Monday, March 31, 2008

DJIA cycles

Not too much to say here, the McClellan Oscillator bounced off the zero line, and after a bit of noodling around the uptrend should resume.
DJIA 65 minute cycles
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Tuesday, March 18, 2008

SPX and the Golden Section

SPX Weekly with Golden Section Grid
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Monday, March 17, 2008

SPX Cycles 3/17/08

I’ve updated the 65 minute SPX chart because the short term cycles have been punching in like clockwork over the last few CIT’s. With the market internals strongly oversold, including the MCO and its 10% Index component which are at relatively negative extremes we can start looking for a turn in the markets. Hint: this may be it, right here.

So I took a look at the current cycles and the 56 bar, (9.38 TD’s) indicates the market should turn tomorrow sometime in the first hour. Considering, the oversold condition, it is almost safe to assume this will be a low.

Moreover, I have also marked two instances of the 59 bar cycle. Actually, these darker instances are only mid point markers which served to pick the high between the actual cycle measures (the wider and lighter lines) Normally I wouldn’t bother explaining these, but the last two occurrences have been lows rather than highs. When cycle timing points reverse, or invert as we say, it is often an indication of a change in the prevailing trend.

Click to enlarge

MCO update 3/17/08

Not much to say, the markets are oversold but in panic mode. The MCO suggests we could have a large bounce starting sometime in the next couple of days. The 10% Index is blown out on the downside, so whatever rally we see coming up should be followed by another retest of the lows. Until we get a sucessful retest, one where the 10% index stays above the -500 level then the trend remains bearish.

As for a bounce, the next cycle CIT is between 9:30 and 10:30 tomorrow Tuesday.

Click to enlarge

Also, CNBC should fire Jim Cramer.

Sunday, March 16, 2008

Bear Goes Bust

Fed cuts by 1/4 point, world markets crash anyway, whoop de do, peoples is so predictible.

Ben Bernanke, is the right man, in the right job, at the right time, and makes the right move.

It is maybe the only move that can set the ship straight. There are those who will say, the Fed should stay out of this, let Bear go under, it sets a bad precedent, whatever. What these columnists fail to see is that Bear Sterns is only symbolic. That what we have to fear is fear itself. To do nothing, at this stage of events, would likely result in a world wide financial collapse.

From what I have been able to read, Morgan Stanley will buy out Bear Sterns for 0.05473 JPM share per share of BSC, Yes, the shareholders of BSC are getting screwed to which they have my sympathy, but my hunch is that despite the rhetoric, there will not be much recourse This is less about Bear Sterns and more about a symbolic management of the capital outflows on all the other fronts. As I write this the Asian markets are down close to 5% and the DJIA futures contract is down about 500 points in overnight trading.

The hedge funds are in a full panic mode and the mystical PPT is going to work. This is a buying opportunity in the making, Monday may be a bit black and blue, but somewhere along the line here, the worst of the news will be factored into the market and prices will stabilize. Until then, be cautious.

Stuff the Fed said:

Press Release
Release Date: March 16, 2008

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

Press Release
Federal Reserve Announces Establishment of Primary Dealer Credit Facility
March 16, 2008

The Federal Reserve has announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (PDCF). This facility is intended to improve the ability of primary dealers to provide financing to participants in securitization markets and promote the orderly functioning of financial markets more generally.

The PDCF will provide overnight funding to primary dealers in exchange for a specified range of collateral, including all collateral eligible for tri-party repurchase agreements arranged by the Federal Reserve Bank of New York, as well as all investment-grade corporate securities, municipal securities, mortgage-backed securities and asset-backed securities for which a price is available.

The PDCF will remain in operation for a minimum period of six months and may be extended as conditions warrant to foster the functioning of financial markets.

If we get out of this in one piece Ben is going to look like a hero.

The Panic of 2008

Panic: A sudden widespread fear concerning financial affairs leading to credit contraction and widespread sale of securities at depressed prices in an effort to acquire cash.

What we are seeing in the financial markets is historic, the bankers have fucked up big time and the devil is demanding his pound of flesh. What we have is a full fledged Banking Panic where the supposed "professionals" are acting irrationally as they run for the exits.

The key word here is irrational. In my opinion, the Fed made the right move by making credit available to institutions like Morgan this week. I think a lot of people are caught up in the rhetoric of what is occurring, as if the entire system is going to collapse. This is nonsense but the danger exists that in a panic to escape something they don’t understand, and that may in fact be less severe that what is perceived, professionals are acting irrationally and running for the doors. Bail first and ask questions later. This type of behavior is what causes long tailed spikes in the stock market and something similar is happening in the banking industry right now. By the time this is over, I think it will be realized that the doubted collateral did in fact have value, maybe a little less than face value, but a lot more than is being currently ascribed to it.

