THE DE-EVOLUTION OF THE YUPPIE BOOMER CASTE SYSTEM
August 2nd, 2010 by Leonard
THE DE-EVOLUTION OF THE YUPPIE BOOMER CASTE SYSTEM
WHIP IT by DEVO
Crack that whip
Give the past the slip
Step on a crack
Break your Momma’s back
When a problem comes along
You must whip it
Before the cream sits out too long
You must whip it
When something’s goin’ wrong
You must whip it
Now whip it
Into shape
Shape it up
Get straight
Go forward
Move ahead
Try to detect it
It’s not too late
To whip it
Whip it good
When a good time turns around
You must whip it
You will never live it down
Unless you whip it
No one gets their way
Until they whip it
I say, whip it
Whip it good
I say, whip it
Whip it good
It was ……1980………
From Wikipedia……….
The lyrics of Devo’s song Whip It were inspired by Gravity’s Rainbow parodies of limericks and poems;
Jerry Casale specified
“The lyrics were written by me as an imitation of Thomas Pynchon’s parodies in his book Gravity’s Rainbow. He had parodied limericks and poems of kind of all-American, obsessive, cult of personality ideas like Horatio Alger and ‘You’re #1, there’s nobody else like you’ kind of poems that were very funny and very clever. I thought, ‘I’d like to do one like Thomas Pynchon,’ so I wrote down ‘Whip It’ one night”.
Horatio Alger in the late 1880s wrote about rags to riches themes and motivational works depicting the ‘get up, brush yourself off, and start all over again ethic that anyone can do it if they try.
The leverage and speculative borrowing in the 1920s that created excess wealth through systemic fraud turned some people away from Mr. Alger’s writings because the end game to acquiring wealth seems to inevitably result in greed that begets greed. Humans can’t seem to help themselves. We have heard the phrase “greed is good” as recent as a couple of years ago. After a crash, they start the process all over again.
Perhaps Devo got it right. They may have seen it coming, because by the mid 1970s, frustrated Boomers could not duplicate the wealth and life style of their parents. The cost of goods were rising, outpacing their incomes while the manufacturing base was contracting. Discretionary funds were becoming living expenses rather than savings.
ASSET COLLECTING
So bunches of Boomers set out on the path to collect assets at any cost. Relationships were secondary to careers. They were called Young Urban Professionals or Yuppies.
And they were right in time for the technology bubble.
The Yuppies were also the recipients of the largest transfer of generational wealth ever. They often borrowed into the future on that wealth and still they felt like glorified hamsters in a wheel finding it increasingly difficult to duplicate the monetary achievements of their parents, many of whom worked simple blue collar 9 to 5 jobs in the 1940s through the 1960s.
To make my point, here are documents from the 1940s of my father’s income relative to his mortgage payment for a 2 bedroom brick bungalow on the northwest side of Chicago.
His mortgage payment was $26.10 per month.
From 1937 thru 1950 he averaged $195.24 per month in income. His mortgage payment was only 13.3% of his income.
The house was paid off in 10 years.
Later my father built 3 more bedrooms upstairs after breaking out the roof into a dormer. He also built a garage in the back yard while remodeling the basement.
From 1951 thru 1964 his income soared to about $357.14 per month an 83% increase in income as the house was being paid off.
Then there was another income jump in 1965 to $400 per month with increases to $550 per month in following years.
His income rose to match inflation.
The 1965 Chevy Bel Air sold for about $2800.
He was able to pay cash for this car by just saving for a few years and if my mother went to work for a while the savings grew much faster.
My father was a screw machine operator and when she worked my mother would wind copper wire on coils.
THE POWER OF BLUE COLLAR DISCRETIONARY FUNDS
The power of blue collar discretionary funds was staggering as compared to modern times.
By the 1970s there was no possible way to duplicate the discretionary spending power of pre 1970s average blue collar workers.
They were able to create savings accounts, grow a family, send kids to college, take 3 and 4 week paid vacations, buy new cars every 4 or 5 years with cash, and retire with well deserved pension plans, all on the back of just one wage earner. If the lady of the house worked it was to stock pile cash.
THE BORING PARTIES 
By the time Yuppies were in full force there were DINKS (double income no kids couples)
I went to those parties during the hyper-inflation 70’s, with cocktail in one hand, listening to subtle bouts of one ups man ship gracing the floor. There were always 3 topics.
“How much they know”, “Where they’ve been”, and “How much they’ve got”. Oh yawn….Beyond that there wasn’t much else to discuss.
With regard to assets, flipping real estate and gentrification of old inner city neighborhoods and warehouses was hot as manufacturing was dying away.
Real estate and metals dominated lots of conversation as hyper-inflation was pushing a hard asset bubble where you borrowed money today, to buy an asset like gold or a house and sold it to someone else 2 months later to someone who had to borrow money at even higher interest rates hoping to cover the cost of the loan and profit as the bubble kept expanding.
THE “BUBBLE RUSH” FEELING
This was the first time that Yuppies experienced a “bubble rush” of quick money exploding the size of their bank accounts. They became addicted “Upward Mobiles” and fought with Paul Volcker head chair to the Federal Reserve for 7 years until he was able to set in motion the crash of 1987.
I don’t think he really wanted to see a crash but it wasn’t very smart of the Yuppies to play chicken with him. He was tougher and finally won his battle against inflation. But he did not win the war against Yuppie Greed and asset collection at all costs.
While the 1987 crash closed the door on inflation, the Yuppies were busy creating a whole new system of potential bubblehead wealth called Supply side economics.
UNLEASHING THE POWER OF FRAUD
In the early 1980s De-regulation and lower taxes especially in the area of investment began to favor those who had cash to invest. George Bush senior called it Voodoo economics.
It was during the 1980s that the bifurcation of wealth classes began to show up in earnest as the service industry began replacing manufacturing. From that platform the wealth class began moving at light speed away from the working class. The Yuppie Boomer Caste System was in full swing.
Who could not like lowering taxes, and the freedom to explore the magic of creative accounting without accountability. Who could not enjoy creating many kinds of irrelevant trading instruments to entertain the masses and pick away at the wealth of the country?
Each of the following decades starting from 1980 contained speculative and fraudulent bubbles in real estate, banking, junk bonds, Stock IPOs, real estate again and derivatives.
The working class was not included and needed not to apply until year 2000.
PARLAYING MONEY
If you are going to grow your money you have to have fertile soil. For Yuppies this meant when one bubble ends you will need another in which to transfer your funds. They figured out how to take what funds they gained and retained from the dot.com frauds of the 1990s and push them into real estate when interest rates were dropped to near zero for the 2000 recession.
LET”S INVITE THE MIDDLE AND LOWER CLASS INTO THE GAME
This time, unlike the late hyper inflated real estate of the 1970s, the giant ball of equity used the working class as cannon fodder for sub prime real estate deals that could be bundled and sold, and resold, and resold, using leverage and borrowed money. The goal was to create an American commission machine. It strewed over into private equity too.
While the working class thought that their turn had finally come on the Wheel of Fortune they actually became the crop farm and source for CDOs and all the other derivative offshoots for a truly gigantic Ponzi scheme of commission-ectomies. Since everyone was spending money they didn’t have, the stock market went up as well on earnings that should have never existed.
The one thing the first decade of the 21st century did produce a lot of was commission. Every one on the food chain got wealthy as long as they weren’t caught holding the hot potato.
THE PROBLEM MAY NOT BE BIG ENOUGH YET
As Americans we solve big problems only when problems become big enough. We are terrible at planning ahead and like to come from behind.
Well we have a big problem right now but it may not be big enough yet to cause a change in attitudes to “I’m ok and you’re ok”. I wouldn’t expect much movement from corporations and banks until they have a handle on projecting what the playing field will look like a few years out. It only makes sense to want to know more about the policies on
Health care
Financial regulations
Taxes
Environment
Military expenditures
Education
Real Estate
Bank debt
and Immigration just to name a few.
Most of these categories are at least finally being addressed with initial bills passed in Congress that are likely to mutate over time.
