S&P 500 - Sept. 30, 2008

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Was today the carrot to yesterday's stick? Is it like bailout plan 60 points up, no bailout plan 80 points down? Was it the spirit of Jewish holiday that calmed the nerves and brought optimism to trading floors?

Many breadth measures were nicely positive for the day. But, again, there were more new lows registered than new highs. No important buy signals were triggered on daily charts, let alone weekly or monthly. Some measures of volatility pulled back a bit, but they are still high.

Economically, fundamentally, nothing's really changed from yesterday that I can see. So, how are we going to justify this bounce one day after yesterday's massacre? I will stay with my carrot and stick analogy until further notice.

You gotta love it the way media spin things. They were saying because of denying the 700 billion bailout, 1.2 trillion dollar was wiped out yesterday, therefore, people lost 500 billion (1.2 trillion - 700 billion they did not give to bankers), well, today, half of yesterday market losses were recouped, 600 billion dollars were generated. So, US tax payers are ahead by 100 billion (700 billion they did not pay - 600 billion market loss), good thing they did not approve the bailout, they actually made money -- till tomorrow.

What a show!

I decided to do a couple of wave counts, but before that, this is the chart with some breadth indicators that we have seen before

This is my preferred count of S&P

The above count is looking for a a conclusion to Major C = Primary A to finally finish this downtrend. For the count to stay valid, Index should not exceed 1184 before completion of Major C.

this is alternate count that counts a double correction from Oct. 2007 high. If this is unfolding, there may very well be a third abc set after the completion of the wave c of the double.

this is a closer look that the index.

These are very volatile times. Students of market history often point out that volatility is usually an harbinger of a change in trend.

I usually think of volatility as a change of tide in a deep river with no breaks, while the tide's in full force, the river looks calm and poised, when the tide's achanging ripples and white horses appear.

On the market front, I would like the volatility to gradually diminish. On the economic front, I would like the TED spread to ease back.

Let's see what tomorrow brings

PS. A friend of mine emailed me with an interesting remark on this post. He said that looking at the charts with the wave counts, the downward channel is not a channel through which he would want to steer his money.

S&P - It's Only Monday

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How can I best describe the way I see the markets? Maybe: Jeff Healey’s Stuck in the Middle With You. On one side, there are global bankers and their worthless papers and sympathetic officials who control every aspect of the system we live in, including the markets. On the other hand, angry Americans and politicians who are sympathetic to their outcries. And in the middle, capital of hard-working people, pensioners, retirees, ... – it is sad.

I read somewhere, in an opinion piece, that had it not been for interventions and bailouts, bear market would have gone through it normal course of progression and would have ended by now.

That’s an interesting thought.

This is a chart we have seen before. I never liked the fact that, despite the rallies, there were more new lows being made every day. Well, now all breadth indicators of this chart have picked on that theme. It is truly a horrible-looking chart.


I was really thinking that we had seen the lows. I really thought the Congress would give the bankers what they wanted. But I never really bet on those thoughts.

Part of my reasoning for not betting big was that we did not have an intermediate buy signal of any kind. Also, the daily, weekly, monthly trends were all down. In addition, as I mentioned before, a bull rally should roll on its own and not on suspicious future market activity into the close.

Another part is a the profound influence that a book called The Black Swan by Nassim Nicholas Taleb has had on the way I define my risk parameters.

I tried to do a wave count. There are a number of different possibilities. So, I’ll wait till things get a bit clearer.

What now?

I am a believer in trying to find answers in the simplest way possible. And I cannot make it simpler than the chart above. Trend is down. It has accelerated on its way down. An accelerated trend will soon run its course. It is not possible to define soon in exact units of time.

To wrap it up, this is the failed set up

I have not added any new annotations because I want to try to make a point.

See how the VIX's trend stayed intact. See how MACD failed. See how congestion zone failed and index broke below.

A disciplined market participant should not ask questions why, instead he/she should close, or at least reduce long exposure. A nimble trader may switch side and go short.

I think it is time I started making a shopping list. It may be time, for fundamentalists among us, to crunch some numbers and see where value might be found to be ready for when one determines buying is relatively safe.

And value can be found, at least that's what Buffett's recent activities are suggesting.

Now What?

What is new is that now the fate of the system, at least in the short term, relies on a working balance, and an understanding between two species whose only objective is survival, no I am not referring to different strands of viruses, I am talking about bankers (majority of whom are left with a lot of worthless paper) and politicians (who are going to face re-election soon and are afraid the public may not forget in two months).

When I was writing the above on Friday, I had no idea how true it would turn out to be.

When I was setting up this blog, my goal was not to do intra-day postings. It still isn't. Heck, I don't even like doing intra-day monitoring of the markets.

But seeing the action today, I could not help myself, I had to try to warn as many as I could that the freight train was coming right at us.

We are now in uncharted territory. We, the mere mortals, are caught between quite a few strong forces. Bankers, politicians, media, angry disillusioned people, presidential election, just to name some.

This morning I was musing a small long position, but the market never showed any strength, it was limp all the way into the vote, and beat after the vote.

I can't help but remember that it was only last Thursday that I wrote this:

some believe there are mysterious agents in the future markets that intervene, usually on the buy side to prop the market. Maybe they also believe that same agents can send the market down to force a political deal

Is the market gonna crash? Who knows. It felt like it. You need buyers, and who's gonna commit? Do we have enough shorts to squeeze? ask the geniuses at SEC. They have all the data.

Is it time to buy? It might be time to start a shopping list.

Cash feels really good, especially cash under the pillow.

I'll try to do a chart tonight.

Hope none of you suffered losses, even more, hope some of you made money out of this.

I Miss Shorts!

You see?

If there were shorts out there, they might jump in on down spikes like we just saw, and it might start a rally on a squeeze, but SEC has squeezed them already, and has banned them from trying again. So, those on the sidelines remain there, those in the market may say enough, or not. But, where is the buying going to come from?

