Living Inside a Broken Clock: Monday, Feb. 22, 2010

An astonishing thing happened on the way to the Olympics. Canada discovered that it had national pride all along. My favourite moment was a women’s mogul skiier who wiped out. She put her errant ski back on and completed the mogul run, finishing with a nice acrobatic stunt off the ramp at the end. That is the spirit of competition!  

Here are some notes on what I’m thinking. I’ll comment more later on Monday AM.

EQUITY

Everyone now expects Monday to be an up day – because it always is. If I had stocks to unload, this is when I would start doing it.  I will be looking for selling into any up-volume and the start of the down leg on the Gartley pattern. There are many ways that a topping pattern can play out, and Gartley is only one of them – but it’s a start. I’m looking for a reversal to start to go short. I don’t intend to play long here – except the odd scalp.

The TA doesn’t affect the market. The Market doesn’t care how carefully you’ve drawn your trend lines, how accurately you’ve parsed volumes, how many times you’ve revised your wave counts. The TA is simply trying to put an elegant structure onto messy, sloppy reality. Trying to pick the change in direction and the exact bottom or top is a mugs’ game. I’m using the Gartley pattern as a guide, which says to expect a reversal coming up. The Market isn’t going to do this just because I think it will. The Market doesn’t care what I think. If I were to go short in anticipation, I would likely put a stop above the SPX = 1115 level – because there has been support / resistance at 1114, and TD has put a resistance level at 1114.79. Likely, some big player or another will run those stop levels, get some retail follow on, then distribute into that volume. OR, I could wait for more TA to line up with a bearish story and then go short. If somebody choses to run stops, only having my stop in an unusual higher place would protect me. But his greater risk (possible higher loss) could make the trade look less attractive.

All this is to say that the TA lets me make a plan for the worst – as in: hope for the best, plan for the worst.  I hope to be right for more total points than I am wrong over time. That’s it. WIth that in mind, here are my Gartley targets:

 Here are the numbers I get for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (projected)
C = 1058.50 – 1069.50 (projected range)
D = 1124 – 1135 (projected range) Go short here if the pattern holds

FX

THe most interesting data point is the COTS data that shows that EUR future shorts increased AGAIN, hittin a new high. You can see some details and discussion at Zero Hedge. IF everyone wants to be short, then I want to be long. The key is picking the proper entry point. YOU CAN BE RIGHT ABOUT THE MARKET’S DIRECTION (on a coin toss you’ll be 50 /50, right?) BUT STILL LOSE MONEY. If the EUR future short interest is increasing, even though it is at a record, it could go higher.

What do I think? I think that the latest shorts could be the nervous money. If the EUR shows weakness, there will be more of this Johnny-come-lately money betting short. However, it will be quick to cover on any EUR strength. That is why the entry is important, as well as the amount of risk the trade takes. If I go short EUR here, it might be better to be long DXY to mitigate the pain should the EUR head lower before reversing. Another key point is to pick where the EUR would be telling me that my thesis is just plain wrong for the time frame that I am considering.

Long term, if the FED is not given more QE powers, I expect the USD to strengthen. The FED’s B/S represents the expansion of the money supply, and, along with the US debt levels shows how much “money” is really out there in terms of USD. I know that consumer and business debt is contracting from the data. I also know that the largest balance on the FED’s B/S is from MBS (mortgage backed securities). Mortgages reduce in principal every month. Hence, without any further MBS purchases (the program ends in March), the FED’s B/S HAS TO SHRINK. Shrinking FED B/S plus shrinking consumer and corporate debt (offset somewhat by growing gov’t debt), means a contraction in the virtual supply of USD. IF foreigners debt and CB B/S is NOT shrinking as rapidly, then the USD appreciates against those currencies.

Short term: It’s a nasty vicious game played with enormous leverage and trillions of dollars. I’m leaning towards more short EUR – simply because the herd is running that way. I’m more inclined to play long EUR (short DXY to reduce volatility) on bounces – since the newly arrived EUR shorts are vulnerable to squeezes.

Cheers.

MONDAY MORNING UPDATE

Asia close Green – rpretty much at the level where it opened.  Emerging Asia was almost all red. It seems like a move away from riskier assets in the risky assets.  Europe is mixed with Spain, Sweden, Denmark, Belgium, and Austria in the red. Germany is flat. However up stocks are less than 50% in most cases so this green does not have the breadth for a sustained rally.

As usual, the DAX gapped up a bit and then promptly closed. It is trending sideways now with 5700 looking to be a support area. There is still a big gap from Feb 17th that needs to be closed. It rund between 5590 and 5640 (more or less).  Only financials and Utilities are green.  This does not bode well for the rest of the day. It also suggests that the SPX will see some weakness.

ES stayed in a range all night, between two TD lines at 1107.25 and 1110.25; It sold off from the peak at the Europe open but is presently back testing that overnight high.  ES looks weak to me – although not “sell off” weak. I think that there is too much weak retail money (trading) expecting an up Monday, as usual, and that there will be distribution. Pivots:

• R2: 1121.75 = Not today.  This was a support area in the middle of January, before the sell off. It looks like it would be strong resistance as those caught in the second half of January breathe a sigh of relief and sell into the “break even”.
• R1: 1114 = ES could touch this – but it won’t hold in the Gartley scenario. If this is breached on a close, then the Gartely scenario does not appyl and it is some other topping pattern.
• Neutral: 1103.25 = Next level of support below the present TD support level at 1105.75.
• S1: 1095.50 = This was support on Friday. Likely would be so again.
• S2: 1084.75 = Would have SPX testing the 1086 line again from above. Has to be tested sooner or later,  but if the Gartley pattern is how this topping will play out, then it shouldn’t hold.

My opinion is that we will see distribution. I think that SPX will lead ES during that process. I see any move of ES up to 1114 being pushed down by SPX selling into any volume (IF there is any volume). IF there isn’t, then I don’t know how the IBs will possibly get out of their positions.

FX

EUR did finally show weakness overnight – but after I had closed out my long DXY position for a minor loss. I didn’t want to toss and turn all night.  RIght now, EUR is testing TD support at 1.3585. There is a pivot below at 1.3558 and more TD support at 1.3553.  I still believe that any weakness in EUR, and growth in the shorts, is leading to a strong retrace that will force short covering. Unfortunately, I have no way of knowing WHEN. I will continue to play any EUR setup that I see with good risk /reward – for an intra-day trade – and trade it indirectly through DXY.

NEWS

I don’t see anything important this AM.

DATA

8:30 Chicago FED Nat Activity Index. 10:30 = Dallas Fed Mfg activity. I don’t think that either of these are market movers.