EARNINGS SEASON AND LAWN CHAIR SPECULATORS
Earnings season is coming to an end. The lawn chair buyers in early July have had a good run so far. Lawn chair buyers are those who just have to buy every earnings season two weeks before it begins and then sit in their lawn chairs crossing their fingers and toes that the market won’t come back on them. The market has tanked after every earnings season since and including the 3rd quarter of 2009. Maybe they’ll get lucky this time.
THE HEAD & SHOULDERS TOP…..NOT
By the way there is no Head and Shoulders top pattern on the S&P. This formation was tossed around from one blog to the other and some of the blogs were actually showing other embarrassing Heads and Shoulders formations that just turned back technical analysis to the Stone Age.
In one way I am glad that they are confused because when the sell point shows up they will have written off the pattern and technical analysis all together. This is what causes fundamentalists to scoff at technical analysis as a valid means of projecting anything.
First of all Shoulders need to be somewhat equidistant in time of creation. Stubby right shoulders in a top are a sign of a climactic event, and a blow off end to bearishness because too many bears are pressing the market as the traders flitter and twitter around the blogosphere. Just see the Head and shoulders top in July of 2009 that didn’t work for the same reason. A forced liquidation is a climactic event.
Secondly the volume on the right shoulder needs to be moderately low. It was not moderately low prior to when the market broke thru the supposed neckline at 1040ish.
Lastly all classical bar charting patterns are intrinsically linked to bullish and bearish sentiment. This is where the junior or inexperienced analysts get fouled up. They project what they want to see or what they are selling to their constituents but they hardly ever link the pattern to sentiment.
The market was not particularly bullish in June. It was the exact opposite with all of the bloggers selling each other on the idea that the pattern was bearish.
WHERE WE GOING?
Having said this the market can still come down but not because there is a supposed Head and Shoulders top. That’s a mirage.
With regard to the market, it has not changed my mind. It doesn’t matter to me if we see 1160.00 on the E-mini S&P. I believe we will eventually see the low 900s. I need to see the market hook a bid on the actual economy gathering steam before my mind would change. I don’t think we’re there.
I’m not sure if we can ever get back to the discretionary spending power that those folks in the 1940s through the 1960s enjoyed but I think that the separation between the wealth classes is still way out of line
Try Downloading “Whip it” See if you can stop from hopping around the room and slamming into something. Devo performed for President Obama in Ohio when he was campaigning for the presidency.
UPCOMING TRAINING
A new 8 week Training for Traders Summer class will begin within the next 2 weeks.
For information regarding this class please inquire at info@trainingfortraders.com
or leave a voicemail at 760 841 1522
Calls will be returned promptly
Leonard Novy
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. Copyright1995-2010
www.trainingfortraders.com
Let’s Play Hide and Go Keep……The Great Big Shrinking Ball of Global Equity Looking For Safe Houses
May 23rd, 2010 by Leonard
Let’s Play Hide and Go Keep…..The Great Big Shrinking Ball of Global Equity Looking for Safe Houses.
The EU Takes on Speculators in a Smack Down
Chancellor Angela Merkel of Germany (a pro-deregulationist) openly declared war on short selling speculators who have been nicknamed “the Wolfpack”.
This theme has been picked up by various other prominent officials within the European Union as disingenuous flag waving, in defense of the Euro currency, ripples through the upper echelon of wealth, while not impressing the working classes.
Turning night into day one wonders who the real wolves are. Selling short the markets is no more unpatriotic than the systemic fraud that bubbled the markets up in the first place. It really hasn’t much to do with patriotism at all. It’s more personal than that. It’s a class war and the corrupted institutions and individuals of the world whether public or private are trying to salvage as much of the fraudulent monies garnered from the bubbles as possible.
Unfortunately ethical institutions and individuals suffer as well.
The Shifting of Funds…. Nasdaq and the 30 Year Bonds
So we see this constant shifting of funds. The Nasdaq is frequently used as a safe house when the markets are rallying. Technology is safer than financials. When the markets turn down, the Nasdaq is hit hard by the pump and dumpsters and the money finds a safe house in US Bonds.
But that’s a scary place to keep money too. If there is anything we have a lot of it is a burdensome amount of debt. There is a never ending supply of debt to be issued in the form of Bonds and T-notes. We have been watching the development of a giant Head and Shoulders top. The pattern needs to be completed by late June or early July at the latest. Bonds would need to be nearer to 112-00 rather than at 124-00 where they are now.
The push of equity into buying the bond market now is temporary as a safe house, but it is threatening to invalidate the potentially bearish pattern. We will continue to monitor the pattern for completion. It will be easy to see how it develops. Only a global debt collapse or a magical economic boon over the next 2 months might cause a sharp decline in prices.
What About the Nasdaq as Related to the S&P?
Generally speaking, the Nasdaq as an index has outpaced the S&P throughout the entire rally from March of 2009. While it is true that technology can lead the way in price regarding the overall index, it is also true that the S&P needs to lead the market in terms of value and that has not happened. There is no broad based market rally in place because the financials are still gutted, and burdened with debt, with non performing bank loans, foreclosures, and new financial regulations trimming away the easy money the banks were raking in with fees.
We have seen the destruction in the markets in year 2000-2001 when the Nasdaq rally got too far out of line with the broad based core of the S&P 500 blue chips.
The chart below illustrates a weekly value spread from 2007 through current times. It represents the value between one contract of E-mini S&P vs one contract of E-mini Nasdaq.
Notice that in Oct of 2007, the Nasdaq stock continued rallying to new highs (top pane) while the S&P stock basically quit (middle pane). That was the end of the road for the bulls. In 2008 we saw valiant attempts by the Nasdaq to lead the way back up, but in each case, the S&P began making newer lows. That crashed the market.
You cannot have a major sustainable rally in the broad based market without value leadership in the blue chips. It is the center of the market. The Nasdaq just becomes a pump and dump playground for fast money traders.
Again in 2010 we see a very flat value spread (in the bottom pane), while the players pumped the Nasdaq up leaving the S&P in the dust. That resulted in a flash crash, much of it being in the Nasdaq.
Pandora’s Boxes are Active
In my April 22 Blog THE MARKET AND PANDORA’S BOXES I drew the chart below, continuing to project lower prices in the S&P.
This is the chart from Apr 22, 2010
The market has fallen about 10% into the weekly 50 bar moving average. I am still projecting a 25% decline into the low 900s however that doesn’t have to be in a straight line down move.
Is a Bounce Coming or are Technicians Only Dreaming?
This last Friday, the hourly chart formed what looks like a H&S bottom pattern as an Island. In other words on Thursday May 20 the market gapped down on the opening and over the 2 days traders created this potentially bullish pattern. By itself it is a technical pattern. It can gather legs if we hear some bullish fundamental news before Monday’s opening bell. One piece of news that could kick start a rally would be any currency intervention by the G20 and the ECB to bolster the Euro.
If we get nothing like that, and the pattern fails, then those who have vested in it will liquidate quickly, and the great big shrinking ball of equity will be chased out of the markets to find a new home as more of Pandora’s Boxes continue to roil the markets.
The Monthly 50 Bar Moving Average
The Monthly 50 bar MA has been a stop reverse pivot point for the ES consistently over 35 years. The reversals have not all been serious in terms of reversals but the market does seem to acknowledge the existence of this long term monthly moving average.
On the chart below you will see that reversal and you will see typical Fibonacci retracements points marking levels of support should the market make its way downwards over time. Again a decline is not necessarily a straight down move from where the market is postured right now.
Deflationists Still Rule
Deflation is pervasive. It is pointless to entertain a CPI, or worse, a core CPI as a measure of inflation. That’s jobblewocky talk from the Fed. Prices of just about everything will continue to fall or base at lower levels including commodities, stocks and real estate. Budgets will continue to get trimmed along with job losses.
That downward spiral will come to an end when the positive forces of re-construction, re-regulation, and reversion to the mean meet intrinsic value. Intrinsic value in this case would be the value of anything minus debt, minus leverage and minus the write offs that are still being kept out of sight, but not out of mind.
In the meantime, Hide and go Keep is the only defensive game in town. Under the mattress anyone? Watch out for “the Wolfpacks and Bond Vigilantes”
UPCOMING TRAINING
A new 8 week Training for Traders Summer class will begin in early June.
