Well, there you have it. You may have noticed the last part of the equation, which implicitly indicated that a stabilizing or even rising Dollar does not necessary mean that equities will be the ones doing the plunging. Scott often talks about ‘escape velocity’ which I find is a very apt way of describing a situation when momentum becomes self feeding. But that’s only one side of the coin. Consider that even a sideways trading Dollar or equities over time burns off extreme momentum. And that might easily happen – let me show you exhibit A:
This chart proved to be extremely useful in assessing the odds of a bearish/bullish continuation on the way up. Each quarter increment higher represented an increase in the odds that the bulls would be able to breach that six month channel – which of course they eventually accomplished. Now this chart represents a cluster of support that the bears would have to slice through. and considering the inability of being able to resolve a very distinct H&S pattern (for the second time in a year I may add) it’s doubtful that we’ll see anything exciting for the bears, short of a miracle gap down. The latter we cannot anticipate or bet on – so it’s a non-factor. Waiting for Godot is not a trading strategy.
Just like last weekend none of my long term charts have really changed that much and are not worth repeating. The VIX sell signal confirmation on Friday was an ace for the bears but even that will most likely not lead to much unless the Dollar can find a bottom. So, let’s see if our DXY chart has any pearls of wisdom to offer:
Yes, we got another green candle up and that’s all good and dandy. But unless I see another green candle Monday followed by at least two more the 75 cluster is starting to look like a potential floor. And as the chart indicates – if that one gives – well, then we could find ourselves in a situation in which we see one final slide to the downside.
Isn’t it fun to watch your currency being destroyed while house prices are being artificially floated? Also, expect commodities/gasoline/food prices to literally explode overnight – should we see this bottom go. If you think I’m exaggerating just look at the chart above: This summer the DXY trades near 89 – now it’s at 77. That’s a drop of 14%! So, while bubble TV debates whether or not Christine O’Donnell is a witch the value of your savings has been eroded by roughly 1/7th.
Now we may look forward to a bottom here but that doesn’t mean it will materialize itself when we want it, oversold conditions or not. The race for mutual currency destruction is on and Ben Bernanke just pushed the nitro button.
As expected we pushed toward the 78.6% fib line – the bears’ last stand. The VIX sell signal leaves about one week for a reversal to occur and that gives us enough time for a quick dip, followed by a ramp right into election day. Even if we embark on Clockwork Orange the bears will find themselves in support zone hell and barring an exogenous event that somehow triggers a banana peel Kodak moment in equities I don’t think we’ll see much fireworks ahead of January. And then there is that cluster of POMO cash scheduled to flow into equities throughout the next few weeks all the way leading into the elections. Finally, right after the Dems are done getting their asses kicked we’ll be close to the seasonal Santa Rally. Yes maybe this year is an exception but how often have the bears gotten a break in the past eighteen months? Not to fall prey to recency bias but I’d like to see one single painful support zone being sliced through before I am able to bet on red again.
Soylent Green leads us above this year’s highs and beyond. How far I don’t know yet – obviously in between we’ll have some kind of correction and I would have to assess the momentum once we get there. If you want a key level that is the dividing line for Green and Orange I would pick 1130 – the top line of the dreaded channel we were bouncing around in for six months (see my first chart above). If that one gives 1040 is a long way down and the bears have failed three times to breach it.
And that’s pretty much it. No fancy momentum charts this weekend – the game is all about currencies and in particular about the Dollar right now. If you are a happy bull look at the DXY charts and then ask yourself if the loss in purchasing power is worth the gains in your stock portfolio. Well, at least you did better than the bears who got screwed both ways. Only problem with jumping on the bullish bandwagon is that it’s late in the game and that my sense of self preservation prevents me from being long a house of cards.
Seems like the two virgins I sacrificed (in a gentle way) paid off as we finally got a VIX sell signal:
The VIX has no business trading in the 18 range considering the level of financial risk out there. But it found itself there nevertheless, just to bounce back and bestow us with a confirmed VIX sell signal. I don’t like that sideways Bollinger band however and thus I am a bit skeptical about this leading to anything intense. But we found ourselves in a similar situation half a year ago, so let’s see how things play out.
