Groundhog Day
June 23rd, 2008 by Leonard
Yes Groundhog Day. The Dow Jones is once again tap dancing on Ben Bernanke’s forehead while singing, “Hit me with your best shot”. It was around these price levels a few months ago in March, when Ben Bernanke went long the market. The Fed decided to “play the market” by allowing investment banks entry into the coffers of the Fed thru the swapping of junk paper from investment banks and brokerages, in exchange for treasuries from the Fed that could be sold for cash.
I guess the plan was, or still is, to buy time for the troubled financial sector while the government’s stimulus package kicks in. That sounds simple enough. Save the banks and brokerages and wait for the happy throngs of shoppers to spend their way into economic prosperity. Bernanke was applauded by Wall Street as the market moved up.
The market has taken back nearly all of the gains that it produced over the last few months. The base building effort since January is in question and there is a strange calm on Wall Street as the bulls are a little quieter.
I don’t want to over simplify how ingeniously these financial instruments were able to tap into a rather complex river of equity being created out of thin air. Think of it as balls of leveraged equity moving upstream. These are accounting tricks that only Wall Street geniuses can produce. The Federal Reserve and the Treasury get twisted up in knots when a problem like this becomes so large, that it can’t be shoved into a corner or dismissed.
In order for the leverage ball to continue swimming upstream, it has to have a place to go. That place has to be a larger servicing institution that can service many leveraged equity balls. The size and scope of transferring ever larger balls of leveraged equity upwards, requires giant institutional facilities to organize and process it all.
The end of the upstream occurs when there is no place for the leverage balls of equity to go. That information works it’s way backwards, and downstream, so that each originator, and holder of leverage balls of equity, along the path of the stream, is suddenly sitting on inventory that can’t be moved….the leveraged balls of equity have no place to go. The supply jam causes prices to turn downwards and the leverage balls of equity begin to shrink towards intrinsic value. The economy slows down.
In August of 2007, we saw Mr. Bernanke doing a 180 degree pirouette on his toes going from a pretend inflation hawk, (trying to talk up the dollar and the economy), to a deflation realist (lowering interest rates as fast as humanly possible for a pretend inflation hawk). So instead of fooling us, he ended up fooling himself. It jerked him out of theory and onto the game board, but he’s a smart enough fellow to make adjustments when needed.
He’s on stage once again this Wednesday June 25. Some of the tweaker bulls want him to raise rates to bring the dollar up, hoping that it will chase oil speculators out of oil and back into the…, yes you guessed it … the stock market. Oh yawn….What is this maniacal obsession with re-inflating the price of the market? Normal bull markets have corrections of 15 to 20 percent without all the drama. But then, normal bull markets are not corrupted with leverage gone wild. A 15 to 20 percent correction is a big deal when multiplied by 17, and it is estimated that leveraged instruments in mostly unregulated financial instruments is about 17 times the world GDP. Individual investment banks and brokerages are leveraged higher.
What we have seen since the October 2007 top of the Head and Shoulders pattern, are losses mainly in the housing, auto and financials. Instead of banks and brokerages remaining relatively stable, while servicing the losses of investors caught on the wrong side of the market, it is the bankers and the brokers themselves who are caught on the wrong side of the market. Credit contractions seem to first attack those who blatantly abuse credit, and who have little respect for the power of leverage to also work against them.
The Dow Jones has finally completed a massive Head and Shoulders top on the charts. If you follow this blog then you know that back on Nov 19, 2007, I imaged a path of what this topping formation would look like. It was a primitive drawing on a Weekly chart showing the market creating a right shoulder, using the overhead weekly 50 bar moving average as resistance. The drawing predicted that at the 50 bar moving average, we would see the market form a distribution point that would send the market down to the horizontal neckline (approx at 11,940) of the pattern.
There was an additional projection down to the 11,731 level as a minimum price objective as the market has fallen out of a bearish rising wedge.
All of the above is happening, and the completion of the H&S Topping pattern was late by only just a week and a few days. (See June 8 Blog for details on the timing of the right shoulder).
The completion of the pattern is step one. The confirmation of the pattern is step two.
The neckline of the pattern has to be broken through to the downside. A 3% break would bring the market into support at about 11,582. That price level of 11,582, is also a floor established from the peak two years ago in May of 2006.
Then if the classical move takes place, the market would go back up to test the neckline as overhead resistance and create a point of distribution, sending the market back down on a long journey to the approximate price level of 9690.50. The bear market would be on. I do not have a time table or schedule for that move.
I have been asked why I do not call the current market activity a “bear market”. There are two reasons. Up until Jan of 2008 the Dow Jones only displayed points of accumulation on the daily chart and since that time there has been a base building effort in play. Until the Neckline of the pattern is thoroughly penetrated then the base building effort is still in place.
Secondly, the Wall Street Pundits want us to believe that we are at the end of a terrible bear market and that the worst is behind us. For them who reside on Wall Street I suppose it looks like a saga from General Hospital and that it can’t get any worse. I am not seeing that. I have not seen a major capitulation from the bulls. There is a bifurcation in the economy that has Wall Street looking at one set of values and the rest of the country looking at a different set of values.
Right shoulders of Head and Shoulder Tops should not scare bulls. In order for a real bear market to take hold, there have to be bulls wanting to buy price areas that look like support. The neckline itself is an area of support until it is sufficiently broken. Then it becomes resistance.
We could say that the Dow Jones is now “poised” to begin a more serious bear market, led by a deepening US consumer recession. The bulls don’t see a recession. For them the market is just working its way through some problems and will be higher by the end of the year The initial blow to the banking and finance sectors knocked off 2000 points from the top in October of 2007. But for bears, patience will be required.
If the market rallies off of the neckline from here, then more distribution points will be required to tamp down the bulls. It is unlikely that people being creatures of habit, will change their habits overnight. I don’t expect for bulls to give up on the buy side of the market too easily.
On Wednesday June 25 at 1:30 PST (4:30 EST) I will be giving a one hour presentation on various aspects of Novy Principles of Market Flow. It is a free seminar and you can register at http://www.onlinetradercentral.com/
If you are not on the Training for Traders email list then you are not receiving the Bi-weekly TFT Critical Futures Updates. It is a free subscription, published once every 2 weeks that covers any important technical and fundamental changes that take place in between the monthly Training for Traders Blog publications. To be placed on the list, simply go to contact on www.trainingfortraders.com and fill in your contact information and you will begin receiving the publication.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2008
www.trainingfortraders.com
The Head and Shoulders Top on the Dow Jones
June 8th, 2008 by Leonard
Well here we are….. Two trading days ( June 10) and 275 points away from the Dow Jones confirming a Head and Shoulders Top formation that I imaged with a primitive drawing 7 months ago. I drew the classical predictive path, on the Nov 19th, 2007 www.trainingfortraders.com Blog. At the time, of that drawing, I estimated that the market might touch down on to the neckline of the pattern in the mid May 2008 period of time.
As the market got closer to that time period, I took a closer look at the detail of the Daily Dow Jones chart, and saw that the left shoulder of this pattern took longer to create than previously estimated. There is symmetry in this pattern, which asks that the right shoulder take as long to develop as the left shoulder. Although these are approximate values, this symmetry is more important, than the individual vertical heights of the shoulders being equal.
If for example, a right shoulder is hurried, then too many traders are bearish, too early, causing for a bottom to be put in place. The left shoulder of this pattern took 98 days to create. That projects June 10, 2008 as the 98th day of creation for the right shoulder. Being a week or so early or late on a topping pattern of this size, should not pose a problem to the completion or incompletion of the pattern.
Once the neckline of the pattern is reached, the market should begin acting bearishly, by breaking down through the neckline. Then, the market will usually find support at lower levels, and stage a small rally back up, to test the underside of the neckline for any resistance. If sellers show up, and knock the market down then there is a likelihood that the real bear market will begin, particularly if the market trades below the recent lows formed, before the small rally took place.