For information regarding this class please inquire at info@trainingfortraders.com
or leave a voicemail at 760 841 1522
Calls will be returned promptly
Leonard Novy
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. Copyright1995-2010
www.trainingfortraders.com
THE MARKET AND PANDORA’S BOXES
April 22nd, 2010 by Leonard
The Market and Pandora’s Boxes
Space mirrors deflecting the Asteroid and disintegrating its surface from New Scientist.com. Can the Feds deflect a downturn of US Bonds thru smoke and mirrors?
We know from the fable that opening the box (which was really a jar) unleashed many of the evils of the world. Pandora closed the lid with only hope left inside, but eventually opened the lid and let hope into the world.
Of course there are many versions and interpretations of this fable including hope as being one of the greatest evils of the world. Another version of the story is that hope is the last thing you lose.
In modern times opening Pandora’s Box refers to opening up a box of un-ending problems. Better to not touch that. This has been one of the benchmarks of complacency surrounding Congress until recently with the election of President Barack Obama who summarily shakes and moves things around. Most folks want change but as I have said in past blogs “Change is just a word until it comes to your backyard”.
Mover and Shaker
The president continues to stir up the pot and tackle sacred cows of money centers.
Like it or not, someone, at sometime, must dust off the cobwebs of complacency, slothfulness, stagnation, excessive greed, unethical behavior and mix up the salad bowl.
I am not worried. When the dust settles everyone will figure out how to do what they do in a slightly different way. If you have ever been to counseling then you know that change does not come easily. And when an entire nation is going thru counseling………..well that’s a lot of energy and turmoil, displacement and disorientation taking place at one time. It will take the fringe loonies a little longer to adjust because their fear meter is off the charts. But hope springs eternal.
The Greek Fable Hits the Greeks
Leave it to the Greeks to test all of these theories as the EU, and the IMF, tries to scare bond vigilantes into submission with the threat of a bailout for the sovereign nation of Greece.
In other words without actually spending any money, the EU, and IMF, continue to act out a charade hoping that the mere threat of billions of Euros in a bailout, will lower the cost of borrowing for the Greeks at their bond auctions. So far, no one is feeling the intimidation. Borrowing costs have gone up and insurance costs (credit default swaps) have gone up as well.
Event Markets and Loss of Control
The opening of Pandora’s Box in this case is that once Greece asks for the money, it may lead to un-ending chain of defaults with other sovereign nations that lead to an “event”.
Markets don’t like “events” because “events” imply loss of control. The only “events” that Yuppie Boomers like are ones where the loss of control is on the upside. They have no problem enjoying imbalances, graft, corruption, irrational exuberance, liar loans, and freakonomics, as long as the value of a house is priced for insanity, and the stock market is priced for lunacy.
But look how they act when the imbalances are corrected back to a “state of normal”. They take out their guns, they want to shoot people, they want to secede from the union, don’t want to share, closet racism comes out of the closet, and they throw fits and tantrums just like they did when they were six years old screaming at their moms in the shopping mall.
This is not to say that they are bad people, but their behavior invokes images of the “Ugly American” from the 1950s replete with a narcissistic right to entitlement. Tolerance for change goes down to zero as fear driven radical conservatism goes over the top and off the edge.
I view this as a “birth of consciousness” C.G Jung; the psychiatrist/philosopher has said that “There is no birth of consciousness without pain”. And we are seeing a lot of that.
The Short List of Pandora’s Boxes
Here is a short list of Pandora’s Boxes, anyone of which could lead to an “event” with un-ending repercussions, unpredictable outcomes and potential loss of control, creating a temporary state of “oh s**t what’s next?”. This list is in no special order.
- Record real estate foreclosures and personal bankruptcies….This lingering aftershock of the finance, insurance, and real estate crises may still be on the precipice of pushing another wave down in the economy
- Greece on the precipice of default possibly needing 80 billion Euros at a minimum in financial aid. The EU and the IMF are on the spot. No love lost between Greeks and Germans. An Army of French waiters are on standby alert as Jean-Claude Trichet, president of the European Central Bank referees.
- Israel warns Syria to stop shipping Scud missiles to Hezbollah in Lebanon. Is shipping Scuds supposed to be a deterrent to an Israeli-Iran military conflict or preparations for a military conflict?
- China bubbling over asking 50% cash deposits on second home purchases. Yes 50%. What’s next? Floating the Yuan and trade wars? I hope not. I was kind of looking forward to buying a Chinese made automobile in aisle 5 at Wal-Mart, imported by General Motors. It will probably look like a Buick. Of course stock market bulls are conditioned to believe that the wheels can never fall off the Chinese command economy. That belief has been reinforced by the results of our own command economy propping up asset prices through government intervention.
- US Treasury Bond asteroids look like they are heading towards planet Yuppie Boomer. Duck and cover. Interest rates may go up sooner than later on an over supply of domestic and global debt. Bernanke has been sending out S.O.S. messages about fiscal disciplines. Is he covering his butt because he’s cornered?
- Financial reform is hastening as the SEC charges Goldman Sachs with Fraud. Is this the beginning of indictments throughout the industry or only a warning shot? And if indictments of malfeasance and fraud are still coming, will Americans require seeing birth certificates of all the heads of these investment banking firms and too big to fail corporations since they really have been running the country?
Opening any of these Pandora’s Boxes could quickly lead to a radical shift in the mood rings within the financial community. I haven’t even addressed Unemployment and the North Korea, South Korea riff.
Every Dip is an Opportunity Just Before Diving off the Cliff
In the meantime Wall Street traders treat every dip as an opportunity. Over the last 2 months the pricing of equities has been pumped up into the anticipation of a good earnings season. Analysts have been focused on revenues over EPS. Steve Jobs is the market with i-everything. I love that he named everything with “i” before it as it is so fitting for the “me” generation.
None of this elevated asset pricing has changed my opinion which is that the market is lacking a litmus test. Yes I am watching and monitoring as best as anyone can the underlying signs of some random stability. But I am also monitoring lots of cities, counties and states on the verge of bankruptcy.
If the economy is on better footing, then a drop in price into the low 900s on the S&P, the low 1400s on the NASDAQ and the low 8500s on the Dow Jones will not cause a cardiac arrest but instead clean out the remaining dead leaves on the economic tree and reinforce trust in the markets as a better alignment of market and economy comes into balance. One has to be able to factor in the existing debt piled up over 4 decades that has been shelved for now.
Call me old fashion, but until some of the Pandora’s boxes above have been resolved, I am not a believer in the 2010 portion of this stock market rally.
My clock is not permanently set at 5 minutes to doom.
I in fact called the March lows in 2009 and projected very accurately where prices were likely to go on the upside. I also called the top in the market in November of 2007 drawing a picture of how the market would look and trade 7 months into the future. The drawing was very accurate. (See Freight Train Analytics )
It is always possible to be wrong. I don’t have an ego issue with that nor do I aggressively fight the tapes. But the automaton momentum traders have not touched my buttons yet. They know bubbles and they are conditioned to trade them having lots of practice over the last 15 years.
Let’s take a look at the 30 Year US Treasury Bonds
The potential Head and Shoulders top on this charts is almost 2 and 1/2 years old. The neckline of the pattern is at 112 or 113’00 dependent on how you draw necklines. In order for this pattern to be valid the Bond prices must reach the 112’00 to 113’00 level somewhere near the end of June. We can give or take a few weeks. But then prices need to break down thru those levels. I would expect that prices would later turn back up to test the 112’00 to 113’00 area as resistance and then begin falling again in earnest.
If on the other hand we see prices elevated to the120’00 in late June then the pattern could be subject to failure and this Pandora’s box could melt away.
If the pattern succeeds then we could expect to see rising interest rates in the fourth quarter of 2010 and into 2011. Yields on the 30 year bonds could move up to the 7.25% level while prices move down to the 82’00 level. Those are price levels not seen since 1994
My Mom Always Said “Live and Let Live”
So you choose which Pandora’s Box is acting up at the moment or the market will choose for you as we move through a very dynamic time in the history of America and the world. Everyday is a good day when you are able to get up in the morning and smell the coffee, laugh a little, and extend a little kindness to your neighbor.
UPCOMING TRAINING
A new 8 week Training for Traders class will begin within 10 days of this post.
