A Scary Trend

This article is on ZH 


In short, a record number of people have taken loans out against their 401ks.

This reminds me a lot of a student I had when I taught Adult Education Technical Analysis for the county school system. She came to me after class one night and asked if I'd be open to giving her private lessons in addition to the class. I already had a few private students so what was one more? We met at a local cafe with Internet access and before I could get my laptop powered up, she was in tears. I'd guess she was about 65 years old and apparently a widower.

She told me that she couldn't survive off Social Security alone and had taken her savings of $350,000 and started trading them for extra income. She lost $50,000 in a week. She had told me she had contemplated suicide because she wanted to leave her children an inheritance, but at the rate she was burning through money and losing it, she was afraid there would be nothing left.

It's a sad story. Members of my own family are struggling with retirement and medicare. To make matters worse, Bernanke's policies have effectively punished those who were responsible saver their entire lives as the dollar is worth less and everyday inflation is much higher.

What makes the 401k loan trend especially scary is the fact that most 401ks will decline significantly in a market decline. There was a time in 2008 when even the stability of Certificates of Deposit were questioned as to their stability. What will happen to these people who have taken money out of their 401ks, when their 401ks fall in value?

Obviously Bernanke's low interest rates haven't helped people get loans and who couldn't see that coming? The banks are taking money at 0-.25% interest, why risk it on loans when they could stick it into commodities and equities that were being ramped?

A government that breaks its promises to its senior citizens is a shameful government indeed. Perhaps I'm too biased by personal experience, but this 401k trend sounds like it's going to end very badly.

Tonight's Miners Trading System Signal

No Changes!

System 1, the original which went long NUGT today remains in a long signal. The current stop-loss for today's signal is $27.94.

System 2 remains long DUST but is moving closer to a crossover signal to buy NUGT. If you are trading system 2 and still long DUST, there is no action to take for tomorrow. The 3% stop loss remains at $42.23.

Closing market update

 Not much of a surprise, the false breakout/negative divergence and some profit taking toward the EOD

 Same thing happening in the Q's

As well as the SPY

The DIA/SPY 5 min charts are a bit ugly, but beyond that, the 15 min continues to suggest we have more upside before this is over with.

USO's Probable Course

There's little doubt that Bernanke/Obama would like to see oil killed off, ironically it's Bernanke's policies that have caused a surge in commodities. I call it the Bernanke Chinese Finger trap. On one end is his economic policies and on the other, the unintended consequences (although some would make a strong case that the consequences were in fact not unintended as Tiffany's sees higher prices and food stamps see record usage). I've never believed in an organic business cycle, I do believe in a Fed controlled business cycle, but that's another story. Right now, we have an election coming up and the MENSA head of the Fed needs to prove his misinterpretation of the Taylor rule wasn't a misinterpretation.

So, USO...

 The RSI negative divergence with Stochastics above 80 (compare both red arrows) was a definite warning sign. As usual, resistance was taken out the last 3 days before USO plunged (pseudo-bulltrap).

 I've viewed this pattern in the white box as a big problem and akin to a bear pennant. If it is so, then the price pattern implied USO target would be near $33.

 The false breakout of the ascending triangle was promptly identified by 3C as exactly what it was, a false move.

 Here it is on the daily chart and as with most false moves, a reversal is in order. I can imagine 1 more relative high being posted before a drop of some magnitude, just because we see this action so often.

On the 15 min chart, we had about 3 days of accumulation near $38.60 and have moved up since then. It's not a huge divergence, probably not a huge position, but may be enough to make a marginal new high.

After that, I'd be watching 3C very closely to see if it is confirmed or if as I suspect, it's another failed move, but this time, if it is a failed move, I would imagine the shoe would drop in a more sever way.

SRS-Trade

Is SRS finally going to have its day?


This is a story that has had me in disbelief for quite sometime. No matter what came out about real estate, double dip, lawsuits that may put REO/Short Sale buyers out on the street, investigations and fines galore, huge overhanging inventory, etc... all of it and SRS (a short on real estate) can't get off its butt. I guess that may have something to do with the Fed moving all of that garbage on to it's balance sheet. Really, I can't think of any other plausible reason.

That may be about to change.

Reuters quoted Robert Shiller as saying a 10-25% slump in housing prices "Wouldn't surprise me at all". I wonder how our mortgage member feels about this? Want to chime in Jack?

As for SRS...

 The potential is certainly there. Here we have a conservative bullish descending wedge so the implied price pattern target is about a double.

 As with just about every wedge, it transformed into a lateral base and now we're getting some volume and some movement. My best guess is that this will end up looking like a complex inverse H&S bottom with a move to resistance around $17, a pullback to $15 and hopefully a move on volume back through $17-ish (sorry about my sad graphics).

3C daily has been positive in the base area and is now in a leading divergence. Also SRS is one of the few bear ETFs actually up on the day.

Keep an eye on this one, I've been watching in disbelief for 6 months now, amazed this hasn't shot up higher.

USO Update

USO has been a bit disappointing, XLE definitely looks better.

For you day traders, there may be an opportunity to fade a little bit of the USO move today-I'd certainly use something leveraged as there's not a whole lot to retrace.

This is the 1 min chart over the last 3 days, NO CONFIRMATION!

Quick Market Update

Green Arrows! That means we've had pretty much perfect confirmation in the SPY trend thus far today, that's why it's continued to move up. Right now there's the hint of a negative 1 min divergence. It could be an intraday pullback or just a consolidation. The DIA is similar, the Q's have been off all day, they haven't been in confirmation and are relatively negative right now for a probable pullback.

