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.

Western Union (WU)

There's good confirmation in 3C showing WU has likely hit a top, I compared 3C with Worden's MoneyStream and got almost the exact same results.

 3C daily-note there was good confirmation of the uptrend, it only went negative at the recent top.

 More or less the same thing in MoneyStream's daily chart...

 3C 30 minute chart shows a failure at the highs in Feb. and at the subsequent retest.

 Same for MS 30 min.

 And 3C 15 minute showing the same failure at the retest...

Just like MS.

I don't have to post a daily chart showing relative strength against the market. Just look at the daily chart the last two days.

NGAS

NGAS just broke out from resistance at intraday highs, may b a trade worth looking into with a tight stop.

More on USO

Take a look at the chart of USO's earlier pullback to our target zone.

And what happens at 10:30 every Wednesday? The US releases their weekly oil report which showed a build in inventories. How anyone would not expect a build considering Middle East events is beyond me.

The Fed's Hawk, Hoenig offers some advice

This week we have had an exceptionally busy speech schedule for Fed regional presidents, I think 10.

Kansas City Fed President Hoenig spoke today, (click the link for the full speech)

The tone of the speakers thus far has been hawkish for the most part. Some of the highlights from Hoenig's speech include his belief that the Fed's $3 Trillion dollar balance sheet should be brought back down to $1 Trillion gradually, that the Fed Funds rate should be lifted from zero to 1% within a short period of time, then the Funds rate should be evaluated and perhaps moved higher, that deflation should not be a primary concern, and finally that the Fed's current policy in the long run is likely to have dire consequences including instability, inflation, more lost jobs and that it would be a "Dear price for middle and lower income citizens to pay"

The Treasury Just Issued $29 Billion in Short Term Bonds (debt)

The yield was 2.895% which is fairly high. We saw a similar yield after QE1 ended and before the Jackson Hole speech announcing QE2, in essence the market is pricing in the same expectations it did back then, that there won't be a QE3.

Indirect bidders (foreign entities) had the lowest participation rate in 6 months. Primary dealers took a little more then 41%, which should shortly end up on the Fed's balance sheet, providing Goldman Sachs and 40 other primary dealers several billion dollars in risk free money.

Today's issuance actually breached the debt ceiling limit. There are some "buffers" built in and there are some ways to reduce debt by redemption of bills. Taking all this into consideration, the US is about $35 billion away from a total, no excuses, or buffers- breach of the debt limit. In mid April there is another scheduled auction for $67 billion in new bonds.

Market Breadth

Enough time has passes that we can get a picture of the market's breadth today.

 Here's the Advance / Decline Ration for the NASDAQ 100, while it's obviously positive, it is also losing momentum with fewer stocks advancing and more declining into the rally. This doesn't seem to make much sense, but you have to account for the way the NASDAQ 100 is weighted. Each stock of the 100 is not weighted at 1%, for example AAPL accounts for nearly 20% of the NASDAQ's weight, so it's not so hard to move the index up by pushing up stocks with heavier weighting. This is why we can see a fall in the percentage of stocks advancing and still have the index up. This indicates once again, as shown yesterday and last night, that there is poor market breadth and the advances in the averages are coming from a handful of stocks with high weighting. Ultimately this is bearish as broad market strength is not part of the advance. It appears to be what I mentioned early yesterday morning (or the day before-I don't remember which-sorry), that the market is being short term manipulated to keep returns for funds (hedge funds, mutual funds, etc) as high as possible to attract new investors and keep redemptions low.

 I ran the same on all 500 S&P components and there's a similar trend.

This indicator simple counts the number of stocks making new 250 minute highs vs those making new 250 minute lows. The highs have been kept in check which is not good breadth, they should be rising with the index. Earlier on the gap fill, there were a lot of stocks making new 250 minute lows. This is the NASDAQ 100.

Here's the same indicator for the S&P-500

Quick Market Update

It looks like we'll be seeing some selling pressure shortly.

