THE BULLS HAVE 99 PROBLEMS BUT A RALLY AIN’T ONE
I have multiple reasons to believe the market is headed much lower during the first quarter of 2012. There is, of course, the various negative fundamental angles, the sentiment angle, the technical angle...and now we have the leadership angle. There is no leadership in this market. Technology, perhaps the most outstanding leader for any bull market worth its salt, has fallen off the map. The price action in the Nasdaq Comp and Nasdaq 100 leaves much to be desired. The all important Semiconductor Index (SOX) looks dead in the the water. I'll be going over the enormous obstacles ahead for both indices in the weekly chart review on Monday. The types of price patterns both the Nasdaq and SOX are exhibiting is resolved one of two ways: 1) Through powerful enough undercurrents, mostly as a result of an overly-negative sentiment picture that creates a disequilibrium in the balance of longs and shorts, creating a surge pushing the index up and through the negative price pattern OR 2) A capitulation to the downside that serves as a reset button for the index, allowing it to carve out a new trajectory. A cleansing, if you will. The bulls have a major problem. The problem lies in the sentiment picture and how it is converging with the negative price pattern in the most important indices. We already had the overly-negative sentiment picture. It came during the August-October time frame. The market had the opportunity at that point to carve out a substantial move higher through the end of the year that would have negated the ominous price patterns and allowed the market a more amicable point from which to correct or consolidate. Instead, we got a powerful surge during October that led to overwhelming choppiness during November and December. The market was on the verge of negating the price patterns across multiple leading indices during October-November. It failed miserably. It's like a 16 year old girl that wants to try out for American Idol showing up for the tryouts two months after they took place. The opportunity to impress the judges in order to further her singing career took place two months ago. There is nobody left to impress. The 16 year old girl goes back to making bean burritos at Taco Bell until she gets her timing right. Here's the kicker ----------- All the meanwhile the sentiment picture has deteriorated (by deteriorated I mean become increasingly bullish) to the point that we are now sitting at the most bullish levels of sentiment for all of 2011 according to the numerous indicators I track measuring option activity. As a result, barring a...
12 OBSERVATIONS AS WE APPROACH THE FINAL TRADING DAY OF 2011
It has become a typical practice of the market to act like it wants to love you and then drive a pitchfork through the back of your head while playing loud heavy metal music, as it kicks small dogs. In fact, today feels a lot like December 8th/9th. I was short then too. Interestingly enough, both incidences were off the 200 day and the same trajectory point. The market is using the same playbook during the same points in the game week after week. If it sticks to the script, tomorrow should be a move down that closes below 1250. I changed nothing within the portfolio today. Basically break even for the week more or less. Some quick observations that I will elaborate on this weekend: - Gold has not put in a bottom of the short, intermediate or long-term variety as of yet - Silver has not put in a bottom of the short, intermediate or long-term variety as of yet - The Euro has more downside ahead - The fact that bonds continue to consolidate along their highs is perplexing. I'm not sure which way this will end up breaking. And I'm not sure of what the bond market is telling us at this point. - The TED Spread and its insistence on carving out a new high day after day has past the point of being able to be ignored. Something is cooking. - The next leg of the crisis seems like it is going to involve the emerging economies, namely China and India. The weakness in commodities seems to be screaming this. - There are far too many bulls out there currently. By all measures bullish sentiment has reached levels exceeding any point since the first half of the year. - Significant tops occur with expanding ranges, increased volatility and wild action. Sound familiar? - The market seems to be conditioning short sellers to take profits on the first dip. Those who are able to withstand this mental conditioning will make the most during the next downleg. It takes courage to be a pig. - On the other hand, the market seems to be conditioning longs to buy into multi-day dips. The combination of short sellers chasing the downside and longs having to sell out when the market keeps dropping is what will cause the ferocity of the next downleg. - I can't believe that such a great country as the US has such a lack of leadership when it comes to candidates for the Presidency. It has become a job that nobody good wants, as the risk versus reward given where we are in the...
SURPRISE: THE MAX CONFUSION SCENARIOS GOING FORWARD
I wanted to update the study I posted to the website on December 22nd. The correlation between July/August time period and the current market continues to be extremely relevant, deserving close observation. The scenario the study points to fits in well with the maximum confusion scenario that I see for the markets. A continued sell-off into the end of the year will fall under the highly unusual and anomalous frame for the markets. This will lead to a general consensus that since we are about to embark on the first week of 2012 and tax loss selling has subsided, it is now safe to begin nibbling come early next week. The market will continue falling through next week , possibly carving out a low during the second week of January, after most of the bulls have come to realize that the seasonal studies they rely on aren't of any use in these conditions. I think that a weak rally through earnings is a possibility. I also have on the table a possibility of a continued plunge right into the mid to late January, with a low coming around the 24th-25th. This alternative is obviously the most bearish of scenarios. Both of these scenarios have us moving below 1200 at a minimum, with an outside possibility of a move all the way to the October lows in January. These are the max confusion scenarios as I see them currently. I'll make adjustments as needed along the way. Here is an updated chart of the study posted originally on December 22nd, with updated notes: click chart to...
