Charts I’m Watching: October 27, 2011

UPDATE:  7:30 PM

Any CDS experts out there?  If the Greece “haircut” isn’t deemed a default, then it calls into question the value of credit default swaps.  Depending on who you ask and how you measure them, there are $2.5 – 600 trillion of these (possibly worthless) things floating around — some presumably on the balance sheets of already under-capitalized banks.  Are they marked to market or carried at cost, where plunging value will further inflate banks’ hidden liabilities?  If you know a little something about commercial or I-bank accounting, let us hear from you.

UPDATE:  6:00 PM

 Wild day for stocks, today; just as wild for bonds.  Remember ZROZ, the Pimco zero-coupon ETF we talked about a month ago?  [The Forest and the Trees]  At the time, it had completed a huge Crab pattern that portended rough times ahead for long bonds.

Sept 29, 2011

We talked about what might presage a 20% price decline indicated by the Crab pattern:

The portfolio’s duration is 27.79, so a 20% decline in prices would indicate a yield increase of 0.72%.  Anything could happen, but a .72% increase in long bond yields would hardly be beneficial to stocks.

Of course, other factors can drive down prices — credit quality, for instance.  We are talking US treasuries, after all.  And, let’s not forget currency fluctuations.  A crash in the dollar wouldn’t do much for the value of long-duration dollar-denominated assets.

The 20-yr yield hit 3.18 today, up from 2.79 on 9/29.  And, we got a pretty significant sell-off in the dollar, courtesy of a 2.45% single-day move in the EUR/USD.  While I expect the EUR/USD to reverse sharply, the interest rate bump is likely here to stay (we’re only half way to our .72% targeted increase. ) And, as we noted back in September, such a development is hardly constructive for stock prices.

October 27, 2011

More later.

UPDATE:  12:15 PM

Closing in on the 1.618, which also intersects a channel line (red) from my last forecast.  Again, the channel lines are guesstimates based on the similarities between the 2007/8 top and the 2011 top (as modeled on 9/28 and revised 10/24).

The ones I drew in here are parallel to those in 2008, but the spacing of the last two to the right involve speculation on my part that they would follow a similar pattern as each of the preceding channel lines.

Note that since they have a steep slope, the point at which the market intersects them is a function of the time involved to get there.  In other words, the fact that we’ve reached the channel line so quickly has allowed us to reach it a higher price than would have been the case had we, say, taken the time to form a more pronounced B wave (a scenario I haven’t completely given up on, BTW.)

As can be seen from a close up of the daily chart, intersecting the next higher channel line now, for instance, would take us to 1332.  While, an intersection on Nov 21 would result in a price of 1307.  There’s no guarantee that we’ll even reach it, as we have reached the outer boundary of the larger (yellow) regression channel.  But, I don’t feel an overshoot is problematic, seeing as how we diverged pretty strongly below it in early August.


SPX is 3 pts away from completing a Crab pattern at the 1.618 at 1278.48.


Charts I’m Watching: October 27, 2011 — 27 Comments

  1. ABQ: I think we're probably of like mind. I consider myself astro-curious. I've seen some studies that seem to have validity (moon cycles, etc.) but some of the stuff seems really out there. If you see something that's working, feel free to post away.

  2. I know this board don't pay much attention to astrological factors. But if this may help the ferocity of this rise. We have Jupiter making a trine aspect to Pluto, which gives a boost to the plutocracy(bankers and govt). The question to ask is what happens after the passing of this event influence.

    An attribute of Jupiter archetypes is excesses, hysteria, panic etc…we sure see some of it being manifested today. It will exact on the 28 Oct.

  3. I also want to explicitly give credit to Pebble for his analysis in July and in mid September looking for the big down moves which helped give me more structure with which to feel good with my bearish positioning — yes, I was bearishly positioned even as I challenged myself to look for ways that the timing could be extended in July — despite the flies in the ointment I pointed out.

    I am going to really challenge my self more than anyone when I see a recent sentiment extreme that agrees with my positioning. Since I am so in agreement with Pebble in philosophy and usually in positioning this may be a funny place to do it but it is because I find the intellect here so high I want the feedback…not ruffled feathers.