There are several hurdles ahead for the bears before staking claim to a real bear market
On a topping pattern of this size (1 and ½ years in creation), where a market has been in a bull mode for nearly 30 years, we can imagine that bullishness has been institutionalized. Therefore, over coming habit will play a roll in convincing investors, and speculators, that the corrective downside move from the Oct 2007 highs, to current levels, may not necessarily be a buying opportunity.
It is far less amazing to be able to draw a classical predictive path as I did, than it is to watch how it unfolded with all of the twists and turns of bullishness, and bearishness, and the thousands of stories that have created the pattern.
The bulls who authored the “real estate will boom forever markets” still point to the “BRIC will boom forever markets” as a place to put your money, but this appears to be mostly out of default. While Brazil, Russia, India, and China have expanded their economies, could they be only 7 to 8 months behind us in terms of economic contractions? I believe that when their economies collectively cool off, that deflation will still be a number one global concern. The credit bubble continues to contract step by step, wasting assets.
The inflation side of the ledger with energy and food should eventually taper off on a long term basis but it is imperative this year that the Midwest farm belt gets great growing weather to create big crops, to help quell high pricing in grains. July is a crucial pollinating/growth month for corn. Hopefully there will be no drought or heavy floods to knock out the crops.
De-leveraging
Yes we’re back to de-leveraging word. We heard that term in the last half of year 2007 when Wall Street was scrambling through the credit crisis. When I hear the word de-leveraging again, then I think that it must mean that the credit crises is still a glowing ember ready to re-ignite.
So as an ordinary citizen, what do I have to do, in order to de-leverage?
It’s simple. Stop borrowing money and racking up debt. And secondly, pay off the debt that has already been accumulated thus reducing risk. This at least is the optimal action but what if there is no choice? What if individuals and investment firms cannot pay off their debt? Isn’t the involuntary side of the ledger called loss part of de-leveraging too?
The point being that Wall Street likes to pretend that it chooses to de-leverage when perhaps a greater reality is that the investment banks are being forced to de-leverage.
If Hedge funds are being forced to liquidate certain assets at a loss because they cannot leverage up (borrow) to balance their portfolios, then those who live and breathe on leverage, have to change their habits, in order to continue prospering.
Change?
I am not so cynical as to believe that people cannot, or will not change their habits, but there is ample evidence that it takes a much longer time for change to be accepted than one could imagine. From the perspective of bears, the bulls have been living in denial with knee jerk habitual buying. The bulls of course don’t see it that way.
Denial may be giving way to anger as the cost of living is affecting everyday life for everyone at a more obvious headline level. Do Wall Street investment houses need to move through bargaining (government programs), depression (nothing seems to work) and acceptance (This is the way it will be forever), before it all turns around? Don’t know that answer but it took former Fed Chairman Paul Volcker some 7 to 8 years, to convince the investing community that the inflation that occurred in the late 1970s was dead.
Volcker and company (Milt Friedman) received lots of verbal abuse from the pundits and Wall Street economists, for tightening the money supply over an 8 year period during the 1980s.. The complaint heard most often on Wall Street was “Why is good bad?” They were complaining of course about the inflation fight that they thought was holding back the growth of the economy. They even complained that inflation is a good and needed thing. Growth through discipline is not a favored activity for speculators.
Volcker ignored the whiners, but they came back with a vengeance later, when they got a little older and he wasn’t around.
In the late 1990s fraud plagued the Dot.com era and in recent times systemic fraud at all levels of finance has been a dominant theme.
Fed Chairman Bernanke has chosen the kinder gentler approach in dealing with systemic banking problems. He buys troubled investment banks. I don’t think Paul Volcker would be willing to spend over the half of the Fed Assets to prop up a corrupted system. Perhaps all that the Fed can do is buy a little time. With worldwide investment leverage at about 17 times world wide GDP, it wouldn’t appear that saving a bank or two would have much long term positive affect on the long term outcome. But time will tell.
In the meantime the market is nose diving on a rising wedge pattern breakdown that is targeting the low price levels of mid March where we saw the Bernanke Bounce (Bear Sterns buyout). He seems to be defending 12,000 on the Dow. And you can bet that he is planning something to hold the line. Perhaps the Treasury will buy dollars
Let’ see if the bears are going to knock him out of the box. If they do, the minimum price objective of the Head and Shoulders top on the Dow Jones is around 9700.
If you are not on the Training for Traders email list then you are not receiving the Bi-weekly TFT Critical Futures Updates. It is a free subscription, published once every 2 weeks that covers any important technical and fundamental changes that take place in between the monthly Training for Traders Blog publications. To be placed on the list simply go to contact on www.trainingfortraders.com and fill in your contact information and you will begin receiving the publication.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2008
www.trainingfortraders.com
The Light at the End Of the Tunnel
April 20th, 2008 by Leonard
“Hey, how’s it going over there?”
“ Well I gotta tell ya, it’s been a little crazy. Maybe we’re going back to the good old days”
“Yeah, I know what ya mean, just buy with you eyes closed, just like when the brainiacs were cranking out those CDOs”
“Yeah, well too bad about those CDOs, it was good while it lasted.” “ Great bonuses”
“Exactly…but not to worry, this time we got everyone supporting us…I mean we got the Feds, Congress, the Treasury and the Whitehouse. They took care of the banking crises”
“Well what about the economy, and housing, and all of the debt that’s still out there?”
“Whadya, a worry wart?………we’re global man. This thing is too big to shut down”.
“But what if none of these programs work? What if the Fed runs out of bullets?”
“Stop bumming, everyone is always bumming. Try to picture this in your head. You’re walking down a beautiful green forest covered path. At the end of the path is an opening, kind of like, the light at the end of the tunnel. Can you see it?”
“Uh yeah. What’s on the other side?”
“ Well uh, there are mountains, and valleys, and beautiful streams, with small waterfalls. Listen, I gotta go now, but just keep that image in mind and keep cranking out those trades okay?”
“Uh yeah, okay, bye. Hmmm……Let’s see, I’m walking down a beautiful green forest covered path, and now I am walking through the opening at the end of the path, into the beautiful valley with mountains and a stream, …….and I see waterfalls and ……
And that’s about where we are with life on Wall Street. There are those who believe that the banking crisis is behind us, with a cure all stimulus money drop, into the hands of the consumer.
And then there are those who believe that the bearish fat lady hasn’t even gotten up on the stage, and that it ain’t over yet…That the players are barely finished with Act one, of a three act bear play.
Act one: The banking crises/credit crunch.
Act two: The US consumer led recession.
Act three: The global recession.
The only stimulus that is showing up so far, is the marketing programs that retailers are creating, to desperately dig into the pockets of the consumer for “wants”, while the consumer is more likely to be spending the money on “needs”.
If retail wants to create a “want” mania, then just lower the prices of everything and cut the profit margins. Then we will see just how bullish those earnings look to stock holders.
It doesn’t appear to me that prices are dropping very much. The consumer is being faced with price rises and less inventory on the shelves as retailers like Wal-Mart don’t seem to be stocking the shelves as well as they did last year.
The path to earnings over the last several years, was greased with consumer money, garnered from speculation in overpriced homes, and recycled back into the stock market. The sponsorship for this speculation was Wall Street, who figured out that all of those little fictitious loans needed a place to go, in order to keep the commission wheels spinning.
Bundling, securitizing and passing on the hot potato (CDO) was a major game in town. Coupled with leverage, through borrowed money, Wall Street created the largest commission machine in the history of the market. But you’ve heard this ad nauseam, and because bad news has become household news, the bullish players on Wall Street are trying to sell us on the idea that things cannot get possibly any worse.
