Head and Shoulders
The heavy price of a “head and shoulders top”. Competition from rising interest rates in emerging markets and record scrapage rates are eating into the prospects for the barbarous relic. So are higher margin rates for traders. Moving out of hard assets into paper ones. Exiting from a one sided trade. (DGZ), (GLL). (GLD).
I've got a bad feeling that the Great Intervention Rally of 2009 - 2011 is about to hit an iceberg. January 2011 is eerily reminiscent of January 2000. Ignoring warning signs of being overheated and overloved, the stock market rose month after month, defying doubters. With 12,000 within one good day's run, the Dow reached 11,908 in the week of January 10, 2000, and then rolled over. The next week it sprinted again for 12,000, hitting 11,834, but alas, the mighty advance was over. The S&P 500 topped out a few months later and then started down a relentless three-year slide. I sense a dislocation coming in global markets.
As gold is currently breaking out courtesy of another concerted take down of the dollar, which has sent futures surging, and the EURCHF to a fresh all time, and very ominous, low, FMX Connect provides some insight on how to trade the current gold bounce.
In closing, keep your eyes glued to the Euro. The markets seem to view the Irish bailout as a “positive” for the currency. If this view results in the European currency breaking above 37.5, then the inflation trade is back on with a vengeance and the US Dollar could potentially be in SERIOUS trouble.
Q&A: An In-Depth Look At The Anatomy Of The Current Supply/Demand Imbalance Propelling Equities HigherSubmitted by MatrixAnalytix on 11/04/2010 11:41 -0400
Low supply+ very high demand = higher prices
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When the Fed announced that it would issue its QE lite program in mid-August, the world took this to indicate that QE 2 was definitely coming.
Indeed, virtually EVERYTHING occurring in the financial markets right now can be traced to the view that the US Federal Reserve has a $1 trillion+ QE 2 program on deck. Nowhere is this clearer than the US Dollar.
Most if not at all traders, be they day, swing or buy and holders have come across technical analysis. You know what I’m talking about! Those squiggly lines all the gurus seem to have on their charts! They consist of patterns like the famous ‘Head and Shoulders’, age old equations seen across nature like ‘Fibonacci’, even historic wave movements measured by ‘Elliott Wave’.
Last week I forecast that we would see a reversal in stocks. The market did indeed show signs of breaking down on Wednesday and Thursday, however, the Fed’s juice managed to keep stocks afloat and closing in the green for the week. All told, the Fed injected more than $10 billion into the market directly via its three Permanent Open Market Operations (POMO) pumps. However, Bailout Ben wasn’t content with mere open market juicing, so he pumped another $10 billion into the system “behind the scenes.”
BofA's chief technical research analyst Mary Ann Bartels has released a note in which she demonstrates the bullish and bearish technicals currently in the market (although with the only thing mattering anymore is when and how big any given Fed permanent open market operation will be, we question the utility of technicals even). While Bartels is still holding on the a call for a "deeper equity market correction" while noting the obvious ("The equity market this year has frustrated both the bulls and the bears, and this is likely to continue into year-end, in our view") she points out that the broader market signals are mixed. She points out that "most short-term indicators have generated a sell signal and Net Tab is not oversold. We still need to break and hold above S&P 500 1150 to invalidate a potential head and shoulders distribution top. A test of the July low (1010) is still not ruled out. A break above1150 would point to a test of the April high of 1220." Today's action shows just how hard the market is trying to breach the upside resistance and disprove all the economic fundamentals that unequivocally point to an ongoing and accelerating deterioration in the economy. Below are the key charts supporting Bartels' call.
"The market stands on the banks of the Rubicon. The technical picture is unusually complex. There are various aspects that are normally associated with topping patterns. Yesterday, it was announced by the American Association of Individual Investors that the percentage of bullish investors had suddenly soared to 51%. That’s usually a big warning signal. Also, on the shelf for the bears remain the series of Hindenburg Omens and the recent VIX sell signal. The bulls are working on an inverse head and shoulders in the S&P. Interestingly, the “neckline” is very near the 1131/1133 level that marks the top of the three month trading range. Thus, a move above that level could suggest a new up-leg in the S&P with a target count of about 1240. That set-up leads traders to believe that a move up through that band might spark a frenzy of algorithmic short covering. That would certify the importance and validity of a breakout." - Art Cashin
Last week I forecast that the stock market would likely rally to test its 200-DMA. We didn’t quite get there, but that’s largely due to the fact that no one was actively trading the market last week.
Indeed, thanks to a holiday week that entailed both Labor Day and Rosh Shoshanna, market volume was truly abysmal. In fact, last week saw even lower market volume than during April 2010 top, which should give you an idea of just how few participants were involved:
Last week I mentioned that barring any additional intervention (monetary or otherwise) stocks would roll over. That is precisely what happened with the S&P 500 falling to test MAJOR support around 1,040 twice.
We looked about read to fall off a cliff until Friday when Fed Chairman Ben Bernanke stated in his speech that the Fed stands ready to do whatever is needed to fight the financial crisis. It wasn’t a direct monetary intervention, but in these desperate times verbal intervention is good enough, and traders gunned the S&P 500 higher back into the gap created by the Monday/Tuesday sell-off.
In this week's update on technical chart formations, Goldman's John Noyce has nothing optimistic to tell clients. Noyce observes that while the market may have entered a short-term consolidation period with the 1,038-1,045, "looking further out the setup on the weekly charts of the S&P and the VIX, plus those for broader asset markets - fixed income in particular – make us think that a sustained bounce is unlikely and that broader risks remain on the downside." Yet the most interesting chart formation is the imminent flattening of the 2s30s... not here, but in the UK. Will the Julian Robertson "suicide" trade shift across the Atlantic?
The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price. As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared? Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered." - Gordon T. Long