Equities: Reaching The Danger Zone

Tyler Durden's picture

By Nic Lenoir Of ICAP

There is one signal we have been pushing consistently when it comes to picking equity tops and that it buying (selling) on bearish (bullish) reversal candles in the Vix outside the upper (lower) Bollinger band. The Vix daily chart attached shows recent history and how any such signal has generated at least a 5% percent move in S&P. As the Bollinger bands for the Vix have been narrowing of late we have been beating that drum impatiently. Today marks the first day we have an outside candle below the lower bollinger. Ideally we would close today above this morning's open at 15.67. If that is the case then no doubt it is time to sell equities without much hesitation. I have attached for confirmation the charts of the Dax using 3-hours and daily intervals. We see we have a potential 5-count on the Dax completed calling for  reversal, and there is strong Stochastic and RSI divergence on the 3-hour chart. On the daily chart we see we should technically at least retest the 100-dma envelope, currently at 5,836, and the daily stochastic is showing a lot of saturation on the upside.

Concurrently, if this reversal does take place it would reinforce our bullish recommendation on 10Y Treasury futures in the US. As can be seen on the 3-hour chart we are close to triggering an inverted H&S at 116-10, and on the daily chart we see the major resistance in not until 117-10. We think ultimately this resistance will be bypassed.

One last parallel we want to draw is with Gold. We first initiated a buy recommendation at 1,080/1,090 on March 24. We then had confirmation after bypassing the neckline of the inverted H&S at 1,135. We have now reached the intermediate target at 1,165. This is the last resistance before making new highs basically. While the price action has looked very bullish, today we have an indecision candle right on the resistance. Gold has decorrelated fron EURUSD completely of late, but if our call in equities which is our main conviction/focus upon triggering the reversal on Vix pays out, it will be a true challenge for Gold to push higher to new highs. Since we are so much in the money on the buy recommendation we would let it play out and stay long if the resistance is bypassed. On the flip side, if we close with an indecision candle tonight watch for a gap down tomorrow morning and a close below 1,156.8 which would trigger an evening star. Given that a lot of the turmoil has been driven by sovereign credit concerns it is well possible to have a change in the positive correlation between stocks and gold observed for 1.5 years now, but we leave it to the price action to confirm whether it is the case or not.

Good luck trading,

Nic  

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HarryWanger's picture

Sucker's bet. This week will continue higher. Then, maybe, we'll see some pull back next week. But the table's been set this week with earnings being tempered even though we all know they will beat by a mile. The game is in full force.

Assetman's picture

Everybody now...

High-way... to... the... Danger-Zone!

I know many of you were singing that in your heads. :)

 

Mad Max's picture

No comment.

Now where did I leave my F14...

Assetman's picture

Hehe... thanks for the movie imagery.

Now all I can think of is Tom Cruise... and Charlie Sheen, for some Hot Shots reason. :)

Mad Max's picture

Just think of a worried chicken being pulled back in a longbow.

There's some imagery to keep you company this afternoon.

tmosley's picture

And here I always thought it was "I went to the Danger-Zone!"

I guess I need to clean out the earwax.

buzzsaw99's picture

Equities = One way train. It only goes up bitchez!

Jesse's picture

Hasn't the market been peaking into earnings season and then correcting 5 to 10%.

I have not looked recently in this ramp-o-rama but that was how it had been.

http://jessescrossroadscafe.blogspot.com/2010/04/sp-futures-reach-apex-with-earning.html

I would not step in front of it.  But if this breaks, it could be a real SOB of a leg down.

Mr Lennon Hendrix's picture

Now?  In the humblist of opinions, Jesse, I have no idea.....time is irrelevant in terms of what the oilgarchs will do.  They live in some other worldly dimension.

When the Levy Breaks, not if.  Bet on it; do not wait for it.

When the levee breaks- Led Zeppelin:

http://www.youtube.com/watch?v=xbJQT2eDseA

jmf's picture

Moin from Germany,

the cover story indicator is "in place".... ;-)

The Comeback Country

How America pulled itself back from the brink—and why it's destined to stay on top.

http://paul.kedrosky.com/archives/2010/04/sokay_were_good.html

 

 

 

Assetman's picture

That's it... we're officially toast! ;)

Mr Lennon Hendrix's picture

The equity market appears to be topping.  However, peak oil/gold/silver will put a floor under it.  It is commodities that are leading the "recovery".  I think it is amazing that when everything becomes more expensive that is a solid indicator of a recovery.  Neo-liberal economics is off the ledge.  Pullback of maybe 99 on the Dow Jones tomorrow.  The PPT appears they will not let a loss of 100 ever happen again.  Tomorrow will be a huge gauge to know what the oilgarchs have planned.  6 months after Tuesday, October 13th (the Knights Templar went underground on this date)...another Tuesday the 13th....this year has been full of subliminal messages a la the Bohimians.  They had their Argonaut the night of March 17th, they had the said date that the Knights Templars went underground on the Julian calender.  I mean this...THIS IS THEIR YEAR.  The writing is on the wall. 

