pebblewriter

Tag: crab

  • Charts I’m Watching: Feb 19, 2013

    The dollar index has cleared an important hurdle to higher prices.  Note RSI has broken above and is back-testing the red channel on the daily chart.

    Of course, it’s not a back-test until it reverses and stays higher.  The first key level to confirm a breakout are the Jan 4 80.995 high — at which point DX will run into the 25% white channel line.The harmonic picture is muddled at best, as DX has tagged the .886 retracement of the move from 78.725 to 81.515 three separate times – preferring to remain in a trading range rather than breaking down or out.

    Breaking this RSI channel is the first very (potentially) positive news for the bears in quite a while.  One caveat, there’s probably a 50:50 chance that the DX RSI will need to tag the midline of the rising white channel before the reversal really gets going.

    One potential problem here is that the midline and the red channel top don’t intersect until early March, so this could mean sideways currency markets for several weeks — which would likely be accompanied by higher stock prices.

    For the past week or so, I’ve been opening intra-day long positions on strength while maintaining a short core position.  Today is no exception.  I’m closing my intra-day longs here at 1526.50, as we’ve reached a 1.618 Fib level of the latest move up.  A move back up through this level, and I’ll add them back on again.

    I must admit, though, that I find the SPX RSI chart a little unnerving.  If DX looks bullish based on a channel breakout, SPX does, too.  Chart coming shortly — if my internet signal will cooperate.  I’m writing today from a hotel lobby in Lake Tahoe, and the connection is a bit slow.

    SPX is obviously trading above the upper bound of the big rising wedge again today (the yellow TL).  This marks five days in a row, though we’ve managed to close below it every day.  As we’ll discuss today, the next day or two is vitally important to the market’s overall direction.

    I put the yellow TL at about 1524 today (1521 on the arithmetic scale rather than log).  This is drawn from the July 21, 2011 high of 1347(inception) through the Sep 14, 2012 1474.51 high.  IMO, a strong move through this TL would be very bullish and practically guarantee 1553-1555 — with one caveat.

    In 2011, there were three potential Point X’s to kick off the downside and calculate the upside: 1370.58 on May 2, 1356.48 on July 7 and 1347 on July 21.  I referred to these in the post All The Pretty Butterflies in calling the April 2012 high.

    I favored the 1347 high because it best fit with the definition of a Butterfly – a Point B reversal at the .786 retrace. The 1356.48 Butterfly didn’t quite reach its .786, and the 1370.58 Butterfly didn’t come close.

    As we found out, the 1347 pattern was the correct one.  It signaled a reversal at its 1.272 Fib of 1421.05 and, in fact, the market reversed at 1422.38.  The decline from there to 1266 set up another Butterfly Pattern (in purple). The 1.272 actually targeted 1464, but SPX stretched to reach the .886 of 1576-666 at 1472 (ultimately reaching 1474.51).

    Because 1347 figured prominently in two important patterns, and neither of the other potential point X’s have seen any real reaction off their Fibs, I have pretty much discarded them.

    But, I show them above just in case.  This market is currently flouting, if not completely ignoring, the rules.  And, the 1356.48’s 1.618 at 1530.58 might suddenly decide to assert itself.  It’s just above current levels and would make for a nice intra-day high.

    And, the 1370.58’s 1.618 at 1553.39 lines up very nicely with the 1.618 extension of the 1474-1343 decline (yellow pattern.)  It also would fulfill a measured move I’ve been tracking.

    On the chart above, the distance from (2) to (3) is 207.77.  Adding 207.77 to the 1343.35 low (4) yields 1551.12 – right there with those 1.618 Crab Pattern completion points. If SPX can break through 1530.58, there are no other Fib levels between there and 1553.

    Obviously, we are still looking at strong negative divergence on the daily and 60-min charts. And, with the sequester looking more and more likely, we’re not lacking for a catalyst. But, the market continues to shrug off some pretty strong headwinds.  I still wouldn’t commit new capital at these levels, and I sure wouldn’t be long and unhedged. But, a close above that yellow trend line and 1530.58 Fib would be hard to ignore.

    More later.

