BKX&VIX

Which one's going to break?

New Targets

My new targets are 21 for the BKX and around 700 for the S&P. I think we could see these by next Friday. Closing SSO @ 21.50.

It appears another batch of liquidation is upon us for next week. Granted, the new administration could negate this temporarily with rule changes or a new bank rescue plan - but I would expect them to wait for this to bottom before introducing new information. We are not the only ones that read the charts...

It's All Laid Out In Front Of Us

Perhaps I'm getting ahead of myself - but I think the bear market in the financial sector could be over. Looking at this chart you could argue for a full retracement rally from the September high. Interesting stuff.

It should be noted that this chart is broken down differently than my weekend post. The weekend post also classified things in four waves - but did so just in this past year. The current chart starts from 2007 after the February mini-crash and ties things together with broader time horizons.

S&P 1000

Despite the route today across most market sectors, the market is setting itself up for one hell of a violent countertrend rally. I strongly feel we will see 1000 in the S&P before we see a new low.

The financials are offering the trade of a lifetime here. Most of the banks will double and triple in less than two weeks. If they don't - the entire system will fail. I would put that opinion in the minority here.

Look for some significant regulation changes out of the SEC and some major support for the banks. All the BKX did today was satisfy its daily target on the charts. Don't get caught up in the hype that the S&P will be in the 600s soon. It won't.

The market still exhibited tenacious strength with the BKX down almost 20%. That's unprecedented and it speaks to the overall exhaustion of selling pressure and underlying support.

For tomorrow - hold that line.

9:40 - Buying FAS @ 8.30

January 1991

The closest domestic market to the present that encompasses a true financial crisis was the 1990-1991 bear market. Although it is the "baby" bear to the current "mother" bear - similarities can be drawn. The outcomes and scales of financial contagion are vastly different - the reflexes and emotions presented in the charts are not. 

The Facts

Just the facts.

More of the same with my concentration on the banking sector index - the BKX. Some really interesting information has been coming out of that area of the market as of late. It is what turned me from overwhelmingly bearish to quite bullish in a matter of days. To make a long story short, the overall market (SPX) is significantly outperforming the BKX; and it appears as though the banking sector is on the verge of being completely washed out (as of Friday). The significance being that the market passed a very large test of the December and November lows last week. The banking sector, however, overshot the November 21st lows by roughly 9 percent. That's amazing relative strength for the overall indices.

THAT SPEAKS VERY LOUDLY TO THESE EARS.

It's rare for the overall market to hold up so well in the face of a crashing banking sector. However, this market appears at the moment to have exhausted the contagion of selling pressure that was overwhelmingly evident this fall. This geometry also squares nicely with the posture of the BKX:SPX ratio (see prior posts). From the standpoints of symmetry, the chart looks ready to swing the other way - and by extension, pull the market through some key overhead resistance.

To break things down further and shed some additional color to this thesis, let's look at the facts:


The BKX has crashed and rallied four times in the past year. The BKX, SPX and VIX changes are measured from 1 year prior to date of the low (edit 1/21/09 for new low on BKX):

BKX Low         BKX/Change    SPX/Change      VIX/Change      BKX Retracement              Rally Trough to Peak

March 10          -34%                -9%                 +109%                   +14%                            9 Days

July 15             -58%                -21%                +88%                   +41%                            19 Days

Nov 21             -57%                 -44%               +191%                   +37%                            7 Days

Jan 20             -70%                -39%                +108%                        ?                                      ?


What's truly noteworthy is the diminished VIX readings accompanying the latest BKX low. The market appears to be saying it has digested the bulk of the financial crisis and is ready to stabilize. If the banking sector can begin to walk again; and more importantly, LEAD, the shorts will be forced to cover in mass.





From a technical standpoint, the BKX has reached its downside targets on both the weekly and P&L charts.

The VIX also looks vulnerable to a strong downside retracement.

The YEN and the USD look very similar as well. Japan's telegraphed intentions last month to intervene in their currency and equity markets could add gasoline to an otherwise combustible mixture.



















