pebblewriter

Month: August 2012

  • Down the Jackson Hole

    As we anxiously await Bernanke’s big show, the market is putting on a little show — reaching the 1409 target we mentioned yesterday (and then some.)

    If Bernanke disappoints, as nearly everyone now seems to think he will, that should just about do it for this retracement.

    As I’ve posted for the past several days, I’m largely in cash (save for a small speculative short position that’s strangely barely moved this morning, and to which I’m adding at 1410.70.)

    More after Bernanke’s comments.

     

    UPDATE:  12:30 PM

    The EURUSD hit our 1.2617 target this morning.  We first ID’d this level on August 22 [see: Charts I’m Watching], and it looked very touch and go up until this morning’s ramp.

    We could even go a bit higher to tag the 1.618 of the little red Crab Pattern — which is the .886 of the larger yellow Bat Pattern at 1.2666.  Most of the time after EURUSD 60-min RSI peaks, we get another lesser RSI peak that corresponds with a higher price peak (known as negative divergence.)

    But, the daily RSI is still back-testing the channel its been in for over a month (note the negative divergence on the daily) and fell out of on Aug 29.  I see RSI closing at or below the white channel and falling back to find support — initially at the purple channel line before breaking down further.

    A break thru the bottom of the white price channel (currently at 1.2388) will confirm the downside thrust has continued.  Until then, there is plenty of support at the various channel lines.  I don’t see an immediate plunge in value — probably not until the German Constitutional Court ruling on the ESM on Sep 12.

    Note that we’ve officially exceeded the red dashed channel line by a bit.  If we get a reversal today or even in the next few days, this is of little consequence. The channel has been violated temporarily before in its battles with the purple channels.

    UPDATE:  12:45 PM

    The dollar has come very close to hitting our target this morning, falling to 80.96 versus our target range of 80.83-80.88 also discussed on Aug 22 [see: Charts I’m Watching.]  Like the EURUSD, one last thrust lower to complete the tag is possible if the past custom of positive divergence were to repeat.

    The daily RSI has probably broken out of the falling wedge it’s been in since May.  In any case, we’re at or very near the bottom for the dollar.

    Recall that we’re in the final stages of a pullback in a larger uptrend with potential over the next few months to 87.076.  For those with the patience to ride out the inevitable swings, this should be a relatively safe place to earn nearly 10% in a few months.

    I expect prices to snap back into the purple channel and resume their climb; although a dip corresponding to a politically related equity surge is to be expected somewhere along the way.  If/when stocks sell off, we’ll get the greatest move in the dollar.

    If the stock market correction is serious enough, look for the long-awaited threatened QE3 to knock the dollar for a loop.  I wrote extensively about DX yesterday.  For more detail, see Managing Expectations.

     

    UPDATE:  3:00 PM

    The S&P 500 is hanging in there after a pretty wild ride.  SPX closed yesterday at 1399.80, soared to 1410.72 on the opening, fell back to 1398.96, soared again to 1413.09, and has since settled back around the the 1404.64 Fib level — where it’s inching higher.

    The markets were clearly not thrilled with Bernanke’s remarks this morning.  But, I suspect there was a sizable short position at yesterday’s close given Lockhart’s “QE3 is a close call” remarks.  It seems like everyone was thinking the same thing: no QE announcement tomorrow (today.)  In retrospect, it was a great opportunity for a short squeeze.

    In the end, Jackson Hole was a non-event.  Bernanke left the door open for QE3.  Depending on how you parse his words, it might even be slightly more likely.  VIX has settled back down, the dollar didn’t fall off a cliff, and the market is trading roughly where it has been for the past three weeks.

    Count today as the 18th session in a row to trade within 5 points of the fan line from 2007, the 15th to touch it, and the 7th to straddle it.  Clearly, the market is trying to make up its mind whether this is the end of the ride or the beginning of the next leg up.  I’ll spend this weekend trying to sort that out, but in the meantime, some charts are in order.

     

    SPX has formed the early stages of another leg down.  The red channel to the right is the same slope as the larger channel to the left.  If we are heading down, we can expect this channel to broaden; so, the top isn’t necessarily in.   The first peak in the former red channel was exceeded twice before the channel was done forming just the left side of its eventual full width.  We’ll come back to those red channel lines in a moment.

    The dashed yellow line that formed the neckline for the small H&S pattern (indicating 1370) over the past couple of weeks is parallel to a number of other important channel lines — shown above in red.  For the sake of illustration, I’ve changed them all to yellow in the chart below — and added a few more parallel lines.

    It’s easy to see how influential they’ve been over the past several months.  But, in reality, they and their cousins have been influential for years.