 DIA

 IWM

 QQQ

SPY

GLD/SLV/USO UPDATE

Both GLD and SLV peaked above their important trendlines, for GLD it was resistance that it had been bouncing off of after a reversal signal and SLV the stronger of the two made a brief pop above it's upper band of resistance, (GLD being the weaker had already broken support and it popped above it's lower band of resistance.

USO is still in pullback mode, but still at the target zone identified last week.

GLD

 On the daily chart, the opening gap just peaked above resistance. Last week we had a reversal signal as GLD peaked to new intraday highs, it then spent some time between support and resistance and broke below support. That support becomes resistance and that's where it gapped above briefly this morning.

 Here's a closer look, there was an attempt to create some support around $138.80, that failed on increased volume.

SLV

 SLV which has been stronger since last week was still bouncing between support and resistance and peaked above resistance this a.m. and failed on increased volume.


UUP

UUP touched our first and most likely target zone for the pullback, since it's bounced off that area a bit. If I'm a longer term trader, I'm not taking any action in USO and just holding the long position.

SMH BELLWHETHER

SMH looks like it's shaping up to become a fulcrum or bellwether for the market action today. It's been at resistance which is purely caused by traders and their affinity for the 50-day moving average. Today SMH poked its head above that resistance and was shot down quickly.

TRID Update

TRID had a limit order to go off if the trade crossed $1.00-$1.03 which puts it at a minimum 12% gain, it may have more to go on the upside, but short term it's near a resistance level and you may want to take a look at taking profits here until the resistance situation clears up.

Resistance around $1.26-$1.28, it hit an intraday high this a.m. of $1.23

HGSI (Long)

HGSI may be a more palatable trade for many then EEE, take a look.

 The two trend lines represent a swing trade entry and stop, click on the chart to enlarge.

Again we have 6 days of a positive divergence in a lateral price trend and what appears to be the start of a breakout @ +2% on the day.

Cash For Clunkers 2

As you know GM's been trading below the original IPO price, putting every IPO buyer at a loss. Yesterday there was news out that the administration is considering "Cash for Clunkers Part 2"

Wouldn't this be interesting if the IPO was backed with government guarantees of fiscal stimulus or subsidies more or less for GM should it not stand on its own two feet? Welcome to the circus.

GOOG

Yesterday I posted about GOOG and a quick lesson about stops, I was contemplating another chapter devoted to buy limit orders which were set off after the second GOOG post, as you might imagine, the went off on volume at another whole number, $581.

The close above $581 yesterday caused retail traders to send in their orders which caused GOOG to gap up this a.m.,  already the entire gap has been filled and we are back in the $581 area. There was a brief dip below $581, again the volume picked up because once again retail traders are making the mistake as yesterday, putting stops at obvious support, not recognizing support is an area, not an exact number and at a placing stops at a whole number. What happens next? I think most likely a bounce off support now that they've grabbed some shares on the cheap again this morning, but that's short term thinking. GOOG is worth watching for two reasons, I for lessons about the market by way of example and 2 for a possible trade.

Anyone needing real time charting can go to www.FreeStockCharts.com

I just updated the chart since while I was writing it began a bounce.

Opening Indications

So far the only average to confirm the gap is the Dow, the SPY, IWM and QQQ are all divergent.

As with yesterday, intraday breadth will be important.

EEE Trade

EEE has finally broken out and triggered my target, you may want to look at this for a trade with a tight stop and any pullback for an entry.

 Volume is already higher for the day in the first 30 minutes of trading, the price pattern suggests an upside target of $4.50.

On an hourly chart, we have an 8 day long positive divergence suggesting that the base is large enough to sustain a multi-day move and probably reach the $4.50 target. These stocks are difficult to buy because of the gain guilt in when they trigger already, but many times, that gain is just the start. If you use a fairly tight stop and risk management that reflects the speculative nature of the trade, I think it's a long trade worth examining.