The McClellan oscillator also appears to be oversold as well as extreme readings evident in the equity put/call ratios.


















I am also quite aware of the rare historical parallels this market avails itself too. And quite frankly, the diminished nature of this retracement rally would be without precedent. In December I was in the camp of waiting for another low to reveal itself in the charts, but at this juncture in time with the overwhelming evidence pointing towards the contrary, I will give history the benefit of the doubt. In that instance, we should expect at the very least a 50% retracement of losses. A 60% retracement would also be within the realm of possibility as well.

To date, we have retraced only 19% of the losses that began last August. At the rally's high-point in early January, the market had retraced only 35% of the losses. I find it comforting that this latest weakness retraced on a closing basis 50% of the gains from the November 21st low. From a technical standpoint that is healthy and it appears to be setting the stage for the next leg up. We shall all have a front row seat.

Freaky Friday

Broadening Bottom - Update

A Bigger Monster

Continuing this weeks theme of fractal analysis, here's a much broader chart of the BKX:SPX going back some 14 years. It looks just like this years chart doesn't it? You could even boldly theorize that the market may have made a much more significant bottom than we first believed. I still need to go over this in more detail - but it is fascinating nonetheless.

It basically boils down to this - The financial institutions and banking industry is the lifeblood and circulatory system of progress. If they are about to be rebooted, re-capitalized and leaders again - the overall market may just follow suit.

Perhaps that's just silliness, but this chart sure makes you think.

Fractals - it's in all of us.

the Monster

I give you the banking sector index (BKX) : S&P 500 ratio.

The moment of truth is truly here...

I just can't get over the symmetry in these charts. It's breathtaking.

Never miss an opportunity to overanalyze, so here goes:

Looking at this chart it is blatantly obvious where all the volatility and fear was captured. If my interpretation is correct, the market will transition to a much quieter (comparitively) and stable trading range. You could say this week was the going away party for fear as we were coming in to test the July lows. Coming out of this test (as long as it holds...), the market should slowly creep higher. It will not be anything like this fall - so I would advise traders to adjust accordingly. This will be hard to get use to after working through chaos for the last six months or so.

Much like an adrenaline junkie reporter adjusting to life in the suburbs after living through a warzone, it will take some getting use to Pleasantville.

Mirror Mirror

Yen Update

Looks like a nice double top on the weekly chart.

This is one of the tenets that changed my trading posture to long from short this week.

The equity markets look to be just testing important lows this week. I still like em'.

The New Trading Range

hopefully...

What Is A Fractal?

Why is this guy harping on fractals? The term fractal was actually coined by a gentleman named Benoit Mandelbrot (the Mandelbrot set) - and yes, he is the mentor of the now famous market philosopher and hedge fund advisor Nassim Taleb. Mandelbrot's work on crisis theory and fractal geometry greatly cultured Taleb's prescient observations of the coming financial tsunami. Here's a brief explanation of fractals by Alan Beck.

What Is a Fractal?

And who is this guy Mandelbrot?

by Alan Beck

The word "fractal" was coined less than twenty years ago by one of history's most creative mathematicians, Benoit Mandelbrot, whose seminal work, The Fractal Geometry of Nature, first introduced and explained concepts underlying this new vision. Although prior mathematical thinkers like Cantor, Hausdorff, Julia, Koch, Peano, Poincare, Richardson, Sierpinski, Weierstrass and others had attained isolated insights of fractal understanding, such ideas were largely ignored until Mandelbrot's genius forged them at a single blow into a gorgeously coherent and fruitful discipline.



Mandelbrot derived the term "fractal" from the Latin verb frangere, meaning to break or fragment. Basically, a fractal is any pattern that reveals greater complexity as it is enlarged. Thus, fractals graphically portray the notion of "worlds within worlds" which has obsessed Western culture from its tenth-century beginnings.

