Markets & Economy: June 2010

6/29/10

Recent S&P 500 Outlook Confirmed

We have been tracking the S&P 500 on these pages for some time now. If you like, you can see a reverse chronological listing of my S&P 500 posts by CLICKING HERE.

Recap:
Over the past month, our main underlining strategy was to sell short into a rally that formed off the the low on 5/25/10. We tracked that rally in a series of posts that can easily be found at the link above. The rally did indeed end, leading to fairly powerful selling which has, as of today, erased 100% of the rally's gains.

Two lines in the sand were drawn: a negation and confirmation line. If prices rallied to take out the highs of 4/26/10, then the outlook would be found to have been incorrect. If prices broke down below the lows 5/25/10 after a rally, then the outlook would be found to have been correct.

Prices have broken below the lows of 5/25 in today's session. The break is not very large, but the market did make a new intraday low below the 5/25 confirmation line.

What now?:
It's my belief that the greater directional risk in this market continues to be to the downside. A new trend is likely emerging. This is indicated by market behavior (price action). More conservative traders who share this view should probably keep stops at the original negation level for now. More assertive traders could move stops down to the 6/21/10 high, while keeping in mind taking out the 6/21/10 highs would not on its own merit negate the outlook for a larger downtrend emerging.

Rallies that occur in bear markets can often be very sharp and fast. Since I believe the larger trend is forming to the downside, and since I have positioned well by selling into the rally, my plan is to give my position room to breath with loose stops for now.

(click charts to enlarge)

A couple of things in the chart above stick out to me. First, we see that downside market behavior has been much more assertive and persistent than the upside corrections and rebounds. If you think of it like water flowing, its not to hard to see which way the current is going right now. The bulls are having to question their stance.

Second, notice that the rally off the 5/25/10 lows respected normal Fibonacci proportional resistance levels at a few different points. Theses zones, taken from three different measurements, also converged with each other. This is yet another set of technical clues about the possibility of an emerging price trend.

And if we want to just keep it real simple, then we can all see that there are a series of lower highs and lower lows. Such is the definition of a downtrend. I've always felt that tactical trading is more like surfing than rocket science.

Last month, prices closed slightly below the ten-month moving average. Unless tomorrow brings a really strong rally (very possible), then the market is poised to close below the ten-month moving average for a second month in a row. Such action, should it occur, is another signal that the S&P 500 is in an intermediate to longer term down-trending phase.

Problem:
The Dow Jones Industrial Average did not confirm the S&P's break below the 5/25/10 lows. Either it will follow through in the next couple of sessions, or we should expect a rally and possibly a more complex upwards correction or sideways action.

OK, now I'll stick my neck out a little more.

The weekly chart above shows my current longer-term Elliott Wave count. It's negation level is the same as the shorter term chart we have been following. While my outlook is extremely bearish right now, additional price action contrary to this model could of course cause me to change my mind. We are trying to measure probabilities and current trend, not certainties or readings from a proverbial crystal ball.

2/17/09 Chart:
The model we are using has been working well for a wile. Here is a chart I posted on 2/17/09 suggesting a large rally was approaching that would ultimately lead to an even larger bear phase.

Even if the current non-confirmation from the Dow turns out to be a clue for more near-term upside action, I think we are most likely entering the model's bear phase now. If so, then look out below.

6/28/10

Rick Santelli to Steve Liesman: "Go Read Some Austrian Economics Instead of the Funny Pages"

Although I rarely watch TV (even the news) anymore, This little video caught my attention today. I agree with Santelli -Liesman is a statist. Government should not be manipulating or regulating economic activity.

Santelli also said: "Stop spending, stop spending, stop spending, stop spending!!!" I again find agreement with Santelli.

6/24/10

S&P 500 Trade Update 6/24/10

As was mentioned in the 6/14/10 post, selling short into the recent S&P 500 rally off the 6/8/10 lows has so far been a successful strategy. Certainly there is still risk on the table, but the market has indicated that we are at least somewhat in harmony with its current behavior and trends. This can always change, so there is no need to get too comfortable.

Let's take a look at the chart of the September e-mini S&P futures contract as of today's close:

(click chart to expand)

It would not surprise me to see some type of short-term bounce soon. Trends don't move in a straight line, and there has been pretty heavy selling the last two sessions.

