Down, Down, Down, Down, and Up Just a Tad: Pretty Bearish Week

This week, the market literally pulled a 180 and made lower lows and lower highs every day this week. In fact, today was the only day that the S&P managed to close up and it was barely up. It did however close in the middle of it's daily range which shows a little bit of indecision but I'm gonna keep my shorts on (pun intended) for now. Here's a look at the SPY daily chart:
I think at a minimum the market will test the recent lows, approx. 104 for SPY, and if that support holds again we will continue to be range bound but in the mean time we can trade this market down. So why am I bearish again? Treasury spreads (here's a recent post that explains the treasury spread indicator), which have been spot on, are pointing lower. Here's an updated chart of where we stand according to the spreads:As you can see, spreads are making new lows which means that my money will be fading strength in the market. That is why my shorts will remain on the table. Now all of this could change and I'll be watching for more divergences but for now, the path of least resistance is down.

Have a great weekend.

TLT

Market Overview

It's nearly Christmas and the markets have taken a slight pause today (some are up a little and others are down or flat). I thought it would be a good time to look over the markets in general and see where we stand. There's a lot of chatter about the annual santa claus rally, lets see what the markets say.

To kick it off, lets look at the S&P via SPY. As you can see from the chart below, the S&P has been stuck in a trading range since early November. The top of the channel has been tested several times in December but we still have not seen a meaningful break. I want to see it break and hold before getting too bullish on the market.

The recent break out in tech (qqqq) is good news for the bulls. Tech is looking incredibly strong and it will help move all the markets higher if it remains strong. I will be looking to enter a long position in either the nasdaq etf or the semi conductors (smh) if the S&P breaks out. Here's the chart for the Q's, note the break out:Okay, S&P is range bound, Q's are breaking out, what else should we be following for an indication...the small caps (IWM). The small caps have been the laggards lately but now they seem to be playing catch up. The Russell 2000 (IWM) is sitting (barely) at fresh highs which is another good indication for bulls. Here' s the chart:We'll go ahead and file the small caps under bullish for now, but this will change if it falls back into its prior range. Next lets take a glance at the VIX. The VIX has just fallen to some fresh lows and it actually closed below the 20 level yesterday...something that it hasn't done for some time. What does this mean? It means that worries are easing, at least for now. This is also a bullish sign for the short term outlook of the stock market.

So far, we have a neutral S&P that might break out (neutral), a breaking Nasdaq (bullish), a breaking Russell (bullish) and a falling VIX (bullish). That's 1 neutral and 3 bullish signs. Where's the case for the bears? Here it is, the financials.

Financials (XLF) have been a huge laggard and they will weigh down the S&P and the market in general if they don't perk up. Here' s the chart:There's the obstacle for bulls and fuel for bears. I don't know which way it will go and I'm certainly not smart enough to figure out how big of a mess the banks are (or are not) in. Furthermore, I can't even try to figure out the effects of the stimulus plan and whether that will provide enough cheap money to raise the market in general and make banks profitable, but there are lots of people out there that think the stimulus is merely going to provide profits to banks. I just watch the charts and try to determine which direction "order flow" is moving and then ride along.

One indication that can provide insight into whether banks will do well (and the economy in general) is the yield curve. The yield curve is currently steep, meaning short term rates are much lower than longer term rates. This is good for banks which in turn is good for the economy and markets in general. This is why the feds want the rates to remain low. Here are the current treasury rates and yield curve that are pulled straight off of Yahoo Finance's Bond Center. As you can see, longer term rates are much higher than short terms rates. This should help banks quite a bit and is indicative of good times ahead. However, there's always the concern that this time is different, especially considering that enormous stimulus plan and the worries of future inflation. We'll see how it plays out but for now I'm counting it as bullish.

