Leonard Novy

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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
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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

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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

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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 23^rd 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

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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.

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.

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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

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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.

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A Technical Look at the Dow Jones One Year Later

November 12th, 2008 by Leonard

The Complex Head and Shoulders Top
Well…Here we are. Almost one year has past since we saw on this website, a bearish Head and Shoulders Topping Pattern on the Dow Jones unfolding. I drew the pattern on November 19, 2007 projecting out about 7 months into the future as to how it should look.

The market took on that shape that was drawn, and has met all of the downside price projections except one. It has yet to complete the downside price projection to 7371 on the Dow Jones based on the overhead complex Head and Shoulders Top that has formed.

Accelerating Deflation
The path of accelerating deflation is as much a fascinating piece of history as it is an emotional profile of the masses.

The elections were emotional and intense matching the fury of volatility that the market unleashed over the last several months. It’s been taking a breather lately. Commitment levels are low for the bulls and bears. Traders may be resting, but more likely confused as to where the market wants to go next.

No Bottom in Sight Yet

It is too early to call a bottom, but you will hear that the market is forward thinking, and that it will rally many months before an economic recovery takes place. This statement is actually true, but it is only true, just once.

All along the littered path of losses you can see where failed former rallies have been. Was the market being forward thinking at those times? Or were traders still pining for the good old rally days?

The Market Action

The actual acting out of the trading drama this last year has been a process of stripping away pretense and hypocrisy. It’s as if every week some economist, TV pundit, or groups of economists, is suddenly surprised at a negative economic report, or that a bank is in trouble, or that a giant corporation is going down. There is a never ending request for money from the government to plug up debt losses and to save corporations.

Government intervention has been creating temporary trading plateaus that end up being cliffs from where the market falls.

Bears and Bulls

A bear market will continue as long as bulls are willing to buy into dips that have not sufficiently discounted negative fundamentals.

When bears temporarily run out the downside course on negative themes, they hibernate, and allow the bulls to develop a bullish framework. The bullish framework could be “let’s build a base” or “let’s get really excited and choose a singular piece of news to prompt a huge rally”. If the framework has weight, then there will be many more bulls wanting to join in on the process of accumulation.

A process like this can eventually turn into a large movement. As confidence grows, the more timid players may begin joining the movement.

When bulls believe that a strong piece of news supports their beliefs, they become more aggressive. You can see the upward urgency in price movement. But part of that move is also driven by wants and hope.

The game then becomes whether the newly formed framework turned movement, can overwhelm the dominant negative fundamentals. If new negative fundamentals continue to emerge, then the rally is cut off, hope and dreams are dashed, and the vested money is lost as the bulls fall over the cliff. Then the market moves down searching for another level of stability.

As the government pulls out heavier financial weapons to counter negative forces, the ensuing price plateaus become larger areas of clashing fundamentals requiring even greater pieces of negative news to roll the market over the cliff. That’s when we get mega surprise surprises and sometimes a capitulation.

A capitulation is a defining moment of exhaustion where the market has discounted current and future negative fundamentals too much.

I do not believe we have seen that capitulation.

When Markets Fall Short of Their Price Projections

A market can fall short of a price projection if the price projection is technically invalid, or if the bulls are too anxious to have their way.

A market that is ready to turn up to form a bottom should have more traders fearing financial loss, than fearing the loss of getting in on the “next big up move”.

What’s the Current Condition

In my opinion the market has been creating a continuation pattern that will help fulfill the downside projections of the overhead Complex Head and Shoulders Top. That price is 7371. It is a minimum price projection.

There are several kinds of continuation patterns. One of the most common is a triangular pattern sometimes called a compression. The term compression comes from the fact that bears are willing to sell peaks at lower levels and bulls are willing to buy dips at higher levels.

Eventually there is a face off of bears and bulls as the clashing fundamentals develop more commitment from each side. A continuation pattern is like a rest stop but generally continues the price movement in the direction from where prices came. In this case down.

It is difficult to predict exactly when but if the pattern remains to be a triangle then typically we will see movement out of the triangle within a month.

Triangles usually break out between half way and three quarters of the way of their development.

