I’m going to continue to track the relationship between equities and the dollar.  As discussed in several of our latest posts, there’s a real possibility that the normally inverse relationship will be positively correlated in at least the near-term.  In other words, everything tanks.

While the dollar has plenty of “issues,”  I expect that a falling equities market will trigger sell-offs in multiple markets, driving investors back to the dollar as a (arguably less) safe haven.  It’s certainly not as secure as it seemed a year ago, but the question remains:  what’s the alternative?  Ironic as it may seem, the dollar’s weakness may ultimately generate the kind of rally it couldn’t achieve any other way.

Tonight’s battle of the blowhards on TV and radio did little to reassure markets here or abroad.  It appears as though we will go down to the wire before both parties come to their senses and do what’s necessary to prevent more serious damage to the markets.  In the process, investors have become very well aware of the massive issues that will remain even after the deal is done.  The relief rally I once expected is increasingly looking like it’ll be a total dud.

Had to make a choice this morning — cash in a 35% two-day profit or go for the gold.  BAC opened at 9.97, gapping down from Friday’s 10.13 close.  The August 11 puts I bought last Thursday for .90 traded at 1.25.  Tempting…

But, I couldn’t ignore the fact that BAC was one of the most active stocks on the NYSE today, and traded off 1.18% when the broader XLF was off only .72%.  As I mentioned to someone, in somewhat technical terms… this is a suckish stock in a suckish sector in a suckish market.  Yet, the premium to intrinsic value is still only a very modest 25 cents.  Can’t ignore that, right?

Although it looks like the histogram is considering a return to positive territory, the stock still trades below all of its moving averages.  MACD is possibly indicating a bounce back, while RSI continues to look bearish.  But, with no compelling contrary indicators, I’ll go with my gut that a weak overall market will continue to hurt BAC’s relative performance.

In the end, I compromised.  I sold about 1/3 of my position at the 1.22 level for a 35% profit and am sitting with the rest.  Tomorrow should be interesting.

Highlights:

2Q  lowered from 4% to 1.7%.

2011 lowered from 3.1% to 2.4%

Additional 2Q forecasts:          July      March

Unemployment                        9.1%      8.9%

Consumer spending                  .60         2.9

Equip. Investment                    4.7        17.2

Resid. Construction                  3.8         12

Fed Government                       4.5         0.9

Overseas operations account for 46% of S&P; company earnings, meaning the majority still generated in the US.  If the domestic economy ratchets down, will have an impact.

S&P; research shows that whenever we have two or more successive quarters of subdued growth (2% or less), either we’re already in a recession or will be entering one within 12 months.

A video interview can be seen here.

UPDATE:  12:00 PM PDT

SPX, still at 1341, has had a few cracks, but so far no big plunges back down.  But, it’s low volume and it has that distinct aroma of being propped up, today.  Lots of gaps from minute to minute.  Still looking for a follow through to the Gartley and rising wedge.  Together they point to 1330-1334 very soon.

If I were the cynical type, I’d say TPTB need to let it droop a bit — maybe more than a bit.  Otherwise, our fearless leaders might look at this rebound and conclude that a default and/or downgrade is no big deal.

UPDATE:  10:20 AM PDT

The market seems to have stalled at the 1343 level at the upper end of a rising wedge.  Should fall any minute.

UPDATE:  9:55 AM PDT

Looks like we overshot by a point or so on the upside; rose through the 5 minute RSI TL.  We’ll see how we fare on the 30-min and 60-min.

30 minute

60 minute

Note the position of the moving averages, just overhead.

UPDATE:  9:30 AM PDT

SPX will complete a little bearish Gartley at 1342.16 that could take it back down to 1334.

ORIGINAL POST:   8:00 AM PDT

This morning’s carry over from the futures markets takes us down a bearish path.  A “good” outcome from the debt ceiling debate looks less and less likely.  While there may indeed be some resolution,  awareness of our insurmountable financial problems is on the rise — both here and abroad.  Investors are increasingly likely to realize that this empire has no clothes.

As I discussed in yesterday’s post [The Chart That Really Matters] the one benefit of this drop is that we can have a nice little relief rally without jeopardizing the 1370 high.  From these levels, even 30-40 might be doable, though I doubt we top even 1350 again.

One chart I watch during the day is the 5-minute SPX.

