SPY Rising Wedge

Here is a chart of the bearish rising-wedge pattern on the SPY intra-day chart that I mentioned earlier (click to enlarge):

The wedge is bounded by the purple lines, and began to form Monday afternoon around 3pm. Notice that volume picked up dramatically before the close Tuesday. That is a potentially bullish development since it might indicate that the upper boundary of the wedge will be pushed upward.

However, notice that that surge in volume was absorbed in the resistance area bounded by the blue lines on the chart. Quite a lot of buying was absorbed, so there were quite a lot of sellers. That area marks the cliff that the market fell off of when the House shot down the TARP. So, the traders that were betting on the TARP passing, and were instead treated to an historic plunge, were selling furiously into Tuesday’s rally, no doubt with great relief to get out even.

The surge in buying at the end of the day was triggered by news reports that the FASB mark-to-market accounting rules were in play. Some Republicans have said that if such changes had been part of the TARP, it would have passed the House. Mark everything up and save the taxpayers some money, right?

I think that the buying on Tuesday afternoon reflected way too much hope, just like on Friday afternoon. This FASB discussion says to me that the TARP is still DOA and our leaders are instead cooking up new crazy schemes. I see disarray.

So, the market is full of hope, has rallied on no real good news, has hit a resistance area, is overbought (short-term), will no longer benefit from quarter-end mark-up, will probably get hit by a wave of hedge-fund redemption selling, and Congress seems intent on doing nothing at all.

The only thing that the market has going for it was the momentum at the end of the day. However, the futures immediately sold off on heavy volume after the bell, so that momentum is likely gone too.

One more thing to consider: even though a lot of systems have messed up data and you might not be able to see it on your chart, the two-day candlestick pattern for SPY is a bullish Harami. I think there is a good chance that this bullish pattern will be broken since it is coming on the first day of the month when the big funds are likely to pull their bids.

Gun-to-head, I would be short.

Panic Over – Depression Begins

The Panic is Over!
That’s the good news. Now the bad news: the Depression has begun. The explosion on Capital Hill today was the political version of Dick Fuld’s suicide bombing of Wall Street a couple weeks ago. Confidence in both our financial system and political system has been lost. And in case you are wondering, none of this is “healthy” – this is a total disaster. Some traders are looking for a giant rally after today’s panic selling. Not me. I’m sticking a fork in America.

McCain Knows He’s Toast
John McCain spoke briefly after the market closed. He sounded like he was delivering a eulogy at a funeral – and he was – his own. I wonder how many decades the Republican Party, a.k.a. The Depression Party, will be consigned to opposition status in Washington?

It’s Time for Congress to Abdicate
It’s pretty obvious that the USA’s experiment with democracy has been a failure. As Congress’s last act before abdicating, they should hire a management team from Singapore to take over. It is no longer acceptable for the world’s largest economy to be managed by rubes.

America is Stupid
Stop and think about what just happened. Ben Bernanke is an acclaimed scholar who has distinguished himself by doing groundbreaking work on the causes of the Great Depression. And here in this new Depression, the American people have told him to pound sand!

Hank Paulson is no scholar, but he is a top practitioner, and is the perfect compliment for the egghead scholar. Even if you don’t like Ben and Hank, you have to admit that you couldn’t find a team with better resumes for this job. But now they are pounding sand. Well, I’m sure that the masses will come up with a better solution…

Stomach Turning
Watching my country commit suicide has interfered with my concentration. But now that I am cheering the rubes onto their new Depression, I am back to enjoying life and should be posting more comments.

The New-Month Massacre

On the SPX chart below, the purple arrows point to the first trading day of each of the last four months (click to enlarge):

All of them began badly. The first trading day of July finished up, but it opened on a large gap down and then rolled over the next day. This happens for a good reason: month-end mark-up. The big funds do their best to levitate the market at the end of the month to pump up their numbers. Then on the first day of the new month, they pull their bids, since we are in a bear market after all. Also, hedge funds do the bulk of their selling to meet redemptions during the first few days of the month.

Of course, on a day like today, not even the big funds can keep the market up. But the futures are up as I write this at 11:30pm, so perhaps the big funds are doing some buying to get some phony enthusiasim going for a bogus mark-up rally on Tuesday.

In any case, regardless of what happens on Tuesday, holding long positions over Tuesday night is probably not a good idea.

