July 2, 2012
COMP appears to be following a set of channels within a much larger channel we identified months ago.
Whether it has the wherewithal to rise up out of the large red channel remains to be seen. In the meantime, we’ll focus on the short to medium-term picture.
Note: only six charter memberships are left as of EOD Thursday. I’ll keep this going until they’re gone. Congratulations to E.J., P.B. and T.J. for locking in today’s annual rate for the life of the site!
ORIGINAL POST: 10:30 AM
It’s a real crapfest on the headlines front: JPMChase is likely facing a trading loss of $9 billion instead of $2 billion; the rumor about Germany backstopping euro credit was false; Obamacare is alive and well; banks are actually manipulating LIBOR for their own benefit; Q1 GDP was left unchanged at a pitiful 1.9%…
Quick, which one of those wasn’t completely predictable? Exactly.
Even so, the market just fell out of our channel. I can live with an intra-day departure as long as the little H&S pattern doesn’t play out (1309ish.) Keep an eye on this guy.
We had a similar dip the day before Q1 ended, too. March 29 opened at 1405, dipped to 1391, and closed at 1403. Money managers like to end quarters on an up note whenever possible. This feels like a fake out.
BTW, JPM’s trading losses are probably much bigger than $9 billion, too. If you haven’t read it yet, this might be a good time to peruse The Wipeout Ratio. JPM has $78 trillion in derivatives. Even $9 billion is a pittance — 0.011% of the total. I have to think they experience $9 billion swings every time Jamie Dimon gets the runs in his silk boxers.
UPDATE: 2:20 PM
While we’re at it, the 1309 SPX level looks like it’s probably linked to 83.182 on DX. As we discussed above, 1309 is the area where a H&S pattern completes on SPX. 83.182 on the dollar is the area where: (1) a Gartley completes, and (2) the previous H&S pattern starts to be compromised.
A lasting push above 83.182 (or below 1309 on SPX) potentially changes the picture. Stay tuned.
UPDATE: 4:30 PM
We got the rebound we were expecting. SPX never dipped below 1313.29, leaving a nice long shadow on the daily candle and closing well within our channel again. Just like March 29 (mentioned above), we lost a net 2 pts on the day.
DX got up to 83.07, and closed at 82.91 — leaving a spinning top on the day without exceeding the previous presumed shoulder that should see DX sell off substantially over the coming days as stocks move up.
The yellow line marks the forecast I last updated on June 10 [see: Currents, See?]. Check in later for tonight’s post on the dollar. I’ll have a complete discussion and updated forecast.
Taking another stab at VIX’s daily chart. Yesterday’s low of 17.09 was just .03 off the .786 Fib level of 17.12 we mentioned a couple of days ago [see: The VIX is In].
There are a couple of different interpretations. Fist: that the smaller (red) pattern is complete at the .886 and should reverse strongly. Second: that yesterday’s low is just a Point B in a larger pattern such as a Crab. Third, That we should be looking at the larger scale pattern — which calls for a Point B reversal at the .786 of 16.67. So, which is it?
Earlier today [see: Close but no Cigarro], I opined as to how SPX wasn’t done back testing its IH&S because — among other reasons — VIX hadn’t even reached, let alone reacted off our target of 18.31 (the solid red line.)
Never mind the “reached” part. VIX nailed our June 12 forecast right at the close. I don’t know about you, but I get all tingly inside when a 22% move comes in right on target like that.
We’ve hit three bulls eyes in a row with VIX — including the interim top on April 10 [see: Bottom Fishing], calling the June 4 high of 27.12 back on April 18 [see: VIX at a Crossroads] and, now this. The fourth will be a little trickier.
continued…
ORIGINAL POST: 10:30 AM
With tomorrow being OPEX Friday and the important Greek vote this weekend, the market is in wait and see mode already. But, we’re on Head & Shoulder watch, meaning the little games that market makers play just prior to options expiration might be a little more predictable. If you’ll indulge me, we’ll try a little real-time experiment this morning.
We have a small scale H&S setting up in the right shoulder of a larger scale Inverse H&S. The smaller pattern targets 1280 while the larger one targets 1403. With those kinds of moves at stake, speculators will jump on board any seemingly significant trend.
