Still Bouncing Around the Room?

The bounce suggested in a recent post -"Bouncing Around the Room"- regarding likely bounces due for the short term prices of Crude Oil and the EURO did indeed arrive.  Because of recent intermarket patterns and trend relationships between these two markets and the S&P 500, we thought that the S&P 500 might find a little short-term support as well.  Also keyed off of was the current inverse relationship of these markets and the USD.  

Readers know that we are looking to increase our short sale positions in Crude and the EURO during this bounce.  Now that the possible bounce has become reality, we have new concerns.  Such is trading.  There are alternate scenarios available to these markets in terms of Elliott Wave structure.  

The bounce could end up being shallow and end right now as a result of subdividing waves within the trend. If this were to occur, this blog will simply increase positions with the break back into trend and let her rip against current stops.  If indeed the bouncing continues, we will be looking to sell these markets short to increase our exposure at higher prices.   

Bagels -NY State's Latest Target for Increasing Loot (revenue)

As the bear market persists, governments are running out of money.  Do they lighten the burden on the also strained individuals?  Of course not.  According to The Wall Street Journal, bagels are the latest vehicle for reaching into the individual's pocket. 

This is yet another example of authoritarianism rising during bear markets.  

State tax officials, under orders from cash-strapped Albany to ramp up their audit and compliance efforts, have begun to enforce one of the more obscure distinctions within the state's sales tax law.

In New York, the sale of whole bagels isn't subject to sales tax. But the tax does apply to "sliced or prepared bagels (with cream cheese or other toppings)," according to the state Department of Taxation and Finance. And if the bagel is eaten in the store, even if it's never been touched by a knife, it's also taxed.

Continue reading.......

The Hindenburg Omen -- Omen-ous or Not?

Elliott Wave International Chief Market Analyst Steve Hochberg Sheds Light on a Feared Technical Indicator
By Elliott Wave International

Last week's volatile market action coincided with a technical signal called the Hindenburg Omen whereby a relatively high number of new highs and lows in individual stocks occur at the same time. This indicator instantly gained an enormous amount of media attention. In this interview, Steve Hochberg, EWI's Chief Market Analyst shares his perspective on this indicator and the "re-emergence" of technical analysis. Read more.

Buying Money With Oil

We are preparing to purchase money with black gold.

As regular readers know, we have been bearish on the Crude Oil market for over a month now.  Wishing the market to indicate that our convictions were correct before taking the plunge, we said we would initiate short positions if prices broke a certain level.  We tightened that trigger on 7/21/10 to the level of  71.09, and the market came within a hair's breath of breaching our signal line in today's session. 

It seems that an Elliott Wave impulse pattern has emerged.

While we are willing to dip our toes in the water at the trigger line, we are going to put most of our risk on the line if Crude prices retrace upwards from near current levels.  In this way, we are able to be lightly positioned for a possible complete breakdown in price, but we reserve most of our risk for a tighter entry using an expected (but not certain) price retracement. 

Stops will initially be at one tick above the 8/4/10 intraday high of 82.97. 

Bouncing Around the Room

Both the EURO and Crude Oil began their current downtrends around the same time as the S&P 500 initiated its change in trend to the downside.  To orient you, it is the first week in August that I am speaking of.  As readers know, this blog is currently short the S&P 500 and the EURO, with expectation to initiate a short position in the Crude market should price action and patterns continue forming as they have been. 

What strikes me as interesting today is that it appears likely that both the EURO and Crude are nearing the end of a shorter term Elliott Wave impulse to the downside.  In fact, I put a note under our last Crude post stating that we would be looking to sell short following any upward retracement in that market.  A similar strategical note was written under the last EURO post.  

As I prepare to implement these strategies (wait for market set up to form) in the EURO and Crude, it makes me wonder if the S&P 500 will bounce right along with them should such a retracement scenario play out in those two markets.  A similar pattern, but to the upside, is present in the US Dollar Index contract, .  Perhaps some short term bouncing in EURO, Crude and S&P 500 is due along with some pull back action in the USD?         

Of course, no one knows what will happen for sure.  We just have to manage the probabilities as they are presented by the various markets.  Still, I believe this is an interesting inter-market situation for us to watch.   

The News

According to the news, people woke up this morning, quickly read all of the latest news, developed new concerns that they did not have yesterday, and then decided to sell stocks.  

I wonder if the MSM will tell us if people did this before or after brushing their teeth and eating breakfast.

It seems to me that the pundits are missing something -maybe the fact that the news is not the main driver of financial markets.

Purchasing Money With Stock

When the topics of investing and trading come up in casual conversation, I am often asked where I am putting my money right now.  Currently, the easiest response I can offer is that I have sold the market short at the moment.  

In many circles that produces strange stares and questions as to just what is "short selling"?  

