Value Incentive for Repatriation

                It has been widely reported that corporations are sitting on massive profits that are mostly just sitting overseas.  This is not so much a problem as it is a shot in the foot of our recovery as money that could be invested in our country and people, is more or less, floating in foreign accounts.  There are two ways to bring these funds “home” or repatriate them. One doesn’t encourage investment in the recovery, i.e. create jobs, but would bring them “home”.  The other is a value incentive that would almost require job creation and growth.

                It has been argued that a tax incentive to repatriate would cause companies to bring those funds back to American soil and that that money would then be invested in the American economy.  This is only partially true.  A tax incentive would bring said funds back to America but would not likely be added to the economy through job creation and growth but would most likely be used for share repurchases, executive bonuses, and balance sheet bolstering.  None of these things add anything to the economy but rather distort the markets ability to be an accurate reflection of the economy.

                I would argue that the issue with repatriation is that there is no value incentive for companies to repatriate.  What I mean by that is that our currency is, at the moment, more valuable overseas than it is here and if that were to change we would see repatriation of funds, job creation, and growth.  The taboo of this idea is that a value incentive would ultimately mean deflation of the money supply.  I call this a taboo because a deflationary stance would cause a flight from equities into treasuries (risk off).  In other words the market would deflate as well.  Not good for the market. But at the same time companies would, more or less, be forced to invest in American jobs and grow their companies here in order to regain lost earnings that had been drawn out from the market.

This is Our Problem and We Can Fix It, Europes Another Issue

            As money is historically, and practically, a public good in terms of the value of labor we must have a rebalance of distribution in percentage terms at least.  Over the last thirty years, my entire life, we have consistently seen executive pay, compensation, and corporate profits soar and outpace inflation by a ridiculous amount while wages have remained stagnant and outpaced by inflation.  As a public good, it is the government’s responsibility to adjust distribution.  Since only the market can determine price through a supply demand metric the only way for the government to do this is to adjust taxes and or rates for a more equitable distribution of money.  Problem is that with inflation outpacing wages we have come to a point where people are less able to afford the inflated price of goods without seeing an increase in wages as the real value of goods is no longer reflective of the real value of labor.

We Need a New “ism”

         

                Throughout the course of human history we have tried many governing styles or “isms”.  We have learned that many of which sound like they would be a good idea but in practice ultimately fail for various economic conditions and social issues.  As we continue I will list various isms as defined by Merriam Webster and discus the pros and cons of each and explain why they don’t work.

                I will start with Marxism as it is seldom heard of and the most likely misunderstood.   Marxism is,

the political, economic, and social principles and policies advocated by Marx; especially : a theory and practice of socialism including the labor theory of value, dialectical materialism, the class struggle, and dictatorship of the proletariat until the establishment of a classless society http://www.merriam-webster.com/dictionary/marxism.

As a form of government this “ism” is perhaps the most socially acceptable as it takes into account fairness and rewards for those that do more than others.  It does end up falling into the category of some of the other “isms” in that the old adage holds true “absolute power corrupts absolutely” and groups of any scale are susceptible to this as well as individuals.  Once there is a dictator in power in line with bringing the “classless society” into fruition, it stalls out there due to the fact that the man in power will have no desire to relinquish said power.  We have seen this play out in other isms throughout history time and time again.

                The “ism” that is more of a transitional idea that leads to other “isms” is the one that is most demonized, and altogether misused in American politics today and that is socialism. 

Any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods.  A system of society or group living in which there is no private property.  A system or condition of society in which the means of production are owned and controlled by the state.  a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done http://www.merriam-webster.com/dictionary/socialism

This “ism” is representative of the “needs of the many” idea.  That is, what is best for majority of the population should (and I stress that as things never work as they should) be best for the given society as a whole.  Again, we fall into the moral hazard issue that plagues “ism” after “ism” and as socialistic ideas take hold, especially in a democracy, it begins to run out of control as the people want more and more and ultimately bankrupt the government.  California is probably the best modern example of this although it is not a socialist government by definition it has adopted enough socialistic ideas that we are seeing the down fall of this “ism” as well.

                The “ism” that is the evolved form of socialism and the direct opposite to our current “ism” is the idea that there should be no private property and everything should (stressed again) be distributed equitably by the state is, of course, communism.  As an idea, it sounds like a good idea as it is based on fair distribution of resources.  It also remains the only “ism” that I know of that lead to directly to war, not fought by soldiers but fought by ideas.  Communism, as defined is

                A theory advocating elimination of private property.  A system in which goods are owned in common and are available to all as needed.  A doctrine based on revolutionary Marxian socialism and Marxism-Leninism that was the official ideology of the Union of Soviet Socialist Republics.  A totalitarian system of government in which a single authoritarian party controls state-owned means of production.  A final stage of society in Marxist theory in which the state has withered away and economic goods are distributed equitably http://www.merriam-webster.com/dictionary/communism.

