Category Archives: technicals

Still 2007

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Yahoo! Finance

I can’t draw on this chart, but you can clearly see the similarities in price, RSI and MACD between the last 6 months and the period leading up to final top of the even bigger bear market rally of 2003-2007. Will we levitate up here for a year like we did back then? I doubt it, since this is a smaller degree wave and the time scale is more compressed. It appears to be running out of steam after 12 months, not 4 years.

Since summer, the bears have been demoralized by time, not price — we’re only 1000 pts higher than last August. The bullish complacency and dejected state of the bear camp is what you need for a final top.

RSI and put:call signals like we have right now are what you need for a smaller-degree top. One of these smaller degree tops will turn out to be the big top. This is not the time to give up on shorting.

One sell signal to rule them all.

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You know the one: the 5-day trailing average equity put:call ratio:

indexindicators.com

Retail options players almost never get significantly more complacent than this, and they virtually ALWAYS get creamed within a week or two, sometimes a little, sometimes a lot. If you did nothing in the market but buy puts or vol when the 5-day CPCE got under 2 standard deviations from its mean and sell or tighten your stop (use a conditional stop with options) when it reached 1SD you’d have a very nice trading career.

Couple this with the classic RSI signal from Friday, and I’d place the odds of a 2% further rise here at under 10%, and the odds of a 5% decline at over 80%. To be very conservative, wait a couple of days to confirm that the rise is broken, and use a stop against the highs, but I bet stocks stall here for no more than a week then fall hard. Maybe this is Oct 2007 redux. Sure smells like a big top circus. The latest EWI publication points out that the AAII survey is again at record lows — this is not as precise a timing indicator as 5-day CPCE, but it puts it in perspective: we’re looking for a major top, so any minor top like this could be the one.

2007 all over again

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This is a big, rounded top. It’s taking its time, though it is still compressed relative to the ’03 – ’07 cycle wave top.

This week’s strength was very impressive and could mean new highs on the Dow and SPX in the next couple of weeks if that previous wave is any guide. Our January-February ’10 drop was akin to May-June ’06, Feb-March ’07,  and July-Aug ’07. Tops are processes, bottoms are events.

Prophet.net

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Maybe the VIX will even scoop out a big rounded bottom and fall several more points:

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Note the advance:decline ratio I threw on there as well. This was a big up day relative to everything since last summer, with 5 stocks up for every decliner. These spikes during a bull trend tend to foretell that prices will drift up some more, though not always, and they do occur in bear trends as well, when they simply serve to clear the way for a resumed decline, as in late Sept ’08. There is still a larger declining trend in the A:D spikes, indicating declining oomph during the strongest rallies, as in the year leading up to the Fall of ’08.

The A:D ratio is also a measure of jumpiness. You can see how it spiked up as fear crept into the game in summer ’07.

Of course, this market is now extremely short-term overbought and treading on very thin ice, so it could just plunge at any time. This could have been our clearing rally.

You can see that the daily A:D was nothing like earlier last year, but you still have to respect this signal.

In America’s Ponzi economy, the financials lead the way.

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There is a huge wall of resistance overhead here, and the upward momentum from the first half of 2009 is simply gone.

Prophet.net

Perhaps it’s time for another look at this chart:

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UPDATE: Pej sent me this updated reset chart, which gives a closer view:

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FAZ (triple bear financials) has toasted so many traders in the last 12 months, but perhaps it’s worth another look for the yahoos out there. It’s not fallen much at all since October, actually, and you have a clear stop at January’s lows.

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My own preference is actually to short FAS, the triple bull counterpart. That way you collect the decay even in a choppy sideways market, and you don’t have to worry about counterparty defaults since the cash is already in your account. Look at how weak the latest rally is relative to previous ones. The high was in October. If you’d sold this short back then, you’d have enjoyed a 20% price decay though the underlying stocks are only down 4%!

VIX cycles

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No strong conclusions here, just some food for thought:

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Prophet.net

You can also see a possible 30-day pattern: 30 days down, then a ramp. Let’s put this in perspective. Here’s a 5-year weekly chart. All I can note here is a divergence on the RSI over the last few months:

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I’ve also noticed how Treasury bonds have resembled the VIX for some time (I put in those RSI buy/sell signals just for fun — not as effective here as in the 60-min chart of Dow futures, but not bad either):

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Just goes to show, when you think you’re trading US stocks, Chinese stocks, commodities, bonds and options, you’re really just trading global patterns of fear and greed. It doesn’t matter what market you choose these days. They’re all the same.

The power of technical analysis. (repost from 3.3.10)

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(First published 3.3.10, 1:27PM EST)

I’ve noticed lately how well the 60-min RSI (relative strength index — a measure of oomph in price movement) has been doing, so today I decided to quantify it. The result is simply spectacular, even with a mechanical buy/sell decision that always had you in the market either long or short.

Here is a 60-day chart of the Dow, by 60-min bar. The circles are negative RSI crosses (red arrows on the bottom) and the boxes are positive crosses (green arrows). The numbers are the Dow points one might achieve by riding Dow futures from the previous signal using the signals alone, with no stop-losses. Additional signals do not add to the position, and the trade is reversed on the next opposing signal.

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I tried to be conservative with those point totals (not buying or selling top or bottom tick), and some of those moves may have been missed due to opening gaps (where the price has already moved so far by the time of the opening bell), but you get the idea. It comes out to 1425 Dow points, even having been short for the whole 500 point drop in late January, which a stop-loss could have prevented. A single mini-dow futures contract, symbol YM, requires a margin of $6825 and is worth $5 per Dow point.

