8/8/2008
About 90% of the global indexes I follow are in downtrends on the daily charts. (Ones that are not include Brazil and Canada). Only 50% of the world indexes I watch are in downtrends on the weekly charts.
Of US indexes, The DJTransports are still in an uptrend on both the daily and weekly charts. The Nazdaq has been in a downtrend on the daily charts but the weekly charts have not given a trend reversal from up to down yet.
The Dow, SP, Russell have had well defined downtrends on both the daily and the weekly time frames. Currently, the weekly charts are correcting an oversold condition which should lead to further upside. However, it would take an incredible amount of work to turn the daily time frames, as well as the weekly time frames from downtrends to uptrends. That is unlikely to happen in the next few months, so on these indexes at least, you are still looking at a corrective rally in terms of structure.
Several weeks ago, we saw the Russell become the relative strength leader across global indexes for the first time in many months! Of course, relative strength is a function of look back period. I use shorter look back periods as opposed to longer ones. I think that there is a growing perception that the dollar has put in a decent bottom. For the first time in many many months, the dollar index gave a reversal from a downtrend to an uptrend that was confirmed today. The huge Macro Global players are grossly underweighted in dollar denominated securities. The driver for a bit better upside rally has been coming from foreign money flows coming into big caps (undervalued relative to the small caps) to take advantage of the currrency play.
So far, I see selective buying only - stuff like drugs, biotechs, McDonalds, and Naz shares. Overly bearish sentiment readings can still add a bit of fuel to the fire.
I am not a believer in forcasting how far a market can go. You can have a structure that says that the market can rally, but money flows are a very tough thing to guage in advance. If enough foreign money comes in, assuming that the perception is that the dollar can have a good run to the upside, there is no reason why these SPs can't pop another 50- 70 points from here.
However, the nature of that rally would still be corrective. And, you can lead a horse to water but you can't force him to drink, meaning ...volume is the number one thing that a technician falls back on to confirm whether or not there are truly any decent money flows. Watch to see what type of volume comes in over the next week. Naz has already had a clean upside breakout. So - that is my two cents worth - the market can still have upside potential from here, but much of it is coming from rotation, which never supports a sustainable long term rally.
7/7/2008For how many weeks has Goldman Sacs been calling for a push in crude into the Fourth of July? Probably in what was one of the more widely forcast market plays, crude rallied close to 146 - just 4 dollars shy of their forecast put out many weeks prior. Forget the fact that crude fell shy of the forcast target, the time factor is what is more important. (push into July 4th). Now there are daily momentum sell divergences as well as volume divergences (higher high made on lighter volume).
A retrace back to the daily EMA basis the August contract, would be 138.30. 133 - 136.50 contanined the percentage of the previous trading range's action. (back into value area)
The spread between the equity relative strength leaders and relative strength laggards has never been greater. At top of the relative strength leader list has been oil, coal and steel.
The XLE has hit an upside wall. Though we rarely suggest shorting relative strength leaders, it does look like calls can be sold on the XLE. The market is extremely oversold by many technical measures. However, the downside momentum has been so strong, that upside should be limited on any reactions. More likely, a brief trading range can form at these levels where the spread between the laggards and leaders starts to narrow by a nominal amount. 6/12/2008
"When Markets Collide"
Mohamed El-Erian
As traders, we are supposed to trade what we see and the why part of the trade usually comes after the fact. This book is a great read to explain not only the strategic, structural, and tactical drivers for recent moves, but aslo how these drivers are going to continue to impact markets going forward.
Rates are starting to pick up steam in a serious way to the upside. November Fed Funds are now pricing in over 50% chance of .75 hike by end of October. Two weeks ago, they were pricing in only a .25 hike. Vietnam, China, India.....starting to see many countries hiking rates - this global trend appears to be in its early stages.
Once again, markets have been a case of sell in May, walk away......
Read this book!!! I feel like every day in these markets for me is a long journey towards getting a PhD! Think it will take me a lifetime to understand everything that is unfolding... 5/15/2008
But, let's not call it discretion!
I was reading a daily hedge fund news letter, and here is a direct quote:
"CHARLOTTESVILLE, VA (HedgeWorld.com)-Since 2005 and especially since last year, quantitative fund performance has not been as good as it used to be. Now that many have come to realize that mathematical models are not flawless ("Duh" - my own injection), a new trend in asset management is emerging: integrating the human touch of a fundamental approach into the blind computer-driven process..."
So...let's see......we come up with computer driven models to take the emotions out of trading (the human element), in the hopes that we can arb a statistically positive expectation. Firms hire dozens of PHds to dissect the same time series data and any edge is quickly arbed out. Not to mention that the future does not unfold in the same way as the past which is what the models are based on.
Now, let's bring back the human touch we tried to get rid of in the first place - this human touch now allows an individual to "override" the computer driven signals. (Of course, this individual will always know in advance which signals will work and which will not). So...what exactly is the point?
There is definately an industry bias against terms like "traders", "technical analysis", "discretion"....but for good reason as well. Too many technicians have been negligent on focussing on risk concepts and instead overemphasize "calling" the market. Who wants to allocate large sums of money to a group who can't quantify risk? How is one supposed to know what type of leverage to use?
