A Trend is a Trend

This one just happens to be the hawkish tone of Federal Reserve bankers. I've been talking about this since late 2010, mentioning that the new crop of 2011 FOMC voters would be more hawkish then the 2010 crowd.


The inflation issue has been a weekly, sometimes daily post.


This week I talked about the unusual number of Fed speaking engagements this week and thus far how hawkish they have been. Here's one more to add to the pile.


From Market Watch, Narayana Kocherlakota of the Minneapolis Federal Reserve Bank says the Fed Funds Rate may rise to 75 basis points by year end.


If you think the market didn't like the uncertainty between the end of QE1 and before the "Jackson Hole Speech", imagine how much worse it could be this time around with funds at maximum leverage and asset prices... well, lets say unreasonable when compared to the economy in 2006.

A Pretty Useful Tool

For those of you using TeleChart, Stockfinder or TC2000, if you don't already have this screen and you want it, email me. This is one of the most successful moving average crossover systems I've tested (most moving average cross-over systems are subject to numerous false signals).

If you want any of the above charting platforms and would like to use any of my indicators, just click the links below to Worden. If you have individual questions on any of the platforms, just email me. I've been using TeleChart for 10 years and have used StockFinder and TC2000 (as I'm a Worden affiliate) before the platforms  even became public.

Here's an example with USO

In the top window is a 10 day m.a. (yellow) a 22 day m.a. (blue); in the middle window is a custom cumulative indicator (yellow) and a 22 day average of the indicator (blue) and the bottom window is RSI 14 using Wilder's smoothing, I also added a MACD histogram on invisible to get the 0/50/100 scale for RSI readings.

It's a simple system, a crossover in the top/middle windows and RSI>50= a long position, just reverse that for a short position. This screen does more then just help you avoid false signals though, it also tells you when the stock is starting to break down (RSI may cross below 50 or one of the top 2 windows will cross back over) and it provides price targets for pullbacks.

Early in the week, as a matter of fact I believe it was last week, I published my target pullback for USO, it was at the yellow 10-day moving price average which is also where the 22 day is as well. USO pulled back exactly to that level, TWICE! Since then USO has moved off that level.

If you have sen this screen before then you know the rules and the expected pullback areas. As you can see, USO started a new move up on 3/16. With any new/first time move up, our expected first pullback is to the yellow 10-day price moving average. When the stocks starts a new leg up, the second pullback is generally a bit deeper, between the 10 and 22 day average. Subsequent pullbacks should hold the 2 day moving average for the most part with a few exceptions. 

I've been using this set up for about 6 years now and it has a high degree of success. If you don't have the Worden platforms that allow you to create the custom indicator in the middle window, you can still get decent results using any charting package with just the price moving averages and RSI.

How'd They Do That?

Pay attention to the last 15 minutes or so of the close

 The DIA looks similar to the SPY...

The SPY

But the Q's are off in another direction, so how'd they do that?

Bought AAPL. AAPL accounts for roughly 20% of the NASDAQ 100, or in different terms, about the same as the bottom 50 NASDAQ stocks combined.

Last Day of the Quarter

Today being the last day of the quarter is important for funds to keep their returns high for Q2 prospectuses, however, the market looks exhausted and the highest return is the Russell 2k @ .25% and selling off as I write. The NASDAQ 100 is at .07% also selling now, the Dow -.11% and selling off on increased volume, and finally the SP-500 -.09% also selling off on some volume.

The negative divergences are there. As I stated 3 days ago now in my first post of the day, it would be possible/probable (despite the fact we already had negative divergences up to the 15 min.) that the market would do its best to keep the returns high into the end of the month (today) and today it's a real struggle.

The action on Monday at 3 p.m. through the close was very negative and on high volume. It's important to remember that 4 p.m on Monday was the last day funds could buy/sell assets which would either show up or disappear from Q2 prospectuses. The fact that the selling was so overwhelming into the close when locals traditionally trade was a bit strange and I wonder if short positions weren't being taken as well as de-leveraging of long positions. Despite this bounce, we are still in an intermediate downtrend and that shouldn't be forgotten.