    So Pebble even more importantly kudos and thanks for the incisive analysis and for his ability to share in a fascinating, intelligent and original way.

    I have absolutely no expertise in the kind of pattern analysis you are so good with so this place has really knocked my socks off and you nail the key macro fundamentals to boot.

  4. Pebble,

    For the record I think you do a great job. It takes balls to be public with your calls in a forum and you have those balls.
    I may not always agree but you have my utmost respect for the work you do and I think it is some of the best work out there.
    I know you like Daneric's work but to be honest I like his effort but he is one of the worst traders I have seen. His bias kept him from making a lot of money and any trader that has a bias will do the same.
    The market is cold as ice and trading what you think can kill you.
    Maybe I don't agree with your bias all the time but I have great admiration for the work.
    You may turn out to be right and I root for you.
    In the meantime I just trade what I see.
    Best to you.

  5. Pebble, your analysis has been great and I am very appreciative as I have noted often.

    You are right, I did not post that analysis here on the futures SI till mid Sept, but that extreme caused me to keep from putting shorts back on the rebound in August – I thought I may have shared that before but you are right I did not till mid Sept. But the primary point of my posts about SI was to posit that we would not be able to extend to the downside meaningfully until this positioning was relived. As I said:

    "All the specs are betting on a crash and the shorts are the shortest in individual stocks since July 2009. They will get taken out before the next big leg down, just like in Feb 2008 and Oct 2008 — these are the relevant comparisons not a bull market like Jan 2011."

    "Big contract short interest is multiples higher than the comparable period in 2008. That is the main difference. Destination is as you note. Only question is timing and when the massive short interest will be relived first. "

    Did the 2008 style move happen? No. Why not? Too many had to buy to take profits…too many shorts. Can it happen going forward? In my opinion yes, the ground is being laid for an investable move down which lasts more than a couple of weeks and will not result in a 223 point upmove.

    I have stayed away from stock indices since the crash of August. Covered a lot of individual shorts as the Q's bottomed the second week of August including NFLX. Lots of regret on that cover. Kept GMCR and AEM. Happy there. But sad to say I kept all my commodity shorts even after the mid October commodity pasting.

    But looking at it as if I were coming in from another planet, I believe the risk/reward on the short side in a number of sectors is very compelling. I believe Demark is right, this looks like late October 1973 on an intermediate term view.

  6. Just setting the record straight, Hook. I didn't call for a crash. I called for a 130 point drop on the way to 1040-1050. We got a 142-pt drop that began the next session and bottomed at 1074.

    You said (at 1216, not 1100) that the short interest "does not resemble a setup for an immediate drop." Yet, we got one anyway — immediately.

    Look, short interest is a great indicator, but it has to be taken into context. The "rinse job" you refer to was the last of a wave 5. And, a wave 5 is typically going to see SI elevated relative to a wave 3, because the bear-cat's out of the bag.

    Even though we didn't quite reach my 1040-1050 target, we had a nice playable move that was very profitable to those who ignored the screams of "short interest is too high!" (Zerohedge had a big, splashy article that very day that practically guaranteed an upturn due to excessive SI.)

    You and I have disagreed before, such as 7/7 when you suggested a multi-month rally was in store, and 7/22, when you suggested more time was needed to set up the turn.

    As for me, I've made too many mistakes to count, as you and every other reader know all too well. This past month has been a great lesson in humility. But, I give this blog my best. That goes for comments, too.

    If I see something that doesn't quite jibe, I feel obligated to point it out for others' benefit. Sometimes that means setting the facts straight, though I didn't intend it as a slight.

    Having said that, I agree with you about gap-ups and short setups. I also agree about getting short here (exercising proper caution, of course.) This market has been on a tear, reminding me of the latter stages of the gold top. Irrational though it was, a lot of bears lost a lot of money fighting the tape.

    We have a similar situation here IMHO, with a rally that has no rational basis in underlying fundamentals. I have seen normally reliable harmonic and chart patterns fail time and again, and am feeling quite snake-bit. I'm tempted to say "screw it" and go sailing, which is why I'm pretty sure the end is near.


