declines in value, it generally becomes more attractive to foreign investors.

Although an opportunity seems to exist in crude oil, it is equally important to consider the volatility and inherent risks involved with investing in commodities. To help mitigate these risks, an exit strategy that identifies a price point at which an upward trend in these equities could come to an end is of utmost importance.

Party's Over..! It's Time To Unload Those YEN.

Break for a smoke..Although the debt malaise in Greece has (temporarily) been addressed through an EU/IMF agreement of sorts, sovereign debt concerns will remain on center stage for quite a while.

Besides the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), the debt situation of Japan is a lingering worry and not without reason as it is the G8 country with the highest debt-to-GDP ratio -- clocking in at more than 200%. Needless to say, 12 consecutive months of deflation are compounding the problem.

Commenting on the difficulty Japan may be facing to fund debt issues in the future, Niels Jensen (Absolute Return Partners) said: “The first country to really feel the pinch could very well be Japan; in the bigger context, Greece is just the appetizer." Japan’s debt-to-GDP ratio has grown from 65% in the early 1990s when their crisis began in earnest to over 200% now. Fortunately for Japan, the high savings rate has allowed shifting governments to finance the deficit internally with about 93% of all JGBs held domestically. This is the key reason why Japan gets away with paying only 1.3% on their 10-year bonds when other large OECD countries must pay 3%-4% to attract investors.

We often hear the argument from the bulls that the Japanese situation is sustainable because they, unlike us, are a nation of savers. Wrong. They were a nation of savers. Looking at the chart above, it is evident that the demographic tsunami has finally hit Japan. The savings rate is in a structural decline and the Ministry of Finance in Tokyo may soon be forced to go to international capital markets to fund their deficits. I very much doubt that non-Japanese investors will be as forgiving as the Japanese, and that could force bond yields in Japan in line with US and German yields. Herein lies the challenge. Japan already spends 35% of its pre-bond issuance revenues on servicing its debt. If the Japanese were forced to fund themselves at 3.5% instead of 1.3%, the game would soon be up.

It therefore came as no surprise when, subsequent to Greece’s lifeline, traders moved their attention from shorting the euro to selling the Japanese yen.

Technically speaking, the Japanese economy should wave goodbye to the recession in the first quarter of this year as the country’s manufacturing PMI indicates the recovery in the manufacturing sector is ongoing. However, economic growth in Japan is likely to be weak. Low consumer confidence, falling incomes, and deflationary expectations should keep consumers’ wallets shut. The strong yen is undermining exporters’ competitiveness and adding to deflationary expectations. With Japan’s strong trade links with China and other Asian countries any slowdown in these countries is likely to impact severely on its exports and therefore the current mainstay of the economy.

In my opinion, Japan’s monetary authorities have little choice but to weaken the yen as this will provide a further boost to exports and eventually the overall economic recovery.

When trying to identify the primary trend of a financial variable I place most emphasis on monthly data. The long-term chart above of the yen/US dollar exchange rate indicates that the three-year uptrend is in danger of being breached, and also conveys an important message when considering the MACD oscillator at the bottom of the chart. This momentum-type indicator has just reversed course (crossing the zero line) for the first time since a buy signal was given in mid-2007, thereby flashing a primary sell signal.

Turning to the shorter-term picture, using daily data, the lower graph above indicates that the yen/US dollar has broken both its 50- and 200-day moving averages, and has also dropped to below its February low. All the indicators in the bottom section are in sell mode, although possibly oversold in the short term, suggesting the yen may find some temporary support at its January low.

It sounds like low-hanging fruit to short the yen, and a number of ETFs are available to do this. One could opt for buying a fund such as the ETFS Short Japanese Yen Long US Dollar ETF (SJPY-LSE) or, for those more aggressively minded, the PowerShares UltraShort Yen ETF (YCS). I would be happy to do this trade on a horizon of a few weeks, but the US dollar doesn't quite instill much longer-term confidence.

Given the recovery and relatively healthy condition of the Australian economy, and therefore wider interest rate differential, my preference will be to sell the yen against the Aussie dollar. However, I'm not aware of an ETF offering this package and one may therefore have to construct the position by buying a combination (in equal money proportions) of a fund such as the CurrencyShares Australian Dollar Trust ETF (FXA) (i.e. long Australian dollar/short US dollar) and a short yen/long US dollar fund. (Of course, those in the UK can simply buy the Australian dollar/yen rate by means of a spread-betting position.) On a tactical implementation note, given the strong decline of the yen over the past few days, it's advisable to build the position in increments whenever the yen bounces back.