EUR/USD

Lets take a look from long to short

 The Euro's weekly chart and semi-secular trend

On the hourly we have a very obvious continuation triangle, FX patterns are manipulated just as much as Equities, so the implication of the pattern is an upside breakout. We also know that roughly 80-85% of reversals begin with a false breakout taking advantage of technical analysis to fuel a counter move.

On a 5-min chart we have a parabolic spike, I wrote earlier to a member that it would likely reverse as these spikes do, especially when breaking out of a channel. Since then it's reversed and climbed a bit in a wedging pattern, but has not threatened the earlier highs. I believe, although I don't know for sure, that the knee jerk reaction may have been due to the possibility of an ECB rate hike. However, a knee jerk reaction is not always a well thought out reaction and the consequences of a rate hike have negative implications for the 17 member Euro zone. We also have to understand where we are in the larger trend (see the first chart).

This is the price action in the EUR/USD pair on a 1 min chart after the parabolic advance reversed.

This triangle looks like it will be resolved soon.

 Meanwhile the FXE which gapped on the parabolic hike is showing a negative divergence.

Compare the FXE to this chart of UUP showing a positive divergence and we have a hint of the probable resolution of the FX pair's triangle.

INTC Follow Up

INTC was mentioned here last Friday

Just yesterday I highlighted semis relative weakness and resistance

It's little surprise INTC looks the way it does today. One little factoid, semi's/technology in general are very sensitive to interest rate hikes, they depend on low rates for R&D so the action in semis this week, especially yesterday and today could very well be correlated to the numerous hawkish statements from regional Fed presidents and voting members on the FOMC for 2011.

 INTC'S BROKEN A TOP, BUT STILL IN THE VOLATILITY ZONE.

 Today's intraday chart, INTC has been down over 2% today and the volume shouldn't be ignored.

INTC daily, 3C, TSV 55 (long term version) and MoneyStream in a leading negative divergence.

INTC is not a huge mover BETA wise, but may make some sense for a long term put.

WMT ON INFLATION

It's strange that it has taken the mainstream press so long to catch on to rising inflation, despite the Fed's releases, and the ridiculous "ex. gas/food " the two things Americans, scratch that, just about every single person in the semi civilized world uses EVERY DAY. Here at WOWS we have been noting the rising inflation for the better part of half a year in manufacturing reports, while the mainstream press heralds the good numbers, we actually read the report and what is being said by producers. Input costs have been a serious, growing issue for over a year. The Fed seems to be taking notice finally as evidenced by the plethora of Fed speakers this week all on message-hawkish. And lets not forget MIT's projection of 8% inflation for 2011.

At USA Today, today :) Bill Simon expresses the VERY obvious and in a main stream news outlet!

Here's his video statements about coming inflation.

Meanwhile commodities are going nuts today and will continue to do so until Wall Street and other speculators across the globe start to unwind their heavily leveraged speculative positions in risk assets. So if you wonder why the talk about definite QE3 has shifted to talk of the Fed absorbing liquidity and nearly free money for the banks in a matter of a month, wonder no more.

As I wrote yesterday, the trend in commodity inflation is without doubt a huge speculative bubble and we know how bubbles end. The Fed seems to be all together this week and on message (even hinting QE2 doesn't make it until June)  and that message should have speculators thinking about their exit strategy.

As for the video, while Mr. Simon does a good job in representing Walmart's plans to deal with rising input costs, if I were a WMT shareholder, I just assume he kept his mouth shut. We'll see how WMT reacts in the next few weeks. Despite what he said, it kind of comes off as, "Expect higher prices and it's not just us, it's everyone".

Breadth

 This is stocks above/below their 50 bar moving average on a 5 min scale. This is the first time the stocks below have shown a significant, growing trend in several days.