When the unlucky bag holders were revealed last summer, the market moved down in 4 legs, with each leg focused on a new “surprise ha ha”. The Fed reacted at key chart points of liquidation where the market has tested support. Yes I believe they are chart watchers. The Fed is long the market. ( See below)
In terms of the Head and Shoulders top formation on the Dow Jones, that I outlined as the most likely path the market may take (see Nov 19 blog), there are 6 weeks remaining for this formation to come to fruition. The recent breakout to the upside last week is threatening to alter that outcome.
The height of a right shoulder is not as important as the length of time it takes to create that shoulder. The right shoulder is usually equidistant in time, based on the length of time it took to create the left shoulder.
This then becomes a simple technical matter of figuring out what the next 6 weekly bars might look like, if indeed this formation is going to complete itself. If the market moves too high on this rally then there is not enough time for the completion target to be reached at the neckline of the pattern.
Incomplete Head and Shoulders are not to be taken lightly. They are a warning, a red flag if you will, that the next top will be a final point of distribution before the bear market begins.
If we link that kind of potential chart activity to the current fundamentals of the banking drama , then the Fed has given Wall Street conglomerates, hedge funds, brokerage companies and investment banks, a slight reprieve in time, to attempt to get out of their locked up assets, or write off the bad debt.
The Fed cannot possibly absorb all of the remaining debt and bad leverage. Whatever perceived wealth that is locked up in bad paper assets that is imploding, may or may not have enough time to get cured, and time will not be on the side of those entities holding the bad paper, should the consumer lead the way in a severe recession.
As day traders we look at intraday charts. The hourly charts of the E-mini S&P reveal many pattern gaps (sometimes called common gaps). Gaps are created in trading ranges, when the market opens higher or lower than the previous day’s highs or lows, thereby creating some space on the chart between the trading activities of the two adjoining days.
Common or pattern gaps are usually covered by the market, and serve as a kind of magnet to traders. If the gap is below, then the market is likely to move lower to trade into that gap, and vice versa if the gap is above.
On the chart below there are 3 gaps that are uncovered or open. They are lower. The market will usually be attracted to moving into those gaps, where buyers will attempt purchases. Then it is a matter of whether the gap holds as support (below) for gap buyers, or resistance (above) for gap sellers.
The red dots are depicting down gaps, and the blue dots are depicting up gaps. You can see that all of the gaps have been covered by market activity with the exception of the 3 gaps that are lower.
Trade carefully and try not to get hit in the head with a shoe.
NOTICE: On Wednesday April 23 at 16:30 EST, I will be giving a presentation on some aspects of Novy Principles of Market Flow. The class is free and you can register at http://onlinetradercentral.com/Presenters.asp
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2008
www.trainingfortraders.com
Systemic Fraud….No Matter Where You Go, There You Are
February 27th, 2008 by Leonard
Before I get to writing, let’s take a look at the charts. In my November 19, 2007 Blog, you will see this picture of the Weekly Dow Jones chart. On it I drew a classical predictive path, outlining where I thought the Dow Jones might go, projecting out to May of 2008. The lines connecting the dots are outlining that projected path. The pattern I drew is a classical distribution pattern called a Head and Shoulders Top.
And this is the actual path of the Dow Jones, up to, and including Feb 27, 2008.
While it is easy to draw pictures of classical predictive paths into the future, they don’t always behave well. This one so far, has been behaving very well and if it manages to fulfill the prediction out to May of 2008, then a major top will be in place that could begin the real bear market. The pattern would need confirmation after breaking down through the neckline at the 12,000 area.
It is intriguing to see the development of this pattern as trader psychology shifts momentum between the bulls and the bears. The dynamics of bailouts, stimulus programs, government interventions, corporations and banks scrambling to cover their tracks, and pundits jawboning the market up, still leaves one with the impression that a heavy weight sits firmly on the neck of the bulls. The bulls are waiting and hoping that all of these programs will kick in soon so that they can go back to their easy money machine. Old habits die hard. We have been promised a stellar second half of the year.
Wall Street pundits have been very clever in deflecting criticism away from their ranks. At first it was all about sub-prime slime, casting an immoral shadow on lower middle income folks, who applied for and got fantasy loans. But later, as the plot thickened, we began to see that this wasn’t about one, or two, or even a hundred people slipping in under the wire of scrutiny of title companies.
It was, and is, in fact, an entire system created to usher hot potatoes from one hand to the next as quickly and as efficiently as possible, while garnering major commissions for the transitory moments of ownership.
Call it a bag holder conduit, purposely designed to shove bad paper from one shelf to another, from one company to another, from one bank to another, and to disguise it, and mutilate it’s origin, and spread it around to as many willing hands as there are people in the world. That is a description of systemic fraud.
It is the unwinding of this systemic fraud that hangs over the market. Every banking transaction is questioned. There is no trust among thieves. Are there real victims? Yes. And sorting out the thieves, from the victims, will take years of litigation, which is very likely to happen. In the meantime, every day seems to reveal a financial instrument that was here to fore unknown to the public, that is about to collapse a financial institution.
Personally, I have a hard time believing that our economy and our financial system will move back into normalcy until most all of the systemic fraud is exposed and cured. I see it as the number one cause for bearishness. It’s a trust issue, and it’s a morality issue.
Wall Street would like us to believe that they have been through hell and that we have come to the end of a bear market. I don’t think that the bear market has started yet, at least not a consumer driven bear market. There is still too much funny money in the system that has to be devalued before real value is restored.
We are watching a fascinating piece of history play it self out. I will re-asses the chart of the Dow Jones Weekly in about a month, to see whether there is still a chance that a Head and Shoulders Top formation will come to fruition. If the Dow Jones is trading near 13,500 by the end of March, then no, I don’t think the pattern is viable. If the Dow Jones has traded under the 13,000 price level throughout the month of March, then it raises the possibility that the pattern will complete itself.
In the meantime, whenever a new and startling banking revelation surfaces, just remember the words of the character “pig killer” from the movie “Mad Max Beyond Thunderdome”. “No matter where you go, there you are”.
Junk is junk. Put it on a shelf, cover it up, separate it, re-name it, and add it to something else. No matter where it goes, there it is, and it will continue to re-value every asset it has touched until the ultimate bag holders cough up the truth, take the loss, and restore trust to the financial system. That could be a long and bumpy road.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2008
www.trainingfortraders.com
Only Bulls Can Create a Bear Market……The Death Cross
January 22nd, 2008 by Leonard
On my November 19, 2007 Blog, Training for Traders projected the Path, and the Direction, that the market was most likely to take over the next 2 to 6 months, based on the development of a classic distribution pattern. And here we are……See below.
And now we are here……………..Notice the dip into early January 2008
As I sit here this evening watching the E mini S&P trading as if it were in the middle of the day, I am thinking about how the market might trade tomorrow when the official pit session opens on Jan 22, 2008. If the opening were in the next few minutes, then the DOW would be trading about 550 points lower than Friday’s close. The S&P would be opening about 69 full points lower, and the NASDAQ would be off about 86 points.
I have emailed my current and former traders (students) that I have trained with a heads up on tomorrow and what to look for in terms of market activity. I will be with them in the trading room, as we analyze and trade the live market.
These are not your normal openings. In preparation for tomorrow’s battle, some trading firms have raised their margin requirements due to the potential extraordinary movements that the market is expected to make under panicky conditions. I am thinking that some folks will be looking to buy tomorrow, hoping to buy the blow off, but these might be the same people who have brought us “ there is no contagion”, “the sub prime market is an infinitesimal part of the real estate market and will not drag down the economy”, “the banks have written off all of their debt”, “the lower dollar is good for businesses” and “Global markets will remain strong”. I could also throw into the group “ there’s never been a better time to buy real estate than now”.
Perhaps Ben Bernanke will come in with another timely lowering of interest rates by .75% or perhaps even 1% to help shock the market back up. That’s what he did last August. But then he only has so many bullets in his belt and you know the old saying “Can’t solve a problem with the same consciousness that created it”.
