We’ve added quite a few new members over the past two weeks.  I thought it would be a good idea to review a few odds and ends.

First, if you signed up for a Charter Annual Membership, congratulations.  Your rate will never increase above $750.  If you signed up for a regular Annual Membership at the sale price of $500, that rate is good for the first year only.

The annual rate will be reverting to $1,800-2,000 after the membership promotion concludes.  If you’d like to upgrade, no problem.  Just PayPal the $250 difference and we’ll adjust your membership type.  You can also use the Consulting button on the sign-up page [CLICK HERE] if that’s easier for you.  I’ll leave the promotion up through Friday night.

If you haven’t already, take a moment to follow @pebblewriter, and, if you’re an active trader, @pebbletrades.  @pebblewriter is a general Twitter account to which I post a random assortment of stuff on a random basis.  @pebbletrades, for members only, will notify you of intraday changes in position.  If it’s not obvious from your Twitter handle who you really are, drop me an email so I can approve your follow request.

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Now, on to investment matters.  For those of you who haven’t figured it out, I am slightly bearish by nature.  I set up this website back on May 2, 2011 because I was concerned that stocks were about to take a big dump.  They did.  May 2 was the high.  The S&P 500 tumbled 22% by October — most of it in a rather nasty 18% plunge over a period of two weeks.In that case, an analog that was replicating the 2007 top was at work.  It predicted the day and exact price at which the decline would begin.  I was over the top ecstatic, and my readers were too.

But, on October 27, a pattern which might have taken stocks well below the 2009 lows was busted by the ECB.  Thus began my quest to figure out just how central banks and their proxies were directly and indirectly moving markets, and more importantly, how to anticipate such activities.The Fed has always had the ability to goose markets via monetary policy.  But, this was something new: deliberately busting bearish patterns via currencies, futures, derivatives, etc.  Five years ago, most folks laughed at the idea.  Since then, it has become common knowledge, and is openly admitted by the BoJ and SNB.  Others, perhaps more shy about it, are no doubt doing the same.

I’m not an insider.  I have no friends at the FOMC, the ECB, the SNB, BoJ or even at Citadel.  I’m just an intensely curious guy, some would say slightly “Aspergery”, who sees patterns everywhere.  It’s no exaggeration to say I even dream about patterns.  I keep a notebook on my bedside table for those times when I wake up at 3am with a particular pattern in mind.

The downside — aside from making me perhaps the world’s least interesting person to invite to your home for dinner — is that I often find myself jumping at shadows.  I’m not really paranoid, but it sometimes seems that way because I pay particularly close attention to downside risks.If something bad is about to happen to your portfolio, I’ll be among the first to realize it and let you know.  This means that if you have a long-term taxable portfolio with an extremely low cost basis, you should take my intraday rants with a grain of salt.  Sometimes they work out, and sometimes they don’t.  It often depends on whether the MIT grad sitting in a windowless room on Dearborn St. in Chicago mashes the “sell VIX” or “ramp CL” button.

This assertion will rub some of you who do excellent fundamental research the wrong way.  Believe me, I understand.  Like you, I was raised to believe that the secret to forecasting stock prices was in analyzing a company’s cash flow, earnings statement, balance sheet, competitive position, management talent, etc.  I believed it as much as anyone.  And, at times, I believe these things still matter.

But, did it matter last August or January, when stocks were dropping like rocks, whether you owned the highest quality stock in its sector?  Did it matter in the summer of 2010 or 2008? How about the countless times, like today, when a 3% intraday rally in oil futures — on no news — produces a V-shaped rally that spikes up to new highs?The reality is that stocks are heavily manipulated.  And, I’m not just talking about the big picture — though that should be obvious.  I’m talking about oil futures, USDJPY, NKD or VIX making sure that SPX gets a little boost when it bumps up against resistance.  It happens multiple times per day, almost every day.

Though once in a while it doesn’t happen, or they try but it doesn’t work.  Maybe the selling volume is too high, or they actually want to flesh out a ridiculously lopsided channel with an occasional pullback.

Lately, we’ve seen what appeared to many to be minor pullbacks turn into 10% corrections.  Love those, as they provide those willing to short stocks an opportunity to pile on positive returns while the indices are dropping.  They almost make up for the days when the algos deliver a melt up that completely ignores resistance.  I still find those days tough to trade — though it’s probably psychological.