In addition to indicating overbought and oversold conditions, the RSI does a very good job of indicating intra-day turns.  I draw trend lines off the highs and lows to indicate potential turning points.  As can be seen above, RSI just ran into its overhead TL and bounced back down, concurrent with another favorite indicator — the 200 period moving average (the red line.)

Together, they forecast a potential turning point in this morning’s recovery attempt — one that could be seen coming ever since the initial bounce this morning (see Point A below).  If the 5-minute breaks through this TL, it generally means it has some room to run (see Point B below).  Otherwise, it marks a resumption of the decline.

Here’s a close up of the same chart at 8:15 AM.

Note the downturn at the TL.  We’ll see if it holds or not.

Although the comparisons to 2007, the bearish technical indicators and the dismal fundamental backdrop are reason enough for me to be bearish, there’s one SPX chart worth revisiting.

First, we were in a rising wedge from March 6, 2009 until June 1, 2011.  We broke below the wedge and have been in backtest mode ever since — currently making our second attempt.  The RSI, MACD and histogram make a compelling argument that this attempt will also fail.

Second, we face significant overhead resistance from a fan line drawn off the 2007 1576 high to the 2011 1370 high.  It stopped very strong advances on May 2 and July 7, and currently stands at 1354, only 9 points away.

Funny, but I originally posted a version of this chart back on May 2 in Collision Looming, the second post I ever made on this blog.  With SPX at 1367.58, I drew this chart and concluded that a top was imminent.  Didn’t realize till later that the top had already occurred an hour earlier…

UPDATE:  3:30 PM PDT

Now that ES and USD/CHF have both opened lower, it’ll be interesting to see if the relationship depicted in the chart below becomes the one that really matters.

UPDATE:  9:30 PM PDT

Another look six hours later.  Looks like stocks are trying to make a comeback, while the USD/CHF is lingering at the initial low.

I was a bit troubled last week [So Far… So Far] when the 20 point advance that I anticipated came as the result of something other than debt ceiling news. 

“While it’s entirely possible this pattern will overshoot vis-a-vis 2007 just like we did on July 7th, I think it’s more likely we’ll backpedal a little tonight or tomorrow (when people realize the Eurozone deal isn’t all it’s cracked up to be) and set the stage for another grab at glory when the deal is announced.

It’s also possible that the deal that’s ultimately reached is so wretched that the market takes it as a negative instead of a positive.  I mean, it seems a foregone conclusion that some deal will be reached, so isn’t that pretty much priced into the market?  What if — and I know this is a stretch — Congress can’t get its act together and do something meaningfully beneficial?  Might not the result be a sell off instead of a rally?”

This is obviously that sell off.  I see two primary possibilities at this juncture.  One, that we linger at these levels and rally up if/when the agreement comes.  We now have ample room to rally and could put in a 40-point advance without breaking the 1370 high.

The other possibility, just as likely, is that a disappointing deal is made and we don’t rally at all.  One obvious result of this past week’s sturm und drang is a greatly increased awareness of just how screwed up our finances are — not to mention the body politic that got us into this mess and whose job it is to extricate us before the next depression swings into gear.

Unless the deal passes the smell test, investors are likely to take it as the band-aid it is — not much help to a patient suffering a massive coronary.

Dare we talk about the third possibility — that no deal is made?  It’s still somewhat remote, although, if the market doesn’t tumble pretty hard here, both sides are likely to dig in even harder.   You’ll know it’s happening from the chorus (from both sides of the aisle) of “now look what you’ve done!”

Friday, the NASDAQ 100 (NDX) made a new high at 2433, a level not seen since Feb 2001.  It got a lot of folks wondering whether SPX has another high on the way.  It doesn’t, and here’s why.

In 2001, when NDX peaked at 4816, it was a runaway.  It had grown tenfold in less than 6 years (SPX grew 1.3 X during the same period.)  When NDX crashed, it fell 84%.  So, when it rebounded in 2007, is it any wonder that it only retraced 36% of the decline (versus 100% for SPX)?

A glance at the chart below tells the 2007 story.  NDX followed the same general pattern as SPX, but failed to spike as much in July.  Only in October did reluctant investors finally forget the past, bidding it up at a much faster clip than SPX.  Between its July and October peaks, for instance, SPX gained 20 points (1.2%).  In the same period, NDX gained 179 points (8.6%).

When SPX reached its all-time high on October 11, it was tired.  Twenty points in 3 months is a lot of effort for little reward.  But NDX, playing catch up, still had plenty of momentum — gaining another 108 points before finally peaking two weeks later on October 31 after making three higher highs in a row.

