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Another futures trade setup which I highlighted back on November 21st was in Soybean Meal [ZM_F]. While still not broke out, its 60min view shows positive divergence in Slow Stochastic so I’m reminding everyone to set your alerts or triggers. A lot of traders are watching this formation as they did Sugar. A break above $324 on higher volume gives us a huge gap to fill on the long side. Ca’ching
I began writing a blip last night about how the market *could* rebound higher if USD/CAD worked its way through the shares at support and broke its triangle to the downside, thus giving crude a huge boost. Unfortunately however life intervened as my daughter called suffering from a kidney stone [Mom to the rescue!] so my post sat until I returned in the wee hours of the morning. Now as the sun rises all bets are off as McDonald’s [MCD] missed almost every estimate possible in their earnings release; then followed by a 3M [MMM] guidance miss and you had immediate shock by investors and causing a new round of risk aversion. Good thing Bernanke says they recession is over, huh? Chump. The USD jumped, and I mean jumped big time as investors sought a safer haven in lower-yielding currencies. I mean MCD has weathered this entire recession as the champion its known to be so a miss was bound to slap many investors into reality. Then to make matters worse, you turn on your TV and see Meredith “The Annihilator” Whitney as guest host on CNBC and you just know it’s going to be a red day.
ES futures broke down out of its rising wedge and the USD [via DXY] jumped up to $62.11 resistance. Once the normal trading session opens I expect ES_F to [at some point] rise up and backtest that breakdown resistance [yes, I'll be shorting it further there]. If it does not hold, watch out below, expect a correction over the next week……………and blame that damn MCD clown. We could still see a Santa Claud rally but clowns are creepy anyway and this is just gives one another reason to hate ‘em 
When the pundits came out two weeks ago stating that the easy money [trade] had been made; they weren’t candy coating it. The Feds program of purchasing its own debt had ended and while they continue to purchase MBS, the hard-core selling of the US Dollar had come to an end. That doesn’t mean that the greenback skyrockets. No way. It’s still enormously weak and the amount of debt now owed will take years to be repaid but by the same token, they can’t allow it to plummet being sold by other soverign nations either. For one, it must be somewhat propped up to appease China [our largest buyer]. It’s selloff has also inflated other countries currencies to the point where they need to somewhat deflate their own currency a tad. [There've been a few articles in WSJ and Bloomberg to this which I will hunt down and add here]
Aaaaannnnyway, while there are many more crosscurrents involved, it’s all adding up to some short term strength [chop] in the USD which is putting pressure on the market. I’ve adapted my trading style here to buy equities at the USD top of the channel and sell equities at USD bottom for as long as this pattern holds. Who knows how it will continue. Could be a day or two. Could be longer. In the meantime, I’m playing the pattern until it’s not anymore; then I’ll get long for one last leg up.
Whether one trades in Forex or not, we as traders need to keep an eye on the almighty buck because as we’ve all learned, commodities have been rising because of weakness in the greenback vs. its other higher-yielding counterparts [AUD and CAD]. Some theorize that the USD will be a little stronger after this week as the Fed wraps up buying its own debt via Treasuries. Others say that USD will continue to weaken amid continued MBS purchases and a poor economy. This from a long-time observer the Federal Reserve gives us his insights as to where the USD is headed; and thereby conversely commodities. I personally am listening. [HT to acrossthecurve]
Noted a post today from a seasoned investor/trader pondering if we’re in for some Bearish moves here based on the last two days irrational movement in what he considers a *rational* market. Had to scratch my head on that one. Rational market? When we’re setting new 52-week highs based on EPS set so low only a snail could crawl beneath and profits earned by reduced inventories, headcount, financing renegotiations and expenditure reductions? That’s not what I would call a *rational* market but hey, what do I know.
Sure, the USD got a boost in the perverial arm late in the week based on [short covering] profit taking and Bernanke talking of eventually raising rates however in my mind it’s only a short term pop. After all, nothings changed. Next week Ben will ramp up the printing press once more, the USD will continue to be sold and our commodity-led rally will resume.
Taking a quick peak at FCX [my barometer for copper & gold] sure it looks like a Bearish rising wedge at first glance, but the Bollinger Bands are expanding not contracting, Accumulation remains high, ADX, MACD every indicator you could possibly lay on the chart screams higher so I don’t see the problem. *Rational* market? No, but it is what it is……..until it’s not.
Well if that wasn’t fun today, I don’t know what was. Just kidding actually. It’s wide-ranging days like this that can make you jubilant for your longs as you throw your shorts overboard. Then sometime later, massive sell orders flood the market and longs scramble to sell, sell, sell. If you were at your screen this afternoon, you can only imagine the panic that must’ve ensued in the crash of ‘29. It surely can give you grey hair; or in my case *more* grey hair. LOL
Before I go into where I feel the market may head, I felt it only appropriate to review how the market has behaved in past recoveries. This chart from dshort.com I’m certain looks familiar. Almost inspires hope that we’re coming out of this and there’s happy days ahead. Well I certainly don’t believe everything I hear; so I dig deeper.
