MarketKarma.com

Still Bullish - Bears Beware! - Dec 9, 2011

2011-12-09T18:54:00.001-05:00

My previous posts on the SP500 outlined it well. Plse see this Nov 28th post and this Nov 13th post which provide a very good view for the equity markets, what has been taking place behind the scenes and what to expect going forward.

For this current post I wanted to focus on the Dow Jones which is always good to watch as it gets the greatest amount of "face time" in the media. The SP500, the Value Line index, the Nasdaq, the Russell 2000, the mid-cap 400, etc. are all better representations of our economy but when it comes to trading, that doesnt really matter. When it comes to the markets, human emotions reign and headlines drive emotions. When is the last time your mother said "Honey the sp500 was up 20 pts today" ? Never. But its very common to hear Mom & Pop (and everyone else) refer to the Dow Jones as THE barometer for the United States economy. Now on to what I see in the big picture for the Dow Jones.

The Dow Jones bottomed out Oct 2002 at approx. 7,200 and topped out at approx. 14,200 during Oct 2007. That was a double and was precisely projected by my proprietary methods. Next the Dow Jones bottomed out at approx. 6,500 during March 2009 followed by a top at approx. 12,900 during May 2011. That was another double. Crazy isnt it? Or is it?

The sell off in the Dow Jones since May 2011 has the form of a corrective wave lower to me. I am expecting another major wave higher. The recent Oct 2011 low took place at a 38.2% retracement of the March 2009 low to May 2011 rally which tells me another big leg up is coming. The May 2011 top at 12,900 surpassed the 78.6% retracement of the Oct 2007 high to Mar 2009 sell off which tells me that prices will target the Oct 2007 high at 14,200.

Prices are now visiting the 12,200 - 12,300 region for the 4th time since the Oct 4th low. This is a recipe for a breakout higher. The target is now 12,900 according to projections and this coincidentally matches the May 2011 top which gives me greater confidence. Reaching 12,900 will complete the 3-phase rally off the Oct 4th low. Larger degree target is 14,200 according to projections and this coincidentally matches the Oct 2007 top which gives me greater confidence. Reaching 14,200 will complete the 3-phase rally off the March 2009 low.

Bears beware, you are about to get run over.

SP500 Outlook - Nov 28, 2011

2011-11-28T22:32:00.001-05:00

Just above is a daily plot of the SP500 as per the SPY etf. Here I have minimized the actual price bars and instead am focusing on a very short term 3-day moving average which is the black line you see. I like to do this sometimes to help me see through the noise of an erratic bar chart and additionally, the 3-day moving average lets me know where the average participant is involved in the price action on average and as near to the actual prices as possible. I chose the 3-day because it takes 3 points to make a pattern.

So what does the chart above illustrate? First of all you can see that the late October high took place right at the mid-March to mid-June double bottom. No surprise there. Next note that the low last week took place at the bottom of the developing trend channel in blue. And lastly, the low last week took place at the 61.8% retracement of the October rally. All of this took place with prices reaching very oversold status according to the indicator along the bottom of the plot.

Currently 117.50 for the SPY average, I think we will see the average move up to at least 121.50 before a sell off begins

Nov 27, 2011 - update

2011-11-27T16:50:00.001-05:00

SP500 futures finally reached the golden ratio retracement. A low should now develop from the 1150 region.

Risk On - Nov 22, 2011

2011-11-22T22:30:00.004-05:00

The best thing a speculator can do is follow his rules and NOT ignore what he has learned over the years. This is particularly true when those hard learned rules came at a costly market tuition. My rules tell me to buy risk now. As I type this, the sp500 futures are trading 1168.

To answer the bond questions. The volatility signal is still on. Volatility is expected to move higher and I have found the market will do this in the most efficient way possible. It looks like this may be with a sharp move higher in prices followed by a larger, sharper move lower. I should add, AUDUSD is now giving the same volatility signal with the previous two same signals taking place July 29th and Sep 1st, both important highs. Difference this time is AUDUSD prices have been in a short term trend lower which suggests a low is nearby.

Bonds ready to MOVE ! - Nov 19, 2011

2011-11-19T18:59:00.010-05:00

Realized volatility reversion studies on US treasuries now say volality is ripe to move higher. Bond prices are about to have a large move. The last time bonds gave this type of signal was Oct 24th which resulted in prices according to the TLT moving from 113 to 116.35 to 109.80 to 119.50 all within 6 trading sessions! Thats quite a burst in volatility and is illustrated by the vertical magenta line on the plot above.

So the billion dollar question is which way will this expected volatility unfold this coming week?I believe the primary result will be lower bond prices (higher bond yields) to agree with the expected low in risk due by Tuesday. Currently 119.30 for the 20y bond etf, TLT, the price target will be 104.00 which will equate to seeing the 10y bond yield trade higher, well north of 2.5% (current 10y is 2.0% yield).

Note the previous low in bond prices took place on Oct 27th (high in yields) and this was generally speaking the high in risk across all asset classes, most notably equities and AUDUSD. This Oct 27th price point was not entirely surprising as it equalled the the price HIGH that took place Aug 25, 2010 as labelled on the chart above. Another classic case of old highs (Aug 2010) becoming future lows (Oct 27, 2011). As far as the state of reversion goes, I believe bond prices are now in a similar position as was seen early Oct 2010 which is the vertical magenta line on the left side of the chart above. The reversion indicator along the bottom of this plot illustrates the similar conditions at both vertical magenta lines and now.

A Low in Risk - Nov 16, 2011

2011-11-16T20:30:00.004-05:00

I am expecting a major low in risk by Tuesday next week from which a year end rally (in stocks, commodities, AUD, NZD, Emerging markets, etc.) will develop. Good gauge is AUDUSD which will bottom out at 0.9900.

SP500 - What the Strong Hands are doing

2011-11-13T10:47:00.006-05:00

The plot above illustrates the SP500 daily data over the past two years with the Vol State Space indicator overlay. This indicator attempts to clarify the accumulation vs. distribution process via the evolution of volatility under the assumption that there is a finite amount of volatility. I believe this is a unique and true assumption and can lead to very useful conclusions that allow one to see the big picture one step ahead of the crowd. I have been trading and studying for volatility for nearly 20 years across all asset classes and this simple but effective approach took a long time to "come to me". Of course its not infallible but I do think it is a logical approach and ties in very well with other "correct" approaches such as wider vs. narrow bases in point & figure charting which indicate the pent up energy developed. (if you are unfamiliar with point & figure charting, I suggest you learn asap!).

So how does this indicator work? In a nutshell, the red line identifies dynamic price points where accumulation or distribution is ready to take place. This is where the strong hands get involved. So beginning with the far left of the chart, you can see that the price action is consistently above the red line which indicates the market is bullish biased. I have circled the interesting points along this chart. The first green circle on the far left took place Feb 2010 where prices dropped but found strong support at the red line where strong hands began accumulating. The next green circle I have drawn took place early May 2010 at the bottom of the flash crash where once again prices met the red line and found support. But the 3rd green circle I have drawn is found late May 2010 and identifies the red line separating from the upper blue line. This suggests the market bias is changing from bullish to neutral or bearish. Going forward from this point we see prices are below the red line

which should be viewed as bearish (or neutral depending upon whether the red line below prices still exists). The 4th green circle is drawn at the Aug 2010 top which took place at the red line - the price point where strong hands got involved again. Finally at the end of Aug 2010, the upper red line once again merged with the upper blue line while the lower red line separated from the lower blue line. Now we see once again there is just one red line and prices are above it suggesting a bullish bias has resumed. And that is how the process works. Prices move consuming a fixed amount of volatility - a type of state space analysis (hence the name Volatility State Space).

So what is it telling us now? I have drawn 6 green circles at specific price poings since June 2011. Each of these points highlights prices where either accumulation or distribution has taken place OR where the price action has become bearish bias or bullish bias via the red line separating from the outer blue line. The 2nd green circle from the right identifies the upper red line merging with the upper blue line. This point ended the bearish bias and indeed prices shot higher out of the volatile wide range that took place during August - September 2011. The far right green circle highlights the lower red line separating from the lower blue line and this now says the market is bullish biased as of early November. This lower red line is rising fast due to the high volatilities and will "push" prices higher. Hence it is now logical to trade WITH the strong hands and trade primarily from the long side. The bears will be watching for the upper red line (does not exist right now) to separate from the upper blue line to reinstate a neutral or bearish bias. Short term SP500 target is 1325.

Ready? - Nov 12, 2011

2011-11-12T10:55:00.003-05:00

Ready for a risk rally? The critical date has passed and a low in risk has been cemented. Meanwhile, the professional market, hedgefunds, have once again loaded up on risk negative trades attempting to make trades based on headlines and fundamentals.

I just find it comical that large hedge fund portfolio managers I know are continuously misreading these markets. No matter what anyone tells you, very few people get it right when it comes to trading and that includes hedge funds, real money funds, mutual funds, etc. And I truly think this is the case because most funds still trade the markets according to fundamentals which just does not work well enough to allow for prudent risk mgmt.

The disconnect between price action and fundamentals can be so great that its very easy to see prices reach a stop loss point long before the fundamentals begin to work. The ONLY way a fundamentally driven investor or trader can successfully navigate these markets is by operating without stop loss orders AND be willing to add to losers in unlimited fashion for perhaps years. And as far as I know, only Mr. Buffet is capable of that with a forever holding period. Most others need to watch their drawdowns to stay in business!

Never forget what Keynes said "the market can remain irrational much longer than you or I can remain solvent". And this is coming from an economist who began investing according to fundamentals but during the 1930's quickly learned that price action over rules fundamentals.

Dates - Nov 9, 2011

2011-11-09T22:47:00.002-05:00

Time is nearly at the critical junction I alluded to in this previous post on Nov 1st.

SP500 Lines in the Sand - Nov 5, 2011

2011-11-05T20:49:00.005-04:00

As noted in my previous post on Nov 1st, there is an obvious head and shoulder topping pattern developing. This nested H&S pattern suggests a big crash lower by 40% is possible should it unfold as the chart depicts. However, I believe this bearish scenario is widely accepted and the H&S pattern I have illustrated is being followed by everyone. Hence I do not think this will happen. Instead, the markets appear poised to move higher.

The plot just above illustrates the path I am expecting for the SP500 short term which is to reach price 1325 by the end of November. The Greece confidence vote took place on Friday keeping G-pap in office. I dont know if this will be viewed as bullish or bearish for risk, but I do know the price points on which one side I am bullish and the other I am bearish and the G-pap vote could propel prices.

Probably THE most important support and resistance lines are determined by old lows and old highs. To be clear, overhead resistance stems from old lows and support below stems from old highs. With this in mind, consider the chart above. Here I have drawn the horizontal lines defined by the key low made during Aug 2007 which kicked off the bear market, the first shot across the bow so to speak when JPY pairs went crazy (AUDJPY in particular). And the horizontal from the key lows of Jan 2008 and March 2008 which took place when the Fed was fooled into cutting rates following the Soc Gen selling error on a US holiday and the subsequent Bear Stearns crash. These two horizontals were emotional lows and continue to be meaningful as the chart clearly shows. The third horizontal in purple equals the high close made during Aug 31, 2011 which supported the market last week.

If the SPY closes this coming week above 126, the Jan - Mar 2008 key lows, then I think prices are headed much higher on a path to the Aug 2007 low at 137.25 which became the May 2011 top. First target along the way is 132.5 (1325 cash) due by end of November.

The Year 2012 Bear Market Crash!

2011-11-01T22:03:00.006-04:00

Please click on the chart above. This is the Year 2012 Market Crash that all the bears are wishing for. A nested Head & Shoulder top stretching back to April 2010 suggests a 40% drop for the SP500 to the 750 to 800 region if this pattern unfolds. I am NOT saying this will happen, but I want you to be aware of what is possible.

In fact, short term I believe the negative price action this week represents phase-2 of the 3-phase move higher from the early October low. The sp500 has now retraced about 1/3 of the move up since Oct 4th which qualifies it to be phase-2 but the duration of this correction is too short. Hence I think we will see prices consolidate in the 1185 to 1220 region with 1212 being the key pivot to allow for a time correction before prices are ready to resume the move higher for phase-3 that will target north of 1300. Phase-3 higher should begin on or before Friday of next week.

What will negate the year 2012 crash pattern illustrated above? A price rally that not only takes out the year 2011 neckline at 1275 ish but also breaks out higher through the trendline connecting the May 2011 top and July 2011 top.

Also on my radar: Euro Stoxx support at 2150. FX implied volatilities have jumped higher since Friday and are now about "fair". As mentioned previously, cratering implied volatilities usually suggests a risk top is at hand and that does seem to be the case.

Review & Previews - 29 Oct 2011

2011-10-29T12:07:00.012-04:00

I have received many requests for more frequent market posts. I would love to be able to do this because I do find it fun but my time is limited. Essentially, I post to this blog when I have the time or I have a market view that has changed or needs to be shared imminently. For the most part, the views on this blog remain valid unless changed in a subsequent post. And I like the fact that historical views are here for all to see, including myself. My aim is to capture the big picture, so I apologize to all the day traders that would like to enter and exit multiple times within one day. Having said that, I myself am entering and exiting many times each week but I will maintain a bias that agrees with my big picture views. For example, if the big picture is bullish commodities, I will enter both long trades and short trades on a given day or week but I will be quicker to take short position profits than long position profits knowing the big picture bullish view could reassert itself at any given moment.

Here is the current big picture referencing previous posts where necessary:

Commodities:
My previous post on the CRB index was Sep 25th found here. The market is still bullish and the chart from this previous post is still valid. Please have a look. The CRB bottomed out at approximately 300 as expected. Currently 323, first zone for major distribution should be 332 to 340. On my radar is the trendline connecting the July 2008 top at 474 to the April 2011 top at 370. We are nowhere near this trendline now (currently 353 ish) but it is worth watching as it a trendline obvious to the crowd. And since all assets are highly correlated now, keep this trendline in mind when other assets reach key levels (such as when equities reach price targets, or AUDUSD and other commodity currencies reach targets, etc.).

Oil
As per the USO etf, currently 36, the next zone for distribution exists 38 to 39 which corresponds to the mid May lows. This would equate to approximately 335 for the CRB index.

Nasdaq100 (NDX)
The index should continue higher toward new highs for the year. Currently 2400, first target / supply zone is 2500. AAPL is on my radar as it is being pressured lower by the bearish island top that took place during mid October. The island top will be negated if AAPL can move higher through the 408 to 415 gap which will result in the NDX reaching the first target of 2500.

SP500
Currently 128.60 for the SPY, first supply zone is 132 +/- or just above 1300 for the emini futures. The market should top out below the May 2011 high at 137 but this has a good chance of being a temporary top particularly since the NDX index will be making new multiyear highs by that time. My previous post on this binary market can be found here.