Ben, this bicycle pump isn’t re-inflating!
Stimulus packages? Who needs stimulus throwing good money after bad? That has been the problem all along. What was needed was a field force of regulators going to banks, and mortgage companies like Countrywide, and making sure that due diligence was being properly applied, or lose your license, and get fined. The Fed needs a feel for the “street” that number crunching under theorized computer models doesn’t do. It is one of the inherent weaknesses of Supply Side Economics. Give a man an inch, and he’ll take a foot.
It’s one thing to de-regulate. It’s another to say and now that we have de-regulated we will trust that everyone will act well behaved. Hey come on! What are you stupid or something? Or is it that no one really cares as long as everyone is making money?
How about resurrecting the CCC Civilian Conservation Corp?
I am also thinking about one very good blogster who thinks that the bullish traders may be in the third stage of grieving according to Elizabeth Kubler Ross’s, On Death and Dying. He believes that bull traders left the stage of Denial sometime last year, and that when CNBC Mad Money’s Jim Cramer had a temper tantrum about the Fed ‘They know nothing”, that it was then, that the traders were moving thru the second stage called “Anger”. I don’t think so.
Jim Cramer having a temper tantrum is hardly enough anger. I don’t think that Jim Cramer would believe that the market is bearish enough. It was he, amongst others last week who were talking about the threat of the faltering insurance companies, who insure securitized mortgage instruments (CDOs), like MBIA, and AMBAC, that pose a threat of insolvency that might collapse the market another 10%. Their ratings were finally lowered by the corrupted rating agencies.
The pundit quick fix idea is to have the government back the insurance companies. While that may put a floor on the market for a while, it begs the question why? Why should Americans have to participate in propping up Wall Street’s industry? Why not purge the system of it’s graft and corruption, errors and mistakes, and brainiacs, who created these mass weapons of financial destruction.
As I continue to write I notice that the E mini S&P market is locked limit down. It can’t go down any further for a while in the overnight market.
With regard to the five stages of grief, I believe that the bulls are just about leaving the first stage called denial, and that we haven’t seen real anger yet. Why? Because one very popular economic service reports that 50 out of 52 well respected economists do not believe we are headed for a recession.
That is exactly the kind of collective thought that causes bear markets. Only bulls can create bear markets. Bears need the undying confidence and willingness of the bulls to keep pursuing the buy side, only to have bigger bulls sell their stocks on rallies. They have to give up their assets. The third stage of grief is “Bargaining”, the fourth stage is “Depression “, and then there is “Acceptance” at which point the market is primed to turn bullish.
Anyone interested in seeing the Death Cross? What is it?
It is the crossing of the 50 day moving average down thru the 200 day moving average. The reverse (crossing upwards) is called the Golden Cross.
The Death Cross signifies the beginning of a bear market. See chart below
Not all Death Crosses yield a bear market. With regard to the S&P there have been Death Crosses in July of 2006, and August of 2004, but the market turned back up quickly for significant rallies. There have also been several close attempts at Death crosses that did not materialize. That is why I have joked in my prior Blogs about Goldilocks cheating death, and the movie Final Destination. So what makes this particular Death Cross set up any different technically?
This is the first time that the market is facing serious sell divergence on the oscillators since the year 2000. See chart below.
Sell divergence is when a timing indicator fails to confirm strong momentum with new high peaks in the market. As the market climbs to new highs, the signal representing upward momentum does not confirm the new peaks with stronger momentum. In fact the signal will show a slowing of upward momentum on each successive peak, as the tops of the signal continue to decline.
Time to hit the bed. I promise to write more often now that the market is at least becoming two sided. Hard to say what will happen tomorrow but a temporary rally is not totally out of the question and would be quite acceptable to the bears who would look for more distribution down the road.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2008
www.trainingfortraders.com
Freight Train Analytics
November 19th, 2007 by Leonard
A trader and a Wall Street economist are walking along a set of train tracks. The trader says to the Wall Street economist.
“I think there’s a train coming” “Oh really? How can you tell?” “Well I can hear it, I can smell it, and I can feel it vibrating the tracks on which we are standing!” “Well that might be your experience but ………..ooooooppppps OH Wow, I didn’t see it coming”
“Are you for real? You actually didn’t see it coming?” “ Nope, there was no statistical evidence that a train was coming”. “Well why not take your head out of your statistical ass-ets and look around. There’s a world out here”.
Yah …..Freight Train Analytics. Don’t see it till it runs me over. There are legions of these literal types working in insulated towers with fancy titles, lots of university degrees, and not a lick of sense. They work as analysts at major banking institutions and brokerage houses, rating agencies, housing associations, and governmental agencies. Some are TV pundits, and some operate professional advisory services. They as a group in the service industry apparently do not think that a housing affordability ratio of 8 to 1 relative to yearly income is insane, was insane, or very abnormal.
But even if they questioned as to whether an 8 to 1 housing affordability to yearly income ratio was normal, what kind of miscalculation took place that would cause these very smart financial statisticians and economists to sell themselves on a containment theory? Is it that financial aneurisms are hard to see until they explode? Is it a political ideology? Or perhaps it’s a socio-economic phenomenon with roots going back to the end of the industrial era that has built in a set of unrealistic expectations.
I’m not a PHD of economics but I am a student of human nature. Over the last 35 years, living beyond our means has been institutionalized in America. Sure, maybe you are one of those people for whom this does not apply. Makes no difference. The greater majority of this nation’s population are not savers. They are spenders and that will affect you who are savers.
I remember when the term Yuppie came into vogue. I remember that as a group trait, they seemed to be particularly aggressive asset collectors. Sometimes the simplest message is the most poignant. Madonna released “Material Girl” in 1985 which seemed to highlight the movement. Bruce Willis and Cybill Shepherd were the quintessential Yuppies in the TV show “Moonlighting”, also 1985. They were glib, smart, with it, argumentative and living the high life. They were also emotionally cold, and suffered from a narcissistic right to entitlement.
The first Yuppie Boomer surge of collecting assets took place during the late 70s hyperinflation housing market. Add to those gains, the collected assets of Yuppie’s parents, who survived and thrived through the “Golden Years” after the Great Depression.
My father, having lived thru the Great Depression, was a machine screw operator. He worked in a factory and made machine screws. Bought and paid for his home in 10 years. He bought a new Chevy every 3 years, and always paid for his autos with cash. Did not have a checking account, but had a savings account. Had a cellar filled with dry goods, canned goods, and bottled fruit, that my mother would bottle (called canning), and it was enough food to last 8 months. He fed us, clothed us, sent us to music lessons, and took a month vacation every year when we would travel by car, to see the wonders of this great country.
He never had a credit card in his life, and the day before he died on an operating table, took me down into the basement and pointed to all of the places in the ceiling behind vents and pipes, where he had stored cash. We were a third generation American family living the American dream, and we were part of the greater middle class.
We had one of these.
The majority of middle class Americans during the 1950s lived the American Dream as one income families. But by the 1970s, it became apparent to us young adults, that doing the same things that my father did, was not going to produce the same results in terms of life style. My point to all of this is that 2 income families, deferring cash payments now with loans and credit, and speculation began supplanting real income as a measure for boomers to maintain a style of living equal to, or better than that of their parents. The world changes, doesn’t it. Hello Yuppies (Young Urban Professionals)
PERCEPTIONS OF THE YUPPIE
A 1986 survey by Louis Harris and Associates found the following:
73% of Americans believed that yuppies were primarily intent on making more money; 81% of yuppies agreed that they were.
72% of the public believed that yuppies were more concerned with their own needs than with the needs of others; the same percentage of yuppies agreed.
70% of those surveyed thought yuppies bought flashy cars and clothes in order to set themselves apart from others; 81% of yuppies said this was so.