Did the Bill Fail?

I hear the Bill failed in the House. God knows what masters of wall Street will do to stock prices to take revenge? Be careful out there.

Cash is not Trash.

Is Price Fixing the Plan?

I just finished reading through the bailout plan as posted here.

Does it really address the liquidity problem, or the confidence problem in capital markets. Why are officials so obsessed with price levels? Prices will take care of themselves. Is it not better to focus on ways of liquefying the financial system. Is it at all possible to maintain prices of assets after the bubble in those assets is burst?

You can fix the price of a house to whatever you want, but you then may need to force me to buy it, if I have the means in the first place.

Or you can make a total ban on all selling, but then good luck finding a single buyer.

It's a sad, sad affair handled by mad, mad people.

Never Ending Fear?

News of bank failures has sent Volatility Index (VIX) soaring again. US Bonds have rallied from oversold conditions as well. I am thinking of a bit of a long (that is not a typo) position. As I have discussed before, the Sept. Low is the line in the sand at this juncture.

Notice Gold is rallying nicely, but gold stocks are having a rough time. As we noted in the previous post, Gold and Gold Stocks may or may not move together, and equating one with the other has been the source of unexpected losses for many precious metal enthusiasts.

Technicaly, talk of a long position is absurd since all mid-term and long-term sell signals are still in place, and short term trend is still down. This is the realm of scalpers and day traders.

I keep reminding myself that cash is a position, and any market adventures at this point should be within my risk parameters and accompanied with appropriate stops.

Gold Stocks Update

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I mentioned GDX looked tired, and that I thought there were a bit too many gold bulls around. I also mentioned AEM might give us a clue on a pullback. Well, AEM sold hard and fast to 38% retracement, and GDX just went down to below the gap we highlighted on the chart of Sep 24, here’s the same chart updated with latest data

Here is the Canadian chart of AEM

We are in the middle of things. I think it’s neither the time to short nor to long at this moment. For a new short I should wait for a run up and if I see signs of weakness in the move, I may enter. For a new long I should be really patient here.

There are all these talks of a possible bailout being inflationary and gold the beneficiary. First off, gold and gold stocks may not behave in the same manner. Secondly, I just like the technicals to firm up before I take that story to bed.

Analyzing Markets

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If you are reading this, you are probably interested in analyzing instruments of money. I am going to share a little fact about all analysis with you:

All analysis (technical, fundamental, behavioral, psychological, sentimental, name-it-emental) are statistical studies of the past employed by the analyst in order to build a probabilistic model to forecast the future. Models can, and do fail.

The financial problems of today are results of spectacular failures of complicated mathematical models, devised by hot-shot mathematicians and economists for future pricing of sliced-up and dice-up loan obligations.

We now know that most, if not all, of those models were nothing more than an extension of the Greater Fool Theory. A financial system based on the Greater Fool Theory works fine by paying today’s price for an otherwise defunct asset as long as a greater fool will buy it for more in the future.

Greedy bankers like Lehman were left with tons of junk because the world ran out of fools. Lehman was the last fool – with respect to the junk it could not clear off onto bigger fools in time.

Let me repeat the truth about analysis: All Models can and do fail.

Anybody who tells you anything else is either a prophet with a vision into the future, bestowed upon him by some higher power (highly unlikely), or a less than truthful person. That is true regardless of the price you pay for market-related insight subscriptions.In case you are interested in an argument more sophisticated than mine, Nassim Nicholas Taleb has a very intriguing article about the limits of statistics.

I strongly believe that when I hear something from mass media sources, the story has very likely run its course. I just built a model here, be aware of that.

A few days ago, before the global money markets came close to having a total seizure, one could not find anything expressed about TED spread anywhere other than the most archaic books of finance. None of the experts that I get to hear, or read, talked about it. The exception was one macro level financial analyst that I highly esteem, Donald Coxe.

TED spread is the difference between two rates of borrowing cash – not credit, but cash. The rate of borrowing from the FED, and the rate of borrowing among banks. In a way, it displays the trust, or lack of trust, among bankers.

Now, I see TED spread shown on financial TV, discussed on the web, and dissected in so-called out-of-the-box letters and analysis. This is after the near seizure of money markets, and consequent cash infusion of central banks in order to re-liquefy them. I guess it takes a long time for some letters to get out of the box.

So, the credit system has been sick, and that is not a new story. What is new is that now the fate of the system, at least in the short term, relies on a working balance, and an understanding between two species whose only objective is survival, no I am not referring to different strands of viruses, I am talking about bankers (majority of whom are left with a lot of worthless paper) and politicians (who are going to face re-election soon and are afraid the public may not forget in two months).

Enough of me talking bigger than I can voice. Let's do charts.

But, please indulge me with the opportunity to repeat the truth about analysis one last time: All Models can and do fail.

This is the 60 min S&P chart that we have been working on recently, and I think we have been doing rather well considering the market condition out there.


See how nicely all trends are holding. What I really like to see is a pullback in VIX so much so that its short term uptrend breaks decisively.

Nothing much to discuss regarding breadth indicators, this is one set of such indicators

Just note that there have been more stocks making new lows than new highs these past few days. Maybe they are all bottoming, who knows? I just like that trend to reverse if we are going to have a sustainable rally.

Mid-term sell signals are all still in place. Of course, a change starts from short term and then, if it is a true change, spreads to medium term. That’s why I discuss shorter time frames here.

You may come across a lot of analysis about LIBOR and short term treasury rates, some may even show a chart like this

And they may tell you that with the spread between LIBOR and Treasury yield so high, stocks are in a doo-doo, and they have a very valid point, to which I myself subscribe.
But then some can show you the yield curve

And they may tell you that history shows that any time the yield curve rose above 2.0, it made monetary situations attractive for the outlook of stocks.

All models are based on historical data, and are prone to failures of the future.