Traditional Euclidean patterns appear simpler as they are magnified; as you home in on one area, the shape looks more and more like a straight line. In the language of calculus such curves are differentiable. The trajectory of an artillery shell is a classic example. But fractals, like dendritic branches of lightning or bumps of broccoli, are not differentiable: the closer you come, the more detail you see. Infinity is implicit and invisible in the computations of calculus but explicit and graphically manifest in fractals.



Whether generated by computers or natural processes, all fractals are spun from what scientists call a "positive feedback loop." Something--data or matter--goes in one "end," undergoes a given, often very slight, modification and comes out the other. Fractals are produced when the output is fed back into the system as input again and again.



Fractals show us that the simplest engines of change often produce exquisitely elaborate patterns. Such systems are at work all around us, from the stock market to the stars. And to the fractal artist, Mandelbrot's insights echo Kandinsky's assertion that "the process of creation is the same in art and nature."

Here is a perfect example of fractals in the charts. One chart displays the market through the 60-Minute timeframe. The other displays the market through the 1-Minute timeframe. Pretty identical - just like a fern! I know it's hard to see where this is all going - and frankly they have yet to bear fruit - but I believe they give a clue of a market that is about to bust itself wide open to the upside in the coming weeks. I am disappointed with myself in closing out my SDS position WAY too prematurely. My timing has been running two steps ahead instead of in the present. More later on.










For those pattern traders out there, it's called a Broadening Bottom. A great reference for traders is any one of Thomas Bulkowski's texts on charting patterns. The reference on this pattern is from his web site http://thepatternsite.com/chartpatterns.html He's really a gold mine.

Another Fractal

This patterns stamp is higher highs and lower lows. Eventually it can break out to the upside and not look back for quite a while. We shall see.

Important support on the SPY's around 85.20. I can see at the moment that these levels are being bumped up against in pre-market activity. Warrants a trade. Adding another tranche of sso @ 23.60.

I REALLY LIKE THIS MARKET HERE.

O.K- stop cheerleading, it's bad for the soul.

Downtrend Broken?

They may take it back by the close-

4:00 pm - Looks like the break held. Doesn't mean much, but it's a start. At this point, this market looks primed to trap those remaining dogmatic bears. I wouldn't want to be holding on options expiration week directly prior to Captain America taking the helm.

Don't underestimate the power of Hope - Just want to make sure it's going up the "Slope of Hope" and not down.

Yen Update

My Last Rule

A wise and successful trader reserves his last rule as the exception to them. I am stealing that play from the book and letting this position run (long the S&P). My trading intuition has been good lately - just early. Unfortunately, if your time horizons are narrow - you can miss the meat of the move. Granted, I am familiar with the dark alternative.

I think the long side has quite a bit more meat here. It's counter-intuitive, I like that.

Other things I like:

- The Yen's bounce seems wasted and technically weak
- New lows continue to recede
- Volatility is on the cusp of breaking below transition (see previous post)
- The BKX may have successfully tested the November lows today - They may begin to lead ( however whimsically)
- Treasury yields have been rising
- Credit markets improving dramatically (see FCT)
- Higher highs and higher lows in the equity market
- "V" bottom thesis due to intermediate low and not "The" low
- Obama
- History - Closest historical parallels (1873 & 1929 autumn crash lows) retraced 50-60% of the market losses and ran into April and May time frame.

Things that worry me:

-Low Volume
-The BKX may be getting ready to go over the edge (see P&L chart)
-Striking similarity to 2002-2003 technical framework (going 50-100pts below 850 on retest - No V bottom)
-Congress
-Dennis Kneale

BKX:SPX

This ratio has helped in the past in determining intermediate bottoms for the financials and by extension - the equity markets. Looks like we are pulling up to a test today.

The break in July was a test of the long term bottom from 2000. If you remember, the financials exploded higher from there.

In any case, I am willing to give the market a chance here for a healthy reversal.

Retracement

The market has hit almost the 61.8 retracement level from this rally's low in December. I was expecting it to bounce off the 50 around 900. In any case, if we breach the 889 in a meaningful way consider this past weeks analysis dribble.

