Nightly Report. January 31, 2012.

 Today’s market action can be summed up as “WTF”?  But that is the nature of the topping process after a long bull run. Like an accelerating car, it has to slow down, stop and reverse. And if it is running till the gas runs out, may be one final push before stalling.

There is no reason for the equities or risk currencies to go higher except liquidity induced push. And for various reasons, that is not forthcoming from the Fed. I am very sure that the Fed will create a wealth affect right before the Presidential election.  But that is far away. For now we have to get past this week before we can see some decent pull-back in the equities.

Situation in Europe is as confusing as ever. Now the hair-cut figure has grown to 70% and even that does not guarantee any deal. Other PIIGS are closely watching and will demand the same relief. So far as Germany is concerned, it just wants to be prepared for the eventual split of Euro. Sarko is going to have the tough time.

Although I said that there is no reason for the equities to go higher, if the SPX comes close to 1300 level or breaches it, I plan to go long for a day or two. Someone out there is trying very hard for the last many trading sessions not to let SPX fall through 1300. Today was another bearish reversal day and that makes it two in four days. And yet we are holding on! 

I would like to show you a chart from Chris Kimble which is self explanatory.

Sooner rather than later, all the negative divergences will catch up with the market. NYMO is giving a sell signal with daily MACD turning over. But NASI is still on buy signal.

Thus there are conflicting TA signals and it will not be resolved unless and until the market moved decisively one way or other. I am expecting that we will get decent pull-back starting from next week. 

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Interesting Monday.

I wrote on Friday that it was the calm before the storm. But given the size and nature of the overextended / overbought market, the sell-off has not been that severe, at least not yet.

Greece will default no matter what. Question is when. One report is saying that it will happen in the early March. (http://www.examiner.com/international-trade-in-national/greece-plans-orderly-exit-of-the-eurozone ) But I think early April is more likely. Germany is tired of handing out money to Greece and they are only buying time. Question remains of contagion. Have LTRO been able to provide a cushion to the European banks from the coming shock? Next in line is Portugal and Spain. But short term trading in Wall St. is devoid of fundamentals. It is all about set up. So today SPX gaped down in the open but reduced the gap at the close. It was all about squeeze the short and keeping the bulls interested. If you look at the variances between Euro/USD, AUD/USD and GBP/USD, you will see that it is more of short squeeze than a rally.

SPX touched the Fib.23.6 level and reversed. Let us see how it behaves tomorrow and day after.

The US Dollar rebounded of key support area at the 38.2% Fib. extension. If this level holds we will see more weakness in equity in the next few days.

The general consensus is that we have a top in SPX at intraday high of 1333. But I think we have not seen the end of the Bull Run yet. This high may be tested very soon and rejected before we can call a short term top and before we see some sustained weakness.  As I always ask myself, where we are in terms of the sentiment?

Yesterday Mr. Gábor Jandó shared an interesting chart in Cobra’s forum which is as follows:

According to him, we may have a final blowout before meaningful reversal.  It is very likely that we will have this situation. So for now, we have to trade like day traders. Take each day and adjust our trading strategy.  The market will do the most unexpected thing to hurt maximum number of traders and so lets be prepared for the worst.

Thank you for reading http://bbfinance.blogspot.com/  and following me on Twitter. (@BBFinanceblog).

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Calm Before The Storm.

GDP report came weaker than expected. Fitch downgrades five European countries. And SPX barely moved! You still think news drives the market and there is no market manipulation! Which rational investor will buy equities when countries are downgraded? All the power to the believers.

Today was a kind of consolidation day where the purpose of the day was to kill the short and bring in the wavering bulls. The problem as I see it, the capitulation is not complete yet. The SSI (Speculative Sentiment Index) is still negative for the Euro and AUD.  The SSI has to turn positive before we can see any meaningful pull back.

AUD completed the week at the top of the range and I think there is not much room to go higher from here. But I have been proven wrong in the past. Even now I think the cycle for AUD has topped and it should go down. But so far it is not listening. From 9 AM Eastern, AUD started the upward journey and followed the trendline. The trendline was broken only after 4 PM Eastern after the close of NYSE. Let us see how it behaves next week.

