Dalas F_E_D President and Hawk, Fisher: Taper at the Earliest Opportunity

NEW YORK--Federal Reserve Bank of Dallas President Richard Fisher said Monday that it is time for the central bank to begin winding down its easy-money policies and give a clear time table for how that process will play out.

"The current program of purchasing $85 billion per month in U.S. Treasuries and mortgage-backed securities comes at a cost that far exceeds its purported benefits," Mr. Fisher said. "We at the Fed should begin tapering back our bond purchases at the earliest opportunity."

"To enable the markets to digest this change of course with minimal disruption, we should do so within the context of a clearly articulated, well-defined calendar for reducing purchases on a steady path to zero," he said.

Mr. Fisher said that when the Fed does begin to cut its bond purchases, it should make it clear the reductions will continue as long as there is no "serious economic crisis" to argue for a different policy path. The official said slower bond purchases don't argue for raising short-term rates any time soon. He said "we may wish to keep overnight rates low for a prolonged period, depending on economic developments."

And that's for the bond market.

Fisher speaks again at 6:30, the market's strange lack of movement reminds me of my own admonition, "Be careful of a dull market", especially in a situation like this.

KEEP AN EYE ON MCP

It looks like it's prepping to make a move

Market Update 2

At 2:18 something happened the market didn't like much...

 You can see it in the price candle on this QQQ 1 min chart (larger candle with the open at the high and close at the low on volume), however you can see it in just about every average, some more than this.

TICK responded the same at the exact same time with a -1000 hit on a 1 min bar, it felt like a knee-jerk reaction to something passing.

 The Q's seemed to have already been starting to lead negative just before then.

The larger 3 min QQQ chart was definitely leading lower, but not tied to that moment.

I wondered how HYG would respond today, I have my answer...

I'm trying not to draw on the charts too much so they are not distracting.

The only thing I can imagine at the moment is Richard Fisher started speaking at 2:15, I imagine he started with prepared remarks and there may have been something the market didn't like, I'll check in to what he's said thus far.

I'll also check a few other indications, leading, and some sub industry groups.

Market Update #1

If I ONLY looked at the NYSE TICK chart for today, my guess would be that the daily candle would be a stalemate or a Doji which is an opening and current/closing price at almost the exact same level, it's an indecision candle and while that may not sound bearish, when you have a day like Friday, you want to see follow through not indecision as indecision opens the door to reversals, this Evening Start Dojis, Harami's, etc. all being reversal patterns as well as the bullish versions too.

 This is the NYSE TICK index, all NYSE advancing issue less declining issues. Readings that range in the +/- 750 area are very neutral, so looking at this alone, I'd guess there's no trend other than lateral as TICK itself shows no trend other than lateral.

A look at the SPY...

A Textbook, perfectly formed Doji, actually an "Evening Doji Star", which is the second part of a 3-candle downside reversal pattern.

The reason why?

Next Tuesday and Wednesday the F_O_M_C meets with a policy decision coming Wednesday December 18th at 2 p.m., that means today is the last day before the 1 week "Blackout " period for F_E_D speakers, thus today we have 3 different F_E_D speakers at 4 events as the market has a last chance to try to divine what the F_O_M_C might do through their speaches.

Here's today's schedule for F_E_D speakers.

Considering this is the scenario, it's not surprising no one is making any big moves before they hear what is said.

Richmond F_E_D President Lacker already spoke and from what I can see, he didn't have anything surprising to say and there has been no market reaction. I think one of the highlights of his speech was, "There's nothing the F_E_D can do to boost growth".

From what I've seen of St. Louis F_E_D President, James Bullard, his most exciting comments (also with little to no market reaction) have been, "A small taper of QE in December might recognize the improvement in the Labor market, while giving the F_E_D an opportunity to monitor inflation in early 2014"

Other speakers have not started yet,

However I think there's something to Bullard's statement that sums up the F_E_D's scenario uncomfortably between a rock and a hard place.

Recall the Taper talk back in May/June and the Bond market lifted yields 1% on the benchmark, it hurt housing and various other industries that are interest rate sensitive, THEN THE F_E_D DID AN ABOUT FACE AND COMPLETELY SHUT-UP RE: QE TAPER.

Since then, Bernanke himself has gone through extraordinary pains to pullback original F_E_D guidance that an interest rate hike would follow about 6 months after QE ends, this is what sent the Yields spiking when hearing that half of the participants wanted to end QE3 by the end of 2013, several wanted to start at that meeting. The bond market didn't like that and they (not the F_E_D) took rates up 100 basis points and hurt housing and other areas.