Perhaps the easiest and most succinct answer to that question is to say that short selling is purchasing money with stocks, rather than purchasing stock with money. 

Death of the McMansion

"McMansions just look and feel out of place today, given the more cautious environment everyone's living in," said Paul Bishop, vice president of research for the National Association of Realtors.

And homebuilders are heeding the call: In a survey of builders last year, nine out of 10 said they planned to build smaller or lower-priced homes.

Read the rest of the article.

Efficient Market Hypothesis: R.I.P.

By Elliott Wave International 

Of all the belief systems of Wall Street, few can claim the devoted following of the Efficient Market Hypothesis, the idea that stock prices adhere to the same laws of supply-and-demand that govern retail products. Once coined the theoretical "Parthenon" of economics, this notion has consistently endured the test of time ----- until now. Academics and advisors across the globe are currently exposing crack after crack in the "Efficient" model so deep as to bring the entire theory crashing to the ground. Read more.

Slave?

According to Dave Ramsey's Facebook page, today, Aug 19th, is the date when the average American finishes paying off his or her respective share of federal, state and local taxes and the cost of implementing govt regulations.  

That is 231 days, or almost 2/3 of the year.  

My question is: what is the definition of "slave". 

The Most Important Question

I receive a number of market related e-mails during the day.  They are enjoyable to me, because its nice to be connected in some way to others while sitting at this desk.  

Some of the e-mails are market opinions / market "calls" from the sender, or a third party.  I try to look through these and remark on them.  It's educational to see the developed and developing disciplines of other market participants.  Also interesting is to see what is sometimes left out of a strategy.  

Today, I received an e-mail that was third party information regarding a directional speculation (market call) on a market this blog is currently watching with a potential trade already outlined in prior posts.  The e-mail was suggesting this particular market would be going the other direction.  

Differing opinions on the market are nothing new, and, quite frankly, I am typically most comfortable when the majority of participants are most convinced a market is destined to go opposite direction than the one we are positioned in or set up for.  However, you will notice that at the Markets and Economy blogspot we try to outline the price levels that will indicate when our stance is wrong.   We endeavor to lay these negation levels / stops out prior to, or with, the trade signal itself.

And that seems to be one of the most important questions in trading. Before taking a position in the market we need to ask ourselves where we will be wrong.  Cutting losses short is perhaps the most important skill to develop in this business.  

Far to many market participants are concerned with being "right" about a market.  It is better to be consistent in your discipline, than it is to be right.  If you are consistent in cutting losses and letting winners run, then one winner can pay for several losers.

That brings me to what was left out of one of the e-mails I received today.  The third-party e-mail suggested a certain directional position be taken in a market, but never said when the trade would be directionally negated or confirmed.  

I find this type of practice to be lacking.  Trading is tactical.  We simply have to know when a position turns out to be incorrect.  We have to know when to retreat as much as we need to know when to advance.  In this business, you cannot afford to take positions without first determining when your directional idea is incorrect.  After determining that, then you need to determine the position size that would limit risk at the negation level to a loss that is manageable and does not risk ruining your account and trading / investing operation.

Crude Oil Still Hanging Around

We have had a trade set up in the Crude Oil market for over a month now.  It has not been triggered yet, but its still hanging around. 

(click chart to expand)

 

The EURO's Summer Vacation -what comes next?

The EURO has enjoyed a little summer break from its prior downtrend.  Although we did not trade it (wish we would have), we identified the beginnings of that downtrend in December of 2009.  Now let's see what can be expected from the EURO as summer winds to an end.

(click chart to expand)

Based on the Elliott Wave labeling above, we are preparing the sell the EURO short (go long the dollar).  After an extended wave '1' of (1) down, wave (2) up is very likely complete.  If correct, wave (3) would be expected to take the EURO to new lows below the 1.1874 mark reached in early June of this year. 

Our set up is as follows:  Stop / Loss orders at 1.3334 (one tick above the 8/6/10 intraday high).  

A quick reminder on risk management and expectations: remember that we do not expect all trades to be winners.  To have such an expectation would be foolish.  Instead we are actively managing probabilities and risks.  Plans to exit if a certain loss is the result (stop loss orders) and limiting amount of capital risked against these stops are easily the most important aspects to long-term trading success. 

Entry triggers: 1) We will consider selling any short-term rally that develops from current levels, but just in case we do not get a short-term rally; 2) We will sell short any break below 1.2732 -the intraday low on 8/16/10.

Clearly a break below the latest upwards trend line drawn on the chart above is important.  Such could be an entry filter for anyone taking this trade.

Below is a 60-min chart of the price action that has emerged off of the 8/6/10 intraday high:

 
That looks like a pretty clear set of five waves down to make an Elliott impulse pattern to me.  

