Managing Expectations


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.





Managing Expectations — 12 Comments

  1. Yeah…sold the weekly SSO calls from this AM into the slide (glad I moved the stops up as the market advanced)  and took a 5 cent loss on the SSO I purchased today as a hedge as well.  Back to short.  Let’s see what Benny and the Fed have to say on Friday…GLTA and have a great weekend!

  2. The DX rise to 87 may be completely related to the crunch of the Euro if the Eurozone has major issues (Spain, another periphery country/debt issue?) rather than what the Fed and BB have up their sleeves.  Perhaps the German courts say “nein” and the Euro gets creamed???

      • PW-Euro finally hit your 88.6 target of 1.2617 this am.  I grabbed some EUO in the pre-market looking for a reaction off this important level.  Ben could of course help by not announcing QE3 and the dollar strengthens.  Let’s see how we trade today!

  3. Taking a quick look at an SPX chart going back to the first week of August, it seems we might be have a H&S pattern lending support to the 1386 idea. 

    •  Yes, thanks for reminding me about that!  Keep forgetting to post it, and it’s decent sized (although a little lopsided.)  If it plays out, it indicates a downside of 1370 or so.

  4. Welcome to my trading world PW.  Nice drop below 1399 to take your stop, and then a little surge upwards.  I picked up 9/7 weekly SSO $58 calls as a hedge against BB announcing the bazooka QE3 tomorrow at 87 cents.  Still biased short (I don’t think QE is being announced, and I’m willing to bet my gambling money on it) but couldn’t resist the set up at 1399.3 given the support you mentioned.

    GLTA and enjoy the long Labor Day weekend.

    •  It seems like everyone is looking at 1399 and setting up stop at that point.

      Meanwhile, I can’t believe I saw a commercial this morning. “Sign up for alert for news from Ben Bernanke”.  For those who are too busy, there are BB alert!    The whole world will be looking forward to hear how BB saves the world (market).  

        • Hello PW, seriously, no offense.  I am little bit confused.

          You said “the intermediate trend is down”.

          I thought from your yesterday post “Lemmings and Us”,  we are heading toward “1433 and 1451 (then 1464 and 1472.).” if the trend plays out. 

          Today, the trend has changed?

          Do you mean “the intermediate trend is down” toward 1370 and then it is heading toward 1433 and 1451?   

          I know it is tough and it mostly depends on BB or ECB.   However, I have a headache that one day it is all bullish toward 1451 and the next day it is bearish toward 1370, along with H&S pattern.   In less than 24 hours, I am bullish / bearish / bullish / bearish.

          Regardless, Thanks!

          • Sorry to have confused you, Tommy.  I should have explained better.  I think we have further down to go in this particular wave down from 1426 — possibly to the 1370-1386 area.  From there, we either break down or reverse for a higher high — depending largely on whether QE3 comes or not.  I’ll put some charts up later tonight or tomorrow.

    • While 1399 was the price level I mentioned, I was actually watching to see if the white channel line would hold or break (right about 1399.)  I find using the chart patterns — especially TL and channel lines, to be more useful than precise price levels.  Among other reasons, the critical price levels change as the sloping channel line advances.