You may recall I kept asking, "What is the F_E_D so Afraid Of?" That's the answer, they are afraid the bond vigilantes will do the same on a QE taper thinking a rate hike is soon to follow which they are more concerned about that tapering itself.

Bullard's comments hint at a small taper in December that allows the F_E_D to see how the market responds, but not with regard to inflation, with regard to yields. It makes perfect sense.

In any case, this explains (for me) why the market is in a holding pattern, I still haven't forgotten about Friday's overwhelming Dominant Price/Volume relationship which would normally see the next day (today) close down.

VIX Charts

You already know about what I think , timing wise taken with record margin debt (leverage) and record investor net worth as well as investor sentiment (Investor Intelligence) with "percentage bearish" levels lower than any reading on the chart, presumably since they've kept records back to 1990, all of this indicates the most sensible contrarian trade of the last nearly 24 years (maybe more) and that's before we even look at the VIX.

Remember earlier this year when the VIX just kept hitting new lows, first a new 1 year low, then 2 year low and then lowest VIX reading since 2007 and then it just stopped, it's at this point where VXX also can be seen refusing to make lower lows, it was apparent then that investors were seeking the safety of VIX, but still not willing to give up on their record bullishness. This brings Warren Buffet's admonition, "When there's blood in the street's it's time to buy", which is just a way to say when emotions have reached an extreme, things are usually on the tipping point of change, the reverse would be true.

 The VIX Bollinger Band, I rarely use BB's except on the VIX, there they seem to be especially useful and I'm sure it's because the VIX is an emotional gauge, even called "The Fear Gauge" A Bollinger Band Squeeze like this I have found to be very effective over the years, the only other indicator I like as much is my Custom, DeMark inspired Buy/Sell indicator which has been right on the VIX on each of the 3 signals it gave this year.

As you know I had said well before the VIX started to breakout of the BB' Squeeze, in fact while price was still under the 20-day moving average on the chart, that after the initial breakout price tends to hang around and pullback to the 20-day then make it's move to the upside, I even posted a chart showing every VIX breakout on the chart (over a half dozen) all pulling back after the initial breakout to the 20-bar m.a. before rocketing higher.

Friday's touch of the 20-day was unexpected, but as you may recall mid last week was a "foggy market" and I suspected something was up with HYG being held together and VXX being suppressed in to Friday.

Today's candlestick is much more bullish, price is in the area, it's a perfect Doji star, perfect balance of indecision which is where we find reversals of trends.

 The Tend 3C showing mostly confirmation, but I marked some smaller positive and negative divergences, the current leading positive is clearly the largest divergence on the chart.

 Plus the actual VIX futures (unlike spot VIX, this is the tradable asset) with a never before seen 4-hour leading positive divegrence put together in what would likely be record time.

Remember the VIX trades nearly perfectly opposite the market.

The 3 min UVXY chart, a very strong positive until last week when it was held up as the red box.

Compare to the inverse of VXX/UVXY, SVXY...

 The 4th is the key date and the current divergence after the 5th.

5 min VXX and the congestion mentioned last week holding HYG and holding back VXX.

Compare to SVXY 5 min.

 The VXX's leading positive in November is the exact same as SVXY's leading negative in November.

 UVXY intermediate/strong 15 min signal leading positive...

compared to SVXY...

SVXY is even worse as UVXY is at least in line in October (green arrow) while SVXY is relative negative, the current divergences are opposite each other as well on a strong  timeframe.

UVXY (just because I can't scale VXX this far out (although this is just the 2x leveraged version of VXX and most think it tracks better), this is a huge leading positive divergence.

Compared to the inverse, SVXY.

These are nearly like the folded paper "Butterfly" images, UVXY slightly negative at the 7th, SVXY slightly positiver at the 7th and UVXY leading positive around the 25th with SVXY leading negative and the current signals as well.

As I said, I'd have a very hard time now not having a position in a VIX long product as Fear moves the market faster than anything, just look at the 4 stages from a bull to a beat market and see how much faster a bear market falls vs a bull market rising. Fear is stronger than greed

VXX / UVXY Long

I'm going to get some more charts of VIX related assets up, but RIGHT NOW, I'd have a VERY hard time not having some long exposure (even if only speculative) as Fear is the fastest market moving emotion.

It's not just about the VIX doing exactly what was expected and the expectations having been laid out days (even a week) before anything remotely close to their fulfillment happened, it's the ongoing positive VXX / UVXY signals and the negative signals in the inverse assets like SVXY.

I was saying earlier a dreadful candle for market bulls today would be a bearish engulfing of Friday's SPX candle, there are numerous other downside reversal candles that all need a gap up, and off the top of y head only one that doesn't, a bearish Harami.

