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After The Bear Trap, The Bull Trap?
Submitted by Nic Lenoir of ICAP
There is a flurry of "analysts" doing cart-wheels everywhere: new highs, and make no mistake "it feels like it wants to break out". I don't respect blind optimism, I envy it sometimes, but the one thing I respect is price action (despite being bearish I did recommend tactical longs at 1,051, and stopped out the 1,107 short recommendation at a profit at 1,095). And the price action here tells us we could be at risk.
As always I will start with the Dax, because like it or not it is technically the most transparent equity index and it gives the most reliable assessment of market direction. We slightly bypassed my initial target at 5,927 on the upside. However looking at the daily chart we see that we hit tick for tick the theoretical level for the high of a right should in what would be a H&S pattern if we sell off from here. Daily RSI-21 is right on resistance, and the slow stochastic is in the process of turning bearish. I also added the weekly chart as January highs are a key retracement level and have not been breached so far.
In S&P future looking at the 3H chart we see that there is divergence in RSI on the highs. Another interesting comparison is between 2007 and 2009/2010. Looking at the fractal nature of the price action both in terms of price and RSI shows strong similarities. The initial sell-off mid 2007 and the subsequent rebound are VERY similar to what we are experiencing. The last observation for stocks is VIX. We see that upper and lower bollinger bands are converging. Most major moves to the downside over the past few years occurred on a bullish VIX reversal day below the lower bollinger band. With the bands compressing here, we could be setting up for a short blow-out move to the upside preceding a massive sell-off. This has been the best indicator to short US equities by miles so I would advocate keeping a close eye on it.
There is another amazing signal: KKR is going public. Let's be honest, these guys have built a very successful business and a premier name in private equity. They are presumably very savvy investors and have invested years in building the franchise. Now they are telling you they want to sell, and they clearly don't need the cash. One can only guess they must think the market is overvalued. Suppose they are as good as Steve Schwarzman. Attached just for a laugh is the chart of BX IPO. If that thing was in the money 48 hours life to date that must be about it... and that was right at offering.
I also like looking at China's PMI because we were told early in this recovery that it is the new driver of growth. The PMI clearly has rolled over, which confirms that Copper should be toppish here. I stand by my trade recommendation to buy USDCLP between 505 and 510 a few days ago which is in line with these past observations. It's probably wise to take profit partially above 520 and buy pull backs but I think the trade has huge potential.
My last observation is regarding USDJPY. From a very long term perspective I think it is massively undervalued. However any return of risk aversion triggers flight to quality into JPY and covering of carry trades. As a result, as long as we stay in the bearish downtrend (see daily chart) one can only buy when the short-term technicals are aligning. We had a sharp move up last week following the break on the hourly chart, but it's wise to take partial profit at least, and a move below 89.60 is also probably a sign that it's not time to be long for the medium term yet. On the upside if we break 91.50 and 92.80 then I think we will accelerate rapidly. Before that, and especially if we experience a pullback in equities, it may be a risky proposition.
Good luck trading,
Nic
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Re: KKR, I submit this guest post from the other day regarding the similar f*ckedness between CRE financing and LBO financing over the next few years:
http://www.zerohedge.com/article/guest-post-it%E2%80%99s-2010-what-should-investors-traders-and-more-importantly-what-should-we-ameri
Right-on brother. You say nothing about trading volume. Despite the massive "dog fnc'ls" there's been clearly an absence of inst'l volume which draws significance to your analysis.
We're looking for the SP500 to go parabolic over the next few weeks, wait for the top nipple reversal signal and bail? That is the way I am reading this note.
In the flight-to-quality trade, do investors favor the greenback or the yen? Theoretically, with the beginnings of a long, slow downtrend in equities, both the dollar and the yen should do well, meaning that the USDJPY pair could trade sideways for an indefinite period. It will be interesting to see how that battle plays out.
It seems a safer play is to be long the EURUSD to the retracement @ 1.4740 while the equity markets ramp up, then sell like mad at the top.
I would appreciate your take on this trade. Thanks for your input, Nic!
Orly, why do you think SPX will go parabolic? A specific cataylst or event, or just a bull trap breakout. Bonds rose today, so folks wanted to go home long over the weekend. Your insights are welcome. Thanks.