Enter the credit card, leverage, and debt, and the end of the great industrial era. The cost of living began outpacing income, and to this day, income continues to fall behind the monthly nut. This doesn’t mean that the quality of life has fallen off. Not in a New York minute. It just means that as a nation, the creation of debt, and the abuse of credit have become institutionalized. Elevated lifestyle addiction comes at a cost. The ever recycling of asset bubbles has been the fix. Each time a bubble is created, Yuppies find it necessary to be very aggressive about pushing the envelope as quickly as possible, in order to optimize their bank rolls that have become depleted by the rising costs of services, and excessive spending, after the most recent bubble deflates.
It’s been said that the Yuppie disappeared after the 1987 crash of the stock market, but that’s not true. They morphed into the mainstream “Boomer” nation and they blended into other cultures. And as they got older, they got a lot smarter about how to create, and extract money out of bubbles. They recruited younger followers, and developed inroads into government, de regulating everything in their path, and dismantling many of the protections of our economic and financial systems, that were legislated because of hard learned lessons from the Great Depression of the 1930s.
Supply Side Economics replaced Keynesian models in the late 70s, and in the 1980s was sardonically called, “Voodoo economics”, and the “Trickle Down Theory”. It began with lowering taxes, and massive deregulation of utilities, banks, transportation, and telecommunications. The theory was, that deregulation raises competition, thereby flooding the market with a cheap supply of products and services, while stimulating the economy. Union busting was part of the process (scheme), which also served to dismantle the political machine of the Democratic party. This was the real end to the industrial age.
Here’s a side thought. The jury is still out on the success of Supply Side economics. Globalization was bound to happen thereby providing a pool of cheap labor throughout the world, that has served to limit income gains in the U.S. But producing cheap products, on the backs of cheap labor overseas, may be just strengthening the corporate ledgers. That wealth is not “trickling down” as fast to the middle class, as supply siders may have touted. Corporate profits have a tendency to stay within the corporate culture of investors (yuppies). And services have not cheapened. Have you visited the dentist lately? How’s your health plan doing?
Additionally with the growth mania of third world countries that we have put to work, we may be at the end of the “cheap labor” cycle. We could be importing inflation soon enough with rising prices of goods. The explosive growth stage for the BRIC countries (Brazil, Russia, India, and China) may be topping out. And do the a’ hem financial experts of these BRIC countries have ANY experience with bubble markets and how they top out and crash?
When these imbalances get corrected we will have a better picture of the success of supply siders. I know that I would laugh myself into a coma, if all of the third world labor pools began unionizing because they found Jimmy Hoffa. Wouldn’t that be a hoot? It would be another example of how economic statisticians always presume that the “constant” in their little magical formulas never changes.
History has shown us that many a system trader has gone down following a system that does not factor in volatility. But why bother with history? Ask any 20 something adult what was the Great Depression and you might find them referring to the time that their parents took their cell phone away from them over a summer weekend. Poor things. What goes around comes around.
The demand for better stock performance, more return on investment dollars, larger bubbles with more acceleration may be the actual end result of supply side economics.
Since real income can’t possibly keep up with rising costs of goods and services, there seems to be an endless supply of highly leveraged “innovative” investment products that are circulating throughout the world’s banking and financial institutions. Some person, or some financial entity, invested in “make believe”. Whoever blinks first is the loser. This is an entirely fascinating game unfolding in the investment world now. If it weren’t so potentially tragic, it might be entertaining to watch the buzzards scrambling.
Time for my disclaimer: There’s nothing wrong with collecting assets, and enjoying a wonderful life, as long as you’re not backing your truck up over other people to load it up.
It has been fairly clear to me, that when we line up all of the bubbles since the late 1970s, that they are one large “Boomer Ball of Equity” bouncing all over the world. Here’s the list
1. The gold, silver, and housing hyper inflation bubble of the late 1970s,
2. The housing and equity speculative bubbles of the late 1980s,
3. The internet bubble of the 1990s,
4. The housing and stock market bubbles of the new millennium 2000-current.
5. The Unregulated Credit Derivative market bubble (CDOs CDSs SIVs).
They all share in the same systemic abuse of leverage, creation of debt, and excessive credit expansion, being used to supplant real income relative to the cost of living. It’s the same large Yuppie Boomer money ball, pushing from one bubble to another. It’s many of the same people, shifting capital into a newly created bubble forums. With the advent of the internet, hunting for bubbles is truly a world wide past time. In a sense it’s just one ball of equity roaming around the world looking for re-inflation.
What is most insidious is the way Wall Street insiders have abused and used the American economy to create “financial innovations”, targeted specifically in areas of speculation that are unregulated. When no one is watching, the cookie jar gets raided.
Gimme an H, Gimme an E, Gimme a D, Gimme a G, Gimme an E and wha da ya see?
Looks like a heck of a hedge, of a hedge, of a hedge to me.
Oh sorry, I’m so used to seeing cheer leading on CNBC, I couldn’t help myself.
This puts undue amounts of pressure on young people to create bubbles. Are we products of our environment, or do we create it? College graduates who do not have country club moms and dads, get entry level jobs as managers of stores in shopping malls at $12 an hour. The country club grad gets an entry level job at a chemical company, two to three times that salary. But even so, both groups of grads will create lots of debt in order to maintain a life style within, and beyond their particular wealth stratum.
The creation of debt through lending, leverage, and the so called “new financial innovations” is at epidemic proportions. If there is a way to create a hedge, of a hedge, of a hedge, the morphed Yuppie will find it, and exploit it. We won’t hear about it until it implodes. It is a prime reason why we are seeing graft, and corruption, at unprecedented levels, only seen just prior to the great Depression.
At the beginning of this piece I talked about Freight Train Analytics, and the folks with the literal nose in the statistical book, who have little capacity to actually create, and formulate a train wreck. But what about the crafty ones, the fraudsters. They might have learned their crafts from this Pee Wee Herman episode.
In one of Pee Wee Herman’s episodes, Pee Wee shoots and kills a deer. He doesn’t want to field dress the deer, so he drapes the deer over his left shoulder and decides to drag it back to his truck. As he is coming towards us, dragging the deer across the highway, a state trooper stops him and points to a sign behind Pee Wee’s right shoulder. In very large letters it reads “NO DEER HUNTING ALLOWED”. Pee Wee acknowledging the sign, tells the trooper something to the affect that he understands, and agrees with the law. The trooper befuddled and frustrated, points to Pee Wee’s left shoulder and says, “Well then what is that!?” Pee Wee says “What is what?” The trooper in astonished dis-belief impatiently yells, “that thing on your left shoulder?” Pee Wee slowly looks at his left shoulder and with bugged eyes and a wild scream, frantically brushes the deer off of his left shoulder.”Oh my God, How did that get there!!!”.
The fraudster tatics involve the purposeful dumbing down of the self, in order to sell an idea that has a popular following, in order to benefit thy self. . And just like with Pee Wee and the state trooper, the manipulative side of the sale is covered, by pretending to be the victim as well. Sometimes they pretend that what they are doing is good for you and the economy.
The peacocks of pandering can say anything to cover manipulation. That’s when Freight Train Analytics kicks in. “I didn’t see it coming”. It is a perfect exit out the back door of responsibility for the manipulator, or the literal dim wit. This is why many economists are able to proclaim a recession, six months after we are into it. They can conveniently now see hard facts that support a recession after it is blooming. Of course 4, or 5 stores in the shopping mall that they frequent, have closed their doors several months ago. And an 8 to 1 yearly income to housing affordability ratio, is not a speculative bubble problem that could add to the probability of a recession.
So on one hand we are advised by ethical dim wits that live in insulated, and over protected worlds. They never “see it coming”. And on the other hand we are advised by not so ethical, but intelligent manipulators, who are the first to jump ship when things get rocky. They use bullhorns from their lifeboats to instruct those still on board to remain calm and steadfast. “Uhhh This is your CEO. Please don’t be alarmed that I am selling 75% of my company owned stock. It was part of my compensation plan, and has no bearing on my belief that this is a fine company on the rebound”.
