Tuesday’s Trading – 12/1/09

SPX Moving Average Convergence
The 20, 50, and 100-period moving averages on the SPX’s 60-minute chart are all converging at about 1099. That will be strong resistance. If the SPX is indeed able to punch through it, it will need to at least run up and tag 1112. If it turns down before doing so, that will be a hint that it is might eventually fall out of its rectangular trading range.

The Dubai Gap
The XLF is the only major ETF that has closed its Dubai Gap (from Friday morning) so far.

Monday’s Trading – 11/30/09

The Fractal Dimension Index
I have posted a page on the Fractal Dimension Index. It has more examples, explanation, and links. Make sure to look at the Apple chart, as AAPL looks poised to make a move. And my FDI indicator is ready if you use TradeStation.

Fabulous Recovery
ShopperTrak reports a rather lame 0.5% increase in Black Friday sales over last year. Does that strike you as fabulous?

Re: Thanksgiving Panic
If you are thinking that the Thanksgiving Panic in the futures was a fluke, you might be mistaken. Here is a Benoit Mandelbrot quote:

“Price swings are highly erratic. The large ones are numerous and cluster together.”

And Mandelbrot’s second rule of markets: “Trouble runs in streaks.”

SPX Rectangle

George posted a couple of chart’s recently showing the market’s sideways trading range. And I think a rectangle pattern is the correct interpretation of the trading over the last three weeks. Here is an hourly SPX chart (click to enlarge):

SPX Rectangle - 11-29-09

The blue box gives the height of the rectangle. A breakout or breakdown should move the same number of points. So, the green line shows the bullish resolution up in the 1140 area, and the red line shows the bearish resolution down around 1057.

The purple box shows the November 9th gap. In the event of a move down, that gap would likely provide support, even if only temporary.

Since the futures have already probed down to 1067, I’m expecting a bearish resolution. Further support for that expectation is that the IWM is now well below its November 9th gap.

Bulls can pin their hopes upon the fact that the QQQQ bounced off the top of its November 9th gap on Friday morning.

Dubai Doubts

Did Dubai really crash world markets?

Here’s David Faber reporting the Dubai story on Wednesday morning:

The market yawned and rallied into the close. The futures didn’t roll over until four hours after the bell. Yes, Faber’s delivery style does indeed induce yawns, but bulls should be concerned that it wasn’t just Dubai that caused the panic.

Also, the market’s seemingly miracle recovery after the futures had plunged on Thanksgiving may only be a retracement. That’s what happened last year. On October 23, 2008 the futures market was shut down at 843 after the SPX futures dropped 60 points. (So, if you went to sleep long only one ES contract, you woke up $3,000 poorer.) But the stock market seemed to shrug it off the next morning and closed at 876.77. The bulls were greatly relieved over the weekend, but on Monday, the SPX went down and tested the lows that the futures had established.

The lows held, and the market rallied for a week or so before rolling over and plunging much lower in November 2008.

We’ve seen this movie before, and bulls should not take it for granted that the panic is over. The 1067 low set by the futures should be considered a price probe until proven otherwise.

Friday’s Trading – 11/27/09

Take That!
On Monday night, I wrote: “Perhaps the market wants to range between 1085 and 1111 for a while.” And since then, the futures have ranged between 1082.75 and 1111.25. How about that? (Note: I had to type this fast because the futes are threatening to blow out the bottom of my range.) Also, while everybody was waiting for the SPX to hit the 50% retracement of the bear market at 1121, it was the 1111.82 level of the Box of Beer that capped this leg of the rally. And back here, I lectured the “Fast Money” Traders who proclaimed that they “didn’t get” why T-Bill yields went negative. Maybe they get it now that Dubai has blown up, and Vietnam has a currency crisis (thanks for the link, Larry). And did you hear anybody on Fast Money calling SKF a keeper like George did here? Hah! Take that Fast Money!

No Escape from the Red Orbit

For a minute there, I thought that the market would just sail right through 3.14 Fibonacci arc. See the red line on this chart (click to enlarge):

Red Orbit

I drew this arc by connecting the swing low from October to the swing high (green line on chart). Notice how the market reacted at the 161.8% arc (blue line and arrow on chart). I was looking for a reaction at the red line on Friday, but it did not arrive, though it appears that it will at the open Friday morning.

Note: Pi is not a Fibonacci number, but I like to include it when doing a Fibonacci analysis.

Turkey Trading – 11/25/09

Selling Marshmallows While Rome Burns
Caterpillar CEO Jim Owens was on CNBC Tuesday morning preaching against the evils of protectionism. I’m sure Cat has done very well in our fabulous new global economy. Just imagine how many tractors Mexico had to buy in order to build all the infrastructure necessary to relocate the US auto industry down there.