    The latest H&S neckline mentioned above stopped a rally in Feb of 1996, touching off three back-to-back Butterfly Patterns in a row that governed the market’s movements for a full seven months.

    The red channels mentioned above guided many of the corrections over the past 20 years.  Most of them were relatively minor, but one stands out from the rest — the crash from 2007.

    There are three more systems of channels I want to chart — along with updating the harmonic picture. But, I’m running out of time before the close.

    I’m going to go ahead and close out my short from this morning before the close here at 1404.50 and reevaluate the next move forward.

    I’ll have lots more charts either later this evening or tomorrow morning — along with a forecast.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

  • Managing Expectations

    ORIGINAL POST:  10:15 AM

    Got stopped out on the opening this morning (1408.90) and immediately shorted. How low can we go?  I see support at 1398-1399, and will consider covering or setting stops there.

    Depending on your point of view, Lockhart was testing the market’s reaction/letting us down easy/managing our expectations.  And, the market reacted predictably.

    According to Lockhart — the economy has been growing at 2% (versus hoping for 2 1/2%)  which is very modest growth, won’t bring great progress in bringing down unemployment.  While inflation remains subdued at a little over 2%.  He said it was a close call in terms of warranting further easing.

    It would be an easier decision if we were to see persistence of less than 100k monthly employment growth or signals of deflation.  But, the question remains as to shorter and longer term costs.

    Forecasting low rates into 2014 has kept rates low, could take rates even lower.  Lower mortgage rates would help qualify more real estate buyers.  But, lower rates isn’t really the issue — even though they would have some positive effect

    Re Draghi no-showing at JH — a signal that all hands are on deck in Europe, paying attention to their issues, which have contributed to the uncertainty that we’re dealing with.  The fact that they’d stay home in august is a good thing.

    Re the costs and benefits of additional QE:  costs are speculative, don’t really know what costs are over longer term.  We could see some benefit, but limited benefit for limited risk and I think manageable costs over the longer term.  Not overly concerned with costs of more action, but see limited benefits, too.

    I continue to believe the Fed really doesn’t want to implement more QE unless they have no other choice. I believe this morning’s announcement was, as George Carlin would call it, a test fart.  How crazy would the markets go if we don’t announce it now.  What if we don’t announce on Sept 13?  What if we never announce it again?

     

    UPDATE:  10:30 AM

    I’m covering here at 1399, but will stay on the sidelines for the moment.  If we break 1398.04, I’ll go short again with an objective of 1386-1389, trailing stops starting at 1398.

     

    Note that 1398 is not only the previous low, it’s the level of one of our channel lines (parallel to the former neckline.)  Breaking it would make an upside harmonic pattern that much less likely.

    more in a few…

    UPDATE:  11:00 AM

    We’re catching a bid here at 1398, with the hourly RSI showing positive divergence on an oversold condition.  I think the market might bounce back to 1402 or slightly higher, and will try a small long position here — strictly a day trade — with stops at 1398.

    If we break lower again, I’ll go back to the short position with 1386-1389 objective and trailing stops starting at 1398.

     

    UPDATE:  11:30 AM

    The 5 minute RSI broke through double resistance.  I’ll stay long and raise my stop to 1399.

    UPDATE:  1:15 PM

    Still sitting with a small long position.  SPX tested our white channel line again and it held.  Our upside probably isn’t terribly great right now.  Resistance is overhead at the purple channel (1402) and the intersection of the white channel with the lower of the two fan lines from 2007 — right at the Fib .886 of 1404.64.

    If we can get to and somehow break through that level (somewhat unlikely) the upside would appear to be capped at the intersection of the top white channel line (the previous neckline) and the larger downward sloping channel right at 1409.

    The larger trend does appear to be down — probably a Crab pattern with a target on the 1.618 at 1386.84 — also the white channel bottom and a purple channel line.  The key will be the white channel line currently providing support.

    UPDATE:  2:45 PM

    The dollar has broken up through the channel midline and is currently testing the recently broken purple channel line.

    The purple channel line is a major feature on the long-term chart.  DX broke down through it about a week ago, but it’s done this in the past and managed to bounce back in short order.

    If it can retake this line, the larger upward trend can resume.  The chart below shows how influential these channels have been in the past.

    But, there are other speed bumps to deal with.  The dollar is at a critical intersection of these purple channels with the white channels and the big yellow channel shown below.   The big yellow channel (used to be purple) has been in charge for almost 14 years.

    And, of course, this intersection is occurring in the vicinity of an election that has major implications for the economy, Fed composition (and thus policy) and our relationship with the rest of the world.

    I wouldn’t be surprised to see DX stay relatively close to this nexus for the next 10 weeks — until we get past the election.  Breaking out of this tangle of intersecting channels would signal an economic sea change — one that’s decidedly not beneficial to equities.

