Wednesday, March 23, 2011

Change

New commitments will stop me from posting too often in the future. I will not discontinue the blog but I will post rarely, maybe once a week.

I will try to post at important points for the markets and the economy.

Tuesday, March 22, 2011

Ready For Another Dive

The spike in the put/call ratio happened:

... while the market is strongly up, but against resistance:

... and while, despite yesterday's big move up, only 62% of the total NYSE volume was on the upside.

So I expect oscillation today and then a steep 1 day sell-off. The market may start rising afterwards.

Monday, March 21, 2011

Market Outlook

I think the market will rally until we see a big spike in the total put/call ratio, maybe to the 0.8 zone:

Also, we need to see the 5 day ema of the put/call ratio move from the deeply oversold condition:

After that, the market will most probably trade lower. It is my conviction that the correction is not over yet.

Friday, March 18, 2011

The Context

Here is a short summary of the economic and technical context.

Real retail sales have continued to rise slower on average.

I think the series can even reach the lower extreme, although that is not a certainty.

CPI has accelerated its rise and the pace may stall for a few months before slowing down.

This evolution will probably mask a faster rise in core CPI than in the food & energy component which has already made its move.

This might be associated with a rally in the dollar starting in April, but from lower levels.

Meanwhile, the intermediate term correction in the stock market is well underway. The SPX was pushed over the edge by two external shocks.

I marked the intermediate term corrections in this bull market. This correction is already big but it can be bigger and not be an exception.

Still, there are indicators suggesting the market is oversold, so, technically a bottom is not much lower. Here is one of them:


Short summary of the above: the economy has not slowed down enough and the stock market has not corrected enough for aggressive intermediate term long positions but the market is oversold and a multiday rally is in the cards.

Here is a possible road map for the SPX for the following months. We might be at the blue circle:

I'm showing this just as an example of what the market can do. The only factor pointing towards this scenario is my expectation of volatility in the stock market until the end of this summer.

Monday, March 14, 2011

The Fed Effect, Second Try

I lied when I said I would update the real retail sales chart over the weekend! I forgot I needed the CPI numbers. While an estimate of the CPI can be made, there is no rush, so I will wait until Thursday.

The market seems ready to head even higher with the put/call ratio oversold:

I think today's probable gap down is a buy, especially with the Fed meeting tomorrow.

I talked on Wednesday about what I called the Fed effect. These days this effect means a weak dollar and a rising stock market. I was two days early, but the effect is there:

USD futures, 60 minutes chart.

As long as the Fed does not change its language towards inflation, the dollar will weaken further. I think there is a too small probability for this change to happen at this meeting. The inflection point in this trend, and probably in the dollar's downtrend, will be after the ECB meeting in April. April is also close enough to the end of the QE2 program and traders may try to be ahead of the curve and buy the dollar earlier. Meanwhile, the stock market may even make marginal new highs.

P.S.: I will not be at my desk tomorrow and Wednesday, so the earliest I will post again is Thursday.

Friday, March 11, 2011

Blog Break

I will be back during the weekend with an update of the retail sales numbers.

Thursday, March 10, 2011

Break Out?

Everybody has this question in mind after the latest multiday coil in the SPX:

The market prepared for break out yesterday as it was all over the place during the session. The rhythm was indeed strange.

As I said previously, I expect a decisive break out to happen after the FOMC meeting, but at this point, with the market carving a top for the last three weeks, I would not stand in the way of any big gap down.

Wednesday, March 9, 2011

The Fed Effect

As long as the market stays above 1316 ES, I am maintaining my belief that the path of least resistance is up in anticipation of the Fed meeting on Tuesday. The put/call ratio is still favoring a move up:


Traders also seem to have started to anticipate the meeting, as suggested by renewed weakness in the USD Index futures (60 min chart, March contract):


Tuesday, March 8, 2011

50 DMA?

Analogies are working until they don't. It seems the resemblance with the May-June 2009 market action was broken yesterday.

I still expect the market to not fall significantly further until the Fed meeting next week, but a bigger correction is overdue and what we are seeing these days is the volatility before such a correction.

The market may just need to touch the 50 DMA first and then head higher until next week.

Maybe something like this:


Monday, March 7, 2011

May 2009 Reloaded

The market action resembles more and more the May-June 2009 top.

After an initial period of zig-zag (blue line) the market dropped and then moved up for three days in a row (green arrow). I do not know if the next three candles will be the same now but a move up looks very probable.

Indeed, the futures are up as I am writing this and next week there is a FOMC meeting. Also, there is no important economic data released until Friday and the employment report was strong. Moreover, the put/call ratio is not overbought. In short, a recipe for a rally this week.


Meanwhile, the volatility has significantly increased, a behavior that precedes more important tops when it comes after a sustained move up with low volatility.

Saturday, March 5, 2011

The Unemployment Rate Is Improving Fast

This recovery is starting to show some muscle. At least on paper.

The unemployment rate is falling at an yearly pace last seen in 1997!

Of course, there is a base effect, given the fact that it reached 10% in 2009. But, still, the tendency looks promising.

Friday, March 4, 2011

Update

Strong employment report anyway you look at it. There are two interpretations:

> the growth momentum will not fade away and the Fed does not act for some time - bullish for the market over the IT;

> the Fed will start heading towards a more hawkish path quite soon - bearish for the market over the IT.

We might get more clues after the FOMC on March the 15th.

Top Scenario

The put/call ratio is suggesting more upside, since yesterday, after a big move upwards, the ratio decreased on my chart:

Yesterday also showed some weakness, with the upside volume only 88% of the total NYSE volume. This is characteristic of a top formation.

If the market is not ready to top at the recent highs around 1340, I will be looking for something like this:


Thursday, March 3, 2011

Changes For ST Trading

Nice overnight rally! Again, without me. It seems I have a problem with the exits for my Short Term Trading. Recently I anticipated well the short term variations but the market kept kicking me out before the bigger moves. The noise is bigger as the time frames become smaller.

I introduced my ST Trading strategy here, about two months ago. Until I have a longer track of positive performance with this strategy, I will stop posting the trades on the blog. I will still post the Intermediary Term trades, my main focus, for which the short term volatility is not as significant and with which I have achieved decent performance over the years.


Back to the markets, the path I anticipated seems to be very accurate. The market is up significantly as I am writing this and I expect it to reach at least the recent highs.

I expect all this to be a top formation. If conditions look right, I am ready to go short around or above 1340.

P.S.: The rest of the blog stays the same.

Wednesday, March 2, 2011

ST Trading: Covered at 1304

ST Trading: Long at 1308

Weakness In Consumption; Buy the SPX

The pace of change of real personal expenditures on durable goods slows down as expected:

The stock market does not acknowledge this yet, but I expect it to do so in the following months. Still, I think the recent weakness is a short term buy. The prospect of a good employment report may pull the averages higher. The put/call ratio also favors the scenario of a rally:

I think the highs at 1340 will be reached soon.

Tuesday, March 1, 2011

ST Trading; Out at 1305.75

I was looking for a strong close. I still expect the market to rally for the rest of the week. I will try to go long again tomorrow.

Zig Zag

I am looking for this pattern to play out:

ST Trading: Long at 1308.5

Market Outlook

Big divergences in the 5 day EMA of the put/call ratio usually precede important corrections:

I think the next good opportunity to sell will be after a spike in the simple put/call ratio. Something like this:

Meanwhile, today I expect a steep drop, followed in the next days by more upside. The employment report may coincide with an inflection point.