We have seen it fail in Russia with the dissolution of the USSR in that what is equitable for most is not economical and leads to bankruptcy of the government, especially with the scarcity of resources, and that has a tendency to lead to unrest.  There were two main factors that lead to the down fall of the USSR’s communism in that they were faced with said scarcity and the ongoing theme of the moral hazard present in all “isms”.  We have seen that communism can and does hold on when there are abundant resources and when paired with another “ism” as we see today in China.  As China is a communist country with abundant resources with a hint of our current “ism” has become one of the most powerful economies in the world but does exhibit favoritism as moral hazard rears its head. 

Fascism, the most repugnant of all isms, often comes about as a result of the popularity of Marxist ideas and the desire for equality amongst the people.  It does however, perfectly depict the moral hazard within Marxism and indeed all “isms” in that it is the point where the person in power refuses to give it up and becomes a dictator and the following definition in itself is the best argument against it.

Often capitalized : a political philosophy, movement, or regime (as that of the Fascisti) that exalts nation and often race above the individual and that stands for a centralized autocratic government headed by a dictatorial leader, severe economic and social regimentation, and forcible suppression of opposition http://www.merriam-webster.com/dictionary/fascism.

 

Which brings us to our current “ism”, capitalism.  Wherein, all most everything is privately owned and distributed in a supply/demand fashion.  In other words you work for your capital and spend it as you see fit.

an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market . http://www.merriam-webster.com/dictionary/capitalism.

This is by far the most economical in that demand driven desires are worked out and achieved in a more or less free market fashion.  It has worked and at the moment continues to work but there are several issues that need to be addressed.  The problem is that money walks, talks (at least it does now that the Supreme Court has ruled it a form of speech) and shits on those who don’t have it.  What we have been seeing is that moneyed speech has been writing governmental legislation that benefits only those with it.  Furthermore, we have been seeing the marginalization of the working class where the largest corporations have been seeking out ways to lower their bottom line any way possible.  We have seen this in the efficiency of production where the automization of production lines eliminates the need for workers thus reducing costs.  Unfortunately this has begun to lead to fewer and fewer people controlling more and more of the wealth.  As this happens, the people without money, or at least less of it, are capable of buying less and less which in turn leads to them spending less and less.  These issues would not be as much of a problem if the free market where allowed to act in such a way that it would rebalance, usually through deflation and less demand.  However, the moneyed interests that have been, for lack of a better description, controlling government have been keeping inflation and wages at a somewhat steady rate while their profits rise nearly exponentially.  Recently though, we have been seeing actions perpetrated by the federal reserve bank (the Fed) that have been pushing inflation higher and benefiting only the corporations in that when inflation rises commodities prices fall (lowering cost of goods sold) and funds are forced out of cash and into equities (stocks) boosting share prices and thus earnings.

                As we have seen, no “ism” is perfect.  This is probably due to the fact that people are fallible and somewhat greedy.  Which is why I think that we need to try a new “ism”, either that or attempt to tweak the one we are currently using in such a way that avoids the pitfalls of each while using the benefits of all to make it the best possible.  We do call ourselves a “melting pot” as in a combination of many peoples and beliefs.  Maybe it is time to stop demonizing an idea because it is politically convenient and start melding together ideas instead of going elementary school and saying “I’m right, and your wrong”.

               

MF G..ive Me My Money!

                Not a whole lot happened in the market today as is obvious from the day’s price action.  We moved up a little, we moved down a little, and closed near flat on the day.  This price action formed what is referred to in candlestick patterns as a doji.  This pattern combined with yesterday’s long real body forms a two day pattern called a harami cross and has the potential for reversal.  Confirmation of this being a reversal would be a confirming close below today’s high.

                Not even the economic data moved the market.  Both initial and continuing claims came in worse than expected, but the ISM and construction spending came in better than expect (marginally, but don’t tell CNBC they thought that those numbers were great).  Not really all that surprising that we had something of a tug of war over those numbers but one would think that the swings would have been greater.  We also saw increases in auto sales although it was mostly business spending as they had to replace fleet vehicles.

                What actually plaid out as the biggest news in of the day was the senate hearing held over MF Global’s bankruptcy.  For those who don’t know, MF Global went filed for chapter 11 bankruptcy back in October.  What remains so controversial about this is not the bankruptcy itself, but the fact that customer money was missing.  Not investments that customers made which have been mostly returned, but money that was in cash accounts that shouldn’t have been touched.  It started out that about 600 million dollars was missing and the deeper they looked the more came up missing.  The largest estimate that I heard was that there was somewhere around 1.2 billion dollars.  It has been suggested that the company used customer funds without their permission for the firm’s investments in European sovereign debt.  The other possibility is that it was outright stolen.  I don’t know what would be worse, whether it was one guy, or if it was the entire firm.  I really hope that this gets sorted out soon and their customers get most of their money back.