I made a couple of hundred dollars with a quick scalp from the long-side in the futures earlier. And now, just when I look up from writing this, I see that I missed another strong move up where I could have made a few hundred more dollars. Do you see the sacrifices that I make for this blog?

Fortress America Fires the First Cannon

Now that the “voters” have defeated the evil bankers of Wall Street, might they now get more aggressive? What might be next?

Perhaps jobs that have been exported to India and China will be brought back to the USA.

Perhaps trade agreements like NAFTA will be canceled.

Perhaps the Japanese and Euros will be told to pay for their own military defense.

Perhaps the empire will be rolled back and Iraqis and Afghanis will be on their own.

Perhaps support for Israel will be discarded. After all, there may have been a tinge of anti-semitism in this war on bankers, right?

What else is in the Rush Limbaugh/Pat Buchanan playbook?

Free at Last!

I used to feel sorry for “voters” who lost their jobs, had their retirement portfolios melt away, lost their houses due to foreclosure, etc. It was quite a burden.

But now that “voters” have instructed the fat cats in Washington to make things even worse, I no longer feel sorry for them. My burden of empathy has now been lifted.

Each time I see an economic report showing millions of “voters” out of work, or kicked to the curb in foreclosures, I will drink a toast.

I have made quite a lot of money this year. I like to imagine that it has been directly transferred out of some fool “voter’s” retirement account and into my account. That makes me feel warm and fuzzy.

When I descend from my paid-for luxury condo with a spectacular view of Miami Beach and stroll along the streets soon to be populated with even more homeless “voters”, I will be whistling a happy tune as I go by. When they reach up to me from the gutter, and ask “buddy, can you spare a dime?” for another bottle of cheap wine, I will spit in their hands.

Yes, there will be a Depression, but not for me of course. I will be happy and cheerful all the way through.

Note: I hope that you were paying attention over the weekend when I was skeptical of media reports that the deal was done. That was a classic, premeditated, and coordinated propaganda blitz. On Friday, the market, like Warren Buffet, was confident that Congress would do something intelligent. I was in cash. After the bill went down today, I went short in the futures, set a stop and let it ride. Hopefully, I bankrupted yet another “voter.”

Tentative TARP?

Last week, President Bush was urging Congressmen to at least act like they were not in a panic, but he failed and the bank runs intensified.

Today, the news media is telling us that a deal has been struck. But if a there really is a deal, why is the word “hope” still being used. From the AP:

“But officials in both parties were hopeful for a House vote Monday…”

It sounds to me like there is no deal yet and the president has finally persuaded Congressmen to stop acting like fools.

I am thinking about taking a short position in the futures if they open on a large gap up at 6pm. I have also withdrawn the maximum amount of cash from my bank’s ATM machine yesterday, and will do the same today.

FBX-T Deployed to Israel

Israeli state radio and Debka have reported that the USA has set up an advanced radar base in Israel.

If memory serves, the last time Israel was loaned a cutting-edge radar system, it was before the invasion of Iraq. It was expected that Saddam would launch missiles at Israel even though Israel was not allowed to participate in the USA’s invasion, and so he did.

The Israeli’s are outraged that they are not allowed on the new American military base. There are two reason I can think of for this: the radar is cutting edge technology and the USA does not want anybody to get a close look at it – even an ally. Or, the USA wants to control when the attack on Iran will occur.

If the Israelis had control over this greatly increased capability of intercepting Iranian missiles, they might be quicker to strike Iran. So, it is likely that the USA is following the same policy as with the invasion of Iraq: strike Iran, don’t let the Israeli’s participate, but protect Israel from incoming missiles.

Fed Explodes

Take a look at David Merkel’s chart of the Fed’s balance sheet.

Merkel is a very smart investor, but he has been against the bailout for political reasons. Now he is in a panic. My question to Merkel is: what did you think was going to happen? Did you think that the Fed would allow the global financial system to collapse just to indulge your naive political views?

So, now we have a pattern:

Day 1 – The “voter”, “taxpayer”, or Depression Advocate instructs his representatives in Congress to implement a depression.

Day 2 – The same fool panics as he sees his investments threatened.

Day 3 – Said fool races to his failing bank to see if his money is still there.

And it is there. But only because his public servants (Chairman Bernanke) have defied his wishes.

The USA was not founded as a democracy, and it is not hard to see why that system of government was not chosen by our Founding Fathers.