Of note is the fact that, with advent of exchange traded funds (ETFs), it is no longer impossible for the retail investor to buy and sell commodity (futures) and foreign exchange (FX) markets in their normal stock brokerage accounts.  Traders and investors not wishing to open a futures account can easily short the EURO (go long the dollar) with inversely correlated ETFs, such as Proshares Ultrashort EURO (EUO).  EUO is designed to gain in value when the EURO is losing in value against the dollar.  

The wave conditions seem to be improving across multiple markets right now.  Surfs up!

Gold Update 8/13/10

Our last post regarding the Gold market mentioned a trade set up and a trigger that would cause us to innate a new position in the yellow metal.  Today, that trigger was hit by price action.  

On 7/18/10, we said that if prices move above 1218.8 without first moving below 1145.8, then we would consider it a signal to go long with stops placed at the turn low.  Today, prices broke slightly above our trigger, reaching an intraday high of 1219.8.  The turn low was 1155.6 on 7/28/10.  

My plan is to obey the trigger and follow the possible new intermediate term price trend, but with skepticism.  My confidence is much lower on this trade set up than it is with the one in the S&P 500 right now.  Therefore a full unit of risk against the stop is not being taken.  We are just going to ease in and see what type of price action comes next.  If we get a pullback that indicates to be a correction against upside action, then we will look into possibly putting a full unit of risk on against the stop at that point.   

If you are not a futures trader, but want to participate in the the gold market, one way to do it is to use an ETF, like Proshares UGL (leveraged), or the very popular GLD. 

Heads up.  There are some contrarian warning signs in the gold market right now.  A friend sent me an article from zerohedge.com which informs us that Goldman Sachs is going openly bullish on gold.  Market trends are funny things.  When it is most popular to be part of a particular trend, it is also usually the worst time to get in that trend.  This piece of news gives me pause.  

China has also entered the gold market according to an article at lewrockwell.com.

Perhaps the contrarian signal is longer term, resulting in still a higher push in the intermediate term price action to be followed by a larger downtrend.  That is the scenario intermediate term price action has us positioning for now.  I would definitely be looking to get on the short side of the Gold market either after a push higher prior to a break of 1155.60, or if prices broke down bellow 1155.60 from here. 

I always feel like a clarifying statement is needed when we start talking about trading the gold market.  Gold and silver are real money.  The FRNs legal tender laws force us to use are intrinsically worthless.  We advocate of people systematically purchasing physical metals and holding them outside of the banking system.  Although the author of this blog might buy or sell gold commodities or ETF's for the purpose of participating in intermediate term price trends, it does not change the view that some physical gold and silver should be held.  Even if I short the gold market in the future, I will likely take part of the proceeds (assuming it becomes a profitable trade) and purchase physical metals with them.  

S&P 500 update -We Have a Ticket to Ride.

Since this blog's inception, we have had some exciting rides in the S&P 500.  You can see the reverse chronological S&P 500 posts by clicking here.  Most recently we have been getting in line, by selling rallies short, for what we have expected to be another great ride.  

Today, the market may have been given us the boarding pass we have been working for.  Get strapped in.

(click charts to expand)


The S&P "Battle Plan" post on 8/2/10 mentioned a new trade set up -a sell signal that would trigger further pyramiding of existing short positions or could be used to trigger initiation of new short positions.  Today prices broke below 1088.01 (cash) / 1084.50 (Sept e-mini futures), which was the set up signal.  


Stops for all units of trade are now at one tick above the 8/09/10 intraday high; 1129.24 (cash) / 1126.75 (Sept e-mini futures).  Counting the new signal which was triggered today, this blog has had five different sell short signals / calls since early May 2010.  All stops are now moving to this new level. 

Looking at the chart, there are several technical issues that further indicate the bearish case.  A valid Elliott Wave count suggest the market has now ended a second wave to the upside.  If correct, a third wave should follow to the downside.  The 7/1/10 lows should eventually be taken out by this action.  While the overall bearish case will not be eliminated until a move above the 4/26/10 highs (negation line), the idea that wave '2' has ended will be eliminated if prices move above our current stop level at the 8/9/10 intraday highs. 


A trendline drawn across recent intraday lows was broken decisively by today's action.  Prices did not even come back to test the line, but closed well below this demarcation of prior lows.  Of note is the fact that his line was part of a wedge formation.  Wedge formations usually lead to a change in trend.  This wedge would also most likely be labeled an ending diagonal to finish a running flat.  All of this is bearish in terms of price action.    

Look at the relative strength index (RSI) at the bottom of the chart.  RSI is a price velocity indicator which compares the magnitude of recent gains to recent losses.  There are several ways people use the RSI.  I personally use it in two ways.  One is the way Connie Brown suggests to indicate price trend by identifying what levels the RSI is between.  The other way I use it is to look for divergences with price trend.

