The Weak Ahead?

The G-20 meeting produced in practical terms, nothing. Even deals that were supposed to be done before the meeting started, like the the South Korean trade deal, were a total dud. Obama went home empty handed and the G-20 issued a farce statement that in practical terms said, “we accomplished nothing but look forward to working together to accomplish nothing in the near future”. The Fed's QE2 probably didn't help the US side of negotiations as countries all around the world expressed their anger in sometimes demeaning terms toward the Fed's action before the meeting even started. So what does this mean in practical terms? Fundamentals aren't my thing, but understanding what is going on in the world is something that even technicians need to pay attention to. If the G-20 can't talk and negotiate at a time like this, the time for talk may be over. Some of the things I thought were possible unintended consequences of QE2 included currency manipulation/retaliation, currency wars and possibly protectionism or trade wars. The bottom line is the path toward progress has detoured if it ever really began. Europe is in the spotlight, emerging economies are preparing for inflows they don't want and China, as they did on Friday, may turn the markets on their heads with new monetary rules and provisions.

The US macro-economic releases of late, whether they can be trusted or more cynically can simply be expected to be revised down to something worse in the weeks ahead, have come in fairly strong, especially compared to what's coming out of Europe; it doesn't seem to bode to well for a stronger Euro vs the Dollar, despite a solid week of POMO. In fact the recent stronger results taken with the “Walmart Inflation Index” (a secret survey showing inflation is here) that shows inflation (taken from a shopping cart of the usual stuff Americans would buy at Walmart) inflation is headed to 4% a year from now. The Fed, in it's “Dual Mandate” (sorry, I almost typed a LOL as their mandate may be dual but their actions suggest it's a bit more then that) said the second round of Quantitative Easing was needed to boost inflation to their target rate of 2%. So if the Walmart Index is on the path toward 4% on it's own, then either the Fed's reason for QE2 is off base or they may create an inflationary environment that they won't be able to get back in the bottle. Now do you understand what I mean when I say this market at any time is a press conference away from an avalanche?

And then there's the wild card, Ron Paul who will become the Chairman of the House Sub-committee on Monetary Policy. The committee that has dealt with commemorative coins is about to get some real teeth and Ron Paul thinks American are ready to listen. Paul is about to be a major thorn in the side of Bernanke as he's like to abolish the Fed. That may not happen any time soon, but auditing the Fed is a more reasonable goal that he may very well accomplish. Again, tides are turning.

“While the Fed policymakers will try to resist pressure from Paul, they won't be able to ignore it, said John Silvia, chief economist for Wells Fargo Securities. And he said there's a potential for that pressure to influence Fed policy.”

Back to this week's POMO, traders must be a little nervous on the bull side-go figure, 5 days straight of POMO and the bulls are worried? Well thus far it's for good cause with the first operation of QE2 on Friday with a bullish accepted to submitted ratio lead to a loss of 1.18% on the S&P and on increasing volume and a loss of 1.68% on the Russell 2k, nearly the same on the NASDAQ 100, with the Dow-30 fairing the best at -.80%. This week should clear some of that up with 5 straight days of operations, but it wasn't a good start. Are they taking away the “Punch Bowl”?

To the charts...

Remember that article, “What if the market turned and nobody noticed?”. It's simply all too easy to create the illusion of healthy stock markets. If you dig a little though, not even very deep, you can see the underlying trends developing and new ones quickly emerging that argue against the pump of cash into a few select, heavily weighted stocks and select ETFs. It's called looking at market breadth and here's the most current look.

Starting with the New High/New Low Indexes (This is the number of stocks for a particular time period making new highs, minus the number of stocks for the same time period making new lows. For a healthy rally, the index should rise with the rally). The index is in green, the NYSE composite is in red.

The 4 week New High/ New Low Index

There are 3 white arrows showing where the index was at 3 recent rally tops. You can see the current rally is showing the lowest reading of all, meaning fewer stocks in the 4 week period are making new highs and more are making new lows then previous readings. It's not good.

The 13 week New High/ New Low Index

 We see the same thing on the 13 week index and this is a significant new low to be made.

The 26 week New High/ New Low Index

 The 26 week was nearly cut in half in just the last 4 days.

The Cumulative Volume Index.

This is the 2007/2008 period when the Bull market topped out. Look at the  NYSE making new highs in October, and then look at the path of volume (red) in a negative divergence. Again, money fleeing the market before the crash.