Should this pattern change shape, then I will reassess the merits of any new input on the charts.

Layered in the background are Novy Principles of Market Flow that tracks directional movement.

On Thursday November 13, at 4:30 EST I will be conducting a one hour seminar about those principles. You can register at this link. The seminar is free and on-line. http://www.onlinetradercentral.com/presenter_081113B.asp

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The Bailout Bubble Inflates….The World Credit Bubble Deflates….The World Waits

October 6th, 2008 by Leonard

The Bailout Bubble Inflates….The World Credit Bubble Deflates…The World Waits.

Yes it’s not just the US. It’s everywhere. The European Union is almost not a “union” anymore. Ireland followed by Germany moved to protect their banks without great consultation and agreement with their economic partners.

Here is a pertinent question. How do you bail out a problem when the size of the problem is being covered up? The Troubled Asset Relief Program is called TARP. Here is a picture of a tarp.

Do you see how it covers things? Inside this TARP is the shadow banking system where all of the bad paper and unregulated highly leveraged financial instruments of the US and the world reside. You are not allowed to see what’s in the TARP. The reason for this is that the authorities believe that you and we are too stupid to understand what it is that we would be seeing and would probably freak out if we understood the magnitude of how much dead in the water debt and insolvency is sitting on the dusty shelves within the shadow banking system. Another reason is that systemic fraud needs cover.

The authorities want to continue using the same system of accounting that created the shadow banking system.

In November of 2007 The Fair Accounting Standards Board (FASB) made it clear that these phony financial instruments (my words), would have to be “marked to market”. There was political pressure to prevent that from happening but the FASB voted by a slim margin to pass the measure for at least financial instruments.

Absurdities

It seems almost absurd that any financial instrument would have to be voted on to be “marked to market” since that is the standard upon which all commerce is conducted. Marked to Market simply means, what would a CDO go for on Ebay? There would never be an answer to that if the shadow banking system marks value to myth and fantasy.

Very clever financial wizards also created a category called “Marked to Model” which is a value placed on a financial instrument based on a hypothetical computer model, that makes assumptions about where the economy would be at some point in the future, based on past performance with similar financial instruments that have been Marked to Market .

This of course is laughable. If you have ever seen a risk disclosure agreement that sits prominently in a mutual fund prospectus, or for any stock or commodity account that you have opened, then you would see a risk disclosure statement. There is always a risk disclosure, a paragraph that clearly says that “past performance is not indicative of the future results”. Using Marked to Model is like presenting a hypothetical track record with no risk disclosure or warnings to investors and worse, the models are premised on happy times forever and ever.

So there is Marked to Market, Marked to Model, and the silly putty category comprising the shadow banking system called Marked to Fantasy.

Of course I am being too simplistic. I need to be more respectful of the geniuses that actually developed these financial instruments. You see when Wall Street gets tired of the same old boring grind of buying and selling stocks, the geniuses step in and create financial instruments to ramp up the action.

And through the process of deregulation, financial instruments were created that were so leveraged and convoluted that no one except shadow banking specialists knew what to do with them. They don’t really have a market. They exist because Wall Street in its existential mind state of pretend land simply wanted them to exist, to ramp up the action.

Wall Street sold this junk pile of assets for great commissions, but used them as collateral to buy and sell more bad assets.

No one cared what they represented. These financial instruments were invented to create commissiondectomies but were sold and falsely legitimized as new financing models for raising capital.

In steps the Treasury Czar, Hank Paulson with a TARP.

This is not the first time that Hank Paulson has tried to pull the wool over everyone’s eyes. Remember his ridiculous attempt to save Citigroup with the Master Liquidity Enhancement Conduit? (MLEC) in Oct of 2007. Roughly speaking, this was a scam to create a market for Citigroup’s lousy asset portfolio by creating a holding company owned by Citigroup so that Citigroup could sell it’s assets to itself thereby creating a fictitious market value. There were several big banks that would act as a backstop. It bombed as an idea and banks began doing what they were supposed to do and write down the debt of their insolvent assets.