Many investors no doubt wondered, as NDX hit 2239 on Oct 31, whether SPX would join it in making a higher high.  It was only 27 points away from completing a massive Inverse Head & Shoulders pattern that might have sent it up 190 points.  Instead, SPX made its first lower high at 1553 (spitting distance from its first topping pattern high of 1556 on 7/19).  It would go on to make successive lower highs, eventually completing a traditional H&S; pattern and tumbling 58%.

In retrospect, NDX’s peak — coming two weeks after SPX’s — was a great indicator of bearish capitulation.   Understandably reluctant investors, by finally turning euphoric, marked the top in a way that would make Prechter proud.  The divergence between NDX’s higher high and SPX’s lower high was a great warning sign.

Let’s turn our attention to 2011.  NDX made three higher highs in a row on Feb 18, May 2 and Jul 7.  On those same days, SPX made what might be a head and two shoulders.  NDX’s last higher high on July 7 was the same date on which SPX made its first lower high (the right shoulder).  Divergence.

On Friday, 2 weeks later, NDX beat that Jul 7 peak by 14 points.  SPX came in 10 points lower than its Jul 7 peak.  More divergence.

And, let’s not forget that NDX has retraced 116% of its 2007-2009 losses.  For SPX, it’s only 77%.  Some would consider that divergence.

Still, we’re left to wonder whether SPX might tag along.  After all, it’s just 10 points away from completing a sizable IHS that could send it up 90 points.  It’s not hard to imagine in this Apple-infused euphoria that’s enabled investors to ignore the greatest economic calamity to face the world in 80 years.

It’s entirely possible that 2011 won’t pull a page from the 2007 playbook, that QE will enable only increasing valuations,  that the debt ceiling increase will magically result in a better economic backdrop for profits — that this time is different.

Don’t bet on it.

UPDATE:  1:00 PM PDT

Like SPX, BAC did very little for the rest of the day.  Unlike SPX, however, this meant a continuation of the slow, steady decline it started this morning.  While SPX traced out what is probably an ascending triangle, BAC has more of a pennant look to it, trending down on the day.  These patterns typically continue uptrends; but, neither is particularly well formed, so I won’t read too much into them.

The August 11 puts closed at .97.

UPDATE:  11:00 AM PDT

BAC hit the MA and has started back down.  The RSI recharged, made a lower high and is apparently on its way back down.  The histogram is turning negative.  A moment of truth is coming up, when the RSI hits the TL it broke through when it recharged.  It’s possible it bounces off that TL and goes on to make a higher high.  The weakness relative to SPX would argue otherwise.

Incidentally, in watching the 5-minute SPX chart, we seem to have broken out of a rising wedge Wednesday.  The backtest on Thursday failed.  In other words, it rose above the wedge and, in fact, started forming another one that broke down last night.

It appears we’re in backtest mode, but with much less gusto than occurred yesterday.  In fact, there’s a divergence setting up between the index and its RSI, MACD and Histogram.  While the index is making a run at a higher high, the indicators are all sloping downward.  In general, the indicators win out.  This action is normally indicative of a stock that’s ahead of itself and due for a correction.

UPDATE:  9:00 AM PDT

BAC complete the first wave down and is trying to rebound.  In a stronger stock, the retrace might make it back to the rising wedge TL in the form of a backtest.  Here, it will likely run into resistance at its 200 period moving average.  I’m watching the 5 minute chart, as it does a pretty good job of showing the short and medium term picture at the same time.

And, I use the RSI as a trading guide.  More often than not, when RSI is above 70 I start looking for a downturn; and, a level below 30 indicates a bottom.  But, because it’s only 5 minutes out of the day, it needs to “recharge” when it reaches either extreme.

I’m charting BAC alongside SPX in order to keep an eye on its relative performance.  So far, it seems to be having a tough time on a relative basis.

ORIGINAL POST:   7:00 AM PDT

Bank of America has fallen from its rising wedge and is down .10 this morning.  The August 11 puts hit 1.00, for potential 10% profit in one day.  If only they were all this easy…

Ordinarily, I would take the 10% and run, but: (1) I expect it to fall further after backtesting the wedge; (2) BAC should really take it on the chin when the overall market tumbles; and, (3) I’m having too much fun.

My price target on a breakdown from a falling wedge is the wedge’s inception.  In this case, it’s 9.40, which should put the puts at an intrinsic value of 1.60.