The USA was Founded on a Fiat Currency

When Ron Paul goes into his usual shtick, as he did during the hearings on Wednesday, and claims that Bernanke is not authorized by the Constitution to print fiat dollars, he is clueless to the fact that the Constitution itself would not even exist without the fiat Continental Dollar.

Ron Paul has obviously not even read the history of the Revolutionary War. So let me simplify it for him:

George Washington spent most of his time trying to raise money to fund his army because “taxpayers” and “voters” would not cough up. Eventually, the government just said “to hell with it” and started printing up Continental Dollars and stole the money from the “taxpayers” and “voters” via inflation and won the war.

Inflation is an alternate means of taxing reluctant populations. Today, “taxpayers” and “voters” are hell bent on tearing down the banking system and ending this nation as we know it. I say Chairman Bernanke should print whatever amount of money is necessary to prevent that. It’s time once again for a massive Stupid Tax on this nation of ignorant fools in the tradition of our Founding Fathers.

Let the record show that am against a new Depression and the dissolution of the United States of America.

Put that in your pipe and smoke it Ron Paul!

Ron Paul is a Fool

As Ron Paul spoke during the hearings on Wednesday (around 11:40am EST), the NYSE TICK plunged. Stocks hate Ron Paul. Stocks think he is a disaster for the economy.

As a life-long libertarian, I never “got” Ron Paul. I have never been a fan. He seemed to always just be frantically regurgitating libertarian philosophy. Nothing he has ever said has struck me as creative, innovative, or original. I understand that much of his stuff is written by Gary North, and I while I enjoy reading North, if one of his essays has Ron Paul’s name on it, I just won’t read it.

During the hearings I heard Paul say the dumbest thing that I have ever heard: that real estate is only worth what the market will pay for at any moment. While that is technically true, during a credit crisis it is totally false.

Suppose I have a house that has been worth $100,000 more-or-less for several years. Then, when I decide to sell it, I can only find one buyer who has $20,000 in cash – enough for a down payment. However, when he goes to the bank he cannot get a loan because there is a credit crisis going on.

So, according to Ron Paul, my house is now only worth $20,000 and I should quit my bellyaching and sell it for what the market will bear.

This is the point where I punch Ron Paul in the face.

Real estate values may be a function of available financing, but the idea that the credit crisis will never end is simply foolish.

Now imagine that Hank Paulson comes along and offers me $40,000. Well, maybe I would sell since it is double my best offer. Did Paulson waste the taxpayer’s money? Probably not. He probably made a deal that will turn out to be very profitable once the credit panic ends.

And if Paulson goes up-and-down my street buying up all the houses on the cheap, his actions would likely end the credit crisis. So, in other words, a buyer of sufficient size cannot only buy a lot of houses on the cheap, but he has the power to make himself right by ending the crisis.

Note: Yes, I know the situation is more complicated than this, but I had to dumb it down so that Ron Paul could understand it.

Friday’s Trading

McCain Crash Scheduled for Friday
Doesn’t seem like the best campaign strategy to me, but what do I know?

Voters Are Against the Bailout?
Here is one provision I think should be part of the bill: any voter who lied about their income on their mortgage application to buy a house that they could not afford should be sentenced to five years in prison for economic crimes against the nation, and disenfranchised. And for you voters out there ‘disenfranchised’ means that you don’t get to vote any more.

Of course, if I had lied to my bank about my income on a mortgage application to buy a house that I could never hope to pay for and then got a HELOC and spent the money on an expensive car and ran up my credit cards into the stratosphere and THEN I saw my Congressman on TV talking about bailing out my bank, I would be outraged too. I would call my Congressman and urge him to drop a BOMB on my bank instead.

See how that works? If the financial system melts down, there’s a chance that all my debts go away and I get a free house, car, and boat in the deal. Sure, it might be inconvenient for a while living in poverty in a barter economy, but I have a negative net worth, so what do I care? And once the new bank is built in the smoking crater of the old one, I could pop in and see about getting a new credit card…

It’s Still Quarter-End
Since the big funds control the vast majority of trading each day, it is still up to them whether or not the market crashes. They will attempt to hold things together just to minimize the horror on the quarterly statements that they send out next week.

But can they do it? It’s not impossible. The selling on Wednesday was very light, and that indicates that all the longs that were inclined to barf-up in a panic at this level already did so last week.