VIX
Looks like the inverse VIX, XIV, wants to target 10. Currently 7.33, we may see XIV reach 10 ish with the SP500 trading just above 1300. I should point out, this relationship between the cash SP500 and VIX index (implied volatility) is not linear. In other words, we could easily see the VIX index decline lower (XIV move higher) while the SP500 consolidates sideways.

USD
USD weakness has taken place recently with GBPUSD bottom taking place as per this recent post and this other post highlighting bearish positioning in EURUSD and AUDUSD to help propel prices higher (weaker USD). Going forward, EURUSD is back above 1.4000, the pivot, and prices should trade in the 1.4000 to 1.4500 range. I should add, the trendline from the May 2011 top to the Aug 29th top is near. Currently this trendline lies at 1.4340 while the Friday close was 1.4150. Watch for consolidating prices to eventually test this downward sloping trendline.

Implied Volatilities
I need to report, implied volatilities across all FX pairs collapsed on Thursday - Friday this past week reaching very oversold readings. This normally corresponds to a top or consolidation in thte underlying given the very strong spot vs. implied vol correlations. As such, I am watching AUDUSD very carefully going forward. More than likely, AUDUSD will range between 1.0400 and 1.0800.

From Wall Street - 23-Oct 2011

2011-10-23T13:43:00.002-04:00

This article has been circulating around the street. Its about dinosaurs, Wall Street and Main Street.

Positioning - EUR and AUD 23-Oct-2011

2011-10-23T13:39:00.003-04:00

Given the Euro based negatives and extreme correlations, the professional market is mainly positioned for lower EURUSD and lower AUDUSD. Maximum pain to the maximum number of people will be for these pairs to head higher short term.

23 Oct 2011 - Binary Market

2011-10-23T12:09:00.003-04:00

The fate of the financial markets rests on the Europeans solving their sovereign debt problems. Meetings are being held this weekend and Wednesday this week. The world is not hopeful particularly when the news is released like this. Despite this, risk continues to rally since the Oct 4th reversal low and closed at a high on Friday Oct 21, 2011. Not only did prices close at the highs on Friday but the SP500 finally broke out higher from the two month long consolidation between 1100 and 1220 (for the SP500 cash). Technically this is bullish and suggests prices are now targeting 125.60 for the SPY (about 1255 - 1260 SPX cash) which equals the emotional mid March low made during the Japan earthquake / tsunami event. That is the 1st target. The range trading that has taken place between early August and early October has been very volatile which means that the breakout from this range could go much further than simple projections suggest. A higher target of 1310 is a distinct possibility. And most likely if the SPX is trading at 1300, we will see the nasdaq100 index NDX trading at new multiyear highs which will wake up many more "highs for the year" bulls. The wall of worry is certainly in place thanks to Europe. EURUSD key resistance lies at 1.4000. Above 1.4000 for EURUSD and the bullish US equities scenario will unfold. Below 1.4000, and US equities fall back into the trading range. Its that binary and when I look at correlations across asset classes, everything is 70% to 90% now. Its all one big trade.

Lastly I should note, Friday Oct 21st is not to be ignored. Major turns in the markets have taken place on the 21st of the month over the years as shown in this older post. If Friday turns out to be a 21st of the month top, it will be a false breakout on the chart which often has violent consequences. For example, the Oct 4th low was a false breakout to the low side and has resulted in a fast 12% rally off the low! The monthly chart is on its way to making an engulfment pattern for the SP500 emini's. A close above 1212 will complete this. This is the key level I am watching for false breakout if the SP500 is indeed topping out on Oct 21st. Otherwise, continue to be bullish biased.

Google - Oct 13, 2011

2011-10-13T21:28:00.002-04:00

GOOG beat earnings estimates and the stock is up big after hours. Looks like tomorrow will be a gap up open. Price cycle target is just above 600$. Watch for GOOG to sell off from 600 - 605$.

AUDUSD - Oct 12, 2011

2011-10-12T22:44:00.003-04:00

AUDUSD is the best G10 FX risk gauge. It rises and falls with global risk. Today AUDUSD reached the 50% retracement mark for the entire sell off since the summer peak (as did the SP500 cash upon reaching the 1220 high today). It now appears as though AUDUSD should pull back lower. Additionally, the rally off the Oct 4th low has now matched the previous big rally that took place during the second half of August and is denoted by the heavy blue line. From the 1.0230 high, I think AUDUSD will correct toward 0.9950 - 1.0000 followed by another rally toward 1.0400 - 1.0500 region. AUDUSD spot prices are very overbought right now and the implied volatility market is extremely oversold which suggests spot is ripe to drop.

Gap and Run - Oct 10, 2011

2011-10-10T22:01:00.002-04:00

Significant price gaps fall into the same category as major lows and major highs in that each of these three events should be viewed as a critical state ending one phase and beginning another. Provided the up-gap made today remains in place through the end of this week, then we should see the NDX test the highs for the year just above 2400. And similarly we should see the SP500 as per the SPY test the mid June lows at about 127. The point-E symmetry mentioned in my previous post was only able to bring one down day on Friday last week. Instead of the expected turn, this phase transition has produced the up gap. It will not be a straight shot higher toward NDX 2400 or SPY 127 but the usual 3-phase move.

Nasdaq symmetry - Oct 5, 2011

2011-10-05T21:39:00.005-04:00

I have been really tied up + travelling lately.. sorry for the lack of posts. To catch up where I left off with these Sep 25th posts here and here, the risk rally i felt coming turned out to be phase-2 of the 3 phase sell off. The plot above illustrates the Nasdaq100 as per the QQQ etf. The risk rally last posted corresponds to the BC length on the above chart. But as you can see, another nasty down leg developed which is CD on this plot. This now completes the 3-phase sell off from point A. Point D was a good hit that satisfied target calculations. Additionally, since point D low was formed, we have seen

1) a bullish engulfment pattern take place on the low day Oct 4th which suggests further upside potential
2) heavy volume take place suggesting a solid bottom. It was the heaviest up-day volume since the early August capitulation
3) a divergence took place in the VIX index - the SP500 took out the early August lows BUT the VIX did not take out its early August highs. Bullish divergence

These are all the things you want to see at lasting lows. But there is some nice symmetry developing in this QQQ chart as labelled above. Accordingly, QQQ will likely top out on the 3rd day of this rally, Thursday Oct 6th at point E, and then test the lows once again at point F. A light volume test of the lows will follow the symmetry and if it continues, next will be the run up to point G.

As I type this, news of Steve Jobs death is hitting the tape and the Nasdaq futures are a bit lower. Lets see how the markets digest this tomorrow. Also on the radar are central bank meetings where people expect the Bank of England to announce QE tomorrow and the ECB to cut by 50 bps tomorrow. We could have some fireworks. A top amidst all this news followed by a final low on about Oct 10 - 11 would be very familiar to those who traded the turns of Oct 2007 and Oct 2002.

Harmonic Commodities - Sep 25, 2011

2011-09-25T19:49:00.003-04:00

Just above is a weekly plot of the CRB commodity index. The price action on this index has been very harmonic the past few years. I think there is a good chance to see a major bottom in this index at 300 +/-. It closed last week on the lows at 301 off the drop in gold, silver, oil etc. I think the chart above is self explanatory in terms of illustrating pivotal golden ratio retracement lows and highs as well as old lows / highs becoming future turning points. Higher commodities off this harmonic turn should be in good agreement with the charts for EURUSD, GBPUSD, Bonds, Stocks, etc. I am seeing.

Unexpected BIG rally in Risk ? - Sep 25, 2011

2011-09-25T18:33:00.002-04:00

Everyone is bearish risk and last week on Thursday Sep 22nd the equity markets gapped down on the open and that gap remains in tact. Friday Sep 23rd the price action was up small and contained entirely inside the Sep 22nd low to high range. But during Sep 22 - 23, EURUSD did not continue lower and in fact, I have illustrated reasons for strong EURUSD support at 1.3400 despite all the Greek Euro zone negatives. I think there is real potential to see something positive for the EURUSD to emerge this week such as a ring-fenced Greece default which will send EURUSD much higher as well as global equity markets. A Greece default will no doubt be bad news but it will remove uncertainty which the markets hate more than bad news. If US equity markets gap higher on the open on Monday and hold the gap, this will produce a bullish island bottom. The Nasdaq index is strongest and first step toward higher prices will be a close for the QQQ above 54.87 which is the half way point of the move lower since the July 25th high and inside the Sep 22nd down gap.

GBPUSD higher - Sep 25, 2011

2011-09-25T18:29:00.002-04:00

Similar to EURUSD, cycles now say GBPUSD has bottomed and will be headed higher. GBPUSD reached a low at 1.5327 last week and I think the next stop is 1.5900

Gold - Sep 25, 2011

2011-09-25T16:47:00.004-04:00

Gold has broken down further since my Karma line bearish posts here and here on the price action. Prices dropped 100$ on Friday. I think the next major support will be 156$ for GLD and about 1600$ for the cash. Watch for a bottom and turn higher in Gold to coincide with the low and move higher in EURUSD.

EURUSD higher - Sep 22, 2011

2011-09-22T21:02:00.006-04:00

EURUSD traded down to 1.3400 today. It is still in the cycle demand zone first mentioned in this Sep 10th post and a tradable bounce is likely. In addition to cyclical suport, EURUSD has now retraced 50% of the full rally since the Jun 2010 low at 1.1875 and the current sell off since early May 2011 matches the sell off that took place Nov 2010 to Jan 2011 as labelled on the plot above. The expected rally will likely target 1.4000.

Bonds - Sep 22, 2011

2011-09-22T20:37:00.003-04:00

The 20y bond etf, TLT, reached 123 today to satisfy cyclical supply zone target in the 120 to 125 range. Cycles now say we should see lower prices, higher bond yields. And additionally, today's high in bond prices was marked with 3 gaps higher this month. This is the same as the 3 gap top we last saw Jan 1st 2009 which marked the top in bond prices.

FOMC results - Sep 21, 2011

2011-09-21T22:09:00.002-04:00

FOMC results met expectations and the risk sold off. So for the SP500, its back to the bottom of the bearish flag formation previously discussed. If and when this flag formation breaks lower, it suggests the sp500 is headed down to below 1000 (current 1155). I will consider the SP500 "broken" when the SPY closes below 114. It closed tody at 116.63. For now, believe it or not, I see an hour buy signal on the SP500 futures at 1155 +/- 5 pts with potential to reach 1182. This low will complete the three phase sell off from the Sep 16th high. However the volumes were very high on this sell off and instead a dead cat bounce may result. But in any case, the intraday cycles do call for a low above 1150.

Bonds moved higher following the FOMC and the 10y closed at 1.84% as the Fed move further out on the curve. The bond price etf, TLT, closed 118.66 and I see important key cyclical resistance at 120 to 122. A high in this zone (low in yield) will match the high made Dec 2008.

Market Test - Sep 19, 2011

2011-09-19T21:35:00.006-04:00

The shorts are nervous ahead of the Sep 21st FOMC. Nervous that Bernanke will come out with a shock & awe type of monetary stimulus, more than the expected operation Twist. Anything is possible and seeing a major high into the Sep 21st - 23rd time frame, a critical cycle date, would not be the first. In fact, with the NYSE short interest at multi-year highs, its very likely we do see a short squeeze to much higher prices.

Today was interesting price action. The sp500 futures dropped into the 1180 - 1184 buy zone off negative Euro zone news and as expected and promptly reversed higher. The Nasdaq100 futures also reversed higher from 2254 making a shallower than expected low due to the AAPL big breakout higher through 400$. Next AAPL target resides around 435$.

Each day there is more negative news out of Europe and after the close today the S&P downgraded Italy which has sent US equity futures lower as I type. This will be a good test of the bulls AND the conviction of the shorts. Will the shorts use the Italy downgrade sell off as an opportunity to cover and avoid a FOMC squeeze risk as they did today? Probably. For the balance of this week, watch for prices to exit today's range to indicate the next shor term trend. Sideways prices inside today's range should be viewed in a bullish light (especially given the negative Euro zone news = refutation of the negatives as we saw when prices continued higher despite 2 french bank downgrades last week).

Having said that, next upside resistance for the sp500 futures is now 1230 and 2340 for the nasdaq futures. From a stop loss perspective, I think prices will trigger downside stops below 1182 for sp500 futures and below 2273 for nasdaq futures.

Update - Sep 18, 2011

2011-09-18T19:29:00.004-04:00

The move higher on Monday Sep 12th off the downside false break is not to be taken lightly. I described this phenomena in detail in this Sep 12th post. So far the move up has been unidirectional which indicates it is not complete. Friday's high reached 1214 for the Dec sp500 futures and I think a pullback to 1180 to 1184 zone will be typical. From 1180 ish, prices should continue higher to complete the entire 3-phase rally.

The Nasdaq futures reached 2308 on Friday and this enters the zone to complete a larger degree move off the Aug 9th low. Watch for the NDX futures to pull back toward 2235 before resuming the move higher.

FOMC meeting concludes on the 21st of the month this week. This is a HUGE meeting on a key natural cycle date. Based on the price action, the 21st of the month looks more like a high than a low. Hence its possible we see prices edge higher this week into that date. There are also cycle dates end of this month and early October (they never end). Europe will be closely watched again and as I type, EURUSD has gapped lower on more Greek default fears. If EURUSD continues lower, next support should develop around 1.3275. Karma line resistance is now 1.3850 for EURUSD. Gold rallied on Friday back to the broken Karma line and is finding resistance. GLD pivot is now 177, negative below and positive above. AUDUSD is following EURUSD lower but is a better gauge for overall global risk. I calc support at 1.0050 ish. Watch for this AUDUSD support to coincide with Dec sp500 futures support. AAPL reached 400 and may be toppish now as described in this post on Aug 27th which also detailed the 2300 target for the NDX futures.

Gold - Sep 15, 2011

2011-09-15T08:17:00.002-04:00

Gold is breaking the Karma Line given in my recent post. Cash gold Karma Line is 1810. A decisive close below this level today will send it much lower. Next stop 1750 followed by 1600.

Karma Line Hurdles - Sep 13, 2011

2011-09-13T20:53:00.003-04:00

Several markets are approaching Karma Line Hurdles.
These are as follows:

SP500 Dec futures = 1185 (above)
Nasdaq100 Dec futures = 2223 (above)
Dow Jones cash = 11,370 (above)
Oil as per USO = 35.80 (above)
Gold as per GLD = 175 (below)
20y bonds per TLT = 109.50 (below)
Commodity index per CRY = 340 (above)
Silver as per SLV = 38 (below)

Each of these represent important resistance. In other words, if the SP500 can trade higher than 1185 for the Dec futures, then prices should run much further to the upside. The same is true for USO above 35.80, SLV below 38, etc. I am not stating that each of these resistance points will be surpassed. I am merely providing the pivot price where I believe the nature of the price action will change from bullish to bearish or vice versa.

