Thursday’s Trading – 10/1/09

CNBC’s policy of not reporting the Chicago PMI certainly backfired on them Wednesday morning, didn’t it? The market got quite a jolt when it surprised to the downside at 9:45am. What’s wrong with CNBC? Do they really think traders would rather listen to them yap than get the news?

In case you didn’t hear, it was Fed Head Donald Kohn’s speech that saved the market Wednesday afternoon. The Fed has exited its exit strategy. It wasn’t enough for a green close, but will it stave off a correction?

The IYT ate away some more of its September 10th gap at 68.57 that I have been talking about recently. The IYT needs to rally quick becuase the support is starting to look awfully shaky.

Wednesday’s Trading – 9/30/09

The XME has hardly rallied at all this week, and is, by far, the worst performing sector since the market’s peak on the 23rd. It is down 6.4% since then, which is almost twice as much as the second-worse XHB. The XME’s five-bar pattern on the daily chart is exactly what a bear flag should look like. A 100% completion would target the gap from September 9th down at 42.38. The SMN, the inverse ETF, would of course shoot up if the XME dropped. But we have big economic reports Wednesday morning, and if they fuel a rally, the XME might be expected to play “catch up” and outperform to the upside.

Breadth got very stretched on Monday, so a bullish take on Tuesday’s action would be that the market worked off a short-term overbought condition while only giving up a few points in the process.

Film at 11.

Tuesday’s Trading – 9/29/09

Yesterday, I mentioned the IYT’s gap at 68.57 from September 10th. Well, everything rallied on Monday, however the IYT came in second from last place among the sectors. Only the consumer staples (XLP) did worse, up 0.75%. And while the IYT was up 1.06%, it spent the last four hours of the day slowly rounding over. On Friday morning, I mentioned that we should be alert for a “slow rounding turn” pattern, and that’s what we had. And as per the textbook (page 88), it finished with a nearly vertical move Monday morning.

Oddly enough, if you look at intra-day charts from Monday of IYT, QQQQ, DIA, IWM, etc. you will see what might be a rounding top forming. It would be weird for a rounding bottom to morph right into a rounding top, but that’s what the pattern looks like so far. The market could have cascaded into the close on Monday, but the XLF and BKX were very strong and held the market up. Speaking of which, the 48.75 area is very important for the BKX. It was support in the summer and fall of 2008, cracked, and was then resistance in the winter. The banks need to punch through that level. It’s hard to have a bull market without the banks, and the BKX’s 200-day moving average has not turned up yet.

Monday’s Trading – 9/28/09

The Iranian Front
Since the futures opened up on a gap Sunday night, I don’t think that the market is worried about Iran. The futures rolled over an hour later, but that’s probably just a continuation of the sell-off. If the futes were worried about Iran, they would have made a large gap down and then kept right on going. Having said that, I still don’t like the smell of this Iran situation. President Obama knew about the new nuclear facility for a long time, and didn’t make it public until after the Iranians did. Here is Obama’s explanation:

“Mr. Obama said he had withheld making the intelligence public for months because it “is very important in these kind of high-stakes situations to make sure the intelligence is right…””

Or maybe he was “saving” it in order to get maximum impact from the news as part of a propaganda offensive to sell the war to the American people. The fact that Obama hastily began his offensive shortly after the Iranians informed the IAEA of the facility and stole his thunder makes me think that a strike on Iran was already in the works until the Iranians noticed the red laser dot on their forehead and fessed up.

IYT Gap Support
Last week, I had the 14.75 level marked on my XLF chart because that was where the September 16th gap opened. The XLF moved back-and-forth through 14.75 on Thursday and Friday, and you could just feel the support crumbling away. This week, I will be watching the IYT. It has a gap at 68.57 from September 10th, and it may be crumbling. That level is also just a few pennies above the IYT’s August peak. If the transports close the gap and move below, it will likely be bad news for the rest of the market.

Meme Propagation
On September 20th, I wrote:

“Trillions injected; zero jobs created. Kind of scary when you think about it…”

Six days later AEP wrote:

“If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved.”

Note to global intelligentsia: you are merely a human botnet which I program with memes. Resistance is futile!

More Iran Noise?

Over the past couple of years, ignoring the chatter about Iran’s nuclear program was the right course of action for traders. But maybe that is no longer the case. President Obama is making it a big deal now, and is supported by Gordon Brown and Nicolas Sarkozy (but not Dmitry Medvedev).

Another sign was the “hasty phone call after midnight” that Obama made to the Czech prime minister announcing the cancellation of the “missile shield.” Why so hasty? George Friedman thinks it was because events were in danger of spiraling out of control and Obama was desperately trying to get the Russians to go along with sanctions on Iran and head-off an Israeli strike on Iran.