The Advance Decline Line (advancing issues minus declining issues-a healthy market should see the A/D line rise with prices)

The NASDAQ Composite (all NASDAQ stocks) A/D Line

For whatever reason, the NASDAQ looks like one of the worst, along with the benchmark Russell 2000 below. Clearly there's a negative divergence between price of the composite in red and the A/D line in green even though the Composite is higher then it was in April. 

Again, the Russell 2000 (which is a great benchmark because of the diversity and number of stocks in the average) is showing a bad negative divergence between the A/D line and price.

Stocks Above their moving averages. 

Here we see the % of stocks 1 channel above their moving averages, meaning they are doing well. You can see at the start of October that % was 75.5%, now as prices are even higher, you'd expect to see more stocks above their moving average, not so. The % has been nearly halved at nearly 38% as the market is higher. 

 Here we have the % of stocks trading 1 channel above their long term 200 day moving average. In April it was 76%, now at higher prices it's dropped to 57.7%.

 Stocks trading 2 channels above their 200 day moving average. This % has gone from 43+% to less then 26% in 5 days!

Stocks trading above their 40 day moving average (no standard deviations above, just above the 40 day average). You can see what past negative divergences have done to rallies at the top, now we see another dramatic negative divergence.

 Now the % of stocks trading below their moving averages. In a rally you want to see this % move down as more stocks participate in the rally and cross above their moving averages.

 % of stocks trading 1 channel below their 40 day moving average.  From September through present this % has risen from 6% to 22.5%-nearly 4x higher.

 % of stocks trading 2 channels (or 2 standard deviations) below their 40 day moving average. This percentage has gone from just over 1% to over 12 % in 2 months.




3C Daily charts for the averages and underlying ETF's-All are in negative divergences.

 The DIA 



 The Dow-30

 The NADAQ 100

 The QQQQ

 The S&P 500

The SPY


Other 3C charts...

 The U.S. Dollar Index in a positive leading divergence

 UUP also in a positive leading divergence

XLF in a negative divergence, even as it traded in a lateral channel.




 Here is USO (oil) recent trend change...

USO daily chart is confirming the uptrend, but....

The recent hourly chart is showing negative divergences as the uptrend has progressed.

The 30 min chart shows the recent breakdown in USO

As does the 10 min chart. It looks as if we may be seeing the start of a change in trend for USO.




Finally, GLD and SLV...

 I've been seeing recent negative divergences in GLD, here you can see one at the end of the day Friday

At the same time on Friday, SLV has looked much stronger.


Last on my update... When I started writing this update, the dollar was trading down as the FX markets are now open, when I looked just now, the dollar is trading up against the Euro. Remember that the dollar has an inverse correlation with most asset classes, most commodities, PM's, and stocks. Her is what the FX EUR/USD market looks like as of this moment, although much can change overnight.

This is a 5-min chart, the red arrow is where the FX trading week began.

So tomorrow is POMO and the results of that will be probably the most important thing going on this week in the market. Time to see if the Fed s truly ready to "Take away the punchbowl".

Have a great week. Ideas will be out as the market progresses.

Ireland vs. QE2 part 2

The Celtic Tiger no more...

It seems the government majority in Ireland, Fianna Fail has finally failed with their slim majority and unpopular austerity measures. There's now open talk of Ireland in talks with the EU for a financial bailout around $60-$80 billion Euros. In Thursday night's recap here at WOWS, I wrote, the “final” government estimates were around $50 billion dollars to save the Irish banks alone and some doubted that was enough. For perspective that turned out to be about $50,000 Euros per Irish household.

Ireland reminds me very much of the US situation a few years ago, “buy now and pay later” with a total collapse in real estate of at least 50% -60% in value; the worst of any developed country. Much like in America, the banks initially came in with low-ball estimates of what they needed to survive. As you'll see in comments below, the nationalized Anglo-Irish Bank was said by the finance minister to need a bailout of $4 billion Euros and much like the US, that number began to rise and now sits at $30 Billion Euros.

In terms of deficit to GDP, including the bad loans at Irish banks their deficit is an astounding 32% of GDP. They hope to get that down to 3% by 2014. The problem facing the majority government, other then deep mistrust and a slim, unpopular, majority is that they need to make deep cuts and raise taxes. They are expected to suffer greatly in upcoming parliamentary elections, but the opposition government has no credibility either. As you'll see by some of the comments below from regular Irish people, it seems the Irish are hoping the EU or IMF will take over the economy; they have lost all faith in their government.

Investors fear that these budget cuts will worsen the Irish economy in the form of falling tax revenues and higher benefit payments. The yields on Irish Bonds are not sustainable or realistic, in other words the interest for borrowing using bonds is simply too high a price to pay for Ireland to sell debt.

