China's Bubble-Ghost Cities and FXP

The entire market is focused on Greece when the blind spot that is sure to have devastating consequences is brewing right now in China.

Several months back I noticed commodities as a risk asset were starting to underperform, I theorized that the world's largest importer of raw materials was probably facing a slow down. Over the next two weeks we were proved correct when China's manufacturing ISM came in below 50 (contraction) followed the next week by their services ISM which also came in below 50 and China doesn't exactly have the most translucent economy, numbers and reports are vigorously massaged so the actual number was probably a lot worse and commodities were reflecting that.

Friday China cut their Reserve Requirement Ratio for banks to spur lending to a problematic real estate market. The initial enthusiasm was quickly reversed when the market recognized that problems in China are probably worse then thought.

I thought it would be interesting to share this video with you, I have seen this on a smaller scale in Miami after the real estate bubble burst and the skyline had seemingly more cranes then buildings; approximately 65% of condominium sales in Miami were speculative purchases, so the dark buildings at night made perfect sense, but that is nothing like these ghost towns.


A quick way to gain short exposure to China is through FXP, although I'll be looking at company specific stocks, this inverse ETF can really move and there's a decent looking set up in place now with relatively low risk and good probabilities.

 FXP's hourly chart has been in line with price until recently in a rather flat , quiet area.

 The same is true of the 30 min chart...

 As well as the 15 min chart, confirmation in these 3 longer term timeframes is important and suggests good probabilities.

 Here's the 5 min chart in that flat area I mentioned.

Because foreign stocks can be very "gappy" I used a line chart to display the price formation that appears to be an accumulation area. I would set some alerts and let the trade come to you, a break out above the $23-$24 area would be an area I'd be interested in buying FXP, a stop can be placed just under $23 or if you want to give it more room, then below $22.

FXP has had multiple smaller runs of 15% or so within a few weeks, but it also can easily double as it did last year, not that I put a lot of weight in to this fact, but the ETF has been as high as $1,000.00; there is potential there and this is a "prove it to me" trade.

A Brief Wrap

I'll cover the market in greater depth a little later, I have a financial meeting at 6:30 so I don't have as much time as I would like to cover everything I'd like to cover.

On the day that Greece was rescued, ES dropped 6.5 points, which is close to the biggest 1 day drop since December, there was a slightly larger drop earlier this month.

While I didn't have time to update our Credit/Risk Asset model, the more aggressive high yield credit underperformed the investment grade which is like the blue chips outperforming the Russell, it's a flight to quality and away from speculative, higher beta credit.

As I pointed out early in the day, financials were a notable under-performer.

Commodities were the clear winner today, from silver, gold, copper, crude, etc, which was a bit strange as AUD was weaker on the day as I pointed out in the last GLD post. In a rare turnaround, stocks lost more then commodities, my personal feeling was the failure of the Dow to hold $13k upset equities as they even broke lower then the EUR correlation. The volume at bot attempts was unremarkable as was the daily Dow volume which was about half of Friday's volume.

SRS had a strong close, not a huge percentage move, but a strong close obviously reflecting real estate and REIT troubles, which were brought to the forefront by China's 50 basis point Reserve Ratio cut for their banks from Friday as the real estate trouble there increases.

Both Home Depot and Walmart had difficult days, reminiscent of some of the stocks I rattled off on Friday's close, but I'll touch on both in greater detail later, suffice it to say, WMT lost nearly 4% on very heavy volume and HD gave up 2.3% intraday to close just above .50% again on heavy volume and an ugly closing candle.

It hasn't even been 12 hours since the "Greek Bailout" was announced and already there appear to be problems with hedge funds having possibly built up a large enough blocking stake to make the PSI deal dead on arrival. It appears that (I need to research this more) that Greece is set to introduce the retroactive CACs we have talked so much about with instead of a 95% threshold of bond holder agreement for the PSI to go through, a lower 66% threshold, if true, this could have many repercussions from lawsuits to default and CDS being triggered. Even the head of the IIF negotiating on behalf of Greek creditors says that Greek bond holders could kill the deal.

If you have time to read the Finance Minister's statement, I suggest reading it, you will see how insanely incompetent or genius it is, depending on the Troika's real intensions. Again, to briefly touch on some of the requirements that seem almost impossible to fulfill, Greece will have to pass legislation allowing the Troika to virtually administer Greece, Greece essentially becomes a Troika colony which will be difficult to pass given the climate in Greece among the 99% ers. Retroactive CACs seem to be a virtual certainty, while the ECB has changed the face of the bond market and created senior and subordinated debt, if you remember my post on the repercussions of such an action, you will remember they are dire and likely to bite the ECB in the rear with consequences that far outweigh any losses they may have taken on an official sector involvement plan.