Now this inflation-adjusted chart of the same recoveries paints an entirely different picture. Were the Bulls being a little too hopeful? Was it too irrational to think we’d continue going higher and higher? Well………irrational, I don’t know. Hopeful? Maybe but that doesn’t mean we’re going straight to the bottom now either. Oh hell no
Today felt like a classic Bull trap. We knew that short interest was at its lowest levels since January ‘09. This meant they could launch an attack at their leisure with guns fully loaded. They knew the entire market was nervous over the FOMC minutes as well as the G20 meeting. Then there was that *leak* of reverse repos the day before the FOMC announcement. It actually wasn’t a leak though. As I pointed out in last nights post, the Fed had begun discussions on reverse repos at their August meeting [Click here for FOMC minutes] so this *leak* shouldn’t have come to a surprise but apparently to many it was. As a matter of fact, Financial Times this evening reported that the Fed is in discussions with Mutual Funds to purchase these Reverse Repos as primary dealers (banks) balance sheets are insufficient to handle the enormity of the transactions. *Yippee* Mutual Funds took a beating last year. The banks have ripped us off enough. Oh,errr, sorry. Got off the beaten path. [clearing throat] Where was I? Oh, yes. How convenient and how much more distracted can one person get? So the market held its breath today and once the FOMC news was released, smidiots jumped for joy and hit their *buy* buttons. Sad, sad smidiots. It’s a difficult lesson to learn but after an inventory release, FOMC or any potentially market-moving announcement, the direction of the initial move is usually the wrong direction. Write it down, paste it over your monitor. Withstand the temptation. I would rather miss part of a move and get in a little late than lose capital because I jumped and was plowed under such as happened to so many today. It’s basically a fakeout. The higher *push* after the release triggers MACD, Stochastics and other indicators on a short term timeframe, say 15 or 30min, and buy orders are hit. Inexperienced traders become giddy and buy but the trend is quickly reversed and its their panicked sell orders that give fuel to the Bears to bring the market down.
I apologize for not writing earlier but I was very interested not only in monitoring the after-market sentiment, but seeing how Asia and now even London traded. Asia hit a brick wall in ES_F at $1061 and now London is showing a little unease in [understandably] protecting their capital and taking some profits [currently @ $1056]. In full disclosure I was never so happy that I had been scaling into an ES_F short this afternoon. I covered it, taking my profits, but did buy FXP as an overnight hedge. It’s so cheap that even if the market goes higher, I believe I’ll hold it until the market does pullback – and it will pullback at some time – that is one thing the above charts show. We can’t go straight up forever.
What I’d like to see would be the market to gap down at the open, bounce off 1st or 2nd support no lower than $1052 then the Bulls come in, fill the gap and squeeze the over-confident shorts. Do I have much confidence that’ll happen? *sigh* No.
John from Across The Curve, a Bond trader, said that oil producing and other commodity producing countries were buying US Treasuries yesterday. What that’ll do is give the buck some strength and put pressure on oil, copper & gold. How long it’ll last is anyone’s guess but I believe if traders see further weakness in crude & copper, there’ll be more profit taking ahead and with that further weakness.
I’m not going to worry about it. I’m hedged. I’m looking for buyers to come in SPX between $1040-1030 but if that does not hold for some reason over the coming days, then I’m drawing my line in the sand at $991. If that is taken out, a Head & Shoulders top becomes a strong threat and with that, a much larger reversal comes into play.
fwiw Crude has support at $67 and $65, gold at $978 and $935. Add notes and support lines to your charts, hedge, take profits at the high, best of luck and remember…………….we’re NOT going to zero.
Sleep came grudgingly last night as I think the emotional, female side of me overtook the rational trader/investor/breadwinner/Mom. Across The Curve mentioned in his September 21 blog post [I should point out one day ahead of the Bloomberg article] that the Fed and other Participants had discussed repos in their August FOMC meeting as an alternative to progressively reducing the pace at which the Fed buys agency debt, or a QE exit.
It’s understandable that the Fed is concerned with the effects its withdrawl will have on the market and banking system. The need to curb any possible inflation mixed with the sensitive issue of keeping interest rates low is mind boggling.
What I have a difficult time accepting is that the Fed would consider selling reverse repos to primary dealers [ie. banks]; those same banks that the Fed had to bail out thus increasing the Feds debt and putting the Federal Reserve in the predicament it finds itself in today. But let’s digress somewhat. Many of the banks have repaid their TARP monies with warrants. They’re healthy now and honored their commitment so what’s the big deal? Well when I consider that they repaid those funds on record profits and while paying high, no, obnoxiously huge bonuses and and now are so strong to even have the ability to buy repos from the Fed makes me ask myself “did they really need a bailout to begin with or just saw an opportunity and conned the taxpayer into getting a low cost handout?”. If they were so perillously close to disaster, how could they possibly have recovered so quickly with record profits and bonuses and have the ability and cash flow to buy reverse repos to [essentially] bail out our government? Bail out our government. Unbelieveable.