False Break - Sep 12, 2011

2011-09-12T22:03:00.004-04:00

The plot above illustrates the Bearish Flag pattern I have mentioned in previous posts. This is a bearish continuation pattern. When prices break down lower from the flag portion of the pattern, the upward sloping channel I have drawn, it suggests the down trend will resume with a target of about 1000 for the SP500. This pattern is very popular right now and is present in many asset classes. In fact, Forbes magazine highlighted this past weekend in this article. Given the extreme popularity of this pattern and the fact that it has become a "no brainer" to be short the market, I am on the lookout for a false break. Well we did not have to wait too long as the false break happened today. A false break is when prices follow a pattern as expected by breaking out through a boundary which is supposed to propel prices to the next target. Today prices dropped below the lower boundary of the flag as seen on the chart above. Due to the popularity of this pattern at this time, more than likely this move pulled in more short sellers AND forced short term longs to sell out. The break lower was off the back of continuing negative Euro news. However by the time the US equity markets opened for trading, EURUSD and other EUR based pairs had each traced out bullish hammer bottom formations. As a result, US equities completed a false break lower by closing the day strongly back above the lower boundary of the flag.

Base on what I have written here, this presents a very interesting dynamic going forward. The markets have a negative bias, the news has been horrible, but someone wanted to buy risk very badly today (rumore is that it is China). The buying took place not only for the US equity markets but across all asset classes including currencies and commodities. If short covering continues, I calc cycle targets of 1215 by Sep 27th and 1250 by Oct 7th using standard 50% and 61.8% retracements. I think these targets will be conservative if "The Big Squeeze" does take place and my proprietary target of 1275 will more than likely be the one to use. Watching EURUSD closely, it is encouragint to see prices bottom today at 1.3490, just 10 pips away from the cycle low target at 1.3480 given in this Sep 10th post.

USDCHF reached 0.8925 today and is in the sell zone near 0.8850 as mentioned in this previous post on Aug 8th. I am expecting some type of reaction lower in USDCHF but it may not be very deep since the major low made at 0.7066 was a generational low as discussed long ago in these USDCHF posts.

Lastly, the German DAX cratered today with the worsening Euro zone news. It traded below 5,000 before closing at 5075. Prices have now finally traded down to 5100, the 61.8% retracement point for the entire 2009 - 2011 bull market. Given today's action in the US equity markets, I would not be surprised to see the DAX gap higher on the open leaving a one-day island bottom just below the 61.8% mark. Watch this one carefully this week. A major low at the golden ratio would definitely NOT be the first!

Options expiry is this Friday while the FOMC meeting is next week on the pivotal 21st of the month. Friday Sep 9th was a cycle date as is the end of this month, Sep 27th ish as mentioned above. French banks are on the verge of being downgraded. Tomorrow is the Italy bond auction which may not go well. Obama's jobs plan is being dissected and it has already been determined it will never pass the republican congress. There is a head spinning amount of news now.. In all seriousness, it is best to trade the price action regardless of the news! Stick with your target entries and exits and let fate take its course. The news will fall into place in accordance with the price action - it usually does.

Still Flagging - Sep 10, 2011

2011-09-10T17:57:00.004-04:00

I was about to post a chart illustrating the very popular bearish flag pattern that currently exists for the SP500 and other major indices. I mentioned this in the Sep 8th post and gave a link to the ideal technical pattern but now I dont have to show our current market chart. This pattern has become so popular that it has made its way into Forbes magazine. Here is the link to the Forbes article with chart showing the current "ominous bear flag pattern" as they say. Isn't it funny when fundamentally driven investors turn to technical analysis during times of trouble? As they say, fundamentals only work during bull markets! In any case, as Forbes points out, the target would be 1000 for the SP500 and I do calculate this same target using my own methods if indeed the market does break down. As of Friday's close, the "Flag" is still flagging and has not broken down yet. Consider the break to have happened if the Sep 6th low at 1130.5 for the December emini's gives way and acceleration takes place with a break of the Aug 9th low at about 1100 for the cash. Having said that, I do calc a short term low side target at 1090 ish for the sp500 Dec futures which would make for a nice double bottom against the Aug 9th low. I was never a fan of the Aug 9th - Aug 22nd double bottom as those two lows are too close together. On a monthly chart, they become one low!

Dec futures closed at 1152.25 on Friday which is still above the 50% mark at 1148 for the Aug 9th low to present price range. Thus there is still hope for the bulls and if Greece does not default this weekend and we do not see any major terrorist attacks on the 9-11 ten year anniversary, then its very possible we see prices move higher toward the top of the flag yet again! Friday was a natural cycle date for the markets (given in this Aug 27th post) which suggests a tradable turn (a price low in this case) similar to the early August low and the early July high. Next date on my cycle radar is Sep 21st which coincides with the FOMC meeting.

Lastly, all eyes will be on Europe this week. Does the Euro survive or not. EURUSD broke lower below 1.3830, the mid July low reaching the 1.36 handle. Next target support zone is 1.34 - 1.3480 and the German Dax is now below 5200, getting closer to the 61.8% retrace at 5100. It will be very difficult to fix Europe as this will require politicians to admit their current system is not working. Not very different to what we face in the US where the government needs to accept our system is not viable and needs to be changed in a way that is economically positive and is applauded by the markets - this may have to wait until there is a new president in office. One potential temporary solution for the Euro is to have only Greece exit and return to a substantially devalued Drachma while the ECB mops up all the Greek debt losses incurred by European banks. Greece should want a devalued currency.. afterall, every other country does.

Updates - Sep 8, 2011

2011-09-08T21:35:00.003-04:00

Stocks: market is digesting Obama speech well. This is unexpected and bullish so far plus also the price action pre-speech held the gains the previous two days well. We will see how the real reaction is tomorrow. Sp500 Dec futures, a buy at 1165 and bullish above 1150 with upside target 1275. Maximum pain to maximum number of people will be prices go to 1275 first and then from there can crash lower toward 1000 which is the overly popular view by everyone according to the bearish flag pattern and the George Lindsay 3-peaks Domed House pattern. FOMC Sep 21st is on the radar.
However, once at 1275, things will look much rosier.

EURUSD & Europe: Prices broke lower through 1.4000 reaching a 1.3800 handle. It is very ovesold according to my work so i do not expect any lower next few days and most likely a rally higher to 1.4000 to test the breakdown price. I think a false breakdown may be possible as was the case mid July. And false breakdowns are the best signals since it traps everyone with the wrong position. Reason I think a false break may be in the works is that the German DAX index hit a very strong cycle low at 5100 this week. I think the DAX has a good chance of rallying to 6100 or about 20% off the lows. It closed today at 5400. Watch the DAX closely. 20% higher would result in higher EURUSD back into the 1.4000 to 1.4500 range and likely send the NDX index back to the highs for the year.

AUDUSD is behaving well despite the down equity markets and poor Australian employment report. Bullish above 1.0500 with target 1.0900. AUDUSD is one to watch in conjunction with the SP500.

USDCHF is very near my 0.8850 target given in this Aug 13th post. USDCHF has rallied hard this week following the SNB intervention and imposed cap on CHF strength. I am always amazed how the markets will follow the cycles. I had no idea the SNB would turn USDCHF around but I did know the cycles called for a MAJOR low in the 0.7500 to 0.7000 range as first given on Aug 7th. Bottom line, follow the cycles and somehow the fundamentals or politics or whatever will change to be in agreement. I should add, now that EURCHF is somewhat pegged, this means USDCHF and EURUSD are much more similar as they were in the old days years ago when EURCHF hardly moved. Therefore a top in USDCHF at 0.8850 ish would coincide with a low in EURUSD. Something to keep in mind.

Risk Positive Feels Lonely - Sep 7, 2011

2011-09-07T21:09:00.004-04:00

Another big day for the bulls. Stocks surge higher again propelled by the key low at 1136 as detailed in this previous post. How high can stocks fly? Tomorrow night is Obama's speech and I have to say, I feel like the overwhelming view is that stocks will collapse lower post Obama and continue lower to take out the early August lows. The other overwhelming view on the street is that the Euro will collapse and is doomed no matter what. And lastly, it seems to be a very popular belief that a stronger USD equates to a much lower stock market. I question all these widely held views.

For stocks, as much as I try and search, I can not latch on to a sell signal nearby right now. Of course that does not mean stocks can not head lower as anything is possible in this wild market. Most likely we will see a sell off post-Obama that will pull in all the traders to sell short. Once the shorts are on-board, I would not be surprised to see prices rally to take out the August highs and finally reach that once popular SP500 target in the 1255 region mentioned in this Aug 31st post that correctly identifed the top in risk and low in FX volatility. Part of the reason I am saying this is that between yesterday and today I have been getting sell volatility signals across various FX risk pairs which typically equates to risk positive markets for at least a few days. Also, now that more time has passed since the panic Aug 9th low and pivotal Aug 22nd test low, I now calc sp500 futures upside target in the 1275 region.

Lastly, as outlined in this previous post on Aug 13th , I believe the Nasdaq has NOT broken down like the Sp500 has which is to say, the battle is still on - NDX bull vs. SPX bear. The NDX has real potential to fly higher toward the highs for the year and this will catch everyone off guard. Gold appears vulnerable and I calc a target of 1600 if prices drop a bit further (it closed around 1770 today). A path to 1600 Gold could easily coincide with the NDX revisiting the highs for the year.

These are unprecedented times. The important FOMC date is Sep 21st. , an incredibly important date even without the FOMC meeting taking place. The market will do its best to inflict the maximum amount of pain for the maximum number of people.

More Serious - Sep 6, 2011

2011-09-06T20:17:00.004-04:00

Its getting more serious. Today the Swiss National Bank came out and said they would not let CHF strengthen past 1.2000 for EURCHF. The exchange rate promptly rallied 10% from 1.1000 to 1.2000. Of course the SNB can weaken their own currency very easily by just printing more as has been done in the US. The race for competitive devaluation continues with Gold being the only currency without a government. Today Gold traded above 1900 again and it does have the appearance of a double top (so far). However, Gold weakness today was actually USD strength following the SNB intervention and also the Gold miner stocks, GDX, are now breaking out higher from a year long consolidation which is very bullish.

I am now watching AUDUSD and EURUSD for risk clues. EURUSD is at the very bottom of its recent range. A weekly close near 1.4000 suggests 1.3400 is next and will happen fast. Initially this will again be Euro centric but watch AUDUSD for signs of it spreading to global risk aversion.

SP500 futures bottomed out at 1136 today, one pt off the support level given in the Sep 5th post. The surprise trade is no longer futures reaching 1170 as previously mentioned. It is now a popular target and I do calc shorts will enter in the 1170 to 1180 zone. If this market is truly destined to go much lower, we may not see futures reach 1180 prior to Obama's speech on Thursday.

Sp500 futures support - Sep 5, 2011

2011-09-05T09:46:00.002-04:00

Plot above is daily Sep 2011 Sp500 futures.

1. Sell off AB = CD at 1135
2. 61.8% retrace at 1135
3. trendline support just above 1135
4. today is 3rd down day from C top - typical reaction

USD - Sep 4, 2011

2011-09-04T21:01:00.002-04:00

On Aug 31st I got buy implied volatility signals across most FX risk pairs. This includes all pairs with very large implied volatility skews of which AUDUSD and EURUSD are the two USD pairs with largest vol skews. Buy volatility in each of these pairs equates to buying USD directionally and this was part of the reason why I pointed out the AUDUSD top at 1.0750 in the Aug 31st post. But additionally, AUDUSD was a 1.0750 short term cycle target top.

At this time the USD is rallying with AUDUSD lower at 1.0570 and EURUSD lower at 1.4150. A decisive close below 1.4085 (week of Nov 12th high print) would suggest prices are headed much lower with first target 1.3400 for EURUSD. And obviously EURUSD much lower will be due to Europe debt woes coming back to center stage and this would take down the US equity markets. This may happen but I also think its possible the SP500 has a chance to climb to 1260 region before then.

As noted in recent posts, SP500 at 1250 was a popular target and for that reason I was cautious on whether prices would make it that high instead believing the 1215 - 1220 target would be as far as it would get. As it turned out, prices reached 1230 by Aug 31st, the same day I got buy FX volatility signals. But now that prices have dropped to about 1160 as I type, a move toward 1260 would be completely unexpected both technically and fundamentally given the payroll no jobs report on Friday. SP500 futures trendline lies at 1155 - 1160 region. Support on this trendline with follow through higher taking out 1170 is the surprise trade short term.

Uncertainty - Aug 31, 2011

2011-08-31T22:24:00.004-04:00

Today was month end. Window dressing by the large funds should be over and September may be very interesting. As it stands now, the markets seem to be rallying on negative news believing the upcoming 2-day FOMC meeting scheduled for Sep 20 - 21 will bring stimulative fireworks from the Fed. Consensus is the Fed will roll their treasury holdings into the longer dates (ie: 20year) which will flatten the yield curve. Its unclear if this will make a difference to the economy but many believe it will at least provide another boost to the markets. Sep 21st is our familiar special 21st of the month date and does feel like a very long ways off (recent market high was July 21st and most recent market low was Aug 21st). Before then we have Obama's speech on the economy Sep 8th (it was just moved from Wed to Thur as requested by the republicans so as to not be on the same night as the republican debate. How did Obama's team schedule Wednesday?) and the CPI report on Sep 15th. Doubtful Obama will say anything meaningful and will most likely create more uncertainty which the markets hate most. Uncertainty leads to investors exiting long stock positions.

It may be time to watch FX more closely for an early signal. Today the volatility market in FX imploded. Similar to the stock market, there are some FX pairs where the correlation between cash prices and volatility is consistently very strong. AUDUSD is a good example and just like the SP500, when prices rise, volatilties come off and vice versa. Volatility is now too low in AUDUSD which says a top in spot is imminent. My recent Aug 27th post said the AUDUSD cycle target top was 1.0750. Prices have now reached 1.0720 and with volatilities collapsing, a top is nearby. The same is true for many other risk FX pairs. Watch AUDUSD and other AUD crosses such as AUDJPY and AUDCHF as an early gauge for risk aversion.

In the Aug 27th post I outlined the SP500 futures target top at 1250. The zone for this top begins at 1250 extending a bit higher which matches the mid June lows. This would be the classic case of old lows become future highs However it seems too obvious and is already a popular view which makes me think prices may not rally that far. Strength today in the Swiss Franc may be another good risk gauge. The Swiss National Bank has actively weakened the CHF the past several weeks but was not there to sell today. Further CHF strength along with any AUD based weakness should be watched very carefully.

Market update - Aug 27, 2011

2011-08-27T18:46:00.004-04:00

US equity markets rallied on Friday despite Bernanke not hinting at QE3. This is a good sign for the bulls and the fact that markets closed near the highs on a Friday after first making new lows during the morning illustrates traders were willing to hold longs into the weekend.

