AAPL on thin ice

Lets just get to the charts on this one...

AAPL's move looked pretty good in the green area, it was advancing, pulling back to wring out overbought excesses and moving higher. In the yellow zone, those pullbacks which believe it or not (they aren't always fun to sit through) are actually healthy for the longer term trend, started to fade away and AAPL started to look wedgie. The Red area is where I consider it to be in a real danger zone fueled most probably only by short squeezes.

 Around the white box, I wrote AAPL looked ready for a bounce. AAPL had a breakaway gap, which is the most bearish gap you will see in the market, although the market has been filling these gaps left and right due to extreme volatility among other reasons, it looked a little out of reach, but last week it became apparent it would fill that gap area and it has done so. Today's momentum is very poor creating what is so far an evening star doji, although price looks healthy, price alone doesn't represent the move, this evening star leaves AAPL very exposed and vulnerable here for a reversal.


 Short term charts are offering no support today as you can see above and below.

 The longer 5 min chart is leading negative and hasn't been supportive in the red zone, which leads me to believe this is a short covering move, which may make for some nice price gains, but doesn't do anything to build a strong base under the advance and again leaves it vulnerable here.

 The 15 min chart looks as it should for the Green zone, in the yellow zone the accumulation period is quite narrow. In the red zone, the 15 min chart is leading negative, implying short selling in to the price strength, a short squeeze creates demand for the stock which would enable Wall Street to sell short in to that demand at favorable prices.

 Longer term, the hourly chart hasn't been supportive of this move at all, so from this perspective, it does look like a forced gap fill/short squeeze and not underlying strength. The yellow box is meant to represent the red zone seen on the first chart.

 My Custom DM inspired indicator has only given 3 daly sell signals, we are in the middle of one right now. You can see the last two very right on track.

 Even more surprising because MoneyStream rarely gives strong signals, but when it does, they tend to be strong, MS is more or less confirming what the 60 min 3C chart was showing, no support for this most recent move up as MS is also leading negative on the daily chart above and the 60 min chart below as well as the 30 and 15 min.

I've urged patience with AAPL as many members have been looking for an entry, but now is the time to pay attention,

SPY Update

Seems like Mer-Kozy's meetings pre-EU summit are failing to impress the market, even on a short lived sugar rush.

 Here are a series of two price patterns, both suspicious from last week, the ascending wedge that was talked about followed by a ascending triangle which was misplaced to be a true ascending triangle. These are some of the reasons I left my BAC short in the options portfolio open over the weekend, even though I had a 5% 1-day gain. At the white arrow we have another tweezer top which is a candlestick pattern that represents resistance. At the yellow arrow, a slight breakout of the triangle which has thus far failed and certainly didn't get to test resistance, the red arrow is the current move lower which is seeing NYSE TICK readings of -1250 (pretty bearish intraday moves) and the white trendline would be the ascending wedge's base, which would be a first target for the SPY/SPX.

 Niether pop in the SPY this morning was confirmed (both n yellow), in fact they were both at negative divergences / distribution areas.


This 5 min chart is more serious and it's leading negative, this is what ultimately swayed me toward leaving the BAC puts in place, along with numerous other observations.

Let's see if we hit our ascending wedge implied target. If you forgot about the predictions made about the wedge from last week, you should take a look back at that post, all of which have come true. This is not because I'm some guru and it's not a lucky guess, t's based on observation of hundreds of these patterns showing up over the last year and I'd say 80% of the time they play out like this (as was outlined before it even began). Here is the post from last week re: the wedge pattern.

USO Update...

Crude has definitely been a tricky asset to follow, everything you see says crude should be sky-rocketting as far as geo-political tensions go. On a more fundamental basis of growth, the argument can easily be made for lower crude prices (for example, a slow down in China-a major importer of Iranian Crude).

The US has been engaged in what looks like some sabre-rattling with Iran, whether it's to exploit the growing rift between the religious hardliners that ultimately set policy and Ah-MAD-inejad or perhaps to exploit what is being called a lame duck presidency as Ahmadinejad tours South American leftist governments looking for friends, it's hard to say, but there does seem to be an element of antagonism from the US. I'm surprised crude didn't move much this a.m. on the announcement that an American born, Iranian descendent, who is an alleged spy for the US has been condemned to death. 

 USO is stair-stepping lower into the gap. There have been a few head fake moves in yellow, but lower it goes.

 This particular head fake move in yellow also created a candlestick resistance zone I mentioned last week called a 'tweezer top' and it held as resistance.

One side of my brain says, Crude must move higher on escalating tensions, even though the EIA has announced over the weekend that strategic reserves from several countries would be released if there were any disruption in the flow of crude. The other half continues to watch the longer term 60 min trend which just hasn't shaped up to a more bullish position, in fact it's been negative for a while and comparing the current 3C position with price levels that are relevant, USO is actually lading negative on the longer term trend.

A gap fill should give us more information on what USO intends to do. However, even today as escalations were ramped up with the announcement of the execution sentence for an American citizen, Crude just hasn't responded.