Notice that previous RSI divergences on this 120-min chart  led to changes in price trend.  Similarly, today's bearish price action follows a clear velocity divergence in the RSI.  Price action to the upside has been getting weaker and weaker.  Now it has started to break down.  

Volume has been very interesting to me throughout this formation.  Expanding during declines, contracting during advances, volume currently indicates that the bearish position is the correct one to have.  Today's action continued this trend in volume behavior by expanding significantly against prior volume readings all while prices precipitously declined.

Price trends are not straight line affairs, and we certainly expect large and powerful rallies even during a strong bear trend.  However, we are positioned to profit exponentially from price action to the downside and take only linear losses if our positioning turns out to be incorrect.   

Although not news to anyone who has been following this blog for some time, we ultimately expect, as per our top Elliott Wave count, new multi-year lows below those registered in early 2009.  We believe the worst of the bear market is just beginning.  Having said that, we are willing to let price action led us.  Our alternate-1 count above still shows a bearish anticipation for the intermediate term, but allows for price action eventually rising above the April 2010 levels before making new lows below the early 2009 levels. 

Needless to say, we are going with the top count (that's why it is called "top") while simply keeping the ALT-1 in our peripheral.      

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The Economic Crisis No One Saw Coming: A Convenient Untruth

By Elliott Wave International

The single most convenient untruth about the 2008 (and counting) financial crisis is that it was unforeseen. For two years policymakers have insisted "There was no way to know ahead of time" that the liquidity boom would come to a screeching halt. Yet even as the mainstream authorities failed to detect the economic earthquake moving below their own feet, somebody did "notice" well in advance. That person was EWI's Bob Prechter. Read more.

Meat Grinder

Quiz: What are financial markets good at?  

Answer: Taking your money.  

To win over the long run in this business you have to have well thought out tactics, good risk management, and the courage to see them both through to win or lose.   

The stock market, as measured by the Standard and Poors 500 index, is most likely in an ending diagonal pattern within a bear rally.  If correct, resolution to the pattern will come to the downside.  If incorrect, then lookout bears (that would be us right now)!  Corrective patterns, and especially the ones that consolidate within a narrowing range, are kind of like meat grinders.

 

It seems like that is what is going on in the market right now -a lot of shaking out of both bears and bulls.  When all of this grinding is over a trend will emerge.  Currently, I think it will be to the downside. 

A break below 1084.50 in the September e-mini futures contract or a break below 1088 in the cash index would be a sign that the grinding was coming to an end and that a trend to the downside was emerging. 

After selling every one of these rallies short, one thing is for sure: if we get to make some burgers out of all this ground meat, they are going to be really tasty.  Of course, if the cooking does not begin soon, we might just have a lot of rotten meat on our hands.

S&P 500 Battle Plan

It's time to modify current stop/loss strategy and highlight a new entry set up.

For several weeks we have been saying that a move above the 6/21/10 intraday highs would lead to closing of the short positions that were put on during every rally since early June.  Today is a rare day, because, as was mentioned in a comment below a previous S&P 500 post, we are removing those protective stops for our shorts.  

Does this mean risk management is being forgone?  No.  The truth is that we actually have a little wiggle room to work with.  Fortuitously, and partially due to chance, our max risk tolerance is not at the 6/21/10 high.   

What if the 6/21 high had been at the risk tolerance and we wanted to keep a position on?  Actually there is are several ways to do this, but the most straightforward is to simply reduce position size right now.  Keep on the amount of position that will allow you to stay within tolerance while removing (possibly for some loss or some profit, depending on entry) enough to bring you into tolerance against your new pattern make or break level.  

Usually when there is a need to to this -reduce position size as a result of loosening stops, the market also provides new setup trades to allow you to increase position size again once a tighter stop can again be placed.  Indeed, this is the case with current price action, as will be shown below.   

The reason for this change in battle plan is that the current rally appears to still have the characteristics of a bear rally.   Volume continues to contract on rallies and expand on declines.  There is a velocity divergence on the 120-min chart's RSI-14 that is similar to preceding divergences which have led to changes in price trend.  A valid bearish Elliott Wave count is still present.  The current behavior seems a lot like the July and August bear rally of 2008.

(click chart to enlarge)

 
Negation of this opinion would be a break above the 4/26/10 intraday high, which was 1219.80 in the cash index.  

Confirmation of this opinion would be a break below the 7/1/10 intraday low, which was 1010.91 in the cash market.  

Now on to the new trade set up that has presented itself.  If prices break below the 7/30/10 intraday low of 1088.01 (cash) / 1084.50 (Sept futures), that would be a signal to establish new short positions and/or rebuild prior short positions that had been paired down for risk management purposes.    

The Broken Window Fallacy