The NDX closed the 2120 to 2160 gap described in this Aug 23 previous post and NDX futures now have potential to target 2310 as mentioned. All of this is taking place from the Aug 22nd cycle low which is promising. But before prices can reach 2300, there will be strong resistance from 2190 to 2210 which happens to coincide with the Aug 17th high at 2214.

The SP500 is in a similar position to the NDX but weaker. Unlike the NDX, the SP500 could not manage close on Friday above the Thursday highs. None-the-less, the immediately outlook is bullish and first resistance lies at 1215 for Sep futures which is just above the Aug 17th high at 1206.75. Once through these key levels, the target would be 1250. Next date on my radar is Sep 9th.

I have to admit, the bullish scenario I just outlined above, NDX futures at 2300 and SPX futures at 1250 is already a popular view among "traders" and hedge fund portfolio managers which makes me cautious. I am regularly in touch with lots of people professionally trading the markets including some of the largest global fund portfolio managers and its not common for them to share my short term views. I might be overthinking this but who knows... Perhaps it is the Bernanke Jackson Hole comments where he said the next move toward stimulating the economy needs to be a fiscal step by congress. Good luck.. we saw how well that went with the debt ceiling debate.

Gold went up on Friday with stocks. Gold is confusing everyone, professionals included. I am looking for another leg down in gold and think the strong support will now be 160 to 155 for GLD. Buying GLD in this region may happen with the SP500 futures at 1215 or it might happen at 1250. Its impossible to know. And just to reiterate, I do not think gold has experienced a bubble run up yet. That does not mean prices can not top out but I think it does mean whatever top does take place that does not follow a bubble run-up will not be a lasting top.

AAPL held up remarkably well following the Steve Jobs news. The stock looks poised to move higher. It closed Friday at 383 but I think there is better than even chance we see it top out at 400 which will make a double top with the late July high at 404. This would then be followed by a 75$ drop.

EURUSD wants to go higher. The continuation inverse Head & Shoulder pattern should propel this to 1.5500. It closed Friday at 1.4500 and I think the entire professional community got this one wrong expecting the Euro to disintegrate due to the continuing debt crisis of Greece, Portugal, Ireland, Italy and Spain. But for whatever reason, prices are going up, not down.

AUDUSD is probably the best US dollar risk gauge at this time. It goes higher with stocks on positive risk and sells off with stocks on risk aversion. Currently 1.0565, cycles suggest a 1.0750 target for AUDUSD which would equate to the SP500 at 1250 ish. We'll see..

Gold - Aug 25, 2011

2011-08-25T06:13:00.002-04:00

I do not think we have seen a bubble top in Gold based on the characteristics of the trend higher the past few months and years. I think its a buy in the 159 to 154$ as per GLD. Correction will be of larger degree if prices drop below 147$.

AAPL - Aug 24, 2011

2011-08-24T20:36:00.002-04:00

Steve Jobs resigns for good. We all knew this was coming. Stock is already down 16$ to 357$. I think it will find good support at 335$ and should be a short term buy at this price. But if 335$ support eventually erodes away as investors doubt AAPL can ever replace the vision of Jobs, then I think prices will drop to 255$.

Key for the opening print tomorrow will be if prices can stay above 353$, the early August low. If instead things deteriorate more by the 9:30 AM opening print and we see a gap open below 353$, it could get ugly very fast with 335$ not holding. In other words, reaching 335$ via a normal open and controlled sell off is better for the bulls than a dramatic gap down below 353$ followed by a drop to 335$.

Equities - Aug 23, 2011

2011-08-23T21:54:00.005-04:00

Stocks rallied big today with the Nasdaq up 4.3% and Dow up 3%. The market is hoping Chairman Ben Bernanke will save the day once again. Last year this time at Jackson Hole Ben made strong comments on QE2 coming which did happen and resulted in the SP500 rallying from about 1040 to 1350 by mid February 2011, a 30% gain in 6months. Pretty good. However many will argue that QE2 did nothing for the economy and only propped up the markets. That may be true but one could also say that economy my have done much worse during those 6months if the SP500 had been flat or down. Not surprisingly, there is much opposition this time around to QE3 and it remains to be seen if the Fed will go for a 3rd round. Some economists believe the Fed will not do QE3 but instead will roll their existing long treasury positions further out along the curve. They will sell 7year and buy longer dates, perhaps 20year or 30year. Doing this will flatten the yield curve and ideally spur longer term lending which should be good for the economy.

The indices have now rallied to the bottom of the price gap that took place on Aug 18th following the poor Philly Fed data. Closing this gap will not be easy. For the NDX index the gap is from 2120 to 2160. I calc strong resistance at 2140 which happens to reside right in the middle of the gap and should be a good location to establish short positions. If prices do power higher through 2140, I think there is a strong chance we see follow through that reaches a 2300 target. For the SP500 futures, the equivalent first resistance in the Aug 18th gap resides at 1175.

Gold: As equity index prices move higher and reach resistance points, watch the behavior of Gold. Today Gold breached 1900 making a high near 1920 before dropped to 1830, a range of nearly $100! In doing this, Gold futures traced out a bearish engulfment pattern which is usually very powerful and does result in lower prices for at least a few trading days. Lots of people are saying Gold is a bubble and today was THE top. Personally, I dont think this is the case and do not see bubble characteristics such as prices going parabolic on a semi-log chart as we saw with some past bubbles such as Nasdaq 2000. Prices may head much lower with first target at about 1500. But I would be very careful in shorting Gold. I do not think we have seen a bubble type top. Buying Gold while shorting equities at key locations may be the way to go. Of course, if gold margin requirements are raised again (as was the case with Silver) then we may see a larger price correction.

EURUSD - Aug 22, 2011

2011-08-22T23:27:00.002-04:00

Supposedly fundamentals for EURUSD are very poor but despite this, prices are not going down. I also think the professional market is positioned for much lower prices. Obviously bearish EURUSD trades have not worked well for the past few months which probably means prices are going much higher given this type of price action and backdrop.

Currently 1.4375, I think EURUSD is now targeting 1.5500 and will soon be launched higher by the continuation inverse Head & Shoulder pattern that is near completion. Perhaps post Jackson Hole this Friday we will see take off!

Markets - Aug 21, 2011

2011-08-21T18:17:00.003-04:00

The NDX closed at 2038 on Friday. This is inside the 2050 to 2000 support zone first mentioned in this What is Possible post on Aug 7th. If prices close below 2000, then we have to assume a correction toward the July 2010 lows is next and SPX cyclical target would be 970 as given in the same previous post. If prices continue lower monday, hourly cyclical support resides at 1099 for the SP500 Sep emini's and 2005 for the Nasdaq100 Sep emini's.

The big question this week will be if the equity markets make a "W" bottom or not with Aug 9th being the first low of the pattern. And today is the 21st of the month!

Note the Aug 9, 2011 low for the SP500 (110.27 for SPY) took place at the 38.2% retracement of the full rally off the March 2009 low and the July 2010 low (101.13 for SPY) at sits at the 50% retracement.

Quick Observations & Conclusions - 13 Aug 2011

2011-08-13T20:40:00.005-04:00

My main views have not changed since the What is Possible post given one week ago. Those who read this important post know that I think the SP500 has broken with potential to see a panic low at SPX 970 based on historical panic precedents given covering the past 80 years of data. However, I also think the Nasdaq index is still bullish and the bounce higher from the expected cyclical low support at 2000 to 2050 did indeed take place which makes it possible we may next see new bull market highs. (which would prevent the SPX from reaching 970)

Regardless of what the media pundits say about the quality of buying, price action for the week suggests higher prices going forward. Seeing the weekly bars for the SPY and QQQ close above the opening prints with long tails is bullish. It doesnt matter why prices got to where they are. All that matters is that prices are where they are. (and additionally, who is to say the rating of the quality of the buying is accurate?).

Focusing on the SP500 since I view this as the caboose, I expect prices to rally to about 1220 for the Sep emini futures (friday close 1176.75). I dont know how long it will take to reach 1220 and we may see prices dip lower first. If prices do dip lower, watch for lighter volumes than we have recently witnessed to keep the 1220 rally alive. Above 1220 the next resistance will be 1256 and it is in this range that the fate of the market will be decided, a sell off toward 970 or onward to new bull market highs.

I think Europe banning short selling will be ultimately bearish the markets. In a nutshell, investors want to invest in markets that function properly. Banning short selling may produce a rally initially, but investors will not be comfortable in a market subject to "new rules" at any given moment. This will likely make investors simply exit the market preferring to play in markets (such as the US) where they know the rules and are confident the rules will not be changed. And I should add, short selling does not cause market crashes, it prevents them. The reason being that short sellers are natural buyers at lower prices. This is obviously too complicated for the European authorities to understand.

Bonds: The TLT bond etf reached 109.37 this past week to match the high made late August 2010. This corresponded to about 2.10% yield low on the 10y treasury which eclipsed the Aug 2010 yield low of about 2.33% but matched the Dec 2008 low of 2.05%. Watch for TLT prices to stay below 109.37 for the bullish stocks scenario to prevail. If TLT prices do move higher, I calc the next target to be 123 which will match the Dec 2008 price highs at 123. Obviously the relationship between the TLT price (20y tsy bond fund) and 10y treasury yields is changing as the shape of the yield curve changes. This will be an important gauge to watch. Volumes on the TLT have exploded higher and are much larger than what we saw during 2008. Any sort of shooting star or engulfment pattern on a weekly scale will be key.

Gold: Another gauge to watch, Gold has gone parabolic. Again, watching for any type of weekly pattern to suggest lower prices going forward to bolster the stocks higher scenario. Right now I dont see anything in the price action that indicates weaker prices going forward. Perhaps we see gold hit 2000$, a round target and double the March 2008 top.

USDCHF dropped as low as 0.7066 last week! The very long term cyclical low begins at 0.7500. I think prices will continue higher with first target 0.8850. Currently 0.7770 as of Friday close, the weekly bar looks bullish. CHF weakness should be viewed in similar light to Gold weakness.

Volumes - Aug 10, 2011

2011-08-10T12:01:00.004-04:00

Capitulation volumes have gone through the past few trading days. Yesterday was a high volume reversal low that caught everyone off guard with the rally taking place during the final hour. This does set the stage for a continued rally in the coming weeks but it is possible and likely we will see backing and filling of prices in the coming days. Key for the bulls will be to see lighter volumes on the down days which confirms the selling is drying up. Prices move higher not due to extra buying but mainly due to lack of selling. The lighter volume so far today is encouraging.

Please see my What is Possible post for the medium term scenarios going forward. The price points given in this post will be valid for some time.

Next - Aug 9, 2011

2011-08-09T21:36:00.003-04:00

The NDX index is out of sync with the SPX and Dow Jones indices. As expanded upon in this Aug 7th post, I think it is possible we will see the NDX index rally to new bull market highs from the cyclical low made in the 2000 to 2050 range. If this does not happen, then the next major low should target SPX 970 as detailed in the previous post. In either case, I think we will see the S&P emini's reach 1240 - 1250 toward the last week of August.

NDX rally - Aug 9, 2011

2011-08-09T08:32:00.002-04:00

The NDX index closed yest at 2060 and futures traded down to 1972 overnight. Prices have entered the NDX buying zone I elaborated upon in this What is Possible post a few days ago. I am expecting a very large rally in the NDX index...

USDCHF - Aug 7, 2011

2011-08-07T18:06:00.002-04:00

USDCHF very long term cycles suggest a major low will develop at 0.7500 and lower. Prices are nearly there now and the US downgrade may present a great buying opportunity for USDCHF.

What is Possible - Aug 7, 2011

2011-08-06T21:47:00.020-04:00

S&P rating agency downgrades US debt from AAA to AA+ while the other two rating agencies, Moodys and Fitch, maintain AAA ratings. Now what?

Well on Friday the market rallied early in the day off the tepid jobs report (117k vs. 85k expected) as people were looking for anything better than expected. This rally was short lived and buyers were swatted lower. The intraday sell off worsened as rumors began that the US would be downgraded afterhours (which we now know did happen). But by mid day, news came out that the ECB would begin buying debt of Spain, Italy, Portugal, etc. and this gave a lift to the market from the lows. But this 2nd half of the day rally back into the positive was still feeble and prices closed rather weak. So it seems the market will sell off with the US ratings downgrade. How far?

It can get complicated. I have read some analyst notes and many smart people now expect S&P to also downgrade another AAA sovereign in addition to the US. Top candidate is France. If this happens, it will aggravate a very delicate situation in Europe which could result in a these twin crises between the US and Europe leapfrogging each other lower and lower. This remains to be seen (more on this further down).

Despite these negatives, analysts are still maintaining SP500 1400 ish forecasts and earnings have been ok. Lets see how long this continues since as we know from actively trading the markets, negative contagion can spread very quickly like a disease regardless of positive fundamentals and just when prices appear extremely cheap vs. intrinsic values, the fundamentals suddenly change. (which is why Mr. Buffet requires an attractive brand in addition to fundamentally cheap prices before buying).

As a trader, we have to figure out if this sell off will soon be viewed as a brief panic of the past or a longer term bear market move lower. To do this, I look for historical precedence knowing that our current market will not exactly repeat anything from the past but it is good to know what is possible. Looking back 80 years or so, applicable panics according to the Dow Jones Industrials include:

May 2001 - Sep 2001 (4 months)
Aug 1987 - Oct 1987 (2 months)
Feb 1966 - Oct 1966 (8 months)
Mar 1962 - Jun 1962 (3 months)
May 1946 - Nov 1946 (6 months)
Sep 1939 - May 1940 (8 months)

I chose these past panics based on my own discretionary chart interpretation which included the location of prices at the highs just before the panic among other factors (ie: a sharp drop at the end of a lengthy down trend is not a panic from the top but the end of a bear market trend). The average of these is 5 to 6 months in duration which would place our current "panic" terminating Oct to Nov 2011. This type of panic would target approximately 970 for the SPX. (Friday close 1199, Friday low 1168). This price point of 970 for the SPX has a lot going for it and is worth the study if you care. Obviously this would be a brutal outcome being nearly 20% lower than the Friday close. I hope we do not see it and there is indeed a chance we will not based on shoter term cycles and mean reversion statistics for the NDX index.

At present the NDX index (nasdaq 100) is stronger than the SPX (sp500 cash) or Dow Jones Industrials. My own cycle work & statistical mean reversion analysis suggest exceptionally strong cyclical support for the NDX in the 2000 to 2050 range for the NDX. This would be about a 7% drop from the Friday close of 2194 and may produce a rally that goes high enough to avert the SPX 970 scenario given above.

Lastly, the king of precedents is the crash of the great depression. This has been the analogue for the Nasdaq as follows:

1929 bubble top = 2000 bubble top
1932 crash low = 2002 crash low
1937 top = 2007 top
1938 crash = 2008 crash
1940 - 1941 drifting top = 2011 top
1942 final low (WWII) = 2012 final low (another US military conflict?)