Speaking of trading…I don’t consider myself particularly good at it.  I used to be, back in the days when good news was good and bad news bad, when real live people traded markets, when borrowers paid you interest instead of the other way around (what’s the PV of something using a negative rate!?)

These days, it’s increasingly difficult to trade without thinking to myself “what are they trying to accomplish, here?” or, “what would be the best way for them to screw over traders who are playing an obvious pattern?”  Witness the prevalence of busted Head and Shoulder patterns, not to mention the number of hedge funds that are closing their doors.

Fortunately, I’m pretty decent at charting patterns and forecasting markets. So, that’s what I do every, while also attempting to identify turning points intraday.  You’re welcome to follow along in the instrument of your choice, as I post these turning points.  Or, simply use the information to inform other purchase/sale decisions.

And, if you have a specific stock, currency pair or commodity that you’d like an in-depth or customized look at, just let me know.  I consult by the hour or, if it’s an ongoing need, on a monthly retainer basis.

Lastly, I encourage you to share.  Most of you are professional money managers or traders, and I know you like to keep your secrets to yourself.  But, we all have unique perspectives, and none of us has a lock on good ideas.  Share something that helps another fellow trader today, and tomorrow karma might smile on you.

 

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p.s.  I’m going to try very hard to get May’s results posted on Thursday.  I’ll POST THEM HERE as soon as they’re available.

Yesterday was a good start toward our downside target.  Today, I expect the other shoe to drop.

USDJPY had no trouble reaching our first and second downside targets.  And, Abe’s suspension of the sales tax hike last night permitted the pair to finally break the rising red TL and get most of the way to our third target at 108.25.CL was a big help, nailing our downside target and closing below its SMA10 for the first time in weeks.The only thing that spoiled our party yesterday was NKD, which ramped into the close and dragged the algos with it.It didn’t appear sustainable at the time, hence my suggestion to maintain a short position overnight.

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Lots to examine today.  Futures are up 3 points, but the bigger development is that DX and USDJPY have reached the upside targets we set for them several weeks ago.  We’ll start with DX, which after losing trend last week, came back and tagged the top of the falling white channel. USDJPY has reached almost as important a level of resistance — the midline of the channel that has guided its downside for over a year.

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When we last caught up with RUT, it was potentially going to take another shot at completing an Inverted Head & Shoulders pattern.  But, as I noted at the time, this would require it to break out of the falling white channel that had guided it lower for six months.

But, to do so, it needed help.

USDJPY [has] continued falling until it reached (well, almost) the most important support on its entire chart: the yellow .618 at 120.11.  If it holds/bounces, then RUT should get another bite at the apple.

As it happened, USDJPY was in no mood to help.  Instead of bouncing at 120.11 in the wake of the first Fed rate hike in nearly a decade, it dropped through and shed 12% over the next several months.  With the yen carry trade unraveling, RUT plunged 19% over the next six weeks.

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RUT’s long term channel is a good place to start.  Like many other indices, RUT should have reversed when it tagged the top of the white and yellow channels at the purple 1.618 in late 2013.  (Of course, that was when USDJPY started making noises about heading higher again.)

Instead, it went sideways for months, successfully avoiding a H&S Pattern that would have sent it to 870.  It finally broke down, but bounced sharply in October 2014 (the Bullard Bounce) to new highs.  It didn’t top out until late October, a month after SPX.

Note that it climbed the underside of the broken white channel for six months — all the way until it hit the top of the rising yellow channel again, at which point it climbed the underside of that channel for another six weeks.Eventually, it topped out — two weeks after USDJPY did.  And, it eventually formed the falling white channel I mentioned in the Dec 2015 post.

In January, that falling channel broke down, and RUT continued until it found another means of support.  I’ve inserted the falling purple channel above, which does a reasonably good job of capturing most of the turning points.

Note that RUT, after bouncing on Feb 11 when oil bottomed out, is back above the falling white channel.  It even backtested it, for good measure.  It looks as though it intends to test the top of the purple channel at 1200ish, though there could easily be a C leg down to 1070 first.

With another rate hike potentially on the way (we’ll believe it when we see it) we have to wonder whether it can actually push to new highs at this stage.

Having already reached the purple 1.272, it has satisfied the bare minimum reaction to that Fib.  And, having already reached the red 1.272, it could conceivably be done with the downside Fib pattern.

But, note the white dot in early May 2017 at 850-867.  It represents the bottom of the falling purple channel, a backtest of the May 2007 and April 2011 highs,the red 1.618 extension, the white .618 retracement, the yellow channel midline, and probably some other stuff I haven’t even noticed.