At points like this the question is whether to move protective stops down with the trend and reduce risk, or continue to keep them at the negation level until we actually get a break through the trend confirmation line. That is a question each trader has to answer for himself. In this case, I am keeping stops at the negation level for now. If prices break through the confirmation line, I will almost certainly be moving stops down with the trend to one tick above the intraday high on 6/21/10 of 1127.50 (sept futures) / 1131.23 (cash index).

We've been tracking this for a while, and you can always view all of the S&P 500 posts at this link.

6/23/10

Socionomic Perspective on H.R. 5175 "DISCLOSE Act"

Robert Prechter Jr. outlines what he calls the New Science of Socionomics. In a nutshell, Prechter says that waves of endogenously regulated social mood are the force behind trends and cycles in the economy, financial markets, politics, fashion, music, pop culture politics, etc.... He has even outlined some mathematical reasoning and evidence of this. The major stock indexes are the best real-time indicators of these cycles and trends, which follow the Elliott Wave principle. Therefore, those major stock indexes, such as the S&P 500 and the Dow Jones Industrial avg, that people monitor on a regular basis are our leading indicator for other trends.

Basically, a bear market, which itself results from a negative social mood trend, will indicate to the Socionomic observer trends in other areas that can be expected. One of these areas is politics. A major bear market / negative social mood trend will lead towards authoritarian politics as well as radical dissent. Most people have been taught to think of this backwards. They think that authoritarian politics will lead to bear markets. This is not true. Social mood regulates them both, and shows up in the widely followed auction markets first.

H.R. 5175 (The DISCLOSE Act) is expected to come to the House floor this week. This act seeks to subject grassroots organizations to disclosure requirements that limit free speech. Certainly we should fight such a bill based on the principles of liberty, but the point I am making here is that a socioeconomic observer knows to expect more efforts like this as the bear market progresses.

DJIA's 200-Day Moving Average: Will the Dow stay above or below this demarcation line?

By Elliott Wave International

Moving averages are one of the most widely followed indicator in technical analysis. Simply put, when the price of an index or stock stays above a particular price moving average line on a chart, that price level serves as support -- a level where buyers reside. If the price falls below a moving average line and "can't" break through from the underside, this price level is a line of resistance -- a price level where sellers hover.

That's an easy explanation of moving averages for you.

Learn to integrate Elliott wave analysis with other technical disciplines. Read the FREE Ultimate Technical Analysis eBook to discover some of the favorite technical analysis methods used by the analysts at Elliott Wave International. Learn more and download your free, 50-page technical analysis ebook here.

A commonly watched line is the 200-day moving average.

After the DJIA fell below its 200-day moving average in May, prices remained mainly below the line until June 15, when the market rose 213 points. But, as this chart from Elliott Wave International's June 16 Short Term Update shows, the NYSE volume has remained muted:

"There was no follow-through today. More stocks closed down than up on the day on the NYSE, within the S&P 500 and also for the DJ Composite. Today's Big Board volume was similarly slow relative to yesterday. ..." -- Steven Hochberg, Short Term Update, June 16, 2010

With a lack of buying conviction, how long will the stock indexes remain above the 200-day moving average?

For the answer, you need to look at the DJIA's Elliott wave structure. It strongly suggests the market will move in a definite direction in a matter of days or weeks.

This article, DJIA's 200-Day Moving Average,was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

6/22/10

S&P 500 Trade Update

We have been tracking a rally in the S&P 500 that I began to expect via a May 25th post. In various posts since then, the expectation was that this rally would be counter-trend in nature, ultimately leading to a larger downtrend. Links to those posts are easily found by just clicking here. The expectation for a rally has been successful, and now I think we are near (possibly at) the end of that rally. In fact, I have been short selling the market into the rally. Based on Elliott Wave analysis, there is a case to be made for possibly one more push higher in the rally before the downtrend emerges, but I also see a case where that is not necessary.

Here is an updated chart:

(click to expand chart)

In the last S&P 500 post on 6/14, I outlined several basic approaches that could be taken with the goal of profiting and limiting risk in this expected scenario. Those approaches are still all valid. Go back to that post to check them out.

The important thing to remember is that we are dealing with probabilities and not certainties. The speculation of a larger downtrend following the rally could certainly be incorrect. One ought to always limit risk so he can return to the table after a loosing trade or investment. One should always have a stop or exit strategy for a failed scenario. In that regard, the negation and confirmation levels continue to be notated on the chart.