Now Paulson is back with another hyperventilating crises moment. The House Republicans did not pass the first bill he presented largely because they wanted to rid the bill of marked to market requirements. When that was modified they were happier with fantasy models of what the assets will be worth into the future. Here is another TARP.

So the Democrats got a little of what they wanted and the Republicans got a little of what they wanted and everyone could go back to campaigning in their respective districts to sell themselves.

Then the market tanked. No surprise since this 700 billion dollar bailout is only directed at unlocking the world wide credit markets. And since the FASB was politically pressured several weeks ago to not enforce FASB reg 140 which required banks and other companies to consolidate the assets held in their QSPEs (Qualified Special Purpose Entities) junk paper, we won’t be seeing how much bad paper is on the books of the shadow banking system until November 15, 2009, and that may only be a smidgen of what bad paper is really out there in the world of banking thieves.

Well maybe I am being harsh in calling bankers thieves…..not…..Because one thing that a thief knows, is that you cannot trust another thief, and so the banks are not lending to each other, or to anyone else for that matter. Did you know that Tarp are kind of fishy?

Okay, well the Dow Jones finally hit the minimum price objective of Head and Shoulders top that I drew as a probable projected pattern on November 19, 2007, almost 11 months ago. What a journey. Here is the original drawing.

And now here is what we are facing as possibilities.

After markets hit their minimum price objective there tends to be a bounce and a consolidation. And that is exactly what we got today Oct 6. Many times in real bear markets as we are experiencing, the consolidation takes the form of a continuation pattern. This means that unless the market has experienced a capitulation blow off, that the next pattern to form is most likely to drive the market further down, particularly since all of these government interventions since August of year 2007 have created neat little distribution patterns as air pockets. I still do not see a capitulation, and there are still too many bulls lurking in the corners.

As you can see on the weekly chart, a Complex Head and Shoulder topping pattern has developed that could project the Dow Jones down to about 7371. Simply measure the distance from the very top of the pattern down to Neckline 2 and project that distance down from Neckline 2 to a point called Minimum Price Objective at 7371 Complex H&S Top 2. The market closed today Oct 6 at 9955.

What could cause that to happen?

Well the list is quite long. There are corporate earnings coming up in mid October. There is a bad Xmas retail season being anticipated. There is a third wave of mortgage resets coming due in 2009 and commercial real estate is hitting the brakes. The list is actually longer but there is always a chance for a miracle if the horse is let out of the barn.

But it’s these damn TARPs.

Neckline 2 at DOW 10,287 now becomes overhead resistance. The declining 50 week moving average is still resistance further up.
In the meantime………Enjoy the ride, and trade carefully.

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

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Uncle Sam The Stock Trader

September 8th, 2008 by Leonard

Uncle Sam the Stock Trader
The Government has now sponsored 5 stock market rallies since August 16, 2007, when 2 Bear Sterns hedge funds bellied up.

The first 4 of these government sponsored rallies have fizzled with the market breaking down to new lows. Failed rallies like these should be of no surprise. Rallies that are based solely on short term patches and fixes for the crumbling financial sector cannot be sustained, unless the economy is improving.

The latest government sponsored rally (number 5) began on July 15, 2008, from a low of 10,827 on the Dow Jones when Congress stepped in to indicate that if needed, Uncle Sam would support the failing GSEs Fannie Mae and Freddie Mac.

Uncle Sam the trader is not necessarily ignorant of how markets function. When Congress and the Treasury made the plans to takeover the GSEs months ago, they sent out the early warning notices mid-July, perhaps as a litmus test, to measure the markets potential reaction. The hope would be that the announcement itself would re-inflate stock prices. It also gave adequate time for counterparties to prepare for the actual event.

Uncle Sam Has Gone Long the Market Again.

So after seven weeks of a low volume government sponsored rally, along with the regular palaver “they have plenty of liquidity”, the rescue is apparently on. Uncle Sam the stock trader is at it again.

If it is not clear to you, that Uncle Sam is timing these interventions, to neutralize severe bear market breaks, then take a look at the chart below. The last 2 days Sept 4 and 5 saw the Dow plunging 495 points to a low of 11,037 challenging the July 15 lows before short covering into the close at 11,220. Oh, what a surprise! Not.