I do like how the Yen is rallying right back to the break today (see lower post). It has relieved the oversold pressure that was present a few days ago in very short order. I think it will roll over again next week.

Go Time

If this replicates, now is the time for buyers to step up. If not, abort...

5:25pm - I still like this market - all in all a healthy pullback. More later this weekend.

YenBoning & Vix Update

Here is a vix chart repost from last year. We were in the "character change" posture earlier in the week. It looks like it may get back there. The yen has clearly broken out of the channel from the fall, this should usher in more upside in the equity markets.

So Far, So Good...

The market seems to be following the fractal script I presented earlier in the week. Will tomorrow provide a 90/10 day just like the March 21st 2007 rally? Then it was the Fed dropping some key language that pushed the bears over the edge. Perhaps the jobs report will provide that catalyst. Based on the shrinking weekly jobs claims it just may.

A bit of a gamble though, since we all know that the January jobs report is notorious for subtracting/adding quite a few from the previous monthly BLS revisions.

A Talking Tape

As every trader knows, the stock market rarely does the obvious in the short term. That is why the deck is overwhelmingly stacked against active traders who feel the need to take part in the daily madness. Although it is far from random, the market has a way of taking the scenic route from time to time. It's healthy and quite necessary to shake the weak hands from the tape and to go against the grain of the market's zeitgeist. It is this very trait that makes administrating short term trading opinions so difficult and a fools game. You give enough opinions (Cramer), and you may be right half the time.

In any case, where this soap boxing leads me to is the formation of a broad market trading thesis for the first quarter of this year. I have been vacillating back and forth between expecting an immanent return of the bear market and the reality of how the market is trading. Like I have mentioned before, dogma can get you into trouble trading. It is why economists make such lousy traders.

With that said, I believe the stock market should make many new lows this year - I just think they will occur after the first quarter. As a trader, one of my greatest strengths is my memory of price and metric patters in the market and my ability to take a pattern in a previous time frame/horizon and apply it appropriately to the present. Lot's of traders keep a dairy. I mostly access it by memory and then go back to the appropriate time frame to utilize the chart as a guide. I suppose it could be called an informal use of fractal analysis, since I take a representative pattern in one time horizon (example-daily chart) and apply it to another (example-10 minute chart). To make it relevant to entering and exiting a trade, the trader has to remember the psychology and fundamentals of the market at that specific time. Like I've mentioned previously, I am not a pure technician - more like a hybrid trader that takes the pulse of the market both technically and fundamentally with armchair psychology to round things out.

So where does that leave us today?

What I have been seeing recently is a very resilient and stable (comparatively) stock market. The market came out of the November lows fairly rapidly and stalled throughout December. As expected, the fundamentals have deteriorated with each passing week - as well as consumer sentiment. Currency markets have remained volatile and full of inertia. I was initially waiting for the Euro to resume its terminal descent, but have recently put off that theory based on the actions of the Fed and the actions of other foreign central banks (primarily Japan). I believe in the short term (weeks) the Yen has room to weaken even further. Granted it is because of their telegraphed future intervention into both their currency and stock markets - but who's counting anyway? This is why I always mention trades are moving targets - especially when the markets are being manipulated by the Fed and foreign central banks.

I would put the inflection point for the current market's posture in mid December when Japan notified the markets of their intent to weaken the Yen and to even buy stocks in the Nikkei. This has worked in the short term - eventually it won't. A loose target for the Yen would be around 100.

From a technical perspective, the last three weeks remind me a great deal of the stock market's behavior coming out of the 2006 market correction. Granted I am compressing a great deal of tape into a much shorter time horizon, but that is the essence and application of fractal analysis. All of the market's emotions and behaviors are repetitive and represented on many different time horizons and scales. It is the market's DNA - its thumbprint - and it is captured in the charts. Getting back to 2006, the market bottomed in July and slowly crawled out of the fog into autumn. Housing markets had just peaked and the stock market appeared to be skating on very thin ice. Oil was screaming higher as well as gold. Henry Paulson was running towards the Treasury waving a Chinese flag and warning of protectionism. Many traders and research shops didn't see the catalyst for the final leg of that bull market until it was halfway past them. The market kept crawling higher - methodically - repetitively.


