Full of Holes

Bernanke's Q&A just doesn't hold water.

Inflation is transitory, yet it needs to be monitored

This commodity index doesn't look like inflation is just transitory. Nearly every Manufacturing report, including the two from this week say inflation is a problem and leading to consumer price increases and squeezing margins.

He also said that they Fed has tried to key the market in to what it's intensions are. For all those permabulls looking for QE3, 4, 5 and 6, he said that the risks are starting to outweigh the benefits, that can roughly be translated into "Inflation outweighs the benefits of more dollar debasing". Head line inflation is like head line earnings, it doesn't mean anything. Look at gas and food prices, the Fed likes to ignore those in core CPI, but every American is pinched everyday by rising costs in both and manufacturers made clear this week that they intend to push inflation along to consumers.

This talk about inflation being transitory is a huge farce. If you understand how important t is for the Fed or someone to buy our debt, then not engaging in QE3, must have some very major risks.

I think an interest rate hike right now would scare a lot of the market and would hurt consumers, but not hiking is going to hurt consumers through price inflation. I'm already changing my driving habits and routes because the cost of gas is one of the biggest costs in my budget and I don't travel a whole lot.

SO while a few things struck me as disingenuous, transitory inflation struck me as a bold face lie.

As for the market's reaction, like I mentioned yesterday, beware the knee jerk. A lot of perma bulls will be disappointed with the statements about QE3.

As another site mentioned, watch China as well. They may be loading up a canon with trillions of dollars of US dollar denominated debt, preparing to give Bernake a broadside salute.

This whole QE thing has been an absolute mess and it's clear who's benefitted from it and who's paid the price (Wall Street and responsible savers respectively).

This may very well have been the Jackson Hole antithesis speech. Just don't rush to judgements quite yet.

Volume

 DIA
 QQQ

SPY

We're also seeing 3C go from confirmation from about 2:30 to a pretty quick move down in most of the averages.

Volume

 DIA
 QQQ

SPY

We're also seeing 3C go from confirmation from about 2:30 to a pretty quick move down in most of the averages.

Bernake

I think some of the upside we've seen during the press conference is that Bernanke hasn't made any major slip ups in a live press conference. One thing I don't think the market will like is that he seemed to indicate that the possibility of QE3, which the market would love, perhaps at this point has more potential risk then upside.

We'll see how the market digests all of this.

XOM Responding favorably

To Bernake's mention that they can't control energy prices.

LEN didn't like statements about weak construction

MARKET UPDATE INTO THE PRESS CONFERENCE

WHAT HAPPENS FROM HERE, BERNANKE WILL OWN

 DIA 1

 QQQ 1

SPY 1

GLD/SLV

The action in both gold and silver since the FOMC announcement reflects the market's opinion that Bernanke will continue to destroy the dollar.

 GLD has moved up 1.41%

SLV is up 3.88%. the pullback in SLV appears to be over looking at 3C, it's solid behind the move so unless Bernanke says something that changes the outlook for the dollar, SLV looks like the better investment, that has a lot to do with the gold/silver ratio. There's about 16 parts of silver in the ground for every 1 part of gold. If we take gold's current price of nearly $1523.00 an ounce, then Silver should be trading around $95. So if you are looking at each for a long trade and if Bernanke doesn't come out with anything that sounds supportive of the dollar, then Silver is where the action should be.

BRCM Follow Up

BRCM was a short trade idea on Feb 28 This was a pretty big post, you may want to check it out. BRCM is now down about 14%.

Continuing the concepts I started with this trade idea, I want to touch on several things that have been market trends.

 The white arrow is the trade idea date.

 Here's a trend and a false breakout above the chanel. These false breakouts that occur before reversals are so common now they are predictable. They come in different forms, but the one thing they have in common is that they must convince traders that the trend has seen a breakout change, whether it's breaking out from a triangle, breaking a major resistance level or a channel like this. The point is, traders will see this as a change and a chance to buy. Their losses when the breakout fails is what kick starts the reversal down. 

 In BRCM's case, we can see the breakout did to things that are often seen in a false breakout, 1) a lateral trend 2) distribution into that lateral trend.

While I've tested many automated trading system, it's hard to find one that beats the market consistently, however, when it comes to stops, I have relied on my trend channel for years. There could be many reasons that I choose in a discretionary way to close the trade, maybe I feel it's not going to make further gains, perhaps even the breakout, but the trend channel takes me out of the trade and lets the channel make the choice. Following the channel, even with the false breakout, the channel kept you in the trade.

In the short term, BRCM has hit the bottom channel and has a good chance of finding some support there. Look for very high volume and a stronger close, that increases the chances of a dead cat bounce. 

