Now Is Not The Time.

Now is not the time to throw in the towel on Equity short positions.
If anything, I would add to the short.
The following is a quote from one fellow blogger, Credit Bubble Stocks:
"A trading process that attempts to avoid any drawdowns by violently and immediately covering shorts and selling longs at the first sign of difficulty is unlikely to work. If it was possible to invest without drawdowns, then no one would need any capital to invest; you could leverage infinitely on margin."
We are not momentum chasing lemmings. We know what is coming and we are positioned for it.
Once again, have patience bears!

Patience, Bears.

The force of correction is being held back artificially to lure in more late stage bulls. It is like a overflowing dam which now is now ready to burst and sweep away everything in its path. The market is way overbought and way out of schedule for correction. I expect that prices will correct more than normal to bring it back on the track.

In the morning post (http://bbfinance.blogspot.com/2012/01/exciting-wednesday.html ) I said if for whatever reason the correction does not starts today do not be disheartened if you are short.  I said it will make another attempt to re-test the high and so it did. Although technically SPX closed in green, it did not take out yesterday’s high. And SPX is showing seven consecutive green hourly bars. Also VIX and SPX both closed in green today. From past experience I think the selling will start very soon, may be from tomorrow.

 The charts which I showed in the morning are still in play. Dow is still within the trend line and symmetric triangle and unable to break the long term resistance.

Stochastic RSI is severely overbought.

SPX is also unable to break the long term resistance and ended up with seven green hourly bars, with overbought Stochastic RSI.

The McClellan Oscillator is overbought as well and every technical indicator is screaming bloody murder. If anyone thinks that SPX will go to 1400 from here, s/he must be drinking some cool aid! ( I know my gracious host Tim is a bear, so this line is not for you TimJ )

After I closed my long position on January 4, I was complaining that I am unable to find direction. For almost seven trading days, the indexes were moving within a range. The price action of yesterday has cleared the direction going forward. In the hindsight I am short four days early and eleven SPX points wrong. I should have been short today. Today was the perfect set up for being short. But then hindsight is always 20/20.

One of my indicators is interest rate for bonds. One easy measure of interest rate on bonds is TNX. SPX and TNX move in the same direction. When TNX rises, SPX rises. When TNX falls, SPX falls. That is when things are normal. But in a trap, that correlation is broken, like now.

Either interest rates will have to come up and catch up with the stock market or the stock market will have to come down and meet interest rate. Knowing that Uncle Ben is not going to raise interest rate anytime soon, the anomaly will be resolved only one way i.e. with a major correction of the stock market.

According to my timing model, we will see a bottom by January 20-23rd. And a hundred point plus corrections in five / six trading days would be something worth waiting for. The seasonality factor also agrees with me. January 16 is MLK day and a market holiday. I now quote the following from www.tradingtheodds.com written by Mr. Frank;

“Table I below shows all occurrences, the S&P 500′s performance during Martin Luther King, Jr. Day week ( 1 to 4 sessions ), and the maximum gain and maximum drawdown – on a close to close basis – during the period under review, assumed one went long on close of the session immediately preceding Martin Luther King, Jr. Day in the past (like on close of January 14, 2011).

Probabilities and odds for a higher / lower close one and two sessions later (Tuesday to Wednesday next week) are more or less evenly distributed, but are heavily tilt in favor of the downside at the end of Martin Luther King, Jr. Day week (day #4). The S&P 500 closed at a higher level at the end of the week on only 4, and up 1.0%+ only once, but lower on 9occurrences, and down -1.0%+ on 7 occurrences. The median weekly change since addition to the list of exchange holidays is -1.41%, and the S&P 500 did not manage a single close above the previous’ end-of-week close during Martin Luther King, Jr. Day week on 4 out of those 13 occurrences.

Conclusions:

If the market is really ‘due‘ for a short-term correction, the next week might provide a favorable (seasonal) opportunity for the bears. “

The market is due for a correction and that seasonality fits perfectly with my cycle analysis which is showing a bottom around that time frame. So, to those of us who are short (before time) I would urge patience. We have been here before. Yes, there is a bit of sweating but I can tell you, it will worth it.

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Exciting Wednesday.

The correction in stock market is coming for sure. Please emphasize on the word “correction”. It should start today but for whatever reason if it does not, don’t be disheartened, assuming you are short. In the worst case it may make another attempt to revisit the high of yesterday. But long term resistance is in place which will be very difficult to break in this attempt. I cannot find much upside but stock market is its own master and does not listen to me.

Let us look at the DOW chart. I have drawn a trend line, touching various points.

It closes exactly at 12515. And Dow touched that point and came back. The resistance at 12500 is huge. Dow has formed a symmetric triangle and only place left is down.

Same situation with SPX. The trend line resistance is at 1292 and there the SPX turned back.  It made a kind of double top (high of 10/27) but a close above this level will take SPX to 1305 not much further.

Although we are looking for a correction but the bull is not dead and gone. I will write about that around January 20. Before that we have some unfinished business to complete. Let’s see how it goes today.

Treacherous Tuesday.

As I mentioned in the morning, it was the third push up from the triangle and the pushes are now complete. Before today, the last seven trading days was a churn. The market was going round in circle and was making it difficult to find any direction. With today’s price action the direction of the market is becoming much clear. I will have to wait for tomorrow to decide whether I will close my short position on January 12 or 20. But either way I expect the market to go down from here. But may be one last attempt to retest today’s high will be made tomorrow.

