PSLV

Last night I posted PSLV as a possible long trade, if you bought on the open, you should be up about 5.5% more then the 4.6% SLV is up (or about 4% if it was bought on the open). I didn't list SLV and didn't consider it yesterday as there wasn't a clean signal there, PSLV was different.

Here's what PSLV looks like now

 This is a 15 min 3C chart and the one that made me decide to put the idea out there, but in all of the 3C charts that follow, you can see the positive divergence was very late day and at the bottom of the day's range.

 The 5 min chart didn't show a credible divergence until 3:40 yesterday

 The 1 min chart was more like 3:52-3:57 p.m.

 I personally don't like the environment surrounding silver and would keep a fairly tight stop. This s the 15 min trend channel which should move up fairly quickly. If the move shows some resilience, this stop may be widened later today.

For those not using a Worden product (my trend channel) then I'd use a 10/22 bar moving average on a 15 minute chart and in this case the stop would be on an intraday basis, not on the close as per usual.

Again, this stop may be widened later in the day if conditions remain bullish.

PCLN Follow Up

PCLN was posted as a possible short trade on Tuesday May 3rd. Yesterday several members asked me to look at PCLN as a possible earnings play on the short side. As strange as this may seem, my response was that I still liked the short trade, but I didn't see an earnings play setup.

Last night PCLN reported and had a blowout quarter, in after hours I saw PCLN up as high as $550.00. However, I don't think I need to elaborate about after hours indications. Smart money won't be chasing a stock higher in a comparatively illiquid market and they don't chase for the most part. So patience is required before jumping to conclusions based on extended hours trading.

This morning thus far, PCLN is down 1.14% at $528.59, well below the $550 seen last night and below the price at the time of the recent trade idea ($542.47).

We'll have to continue to show some patience and see how PCLN closes, it's certainly showing impressive relative weakness vs, the market this morning.

One of the reasons I favor the PCLN trade would certainly be the risk / reward ratio as the risk was rather low when the trade was mentioned, but also the high amount of margin that has been used in PCLN, a seemingly unstoppable train. When margin calls start to come in, PCLN is one of the contenders to see a massive leverage squeeze. So far, so good.

Banks Perfect Trading Record

One of the effects of QE and one reason I believe the Federal Reserve's monetary policy is biased toward the big banks, a glaring conflict of interests, can be found in the earnings reports of major banks. I touched on this a few days ago when I asked what the bank's earnings would look like in an environment absent Quantitative Easing and POMO. JPM today and BAC yesterday both reported perfect trading results at their trading desks for the quarter.

It seems fairly clear that the Fed's massive stimulus nearing 2 trillion dollars has done little for price stability and arguably nothing for employment, their two mandates. However, it has given the banks windfall profits from trading operations, which probably has saved several banks from falling down the Lehman Brothers chute over the last year or two.

The evidence is there right in front of us, input costs are rising, consumer costs are rising, the value of the dollar has plummeted and unemployment has barely budged nearly two trillion dollars later, but the banks have consistently posted record trading profits. I wonder what the effect on the economy would be if the Fed removed this free bonus from the banks and made them rely on traditional profit structures? I wonder if housing would be in better shape, if small businesses would be better able to borrow and hire more employees, if credit standards would be relaxed a bit allowing consumers to spend reasonably to buy cars, houses, etc?

Why these questions are hypothetical for the moment, it seems we may find out the answers before year's end if we are to take recent Fed statements at face value. The banks have had time to sock away a nice nest egg under quantitative easing. Perhaps soon the public will be able to do the same, or at least see their savings accumulated over a lifetime worth something once again.

And the other side of the coin

While the NFP number was stronger then expected, the workforce participation rate remains at 25 year lows for the 3rd consecutive month.

Another metric, the total number of persons NOT in the labor force just hit a new high, 86,248,000!

NFP Surprises to the upside

Despite all of the evidence earlier in the week, payrolls came in surprisingly stronger then expected. Of course BLS in known for their revisionist activities, so we'll have to wait a month or two before the revisions are complete.

Silver Dead Cat or Something else

I didn't see much I really liked today in SLV, not anything really convingng, but looking at PSLV, there's a 15 min positive divergence forming that looks pretty clean. whether this is a dead cat bounce, a blip or something else, I have no idea and if it were to bounce, I can't say what the CME would do under a presidential directive (we see a hike just about every other day so tomorrow we'd be due for the 5th at the rate the CME has been going).

In any case, take a look at PSLV.

PSLV tracks a bit different then SLV, but that's a pretty clean signal on a 15 min chart. Remember that divergences can go on for several days, it all depends on how much they're trying to accumulate. I will say this looks pretty mature, pretty fast.

Some Pre-FOMC Observations

These were all posted here before the FOMC meeting:

"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" 11 a.m. 4/27/2011


"I've got to say, I've been doing this for a long time and I don't often get nervous about much anymore, but I have to admit, there's some energy flowing through me regarding the FOMC announcement tomorrow. Almost as if we're about to witness something historic, in a way we will."
3:52 4/26/2011


The Red Arrows point out the day of the FOMC meeting, 4/27/2011

 SPY

 Global Commodities Index

 SLV

 EUR/USD

Below, here are some currencies vs the Yen

A few things to note, 1) the Fed effect held up, I think the trend underway is the market's true reaction to Fed policy. 2) Risk Assets (specifically commodities and precious metals) have been hammered 3) There's an unwinding of the carry trade in the Yen. 4) Many of the important divergences I've shown you have all had one thing in common, they all started April 28th.