But, I don’t trade bonds, so what does this mean for the stock market? One has to question how much of the downward pressure in the stock indices is a result of liquefying collateral assets, and how much is a result of the slowing economic conditions.

I believe that since the majority of the negative economic news is coming from the financial sector one has to at least consider the possibility of a wipe-out on the downside. The markets are behaving irrationally at the present moment, this means that within the monolithic block of equities we call the market, there are stellar opportunities to find value.

Taking stock. Again the keyword here is "irrational." The players in the markets are being over emotional, traders are nervous, and the price movements are highly volatile.

The Risk:

The first point I would make is that one should never discount how irrational the markets can be in a panic situation. Concepts like "value" get thrown to the wind as panic investors turn equities into cash. Just because something "looks cheap" doesn’t mean it can’t get cheaper. If the markets break sharply to the downside in the next few days, it is entirely possible for them to decline another 15% from present levels.

The Possibilities:

Market internals, the technicals, are in the general ranges found at bottoms and we can use them to evaluate where we are in this train wreck.

1. The McClellan Oscillator is forming a zigzag bottoming pattern. This could be over in a day, or in a week, so it bears watching. Additionally, the 10% Index is indicating that whatever bottoming process begins here will be re-tested within the next ten weeks or so.

2. If the markets continue falling next week, then the McClellan Summation index will fall below –1000, While this is in the zone where bottoms form, it also is accompanied by accelerated declines in equity prices.

3. The AAII sentiment numbers indicate 60% of the advisors are bearish, this is the type of reading which is necessary for capitulation on the downside in order to start a new bull run. Again, this could persist for a bit longer but taken as one of the best contrary indicators, investor sentiment is Bullish.

4. The other technical indicators, New Highs vs. New Lows are not confirming the decline. This is bullish.

5. The price indicators, MACD’s etc on the major indexes are within 3-4 days of turning up. The price turn happens before the indicator’s change direction, so this is moderately supportive.

6. Aside from the problems in the Housing and Financial sectors, the fundamentals are only moderately negative. There is evidence that the economy is slowing but according to the UCLA economists it will not enter a recession. Corporate balance sheets are reasonably strong and relatively speaking, stock prices are cheap, so there is justification for thinking the market is going to go higher for a couple of years. It will take another six months to get people interested in stocks again, I suspect in the period between now and the election, we will have choppy, essentially trendless, action and the real rally won’t start until after the election once the banking mess is cleared up.

What I’m Watching For:

1. Some evidence that the market is turning higher. I expect that the upcoming earnings reports from the financial sector will continue to be negative. IF, the stocks rally on this bad news it is bullish, anything else is a non event.

2. In any decline a $TRIN reading over about 4 would be a reversal warning. The TRIN compares up-down stocks to up-down volume, one is a neutral reading and increasing positive numbers indicate increasing fear (selling pressure)

3. I’ll watch the VIX (Volatility Index) whatever it does, except for going to 10, is a buy signal here, fear is rampant. At the moment, volatility is very high, this works both ways and eventually dampens down. It is the reason the VIX is high, the VIX is telling us how big each stick is. When the market is trending in an orderly manner (up or down) the VIX will be lower, and the daily sticks will be shorter. At points of volatility, blowoffs either up or down, the daily sticks will be long like they are now, and the VIX will be higher.

4. An up day with Up Volume 10x Down Volume. As I noted in an earlier post, we have had several down days with lopsided Down to Up Volume ratios and what we need to see to confirm any upward trend is two 10 to 1 Up Volume days within sighting distance of one another.

5. Stocks which do not break their previous lows on any upcoming decline. Now is not the time to be a hero and pick the "exact" bottom, leave it for someone else and buy a lottery ticket. Since the bottoming process will take a few months, stocks which take out their prior lows are not finished scaring people yet, buy something else.

Watch for a cycle low Tuesday 3/18 in the first hour of trading.

Friday, March 14, 2008

HUI weekly cycles

A lot of market research and inquiry is generally an attempt to predict the future based upon what happened in the past. I decided to go back and have a look at one of my old HUI charts to see what has occurred since my original markups. My charting software allows me to save the drawing instructions, and I had a file I last saved on January 27, 2004 which seemed like ages ago. So here's the chart, I extended a few of the trendlines and increased the scale to accomodate the rise in the HUI, other than that, it's the way I drew it in 2004 with the new data added. It was an interesting exercise.