I haven’t seen the details of the “save the GSEs program”, but I understand that Fannie Mae and Freddie Mac are going into conservatorship. A conservatorship I guess, is different from a receivership, in that the GSEs are not being nationalized…..Yet.

Government sponsored rallies have been good things if you were interested in finding higher price levels to liquidate your stock portfolios. It’s an ironic twist of fate, (or is it), that by propping up the banks, and brokerage houses (that the government is trying to “save”), that the hope rallies pushed up by short term traders, allows major institutional players to liquidate their long term holdings in an orderly fashion. Classic distribution.

Touchdown

If you follow my blog, then you know that on Nov 19, 2007, I drew a picture 7 months out into the future, depicting the most likely path that the Dow Jones would take. The picture was one of a simple Head and Shoulders top formation. The price target was 11,940.

The market finally hit the predicted price target on June 20, 2008, slightly later than expected, but no complaints. It was a good call on two counts. First of all the pattern that I drew conformed to a classical predictive path called Gates of Confirmation (part of Novy Principles of Market Flow). Coincidentally the market flow outlined a giant one and a half year old Head and Shoulders topping pattern that remains in force, at least for now.

Denial …………One Year Ago

In lowering the discount rate on August 16, 2007, professor Bernanke took the very first baby step towards awakening the investment community (or at least himself) from a pompous state of denial, that the housing market mortgage problems were contained.

It’s hard to figure out why de-coupling theorists ever had a voice in market analysis, other than to promote the buy side of the markets by habit. One of the clear problems with de-coupling theories is that it seems to apply best to what is convenient to making your case. If you can ex out anything that bothers you, then you can by default, extend denial to infinity, or at least until infinity comes rudely knocking on your door. So far, de-coupling theories have been about denial. Bad things only happen to other people.

With recent reporting from the Fed, it appears that they are more in tune with the overall situation regarding the weakness in the economy and the affect of the housing market on the economy. Cheer leading has been noticeably dampened. Over time, the Fed may be able to gain more credibility being market savvy rather than politically correct.

Welcome to Wall Street

Wall Street became the world center for the trafficking of bad debt. If the DEA were to add the selling of bad debt to their list of illegal drugs, then what we saw was pretty close to pushers on Wall Street buying and selling it. Huge bonuses and commissions created an oversupply of debt. The inventory that is sitting on the shelves of banks, investment firms and financial institutions, cannot be easily sold at this time.

Wall Street tapped into the credit/debt addiction of the masses, who were trying to replace sub standard incomes with fantasy driven speculation. Now everyone is angry.

Survival of the fittest has Wall Street banks and investment firms, wanting to hide bad debt. If they can’t hide it, they want to re-name it, to split it up into parts, to re-sell it, to amortize it, to swap it, to dismiss it, to delay its transparency, and in the end it to pass it on to the public as a tax, as the government intervenes.

Bargaining to Depression, the Real Bear Market
Shifting the market psychology from bargaining to depression means that traders would be ready to concede that government sponsorship and interference (bargaining), with bear market forces is not working. This would be the tipping point, where traders and investors begin to assume that bearishness is the dominant mode (depression), and that all rallies should be sold. Four government rallies so far have failed. The fifth rally has been in progress for about 7 weeks. Volume has been uninspiring low which is not bullish.

The market has tested the underside of the neckline (11,940) of the Head and Shoulders Top. The closest the market has come to the neckline as a point of resistance was on Aug 11, 2008, when the market reached a high of 11,867.

There are of course many variants of how tests take place. The reason for this is that a test of a neckline represents a potential shift in the psychology of the market from a stage of bargaining (testing the neckline) to stage of depression, (a real bear market), or to an upward shift, if the topping pattern is not validated. In that case the market could rally but the Head and Shoulders Top becomes a warning sign that a real top is near.

The Typical Path

Here is the path that usually takes place when a market tests a Head and Shoulders top.