It’s more than a little ironic that it’s the same price range that the 2014 H&S Pattern targeted.  And, given that TPTB worked so hard to avoid that drop in the first place, it’s probably a long shot that it could fall another 24%.

If it bounces from here, the upside resistance consists of the purple .618 at 1161.19, the purple channel top at 1200, and the white channel top at the .886 of 1255.77.  From there, it’s only 40 points to new highs.As in December, much will depend on whether or not the Fed announces another rate hike in June.   It appears, at this time, that they’re trying to get it up past as much resistance as possible before that occurs.

Stay tuned.

In our last update on NDX, I noted that NDX was testing key support at the bottom of a long-term channel as well as the 100- and 200-day moving averages.  The index had climbed to within 1.6% of its tech bubble highs from the year 2000.  New all-time highs appeared to be just ahead.  But, there was a catch:

However, if investors are disappointed with the Fed’s upcoming decision, look for another test of the white channel bottom at around 3955.

As it turned out, investors were quite disappointed when, two days later, the FOMC increased its target range by 25 bps to .25 – .50% and the YE 2016 target rate to 1.375%.  TPTB managed to tread water for another 10 sessions, through the end of the year.

Then, NKD broke down.  It reached 3992 within the next three weeks, bounced almost 8%, then plunged below our 3955 target to complete a Bat Pattern at 3888.  By the time all the dust had settled, it was an 18% plunge in about 7 weeks.Hedgies that were crowded into some of these can’t-miss stocks took it on the chin.  Now that the index is back to a point of major resistance, what lies ahead?

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There’s an old saying: never let a good 3-day weekend go to waste when the market needs propping up in the weeks leading up to a rate hike.

Not really.  I made that up.  I’m not sure it’s going to catch on, either.  But, it might…if more investors took a good, hard look at all the shenanigans that go on around 3-day weekends.

I looked back at the past 15 Memorial Day weekends to get an idea what we can expect over the next several days.  Spoiler alert: there’s a very high incidence of major market manipulation — the momentum-changing variety.  And, it wasn’t always successful.

For details, read on.  The yellow arrows in each chart refer to the day markets reopened after each Memorial Day weekend.

May 30, 2000

SPX gapped back above the 200-day moving average, then bounced 7.6% over the next six sessions.  This occurred shortly after stocks made a new all-time high at the height of the tech bubble.May 29, 2001

SPX did its best to hold above the SMA100 it had just gapped above (breaking the falling trend line in the process.)  Ultimately, it couldn’t stop the tech bubble from bursting. SPX dropped 26% in the next four months.

May 28, 2002

Again, SPX tried and failed to hold a breakout.  It led to a 23% drop in the next two months.

May 27, 2003

SPX gapped above two important trend lines as well as its moving averages.  SPX gained 8% in the next three weeks.  It marked the end of the tech bubble crash.

June 1, 2004

Nothing spectacular here — just kept a strong bounce intact and held the SMA50.

May 31, 2005

This day was about playing defense.  SPX had twice tried, and failed, to retake 1200.  On May 31, the pullback was limited to a channel midline and the 10-day moving average in order to allow 1200 to broken the following day.

May 30, 2006

More defense.  SPX fell 20 points from the Friday before the close, but managed to hold the line at the 200-day moving average.  The battle was lost a few days later, but the war was won when the bottom of the rising purple channel from 2004 held.

May 29, 2007

SPX had just topped 1500, but had run into the midline of a channel dating back to 2003.  It needed to hold on to its gains, and a push back above the SMA10 over the weekend helped it do so.  It bounced for two more days, before continuing lower in the crash of 2007-2009.  It wouldn’t see those prices again until May 27, 2008

After having lost 320 points from new all-time highs the previous October, SPX had just bounced up to trend line resistance and the 200-day moving average. Memorial day weekend provided a nice bounce at the SMA50.

Unfortunately, the bounce only lasted two days.May 26, 2009

This one’s kinda special.  After crashing 58% since October 2007, SPX was considering breaking out of the huge falling channel that guided it lower.

The smart move might have been to allow a deeper dip in May to set up an inverted Head & Shoulders pattern.  But, they powered it right on through and put in a small right shoulder after topping the SMA200.  It’s all good.

June 1, 2010

Ah, ha, ha, ha, stayin’ alive. Stayin’ alive.  SPX plunged 2%.  Fortunately, the Ben-Gees were ready with another round of QE.

