More from WOWS Global Analysis

Remember, the words, "the economy has accomplished more then 10,000 Al Qaeda terrorist/martyrs could have dreamt of" and this lesson won't be lost on them. The fulcrum is not terrorism, it's economics. In that light, here's a story I was just emailed.




Iraq's biggest oil refinery at Baiji, 180 kilometers north of Baghdad, was blown up early Saturday, Feb. 26, by an Al Qaeda cell activated by the Iranian Revolutionary Guards Al Qods Brigades, debkafile's Middle East sources report. Tehran is using the Middle East turbulence to generate fuel shortages in Iraq and boost oil prices worldwide.
Thursday night, Feb. 24, saw the first signs of unrest in Saudi Arabia with demonstrations by young people demanding reforms of the kingdom's system of government and by Shiites living and working in the kingdom's oil-rich eastern regions. They demonstrated at Awwamiya in Qatif in solidarity with the protests in Libya and Bahrain. They also demanded the release of detainees rounded up by Saudi security authorities among the two million Shiites living and working in the main oil centers of Saudi Arabia to nip potential unrest in the bud.
Friday, in the Red Sea town of Jeddah in the west, a group calling itself "Jeddah Youth for Change staged a demonstration.
The slightest sign of unrest in Saudi Arabia, the world's biggest oil exporter, is bound to affect the price of oil. Iran is the biggest beneficiary of soaring prices. Day after day, as Arab capitals are beset by popular turbulence, Tehran is watching the damage caused its economy by international sanctions shrinking.
 In 2010, sanctions slashed Iran's oil revenue from $120 billion to $80 billion, i.e. 6.6 billion a month, whereas in February, 2011, it shot up to $10 billion as a result of Middle East unrest.
Early Saturday, Tehran gave the oil market another nudge by knocking Iraq's biggest refinery out of action just hours after clashes with anti- government rallies left nine dead in three North Iraqi towns.
The gunmen shot four refinery guards and engineers and blew up the Al Shamal unit, its main kerosene and benzene producer, leaving sticky bombs in other operational units to explode after they fled. It took hours to put the fire out. The entire installation is now closed. "We are not talking about days," said a refinery official, "The damage is too severe."
The Baiji refinery working at 70 percent capacity produced 150,000 barrels per day. Oil experts estimate that Iraqi towns face a 35 percent decline in petrol supplies for several months, with effect on world prices and domestic stability in the country.
debkafile's intelligence sources report that the sabotage of the Iraqi refinery marked another stage in the fuel war becoming an integral part of the rising tide of protest engulfing the Middle East since Tunisia's Jasmine Revolution erupted in January. On February 5, the Palestinian Hamas used the uprising in Egypt to blow up the Sinai gas pipeline to Israel and Jordan. Supplies have been cut off since then.
In Libya thus far both Muammar Qaddafi and the opposition fighting him, mainly in Cyrenaica, have refrained from touching the country's export trade of 1.8 million dollars a day. However, the fighting in oil-sensitive areas is thought to have cut supplies by half. It is estimated that Libya's partition between Cyrenaica and Tripolitania will split half of its oil resources roughly equally between the two entities, leaving the export terminals with the rebels.
Whoever ends up ruling Tripolitania will have to come to terms with Cyrenaica over the use of those facilities or build new ones. That is why Qaddafi's opponents are fighting so crucially for control of the four outlying towns of Tripoli on the Mediterranean coast - Sirte, Misrata, Zawiya and Zuara.  Without them, the Libyan ruler has no way of exporting the oil produced in Sahara fields.

As We Said..

The radicals have been biding their time. History shows 1 thing with regard to revolutions and power vacuums, it's not the most popular who wins, it's the best organized. Recent presidential elections in the US have even shown that and as I noted, Hamas has been in Egypt for nearly 3 weeks now coordinating with the Muslim Brotherhood.

For Al Qaida , this is a gift from Allah and they are now making their presence known..

The Story...

This is not an Islamic Revolution

In the recent past I've listed a number of countries seeing protests, many outside of the middle east and Africa including Europe. We have seen the initial stages of protests in China, North Korea, south Korea and now Vietnam -Article Here from Al Jazeera.

This has more to do with the inflation that CPI refuses to acknowledge and threatens several varieties of Black Swan Events. The UK's latest inflation and GDP are putting them in a spot in which they have to consider raising interest rates. I have berated Bernanke for playing the innocent role of "QE? Causing civil unrest? No!" As he recently said when asked during a Q&A, his smug answer was that central bank policy can't add one bushel of corn. This is not only smug, sarcastic, but condescending as we all know that Bernake's QE or the Bernanke Put has caused money to be borrowed at nearly zero interest and invested in risk assets so you can effectively say that the Fed IS EXPORTING INFLATION.

Take a look at the CRB (commodities) Index and tell me the rising prices caused by ultra low interest rates have not fueled immense speculative activity in all risk assets including the stock market.