BobPaulson's picture

What about the Talmud and the Mayan calendar?

Mr Lennon Hendrix's picture

I am covinced that when the Mayan calender was discovered, it was sent straight to J.D. Rockefeller, who promptly noted that 2012 was its end.  'Perfect!'  He thought.  "Let us have no truths told about the fact that this merely states the planets will be alligned, and we will move into a new hemisphere of the galaxy.  It will be best to write silly tales of the end of times." 

Dirtt's picture

We will all be dead before Peak Oil.

Mr Lennon Hendrix's picture

Dirtt, oil peaked in '08.  That is the conservative estimate.

Ira Fuse's picture

I put everything in short bonds (pretty much only option in my 401k) on March 31st. I’m there till sometime in May.  Because April is a bad month.....

 

April 04, 1968 – Martin Luther King Jr. assassinated

April 06, 1917 – U.S. Entered World War 1

April 06, 1994 – Start of Rwandan Genocide

April 12, 1861 – Fort Sumter bombed (beginning of Civil War)

April 14, 1865 – Abraham Lincoln assassinated

April 15, 1912 – Titanic Sunk

April 16, 2007 – VA Tech Massacre

April 17, 1837 – John Pierpoint (J.P) Morgan was born.

April 18, 1775 – Beginning of American Revolution (Paul Revere’s famous ride)

April 18, 1906 – San Francisco Earthquake

April 19, 1993 - Waco

April 19, 1995 – Oklahoma City Bombing

April 20, 1889 – Hitler was born.

April 20, 1999 – Columbine School Shooting

April 24, 1915 – The Armenian Genocide

April 26, 1986 – Chernobyl

April 27, 1865 – Sultana steamship explosion (killing 2000 passengers)

April 29. 1992 – LA riots after Rodney King verdict (Police found not guilty)

 

 

April ??, 2010 – Stock market crash?

john_connor's picture

I started buying OOM Dec 2012 SPY puts today for shits and giggles.  Let's see what happens.

Spitzer's picture

Focus more on gold stocks, thats all we care about here. When will gold stocks decouple and go up like they did during the great depression ? That is indeed the question.....

hedgeless_horseman's picture

Trees do grow to the sky?  Funny, I was always told they do not.

yabs's picture

so its a vix sell signal?

that got us the 7 percent decline or so in january so lets hope so

Mr Lennon Hendrix's picture

I HATE THE BANKSTERS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Cursive's picture

Me too.  I'm looking into solutions.  We need to repeal the FRA of 1913, then take our money back from the banksters.  If you want to hold gold, great.  If you want currency that is sound, even better.  Check out SwarmUSA:

http://www.swarmusa.com/vb4/

Mr Lennon Hendrix's picture

Did it stop?  Ah jesus I was about to have a heart attack!  Tell me it stopped.  Why must they have so much power?  How can they manipulate gold/silver like this, and get away with it?!  Please make it stop.

PS I like the site, especially the bees.

Captain Obviousness's picture

LOL... what a silly article.  Stocks don't go down.

crosey's picture

Options expiration week = upward bias (typically).  Might sell off a tad on Monday.

HarryWanger's picture

Agreed. We'll top out around the SPX 1225 area on Friday. Then a slight pull back to test 1200 early next week. Other than that, lots of upside to go.

Al Huxley's picture

Mondays never sell off anymore.

Mr Lennon Hendrix's picture

The movement in AIG is a tell.  Come on America!  They are bluffing!

This is so bad.....oh my, this is going to get even worse......

TooBearish's picture

no volume no down tick equities ...however Nic's call in bonds spot on as long as USD weakening all assets may rally

crzyhun's picture

Traders Almanac says to day is up 80% of the time in the midst of opex on Friday.

Gordon_Gekko's picture

Although I generally remain in favor of a MASSIVE stock market crash, perhaps it could be that equities are pricing in an impending crash in the dollar's value - in which case all those retail investors and dollar-deflationists who bought Treasuries as a "safe-haven" are F**KED.

Mr Lennon Hendrix's picture

"[A]n impending crash in the dollar's value."

Please continue, or if you will, extrapolate.

trav7777's picture

Debts are being discounted in the face of a future of contraction.  The FRN is debt.

YourAverageDebtSlave's picture

Correct me if I am wrong, but won't the market continually go up when priced in dollars.  Since we've dumped so many dollars into the system, it seems to make sense the market has been rising to price in the dollar's future inflation. 

erik's picture

john, at this point that appears to be the only safe bearish trade out there.  the only way to cover for chaos and manipulation.  i am holding jan'11 (oops) and jan'12 trades.  the only negative on options is of course the counter-party issue if things get really bad.