So what else is there? The Dollar. The dollar has been in the headlines and has been talked about quite a bit lately. Most of the chatter has been about how bad the dollar is and that it's falling and going to lose half its value...blah, blah, blah. The dollar has actually been strong as of December and it appears that a reversal of some kind is under way. Here's the chart of UUP:Until recently, the dollar had shown an inverse correlation to the stock market, but that relationship seems to have changed as the dollar has been climbing with the market. I particularly like the long play in the dollar and I'm currently in it. One reason that I like it is that the dollar has been rising with stocks, but, the dollar also serves as a good flight to safety instrument that the world buys it when things start looking bad. Therefore, the dollar will likely keep rising in its current trend, and then if things get bad in the equities markets, the dollar will rally even harder. That's my current theory and like I said, I'm in this one.

Last but not least, Gold (gld). Gold has been on a bullish tear for quite some time, but now it seems to be falling back to earth. Why is gold a good short right now? Here's 3 reasons: 1) gold is likely in a bubble and bubbles break hard when they pop, 2) historically, gold has sharp climactic tops and long rounded bottoms and Dec. 3 sure looks like a climactic top to me, 3) the strong dollar will put pressure on gold prices. All of these things tell me that gold is a good (note not a sure thing) short right now and I'm currently in it. Here's the chart:Alright, here's a quick recap. The S&P is still range bound (neutral) and needs to break out, the Nasdaq is trending higher (bullish), the Russell is perking up and printing new highs (bullish), financials are lagging (bearish) but the yield curve is steep which makes it easier for banks to make money (bullish). The dollar is showing strength and gold is weak. These are neither bullish nor bearish (IMO) but they are very tradeable and I'm in both.

So what now? I'll be looking for a break out in the S&P with confirmation from small caps, financials and bonds (lower bonds). If this happens, I'll be looking to go long tech (QQQQ, XLK) and semi conductors (SMH) and short bonds (TBT). I'll also be adding to the long dollar position and the short gold position if they continue in my favor.

If the S&P doesn't break higher, watch out because we might see a substantial drop in the markets. For the bearish scenario, I'll be looking to short financials and emerging markets and look to go long utilities (xlu) and bonds (tlt). There's the game plan for the rest of the year and the beginning of 2010. We'll see how it plays out.

Have a merry Christmas and a happy new year!

TLT

Strong Market Today, Let's Take a Look At It

It's not too surprising that stocks are strong today as there were quite a few buy programs that hit the market in the last hour of trading yesterday. As of this writing, the SPY is up approximately 1.25% and IWM (small caps) is up 1.5%...which is significant because there has been a divergence between large cap and small caps lately. One notable divergence that is still in place today is with the financials (XLF) as it is down a little and not participating in the rally, making todays rally a little suspect. Here's a screen shot of my intra-day stock monitoring screen with the SPY and some annotations:As you can see, the SPY gapped up and is currnelty holding onto gains. It's currently in an uptrend on the 15 minute time frame, but there's some overhead resistance at the $111.75 level. We'll need to see that level taken out and for it to hold in order for the SPY to see higher highs...otherwise it will just continue to chop around in that 111.75-109 range that it's currently stuck in.

At the beginning of this post I mentioned buy programs...some might wonder what this means. I (along with most other traders) monitor the NYSE tick index or the TICK for short. Various people state that certain levels are important, such as 800, 1000 or 1250 and the corresponding negatives of these values. Others monitor an average of the values and watch that to see if there's more buying or selling. Personally, I just keep track of the number of readings above 1000 and below -1000 and I note if there are several readings that are close but not quite at these levels. I also keep an eye on the 20 and 50 period moving averages on the 5 min chart to look for consistent buying or sellling.

For example, lets look at today's 5 minute tick chart:There have been 6 readings of 1000 or more on the tick and there has not been a single reading at or below -1000, although there were a few close readings around -900. In fact, the majority of this morning's tick reading were positive as indicated by positive 20 and 50 period moving average readings. What does this mean? It means that buy programs have been hitting the market and the significance of this is that the big boys are trading to the upside, at least for now. This tells me to only trade to the upside and to let profits run because the trend is likely to continue...as opposed to a choppier day evidenced by extreme tick readings in both the positive and the negative that would warrant taking profits quickly.