QUICK THOUGHTS
The markets today were predictably dull following the long weekend. I think that things will begin picking up tomorrow, with Thursday and Friday being volatile sessions. I do expect the volatility to have a downside slant for the remainder of the week. The only real movement in the portfolio today was in crude oil, which managed to make another move higher based on Iranian threats to close the Straight of Hormuz for the upteenth time over the past 20 or so years. The threats are always hollow in nature. I don't expect this time to be any different. There will, of course, come a time when the threats are followed through with action. Hopefully I am not short at that point. As I like to say, this is an odds based game we are playing. Whenever I can take odds on a perceived event coming from a source that has never followed through on its threats over a period of decades, I am happy to make the play. Not to mention the fact that directly ahead is a huge amount of resistance for oil right around the 103-104 range. That's where I plan on adding should the market move up to that range in the coming days. For the time being, I am holding onto a small position in SCO. Italian bond auction tomorrow is what everyone will be watching. Never thought I would be typing this phrase as the event for a particular trading day without living on the Amalfi Coast and driving a Fiat...yet here I am. The rest of the week is promising to be more interesting than today. That I can promise...
THE CURRENT PATTERN IN THE EURO LEAVES IT WITH ONLY ONE PATH TO TAKE IN THE NEAR FUTURE
When I looked at the chart of the Euro over the weekend, I had an instant reaction that I had seen this pattern somewhere else in 2011. Being that I have a library of my thoughts available to me through this website, I began looking over the charts I had posted this year. Then the memory became more clear. I knew it was a pattern in the QQQ. After a few minutes of looking through QQQ charts, I found the chart I posted way back on April 12th. The link to that chart is here http://www.zenpenny.com/wp-content/uploads/2011/04/QQQ-4-12-11.gif Here is a shot of the chart zoomed in from that time without my notes: click chart to enlarge Here is a current chart of the Euro: These are the exact same patterns. Of course, the Euro's pattern is in reverse. However, equally as powerful. The series of small declines in the QQQ during an uptrend eventually led to a powerful explosion higher as the shorts couldn't sink the ship despite piling in thinking the market would collapse. Now with the Euro we have a series of higher lows that looks very organized and calm in its approach. It is more or less going nowhere, however, given where we have come from. Guess how this ends? With the Euro plunging from here in the coming weeks just as the QQQ exploded higher in April. This is a powerful pattern that is highly reliable. A breakdown from here is an inevitable conclusion for the...
6 CHARTS HANDCRAFTED TO MAKE THE WEEK AHEAD A FESTIVAL OF BEARISH DELIGHTS
click chart to enlarge
THE BOTTOM LINE ON LEVERAGED ETFs
I have received a bunch of emails over the past 24 hours with respect to leveraged ETFs following the ZeroHedge article on FAZ. This is actually an article I have been wanting to post for awhile, just haven't gotten around to it. The Zerohedge article seems like a good opportunity to address the issue of leveraged ETFs. The answer to the question of whether leveraged ETFs are bogus, frauds or just money sucking vampires is very simple to address. They are as much bogus, a fraud or money sucking vampires as option contracts are. In fact, leveraged ETFs should not be classified with the "ETF" label. These are not ETFs. They are essentially derivative contracts that employ varying degrees of leverage. Much like a steroid user in the bodybuilding world, you don't get the benefits of looking superhuman without the drawbacks that come with it. If you don't manage the drawbacks of anything that boosts performance, then it can ruin you. Leverage is much the same way. There is no such thing as "free leverage" on Wall Street. You pay the price for the potential performance in the form of deterioration of that particular asset should the market not go the direction you had planned. In fact, the deterioration still occurs if the market takes it time in eventually making the move you expected. Much like options, in order to get the maximum potential out of a leveraged ETF, your timing needs to be correct. These are not invest and forget securities. That is exactly why I look at my investments in issues such as FAZ, TZA and EDC as option contracts. I look at them as deteriorating assets within the portfolio that need to be managed appropriately and are not meant to be held for more than one month. I prefer to use leveraged ETFs as opposed to option contracts because the deterioration should I be wrong about a particular trading idea is not nearly as great as an options contract. For traders who know how to manage their risk appropriately, securities such as FAZ can be great tools for maximizing your gains. As long as you realize what these securities are and what they aren't. If you are the type that takes a look at FAZ and makes pie in the sky calculations of how much money you will make when Bank of America begins trading on the pink sheets, odds are that you will be terribly disappointed. I believe that in 2012 these "ETFs" will be reclassified and see more regulation. I don't expect them to be removed from the market as they do have a...