If this scenario is meant to happen as both US and Europe crises leapfrog lower and lower, I would expect the SPX to bounce from 970 to about 1225 and then a final (1942 analogue) low to take place in the mid 800's. This would be the buying opportunity of a lifetime in the same league as the 1942 low or 1982 low.

Addendum: In the event the markets rally this week without NDX first reaching 2050 - 2000 region, watch for traders to enter short positions in the SPX 1260 to 1280 region which is the Head & Shoulder neckline support, the Jun 2011 low, the 50% retracement of the sell off from July 7th top and overhead Karma line resistance. It may not sound possible for the markets to rally this week based on what I have written above and the headlines appearing in the media right now. But keep in mind the market is a discounting machine and the violent sell off in stocks we witnessed last week was partly due to the market expecting a US downgrade. In other words, the removal of uncertainty may result in a "buy the rumor, sell the fact" stock market rally. It pays to be ready for all possicle scenarios including the one's that seem most remote.

Damage Done - Aug 5, 2011

2011-08-05T19:48:00.003-04:00

The technical damage done to the markets will take time to repair. The weekly bar looks poor. Next major SPY support is at 115 as per this last post. Please see this post. If we do see the market rally, SPX resistance lies in the 1265 to 1285 region.

I'll be away for 2 weeks!

Bigger Picture - Aug 4, 2011

2011-08-04T22:24:00.003-04:00

When there is panic, it is worth taking a step back to see the bigger picture. Just above is a monthly chart for the SP500 as per the SPY. I last used this chart on July 10th and commentated quite a bit on it. Plse see this previous post. To reiterate, the SP500 is just now returning to the pace seen during the 1996 to 2000 bull market trend as shown by the blue trendline. And drawing the channel which passes through the April 2010 and April 2011 tops and July 2010 low, the SPY is not far from channel bottom support which will also match the 1996 - 2000 trend pace. This SPY low is expected to take place at 115 or higher.

SP500 cash - 04 Aug 2011

2011-08-04T11:46:00.004-04:00

SPX is now trading just below 1220 which equals the April 2010 top and is a key support zone to keep the current market structure in place. Larger degree cycle support indicates 1200 ish. Next support would be 1150 followed by 1000.

I should add. The NDX is behaving extremely well and is supporting at smaller degree targets which the SPX did not support. Could be a classic case of NDX bouncing from smaller degree (current low above Jun 2011 low) while SPX bounces from larger degree (low below the Jun 2011 low).

Needless to say, the employment report tomorrow will be critical.

Briefly - Aug 3, 2011

2011-08-03T23:04:00.002-04:00

The Dow Jones reached mean reversion oversold status and cyclical support on Aug 1st as elaborated in this Aug 1st post.

The SP500 reached mean reversion oversold status and cyclical support yesterday on Aug 2nd.

The Nasdaq reached mean reversion oversold status and cyclical support today on Aug 3rd.

There is a large Head and Shoulder pattern top in the major indices. The neckline was broken but prices are rallying back up past the neckline. This type of action is very bullish as it shakes out the weak holders AND pulls in new shorts that will have to cover.

All three indices are now ready to rally. Today's action saw key hammer formation lows on very heavy volumes (heaviest since May 2010) in the 3 indices, a very good sign for a lasting bottom.

USDCHF and EURCHF implied volatilities spiked to capitulation levels suggesting a peak in CHF strength. USDCHF spot reached 0.7600 and GBPCHF reached 1.2400, in the zone for the cyclical lows on each as described in this recent post. CHF weakness will equate to risk positive markets.

Bond Price etf's reached mean reversion overbought levels yet closed flat on the day. This took place with a very bearish shooting star top formation on heavy volumes. This suggests higher yields going forward which will equate to risk positive markets.

The BOJ is on the verge of buying USDJPY. Yen weakness will equate to risk positive markets.. USDJPY is flying as I type.

Oil is ready to rally. The USO has dropped too fast too far reaching mean reversion buy prices AND prices have reached a short term cyclical low. Higher oil will equate to risk positive markets.

Dow Jones - Aug 1, 2011

2011-08-01T22:27:00.003-04:00

Just above is a plot of the Dow Jones Industrial average since the start of this year. As you can see, its been a choppy year so far making it difficult to make profits. Here I wanted to present the bear case which is the Head & Shoulder pattern as illustrated. Prices are yet to break the neckline and only a decisive close below the neckline would confirm the index rolling over. Currently 12,132, if prices do roll over, first target would be approximately 11,400. However, I not think this will happen just yet. The lower indicator on this plot highlights prices are very oversold and ready to revert to the mean by moving higher or sideways. For comparison purposes, I have drawn vertical dashed lines for each of the previous oversold mean reversion signals generated earlier this year. This is a specially designed mean reversion indicator that removes the shortcomings of the more popular reversion indicators such as RSI or Stochastics. It works well and I mainly use it as a filter to avoid poor risk reward trades. Current conditions say do not sell short.

Today the combination of continued Euro debt problems and worst than expected ISM data swatted prices lower off the morning highs. This resulted in a long range bar and it may take a few days to break free from this. I am watching for a false break lower of the H&S neckline to signal the path higher to 12,500 on the Dow. Given today's tricky action, several people have asked how I played the price action. Here's exactly what happened: I got long on friday from 1285 down to 1279 for Sep emini's. I sold out some at 1299 on Friday. Sunday night I sold out more at 1307. Today I stopped out of the balance for scratch and thats how it goes! And I will be a buyer again tomorrow/tonight.

GBPCHF - longer term support Aug 1, 2011

2011-08-01T22:11:00.002-04:00

Cycles show GBPCHF has reached longer term support between 1.2700 and 1.2000. Along with USDCHF reaching longer term cyclical support at 0.7500 and lower, I think CHF weakness is around the corner. USDCHF traded down to 0.7729 and GBPCHF reached 1.2580. Any Swiss weakness will be viewed as capital moving out of safe haven status and could be a trigger for global risk.

How High - July 31, 2011

2011-07-31T21:54:00.003-04:00

Congrats to all who were brave enough on Friday to buy into the weekend event risk knowing that prices AND crowd emotions had reached extremes thereby making the risk reward attractive as discussed in this previous post on Fading the Crowd. As I write this, futures are flying higher off the back of a debt ceiling agreement (spu's up 20 pts for so from friday close)

Next question. How high will prices go? The Dow Jones closed on Friday at 12,143. I expect prices to rally without interruption to at least 12,500. This will equal the July 18 to 21 rally and reach the 61.8% retrace. Once 12,500 is reached, I will assess whether the markets have potential to make the large scale breakout higher presented in this previous post on July 19th for the Nasdaq. The bigger question will be what the bond market does following this debt ceiling agreement. Bond prices surged on Friday with the 10y yield trading below 2.80% but the price and volume action has the look of what took place on Mar 16th which led to bond prices turning lower from a high volume top. Hopefully we will get some clarity on bonds later this week although we may need to wait for the employment report on Friday.

Fading the Crowd - 29 July 2011

2011-07-29T20:22:00.005-04:00

There is an old market saying "Never fade a Friday" which means if the market is dropping on a Friday, do not buy it. And if the market is rallying on Friday, do not short it. Thats fine and all but I can tell you that the people who repeatedly regurgitate this "rule" dont really understand what trading is all about.

One important aspect of trading is knowing WHEN to fade the crowd. In fact, this is when a trader has his greatest trades! To understand this you have to realize there are different types of risks driving human behavior. There is intraday vs. overnight risk where many people will not hold positions overnight due to the unknown risk that may develop during the night and hurt them on a gap the next morning. There is weekend risk where people will not hold positions into the weekend for fear of the unknown during a 3-day span with no trading that will surely hurt them. And lastly there is event risk where people will exit positions prior to an important event believing the market outcome will doom them.

So when is it ok to take on all these risks that average people want to avoid? When prices AND emotions are extreme. Under these conditions when prices are very low or very high with emotions at a zenith, the risk reward is exceptionally attractive to take on the unknown risks that exist overnight, into a weekend or through an event.

I think we are at one of these zenith points right now. Prices cratered today (following poor GDP data and the continuing debt ceiling saga) with emotions running high on a Friday into a weekend event risk (debt ceiling deadline). Today was a good day to fade a friday which meant buy long stocks! To place more emphasis on this, I would rather buy long on a Friday with extreme prices and emotions than on any other day of the week! Why? Because I know that prices reached extreme levels precisely because the crowed engaged in indescriminate selling for fear of the unknown!

As an example, Friday Sep 21, 2001 the market cratered into an extreme emotional low following the 9-11 tragedy. This was THE day to buy long but very few people did. And there have been other Friday's too with these conditions such as Friday Mar 21, 2003 for selling short! So dont be afraid to go for it on a Friday when everyone else is running scared. You might just make a killing!

USDCHF Long Term - July 27, 2011

2011-07-27T21:36:00.002-04:00

I see multiple longer term cycles (30yr cycles!) suggesting a very important low will begin for USDCHF at 0.7500. I also see shorter term cycles (3yr cycles) suggesting a key low for USDCHF begins at 0.8000.

Bonds - July 25, 2011

2011-07-25T22:19:00.002-04:00

As stated in this post on July 14th, I think the TLT is headed for 90$ per share which will correspond to about 3.40% to 3.50% on the 10y treasury. If the debt ceiling is not raised, then sell US debt (its being downgraded!). If the debt ceiling is raised, real money asset reallocation will be moving a mountain of money from bonds to stocks sending bond prices lower (TLT to 90) and yields higher. And of course this latter scenario will contribute to the NDX breakout higher.

NDX Breakout - 19 July 2011

2011-07-19T22:27:00.008-04:00

Just above is a point and figure plot of the NDX index using 10 pt boxes and 3 box reversal. On this chart I wanted to illustrate the regular pattern of consolidation, trend, consolidation, trend, etc. This is easy to see on a PnF chart where there is no time axis. In fact, the width of the consolidation base is strictly a function of the price volatility experienced. The idea is that the wider the consolidation base, the stronger the price breakout will be and the further the trend will go. This does make sense since a consolidation represents a time during which shares change hands from weak holders to strong holders. During this time the outstanding float for a stock can be turned over and this is how accumulation takes place before an upward trend begins (or distribution takes place before a downward trend begins). Those familiar with this blog know the Vol State Space indicator I use is partly based on this concept of linking price breakouts to accumulation and distriution. For the plot above, I have drawn a rectangle around the Feb 2011 to July 2011 base and copied this rectangle over the previous two bases as illustrated. This demonstrates that the current base is actually wider than the previous two which suggests the resulting trend higher should be greater than either of the two previous trends which were 990 pts and 650 points. This projects a target in the 2850 to 3000 region which agrees with three phase theory where phase-1 = yr 2002 low to yr 2007 top, phase-2 = yr 2007 top to yr 2009 low, and phase-3 = yr 2009 low to price target 2850 / 3000. And lastly, a 50% retracement of the year 2000 top to year 2002 low will be price 2800.

But before this big breakout takes place, we need to see the NDX close decisively above the 2400 - 2420 region, the tops established during Feb, Apr, May and early July this year. The mean reversion indicator along the bottom of the chart above works well on PnF charts and says the price action is NOT yet stretched to the upside which increases the odds of a successful breakout higher. AAPL reported big earnings after the close and is up 20$ after hours trading near 400$. I do project target resistance just over 400$ for AAPL which will also be 2x the year 2007 top and 5x the year 2008 low. So lets see how AAPL holds the opening gap. Ideal for the bulls will be a close above the opening print.

SP500 Outlook - July 10, 2011

2011-07-10T20:48:00.009-04:00

There are 3 plots of the SP500 etf, SPY, just above. The bottom plot is daily, middle plot is weekly and top plot is monthly.

The bottom daily plot illustrates the Vol State Space indicator applied to the price action. Most recently on Jun 13th I used this indicator to help me identify the pending low which took place
three days later on Jun 16th at the PRICE-TIME balance point. Please have a look at these two previous posts.

To briefly summarize, the Vol State Space indicator identifies when the market is undergoing accumulation or distribution according to the PRICE vs. TIME balance conditions applied to volatility. My theory is that the market contains a finite amount of volatility which combined with the market always seeking a natural balance between price and time, one can make interesting and tradable conclusions. (more info on my approach to indicators and the markets can be found in this trading story Jun 27th post) Having said that, the Vol State Space indicator is now saying the price action for the SP500 has changed from bullish to neutral. This can be seen by separation of the red line and blue line just above the recent price action. This change in bias took place on July 6th and is due to the recent surge in price volatility. In other words, the rally off the Jun 16th low has been too violent to maintain the bullish bias and may be an early sign of distribution at the top. Watch this space for a change from neutral bias to bearish or back to bullish.

The middle plot above illustrates the weekly chart and Head and Shoulder topping pattern I had highlighted in this July 6th post. On this plot I have drawn a price channel defined by the March and June lows with parallel extended from the February top to catch the July 7th high last week. If this H&S topping pattern completes, it suggests a Sep 2011 low just below the April 2010 top as drawn on the chart. I do believe a sell off to just below the April 2010 top will be healthy for this market to perpetuate the bull move and in this Feb 16th post which identified the Feb 18th top, I identified the longer term topping zone which is still value. Of course, bullish markets beyond a future low just below the April 2010 top will be entirely dependent upon the nature of the move lower between now and then.

Lastly, the top plot above illustrates the monthly price action for the SP500. Here I wanted to point out two things. Firstly, the monthly price action for the SP500 since March suggests distribution at the top. Each of the monthly price bars has completed a bearish hanging man pattern. This is not a strong pattern but it is a warning. Secondly, I wanted to point out the rate at which the upward trend since the March 2009 low has taken place. On this chart I have drawn parallels to the bullish uptrends that took place during the late 1990's and 2003 to 2007 all drawn from the March 2009 low. As you can plainly see, the current trend has been rising at a much greater pace than the previous two bull markets. Lower or sideways price action would bring this market back to the old pace.

I am now trading this market from a neutral bias but I wanted to bring to your attention developments I see on the charts. If prices can eat through supply and resume the bullish bias, topside target is just north of 1400 at the perfect square.