Unfortunately, the meat of this market's assent is probably over. But that does not mean it will fall out of bed tomorrow and test or make new lows next month. Here are two charts for comparison. The time horizon's and scales are vastly different, the price action and metric patterns are quite similar. Factoring for like sentiment and psychology; and the benefit of knowing how the 2006-2007 market resolved the impending structural, fundamental and technical problems - I would deem the chart useful as a fractal guide.










To review -

I am looking for the equity markets to make new highs over the coming weeks - followed by a test of price action similar or slightly higher than today's closing high - followed by a new marginal high. In essence - whipsaw, with highs in between.

After that, I expect the bear to continue its course.

Analog of The Day

10:30 AM - The 2007 February Mini-crash. Very similar tape, although now expressed in the 10 minute bar.

12:00 PM - I am selling my SDS @ 68.50 for a loss of 4%. I will look for a better entry later in the month.

This afternoon I may be looking to acquire some SSO. If memory serves me, we will get a lower print then.

1:00 PM - Bought SSO @ 27.10

3:30 PM - Looks like I was a bit too anxious. Should have taken my advise earlier and waited. No worries.

2002-2003 S&P

It is fascinating that we are traveling so closely through the same price levels of the 2002-2003 bear market. It is because they are the only technical roads leftover from the previous bear. If and when we break through the November lows, the market will take on a different character, namely one of panic.


As for today, I think the market bounces around 914. Right now the tape has teflon to it, I wouldn't be surprised to see a pretty descent reversal.

Always Loved A Good Conspiracy

From Barry Ritholtz's site http://www.ritholtz.com/blog/ comes a very interesting read on the commodity rebalancing trade going on right now. So much from gleaning anything from the gold/silver ratio...poof, it's gone.

"The major commodities indices are being rebalanced, and I am forced once again to question their timing.

Recall the last major rebalance: At the time, I had been challenged by Larry Kudlow to find a smoking gun for the sudden 2006 collapse of Oil prices a month or two before the mid-term election.

That challenge led us to discover the actual mechanism — the GSCI rebalancing. Just 3 months prior to the election, GS decided to significantly lower the weight of Oil and Natural Gas, effective a month prior to the election. Prices plummeted, albeit temporarily.

There was a cost to this: Subsequent performance of the index, reweighted with less energy, was negatively impacted, as energy prices for the following 2 years boomed, until Oil peaked at $147. The reweighted indices performed much wore than they would have had they not been changed in ‘06.

Bill King noted yesterday:

The weightings for both indices are released ahead of time, but begin to kick in the first few working days of the new year. In the case of the DJ-AIGCI — which JP Morgan estimates has $25bn in funds tracking it — the new weightings come into force during the roll period that begins January 9th. The S&P GSCI index weightings kick-in after its January roll which commences January 8th. JP Morgan estimates about $50 bn of investment into that index… Accordingly, JP Morgan sees the most significant change coming in the DJ-AIGCI rebalance. Here the market weight of crude oil is expected to increase from 9.6 per cent to 13.8 per cent, gold from 10.8 per cent to 7.9 per cent, copper (COMEX) from 4.5 per cent to 7.3 per cent, live cattle from 6.4 per cent to 4.3 per cent and sugar from 4.7 per cent to 3.0 per cent. Meanwhile, S&P GSCI crude oil weight will go from 32 per cent to 33.8 per cent…Nevertheless, gold tanked on Monday on expectation of a weighting reduction of gold in the DJ-AIGCI Index …This harkens memories of July 2006 when Goldman greatly reduced the weighting of gasoline, which precipitated a huge collapse in gasoline prices ahead of the 2006 midterm elections.

I have no idea why the managers of these indices made these changes, but they are certainly curious.

