Living Inside a Broken Clock: Thursday, Jan. 7, 2010

by gmak

There are a million reasons for the market to go down, and only one for it to go up.

We are in a year ending in ‘0’ (zero). The FED discussed buying more assets at their last meeting. MBS spreads are at their lowest in more than 17 years. The rats are leaving the sinking ship as Dodd retires. Barney Frank is trying to make shorting near impossible or illegal. The yield curve continues to steepen as spreads-over-2s widen from almost every longer maturity.  Fannie and Freddie are rotting zombies ready to take down what remains of the USA. even as they are given carte blanche to do just that. 20% of Gross Income is supplied by the government. There are more government employees than goods-producing employees in the USA.

New Zealand’s imports are falling faster than their exports.  China is determined to continue the building boom. Greece says that it doesn’t need help.  The ECU says that’s fine with them. Samsung announces a new 4-door french door refrigerator. More junk to go with the junk everyone already owns. Technicians everywhere twist the TA to justify their bearish point of view.

Meanwhile, Bernanke just throws another wad of FRNs on the financial fire. Tick. Tock. Tick. Tock.

Here is a teaser on liquidity flows to help make the point.

http://www.safehaven.com/article-15413.htm

EQUITY

The SPX pushed a pin through the trend line “Since Oct 21” and remains within spitting distance. Everything that I wrote yesterday still applies. I’m looking at that red ’13’ from two days ago and thinking that TD’ers everywhere are looking for the retrace (sure…. like on Nov 9th. heh.) TA explains where the market has been. It doesn’t tell you where it’s going. But it sure will help you manage your risk. Every time you place a trade, the market can go either up or down in your preferred time frame. However you decide which way lies your conviction, the fact remains that you can be wrong.  I know that there are sharks in the ocean – yet the coastlines are full of swimmers. Just because all the facts indicate that the market should be falling does not mean that it will. Swallow your distaste and play the moment with your instinct, not your brain. The IBs desperately need the greater fool to take them out and you can be sure that they will be leveraging every FED program to the hilt to make equities look attractive.  Use TA to pick your spots to go short. BUT, also use TA to pick your spots to go long. It’s a trade, not a life-choice.

THIS IS WHAT I WROTE LAST NIGHT REGARDING ES REINDEER GAMES.

It’s 6PM EST, just after lock-up. ES is looking like it’s testing support in a short term channel, and a TD risk level at 1131.50. This is a good place to play long with the stop-loss below that 1131.50 point. I’ve drawn the channel that ES has been running in since open on Wednesday. No reason to believe that this won’t continue in the AH reindeer games. I think the upside is limited in the way that daily ES is pushing into the nose of the wedge. If ES gets below the channel a short might be a good idea after the lower trend line of the channel is retested. Pivots:

• R2: 1140 = Could be new highs.
• R1: 1136.50 = Resistance overhead for now. Would also be a new high
• Neutral: 1132 = ES is just stepping out onto this floor at this time
• S1: 1128.25 = part of the support band from Jan 06, 2010.
• S2: 1123.75 = Support from the Dec 30 – 31 overnight.

HERE IS WHAT HAPPENED AFTERWARDS. The surprise is how ES turned weak and, under control, headed downn to S1.  As I’ve annotated on the chart below, TA gave clear signals that the long trade was not going to play out.  When conditions are right, the Bloomberg TD software puts a single density green or yellow picket fence on the chart. The targets at blue and red (price exhaustion) seem to always be double density. When yellow or green are single density, they act as short term support or resistance. I appears that when the price goes past one, then retraces back, that it is a signal that the trend will continue to the price exhaustion level. It is the “going past then retracing” that activates the momentum to continue the original trend.  So the long green picket fence above beginning around 15:00 on the chart is a sign of a possible top on the long. I played that it would turn into momentum from resistance – and was wrong. My losses were limited when the yellow picket fence when from single to double density.. Going below the pivot, having another double density yellow picket form, and having a TD dashed line appear and turn solid were too many signs to ignore. The trend was a high probability down.   The pivots remain the same as last night. However, ES is sitting on suport at S1 at 1128.25.  Green resistance (picket fence) turned into momentum, but ES failed to move much beyond the blue picket fence before the TD Pressure triggered a low risk SELL indicating that upward momentum had waned. This can be played for a short – understanding that momentum can always return after the pressure is “released”. That’s the end of today’s rambling lesson in risk management.

ES Daily continues to push into the nose of the rising wedge. It won’t be long until we see a dramatic move one way or another (by Jan 29th, no?). Notice the purple dashed line? It hasn’t turned solid, which to me, in TD parlance, is an indication that the trend will not continue up. You can see previous red and purple lines on the chart – red for down, purple for up and how they behaved. For TD’ers, the setup counts are sequential, and the lines are TD TDST sequential indicators.

The world is mainly red. DAX is not moving to new highs and looks decidedly listless today.  As goes the DAX, so goes ES, meaning the DAX is a good analog for what might happen in ES and SPX. Notice which sectors are green in the DAX, and which are really red. This can be an indication of investor sentiment (sectoral rotation and all that).

FX

DXY has bouncd off of the support line I drew on the 30 min chart. Looking for a new high here to confirm the continuation of the upward trend. Note that the correlation between DXY and SPX has been intermittent and not always solid over the last month or so. The red, grey, and green horizontal lines are pivot points for each day. The most recent are listed on the right hand axes.

NEWS

Tsk tsk. Has Timmay been caught covering the FED’s tracks?

DATA

A lot of eyes are on the numbers today. It would be a mistake to think that it won’t affect the trading market. News matters in the same way that corporate announcements matter. There is always someone trading one view or another, and whether their expectations are met or not determines short term market gyrations after the news, IMHO.

I just want to add that the data out of Europe and the UK this morning either met or exceeded expectations to the bullish side- except Swiss CPI which was less than expectations and on the deflationary side (negative CPI).

Cheers.