NYMO is also hanging on and refusing to break down below the trend line. So the change of trend is not confirmed yet.

From a TA point of view, it is possible for SPX to move towards 1200 level in the next seven to ten trading days.  But that is based on the assumption that TA is allowed to work independently.

The correction, when it comes may not comply with the TA parameters. What makes me worried about the correction is the huge long position that the commercials have in Euro for last so many months. At some point of time, they will take profit from their long position. When that happens, indexes will go through the roof. Take a look at the latest COT report.

The million dollar question is, when? I wish I knew.

For now however, US $ is testing the support at 9871-9823 region and in near term, may see a bounce which is consistent with the reversal in equities and other risk assets.

Thank you for reading http://bbfinance.blogspot.com/  and following me on Twitter. (@BBFinanceblog). Have a relaxing weekend folks.

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The Evil Plan.

In a regular bull market the rise in share prices is backed by general growth in economy, wage growth, falling unemployment and all good things. In a bear market, it is the opposite. There is recession or fear of recession, credit is unavailable, unemployment is high and mood is gloomy. That is what fundamental analysis tells us.

If that is correct, where do you think the world is today? Is it in a growth phase or declining phase? There is no Nobel Prize for guessing the correct answer. But the question is if the world economy is in a declining stage, why the stock prices keep getting higher. The answer to that riddle is found in the continuous flow of liquidity injected by the CBs of the world. They are trying to solve the problem of solvency with more liquidity. In the process, they are buying time, hoping somehow, miracle will happen, growth will return and we will return to the goldilocks economy.

What do the small investors do in such a situation? If we short the market now, we will see that for the next one year or so, stock prices zooming higher and at some point we will be forced to cover our short position. So the best course of action may be to run with the hare and hunt with the hound.

Many do not believe that the stock market can be manipulated. They argue that it is so big, how can anyone manipulate it. But the fact is the big Ponzi scheme that is stock market is utterly rigged by the fifty TBTFBs of the world who control 90% of the trading and most of it through black pool trading which we never know. These are the same powerful bunch who borrow money from the FED or ECB at zero % rate of interest and then give back the same money to the FED at 3% ( buying treasuries). Thus, the Fed monetizes the debt at back door and banksters make risk free money from the tax payers.

As there is no immediate trend, they set up the market and create volatility. For the last two weeks they have created an expectation of a bull market where prices just keep going up.  Slowly all the bears are throwing in the towel and joining the buy program. Equity mutual funds are again seeing inflow of money. Retail is now afraid that they might miss the bus and are too eager to join. The free cash levels of the equity mutual funds are at all time low. Rydex money market funds have only $669 million now vs. $1.5 billion at October 2011 market bottom. The game plan is working. While retail is buying at the top, someone is selling these shares to them. You can again guess who are that someone. Today the believers of the rally are saying that one day sale does not derail such a strong bullish move.  While they would be correct in a normal market, this market is anything but normal.

When almost everyone is in, then the Boyz will take out the carpet under our feet. For the next two/ three week, we will see that a bearish environment will be created. ZH, CNBC will be filled with stories how Europe is falling apart. The retail will again sell cheap.

   

This pattern will be repeated many times in 2012 and if we can remember this game plan and play accordingly, we can come out alive in this market. Timing will be the key. As an individual trader we are pitted against these behemoths that have the best brains, best technologies and almost unlimited resources at their disposal. Our only chance is to find a quantifiable edge. That may be cycle analysis, TA, COT report, Liquidity analysis, market sentiment analysis or whatever works. Sometimes nothing seems to work, like now. But even in such situation two eternal drivers of the stock market work. Greed and Fear.

Today morning when the markets opened higher and kept going higher, those who were on the sideline, joined the buy express. Those who were short, closed their short to cut down further losses.  And now the almost entire Fed rally has been wiped off. Will they buy the dips tomorrow? May be we will see some buying in the morning just to convince the doubters.

But the evil plan is: wash, rinse, repeat.

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New Bull Market or Irrational Exuberance?

Are we in a new bull market? Surely the Boyz would like us to believe that. Remember that time in not so distant April 2011 when the famous perma bear David Rosenberg capitulated and accepted that may be a new bull market has started.  Ironically that was the top of the market.