For information regarding this class please inquire at info@trainingfortraders.com
or leave a voicemail at 760 841 1522
Calls will be returned promptly
Leonard Novy
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. Copyright1995-2010
www.trainingfortraders.com
US TREASURY BONDS ON THE WATCHLIST?
February 25th, 2010 by Leonard
Before you get too comfortable in your equities lounge chair take a peek at the Monthly US Bond Chart later in this piece.
On Jan 6th, I projecting that, irrespective of whether the market went further up near term, the E-Mini S&P needs to break into the low 900s. Here was that chart.
The market went a little higher after that call and then took the tumble on problems in Euro-land with looming Greek bond defaults resulting in a falling Eurodollar.
To date, the lowest point of the recent fall has been 1040.75 followed by a rally back up to the 1100 levels. The situation with Greece is still fluent and unsettling.
I have not changed my view. I don’t expect the market to roll over easily, but still see the downside projections into the low 900s for the E-Mini S&P irrespective of whether the market moves higher.
Bullish traders have been enjoying a free pass with the Ben Bernanke proxy hedge fund calling the shots.
The Clock May Be Ticking for Mr. Bernanke
The “Great Experiment” may be running out of time. Bernanke, acknowledged as an authority on the Great Depression is attempting to use the lessons of the 1930s as a treatise on how not to conduct Fed policy.
The paradox is that in the1930s as well as now, the experiment is similar in many ways including the expected political obstructionism from the beneficiaries of the pre crash markets.
The general thought is that stimulus was not big enough in the 1930s and therefore the economic malaise dragged on for much longer than anticipated.
A Perfect World We Do Not Have
In a perfect world we would be able to see whether Bernanke’s theories work. But theories are often created in vacuums, void of the miscalculations that abound when dealing with the complexities of government agencies, politicians, and the unnatural forces of displacement.
Moving through a process like this requires political will and the cooperation of many agencies including congress…..Good luck there
The wealthy are mostly concerned about deflecting the taxes that will likely be coming their way. The corporations want the “free market” to reign again (easy money) ha ha. The general populace is gritting their teeth, stuck in their anger, and the under 25 year olds just wander around from one lousy shopping mall job to another, making $9 to $12 an hour, for 30 hours a week (if their lucky). Many live at home with their parents and neither they or their parents are necessarily crazy about that idea.
Game Delay
Mr. Bernanke could say that his program is being dragged into the ground by the inactions of Congress, and that political self preservation, and dysfunctional obstructionism are playing chicken with the Feds time table.
It is causing a game delay and creating an oversupply of Bonds for sale to cover government debt as economic growth is lacking.
Normally Bonds can go up in value when an economy is sluggish, bringing interest rates down. With interest rates at all time lows they can rise just to normalize the system, but the timing of that is touchy. Bernanke raised the discount rate shutting down the free money at the discount window and forcing the banks to borrow from each other.
The US Bond Chart Pattern to Watch
With Equity markets at a wall of resistance the US Treasury Bond charts are forming a major topping pattern that if completed could pose a problem to the stability of our fragile economy as well as for global banks.
The almost 2 and ½ year old Head and Shoulders top pattern is about 4 months away from completion. Lots can happen in that amount of time. See chart below.
If this pattern is completed, and validated, we will see higher interest rates slamming right into a very large round of Alt-A mortgage loan resets expected to expand over the next few years. That could pressure the housing market again and bring equities down in a continuing deflationary contraction. Call it what you want, but displacement will be a troubling, surprising and elusive factor that will continue to disturb the best laid plans.
So what could cause bond prices to move downwards forcing interest rates up?
An overheated economy?……………….but we are not there yet.
A global debt crisis? ………..Possibly
A global governmental debt crisis, with an oversupply of bond issuance could drive interest rates higher and bond prices lower as bond buyers fold their arms, and keep their hands in their pockets.
Potential Dollar Madness?
This could cause for the dollar to become the safety haven of choice for investors. That could in turn further wreck the equities markets as the dollar carry trades unwind and while interest rates spike higher.
The US Treasury Bond market needs to reach the approximate price of 112-00 around mid to late June in order to complete the pattern. Validating the pattern means moving lower through the 112-00 neckline, coming back up to test the 112-00 area and then falling into distribution patterns down into the 82-00 area.
Yes I know, we are so accustom to a controlled interest rate environment that it’s seems impossible for this to happen. Yet the pattern is in formation and even if it withers and fizzles, it would be remiss to ignore that it at least exists.
The good news is that we will be able to tell if this scenario is unfolding by simply watching the bond prices. Any moves above 124-00 between now and mid to late June will generally invalidate the pattern. In that case you can just credit me with a vivid imagination.
Upcoming Training
A new 8 week Training for Traders class will begin within 10 days of this post.
For information regarding this class please inquire at info@trainingfortraders.com
or leave a voicemail at 760 841 1522
Leonard Novy
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. Copyright1995-2010
www.trainingfortraders.com
DISPLACEMENT……..THE NEW 2010 GAMEBOARD
January 6th, 2010 by Leonard
Imagine millions of independent, yet inter-dependent financial systems all trying to survive the greatest and fastest credit contraction of the last 50 years.
When I say systems, I mean the simple as well as the complex. From the gardener and the nail salon, to the municipalities, and to Wall Street, every change in habit and action creates a reaction.
How Does it Work?
If you do that, then I have to do this. And if I have to do this, then some other entity dependent on me must do that. Everyone shifts their paradigm and regimen.
And so millions of reactionary shifts in the smallest of ways, create massive movements of unpredictable force.
While Mr. Bernanke and Mr. Geithner are fast at work attempting to patch up the easy to see holes in the macro world of finance, the micro world and it’s unseen, un-recordable and unpredictable financial complexities are constantly mutating in size and shape and disorder.
There are no computer programs at the Fed capable of capturing these changes, or determining likely outcomes into the future. It’s all an experiment.
The neoclassical economists will continue to look for the untold story as they sort thru the data, but their data will be missing what was missing in 2004 thru 2007, that being common sense.
When there are write offs of debt, someone or some entity loses money. Those losses cause a reactionary shift. When leveraging is limited after enjoying open season on leveraging, there is a reactionary shift. And when credit is tight there is no cushion to buffer the loss of money, a situation specific to this recession, and unlike all others.
Poor Bears
Bears have been beaten up since July of 2009 when bank stock took off to the upside as a result of the cumulative massive infusions of liquidity from mid 2007 thru 2009, by the Fed and the government.
By proxy, Ben Bernanke and the Fed have become the largest hedge fund bulls of the stock and commodity markets. They have also become the largest hedge fund bears of the US dollar.
The Fed buys Treasury debt, suppressing interest rates, depressing the dollar, while gold rallies on inflation fantasies. The Fed gets to redirect the focus of attention away from deflation and to stoke inflation concerns as the well connected investment houses borrow cheap money, and buy things like equities and commodities.
This keeps an artificial support system underneath the equity markets while the US replaces Japan as the carry trade vendor.
Dr. Bernanke the Psychologist
In keeping equities buoyed, the Fed hopes of course that somehow the consumer will believe that 2008 was just a bad dream, and that boomer bubbles are a better alternative to reality based deflation.
And just to make sure that the bubble is well constructed, over 90 percent of the professional bubble makers in the corporate world have been retained and rewarded handsome bonuses.
This of course is creating a seething angry populace undercurrent of “what about me?”
The year 2010 could become the year of revolt if the wheels fall off of the 401K recovery wagon.
Measuring Success One Dreamer at a Time
The measure of success for the Finance, Insurance, Real Estate economy (F.I.R.E.) had to do with the price of assets rather than the quality of the infra-structure. The bifurcation of wealth between the F.I.R.E. economy and the real economy widened as the infra structure was gutted.
Hello…..without a base just where did these corporate heads think they were going to go? They were so busy creating infra-structures in 3rd world countries to push their own stock prices up, that they forgot where they live.
And now we see that the unions are being once again made to look like ogres. Teachers, fire fighters, policeman and other city and state workers are fighting to keep their benefits. Why not?
I remember watching the CEOs of the Big 3 (GM, Ford, and Chrysler), up before a congressional panel and threatening congress that if any one of the Big 3 were to fail, then all of them would fail and bring down the entire economy. They were nodding their heads and looking at each other like children as to say, isn’t that right? Wow….that’s a corporate union of unprecedented size. And then there appears to be Wall Street unions made up of investment banks, and insurance company unions who hire lobbyists as representatives that have enough power to bring congress men and women to their knees.