"The initial sell-off mid 2007 and the subsequent rebound are VERY similar to what we are experiencing. The last observation for stocks is VIX. We see that upper and lower bollinger bands are converging. Most major moves to the downside over the past few years occurred on a bullish VIX reversal day below the lower bollinger band. With the bands compressing here, we could be setting up for a short blow-out move to the upside preceding a massive sell-off. This has been the best indicator to short US equities by miles so I would advocate keeping a close eye on it..."
This is from the article above by Nic Lenoir.
That means a blow-off top, which is a parabolic move to the upside as the bulls squeeze the last of the move from the market. He uses the DAX in Germany as a proxy for the SP500 because it is the least manipulated and most "pure" market. The PPT here in the States can play all the futures ping-pong they want but they cannot hide the underlying themes and are quite powerless to stop it.
In general, when there is a downward move in equities, there will be a corresponding move into risk-averse assets, which include the USD, USG Treasury debt and the Japanese yen. The bond market is so far warped what with foreigners coming in through the backdoor and buying huge chunks of debt that it cannot be relied upon for any sort of market analysis. No one really knows who is buying this debt, so one cannot easily say that investors are comfortable with bonds. It is even possible that foreign banks are repatriating dollars that we swapped for their currency in the beginning of the crisis, meaning, in effect, that the Fed is monetising the debt through surreptitious channels. All very confusing for any "free" market. Confusion is the last thing you want in a true free market but we have it here in spades.
The question is, for me anyway, where will investors flee to when the big move begins? Will it be the yen or the dollar? I know they will sell Euros and Pounds like they are going out of style, so I can get short those currencies. (The Euro is headed for a nice advance as the markets ramp up but will sell off dramatically once the bulls have exhausted their ammo...)
The interesting question is whether investors will favor the USD or the JPY. I know Nic won't give "investment advice," so I will answer my own question. I believe the yen will strengthen relative to the USD over the short-term, perhaps breaching all-time lows in that pair before a massive reversal to the upside for the dollar. My timing has it around the middle of August 2010 but who knows? Timing is difficult enough when you're playing on a more level playing field but becomes incredibly difficult and more akin to guessing when the governments are manipulating markets at every turn.
If I am correct, though, the move long in the USDJPY could be the 4X trade of a lifetime.
Orly
Orly, thanks for your reply & critical analysis. I follow your line of thinking in it. Looking at the VIX chart, Friday's range was between the .6 & 1.3 lower BB's (20 day), so while the bands are contracting, I don't yet see a "squeeze" on my chart by combining the BB's with a Keltner channel. The 10 ATR has contracted back into the lows, so I think Nic maybe just a little early here in his call. I'd like to see a tighter squeeze to set up for any possible spike as he mentions in his historical reference. If the collapse is from a parabolic, then it is an ideal short equity trade for me.
"The question is, for me anyway, where will investors flee to when the big move begins?" Yes, the $64 question for sure. To your usual suspect list I would add gold. Especially if some event would occur that would favor it. I'm looking for a clues that might leave footprints in all asset classes that might give us some direction considering the fog of manipulation we're suffering through.
For your reference, here's a link to my BB squeeze chart for the VIX & one with mean deviation in a longer time frame:
http://i41.tinypic.com/2yzaqkw.jpg http://i41.tinypic.com/351aihj.jpg
Thanks again; it's refreshing to read some critical analysis with folks trying to dope this all out. Good luck with your themes & trading!
You're very much welcome. And you're right, it is dope, in more ways than one.
I do have a contention with your bullish call on gold, however. Since the Fed and other global governments have pumped liquidity into the market and have basically said that QE and bailouts will continue for some time into the future, gold has acted like a more risky asset class and has ramped along with the equity markets, albeit with the opposite force from the PPT as they try to supress the gold price (yeah, thanks, Mr. Summers for your thesis that interest rates can be controlled through pressing down the price of gold...).
To me, most of the gold investors- and not the "gold bugs" that frequent ZH often- but the ETF and other paper traders, have put in a long trade on gold in the hopes that the Fed loses control of the price and Au skyrockets. I think they are sadly mistaken and will bail as soon as the equity markets begin to tank.
Gold will not gain a firm footing until later when the nervous will try to trade in physical bullion, only to find that scarcity and purity issues make it entirely too expensive (2/2 premia...) and not trustworthy.
I appreciate your technical analysis but I have found that the VIX to also be an untrustworthy indicator for the reasons stated above. It seems when the ratio of puts to calls reaches a certain level, Timmay has his boys kick it back down with the purchase of long calls and more shenanigans than I can even comprehend. I suppose Goldman likes to accumulate their short positions with as little vol as possible. Go figure.