What we see today is pure and simple irrational exuberance. Nothing Uncle Ben said today was new, except that they will maintain the ZIRP till 2013 or infinity. There was no talk of QE3. On the other hand, everything that we know in TA is way out of sync and over extended. But we have been in such set up many times before and yet our collective memory is no better than a goldfish. As much as we talk of being a contrarian investor, we still fall victim of collective emotion and greed.

If the purpose of this set up was to lure in investors, they have been quite successful.  Investors have take out money out of the equity mutual funds in the last eight months of 2011, selling into the stock market decline. Now as per the ICI data for the week of January 11, 2012,: “Equity funds had estimated inflows of $1.43 billion for the week, compared to estimated outflows of $9.37 billion in the previous week.” Investors have now bought in the hype that the new bull market is here and now and they do not want to miss the bus.

The fact is none of the reasons that are being given for the rally are true. Neither fundamental nor technical. 

Last year, when everyone was sure that the market collapse is imminent, I was possibly only one saying that the world is not going to end. Now when everyone and his uncle are convinced of a new bull market, I dare to say that we are being set up and a bigger correction is around the corner.

Today it may sound like a broken record but one week is not a long time in the life time. We will see.

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Market Manipulation 101

ES closes the last four days as follows:

1310.50, 1310.75, 1311 and today 1310.50

Does anybody still think that there is no market manipulation? As usual, volume was almost non-existent and well below average.

Given that we are being set up nicely, where the retail is encouraged to buy buy buy by various talking heads of CNBC and other MSM, this itself should raise the red flag that there is cliff ahead.

Everything is screaming for a reversal but the money flowing in from Europe is keeping the US stock markets alive. Some of the reversal patterns are so rare that they happen once in a while and yet we are hanging on. Can the market defy gravity forever?  Unless there is more free money infused by the Fed, it cannot. So may be one more day we will have to bear the agony. In the mean time, gold down, silver down, oil down, copper down and equities barely moved!

Today we had a 3rd consecutive doji  or tri star pattern in SPX. It can be a good reversal pattern but given the fact that so many reversal patterns have not yet delivered, let us not be too excited about this one either.  When the reversal comes, it will be short and swift because I think there are unfinished businesses on the upside. 

AUD retraced back some of its earlier losses and is now testing the 1.05 level. Aussie economic data will be out tonight. The technical outlook suggests that AUD may have put an interim top. The ATR (Average True Range) suggests that the topside breach may be a head fake.

Another carry trade favourite pair AUD/JPY  also seems to hot the resistance.

Apple blew past the top line and bottom line projection. But there should be no surprise there.  After market it is trading at $ 452.50 after reaching a high of $460. This was the only thing left to convince the retail to join the buy express and buy the dip.  IFM on the other hand came out with their dire projection of the world growth and no deal has yet been reached on the Greece debt.  So neither technically nor fundamentally, I am able to convince myself that the bull market is here. May be after some 50-75 points correction, it will be nicer bait but at this moment, it is not that inviting.

But it seems to be working at some level. During the “buying stampede” which typically last between 17 to 25 trading sessions, even the weak stocks have been bid.  You can see for yourself where we are at this point of time. With the bullish sentiment at extreme high level, it is just a matter of time.

Tomorrow morning is going to be interesting. With the huge up from APPL and expectations of more free money, the markets may open higher. But when everyone is agreed that the market will move up, it has a tendency to do the opposite.  

Thank you for reading my not so cheerful thoughts at http://bbfinance.blogspot.com/ and following me at Twitter. (@BBFinanceblog). I am looking forward to write something more interesting in the coming days and weeks and not be stuck at the anticipation of correction.

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AUD Reaches Measured Level.

Hat tip to Jamie Seattete, currency trader.

The AUDUSD has exceeded the trendline that extends off of the July and October highs and has reached the 100% extension of the rally from 9861 (2 equal legs). An extension of strength targets channel resistance at about 10650 on Tuesday. 10490 is short term support. While the rally looks tired at these levels (extremely low volatility for example), the upside demands respect above 10458.

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Time To Wake-Up And Smell The Coffee.