    UPDATE: 2:00 PM

    SPX broke back above 1526.50, so I put the intra-day long on yet again.  As we approach 1530.58, I’ll take another stab at lifting it.  We’re certainly not making any money with this approach, but I’m much less concerned with a sudden 30-point updraft than a sudden 100-pt downdraft.  I seem to have plenty of company, however, and this concerns me.

    OTOH, today’s USA Today headline reads: Mutual Funds Breaking Records.    The only thing missing is the exclamation point.  Inside the Money section, you can take your pick of “Has Dow Outgrown Crazy Days?”, “It’s Hard Out There for a Repo Man” and the imponderable “Fast Foreclosures Help Home Prices.”

    Turns out judicial foreclosures slow things down because the banksters are occasionally restrained by the rule of law (that must really suck for them.)  When it takes too long to kick families out of their homes, it creates “real uncertainty.”  Of course, so does having your former neighbors living out of their Toyota.  Guess that’s where the repo man comes in.

    More shortly.

    UPDATE:  2:45 PM

    Taking another stab at an interim top here at 1530.50 — lifting the intra-day long, full short again. Tight stops on this sucker; as mentioned above, whole lot of blue sky between 1530 and 1553.

    Remember, this is the 1.618 of the Crab Pattern formed by the 1356.48 to 1074.77 decline between July and October 2011.  Downside targets that matter include 1474.51, of course. But, first, let’s think about the scenario that would confuse the most people: a decline to 1490-1497 that would leave open the possibility of a new Butterfly/Crab higher to 1553-1555.

    I’m being summoned for Dad duty (the kids are off school this week and it’s snowing outside – yay!) so I’ll leave it at that for the time being.  I’ll be back later this evening to tidy things up and answer any questions.

    GLTA.

  • What Gives? Feb 13, 2013

    It was worth watching the SOTU last night just to see Boehner’s contortions, trying to scowl in a dignified, statesman-like way.  Nothing much new in the speech or the response.

    More interesting was Mitch McConnell’s comment on CNBC last night that the sequester will go into effect. I don’t know any reputable economist who believes we can go through sequester without a sizable hit to GDP.

    But, the market is ignoring the tenuous economic situation and continues to edge higher.  What gives?  Aside from the $85 billion mainlining into the banks every month courtesy of the Fed, that is…

    Zerohedge ran a BofAML study last night that pretty much says it all.  The market is currently reflecting bullish sentiment that’s higher than almost any time since 2002.  I imagine it’s even a little higher this morning.

    Most past ventures into this sentiment range have not ended well for the markets – especially when there is a huge divergence between soaring markets and faltering economic backdrops, as the charts below show.

    Notably, the market is ramping these past few days on negative divergence in every single time frame – from weekly on down to 5-minutes.  And, it has completed some very significant harmonic patterns at the very top of a massive ending diagonal/rising wedge that’s precisely aligned with several previous tops (Jul 2011, Apr 2012, Sep 2012.)

    SPX surpassed our IHS target of 1522.60 from yesterday.  I’m closing out longs here at 1524 and will play the downside.

    UPDATE:  3:15 PM

    Getting a nice little push to the downside here — now 7 points off the daily high.  The white channel line that had been providing support is now providing resistance at around 1518.60 (the purple Crab’s 1.618 Fib is 1518.57.)

    SPX just completed a little H&S pattern that targets about 1510.80.

    Stay tuned…

     

  • Is It or Isn’t It a Recession?

    ECRI’s Weekly Leading Indicator (WLI) came out Friday at 130.2 — up from 129.6 the week before.  Further, they reported that the index’s annualized growth rate increased from 8.2 the previous week to 8.9% — the highest since May 2010.  I wondered: are they retracting their Sep 2011 recession forecast?  Are things really getting better?

     

    CAN’T WE ALL JUST GET ALONG?

    There’s currently an argument raging between various economists and analysts as to whether the US is still in/dipping back into a recession or is on the mend. ECRI is pretty sure we’re in one, while folks like Doug Short and, of course, the mainstream media think not.

    There’s no question that we’ve seen an uptick in several economic measures. My own thesis is that most of these have been not secular, but cyclical swings.  In other words, I don’t yet see evidence of a sustainable trend change, only natural swings from one side of a channel or wedge to the other.

