Tickerville Tape Talk 7/26/09

QMan at Tickerville reminds you to trade the traders, not the macro fundamentals...

Here's the weekend Tape Talk.

Some of the sectors he thinks attractive happen to coincide with mine. Specifically, he seems to be looking at sectors which have been dismissed or neglected by traders: commercial real estate (people just want to short), financials, commodities (industrial metals, oil, but NOT ag). He likes retail, too. NOT because of fundamental reasons but market psychology (i.e. other traders).

If you haven't noticed, in this 2-week rally, commercial real estate and financials didn't materially participate. Check the charts of ETFs - IYR for commercial real estate, and XLF for financials. They basically went sideways.

I have NRO (commercial real estate) and FAS (financial 3x long), and I've been sitting on MTL (iron ore) and DXO (oil). I hope Qman's right.

In the video, he said one interesting thing. He said the bearish patterns like head and shoulders ended up breaking to the upside, instead of down. Maybe that's a sign of a bull rally. Or maybe it's because of High Frequency Trading feeding frenzy...

If this rally has more legs, "everything will go up, at least initially", according to Quint. I agree. Just know when to quit. (If that's easy....) Whatever will be, will be...

Dow's Target (Barring Disaster, That Is)

Today, Dow Jones Industrial Average went past 9,000 for the first time since January this year and stayed above despite a modest selloff EOD.

This is a 2.5-year daily chart of Dow Jones Industrial. I am cautiously optimistic that the rally may continue for a short while. "Cautiously", because I do see some mixed messages. First, the volume continues to be unimpressive. Second, MACD does show a negative divergence. But I think what's significant here is RSI. For the very first time since June 2007, it poked through 70. Not even the market top in October 07 didn't see RSI go over 70 (that was a negative divergence, signaling the imminent downturn). Also, ever so slightly (so slight that it could be my imagination) the 200-day moving average seems to be finally flattening out, making the crossover of 50-day MA and 200-day MA more valid.



Provided no new disaster (financial, economic, political, what have you) strikes in the next several weeks, how far could Dow go? For that, I turn to Fibonacci retracements for a change. There are two sets of Fib lines on the chart. The yellow lines are from Oct 07 market top to March 09 bottom. The green lines are from Sept 08 to March 09 bottom. 38.2% retracement from bottom for the yellow line and 61.8% retracement from bottom for the green line seem to almost coincide. That seems like a logical target, around 9,450.

If it ever gets that far, I think it may overshoot and go even higher, perhaps to 50% retracement on the yellow line. That would be 10,334.

One disaster that I could see coming sooner is Treasuries. The yields on 5-year note, 10-year note and 30-year bond all jumped significantly today. The government will be selling over $200 billion worth of Treasuries including notes and TIPS next week. The U.S. dollar is barely hanging on to the dear life just below the long-term support line of 80 (see previous post). It just doesn't seem possible to support all of them, Treasuries, US dollar, and the stock market. Something gotta give, soon.

Watch US Dollar

and watch the grass grow. But it's at the very critical point. My post in early July showed the charts of Euro and US dollar, both about to break in the direction of the prevailing trend (up for Euro, down for USD). US dollar has been sitting there ever since, within that tiny pennant/wedge.

And here's the reason that it's at the very critical point. The chart is a recycle from my other blog posted in May, but here again not much has changed since then. The US dollar index is slightly below this long-term support line of 80, but not by much (78.67 right now).

I think it will break down. The first time it broke 80 was back in August 2007, and the index dipped to 70. Then a reversal came when the stock market was showing the sign of topping in August 2008, and the reversal got violent in October as the stock market tumbled. Now the dollar is back at the support line the second time in 2 years. The first move down could be considered fake (and it was), the second time it's more likely to be the real move. (Although sometimes it takes more than two tries to break the support line.)

If it breaks down, a short-term target will be the March 08 low of 70. The dollar remained at that level for several month while the stock market was rallying. (See the green box area in the chart.)

Beyond that, no one knows, as US dollar has never, ever, been lower than that. It will be a new world for all of us on this planet. Good luck to all of us.

S&P 500 May Go Much Higher

It just may. Last Wednesday I suggested the possibility of S&P 500 Index forming not "the head and shoulders top" but "double bottom", with some caveats (see the post below).

Well, well. So far so good. The last week's performance was one of the best this year. If the formation is the double bottom, the target would be around 991 (W's mid point plus distance between the mid point and the right side bottom). I personally think it may go higher than that, and my target is around 1,050.