What about the Current Market?
The chart below of the E-mini S&P shows a classic rotational “pump and dump” trading pattern as conducted by traders rather than investors.
You will see low volume rallies (the pump) followed by high volume breakouts over previous benchmark highs as shorts are knocked out of their positions. The “pumpers” then “dump” into the short covering buyers and the game begins anew in the following month.
This pattern surfaced in Sept and Oct but something changed in the Nov-Dec period. We saw the classic low volume rally (the pump) but we have not yet seen the high volume short covering rally when the Nov highs were exceeded (the dump into short covering).
Negative Divergences
Volume is diverging against the rally and the S&P is lagging greatly behind the Nasdaq in gains. Yes yes, I know, the Nasdaq leads the way but that is only in price increments. The S&P always leads the Nasdaq in total value going up and going down.
The exception was in the late 1990s when the Nasdaq went ballistic on the dot com IPO internet bubble. But the Nasdaq paid dearly for that imbalance after year 2000 losing 80% of its value.
The market is currently lacking broad based participation. The S&P is not cooperating.
This Friday we will see the unemployment numbers and next week the beginning of corporate earnings for the Q4 of 2009.
We have seen a pattern of weakness in the numbers whenever a government program comes to an end. To date there has been no proof that the market can sustain these lofty PE ratios on it’s own without the help of Uncle Ben.
Should that change then there should be high volume accompanying any up move. Otherwise, traders are still squeezing the last drops of juice out of the lemon.
Validation
I contend that the S&P market needs a break into the low 900s irrespective of where it goes on the upside. This would allow for a healthy test of the 50 bar moving average on the weekly chart. If the market held its ground at those levels or at the March lows then perhaps a base building attempt could emerge.
That’s as bearish as I want to get right now, although I am aware of projections a lot lower from reputable technicians. Only 15% of market technicians are bearish at the moment. Bullish complacency is rampant.
A break in the market would be a healthy process that would make a lot of sense to the millions of people who see this disconnect between where the market is, and where each of their own economic realities are residing.
If the economy is on the precipice of greatness, then there shouldn’t be any problem or worry at all with a healthy break in asset prices that can stand the test of time. A solid base in the market would bring about more confidence that things may actually be getting better.
In the meantime, watch the wonders of displacement, and the many ways in which people you know adjust to the new order of the economy. In doing that, you will be several light years ahead of Mr. Bernanke and crew.
Upcoming Training
A new 8 week Training for Traders class will begin within 10 days of this post.
For information regarding this class please inquire at info@trainingfortraders.com
or leave a voicemail at 760 841 1522
Leonard Novy
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. Copyright1995-2010
www.trainingfortraders.com
BEING AT ONE WITH THE LEMON
November 6th, 2009 by Leonard
Being at One With the Lemon.
I spend a good portion of every day helping traders fine tune their work. They also learn about deep structure of market flow that I discovered more than a decade ago. And in our sessions we talk about kinesthetic flow, and that markets through price action, leave markers of information that can be useful in finding classical predictive paths. One only needs to observe and log that info to discover how unique and repetitive patterns of price movement really are.
For example, the very top of this market in Oct 2007 formed a giant Head and Shoulders top that met all of its minimum downside objectives. And its formation was ignored by the bulls. I’m not saying that they didn’t see it…………they just didn’t believe it. It was a time of great haughtiness, arrogance, and the most dangerous of all trading moods…………….omnipotence. Omnipotence proved to be the final blow as the bulls stayed in a mode of disbelief and quasi bullishness throughout the liquidation crash.
That is how a bearish pattern is supposed to work.
On the other hand, if everybody who sees that bearish pattern believes in it (while it is being created), then aggressive short selling forces the pattern to completion prematurely as bears pile in. That might work for a little while, but only bulls can create a bear market through liquidation of their holdings. If they don’t feel like liquidating, then the selling comes to a halt and the bulls run the bears back into the woods.
Failed Patterns
In June of this year we saw an example of such a failed pattern on the daily E-mini S&P. Traders were too anxious to sell thinking that it was time for the market to take a rest. When the majority of the traders feel that way the pattern gets pushed to completion too early and sellers exhaust themselves.
Later in August on the hourly chart, we saw the same pattern fail twice more. These were smaller H&S Tops constructed on hourly charts as the market was climbing
And in October, yet another Head & Shoulders Top developed on the hourly chart that has done a little better than average. But the market is pushing up again with an impending unemployment report in the morning.
The bears who sold the tops of all these patterns may have done ok. But those who sold the breakdowns of these patterns “into the hole” on expectations of downside follow through did not end up happy. They fell into the trap and got sand bagged by the bulls, who ran them out of the market on short covering.
The bears believe that this market is a lemon and that the bulls are trying to squeeze the last drop of speculative juice out of it.
Bears are separating the activity of the market from the activity of economy. Bulls are fantasizing about the future.
The economy on some levels may be showing what looks like signs of recovery, but how can that be trusted when it’s all part of a vast experiment of life support systems provided by the Fed, the Treasury, and the Administration. If they aren’t stimulating then they’re absorbing critical debt, keeping interest rates down, and depressing the dollar.
I am not saying that I am opposed to their efforts within this vast experiment, but I believe that buyers of the market are simply doing what they are conditioned to do and that is to buy the market until it stops going up. That means that the market may be way ahead of the economy in terms of it being a sustainable economy without life support from the Fed and Treasury.
THE “V” BOTTOM …..I don’t think so………….
There aren’t many markets that create “V” shaped bottoms. When that happens, it is usually in a commodity market like Live Cattle Futures. You know, real supply demand markets. No product around? Market goes up. Too much product around? Market goes down.
If we apply that measure of supply and demand to this market, then the commodity is “debt”. It was debt over almost 3 decades that propelled the market into the stratosphere. But an oversupply of debt crashed the market.
Just because the Fed buys debt doesn’t mean that it goes away. It sits there waiting for the Fed to unwind the clock and let it seep back into the economy.
There is much we don’t know regarding the outcome of these government programs, but all of that information will come in time. While it may be many years before we can assess the success or failure of what the Fed did, we can see that the meltdown in the banking system and the counter party risks associated with the giant banking institutions in 2008 did calm down a bit although it may only become temporary.
Stock markets do not normally “V” bottom. Where’s the Base?
Fundamentals change more slowly in Stock Markets. Normally we expect to see a base building period of sideways movement reflecting a gradual improvement in the economy.
This market is lacking a base and the “economy” needs to provide for that base, not the Fed, or Treasury, or pump and dumpers on Wall Street.
The Fed is committed to exceptionally low levels of the Federal Funds rate for an extended period of time and that is because the economy is only hobbling along.
Personally, I’m fine with any experiment they want to run as long as the markets trade at valuation levels befitting an experiment. Fantasy needs reality for sustainability.
For me it means a lower market, not necessarily a crash, and not necessarily right now, but perhaps a more sober kind of pullback say to the 50 bar moving average of weekly E-Mini S&P in the low 900s.There are uncovered common pattern gaps on the hourly chart at
912.50 created on 07/15/09
810.75 created on 04/02/09
775.50 created on 03/23/09
The 912.50 gap would be a likely target. Another crash is always possible but I think that would come have to come from a number of negative events, both domestically, and globally coming together at the wrong time.
Currently the E-mini S&P market has another shot at one of those possible Head & Shoulders tops on the daily chart.
If the market stops short of 1100 and turns down, we may see the beginning of an intermediate top, driving prices down to the low 900s. Other from that, the bulls will party on till they eventually run the market off the cliff. The market needs a base.
In the meantime Bears will try to be “at one with the lemon”.
Classes for the winter are beginning within a couple of weeks. If you want to be at one with the lemon then request some info at info@trainingfortraders.com. You are just minutes away from a different experience.
Registration for the winter classes can be found on this website by clicking on Registration in the left hand border.