We ended the day with a spinning top candle in SPX and red in DOW as well as Nasdaq. And the volume was non-existent. So far the much anticipate correction has not materialized in any meaningful way. But even when I am trying to become bullish, I am unable to find much upside in the market. 16 SPX points after 1300, SPX is sitting just below the long term falling trend line, with all parameters and indicators over stretched.

Many reasons have been given for the continued rise of the stock market. Seasonality, Greece deal, QE3 etc. Apart from seasonality, none of the other reasons are good enough. But seasonality also called for a correction in mid-January, which has not come. And without more free money from the Fed and ECB, this extended Santa rally cannot be sustained. This is a game we have seen many times over. I am not a bear per-se. So I am happy to participate in any rally and gain from it even when it is not supported by fundamentals and even when I do not believe in it. But I would rather not join in any such rally at a late stage.

Or if you would like, we are close to the “Oh Sh*t” moment as highlighted by Doug Short.

The market manipulators are doing their best to make people believe in tooth fairy. So far all their efforts have resulted in paltry 16 SPX points and have taken the market to the edge of the cliff.  GS advised its client to short 10 year treasury. In other words, they want client’s money to come out of bonds and go into equities, equities which are now at the top of the range and are at serious risk of gut-check.  Is it because they want to get out of equities at the top? Normally, it is a good practice to do opposite of what GS says. I think 10 year Treasury has reached its downside price target for now and there is not much room to go down any further.  A look at TLT will show that it is sitting on a long term support and is oversold.

Today VIX BB sell set up was triggered.  Yesterday, VIX closed outside the BB and today it closed inside BB and in green.  Such a set up signifies reversal in the market.  Whether the reversal starts tomorrow or few days after does not matter. It is not a question of if; it is a matter of when and how far. Longer we will have to wait for the correction, more significant it will be.

I think tomorrow morning we will see SPX will re-test the high of today and in all likelihood fail and roll over.  If markets were going up either on the hope of the Greek debt deal, that hope has now been dashed, per ZH.  Also it seems S&P has started downgrading the European banks. How far it is true, we will have to wait and see.  There is a lot of tail risk coming out of Europe and while technical rally has taken us this far, the next six months are going to be painful. Also I do not think QE3 is coming anytime soon. Whether we get one last up move in US stock markets will depend on how quickly we resolve this current overbought condition.

That leaves us with the situation that there is no more free money, at least for now. Will the market now wake up and smell the coffee?

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The Week Ahead.

After the surreal week when equities defied all logic and reasoning only to gain 15 SPX points, the hangover from the party may be due next week. In the process, all trading parameters have been trashed to the extreme and if there is anything called super overbought, it is here and now. But we all know that markets can remain irrational longer than we can remain solvent or sane. So we see die-hard bears throwing in towels. When such a thing happens, you know that the reversal is round the corner.

The situation is not a cut and dry one. I expect a higher high in February before weakness returns with a vengeance. By May of 2012, the bulls will forget that they were ever so ecstatic. The mood will swing from euphoria to eternal gloom. But we have some unfinished business before that.  For now let us take a short term view of only the next week and see what is possibly in store.

Given that indexes are due for a decent pull back, question is when is that going to happen. For answer let us look at AUD which has the highest correlation with SPX. AUD has reached 100% of FIB extension on Friday, January 20^th, and the coming week we may see a sell off. The following is from David Song, currency analyst.

“The Australian dollar advanced to a fresh monthly high of 1.0480 following the rise in risk-taking behavior, but the high-yielding currency may come under pressure next week as the fundamental outlook for the region deteriorates. Indeed, the 4Q Consumer Price report highlights the biggest event risk for the Aussie, and the development may trigger a selloff in the AUD/USD as the headline reading for inflation is expected to expand at a slower pace during the last three-months of 2011.

In turn, the Reserve Bank of Australia is widely expected to further reduce borrowing costs this year, and we will maintain a bearish outlook for the high-yielding currency as interest rate expectations remain weak. According to Credit Suisse overnight index swaps, market participants see the RBA lowering the cash rate by another 100bp over the next 12-months, and the weakening outlook for growth and inflation is likely to heighten speculation for additional monetary support as the central bank tries to balance the risks surrounding the economy. At the same time, the slowing recovery in China – Australia’s largest trading partner – fosters a bearish outlook for the AUD/USD as the world’s second largest economy faces an increased risk for a ‘hard-landing,’ and we may see the RBA aggressively scale back the slew of rate hikes from 2009 as the region faces a protracted recovery.