The chart is S&P 500 Weekly chart. I put up this chart on my Japanese blog post already, but I just noticed something else about the chart.

But first, notice that my target of 1,050 is a nice confluence of several trends - 89-Moving Average trending down, the index trending up, and 61.8% Fibonacci retracement line from the September 08 top to March 09 bottom. If, as Elliott Wave people say, the bear market ends in three waves and we are currently on Wave 2, the start of Wave 3 could be somewhere around this confluence.

Now about that something else I said I noticed. Look at the most recent 5 weeks: 4 consecutive down weeks , and one huge up week. Now look at the March low: 4 consecutive down weeks and one huge up week that started the run. The recent 5 weeks is like a miniature version of the March bottom. Nice fractal.

The difference is that the recent pattern already achieved what the March pattern had done in 8 weeks; that is, getting back to the beginning of the decline. The low of the current pattern (870) was at the same level right where the severe 4-week decline started in February. I think the index may have touched the support level there, and now are bouncing back up.

Index futures are currently green, no doubt due to the hope that CIT may be able to avoid bankruptcy.

(BTW, CIT joined my "Shoulda, Coulda" stocks. I did call up the screen on Thursday to buy the stock at 39 cents. I didn't think CIT would be allowed to go bankrupt, and I was almost certain they were driving the stock down to buy in and flip it the next day, which was exactly what happened on Friday. And the stock more than doubled. Why didn't I buy it? The money I was willing to risk would have gotten me 10,000 shares, and doubling that money didn't seem like much on Thursday. What was I thinking???!!!)

S&P 500 Curve Ball: W-Bottom Instead?

As every trader was watching the Head and Shoulders Top formation on S&P 500 index and itching to go short, the market threw a curve ball. Instead of breaking down at the neck line around 875, the index held there for 3 days last week, and on Monday, bam! Tuesday, it took a lower volume rest (still managed to go up), and Wednesday it resumed big upward movement at a higher volume.

Is it possible that, instead of the bearish Head and Shoulders, we may have a bullish Double-Bottom formation?

The pattern we see on the chart seems promising:
1. The right side of W is lower than the left side;
2. Volume throughout the formation hasn't been too great, but it is increasing as the pattern completes;
3. The index has come back to the mid-point of W, which is the breakout point if the pattern breaks out to the upside.

One caveat: Double-Bottom pattern is a trend-reversal pattern. The existing trend immediately before the Double-Bottom was an uptrend. Darn! You could possibly argue that the bigger trend since last September was a one gigantic downtrend, so this formation could serve as a trend-reversal pattern.

Another caveat: High-frequency quant trading is now out in the open, thanks to Goldman Sachs. Just be aware that these computers and servers don't care about you and me, small retail investors and traders.

Goldman Sachs - Make or Break?

Since I follow financial stocks more than any other, I keep an eye on the financial index and the underlying stocks. Here's a daily 9-month chart of Goldman Sachs (GS), the firm in some unwanted spotlight these days.

Ever since the stock bottomed in November, it was in a fairly wide channel (between the two blue lines in the chart) until April 2009, when it broke above the upper channel line. This line acted as support as recently as July 8, and the stock bounced up and formed a mini W-bottom, as you see in the upper right-hand corner of the chart. So far so good, a bullish chart, right?


Well...I have a mixed feeling. For one, since April as GS climbed higher the volume has been declining (until very recently). MACD and RSI also register negative divergence - stock price on an uptrend, technical indicators on a down trend. Second, $150 (plus or minus $2) has acted as resistance twice already since early June. This $150-ish line is a long-term support/resistance, and it has been a resistance (hence the W-bottom formation).

The 3rd time luck is certainly possible, and the stock may break out above the resistance. The catalyst could well be the announcement of its earnings tomorrow morning before the market open. The stock jumped today almost entirely thanks to Meredith Whitney's only "buy" recommendation.

S&P500 - Now What? Q-Man Is Bearish

Here's a screen shot from the latest Tickerville Tape Talk. S&P 500 Index sits at the very precarious juncture: "the head and shoulders" pattern that everyone was watching now seems to have completed, and that neckline is actually a line that connects previous resistances (January, February, and April, in light blue circles that I added) and the recent supports during the H&S formation.




Q-man (Quint Tatro) at Tickerville is not excluding the possibility of a bounce from here, but he thinks the character of the market has changed and the short-squeeze fest we had in May is unlikely to happen again. So, if there's a bounce, it may be a light-volume bounce before going much lower. He continues to be constructive on commodities though.