    Here’s an example I posted last week. Total Confidence has traced out a pretty solid-looking channel, while the Present and Expectations indices have formed expanding wedges (and are nowhere near their upper bounds, especially given the recent downturns.)

    underlying chart from briefing.com

     

    Hardly a day goes by when I don’t second guess myself.  Is all the “good news” just one big, well-coordinated head fake or am I missing something?  I spent much of the weekend studying ECRI’s historical WLI (who says technical analysts don’t live exciting lives!?) and found a lot to think about.  First, a brief primer on Harmonics.

     

    HARMONICS

    Regular readers of pebblewriter.com (heck, even the irregular ones) know all about Harmonics and that the corrections experienced in April 2010, May 2011 and Sep 2012 correspond to the important Fib levels of 61.8%, 78.6% and 88.6%.

    For the uninitiated, measure the drop from SPX 1576 (Oct 2007) to 666 (Mar 2009) and multiply it by a Fibonacci 61.8% and you get 1228.74.  SPX reached 1219.80 in April 2010 (within 10 points) and promptly sold off by 17% over the next three months.

    In May 2011, SPX peaked about 10 points away from the 78.6% Fib level (completing a Gartley Pattern) and plunged 21.6%.  And, in September 2012, SPX reached the 88.6% Fib level (completing a Bat Pattern) and corrected by almost 9%.

    Those of us who follow Harmonics were well aware of each of these downturns well in advance [see: HERE, HERE and HERE] and profited nicely from the market’s plunges.  Those who rely solely on fundamentals or [involuntary shudder] the mainstream media…not so much.

     

    THINGS THAT MAKE YOU GO “COOL!”

    While I had noticed the WLI’s channel-like general decline before, I never noticed that it also complied with the rules of Harmonics.  From its all-time high of 143.73 in Jun 2007, the WLI plunged to a low of 105.40 in Mar 2009.

    Like SPX, it found its footing (thanks to QE1) and started higher.  Its first big pause was in Oct 2009 at the 61.8% Fib level.  It paused again in Jan 2010 near the 70.7% Fib, and eventually reached the 78.6% level in April — completing a Gartley Pattern as SPX had finally retraced 61.8% of its drop.

    One could infer from the mismatched Fib levels that the economy — as measured by ECRI’s leading indicators — was ahead of the market at this point. The WLI had retraced 78.6% of its drop, while SPX had only retraced 61.8%.  In any case, they both suffered from the removal of the QE drip – SPX shedding 17% and WLI 11%.

    When the Fed realized their patient would flatline without more QE, they were back with QE2.  The market took off, reaching the 78.6% Fib in May 2011.  This also completed a Crab Pattern, a 161.8% extension of the amount of the Apr-Jul 2010 slide.

    The WLI, however, retraced only 78.6% of its slide since its 2010 high.  In other words, the market was now officially ahead of the economy.

    Following the expiration of QE2, SPX plunged 21.6% to 1074 through October 2011, while WLI gave up 8.9%.  From there, SPX climbed to 1474 primarily on Fed jawboning and promise of more QE — which it finally delivered the day before the 1474 high.

    The timing was no doubt an effort to send the SPX soaring right through the 88.6% Fib retracement of the 1576 – 666 crash.  I seriously doubt that “two points over” was what they had in mind (the market sold off anyway, correcting a respectable 8.8% to 1343.)

    The WLI, in the meantime, topped out at 127.77 — only an 88.6% retracement of its decline from its previous high in 2011.  Again, the market was outpacing the economy.

     

    IS IT OR ISN’T IT?

    The world of market prognosticators is, as always, divided.  There are those who believe the economy is improving, and the market – as a leading indicator itself – is all the proof we need.  Then, there are those who believe the market is priced well in excess of levels justified by the underlying economy — which remains in or is dipping back into a recession.

    Whether QE has “saved” the economy or not, I don’t know of any respected economist or technician who doubts that it has significantly goosed (i.e. “manipulated”) the markets. And, we should pay attention to the disconnect between the markets and the economy as evidenced by the SPX/WLI comparison.

    The WLI just hit an important Fib level (88.6%) after demonstrating that it does, indeed, pay attention to such things.  This occurred at the same time that the S&P 500 hit several important Fib levels and is thus, by my reckoning at least, poised to correct [see: Satisfaction.]