    The wild card remains the euro.  It’s such a major component of the dollar’s value that a failure of the EZ to produce a fix the market can believe in will boost the dollar — regardless of what Bernanke announces tomorrow or on Sept 13.

    The red channel I show extending to the right up above is the likely path forward.  Reaching the upper bound is the next major move, but there’s a lot of ground to cover first.

    Our medium-term objective for DX remains 87.  It’s the Fib .886 retracement of move down from June 2010 to May 2011 (purple pattern) and the 1.618 extension of the Jan to May 2011 decline (yellow pattern.)  The intersection of a Bat and a Crab pattern is almost always significant, so we should expect a serious reaction at 87.  The charts say it’ll happen at about the same time as the election.

    This timing intrigues me. What would it mean?  Would the administration and the Fed allow the dollar to rise (and equities to fall) as we approach the election?  I think it more likely they’d pull the trigger on QE enough in advance of November 6 to make a difference.

    More in a few…

    UPDATE:  3:20 PM

    Just hit 1402, so I’m raising my stop to 1400.50.  I still plan on being largely in cash by the end of the day (though I’ll probably put on a small, highly leveraged short just for fun.)

    UPDATE:  3:40 PM

    Almost to 1404, and just tagged purple channel line.  Raising stop to 1403.30.

    UPDATE:  3:50

    Finally stopped out there at the channel line.  Could be a few bucks left, but that’s okay.  I’m buying a few O.O.M. puts with a downside target of 1386 tomorrow (if there are any QE bulls who haven’t already pulled the plug???) but am otherwise in cash.

    Thanks to OnTheFly, who correctly pointed out the H&S pattern that began on Aug 6 and completed today (dashed yellow neckline.)  It’s very lopsided, but if it plays out it indicates a downside of 1370.

     

     

     

  • Sleeping Soundly

    Reposted from last night:

    Yesterday, I ran into a friend (and member here) who was trying to develop a strategy for the rest of the week; we got to talking about various approaches.

    I know I wrote this numerous times last week, but it bears repeating: if you’re not a gambler, stay out of this market.  In the short-term, it’s just too dependent on what Bernanke says (or doesn’t) on Friday.

    I blog every day about what I see and what I think.  As always, I have an opinion as to what will happen.   But, right now, my confidence in my opinion being right is a lot closer to 50% than the 70% I shoot for.  Why?

    Most of what happens in the next couple of days will be driven by what Bernanke says on Friday.  And, while I have opinions, I have no special insight into what he’s going to do.  So, unless something really weird happens in the next two days, I will have at most a very modest bet in place when Bernanke starts talking.

    Ever since 1426, trading SPX has been very high risk.  First, 1426 didn’t really match up with any patterns; 1422 or 1433, sure — but not 1426.  I saw a few Elliott Wave guys get it right, but that’s about it.  So, it wasn’t clear it was the top (still isn’t.)

    Second, every one of the past 16 sessions has traded within 10 points of the fan line from 1576 in October 2007.   Thirteen have actually touched it, and 5 have straddled it.  Fan lines are extremely important, and the fact that the market can’t make up its mind is very telling.

    Third, the cost of being wrong could be substantial.  I’m working on a forecast that covers a range of outcomes, but SPX could move +50 or -50 in a matter of a day or two — depending the what the news is and how well it’s delivered.

    Looking back over the years, the worst trades I ever made came from being invested at a time when I wasn’t very sure about the direction, but had enough of a hunch to stay invested.  Sometimes these even work out, which is dangerous (it only encourages more hunch playing.)

    I’ve learned the hard way that it’s perfectly all right to be on the sidelines.  Sometimes, it’s the only sensible approach.  Although illogical from a mathematical standpoint, in my  opinion losing actual money sucks more than does an opportunity loss.

    So, unless there’s a great straddle (currently 5.10 ATM on SPY) or volatility trade that makes sense, this is one of those times.  I’m still long from 1409, with an objective of 1420-1422 and a stop at the fan line around 1405.  I’ll continue to take stabs at the intra-day stuff for those who like to day trade.  But, if nothing substantive happens in the next few days, I’ll be market neutral (and sleeping soundly) Thursday night.

    I’ll post more after the open.

    UPDATE:  9:50 AM

    We’re getting that rebound we were expecting off the lower channel bound on the 30-min chart.  So far, the TL (red, dashed) from 1426 is holding, but I expect it to give way in the next hour or two.  If it does, potential targets are the .786 at 1420 and the .886 at 1422.  But, I wouldn’t be surprised if the channel midline (the yellow dashed line) keeps a lid on any break outs.