(The Russians can supply all of Iran’s gasoline needs by rail, so a naval blockade of Iran’s gasoline imports could be defeated by the Russians.)

Here is Friedman’s conclusion:

“The Russians may be betting that Obama will fold. They made the same bet on John F. Kennedy. Obama reads the same reports that we do about how the Russians believe him to be weak and indecisive. And that is a formula for decisive — if imprudent — action.”

Friedman wrote that before Obama’s Iran offensive at the G20, so he predicted what Obama did, and that gives credence to his strategic assessment.

Friday’s Trading – 9/25/09

Weak Internals and Weekly Candles
The market’s internals were so weak on Thursday that they almost have to improve today. The odds favor some sort of bounce, however it’s no slam dunk. The market can go sideways as the internals improve, and if it does so, then it may simply be consolidating the downtrend.

SPY, QQQQ, IWM, XLF, DIA, and XME are all drawing bearish Harami candles on their weekly charts so far. If they all stick, then the vote for a down week next week will be unanimous. USO agrees too.

Make Up Your Mind FOMC
Is it 0% as far as the eye can see, or is it tightening with “greater force than is customary?” according to Fed Head Warsh (in an otherwise boring and pointless piece):

“…I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary…”

SRT Alert
Now is a good time for shorts to go on Slow Rounding Turn alert. If the market starts to creep upward, no matter how feeble the move looks, you have to take it seriously because the SRT just might rip your face off. See SPY’s intra-day chart from September 1-3 for an example of an SRT.

Thursday’s Trading – 9/24/09

Ghost Ships Haunt Christmas
The nation’s retailers expect this Christmas season to be flat with last year’s, which was the worst in 42 years. And they will be hiring far fewer seasonal workers – maybe 100,000 fewer this year. Wall Street Journal story here. Now we know why the Shanghai Composite has topped out, the Baltic Dry Index has been declining, and all those ships have been mothballed: retailers in the USA have very low expectations for the Christmas shopping season.

Here’s the staffing formula: figure out how many extra workers you hired last Christmas as the world was ending. Then SUBTRACT 100,000.

Can you imagine? Retail jobs will be 100k below the Apocalypse – AFTER the feds have injected trillions of dollars into the economy.

Appalling.

Bulls Impaled by Stupid Spike
Yesterday, I was skeptical about the “Super Spike” that Joe Terranova predicted on CNBC’s “Fast Money” Tuesday night. Today, Terranova got a spike all right – a Stupid Spike jabbed right into his eye. SPY did indeed find its October 6th gap to be “a formidable barrier” as I mentioned yesterday.

And now SPY has printed a pattern that looks suspiciously like a double top, which you can see clearly on the 60-minute chart. The first peak is at the exhaustion gap at the open on September 17th and the second peak is at the FOMC spike on Wednesday. SPY left behind a small gap on the morning of the 16th, and that gap provided support on the 21st. So that level, the 105.75 area, would be the neckline of the double top. If SPY pierces that level on healthy volume, the pattern projection gives a target of 103.30 with a 100% extension.

However, a further extension is possible because this sell-off has caught many traders leaning the wrong way. Everybody on Fast Money Wednesday pooh-poohed the sell-off, so it looks to me like there are a lot of trapped bulls who will likely be selling into any bounce. So, SPY might be able to fill its September 8th gap down at 102.07, and that would be an excellent place to look for a substantial bounce. Gap support is often an excellent entry point to buy a pullback. Just look at how SPY bounced off its July 30th gap when it dropped down to test it on August 17th.

Wednesday’s Trading – 9/23/09

The IWM finally closed its October 6th gap on Tuesday, and that is a significant bullish development. Now it is SPY’s turn. The top of it’s October 6th gap is 109.97. SPY has eroded some of the resistance at the lower end of the gap, but it should still prove to be a formidable barrier – especially now that CNBC talking heads have begun jabbering about the “Super Spike”.

Speaking of spikes, the VIX spiked down right at the bell on Tuesday. Maybe traders were buying call options to get ready for the FOMC to launch the Super Spike with their announcement at 2pm. You see? It’s all planned out; easy as pie.

The Fed probably won’t turn off the digit spigot today, but leaking this a repo story to the press is probably designed to start letting the market down easy. The economy is still weak, but the soaring price of gold may force the Fed to implement the dreaded exit strategies sooner than they would like.

Here is the best part of the story:

“More trading partners may be needed since primary dealers have been shrinking their balance sheets the past two years, and likely can’t absorb an additional $500 billion of securities…”

The Fed is trying to scrounge up enough banks to which it will sell bonds! Can you believe that? The banking system is wrecked to the point where the Fed is struggling to conduct open-market operations.

Marc Faber is an Idiot

In this video, Marc Faber calls unemployed Americans “global village idiots.”