Time for my second disclaimer: There are good CEOs out there who do not back their trucks up over their employees for the sake of their own personal wealth.
Recession or no recession, let’s take a look at the long term charts. Below is the Weekly Dow Jones
There is sell divergence on the charts. For you non-technicians it means that if you align the 2 peaks of the timing indicators (MACD and Stochastics), under the down slanting red lines, with the 2 peaks of market at the top, you should see that the although the market made a higher high in October than in July, that the second peaks of the timing indicators did not agree with the market, in that they did not also make new highs. This represents a loss of upward momentum. The bottom indicator is an ADX trending tool. The ADX line moves up when the market is trending. Currently, the market is not trending. It is said to be in de-trend (neutral).
One of the traits of Double Tops is that the tops need to be somewhat equi-distant in time. That is, if the left top is created over a period of 18 weeks, then the right top should take about 18 weeks to complete the pattern. We are not going to squabble over a couple of weeks difference from a target date, however the pattern tends to be invalidated, particularly if the second top is completed very early. This is because it would represent a severe decline acting more as a climactic blow off. The bulls are not supposed sense a top, and believe that they are buying a bottom. So for the bears, they would prefer a softer landing on the neckline of the pattern (red horizontal line on the market). Let’s move on to an extension of a possible broader bearish pattern.
In the chart above you will see that I have drawn further out in time as a possible bearish path, called a Head and Shoulders Top. Should the market rebound in early January, then I would expect for a right shoulder to form, and complete itself by mid May 2008.
I might add, that currently there are no confirmed distribution patterns on the chart as of today. Additionally, the 50 week moving average (50 bar MA) is currently slanted upwards. The market has used this moving average to launch at least 5 rallies over the last 3 years. Therefore we are not in a bear market, even though the market has been hit hard over the last 4 weeks. But bears will gladly take sideways for now. A market has to first lose it’s upward momentum, before turning bearish.
The tendency for bullish traders to use the 50 bar MA as a launching pad has been successful enough, that I remember seeing a particular young man looking a little wet behind the ears, on CNBC several weeks ago. He said the following sound byte. “The market will build on it’s own scar tissue, and inoculate us from further spooking down the road”.
Well from the mouth of babes comes the truth. He is exactly right. He echoes the sentiment heard from money managers, and pundits, who never really seem spooked by breaks in the market. The modern bull sees all breaks as minor profit taking, or buying opportunities, or over reactions to negative news.
Won’t they be surprised one day when old faithful doesn’t geyser. That’s exactly what causes a panic. Though volatility is high, we have not seen anything yet that could be called a panic move. You will know when it comes. It will be spectacular.
So if I were to make up some imaginary fundamentals to fit the charts above, it would be a massive wave of foreclosures showing up, starting in the first Quarter of 2008 based on the mortgage resets taking place now. It will take a while before the foreclosures will actually show up. That certainly wouldn’t help the valuation of all of trillions of dollars of derivatives floating around the world, so include massive write downs, and bankruptcies of major institutions.
Now if you are strictly a fundamentalist, then you have the right to consider the charts above, and below, as drawings from an imaginative mind. But you can bet that every CNBC analyst touting stocks based on fundamentals, has looked at a chart and most likely, knows a lot more about technical trading, then you might guess. It’s just easier to make viewers believe in imaginary fundamentals, than imaginary drawings. Viewers like to have story lines that make perfect sense, before they lose their money. Secondly, fundamentalists are the very first people to run into the chartists office, when the market is in the throes of a panic move. And chartists always want to know what’s going on. “Is there any news?”
Let’s do a bullish scenario since I’m in the mood for drawing
This is easier, The bulls just need to keep the accumulation going. For immediate results, they will need to launch a rally from the current levels since the market is sitting on the 50 bar moving average. Should the market slip below the 50 bar moving average on the weekly chart, there is still room to launch a rally. Any movement though, below the August lows at 12,500, will begin to cause worry beads on the foreheads of buyers.
I guess the fundamentals going along with bullish scenarios is that global markets go crazy to the upside, and we tail along for the ride. And that the prices of homes remain at astronomical levels, and that every corporation decides to double and triple everyone’s incomes, while stock investors learn how to share in the profit margins.
That’s the best I can do for now, but I’m sure that the yuppies must have a plan, or at least another bubble developing somewhere.
By the way, I am frequently asked if the work that I do in training traders is long term position trading, This is because of my blog. The answer is, that the major work we do as traders is in electronic day trading with highly specialized charts, but all of the traders I train understand, that the use of Novy Principles of Market Flow, universally applies to all time frames, and all markets. Have a very Happy Thanksgiving
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2007
www.trainingfortraders.com
Goldilocks is Auditioning for a role in the next Final Destination Movie
September 1st, 2007 by Leonard
Breaking news, Goldilocks is auditioning for a role in the next Final Destination movie series called, “Cheating Bull Death”. In the movie, it’s purported that just before Goldilocks is eaten by the bears, she sings an old favorite song from 1919 called, and I’m Forever Blowing Bubbles. The Lyrics go like this.
Verse 1
I’m dreaming dreams,
I’m scheming schemes,
I’m building castles high.
They’re born anew,
Their days are few,
Just like a sweet butterfly.
And as the daylight is dawning,
They come again in the morning.
Chorus
I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high,
Nearly reach the sky,
Then like my dreams,
They fade and die.
Fortune’s always hiding,
I’ve looked everywhere,
I’m forever blowing bubbles,
Pretty bubbles in the air.
What can I say that hasn’t been said a zillion times over the last month of high volatility by the TV pundits? You don’t need to hear anymore distractions about credit crunches, discount rates, Fed fund rates, spreads, blah, blah and blah.
Wall Street, the Fed and the Government seem to be trying to cheat the death of the credit bubble.
The last Final Destination 3 movie is a comedic (sardonic) horror film where arrogant individuals catch their lunch in the end after they believe that they have cheated death.
As an example, there are a series of vignettes that set up the action so that after the victim wipes his or her forehead, having cheated death, their arm accidentally bumps into a small desk that knocks over a lamp that rolls along the floor that bumps into the leg of a scaffold that wobbles and causes a bag of cement to fall on their head and boom ….final destination. But the movie has far more inventive scenarios for cheating death. So part of the intrigue for the viewer is to see how each vignette will play out.
And that seems to be what we are watching on Wall Street at this time. We are like voyeurs watching a vignette play out as a Final Destination. What is obviously different, is that as a bull market dies, a bear market is born, and as a bear market dies, a bull market is born. So there is always a constant movement of sentiment towards a tipping point that turns the market in the other direction when capitulation takes place.
Just as there is Newton’s Law of motion, we call a strong directional move the law of E-motion. It’s an idea that stays in perpetuity until an opposing thought slows down the original thought and eventually changes direction.
It strikes me as very odd that a 5% or 6% correction is bringing this much angst, and emotion to the forefront of news. A 10% or 15% correction in the market, is quite normal and necessary, for markets to remain healthy and pruned of excessive speculation.
It just tells me that people like to argue, about anything and everything, and that pushing your point to be the world’s smartest and usually arrogant individual, is the prize.
It tells me that when real income, has been replaced by the leveraging of crafty investment instruments, that we move away from real value. Leverage moves in both directions. Speculative gains can be very temporary as speculative loss is quicker. Maybe the markets can’t afford to trade for too long at the 10% correction level without causing major upheaval.
I have to say that even though there has been high volatility, as expressed in terms of wide range trading days, the markets have been very behaved technically.