Furthermore, the Dominance of the Price/Volume relationship on Friday was huge and we haven't seen even reasonable dominance in any one of the 4 possibilities in a week or so, but Friday something like 70% dominance in almost every average and complete dominance in every average and that being the most bearish relationship of Price Up / Volume Down, for those of you who have been following this rare metric over the years, you know the next day close is typically down after a P/V dominance like that, it's like a 1-day overbought signal. Taken altogether, I'd have a very hard time not having some exposure, even though I'm more skeptical of these assets than ever. However, I'm not looking for a month long trend, but I think the way these can move and the way we are set up, they are a very intriguing asset.

Charts coming.

BIDU Trade Idea Follow Up

I look at the BIDU chart today and just want to ask, "Isn't Wall Street and predictable?", but it's really Technical Traders that are predictable and Wall St. just uses that against them.

In any case, last week on Friday December 6th I wrote about a "Trade Idea: BIDU (Short)"

This was the exact chart and commentary following it from the post above....

"This is the same ascending triangle, first month Technical traders learn these triangles and know an ascending triangle is expected to breakout to the upside and start a new leg higher, so long as we know there's distribution already present in BIDU which we know from out initial entry, we know the chances of an upside breakout being a false or failed breakout are very high, but the breakout provides us with a short entry that is a better price, much less risk and much better timing as head fake moves usually come right before a change in trend."

And wouldn't you just know it, the move we are looking for for a BIDU entry or add-to as it was a phased in trade idea originally with 1/3 entered and 2/3rds remaining to be filled, as discussed last Friday, this is the actual chart and commentary in the post linked above....

"My first choice entry is "A", a breakout to the upside above the $170.78 level, the breakout would usually be quite strong, it has to attract the attention of bulls and convince them that this is a strong move, they are selling a lie, so they must really make traders believe so don't just expect a move to $178.85.

Once we confirm distribution in to a breakout, we know the probabilities are very high it will be a failed breakout and "From failed moves, come fast reversals", this is the hardest to short emotionally, but it is the best price, the least risk and best timing so holding your nose and jumping is actually rational even though emotionally it is hard to short a strong looking breakout."

BIDU today, just 1-day after the "Trade alert/set-up"....

 My EXACT "Option A" preferred set up... "My first choice entry is "A", a breakout to the upside above the $170.78 level, the breakout would usually be quite strong, it has to attract the attention of bulls and convince them that this is a strong move, they are selling a lie"

As I said in the initial post, since there's already significant distribution there the chances of such a move being a false breakout are already very high just like our last textbook short in BIDU, but I always want to confirm. Even though it's probably a little early, we do have initial signals.

 The initial 1 min chart, the fastest to respond is negative.

An intraday look at the same chart.

And the initial migration from the 1 min chart to the 2 min chart, also note the little dip accumulated just before the breakout.

From here I just want to keep watching these charts until I think BIDU is at a position where the divergence is so strong that it's ready to reverse and then enter the rest of the trade so the timing is as close as possible to get the best entry and to have the least amount of opportunity cost.

This is the exact, preferred set up posted Friday. As I said and even demonstrated Friday, that ascending triangle wasn't naturally occurring.

MCP Trade / Follow Up

MCP is a current long, even though I don't like chasing assets, MCP's +2.5% gain today is still below the momentum area where it would really be chasing it above the $4.95 area. Friday MCP was put out as a long idea. There was also this update for MCP Friday and this update Thursday and this Trade alert Thursday.

Friday I felt very strongly that the MCP move was a stop-run/head fake move, today we are up 1.25-2.5%. Right now there's a bit of a pullback which I like for an entry.

Here are the charts and expectations near term.

 This probable X-Over daily screen was one aspect, the first pull back after the initial long x-over is to the 10-day (yellow), but we don't have a full long signal, so being there isn't that much space to pullback, MCP holding at the 22-day is fine.

 This is the apparent stop-run move, we see head fake moves just before reversals.

 3C remained very positive on the stop run as you can see.

Even here we have the 4 cycles, to the left stage 2 mark up, then stage 3 top, stage 4 decline which is the pullback which turns in to a stage 1 base with a head fake move just before an upside reversal, the same as you'd see on a long term daily chart's base. This is the fractal nature of cycles in the market.

I believe the stop run hit around the $4.95 area means upside momentum is likely as price crosses back above $4.95, as long as MCP is below, I think it makes for a reasonable entry long.

A.M. Observations

A quick look at futures and its clear that JPY carry crosses didn't lift higher overnight as per the norm, often (but less and less so) cattying futures with them.