Cycles and Trendlines calculated 1/27/2004
Click to enlarge

PS, the trend is up and should remain so for the next ten years.

Wednesday, March 12, 2008

MCO Update

Well shucks, Monday's little fiasco blew out the 10% Index again. When the 10% Index, the 10% exponential average of the advances - declines, goes below -500 it is an indication of extreme selling pressure. Even though one can expect the popular averages (ain't so popular today, huh?) to bounce, in order to relieve the temporary excesses, it is usually followed by a retest of the price lows at a later date. How much later, you ask? Varies, like everything else the market does, but usually if it happens within a few days it doesn't really satisfy the requirement. If you look at the incidences on the marked up chart, you will see they have been separated by anywhere from two to five months. This seems to be about the normal expected span. While, two to five months can seem like a lifetime if you are a trader, over the short term acting like there will be a bounce is generally a profitable strategy.

So, with this pesky little witch doing triple backflips in the next week, I'd be looking for a bit of volatility. About now, the general public including, the less than slick hedgefund masters, are probably changing their underwear for the third time in as many daze. Since the market seems like a machine for making most of the people wrong most of the time, I would almost bet, if I was a betting man, that the boyz will take the put buyers to the cleaners by expiration. On the Monday or Tuesday after expiration we might look for another market plunge, so the boyz can effectively market the next batch of puts.

So after that bit of volatility, it will be time for a springboard rally. Hop on the solar stocks, summer's coming.

Click to enlarge

Tuesday, March 11, 2008


Hurumph, the 11 day worked, how about that.

Click to enlarge

More later: So it's later and I've added the daily chart for the SPX cycles below. The 10% component of the MCO blew out the -500 level yeaterday which indicated the market averages will retest yeaterdays lows at a later date. On the dialy chart, I've marked the April and May cycle CIT's which seem like a likely spot for this to occur.

Click to enlarge

Saturday, March 8, 2008

Up Down Volume

I downloaded the Advancing and Decling volumes and had a look relative to the comment in my previous post. The chart is more or less self-explanatory. I calculated the ratio the down volume was relative to the total volume DNVOL.ny/TVOL.ny. On the chart I filtered the results, the red plot is DN/TOT > 90% and the green plot is DN/TOT > 80%. It looked to me like there are some errors in the dataset about mid chart, but since I was more interested in the current timeframe, I let them be.

In any case, it looks to me, based on a very limited dataset, that there are more extreme volume ratio days now than there were in the past. It may be that the advent of both Ultra (or 2x) Index ETF's and Short Index ETF's (inc 2x) is increasing volatility and that results from past volume studies may be deceptive. This is about as far as I'm going with it, I'll leave it to someone else with a bigger and more reliable dataset.

Click to enlarge

Friday, March 7, 2008

Don't Jump the Gun

In my opinion this is a very dangerous market. It is oversold enough to have a good bounce but sentiment is so poor it could just as well crash. Yes AAII investor sentiment numbers are at the lowest point since 1990, but this can persist for a couple of weeks and the DJIA could happily trim off another thousand points in the blink of an eye. The unemployment numbers Friday didn't help general sentiment on main street, which is exhibiting a growing fear over future economic conditions, I cannot discount the fact that this anxiety may push the indexes lower.

The cycles look like they are working fairly well once I readjusted the earlier 55 bar to 56 bars. The one marked 59 is actually 58.6 bars or roughly 9.77 trading days. The SPX eeked out a minor bottom and turned higher late in the afternoon more or less on schedule. Next up is the 66 bar cycle, 11 trading days, which is due late Monday. I've marked out a potential symmetry which aligns the last high and reaction low with the upcoming projection. Unless something positive happens in the banking industry over the weekend, not likely in my opinion, the markets should trade lower on Monday, for at least part of the day.

On Friday, the SPX closed below the lower 20 day Bollinger band, this is not good. This kind of an event has a couple of possible outcomes. The first is an outright crash, 1987 is the famous example. The second, and more likely outcome, is that the market snaps back above the Bollinger band like it did in January and then retests the low a few days later. Regardless, it indicates that Fridays low will be tested again which means there is no big rush to jump in the water while the sharks are still circling.

Click to enlarge

The McClellan Oscillator is finally becoming oversold enough for an intermediate term bottom. However, it is also indicating a very weak market, with the 10% Index crashing below the -500 threshold during Fridays trading session. Only the positive action from late afternoon rally managed to keep it above the -500 zone. On the plus side, so far we still are seeing postive divergences in the MCO behavior. Like I said there is no rush, but we are starting to see the kind of setup we want to see for a decent intermediate term rally. Just because it looks like it today does not mean it will happen, we will have to wait and see.