One final note. It is the first time I know of that the FED has an ailing balance sheet. Fed’s balance sheet has so much junk on it, accumulated from dumpings of Wall Street houses, that it runs the risk of being like the balance sheet of Lehman, or Bear Stearns, or whatever. Added to that is a Treasury that is operating on the balance sheet of a country that is seriously in debt. The combo there is not a happy meal. Let’s see when mass media picks on this theme. For, then, that story might be close to its end.

The world is awaiting action from the show-on-the-hill, it all reminds me of the play Waiting for Godot by Samuel Beckett.

Have a nice Weekend!

S&P - Sep 25, 2008

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We have seen the following chart in an earlier post. Let’s update it a bit.

So far, we are on track. The drop zone has held, and has provided the adventurous with an opportunity to test the long side. Patience that we advocated on the MACD paid off, and now we have a short term buy signal there. One downtrend line was broken, and now index is sitting above it, I like to see a pull back in VIX.

May I hazard a wave count now? Previous wave set was forced into termination by government and SEC intervention, and what had every technical indication of unfolding as a clean wave down, was aborted. Amazingly enough, it still can be counted as 5 waves. It is not as clean as I would like, but what is clean about these markets, anyway? I meant that literally.

There, of course, is the possibility of what is marked as Primary A to be a lesser degree wave, and a part of a monster wave down. But, as I have mentioned before, as long as the Sep 18 low holds, I will give it the benefit of the doubt. And that is in view of all the panic signs that we've noticed, some of which, I have already discussed.

Technically, it should be a low good enough for weeks if not months, but what do technicals, or fundamentals, mean in a heavily manipulated market? You be the judge of that!

To emphasize, there are very bearish wave possibilities here, and I am just giving this semi-bullish version the benefit of the doubt because of reasons I have already discussed.


I am by no means relaxed, nor complacent. This market can implode in a New York minute against a backdrop of heavy-handed intervention, lies, deceit, political posturing, bad loans, bankrupt banks, indebted USA, soaring TED spread, collapsing corporate bond market, should I go on?

So, the sky is falling, why not be bullish? That was part joking, part being contrarian. I am just giving it room to play here, the onus is on the bulls to show their worth. They have to prove that this rally was not another buy-the-rumor, sell-the-news shenanigan for which Wall Street is so famous.

If in doubt, I should remind myself that there is nothing wrong with cash, at least not yet.

One final note: some believe there are mysterious agents in the future markets that intervene, usually on the buy side to prop the market. Maybe they also believe that same agents can send the market down to force a political deal.

Making Nat Gas Exposure a Full Position

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Continuing with my natural gas escapades and the intial position for the winter I started a few days back, I increased my Horizon Betapro Natural Gas ETF (TSE:HNU) position to a full size this morning when it was being hammered. If things go bad, I may dump the 1/2 position I purchased this morning.

Has GDX Peaked?

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The action in GDX over the shorter time frame looks a bit tired I would watch levels marked on the following chart to see if a last burst of action to the upside will come into play or a retracement of the previous advance will ensue. It seems a bit late to start a new position, and I, personally, will wait for a pullback. The structure and force of that pullback may tell me if further advance for GDX is probable or not.

Whipsaw Market

Until the show on the hill concludes, or at least produces some sort of intermission with concessions, market is going to be rudderless and lacking participation. In this type of environment, Whipsaws happen. It becomes so easy for some parties with a good dose of capital to bid things it up or down.

On the other hand, if one is convinced that a certain stock is a must have, one may be able to get it during times like this.

I tried a trade with SSO, but closed it with a big fat profit of 0.6% -- Heee Ha!

I'll try to see if I can spot an opportunity somewhere, and if I do, I'll post it. Other than that, I keep reminding myself that cash is a position, too.

The Wisdom of Others

a piece of news

http://www.bloggingstocks.com/2008/09/24/t-boone-pickens-loses-1-billion-on-wrong-oil-bet/

so the next time I hear someone telling me what these big names did, or thought, or said, I should remember that it might be that rare occasion of them being wrong, assuming that they never speak out of self-serving interests, of course

One who solely relies of wisdom of Dickens 'n Chickens 'n Hartmans 'n Fartmans is eventually doomed to be had for the plucking, and the stench

do not get me wrong, one should actively engage in taking opinions of others under advisement, but I should learn the tools, and do my own thinking, so mush so that the mistakes I make become all mine and no one else's

ATR at 40

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S&P retreated some more on decreasing volume while the show-on-the-hill dragged on. Ideally, one wants decline on decreasing volume, but these are not the kind of times one learns in the books, so, who knows what decreasing volume really means?

Nothing’s really changed from yesterday. But I noticed one very interesting development. Average True Range (ATR) on S&P has registered a high value not seen since April 2000. ATR does not give us any clue for a probable price direction. It simply is a measure of price volatility. Usually, extreme volatility happens near turning points. I am not sure if it is of any significance or not. There is no guarantee that it will not hit a higher number tomorrow. It is basically telling us how rudderless, confused and news-driven the market is – so easy to manipulate if some party has enough capital to send a shock wave in the future markets. It is very difficult to carry a sizable position; unless one has enough conviction as either a bull or a bear to sit through the churn.

Day traders, of course, love it. I know one who is having the time of his life. It's hard life, but he likes it.

On the weekly chart, S&P is nicely channelling down. It had a hard bounce off lower channel boundary, and is now pulling back. An optimist can say that it is forming a falling wedge, a pessimist can say all MAs on this chart are pointing down, and down it will continue. The positive divergences set on the recent low are still in place. But, it all depends on the outcome of the show-on-the-hill.

As I am typing this, futures are up, some say it’s because Buffett has decided to dump 5 billion into Goldman Sachs. It may change direction tomorrow. Markets as jittery as this can turn on anything. So, if I feel like I have to have a position, I may need to give it a wide room to gyrate.

I still am sticking to levels I computed in a previous post.