Of course, if the big funds are flooded with redemptions, then they may have no choice but to dump stock. I wonder if the brilliant American voters are aware that they crashed the futures and are now firing off redemption requests and are accelerating the crash that they have voted for. Seems like something that they would do…

I would also expect an exodus of foreign money. Any foreigner who has money in the USA needs to have his head examined. His home country might not be much better, but gold comes to mind…

If the selling volume is light after the open, then the big funds might be able to thwart the McCain crash. But I wouldn’t bet on it until I see it. The havoc created by Congress this week did set up a good buying opportunity in front of Thursday’s rally. Perhaps a raging market panic would knock some sense into people and a bill could get passed in a hurry. Taking a small long position at the height of the panic might not be a bad play.

John McCain to Save Stock Market?

Crisis Averted!
When I first heard that John McCain was suspending his campaign because of the financial crisis, I thought: “Wow, this thing is getting out of control if the presidential campaign has to be shut down.” But I had it backwards.

As soon as Congress heard that McCain was coming to town, they immediately freaked out. I didn’t realize this until Barney Frank spoke after President Bush’s speech Wednesday night. Frank was apoplectic that John McCain was on his way to steal his “Savior of the Economy and Bringer of Justice to Evildoing Bankers” mantle.

The presidential campaign is the big show of course, and the cameras will turn toward McCain if he inserts himself into the process. And Obama might not be far behind. So Frank went out of his way to assure us that Congress practically had the bill all done and didn’t need McCain’s help.

When Frank first came on TV, the S&P 500 futures dropped to 1186, but after he spoke, they jumped up to 1199. The market doesn’t know what’s in the bill, but I think it is just happy that Congress is not going to legislate a meltdown.

Can the Market Rally?
Here the factors in favor of a rally Thursday:

  1. The market stabilized on Wednesday
  2. The Congressional crisis seems to be over
  3. The market is oversold
  4. It’s quarter-end mark-up

The big funds probably got a lot of redemptions during the plunge last week, so maybe they won’t have enough cash to bid the market up this time. But I’m thinking that it was probably them bidding under the market on Wednesday, and that would explain why stocks were flat while Congress sent credit markets into a panic.

Also, we have three important economic reports in the morning. Not that anybody is still paying attention to the economy, but the reports aren’t likely to be rays of sunshine. And of course, bailouts have lost their power to spark rallies.

Gun to head, I would be long for a potential relief rally, though I wouldn’t over-stay my welcome.

Watch the comments for updates throughout the day.

Buffet to Trigger Bank Bounce?

Fade the Goldman Gap?
The market will probably open Wednesday with a gap-up on the Warren Buffet/Goldman Sachs news. So, let’s go back and look at what happened when Buffet announced his last investment in financial companies.

On August 24th, I wrote Buffet Buys Banks? a couple of days after I saw Warren Buffet tell Becky Quick on CNBC that he had increased his stake in either Wells Fargo or American Express. If you go back and look at a chart of the XLF, that was when it looked like it was rolling over. But the XLF gathered itself and went on to make new highs, fleeting though they may have been. In fact, the XLF is still above that point.

Whether or not Buffet was the cause of the XLF’s revival, he does indeed have a lot of followers, so I wouldn’t automatically scoff at this Goldman news. Also, the market is oversold, so it is likely to produce a lasting bounce. Of course, “lasting” is a term that is open to question in this market.

Clown Collage? How About Clown Congress?
Whether or not the Paulson Plan is pure evil or white light, I think the Senate on Tuesday gave the impression that they were a pack of ignorant, hostile fools who didn’t care if everybody’s bank account was erased. It was like Senator Schumer starting the run on IndyMac times a hundred. That was the scariest thing that has happened in this crisis so far.

Watch the comments for updates throughout the day.

A Trillion Dollar Inflation Surge?

A lot of traders are talking about, and betting upon, a new surge in inflation caused by the bailout plan. But I’m not sure that is a done deal. Putting any amount of money into the banking system will not expand the money supply and stimulate the economy at all if the banks don’t increase their lending.

The Fed has already pumped billions into the banking system, and it has simply disappeared into the black hole. It has not stimulated the economy because the banks have not increased lending. In fact, they have decreased lending and the money supply has not expanded.

So, the moral of the story here is that the Fed does not expand money and credit. The Fed pumps money into the black-hole system and hopes that banks will increase lending. That worked in 2003. It is not working in 2008.