SP500 and EURUSD update - July 6, 2011

2011-07-06T09:56:00.016-04:00

There are two plots just above. I will start with the lower post which is of the SPY, the SP500 etf. My last post on the SP500 on Jun 28th stated the Jun 16th low should hold (reiterating the emphatic post on Jun 16th), the market looked bullish going forward, I expected prices to oscillate around the PRICE-TIME balance line, first target was 1310 for the Sep emini futures due by July 8 -11th, and volatility was due so fasten your seatbelts. +

Since then volatility to the upside has happened and the SP500 price is running well ahead of time. The chart above illustrates prices are now well above the PRICE-TIME balance line and I am expecting prices to move sideways or lower short term which will once again balance price and time. Additionally, the lower two indicators now say prices are too high to buy. So at this time, I would do nothing. Trading position longs were sold out end of last week and its time to be flat from a short term trading perspective. We need to watch how the next pattern unfolds which will tell us the short term path of least resistance. +

Next I want to bring to your attention the potential Head and Shoulder topping pattern as illustrated on this chart. The Feb 2011 top is the Left Shoulder, the May top is the Head and Western analysts will be looking for a Right Shoulder top to develop where a symmetric right shoulder top would be due July 12th. It remains to be seen if this pattern will be completed or not but it is always good to be aware of potential developments. +

Longer term the picture is not much clearer. In this post on Jun 13th I did identify a much higher target north of 140 for the SPY (north of 1400 for the SPX cash) but in this mid February post I identified longer term topping zone for all 3 major indices. Upon further inspection, I now find that reaching the target north of 140 will not invalidate the topping zone illustrated in the mid Feb post! +

Perhaps all of this will be decided by EURUSD. The top plot above illustrates EURUSD spot tracing out a large wedge pattern. My recent post on Jun 29th stated the 1.4600 - 1.4650 zone for a top. Prices topped out short term at 1.4577, close enough, and are now back to the middle of this wedge. Wedges are nearly impossible to predict. But gun to my head I would go with the path illustrated on the chart above. EURUSD prices are NOT oversold which makes further downside very possible. A break of the bottom of this wedge suggests a first target of 1.3800 ish followed by a lower target of 1.3500 - 1.3600. Watch to see how the US equity markets holds up with a lower EURUSD breakout. +

An update in bonds is coming soon. On Jun 24th the 10y swap rate reached the low yield target and this did turn yields much higher.

EURUSD - 29 Jun 2011

2011-06-29T23:21:00.004-04:00

Currently 1.4500, EURUSD short term target remains 1.4600 - 1.4650 before a turn lower should begin. My previous EURUSD post on Jun 23rd, identified volatility coming (and its happening) and I said 1.4600 would trade before 1.4100. I still believe this (EURUSD dropped to 1.4102 on Jun 27!).

SP500 futures update - 28 June 2011

2011-06-28T22:05:00.003-04:00

Above is the same chart given in my June 23rd post. As stated then, I expect prices to oscillate around the Price-Time balance line drawn in red. So far so good. First target remains approx. 1310 due July 8 - 11th. Note today's close at 1294.50 is the first close above the April low at 1289. This is a bullish sign as old lows are most important for defining future tops. Tomorrow is the Greece austerity vote. Volatility is expected and as the lower indicator on the chart above illustrates, the SP500 is due to get wild. SP500 prices are NOT overbought thereby making upside volatility equally as likely as downside volatility. Fasten your seatbelts!

Market Analysis - Jun 27, 2011

2011-06-27T20:48:00.005-04:00

Many people have asked me for more "instructional" posts explaining how I interpret the markets and the indicators I use. I will not go into detail on my indicators but as I have said in the past, I am of the view that to be successful in trading the markets, one must think differently. To me this entails using the popular indicators in a completely unorthodox manner and/or using proprietary indicators. I do both.

Many of my posts have illustrated the results of my proprietary indicators such as the Vol State Space indicator or the Karma Lines. My primary conditions for proprietary indicators is that the process must be sensible, operate on a feature inherent to the markets and satisfy an equilibrium condition on all time scales.

What do I mean by using popular indicators in an unorthodox manner? How about buying long when the popular relative strength indicator, RSI, is flashing a "sell" overbought signal! And there are many more.. Bottom line is that you have to get creative and be insightful keeping in mind the psychology of the crowd.

One other thing I can share. Many people believe the markets operate in a continuous manner and as a result you will see legions of academics apply textbook statistics to price time series (ie: whats the standard deviation, kurtosis, etc.). However I have found that if one focuses on what I call "digital" events, you can read the tape much better. The three digital events on my watch list include:

1) High Volume Days
2) Long Range Days
3) Gaps

If you are able to interpret these three digital events, you will see things others don't and have the confidence to stay in a position or fade a move. This is important. In addition to carefully analyzing the major indices, I comb through the important single names looking for these digital events to help me decipher the big picture. (notice MSFT today?)

I combine all this with my usual cyclical analysis of prices and time (Gann and modified Elliott Wave) held together inside the Too Far Too Fast statistical boundaries.

As for the SP500, my views have not changed. I still believe the PRICE-TIME balance point described in this Jun 16th post defined the low and accumulation is underway as first stated in this Jun 13th Vol State Space analysis post. And I still believe the path going forward will be as described in this Jun 23rd post.

Bonds - Jun 24, 2011

2011-06-24T20:00:00.003-04:00

The cycle distribution zone for a top in bond prices (low in yields) is still in force. The zone for the 10y treasury yield to bottom is 2.90% down to 2.75% and bonds have been trading in this range all month. Today was the first day the 10y swap rate reached its distribution zone which exists from 3.0% to 2.85%. The 10y swap rate made a low yield of 2.99% today. The 10y treasury AND 10y swap are now both ready to move lower (higher yields)

EURUSD volatility - 23 Jun 2011

2011-06-23T22:53:00.002-04:00

Volatility indicators suggest EURUSD is about to get wild. Prices have been wedging sideways since the early May top but gun to my head I would have to bet on EURUSD moving higher more than lower. Currently 1.4250, I think it trades at 1.4600 before it trades at 1.4100.

SP500 Price following Time - 23 June 2011

2011-06-23T22:30:00.005-04:00

The views have not changed. The SP500 Jun 16th low is still in place and this was defined by the price-time balance point as illustrated in this Jun 16th post.

The chart above illustrates the expected path for the SP500 futures going forward. Prices have been held down by the April 2011 low at 1289 and this has defined the top of the recent consolidation. I think we should see prices eclipse 1289 no later than Jun 30 / July 1st and going forward prices should more or less oscillate around the upward sloping PRICE-TIME balance line drawn in red on this chart. I think the first target will be approx. 1310 for the September futures reached on about Friday July 8 or Monday July 11. From 1310 a reaction lower is likely and then PRICE will need to play catch-up to TIME as defined the the balance line.

Price & Time - Jun 16, 2011

2011-06-16T22:14:00.003-04:00

As you know from my post a few days ago, I believe the SP500 as reached a price point where an accumulation process has begun. It remains to be seen how long this process will last before prices rise from the accumulation zone but I think there is a good chance today was the low point of this zone according to PRICE and TIME being balanced.

On March 16th the SP500 made an emotionally charged low at 125/126 as per the SPY etf as the world watched videos of the earthquake / tsunami tragedy in Japan. Prices made a LOW and began moving HIGHER from a very negative event. 32 trading days later on May 2nd prices made a HIGH and began moving LOWER as the Western world rejoiced the death of Bin Laden. 32 trading days later today on Jun 16th prices have made a LOW at 125/126, the same low price seen March 16th, as news out of Greece reached a low point. Between Mar 16th, May 2nd and Jun 16th, the market has made a balanced round trip through PRICE and TIME. This suggests a turn is due or in the words of old WD, PRICE and TIME are square. Watch for prices to move higher from the Jun 16th low.

Bond Market - 14 Jun 2011

2011-06-14T22:27:00.003-04:00

On Friday last week I issued a "bond market alert" saying volatility was about to dramatically increase. The jump in 10y yields to 3.10% today (sell off in price) has NOT satisfied this volatility signal yet. I am still looking for bond price action to get more wild. Also, you know I have been calling for higher yields following the forecasted low for yields at 2.90% on the 10y, top in the bond TLT at 98$. I dont know which direction in bond prices will produce the higher volatility, but it is imminent. Right now with the TLT at 95, prices are neither oversold nor overbought. But considering the very skewed media and extremes in sentiment, I would have to assume higher bond yields will result from higher volatility.

SP500 update - Jun 13, 2011

2011-06-13T22:45:00.005-04:00

Just above is a plot of the SPY etf which tracks the SP500. This plot illustrates the price action since July 2010 when the market was last making a major low following the May 6th "flash crash". Its been a long time but I thought it would be worthwhile to have another look at the Vol State Space indicator which evaluates accumulation & and distribution according to the volatility of prices. On this chart I have tried to annotate the indicator conclusions as best I can. You can see where the indicator bearish bias ended early August 2010 by the merging of the upper red and blue lines and the bullish bias began by the separation of the lower red and blue lines late August 2010. This bullish bias was not tested until mid-March 2011 when prices dropped to the lower red line and successfully bounced higher. Here we are again with a 2nd test of the bullish bias as prices are once again meeting with the lower red line. There are typically several bounces along this lower red line before a trend rolls over and as the current action is only the second meeting, I expect prices to bounce substantially higher. Having said that, there is not unlimited time for the expected bounce to happen. As time passes by and prices move around, the fixed amount of volatility in this market will be consumed thereby making the lower red and and blue lines converge to remove the bullish bias and create a neutral state. Hower I dont think we will see a neutral state unfold and am looking for prices to head toward the target labelled on the chart which will meet the trendline stemming from the April 2010 top by late August / early September 2011.

Bond Alert & Market Update - Jun 10, 2011

2011-06-10T07:16:00.004-04:00

I wanted to bring to your attention the volatility signal in the TLT bond etf valid as of yesterday. This signal says the price action is about to get more wild imminently. The last such signal took place on Apr 4th and resulted in the TLT dropping from 92.60 to 89.60 over 5 trading sessions. This does not mean the TLT will drop in price again with the current signal. It simply means prices are about to move big. But of course, if you have been following this blog, you know that my analysis says the TLT topped out recently and is headed lower medium term.

And to update on the equity markets, I believe the SPY (SP500) is undergoing accumulation centered at 129 as stated in my recent post. Lastly, I recently posted a buy signal in AUDCHF and the importance of this FX pair. I now believe the currency Swiss, CHF, is about to make a major turn lower, weaker CHF, against all other currency pairs and this will be a macro sign of a change in risk sentiment.

SP500 & AUDCHF update - Jun 5, 2011

2011-06-05T19:02:00.028-04:00

As per the SPY etf, the SP500 is very near a terminal 3-phase pattern to end the sell off from the May 2nd top. I am looking for the SPY to bottom out at 129 +/- 50 cents. It closed Friday 130.42.

In the world of FX for the G10 countries, the currency pair AUDJPY has historically been most representative of the balance between positive vs. negative risk. When risk appetite is strong, equities, commodities, and AUDJPY moves higher (stronger AUD, weaker JPY). But when risk aversion takes hold, equities, commodities and AUDJPY moves lower. This is still true but AUDJPY and other JPY pairs (EURJPY, etc.) are no longer the most reliable barometers for risk since the Bank of Japan and other central banks intervened in the FX markets to sell JPY during mid-March which created the emotional USDJPY low at 76.25.

The new FX risk barometer is now AUDCHF. This does make sense since AUD is the highest yielding G10 currency while CHF is one of the lower yielding currencies and a popular funding currency (behind the JPY) as well as being the safe haven of Europe while Euro based sovereign debt woes persist (Greece, Portugal, Ireland, etc.). According to the plot above, AUDCHF completed a three phase sell off on Friday last week, is very statistically stretched to the downside and should begin a move higher. The plot illustrates my best guesstimate for how this rally will unfold with target in the 0.9400 region. Watch for AUDCHF to move higher from last weeks low at 0.8860 as an early indication of risk recovery in the global markets.

Financials - Jun 1, 2011

2011-06-01T23:05:00.002-04:00

As per the financial exch traded fund, XLF, prices are ready to bottom. XLF dropped to 15.29 today and my work shows the zone for accumulation has been reached with today's low. And since the financials are interest rate sensitive, it is good to see the XLF signal for a turn coinciding with a signal for a turn in bonds.

Top in Bonds (low in yields) - Jun 1, 2011

2011-06-01T21:54:00.009-04:00

Today the TLT bond holder reached the 98$ target and I think the next big move should be lower prices. I last posted on this May 16th and at the time projected the 10y bond yield target to be 2.90% for a low in yields. The 10y bond reached 2.94% today. Close enough in yield but I am more focused on the price target for a top having been satisfied.

This Friday is the US employment report and it will be highly anticipated. The recent US economic numbers have been weak and people are speculating QE3 (the 3rd round of quantitative easing) may happen despite the Fed saying otherwise. If the employment report is very weak, we may indeed see QE3. In fact, its very possible that we are now seeing the 10y bond yield at 2.94% because the market is expecting QE3. Or in other words, QE3 is already priced in!

Thus I think there is a very strong possibility we see bond yields move higher post-employment report and in my experience, it is merely the passing of the data point thereby removing the uncertainty which causes the market to turn. Whatever the data is, stronger or weaker than expected, the fact that it is past tense will turn the market when the price action is ripe as I believe it is now for the 10year. And this concept holds in all asset classes too! I dont know how else to explain this but if you trade it, you know what I am talking about.

Lastly I need to report, the volatility expansion indicator is saying sp500 emini realized volatility is ready to explode higher. Today's 2% sell off in the SP500 was large and does contribute to higher volatility. But the indicator says it is just beginning. Volatility will move higher most efficiently with wild up days and down days rather than just a crash lower in prices. So watch for some wild price action and for volatility to move higher faster for the remainder of this week, it will happen easiest by seeing the sp500 eminis move higher, opposite of today's large down day. Bonds will probably lead the way.

10y Bonds - May 26, 2011

2011-05-26T21:16:00.003-04:00

My target cycle top for bonds was previously posted as 98.0 for the TLT. This is still the case for the TLT as prices rose again today reaching 96.60, the same high made May 17th, while the 10y bond yield made new lows at 3.05%. However, today the June futures for the 10y bond reached the cycle target just above 123 and I am now looking for bond prices to begin the topping out process.

Possible Low - May 24, 2011

2011-05-24T21:13:00.002-04:00

Despite equity markets eroding lower over the past several trading sessions, other risk markets have held up relatively well. AUDUSD has not reached the downside target given in this recent post and AUDJPY has not broken down either. Oil and Silver have been consolidating at the lows established earlier this month. The biggest problems lately have been centered on the Euro and this has led to a lower EURUSD since May 19th but not a higher USDCHF. I realize this is a lot to digest at once but its starting to feel like risk wants to go higher as I would have expected the risk aversion to contaminate other asset classes by now.

Turning to the prices (which never lie!), I see the following: My SP500 emini downside target of approx. 1300 for this swing has nearly been reached. 1305 just traded.. The corresponding downside target for the Nasdaq emini's is 2286 and this has been reached (now trading 2283). My main concern is the down gap that took place on Monday May 23. This was a large gap down for the indices and could have longer term bearish implications. But I also think that even if the gap down does mean prices are headed lower for longer, the market is due for a bounce higher according to PRICE cycle targets being reached. It may only be a short term bounce, several days, but would be sufficient to exit. Additionally, TIME cycles suggest May 24 to 27 is the window for a short term low.