Now, this is hardly a perfect reflection of actual trading, but just mechanically trading a simple signal is infinitely superior to trying to outguess the crowd based on mumbo-jumbo like the Greek situation, Barney Frank, Obama this or that, oil prices, GDP, consumer data, or any other nonsense.

Now, I don’t have to tell explain any further why I think the market will probably fall by early next week.

Long term Russell and Nasdaq charts

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These two have the furthest to fall, and are really still in the process of making an historic secular bull market top.

The Russell looks like it’s forming a giant head and shoulders:

Prophet.net

See those RSI trends on the bottom? This is a market that’s running out of steam. We know from mutual fund reports that managers are already “all in” again as of January, and as Richard Russell says, it takes buying to put stocks up, but they can fall under their own weight.

And the NASDAQ 100 is back at 1999 or 2007 levels! These indexes, like Chinese and Indian stocks, show that the world still has an astounding appetite for risk in the face of depressionary business conditions. It was one thing to pay 100 times earnings when the credit expansion was still going and almost nobody knew how the story ended, but now that it is plainly over, what are people thinking?

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Russell 2000 yield: 1.2%

Nasdaq 100 yield: 0.49%

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Stocks in the Nasdaq 100 with zero dividends:
z
Adobe Systems
Amazon
Amgen
Apollo Group
Apple
Autodesk
Baidu
Bed Bath & Beyond
Biogen Idec
BMC Software
Celgene
Cephalon
Cerner
Check Point Software
Cisco Systems
Citrix Systems
Cognizant Technology
Dell
DirecTV Group
Dish Network
eBay
Electronic Arts
Express Scripts
First Solar
Fiserv
Flextronics International
FLIR Systems
Foster Wheeler
Genzyme
Gilead Sciences
Google
Henry Schein
Hologic
Illumina
Intuit
Intuitive Surgical
Lam Research
Liberty Interactive Series A
Life Technologies
Logitech International
Marvell Technology
Mylan
NetApp
NII Holdings
NVIDIA
O’Reilly Automotive
Patterson Companies
Priceline
Qiagen
Research In Motion
SanDisk
Seagate Technology
Sears Holdings
Starbucks
Stericycle
Symantec
Urban Outfitters
Verisign
Vertex Pharmaceuticals
Warner Chilcott
Yahoo
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After the last year’s action, it should be abundantly clear that fundamentals do not drive stocks, and they only offer resistance and support at the most extreme heights and bottoms. Herding behavior, animal spirits, fear and greed are what make the tickers tick.
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That said, we are now entering a long phase of value restoration. By the end, people will talk about steady cash flow and yield again, as they did in 1982 and 1942. It will take a lot more than the above to lure them in, and since there are no more miracle cures for the numerator in the yield equation, the denominator will have to come down to earth.

Short-term strength in copper?

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Nothing to do with the earthquake of course — by late Monday, Sunday night’s spike was retraced to where copper closed on Friday, once traders calmed down and actually read the news reports that copper production and transport facilities were fine.

In the 3.29 – 3.35 range this morning, it was trading about where I’d expect given the action in stocks, oil and other metals. There ended the rational for my short from 3.45 Sunday evening, and I closed the trade at 3.34, noting the neutral trend of RSI and a bullish MACD cross on the hourly bar:

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I’ll now be looking to re-enter for a longer-term short, since I think the pending implosion of Chinese, Australian and Canadian real estate and the general resumption of the deflation trade will not be kind to industrial commodities.

Earthquake in Chile spooks the copper market

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Reports indicate copper mines and ports are in good shape. The futures market seems to be overreacting.

Copper futures just opened an hour ago with a 6% pop from Friday’s close, up to just under $3.50 per pound. Traders are concerned about a supply pinch, since Chile produces 36% of the world’s copper. Bloomberg reports that four mines representing 16% of the country’s supply have been at least somewhat impaired:

Santiago-based Codelco, the world’s biggest copper producer, is restarting operations at its El Teniente mine after output was halted by the quake, which also closed its Andina mine. The two projects produce about 600,000 tons of copper. London-based Anglo American Plc said Feb. 28 power had been “partially restored” to its Los Bronces and El Soldado mines in Chile, which produce a combined 280,000 tons a year. The two mines stopped output on Feb. 27.

The mines were closed because of power outages, the two companies said. A rockfall also caused damage to a slurry duct at the Andina mine, Codelco said.

Codelco said the quake didn’t cause any significant damage to installations at El Teniente and it may open its Andina mine “in the coming hours.”

Power to the two Anglo American mines was “partially restored,” spokesman Pranill Ramchander said in e-mailed comments that didn’t give further details.

Ports Closed

Chile’s earthquake also severed the country’s main highway and destroyed bridges and apartment buildings.

The central Chilean ports of San Antonio and Valparaiso remain closed after the earthquake, TVN reported, without saying where it got the information.

Expanding copper inventories provide a cushion for supply disruptions, said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt.

“The exchange stocks worldwide are still very high and the market was in oversupply before the earthquake,” he said. Prices may still rise $200 a ton as traders switch focus from demand to “supply risks,” he said.

Also see this report from Reuters with much more detailed info on particular ports and mines.

It sounds like the miners have things under control and that the market is probably overreacting. This is Chile — they can handle earthquakes. The market isn’t going to be short of copper. It seems like we’re talking about 5% of world supply being down temporarily.

Demand is slack, and London warehouses are chocked full of the stuff (as are those in China), with the equivalent of almost a year’s worth of Codelco’s production:

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Technically, the market looks weak, and a blip like this is probably not going to jump-start the bull unless the Chilean situation is much worse than it appears:

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I view this as an opportunity, and I have taken a short position tonight.

(UPDATE): Codelco says it will meet its delivery contracts