May 31, 2011

This bounce came a few weeks after I started publishing my research on May 2 — thinking that a top was near.  It shook my confidence, as SPX broke out of a well-formed falling channel.It sure looked like a breakout, so I was more than a little nervous as I posted that day:

If [the push to 1381] doesn’t happen by Monday, then the drop from May 2 was IT. 

Thank you, oh wise and powerful chart gods.May 29, 2012

After clawing back to the 2011 highs, SPX finally reached the 1381.50 Fibonacci target — but formed a Head & Shoulders pattern and completed a Butterfly pattern in the process.  May 29’s bullish-looking bump proved to be a 1% head fake in the midst of an 11% correction. 

May 28, 2013

An unremarkable 0.6% bump in the midst of an 8% correction.  It didn’t matter, as SPX was backtesting the 2007 highs.

May 27, 2014

This one was a bit of a dud — a 0.5% pop over horizontal resistance.  Just another day in paradise.

May 26, 2015

SPX closed the Friday before Memorial Day weekend just a few points away from our long-held 2138 target.  No doubt, most traders went comfortably long into the three-day weekend.

After having pointed out the dangers two days prior [The Last Big Butterfly], I was anything but comfortable.  But, I was surprised all the same to see SPX dump 22 points when the markets reopened.

By the time the dust had settled 3 months later, SPX had shed 12.2% and May 20 was crowned the new all-time high.  A year later, it still is.

Lessons Learned

Of the sixteen Memorial Day weekends since 2000, seven have been seen SPX fall on the following Tuesday.   Losses averaged 12.4 points.  The other nine Tuesdays saw SPX rise by an average of 15.4 points.

The biggest gains occurred when SPX was trying to recover from a sharp decline and needed support.  The biggest losses occurred soon after new highs or an extended rally such as we’ve experienced this past several months.

Bottom line, markets like 3-day weekends for the same reason that muggers enjoy dark, moonless nights.  It’s easier to accomplish the task at hand when no one’s around to notice.

With SPX only 35 points from new all-time highs, it would seem an ideal time to push through resistance. What better opportunity?  Of course, that’s what folks thought last Memorial Day weekend.

We have a rate hike coming up, possibly next month.  Things didn’t go so well the last time the Fed hiked rates [see the Bonus Charts below.]  Watching the dollar spike today, I’m apparently not the only one who remembers.

Bonus Charts:

The last time the FOMC actually raised the discount rate was Dec 16, 2015.  The markets reacted with their usual rally.

The Fed likes to “help” markets rally on FOMC announcement days.  It reassures investors that the FOMC has their backs, and won’t let anything bad happen.

In this case, SPX actually broke trend and popped above the 200-day moving average — a very strong reaction.  But, of course, it didn’t stick.  After the support was withdrawn, SPX dropped like a rock.

If it plays out like this again, look for the US dollar to make another strong move.

Like nervous high school boys dressing for the prom, investors everywhere are wondering whether or not Janet Yellen will deliver the goods today.  Her fellow FOMC members have practically guaranteed a rate hike by July, maybe even June.

There’s no better indicator than the US dollar, which has spent the past 10 days or so dancing around a range of support — formerly resistance.continued for members… (more…)

I’ve been observing the CL algo nonsense for a long time, so I’m not easily shocked by the ludicrous goings-on there. This past week has truly set for records for ludicrous-ness (with apologies to Mrs. Seine, my 10th grade English teacher.)

What’s my forecast for oil?  Whatever price is necessary to keep stock prices rising. And, after USDJPY’s dismal showing last night, it’s more necessary than ever.

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Back on May 2 [see: Happy Anniversary] I noted that USDJPY was in danger of losing its last shred of support.

USDJPY has clearly lost the support of the rising purple channel from 2011, meaning the yen carry trade is on life support.  It’s possible the yellow .786 will give it the bounce it needs, but it looks tenuous at best.

As it turned out, the BoJ must have come to the same conclusion.  Because May 2 was the bottom, and USDJPY has since bounced an impressive 4.8% — though not without fits and starts.

Now that it’s reached its first serious resistance, will it be able to punch through?  Can the yen carry trade be saved?

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SPX made its way to our channel top yesterday, thought about it for a nanosecond, then broke out forcefully.  While the housing data helped, most of the gains were already in the bag on the back of a massive 3.6% rally in oil, and an almost as impressive 1.11% ramp job in USDJPY.  The USDJPY rally would be more impressive had it not taken the pair to some pretty heavy resistance.

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