Definately a Catch-22. But, it still made me laugh to see that the "trend" is now using human judgement integrated with computer driven models....Let's just call a trader a trader.... 5/6/2008Bonds - rare technical condition on the higher time frames......one of the lowest ADX readings on the daily charts in years. Low ADX readings highlight extended coils and the moves out of these coils lead to prolonged trend moves.
I had a dream that these bonds fell out of the recent multi day support, and fell like a rock. My dreams have been coming true lately. So much for technicals, eh? Seriously, sometimes it is our subconscious telling us something powerful.
30 year yields can have test back up to the 2007 highs at a minimum.
Major trend reversal in the makings for yields across the curve.........
Stay short core position in the bonds and continue to scalp from the short side as well. 4/28/2008I heard these at the annual AAPTA conference in San Francisco last week!
"We have great values in our portfolio." translation - Our stocks have been massacred.
"The market sold off on technical factors." translation - We have no idea why the market went down.
"We are short term cautious but long term optimistic." translation - We want to be right no matter what happens.
The market appears to be at one of those critical junctures where everyone wants to be bullish short term because the market has been going up, but still claims to really be bearish for the longer term. I think this type of thinking is what has exacerbated the dog-pile in, dog-pile out psychology that has characterized the market for the past year.... 4/24/2008
Time for a cyclical correction in these commodity prices. It might come as a shock, but trees do no grow to the sky. Sentiment readings on the dollar have been at historical negative levels. This is OK when a market is in the middle of a strong momentum move. However, the momentum has begun to flatten out, and the long overdue turn back up in the long end of the curve may be just enough of a kicker to trigger some buying in the dollar. And this in turn can take the now extreme speculative excess out of some of these cash commodities. Just as trees do not grow the the sky, prices are not going to fall straight back down, nor will they approach any of the price levels seen 3 years ago.
Crude - classic example. One would think there was not one drop left in the ground of this stuf the way it has been trading. Sure the world may run out of this stuff one day, probably after I am long dead, BUT, no doubt the market is a bit overweighted to one side at this point.
As always, how far rates start to back up can determine the extent of this selloff in commodities. At some point, market participants will weigh the cost of carry in a market like gold when rates back up high enough. CPI only running at 4%?? I dont think so! Of course, the cost of carry may be minimal compared to the potential for double digit inflation at some point down the road. That may be way down the road though. For now, we like the dollar from long side, bonds from short side, most cash commodities from short side.
3/31/2008
Here is the quote to sum up 1st Q: Volcker on the Charlie Rose show...
"The market was being run by mathematicians that didn't know financial markets. And you keep hearing you know, god, that event should only happen once every hundred years, according to my model. But those every hundred years events are coming along every two or three years, which should raise some questions."
And so first quarter brought in a new awareness that boosted book sales of Taleb's Black Swan to higher numbers then Greenspan's new book!
The main thing missing first quarter was the plethoria of emails on religeon and family that hit when the market was approaching its lows in 2003.
Soros likes to talk about reflexivity. The process of reflexivity (best read about googling information as opposed to my feeble summary on a blog) tends to drive prices to extremes - well beyond where a natural equilibrium point might be. I guess Bear Sterns at $2 is just such an extreme.
Despite the record amount of cash that is now on the sidelines parked in money market funds, have equity prices truly reached the type of extreme to draw this cash in? Not by any historic measurements of PE ratios. However, if prices correct up enough, perversely, it will draw some of this cash in as fund managers hate to feel the boat is leaving without them.
Technically, it looks like these weekly charts are continuing to consolidate by remaining in a broad trading range, correcting extreme oversold conditions. Watch the weekly 20-period EMA. Who would have ever guessed that Big Blue (IBM) was one of the relative strength leaders for 1st Quarter?! 3/10/2008Where is the panic? Where is the fear? The market has a case of the "oooze"...the deadliest type of trending action. A slow steady deterioration, with an occasional sharp short covering rally that erases the oversold condition on an intraday basis but does little to correct the oversold sentiment readings. These bear market technicals are not coming as a surprise to most. What is a surprise though, is the lack of panic and concern that has not yet hit the market. Maybe that is because nobody has gotten their first quarter statements for 2008...... 2/25/2008
A good part of trading is about doing nothing. The good patterns that offer low risk opportunities simply do not come along as often as we would like. Here are two nice patterns that formed on Friday:
Canadian Dollar has an inverse head and shoulders bottom. It had nice price rejection on Friday when it tested the area of a previous low. Price rejection of lower levels when there is negative news is often a sign that the market is all sold out. (When looking at longer term currency charts, the "cash" will often show slightly different levels, but the cycles wiwll be the same).
Another chart that also showed price rejection on a test of the previous low: AAPL The nice thing about this chart is that there is a clear "three pushes down". The 20-period EMA comes in aroudn 130. The bad thing about AAPL is that of the NAZ shares, it has been one of the weakest. The weekly charts have been so negative, that a tradable bounce only can be expected.
If the SPs can take out 1371 to the upside and get back towards 1400, it could go a long ways towards reducing the excess negative sentiment that has built up. The cycle in many of these NAZ shares suggests that they are oversold enough now to provide a bit of "fuel for the fire", even though they have been laggards.
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