Or you can leave a message at 760 841 1522
Leonard Novy
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. Copyright1995-2009
www.trainingfortraders.com
BEARS RETREAT to the WOODS…….CAN’T SAY I DIDN’T WARN THEM
August 10th, 2009 by Leonard
More than 2 weeks before Meredith Whitney (a former Wall Street analyst gone independent), issued her bullish flip on Goldman Sachs (July 10), I had issued a warning to the bears that they were most likely selling short too early. Its not so much a contest as to who says what first, but an intersting study on the development and failure of a premature Head and Shoulders top that needed a catalyst to negate the pattern.
The fact that I saw what I deemed to be early selling was confirmed, after Meredith Whitneys statement that became the trigger for a rally already primed by early sellers, too anxious to end the rally.
In my June 23rd Blog I said the following:
June 23, 2009
“The 50 week moving average on the weekly chart is a well known technical entity that separates bull markets from bear markets. Since the market is in a long term bear phase, the markets are below the 50 week moving average that has now become a major point of overhead resistance. Furthermore it is pointed downwards on an angle which isn’t really good for bulls.
Secondly, everyone and their uncle knows that 50 bar moving averages are the most commonly used moving averages in the stock market for support and resistance.
Since all of Wall Street knows about this too, we are seeing some profit taking and outright short positions being launched over the last few weeks. These traders may be early in calling a top since they have ganged up at the 50 bar for selling. There is room on the upside before the market runs into stronger points of resistance. But clearly Wall Street is in lock step with the moving averages.”
To make matters worse for the bears, is that they thought they saw an opportunity to create the right shoulder of a Head and Shoulders topping formation. The selling became pronounced enough to “force” an early completion of a right shoulder. This is never a good thing for bears.
You can’t rush the natural forces of psychological market flow. Well maybe you can, but then it lulls you into a trap. It’s the mistake of those who fail to attach a meaningful trading game mentality to the formation of Classical Bar Charting patterns.
The construction of these patterns is in part an imprint of the dialogue between the bulls and the bears. When there are patterns it is a description of the current trading game.
Bears were duped, but as we go higher, the weight of sustaining price increases is on the back of the bulls and requires a strong foundation.
That foundation is called “base building”. It is comprised of up and down moves. The up moves are explorations into unknown territory. The down moves are tests of the foundations already built. Each passing test ads to the strength of that foundation.
Therefore one should not worry about down drafts that act to strengthen foundations. It is when a test fails, like a failure to confirm accumulation, that we see the foundation being threatened.
A series of chart gaps (5 of them) have been left uncovered below the price of 1000. It is likely that the market will return to cover most if not all of them. They are usually created by overnight news that opens the market higher the next day.
A Heads and Shoulders topping pattern becomes bearish in bullish environments, where traders dismiss their existence. Back in late 2007 and early 2008, bullish traders were dismissing the housing market problems as a miniscule part of the economy. And in 2007 and 2008 most bulls missed or dismissed the developing massive multiple Head and Shoulders topping pattern that eventually pointed the way down to meet all of its lower minimum price objectives.
But one could hardly compare the recent bullishness of June 2009 to the omnipotent bullishness of late 2007.
At present we are experimenting with ideas, plans, and actions. In 2007, we were floating on the fumes of avariciousness.
Traders will price in optimism. The market will require tests of that optimism. A Base will eventually be constructed.
CNBC has anointed Mr. Art Cashin, head of floor operations for UBS to offer technical advice. He talks about resistance in the 1017 to 1020 area for the ES. No mystery there. The price of 1017.50 is the 38.2% retracement up from the March 2009 Bottom.
Mr. Cashin may have his own other reasons for warning bulls to respect the 1017 to 1020 price area, but having that price represent the 38.2% up retracement may be good enough.
The question will be, when the market turns, how far down will the market be willing to move? This is when the other set of green Fibonacci numbers begins to kick into play as traders look for resting spots for accumulation.
Finally, Heads and Shoulders topping patterns that fail are warning signs that a real top may be near as bullishness increases.
One thing that should increase as the market moves higher is the eventual volatility that will be produced by any down movement. Most short term traders like volatility even if investors don’t.
Stay alert and on your toes.
Leonard
I am scheduled to hold a live presentation in Denver Colorado on Saturday Sept 12, 2009 at 9:00 am for the Denver Trading Group.
This will be my very first live presentation and perhaps the only one since I normally do not travel to expos and trade shows. It will be a 3 to 4 hour presentation. For information about this live and in person seminar, please go to contact on www.trainingfortraders.com and fill in your contact information. You will be sent the information link for that event. Or email me at info@trainingfortraders.com or call 760-841-1522 and leave a message. I will call you back.
I will also be starting an 8 week class in NTM Basics during the week of Sept. 14.
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. Copyright1995-2009
www.trainingfortraders.com
CHANGE IS JUST A WORD UNTIL IT COMES TO YOUR BACKYARD
June 23rd, 2009 by Leonard
Back in January of this year I began to see the glimmerings of base building and wrote a Jan 26 blog called, “Are Baby Bulls Base Building?” I talked about a couple of technical caveats that needed to hold in order for the traders to begin a bottoming process, otherwise we would see the market head down to test the lows of Nov 21, 2008.
One of those caveats was that the E-Mini S&P needed to hold support at the 50 bar moving average on the hourly chart roughly trading at 835.
The second caveat was that the market was likely to move up into 2 overhead pattern gaps on the hourly chart. One gap was at 856 and the other was higher up at 920. This is a re-print of the chart that was published in Jan.
The E-Mini S&P moved up to cover the 856 gap but never made it to the 920 gap. It collapsed under a wave of political nihilism to trade below support at the 50 bar moving average.
With these 2 caveats failing the market was free to move down to new lows to test the Nov 21, 2008 bottom
THE LEG OF NIHILISM
Sounds like a Vin Diesel movie. But the February 2009 down leg was driven by nihilism.
The downturn in the stock market that began in late 2007, and early 2008, was cascading in free fall by the time the November 2008 elections were held. With the entire banking system and Wall Street collapsing, we were left with a new president elect tied to the future, not yet able to set forth policy, and a lame duck president tied to the past, and also not able to set forth policy. The markets were in purgatory. The electorate clearly unhappy with the “new world order” of the former ruling party booted them out of office.
The markets found a temporary bottom on Nov 21 2008 (at my minimum downside price projections for the complex head & shoulders top I drew one year earlier on Nov 19, 2007). The source of that temporary bottom was a Timothy Geithner appointment as Treasury Secretary that led to a reversal in Citibank stock.
At that time, traders began injecting some hope into the devastation and wreckage of the equities markets.
I THOUGHT THE ELECTIONS WERE OVER
As America moved into the inauguration of the new president in late January, The trend towards the center of the political spectrum that began in the 2006 mid term elections was now firmly cemented.
So while the market was continuing its sell off from the 2008 bear market, the radical wing of the old ruling party decided that this would be a good time to challenge the agenda of the new ruling party. Might as well “toss some grenades” into the first 100 days of the new presidency. The old standby “fear as a control mechanism” was used to accelerate bearishness in an already weakened market.
Everyone hated everything, and no plan was ever going to succeed.
The barometer of success of that attack would be measured by how low the markets could go. Lower would be “proof” that the new ruling party was failing, and being given a vote of non confidence.
The underlying issue is change, ……………and
CHANGE IS JUST A WORD….. UNTIL IT COMES TO “YOUR BACKYARD”
It is quite natural for those who fear change the most, to want to control exactly what does or does not get changed.
The February down leg in the markets lead by the decimation of structural facades, and fear stoked by political nihilism bottomed in early March.
THE COMMUNITY ORGANIZER ROLLS OUT THE MACHINE
Argue as you may about what to stimulate with stimulus, the merits of creating federal debt to cure domestic debt, raising taxes on the ordained, and disciplining collusive corporate boardrooms, each and every major American economic plan created over the decades has been an experiment.
The New Deal was an experiment, The Great Society and the Economic Opportunity Act of 1964 was an experiment, Wage and Price controls in the 70s, Supply Side Economics and the Monetarist system in the early 80s were all experiments.
And none of these economic experiments were met with gracious acceptance. All were criticized, politicized and bashed. It’s that “change word” that upsets most people.
Economies change, ….. The old economic base gets replaced by a new economic base that requires more flexibility, that is flexibility with disciplines.