LOOK AT THAT VERTICAL RISE SINCE QUANTITATIVE EASING. The Fed has now not only put the American economy in extreme danger as traders have leveraged up on margin debt to levels not seen since the bull market top in 2007, but they are now contributing to inflation worldwide, that's what these revolutions are about, however, what they turn into may be something completely different. This is the MOST dangerous Fed we have ever seen, one that is fueling world political turmoil.

Furthermore, QE can not last forever and when the Bernanke put is removed (and the market's recent dip may be discounting that now) the failure of the SEC to address structural liquidity problems may very well cause the greatest bear market drop we'll ever see-Which for us is not entirely bad as we will be there to take advantage of the change. However, millions of Americans and possibly billions of people around the world are going to pay the price for Bernanke's "academic experiments". I feel it is because he's putting the "too big to fail banks" first as the Fed shows it does NOT have the self proclaimed political independence and as these banks show record trading quarters.

Here's the Vietnam Story-the World just got a little more dangerous.

Could I have not written this?

OK, this isn't a pat on the back, but if you put together the sum of my posts and videos, is there much daylight between what I've been saying and what follows in this article?

It's not that you need to be a guru to see it, you just need to open your eyes to see it and many have been blinded by the Bernake Put that has ramped the market up, oh how greed blinds us. My job is to help you make money, but in a responsible way. I think this article is an excellent read as it does a better job then I have to put many of the pieces together in one article. Of course members know my mind toward this, but for newer members, this is a must read.

Just remember, change is not be feared, it's an opportunity and perhaps one of the biggest we'll see in our investing lifetimes.

The Article...

Managing Risk

The markets are now very highly correlated which is a condition we seek to avoid in choosing positions for our portfolio from a risk management perspective. In the past that would mean not buying GLD and a Goldminer or multiple stocks in the same sector unless they are treated as one position. However since the Fed has kept short term interest rates at record lows for an extended period of time, money is now taken at the very low rate of interest and invested in risk assets that have generated higher yields and why not? The CRB (commodities) Index has gone virtually straight up. The Fed's Permanent Open Market Operations (POMO) seemingly have a quid-pro-quo with the Primary Dealers that buy treasuries at auction and flip them to the Fed sometimes only two weeks later at a significant premium that puts billions of dollars at their disposal with virtually no risk. When this happens and the submitted:accepted ratio is favorable, the Primary Dealers drive the market higher which has been going on for a long time. Make no mistake, it is Federal Reserve initiated and sponsored market manipulation.

There's really very little perceived risk, thus all asset classes have moved up making the market of investible instruments highly correlated. While this can not and will not persist forever, it creates a danger that any down turn in any of the risk assets will affect nearly all risk assets similarly, especially as traders and hedge funds hit multi-year high levels of margin debt-again showing very little respect for risk which in the recent past has led to some of the legendary Wall Street firms going belly up. This also creates a very unstable condition in the market, especially when the market drops. The fact that the consistent melt-up in the market has created a scenario where there are very few shorts sellers in the market to provide a bid (when they cover to take profits in a falling market) when the market falls has created even more danger. As you can see in my recent videos on market risk, High Frequency Trading Firms of all types have undercut the role of the traditional market maker or specialist and have left the market in a situation where there is very little liquidity, especially in stocks. So imagine a black swan event when the market falls and you want to close out losing positions, it will be harder and take longer to find a bidder to relieve you of the losing position. Just today it was announced that the SEC is underfunded and can not (nor have they shown a willingness in the past) to rectify the structural problems inherent and increasing in the markets.

Thus being long risk assets, almost any kind, creates the same effect, they all rise and fall together which is exactly what we don't want in diversifying a portfolio. The fact that we may be at a market turn makes this problem of utmost concern now.

I'm not sure what you can invest in that is not highly correlated already, so my personal attempt to limit risk includes the following:

Reduce leverage, this can be done by getting off margin and taking on fewer shares of long positions. I would also raise my cash levels, each trader/investor will have to decide what is appropriate for themselves. I would have short positions in stocks that are trending lower that make sense as an investment anyway, but not too big of a position, not a majority portfolio position until the market confirms the downside reversal through price action. I would also have a heavier bias in real short positions rather then inverse ETFs, although I would hold inverse ETFs. The fact is you have advantages in a real short position that inverse ETFs (which is the equivalent of being long) do not have. Please see my article at Trade-Guild.net titled, “Making more then 100% in a short” and you will understand the mechanism. Any inverse ETFs should be probing positions until they breakout and start trending higher. ETFs are meant to approximate one day's gains not a month's. So when they are trading laterally, the leverage inherent in them creates compounding that is magnified by the leverage and in many cases that compounding can be dangerous. Thus I'd keep these positions as “toes in the water” and only add to them when they trend and consider using them as swing positions, meaning try to get out of them when they pullback.