Can the banks swallow up another trillion dollars? Maybe they can because not only is the banking system broken, but so is the real-estate market. As long as house prices are falling and deadbeat Americans have no money for down payments, it will be difficult for banks to inject much money into the economy even it they wanted to.

Banks are hoarding capital as revealed by the Libor rate, which is more than 50% higher than the Fed Funds rate. Any new money injected into banks is likely to go straight into the mattress.

I have written about this before here. In that post, there is a link to the True Money Supply which I think is the best measure to use.

I am not betting on a giant tidal wave of inflation just yet. If it comes, it may be awhile.

SPY Bull Flag – Day 2

Maybe I’m crazy to continue doing chart analysis after Dick Fuld detonated his suicide bomb last week sending all asset classes flying in random directions like so much shrapnel, but let’s just see what we have anyway.

The SPY bull-flag intra-day pattern that I first discussed on Sunday has evolved like this (click chart to enlarge):

The purple line marked “A” is the same. That’s the first half of the flag pole. Remember, the flag flies at half mast. Line “B” is the same height, but it is moved down because we measure from the tip of the flag. So, our upper target keeps falling the longer the flag waves.

Now comes the interesting part. I have stretched out the chart so that you can see that the flag, bounded by lines “C” and “D” has formed into a falling wedge pattern.

Falling-wedges are bullish patterns. Make sure to click the link and read up on them if you don’t know what to look for.

Most intriguing is the last bar. Look at the volume. That increase in buying may signal that SPY is about to break out of the wedge to the upside. Your chart may look a bit different depending on how your charting program makes its bars, but if you look at a 5-minute chart, you will see the surge in buying before the close. As I write, the futures are also up a few points.

If I wanted to short here, I would wait until prices pushed line “D” down far enough to erase the wedge. If I wanted to go long, I would wait for prices to break above line “C” with a surge in volume.

The way it breaks is likely dependent upon what Congress does.

Monday’s Trading

Will the market continue to gyrate in wild swings because traders don’t know what the rules of the game are? Are 1% moves in the major indices just noise now, and much larger moves the norm? Maybe we can get answers to these questions today. After a giant up-wave like we had last week, you would expect the market to consolidate in a much narrower range. Let’s see if it can do that.

Watch the comments for updates throughout the day.

SPY Bull Flag

Here is a 60-minute chart of SPY from Thursday and Friday showing the bull-flag pattern that has formed (click to enlarge):

The purple lines outline the pattern. If it completes, the target would be $136, which agrees with David’s analysis (see David’s links in the comments of the previous post.)

While flags are not the most reliable of patterns, it is usually not a good idea to fight them until you see them begin to fall apart.

The market is short-term overbought, so I would expect some more consolidation from here. However, longer term, the market is not overbought at all, so technically, there is plenty of room to run up the second half of the flag pole.

This is an intra-day pattern, so it does not carry the same weight as a multi-day pattern. Also, SPY’s volume increased in the last two hours on Friday which is a sign that the flag may unravel. Volume is supposed to remain light in the flag-part of the pattern as longs take profits and traders wait patiently for a pullback to initiate new longs. SPY could correct more than it already has, but volume is still the key.

Another problem is that flags are continuation patterns, not reversal patterns. However, since the Brits announced their ban on the short selling of financial stocks while the US market was still open, we may have a legislated bottom that will not look “normal.”

And finally, knowledge of technical chart patterns has been developed during an era where short-selling has been allowed. Will chart analysis still work while the shorting of stocks in the most important sector of the market is outlawed? I don’t know the answer to that, but I’m sure that there are traders somewhere with experience in the Chinese and Pakistani markets who could tell us.

Since this relief rally is occurring while the economy is contracting, it has to be classified as just another bear-market rally until proven otherwise.

Saved by the Short-Selling Ban?

I see a lot of traders around the web getting excited by this ban on short-selling financial stocks. Why don’t we take a look at how well banning short-selling has done in another major market. Here is a chart of the Shanghai index from Yahoo Finance (click to enlarge):

Hmmm…a drop from 6000 to 2000? …doesn’t strike me as bullish…

If anybody knows the history of the ban on short selling in China, please post a comment. After a few minutes of searching I wasn’t able to google-up anything beyond the fact that the Chinese don’t allow short selling.