The technology sector (important to the NASDAQ 100) has some decent positive divergences, it just hasn't broken out yet. As far as the XLK goes, a move above $25.26 should kick start the NASDAQ 100. The NASDAQ Composite is performing better.

FAS/FAZ Chart Request...

3C for newer members is a proprietary indicator I created some years ago to see the underlying action of the market. Just because price is moving up doesn't mean the trend is stable. When we have a negative divergence (red arrows) into higher prices, Smart Money is distributing their shares into demand and the trend is likely to reverse when they are done. Likewise, a market moving down may be under accumulation and soon to reverse to the upside-positive divergences occur when price moves lower and 3C moves higher (white arrows). Trend confirmation (a stable trend-will see 3C moving with price-in an uptrend, making higher highs and higher lows and vice-versa).

The name 3C is simple, "Compare, compare, compare" The more confirmation you have among timeframes and different equities with inverse relationships, the more reliable your findings are.

So here we'll compare FAS (Financial Bull 3X leveraged) to FAZ (Financial Bear 3x leveraged). You'll notice I use a lot of ETFs, the reason is because they tend to give faster signals and more reliable signals. If I compare the SPY with the S&P-500 there is often noise in the S&P-500 as stocks within the index are traded in baskets to equalize tracking funds and ETFs, so the actual trading of these stocks often isn't a sign of an accurate signal, but just routine maintenance of tracking funds and ETFs. ETFs will trade with different volume then the averages and usually will more accurately portray demand or supply.

With 3C, the longer the timeframe, the more important a divergence is on that timeframe. 15 min timeframe divergences often reflect swing moves in the market when confirmed with shorter timeframes. The 1 min timeframe is usually indicative of market maker/specialist activity, it's largely irrelevant to a broader trend, but does have implications for intraday moves.

I'll start with FAS and then compare the same timeframe in FAZ in different timeframes so you can see direct comparisons. If there's a good signal we should see similar divergences, albeit inverse (a positive divergence in FAS should see a corresponding negative divergence in FAZ).  For those of you not trading either, this is still valuable information as it will portray the underlying dynamics in financials which are important to broader market action, especially in the S&P-500.

 FAS 60 min. Positive divergence lasting approx. 5-6 days

 FAZ 60 min. negative divergence of the same duration.

 FAS 15 min.  a negative divergence at the close of 5/31, note this was also a false breakout and FAS moved lower on the open the next morning. Current positive divergence.

 FAZ 15 min. Shows the exact inverse behavior with a closing positive divergence on 5/31, again with a false breakdown sending FAZ higher. Currently a negative divergence.

 FAS 5 min. Positive leading divergence

 FAZ 5 min. leading negative divergence

 FAS 1 min. intraday FAS is seeing some profit taking, this may form a consolidation or a pullback.

FAZ 1 min. intraday is seeing some accumulation, again it could lead to a consolidation or a slight bounce.

Overall, there's excellent confirmation between the two, suggesting financials have upside in them over the course of the next several days. This should be positive for the market, especially the S&P which is outperforming the NASDAQ 100 by a 2:1 ratio.

The Miners Trading System

A lot of you emailed me last night and today asking my opinion. My opinion is when a trading system works well I don't like to mess around with the signals too much, but you simply cannot account for divergences in 3C and other factors in a backtested system. In essence, a trading system works well (when you find one that works-I've tested probably thousands and most of the ones that you see in some of your favorite books, you'd be disappointed with the real backtested results) because you are taking yourself out of the trade and are sticking by signals that have been tested and shown to work.

That being said, 3C is a unique indicator and showed us some trouble spots late yesterday. So I suppose the question is, can our intervention help the equity curve when it comes to tweaking the entries and exits. I'd say largely the answer is no, but yesterday we did have some strong signals. My answer to all of you was that I would exit DUST and enter NUGT. The very nature of the system will always put you 1 day behind the signal, there's no way around that, but in this particular case, there was enough evidence to take the NUGT long and thus far it's worked out well. We'll see f trade system #2 gives the same signal tonight as trade system #1 did last night.

Here's what NUGT is looking like so far today

Up over 4% on the day. Still, the answer to trade system intervention I suspect won't be answered in one day's gains.

If I get a little time today, I'm going to run the same criteria that triggers trades in the miners on some different asset classes to see if perhaps I may have stumbled on a more useful system. I'll keep you informed.

Chart Request-BAL

BAL is a cotton ETN.

 To preface this, I view this as a counter trend trade. This looks a lot like a top to me. Also you should be aware of the low volume in this ETN, this is what I was complaining about yesterday. There are some very specific ETF/ETNs that I'd like exposure to, but the volume is so low it would be insane. This isn't quite insane, but very low nonetheless.

 I overlaid my cumulative volume indicator on the top area and it acts like a top, volume shrinks on the rallies, grows on the declines, so once again, any long trade here I view as counter trend.

 That said, there's a pretty large positive divergence on the 30 min chart, accumulation is in the low end of th range as usual. Several days back it ran a bit too high and it looks like the specialist knocked it back down (at the red arrow) and then accumulated the dip again.

 The 15 min chart confirms the 30 min chart above, same action exactly.

Interestingly, the 10 min chart is in a leading positive divergence (the most powerful type) inside the white box so it looks like the recent round of accumulation was quite strong.

If the bis ask spread isn't too wide (what I see right now is about a $.24 spread) it may be worth a crack. I'd watch the position size unless you have a low commission structure and can afford to ease out of the position into demand. Otherwise, it looks like a decent candidate.

I looked at CORN a little earlier for someone else, it had already gapped up and I'm not a fan of chasing gaps. While there may be some more upside in the days to come CORN looks like it's going to faded to the downside today.