Wednesday’s Trading – 4/22/09

Banks Seized
All the banks, that is. Here is what Geithner told the TARP oversight committee on Monday when they asked him about banks returning TARP funds:

“My basic obligation is to make sure the system as a whole…has the ability to provide the credit that recovery requires…”

So, we now have a precedent: in addition to traditional policies used to fight recessions, the government now claims the right to direct the lending policies of banks.

Is this a hint that Geithner will soon be taking a more active role in commanding banks to “provide credit”? Can that be a good thing for banks in the long run? The camel’s nose is under the tent, and…

The postofficeification of America marches on.

German Investors Turn Rabidly Bullish
According to Zew. Jason published a similar study on US investors a week ago here.

Downside Targets

Today, the market re-gained about 50% of Monday’s drop. As I write this Tuesday night, the futures are sagging, so let’s see if we can find some targets if Tuesday’s bounce turns out to be merely a routine retracement. Here is a 60-minute chart of the SPX (click to enlarge):

spx-4-21-09

The red lines are a Fibonacci price extension.

A 100% extension of the bear flag would take us to 801 (green line), which was support on April 1st (green arrow).

Before that, the market would almost certainly bounce in the 811 area, the Mark-to-Market Gap (blue rectangle), which would be a 78.6% extension.

And a 50% extension would take us back to Tuesday morning’s low, the Wells Fargo Gap (purple line.)

Take a look at the purple arrow. Notice how the SPX didn’t quite fill the gap. When you see that, it means that dip-buyers were very eager to buy at that level; so eager that they were all trying to get the jump on each other and never allowed the gap to be completely filled. This happens in reverse also, when sellers are eager to short the market as it moves up to fill a gap. This is an important signal to watch for. This morning, there were many eager dip-buyers, and that was a bullish tell.

Wednesday is an important day. If the market is able to continue rallying, especially above 857 (the 61.8% fib retracement) on strong volume, then you have very bullish action. Recovering that quickly from a “wedge snap” isn’t easy, and would demonstrate a very large horde of dip-buyers.

So, is Goldman Sachs done squeezing the hapless quants yet?

XLF
The double-top on the XLF that I mentioned in the comments on Monday may have been triggered by the stress-test rumor. The XLF rallied back on Tuesday morning when Geithner told Congress that the banks were fine. So, it is possible that Monday’s plunge was a “mistake.” Nevertheless, I agree with Meredith Whitney that the XLF will be back to its lows by the summer.

Tuesday’s Trading – 4/21/09

Wedge Snap
What happens when a rising wedge pattern snaps like we saw on Monday? For the answer, turn to page 165 of the textbook:

“Once prices break out of the Wedge downside, they usually waste little time before declining in earnest. The ensuing drop ordinarily retraces all of the ground gained within the Wedge itself, and sometimes more.”

So, where does did the wedge begin? I like 780, the low on March 30th, as the beginning of the lower wedge line. So, that’s my target for where this pattern should complete over the next few days. On the way there, there should be support at 825.16, the Wells Fargo Gap from April 9th, and then at 814.53 and 811.08, the top and bottom of the Mark-to-Market Gap from April 2nd.

Wedge targets are not always hit, but this market is so overbought that a correction down to 780, or so, seems very doable.

MacOS Breakdown

The McClellan Oscillator has broken its uptrend line (click to enlarge):

macos-4-20-09

The MacOS is the purple line in the upper panel. The SPX is the green bars in the lower panel. The black lines highlight the triangle that the MacOS had made, and the black arrow points to the breakdown that occurred today. The last time this happened on February 13th (red line, and red arrows) was a very bad omen for the market.

The MacOS is just above it’s longer-term uptrend line (blue), and that may provide support. If not, then the rally may be fatally wounded.

Monday’s Trading – 4/20/09

FXE Frowns Upon Rally
The euro is down again as I’m writing this Sunday night, and the FXE may fall below the last Fibonacci level on the chart that I posted back here. Normally, stocks would be moving down with the euro, but they are not, probably because of the short squeeze that is killing off the quant funds that Zero Hedge has been writing about.