Wall Street's Leaky Pipes-INHX Deal

I read about some unusual Call buying action in a small stock, INHB, a bio tech. On Friday apparently the  volume of calls was 11,138 vs 937 puts, a curious day for the small stock's options. It turns out over the weekend, it was announced that BMY bought the small company for $26 a share, it closed Friday at $9.87.

I decided to take a look a 3C as I always like to follow these apparent leaks, here's what I found.

 Both charts show strong accumulation since mid-December as the stock traded down, and note the accumulation on two parabolic drops (white boxes around price).

Here's the stock today...

Up nearly 142% in 1 day.

Between the options activity and the 3C charts above, you can make the call. The real question is whether Mary Schapiro will be making any calls, doubtful.

Credit/risk Basket Update

There's still not much that's very exciting yet, here are the only harts in the Credit/Risk layout that have made any moves of any consequence.

 Yields which tend to act like a magnet for equities have continued dropping and hit a new local low this a.m.

High Yield Corporate Credit has been flat on the day, apparently waiting for something to happen.


Other then that, Italian 10-year BTP's are above the red line 7% level again (as a reminder this is the level that sent Greece, Ireland and Portugal all looking for bailouts as the yield on 10 year debt is seen as unsustainable, despite what Italy's Technocratic government has said today about not needing additional measures to reach their budgetary target.

On the Mar-Kozy Meeting

Lets face it, we've seen the play before, the meeting, the grand ideas and then an EU summit where they put as much lipstick as they can on the pig as nothing gets implemented, I think the market probably knew what to expect in most regards from this meeting except one, Greece and the next tranche of aid, which last week was said to be put on hold until March a day after the new Greek "Pap" sad if they don't get the money soon (sounded like he meant this month) that they would not be able to meet their debt obligations coming due around the same time-March.

So far the only interesting news that has come out of the meeting is a reinforcement of what was sad last week regarding the tranche,

It was leaders’ intention that no country leave the euro, Merkel said.

But she also warned that rapid progress must be made on finalizing a second rescue plan for Greece and called for the rapid implementation of a debt writedown for holders of Greek government debt.

Failure to finalize such a package would make it impossible to release Greece’s next round of aid in coming months, Merkel said, while also emphasizing that haircuts for Greek bondholders remain an “exceptional” case that won’t be repeated elsewhere in the euro zone.

Merkel-Sarkozy Set the Tone

The obvious fulcrum event in the market today is the Mer-Kozy meeting, which usually amounts to nothing more then a sugar high as even their best laid plans get nowhere in front of a full Euro-zone conference.

Overnight the Euro traded below $1.27 around 1.2666 before moving up on the Merkozy summit/meeting/waste of time. Currently the Euro has lost momentum and is around $1.2753.

Overnight the Euro hits new lows going back more then a year.

The meeting is addressing everything from closer monetary ties, a subject the UK has objected to without specific measures being included which are unlikely, to unemployment which is a huge issue for Sarkozy who faces a reelection bid in 4 months with French unemployment at 12 year highs. The problem of unemployment across the Euro-zone is being considered as harsh austerity measures have predictably caused a greater unemployment problem.

The Tobin Tax issue is also being discussed, which is a tax on financial transactions and this is the one the UK is resisting as the "City" in London (Financial district) would be hit hard by the tax. The UK position is, unless the tax is applied globally, the UK will Veto any EU ONLY version.

Sarkozy may try to move forward in initiating the tax in France regardless of the EU outcome.

An announcement is expected around 1:30 p.m.

China is set to look for 7% growth in 2012, a percentage lower (8%) that has been the standard for the last 7 years, we were right when we speculated there's big trouble in China upon seeing commodity prices underperform.

As for the US where many are thinking the new 2012 F_O_M_C_ doves that came in to voting rotation (9/10) will initiate a new round of QE shortly, may have seen a set back as the F_E_D_S Bullard has said they probably would not due to encouraging US labour conditions. QE talk was centered around the purchase of MBS, so the QE fans got another disappointment when Dudley said that the US taxpayer and Mortgage Bond investors should shoulder the burden of mortgage principal reductions. Interesting developments there.

Earnings season also kicks off in the US with Alcoa releasing after the bell.

Lastly back t Europe. the almost daily ECB deposit facility news is back with the ECB seeing a new all time high at $464 billion Euros. This is nearly all of the ECB's LTRO 3 year loan money that has come right bak to the ECB on a negative carry trade.

I wouldn't expect too much from the market or take anything too seriously until the conclusion of the Mer-Kozy meeting. Then I would pay close attention to details.

The January Effect and the market effect

Traders can be more superstitious then hockey players, but over the years the January effect has gained credibility-whether it is deserved or not is another conversation. The saying is, "As goes January, so goes the year". Some people use the first week of January, some use the month.

If we look at the gains for the first week of 2011 we come up with a gain of +1.10% for the week, this isn't really much of a move, we have often seen 1 day moves of 1% or more. For the month of January the gain was 2.26%, but that was only because of January 31st, take away the 31st and go to the 30th and the gain wasn't much different then the first week, +1.49%. So how did the year go? A loss of  1.12%, which is not adjusted for the value of the dollar during unprecedented QE/dollar devaluation.