    We all know the old truism “the market isn’t the economy.” However, another quarter of negative GDP following the tax hikes recently enacted and spending cuts in the works would certainly remind investors that the market and economy are, indeed, joined at the hip.

    I care about the economy because I have children.  The Fed’s unprecedented experiment in QE will quite possibly end very badly for the country, for my children and for yours.  But, there ain’t much We the People can do to influence Fed policy.  They don’t answer to us or our political “leaders.” So, we play the cards we’re dealt.

    As an investor, my goal is to capitalize on whatever the market throws at us — regardless of how manipulated it might be, and regardless of what economists call the current business cycle. If depression or hyper-inflation come along, we’ll hopefully see it coming and be well-positioned.

    Are we still in or dipping back into a recession? Will the current QE4-ever result in another 2009-2011 run, or does the market’s yawn last September signal the end of QE’s effectiveness?  We’ll find out in time.  In the meantime, we have some very good tools at our disposal that have provided excellent returns in a very difficult market.  I’ll continue to call it as I see it, and appreciate having you all along for the journey.

     *   *   *   *   *   *   *   *

  • Satisfaction

    Will the sixth try be the charm?  SPX has futzed around in our target area for six sessions in a row.  Today, we should finally get some satisfaction.

    The dollar has broken out of and is back-testing the yellow triangle. Lots of juicy Fib levels ahead, starting with the cluster at 80.758-80.883.

    RSI appears poised to break out of the red channel and explore the upper half of the white.

    While the EURUSD looks like it’s ready to tumble.  The test I’ll be watching closest is the intersection of channels around 1.3253.  But, merely popping back down below those falling white channel lines would be a great start.

    If I’m right, the falling white and/or yellow channels will take it from here.  Note the negative divergence represented by the last two spikes up to the top of the yellow channel.  The flatish red channel dates back to the fall of 2008, and every sustained push below its midline — currently around 50.51 — has been accompanied by a nice sell-off in EURUSD.

    Japanese finance minister Taro Aso is frantically searching for the “off switch” on the yen-cinerator.  In a chat with a legislative budget committee, he admitted: “it seems that the government’s policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78.”

    The 7 sessions in (and slightly above) our target area are looking tenuous.  A dip to the bottom of the white channel could take the pair back to 90.82.

    And a fall from the white channel could easily see a back-test of the midline from the purple channel dating back to 2000.

    continued for members… (more…)

  • Charts I’m Watching: Feb 7, 2013

    Nice little intra-day sell-off again yesterday, culminating in a last minute positive close — another shake-and-bake by your friendly neighborhood market makers to separate you from your hard-earned money. Look for more of the same today.

    Today’s news is all about currencies.  Draghi’s comments are successfully taking some of the bloom off euro’s today.  The euro is up 11% since Draghi’s “whatever it takes” speech last July 26.  What has it gained them?

    Oil got a little cheaper — at least through the end of the year.  Germany might not care, but  Spain, Italy and France exporters are feeling the pinch at a time when they can ill afford it.

    IMHO, this will set up a battle of political wills between the haves and have nots in the EZ.  Bucking the global trend and trying to achieve nominal growth without more accommodative monetary policy is doomed from the get-go.

    The EURUSD chart shows how the market feels this will ultimately be resolved.

    Though the pair will likely find support right about here — an important Fib line (red .618) and the intersection of two prominent channel lines.

    The top of the big falling white channel is still out there as an upside target.  Timing would determine price, of course, since the channel features a fairly steep slope.  But, the range currently includes the red .886 at 1.3995 (the top of the purple channel), the white .500 at 1.3956 and the purple .618 at 1.3832 (the purple midline.)

     

    SPX isn’t enjoying the plunge in the EURUSD.  I’m taking an intra-day short position with the channel line cross at 1508 with a target of 1497.29 – 1499.29 — the .886/.786 of the latest run up.  Charts in a few.

    60-min RSI shows likely downside to at least the red midline and white channel bottom.  This likely translates into the .886 at 1497.29, but the purple midline is way down at 1492, so I’ll give it some rope (and reconsider our upside target) if SPX dips below 1495.