 The NASDAQ 100 A/D ratio which has been falling off most of the week, right now it's falling off in the latest intraday move up.

This is also a significant reading for the week in the count of new high/new lows on a 5 min chart at 250 bars (roughly 20 hours) or roughly 3 market days.

SECTORS

A quick look at sectors performing and under pressure, note that until today, nearly all were performing well:


Performing well: AGRICULTURE, COMMODITIES,OIL, MINING, BIOS, INDUSTRIALS, MATERIALS, HEALTH CARE (MODEST), TRANSPORTS, PRECIOUS METALS, NATURAL GAS

Under pressure: FINANCIALS, CONSUMER SERVICES, HOME CONSTRUCTION, CONSUMER DISCRETIONARY, SEMIS/TECHNOLOGY, RUSSELL TOP 50, RETAIL

Market Update

The charts, as well as the breadth posts of the past couple of days speak for themselves.

 DIA, yesterday's highs not confirmed and this morning's highs were not confirmed.

 The same for the IWM, it's a shame the 1 min. chart can only go back 2.5 days.

 The QQQ

 SPY-note that there's no positive divergence before the current move up from the 11:40 lows

On the TICK chart we have another appearance of a sub -1100 reading, we haven't seen that since the 3p.m. sell off on the 28th (connected to quarter's end T+3 settlement date).

USO Traders

Keep an eye on USO today, it's near its March highs on a gap up this a.m. after moving off support yesterday. Volume in increasing and thus far it's nearly as much as yesterday's full day volume.

HGSI (Long)

HGSI was featured yesterday as a long

HGSI could be a possible rounding bottom.

60 min 3C chart.

Lots of News Out This A.M.

The first market moving event was European CPI coming in a bit hotter then expected at 2.6 (consensus 2.4) which makes a rate hike by the ECB more likely to tame inflation, the Euro gained on that news earlier. Sticking with Europe, the Irish Bank Stress Tests are due out shortly, it's already been widely leaked that several banks will have to raise capital and the government wold be an obvious source of that capital. Should the government invest enough into the banks that it cracks the 50% ownership threshold, then the possibility of senior bond holder impairments becomes a very real possibility, it can't happen unless the government becomes the senior figure with over 50% ownership, but the possibility is increasingly likely and as such, bonds all over Europe are selling off including France, Italy and Spain. 


The expectations for a new E.Z. bailout mechanism aren't materializing as expected so once again, contagion becomes a big issue, especially if Spain/Italy's banking sector can't raise money with bond offerings because of the threat of "bond holder haircuts". I think the Euro could be in for a roller coaster day.


In the US, initial claims missed and came in higher and AS USUAL, last week's number's were revised higher from a beat to a miss (when was the last time they were revised lower?).


The Earthquake/Tsunami has already hit Japan's manufacturing hard, their PMI index plunged to the largest drop ever from 52.9 to 46.4. As with our PMI, readings under 50 indicate contraction.


Our own Chicago PMI came in a bit ahead of expectations at 70.6 (consensus 69.9, but a decline from the last reading at 71.2), once again seemingly good news in the headlines, bad news in the report... Prices paid hits 2008 highs and it's expected to get worse with the impact from Japan's manufacturing sector shut down in many cases.


Some comments "Commodity inflation hurting profits. Issuing first pricing increase in 3 year to help recover."
" It seems like it's time for everybody to jump on the "price increase" bandwagon, justified or not. "
And Finally the Fed releases thousands of documents pertaining to the discount window lending, this is the Supreme Court Case that was lost a week or so ago. There should be some juicy nuggets there.

Exhaustion Gap?

That was a thought I had yesterday at the close. The bounce was defined as needing to break up the flag patterns, to create a "scary" move, of course there's the qtr. end stuff and yesterday it closed about a half a point above the target I published last week. So yesterday's gap up with a rather small bodied candle looked a little like an exhaustion move, market breadth would support that theory, as would volume.