Central Banks Save the Day…….For Now

          

                Let’s start with the news of the day which was a worldwide coordinated central bank action to provide liquidity to European banks.  Yay, were saved right? Wrong.  What this actually signals is that European banks were basically not lending to each other.  This was the same thing that spurred the selloffs and consequent market crashes in ’08.  If anything we should take this as an early warning of bad things to come.  That being said, we continued the rally from Monday adding over 4% across the board.

                The economic data came in as follows:

                                MBA mortgage index -11.7% Vs. previous of -1.2%

                                Challenger Job Cuts -12.8% Vs. previous of 12.6%

                                ADP employment change 206k Vs. previous 130k (revised from 110k) beating                                                                     expectations by 81k

                                Productivity for Q3 2.3% Vs. previous 3.1% missing expectations by .3%

                                Unit labor cost -2.5% Vs. previous -2.4% missing expectations by .4%

                                Chicago PMI 62.6 Vs. previous of 58.4 exceeding expectations by 5.1

                                Pending Home Sales 10.4% Vs. previous of -4.6% exceeding expectations by 10.3%

                                Crude inventories of 3.932 m Vs. previous of -6.219 m

                I’ll let you decide what the numbers mean as they are mostly mixed with the exception of the mortgage index, job cuts and pending home sales, and can be interpreted in many ways.  What was probably more important was the Fed’s “beige book” which is a compilation of economic data that the Fed has been looking at to determine the general state of the economy.  The beige book pretty much said that the economy was growing at a “slow to moderate” pace.  Nothing we didn’t know already but points to things being, again, worse than the above numbers seem to indicate.  Two possible things are happening here.  One, things are actually getting better and we should be confident in the markets.  Or two, things are being skewed by some people taking advantage of the economic situation.  I am more inclined to believe the second.

                I should also mention that China eased its reserve requirements for its banks.  Is this good or bad?  I’m not really sure.  I seem to recall that until the European crisis became the main focus, we had our attention fixed on the Chinese economy and every time there was a hiccup in the data our markets would turn down on fears that China was slowing.  This is just evidence that, yes, they are slowing and they are trying to keep it going by any means necessary.  Their rate of inflation should be a very clear sign of that.  

Where to Start….Hmmm

               Let’s begin with U.S. economic data that was released this morning.  Biggest market mover was the consumer confidence number that came in at 56 versus 39.8 which beat expectations by 13.5.  An absolutely huge boost to confidence, right? Not really.  As it turns out, the consumer confidence number reported today is actually from October.  I seem to remember a large rally in October which was likely the reason for the boost.  Probably more telling was the Case Shiller number that came in at -3.6% versus -3.8% which shows a modest improvement but missed expectations by .6% on the downside.  That number was mirrored by the FHFA price index coming in at .9% versus -.1% prior, beating by 1%.  Over all, the U.S. market data remains overshadowed by Eurozone concerns.

                Out of Europe; a bond auction, more rumors, and red flags.  The Italian bond, auction which was expected to be abysmal, beat expectations in terms of demand.  Yeah, hooray, people will still buy Italian bonds, however at historically high and unsustainable yields.  The 3 year yield came in at 7.89% and the 10 year at 7.56%.  Later the rumors began to fly that the ECB and IMF were looking to leverage the EFSF by 2.5 times which on the upper end of the spectrum should bring about 625 billion euros.  Not only is this the 4^th time (I think) that this rumor has been floated, but it wouldn’t be nearly enough.  600 billion might, might be enough for one of the PIIGS but not for all of them.  And then, the OECD (Organization for Economic Co-operation and Development) came out and cut European forecasts and warned of a possible Eurozone breakup.

                So U.S. data, with exception of the lagging Case Shiller, was rather lackluster.  Italian bond auctions weren’t terrible but were still bad.  Rumors of a solution were being recirculated although they had already been refuted and would be ineffective even if true. And rate cuts, downgrades, and possibility of a breakup of the Eurozone.  Oh my.  Maybe we need us some ruby slippers, a tin man, a scare crow, and a cowardly lion.

Rumor Mill Mayhem

European rumors were flying this weekend and during the day today.  Most were unfounded like the Italian newspaper rumor that the IMF was about to bailout Italy.  This was later denied by the IMF.  You would think that markets would back off by the denial but they managed to stay at their peak.