So ….Programs came rolling out of the community organizer’s machine at a very fast pace, fast enough so that the opposition was always held off balance. There would be no slowing down, stalling, procrastinating or distractions. The new ruling party evidently had a conceptual umbrella in place that was well planned to meet targets, goals, and timelines. A new transparency was welcomed as the consensus of consumer confidence began to rise.
The new ruling party had correctly anticipated this battle for the public and political minds.
CROSS CURRENTS CALM THE WATERS
As the February nihilism continued pressuring the markets down, a cross current of calmness began creeping into the picture. Volatility quieted down which was a clear warning to the bears that the Leg of Nihilism could be coming to an end.
On March 9 we had watched the development of a Head and Shoulders Bottom formation on the hourly charts of the E-Mini S&P. The pattern had run out of time for completion. The only way it could work would be to see a big up move in the first hour of trading the next day.
On March 10, 2009, we watched the hourly charts as the market exploded on news that Citigroup told investors that it earned a profit, and on the news that the uptick rule may be restored soon, and that there were plans for addressing the bad mortgaged backed paper (CDOs) with relaxed marked to market rules.
A Head and Shoulders Island Bottom was Born. (See below)
Several weeks ago, I conducted an on-line seminar describing the Island Bottom trading pattern that was created between March 5 through March 10, on the hourly chart of the E-mini S&P. Here are some of the salient points about which I talked.
THE ISLAND BOTTOM……The Gift That Keeps on Giving.
The Island Bottom is one of the most powerful of all reversal patterns in the world of Classical Bar Charting. A Head and Shoulders Island Bottom is even a notch stronger in magnitude for reversal patterns. And when this kind of pattern showed up at a point of selling exhaustion like that which we saw between March 5 and Mar 10, the result was like a space launch as the market took off to the upside. If you weren’t watching the hourly charts, or if you weren’t here with us, then you may have missed it.
ISLAND BOTTOMS TAKE NO PRISONERS. (Bear Killer)
Why do Island Bottoms create such forceful rallies?
In severely oversold and exhausted markets, the only traders who really care about where the market is going are short sellers. Depressed, and dejected bulls have long given up on any buying since they have been busy liquidating their assets.
Under these conditions, the only traders that have something to lose are short sellers.
When bearish traders find it increasingly difficult to press the market lower, particularly in the wake of bad news, they begin buying back some of their short positions. This puts a halt to downward movement.
Then an initial burst of buying catches most traders by surprise. It is usually driven by news that is less negative than expected. In this case Citigroup said that it was profitable for the first 2 months of this year. In a normal environment this would be no news at all. But an exhausted market looks for any excuse to rally, particularly in the midst of nihilistic sentiment.
Island Bottoms do not stop for a rest. The process is one where the bears are cannibalizing their own positions as fast as they can. The short covering is frenetic. It’s like watching Pac-Man on steroids gobbling up short seller’s equity. The bulls just sit and watch, being too afraid to enter long since they recently liquidated their holdings.
ISLAND BOTTOMS PROJECT TARGETS CALLED “POINTS OF ORIGIN”
Island Bottoms send markets directly back up to the first point of origin from where the most recent significant down leg began. That first point of origin of the E-mini S&P was the high of Feb 9, 2009 at the price of 873. That target was reached when the E-Mini S&P traded to a high of 879.25 on April 29, 2009.
The second point of origin was the high at 942.75 created on Jan 6, 2009. It was reached on June 1, 2009 when the E-Mini S&P traded to a high of 947.25.
Interestingly, the common pattern gap that had been left uncovered in January at the price of 920 on the E-Mini S&P was finally covered 5 months later. It served as a long term target on the upside for the traders who work in this program with me. Markets have long term memories.
THE ISLAND BOTTOM IS NOW A DISTANT MEMORY
The Head and Shoulders Island Bottom on the hourly E-Mini S&P generated a lot of steam and moved in 3 phases.
We saw an initial burst of frantic short covering in March, some entry level trading of funds in April, and bubblehead buying in May and June before the market ran into a wall.
Lets take a break and have a look at a couple of entries from the Giles Deacon Spring/Summer 2009 collection based on Pac-Man themes. This as a tribute to the massive Pac-Man short covering that took place this Spring in the markets.
perhaps a Mid-East influence ?……
THE GREAT DIVIDE
The 50 week moving average on the weekly chart is a well known technical entity that separates bull markets from bear markets. Since the market is in a long term bear phase, the markets are below the 50 week moving average that has now become a major point of overhead resistance. Furthermore it is pointed downwards on an angle which isn’t really good for bulls.
Secondly, everyone and their uncle knows that 50 bar moving averages are the most commonly used moving averages in the stock market for support and resistance.
Since all of Wall Street knows about this too, we are seeing some profit taking and outright short positions being launched over the last few weeks. These traders may be early in calling a top since they have ganged up at the 50 bar for selling. There is room on the upside before the market runs into stronger points of resistance. But clearly Wall Street is in lock step with the moving averages.
Call this activity normal. Call it overdue. After all, the bottom of this market has never been tested. There has never been a thorough retracement move downwards to begin validating a base. When a market retraces downwards it is looking for willing buyers, in this case, buyers who missed the entire first round of buying that began in March.
These second round buyers tend to be more reserved and require some confirmation that the economy is at least stabilizing if not getting better before sticking their toes in the water. So I think we can expect a prolonged trading range base building effort because economic conditions are unlikely to improve overnight.
FIBONACCI TRADERS
The market may bounce around for a while as the Fibonacci traders mark out 38.2%, 50%, and 61.8% retracement numbers as measured from the lowest point in March to the highest point in June. Those numbers are 846, 811, and 777. I would expect to see numbers of Fibonacci traders exploring the long side of the market at those price levels.
This rummaging around could last all summer long and then if the world hasn’t fallen apart there could even be a Santa Claus rally.
2010
But then we get into year 2010. The market will need to prove that it can sustain rallies. Unemployment, credit card defaults, Alt-A mortgage resets and any number of other issues regarding the overall economy may test the patience of the public, who will at that time be experiencing a different economic model than that to which they are accustomed.
Only time will tell if the conceptual umbrella of programs rolled out are able to handle and defuse future crises and be able to re-order all of the broken pieces of the economy into a newer, more efficient model, capable of withstanding global crises.
There are theorists who postulate that it cannot. Theories of doom are backed up by charts mostly pointing to debt in relation to everything else. The numbers always look like very large debt is way out of whack in relation to all other statistics and the math always looks bad.
For those who see it this way we could create a very large rounded bottom on the long term charts. This would mean that the market could hit a new low in 2010 before rounding out a bottom.
For those who believe the bottom is already in, we could see support at those Fibonacci numbers as notated earlier in this writing; we could see a smaller rounded bottom and perhaps an attempt at creating a large Head and Shoulders bottom pattern on the weekly charts.
You can take your pick.
Undoubtedly, this country is having a makeover…That means that some of supply side economics will be kept but a lot of it as an experiment will be scrapped. It was the crowning piece of Yuppie Boomer economic theory that worked ”on paper” but failed when human beings and ethics were put to the test.
A new infra structure is being built. It’s going to take a lot of patience and tenacity to make it work but I hold some optimism there.
The market is seeking intrinsic value. It is seeking a fair price for real earnings, minus leverage, minus write offs, minus debt. That’s going to take a while.
In the meantime do not expect the nihilists to go away. Political opportunists will be stoking the fires of doom soon enough as the market moves through it’s down phases.
I look forward to a time when Americans will realize that American Idol is a Karaoke show, and that there is no such thing as reality TV.
Watch out for Pac-man.
Leonard
I am scheduled to hold a live presentation in Denver Colorado on Saturday Sept 12, 2009 at 9:00 am for the Denver Trading Group. This will be my very first live presentation and perhaps the only one since I normally do not travel to expos and trade shows. It will be a 3 to 4 hour presentation. For information about this live and in person seminar, please go to contact on www.trainingfortraders.com and fill in your contact information. You will be sent the information link for that event. Or email me at info@trainingfortraders.com or call 760-841-1522 and leave a message. I will call you back.
I will also be starting an 8 week summer class in NTM Basics in July.
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. Copyright1995-2009
www.trainingfortraders.com
THE ISLAND BOTTOM…The Gift That Keeps On Giving
May 10th, 2009 by Leonard
THE ISLAND BOTTOM….The gift that keeps on giving….