We have also had two days where the down volume to up volume ratio was over 10 to 1. There is statistical evidence that this is a bullish event, indicating a washout of selling activity. I would also note that in the recent past I recall several 10 to 1 down days which were cut short by traders jumping the gun, antcipating a rally, this didn't occur last week, indicating to me that the players are cautious if not outright scared.

Click to enlarge

Wednesday, March 5, 2008

$1000 GOLD - Just Around the Corner?

There's been a lot of recent press about $1000 gold being just around the corner, the hitch is that corner, might wack your shin. I've put up the GLD chart, which is how most people are playing the metal, marked up with some of the relevant time cycles and a couple of trendlines.

The trendlines are color coded pairs. Each pair, consists of a primary trendline, and a secondary trendline at 1/2x or 2x the slope of the primary line (they're marked 2.00 and 0.50, the primary line is unmarked)

Click to Enlarge

Of interest, the yellow trendline drawn between the Aug-07 low and the Nov-07 high, when GLD corrected it dropped down and tagged the 1/2 slope yellow trendline. It is likely that a correction from the current (or upcoming) high might follow the same pattern (the green pair of lines) At the moment it looks like GLD could push a bit higher, and I'll have to redraw the green set.

Also suggesting that we might be approaching a temporary high, are the normal chart indicators, the Stochastic, MACD and RSI are all more or less confirming the recent rally with no glaring divergences. However they do look like they are ready to turn down indiating at least a short term hiccup. The two volume based indicators (bottom two) are weaker, the Volume RSI is starting to fade as is the Money fFlow.

The 101 day cycle (yellow) is a major interval over the data set I have, hits in mid May.
The 50.5 day (blue) is midpoint of the 101 cycle, typically it woulod be considered more bullish if the trading high comes to the right of the midpoint. This CIT point is today (Wed 3/5) and could be a reversal of the little correction so far or nothing significant at all. I'm viewing it more as a location than a timing spot.
The 147 day cycle (red) has been important in its past incarnations and is due to hit mid month.
The 29 day cycles (orange) are the short term trading swings and tend to vary a bit between 27 and 34 days.

Given the current excitement about GOLD, I have a hunch the mid-March cycle point may be worth paying close attention to. If GOLD (and GLD) continues to press higher towards $1000 then I would expect the mid-March point to be the start of a sharp correction (15% to 20%). On the other hand, if the current weakness accelerates, then mid-March could be a low point. In either case it is probably a bit late in the game to be initiating new positions unless one is very disciplined about money management, use stops please.

Longer term I remain bullish on the precious metals with the same wild guess target I've had since the lows, $2500 gold is coming, I just don't know when.

Tuesday, March 4, 2008

SPX Cycles 3/4/08

Finessed the white 55 bar cycle in the previous chart, extending it a bit to 56.25 bars which is a better fit going backwards and as it turned out for todays low.

Today's MCO is still only mildly oversold at -136.5 but we could get a bounce higher possibly tomorrow. However, unless is starts from a hard early morning selloff I would suspect the rally will fail with a potential panic decline into 3/7 or 3/10 (yellow and green) CIT dates.

Click to enlarge

SPX Cycles 3/3/08

Sunday, March 2, 2008

Dancin' with the Devil

Well, I guess push is coming to shove. The players are starting to get a bit panicky, the NYSE upside-downside volume on Friday was seriously lopsided on the downside. I guess inquiring minds want to know, "Is it a bottom yet?" Well, in my opinion, not quite.

The SPX tried to rally, but was soundly rejected at the 50 day moving average and the upper 20 day Bollinger Band. Feeling slighted, prices are running hard in the other direction. If the SPX penetrates the lower Bollinger Band (1300-1316) then a retest of the January low, at a minimum, very likely.

Looking at the McClellan Oscillator we can see that it is starting to get oversold again at –118. Given the current market climate, I question whether or not, this is oversold enough to launch a reliable turn higher. I seriously doubt it. Further, I would like to see the 10% Index of the MCO penetrate the +500 level on any future rally before I would have much confidence that a trend change is in place.

On a positive note, at least so far, the 10% Index is currently at -182 and even if we have a nasty day on Monday, it will stay above -500. It would also get the MCO oversold enough for a rubber-band bounce to the upside. It would be preferable to see a continuation of the sell off on Monday rather than a weak bounce which would only confirm the bearish trend.

So while Friday looked a bit like the start of a selling climax, I think the SPX has farther to run on the downside. There is a reasonable chance we bounce higher Monday or Tuesday But somehow I think this will only be temporary.

Dancin' with the Devil? Picking bottoms in a bear market.