    If the channel should break down for some reason, the immediate downside should be limited to the fan line down around 1405.  The channel bottom and the red TL intersect around 1410 at 1230 EDT, so look for a breakout or breakdown before then.

    continued… (more…)

  • Lemmings and Us

    ORIGINAL POST:  9:30AM

    The dollar and the euro each overshot our short-term targets just a tad, but are resuming the path we mapped out for them last week.

    The EURUSD came very close to a key .886 Fib level, prompting many to wonder “was that it?”  I wasn’t so sure, myself.  The resultant sell-off was pretty convincing, taking out the previous low.  It reversed as we expected it would overnight, and appears to be taking a run at 1.2588.  If it can break that level, it would complete a measured move to the .886 at 1.2617.

    The dollar, meanwhile, bounced hard off the channel midline as expected, and has resumed its decline towards the 1.272/.5000 at 80.83 – 80.88.

    Each of them is at a smaller degree .786 or so, meaning they’re due for a pause here.  And, if they can’t seal the deal with a higher high (euro) or lower low (DX), then the party’s over sooner rather than later.

    But, I’m still operating under the assumption that we’ll get one last push in this corrective wave before things come undone at Jackson Hole.  I have yet to see any serious trial balloons regarding an imminent QE announcement.  While not necessary, I would expect the very political Fed to do so, especially given the diatribe coming out of Tampa this week.

    If DX and EURUSD are only in a corrective wave, can SPX break out to new highs as we wondered last week?

    continued… (more…)

  • Charts I’m Watching: August 27, 2012

    I’ve been charting various indices all day — XLF in particular.  I’ll post those charts this afternoon.  In the meantime, SPX is trading in a little channel which hit the upper bound this morning at 1416 and has potential to about 1408-9 on the downside.

    We’re still long from 1409 on Friday with a stop at 1407.  But, I think we’ll bounce around in this channel for the next several days.

    The short-term harmonic picture shows a potential Gartley to 1420.55.

    DX bounced back to the channel midline as we discussed last week, back testing an important channel line, too.

    And, EURUSD back tested the lower bound of its channel, only to reverse off it and come to rest on a trend line of support.  The RSI did pretty much the same.  Charts coming in the next hour.

    Update on the AUDUSD — also reaching an important level of support on daily RSI.

    More later.

     

  • Big Picture: August 24, 2012

    With all the whipsaw action these past two weeks, it might be helpful to review the big picture.  We’ll start with the chart pattern that’s easiest to see: a big rising wedge.

    The wedge shows the potential for higher prices — a tag of the upper bound, for instance.  The apex is currently around 1472 in January of 2013 (but, wedges rarely play out all the way to the apex.)

    continued… (more…)

  • Charts I’m Watching: August 24, 2012

    We got the reaction on the dollar and euro we discussed yesterday afternoon.  So far, it’s pointing to a continuing sell-off of equities.

    continued… (more…)

  • Through the Looking Glass

    We’re all familiar “good news is good” and “bad news is good.”  Are you ready for “good news is bad?”  In a sign that things are becoming curiouser and curiouser, slightly better than expected employment numbers and flash PMI have sent the market down this morning.  Bullard, a non-voting Fe governor, made things worse by pronouncing QE3 iffy.

    While the dip is slightly stronger than we expected, this is the back test of the neckline and .886 Fib (at 1404.64) we were expecting.

    We’re flirting with breaking the wedge.  If this should happen, look for support at 1404.64.  If that level fails, then it’s likely down to the channel midline around 1390.

    continued… (more…)

  • Update on Gold: August 22, 2012

    UPDATE:  August 22, 2012

    Today, gold reached the 1655 target from our August 15 forecast — closing at 1656.20.  Note that this represents a probable breach of the descending triangle upper bound as well as a tag of the Fibonacci .886 level of 1655.70 for a proper Bat Pattern completion.

    continued… (more…)

  • Charts I’m Watching: Aug 22, 2012

    ORIGINAL POST:  9:15 AM

    The futures show how perfectly balanced things are at this level — with a step in either direction being very significant.

    We tagged the IH&S target created back on June 19 yesterday, creating a double top after having broken the fan line off the Oct 2007 top.

    We appear very likely to hit yesterday’s target of 1408 – 1410 on SPX after the open.  If it can hold those levels, we could see another leg up in the rising wedge.  If it breaks, look out below.

    More in a few.

    UPDATE:  9:35 AM

    SPX had no trouble reaching our target range on the open.  Note that we have three chart features in play at the moment:  the rising wedge bound, a back test of the fan line (purple, dashed) and a little trend line drawn under the prices on the 60-min chart.

    continued… (more…)