Lastly, I am still watching for bonds to top out at 98 on the TLT as stated in this earlier post.

The AUDUSD risk gauge - May 17, 2011

2011-05-17T22:35:00.005-04:00

AUDUSD is one of the best gauges for overall market risk. And it is a particularly good gauge for the health of the commodity markets since Australia is rich in commodities and commodities are priced in USD. In other words, the AUDUSD exchange rate has both sides of the equation - AUD representing commodities and USD representing the pricing. Additionally, Australia is the only G10 country with interest rates above 5% which is very attractive for investors seeking to earn carry and is especially attractive against the USD where rates are very low allowing one to capture the interest rate differential. Thus AUDUSD reflects the most liquid positive risk carry and the commodity markets.

The plot above is my estimation for the current AUDUSD fractal 3-phase evolution where I have drawn each scale in a different color since the early May top. Bulls should be looking for spot AUDUSD to bottom out in the 1.0360 to 1.0260 range between May 24 and 27th. Also note 1.0260 represents the Dec 31, 2010 high for AUDUSD, a perfect example of an old high becoming future support. If this support zone does not hold, then we will likely see the markets head toward my larger degree targets given in this May 15th post.

Bonds - May 16, 2011

2011-05-16T22:25:00.003-04:00

Bond prices topped out late August 2010 and then bottomed out early Feb 2011 at 88$ for the TLT bond etf. Currently $95.60, I am looking for bond prices according to the TLT to top out at approximately 98$ between now and May 25th with a focus on May 19 & 20. This expected high in bond prices will probably be in the vicinity of 2.90% for the 10y bond yield. A top at 98$ for bond prices may coincide with a low for the SP500 futures near 1300 as mentioned in my previous post. It remains to be seen if the TLT high at 98$ is longer lasting thereby sending bond yields much higher as prices move lower.

Big Picture - May 15, 2011

2011-05-15T22:29:00.002-04:00

I have posted a bunch of updated views and plots on the markets today after spending time going through the price AND time cycles.

In this post on US equities, I illustrate the 1331 support for the sp500 futures (which has already been broken since posting). The Sp500 is still following the path given mid April and I calc next support is near 1300 as shown on the chart. Also important, volatility is ready to jump higher again. The plot highlights the last two volatility signals.

In this post on commodities, I illustrate how the CRB commodity index has topped out at the pivotal 61.8% retracement of the 2008 crisis crash. This is not insignificant especially when one considers that the April 2010 top which led to the May 2010 flash crash (Dow Jones down 1000 pts in one day) also took place at the 61.8% retrace. Target is given for the CRB index.

In this post on the US dollar, I illustrate USDCHF which I believe has made a major low at 0.8550 as both price and time cycles agree. USDCHF now has good potential to reach 1.3300. Next two resistances will be 0.9000 and more importantly 1.0000. This analysis stretches back to the 1985 Plaza Accord where the USD was devalued.

In this post on the Euro, my chart illustrates the current channel lower for EURUSD, the pivotal 1.2000 support, and how the 1.0000 target could happen extremely fast.

The Euro - May 15, 2011

2011-05-15T20:47:00.006-04:00

The situation in Greece is deteriorating. The country is insolvent and this is spreading contagion fears as Portugal, Ireland and Italy will be next... followed by Spain, the big one. (the PIIGS). This is serious stuff. The monetary authorities of Europe can not let the PIIGS default or it will be total chaos and the markets will go into free fall. The only solution will be to restructure the debt of Greece. For example, 10year Greek bonds will be changed to 20year maturities. This will create an immediate 30 to 40% haircut for all Greek bond holders such as the large German banks. To neutralize this 40% loss, the German government will give German banks holding the Greek debt a huge tax break. The German banks will see zero impact to the bottom line but German government revenues will suffer and this is how the problems of Greece will be transferred to the European governments. Sound familiar?

I dont really care much for fundamental reasoning since I believe price action drives fundamentals in the short to medium term but understanding what is going on can help one have more or less conviction in technically driven views.

With this backdrop in mind, it would not surprise me to see the EURUSD be extremely whippy while trending lower, oscillating between government plans that will save the Euro (temporary positives for the Euro) and prices continuing lower.

Just above is a monthly plot for EURUSD stretching back to the inception during January 1999. As you can see by the horizontal drawn, EURUSD 1.2000 is pivotal. I expect a very choppy move down to 1.2000 where support should materialize. Once 1.2000 breaks, the target will be 1.0000 and this should be lightning fast, perhaps from 1.2000 to 1.0000 in one week. Many of you remember the 1998 Asian crisis where USDJPY dropped 9% in one day that fall. This type of move has yet to happen in EURUSDD but it will.

The Perfect Storm: There is a very good chance EURUSD will drop exceptionally fast as it represents the perfect storm. Greece debt restructuring and contagion fears is a very big negative for the Euro. This is enough to send EURUSD much lower. But at the same time, we are seeing commodities roll over at the 61.8% retracements as illustrated here which will lead to a stronger USD and that is the other side of the EURUSD equation. A stronger USD also equates to lower EURUSD (a larger denominator in the exchange rate).

The US Dollar - May 15, 2011

2011-05-15T19:16:00.005-04:00

For those that are unaware, commodities are denominated in US dollars. This means that a weaker US dollar leads to stronger commodities and vice versa. And analysis of the US dollar via the USDCHF exchange rate reveals potential for a major bottom. Such a low in the US dollar will decsively confirm a top in commodities as illustrated in my previous post on the CRB index.

The plot just above is a monthly chart for USD-CHF (US - Switzerland) going back to the 1985 Plaza Accord where it was agreed globally to devalue the US dollar. According to 3-phase time analysis, there is a strong chance the early May 2011 low at 0.8550 will lead to a rally that will reach approximately 1.3300 as shown on the chart above before longer term resistance materializes. I do think the structural long term trend lower for the US dollar is not complete and we will see prices below 0.8550, but a strong rally toward 1.3300 should happen first.

Short term overhead resistance resides at 0.9000, the mid March low close due to the Japan earthquake. A monthly close above 0.9190 will completely reverse the April 2011 down bar. And prices higher than 1.0000 will eclipse the March 2008 & Nov 2009 double bottom thereby ensuring the path to 1.3300.

Commodities - May 15, 2011

2011-05-15T14:37:00.008-04:00

The sell off in risk this month is being driven by commodities. It began with the wild sell off in Silver which peaked just shy of 50$ to end April and has traded down to 32$ this past week. The 50$ high matched the bubble top last seen during the early 1980's when the Hunt brothers tried to corner the market. This crash in silver then spread into oil which dropped from 115$ to about 90$ for the June contrract. The sell off in commodities is likely not over and will probably spread to other asset classes as large funds attempt to manage drawdowns.

Commodities May 2011 = Equities May 2010: Just above is a plot of the CRB commodity index. As you can see, the recent top in commodities has taken place at the spring 2006 top on the far left side of the plot and is the 61.8% retracement of the 2008 crisis sell off. This is reminiscent of the late April 2010 top in US equities which also took place at the 61.8% retracement of the 2008 crisis sell off and led into the May 6, 2010 flash crash. I have drawn the expected classic three phase sell off and target for the chart above.

Brief Update on Equities - May 15, 2011

2011-05-15T11:52:00.005-04:00

There is not much new to say on the US equity markets at this time. Prices have been following the script given on Apr 14th perfectly. Click here to see the Apr 14th post. Prices topped out on May 2nd, the first trading day of the month, according to projections and in my May 2nd post I explained why this price top on May 2nd could be significant as it related to the killing of Bin-Laden and an emotional zenith.

Where to now? The plot above illustrates the SP500 futures short term. Horizontal support exists at 1331.25 based on recent highs. Prices have been sitting on this support since May 5th and will likely challenge again this week. I have also drawn the upward sloping trendline in place stemming from the mid March low due to the Japan earthquake & tsunami and represented a real panic but mainly in Japanese markets - Nikkei & Yen based fx pairs. My theory on sloping trendlines visible to the lemming crowd is that these are no better than a 50-50 coin toss. Trendline supports and resistances hold only when prices are stretched (oversold or overbought). Right now prices are NOT oversold and I expect this upward sloping trendline to break. I have drawn in the first downside price target in red.

Volatility expansion coming, again. Lastly, the indicator along the bottom of the chart above says much higher volatility is imminent. You can see the vertical rectangles I have drawn on the chart the last two times this volatility indicator flashed a warning signal. The early March volatility signal resulted higher realized volatility via a very sharp sell off in prices while the mid April volatility signal resulted in higher realized volatility via a very fast rally.

Dow Jones Target Reached - May 2, 2011

2011-05-02T21:19:00.005-04:00

The news of Bin-Laden's death today gave the markets a final spurt higher that allowed the Dow Jones to reach the sell zone centered at 12,900 illustrated in this April 22nd post. And the fact that the Dow reached this critical window off the back of an exogenous market event on the first trading day of the month could prove to be very important as it creates the potential for a day where THE top was crystallized. In other words, for those that actively trade the markets, its not too difficult to look back at major market lows and highs and remember crystallizing events that marked those lasting turns. These types of events pinpoint the zenith of crowd emotion which always confirms the end of the trend.

Also very interesting (to me at least) is that the sell zone was reached only for the Dow Jones and not the other major indices. I watch all indices and important single names stocks very carefully (as well as all the other asset classes!) but I have often found that the Dow Jones presents the most important signals, more so than the SP500, Nasdaq, Russell 2000, NYSE composite and other indices. Why is this the case? My only answer is that the Dow Jones is the one index that best represents the collective emotions and intelligence of the crowd. Not the professional trading crowd who focus on the SP500 and other indices or sectors that truly represent a market average (the Dow Jones is only 30 stocks.. clearly a poor representation of the entire US stock market!). But the real crowd that includes not only professionals but also amateurs who do not work in the markets for a living and others who know nothing more about the markets than occasionally hearing where the Dow Jones last traded. I will never forget during Oct 2007, only the Dow Jones registered a proper price cycle sell signal. Neither the SP500 nor the Nasdaq gave cycle sell signals and Oct 2007 turned out to be THE top.

Going forward, close for this week will be key as the week has begun with a gap higher which sets the potential for an engulfment. First support will be 12,400 for the Dow Jones.

More Volatility - Apr 22, 1011

2011-04-22T18:55:00.010-04:00

On Apr 14th I posted stating the stock market was too low to sell and that the form of the rally from the mid-March low suggested another leg up in prices. On Apr 17th I issued a serious volatility warning as indicators suggested the price action would become wild imminently. Monday Apr 18th prices gapped lower and were down 2 to 3% at the worst point of the day but managed to finish strong into the close making a hammer low. For the remainder of the week prices continued to climb following good earnings from YHOO, INTC, AAPL, IBM, etc.

Here we are one week since the volatility warning issued last weekend and this same indicator says there is still much more volatility to come. The chart above illustrates the Dow Jones industrial average. The lower indicator on this chart still says price volatility should increase dramatically. I have drawn vertical lines for the last 2 volatility signals given by this indicator. My understanding is that when a volatility alert signal takes place, the market will produce price action to increase volatility in the most efficient manner which is always whip-saw price action. For example, a trend higher will be interupted by a sudden sell off and then more violent rally.

Since the voaltility signal we have so far seen a violent move lower, from Friday Apr 15th to Monday Apr 18th, followed by a more violent move higher from Apr 18th to present. For volatility to increase even further, prices should next move lower. However as mentioned earlier, the correct form suggests prices should rally to about 12,900 on the Dow Jones.

Thus its not completely clear what comes next. I do believe volatility will increase much more in the coming days and weeks. This will happen easier with lower prices given the rising price action this past week. I normally would not fade an expected 3-phase move but am also aware of the pivotal 21st of the month which captures many multi-month highs & lows including the annual high seen during February. I also thought the reaction to GE earnings and dividend boost was interesting with prices down big from the opening print. Based on all this, I shorted the emini's during Thursday morning. Dow Jones downside target is 11,900.

Volatility Warning - Apr 17, 2011

2011-04-17T21:09:00.008-04:00

Indicators say there could be some serious market volatility imminently. The top plot above is a weekly chart of the Nasdaq100 index. According to the lower indicator on this chart, prices are now in a similar state to early Sep 2010 which resulted in prices rocketing higher for the next few months. The lower chart above is a daily chart of the Nasdaq100 index. According to the same lower indicator on this chart, an increase in daily volatility is now due and prices match past conditions illustrated by the vertical red lines.

I realize my previous post illustrated the "form" was not right for a sell off to continue and 3-phase theory suggested a move up was next in addition to the SP500 being very "low". But the monthly charts (not shown above) have all traced out a bearish Hanging Man pattern for the month of March and this is likely weighing on the market. Also I should add, AAPL is no longer 20% of the NDX index after the reweighting. Here is a good article on the reweighting. I think this reweighting could have a big impact since AAPL, QCOM and SBUX will all see their weightings decreased while MSFT, ORCL and INTC will all see their weightings increased. Look at the monthly charts of these 6 names and you will quickly see what I am talking about.

SP500 Too Low to Sell - 14 Apr 2011

2011-04-14T21:40:00.006-04:00

The mid February top took place at the expected distribution zone as posted on Feb 16th. Prices sold off in classic 3-phase fashion which completed the move down ending with the mid-March low punctuated by the Japan earthquake / tsunamic panic. This is highlighted in the charts above by the 3 red waves.

Since mid-March, prices have rallied to the early April top and have been moving lower again but I do not see the correct form yet to sugggest the rally from the mid March low is complete. In other words, I think there will be another leg up as drawn by the three green waves on the charts above.

Additionally, according the lower indicator in each chart above, particularly the SP500, prices are now overly stretched to the downside and the risk reward no longer favors lower prices short term. We should see prices move higher imminently to relieve this stretched state and complete the 3-phase move up from the Mar 17th low.

Global Risk Targets - April 11, 2011

2011-04-11T21:51:00.003-04:00

As we near the end of QE-2 this June, it is likely we will see the crowd book profits and exit positive risk trades. Higher commodity prices are eating away at profit margins while US rates have been held artificially low. My fear is that once QE-2 ends, we will see equities head much lower while interest rates move much higher as treasury purchases by the Fed stops. This will be bad for everyone. If it is bad enough come June, it is possible we will see QE-3 announced.

With regard to price cycles, there are many asset classes that are in the zone for a turn. This includes: SP500 top, Nasdaq100 top, AUDUSD top, USDBRL bottom, Oil top, EURJPY top, AAPL top, AUDJPY top, GE top, etc. I am not going to post charts on each of these, but it is true that every single one has topped out already (AAPL) or has just now reached its own topping zone and the macro turn is underway.

Downside Targets? Probably the best gauge will be the NDX index (Nasdaq100) which closed today at 2314. The first downside wave target will be about 2050 which is the April 2010 top, will be a drop of about 15% from the Feb 2011 top at 2400 and will retrace 50% of the rally from the July 2010 low at 1700. Squaring out this price target in time would require the 2050 low be made Jun 9th.

