Category Archives: charts

Price Channels

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Prophet.net

Now, if prices flatten out and start wobbling like January 11-19, we’ll have a very nice set-up for shorting. Always be wary of shorting a rise — wait for a break of the uptrend and a clean spot to set your stop, like the thrice-tested 1150 level in January. Perhaps 1108 will serve the same function, but it’s too early to tell — first prices need to drift out of their little channel.

Very funny juncture here, with a deeply oversold euro, but overbought AUD, CAD, stocks and commodities. The euro is still subject to the same forces as everything else, but its upside is muted and its downside is magnified. How will the situation resolve itself, with a melt-up in risk assets and little bounce in the euro, or a melt-down in the euro and reversal in everything else?

Gold

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2

Look at the similarity between the March 2008 peak and immediate aftermath and what we’ve seen since the December high in gold:

Prophet.net

Sure, there could be a little more oomph here for a push like that close second peak in ’08, but just because gold hasn’t dropped like a stone doesn’t mean the mania will go on without a hiccup. Each high was accompanied by extremely high and sustained bullishness, which tends to exhaust the upside for at least a few months, since after such an event everyone has already bought all the gold they want for the time being.

Also, if the euro’s run is over, why not gold’s? For all its timelessness, the markets still treat it like another currency, a highly-speculative one at that. Here is a euro chart where I’ve highlighted the same periods as above:

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I am going to view any near-term upside with an eye towards taking a short position in each of these, though of course I own physical gold for safety’s sake.

XME still mashed up against trendline

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The miners have been among the leaders since the bottom a year ago, with everyone seemingly sure that hyperinflation is right around the corner. The thing about commodities is that when they break an uptrend, they can fall hard and never look back (witness oil’s drop from $147 to $35 in six months).

If XME is able to vault over this trendline and hold its ground, it will be bad news for the bears. Coming off extreme sentiment and a hard break, this is a very defensible short position with a tight stop.

Prophet.net

S&P update

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Not a bad spot for a rally to stall:

Prophet.net

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Retracements have a tendency to move into the territory of previous rapid price changes, such as the drop from 1100 to 1080 several sessions ago.

Commodities and commodity currencies have had a great few days, and they have more than cleared their oversold conditions. The Euro even enjoyed a nice rally today, but it is moving closely with the S&P again.

After all that worrying, is that all the bounce we get?

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This might have been as simple as an A-B-C countertrend rise to the 50% retracement of the Wed-Fri decline:

Prophet.net

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For an across the board deflation-style sell-off that started with such powerful internals, it would be odd for the move down from January 19 to end with the 10-day average equity put:call ratio not even breaching the mean:

Indexindicators.com

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Treasuries are well-bid and commodities are looking weak. Not much in the way of animal spirits today, though Greece enjoyed a little bounce from its extreme oversold condition. I’d consider buying a Greek ETF if there were one.

Some sector winners and losers so far

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The winners are those groups that have fallen the least since mid-January, somewhat adjusted for their potential to decline. I view these as the least prone to violent snap-back rally right now, so this is where I am adding, conservatively, to my short portfolio:

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Losers

Materials are among the big losers so far. Commodities have a tendency to fall hard right from the peak and keep crashing for months. I’d like to short here, but will wait for a better entry (which may never come).

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It is also worth noting that among the world’s stock markets, the US has held up pretty well so far, along with Japan, and believe it or not, Russia. The worst markets, besides Greece (which has already given up the majority of its 2009 gains) are the “emerging markets.”

Key to chart below:

Green: Japan; Purple: Russia; Dark blue: S&P500; Orange: India; Light Green: various emerging markets; Light blue: Europe; Brown: Brazil; Red: China (Shanghai-listed stocks)

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I suspect I’m going to be shorting Russia soon. It was among the very worst in 2008.

Some crystal clarity on the waves

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4

Someone asked for clarification on where I think we are in the wave structure, so naturally I broke out my kiddie drawing program:

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Seriously, it’s hard to get precise about labeling waves at anything but larger orders of magnitude. It’s more about the feel of the market (whether it is the probing ones and twos or a rushing three or a struggling four or an exhaustive five).

Anyway, the above drawing starts at the 2007 highs (B wave top) and ends where I think we are going in 2010. Primary 1 ended in March, primary 2 may have just ended in January, and we are now in a smaller degree first wave in primary 3. Since we’re barely 3 weeks in and are only down 6-7%, it’s likely that we are still working on minor wave 1, and within that wave probably in the 1-2 area. Minor 1 of primary 1 bottomed in March 2008 with the markets down 20% and Bear Stearns going under. This doesn’t feel anything like that yet. This is more like the early probes of February-March, July-August or October-November 2007. We’re so early in, the news guys don’t even feel the need to come up with explanatory narrative yet.

Because this is primary 3 already, don’t expect the market to be as generous with shorting opportunities as in the drawn-out, rounded top of 2007. I expect minor 1 alone to do some serious damage, certainly get down under 9000 on the Dow.