The market's fear is that Ireland is just the start as the periphery of the EU once again meets that nasty word in the EU, “Contagion”. If the EU is not already experiencing a double dip recession, it seems very likely that they will be soon, again, that is if they are not already there. So watch the EURO, it's likely to trade down, the dollar up and we know this has a negative impact on everything from commodities, gold, silver and especially US equities. This is why I wrote the article about “Ireland vs. QE2”.

Here's a map of EU countries debt as a % of GDP.

HERE'S A LINK FOR THE INTERACTIVE MAP

The bottom line...

I'll be providing a more comprehensive outlook of the market Sunday, but for now; Friday we saw a big POMO operation in essence, due the exact opposite of what was expected. I've been saying to watch for any differences between this operation and the last, I was thinking "subtle", but there was nothing subtle about Friday's market performance.

One of three things is influencing the market in my mind at this time or maybe all 3. The first is that this was a one off deal and the market was simply too spooked by news coming out of the Eurozone regarding Ireland and "Contagion". The second would be that the words of Janet Yellin's Columbus Day speech were to be take seriously and they were not. She quotes a former Fed chairman, William McChesney Martin who was the longest serving Fed chairman ever from 1951 to 1970 and under 5 presidents, "the Fed’s job was to take away the punch bowl when everyone was having a good time." Thus my warning to not assume QE2 would be the same as past operations. The third and last reason is that the market makes the most money by making the most amount of people wrong at any one time. With everyone thinking that easy money was simply to front run the Fed' POMO days, investors and traders have been well trained or indoctrinated with a theory that had served them well, as such, humans have a very difficult time letting go of a notion that has made them money. This is part of the reason so many investors crash and burn after a bull market, they can't accept that a bear market has taken hold, they refuse to accept it until they finally capitulate. 

There's always two sides of the story, and then the grayish truth in the middle. I always like to hear directly from the people of the country as they embody what everyday life is like, they are feet on the ground and usually closer to the truth of the matter.

What the Irish people are saying....

"This is really bad news. Why should the Irish taxpayer have to bail out reckless private banks to compensate bond holders who were paid to take risk? Ireland has been ruined by bad government and greed and this is the last straw." John O'Brien, Limerick

"Amazingly the government and the media elites here are still saying that we have to make massive cuts to sate the markets. Yet everyone outside of Ireland is saying that the cuts are going to worsen our economy. Frankly this government needs to be brought down by any means necessary to save the economy." Lorcan Myles, County Wexf

"Even the dogs on the street know the bailout is coming. The 7 December budget should be cancelled and the IMF should come to town ASAP. Irish people are keeping their heads in the sand a bit over this. Our finance minister is like Comical Ali saying everything is OK, while the markets laugh at Ireland. 20% of houses lie empty, while crime and drug abuse is sky high. The government will be voted out eventually, but the opposition is not credible. There are at least 10 years of pain to come." Gavin, Dublin

"Nobody here in Ireland is surprised by this. Our government party, Fianna Fail, has finally bust the country. We have to radically change things here to get rid of the cronyism and corruption. All this is the result of trying to save the banking and construction sectors. Bondholders will get away scot-free and the taxpayer will end up footing the bill. Meanwhile, current government ministers and TD's (MP's) will get to retire on nice pensions." Joseph, Skerries

"I hope this is true, and that it is an end to the lies the government has been telling the people here for the last two years. The bailout of the now nationalised Anglo-Irish bank was said to cost 4bn euros by the finance minister at first, and each few months the estimated costs have been rising and rising. It's now said to cost 30bn, and the other two main banks will probably cost a similar amount." Nick, Cork

Update on the Email Updates

Ok, I believe this is a fix for the emails, quite a few private sites have been affected, so it has been a problem on the Google side, but this hopefully solves it.

If you get this email, maybe a few of you can can send a response saying you have received this update as you used to. If you see this update and did not get it in your email, please email me so I can double check that you are on the list properly and get you squared away.

Thank you for your patience with this problem.

Brandt

The Market and the Currency Market

One of the last posts I showed you what appeared to be 3C accumulation on a 5 min chart via a leading positive divergence. Compare these charts and watch  1 p.m.  on all 3

 1 min EUR/USD chart

 5 min. 3C chart of the SPY

5 min SPY chart

It seems to me like POMO thus far, has had no positive effect on the market today. The afternoon rise in stocks seems to be purely correlated with a regular bounce in the EUR/USD chart. This would be a significant change in character for a POMO day.