To negate this scenario, the NDX would need to trade higher than 2420. Note this downside target was first given in this Feb 16th post for the major indices with plots. The analysis given on Feb 16th is still valid.

Throughout this entire bearish scenario, it will be worth watching USDJPY since the global central banks decided to support USDJPY mid March forcing higher from 76.25 to the recent high of 85.25. (Altho there was a major price cycle low for USDJPY identified in the 75 to 80 region in this Mar 13th post. ). The USDJPY high side target was 89.0 and prices got up to 85.50 so far, not quite reaching the target. AUDJPY on the other hand is in the same boat from a Yen based risk perspective and did reach the cycle target of 89.50. So we may see AUDJPY lead the way lower dragging USDJPY with it. My point being that if USDJPY does drop significantly below 80.0, it will be viewed as a failure by the world central banks which could have major consequences on crowd sentiment.

EURJPY top - Apr 3, 2011

2011-04-03T20:59:00.004-04:00

EURJPY should make a short term top at 120.0 to 120.50. According to the chart above you can see that spot EURJPY has just reached 120.0, the old low from Feb 2010 circled. Old lows and old highs often become future tops and bottoms respectively. Secondly, both of the mean reversion indicators along the bottom of this chart are saying spot EURJPY has rallied too far and a sell off is due. And lastly, the rally off the August 2010 low at 105 has happened with the classic 3-phase move that completes all moves. All of these reasons combined suggest EURJPY should head lower in the coming weeks and risk reward favors selling at 120 and higher with stop loss 124.50.

EURJPY may be an interesting global risk gauge to watch going forward as the the YEN has been the focus since the Japan earthquake / tsunami hit mid March. My previous post on USDJPY did identify 76 as being longer term pivotal and the target of 89.0 is still very possible for USDJPY. But the Yen crosses such as EURJPY and AUDJPY have always been better risk gauges than USDJPY.

Last Resistance - NDX Index March 25, 2011

2011-03-25T08:21:00.004-04:00

The plot just above illustrates the Nasdaq 100 index (NDX) since late Dec 2010. The rally off the March 16th low last week is gaining some good traction and about to encounter the final test. On the chart above see the red Karma line which serves as overhead resistance and resides at 2323 for the NDX which happens to coincide with the 61.8% retracement at 2321.
Ideally a resistance level like this would be encountered with prices statistically stretched but this is not the case according to the two indicators along the bottom of the chart. Therefore, the best one can do with this information is 1) do not buy long at current prices if currently flat 2) take partial profits on long positions. This is particularly true since the SP500 and Dow Jones are relatively stronger than the NDX at this time. Watch how the NDX handles 2320 - 2325 in conjunction with gold and ABX as described in this earlier post.

Gold - Mar 24, 2011

2011-03-24T22:25:00.002-04:00

There are two weekly charts just above. The lower chart is of GLD, the gold etf. The upper chart is of Barrick Gold (ABX). As you can see, both topped out March 2008, bottomed Oct 2008 and have trended higher since Oct 2008. The main difference being that Gold has eclipsed the March 2008 top while ABX has not. Focusing on the ABX chart, we see that prices tested the March 2008 top during Dec 2010, failed and have since made a lower top early March 2011. Time is running out for ABX and the supporting trend line in place since Oct 2008 is near. There is good reason to believe the move up from the Oct 2008 to the Dec 2010 top for ABX is complete a larger leg down is now underway. As the upper chart illustrates, it all "fits". Watch ABX for a break lower through the trendline to lead gold lower.

Not the Best Close - Mar 20, 2011

2011-03-20T21:59:00.005-04:00

When evaluating the behavior of prices, I pay attention to HOW the price action took place and WHERE it took place. This is much more important to me than WHAT the price is. Four HOW features I watch for include: 1) Long range low to high days 2) large gaps 3) same day close to open relationships and 4) volumes going through. Each of these can let you know how bullish or bearish the price action really is or whether there is actually no new information (dont bother trying to decipher noise). Combine this with an understanding of price location, WHERE, and you have a good basis for evaluating who has the edge, bulls or bears, on any given day. Note: there is also a "WHY" for evaluating price behavior as it relates to the daily news but this can be much more difficult to decipher. And of course there is also a "WHEN" which may be the trickiest of all involving cycles and other time based approaches. More on the HOW, WHERE, WHY and WHEN of price behavior at a later date!

The Sp500 futures got up to 1287.50 on Friday, not quite 1300. Stiff resistance still resides just above at 1305 based on hourly cycles but according to Friday's action, I am not sure prices will get there. Looking through the various sectors and many big single names (MSFT, AAPL, GE, GOOG, etc), the HOW price action was not encouraging for the bulls. Monday will be day-3 for a rally off the March 17th low and likely the last chance for the bulls to get prices into a position of control such as a close above 1300 - 1305 region for the sp500 futures. Otherwise, it will be down to 1215 for the SP500 futures to test the April 2010 tops, the original targets given in this Feb 16th post.

SP500 update - Mar 17, 2011

2011-03-17T21:38:00.006-04:00

My medium term stock market posts identified the April 2010 top for the next downside target. This was illustrated with charts on Feb 16th, before the Feb 18th high was in place. The downside target given was Dow Jones 11,260 or about 1220 for the SP500 cash. This could still happen but in light of the recent extreme events, I now find the following. (as Keynes said, "when the facts change, I change my mind. What do you do sir?")

The March 16th low for the SP500 and other major indices was capitulatory in nature. This can be seen by the very large singular volume spike across the board for all big single names. And given the dramatic change in sentiment for USDJPY and earthquake/tsunami/nuclear induced panic, I think we could see the US equity markets rocket to new bull market highs.

At this time, I calc the real test for the SP500 will take place at 1300. I do think the futures will reach 1300, this is an hourly cyclical target, but prices need to get past 1300 to skip to the next higher fractal scale to continue on to new bull market highs (cyclical targets will be provided). Also recall I stated in recent posts, the quarterly options expiration tomorrow has enormous open interest for the 1300 strike, more than half the daily volume being traded in the market, and could act like a magnet for futures.

Taken to Task ! - March 17, 2011

2011-03-17T21:01:00.008-04:00

I have been taken to task for my USDJPY views and posts over the past days, weeks, and months. This Oct 5th post illustrated many macro cyclical targets across multiple asset classes including the USDJPY zone of 75 to 78 for a MAJOR low. As we neared this macro target, I reiterated the view with this March 13th post. Of course, the March 13th post was after the Japanese earthquake and thus many people let me know "you are right because of the earthquake. you got lucky".

In my post yesterday, I am now calling for USDJPY to rally to 89.0, that is the new cyclical target. As I write this, it has been announced there will be coordinated intervention by the G7 central banks to buy USDJPY. The BOJ, ECB and FED will all buy USDJPY in their respective time zones. We could very well see USDJPY reach 89.0 by April 4th or if not, then by May 4th. Tomorrow I am sure I will hear from the naysayers, "you are right about USDJPY because of the G7 intervention. you got lucky"

My point is this. In trading the markets, it will ALWAYS appear like luck when one gets it right in calling a turn, a sudden change in trend. There is always something to point to for the reason "WHY" a move in the markets has reversed. The name of the game is to put yourself in high risk reward positions that if right, you make out big. And if wrong, you lose small and move on. I always find it amazing how amateurs can marvel at how a professional operator somehow manages to have the right position to capture an event such as being short the stock before the earnings miss. Little does the amateur know that the operator is likely booking profits on the event!

So when anyone says "you got lucky" due to some exogenous market moving event, that is a good sign he just does not understand how markets behave and that prices always move along the path of least resistance, regardless of the event! Got it?

YEN YEN YEN ! - March 16, 2011

2011-03-16T20:27:00.002-04:00

USDJPY traded down to 76.25 today to satisfy the cyclical projection target detailed in this March 13th post. This should be a pivotal low for USDJPY based on the lengthy historic cycles required to hit this critical point. The Yen based options market has been caught short gamma and short volatility which exacerbated the drop in spot USDJPY to help create this capitulation low crowd behavior. Going forward over the next week or two, we should see the market exit short derivative risk to help solidify the new trend higher for USDJPY. Also keep in mind, this friday is the quarterly equities option expiration and the most important 21st of the month of March, the first day of the Gann year, is Monday. See this November 2008 post for a brief 21st of the month read that everyone should know.

I am now looking for USDJPY to begin the climb to 89.0

Nikkei, US Bonds, SP500 - Mar 15, 2011

2011-03-14T22:34:00.004-04:00

The Tokyo stock market has dropped another 6.5%. The Nikkei index stood at 10,430 on Thursday March 10th. By Friday close it was 10,250 not having time to fully react to the earthquake. Monday March 14th the Nikkei dropped more than 6% to close at 9,620. At this time it is trading 8,999, which is 6.5% below Monday's close. The global equity markets bottomed summer 2010 with the Nikkei bottoming at 8,800. If prices do break through 8,800, then we will likely see a test of the year 2008 crisis low which was 7,000 for the Nikkei.

Investors are turning to US treasuries for safety. The 10y bond yield is now 3.23%, off from the 3.765% high made Feb 9th. Obvious support for the 10y bond yield appears to be 3.27%. If this level breaks, a decisive close below 3.27%, the next target is 3.0%.

SP500 emini's short term target support is 1260 - 1265 region. Nearly there now with futures now trading 1268. We should see a bounce from this region but eventually I think we will revisit the April 2010 top, approximately 6% lower to 11,260, and first illustrated in this Feb 16th post.

USDJPY & Nikkei - Mar 13, 2011

2011-03-13T10:34:00.021-04:00

In my Feb 27th post I stated spot USDJPY was ready for a short term rally according to mean reversion analysis. Between Feb 27th and now, USDJPY spot rallied from 81.65 to a high of 83.30 on Friday Mar 11th. That analysis and view was very short term based on models only and was fulfilled despite spot not reaching the very top of the trading range at 84.50.

I now believe USDJPY spot has a good chance of reaching the longer term down side targets that reside below 80.0.
According to my price cycle work, I see longer term USDJPY target zones for a major LOW at:

75 to 84
76 to 80
77 to 80
77 to 78

Thus I am looking for spot USDJPY to make a major low in the 75 to 80 range with focus on the one figure range between 77 and 78.

The massive earthquake in Japan last week first impacted USDJPY with Friday's price action. This saw the Yen strengthen and spot USDJPY drop from 83.30 to 81.65 on Friday alone. There are analysts out there pointing to the 1995 Kobe earthquake (Jan 17, 1995) as a precedent for Yen strengthening following the earthquake. In times of crisis, the Japanese will repatriate their Yen and USDJPY did drop from about 100 to 80 during Jan 1995 to March 1995. While this is true, one must not read too much into the 1995 precedent since during that time, it was a global USD meltdown with many USD pairs reaching all time USD lows, which is not the case now (although the USD has been weakening against many other currencies but it is not at all time USD lows). In other words, you will see some people calling for another 20% drop in spot USDJPY from 83 to 67! Let me continue.

Spot USDJPY below 80.0 could be very interesting. Just about all speculators have been establishing positions betting that spot USDJPY goes much higher over the coming year(s). Many of these bullish USDJPY positions are depending upon the Bank of Japan (BOJ) supporting spot USDJPY at 80.0 through intervention in the markets as took place on Sep 15, 2010 when spot bottomed at 82.90 and rallied to 85.90 in just one day. The BOJ intervention last September failed with spot later reaching 80.25 by Nov 1st. I suspect the BOJ will fail again in trying to prevent the market from moving lower. This should be particularly true for spot USDJPY below 80.0.

As mentioned in previous posts, the USDJPY market has become quite boring as spot has been contained between 84.50 and 80.25 for many months. This range trading environment has resulted in shorter dated implied volatilities being sold aggressively and the implied volatility curve becoming very steep with 1month implied volatility well below 2year implied volatility. This in turn has attracted volatility trading desks to sell 1year and 2year type options to earn decay taking advantage of a steep implied volatility curve. A 1year option loses value over time if spot does not move and it loses value much quicker if it rolls down a steep volatility curve to become a much lower volatility when it is a 6month option. Hence the professional market has been short USDJPY volatility happy to collect this decay. This normally works fine and when spot eventually starts moving, volatility returns and option traders simply buy back their short 1year and 2year type options. But this time the expected higher volatility with spot moving lower, through 80, could be very different.

Below 80.0, the USDJPY market is littered with option barriers and longer dated structured products that will make life for the BOJ much more difficult and bring volatility much faster than anyone expects. Over the past 10 to 15 years we have seen many longer dated yield enhancing products emerge from Japan. This resulted from investors desperate to earn returns greater than zero as the govt Zero Interest Rate Policy (ZIRP) has remained in place. Typical yield enhancing products sold to investors are tied to spot USDJPY such that the coupon payment increases with higher USDJPY and decreases with lower USDJPY. To hedge such products, bankers find themselves having to buy spot USDJPY as spot heads higher (to offset the larger coupon payments they must make) and sell spot as spot heads lower as the coupon payments decrease (they dont need to be as long spot USDJPY). This repeated process of buying high and selling low equates to being short longer dated low strike USDJPY options and can exacerbate any moves in spot.

In other words, below 80, we should see the moves in spot USDJPY become more volatile generally speaking. Bankers will be selling spot as spot moves lower below 80 due to 10year to 20year yield enhancing product exposures. We will also see bankers buying back 1year to 2year short option positions once spot breaks 80.0. This will be additive contributing to overall volatility.

Japanese stock market: The earthquake took place just before 3pm on Friday. The Nikkei has not had time to react to this disaster yet and this weekend we are learning the devastation could get much worse as nuclear power plants fail. Japanese will sell their investments and repatriate their yen. Japanese insurance companies will need to prepare for enormous claims, again repatriating yen. The Nikkei was already in a weaker state than other global equity indices. Unlike the Dow Jones or many of the European indices, the Nikkei had never eclipsed the April 2010 top, suggesting a weaker market. Cycles suggest the Nikkei will find first support at about 9800 which is about 4.5% below the Friday close of 10,250. Whether the sell off in the Nikkei continues will be determined in large part to how other indices around the world react to this disaster. The short term Dow Jones target remains 11,800 as mentioned on March 10th.

Sectors - Financials & Semi's Mar 10, 2011

2011-03-10T21:02:00.004-05:00

For a short term trade, I think the semiconductor sector is very near a good buy point. The SMH etf should see a short term bounce higher from $33 ish that will carry prices up to at least 35$. (current 33.74)

I also think the financial sector is on the verge of collapsing based on the price action of the double exposure short financial etf, SKF. A break higher through 58.75$ for the SKF should send it quickly to short term target 61.5$ and possibly to 67$ which was the April 2010 and Nov 2010 double bottom (tops for the stock market). Current 58.34