The gist is as always, a top is rarely an event, but rather a process, we have seen that process playing out, no where is there a better example then the Russell 2000/IWM chart which has now joined the transports (Dow-20) in diverging from the other market averges.
The red indicator in the middle window is a 5 day price percent change. The white indicator is a 10 day average of the ATR (Average True Range) which has been warning for some time as the range )5 day average of the move from high to low or the range has dropped from over 20 points a day to half that, in essence momentum has failed. The light blue indicator in the lower window is a 5 day average of the close within the daily range (a high close is bullish, a low close is bearish), you can see the indicator started down around the time of the Channel Busting move, as the Trend Channel depicts a lateral trend in the R2K (now moving down), note how the close within the range deteriorated steadily.
Still, as I pointed out in the AAPL post from Friday linked above, our best timing indication is almost always a head fake move, GLD and USO are two recent examples.
Never mind the Channel Buster in USO, as we suspected, USO would kiss the channel good bye, which it did on Thursday, it was also a breakout through resistance on a 60 min candle that failed within the same hour as the break out on heavy volume, depicting bearish churning.
The point being, as I stated in Friday's AAPL post linked above, I'd estimate that reversals are preceded by head fake moves about 80% of the time. AAPL being the most scrutinized stock and the most influential stock in the market, I theorized on Friday is going to give us a head fake breakout. The charts in Friday's post lay it all out, but the the most important charts are as follows...
A couple of interesting events we have this week, Apple unveils the Ipad 3 on Wednesday, although the Bollinger bands are so tight, I don't think the breakout will wit for Wednesday. A little known or talked about problem AAPL has is in their next visionary product, Apple TV. There is speculation Apple TV will be launched on Wednesday as well, a failure to launch Apple TV may be seen negatively as AAPL is having some little talked about problems. Content providers are not cooperating the way AAPL would like, they don't want to hand over so much control of content to AAPL. This is not a perfect analogy, but close enough. When APPL launched the I-Phone, they needed a network that was willing to upgrade their system so I-phone features could be utilized, AT&T stepped up and was rewarded with a 5 year exclusive contract. Imagine if not networks stepped up, this is sort of akin to the content problems AAPL is having, thus the failure to launch Apple TV Wednesday with the Ipad 3 could be seen as a problem with negotiations with content providers.
We have a bevy of other potential game changing issues coming due around the same time, specifically the Greek PSI deal is slated to be completed Thursday this week and the consequences carry the entire bailout. Here are some of the issues...
The bond exchange “invitation” is set to expire at 3pm EST on Thursday March 8th. This is the so-called Private Sector Involvement or PSI
Greece has other steps to take during the week, and ultimately the Troika will determine how to proceed with the bailout, but not until the results of the PSI are known. Last week we already saw the Germans saying that Greece was not taking this seriously and failed to make del breaker changes needed to secure the next bailout. Remember what I also tried to point out, the circular nature of the decisions of the major players. The Greek bond investors want to know that Greece has secured a bailout, the Troika wants to see the bond deal done before backing the bailout and the IMF is waiting to see what happens while the Troika are waiting to see how much the IMF is willing to contribute. Greece is waiting for the Troika to give the okay on the austerity changes made and so far they don't seem happy with them. No one wants to move until they see what the others will do, I'm not sure how this will play out with everyone waiting on everyone else while the clock ticks away.
Some of the Greek bonds are denominated in currencies other than the Euro. These bonds had stronger bond-holder protections than Greek Law Bonds. So these bonds have some rights that give them more protection in theory than Greek law bonds, and more importantly, any lawsuits by hedge funds building a blocking position could be decided outside of Greece, the hedge funds could get full par on some of these bonds such as English law, which will be a major pay day as they bought them far below par.
How do Portugal and Ireland react when they see Greece receive big debt forgiveness? This is another question and we are already seeing rumblings, but without the PSI, there will be no deal.
Remember that Germany has made it very clear that if the PSI fails, the bailout is off and this is set for this Thursday 3 p.m. EDT. Interesting timing with the AAPL launch.
Just this weekend, Bloomberg reported that the German Der Spiegel citied ECB sources as saying,
"Greece may fail to garner enough investors to participate in a voluntary writedown of its debt"
Last week we heard some pre-emptive talk of contingency plans as well.
Sentiment continues to be perfectly positioned for a massive move down, dumb money as seen by the chart below is still wildly bullish.
Then we have the Rydex Total Bull/Total Bear weekly chart...
So this will be an interesting and perhaps definitive week. During the week I will continue updating the normal indicators that we use, Credit/Risk Assets and their divergence from the market, 3C of course which has been signaling this as a very dangerous market as well as other leading indicators from currencies to specific correlated stocks, ETFs, the VIX and others.
Don't be too quick to judge initial moves, price above all is deceptive and the underlying and leading indicators have all converged to a very bearish level as well as investor sentiment. The Macro economic environment is also at a major crossroads this week.
I'll also continue to provide, as usual, both short term and longer term trading ideas as well as updates on positions already mentioned.
Not that I think they matter a whole lot right now considering the bigger picture, but here is how the EUR/USD and ES have opened tonight.
This is the pair since last Sunday's open.
It will also be interesting to see what the ECB's deposit facility looks like, as of last Friday after the LTRO, the facility hit a new record with virtually all of the new net liquidity from the LTRO going in to the deposit facility. The ECB has made some noise that this will be the last LTRO as it has not gone according to plan, however their excuse is that they don't want banks leaning on them too much. The reality is the 3 year 1% loans were "supposed" to be used to finance sovereign debt carry trades where the banks borrow for 3 years at 1% and buy sovereign debt yielding 5% or so and keep the 4% carry profit, instead the banks have chosen to take the money out of the financial system altogether and put it to work in a negative carry trade by which they pay 1% on the loan and get .75% from the ECB's deposit facility, ultimately financing a negative 25 basis point carry trade, or in other words, they are losing money to the tune of about $6 billion a year collectively to keep the money in the deposit facility rather then finance "profitable" carry trades, but who can blame them after the ECB essentially created a senior and subordinated bond market in which the more ECB debt held for any particular nation, the greater the private sector loss will be when those countries seeks to get the same fair treatment as Greece in a debt swap "hair cut". Just as I thought, the ECB's bond swap two weeks ago with Greece, putting the ECB a safe distance from any retroactive collective action clauses or "losses" Greece may invoke, has seemingly already turned to bite the ECB in the rear end. The results of the PSI, activation of the CACs and the decision as to whether CDS are triggered or not will be the ultimate say in the European PIIGS bond market and any one of those events could easily send yields soaring again to the 6-7% or higher level creating a fresh new crisis in the PIIGS and further contagion of the core.
Have a Great Week, see you in a few hours.
