Where we really are in the market...

It feels like we've been brutally selling off since the market started trading this year..especially if you've been watching news, reading market commentary, etc.  I've had people that don't have anything to with the market, except for a $10k roth ira, start talking to me about the awfulness of the market and the price of oil. My gut feeling is that we've probably already seen the short term bottom or are very likely to it..both in oil and equities.

Take a look at this chart:

We are basically in the same zone that we were in after the post August sell off.  We basically sold to the same levels, it just took several weeks to accomplish rather than a couple of days like in August.  So why are people freaking out so much and why are they so certain that we're entering a bear market?  This is what I've been asking myself.  The answer is probably that we just haven't had much volatility over the last few years and there hasn't been that much to be concerned about.  Now we have oil crashing, china imploding, rates rising, and a war in the middle east that America and Europe are not really talking about or calling a war.  While I think we have seen a regime shift in the market and we will probably stay in an elevated volatility environment, I doubt that we're entering a big bear market..unless we have a huge market impacting event (terrorist attack, china actually implodes, sovereign default, etc.).  Short of any of those scenarios, I think we just see bigger chop in a bigger range.

Another chart worth looking at is a VIX chart with the ATR indicator.  The ATR of the VIX is basically the volatility of volatility, and this chart shows that a regime change has been in place since late August (the on going higher ATR levels) and it shows that a short term bottom might be in place (the blue circle showing the only significant decrease in the VIX's atr that we've seen this month).

So where is the market really at?  Probably in a big choppy range.  What am I looking for going forward?  I'm watching the zones in the SPY chart above..if we trade below the August/January lows, then we're probably going to see higher volatility and more of a sell off.  If we don't see new lows, then we'll probably drift up and down between the highs and lows of the zone until we clearly trade out of the zone.

Just note that active trading in a higher volatility environment is different than we've seen for several years.  Moves up and down reverse much faster and day to day follow through is limited.  While this presents great opportunities for nimble short term traders, it can be devastating for traders that are anticipating that their older trading patterns will still work.

Stay nimble and alert.

George

LIBOR Spreads Say, "Bull On"

Spreads between the 1 month and 3 month LIBOR, one of my favorite gauges of market risk appetite are very bullish right now.  Take a look at the chart:

Have  great weekend!

TLT

Leading Indicators Study Say's Bears are Still in Control

One indicator that I created a while back and have been following is called the "Leading Indicator Study."  No, these are not the economic data leading indicators, these are just different etfs of asset classes that represent the bullishness or bearishness of the market that tend to lead big moves.  It is based on the Euro (FXE), Copper (JJC), Small Caps (IWM), Emerging Markets (EEM), VIX (VIX or VXX), Long Term Treasuries (TLT), Short Term Treasuries (SHY) and Consumer Staples (XLP). 

I'm not going to go into exactly how this works, but I wanted to share the general idea...maybe it will spark some ideas with clever traders that look at such things to derive an edge.  The basic concept is to take risk sensitive asset classes, determine whether they are in an uptrend or downtrend, and then create a score based on the trends.  This particular indicator uses a couple of regression calculations to determine the trends and then it adds points for the bullish trends and subtracts points for the bearish.  Simple enough.  Regression is not necessary, you could easily use a moving average or volatility break out system in place of the regression.  The point is to look at multiple asset classes at the same time to get a heads up on what the market's current risk appetite is.

Here's a screen shot of the indicator paired with the S&P 500, note the colors of the price bars are indicative of the bullishness (green), bearishness(red), buycaution (yellow) and sellcaution(blue):

Hopefully you found this interesting and you can work out something similar or even better to implement with your own market analysis.  As you can see with the chart, price bars are red and the indicator score is a very low -92 which confirms the bearishness of the market.  That tells me not to get too excited about any rallies until this indicator gets back to bull territory.

TLT

Headline Risk

What Does Headline Risk Mean?

"The possibility that a news story will adversely affect a stock's price. Headline risk can also impact the performance of stock  market as a whole."

Read more from Investopedia.

It's hard to say, as the market never likes a "negative" event that has never occurred before.  Was there really any new information?  Does this really change anything?  There's a good chance this could be a big deal, but the other side of the coin is that the market will come to terms with it and start discounting what rating agencies have to say.

Just hang in there and don't panic.  I could be wrong but I don't see a "2008" scenario here.  As always,  only time and price will tell.