In short, this market cannot be trusted at all but the price action speaks of a continuing parabolic move higher that will end in a lot of pain for the home-gamers whom they sucker into the market in the eleventh hour. That is what they are hoping for. I am not at all certain that retail investors are even thinking about moving into equities because, a.) they are far more educated now than even a year ago, b.) they have been badly burned twice already, and c.) they don't trust the government any more than you or I do. It is sure to be an interesting couple of years ahead!
Best of luck to you as well!
Bountiful trading, my friend.
There is NO point to a coordinated pump, without the resulting dump. The game for months has been bait the bears and forced covers. Now that bulls are complacent as Hindu cows, time for their trip to the butcher.
According to Bob Janjuah, S&P will top 1220 in the next few weeks before turning back down. More and more are in agreement with this analysis - I don't know if "analysis" is all that accurate these days though.
and if u listen to that guy you may as well take your money to the casino
Nic,
Do you believe that the PPT is closely managing the markets?
KKR reads my blog, they see the writing on the wall:
Pension funds withdrew private equity commitments in 2009
PE is in for a long, tough slug ahead.
KKR reads my blog, they see the writing on the wall:
Pension funds withdrew private equity commitments in 2009
PE is in for a long, tough slug ahead.
How many victims will it take before reality sets in? I can't believe this market is too scared to correct. Price action indicates it wants to let off steam but the pot keeps boiling.
They forgot to write corrections into the algorithm. Good article Nic.
Will they ever allow the market to fall more than 8% every few months? The criminals from Detroit take the PPT gig too far and seem to manipulate daily if need be. I wouldn't doubt if GS is the primary PPT contractor and that's where they make all their money stealing stop running money at critical junctures on a daily basis.
I predict KKR goes public, and will use half the proceeds to take itself private after it pulls a BX...hey, it's what these guys do for a living.
BWWAAAAHAHAHAHAHA
I bet you are right. But I bet at LESS than 1/2 !
You make it seem that Blackstone was the only IPO in history to be overvalued.
They were in a $4 to $6.5 trading range for 6 months, and still kept paying a $0.30 quarterly dividend. Do you think that Blackstone is worse today than it was back in late 2008 and early 2009?
If KKR is a Blackstone copy-cat, it would be a sure deal by shorting it. Is anyone doing that trade?
Nic, Interesting chart on China's PMI.
A few more details: http://www.favstocks.com/wp-content/uploads/cache/313b5_cflp-tabel.jpg
This is further supported bya falloff in export orders.
http://www.favstocks.com/wp-content/uploads/cache/166f0_chinaman-pic4.jpg
Maybe time to short some of what China has been using.
Repeat after me:
In the rigged monopoly known as the "market" no one wins.
"No one", said geithner,orszag,bernanke,summers,paulson,
greenspan,rubin,friedman,fuld,rank,thain,
dodd,mozillo,o'neal, clinton, bush, gensler, cassano, blankfein, yellin, shapiro, and the rest of The Tribe.
Henry Kravis doesn't do anything until he checks with Leo.
KKR may also be looking for permanent capital. It would give them greater flexibilty on future deals. Just a thought
When all is said and done, Blackstone, KKR, and TPG will be part of a handful of PE funds that will survive the slaughterhouse. The rest will vanish.
Have you ever wondered why guys like you earn so much less than guys like them ?
What kind of a stupid question is that? Some PE guys are very impressive (David Bonderman), others not so much. They are shrewd sharks who know how to milk the system using their political contacts. I am not easily impressed by the great PE or hedge funds as most of you are.
KKR is already public on the Euronext Amsterdam. This is simply moving that listing to the US. This has been a three year process. Unlike with Blackstone, the founders are not trying to take a bunch of chips off the table. If anything this will eventually allow raising additional permanent capital and expanding beyond the private equity core.
great note, Nic.
the baruch-y nature of tracking big boyz is one of the very finest ways of navigating long-term trends. tracking member firms and exchanges themselves alongside 'best n brightest' of PE ain't gonna help for daily timing but certainly does help for off-peak market studies.
Does anyone know how to trade the USD/CLP contract... ie. what broker do you use? Didn't see it as being a contract on the CME website either...
As warned about earlier, the bullish basing has resulted in a EURO and EUROYEN rally.
http://www.zerohedge.com/forum/market-outlook-0
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