Living Inside a Broken Clock: Tuesday, Mar. 9, 2010

by gmak

China makes noises about reducing gold purchases due to price pressure. Gata continues to protest rigged market (join the club). I don’t get it. If the Gold price is being artificially kept low, why aren’t they buying more and more? If someone was offering me an asset at what I believed was fire sale prices, I would be leveraged to the hilt on zero-cost fiat paper and stacking physical next to my tuna stash. 🙂 Could it be that the gold bugs are already all in and, because of their book, now want an apocalypse of sorts?

The FED is just about finished with the MBS purchase program, including a lot of junk from Freddie and Fannie, the evil twins. Now, the B/S is expected to contract slowly as principal on all those mortgages is repaid over time. This has the effect of reducing liquidity in the financial system – but in a controlled manner. There has been no mention of what happens to the junk that doesn’t repay.

At the same time, the FED has drafted money market funds, apparently, into becoming reverse repo dealers. I guess if GS and company won’t take back the junk, even with clothespin on nose, there is always the American taxpayer  retail suckers to take up the slack.

Meanwhile, Europe has some heavyweight IBs from the list of underwriters for debt issuance. I guess they want to remove any hint that there might be off-B/S shenanigans in the future.  I wonder how many first born are going temporarily disappear over this one?

Welcome to the broken clock.

EQUITY

SPX surprised many, yesterday, by putting in a red candle (closing below the previous day’s close).  the previous day had been what I call a ’17’ bar (open at the low, close at the high). Yesterday was more of a cross, a ’33’ given the location of the open and close to the high – low. 

If the second number is higher than the first, the close was higher than the open, and vice versa. The bar is divided into 7 segments 0% – 4% – 23.6% – 38.2% – 62.8% – 76.4% – 96% – 100%.

Of the 444 ’17’ bars that have occurred since April 21, 1982 [when SPX high low data is available], 10% of the time it is a cross type bar. ie the close is within 4% of of the open, based on the high-low.

I don’t know what this says, but it’s a beginning. The cross-type series (22, 33, 44, 55, 66) are most often followed by a ’16’ or a ’17’ which indicates that there is a higher prob of today being a day with the close higher than the open. This can be traded intra-day – but I don’t have all the probabilities nailed down yet – so it is difficult to manage the risk in a winning way over a large number of trades.

As well, given the probability of SPX crossing back below the 55 DMA by the 10th day over, today could be a down day. NOTE however, that the close could still be higher than the open, just lower than yesterday’s close. Got it? Good.

 ES fell after the Europe open, but has found support at S2 = 1132. Pivots:

• R2: 1143 = Like we’re going to near the Jan. high when it’s NOT an opex week.
• R1: 1140 = Do-able. ES got here on Monday to put a scare in the perma-bears.
• Neutral: 1137.50 = pretty tight pivots after yesterday. This is just above interim TD resistance which was already tested just before the Europe open. Sure smells like reindeer games.
• S1: 1134.50 = Already rejected an attempt from below after the Europe open. Looks like resistance for now.
• S2: 1132 = Support for now.

I’m running late – so that’s about it. I’m scalping EUR before the open, and I am seriously considering playing ES long from the open – but with very small money  – depending on how far below yesterday’s close it gaps down. If there is enough room to make money with a gap close then I’ll probably hold my nose and try it.

Cheers.