Trade #1

All the stars seem to be lining up nicely.

- The dollar looks ready to rally.
- The VIX looks exhausted, but hasn't collapsed below trend.
- The S&P is heavily overbought.
- The gold/silver ratio has come in, but hasn't collapsed below trend.
- The BKX has rallied to the top of the downtrend.

For the record I am a buyer of SDS here.

Long SDS @ 71.25

BKX

EURO

S&P Bullish Percentage Chart

Although many see the strength in the S&P bullish percentage chart as a positive - I see it as a contrary indicator. Sure it's data mining, but it's creative data mining...

Every interim high has been flagged by this chart since the bear started roaring. What do you think?

Pattern Trading

One possibility is to close tomorrow around 859-860. That would set the market up for a gap down open on Friday below the pivotal 850. I believe there is a decent chance the market behaves like it did one day prior to the November election and directly after the election. Momentum has been holding this thing up on fumes - once it subsides, watch out.

_________________

Post market close update - 12/31 4:45

Last 5 minutes of that market was a window into its soul. Wrong about the call for today, but the next few sessions should be interesting. All said, it was a lower high on extremely light volume. If the market wanted to really explode, today was the day to take out 918. Have a happy and healthy New Year.

Last Gasps?

A Break - But is it real?

Reading the TIPs

Grail-Flag

So many metrics are coiled - the gold/silver ratio looks ready to go higher. I am looking for another bout of risk aversion in the coming weeks.



Transports look like they may have spent all their ammo.

Taking Stock

Wow am I exhausted. After countless trips around the Tri-State area we are back in town. A tremendous holiday for all - especially the little ones.

In any case, let me get back on the proverbial bike and start riding again - if not, the atrophy will take hold and it will be back to that blissful ignorance I remember so well as a child - or more truthfully, as a young man.

Over the course of the last month, the markets have been reseting their traps for another violent move. Who's to say it won't be that "equal and opposite reaction" - a bull charge of the likes we haven't seen since the early 1930's. It really does seem absurd to not be bullish on the markets in the short term. The bearish equivalent of greed perhaps? How much risk could possibly remain after being bisected in a matter of months? Isn't everyone tired of guessing the bottom? Hardly.

I can't say with any tangible description or reference; but I suppose the old phrase will apply - I will know it when I see (or hear) it. And frankly, there has been a bull market in bottom feeding and rather orderly markets (equity) considering the alternative to capitalism. Anecdotally, that doesn't help the markets in the near term. Here are a few things churning inside me. 

I realize I keep coming back to the same reference points - but just as a trial lawyer methodically builds his case - I have been refining my perspective and trading thesis towards this market. The targets are always moving against sliding landscapes - the secret is to keep framing and observing the primary subject and its relationship and kinetic reaction to the current landscape at hand. I am not a pure technician. Far from it, I use technical analysis as a tool in the development of the thesis. Consider it my forensics lab. It isn't full proof - and it is still at the mercy of human error and misjudgement. If the detective only relied on the forensic report he would rarely be able to piece together a representable version of the story. Likewise, charts need to be placed within the broader context of market psychology, fundamentals and the intangible art of reading the Matrix. If it was a pure science the formula for success would be readily available and patented for sale at the neighborhood drug store - the smooth returns of Bernie Madoff would be legit! But as we all know, it isn't a pure science and just as much an interpretive art.



Here are some technicals that I am reading.






The Transports appear on the cusp - again. And just as I have mentioned in the past, the Transports have led us into every major market bottom. Those Dow Theorist really do deserve a merit badge. If I could be so brazen, it appear tomorrow will decide the near term fate of the Transports - and I suppose by extension, the overall market.











Although there appears to be two camps for interpreting the VIX - it has been cut in half in a rather timely fashion with very little benefit extended towards the equity markets. The same goes for the dollar's weakness as well.

The Holy Grail of Pain

Have a Happy Holiday - I will be back soon.

As for the market - those lows from November look increasingly vulnerable. They may reflate things at some point in the future - but certainly not tomorrow and probably not next year.

Revisiting "A" Gameplan

This was a chart I built on November 17th of this year. Just thought it might be good to revisit.

Here's a little mock up of the varying boom and bust cycles starting in 1994 or so. One interpretation may be that we are currently going through the second and more destructive deflationary wave.