 Exhaustion gap?

Rounding top?

That Commodity Trend Reversal is Looking Better With Every Fed Speech

Here are remarks from Fed regional president James Bullard, do you see a pattern emerging here? The market's not going to like it.

Well That Didn't Take Long

Here's yesterday's analysis on Fukushima and don't forget about the post about Japan being a seafaring nation relying heavily on its fishing industry.

Here are the relevant stories-The Chernobyl Option

On their fishing industry...

The Fall of Commodities

The trades that are the most obvious send people all to one side of the boat and eventually it capsizes.

Here's a great example...

For historical purposes, I'm using the Dow Jones Oil and Gas Index. So here we have a 300% gain and one of those bubbles that was like all others, "different this time". Whether it be peak oil, corporate control over the administration, or any number of reasons, there was no end in site of what oil would do, right up until the end, which by the way, 3C nailed the reversal in USO within 1 week; considering there were about 280 weeks to the trend, that's pretty impressive. The posts are on Trade Guild. USO lost about 80%, for commodity traders operating on sometimes lofty margins, this was a disaster and put many young and upcoming commodity traders in the unfortunate position of being the guy who took down the hedge fund. I recall that week very clearly, Cramer was on Mad Money telling people that they needed to be contrarians and the next bad weekly oil inventories report that came out, they should be buyers. I remember this so clearly because it's probably 1 of maybe 20 times I've watched Cramer and I remember seeing the signals suggesting the reversal was coming and finally I thought it was incredibly laughable that millions of viewers all doing the same thing was "Contrarian". In any case, those that did what Cramer said were left holding the bag. Being the trend was so long, I would dare to say that many thought it was a blip and would recover, but it didn't and I know of several traders I knew at the time who just wouldn't let go of their longs.

Today a similar situation appears to be playing out...

By now, it's very clear that extraordinarily accomodative monetary policy has been behind the move up in the market since March of 20009. Just look at how the volume faded into the uptrend and exploded into the lateral trend.

Here's a rough timeline for Fed easing that levitated the market. Unemployment at the bottom at March 2009 is 8.6%; unemployment is one of the reasons for QE. Today unemployment is higher then at the market lows. QE has failed to do anything but levitate the market, meanwhile insiders have been selling consistently since April of 2010. The argument of why this time is different is the many experts who insist that the Fed must continue with QE and will enter round 3 in 2011. This week we've seen several events from Fed speakers hawkish tone to the Fed experimenting with reverse repos/draining liquidity from the markets (the opposite of QE).

Here's the S&P 500 in green and the CRB (commodities index) in white, nearly perfect correlation. Through QE, the Fed has flooded the market with cheap money under the guise of kick starting lending, but banks have different ideas about it. They take the cheap money at nearly zero interest rates and invest in risk assets: equities, precious metals, commodities.

As we have seen, a trend in inflation has emerged throughout various manufacturing reports. A week or so ago, MIT projected 2011 inflation will reach 8%

Manufacturers and a number of different corporations are feeling the squeeze in margins with higher input costs, the effect...

NKE passes costs on to consumers and loses 9% in one day.

RIM experiences a similar margin squeeze...

and drops over 11% in one day.

It seems the Fed is now taking real inflation seriously. Looking at this week's Reverse Repos and the hawkish tone from regional Fed presidents, it seems the Fed is letting on that rates may rise soon. The damage is probably done to most equities, but if something isn't done, the damage will be a lot worse.

Remember it was a sole individual in Tunisia that started the entire MENA crisis as standards of living and inflation costs hit people across the world. China is another example, I won't go into depth, but they've hiked reserve requirement ratios for banks at least 3 times this year in an effort to drain liquidity and cheap, speculative money that has given rise to inflation in equities and commodities.

So is there a shift coming in commodity prices? We're very early in the process of assessing this possibility, but it could be a rewarding trend.