CNBC spent all day trying to figure out the reason for the rally but never really settled on anything.  What it amounts to is that the rumor started the rally and most likely short covering kept it at these levels.  We had a modest gain in existing home sales but the modest gain came after downward revisions and was paired with falling prices.  So that wasn’t good enough to keep us here.  Then it was attributed to European leaders “adjust” euro funding rules.  I think the thought that Europe will get out of this without anything short of printing or a full on handout from another country has already been proven with the reaction to the IMF “news”.  Then there was holiday shopping weekend and I just don’t believe the numbers considering unemployment, savings rates, credit, and the like.

You decide if you want to buy in to this.  I honestly can’t tell you that this will continue or fizzle, at this moment.  We do have some pretty heavy resistance to get through coming in at the moving averages and the psychological level of 1200 (on s&p).  it should also be noted that we did stop the advance right at the 10 day EMA and have both the 20 and the 50 coming in around 1200 which is just about 1% above were we are right now. I don’t really see anything that could keep this rally going right now and hence will think of it as a contra trend.

In Response

A conversation in response an article on http://www.politicususa.com/en/the-new-american-crisis  titled “The New American Crisis”

Shiva on November 25, 2011 at 9:17 am

     The Constitution that we live under was signed under similar circumstances as we have today. It was a time when states were highly distrustful of each other and even the people who had fought together in the Revolutionary war did not trust each other. For example, Patrick Henry refused to attend the constitutional convention because he said he smelled a rat. It was a time when the 39 people who signed the Constitution had absolutely no regard for the rights of women nor the rights of slaves. Today’s Republican Party wants to take us back to that frame of time. Where women have no rights, and people are not cohesive enough to fight against tyranny.

     74 men were chosen to be sent to the constitutional Congress. 55 men actually went and only 39 of those signed the Constitution. This country was not born from what the people of the states wanted, but what 55 men themselves wanted. And the Constitution was born out of compromise. That compromise today that is so hugely important to the governing of this country is disappearing. And that will lead to the destruction of this country and the rights that the people have.

     This is a time for revolution, but I have news for those who think that revolution is carried out with three cornered hats and guns. The revolution has to be carried out at the voting booths and the people who are responsible for the destruction of compromise must be removed no matter what party. Revolution does not recognize partisanship, it only recognizes doing the right thing

Josh Smith on November 25, 2011 at 8:54 pm

     Truly. However, and this is not an advocation for violence, but sometimes the only thing people respond to is force whether that be force of will (i.e. voting) or force of stick. It is truly disparaging that our apparent system appears to be so broken that we can’t even change things through a voting booth as was clearly depicted in the bush elections. When a system exists that provides political power through money and said money comes from corporations, the system as intended (that is by the people, for the people) is no longer a representative system but a bought system.

Rumor Rules the Day

So rumor was the largest contributing factor to today’s market movements.  From the open we began to continue yesterday’s trend and then the rumors began to fly.  The rumor that the SNB (Swiss National Bank) was going to buy Italian bonds was the “major” market mover today.  As time passed the rumor was revealed to be unfounded and the markets hit the brakes.  After that we began to hear that Greece, yes Greece again, was in talks outside the IIF (the Institute of International Finance) to make a deal on their debt.  Things stayed pretty much flat on that until we found out that the actual meaning of that wasn’t really a good thing.  What it amounts to is that Greece was in talks to renegotiate their bailout to try and get a better deal and avoid a larger hit. 

Bottom line, nothing really happened.  We closed slightly down which isn’t terrible but it was widely reported that this week, the week of thanksgiving, was the worst week in the markets since the 1930’s.  From here I expect more downside to come as S&P and Fitch (even though Fitch retracted) downgraded Belgian bonds from AAA to AA+ (or was it AA+ to AA? Don’t remember) today ahead of bond auctions next week and that we ended up forming a gravestone doji (bearish signal).  Things really are not looking good for markets.

Dear Washington

                We are all getting very tired of the fighting, in-fighting, and partisan bickering.  There are solutions on both sides.  Is it really that hard to compromise?  Here’s an idea, pick one republican idea and one idea from a democrat, AND DO THEM BOTH!  We really just want you to get something done.  We understand that neither side’s constituents will be happy with the other sides portion but we would have be reassured by action on your part. 

Wishing you well,

America

Dear Washington,

                Happy Thanksgiving.  We all hope you have an enjoyable time with your families but we need you to get back to work.  Unfortunately we are facing really tough times right now and can’t afford to give you your extended vacation this year.  We are very sorry for the inconvenience and the stress that this will put on you and your families.  Unfortunately if you ignore our requests we will be forced to find a replacement. 