Ignore the headlines that Greece has been saved, nothing is certain until all of the EU countries vote and some of the votes being considered would be after Greece's March bond payment.

Again, it all rests on the successful completion of the Greek bond swap, with no details as to what is considered successful and Greece must implement a wide array of painful austerity measures within a week, seeing how the political system works there and with elections in April, this alone is a huge hurdle.

My earlier article that touched on some of the issues making the "Agreement" rather un-agreeable were only about a quarter of the notes I had taken, they were just the most obvious and glaring pitfalls, since then even more have emerged and to think all of this from a roughly 3 page statement!

I'll post more later after I've had an opportunity to look at everything I normally check on.

In general though, I would say the market's mood was surprisingly sour as in the past, just the headline alone had the ability to send the market much higher, that is until the details were sorted out and understood. We didn't see that today and the whole Dow 13k issue was certainly strange.

GLD Update

It's been a little while and I won't be dishonest, analyzing gold and silver are my two least favorite assets to analyze, there are so many wild cards at play between rates, correlations, broken correlations, flight to safety trades that turn in to risk on trades as well as the often arbitrary COMEX margin hikes and the surprising recent lowering of margin maintenance. However, I have several gut feelings about the asset 1) It may very well be a bubble, the psychological environment is very "bubble-like" and that is always accompanied by a "This time it's different" and there's a compelling case to be made for gold in a devaluation of currencies the world over, however there's an equally strong case that goes like this, "Central banks throughout the centuries have done some of the most criminal, dishonest and manipulative things they could possibly due to control the money, they fought hard for fiat currencies and without fiat currencies, they lose their power". If you think politician's are power hungry, look at the history of the Central bank cartels and how they came to be and always remember that Federal in a corporation's name doesn't make it any more "Federal" then Federal Express, these are quasi-governmental corporations that are for profit and have shareholders they report to. Gold represents a clear and present danger to their power.

As for GLD analysis, I dug deep on this one to take a look at all angles.

 Here is one way to look at GLD's trend, bulls will point out that the pattern and volume is that of a bull flag, I would suggest that a bull flag or a bear flag is a consolidation pattern that rarely exceeds two weeks in length. This could also be viewed as a downtrend and in a downtrend, volume IS NOT important. You've probably heard the saying, "Stocks need volume to rise, but they can fall of their own weight", furthermore, in studying bear markets and confirming what I have learned, low and declining volume is a hallmark of a bear market. So there are two views that are opposing, lets dig deeper.

This is a second way of looking at GLD, a large triangle top (large triangle's are most often tops or bottoms, not consolidation patterns). Then GLD broke down from that pattern and broke the 3 year old support of the 150 day m.a. I have pointed out how the break down of tops has changed over the last 10-years and is totally different then what Technical Analysis has preached for a century. According to Technical Analysis dogma, a break of a top is to be shorted and in 2000 that worked well, but things have changed with people using the internet and cheap online brokers and turning to technical analysis. Wall Street knows what technical traders will do when a top breaks, they will short it, that is why we almost ALWAYS see a volatility shakeout after a major break causing the shorts to be run out of the trade. This does not nullify the top, it just takes advantage of the predictability of technical traders and makes Wall Street easy money because of their predictability. That appears to be what has happened here in GLD if we consider the "Triangle Top " scenario. I even said way back when price was under the 150 day, to expect a move up on a shakeout and probably to the area of the triangle's apex, which has happened.

 Last year I pointed out to members that GLD touching it's 150 day moving average, historically over the last 3 years or so, has been an excellent place to buy GLD at very low risk and very high probability. However, as the trend accelerated, there have been fewer and fewer opportunities to buy at that average and when we hit it late last year, I didn't feel good about buying there and suggested that we hold off, the decline to the moving average was sharp and unlike anything we had seen previously, remember, changes in character are warnings.

I added a Rate of Change to GLD, it got a little extreme in late 2009 and when we see extremes in volatility, they often mark tops, in 2010/2011 the ROC flattened out and then burst in to a very volatile move, this is what I was worried about on the buying opportunity and why I said, "We should wait this out'".