This is absurd. When American factory workers are fired, and the plant is moved to Asia, is it because the Americans are too stupid, lazy, and uneducated to “contribute to the global economy?” Certainly not.

In fact, if India were to fall off the face of the Earth, we idiots would have no trouble whatsoever writing our own software. If China fell off the face of the Earth, we would have no trouble at all assembling our own iPods. And we certainly don’t need Mexico to assemble our cars.

Note to Faber: An apology is in order.

Note to global economy: Jobs from the USA have been sent to you courtesy of foolish trade policies, such as NAFTA. You have been very lucky. Maybe your luck will hold, or maybe President Obama will repatriate a few jobs from your country…

Tuesday’s Trading – 9/22/09

Nearly every sector was red on Monday, but tech held the market up, no doubt because of Dell’s purchase of Perot Systems. The NDX futures have also been strong so far tonight probably because Michael Dell said that he was shopping for more companies. But will the rest of the market follow tech higher?

Counterbalancing tech at the moment are the banks, which are worrying about the G20 tightening regulation. The XLF left a good-sized gap overhead on Monday morning, so that will need to be filled if the market wants to rocket higher. The #2 leading ETF, the XME, also left an overhead gap behind, though it is much smaller than the XLF’s.

If the QQQQ can convince the XLF and XME to fill those gaps, the market may be able to rally on Tuesday. Otherwise, we may have another Doji day.

Monday’s Trading – 9/21/09

Box of Beer
As you may have noticed by now, the Box of Beer is named in honor of Joe Sixpack.

Kleenex Indicator Still Lagging
Back here, I linked to a story about falling Kleenex sales, and wondered if happy days were really here again if Americans could no longer afford Kleenex. Last week, Goldman Sachs upgraded Kimberly-Clark. Are Kleenex sales improving? I doubt it. I just opened a new box of Kleenex and was startled by an astounding plunge in product quality. The stuff feels like sandpaper now. Maybe quality reduction will be the next big thing, after mass layoffs, to improve corporate profits.

New Meme
I’ve noticed a bizarre meme on Larry Kudlow’s CNBC teevee show. It goes like this: American companies have laid off huge numbers of workers, and that has caused them to become so fabulously profitable that they will be able to afford to hire more workers.

Is that not crazy? Doesn’t it logically follow that they would lay off even more workers to become even more profitable? That’s what IBM is doing after all. Is IBM management going to conclude: “Wow! Firing our American workers and replacing them with Indian scabs has made us rich! Now we can send the scabs home and bring the Americans back!”

I don’t think so. IBM’s neutron bombing of Minnesota, Rochester, and Armonk is not going to stop. Why would companies do any hiring if business is not picking up? I would expect hiring to be driven by top-line growth, and recent reports show that there is still no evidence of any such growth. Fedex just said that package volume “was essentially flat“, and Oracle’s “sales have fallen significantly.”

ES RSI Splat Pattern

Friday’s close was not orderly. Here is a one-minute chart of the futures up to the 4:15pm close (click chart to enlarge):

ES RSI Splat

Seven points straight down in thirty minutes? That’s a major panic by recent standards. The purple circle highlights the RSI splat. You have to go back to the plunge on September 1st to see the RSI flattening out in oversold territory. The market ran out of dip buyers at 3:30pm on Friday, and I expect that it will probe lower until it finds some more.

Blog Motto Update #5

While it looks like my “Bear Market Growls Until January 2010” blog motto has been wrong for several months, if you look back at my original post, you will see that what I wrote there wasn’t too far off the mark.

I used a far-off-sounding 2010 date because I was trying to shock readers out of being so optimistic that the recession would end soon. And that was a very good call to make in July 2008. And while the stock market has rallied, the ranks of unemployed in the USA are still growing at an alarming rate. We are enjoying a statistical “recovery” at the moment, but nobody’s life has actually improved. And the stats have been clearly bent by the gigantic federal stimulus. Trillions injected; zero jobs created. Kind of scary when you think about it…

Most traders define a bull market by the slope of the 200-day moving average, so by that definition we are clearly in a bull market – except for a couple of crucial sectors. The 200-day for the BKX banking index has only just begun a very slight upturn, the DBC commodity ETF has turned up by exactly one penny, and the USO’s moving average continued to drop last week. Those three moving averages bear watching over the next couple of weeks.

The new blog motto is: “What Would Joe Sixpack Do?” Even professional traders have been baffled by the market’s historic straight-up move. Seasoned veteran and CNBC commentator, Art Cashin, has been reduced to mumbling darkly about “Ramadan” and “geopolitical events” as if he had inside information about a terrorist attack or impending war, which I’m sure he does not. Cashin sounds every bit the trapped short trying to rumor the market down.