Sincerely,

America

No Safety in Europe

Biggest market mover of the day was the abysmal bund auction.  Essentially a buyers strike on the bund today as the Eurozone crisis continues/deepens.  This drove the euro lower, the dollar higher and pulled people out of equities.  This paired with underwhelming U.S. economic data equals selloffs and flights to “safety”.  We did close right at a support level of 1160 on the S&P but at the lows of the trading day.  I’m not sure what will happen on Fridays half day with no real data scheduled but I think that next week is going to start off pretty bad as people return from vacation and try and digest what has happened. Be afraid, be very afraid.

Where you at Bloomberg, CNBC?

                Last week the MBA mortgage index fell by 10%.  This week we find out that it is down another 1.2%.  Although not as bad as last week, the number overall is still pretty bad.  So, altogether over the past 2 weeks the MBA mortgage index is down a total of 11.2%.  Not the worst number in the world but what gets me is that this number was completely ignored by both Bloomberg TV and CNBC’s squawk box.  As this number has had the potential to move markets in the past due to it being an indication of how the economy is doing, it boggles the mind that it has been as underreported as it has been so far.

http://www.reuters.com/article/2011/11/23/us-usa-economy-mortgages-idUSTRE7AM0WX20111123

Good, Bad, it's all Ugly

                We started the day on some really bad numbers that were spun as “not that bad”.  Let’s put it in perspective. 3Qt GDP came in at 2%, that’s .5% below expectations.  Doesn’t sound that bad, right?  But when you look at it in percentage miss terms it was a miss of 20%.  That’s right, 3Qt GDP missed expectations by 20%!  No matter how you spin that it was a bad number.

                Then we hear news from the IMF (the international monetary fund) that it is preparing to assist in the bailout of the Eurozone.  Good news right? Not if you’re an American.  First, the IMF was a fund set up to aid emerging and third world economies not bail out a continent.  Second, the IMF is partially funded by the American tax payer.  Not to mention that any one of the PIIGS needs over a trillion euros and the IMF only has about $400 billion on its balance sheet.

                Further on, we got the FOMC minuets.  Not good, but not bad either.  The general spin on this was that economic conditions may warrant farther easing by the FED.  Yep, they seem to think that the mere mention of QE3 would be enough to cause a rally.  No such luck.  Markets moved more on the IMF news and that wasn’t even enough to push things higher.

                We also should take note that the 5yr U.S. Treasury bond auction finished out with record low yields.  For those who don’t know, bond prices and yield move in an inverse relationship.  That being said, I pose a question for anyone who remembers econ 101.  What factors might cause an increase in price?  Two answers right, either a decrease in supply or an increase in demand?  As supply is clearly not a consideration when you have a reserve bank that is willing to print at the drop of a hat we must consider an increase in demand.  As demand for treasury bonds increase we generally see a flight from equities (stocks) and into cash.  All this considered we could expect more downside in the markets to come.

                When it all comes down to it you have to ask yourself, “do I really want to go into a 3.5 day weekend in a long position?”  I sure as hell don’t.  Especially considering that the 10 period EMA had crossed the 20 yesterday and crossed the 50 today, a rather bearish sign considering that price, the 10EMA, 20EMA, and 50EMA are all below the 200EMA. 

it's been a while

I know it's been a while since we have talked.  I regret to have been unable to perform my duties in relation to this blog due to personal and professional distractions.  I am breaking my current silence tonight inorder to share a message with you from me to the occupy wall street protesters.  this message reads:

to the 99%,
The root of the problem that caused the financial crisis that stemmed from the housing bubble is the CDS (credit default swap). CDS's are basically a bet by wall street that people will default on their loans. as long as people are allowed to bet on loan defaults the system will be set up in such a way that makes it an eventual inevitability. one message I have not seen on any banner, "pizza box", or piece of card board, is "outlaw credit default swaps".

this is purely a moral issue.  we should not fear those who are exercising their constitutional rights.  nor should we demonize them inorder to protect the financial minority.  it has allways been a fundamental American right to stand up and speak out against inequality and injustice.  this is America at its best and should be supported.  this is a movement that can and will change America but it needs to consolidate its message so that real progress can be made. 

I will be back eventually

                I am sorry I have been away; I have been dealing with issues ranging from a sick dog to frustration with the market.  I have enrolled in the “CNBC million dollar portfolio challenge” and as such have been overly distracted with fake money, real money, and my dog’s health issues.  All that aside, I wanted to let all 2 of my regular viewers that I will continue to cover market action when I have eliminated one, or more, of these issues from the equation.

                In the meantime, I wanted to share a video with you that was brought to my attention a little while ago.  For some the way in which it is presented probably won’t appeal to you, but the content is incredibly insightful.  This video really gets to the heart of the debate in Washington.  Have a look and pay attention more to the content than the presentation.