This was from a post on December 1st of this year:

We are currently experiencing the practical application of the old adage "Markets can stay irrational, longer than you can stay solvent". Or perhaps today's version, "Markets can get oversold and remain oversold longer than you can remain solvent." Many of the traders in the past year have received a crash course in this axiom. Their guidposts that they follow on a daily and weekly basis have become the Bonneville salt flats. Wide open, barren, desolate, hard and fast if you find momentum.

I think traders looking for a sustained rally here may be asking for too much. Isn't everyone from Barton Biggs to Marc Faber waiting for that? Granted Barton Biggs has been saying that for no less than a year and a half, I firmly believe that on a longer term trading horizon (weeks and months) the carnage in the financial sector (BKX) foreshadows considerable downside to the overall market. The fact that this is a financial crisis of the likes there are few comparisons, and that the financials constitute the single largest (~16%) percentage of the S&P 500, it should be no surprise that the 2002 lows will be substantially violated; and I am not talking about 741 verses 768. We are talking about a possible 40% decline from the lows.

EKG = VIX

Just as the EKG presents the indisputable artifact of a heart attack, the VIX displays the same for a crashing market. If we look back at the October 2002 lows and compared the print of the VIX then to the VIX now, we see remarkably similar emotions in the charts. See for yourself. I took the liberty of indicating where the November 13th and Nov 27th lows on the S&P would be on the 2002 VIX chart. As you can see, the final capitulation low on the S&P prints a lower VIX then the double tops.

To me it looks like the groundhog has seen his shadow and we may be in for six more weeks of winter.

The Frown of Citigroup

Big Moves Coming

I just wanted to point out, that I typically do not day trade the market. On occasion there's blatant set-ups that are scalped, but primarily I look for bigger trends. I believe we are going to experience the next leg shortly. Very shortly.

In the bulls favor is short-term momentum, government intervention and anxious hedge fund managers eager to close the performance differential before the year end.

In the bears favor is headwinds created by currency dislocations, commodity dislocations and under-performance of the markets technical leaders - banks (BKX) & transports ($Tran).

Some loosely compiled stats from the November 21st low:

Small Caps + 24%
Big Caps +17%
Tech + 16%
Banks + 15%
Transports + 12%

Silver + 19%
Gold + 13%
Oil - 26%

Options Vapor

VIX & SPX

H&S Tops in The Leaders - Transports & Banks

Zirp - Helplessly Bernanke

I would like to preface this by saying I have the utmost respect for our Chairman. He's just in the wrong place at the wrong time.

With that said, some entertainment, courtesy of Neil Young's Helpless, as seen through the eyes of Bernanke. A GuidePostings original production...

Still Scraping - Tick- Tock- Tick- Tock

A Little Perspective

The equity market's extremely weak under-performance compared to the dollar weakness/euro strength is quite bearish. If we are robbing from Peter, Paul is getting the shaft. I can not really see much more strength in the Euro from here in the near term. Inquiring minds want to know.

Does This Look Like A Healthy Chart?

Talk about bait and switch. The pundits on CNBC high five one another while the equity markets go up a few percent and the dollar goes down the same. Robbing Peter to pay Paul. When our currency stabilizes and stops trading like a stock I will buy this market hand over fist. Until then, it's just a pink pong ball going down the stairs.

This Is All Well And Good...

But one of these mornings in the very near future, this will all fall apart quickly.

The more I look over the charts, the more I feel comfortable with not buying this tape. More tomorrow.

One For The Bulls Quiver

Confusion, Confusion. No one said this would be easy.

P&F charts can be very helpful. Today the bulls broke out and projected the S&P to over 1000. Something to consider. Strongly consider...

Another bull nugget. The Transports are showing a "P&F Bear Trap".
My dogma just got a little weaker.

Deja Vu - December 2007 Post Fed

Still Scraping...For Now

I see no need to panic. The first move (and just like last December - go check the charts) is typically the false one.

I Love Charts - The Theme Song

I was putting my little guys shoes on yesterday morning when his feet started tapping. Before I knew it he was dancing to,

"I like charts, because charts rule. A chart is a handy dandy scientific tool. It gives you information you can see with your eyes, a chart let's you visualize."

How could you not love public television.