But there is one thing that can make the market defy logic and go straight up: the American public stampeding in. Has Joe Sixpack gone back to daytrading 1990s style? Maybe. On September 16th, the Wall Street Journal published: “Return of Day Traders Drives Rise in Volume.”

If the stampede is on, it would explain why thinking like a professional trader has been a very dumb way to think recently. For example, when a stock shoots straight up, a professional trader might think: “That stock is overbought and is due for a pullback,” while Joe Sixpack might think: “Wow! That stock is going to the moon! I need to get on that rocket!” And you know what? Joe Sixpack wins that argument. Professional traders may have more money than Joe Sixpack, but Joe has the pros outnumbered by a rather wide margin, and “quantity has a quality all its own.”

So, the purpose of this blog motto is to focus on thinking like Joe Sixpack. Imagine that you are unemployed and despondent because you know that your government is sending all the jobs to Asia. You are sinking into destitution, have nothing left to lose, and decide to try your hand at gambling in the market with your unemployment checks before they run out. What do you buy?

In the 1990s, people logged onto America Online and read The Motley Fool. They also bought and held AOL stock and made a lot of money. What do they read now? Do they just watch Cramer on CNBC? Does Joe Sixpack buy the stocks of companies which advertise on NASCAR?

And of course, the American public has the reputation for coming in at the top. So, what does it take to make Joe Sixpack panic and cash out?

Note: I don’t think this era is analogous to the 1990s because back then, the USA had re-embraced capitalism after the debacle of the 1970s. Such is not the case today, and going in the socialist direction is not likely to spark a years-long bull market.

IWM Gap

The IWM gap that I’ve been talking about recently finally did manage to stop the market after all. The IWM surged above the top of the gap today, but was unable to close the deal. See the blue box on the long-term chart (click to enlarge):

IWM Gaps

If the IWM can eventually fill the October 6th gap, the next major milestone will be the TARP gap (green box). Also, there was an exhaustion gap on 9/19/08 (purple box). I don’t regard that gap as significant because there would be resistance at those peaks anyway. However, I found it interesting that the IWM’s inverted head-and-shoulders pattern projects right to the center of that gap.

The October 6th gap was seriously weakened today, so the next time the IWM heads above 62, it is likely to stick.

(Note: the blue box shows the top of the gap according to the daily chart which uses “corrected” data. Looking at the intra-day chart, the IWM closed lower on October 6th, at 62.03, which is why I said that it traded above the gap today. I use the close shown on the intra-day chart for gaps.)

Thursday’s Trading – 9/17/09

The IWM sliced right through the bulk of its October 6th gap in a very impressive show of strength on Wednesday. Nevertheless, the resistance should be strongest near the top of the gap at 62.03. That’s only 23 cents away from where the IWM closed on Wednesday, and it would be very unusual for it to just sail right through the gap without a struggle. The market should stall, at least for a bit, in this area. But who knows? This is the least logical rally in history.

The Box of Beer

In case the market has a larger-than-usual move up on Thursday, here is the new Box of Beer (click chart to enlarge):

Box of Beer

The market is still respecting the Fibonacci proportions of the initial impulse wave up off of the March bottom as defined by The March Box. As you can see on the chart above in the Box of Bulls, the Fibonacci levels are still frequently acting as important support and resistance levels (red arrows).

I will update this post to explain the “Box of Beer” name when I have time.

Update: The Box of Beer is named in honor of Joe Sixpack, who might be driving this rally now.

Wednesday’s Trading – 9/16/09

The XLF raced above its August 31st gap on Tuesday, and successfully back-tested the top of the gap at 14.76 twice before running higher. It looked like the matter was closed, but a wave of selling in the last half-hour drove the XLF to a dramatic 4pm close at 14.75. So, the gap is still open, but is now just a sliver only one penny high.

A big part of the market’s problem was due to the IWM hitting its October 6th gap that I mentioned yesterday. The IWM closed at 60.56, which is only two pennies away from the bottom of the gap at the 60.54 level that I mentioned yesterday. Of course, the IWM represents 2,000 small-cap stocks, many of which will have corresponding gaps in this area. If many of these stocks stall, or pull back here, it is possible that the rest of market will do likewise. Another possibility is that money will rotate into larger stocks.

Tuesday’s Trading – 9/15/09

The market stalled out for several weeks when the QQQQ first hit its TARP gap. The Q’s are now through that gap, however the market may stall once again as the IWM approaches its own TARP gap. Actually, the IWM has a second, large gap to fill before it can go after its TARP gap. The second gap is the October 6th gap, the top of which is at 62.03, and the bottom is at 60.54. That’s only about fifty cents above where the IWM is now, so keep an eye out for this important resistance level.

The XLF is trying to “echo gap” over the gap that I showed on the chart last night. If it can do that, or just advance through the gap, it will obviously be a bullish sign for the market.