     

    continued for members… (more…)

  • Charts I’m Watching: Feb 4, 2013

    The US dollar bounced off the .886 of its Sep – Nov 2012 run…again.  This is the fourth time it has found support in the 78.725 – 79 range, though each subsequent bounce has been lower than the previous one.

    The result is a descending triangle that arrives at the bottom of an uptrend (the white channel below) and a 2nd back-test of the latest channel (red) that was originally broken out of on Jan 2.

    The primary driver has been euro zone weakness, with the EURUSD back-testing the midline of the white channel after a bull run that equaled that of this past Aug-Sep.

    Though, the yen is also pitching in — reaching our secondary price target well in advance of the forecasted date range.

    SPX was off over 10 points this morning, making our decision to short Friday at 1514 appear to have been the right move.  SPX is heading toward the next lower purple channel line, where it will likely get at least a bounce in the 1500-1501 range or the .886 Fib at 1498.77.

    The question is whether the market is just taking a breather or beginning something more significant.  I’ll spend the next hour or so examining the road ahead.

    continued for members… (more…)

  • Charts I’m Watching: Feb 1, 2013

    ORIGINAL POST:  9:15 AM

    E-mini futures are up big overnight, but have yet to exceed Wednesday’s high.

    A positive revision in BLS’s Nov and Dec employment numbers makes 2012 look better than it did, but I’m not sure how it helps today’s 12.3 million unemployed or 8 million underemployed or 2.4 million marginally attached…

     

    Markit Mfg PMI actually a little lower than Jan 24 flash numbers.

    Verdict: not chasing this ramp job unless it exceeds recent highs — which I don’t believe it will, at least not from this news.

    Remember, we have Reuters/U of Michigan Consumer Sentiment coming up at 9:55 and ISM’s Mfg Report on Business at 10:00.

    Watch the channel midline here…

    continued for members… (more…)

  • Charts I’m Watching: Jan 29, 2013

    Currencies are relatively quiet this morning in the midst of a slew of earnings and economic data. The dollar looks like it could hit our downside target of 79.50 – 79.59 from Jan 25 [see: Update on DX] this morning if the yellow channel holds, but note that its midline intersects with the bottom of the white channel (support) just below current levels.

    EURUSD looks like a lock to tag the 1.618 at 1.3490 we’ve been tracking the past few days.

    This e-mini chart caught my eye this morning…

    With the overnight slide of 8 points, the e-minis give the impression of a broken channel and back test.   Now, it might be one of those dips from which we quickly recover as occurred on the 16th.  But, for those playing the intra-day moves, this bears watching.

    This ES channel equates to the small purple channel within the larger white one on SPX.  So, as yesterday, watch the channel midline for signs of something more significant.  It’s currently around 1498.30.

    The 15-min RSI should see a bounce at the red trend line if the trend is to remain on track.

    As we discussed yesterday, there is a great deal of economic data due out this week.  But, all pale in comparison to the FOMC announcements following their two-day meeting getting underway right about now.

    Last we heard, dissension was growing over how and when to throttle back on QE.  The language that alarmed the Dow 20,000 crowd:

    While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased. Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program’s efficacy and costs at upcoming FOMC meetings. In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

    Needless to say, an increase in hawkish rhetoric could really do a number on this rally.

    Odds are we’ll see another day like yesterday, with market makers shuckin’ and jivin’ to try and convince us a larger move is underway — the better to shake loose some of our hard-earned money.  But, I unless we see a huge miss on economic data or earnings, I don’t expect any fireworks until Bernanke steps up to the microphone (though much of the juicy stuff will have to wait for the minutes to be released.)

    UPDATE:  10:00 AM

    The Conference Board’s Consumer Confidence Index came in well below expectations: 58.6 vs expectations of 65 and Dec 2012’s 66.7.  Most of the rise in pessimism was the result of worsening job market conditions.  Those expecting more jobs in the months ahead dropped from 17.9% to 14.3%. Twenty-seven percent expect fewer jobs — unchanged from last month.  A full 22.9% (up from 19.1%) expect their incomes to decline.

    Briefing.com tracks the data and puts it in a nifty little chart (reflects data through December.)  There are a lot of potential interpretations here, but to me it comes down to “expectations coming back in line with reality.”