Mirror Image

Forget LIBOR

Forget LIBOR, I have been using FCT as my proxy of the credit markets. Don't listen to the pollyana's on CNBC, the credit markets are worsening.

FCT -

First Trust/Four Corners Senior Floating Rate Income Fund II operates as a diversified and closed-end management investment company. The fund invests in a portfolio of senior secured floating rate corporate loans. Its investment portfolio includes investments in consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, telecommunication services, and utilities sectors.

You Are Here

Never a good idea to prognosticate on patterns alone, but this market is sure trending like late September. It is probably hyperbole to get as cute as pointing to trends and saying this is what's coming, but it is something to consider with this very repetitive tape. It will work until it doesn't.

The one thing that did get me a little cautious was the weakness in the gld/slv ratio. It is something to watch.

Le Dead Cat Bounce

Transports Tell the Tale - Every Time

Keep it Simple Stupid, KISS.

To the right is a relative performance chart of the Transportation Index verses the SPX. The relative weakness in the Trannies has led us into every interm low. I have highlighted these lows with the vertical green hash marks. Based on this chart, the 741 low in November wasn't the low. Look to the stoch's as a GuidePost. We look to be on that verge again...

Ghost of Christmas Past (1990)

I have been comparing the 1990-1991 Savings & Loan bear market as a navigation tool through the current bear. It isn't a perfect parallel, but the fact that it was driven by a severe banking crisis holds relevance to today. Think of it as a fender bender bear. The market we are currently experiencing is the highway collision bear. The dynamics and reflexes are similar, the severity of the collateral damage is worlds apart.

The first two charts are of the two bear "financial accidents". Although the magnitudes of the declines are standard deviations away from one another, the trends are very similar. For clarity, you can see that the 1990 Bear carved out three separate lows over the fall crash cycle. The 1990 bear crash/liquidation cycle started almost two months earlier than the current crisis. Setting them on the same timeline, we will experience a third low next week or soon thereafter.

To sound like a broken record, I have been following the gold/silver ratio as a barometer of risk appetite in this financial crisis. To further simplify, I have removed silver from the ratio and replaced it with the SPX. I then compared the two financial crises in this ratio. They trend with stunning similarity. You be the judge.

Risk Adversion 4.0

BKX:SPX = More of The Same

This was from my November 17th post prior to the last interm low:

"Dig a little deeper and you can see an interesting relative performance chart for the BKX and the S&P 500. In both instances, the BKX led the turn in the overall market by several months. Back in July of this year, the ratio bounced HARD off of the bottom established in the 1998-2003 bear market.

Assuming logic and geometry prevails (if you have any question about this market's geometry look no further than the 2 beautiful tops that the market carved out in 2000 and 2007 on the S&P - as much as the market feels random and volatile, there is a rhyme and rhythm to this beast):

The fact that we took ourselves back down to the last bear market lows in this ratio puts the very real possibility that the 768 intraday low on the S&P in October of 2002 will be revisited in this waves decline. Slightly scarier, is the ratio's decline during this bear took out the intraday low from the previous by a substantial margin. Obviously, if those lows are taken out on a closing basis (especially on the weekly or monthly charts) this market will gain new and uncharted territory potential towards the downside."

This is a very fluid situation, anyone picking a bottom is just picking. Picking bottoms get smelly hands...

Coiling to Spring or to Break?

Quite as bit of pent up energy in this coming trade.

Bernanke's Smokescreen

Gold Miner's Update

I am still reluctant to buy the gold miner's here. They have had tremendous gains of late, however, they were from extremely oversold levels. Many of the best and the brightest are recommending buying them here. Most notably, Bob Hoye, is quite bullish on the miner's. The parallel being a post bubble equity market deflationary collapse like the 1930's in which the gold miner's were one of the only areas of the market that significantly outperformed over the next ten to twenty years.

Who am I to go against the grain of Mr. Hoye, but I am sticking to the game plan in which the final liquidation low is still in the future. That being the case, the miner's have more room to fall. Perhaps the October low's are the left shoulder of a yet to be completed inverted H&S. Scary to think that things could liquidate much further, however, the forward looking proxies such as the BKX or the eurodollar index (eurobonds denominated in dollars) indicated that there's still more room for downside. Lot's of it.

Scrape, Scrape, Scrape