What where the key statements from Bernanke?


With regard to QE3:


"The trade-offs are getting less attractive at this point. Inflation is gotten higher. Inflation expectations are a bit higher.  It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. In my view if we are going to have success in creating a long-run sustainable recovery with lots of job growth we have to got to keep inflation under control. We got to look at both parts of the mandate as we choose policy."


With Regard to the monetary base:


"What matters primarily for interest rates, stock prices and so on is not the pace of ongoing purchase but rather the size of the portfolio that the Federal Reserve holds. So when we complete the program as you noted we are going to continue to reinvest maturing securities both Treasuries and MBS and so the amount of securities that we hold will remain approximately constant.

At some point presumably early in our exit process we will I suspect based on conversations we have been having around the FOMC table it’s very likely that an early step will be to stop reinvesting all or part of the securities that are maturing but take note… that step does constitute a policy tightening"

While Bernanke says the above does not constitute a policy tightening, he may be correct, he may not, but today's comments from Kocherlakota certainly hint at policy tightening, by 50 basis points. Bernanke has claimed he's trying to make the Fed more transparent, the press conference being a first of its kind is certainly a symbolic gesture. Today's Fed comments could certainly be taken as a warning directly from Bernanke, in which case, something must have changed very quickly in the Fed's view.

Right now we are seeing some of the most heavily margined and speculative assets being sold off. I wish I had the capacity to be able to draw a chart showing the interconnectivity of all of the different asset classes and say, how unwinding in the Yen Carry trade effects other asset classes, how declines snowball because of margin maintenance and how other assets are sold to meet margin calls. It's a confusing web of arbitrage, margin, leverage, hedging, etc. However, it's pretty plainly visible that there's a massive risk liquidation, whether self imposed, forced (i.e.-Silver margin hikes) or both. This is something that is difficult for people like us to understand. A very small move in an asset can cascade into big trouble when dealing with the kind of leverage these institutions have access to.

In any case, the point was the Fed effect and what the emerging view of the FOMC meeting has matured into. And by the way, watch for something big coming out of Japan very soon.

   

Failed Breakout

 Here's where volume picked up big in the SPY on a 1 min chart, it doesn't correlate well with any intraday support like we've seen a couple of times over the last week, but....

When looking at a daily chart, it's exactly where the breakout on 4/26 occurred. It seems I'm not the only one looking at the probability of a failed breakout.

Market Update

So the idea yesterday was we would see some upside today as today would be the perfect day to lift the market before a bad NFP number on Friday. The Q's and IWM did exactly that, the SPY got close, the DOW is the biggest laggard.

Right now the Market is dropping like the Fed announcement I just mentioned was just released, although it was released a bit ago. It would make some sense as the negative divergence sending the market lower wasn't huge so a surprise announcement would have fit the bill. Of course it could just be they spent a little time setting up the chess board, but today has me a bit frustrated.

Here's what the Q's look like in several time frames.

 Long term, this makes sense with a breakout move up that fails, for me this is the most important outlook, longer term negative. It has all the components of a reversal.

 Here's yesterday's accum. at the lows and today's negative action into the late afternoon. Still makes sense even on the short term in which yesterday the idea was to lift the market into the NFP which allows some relief of oversold conditions and shorting into a bad NFP number.

 The 5 min looks the same.

 As does the 1 min, but notice the last negative divergence really isn't that deep, that's what is frustrating, but all considered, it seems to make sense even if it doesn't look exactly like what I'd anticipate.

The SPY...

 Long term, we have the breakout seen before reversals which appears to have failed-makes sense.

 Another look at the complete cycle, makes perfect sense.

The action yesterday and into today's morning lows and the negative divergence here make sense, the only thing that doesn't is that the SPY didn't perform better today.

The IWM

 Long term, the same set up, a breakout to new highs that appears as if it has failed. This is the common theme among reversals.


 A look at the entire cycle and a nasty leading negative divergence now.

 This 5 min chart also shows the positive action into yesterdays lows as well as the gap down this a.m., timing and all make sense here.

Again, this 1 min chart is what is frustrating, but it appears the bigger picture is negative, there was some relief with the IWM up around .70% today near the highs.

My guess is the NFP will be bad tomorrow and the market should not react well to it.

If you believe in Fed transparency...

Then the rate hike that has been speculated as having wreaked havoc in the commodities sector and the market this week just got a little credibility, again, if you believe in Fed transparency.


From the Minneapolis Fed's Kocherlakota's speaking engagement today, 


"A core inflation rate of 1.5 percent is still markedly below the Fed's price stability objective of 2 percent. Accordingly, an increase of 50 basis points in the fed funds rate would still leave the Fed in a highly accommodative stance. First, the fed funds rate would be extremely low—between 50 and 75 basis points. "


A 50 basis point hike! This language (and every FOMC statement is compared for even the placement of a comma) is quite a divergence from the recent FOMC's highly accommodative stance for the foreseeable future. First of all, it's parsing words with regard to "highly accommodative", Kocherlakota just redefined accommodative which was until today considered a Fed Funds rate of zero to .25%, now it means 50 basis points higher. 50 basis points in a single move sounds more like panic and would have a dramatic effect on the Fed's balance sheet not to mention the speculative money banks have out in the market. 


I think this explains a lot and I think the banks had a heads up, probably last week.