Sometimes I get asked questions about how to sell short or trade futures contracts, etc... The fact is that, in today's market, the average investor can put on a short position without dealing with all the nuances and technical issues related to actually selling short, selling a futures contract, or buying a put option. You can do this by purchasing inversely related Exchange Traded Funds (ETFs). There are several out there related to the broad indexes. Some even provide a level of leverage. One such example is the Proshares Ultrashort S&P 500 (SDS). A chart of SDS in the same time frame as the E-mini S&P futures chart above is included below.

6/19/10

Tightening Stop on Gold Position 6/19/10

I am tightening the stop I have on my speculative long gold position and bringing it up to 1217.4 (basis continuation contract). Reasoning here is that I am simply making a tactical decision to step aside from my speculative position if prices break below what is currently a pretty well defined upwards trend channel. As has been mentioned in prior posts, my comments on trading gold in the intermediate term, do not necessarily reflect my opinion on core long-term holdings in the physical metal.

6/15/10

Big Bear Markets: More Than Falling Stock Prices

Many infamous authoritarian regimes emerged during or after big bear markets

By Elliott Wave International

Fear and uncertainty that drive a severe bear market are the same emotions which can set the stage for authoritarianism, in most any nation.

"Bear markets of sufficient size appear to bring about a desire to slaughter groups of successful people. In 1793-1794, radical Frenchmen guillotined countless members of high society. In the 1930s, Stalin slaughtered Ukrainians. In the 1940s, Nazis slaughtered Jews. In the 1970s, Communists in Cambodia and China slaughtered the affluent. In 1998, after their country's financial collapse, Indonesians went on a rampage and slaughtered Chinese merchants." - Bob Prechter, Wave Principle of Human Social Behavior, p. 270

Why do authoritarian tendencies emerge only during bear markets in stocks?

"As society becomes more fearful, many individuals yearn for the safety and order promised by strong, controlling leaders." - The Socionomist, May 2010

Learn How to Anticipate and Prepare for Political Conflict and War, Bull Markets and Bear Markets. The 118-page Independent Investor eBook covers a vast array of investment topics and exposes myths that mainstream investors accept as fact. Once you learn the real cause of conflict and war, you might be surprised how the stock market plays a key role in forecasting major social events. Click here to download the 118-page Independent Investor eBook for FREE

Bob Prechter's new science of socionomics explains that stock market fluctuations mirror trends in people's collective mood. In simple terms, when the market is buoyant, it indicates positive social mood; the opposite when a bear market takes over.

The fascinating part is that because the stock market and social mood trend closely together, a forecaster can apply Elliott wave analysis to both -- and predict both.

Generally, widespread brutalities and wars do not follow the first phase of a bear market. Extreme violence, when it does occur, often follows the worst part of the market's downturn -- like the end of the Great Depression, a negative social mood period that ultimately ushered in World War II.

But even during the first phase, a negative social mood grows. So, if a forecaster determines correctly where in the wave structure social mood resides, he can make educated forecasts about what will follow in society -- given what has happened before under similar social mood trends.

Authoritarianism is a subject of heated discussions these days, which makes it a timely topic for a socionomic study. The latest, two-part issue of the monthly Socionomist gives you just that: A look at historic trends and specific forecasts for the years ahead.

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

6/14/10

S&P 500 Trade Set Up 6/14/10

As described in the previous S&P 500 post on 6/3/10, my expectation was for prices to rally a bit above the 5/25 lows before then resuming a larger downtrend. While the rally did not form exactly in the pattern expected, the general short-term trend indicated has been correct. I said that I would be planning to sell into this rally in order to increase my current sold short position in this market, and that continues to be my strategy.

The Chart below shows current expectations based on Elliott Wave analysis:

(click on chart to expand)

Some of you will notice that I basically reversed the top and alternate counts from the last post. Reasoning here was two fold. The size and time taken in the current upwards correction indicate that the larger degree is likely the appropriate count. Also, this makes the whole picture more simple and clear.

Negation levels for trade ideas or trend are one of the most important aspects to consider when planning to take action in a market. Knowing when you are wrong allows you to cut your losses before they wipe you out. As in the previous post for this market, the negation and confirmation levels are clearly identified on the chart. Yes, it is possible that my whole outlook here is wrong. We are trying to manage probabilities, because none of us know the certainties until it is too late to profit from them.