It puzzles me how, when the market does exactly what it’s expected to do, some folks take it as a sign that everything’s somehow changed.

Late Tuesday night [Ten Lousy Points] I blogged for the 1,000th time about the similarities between this market and that of 2007.  I pointed specifically to December 21, 2007 as the day most equivalent to Tuesday’s big run up. 

I further theorized that the inverse head & shoulder pattern we completed that day could take us from 1324 up to 1344, where we would be just 10 points away from completing a much bigger IHS pattern that would be extremely bullish. 

After Wednesday’s market went nowhere, I put up a couple of 60-minute charts — one from December 2007 and one from today [Merry Christmas].  I suggested the time was at hand for us to complete the pattern we’ve been following.

Today, we…um…completed the pattern.  So…  what’s wrong with that picture?  The only thing that bothers me just a little bit is the way we got there.  I thought it would take two days, but it only took one.  I also thought it would come on the heels of a debt ceiling deal; the deal is yet to be reached.

While it’s entirely possible this pattern will overshoot vis-a-vis 2007 just like we did on July 7th, I think it’s more likely we’ll backpedal a little tonight or tomorrow (when people realize the Eurozone deal isn’t all it’s cracked up to be) and set the stage for another grab at glory when the deal is announced.

It’s also possible that the deal that’s ultimately reached is so wretched that the market takes it as a negative instead of a positive.  I mean, it seems a foregone conclusion that some deal will be reached, so isn’t that pretty much priced into the market?  What if — and I know this is a stretch — Congress can’t get its act together and do something meaningfully beneficial?  Might not the result be a sell off instead of a rally?

I don’t really know.   Never been in quite this situation before.  But, I do know that there’s very little any politician can do at this point to fix things in such a way that won’t bring a great deal of suffering to most Americans. 

The way the game was played, huge benefits were wrung out of the economy for the benefit of a few.  Instead of being held accountable, those few are mostly living very comfortably and secure in the knowledge that the system has their backs.  The rest of us will be paying the price for many, many years.  A debt ceiling increase will do nothing to prevent it.

A quick look at what I expect to be the way forward:

In addition to the divergence between RSI and MACD and SPX for most of the day, VIX set up a bullish falling wedge that should break upwards in the morning. 

And, the dollar completed a bullish Butterfly Pattern that should reverse today’s slide.

I’ll try to post again before tomorrow’s opening.  In the meantime, stay calm.  Use stops.  And, keep the faith. 

Now that our daily volume is up to 1,500 or so page views, it occurs to me this is getting a lot bigger than I originally expected.

If it’s useful information for you, please take a minute and register as a follower.  That way, I can get an idea who’s checking in and when, and try to get info out on a timely basis. 

While we’re at it, leave a comment below and let me know what you’d like to see discussed.   I’m all over the map at times, jumping from SPX technical analysis to economic discussions and back again.  I try to write about things that interest me, but let me know what interests you.

Last, yesterday someone must have clicked on some ads, because Google dumped a few bucks in my account.  I have no interest in taking any money from this little endeavor, but I’d love to add any revenues that are generated to the Novosel Foundation’s take [see the sidebar to the right.]

The Foundation helps Guards and Reservists returning from service abroad transition back into civilian life — primarily providing such things as wheelchairs, ramps, prosthetics, etc.  So, if you see an advertiser that interests you,  click away.  It’s for a good cause.

ORIGINAL POST:  10:50 AM PDT

Just a little experiment here, to demonstrate how technical trading works.  Bank of America, hailed as a screaming buy after losing only $8.8 billion in the latest quarter, is currently trading at about 10.24.

It seems pretty well stuck in a descending channel that’s had BAC circling the drain since last February.

Lately, it made a nice move up after posting an $8.8 billion loss that, supposedly, cleaned up its mortgage liabilities.   Here’s a close up.

 As can be seen in this chart, the stock broke though overhead resistance in the form of a TL that’s kept it down for 7 days.  But, in so doing, it runs smack dab into heavier resistance in a TL that dates back to Jun 29.

It also formed a rising wedge in the process, and is most of the way back toward the top of the channel that’s contained it so effectively for months.  If BAC continues in the channel, it could fall back towards the lower end in short order.  The divergence between its price ascent and its RSI descent adds to my confidence that this is a great stock to play on the downside.

I’m picking up some August 11 puts at .90 each.  We’ll see how this plays out; I’ll post an update each day until I close out the position.