There was some bad economic news on just about every continent overnight, but the one that stands out is a former BOJ member and current Head of Rates and Currency Research for Japan says the soaring USD/JPY days are done, the BOJ can't loosen enough next year to recreate the rise seen this year, also that USD/JPY should head back to $100 and the JPY itself will likely not be in free-fall anymore either.

EUR/JPY vs ES (purple) overnight (yellow)

This didn't seem to help the JPY crosses, however somewhat strangely...

A closer view seems to show ES leading the EUR/JPY.

In any case, as you know from Friday's wrap, I feel something strange was set up 3-4 days in advance of Friday, leaving HYG credit looking like this in to a gap up.

HYG selling off Friday on a gap, can't wait to see what it does today.


I think with Friday's close, for any truly meaningful bearish candle we needed to start with a gap up this morning (Evening Star Reversal, Hanging Man, Bearish Engulfing, Dark Cloud Cover, etc-all require a gap up), some of those would be absolutely destructive on the close today after Friday.

Also weighing heavy on my mind is the Dominant P/V relationship Friday, the most bearish and one that typically sees a red day the next trading day.

It could be a very interesting close after Friday's candle.

The Ghost of 1929

We have a lot of members and I get sent a lot of articles, charts, and many other interesting data tid-bits.

One thing that I've received many times in the last week or two is this chart of the Dow-30 from the 2012 period to present, an area I've noticed to have EXTREME signals in many fashions, not just 3C, but market breadth being one of the most credible as well as market volume and many other indications,  overlaid on the Dow 30 of 1928 through 1929.

The chart looks like this, I'm sure most of you have seen it.

I think you can sort out what is what. There's an "Dooms-day" date of January 2014.

Let me state categorically that I believe history, as Mark Twain once said, "Rhythms", but doesn't repeat exactly.

I also believe that you can justify any point of view you want to take about the market if you are goal-seeking your data. There's so much data over more than a century of market charts that you can make anything fit the way you want with a little stretching or squeezing.

This is one of the greatest dangers in market and stock analysis, I suppose you could call it a "Cognitive Bias". One of the most difficult things in trading is learning and continually evolving to weed out subconscious biases and its for this reason I'm a very strong believer in keeping a journal about trading rather than a trading journal, something that is just like an every day journal that addressees emotions at the moment, circumstances at the moment, it's much different than what most people would think of as a trading journal, it's not a ledger.

For this reason and many others, I typically am dismissive of charts like the one above because I see the circumstances of today's situation being much different than 1929, for example, the economic factors, technology, global trade, the shape global markets are in, the way information moves now, things like derivatives, etc.

However after a little further investigation as I already knew the chart came from the well respected Tom McClellan, I did not know he was made aware of it by the equally well respected Tom DeMark.

Still, I viewed the chart pretty much as an interesting side note, I certainly wouldn't build any analysis around it, just the same as I find the Hindenburg Omens that were once so successful (and still have a good track record) as interesting and worthy of notation as I mentioned Friday, but again, I wouldn't make decisions based on it.

In reading more about past bouts of Central Bank "extraordinary accommodation", I read a bit about the start of Open Market Operations, I read this history directly on the Federal Reserve's own website! What I found was a bit CHILLING.

The F_E_D engages in Open Market Operations for the first time....
After World War 1 in 1923 a severe recession gripped the United States, Benjamin Strong who was the F_E_D chairman from 1914 until his death in 1928 had "realized" or "Theorized" (depending on your perspective) that by buying large quantities of US Bonds could the F_E_D could influence and generate credit availability in the banking system. Strong's Open Market Operations (just missing the Permanent, otherwise you get POMO=Permanent Open Market Operations) which consisted of  LARGE purchases of government securities, just like today's QE, were considered "AGGRESSIVE" policy to stem the 1923 depression.

It was during the 1920's that the F_E_D began using Open Market Operations as a Policy Tool (sound familiar?) Strong was also known for promoting relations and presumably policy with other Central Banks, the Bank of England being a notable example (again, much like today). Strong died in 1928.

What came next directly from the F_E_D's own site and in their words...

"During the 1920s, Virginia Representative Carter Glass warned that stock market speculation would lead to dire consequences. In October 1929, his predictions seemed to be realized when the stock market crashed, and the nation fell into the worst depression in its history. From 1930 to 1933, nearly 10,000 banks failed"

Much like the 1920's, "The Roaring 20's", the F_E_D used extraordinary accommodation to buy large quantities of Government Bonds, Just like the "Roaring 20's" which is a characterization of the decade defined as follows...