  7. Hook,

    You are right. It does feel like 2008. In October, there are only few days where the DOW moved less than triple digits. It has been up big or down big, contributed by the algo, non human traders. Look at August we have 600+ and 500+ down days, I won't be surprised to see 1000+ point moves to the downside if the CDS blew up (if that is the right word to use) MF is in trouble and I don't think it is the only one in trouble. After this initial euphoria, things will unravel FAST and furious.

    Pebble, you are right when you said when bond's rate goes up, it's bad for stocks. I have noticed in the past few months when yield gets to certain level, there will be a scare in the stock market. ( it feels almost if it's orchestrated). Everyone will flock back to treasury and the yield goes down. With the amount of debt US has, a 0.01 % increase in rate will be an enormous amount of extra money that Bennie needs to print….He won't let it rise,he can't afford to let it rise, even if it means to crash his favourite Russell 2000….

  8. I said that the open interest in the futures precluded a crash. And it did. The crash happened in August when the specs were long as as everyone can see late Sept was a rinse job in stocks. I stayed with my commodity shorts and stayed away from stocks following my analysis.

    But now, the equity board is full of excellent short setups and we have the highest number of gap ups in history in the record books for today with the only other comparables in 2008 It is time to scale into shorts.

  9. I just checked and you have to go back to August 3 to see the kind of volume we saw today on the S&P.; Needless to say what followed was about 140 points to the downside over the next three trading days. Somethings going to give. Soon.

  10. My stoch setting on the daily at 13/2 have made lower highs with each daily high.

    As i said I have no sell signal as of yet but it could mean we are close to some kind of top.

    Just a ray of light for those who trade with a bias.

  11. Hook, thanks for the reminder. If you'll check, you'll see that the conversation took place after SPX closed at 1216 on 9/16. I had forecast a 130 point drop to 1090 and you felt that high levels of short interest would preclude that. The next leg down completed on 10/4 at 1074.

    Of course, now we've had a 210-point rise. But, that's not the time frame we were discussing.

  12. Pebble,
    Does it mean that intraday neg divergence has little bearing on future price actions? Well I guess time will tell.

    Hook, thanks for taking a stance when everyone was bearish. I guess I should have listened to you.

    I am in the same boat as you. I am a scared long but complacent shorts. I was in deep red already before today, now it's so deep red that is actually laughable. Only a submarine can find my shorts now……

  13. Pebble, an astute commentator pointed out that today had the most gapped up issues in history. The only other days in this range were in September, October and December 2008.

    Lets just say the implications were far from bullish.

  14. Ckorey,

    care to explain a bit more about the neg divergence you see after today's massve runup? The SnP went as high as 1292 before relenting, the shorts are being squeezed like lemons. I did notice a bit of divergence in the vix which did not make a lower low when the market made a higher high…and it filled the gap left open in early august…

  15. A ray of light for the bears is that on my custom set Stochs, they have made a lower value in each pop higher which bottom line is negative divergence.
    That may mean a top of some kind is near.
    That being said it is far from a sell signal.

  16. ABQ: depends on which pattern you're looking at. The rule is a .618 retracement of the AD leg. So, for the (non) Gartley between 5/2 and 8/9…a reversal at the .786 of 1307 would indicate a downside target of 1158. For the smaller Crab above that started at 1256 on Monday, the AD leg is from 1221.06 to 1292.66, or 71.6 points. 61.8% of that is 44.25, targeting 1248. BTW, a .618 retrace is a guideline, not a rule. Many reversal are a lot less, and many go on to the 1.27 or 1.618 extension – especially Crabs and Butterflies. Then you have the 30% or so that don't play out at all, which is a great argument for stops just beyond the reversal zone.

    The pattern above should have reversed at 1278.37 (the 1.618). It did try to reverse at 1275, and again for about 90 minutes right at 1278, but ultimately blew through that. A lot of harmonics investors take a position just shy of the reversal zone, say shorting at 1275, then place a stop at 1281 or so. If the pattern is blown, at least you don't face a huge loss.

  17. dillzs99 – If this is the pattern, what is the downside fib/level you are looking at?
    Market seems 'too scared' to go down today…I have been short for a while, and very complacent/comfortable with my positions. I fear a number of traders are in this state & the market continues it run…We need a shock to get the ball rolling.
    Thanks for the insightful blog Pebblewriter.