Even Ben Bernanke was able to be a market timer, when he lowered the Discount rate, just as the Dow Jones touched onto the 50 bar moving average on the weekly charts. There was also straight line support, from the market peaks created in mid February of this year. Additionally the low point at 12517, was only 83 points under the 10% correction level from the 14,000 high, set in the week of July 16, 2007.
In my opinion, the Fed apparently timed the event, knowing that technical traders would be ready to pounce on the news, since the bounce was already set up. If you’re going to do something, it might as well be timed for maximum effect. The Fed doesn’t really have a lot of bullets to waste. See chart below.
George Bush also did his own little piece of timing today, Aug 31, as his administration postured to intervene in behalf of some home owners, (really banks), as he rode on the heels of Bernanke’s speech, an hour earlier. There has been a noticeable double teaming, and triple teaming, of White House officials, the Treasury and the Fed on various days kind of like a one, two and three punch in an attempt to micro manage the markets thru public sentiment on CNBC.
In a nutshell, it appears that that the Fed is assigning itself to buying time, by providing liquidity to the banks, so that they will perhaps learn to trust each other. So far, the banks have been sticking the liquidity into cash, as the T-bill rates have come down. Who knows where an insolvent CDO (Collateralized Debt Obligation) will show up?
Is it the hope of the Fed, that the market stays buoyant long enough in time so that CDOs will perform? so that the mortgages comprising the CDOs will perform? The real problem is, that no one has a clue as to the actual size and depth of the CDO market, and no one knows just how the mortgages will perform. The guesses are not good.
But there is another more important event trying to take place.
The credit base is trying to shrink, as consumers may be running out of spending money. This is a healthy sign, maybe not healthy for corporate America right now, but the adjustment has to begin at some point, painful or not. No one should try to prevent this from happening.
The old axiom is “You can’t solve a problem with the same mentality that created it”.
Bernanke is locked into an inflation deflation puzzle, that will probably cause him to move very slowly. This is a journey into un-chartered waters, where data points associated with consumer psychology, are more important than neo classical economic statistics.
The advocates of free markets want the government to step away, when things are going well, but whine just like anyone else for government intervention, when things are not going well. Of course that translates to free markets being just bull markets.
While we have seen a lot of volatility, we have not yet seen panicky trading. Bulls have not capitulated. There is a benchmark low at 12,500 and currently, a first point of accumulation, created this last week at the 13,000 level.
Two or three weeks, may seem like a lifetime in this market, but one would guess that the market is pricing in a rate cut for the September 18, FOMC meeting. There is resistance overhead at the 13,500 level, where a 50 bar moving average on the daily chart is poised. The market is approaching that 13,500 level, at the 50 bar moving average, from underneath, on the daily chart.
Goldilocks is still singing. We are witnessing a process made up of events. The tension in the air should increase as we get closer to September 18.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2007
www.trainingfortraders.com
Brother, Can You Spare Me a Credit Line?
July 31st, 2007 by Leonard
Brother can you spare me a credit line? Look, I know it looks bad out there, but honest, I got some friends in high places. If you can just spare a little credit, I got a deal right around the corner, and man, it’s going to net a ton when this whole nervous thing blows over. What transparency? Look, I can’t really talk about the details. You know how that goes. But trust me, it’s a lock. Congress? Regulations? Taxes? Congress schmongress, we got em set up to take the fall if anything goes wrong. You know, we’re using the financial media to back them off. The regular stuff about interfering with the market forces and ruining everything. So what’d ya say? Are you in? Last chance to get on board. What’d ya mean it sounds too risky. Risky is eating the wrong meat from China. Look, it’s the best of all times. We’ve got em confused. You know throwin around a few buzzwords like containment, contagion, contamination, whatever. Then we made up a bunch of D words like de-coupled and de-leveraging and I think de-composing is in there somewhere. I’m telling ya, they’re eatin it up. And in the meantime, we get to play. Ya got it now. Man…. What’s it going to take to get thru to you……………
And so, we have the saga of the credit bubble junkie, looking a bit frazzled, with a slight touch of desperation, and pathos on his face. He’s looking for a fix. The sad thing is that there are no known rehabs for this addiction. At one time in the late 1980s, it was a rumored that the king of all junk bonds, Mike Milkin, had an interest in vesting in a junk bond, credit bubble, and debt detox center, but the deal fell through. They were going to issue junk bonds to cover the cost of building it. There was a negative response. It was totally made up anyway.
Besides, it was presumed that we could never be that stupid to go thru the debt syndrome again. We’re too smart to repeat the same…. mistakes? Or are they mistakes? No… no, I guess they’re not mistakes. Mistakes are for the ignorant. And since we are really smart, this credit bubble is an opportunity. Yes these are once in a lifetime opportunities. Everyone else is doing it, and the central banks have left the door wide open. It’s a global thing.
The pundits are very busy dissecting the expansion of this credit bubble addiction that creates debt.
The new CNBC buzzword is De-leveraging. The idea is that De-leveraging has de-coupled the credit bubble from the contagion that was thought to be containment. Get it?
When Wall Street and the real estate industry tagged team on the backs of a loose Fed policy, and loose central banks throughout the world, a pseudo economy was created within the greater economy, employing it’s own servants to create revenue from the leveraging of debt, for it’s own purposes. Debt has a way of cannibalizing assets.
We get pseudo arguments, to accommodate pseudo economies. Uh….The global market is booming, just American equities are lagging ( sub prime containment ). Uh….. the play is Tech stocks up and Financials down (decoupling?). Uh….The sub prime slime seems to be a spreading (contagion). Uh….The credit spreads are widening, the CDO indexes are falling (de-leveraging). Wow, by the time you figure out one of these plays, another one comes along to spank your face in another direction.
In the meantime, back in the real world……while all of this jabberwocky is distracting us, just about all of the neo classical Wall Street analysts, investor rating services, TV pundits, the Presidents economic team, the chief economist of the National Association of Realtors David Lereah, the Federal Reserve members, and chairman Bernanke seemed to have completely missed the mark regarding the severity of the housing decline, and worse,…how it would affect the economy. All through 2006, the housing debacle was pooh poohed as an overblown concern.
It makes one take pause, when chairman Bernanke says that the Fed interprets today’s statistics to plan a course of action for one or two years out into the future. That’s actually kind of scary when all that was necessary to assess the distortions in the credit system, was to look around your neighborhood to see that the prices of homes were rising out of control due to liar loans, and appraisers on the take along with very loose banking standards.
The gravy train was moving way too fast to want to get off, and this is symptomatic of the same greed thrust taking place at all levels and stratum of the economy. Sub prime slime is not just about those folks over there in the lower middle class neighborhoods trying to get a leg up. It’s pervasive, and it gets a lot slimier at the top where the economy within the economy is created by the large money operators. It’s about sophisticated, and very experienced investors playing with the entire economy under the guise of doing business, and producing relatively little in terms of real wealth distribution.
So the latest buzzword “de-leveraging” is more comfort food for the masses. It means that anytime, that anything bad is about to happen to us, that we can simply unhook our choo choo from that threat or the rest of the world and run a decoupled market that will somehow self heal the leverage problem, and then it’s back to business.
Last week the market was volatile, but I would not characterize the sell off as panicky. It was an orderly down trend with intermittent resting points, on technical points of support and resistance, with very high volume. The distance covered from the high point of a day to the low point, and the retracements and counter trend moves, were quite large by normal standards. But panicky……not yet.
I would reserve the word panicky for a time yet to come, when market participants will understand what the word panicky really means. I was trading one of those panicky markets on Oct 19, 1987. No, this break was a controlled re-positioning with just a tinge of madness. A panicky market is one where one feels as though the world has lost its mind.