There are several approaches that can be taken with the same information and outlook. Pure trend followers who are neutral this market right now can simply sell a breakout to new lows. They will also be poised to buy any breakout above the negation level of my discretionary outlook. Another approach is to do what I am doing and sell into the rally to get better pricing. I don't always do this, but will on the occasions when the scenario seems fitting. If you are keeping your risk against the stop / negation linear, selling into the rally vs the breakout means that you can afford a larger position size. One could also use a hybrid approach and move an entry stop up along with the current rally. The dotted line on the chart is an example of the hybrid trend following / discretionary approach. With the hybrid approach, you have an discretionary outlook (something pure trend followers do not engage in), but you are requiring it prove itself by pattern fulfillment or failure at lower degrees than would be necessary with a pure breakout strategy. I have and do use all three approaches depending on the situation presented.

Speaking of the rally, I have seen some others talking about a possible head and shoulders pattern forming here. A Head and Shoulders pattern is indeed possible. Such would require prices to move further to the upside and further out in time towards the higher Fibonacci retracement levels shown on the chart above. I have no problem with that outlook. It is consistent with the one I am presenting, and also suggests a selling opportunity. Such a pattern does not have to form, but it is good to know what it would look like if it does:

Like the Elliott Wave scenario I have been presenting, the Head and Shoulders scenario would be confirmed with a break to new lows after a rally builds the right shoulder. If prices break down from near current levels, then it's the Elliott scenario alone that properly described the market behavior.

The bottom line is that regardless if a larger right shoulder forms or not, I plan to sell into the current rally. I see the swells growing, and I am gearing up to catch the waves they are likely to produce. This might be one for the big wave board. That means strapping in, and being ready to hang on through a lot of volatility, most of it being expected to the downside.

6/3/10

S&P 500 Update 6/3/10: Big Swells Comming Our Way?

The short-term part of our outlook from 5/25/10 has so far been proven correct by this market. We will have to wait on confirmation to make such a statement about the intermediate and longer term outlooks that have been posted.

(click chart to expand)

While I have remained in a sold short (profit when prices decline) position for approximately one month, I plan to add to that position by selling short into this rally. This is based on both my intermediate term outlook and longer term outlook. If you would like to see a longer term outlook for this market go to the S&P 500 post from 5/20. Scrolling down to the bottom of the post, you will see a long-term Elliott Wave model for the Standard and Poor's 500 that was originally posted on February of 2009, and has also been proven correct so far by the market.

The negation level for the short to intermediate term outlook remains at the intraday high of 1219.80 (cash index) / 1216.50 (June e-mini futures) that was achieved on 4/26/10.

I've always thought trading was kind of like surfing. You watch for the swells. When you see clues that indicate big surf, you gear up and try to catch some waves. Some big swells might be coming our way.

'Defensive' Stocks: Are They the Ticket in a Downturn?

In a severe sell-off, 99 percent of ALL stocks can fall.

By Elliott Wave International

Approximately three out of four stocks go down in a bear market. This ratio doesn't just apply to high beta names; historically, 75 percent of all stocks go down when the general market falls.

Considering we could be headed into a severe bear market (read Bob Prechter's latest special two-issue Elliott Wave Theorist, if you haven't yet), we could see more than 75 percent of stocks take a dive. In that case, even a basket of "defensive" or "quality" names isn't likely to help your portfolio. What good are dividends when you're losing far, far more through capital depreciation?

On May 20, when the DJIA lost 376 points, 497 out of the S&P 500 stocks ended the day lower. (In other words, 99 percent of stocks fell.) Yet a financial television host recommended "defensive" names the day after. Wouldn't his viewers be better served if he said, "You may want to step aside for now"? Apparently, stocks of one kind or another must be recommended -- no matter what the market is doing or is expected to do.

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How about "quality" stocks that don't fit the "defensive" category, like blue chips or major technology names? The 1973-1974 bear market provides a clue. The "nifty fifty" stocks were "glamour" stocks; pundits said the "nifty fifty" should "be bought and never sold." However, by the time the bear market bottomed,

Polaroid cratered 91% (eventually went bankrupt)
Avon nose-dived 86%
Xerox fell 71%
Standard Brands Paint (eventually went bankrupt)

Here's what Prechter said on the matter in his September 2009 Theorist: "When the stock market overall ended its bear market in the fourth quarter of 1974, the nifty fifty had fallen substantially from their highs, and many investors continued to hold them under the belief that they would come roaring back. But they underperformed most other groups of stocks throughout the rest of the 1970s and into the 1980s." [emphasis added]

Similarly, big-name stocks that fell in 2007-2009 have yet to come close to fully recovering. Today's favored stocks could likewise nose-dive.

Learn from the past. Avoid the mistake of holding a defensive or quality stock "all the way down."

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