Updating Gold Stocks

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We mentioned that Agnico-Eagle (NYSE:AEM, TSE:AEM), and Goldcorp (NYSE:GG, TSE:G) were leaders of gold stocks and they have retained that role, especially AEM.

We also mentioned that GDX might be an OK play as a laggard to follow AEM’s lead, and it did that. I am getting a bit concerned about the rally here. There are, all of a sudden, too many gold bulls out there.

Technically, it still looks like it has more upside in it, but I personally would not open a new position before a pullback happens. I may start thinking about taking some off the table.

AEM paused at the gap, but then pushed through it nicely.

It has retraced 62% of its resent drop, but is yet to show serious signs of short term peaking. It seems like Gold and Gold stocks are performing to a renewed tune of inflation worries.

I still am maintaining my count, and am calling this a counter trend rally. So, I’d rather err on the side of caution as long as my count stays valid.

Also GDX have been outperforming gold, which is positive, but remember that GDX is a weighted ETF and its performance is tilted towards Barrick (NYSE:ABX) and Goldcorp. Those two make about 23% of the ETF.

If things keep on rolling as they have, and AEM stays ahead of the pack, we may see signs of peaking in AEM first.

S&P Quick Update

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We mentioned S&P was at resistance, and thought there would be a pullback, and S&P obliged.

It looks like it needs more time to cool, but who know? Market is like a manic depressive – swinging from heights of euphoria to depths of depression.

Volatility is a day trader’s dream, and a position trader’s nightmare. With all the circus going on in the world, one may need to give any position a wide room to play. If that’s not acceptable, then one needs to either stay out, or pick some level with a tight stop.

It may help to remember that the market circus is a 24 hour show, most of the times the moves are set well before market open, so stops may not protect anyone from anything.

I am still of the mind that the recent low is of importance and bulls have to defend if they mean business. I am sticking with levels that I computed and discussed yesterday.

Are the Markets Safe?

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Quite a week, ha? Markets play with our heads and pick our pockets, if we let them, that is. Now the world is waiting to see what this weekend’s meetings would hatch – what a show!

So what Now? Do we have a bottom of some sorts? My take is that if with all this money and effort thrown at the beast, it still cannot be tamed, then maybe we should seek refuge on Mars.

The low of Thursday should be some line in the sand, and I will give it the benefit of the doubt. As long as it holds, I may treat every pullback, and we’ll have pullbacks, as possible opportunities to ease into the market on the long side. I do not see, at this point, a multi-year, brand new bull market, but the possibility of a multi-week, multi-month rally is there. There is some contextual reasoning for my thinking

1. Many places I go on the web people are skeptic and bearish
2. I think governments and bankers at many levels, and of many places want to stop the slide
3. Governments and bankers can, at least in shorter time frames, set the direction of the market
4. We are getting closer to the US election heat, and I don’t think anybody really wants a falling market into that
5. We are coming out of seasonally weak period of markets and going into a seasonally strong period
6. Many and many shorts were destroyed, plain and simple, on Thursday and Friday.
7. Two problem sectors, banking and Housing, did not confirm new lows, brokers did, but that was where the bulk of the implosion was this time. Some economically sensitive sectors made new lows, but that probably is because of a perception of global slowdown and not a financial crisis. Economic slowdown has, in the past, been successfully greased back into gear by adding liquidity to the market. It, I think, has different market dynamics that financial crisis, bad debt and bankers’ unwillingness to lend to each other.
   A look at TED spread tells us that bankers were scared to the point of sending money markets into some kind of cardiac shock. TED spread has retraced a bit, but it`s still high, and will be a measure I will be watching in coming days.
8. Hank Paulson needs a break, well, at least, a few weekends with his family.

The most important thing, if a sustainable rally unfolds, is the structure and breadth of that rally. And that will be where I will be spending most of my time studying the market.

As I am typing this, I received an email from a friend of mine saying Australia has also banned naked short selling. So, it’s a war on shorts for now, and seems to be spreading.

Let’s look at some charts

Second day of an up-move at good volume. But was it because of short-covering, expiration day, intervention, mysterious buying agents of the future markets?

I should not lose focus: Market rallied back-to-back days on good volume. It is now at resistance, let’s see what it does there?

On shorter time frames, I mean less than daily, S&P is overbought, a pullback may ensue, but remember it is not overbought daily, and the short-term pullback, whenever it comes, may tell us how the probabilities are stacked for near term and intermediate term.

This is another chart with improving breadth indicators

I like to see a few days of normal market action without governmental gymnastics, or media bombastics, in order to assess if we have something going or not.

I have calculated some levels, some of them coincide with fiboancci levels, and some are purely my own calculations and pivots for S&P

1497
1459
1421
1383
1346
1310
1274
1239
1204
1169
1135
1102
1069

If these levels prove to be the turn points of the market, I will probably look like a prophet or something, definitely more than a guru. Looks can be so deceiving.

I assure you I have no advance knowledge of anything. I confess that I do not believe in any kind of fortune telling. These are not numbers set in stone, they are just guidelines. To me, above levels are the battle grounds, and bulls must win them to deserve increasing dose of my capital.
S&P should climb up and give little back, if it is in a bull, or, at least, in an intermediate advance. They may even prove to be irrelevant, but they are what I see at this time.

My market focus and goals are intermediate to long term. I am not a day trader, and I usually start a position to hold if the market lets me.

For shorter term pivot calculation, I know of Joseph Acevedo’s site where he does some amazing stuff with short term trades in mind.

For sector and industry data, and charts, as well as out-of-the-beaten-path commentary I usually go to the prudent trader site operated by Market and Commodity Veteran Bill Zimmer.

And, of course, for all sorts of market insights as well as pivots, I go to Tony Caldaro’s site

These are sites that I never miss.

Picking a Fallen Angel

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The same way some fearful souls were bidding TLT to heights of absurdity. Other fearful souls, or may be the same souls, were dumping everything they had at every bid they could get.