After breaking down through the neckline the market will find a benchmark low at an area of straight line support. The market will try to rally back up to the neckline. It doesn’t have to touch the neckline. The market can stay under the neckline, or stay at it, or move above it. If the volume of trading declines as the market moves up it is generally bearish. If the volume rises as the market moves up then it is generally friendly to building a base. The volume has to be very high.

In the testing area, near or at the neckline of the pattern, sellers begin selling to form a distribution point. If buyers do not begin accumulating, to counter that, then sellers can bring the market back down from the neckline, the same distance, that approximates the distance measured from the top of the head, down to the neckline. In this case, a confirmation of the top, would bring the market down to about 9,690.

Where is the Overhead Resistance for the test?

There are 2 major points of overhead resistance. First, there is the area of the neckline at the 11,940 level. Secondly, there is resistance at the 50 week moving average which is slowly moving down to meet the market. It is currently at 12,520, but has been descending about 30 to 50 points a week.

The test and confirmation of a Head and Shoulders topping pattern is more of a process than a defined market action. It is very often a choppy area, because after moving through denial, anger, and bargaining, the market may have completed a normal bull market correction. If so, the bulls would have an opportunity to gather their resources, charge upwards on high volume and make a stand.

The next stage lower however, would be called depression, and that would represent the beginning of the real bear market. The minimum price objective as explained earlier would be 9,690.

That is the classic outline. The market could of course, move through a variety of twists and turns while following that outline.

What About the Bulls?

In order to invalidate the current Head and Shoulders top formation, any price probes above 12,000 needs to be accompanied by very high volume. There should be massive short covering along with multitudes of fresh bulls pouring cash into the market.

So far, volume on this 7 week rally has not been good with regard to that scenario.

As bearish as the fundamentals have been, we have not yet seen typical bear market action. The bulls have never thrown in the towel or capitulated. If they succeed in creating high volume rallies, then we can only say that the great bull market absorbed a very troublesome credit/debt bubble correction and the market will move on to a new dynamic of wealth creation. At this time that has not transpired, nor has it gotten close to transpiring.

Change does not occur overnight. It took Paul Volcker and the Fed of the 1980s about 8 years to rein in the inflationists. Taking the needle of credit/debt addiction out of the arm of today’s investment community will more than likely put the market in rehab for a while.

Longer Term Bearish Considerations

In order to confirm distribution, the Dow Jones needs to close below the July 15, 2008 low at 10,827. That would project the market down to 9,690 as the minimum price objective of the current Head and Shoulders top.

If the market takes a very long time to turn over, say another 2 to 4 months, then we may see the development of yet another right shoulder duplicating a left shoulder created in late Jan 2006. The completion of a new right shoulder, could occur as far out, as the beginning of Jan, 2009, equaling the amount of time it took to create the left shoulder.

Since the market already has a Head and Shoulders Top formation, the completion of an additional right shoulder could come sooner. We would then be seeing the completion of a complex Head and Shoulders Top that if validated, could send the market down to a minimum price objective of 7,390. I would presume that a global recession would be in force.

Near Term

All eyes are on the US consumer near term, and the global slowdown further out. It is possible that a further slowing of our economy could produce the fourth stage (depression), and the further slowing of the global economies could produce a fifth stage (acceptance). At best this is guess work. I really don’t know what if any other fundamentals would guide the market down.

Real bear markets lose 35% to 50% of valuation, not 24% as this one has. Therefore as unbelievable as it seems, the market still needs to prove that it can take on real bearishness and become a real bear market.
The lack of transparency regarding debt in the financials, makes it difficult for traders to trust, and sustain rallies.

Stay focused on our economy, and the economies of the world. The Freddie and Fannie takeover by the Treasury will probably cause a lot of volatility. Avoid trading on election bets. Thirty years of observing election markets has not shown me any reason to place election bets. It is an exciting time in our history, and in the history of the world. Vote. The elections will be over soon enough.
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On Tuesday September 9, 2008 at 1:30 PST (4:30 EST) I will be giving a one hour presentation on various aspects of Novy Principles of Market Flow that tracked the topping process of the Dow Jones over the last 8 months. I will also display its use in scalping and day trading. It is a free seminar and you can register at http://www.onlinetradercentral.com/.

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