This is a risk management problem that I have not had to face before and I don't think there are any great ways to deal with it, but it is still imperative that losing positions do not cause you to lose more then 1-2% maximum of portfolio and that's aggressive. My article on risk management here at WOWS will help you understand how to properly position size a trade so that you will not (except for gaps we can not account for) take losses larger then 1-2 % of portfolio value at maximum. Personally, I'd go even more moderate as the article will also explain. 

If you have questions or ideas, please email me as this is the most important aspect of trading and ultimately will determine your success in the markets through consistent risk management. It only takes one trade to lose 50% and you have to make 100% just to get back to breakeven, thus it is infinitely easier to keep your money then it is to make it back.

USO

While we can't say the pullback is over, we can say that the targets for USO's pullback have been spot on and it looks like a close above resistance,,

The close above resistance at the upper trendline may kick start some technical buying Monday.

Final SLV Update

 5 min chart of today-does this look like short covering to you? No, I don't think so either. A wedge?

And the 5 min 3C....

I think this battle between JPM and the silver bugs isn't over just yet.

DIA market update

 It's not often we get a 1 day correction, but sometimes when momentum is very strong and a trend has initially reversed, we will see such corrections. Dealing with the entry is a swing entry set up as I described earlier, you look for the candle that has made both the highest high and highest low and that is your signal candle, that would also, at this point be today's candle. The entry would be on a price move below the white line with a stop just above the red line. Note that the market did exactly what we expected with the bearish ascending wedge and broke out to the upside. Technical analysis books for a century have taught traders that the ascending wedge should break down without any upside movement like we saw. They also taught if there was an upside breakout it was a failed pattern and you go long the pattern. Wall Street knows that this is how technicians think as they have failed to adapt, Wall Street has adapted and by causing that upside false breakout they trapped longs in a bull trap, when prices fell, margin calls rolled in and the longs now at a loss closed their positions which creates more supply and pushes prices down lower. I'd say this now happens 85% of the time and technicians still fail to adapt. So we expected to see as much and did. However, the larger wedge pattern is still relevant.

 DIA 1 min chart has not confirmed price at all today which leads me to believe that it is being distributed to retail while institutions may be going short on the other side of the trade.

 Now we have a significant 5 min negative divergence. This doesn't mean the bounce is over, but it does mean it is highly likely that distribution has begun in full swing by institutional money.

And now we even see it on the 10 min chart which is significant. Be careful on any long market average ETF positions as they seems to be in a distribution mode. I'd guess the chances of seeing a resumption of the downtrend are at least 50/50 which says a lot in this market. Furthermore should that downside resume, we will likely break the S&P and other support trendlines which will cause more technical selling and margin calls/forced margin sell outs.

Be cautious.

EDZ Trade Alert (long)

EDZ has been a long time favorite as the emerging market trade I believe to be overdone-a bunch of sheep all heading to the slaughterhouse. It's a prime example of how bullish descending wedges have been behaving lately after their breakout of the wedge as they create a lateral base (lateral action is often where we see accumulation and distribution).

Here's the charts....

 EDZ's bullish descending wedge and subsequent base building, note MACD's positive profile and good volume in the lateral base.

 3c daily tracked the trend well as it fell, but then went to a huge daily leading positive divergence throughout the base. I like this chart a LOT!

And here's the Trend Channel setting for EDZ that has tracked the downtrend and should do well with the uptrend (note that only a close below the lower trend line is a stop out, not intraday action below it). Around the white box is where I prefer a stop to account for any market volatility.

There are many reasons I like Emerging Markets short. I said way back that they would fight the Fed's main export to their economies, inflation and they have fought back against the hot money flows. Many of what we may consider emerging markets are also going through social upheavals which will also close down long trades in those markets. In my opinion, the trade looks better and better.

Trade Alert A look at FAZ (long)

Of course this is an ETF, actually a 3X levergaed bear ETF on financials, an easy way to short the financial sector. Understand there are dangers to ETFS as they are meant to approximate 1-day's returns, however I have successfully traded them in trending situations. They can become dangerous in lateral situations because of the compounding of the extreme leverage. However, I still like FAZ as a part of a portfolio, I believe it can have it's place in a diversified portfolio.

Here are the charts

 This is early on the X-over screen, but I do think the 3 signals are headed toward a long signal. FAZ has pulled back close to the yellow 10-day moving average which is typical expected behavior.

 The daily shows a nice positive divergence on an important timeframe.

 Here the 10-min shows a recent positive divergence today that is in leading position.

 Same with the 5 min chart

The Trend Channel shows the downtrend broken at the red box. If I were to get my toes wet here, I'd place an initial stop a bit below the trend channel around the white arrow. The more room you can give the trade initially, the better the chance of succeeding and you do not have to encounter more risk if you adjust your position size down. You can always add to it later.

FAZ has definitely changed character recently and is looking interesting at these levels.