But once the squeeze is over, SPY may play catch-up with FXE black-swan style.

Kill the Dollar
When Ben Bernanke dreams at night, he dreams of chopping the dollar into little pieces. That’s how “growth” is accomplished here in our post-capitalist economy.

If you don’t want to allow the “creative destruction” phase of capitalism to function, then you have abandoned capitalism. In a real capitalist economy, Citi would go belly-up and BB&T would take over a chunk of their assets. Bad managements would be punished and good ones would be rewarded, right?

But we can’t have any of that here, now can we? Citi must be saved at all costs. And that makes growth sub-par because resources are held hostage by bad managements propped up by the government.

And so we try to grow by inflation: print a lot of dollars, get some inflation going, and just watch your stocks and real estate shoot up.

It’s a very dumb economic strategy, but this is the USA’s policy. So, if the dollar refuses to die, it will be very difficult to pump up the stock market. That’s why this divergence between SPY and FXE is so alarming.

The Wedge
Everybody is aware of the rising-wedge pattern on the SPX. And with the market making this bearish pattern right at strong resistance (875), I wouldn’t be surprised to see the rally die here. “Wedge snaps” can be sudden and powerful. Of course, there is no way to know how far down dip-buyers may lurk. But what if the dip buyers have been quant funds getting blown out of their short positions?

Death Stars Align
Strong dollar, SPX wedge, dying quant funds, ridiculous overbought levels, giddy CNBC talking heads, “sell in May”, and the super volcano that we call Yellowstone National Park about to explode, well, you can color me bearish.

If the Zero Hedge “black swan of black swan events” comes true, an early warning might be spreads widening. So, keep on eye on whatever you are trading, and if you see the spread acting funny, it might be a good idea to start running.

On a Bullish Note…
It seems to me that the QQQQ and SMH would not come this far without at least tagging their November highs. So, maybe there is another stab higher before the lava starts flowing.

Friday’s Trading – 4/17/09

Copper Coming Back?

A while ago, I commented that if I were China, I would be stockpiling metals too – in order to diversify out of my dollar holdings now that the Fed is “monetizing” the federal debt – printing money that is. Now, here is somebody who agrees with me:

“They are definitely buying metals to diversify out of US Treasuries and dollar holdings.”

Copper’s rise (chart here) may be the first manifestation of the inflation that many believe is in our future. Don’t forget, “expectations” are important to inflation. The Chinese expect problems with the dollar and have inflated the price of copper.

American pennies used to be made from copper, not zinc like they are today. So, copper used to be money in the USA, and it might be money again one day – in China.

Nothing Screams “Recovery!” Like…
…Google’s “first sequential drop in quarterly sales since the company went public in 2004.” But on the other hand…

Knowledge of Fundamentals Can Hurt Your Trading

“Avoid fundamental analysis of short-term trading vehicles. Mental bias from knowledge of a company’s inner workings can distort the message of the price chart just when opportunity knocks.”

That’s from Alan Farley’s book “The Master Swing Trader” (page 23).

875
If the rally continues today, 875 is the next major resistance level.

Thursday’s Trading

Max Pain is still at 80 for SPY, and we have seen the market do wild things to try and hit that number at the end of opex week. But the market is ignoring a lot of bad data again this morning.

Perhaps the hedge funds that sold all of those SPY 80 calls are out of firepower to drive the market down.

The January Line

You should have the January Line on your charts. Here it is on the XLF chart (click to enlarge):

the-january-line

In January and early February, it served as support until the XLF gapped under it. In March and early April, it served as resistance until the XLF gapped above it.

If the support doesn’t hold, don’t be surprised if the XLF gaps back under the line.

Also, note on the chart Tuesday’s volume (black arrow). That’s the second tallest red volume bar since the rally began, and is something to keep an eye on. If the XLF falls on heavy volume Wednesday, especially with a gap under the January Line, then we might have a significant crack in the rally.