There were people who were willing to buy a piece of paper that not only paid nothing, but exposed them to great capital loss risks.

There were people who would dump once so cherished stocks that could pay them 10+% in yearly distribution and had a potential of capital gains.

One such stock was Canadian Oil Sand Trust (COS.UN:TSE) listed on Toronto Stock Exchange.


And this the daily

Based on my OEW count, stock is correcting along it intermediate wave iv. I cannot say if it is on it last leg of that correction, which is my preferred count, or whether it is in the midst of some larger correctional pattern.

Technically, It did not look that good on Sep, 16. But to me, of utmost importance is position sizing, diversification, and risk management.

Maybe buying COS.UN on sep 16 was not a good idea, the chart looked horrible, but it was near support areas, and it was oversold on a daily chart.

According to the company’s published statements, which I incline to trust more than the ones from banks and brokers, and can actually assess based on income and cash flow, I deemed it as good value.

It pays hefty dividend, and if it dropped below support, I would lose a buck or two and that would be it. I had this in mind for a value play, and also somewhat of a contrarian play on the out-of-favor oil that many were saying (and still do) was finished due to global demand destruction – big words, indeed.

I understand that its price is a variable of the price of oil. I understand that oil is out of favor. I understand some say oil will drop to 80, 70, 60, whatever, but didn’t some people say oil will go to 200? Didn’t the most honest financial house one can find, Goldman Sachs, just predict oil at 145 before it dropped to 90? So what the hell do they know? They seem to be as clueless I can be.

If I wait for people to tell me what to do, I may end up buying TLT above 100, and selling COS.UN at 38.

I did not just stumble upon this. I had done my homework, and looked at numbers.

I had already decided that this was something I wanted to own, and hopefully keep. I was waiting for it to come to an area where risk would be such that I could accept it. In fact, I was not even paying attention. My buy order was already in the system, and it got filled.

Remember, unlike the essentially yieldless piece of paper called TLT, this one has a 5 dollar yearly distribution, which at 38 dollars or so of a stock price equates to 12-13% of a yield.

Stock suddenly came to life on Friday, Sep 19, and ran to 45. Were many out there thinking, like I did, that COS.UN was a potentially good value play at 38? Was the run result of massive short covering into expiration on Friday? Was it because oil rose in price? Was it all of the above? Who cares?

Fact of the matter is that the stocks was bombastic. But it closed at resistance. 5 dollars or so gain in a day or two on a 38 dollar stock is really good percentage, value or not. So one may take some profit, one may sell covered calls, one may do whatever one thinks appropriate for securing part or all of the profits, or reducing cost.

Will I be holding it no matter what? Absolutely not, if it drops below my stops, it will have to leave.

The Madness of Crowds

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What a week! More important than any money lost or gained, more important than all the games played by market players was the emotional roller coaster people had to suffer through it all, and who says it’s over?

There are so many things to write about that one blog posting seems so inadequate. There is going to be a lot of talk and analysis all over the place about everything that happened last week. So I decided to make this post about identifying possible opportunities in the very thick of the mayhem.

I wrote in an earlier post that at some point last week bond yields approached a big fat return of nothing. And people still bought them. Was it because the paper treasuries are printed on is better quality than the one that carries the Dollar? Better ink? Lack of confidence in the FED (issuer of the dollar) but full confidence in the Treasury Department (Issuer of the Bond)? It did not matter really.

What mattered was this


At the height of it all TLT traded at the lofty price of 100.86 according to stockcharts.com. This happened while momentum oscillators had been in overbought areas for a few days. Look at the spike. Spikes like this are seldom sustainable. Given the background of high anxiety of market participants, and rampant confusion broadcast from every financial media outlet, one could assign to this spike a high probability of being a mad rush, and not a sudden fundamental change that would make the US 20-year note the best investment out there on that day.

One could short it on the spot for a small opening positions, and await the outcome with a stop in mind.

When the Stochastics failed to rise with the price and then rolled, the game was technically (I emphasize technically) up, and an increase in the short position would be probabilistically justified – tightening the stops just in case.


This kind of setups may not last for very long. That’s because foaming heights of madness is soon replaced by depressing depths of exhaustion.

The trick is to be prepared for it. There was a lead up into the spike for many days as anxiety and fear were building.

Shorting TLT was not the only way to play this. This spike along with spikes registered on other volatility indicators like VIX were probable indications of a last minute rush out of long position in the equity markets. And, thus, increasing the probability of a seller exhaustion in the broader markets.

Is TLT finished? I don’t know. I just know that it has a massive technical gap to overcome. That gap and the resistance line around it define areas of possible stops for those who got in early and are now thinking about locking in the profits, if they have not taken them already.

There is a wonderful poem by Rudyard Kipling called If. My interpretation is that the poem talks about keeping one’s cool when many others are losing it in the head (and the pocket). Look it up. In fact, if you want, you can read it here at Tim Knight’s site. Tim's post reminded me of the poem and inspired me into writing this.

PS. Straight Shorting of TLT may not be very prudent since it gets the shorter on the hook for the distributions of the bond ETF.

We See Fear!

We said it was too late to establish new shorts.
We said those in cash should sit tight and prepare for signs of a bottom to ease back on the long side.
We said long-term short positions should be re-evaluated for profit taking
And we said if yesterday's action was not the bottom, it was close.

Now, we really see fear. In fact, it seems like politicians at every level are afraid. There are all these reports about possible banning of short selling all together.

It seems like officials want to intervene at every level. If so, this cannot be a truly free market governed by demand and supply, or fear and greed of its participants. It will be a govenment controlled operation. How would that be different from price control exerted by countries that openly oppose free markets?

I leave all these complicated stuff to those with bigger heads to deal with them.