Not-So-Docile Holiday Trading
The day before Thanksgiving last year, the market gapped down and then rallied the entire day. At 9:31am, SPY was at 84.14 and it closed at 89.04 – almost $5 higher. So, don’t think that this day can’t be eventful. Though last year the country was in the thrall of Obama Mania. This year it’s Gold Mania.

America’s Selfish Past

Here is a chart of the S&P 500 for the final 15-years (1980-1994) of America’s sordid, protectionist past. NAFTA went into effect on January 1, 1995. Click chart to enlarge:

1980s

The S&P 500 went up four-fold during that dark era. I shudder to think of how we selfish Americans hogged all of that economic growth to ourselves. Isn’t it time that we made a formal apology to the world? You know, like apologizing for slavery, or dropping H-bombs.

On this Thanksgiving Day, make sure to say a little prayer for all the great Republican, Democratic, and Libertarian advocates of “free trade” who are valiantly protecting us from suffering a relapse into the horrors of protectionism.

Here is the “Free Trade Era” chart of the S&P 500:

Post NAFTA

Isn’t that better? A nice egalitarian, sideways chart that proudly proclaims America’s economic sacrifice on behalf of the global economy. It’s a beautiful thing, is it not?

(Note: The second chart does run up nicely for the first five years. But the task of exporting millions of jobs doesn’t just happen overnight, right? A lot of infrastructure had to be built up in Mexico and Asia before our manufacturing base could be relocated. But we got it done in record time. The USA is can-do nation.)

Tuesday’s Trading – 11/24/09

People have been talking about the “confusing” price action, but all the market did was execute a rounding turn pattern. Or as I like to call it, a “slow rounding turn” which emphasizes how sneaky it is. The market shot right back up to where it began its fall: Thursday morning’s gap, and that completed the pattern. I believe it is significant that none of the major ETF’s were able to close above their Thursday gaps. DIA came the closest, but missed by a few cents. So, the gap is still resistance, although it has been weakened.

Today was also a good example of gap trading. If you had put a limit order to short up at the QQQQ’s Wednesday close, which is the top of the Thursday down-gap, you would have gotten filled at 44.35, and had an instant winner. The Q’s did blast right through Friday morning’s down-gap, however that one was within “echo gaping” distance. It was too close to fade reliably. The key is to find a fresh gap that is one monster day away, up or down. SPY and DIA punched through the tops of their gaps before falling back, and XLF could only reach the bottom of its gap, so there is, of course, variation.

The SPX could be in a bull-flag pattern now since it bounced just above a 50% retracement of the morning blast. However, breadth deteriorated more than it has during recent rallies, and the futures have been weak since the close. So, it just doesn’t feel like a bull flag. Perhaps the market wants to range between 1085 and 1111 for a while.

Parabolic Gold Update #1

Gold has been shooting straight up since I brought up the subject last week. But will it keep going? I reckon it’s time to dust off the old Fractal Dimension Index (FDI); don’t you agree? Here is a weekly GLD chart (click to enlarge):

Parabolic Gold Update 1

The FDI is in the red line in the lower panel. When it drops down to the purple line, that means that prices have been moving in a straight line, which our allegedly fractal markets are not supposed to do. And sure enough, low FDI readings have corresponded to peaks on the GLD chart. (Points 1, 2, 3, 5, 6). And, as you can see at point X, the FDI is very low right now.

However, that does not mean that gold will take a plunge. It might, or it might just pull back a bit and gun higher as it did at points 1, 2, and 5. A low FDI reading only tells you that the trend is long in the tooth. It doesn’t tell you what will happen next.

Now look at points 4 and 7. A high FDI reading means that prices have been consolidating and that a breakout may be imminent. Not bad, huh?

Note: I will write more about the FDI as soon as I’m done coding it. I just have to add the alarms now.

Monday’s Trading – 11/23/09

Call of Fame
I am pleased to report that another one of my calls has been enshrined in the Call of Fame by a unanimous vote of the induction committee which consists of three voting members (me, myself, and I). However, even though SPY popped out of its falling wedge pattern at noon on Friday, the bulls weren’t able to build much momentum.

Bulls Clubbed Like Baby Seals
For three days in a row, the QQQQ has gapped down, and retraced weakly. Dip-buying bulls who stepped in to buy the down-gaps had to be satisfied with meager profits taken quickly, or get clubbed like a baby seal. The psychological impact of this pattern is that if the Q’s drop again on Monday morning, the bulls will be less likely to stick their fingers into the light socket again. And if the dip-buyers step aside, then the market would whoosh down searching for another stratum of buyers. So, it is critical for the bulls to break the pattern.

Today’s Setup
Bullish Factors:
1) Cheerful holiday trading atmosphere.

Bearish Factors:
1) Breadth is no longer deeply oversold.
2) The VIX is still very low indicating complacency
3) As 2thfixr pointed out, there is a sinister broadening pattern on the NASDAQ chart.
4) Bears have the momentum.

