At The Knife’s Edge

I’ve spent most of my weekend on hooking up NinjaTrader to an institutional Forex feed. It’s not done just yet but I am able to connect to Hotspot at this point and pull the type of DOM data that we retail mortals usually do not have access to. The goal of this project is to further refine ZeroFX and extract more precise buying/selling exhaustion points. The signal is working pretty well thus far but I am convinced that there’s a lot more ground to cover, the key being access to institutional market data. It’s in the works and probably will take me a few weeks – but I have an inkling the effort will pay off in spates. FYI – I’m doing this project in collaboration with one of the FX ECN brokers I have been talking to. Expect a pertinent post later this week – sorry this has been taking so long.

No other chart puts the current market conditions in equities into better context – here’s a P&F view on the SPX. As you can see we are literally at the knife’s edge and if you fade out all the noise it’s clear that the uptrend remains in overdrive. IF there’s any chance of a reversal it would have to happen right now – as I mentioned last week, once we establish support at 1370 the bears are going to be in a world of hurt. Not that they’ve been feeling the love lately.

Notable is the bullish price objective of 1390, which is roughly what my time based charts are suggesting as well. Even if we hem and haw around here for a while due to lack of upside volume (remember my vol profile chart) it would take a long pole reversal warning to to give the bears a fighting chance. If it happens I will let guys know – until then please don’t do anything stupid.

A lot more where this came from – please step into my dusty lair:

Ole’ bucky on the other hand has seen better days and we are now pushing toward our bearish PO of 76.25. If you look at the tape since January then you may notice a subtle diagonal support line which has now developed. It’s not plotted on the chart but I think it’s rather clear. If we make it toward 77.8 then I think the bearish PO is all but baked in. Again – IF the bears are making a stand right here and now then this is the place to do it.

One more from the P&F department – here’s gold. Something I’d like to point out is an inverse H&S formation and we are now near the neckline. Some may argue the validity of this but we also have a double top breakout and if we make it above 1800 then we should be good to go all the way.

I was poking around a little for signs of weakness and the picture is mixed. In essence the short to medium term is looking supportive, as for instance the FXA:FXY ratio (i.e. AUD/JPY). Obviously the currency side is driving this rally – and if you remember my BDI chart then it’s clear it’s not the economy 😉

I also like to follow the JNK:TLT ratio for early alerts on the credit market side. The TLT-JNK ratio is basically a proxy for high yield credit spreads (we are looking at the inverse here to bring the two signals into directional alignment). And thus far we keep on climbing with plenty of room to grow (meaning the TLT-JNK may continue to narrow).

While we’re on the subject here’s my descending channel on the 2-year vs. 30-year treasury yields chart. And that spread has obviously been scraping the bottom of the barrel lately, which means that the delta between short and medium term yields is low – a typical expression of quantitative easing. From a trading perspective of course I could not care less but what I do care about are touches on bottom and top of that descending channel. Apparently we are getting pretty close to a touch again, which further supports the title of this post. Meaning – if the bears are able to step in here – this is the where to do it. Now we may get a push higher in equities coinciding with a spike into 0.11 AFTER which we get a reversal in the form of a retest. But of course all that is mental masturbation – the basic message here is that conditions would support a reversal but we may also see a break out.

NYSE Declining vs. Advancing Volume – I mentioned a week or two ago that I’d like to see a more pronounced divergence here. If you recall the 2011 analog I was proposing then we could run up into 1.5 before we see equities respond.

I keep looking at this chart with incredulity as a divergence of this magnitude is unprecedented at least in recent history. But it’s a long term chart and thus it tells us to be careful on the upside on a long term basis. Obviously thus far equities have been able to defy this and other Cassandra calls.

I spent a bit more time on my mysterious market maker mind reader chart one this weekend and what I’m seeing is a strong potential for a downside correction when we get spikes above the upper Bollinger line. However, that does not always work – during periods of a prolonged rallies (e.g. late winter of 2011) it takes a divergent signal to herald in a meaningful reversal. Based on where we are right now this is exactly what we may see once we push above 1370. It would be rather exciting to see the tape run ahead while the MMMR is plotting a divergent signal. Until I see that I remain very cautions about suggesting contrarian trades on the equities side. The trend is your friend until it’s done.

Last but not least here’s a quick reminder of where we are in terms of seasonality. Obviously the traditionally bearish February period was anything but and we are now heading back into seasonally bullish Easter season. Draw your own conclusions – I personally think there are much easier trades out there than trying to short equities. Case in point all the fun we’ve been having on the commodities and FX side.

Cheers,