It was just 11 point gain in SPX for the day. And I think the market will soon give back those 11 points and some more. The interesting thing to notice is how the sentiment changes. Before the year end, when I was talking about Santa Rally, there was general skepticism around. Not many believe that SPX will come close to 1300. And yet today, there is talk of SPX crossing 1400!

But I think it will be 1240 before 1400. The picture will be clear at close tomorrow. The pivot point tonight is whether AUD can hold 1.0260. As per CBOE, the equity put call ratio today was 0.65, indicating retailers are ultra bullish and index put call ratio was 1.40, meaning big guns have purchased more puts and are hedging for a downturn. In the mean time various divergences are cropping up all over the place. $NYHGH:$NYLOW vs. SPX shows a huge divergence.

(Hat tip to Alex. Grant)

I am not a TA guy so I have problem finding positives and room for more upside from the current charts. I have difficulty in believing that the Q4 results will be great but that would not stop the Banksters to jam up the market.  I quote the following from Phil Davis;” This is, of course, a gold mine for the Banksters, who KNOW they are going to jack up the Futures so they just wait for a nice dip, buy from the Retailers (using the money we lend them for free through the Fed) and then they jack up the Futures and dump it on the suckers who chase the rally in the morning.  It's nothing more than a 3-Card Monty game where EVERYONE is in on the scam except the mark – and that mark is the retail investor!  “

But it is not our job to question the market. We just want to be the right side of it. We just don’t want to be fooled again and again. We do not want to chase the bus or fall for the trap. If the Gods of the markets want SPX to be at 1400, we have no quarrel with that and we will be happy to accept it. Let others scream and shout how impossible and wrong it is.  

On the other side, Elliot Wave guys are going all over the place. Their Guru is calling today’s move as end of cycle 2 and asking everyone to be super short with a stop loss of 1360 in SPX. (What a joke, another 5 % up). Some other wave guys who collect $100 per month are calling it wave 5.  I do not understand this theory of major wave, minor wave, infant wave even stillborn wave  and ignorant of this wonderful magical science. So I would rather stick with my own system which says not to worry.

My problem is I will be travelling to Asia on business tour from January 13 and will not be here in North America for about a week. And I do not want to keep open positions unattended.  So for me, it is very crucial to find out the direction of the market. I am sure about the correction but will have to get a hang on the magnitude of it. So, for me, tomorrow is very crucial.

Thank you for visiting http://bbfinance.blogspot.com/ and following me in Twitter. (@BBFinanceblog) Hope my trades will be useful to you and they will be profitable like they have been in the past. Please send your comments and suggestions and retweet / share it with your friends and circle.

Trading Journal, January 10, 2012

Purchased;
Call, VXX $35 Feb.2012 @ 1.40

Making New High.

We all have seen the futures rising and making new high for the year. If this extends to the trading session and it looks like it will, then it will clear the future course of action.
If you remember, I was expecting the Santa Rally to top around 1300 level in SPX but it did not and instead stopped around 1280. It might make one last attempt. A look at the SPX chart shows that it is an ascending triangle and there have been only two push up so far.

There will be a third push and subsequent failure. So I am keeping my short position because even at this break out level, it will be out by only 10-15 points. In fact I plan to add VXX today. 

We have been in this position before. So we will sweat it out a bit but once this zone of indecision is taken out, then the downside is much more.

Sleepy Monday.

January seasonality is being played out true to textbook. And the earning season is upon us. So while the top is in, do not expect major downside. There will be correction alright but I do not think it will be very deep. Let us look at SPX chart from various time frames. The 1st one is the daily chart.

The lines were drawn on January 4, when I closed my long position. Nothing has changed from that day.  SPX is in the same channel unable to break the 1282 level or exceed the October high. And Stochastic RSI is overbought for a while now.

Hourly SPX chart is clearly showing a symmetric triangle with a sloping trend line. And it will break soon. The 1st breakout is normally the false breakout. I expect SPX will make another attempt tomorrow to break the sloping trend line and turn down.

Five minute SPX chart clearly shows that it has made numerous attempts to break 1282 but failed every time.  As we are in the down cycle, I do not expect it to break tomorrow either. If anything another failed attempt will be the final push.

Today earning season kicked off with Alcoa. Without accounting hoodwinking, it actually made a loss of $34 mil. Or 3 cents per share.  The loss from continuing operations was $193 million, or 18 cents per share, compared with a profit of $172 million, or 15 cents per share in the same quarter of 2010. And it converted the loss into profit with some ingenious accounting entry. That too after reporting higher revenue. How long it takes the market to find out the scam and sell? Alcoa actually burned cash in Q4.

Something happened in the Tech. sector which I have not been able to figure out yet. Google sold off hard and closed down over 4 %. Apple also sold off although not much. QQQ is down but Compq is positive. Overall the NYSE volume was much lower than even December. There is a huge price volume negative divergence for last many sessions and it would count at some point. Plus there are over $ 140 billion bond sale scheduled this week.Commodity sector was weak despite US $ not doing much.

    

I am short from last Thursday (January 5) close. I mentioned in my Friday post (http://bbfinance.blogspot.com/2012/01/there-is-no-decoupling.html ) that my heart is not into shorting this cycle. I will close all my short position by close of 12th January.  And then I plan to spend the rest of January on the side line. My models are telling me that January is going to be a very rough sea without any clear direction. It is going to be so choppy that it will make even a sailor seasick. On one hand January effect and earning season will try to keep the market elevated. On the other hand FX and TA will try to bring the market down.  POMO by the Fed and bond sales by NY Fed will add to this choppiness.  So after I have closed this short position, I better be market neutral.  However I still expect some correction in the next few days.

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