Let’s cover a few more extremities (no pun intended) – there are plenty if you bother to look:
Everyone hated gold at 700 – they laughed at it when it reached 850 – started liking it when it reached 1000 – and now that it’s trading at almost 1400 everyone wants a piece of the action. Reminds me of early 2008 all over again.
The chart has us painting some extremes in the long term stochastic department. Gold has burned a lot of short in the past month – that’s gotta suck. But if you’re long right now it’s time to get out. It had its run and although I don’t see a divergence yet I think this is not where you want to be long.
Am i going to short it right here? Hell no – not yet. My other momos indicate that it may stay embedded a tad longer.
Sticking with stochastics – a peek at the TNX which just painted some extreme lows – 2.33% – boy! Now we’re pushing above the 20% line. I wonder what happens next.
As a side note (and per my comment). If you want to know that equities are being ‘futzed with’ look no further than this ratio chart
Everyone keeps looking at the AUD/JPY but I think the AUD/HKD (Aussie vs. Hong Kong Dollar) traces the spoos so much nicer. Go compare if you don’t believe me.
What really got me was the strange reading on my stochastic. I actually had to zoom out to make sure that my indicator wasn’t broken. I don’t think I have ever seen anything that bubbly – that takes some serious currency games. Not sure what the carry trade situation on the AUD/HKD is – maybe some of you Aussies or Asians can enlighten me?
If you think equities or gold are a bitch to short – don’t try sugar. That one loves to burn the shorts (and sometimes the longs). If you want to play contrarian with commodities, do it like the porcupines – very carefully.
Otherwise it’s another example of a market that loves to push into extremes. And with sugar the trend is the trend – until it’s finally (and quickly) over. See, if I would play sugar I would simply wait for extreme readings combined with a long leg up in prices (check). Then I would give it time until I think that a new trend is clearly visible. And then you take your trade. Doesn’t always go your way (see a year ago) but when it goes it goes and usually for a long time. It’s the gift that just keeps giving – assuming you are not trying to call tops/bottoms.
We have ourselves a very extreme market here – so bring your cup, a parachute, and a helmet. Trading extremes is difficult and can bite you in the ass in a hurry – it’s just too much fun to burn the shorts (just ask shortqueeze.com). Which is why you start legging in slowly when your signals start flashing.
Disclaimer: I took on a few shorts based on the confirmed VIX sell signal – fully knowing that tomorrow and Monday and Wednesday and Friday again are POMO days. Sheeesh!! Exactly – a snowball chance in hell they’ll pay off. Which is why it’s a tiny position – but I have to listen to my signals. Then again – I don’t have to throw a lot of coin into this woodchipper.
Looking at all this I see a potential for a correction on various ends – how big I don’t know. Could be a few days – could be a few weeks – could be nothing. Those turn dates came and went – so far the Dollar is still fighting for a floor. Elections are looming and although I don’t trade the news I know when taking a contrarian trade is tantamount with pushing a rock up a hill Sisyphus style. Why bother? Let’s see some red candles first.
Alright, you bears asked for a glimmer of hope and tonight I finally can deliver something. But you better start praying to your favorite deity right now.
That’s right, start praying for confirmation tomorrow (not Friday or Monday) – because without it you bears are looking at a pretty meager X-Mas this season. Pass the dry bread please!
I left half an hour before the market closed today and at that time Mr. VIX was still below yesterday’s close. But I just checked and it seems that we indeed closed back inside that 2.0 BB. Now, as some of you remember, this close inside represents a 2nd step toward an equities sell signal (or VIX buy).
For the noobs – here are the rules:
For a $VIX confirmed signal you need 3 events:
A close outside of the 2.0 Bollinger Band (20-day SMA) – check!
A close back inside the 2.0 BB – this issues the signal – check!
A higher close (sell) or lower close (buy) than the close of the day back inside the 2.0 BB – this confirms the signal.
So we still need a higher close for confirmation. Without confirmation no cookies – let’s be clear on that. That doesn’t mean the tape can’t go lower but the ‘odds’ are not as good – simple.