 Here's a close view of the Apex of the triangle and rally off the lows that broke support right to the apex. A trading range has been established, this is a set up for T.A. traders, a breakout from the range is supposed to be bought, but look at the first break to a new high around early Feb. The breakout volume was low, the failure to hold it was on increased volume, longs were stopped out. Now we have another possible breakout of the range and again volume is low. To entice longs to buy this breakout, it will have to make a new high and surpass the former breakout to remove any lingering doubts.

 The first negative divergence around November was the break from the triangle and made the local new low which was the first serious lower low in 3 years. You can see the accumulation of that low for what I suspect was the volatility shakeout, while Wall Street may view this as a bubble and be moving out of the position, they certainly will play the long side especially when they set it up, the recent negative divergence suggests that this cycle is at stage 3 distribution.

 Long term, 3C 2 day shows the first serious negative divergence in 3 years and around the top area. 3C was in line with price as it declined to make the first lower low of the 3 year old trend, the probable "volatility shakeout" is not in line with 3C, but leading negative, which is exactly what I would expect to see, shares distributed in to strength and Wall Street could have easily picked up the shares on the cheap as the accumulation for this move seen on the chart above, was during the month of December. Remember the Paulson Flagship fund "Advantage Plus" that lost over 50% last year, of their top 5 holdings, only GLD was profitable. Being the end of the year and having lost over 50%, they were hit hard with redemptions and the only way to meet the redemptions (raise cash) was to sell their only large profitable position, GLD, so other Wall Street firms could have easily picked up a large sell transaction and accumulated from Paulson's selling.

 3C is not the only indicator showing long term distribution, Money Stream which was invented by the man who was the creator of the first money flow indicator, "Tick Volume" and which all money flow indicators that are popular today are based on, shows a negative divergence even worse then 3C's and these two indicators have almost nothing in common in their source code, if they did it would explain why they gave similar signals, but they don't.

 A 5-day chart of Money Stream shows how bad the divergence is, this is leading negative.

 My DeMark inspired indicator has given several buy/sell signals, but the worst was clearly at the top for GLD.

 Recent analysis has shown my Trend Channel looking like it was about to roll over and I have said, I would wait for a break of the bottom of the channel before entering a GLD short, however if this breakout today shows strong distribution and looks like a head fake move, then we may very well have a better risk/reward set up, but as I mentioned, to remove doubts about this being a false breakout, I would think a higher high would need to be made to get longs in the trade.

 I've done my research with regard to which currencies have the best correlation to GLD and by far, the Australian dollar or AUD/USD by far has the best correlation and the best leading indications. At point "A" the AUD (FXA) made lower lows while GLD made higher highs, it diverged negatively and that was gold's top. The same happened at point "B" and at point "C", the AUD made higher lows and was in an uptrend while GLD was still bottoming, so AUD led GLD and gave advance notice as a leading indicator.

 Here we see the last positive divergence in AUD leading GLD higher.

 On a shorter 15 min chart, there's a negative divergence which enforces the idea that this may be a false breakout or head fake move.

 The 5 min chart makes it clear as well.

 Interestingly, intraday, if we use the downtrend channel I showed above, GLD popped in volume on the break above and then popped on volume as it tested support and perhaps, failed (depending on how accurately I drew the trendline.)

 The 1 min chart suggests this may be what happened.

 So does the 5 min chart

And the 15 min chart, even though it was in line today, it was also in a leading negative position.

So if you are interested in a GLD trade, we'll keep an eye on possible confirmation or a negative divergence. A break back below the $170.50 area may be an area to start a position, I would still wait to add the bulk of a position upon the break of the trend channel around $166.50.

Market Update Addendum

Regarding those 1 min positive divergences, I looked at all of the averages and they either look similar to the SPY or worse so I'll just update the SPY.

 The 1 min divergence is now a real divergence, it however still is on the 1 min scale which could lift the market in to the close, but it wouldn't be a strong underlying tone, or it could be just enough to keep the SPY in a consolidation area.

 The 2 min chart is in line, no positive divergence and the 5 min chart below, even more so, so this is not a strong underlying move, but may produce an intraday move or consolidation.