Holding Pattern

Looking at the TICK chart, it seems that there's some uncertainty, most probably waiting for Bernanke's Q&A, but the TICK chart rarely looks like scribble like this

SPY

The SPY is moving a bit closer to confirmation, although still off.

Market Update

 DIA 1 min hasn't confirmed

 QQQ has barely confirmed, but is not as strong as earlier readings at lower prices

SPY 1 min is not confirming. This would al suggest to me that smart money hasn't made any significant moves as of yet and this looks more like retail traders.

5 Year Bond Auction

The Treasury auctioned off $35 billion in 5 year treasuries, for the second day Primary Dealer's interest "declined broadly".

The debt ceiling is $23 billion dollars away, tomorrow the Treasury auctions off $24 billion, so......

More on volatility

Don't forget that tomorrow, the Fed will release revised 2011 GDP and perhaps revise 2012. This could be a very extreme roller coaster ride.

Another Huge Contribution to Volatility

This could be very messy, check out this story on how computer driven trading is likely going to go haywire in dealing with the Bernanke presser.

http://www.zerohedge.com/article/biggest-losers-todays-fomc-conference-robots

Another look at the SPY

I suggested in the last update that an inverse H&S pattern seems to be forming...

 Here's the current price pattern, very much like an inverse H&S bottom, but volume needs to pick up substantially in the area, especially on a breakout. Volume is more important in inverse H&S bottoms then in H&S tops.

 Here's the 1 min 3C chart that continues to move in a leading positive divergence, but....

When zoomed out, you can see that 3C is actually below price, meaning it's showing the short term positive divergence, but within a negative overall position.

Market Update

I'm not sure how meaningful any of these reading are considering the FOMC statement, but here they are...

 The QQQ 1 min with a negative divergence right off the opening gap up sends it lower, there's a poitive divergence at 10:30 or so, but so far it's traded in line and isn't very big, actually it doesn't look like more then the regular intraday moves we often see.

 The 5 min QQQ is trading in line so nothing to be learned there.

 The SPY also had a negative divergence on the gap up and a positive divergence toward 11 a.m. that is now leading. The price pattern here looks like a small inverse H&S may develop.

The 5 min chart confirms the same.

The IWM 1 min is largely in line with a slight positive bias around 11 a.m. The 5 min IWM is negative and leading lower.

The DIA is largely in line on the 1 min. The 5 min DIA is in a negative stance, more or less leading negative. The longer timeframes in all of the averages remain negative currently.

ACAD Follow Up

ACAD is a long idea from April 18th

I'd say it's time to take profits. Even at +35%, the trade was worthwhile.

FOMC Market Action

Last night I warned to beware or market action following an FOMC policy statement. Historically there's been a knee-jerk reaction that changes either the same day or within several days, it hasn't been as pronounced recently, but it's something to be aware of. Below is a depiction of policy statements and meetings recently.

Note the day after or within a few days there tends to be a different reaction, it may appear subtle here, but the January example saw a nearly 2% drop within two days, it wouldn't have felt subtle then. The 3/15 statement saw the market close rather weak, the next day it was down an additional 2%, then the day after was up 1.34% and reversed a downtrend. The initial reaction wouldn't have given you the impression that the FOMC release was good for the market. So things can change quickly around FOMC statements, this one due in about an hour and 20 minutes. I expect the market to be very volatile today, especially between the statement and Bernanke's 2:15 presser.

One other interesting note, there's no doubt that the Fed had an arrangement with the Primary Dealers, giving them nearly risk free money in the billions to act as a middle man. In return the PD's often used that money to lift the market, the phenomena is well documented and even the submitted accepted ratio was nailed down to predict whether the PD's would be putting the money in the market, depending on whether the S:A ratio was above or below the median. It seems there's a reason Bernanke made this arrangement. Taking the dollar's year to date loss and the market's year to date return, in real terms of a dollar's buying power, the market has gained nothing year to date, when compared to the dollar's loss of buying power.

Wouldn't it be interesting if earnings ytd we're calculated for the real value of the dollar ytd?

GIGM Trade Idea

Take a look at GIGM, it has formed a H&S base or inverted H&S.

 The volume for the pattern is correct, the breakout zone is right in the area, $1.68 officially breaks it out.

The daily 3C chart also agrees almost perfectly with the volume for the pattern.

The pattern carries an implied price target of approximately, $2.40 which would likely take several months to achieve with pullbacks along the way. It's in an interesting spot and well worth a look. Remember, this is below $5 and as such is a speculative trade, risk management should reflect that.