We have made good during the bear drop. We have been cautious, and prepared for the recent bounce. It seems like the risk / reward profile has significantly changed. Now we have a very unknown risk of full goverment meddling in every aspect of the market to the detriment of sellers. It may not happen, but if you have bazooka and your opponent has nothing, the fear of the bazooka may force your opponent into submission and you may never even have to use the bazooka . A prudent investor shall not bet big, if at all, against a financial bazooka.

I will stand aside and watch how this unfolds. Meanwhile, I may try a small measure on the long side of the market when I get a good entry, but that is like playing the roulette table at this point. Do I belive in a bull market now? I find it hard to believe in any market, other than a free market.

I urge you to read two articles by Mike Sheldock

Stock Market Cheers Fiscal Insanity

and

Peak Insanity: SEC Plans to Temporarily Ban Short-Selling

Do I belive in everything he says? I only believe in risk management and diversification. But those articles make some very sobering points.

It seems very risky to go gainst the short term wills and whims of politicians and central bankers. I opt to stay safe.

Do We See Fear?

charts courtesy of stockcharts.com

Another day of high drama on the financial markets. Sometimes, I think if there were ET creatures planning an invasion and occupation of Earth, a few days of observing the behavior of market participants world over would make them abandon their colonialist plans for ever. For they would think that this planet makes its inhabitants go insane beyond all hopes of mental repair.

We wanted a bounce and we got a bounce. Would it not be nice if I could get everything that I had asked for? I would look like a guru. I ain’t no guru, and I seldom get what I ask for. Recently, I have been in sync with the market. That will change at some point. But enjoying it while it lasts, let’s take a look at some charts

Almost all breadth indicators that I follow had an up day, some are still in a downtrend. Up volume nicely exceeded down volume, but there were more stocks making new lows than new highs. Forget about new highs. It’s a bear market. All but CNBC anchors know that, but if the bear is dead why are so many stocks make new lows? Can it be that most of the volume is driven by massively oversold large caps? That alone does not rule out a new bull, market leadership has to come from somewhere. Let’s see if this rally can prove itself and follow through on the promises of today.

I am still maintaining my OEW count of yesterday, and am going to label this advance as part, or all of minute iv wave up of minor 3 wave down.

Even if we have not seen the bottom, We must be very close. Fear was palpable yesterday.

Bonds without yields.

What is that if it is not sheer panic? There were people willing to exchange paper issued by the FED (the dollar) which pays nothing with paper issued by the Treasury that, due to its zero yield yesterday, would pay nothing.

Volatility Index Indicator (VIX) pushed to nosebleed heights of 40.

Despite all the drama, not much has changed in the big picture. Of course, it takes incremental changes in the small picture to finally change the big picture. Let’s see if this rally has legs enough to give us a succession of higher highs and higher lows. Let’s see if it can invalidate my bearish count.

Wave Counting S&P - Sep 17, 08

Charts courtesy of stockcharts.com

What a day! Despite being right, and having called it right, I feel no joy. Greed and stupidity of those who have been entrusted with the care of many has led us to the verge of collapse and hardship.

Let's take a look at S&P 500. I am going to present an OEW count of the S&P 500 that I think is very probable at this stime.

This is a weekly chart of S&P 500

According to this count, market is correcting along its primary wave A. It so far has done major A, and major B, and we are in the last leg, major C. Within major C, we have completed intermediate A and intermediated B, and doing intermediate C.

This is shorter term view showing the ongoing intermediate C.

Accoding to this count, we are in minute iii of minor 3 of intermediate C. Third waves are where maximum damage is typically inflicted, and we are in a iii of a 3.

Bear in mind that there are no guarantees that this wave count is correct. As things stand, it is the most probable to me, and until market forces a change, it will be the count I will use to navigate the market.

As you can see from the next chart, we had another massive distribution day. Seemed and felt like a fire sale -- please, get me out of these positions, any price would do, one could almost hear that.

In situation like this, I cannot think of any advice for those who are stuck with falling long positions. One does not know when it ends. Yet one does know that a bounce is imminent. I really am not sure what to do with long positions that are falling hard like this.

Those who are in cash, well, they sit tight, and wait for signs of a bottom to ease back into the market. Unless they are very nimble, capable traders, they might better be off not to start shorting right now.

Those who are short from higher levels, take a moment to cherish. Ok, that's enough self congratulation, market is getting very close to a bounce. Just look at that spike on the volatilty index VIX on the charts that display it.

Also, distribution days like this will eventually snap back. See what happened with gold stocks? Sellers get exhausted. Professionals of the market smell that. They start the rally, late shorts get squeezed hard, rally will feed itself untill all leveraged, and scared shorts are cleared.

Be on the watch, the job of managing a position ends only when the position is closed, no need to rush to sell, just lay out a game plan of what portion of the profits you will be taking and under what circumstances.

Here is another chart with some other breadth indicators. S&P is under a NYSE summation index sell signal. Summation index signals are rather late signals, and should be treated as intermediate term signals. Until it reveses, any bounce may be suspect of failure from a medium term point of view. That is regardless of the ferocity of the rally, or the loudness of the screams of mad men of financial shows on TV.

These are dangerous grounds. Many, and many self-appointed professionals and gurus are being slaughtered. Cash is a position, too.

Just a quick note on the market

We called the bounce yesterday without umph, and it was just that.

Seems like market is having another high distribution day! Back-to-back distribution days usually lead to seller exhaustion and can form some sort of a bottom for a bounce.

Where the bottom is, how long it will last, what sort of bounce, ....? who knows. I think it is prudent that short positions are reviewed at this time, stops are tightened, profits are taken (all or partially).

It differs from one individual to another. Just be careful not to lose all that gain from short positions. It seems like a cathartic washout of some sort is in the making. maybe not, but it never hurts to be aware of possiblities.

I'll try to do a more detail analysis this evening.

AIG Addressed, What Now?

Charts courtesy of stockcharts.com

AIG's situation is resolved, or so they say. Now what?

The bounce I talked about last post did come in a dramatic fashion, index swung from a low of 1169 to a high of 1214 and close at 1213.