I consider these contra-indicated: In a time of massive Fed credit creation and Treasury money printing, they oddly want less exposure to Gold. And with the worldwide recession getting worse, they want more exposure to Oil. Both of these are poorly timed macro-trades.

There are two things I can tell you about the index rebalancing: First, the last such contra-indicated changes were steamrolled over by the market, and cost investors in these indices to miss out on a huge move in Oil via the lower weightings.

Second, it won’t take long before people start to consider the political ramifications of goosing energy prices 2 weeks before the Obama administration is sworn in.

I have no clue what the motivation is for these moves, nor do I knows what what they were in 2006. But they are looking increasingly curious and ill timed. Once is a coincidence. Twice makes you pay close attention. After the third such move, expect to see the index managers dragged before a Congressional panel . . ."

And straight from JP Morgan:

"In financial terms, we expect the rebalancing to have the greatest impact in gold, COMEX copper, crude oil, gold, and live cattle. We estimate that the rebalancing of the two indices is expected to result in $877 million of selling in gold, $699 million of buying in COMEX copper, $528 million of selling in live cattle, and $523 million of buying in crude oil."
http://aaronandmoses.blogspot.com/2009/01/gold-sells-off-on-commodity-rebalancing.html

The next thing we will see is enormous gold sales by the IMF. Can we blame them? These are the only tools left in the bag.

S&P Line In The Sand

On the Edge

~940 looks like the closing target

Very Very Sad

The implications of shorting VW.

Testing Disqus

Disqus enabled...I think.

The Stock Ticker "YEN"

What's the beta on currencies these days? When currencies stop trading like stocks, a bottom will be close. For now, the velocity of these moves is important to observe. All of the momentum (chaos) is being maintained within the system, the currencies just rise and fall with it. These central bankers and Fed officials will soon realize that the only remedy for theses pains is time. There is no painless way around that. Japan learned this a decade ago, and apparently even they forgot it. Ah, the limitations of a democracy - a new administration get's to repeat the same mistakes again and again...

Fractal Analysis

Here is a new script for the next week or so.

Tomorrow we make a new high - followed by an immediate retracement of gains back to the ~ 860 by the end of the week or beginning of next week. Markets whipsaw back through old highs and make slightly higher print followed by the great unwind below 700.

Here is a similar fractal using a different time horizon (daily) verses our current tape represented in the 10 minute frame.

My Gut

To me, these daily grinds are mostly noise at this point. But if I had to guess, this uptrend culminates around 950. Based on what I see in the oscillators, I think we have one more good move up- then watch out below. So many of the metrics I follow are coiling to jump higher (bearish), otherwise they would have broken down by now. Whether it is the gold/silver ratio, the gold/S&P ratio, the Yen or the Dollar; they all look primed to break out to new highs. And those critical component leaders of the equity markets, the BKX and the Transports, look ready to tip toe to new lows. Because the equity markets are trapped in an adverse feedback loop, it does help to look at the previous tape for any parallels. Granted this fall was extreme, but I do not think volatility will revert to the mean any time soon.

It does look like the treasury market is starting to crack. Another leg added to the mother-of-all-adverse-feedback-loops.

This bear started with a correction in housing- that led to a correction in the stock market - which further corrected the housing market - which further corrected the stock market - which eventually corrected commodities - which eventually crashed the stock market - which eventually crashed the housing market - which eventually crashed the commodities market - which led to a bailed-out nation - which led to a crash in the treasuries market - which led to the end of life as we know it.

Rinse, repeat.

But hey, Jim Cramer is bullish on stocks here, yeah baby!

Nov 3-5th & Jan 2-7th

Some striking similarities between these two tapes. Could it be this easy? Doubtful, but you never know...We could get a move to my pivot around 938-940 before sliding.

The only reason I am floating this is because of the similarities in the currency markets and precious metals markets and their kinetic relationships to each other. Let me put it this way, by the end of the week I expect the equity indexes to be significantly lower than they are right now.