    And, though I don’t have the time to construct a chart, I’m pretty sure that expectations — the yellow line — have tagged the top of a descending broadening wedge (megaphone) while present conditions have formed a garden variety falling channel.  Both appear to be at or near their upper bounds, meaning a breakout or a fall is imminent.

    Global Economic Intersection posted an interesting article last month that showed the relationship between consumer confidence and past recessions.  Definitely worth a read for those who pay attention to such things.

     

    So far, the market is pretty much shaking it off, with a dip to the white channel midline the extent of the reaction.  If the midline holds yet again, there’s a good chance we’ll hit our upside target later today or tomorrow.

    continued for members… (more…)

  • Trading with Harmonics

    The first of a two-part article on harmonics trading strategies.

    Part 1.  January 28, 2013

    Harmonics are a great source of information about the market, but they don’t tell you how or when to trade any more than do MACD crosses or breadth indicators.  So, how do you use them?  This discussion of the basic process might serve as a good starting place for beginners.

    I consider harmonics like trade alerts.  That is, every time we approach an important Fib level, I stop and consider whether the market is likely to react or not, then make a trade decision accordingly.

    There are pages for each specific pattern under the Learn>Harmonics tag on the Home Page.  But, they all relate to one another.  Let’s walk through a real world example.

    SPX has fallen from 1576 to 666 and seems to have bottomed (how to know it’s bottomed is the real trick.)  I draw a Fibonacci Retracement grid on the price range (100% for 1576, 0% for 666) and make sure every important level is showing as on the chart below.  For a discussion of Fibonacci levels, click here.

     

    ThinkorSwim makes this very easy with a built-in drawing tool, as do many other platforms.  If your platform doesn’t provide it, you might want to think about changing, or at least opening up a TOS account to facilitate your charting (and, no, they don’t pay me to say that.)  You can read about harmonics and study the charts I post, but there’s no substitute for doing your own charting.

    Back to our example: because we went long at the very bottom, we set our sights on the higher Fib levels.   All harmonic patterns are marked using the letters X, A, B, C and D.The inception point (high) is X, the low is A.  B is the first reversal, C is the next, and D is the completion. The location of the reversals relative to specific Fib levels tells us what kind of pattern we probably have.

    Suppose we’ve watched SPX climb all the way up to 956, where there’s a 9% correction down to 869.  Because this reversal occurred below the .618 Fib level, we might have a Bat Pattern on our hands.  Bat Patterns complete at the .886 (1472) so we’ll make a note of that for future purposes and consider 956 a potential Point B.

    We sail right through the .382 and .500 levels, then experience another 9% correction at just above the .500 (1150 to 1044.)  Again, it’s below .618, so it could be signalling a Bat Pattern.  But, it’s a relatively minor reaction, so we treat it as only a potential Point B.

    Now we’re approaching the .618 at 1228.74 — the most important of the Fib levels.  Because the two prior reversals were pretty tame, we might suspect more from this one. We begin to contemplate a short position, and look for other signs of a reversal.

    Because we’ve been watching closely, we notice a smaller Crab Pattern setting up as we approach the .618 (the purple pattern below.)  It features a Point D at 1215.93 — slightly below our .618 at 1228.74.  So, we feel pretty confident about this being a good trade entry.

    Are there other chart patterns such as a rising wedge, channel, fan line, etc. that also hint at a reversal?  In fact, there’s a nice channel that’s formed over the past 9 months, not to mention a broken RSI channel (in red) just shy of the Crab completion.  And, we’re nearing the 1240 target of the Inverted Head & Shoulders pattern completed at the 2009 bottom.

    These would all be good reasons to consider a short.  Taken together, they make for a pretty compelling argument.  Where, though?  Other traders are watching the same charts we are, so there’s a chance the reversal will come a little early.  We don’t wait to wait too long and miss the top.  But, of course, every point too early is a point of lost profit.

    In the end, timing is a judgement call based on many factors, including liquidity, risk tolerance, the type of instruments we’re trading, other positions in the portfolio, etc. and is worthy of its own article.

    Let’s assume we make the decision to open a short position around 1213 on the April 15 — in case SPX doesn’t make it all the way to 1215 or 1228.  We feel pretty good about our decision when SPX is down to 1186 the following day and 1183 the next.  That’s a 2.5% move in two days — not bad.