How did we finish this week?  A gain of...... drum roll.....   .03%, that's right! It may not have felt that way, but this is why I encourage you to look at the bigger picture and not the daily fluctuations.

The important Russell 2000 closed the week at a loss of -.36%, the Dow, down -.29%. Only the NASDAQ 100 managed any kind of respectable, well any kind of gain, 1.45%. However the broad average of the NYSE index (a sample size that is roughly 20 times larger) ended the week down - .91%.

Seasonally, we are in the time of year that the market should be performing well. With all of the redemptions in mutual and hedge funds, there wasn't much sidelined cash waiting to flow back into the market. We saw unprecedented volatlity  in 2011 with the S&P-500 travelling 1234 points just from May 1 to December 1st, imagine what the range was for the year and after all of that movement we ended the year with a loss of 1.12%. THIS IS WHAT I MEAN WHEN I SAY THAT YOU ARE TRADING ONE OF THE MOST DIFFICULT MARKETS I HAVE EVER SEEN and traders who have been doing this since the 1950's agree. The market moves a lot but doesn't manage to put together any real moves or trends, it's something we haven't seen in a long time and some people have never seen it; it's something we have to adjust to.

In my opinion, with less Assets Under Management, the squeeze on funds to generate returns that normally would be found in the form of 1.5-3% of AUM in management fees, is going to be on, it is survival mode. This was evident in the end of year mass lay-offs on Wall Street. Hedge funds, regardless of their performance, make 1.5-3% of asset under management just in management fees, so a fund like John Paulson's flagship Advantage Plus fund, which lost 53% last year, lost more then half of their management fees. Who knows how much more the fund loss due to redemptions?

So what does this mean, volatility probably isn't going anywhere soon. I am a firm believer that the market will trend and my money is on down, but until then, I've been tinkering the last week with hit and run trades. This week the S&P returned +.03%, seeing this range bound market, which has been in effect for about 2 months now, I decided I'm going to take what the market offers and the BAC trades were great examples of how you can make money in even a flat market, it's better then sitting there watching every tick waiting for something to happen. The 30% and 57% 1 day returns (as well as a 5% and 10% return in 2 IWM trades) have me convinced that you can make money even in this environment and while my longer term positions are still in place, I'm not one for just sitting around when there's money to be made and I know several of you took the same trades and made out pretty well.

A lot will change in the market this year, the EU crisis will almost certainly get worse. The idea that the US economy can or has decoupled from the world is in my opinion is a self-deception. Who will the US export to? The US? We saw how the world financial system is one big spider web when the US housing crisis effected nearly every nation in the world, can we really expect that to be a one lane highway in which EU problems and Chinese problems won't have an impact on the US?

This is why it is important to be a lifelong student of the market, to adjust to the market. Look at how many examples we saw this week of traders being stopped out because they use technical analysis the exact same way it was used in 1940. Wall Street knows what traders will do for the simple reason that traders have not adapted or learned anything new. What traders are doing is the definition of insanity.

I've gotten a bit off track though, the point is January has started off with a fizzle not a bang. The much anticipated Santa Rally never came to town and the signs were there the whole time, see my Santa Claus Rally video posted 2 weeks ago.

In any case, I'm going to move model portfolio allocations to reflect an intermediate trend in which I'll use wider stops and have a longer term approach (when I say longer term, I actually mean a bit shorter then what I would normally consider long term-maybe a month or two time horizon) and a much shorter approach that will include trades like the BAC trades as well as trades that are swing oriented, from several days to a couple of weeks. I think it's important for traders to hit singles and doubles and keep confidence up with some winning trades that add to the pot. Investing should be fun as well as rewarding, most of us are here because we love the markets despite what they've become. Just sitting and waiting for longer term positions to take off is not healthy for a trader's mental state. What tends to happen is traders look at every single tick and every day and put too much emphasis on noise instead of seeing the bigger picture those trades are meant to represent.

Taking the short term trade opportunities is good for morale, it's good for keeping you focussed on the market and making observations and learning, it's good to expand your tool box and keep you on your toes. The bottom line is the market is changing and we need to adapt to those changes. I'm all ears if you have ideas you want to share, the diversity of our members is a huge asset.

I have some ideas that fall along the lines of what I have outlined above and will be back testing some of these strategies this weekend so keep your eyes open for some posts and if you have ideas you want me to back test, just shoot me an email.

Have a great weekend!

Holding BAC Puts

So far I have about a 5% 1-day profit on BAC, but this daily chart looks ominous.

The 2-day candlestick formation is about as perfect an example as you will ever see of a bearish Harami reversal pattern, of what the Japanese call "Mother with baby', in western culture it's called an inside day, whatever you want to call it, it's a bearish formation so being the Puts have a March expiration, I decided to hold them. As a reminder, in the last week, I've had 2 other BAC trades using January Puts, the first gained almost 30% in less then a day and the second 57% in a day.

The fundamental situation with BAC is pretty bleak as well.

UNG starting to show a heartbeat...

Yesterday looks like some form of capitulation and in general, the green volume bars are rising. The lateral movement this week is an improvement over the down trend. It's possible this was sold for tax loss and prospectus reasons and bought back after the year end.