This is how I follow and look at the TICK chart. Note that there are several interpretations on how to use and read the tick chart. Furthermore, this post has not gone into very much depth about the tick and it assumes that you are at least familiar with it. The tick index is merely the number of stocks on the NYSE that are trading on an up tick vs. the stocks trading on a downtick. If you're not familiar with the tick index and want to learn more, a good place to start for learning about the TICK index is Investopedia with this and then read some of the links as well.

Have a profitable trading day!

TLT

New 52 Week High 2 Days in a Row: FCX

I spent almost the entire day working on a Motion for Summary Judgment for a civil lawsuit that contains nine separate causes of action and the Petition (or complaint) is so poorly written that it appears to be drafted by a moneky. If you're not familiar with a Motion for Summary Judgment (MSJs) then consider yourself lucky because they are not fun...unless you're one of those sick twisted individuals that likes that kind of stuff...I knew a few of them in law school. Needless to say I didn't trade any today, which is okay, but I did manage a position that I already had on. I've been long FCX since November 10th and this stock has been on fire the past few days. Here's an intra-day chart with some comments on today's price action: FCX sold of with the market a little this morning but then it began showing strong relative strength as it was able to get into the green before the market did. At this point, I'm just trailing stops with this trade as it's in the money and making new highs. I don't want to add to it though as this market is a little shaky to be adding on too big a posistion...something I did just before the market made its dip back in October.

It will be interesting to see how the rest of the week plays out. The first two days of trading this week look a lot like the first two days last week--a gap and rally followed by choppy consolidation. This market tends to head higher when there's not any potential bad news (i.e. anything that could cause the dollar to rise), which leads to short covering, which leads to higher prices and then the cycle repeats itself. The only problem is that it's a game of musical chairs right now because the dollar will eventually rise, (due to rising rates, risk aversion, profit taking on the carry-trade, central bank intervention the fed even hinting about the possibility of raising rates in the future, you get the idea) and being long this market is basically a game of musical chairs for now, which is why so many pros and pundits hate this rally. Gotta love it. Although it can be confusing and frustrating at times, the market is never borring.

Hope everyone is having a good week!

TLT

Bearish Signs Abound

Despite closing in positive territory, the markets were unable to mount an impressive rally...not a good sign with the presently oversold conditions. The averages were unable to break the current down trend that's present on the hourly chart.

Several things about the present market environment concern me, including: the recent dramatic rise in the vix, the continued selling off after the release of good news (both earnings and economic), the ugly technicals (i.e. moving averages crossing over and falling and MACD divergence/MACD crossing zero line on daily chart), and the upcoming fed interest rate decision. All of these things concern me to the point that I unloaded most of my portfolio today with the exception of one small tech stock (tsys) because I don't feel like I have any edge in this market. Here's a hourly and daily chart of SPY with some annotations:The dip buyers may appear and turn this little scarry slump into a great buying opportunity, but for the reasons stated above, I'm sitting out for now. If anything, I might dabble on the short side, but will probably only day trade for now, at least until I get a short sell signal on the indexes from my TLT Trender v2 system.

As for the fed interest rate decision on Wednesday, I'm having trouble anticipating ways that it will be positive for the market. At best, it will probably leave market participants complacent and more likely than not, it will give people a reason to sell. I don't want to be in the market if the fed decision positively impacts the dollar, for whatever reason, and everyone heads for the exit at the same time...that scenario would be ugly. As always time will tell and it's our job to sit back and let the market dictate what to do.

Be careful out there.

TLT

Morgan Stanley, Ok?

It looks like MS is off the "Death Watch" list. They came to an agreement with Mitsubishi last night and all looks well, or at least they're still in the game. I think this is actually a good sign for the market because they're one of the first firms to make it after being put on the "Death Watch" list(as opposed to Wachovia, AIG, Freddie and Fannie, etc.). Maybe I'm speaking to soon, only time will tell.


Overall, the markets gapped up pretty big this morning but keep in mind that it's a holiday and the move might not mean much if volume is light today. We've been overdue for a bounce and we're finally getting it, both in the stock markets and forex; now it's time to stay alert and look for good setups for entering the longer term trends. Good luck out there.

TLT