Volume was heavy, and by a first glance it can be looked at as a reversal day. But was it really so?

look at the chart below.





I have included a few breadth indicators here. Going through them we see

• up volume / down volume was 1.8, compare that to a few days ago where we had 3 days of down volume / up volume more than 11



• 1024 stocks on NYSE made a new 53 week low



• 10 stocks on NYSE made a new 52 week high



• advancing issues were less than declining issues

This is not a very impressive rally. Add to that the fact that index is below a myriad of moving averages, is still on a MACD sell signal while MACD is sharply pointing lower, and is just bouncing from the lower boundary of a well defined downward channel, and it becomes a bit hard to sell as a bull case.

So far, it does not look like Monday's decline has generated any buying enthusiasm.

Can it keep going up? Of course it can, but the chances of that with this kind of internals, and the type of selling pressure we have recently seen are very slim. Anyone who has maintained a short position from any of the lower highs on the chart will get a lot of chances to re-assess his/her position in coming days.

Market has to start making higher highs and higher lows on improving internals for me to start to believe in it.

On a side note, do you think a truly new bull market based on sound fundamentals that are known only to a few well informed people needs late night, weekend gatherings of bankers of all sorts to prop it? Do you think a true bull market needs some screaming showman on a financial show to plead with bankers to rescue this or that financial company?

A true bull should roar on its own.

I must mention that the number of new lows is very high, and a bull may say that that is a solid first sign of a market bottom. Also, new recent low was not made on lower momentum indicator readings -- something to have in mind in the days ahead.

Immediate days ahead will lead us into expiration day this coming Friday. It may turn out to be a real roller coaster event. Be aware, define your risk parameters, lay a game plan, and play it.

If we get a follow through rally, it may embolden the bulls, but regardless of what showman is screaming on what show, keep an eye on the internals to assess the quality of the rally.

More charts with more internal measures to come later, stay tuned.

BTW, if there is a ceratin aspect of the market or a certain stock of significance that you want me cover, leave a comment, I'll see if can fit it in.

Staying With the Trend

Charts courtesy of stockcharts.com

I mentioned in my previous post that key to success in the market is to identify a trend and maintain a position in the direction of that trend. One way of determining the probable future direction of the market is using breadth indicators. Here are two breadth indicators.

$SPXA50R indicates prcentage of stocks below 50 day moving average, tradeable bottoms usually see the indicator drop to 20-30% area, causing a short term wash out of sellers.

$SPXA200R is percentage of stocks above 200 day moving average. when it breaks below 40%, it gives an intermediate sell signal. It needs a move above 60% to reverse that signal.

Think about it! How can we have a bull with less than half the stocks below 200 day moving average?

It broke below 40% in Nov 2007. A move above 60% has not happened yet. S&P 500 price is clearly in a downward channel. it is getting very close to the bottom of the channel, and it may produce a bounce. But until the index shows improving signs of its internal breadth, every bounce should be treated with suspicion.

Breadth indicator signals should not be taken in isolation, a variety of them studied in conjunction with the behavior of the actual price may help us determine whether probabilties are in favor of the long side, or the short side of the market.

Starting a Position in Natural Gas

Charts courtesy of stockcharts.com

What a day, Ben-Hankee team did not pull a rabbit out of the hat. Mysterious buying agents of the future markets were not very active, or effective to cause short coevring rallies, and the bear showed its true face, smashing everything in sight.

The key to success in Markets is to identify a trend and maintain a position in the direction of that trend. That is one lesson I learned from the account of Jesse Livermore's life in the book Reminiscences of a Stock Operator .

If one thinks that a bull market is in progress, one should maintain a long coore position and ride it. One can add in pullbacks, but the core is the core and should stay. The reverse is true in a bear market. Until market conditions force one to re-think the bullish, or bearish stance.

I followed up my post on natural gas and started a small position buying TSE:HNU (Horizon Beta Pro Natural gas Bull Plus ETF) on Toronto Stock Exchange. The position is small, the risk is very well defined, and stops are determined.

This is the chart of HNU at the end of today's market session





If market continues as it did today, it may keep forcing a lot of liquidation everywhere, and I may be fotrced out of my position. We shall see.

Smarts of the Street are Dumber than the Dumbest of the Dumbs

Today, my friend Bill Zimmer of prudenttrader.com asked an interesting question in a letter to his subscribers.

Have you been keeping tab of how they rain praise on Wall Street CEOs? calling them smart? What's so smart about them? Other than the fact that they managed to book for themselves lavish life styles and bank accounts on behalf of the shareholders of their companies, they have proved themselves as big destroyers of wealth as Joseph Straus of JDS Uniphase, and John Roth of Nortel Networks. Remember those two clowns? I mean, visionaries?

OK, I have to admit Wall Street CEOs are smarter than their shareholders. At least they exercised and sold as much of the shares as they could.

Real smarts here have been shown only, and I emphaize, only by the Ben-Hankee team. That nickname I have for that team is no indication of disrespect. It is more from awe and admiration.

Whatever your views, or mine, on the ongoing stream of interventions, or late night weekend decisions, they have constantly drawn magic rabbits out of their hats. Throwing such beautiful changeups Tommy Glavine could only dream of throwing. OK, maybe Glavine can throw as good, he's my all time favorite, after all, but most of those Armani clad arses of Wall Street could definitely not.

If CNBC anchors think these bozos are smart, what does that tell the world about the itelligence of CNBC people?

A look at the balance sheet of any house on Wall Street would tell you that the operation could have easily been operated by anyone, anywhere, any time, and as disatrously, regardless of education, background, or age.

I am just worried that the Ben-Hankee team is running out of rabbits. I am worried that by letting Lehman die the well-deserved death, the process of debt deflation is now getting out of control -- out of control of hat-borne rabbits, that is.

If that is the case, would it not have been smarter to let Bear Stearns die the well-deserved death. At the very least, we would been months closer to the conclusion of this.