As the rally in the AUD/USD tapers off ahead of 1.0500, the weakening outlook for growth and inflation is expected to drag on the exchange rate, and we expect to see a short-term reversal next week as long as the relative strength index holds below 70.”

Yesterday I posted about the RSI divergence in AUD, (http://bbfinance.blogspot.com/2012/01/aud-trend_20.html ) and the before that I have posted that AUD has reached the top of the triangle (http://bbfinance.blogspot.com/2012/01/bend-in-road.html ) . It seems that AUD is running out of steam short term and may now test the lower trendline of the triangle. And the AUD cycle tops early next week.

 The following chart shows the daily correlation between AUD and SPX. You will note that from time to time, SPX diverges from AUD but eventually comes back closer. 

If now is the time for correction for both AUD and SPX, we may see some violent movement in SPX in the next week. Of course nobody knows what will be the extent of the correction because many other factors are in play and given that a high is due in February, the correction this time may not be for long either. It will be an opportunity for trapped short holders to get out of the position with the skin intact. A bigger and better opportunity to short is coming by Mid-February.  

The year 2012 is going to be more like 2011. No one can afford to be perma- bull or perma-bear and investors will find it hard as ever. While we may see SPX 1000 being tested by May 2012, we may also see SPX 1500 being probed in October 2012. So let us not get carried over by end of the world stories. Nor let us believe the buy hype because fundamentals do not justify. It will be a liquidity driven market, run by the TBTF banks, for the TBTF banks.  That is the only way they will be able to make profit and write off the toxic assets in their balance sheet. Otherwise they are all dead men walking. The Fed, ECB, Governments and TPTB (the powers that be) know this and encourage this with their printing press.

So let us ride the BS when we can. Let us run with the hare and hunt with the hound and keep the holding period short.  

Thank you for visiting http://bbfinance.blogspot.com/ and following me in Twitter (@BBFinanceblog). Please share it with your friends and circle. And enjoy the weekend.

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End Of A Surreal Week.

What a week! Let me accept the fact that I have not expected the last fifteen SPX points this week. I was ready for it in the 1^st week of January but not now. Each and every indicator we can think of is stretched beyond imagination and if this logic defying situation continues longer, the retracement will be that much harder.

Throughout the day, I have been following the moves of AUD and at the end of the day, it tagged 100% of fib. extension. (http://bbfinance.blogspot.com/2012/01/aud-tags-100-fib.html )

It also developed a RSI divergence at the 240 minute chart which needs to be resolved. (http://bbfinance.blogspot.com/2012/01/aud-trend_20.html )

The late gain in SPX is correlated with the gain on AUD.

When everything else fails, we have to look at what is working and at this point only thing that seems to be working is the following analogy which I showed yesterday.

Let us see if we get the long awaited correction on Monday/ Tuesday of next week. A short panic would be nice. The original plan was to go long by the last week of January following a correction and go short in the 1^st week of February following the top.  Depending on the price action in the early part of next week, I may close my short position, go long for a while and flip to short again.

Trading is not about being right all the time. It is about being right more often and quickly adjusting and minimizing the loss. While the retail has been absent in the current rally, the mutual funds have totally committed themselves and the available cash with the institutional investors is at record low.

The big sell off is round the corner but a higher high is going to come before that. I would love to take part in both. But will have to wait till next week for that.

Thank you for all your support and comments. Please share this blog in your Facebook / retweet to your friends. Have a nice and relaxing weekend folks. 

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AUD Tags 100% Fib.

While AUD broke above the trend line, the RSI divergence shown earlier in the 240 minute chart remain valid for the next week as well.
It has reached 100% of Fib. extension and risk remains for a sharp correction.

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AUD Faces Trend line Resistance.

AUD action will define SPX move in the coming days. 

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AUD Trend

Hat Tip to CVecchioFX

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