DEC 23rd: PORTFOLIO POSITIONING
During the trading day Friday, I tweeted the following: EDC was initiated on December 13th with an additional buy made on December 14th. I initiated mid-sized positions in TZA and FAZ. Both of these sectors will be susceptible as the market is now in the process of topping for a retest of the October lows. I outlined some of the reasons I believe we are close to putting in an intermediate term top in my article posted today. As of the close Friday, I am long three inverse ETFs: SCO, TZA and FAZ. I may be adding early next week depending on price action. Happy holidays to one and...
THE PIECES ARE FALLING INTO PLACE FOR A MOVE TO THE OCTOBER LOWS
In order to gain an accurate appreciation for where the market is going, it is important to look back at what has been said. With the overwhelming abundance of information available to us, it is nearly impossible to remember the analytic road map that got you to whatever frame of mind you are in with respect to the market. This is why I find it imperative to keep this blog updated, as well as take personal notes, in order to realize where my current frame of thought is originating from. Without these valuable journals, I am left with an abundance of thoughts each and every day that remain uncatalogued and disorganized. I believe we are reasonably close to a point in the time for the markets where an intermediate term top will be seen. This top will give way to a test of the October lows within the coming 1-2 months. I don't simply base this on the study I posted Thursday night with respect to the topping formation on the weekly chart for the S&P. I base it on analysis that was born in mid-November with this article explaining the reasons why I believed we were on our way towards testing the October lows. A day after publishing that article, I published a follow up note explaining how sentiment was still not in the proper place to reward the bears with a dramatic move down. That article is here. I have been following the sentiment picture very closely, as it holds the key to cultivating an environment where a retest is possible. Let's look at how the sentiment picture has changed, not via surveys or odd indicators of money flow, but with real money data utilizing the put/call ratio. In order to gain some sense of where we are currently vs. where we have come from, the first chart and notes are from mid-November. I use the moving average of the put/call ratio ONLY in order to smooth out the data: click chart to enlarge My article from November 13th was titled "The Next Leg Down Will Begin Once This Indicator Falls In Line". As of Friday's close we are 1-2 days away from the indicator moving into a territory that allows the sentiment picture to accommodate a drop back to the October lows. You can see in the current chart of the put/call, the 20 day moving average has plummeted recently without new intermediate term highs being observed in the markets. This highly reliable sentiment study along with price patterns and the suspect price action during bull moves, makes me believe that it is not a matter of IF we revisit...
BULLS WATCH YOUR STEP, THERE MAY BE A CLIFF RIGHT BEHIND THAT CHRISTMAS TREE
I'm about to pee in the bull's cheerios. Or if I may invoke a Christmas motif, I am about to pee on Santa Clause. I don't necessarily want to berate the bulls at present since I count myself as one of them via my current portfolio exposure. However, it is my responsibility to report what I see as I see it. That's the point of this website. An unbiased reporting of observations regardless of my current book. It helps me and hopefully you in making decisions that will keep us all from going the way of Willy Lump Lump. There were some problems today from a pure price action perspective. It is a well known fact that this market has made it a habit of putting together most of its gains over the past few months via upside gaps that have very little in the way of intra-day gains. What happens is we gap up overnight for one reason or another, mainly due to a positive action with respect to Europe. The market simply spends the rest of the day either moving sideways or adding another percent to the one or two percent gap that nobody managed to catch. When the market is left to its own mechanisms - without the benefit of a news driven gap - the action hasn't been anything to write home about. Today was a prime example of the problem the market faces in terms of momentum and sheer power. There isn't any. That's the bottom line. You can blame it on the lack of liquidity given the holiday season all you want. However, I should remind you that past the first half of October, this has been the modus operandi for bull runs that do not begin with gaps. Without the gap the bulls are crap. A t-shirt is born. That should leave the bulls asking themselves: 1. How will we function with the much lauded 200 day moving average lying dead in our path? 2. How will we overcome the October highs above 1290 without the benefit of further gaps? I'll tell you how. The bulls need more gaps. The bulls need news driven action to make it stick. Problem is there is only so much that can be announced before the bulls have to do it themselves. Short of the singing of kum ba yah in Europe by members of the ECB and governmental authorities, there isn't much more good news that is going to come out over the next few weeks. That's a problem. And then we have this chart. Could it? Would it? Will it? You be the judge. I...