TLT

Looking at the S&P Bar by Bar

We've had some interesting price action over the last week.  I've taken this dip as an opportunity to add some longs for both me and some clients.  This market will likely continue higher and it will be confusing to many retailers when they see this market making new highs despite all the negative news stories.  Here's a quick break down of recent price action in the S&P via SPY:

I've pointed out 3 interesting scenarios that have taken place within the last 7 trading days.  First there was a strong swing low last Friday, which looked like an excellent bullish reversal.  That was followed by a  big gap down on Monday that had a false break to new short term lows (15-20 day lows).  The interesting thing about Monday is that a bunch of stops were likely taken out and then the market closed pretty close to the highs for the day.  I'd imagine quite a few retailers lost some money on that move.  Tuesday, the bulls were definitely back in control and going long above Monday's highs was a great short term long setup.  Then today...we gapped way up to 6 day highs and didn't lose too much ground.

From my point of view, this type of price action is showing that bulls are still in control.  Every time the market looks like its setting up a shorting opportunity, the move gets faded as buyers hit the market.  The long and intermediate trends are both up and that's how I will trade until that changes.  Going short in this market is for suckers that like to pick tops (a skill that very few can successfully do) or major suckers that like to pick up nickels in front of a steam roller (sure you might make a few cents here and there but you're taking an enormous risk).  As always, this is just one person's opinion and I am wrong just like many others...I've just learned to cut my losses over the years and to hold on to winners when the current trade is acting "right." 

Outside of the market, it has been hectic lately.  Work is incredibly busy and my wife and I recently closed on a new home and moved about two weeks ago.  Unpacking always takes about 10 times longer than I think it will..eh, you guys know about that.  I guess I'm saying these things to explain why posting has been limited lately.  I have managed to read a couple of interesting books lately and I plan on posting a couple of reviews on them.  Maybe I'll have time this weekend. 

Hopefully everyone is off to a profitable start this week!  Keep your head up and stay alert..this is a crazy market.


TLT

Bears Beware?

We saw a wicked rally yesterday and a substantial gap up this morning but, unfortunately for the bulls, prices plunged this afternoon.  That little rally was enough to inflict some pain on the shorts, me included, as I got to watch prices gap right through some of my stops and take me out of some positions that ultimately would have been great to have at the end of the day...kind of an insult to injury but that's part of the game.  

SPY Daily

 Technically, stocks still registered a higher high and a higher low, so there's still some hope for the bulls, but I think we're heading lower.  My indicators are calling for lower lows and fortunately, I've still got some shorts on the table...I got knocked out of my TZA (3X small cap bear) position but I'm still in the slightly tamer SDS (Ultra Short S&P). 

So should the Bears Beware?  Obviously, I don't think so and I've got my money where my mouth is.  That being said, there's always the chance of being wrong which is why using stops (even when you get whip sawed) and proper position sizing is so important.  The best trades tend to be at inflection points, where the market looks like it will go either way, because those are the spots that offer the best risk to reward.  The key is to have a reason (indicator, system, guru to follow, etc) that helps you determine which side to be on and  is right often enough to make money.  So my system is pointing down..we'll see how it plays out.

Hope everyone's having a great week so far.

TLT

What a Day, Glad I was Short

What, did he just say he was short?  Didn't the Lawyer Trader just post something about the intermediate trend being up and that the path of least resistance would continue to be up...?  Although I did say that, I also said that this was subject to change and change it did.  I've been short for 2 days and I piled into TZA (Triple Short Small Cap) this morning at the open...an etf that gained 10% today!

So what happen to change my mind and give me the conviction to pile on the shorts this morning?  Well something occurred over the past couple of days, especially yesterday, that over rode any bullish bias.  That something was in bonds, and bond spreads to be exact.  I've posted about my Treasury Spread Indicator before and it gave a glaring sell divergence yesterday.  Here's the chart: 

So what's the significance of this divergence portrayed on the chart?  Well it basically boils down to the stock market and the bond market disagreeing on the state of the economy and the state of the stock market.  Stocks were flat and bonds indicated that stocks should be sold off.  When that happens, it pays to bet with bonds. 

Have a great weekend.

TLT

Treasury Spreads Indicating a Possible Buy Divergence

Yep, treasury spreads might be indicating a further move to the upside. I've been tracking the yield curve for a while now and have recently been playing with some potential treasury spreads as indicators. There are several standard spreads that some people use, like the 30 year-3 month and the 10 year-3 month. I've come up with a composite of the 30, 10, 5 and 3 month that seems like it might be useful. Here's the most recent chart:Note that there was a considerable sell divergence back in April as the spreads began making new lows (converging) before the SPY topped out. Now there is potentially a buy divergence forming, although it is a less obvious divergence than the previous one..not sure if that gives it more potential for follow through or less. Regardless, it will be interesting to see how it plays out.

It seems that everyone (including yours truly) is expecting another sell off and markets generally play out in a way that confounds the most people. How could it do that right now? Well, we had very bearish technicals yesterday, as the market stalled out at the 200 day moving average, but (drum roll) it rallied today instead of following the obvious signals. So from here, it might rally a little more, just to make more of the shorts throw in the towel (yes they are scared right now). After a little more capitulation from shorts, we could see a massive drop...leaving previous shorts to wonder why the lost money on the short side. Just one scenario that I could see playing out.