    On the third day, however, our plan is looking iffy.  SPX gaps up on the open and hits 1208.  Three days later, it pops above the Crab target of 1215.93 and tags 1217, seemingly in search of the .618 at 1228.74.

    Suddenly, we’re underwater by 15 points or 1.25%.  Is it time to bail?  Again, it depends on the type of investor you are.  Options traders might have closed their puts for large profits already, while swing traders might be happy as long as SPX doesn’t exceed 1230-1235.  Buy and hold types might have used the Fib level as a warning of a potential downturn and hedged or lightened up on their long positions.

    Checking our charts, we can see that neither the price nor the RSI channels have been broken to the upside.  In fact, the little red RSI channel which helped convince us of the downside potential shows the latest push higher came with a lower RSI score (negative divergence) and a pretty pathetic back test.  So, we’re inclined to hang in there.

    It turns out to be a great decision.  The following day, RSI plunges through the midline of the purple channel.  SPX plunges 38 points from its high, stabilizes for four days, then really starts falling apart.  On May 4, SPX reaches the white channel midline, a possible bounce spot.  We’ve already made 4.5% since shorting at 1213 less than 3 weeks ago.  Time to bolt?

    To be continued…

  • New Charts: 10-yr Notes

    First, an important caveat:  I’m not a bond guy.  Never have been, never will be — at least with long bonds under 8%.  I find the idea of sinking even one dollar into a security (on credit watch, mind you) that guarantees less than 2% for 10 years ridiculous.

    But, different strokes and all that.  Plus, bonds can be a good window on equities and currencies, so I don’t mind charting them once in a while.  The 10-yr has obviously been on a tear for several years.  It’s settled back from the 2008-09 spike into the bottom half of a channel that dates back to 2005 (white.)

    The big question is whether the white channel is still in charge, or the less aggressively sloped purple one has taken over.  Making things interesting, there’s a pretty well-formed rising wedge that broke down in August.

    But, the RW is slightly suspect because the July 25 high was slightly exceeded on Nov 16 and Dec 6, meaning there are two higher highs and a higher low in place since the August break (though both highs came on negative divergence relative to the July high.)

    Harmonics have performed pretty well with the 10-yr note.  The chart below shows a big Crab (grey), followed by another Crab (red), a Bat (white) and another Crab (purple.)  Each previous Crab Pattern completion has been followed by a significant retreat, so we should suspect one here with the purple pattern completion.

     

    The only potential hitch is whether the white pattern is still in play.  Bats can and do go on to form Crabs, and the white 1.618 is way up at 138’170 — a 4.5% increase from current levels.

    There is a significant amount of negative divergence on the daily and weekly channels, so I expect prices to fall.  But, obviously, a strong equities sell-off would turn that assumption on its head.

    A return to the top of the red channel, for instance, would take daily RSI to the purple midline.  On negative divergence, that could easily line up with the white 1.618.

    The close-up shows a potential channel since the most recent Crab Pattern reversal and the impact of the white 25% channel line.

    Otherwise, the bottom of the white channel and the middle of the purple channel intersect at the 126-127 area (the purple .886 is 126’267 and the white .886 is 126’285) around the middle of March – about where things were in March 2012.

    Stay tuned.

    *  *  *  *  *  *  *  *  *

    Just got this one in my inbox, an oldie but goodie…

    A successful trader parked his brand new Porsche in front of the office in order to better show it off to his colleagues. As he got out, a delivery truck came along too close to the curb and smashed into the driver’s side.

    The trader immediately grabbed his cell and dialed 9-1-1. Five minutes later a policeman pulled up.  Before he could even ask any questions, the trader started screaming how his car, which he just picked up that day, was completely ruined and would never be the same again.

    After the trader finally finished ranting, the policeman shook his head in disbelief.
    “I can’t believe how materialistic you Wall Street guys are,” he said. “You’re so focused on your possessions you don’t notice anything else.”

    “What the hell are you talking about!?” asked the trader.  The policeman replied, “Didn’t you realize that your left arm is missing from your elbow down? It must have been torn off from when the truck hit you.”

    The trader looked down in absolute horror.  “Holy Shit!” he screamed. “Where’s my Rolex!?”