Can We Make a Case for Natural Gas?

Charts courtesy of stockcharts.com

Natural gas is a very volatile commodity. I have heard that many professional traders stay away from it. If true, it might be indicative of how trading positions may be whipsawed by short term swings of natural gas prices. But I, personally, like it. It has a period of seasonal strength into winter. Seasonality is not a guaranteed path to success. But when a commodity corrects heavily prior to its period of seasonal strength, its chances of performing well during that period increases.
This is a long term chart of Natural Gas traded on NYMEX.

By historical measures, it is oversold. It also is in an area of strong support. What that means is not that it will certainly stop dropping here, it rather means that the risk is very well defined, and is becoming more acceptable to me.

I think the key to success with natural gas is not short term trading but gradually building a position – more like mid to long term position trading.

Also notice in the chart above that according to the ratio of Crude Oil ($WTIC) to Natural gas, which is represented in the bottom panel, gas is very cheap compared to oil. Those extreme price differentials have, in the past 13 years, marked an area of a tradable bottom for natural gas prices, especially when they occurred closer to the end of the year.

I think the risk reward profile is pretty good. That does not mean that I would rush to mortgage my house and buy natural gas contracts. I think a prudent market participant should have a well diversified portfolio of assets. In that portfolio a portion may consist of commodities or commodity related stocks. A portion of the commodity part of the portfolio may consist of natural gas-related issues.

There are three ways of participating in natural gas market.

1. Natural Gas future contracts
2. Natural Gas commodity ETFs
3. Stocks of companies with good exposure to Natural Gas.

I am not really interested in future contracts. As for ETFs, one can play the Canadian ETF TSE:GAS (Claymore Natural gas Commodity ETF), or the American UNG:AMEX (Unites States Natural gas Fund). They provide exposure to changes in the price of natural gas minus the management fees. More risk-taking participants can opt for the Canadian TSE:HNU (Horizon Beta Pro Natural gas Bull Plus ETF), which provides 2x exposure to the changes in the price of natural gas minus the management fees.

Here’s a daily chart of HNU on TSE in Canada

There are huge positive divergences building. Positive divergence does not mean a bottom. But it is a very encouraging development. There are two initial resistance areas on this chart, Marked R1, and R2. Those are my potential profit targets, at this point.
Price pattern on leveraged ETFs can be a bit erratic at times, so, let’s take a look at the commodity itself

It should not really make a new low, and if it does, I may lose my interest for a while.

One, of course, could take gassy companies and their stocks into consideration.
In Canada, there are a myriad of gassy companies and income trusts. Analysis of one, or more may be the subject of a future posting. But for now, I will throw in some names, and you can look them up for yourself, a majority, if not all of them have suffered major drops , and have horrible looking charts
Enerplus Resources (ERF-UN.TO)
Arc Energy (AET-UN.TO)
Peyto Energy (PEY-UN.TO)
Compton Petroleum (CMT.TO)
Higpine Oil & Gas (HPX.TO)
On the US market one can take a look at the likes of XTO energy (XTO).

Is The Bottom In For the Gold Stocks in?

What a spraying of bugs we have seen. Gold bugs that is – an outright massacre.

I know. I have heard it all: manipulation, hyper-inflation, deflation, stagflation, you-name-it-flation. The FED did this, Treasury did this, fill-in-the-blank did this. The fact of the matter, however, is this

charts courtesy of stockcharts.com

More than two years of gains are wiped clean from the $HUI index. Index is below long term moving averages, and just got a bounce from a 7 year trend line.

So, the longer term picture is right at the edge. How about the more near term picture?

Bugs are resilient creatures, and gold bugs may say that this is the time to buy.

At this juncture the risk reward may benefit short term speculators on the long side. There are probably a lot of late retail shorts that may get squeezed in coming days and, in doing so, may provide fuel to a short covering rally. Especially, since next week is an option expiration week.

Let’s look at two bellwether gold stocks that big investors typically buy, and pundits typically tout. Here’s a daily chart of Goldcorp (G:TSE, GG:NYSE)

Here is a daily chart of Agnico Eagle (AEM:TSE, AEM:NYSE)




The massacre is in plain view. But both stocks are showing good activity from deeply oversold levels. As things stand now, my OEW count has both stocks correcting from a Cycle wave 1 top. If the recent lows hold, both stocks may establish major wave A of the correction, and then embark on major wave B counter trend rally up.

Counter trend rallies can be furious, making everyone think happy times are back to stay. But, according to my studies, more downside may be seen before a true bottom is formed.

That is the longer term view. For now, the neighbourhood of recent lows may provide a low risk point of speculation for a substantial bounce.

I, personally, do not see much sense in chasing them right now. Especially, since next week is an option expiry week and these two, as well as many other gold stocks may see some fireworks from short covering activities. Very often, a rally which is accelerated by shorts being squeezed gets pulled back very fast, and such pullbacks, if they come to be, may provide low risk entries for short term speculators.

In the case of AEM, notice the two gaps that I have highlighted with shaded areas, the 1st gap was taken with ease, the 2nd gap may prove harder to overcome, the 2nd gap also coincides with 32% fibonacci retracement of the drop from July high.

If AEM stalls there, and short term oscillators become overbought, a pullback may ensue.

Both stocks are among the leaders of the pack. If the rally is for real, the laggards will follow. This is a daily chart of gold stocks ETF (GDX:AMEX). On bottom panels, notice that GDX has been lagging both AEM and GG.

If I were less patient to speculate on the long side of gold stocks, I might have considered GDX. It is not far from its most recent low. A word of caution, however, while leaders correct, they may not make new lows, but laggards may. An ETF, which is a basket of leaders and laggards, may make a new low. So, as always, risk management is the key to stay in the game.

For more information on OEW techniques and labelling practices, visit Tony Caldaro’s site. Tony maintains active charts on a variety of markets.