<iframe width="560" height="315" src="https://www.youtube.com/embed/d0nERTFo-Sk?rel=0" frameborder="0" allowfullscreen></iframe>

Analysis for 09-14-11

Intraday:

                What can I really say about this?  We started the day off with things looking like they were going to stop at the 20 day moving average and form a reversal pattern but things went nuts and just kept on rising bring us up to a close 1.35% higher.  None of this makes any sense and I’ll tell you why.  We had worse than expected economic data, a looming default of a country, A COUNTRY, and even more concerns in Europe.  This rally was not a sign of strength nor was it institutional investors.  It was individual investors who don’t know jack about the market.  None of our technical levels held up and the overall economic outlook has not changed.  If you want more evidence that this was individuals, just consider that the Scottrade servers crashed as the moves began to accelerate.

                Even with all of the above information, we can still see some things that point the market lower.  As we “rallied” today we ended up forming an even larger and broader bearish rising wedge with a sharp reversal with no warning in the last hour of trading.  This has given us a better shorting opportunity as we will probably see bears come into the market and slap this individual rally down and down hard not to mention all of the people who made money today will probably go ahead and take some profits.

Daily:

                On the daily time frame we set up a rather large spinning top pattern which can act either as a continuation or a reversal pattern.  All of our indicators are showing bullish signals but considering the nature of this rally and the lack of volume to confirm reversal I think this is going to fail.  Don’t forget that our indicators are based off of either moving averages or price or both and that irrational movements in the market can move them.

This irrational rally came up and reversed off of the upper trend line of this large bear channel which also kept us in our bear flag pattern.  If we break out of this bear channel all bets are off and we will be rallying much further to the upside.  Is this likely to happen?  I wish I knew for sure.  I think, however, that we are more likely to get a reversal tomorrow and begin a move to the lower trend line of our bear channel which will have made our bear flag pattern break down as well.  This rally has no strength behind it.  There was no real volume behind it, and there were no “big” moves in our indicators.  I expect to reverse down and hard.   

Analysis for 09-13-11

Intraday:

                Today we pretty much continued the trend from the end of the day yesterday.  We had a bearish rising wedge (red lines) that broke down 45 minutes after the open and settled into what might be a bull channel (orange lines).  We traded within this range throughout the course of trading.  This may be setting up as a much larger bear wedge which would put us in line with my theories thus far.

Daily:

                On the daily timeframe we got what amounts to a continuation pattern as far as candles are concerned.  We are getting mixed signals on our indicators which leaves us with an air of uncertainty.  The ADX has turned bearish, the MACD histogram is still bearish whereas the signal lines are turning bullish, and the stochastic is still bearish.  I wish I had a crystal ball and could tell you exactly what was going to happen but I can’t.  The best I can do is to outline the different possibilities. 

                From here we have a couple of possibilities.  We could reverse tomorrow as we have tagged the 10 day ema twice today but as we have formed a continuation candle that is somewhat unlikely.  We could continue up until we tag the 20 day ema and form a reversal pattern there.  Or we could move up to the blue trend line from the peak before the previous selloff, maybe at the 50 day ema.  All three of these things are possible but the overall move should put us back through the lower trend line of our bear flag pattern for a second leg down as we have confirmed a lower high and a lower low.  Look for another lower high to set up here sometime soon.

                 

Analysis for 09-12-11

Intraday:

                We started off the day by broadening the bear channel from yesterday led lower by, what else, European concerns.  We continued in this bear channel for most of the day until news that Italy has approached a Chinese mutual fund for assistance, not the Chinese government but a mutual fund.  Regardless of whether this goes through, ultimately the quantities talked about will ultimately have no effect on the issues in that region.  We continue to see the irrational trading strategy of “buy the news and sell the facts”.

Daily:

                Today, we ultimately failed to get the break of our bear flag pattern today with a potential reversal in the form of a hammer candlestick.  Having confirmed a lower high and a potential lower low that could complete sub wave 1 of my wave 3 we can expect to see a short lived rally.  This short rally will likely go up to either the 10 or the 20 day EMA (exponential moving average) before confirming another lower high and reversing to begin sub wave 3 of wave 3.  This is not to say that we could fail to get this rally considering that all of our indicators are still showing bearish signals and that we closed at a Fibonacci retracement level.

Play by Play Friday for 09-09-11

Intraday:

                We started the day with a sharp selloff following Europe’s lead down again.  Yesterday we were on the verge of forming a bearish alignment of the moving averages and with today’s price movement we got it.  We were in an orderly bear channel for the majority of yesterday’s session and probably would have continued in that formation had Europe not fallen so sharply as we broke down out of this pattern right at the open. 