Since my last blog in late Jan 2009, a lot has happened in the markets. I have gotten requests for an update concerning the current Market Flow, especially from those who know my work.
I have decided to give free presentations this week about my opinion of exactly what has happened in the markets over the last 9 weeks or so. These will be free technical presentations examining the infra structure of the market flow that brought the market down to a low of 665.75 on the E-mini S&P in February and up to the recent highs of 929.50 during March, April and May.
There will also be projections for the future Market Flow.
As always, Novy Principles Market Flow includes trader sentiment and it’s affect on the trading game board.
The first free on-line presentation will be on Tuesday May 12, 2009 at 4:30 EST. You can register at
http://www.hotcomm.com/virmeetCID_ARR.asp?CID=QUUMEE&MID=QA3QQ7
For anyone missing that seminar there will a second and third free on-line presentation on
Thursday May 14, 2009 at 4:30 EST. and
Saturday May 16, at 12:00 noon EST (11:00 am CST)
Please go to www.Gatesofconfirmation.com to register for these free on-line presentations.
A new blog will be published sometime after the presentations
I can also be reached at info@trainingfortraders.com
or 760 841 1522
See you there. Don’t be square. ha ha
Leonard
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. Copyright1995-2009
www.trainingfortraders.com
Are Baby Bulls Base Building?
January 26th, 2009 by Leonard
Are Baby Bulls Base Building?
What is Base Building? It is a period of time when downward momentum in a market slows to a temporary halt and begins to move sideways. This happens when the realization of much of the “known” bad news has been discounted in the market. It is a price area or price range where some traders are willing to take the risk of buying what they believe to be the construction of a developmental platform from which a bull market will emerge into the future.
First, A Little History
On Nov 19 of 2007, I outlined and published the projected downward path of the bear market that unfolded in my Training for Traders Blog. That path not only included the important price points that would be touched many months into the future, but the time at which those price points would most likely be reached.
All of the price objectives were met including the recent Nov 21, 2008 technical bottom that completed the approximate minimum price objective of the complex Head and Shoulders Top. As predicted in my last newsletter, the Nov 21 technical bottom is now being tested. This is quite normal activity.
Surprised to the Upside
The market bounced hard to the upside after hitting its technical bottom on Nov 21, 2008 and continued rallying for 5 days. Markets do this when short traders, not knowing that a major technical target has been achieved, are taken by surprise by an important reversal. Buyers wanting to get out of their short positions try to do the correct thing. They wait for a dip to exit their short positions, but in this kind of situation, dips never come and the force of their panic buying pushes other short traders out of position.
Just before the bounce, some traders had already been skittish about oversold conditions as Citibank and JP Morgan had been beaten down throughout the previous week. There were also several Obama cabinet appointments including that of Timothy Geithner as Treasury Secretary that the traders saw as re assuring
Most traders missed their chance to catch any of the 5 day rally.
Buyers run out of Steam, the Market backs off
As the initial 5 day pushed upwards it ran into overhanging supply, the rally subsided. More bearish news came forth and the mood ring turned the market back down. This too is very normal activity.
As the market comes down it probes for more demand from new buyers who missed the first rally and from shorts that have changed their mind about being short.
Base building is a process where the market bounces around in a trading range. It is trapped between over hanging supply of those who want to liquidate their holdings (fear), and underlying support of those who want to buy what they believe to be discounted prices (greed).
Time to Enlist Sherlock Holmes for Clues
There’s a new game afoot Sherlock. Let’s take a look at some of the detail on the charts of the E mini S&P to see if the baby bulls are base building. To do this we need to move down to the hourly charts for the inner construction
Studying Gap Clues on the Hourly Chart
You are seeing common gaps (pattern gaps), that have been left uncovered (open gaps) higher up on the chart. Gaps are created when news items force the market to open higher or lower than the previous day’s range. These gap areas become natural resistance areas when they are above the current market action and natural support areas when they are below the current market action.
Traders expect that when the market reaches a gap that it will act the same way as when the gap was created. Therefore it is anticipated that if the market reaches the gap above at 856 or 920 that sellers will be waiting to drive the market back down. That doesn’t always happen.
Studying the market action at gaps gives us an indication as to the strength or weakness of resistance and support. There was an open gap at the price of 802 where buyers were waiting when the market had recently come down. The market promptly lifted up from that price level and neutralized some of the bearishness.
Bring out the Microscope Sherlock
Let’s take an even closer look at the game board to see if there are any mood changes developing. This is a close up view of the Hourly chart from about Jan 6 through Jan 26.
Notice that from Jan 6 through Jan 14, the market came down in a distribution pattern commonly called stair step distribution. The market flow is down then level, then down then level, then down etc off, with no real rallies as the bears relentlessly pound the market.
Notice that since Jan 15 the buyers are scooping up contracts even though the market is still coming down. In other words there are at least some significant rallies taking place even though the fundamental news is as bearish as ever. These are buyers who believe that some bearish news is lagging and old and already built into the pricing structure as a discount.
When baby bulls are buying dips it is called accumulation. Thus we see the struggle between baby bulls and mature bears. Every time the baby bulls are able to push the market higher over recent peaks of distribution on a closing basis, they wrestle some control away from the grip of the bears. That process is taking place right now but it is a tenuous and nervous situation.
Day traders either love or hate these kinds of markets. The ones who love it are very flexible and light on their feet. It is a typical area where positions are being established by long term position traders who want to nibble at a bottom (baby bulls).
What do the Bulls Need
The baby bulls need stabilization. For example, any bearish report on housing that is less worse than the previous worse report would be taken as a sign of stabilization.
From a technical standpoint, the blue line on the hourly chart represents the 50 bar moving average. It is a mainstay moving average for the stock market. In order for the bulls to advance prices they need to push the market through that moving average as they have and continue to sustain prices above it. Then at some point the same would need to be done on a daily chart.
This wouldn’t mean that a major bottom is in. It would mean that for the moment, bullish traders may be able to gain control of the market action and bring the market to higher levels where sellers will be waiting in the wings such as in the overhead gaps at 856 and 920.
Further On Out
If the market should manage to work itself up to the 920 level then of course the baby bulls will be looking for more baby bulls to sustain the up move. We will probably see the CNBC pundits getting excited about the upside and proclaiming that the test of the Nov 21, 2008 has been confirmed.
However the market will then be nearer to the high end of the 3 month old trading range. Follow through to the upside would depend on how well the bulls can eat into the overhanging supply of stock that traders want to liquidate, and whether confidence is building in the stimulus program that will be passed.
Failed Accumulation
If the market fails to sustain prices above the 50 bar MA on the hourly chart then there could be more immediate spilling to the downside. To further test the Nov 21 lows.
Ying and Yang
When I look at the fundamentals of the economy 6 months, 1 year and 2 years out I see 3 forces of motion.
One. Nothing will stop the deflation of assets. Those assets will eventually be smoldering ruins.
Two. The Feds and the Treasury have been trying to slow down the speed at which assets and the economies of the world are deflating; their actions are temporary brake pedals.
Three A stimulus package will be launched in an attempt to rebuild the economic infrastructure. Along with that…new rules, new regulations, accountability and transparency. At least that is the hope.
Will there be a Capitulation? It’s Very Possible.
Technically we have not seen a major capitulation to the downside. We have not seen that wash out that says that the bulls are in complete panic. Most of Wall Street has Thain on the brain.
My cautious side says let’s go at this one day at a time and watch the market flow as compared to the news. Nihilistic bubble heads and pundits are still around. They just don’t have as many toys to play with. If history gives us any lessons then we should know that real change often comes with real pain.
Lastly it may not be “all about us” and “our economy”. A capitulatory down leg wash out could come from out of the blue through an international crisis, jolting the fear meter to new levels of crazy. Baby bulls may be base jumping at that point.
Maybe Yoga’s the answer.
Maybe it is Ying and Yang, the perpetual circle of life?
On Wednesday January 28, at 4:30 EST I will be conducting a one hour seminar about various Novy Principles of Market Flow. You can register at this link.
http://www.onlinetradercentral.com/presenter_090128B.asp
The seminar is free and on-line.
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. Copyright1995-2009
www.trainingfortraders.com