You all know I have become quite cautious when it comes to predicting bearish tape, especially since the daily Zero has been flat as a flounder as of late. But that does not mean I will dismiss any bearish evidence I come across. If we get confirmation tomorrow it will bestow an opportunity for the shorts – whether or not they can turn this into a meaningful correction with a dozen POMOs scheduled ahead of the midterm elections is of course another story.
See you on the other side – let’s hope we’ll see some fireworks tomorrow.
P.S.: Anyone who asks me a dumb question about those VIX rules will be shot on the spot. Plus his/her entire family will be enslaved in a North Korean work camp. You have been warned.
Sweet irony. A few hours ago I posted the wrong POMO schedule as I was still under the influence of melatonin (no, nothing else!). Anyway, with the old calendar at hand I pointed out that the Fed had the period until the midterm elections covered nicely. Then I realized that I was looking at the wrong month. Foot in mouth ensued.
Well, here is the update – which comes out Thursdays (just not as early as I had thought). And my point stands – Bernanke and his Dollar burning cronies are not leaving anything up to chance here. Don’t expect any meaningful downside correction in equities as long as this calendar keeps resembling Lady Gaga’s booking schedule. BTW, you can ignore the TIPS purchase on the 18th – that’s usually insignificant for equities.
UPDATE: I f…ing had it with AT&T here in Los Angeles. Frankly, I barely use my mobile because every time I get a call it drops out after a minute or so.
Goodbye iPhone – my next mobile will be an HTC on Verizon. Kicks ass plus I can tether it without paying a monthly surcharge.
Sorry – I had to vent, folks.
Anyway – the market, right. Bottom line: The bear case is done until early January – at least in equities. Bonds look like they’re ready to reverse but in a market where equities, gold, and bonds all move up I am not willing to entertain any big bets.
I’m my previous update I mistakenly posted the prior POMO calendar. Sorry about that – I was a bit out of it after having popped some melatonin last night. Anyway, let’s look at a related chart, which is the DXY. After all – the injection of POMO cash leads to a further weakening of the Dollar and I continue to dislike what I see.
Basically, the bears are being smothered with Dollars – and not in a good way.
We are painting somewhat of a floor right now but that could be a curse in disguise. Because what we are also looking at is a green candle without any follow up. Yes, the last few candles seem to observe the fib line and it seems there’s a buyer there. However, all the green candle did was to reset the ‘odds’ for more downside.
In case that doesn’t make sense to you, let me explain: The underlying idea derives from 2sweeties’ retracement levels. Back in the days before he introduced automated odds adjustments I realized that as long as the tape continued down the long odds remained the same. And as soon as there was a bounce the long odds slipped down through a further extension of his secret Fibonacci extensions formula.
So, what I took away from this was a key observation. Which is also something I discussed in person with Yelnick yesterday afternoon: As the market moves downstream and takes twists and turns the odds change constantly. It’s a bit like being a boat on a river – as soon as you navigate into a new side arm of the stream there’s no turning back and new branches appear that were not part of your equation before. This all ties into chaos and fractal theory and it’s something that I think 2sweetie attempted to combine with statistical measures to produce a short/medium term predictive model.
Anyway, theories aside – the Dollar still looks very weak here and a quick green candle without follow up may actually have harmed the bullish case (for the Dollar) instead of helping it. What we want to see is a follow up that holds up – maybe a little retracement afterward that remains above the lows – not right at them. My spidey senses are warning me that a final squeeze could be in the works. You know – with POMO and all.
Sorry for the late update but I didn’t get much sleep Monday night and had to catch up a little after my return from Nerdville. For some reason the flight back was full of nice looking ladies – unfortunately I was way too thrashed to muster up the energy of taking over the pilot seat and steering the plane to the Bahamas. There’s always next time.
Anyway, I just fell out of bed after catching up on some much needed beauty sleep. Let me grab a bite to eat and then I’ll take a gander across the chartosphere. But before I do – here’s pretty much all we need to know for the next two weeks ahead:
The new POMO calendar is out and it looks like they’re not taking any chances ahead of the midterm elections. Don’t be short on those days, folks. Yes, it’s tempting to stick your pinky into that electric pencil sharpener but it’s also very painful.
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