A New Game?

Like I keep saying, watch how this QE2 goes down, it may be vastly different then the last operation as so many traders have been brainwashed into thinking they simply need to front run the POMO, some of them probably got crushed today doing that.

The 1 minute charts are showing either confirmation or they are slightly out of line, but they are not showing the same strong positive divergences, however the 5 min charts look very positive with leading positive divergences.

 DIA  5 min leading divergence

 QQQQ 5 min leading positive divergence

SPY 5 min leading positive divergence.

NEW TRADE LIST IS UP

HERE ARE A FEW TRADES YOU MIGHT WANT TO LOOK AT...


BAC (Bank of America) position is a short. Recently there was a nice bounce that remained under the Trend Channel I use to set stops for trending trades, which BAC seems to be. The current stop from the Trend Channel would be around $12.93, but it moves down with the trade. If you are not using TeleChart or StockFinder then you probably do not have my Trend channel indicator. A rough approximation of it would be a 22 day moving average. 

I'm using the red trendline as an entry point on this chart. A close below that point is the opening of the short position, which would also be a new low from the bounce.

Here is the my Trend Channel and the red arrow marks the most current stop, although it does move down with the trade. For a short, a close above the top channel is what I use as a stop out and for a long, a close below the bottom channel is a stop out. To get a similar stop point, you can use a 22 day moving average on a 3 day chart. You can see the Trend Channel would have kept you in the trade for the entirety of this downtrend. 


MSPD as a short position. This has been one I've liked for a while now. The stop I'm using here is at $6.82. The LIMIT order is below< $6.25 There's an alternate situation for those with a longer time horizon/greater risk tolerance/excellent risk management. This would be to short some of the position, maybe up to half of the intended size on any rally/bounce near the $7.00 level with a stop around $7.15 and then add the rest of the position as it breaks the limit order on a drop below $6.25.

The two tight trendlines around the recent range represent the entry (lower trendline) and the stop (upper trendline).  The alternative situation I mentioned would be up around the higher trendline.




TMV (Long) This is a position I presented before, I put up a post showing a possible pullback and an opportunity to go long on that pullback. The stop is $39.79 and the Entry is on a pullback to the 10-day moving average. There are two possible stops I like using my Trend Channel indicator. One would be at $39.79, but it moves up every day more or less as TMV remains in an uptrend. If you don't have the Trend Channel, a 22 day moving average is a close approximation. The second stop would be a bit longer term at $37.41, again a 22 day moving average on a two day chart is a close approximation of the Trend Channel.

 This is the Trend Channel for stop #1, you can see how it would have kept you in most of the downtrend on a short position earlier in the year. You can use a daily 22 day moving average as an approximation of this stop .

 This would be like using a 22-day moving average on a 2 day chart and you can see that it captures a little more of the downtrend as it is a wider stop. This would be the second stop option I presented.

This is the entry screen I like to use for moving average trades as it has 3 conditions that must be met to weed out false crossovers or whipsaw action. The entry in this scenario is at the 10-day moving average which is the yellow line in the price window.


These are ideas, if you like any of them, you may want to adjust them to your own personal style of trading or risk tolerance.

Update

The same positive divergence in also in GLD, SLV and USO but only on the 1 min charts.

Update

There are 1 min positive divergences in the SPY, DIA and QQQQ. The DIA also has a positive divergence on its 5 min chart. We should see a real move up this time.

AAPL

As stated last night and often, because the SPY is up doesn't mean we have a healthy market as evidenced by my breadth and 3C postings. DISTRIBUTION IS SELING INTO HIGHER PRICES, THAT IS WHAT A 3C NEGATIVE DIVERGENCE TELLS US.  I have talked about AAPL in the last few weeks and distribution. Today in a Q3 13F filing found at Zero Hedge Capital Growth Management reduced their AAPL holdings from 1.15 million shares to 111,000 shares.

Here are the 3C charts showing distribution.

 AAPL 1 min chart showing a negative divergence and distribution, interestingly there was another round of distribution right before the 13F filings were released today through Monday.


 AAPL 60 min chart, again showing a trend of distribution in a important timeframe. 3C is now in a leading negative divergence in AAPL.

Here is the daily chart of AAPL showing confirmation of the recent uptrend and now we see a massive daily negative divergence, borderline a leading negative divergence. It seems that they held through the last POMO operations and dumped in between the last operation and the start of this one.

Interesting.

The SPY Daily

As I said last night, a break below the red trendline will put the daily chart into a nasty leading negative divergence. It's already given up ground thus far today.