I find this not only extremely insulting and intollerable but I’m angry and disappointed over the clear fact that we, the people, are being sold a bill of goods where the Fed will make the attempt to make a silk purse out of a sows ear. We will now have the banks bail the government out and they will benefit from the redemption of the repo certificates when essentially it accomplishes the same effect of the Fed withdrawing from it’s quantitative easing purchases but at a higher ultimate price.
Come on people. If they’re going to exit, just exit. Don’t make the banks richer by masking the Feds exit of QE by putting on a dog-&-pony show when they caused the problem to begin with.
Just a random note. This is how I’m viewing SPX right now as I wait for tomorrows release of the FOMC minutes.
An article in today’s Financial Times calls for coordinated intervention if the $USD continues to fall. The case for intervention seems weak though and the odds of success seem small when, as the FOMC informed us last time, the Fed funds rate will likely remain low for an “extended period”.
One idea being bandied about is the banks buying securities from the Fed which would be redeemable later but give the Fed a cash injection they desperately need as they near their spending limit. [Click to view article] Interesting concept I must say and it’s clearly just another shell game – move money from one place to another but clearly this would send the message they are not prepared to exit their quantitative easing measures at this time. How would the market like the idea and what about the stockholders and publc in general? The thought of banks [that we just bailed out] would be in essense be bailing out our government? Doesn’t give me the warm & fuzzies; I don’t know about you.
Of course this is all heresay and conjecture at this point as the minutes tomorrow. Any mention of changing that stance could send SPX into a spiral; something the Fed is trying their best to avoid. At some time, they’ll have to bite the bullet but right now I believe they’ll dodge it once more and the market will head North again, albeit slightly less overbought. Make sure to wear a seatbelt.
After being away, I prefer to drill down from the longer timeframe to the short, so here goes.
Coming up to 20month resistance
Here’s what we know:
- Overall short interest (according to the *pundits* on CNBC and Bloomberg) is at the lowest level since January 2009. How this translates is that most of the shorts have covered their positions and we need shorts to help the Bulls fuel the market higher. So understand, less shorts means less fuel here. Doesn’t mean we can’t go higher, sure we can, it’ll just be tougher. Now the good news….
- Tomorrow is Labor Day. Tuesday Fund and Money Managers across the nation come back from the Hamptons and many theorize they will unload their longs and take profits. Hence talk that September is typically a down month. Unload in Sept/Oct and in Oct
Resistance using fans on the Weekly
begin loading up for an end of year run up. At least that’s the theory. But all of this does mean we’re going to see volume pick back up and that’s a good thing.
- fwiw, poking around shortsqueeze.com I did notice that short interest was down everywhere except the following which I noted. $SKF +15% $XLF + 21% $IYF 92% $RWR +56% per and $KRE -21% $ICF -29% $RKH -22% $VNQ -38%. It would seem the shorts are much less in some financial ETFs but increased in others. I point out IYF with a 92% increase. It’s holdings include V (which I am short) GS COF and many more. Look IYF on your brokers website as those components may be good short candidates in the future.
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Various retracement levels on the Daily
If you’re Bullish, don’t break out the party hats just yet b/c the shorts are down. The thing about the market having low short interest is this gives the shorts the ability to pile in whenever and as much as they wish. In January SPX was down and so were the # of short postitions but then came a whopping 30% drop from January-March so don’t celebrate just yet the shorts are down. Be cautious.
- In the USD there are numerous Bullish divergences on indicators and the Commitment of Traders shows that Commerical net positions (usually shorts) are almost totally out of the USD. That doesn’t prove that the dollar will go higher, but again, they’re warning signs and a reason to be cautious. A higher buck is going to hurt commodities, including metals and crude.
- AUD/USD (my copper indicator) and USD/CAD (my crude indicator) are both at extreme support/resistance levels that they’ve been unable to break.
- Then there’s good old gold that’s caught a bid partially I believe as a flight to safety in an uncertain market, and partially because its coming into seasonal demand. Click here to view a seasonal chart on gold.
Bottomline is no one knows for certain that the market will fall off a cliff here. Those money managers could let us go higher, say to $1121, and then slam us down, or they could play cat-n-mouse going up and down. No one really knows. The Contrarian in me shorted an ES mini @ $1016 and will short again at $1037 (I’ll hold em short with a long leash), I bought a little 100 TZA (whoopee) and am short V which I found funny that somebody couldn’t get shares of V to short last week. Guess I’m not the only one waiting for that bad boy to fall. *lol* I am long GFI (gold play) SYNA (yes, bottomfished) and PGF adn will day trade a little if we head higher, but nothing insane. The big boys are back in town and they have a much deeper pocket than I.