                After the break down of yesterday’s bear channel we began setting up a bullish falling wedge.  We followed this pattern and broke out right around the European close.  After breaking out, and I mean immediately, we slammed into overhead resistance at the 10 period MA (the blue line).  Having hit resistance we then proceeded to back test the upper line of the pattern and gradually drifted lower.

                Following the failed break out of our falling wedge pattern we were forced to redraw our trend lines.  After redrawing trend lines we found a new bullish falling wedge.  In this new falling wedge we had a much tighter price range moving into the break out of this one.  This new wedge also failed as our moving averages had formed heavy overhead resistance which we could not surpass for most of the day.

                In the last hour of trading we saw another attempt to break out of this downtrend.  Over the last half hour we poked above the 10 period MA and made a quick attempt for the 20 (the red line).  After hitting the 20 period MA we reversed sharply and retreated back down to the 10 period.

Daily:

                On the daily time frame we two out of three indicators are Bearish.  The MACD is weakly holding on to bullish signals but moved into a position that makes bearish signals not only a possibility but almost certain.  The ADX and stochastic are continuing their bearish alignment and have not shown any signs of reversing yet.

                Having gone over the indicators in a general sense I want to tell you about divergences.  We have set up and are exhibiting divergences on both the MACD histogram and the stochastic (indicated by the black lines within the circles on the indicators.  This usually occurs when overall momentum is contrary to the price. 

There are several types of divergences but I won’t bother confusing you and I will keep it simple by using the words divergence and convergence to describe the patterns.  When in an uptrend, i.e. prices are moving upwards, and your indicator moves in a contrarian direction you have a divergence and prices tend to eventually move in the direction of the indicator (this is what I have pointed out on the chart).  This occurs in both uptrends and down trends and can be recognized by the “divergence” of price and indicator.  On the other side, that is the other type, we have what I call a convergence.  A convergence occurs when price and indicator, what else, converges.  This second form usually is an indication of a top or a bottom as it indicates strength at a turning point and can occur in uptrends or downtrends as well.

Our bear flag is setting up beautifully.  Paired with our indicators either being in a bearish alignment, setting up a divergence, or both we can reasonably expect to break down out of this pattern and move to challenge the 1100 level and quite possibly lower.  When you consider the above information and recognize that we got confirmation of yesterday’s reversal pattern and that downside volume is beginning to pick up you have to conclude that the best guess (that’s all that market analysis is) would be further downside movement.

All of the above information is culminating with my wave counts to play out.  According to my wave count we completed a wave 1 with the 1100 low and have just finished the sub wave 5 (the red zig zagging lines) of my wave 2.  If my wave count is indeed correct, we are looking at a large wave 3 down with another rally attempt for a wave 4, possibly with another bearish formation (i.e. a rising wedge, or even another bear flag) before making one final push lower to form a wave 5 before moving back into a bull market.  This could all fall apart if Bernanke comes out with some form of QE or if there is some extremely good news either about jobs or out of Europe.

Weekly:

                On a weekly time frame, 2 out of three of our indicators are in agreement.  The ADX and Stochastic are in a bearish alignment but the MACD histogram is holding on to a series of upticks.  Even though the MACD is showing mixed signals (i.e. histogram up but signal lines down) we have several signals that we are headed lower next week. 

                With potential bearish signals on all three indicators paired with confirmation of a reversal pattern off of our last up week, we can be confident that the markets are heading lower.  We will likely pause temporarily at several possible levels of support(these levels are indicated on the chart by the red horizontal lines and will provide insight to the end of this bear market and potential reversal points to put us in a new bull market).  These levels of support are, however unfortunately, levels that we haven’t seen since last year.  Further beyond these levels we have no support until the 666 bottom from the ’08-’09 break down. 

Obama Vs. Congress

  

                Obama came out swinging with a 1, 2 to the face followed up by a hard shot to the body.  Last night we heard from President Obama on his jobs bill entitled “The American Job Act”.  By his description during the speech it sounds like this is an extremely bipartisan and all-encompassing bill.  He roughly outlined programs that both parties want and don’t want.  Over all, I think that this is the best course of action.  This bill will give compromise on both sides and help get us out of this mess.

Analysis for 09-08-11

Intraday:

                Today we started off relatively stable continuing the overall trend of the past three days.  We remained more or less flat following Europe’s lead once again.  We ended up breaking bearish rising wedge after bearish rising wedge forcing us to constantly redraw our lower trend lines (red trend lines).  As we approached Bernanke’s speech we appeared to find support at the upper boundary of the bull channel from three days ago.  Right as Bernanke began to speak we broke down out of the bearish rising wedge patterns and the upper boundary of Tuesday’s bull channel.  By the last hour of trading we moved all the way down to the lower trend line of the three day bull channel and ultimately broke through that as well.  The last 30 minutes of trading we back tested this line and immediately reversed off of it (the strongest trends don’t retest.  I have no info to support this but I hear it often from other analysts.).   