Market makers, who rake in a lot of their money writing calls and puts to said speculators, have a vested interest (read: house in the Hamptons) in seeing the market go nowhere (unless they’re sadly underwater.) But, with no volatility at all, speculators would look elsewhere for action.
So, MM’s engineer moves that look like a break out or break down and write options to suckers speculators who — seeing the move they’ve been hoping for — jump on board. They’ll let it run a little while, just to make sure they have everyone on board, then let the air out and run the game in the other direction.
It’s been going on for the past week, and yesterday it indicated further downside when the latest RSI fan line was broken. Having been long since the last turn at 1307, I played along and went short at 1317.
I was no doubt one of many who believed the little H&S might either complete or come close to it around the 1304 level. Personally, I was hoping for a quick 20+ point round trip (10+ each way.)
This morning’s opening was mixed, but what initially looked like a back test to a perfectly good decline quickly developed into something more when the back test turned into a fan line violation to the upside.
I took two points of lumps and got long again. Sure enough, SPX has started a nice little run to the upside.
Now, as we approach the purple channel line on RSI and the previous high on the price chart, the upside target becomes a little more clear — probably a little over 1325. A 10-pt gain should be enough to get bulls salivating over the H&S (the one with the 1403 target) completing.
The way this usually works, the move should fizzle and prices slowly settle back. Call buyers won’t know what to make of it, but many will hang on — maybe even double down as the excitement fades and bears begin to wake up.
It’s not unusual to see several false breakouts and breakdowns during this period — just so everyone has the opportunity to contribute to the Hamptons summer house fund. For nimble traders, lots of opportunities to scalp a few points on the churn.
Stay tuned.
UPDATE: 12:55 PM
One of the no-so-fun quirks of WordPress versus the old site’s Blogger is that I’m occasionally logged off for no good reason, without warning. I might have been logged in all night, with no activity whatever. But, right in the middle of writing a new post WordPress can kick me off.
It means, say, if I hit the “publish” button and run off to get my daughter to camp on time, I might come back to a page asking me to log in. Fortunately, the post wasn’t lost. But, it also didn’t get posted when intended. My apologies.
SPX slightly exceed our 1325 target, hitting 1326.66 just a few minutes ago. I’m going to go ahead and take profits here and see if we don’t get a return trip back down. If we break through the red dashed TL, I’ll jump back in for a trip to 1335 — but with tight trailing stops.
If you’re wondering where this is all going, my inclination at this point is to go into the weekend in cash. While the outcome of the Greek election is fairly predictable, I don’t like the idea of twisting in the wind while the investing public decides whether it’s good news or bad.
UPDATE: 3:08 PM
No interest in playing these whisper rumors. I’d be really surprised if it holds. Staying in cash — probably through the weekend at this point.
ORIGINAL POST: 10:00 AM
As Reeodd pointed out yesterday, there is a potential H&S setting up on the 60-min chart. I’ve been a little leery of it, as its completion would certainly alter the timing of the forecast currently in place. It’s highlighted below, and it targets somewhere around 1280.
As we saw with the last major H&S top at 1422, when H&S patterns don’t complete, it’s sometimes with a bounce just above the neckline, rather than going through the neckline and playing out. Here, a bounce at the neckline is what would keep us on track with our current forecast. But, it’s not at all assured.
continued…
ORIGINAL POST: 11:00 AM
With all the volatility these past few days, VIX has put on a spectacular show — gaining 3.69 yesterday alone (18.6%). The weeks ahead promise to be just as exciting, but not for the reasons most expect.
As discussed back on June 2 [see: Channeling VIX] the “fear index” was on track to complete a Crab Pattern (in purple below) and fulfill its Inverse Head & Shoulder pattern target. These were targets originally set back on April 18 [see: VIX at a Crossroads.] With VIX at 18.70, we forecast a high of 27.13.
It topped out at a nearly perfect 27.73 on the 4th and has been sliding ever since — with yesterday being the notable exception. Now, as many investors are wondering which way is up anymore, we’ll plot out what appears to be a very clear path forward.
continued…
This morning’s hunch to fade the futures’ ramp was a good one [see: Mixed Signals.]