In my last blog of May 10 there was a projection line on the monthly chart of the Dow Jones that I thought might stop the market, if by the end of May, the market were to close at or below 13,370. See below
The market closed the month of May above that 13,370 by a few hundred points at 13,627. The following 2 months however, the Dow Jones could not stay above the projection channel line. The market was just too extended. In June the market closed at 13,408 bringing it well below the projection channel. And while the month of July found the Dow Jones temporarily screeching up to the slightly above 14,000, it appears that unless the Dow rallies 300 points on the last day of July, the market will close the month, well below the projection channel line. See below.
This next chart is the Daily e-mini S&P as a continuation chart. Futures contracts have a limited life span, and when a June S&P contract expires, it’s history of activity is fossilized, and remains on the continuation chart as the new September S&P futures becomes the leading traded contract. This chart presents a unique view versus the cash, or the single existing futures contract month. What you are seeing below, is a broadening top, at least for now. It is created by the dynamic forces of opposing opinions between the bulls and the bears.
The market will make new highs, followed by new lows, followed by newer highs, and then newer lows etc. This oscillation creates wide vertical swings, that show up as a reverse symmetrical triangle. Momentum and volatility picks up steam, until the market does one of two things. First, the market can simply break out, and continue moving out of the pattern in just one direction. If that direction were thru the top, then the pattern would be classified as a continuation type. If that direction is down, then the pattern is a reversal type.
The other thing it can do, is to begin contracting into a symmetrical triangle where highs are not as high, and lows are not as low, so that over time, the pattern takes the shape of a diamond top. This would take a few months. The cause of that action would be that the economy stalls, while the bulls are willing to accumulate and the bears are willing to distribute. A diamond top, should it take shape, is a very bearish pattern. We will watch this together.
Paring down your debt and spending money on your needs rather than wants is not a bad idea in these kind of environments. And watch out for the wheeler dealer at the top of the page. He wants your money.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2007
www.trainingfortraders.com
Climbing Walls and Jumping Hurdles, Isn’t it Time for a Lunch Break?
May 10th, 2007 by Leonard
Photo courtesy Flatrock.org
The market closed above the 12,850 resistance barrier at the end of April on the Dow Jones monthly chart. In taking out that NTM Projection Channel, a new and steeper angle of ascent is now in play.
Now here is where I am supposed to ramble on about the bullish and bearish fundamentals, and the diversity of thought in the bullish and bearish camps. But the more we hear these arguments, the more we are reminded of college debate clubs, and the more we’re turned off. At least the more I am turned off. It’s always a rehash anyway of the same old arguments about the oxymoronic inflationary slowdown of the economy. It doesn’t appear that the market gives a hoot about that argument. It’s trading on a different set of paradigms in the backrooms of stock manipulators and dealers.
Bubbles are always unexplainable and unbelievable while they are expanding. TV pundits, Wall Street economists, and columnists, choose to take one side or the other and create a following of devotees. If the market keeps going up, the bullish forecasters keep looking like geniuses.
In a bubble where historic norms of market action are being challenged, it does take some moxie to continue to promote the buy side. For some it’s just sheer greed. But for others, the money manager, the columnist, or the advisor on the tube, it’s more of a career bet. It only takes one event to turn flowery predictions into a perverse reality, but by that time, the promoters have banked the money and are at the check out line.
One promoter columnist on MSN predicts that the Dow will be at 21,000 in four years. Why 21,000? Why not 43,000 in five years and three months? He must be drinking the new tea called “Essence of Pandering”. It really doesn’t make a difference what anyone projects 5 or 10 years out. It just sets up conversation for the next big Las Vegas convention where an inquisitive audience can be sold their dreams.
Well, I will be presenting technical walls of resistance that the market must overcome in order for the market to continue climbing and making the bullish pundits, columnists, and money managers who appear on CNBC, wealthier.
By the way, I am a bear by nature, but I don’t necessarily sell short walls of resistance, unless the market respects the walls, and then begins forming distribution points along with other technical signs of weakness.
Here is the new point of resistance that the Dow Jones must overcome by the end of May. Below is the Monthly chart of the Dow Jones, displaying the NTM Projection Channel Line resistance at approximately 13,370. The market can go higher anytime before the end of May, but closing at approximately 13,370 or lower on the last trading day of May, would be the first sign of respect for the overhead resistance.
Failing that, I will continue to create walls of overhead resistance that the bullish traders must overcome to keep partying. You are welcome to join the bulls if you like. I am very happy and content to be on the sidelines waiting for the kill. Without bear markets, we would never be able to clean out the excesses, the irrational exuberance, any white collar criminals, and the imbalances and the inequalities of the wealth classes.
There is goodness in reverting back to the mean, just as there is in leaving it. Bearishness is about moral prosperity and keeping America strong. Bears know how to wave flags too.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2007
www.trainingfortraders.com
Three Little Bears Watching Goldilocks Rampage
April 21st, 2007 by Leonard
Television pundits, while having nothing particularly good to say about the American economy are advising TV followers to buy right now and follow the Goldilocks gravy train to Europe, Asia and other far corners of the world. As you can see from the picture, the three little bears are at a loss for words. They are innocuous and timid, just sitting on a hill and watching the game at a distance. No one here wants to play.
So since the pundits want us to blindly follow the leaders to the upside, then I guess the game is to blindly follow the leaders to the downside, when ever that happens. Who needs cheer leading from Ben Bernanke. Who needs depressing contrarians, just follow the bouncing ball Hmmm… I guess I’m going to have to find an Asian Black Bear or a European Brown Bear.
Photograph by Joel Sartore courtesy National Geographics
Whoa…..Now that’s a bear and a half from Asia
And look at the size of this European Brown Bear.
Now that we know that they exist …it’s just a matter of finding where they are likely to come out to play. So, on that note, I will introduce technical hurdles of overhead resistance, which must be overcome, in order for the stampeding Goldilocks traders to continue moving the herd of giddy bulls onwards and upwards.
You can of course choose to trade up or down. If a technical hurdle to price advancement is surpassed, then the market goes up.
In My Feb 24 Blog I had called for a benchmark high at about 12,750 and got it. I also called for a first level of support in the area of 12,222 and got that as well as the market rallied back up from that area.
In my previous blog, I pointed out a potential distribution point on the weekly chart of the Dow Jones. As noted in the Blog, the market was in the process of testing the February highs before the Shanghai break took place.
The Dow Jones has now surpassed that resistance and closed this last week on a new high at 12961.98. So what’s next, now that the market has surpassed its Feb highs? With regard to the Dow Jones, there is a hurdle being challenged at the top of an NTM Projection Channel Line. Should the market close at or below 12,850 by the end of April, then the resistance hurdle may take on more importance and stop the advance
The pundits have instructed and encouraged us to blindly follow the emerging markets, let’s take a look at the EEM index. This is an emerging markets index daily chart displaying a potential rising wedge formation. This is one of those hurdles that the market must conquer in order to advance to the upside.Rising Wedges are bearish formations, and tend to send the market back down to its originating low point. In this case, the target would be the low of March 6 at about 103.5600. The current pattern shows a break down out of the rising wedge now being tested for confirmation. The bearish pattern is only valid if the upside test fails, and the market closes below 119.7500 as distribution takes hold. Then we would need to see a rather fast break as this kind of pattern usually invites liquidation. The pattern will be voided if the market continues to move up and push thru the highs of April 16. 
My friend and long time CBOT trader Frank Jost Jr (see bio on my website), has as many professional traders have, a propensity to trading the short side of markets. I asked him why. Aside from the fact that the public tends to trade the buy side, and are generally less informed, he told me that he had a psychological aversion to trading the long side of markets because it felt like he was pushing a giant snowball up a hill, that when it reached very large proportions, it simply rolled back down about 3 times as fast as it was pushed up.
Finally I offer an apology for not providing pictures of the bears in South America, Russia, Latin America, Mexico and anywhere else in the world where markets are emerging. Perhaps those countries are not that interested in seeing their bears at the moment since they are basking in excessive speculation. Rest assured, they are there.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2007
www.trainingfortraders.com