Market Update

I suppose this kind of market action would not be what you would expect to see upon reading headlines that "Greece got its bailout", which if you read the 3 page statement alone you would see it was clearly filled with holes and escape clauses with plenty of ambiguity. Or the kind of market action you'd expect from headlines flashing, "Dow 13,000!", but remember it is the market's job to make the most amount of people wrong at any one time and while the market action today I think speaks volumes, regardless of the percentage move, it's no time to take victory laps, but I do think it is a signal that 3C has been pointing out, breadth, Credit and risk indicators as well as numerous other indications that all suggest this is not the bull market rally most think it to be, rather more likely a very impressive bull trap or bear market rally, that has been my position and I haven't wavered from it. I don't come to these conclusions because of an opinion, they are the sum of observable facts if you look at indications other then price alone and in the end, this may indeed be a very dangerous market as I have often compared it to picking up spare change in front of a steam roller. In any case, like I said, this isn't a victory lap by any means, I don't see us there yet, but it is certainly a day of trade that would suggest the underlying action in the market has been correct in showing a dangerous bear market rally. We'll have to let it play out, but at the same time, take advantage of whatever opportunities we come across, long or short.

As for the update...

 The market is clearly more bearish then the Euro, but we have seen these divergences many times, the most important is the long term below...

 The Euro is deeply dislocated from the market correlation, I don't think this is because the correlation is broken, I think there will be a reversion to the Euro, I believe it is because the market has been in bear market rally mode.

 Late day sector rotation is showing subtle changes, financials look to be cresting and starting to rotate out (keep in mind this is relative to the S&P performance), safe haven sectors like Utilities, Health care and Staples are rotating in, Basic Materials, Industrials look like they have crested and Tech is already in decline with Discretionary.

 The DIA is now negative on the day, a mini fall from grace.

 Here are the negative divergences as the Dow tried to break 13k and hold it, thus far the 5 min chart is in line with price action.

 The 15 min chart was also negative at the try for 13k, this is a more significant divergence and while I would think a close above 13k would trap the most longs, so far it seems the intraday move has done its job, of course as I said earlier, this has not played out to the point in which I would say the reversal is upon us, but it doesn't look good either.


 As a reminder of why I have felt we are seeing a dangerous bear market rally, the 30 min DIA chart says a lot, other charts such as credit and breadth as well as other indicators have been in agreement. If this is accurate and I have no reason to doubt it, it is one of the most dangerous looking divergences I have seen.

 The IWM should lead all risk rallies, it is leading to the downside.

 There is a slight positive or possible positive divergence on the 1 min chart, it is not on the 2 min chart and hasn't made a higher high so it may just be that I captured this screen shot at a time before 3C started moving down again.

 The 5 min chart, as I warned last Friday and again today, looks the same as Thursday the 9th before the market fell the next day, except worse because 3C is leading deeper at this point.

 The QQQ intraday

 Again, the sme warning as mentioned above, except again 3C is deeper in to a leading negative divergence making this divergence worse then Thursday the 9th.

 The 15 min chart is usually influential enough to cause a change in trend, except when we are deling with a larger distribution period, it looks very bad.

 And the macro picture represented by the hourly chart is one of many reasons I have held to the view that this is a bear market rally. If so, when looking back at this period several years from now, it will be clear as a bear market rally, but appear as a blip on the chart, not at all like the emotional experience of going through it, which is why I encourage you to try to view historical charts in an emotional manner, in the end, a price chart is simply an expression of human fear and greed as well as Wall Street manipulations that have occurred since they started trading stocks on the actual wall on Wall Street.

 The SPY intraday, all of these charts have fallen on the rejection of 13k in the Dow and probably on the realization of what the truth of the Greek Bailout announcement truly amounts to.

 The 5 min chart is so far in line.

 There is a hint of a 1 min. positive divergence, it is not on the 2 min chart, and thus not strong if in fact it is a positive divergence as it has not made a higher high yet.

 SPY 2 min chart, with no positive divergence, although I would not be surprised to see a late day bounce to keep the "Buy the dip crowd" in the game on what appears to be a slight move down in price.

 Remember the earlier post of Financial weakness or underperformance, here's the negative 5 min chart

 The longer term 15 min chart

And the 60 min chart... These spell out bad news for this trend since late December.

TLT

 There's no doubt that the short term trend in TLT is down, but as I pointed out Friday, the late day grab for protection (the same time the pros make their trades) is worth at least noting, we are seeing the same today.

 On an hourly basis, TLT has stayed in line most of the time, but recently has been slightly leading, which is another small change worth noting as small changes are usually the most important early signals.

On a daily basis, it's kind of hard to call TLT bearish, being this is a flight to safety trade, it shouldn't be ignored.