The problem is, that it's hard to tell how many others out there are thinking the same thing. If that's the case and we're all holding our shorts waiting for "the others" to capitulate, then the market could end up just trickling up higher and higher, slaughtering the greedy (stubborn?) shorts. As always, time and price action will tell.

TLT

Markets are Moving Today: Check Out the Eur/Usd

If I could only watch one thing to make all of my market decisions right now, it would be the Eur/Usd pair. This should not be surprising to anyone that follows the markets on a regular basis as everything has been following the dollar..and the euro. This pair represents a gauge on the overall fear involving Greece, Spain, and Portugal and it also gives you a heads up on what the risk appetite of the market is...dollar still rallies as a safe haven currency when the equity markets tumble.

Today the Eur/Usd has made new lows and the stock market is falling which is confirmation to continue to hold shorts. Here's a daily chart of the Eur/Usd:
I've made a few notes on the chart relating some of the more important things that I'm taking from it. The 2 most important things that I see, things that give me conviction to hold positions, are the fresh lows and the leveling out of the BB Width. I've found that the BB Width indicator is one of the best tools for determining continuation of a trend. When volatility kicks up, the short term BB Width rises above the 5 period average and more times than not we see follow through in the direction of the trend. When the BB Width is declining and below the 5 period average, we generally get consolidation with the potential for a short term reversal, which is what we've had lately.

So, right now, it's looking like the sell off of the Euro will continue and we'll also see the stock market sell off with it. Note that the BB Width hasn't risen above the 5 period average yet..but it has leveled and looks like it will likely cross. For now I'll be holding my long dollar and short equity positions and if the continuation is confirmed, I'll add a bit to the positions.

Anticipating what will happen and then having plans and contingency plans is the name of the game. If you make the proper plan, then it's likely that market action will not surprise you. Then if you add the ability to cut losses to the equation, you've got what it takes to trade successfully. Simple, yes. Easy to do, not exactly!

I hope everyone has a great weekend.

TLT

The Lines Have Been Drawn

The bulls made a good showing today, but the bears hopped on the intra-day double top and shorted all the way down to the close. The increasing volume to the downside in today's action combined with the technical damage that we've seen on the higher time frames...in particular the daily...tells me that the short side will probably win. That being said, if the bulls manage to trap the bears, there could be a big rally as the bears get squeezed. With Obama giving his state of the union tomorrow, I'd be very cautious trading to the upside, but then again, I'm short and probably a little biased.

We'll see if tomorrow's trading can get us out of the range.

TLT

Today's Action: ZZZZZZZZZZZZZ

Wake me up when something happens. I must say that the consolidation is not a good sign for the bulls...lots of people were expecting a big move up after the sell off we saw last week. The good news for the bears is that the S&P was able to stay above Friday's lows, at least as of 2:30 central time as I'm writing this post. Here's an hourly of the SPY to illustrate my point:Fortunately, inside days like today provide tight consolidation that leads to a good move whenever a break out/down does occur. We'll just have to wait and see.

TLT

Trapping Traders: The Mid-Day (False) Move

Another day of earnings releases followed by selling in the market. Even in after hours today, Google sold off after releasing results. There was a lot of money to be made trading the short side this morning, at least for the first hour and a half of trading. After that initial move the markets merely chopped around and most likely chopped away a lot of day traders' profits from the morning.

A good example of why intra day traders get chopped up mid day occurred around 12 o'clock (central time) today. For this example we'll use the SPY index, but you can see this same kind of set up among several different indexes and stocks at various times through out the day. Around noon, the SPY finally looked like it was going to crack the lows of the day and head lower. I'm sure several traders were eager to add to their shorts or sell short again or even short for the first time because they missed the big move earlier in the day. SPY broke through the prior lows by 6 or 7 cents but then quickly retraced and continued heading higher for quite some time, which trapped traders and no doubt ate up some profits from earlier as traders had to cover their loser shorts.

So what caused this? Most likely, two things: 1) buy programs, and 2) professional traders. There are several algorithmic programs that are programmed to fade the highs and lows of the day, especially when the high/low occurs during the middle of the day when there's not a lot of volume. These programs are designed to trap short term traders and force them to exit their positions causing the stock to bottom/top and the program exits for a profit. Lots of professionals know about this because they've been doing the same thing for years, it's just that the algo trading has dramatically changed the moves, as they are much quicker and tend to last longer now.