“There’s a channel line just overhead at 1337.30 or so that should limit the current rally. Given the way the futures behaved overnight in equities, the dollar and the euro, I’m going to fade this ramped up opening and see if it settles back down.”
The market not only reversed within minutes of the open, but it got all the way back down to our target range of 1303.47-1308.88, putting in a low of 1307.73 and closing at 1308.93. Mind you, I hadn’t expected it to happen only six hours later, but I’ll take it thank-you-very-much.
Although we got to the right trade in time, it was the result of a great deal of brain-racking and teeth-gnashing. Had I bothered to look at the emini’s, the decision would have taken all of five seconds.
All-together, SPX reversed over 28 points. But, that was dwarfed by the e-minis reversal from +19 points to -23 points — a daily range of 42.25 points. This was the single biggest red candle since 2011’s crash.
As noted in last night’s update on the dollar [The Dollar: Currents, See?]:
“I suspect the euphoria over the Spanish bailout will be relatively short-lived. Putting the rest of the eurozone in harm’s way seems like a better way to get them downgraded than it does Spain upgraded.”
Sure enough, there was plenty of talk about downgrades today — as doomers got the upper hand for a change. The argument — a good one — is that there simply isn’t enough firepower in the ES, ESFS and IMF to bolster the creditworthiness of all the countries currently circling the drain — let alone those that aren’t yet in the headlines (Italy and France are on deck.)
In the end, it will be up to Germany, the US and China to decide how much to contribute — a matter for another post. Returning to the markets, there are several important take-aways from the ES chart above.
continued…
As a member correctly pointed out in his comment on XLF Update, a ramp in XLF would mean some big returns for important components such as BAC, C, JPM, etc. This is very true. Though it pains me to say it, I think banks are ready for a bounce.
I sold all my remaining JPM, GS and MS puts today. I jumped on the downside March 27 when JPM was 46 [see: End of the Line], GS was 127, and MS was 20 [see: Lots More Where That Came From.]
I bought puts, but even straight-up short positions would have made some decent returns over the past nine weeks:
JPM: 46 – 32 = 31%
GS: 127 – 92 = 28%
MS: 20 – 12.50 = 38%
But, all good things must come to an end, and I think the tide is turning for financials. Don’t get me wrong…I still think they’re dead meat in the longer term. I just think we’re looking at a sizable bounce here and now if — and let me be clear, it’s a very important IF — the rumors are true and Kumbaya Banking and Quantitative Whatever are back.
If not, this entire exercise isn’t worth the bytes it’s written with. The financials, along with just about everything else Bloomberg quotes, will roll over and die. OK, with that huge caveat out of the way — and before you laugh me out of cyberspace — here’s what I’m looking at.
My targets are as follows…
JPM: today’s close = 31.99, price target = 38.69 (+21%)
C: today’s close = 25.75; price target = 34.79 (+35%)
BAC: today’s close = 7.10; price target = 11.34 (+60%)
JPM:
CITI:
BAC:
My favorite. It starts with this little H&S pattern back in the 2007 market top. Keep an eye on those ascending trend lines.
Here they are again, on the bigger picture, along with some descending ones, and a nice little channel (red) that works pretty well since early 2009. Couple of nice channels on the RSI, too.
This one’s a bit of a long-shot, because it means breaking the red fan/channel coming down from the right shoulder up there, but the RSI channel makes me wonder if we might just make it up to that 61.8/1.618 Fib level. If not, I think 8.89 is a safe bet.
So, there you go. Earlier today, XLF July 15 calls sold for .09 and the August 14’s went for .49. If I’m wrong, they’ll probably go to negative eleventy-hundred. Then again, it’s so crazy it just might work!
Right about here, my attorney would want me to remind you this is not an investment recommendation — nor is anything on pebblewriter.com. Investing is risky, and options are a particularly effective way to end up living in a van down by the river. For full risk advisory and other legal disclosures, read this.
Fridays before a holiday weekend have a tradition of being very, very quiet. Today seems to be no exception. Unless something weird happens, we’re aiming for a close around 1323, up a few points.