 Above is a "corn" fund. First of all check out the volume rising as prices rise, this is the hallmark of a healthy trend. However recently on this weekly chart, volume has gone red and we have a bear flag type pattern breaking the uptrend.

 On a daily chart, the red volume uptick can be seen as the uptrend goes lateral and then makes a lower low.

 CORN on a 30 min 3C chart shows several distribution/reversal points.

Now, here's the difference n commodity indices and where you want to be and where you don't. In red we have the most commonly used gauge of commodity price action, the CRB index. In red we have the  Continuous Commodity Index ETF. Note the correlation between the two until this week as they diverge. Why did they diverge and what makes the Continuous Commodity Index a better way to gauge commodity inflation? The CRB is weighted differently and has substantial weighting in energy. I expect the trend in energy will continue to rise. The CCI has equal weight to each component and isn't distorted by energy, making it a better index to gauge commodity inflation.

I'm not saying to short the CCI, but there are unique equities that represent different commodities and some of those will have potential for being good short trades if this very early trend change is real and depending on central banks, especially the Fed's actions.

The notion of "this time it's different" may be in the midst of being proved wrong right now as it has been for hundreds of years in dozens of bubbles. So I'm starting another watchlist of various commodity producing and related equities. As I said, this is very early on in a possible trend change, but as you saw with oil in 2008, markets fall a lot faster the they rise and there may be a very significant opportunity in this possibly emerging change of trend.

Still Quarter End Action

And someone send me a calander, I've said several times the quarter ends the 30th, not true, there's 31 days in March, but sometimes you say something and just keep repeating it, kind of like lokking for the car keys that are in your pocket- I hope I didn't just admit to something that only happens to me.

Here's EOD action, also when smart money trades the most...

These captures are from about 5 mins before the close, so they don't show that it got worse into 4 p.m.

 DIA, intraday, momentum was declining in MACD. Most of the gains this week have been on the open and lateral trade the rest of the day, which isn't as bullish as a market trending up all day and with good breadth and volume. Note the volume surge as intraday stops were hit. I don't even have to draw a trendline, support is very obvious.

 DIA 1 min showed a negative divergence most of the day so I think it's building in to the longer timeframes as TOMORROW is the end of the quarter.

 Q's showed a very negative 1 min divergence

 And there it is building into the 5 min as suspected.

 Just for perspective, since we went negative several days ago, that's been building into longer term charts like this 60 min. Usually we turn at 15 min divergences, but as breadth has showed and market action, funds are manipulating the markets short term to keep Q1 returns looking the best they can to avoid redemptions.

 SPY 1 min

 SPY 5 min

And the TICK index hitting lows for the day.

Stick around for a few minutes, I was working on a post on commodities I wanted to get out to you.

LEN (Short)

I just read last night that 13% of all US homes are vacant. We've seen plenty of indications that housing is entering a or rather has been in a double dip recession. In the Challenger report this morning, there were heavy job losses, I believe the heaviest, in the construction industry. LEN has also shown less then ZERO relative strength. At this point a dead cat bounce would be most welcome in LEN and I think it's likely.

 The daily chart shows a bearish ascending wedge, the typical lateral/top formation after a wedge, a failure in MACD and this is a long version (26/52/9) as well as very poor relative strength the last 3 days on huge volume, which could set up a dead cat bounce on an oversold condition. It also broke the last bit of support today.

 The daily 3C chart has tracked all the major moves accurately and is quite negative right now in a leading neg. divergence.

 The 15 min chart for 3C, TSV and MoneyStream all agree with TSV/MS in leading negative divergences. Also note the volume in that little red box.

 Looking at the daily chart alone, a dead cat bounce looks likely, the 3C 1 min chart seems to confirm that.

Here's a potential stop as the 2 day Trend channel has tracked LEN very well. ADX also has turned down from above 40 signaling the end of the uptrend. This is the kind of environment when you want to use any strength for a tactical entry. Oh, and because the TC stop is near $20, please do not use $20 being an even number.