"The Roaring Twenties is a term sometimes used to refer to the 1920s in the United States, Canada, and the United Kingdom, characterizing the decade's distinctive cultural edge in New York City, Chicago, Paris, Berlin, London, and many other major cities during a period of sustained economic prosperity."

While the F_E_D is using the same Open Market Operations during the 1920's as they are using right now and have been since late 2008, better known to most of us as QE, the economy took off (sadly unlike ours now), but there were dire warnings regarding the excesses and speculation in the stock market. Strong died before he could see the end result of his Open Market Operations.

It's stunning to me that a historian of F_E_D policy like Bernanke who is more an academic than an experienced economist, more so than probably any F_E_D chair in recent history, would know what happened in the 1920's and immediately panic in 2008 and make that his hail Mary, go to ground game. Furthermore, after seeing the ineffectiveness of QE (after all, if QE were effective, why are we on the 3rd iteration and the 5th version since late 2008?) why would he push more and more knowing the ONLY "Wealth Effect" achieved is for the TBTF banks as the disparity between the have and have-nots has grown exponentially with some believing the middle class will never recover from the decimation of it over the last 5 years.

While it doesn't matter for analytical purposes, it has always been my feeling that QE always has been exactly for that reason, bailouts of the banks in 2008 were HUGELY UNPOPULAR, however QE is a stealthy mode of wealth transmission to the very same banks while having the most destructive effect on the most responsible people, the middle class "Savers" as their savings have been destroyed by QE and dollar debasement.

Unlike the 1920's, the present iteration of POMO / QE has not created any real Credit growth, just the opposite in fact as the money chases higher and higher yields. There are many structural shortcomings in the market that make a decline truly scary and it is one period of market history that I will not sit out  as I have always believed, it will have unparalleled opportunities for those who adjust and ride the wave, trading the market. 

However with the evidence of the 1920's and QE at least having done what it was meant to do for the better part of a decade, even though it ended badly, we now have something much more maddeningly dangerous and far less effective if it can be said to be effective at all, I believe it will be seen in history as the most destructive F_E_D policy ever witnessed.

It was in this research that I came to find the reason for the "January 2014" target date on this Dow chart...

The answer was not as simple minded as I had imagined, in fact I'll reproduce in its entirety the article that made me understand this date as "The Best Case Scenario" which is from the weekly update from Hussman Funds which is a Fund Management company. The Optimistic view of January 2014 doesn't come from how many days we are away when the two charts are overlaid, it comes from a "Sornette log-periodic bubble".

Before I reproduce the article, I've been an avid student of market bubbles right back to the Dutch Tulip Craze centuries ago and every one since. I've shown this before, but it would seem to me that as Glass warned in the 1920's, it was obvious to many (and likely many that we might call "Smart Money " today) that this wasn't going to end well.

This is a view of the Dow-30 with 3C chart from 1929 (I have long known about this)...

 Remember the recession was in 1923 in which the F_E_D responded with Large Scale Asset Purchases.

However by 1924, there's only one hiccup through 1928 in 1926, The Roaring 20's. The green arrow represents 3C/price trend confirmation as 3C makes higher highs with price.

Then on to 1929, something changes...

 From confirmation to a clear negative 3C divegrence in to the top just before the crash. For some context about the nature of even bear markets, the area at the white arrow is a 6 month rally (bear market rally) that gained +45%, 3C called a negative there too, but few probably realize the emotional hell this market was. There were at least 5 such bear market rallies during the decline, each successively less powerful.

#1 is 1923, #2, the Roaring 20's, #4 is the 6 month counter trend rally after the crash that made +45% and #5 is where 3C calls a bottom.

Here it is back on the daily chart, 1932/1933.

Now to present...

 The 2007 top, from confirmation to a negative divegrence.

 After the 2009 low, confirmation with a few hiccups like the Roaring 20's, most of these were at the end and/or in between QE programs. 2013 saw 3C getting more extreme that I've seen historically, many finds have come out and said plainly they have been net sellers of everything not nailed down for the last 15 months and the 10Q's / 10K's prove it or Dan Loeb returning about 10% of his client's money .

Now the entire picture, #1 is almost a -20% market decline round late July/early August 2011, #2 is where things looked pretty extreme to me in 3C terms, #3 is the most severe divergence I've seen for the entirety of the Dow's history since 1916.

This is the link to the Huffman Funds Weekly Report which will better explain why the price on this chart is called a "Best Case Scenario according to a "Sornette Log-Periodic Bubble".

***None of this changes of negates any of my analysis, I just believe it gives so extra credibility to a popular chart I had pretty much dismissed. I think there are some other very worthy data points in the article,  my thing is to follow the clues on the charts and let the market tell me. However that doesn't make the information in the article any less meaningful.