Not-So-Fast, or Swift, Money
On Friday’s episode of Fast Money, the genius traders began to talk about parabolic gold. But you read it here first, three days prior. The pony-tail guy even mentioned Daneric’s 1300 target, and credited it to the dopey Fast Money weather man, “Glide Path”. Weasels. How long will it be before they start talking about K’s Ted Spread? Speaking of which, the traders also said that they “didn’t get” the negative yield on T-bills. What’s not to get? The big money is afraid of something. If you want to take the attitude: “I don’t get why the big money is fearful, but I’m not” go right ahead. And I wish you luck.

(Note: AEP discusses a $6300 gold target here.)

Pony-Tail also raved about “Mutual Fund Monday” where, allegedly, money pours into mutual funds over the weekend and the fund managers then buy stocks with it on Monday. However, if you actually look at the data, you will see that funds which invest in US stocks have been suffering redemptions for 13 weeks in a row!.

You Throw Like a Girl Compared to Her
On Friday, I flipped the channel at the exact moment that a hot chick in a bikini was throwing a perfect 40-yard touchdown pass. My jaw hit the floor. What the hell was that? It was Anonka Dixon of the local franchise of the Lingerie Football League, the Miami Caliente. The players and coaches take their football very seriously, but management does not. So, I couldn’t find a professionally done highlights reel. But at 1:04 into this video, you can see Dixon throw a touchdown. Playing on AstroTurf is bad enough, but doing it with no clothes on has to take a toll. By the end of the season, these girls will be walking scabs. I hope that they are being paid well.

It’s the Trade Policy, Stupid

This comment from Bill Gross got a lot of play last week:

“Raise interest rates with 15 million jobless and 25 million part-time working Americans? All because gold is above $1,100? You must be joking or smoking – something. We will need another 12 months of 4-5% nominal GDP growth before Bernanke and company dare lift their heads out of the 0% foxhole – mini-bubbles or not.”

The Fed has had rates at zero for quite a while now, and how many jobs have been created? Zero. How many jobs have come home from Asia, Mexico, and India? Zero. How many jobs will come home? Zero.

There’s Bernanke, with his precious 0% interest rate, patiently watching General Motors to see if they will close plants in Mexico and China and bring them back to the USA. He’s certain that if he just holds it at 0% for long enough that IBM will rescind its “No Americans” hiring policy, and bring programmer jobs back from India.

Good luck with that.

Bernanke hasn’t figured out that he isn’t even a player in the jobs game now. It’s all about trade policy. The President will be holding a “jobs summit” in December, and what are the odds that something like “Rescind NAFTA” will be on the agenda? Zero.

Mr. Gross has put his stamp of approval onto the gold bubble, so it looks like it is unanimous now among the powers that be. The meme is: “We must ‘suffer’ a gold bubble until jobs are created.” Don’t bet on the gold bubble popping while the powers that be are chanting that mantra. And since our national economic policy is to export as many jobs as possible in the name of “free trade”, don’t expect that mantra to end any time soon.

Viva La Mexico!

Mexico’s economy is growing at annual rate of 12%. How did they accomplish that? According to this Wall Street Journal story:

“The U.S. cash-for-clunkers program fueled demand for cars and helped Mexico’s export-oriented auto industry in the third quarter…”

Wasn’t it a great idea to move 1,000 factories and 1,000,000 jobs to Mexico via NAFTA? Wasn’t it a great idea for the US taxpayers to bailout General Motors so that they could put Mexicans back to work?

“Since the bailout, the rate of factory and warehouse closings has actually accelerated as the company has used federal dollars to pay to padlock facilities in the U.S. and to open plants in Mexico and China.”

For a list of GM plants in Mexico, go to www.gm.com and type “Mexico” into the search box. You won’t find anything. They don’t want you to know: “U.S. automakers expand in Mexico, but do it very quietly.”

SPX Bear Flag

A bear-flag pattern may be forming on the SPX. Here is a 60-minute (click to enlarge):

SPX Bear Flag 1 11-19-09

The blue line was a high-volume plunge. The purple lines outline a sharp retracement on lighter volume. The red line is the same height as the blue line and is placed at the top of the flag to get a pattern projection. If the pattern plays out, the bottom of the red line is the target. Notice that it’s close to the level of the still-unfilled gap left from the open on November 9th.

On the 15-minute chart below, we see that the retracement, if it is indeed complete, was weak; only being able to muster a bounce to the 38.2% Fibonacci retracement level (Point B). Another bearish indicator is that the opening gap was not filled (Point A):

SPX Bear Flag 2 11-19-09

The next chart shows Fibonacci extensions, and uses the same three points as were used in the flag on the first chart:

SPX Bear Flag 3 11-19-09

What I find interesting is that the 127% extension matches exactly with the close on November 6th, which is where the gap discussed above opened. (The blue horizontal line highlights the connection between the gap and the 127% extension).