Daily:

                Today our indicators remain somewhat bullish despite the day’s sentiment over Bernanke’s speech.  The ADX is still in a bullish alignment, the MACD is trending sideways but remains bullish, and the stochastic looks as though it is turning bullish.  Even though we ended down for the day our indicators are moving into agreement but this can change if tomorrow’s price movement is also down.

If we look at just today’s price movement, we have formed a “spinning top” pattern (pretty self-explanatory).  This is typically a candle of indecision indicating an overall lack of direction.  By itself this pattern is more of a continuation pattern but does have the potential of reversal.

                We set up a potential reversal pattern in the form of a two day candle pattern called a bearish harami.  A harami forms when the day’s real body forms within the real body of the previous day (harami is Japanese for pregnant).  Directional connotation is usually on the second day’s price movement. Bullish is an up day after a down trend where bearish is a down day after an uptrend. 

From here we still have pretty much the same possibilities as we did yesterday (see yesterday’s post).  We could continue down and break our bear flag or we could move up a bit more before we reverse.  I am still thinking that we will see further upside to somewhere in between 1225-1240 considering that our indicators are showing bullish signals.   

Analysis for 09-07-11

Intraday:

                Well, we continued yesterday’s rally after the initial selloff and are continuing to follow Europe’s lead.  We had a large rally at the open and steadily moved higher throughout the day.  We appear to be setting up two possible bearish rising wedge patterns.  The wedge with the blue lower trend line will likely breakdown sometime tomorrow. We could find some support at the upper trend line (the green line) off of yesterday’s bull channel. I expect, however, that the larger pattern will hold more firmly up until we either form another reversal pattern on the daily time frame or hit the upper trend line of our bear flag pattern.

Daily:

                I have a lot to go over on the daily time frame, so bear with me.  Our usual indicators are giving mixed signals once again.  The ADX has moved to a bullish alignment, the MACD and histogram are in agreement and appear bullish at the moment, but the stochastic is still in a bearish alignment.  I expect that our indicators will all move into agreement on the next up day which we should get tomorrow.

                The blue lines on the chart depict a large bear channel which could prove very difficult to get out of.  Any break of this trend line should be watched extremely carefully as it could be a shake out of more risk averse investors.  We could also continue to trade within this channel for an extended period of time because trend lines get drawn, redrawn, extended, contracted, and expanded frequently. All of these things happen especially when volatility is high, as it is now.

                Today we got confirmation of yesterday’s hammer reversal pattern as well as a new bullish pattern.  This new bullish pattern is called a bullish engulfing pattern (the green circle on the chart).  Engulfing patterns occurs when the day’s price movement completely “engulfs” or overshadows the previous day’s candle.  This usually occurs with a gap in the direction of the previous trend.  You could make the case that this is a “matching low” pattern (these two patterns only consider the real body of the candlestick) either way, they are both bullish patterns.  I usually consider matching low patterns as a pattern of its own but when you have a clear engulfing I will call it a combination and consider it a stronger signal.  At this moment I see no signs of impending reversals off of yesterday and today’s trend so I expect us to continue higher.

                We continue to trade in this bear flag pattern (the red rising trend lines) and the longer we do so, the more confident I get that my current analysis is correct. When combined with my current wave counts (black zig sagging trend lines and red falling parallel trend lines) we can project what may happen over the next week or so (see older posts for further explanation).  We appear to have completed sub wave 4 and have begun sub wave 5 of my overall wave 2, remember that Eliot wave says that each market movement occurs in 5 waves.  Wave 2, of 5 large waves to complete this down trend!

                If our current direction continues over the short term, we can reasonably expect one of three things to happen.  One, we could reverse off of today’s bullish signals and daily patterns to thrust us lower (the first red falling trend line).  This is very unlikely at this point but with recent market moves it is a possibility.  Two, we could move up again tomorrow and form a reversal pattern around the Fibonacci level at the 1205 level (the middle red falling trend line).  This could play out putting in the first lower high indicating an overall change in direction and send us lower possibly to challenge the ’08 lows.  Three, we could move all the way up to the upper trend line of our bear flag pattern and slam into three converging resistance levels.  These resistance levels alone could easily stop an upward movement but combined they are a steal door.  This convergence of resistance levels consist of; 1, the upper trend line of our bear flag pattern, 2, the upper trend line of our bear channel, and 3, a Fibonacci level at 1235.  I believe that this final scenario is the most likely to occur.  Watch these levels and possibilities carefully and trade with caution.