Here's a 5 minute intra-day chart of SPY that illustrates what I'm talking about:So what can traders do to protect themselves from these kinds of traps? First, they can not be as aggressive to trade a breakout, especially when it occurs outside of peak hours in the market. They can also wait for confirmation. Notice that the new lows didn't even hold on the 5 minute chart above...just waiting for prices to close at the new levels would have kept you out of this trade. Another thing to do is to cut losses quickly. Set your uncle point and stick to it. Note that adapting to program trading is just part of trading these days and it forces traders to either cut losses quicker than before and wait for a re-entry or allow trades more room to breath and slowly build a position.

These intra-day high/low fades are funny to watch when your not in them, but they are awful when you're caught in one and you're not prepared to exit quickly. One last suggestion on how to deal with this is to examine your intra-day P&L levels. I've noticed that for the most part, my trading profits occur during the first hour and a half of the day and the last hour of the trading day. I tend to take mediocre trades and get chopped up in the middle of the day, unless there is something specific that is making the market move. Paying attention to your intra-day P&L will give you insights into what times you should be trading and what times you should not be trading.

I hope everyone is having a profitable week so far and is prepared for what will likely be a very interesting Friday tomorrow.

TLT

Not Too Much To Do Today

There was not much to do today, especially after 10:30 a.m. (central time). Unfortunately, I was in court for most of the morning so I missed most of the good shorting opportunities. I did use today's strength in the dollar to exit my long dollar position (uup) because that idea didn't pan out the way it should have. The dollar and the markets seem to have started their inverse correlation relationship again, which indicates that the dollar strength at the end of 09' was probably just traders unwinding their carry trades for the year.

The selling in the markets stalled out this morning and almost all of the stocks that I have on my potential short list couldn't follow through to the downside...so I went long TNA this afternoon with a buy the dip trade. We'll see, BGU may have been a better call but the small caps have been strong lately.

Have a great long weekend!

TLT

Outta Gold and Into Utilities and Some Random Observations

I bailed on my short gold position today as it broke through my stop. It's showing quite a bit of momentum and it traded on decent volume today. I'm out for now and will look at going short again once (or if) it approaches the recent lows. Here's a daily chart:You can see that gold bounced off the 50% retracement level and then failed to make lower lows. We'll see if it chops around or takes off higher. One thing to note is that Silver (slv) has been very strong this week...it has been at the top of my relative strength list for 2 days in a row now.

I did manage to get in utilities (XLU) today. This is a support test trade which means I'm betting that the recent support will hold. The weakness over the past week has offered a good risk to reward entry and as always, we'll see how it works out. Here's the daily chart for XLU:Note that I labeled the support a zone, this is because I don't like pinpointing the exact price but rather a thin zone for support/resistance trades. The stochastic is in oversold territory, which is essential for this type of trade.

Other things to take notice of are the extreme strength in both energy (xle) and materials (xlb). As for materials, FCX and DOW have been particularly strong. There was some weakness in tech (qqqq, xlk, smh) but that's not surprising given the strength that the sector has shown recently.

Last but not least, the dollar (uup), which I'm still long, continues to chop around with little significant moves in either direction. Long term yields pushed higher today which helped my short long term bond (TBT) position. I'll be back later in the week with more.

I hope everyone's off to a good start for 2010.

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

Required Reading For Today

If you read anything at all today, make sure to check out these 2 articles:

1. ETF Update from A Dash of Insight
2. Goldman Sachs About To Report "Lofty Returns"

The ETF Update is truly a gem...those guys at A Dash are always posting quality material that is well worth the time it takes to read.

Markets are up a little today, although I'm not too comfortable with equities right now. Oil looks like it wants to fall more, the dollar looks like it's about to pick up strength, and I'm seeing a lot of bearish patterns forming in individual stocks and sector efts. All this combined tells me that I need to be careful! It could be the perfect time to buy, or it could be a great time to short. Pivotal situations like this offer up substantial risk and they take away my edge because I need established trends to make money and the trends that are out there right now are rolling over in new directions.

Good luck and make sure to manage risks carefully.

TLT

Eur/Usd: Reversal or False Breakout

The stock markets are continuing there 4-day rally and the Eur/Usd is following suit. There's been some weakness in the dollar after the substantial gains in the indexes and the Eur/Usd is beginning to look like a potential reversal in trend in coming. Here's an hourly chart that shows the current uptrend:
So what's the game plan now? Well, you can either sit on the side line and wait for the follow through or take a little nibble and buy on a small dip with the intentions of adding to the position if the pair continues up. This will be one heck of a shorting opportunity (go long the dollar) if this move ends up being a false breakout, but I'm not going to fade the break in anticipation...I just don't feel like I have a great grasp on the markets at the moment and I need to see a little price action to get my bearings. We'll see how it turns out.

Good luck out there.

TLT