That’s the market’s way of telling you: “I’m thinking about filling that gap.” Gaps are targets to which the market gravitates. A 127% extension is feasible because, as we saw on the second chart, the retracement was weak, and the market left behind a gap overhead. Also, all the major ETF’s left gaps behind, so it was a rather emphatic, bearish statement.

Gaps above are resistance, and gaps below are support. So, if you are bullish, you want to go long as prices approach the downside gap.

Of course, there is no guarantee that the market will drop that far, or at all. An alternative scenario would be a 61.8% extension which holds the November 12th low at 1085. Or the market could retrace upward some more on Friday, which would cause all the downside targets to be raised.

One thing to watch for on Friday is for the market to fall in a wedge pattern. That often gives a clue as to how far the extension will go, and is a typical way for a correction to complete.

And since this is a bull market, prices can simply keep going up from today’s close. If this were a bear market, that would be very unlikely, but in a bull market, such “pattern failure” happens all the time.

Thursday’s Trading – 11/19/09

Housing Denial
The futures were frisky Wednesday morning, and the market was looking to gap-and-go until the CPI and housing data were released at 8:30am. Inflation was up a bit, and housing starts were down a lot releasing a tinge of stagflation into the air. The market managed to stay flat for the day, though the rally-leading QQQQ left behind an overhead gap. It’s been a while since the Q’s have done that, and is a bearish omen for the market.

The talking heads on CNBC said that a plunge in housing starts is a good thing. Ostensibly, because it reduces the supply of houses which should increase the price of existing houses since there is less supply. Translation into plain English: “I am very, very long the market and this plunge in housing starts is making me very, very nervous to the point that I’m saying crazy things.”

Of course, as we know, Housing is the Business Cycle. And speaking of supply… when the talking heads make denial noises, there is likely to be a supply of stock overhanging the market with itchy fingers ready to click the sell button.

The bulls will need some good news, and there are three important reports coming Thursday morning. Also, two Fed Heads will be speaking (Plosser and Fisher). Here is what they will say: “Asset bubbles? I don’t see any asset bubbles. It’s totally cool if the dollar goes to zero and gold goes to infinity.”

Awesome Oscillator Flips Red

Here is a daily chart of the SPX with the Awesome Oscillator indicator at the bottom (click to enlarge):

AO-11-18-09

Sine the July low, the market has corrected after each of the four times that the AO flipped from green to red (see the blue vertical lines on the chart). And on Wednesday, the AO flipped to red once again.

The AO is an excellent indicator, though it is not magic. Nevertheless, the market has lost a critical amount of momentum, and selling strength may work well for a few days. Maybe we will have a correction now, but remember that Thanksgiving is next week, and the market made a bottom on November 21st last year.

Read more in my book: The General Theory of Day-Trading.

XLF Triangle

Here is a 60-minute chart of the XLF showing a symmetrical triangle outlined in blue (click to enlarge):

XLF Triangle - 11-17-09

The purple line gives the height of the triangle. The green line is the same height as the purple line and shows the 100% extension for a breakout. The red line shows the target for breakdown. So, the XLF is geared to either test the October 14th top, or the November 2nd bottom.

So, as The Fly says: To the FAZ-mobile!

Or the FAS-mobile. Or SKF/UYG if you prefer. I suppose that the CPI report Wednesday morning could call the direction. A little pop in inflation might make traders think that the Fed will tighten sooner, and that might be bad news for the banks. If the number is in-line, then take a look at market breadth after the open; strong breadth would give the edge to an upside breakout. Also, the swing down Tuesday morning did not reach the lower triangle line (blue arrow on chart), and that may be a bullish implication signifying impatient dip buyers.

The BKX banking index has the same triangle, however, it was able to break above the upper line during the last half hour of trading today. And both the XLF and BKX have moved above all the important moving-averages on the 15-minute chart.

Tuesday’s Trading – 11/17/09

Gold Going Parabolic?
Is it just me, or does the GLD daily chart look like it’s going parabolic? Back here, on November 3rd, I wrote:

“On Larry Kudlow’s CNBC show Tuesday night, Steve Leisman reported that high government officials said that they are content with the dollar’s “orderly” decline.”

And that was the end of the dollar rally. If you look at a chart of the DXY dollar index, you will see that it was all down hill from there, and the end of the stock-market’s correction. Since then we’ve heard from President Obama that he wants “more exports” which means smashing the dollar some more. And on Monday, Chairman Bernanke said that he was paying attention to the dollar, but doing nothing about it, and that asset bubbles were “hard to identify.”

The USA is following a “crush the dollar” policy, and the Fed sez that it’s turning a blind eye to asset bubbles. Why wouldn’t gold go parabolic?

Bernanke quote:

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value…”