On A Knife’s Edge

There is definitely change in the air and no, it’s not the smell of spring rain. On a short term basis we seem to be hovering on a knife’s edge in several key markets.

I also collected a few long term charts over the weekend – and must report that the long term picture is starting to look increasingly grizzlie.
[amprotect=nonmember] Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
[/amprotect] [amprotect=1,9,5,2] Let’s start with our short term outlook:

The spoos are frankly hanging by a thread here. We barely closed below our NLSL on Friday and at today’s open it looked like it would be a no go and the bulls were about to take it all back. As I’m typing this however we are again back right at the NLSL and another close below today would be additional evidence that we are looking at lower prices here for the coming week. Of course a close above may at least postpone that outlook.

Not surprisingly we have a similar situation over in the EUR/USD. We did get our sell signal last week but since then we have kissed that NLSL three times now. Frankly, it’s time for a more meaningful drop now as we are slowly painting a base here. Again, my initial target was the 1.4 mark but it is possible that a deeper drop is in the cards. But for that to happen we need to a) close below the NLSL today and b) proceed downward post haste.

TLT – a lot of folks expected a reversal here last week but all we got was a little consolidation. It’s quite possible that we are looking at a trend change here which will lead us a quite a bit higher.

Here we got TLT and TBT side by side. As you can see there is a bit of volume hanging above that may draw the 20-year higher. The next volume hole is at 97.5. It was probably surprising to many that the volume accumulation below 94 on the TLT was completely ignored as we ramped higher. All these are signs of a possible trend change.

Silver bugs are not feeling the love. As you may recall – after predicting the initial drop I mused that we’d see a ramp followed by additional weakness. What I was not anticipating was the listless nature of the dead cat bounce. We closed below Silver’s NLSL on Thursday and there was an attempt to regain the upper hand – which seems to be failing today. Next possible target areas area 32 and 26. Maybe those ZeroEdge trolls should have listened to me – just saying 😉

Alright, now let’s take a look at the long term perspective:

You’ve seen this chart before – we keep bouncing around in a shrinking momentum range, but as you can see the juice is draining out as the big picture is an obvious divergence that’s been developing for nearly a year.

When has this chart ever lied to us? Again, the long term picture continues to be bearish and that divergence is now becoming quite pronounced. When’s the last time that happened? Yes, I hate to say it – at the end of P1. Now, am I expecting a P3 type scenario? Not really – the game has changed a lot since Banana Ben steered us off the fiat currency cliff – but I do see the bulls shedding a few tears in the not so distant future.

Here we have junk bonds vs. the 20-year (which as you now know is climbing). And again we are painting a clear multi-month divergence. Seems like the appetite for risk in the credit market has found it’s peak – equities apparently have not yet gotten that message.

Same picture on the FAGIX:VUSTX ratio. Rarely do I see such a divergence on the credit side being ignored for such a long time over in equities.

The NYSE Summation Index is painting a textbook descending triangle. The range is getting smaller and smaller – plus we are again near a possible reversal spot. Not guaranteed of course because this chart says so but it’s another piece in the big puzzle. Always remember – TA is a lot like CSI – you keep collecting evidence until the big picture emerges. One chart on its own is usually meaningless.

Bottom Line:

Quite frankly it’s very much possible that Fed & Friends are able to postpone the inevitable for another month or two. But by mid summer I expect the official launch of hog hunting season over in equities. Of course it’s all about the Dollar in the end and Banana Ben could throw us yet another curve ball by finding another means of pumping cash into the system. As of right now the expectation is that QE2 runs out this summer – after one final fuck-you-bears-spike up (see my POMO update last week) things could get very dicey for the longs. At minimum you want to be delta hedged these days – but as I don’t see a clear edge I would recommend that you keep a majority of your assets in cash and watch others get whipsawed into pieces.

Trend change periods are ugly and full of nasty surprises – not a good time to get positioned. There are no easy trades and when fear is making its round you can bet that there will be rumors and manipulation attempts galore. So, on my end I’m sticking with very short term intra-day setups (i.e. scalping and swing trading), a few selected stock symbols as I see them again delta hedged), and of course my FX plays (nicely aided as of late by ZeroFX).

Cheers,

Mole