Almost all sectors seem to sit at a critical point. Now that Goldman Sachs may be in trouble for too much success from its quant trading, the market may be acting more naturally. And the natural way seems to be the path of least resistance right now, which is down.

Currency Charts - Euro & USD

These two charts look identical. Both now have developed a bullish pennant that looks ready to break out to the upside.

I wish it were the case, particularly for the US dollar bulls. But the bottom chart is UUP, an ETF that tracks the US dollar index, flipped horizontally and then flipped upside-down. The top chart is FXE, an ETF that tracks Euro.

It looks just a matter of time, probably very soon, till we know which way these pennants break. The safe (and usual) bet is that they will break to the existing trend - up for Euro, down for US dollar. If that happens, Euro is set to retest the recent highs, US dollar is set to retest the recent lows.

Commodities may benefit (since they are still priced in US dollar), but not sure about the stock market.

Head And Shoulders On S&P 500 Index

That's what every trader, amateur or professional, has been watching for some time, probably ever since the index bounced off 888 on June 23, completing the "head" part. Many people have been very anxious to short the market, and now they have "the right shoulder" complete.

The head and shoulders formation is a bearish chart pattern. It is expected to break down at the neckline, which is where the index is at right now. According to Q-man at Tickerville.com, since so many traders (including him) think (and want) it's going to break down from there, it will eventually break down.

But the stock market doesn't always comply with the majority's wishes. One good example was the market's advance AFTER the initial V-shape bounce in March. From April to June, the market kept going up, albeit at a much slower pace, frustrating lots of traders who went short the market at the end of March.

Now the long-awaited "head and shoulders" has materialized! Time to short? Maybe. Maybe not. I am personally neutral, mainly because of the green circles that I put in the chart. During the whole period in which this head and shoulders formed, the candlesticks that usually signal a trend change - hammer, hangman, doji - did signal a trend change. And today we had a hangman, with the shadow touching the 200-DMA. Slow stochastics could be interpreted as positive divergence.

Of course it doesn't need to go up again, and the index can break down right here, right now. Then it will be one of those few cases where the majority is right.

Why Does Crude Oil Look Bullish In Global Recession?

This must be one of the questions that confound people who believe deflation is coming. I am not one of them, as I look at the 3-year weekly chart of crude oil.

The chart looks very bullish. On a weekly chart, exponential moving averages (13-EMA and 34-EMA) seem to work well; their crossovers seem to indicate a new trend well. The crossovers of these moving averages also coincides with very slow stochastics (60, 3) crossing 50.

Right now, 13-EMA is just about to cross above 34-EMA, and both EMAs are turning UPWARD. RSI looks well supported at the trend line. I don't like slow stochastics still very far from 50 and turning down slightly, but since this is a weekly chart I'm willing to give it several more weeks.

Besides, the formation since the last EMA crossover (September 2008) looks like a cup and handle, with the handle forming above 50% (barely, but still above) retracement from the bottom to the price immediately before it started to tank in earnest.

If this formation breaks out of the handle, the target price would be the handle high ($73.90) plus the depth of the cup ($38.77), which will take the crude oil to $112.67, a 69% increase from today's close at $66.73.

With dismal news all around us again, this number looks literally fantastic (i.e. that which exists only in fantasy). Or crude oil price movement is telling us it is inflation, not deflation, that's coming our way.

IWM Call Options Unusual Volume Intraday

The market movements these days are very predictable in a sense. There is a spike in the morning that will keep the indices floating most of the day, or there's a spike at the end of day that miraculously saves the day from any severe loss. Today was the former. The market today started the sudden descent right after 10:00 AM EST, and at 10:15 AM EST it reversed and started a rapid ramp-up.

There are increasing talks of market manipulation - started in chats, message boards, blogs (which are being ridiculed and vilified constantly these days by MSM), and taken up even by CNBC and Bloomberg. The favorite tool for manipulation seems to be S&P futures and SPY, but I've heard other market tracking ETFs mentioned.

Then, after the market was over as I was flipping through different charts for the market tracking ETFs (SPY, QQQQ, IWM, etc.), I found this. It's an intraday chart of IWM July call option (strike at $51). Someone bought 20,000 call options at 10:00 AM EST, at $1.53 a piece. That's over $3 million. Options on SPY or QQQQ didn't have such large purchase.


IWM tracks Russel 2000 index. Since the index tracks small to mid-size companies, it has higher beta than the broader market index like S&P 500. If you want to move the market, what better tool to use than a high beta index, or better yet, a derivative (option) of the derivative (IWM) of the index (Russel 2000)?