Lord Peter Pipsqueak's picture

With just an hour to go,the market volume is now around half the recent average daily ,this is seriously scary stuff.................

Mako's picture

Cursive

Getting rid of The Fed is not going to solve the problem.  Humans can continue to lend and borrow to each other at a rate of compounding interest.  The system will still collapse, matter of fact you dissolve the Fed right now... instant collapse. 

ThreeTrees's picture

They could try.  The nice thing about sound money and a non-fractional banking system (the likes of which arise organically out of a free market and are not the product of government meddling) is that systematic risk in an economy imposes real limits on credit expansion.  Without moral hazard and constant asset price inflation upon which to leverage lenders can only extend themselves so far before the law of diminishing returns slaps them in the face and tells them to get real.  In the absence of credit expansion you can only lend so much before you run out of profitable enterprises to lend to, the rest are dead fish that could only be profitable if debt is growing fast enough to sustain demand and thus their output.  

You're right, the math is inviolate, you can't fight the equation.  But in the absence of fiat the real world precludes further compounding long before it can go exponential.

Mako's picture

There is no such thing as non-fractional banking system. 

You are either lending and borrowing, or you are not.  You can hold what you lend out. 

Humans worship the power of the equation, the equation eats the worshippers when it is no longer being fed what it needs... what it needs is more at an exponential rate.

 

 

ThreeTrees's picture

I think you missed my point.  Fundamentally I don't think you and I disagree on the mechanics of what you're describing. I simply contest that this is the only way things can play out because, under sound money, the supply of capital is finite the price of capital, the interest rate, must rise as the supply dwindles making it harder for businesses to borrow.  This checks credit expansion at a level where the growth in the economy generates enough wealth to at least service said debt.  We can then deduce that any further lending of capital beyond this point results in a loss as the growth rate will at some point become smaller than the interest rate.

In the real world the function cannot go exponential.  Thermodynamics deigns it so.  The flipside of this is that fiat money partially disconnects finance from reality.  I say partially because in the end debt has to be repaid with real wealth and it is at this point that the exponential function gets unsustainable and the economic systems built around paper money break down.  Fiat just keeps the party going longer because inflation is capable of increasing consumption in its wake, translating into growth which feeds the equation that much longer.

RockyRacoon's picture

Sound enough idea, with a sound money.   Wonder if gold could fulfill that purpose?  Just a thought.

RockyRacoon's picture

Hey, Three Trees, check out some possible avatars:

http://tinyurl.com/y9bryge

tmosley's picture

Sure, people will continue to lend to each other, but the perverse incentives toward risk will disappear.  Without an open channel into the taxpayers pocketbook, people will only give and take loans that make sense, and if they fail, they will be the only ones.  They won't take anyone else with them.  Their assets will be bought up and put to more productive use.

This is how capitalism works absent government interference.

Ned Zeppelin's picture

OK you ZH whiners, Kudlow says V-Shaped Boom is here! Here's what he says:

"Rather than blow their credibility over a cyclical rebound that is backed by the statistics, free-market conservatives should tell it like it is.

"Let’s begin with the March employment numbers recently released by the Labor Department. Those numbers were solid. People say small businesses are getting killed by taxes and regulations from Washington, but the reality is that the small-business household employment survey has produced 1.1 million new jobs in the first quarter of 2010, or 371,000 per month. If that continues, the unemployment rate will drop significantly.

"Additionally, the corporate payroll number for March increased by 224,000 -- not 162,000 as some claim -- with the prior two months being revised up by 62,000. And this is being led by private-sector job creation.

"And according to just-released data, retail chain-store sales for the year ending in March were up a blowout 10 percent. Ten percent. That’s a V-shaped recovery. And the real-time ISM purchasing-managers reports for manufacturing and services indicate that the economy in the next few quarters could be much, much stronger than the consensus expects -- maybe 5 to 6 percent. Another V-shaped recovery.

"Commodity charts, meanwhile, are roaring. All manner of raw industrial materials have been booming -- iron ore, steel, you name it. More V-shaped recovery. So with higher commodity prices running virtually across-the-board, there is every incentive for rapid inventory-rebuilding. (Inventory prices are going up as commodity prices go up.)"  [emphasis supplied]

There, now get on board and load up on those equities.  Between today's MSM factoids telling us the bank bailout cost us practically nothing, to the VIX hitting near zero, and the Dow climbing over 11,000 and the S&P in striking range of 1200, it's all over folks! The recession is over, and the V-shapers have won.  

Larry says so.

 

Mr Lennon Hendrix's picture

"Now Larry needs a line!" -Larry