I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Friday, May 28, 2010

Bounce, Happy Memorial Day and Thank You

First, I would like to wish everybody a Happy Memorial Day and to say Thank You to all of our Veterans and Armed Service Members.


Bounce. Looks like a bounce down off the 200 day MA. Oh, then I guess I mean drop.

Today's action was confusing but I am going with a LD with a 78.6% retrace. No good. Blankfiend makes an excellent point regarding the diagonal.

In the larger count I am still sticking with the LD. We did not break higher today and hit the 50% retrace. Trendlines are still converging. Also, the second peak today at 78.6% bounced off the trendline. Bounce? again, I mean drop.


Sorry I wasn't around most of yesterday. Terribly busy. If we reach the 50% retrace, then I am switching to 1-2, 1-2 as my preferred count.

Wednesday, May 26, 2010

A word on Diagonals

I recently had a very unpleasant conversation regarding diagonals: see http://marketthoughts...

The jist of a conversation was that there is no such thing as a 5-3-5-3-5 diagonal.

This is an incorrect statement. Both Frost and Prechter's Elliott Wave Principle and Robert Balan's Elliot Wave Principle Applied to The Foreign Exchange Market identify a 5-3-5-3-5 diagonal triangle.

From Frost and Prechter's Elliott Wave Principle pp. 39

...variation on this pattern occasionally appears in the Wave 1 position of impulses and in the Wave A position of zigzags. The characteristic overlapping of waves 1 and 4 and the convergence of the boundary lines into a wedge shape remain as in the ending diagonal triangle. However, the subdivisions are different, tracing out a 5-3-5-3-5 pattern.

From Robert Balan's Elliot Wave Principle Applied to The Foreign Exchange Market pp. II-2 (regarding diagonals in general)

... Overlaps between the terminals of Waves 1 and 4 are frequent but not obligatory...

From pp. II-3 (regarding leading diagonals)

...has sub-waves composed of five waves instead of the ususal "threes". ...


Like I was observing yesterday in Sloppy Joe:

Here is what I think. And the more I look at it, the more I like Alphahorn's Leading diagonal idea: Monday midday update, updated for the close.

I still like that count a lot. It could be a giant 1-2, 1-2. But there is something about that count that doesn't feel right. Not yet. I think alpha was right on with the call. The LD is an impulsive count that doesn't look very impulsive. So it doesn't put fear into the hearts of the bulls. Plus LD's typically have a large retrace of 62-78%. This will act like a huge sentiment "reset", and will give a lot of fuel of Int 3 of P3 down when Int 2 runs it course in terms of decreasing volatility and providing another nice top to short.

But there is another strong reason why I favor the LD scenario. I was making this observation yesterday too:

Also, I did an extensive study of Wave 1's and 2's within P1: see O Mandelbrot, O Mandelbrot. And Minor 1 of Int 1 of P1 was a leading diagonal. In fact, there is quite a lot of similarity to the pattern. See this chart: M1 of I1 of P1

Here is the chart of mine that I was linking to. If you look at the wave yesterday and today and compare it to the other 4, the resemblance is uncanny. In fact the whole structure is very uncanny. The one in 2007 was a Minor degree wave and I think this one is an Intermediate Wave, but there is a lot to like and to think about with this comparison:

Tuesday, May 25, 2010

Sloppy Joe

Here is what I think. And the more I look at it, the more I like Alphahorn's Leading diagonal idea: Monday midday update, updated for the close.

Also, I did an extensive study of Wave 1's and 2's within P1: see O Mandelbrot, O Mandelbrot. And Minor 1 of Int 1 of P1 was a leading diagonal. In fact, there is quite a lot of similarity to the pattern. See this chart: M1 of I1 of P1

Monday, May 24, 2010

Hoagies and Grinders

Navy beans, navy beans. Meatloaf sandwich.

This is what I think of the current "sloppy" count:

Friday, May 21, 2010

Sliding Down A Slope of Hope

In mid-March, I wrote this post: Putting my last post into perspective: Bears and Idiots - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=355132. What I did in this post was to review why the January pullback was just a correction, what the signs were (and there were lots of signs). And to show some very obvious (and troubling) differences between now and then.

From the last post:

So what happened next? A nice fat very bearish selloff:  Looks Like Hibernation Time Is Over / The Real Deal? (Div....... But was it a crash? Nope. And could we have known at the time that it wasn’t

…. Yep. And I did, but I was being stubborn in my call. …. In short, I was being an idiot.

First indicator: Sentiment. It shifted from extreme bullishness to extreme bearishness *much* too fast. When the next crash begins in earnest (assuming of course we have one, which is *not* a given) it will be in denial. The bulls will be denying the new downtrend just as vehemently as the bears have been denying the uptrend (just as I have done many times). The fact that everything got bearish should have been a huge red flag.

Why? Like I said above: Markets climb a wall of worry and fall down a slope of hope. Changes don’t happen when they are expected, and they certainly don’t happen when the crowd is “on to it". When cab drivers start offering stock advice again (or hell, even engineers for that matter :) ) then we will have a top. Not before.

Second Indicator: The move was not an impulse. I saw this. I tried to rationalize it. I tried to justify it. But it was not one. I was so *sure* that the trend had changed that I ignored clear and valuable technical evidence to the contrary. Until we see 5 clear waves down in a impulse structure, with acceleration down on the 3rd wave, that is absolutely an unambiguously discernible on a 60 minute chart, there will not be a crash. That is the opening salvo. And even if we do see this, it DOES NOT guarantee a crash. But there is *no way* a crash will commence without this pattern.  P3 is an impulse, and the move from January to February was not an impulse. …. And I knew it. Shame on me.

Third Indicator:  This is the one I am really kicking myself over. Subconsciously, I knew the correction was over (which I should have know consciously). I knew it the day before the new uptrend started in earnest. I even got out of shorts. But I did not have the balls to go long. See this post from Feb 12: And the Hits Just Keep on Coming. I then tried to justify some BS expanded flat as a wave 2 and went short much too early.  

Lets talk about indicator #1: Sentiment

As I was saying above, everybody turned bearish in January. The comments that were made, blogs posted, and especially sentiment surveys showed a very sharp change in mentality. Everybody was onto the change, and major peaks don't happen in conditions like those.

Now compare the action of the last few weeks. You see all over the place in the blogosphere, and especially on Caps, statements like: "This is the correction were were looking for, just another dip to buy, look at all the beaten down blue chips, Time to load up!, selling pressure is easing, look at the VIX spike it is so abnormal, etc."

My point is: worry right now is NOTHING like it was in January. Even professional sentiment surveys agree. Bullish sentiment dropped only a few percent last week compared to the peak at the beginning of May. You are still seeing bullish (bordering on arrogant) pitches and comments.

On top of that, the macroeconomic picture now compared to January is far more imminently bearish and the technical damage done the last few weeks is far more destructive than January.

So looking at the technicals for a minute:

As I pointed out last week (No Whammies!) we had break through down and then a failed retest of the 20 day MA, 50 day MA and the support trendline going all the way back to March 2009. On top of that, we closed down yesterday below the 200 day MA in almost a year. Institutional investors watch that last one like a hawk. That is not something the market lightly shrugs off and catapults to new highs.

I think you should prepare yourself for a very serious pullback, not something that just gets mopped up in a couple of days. There is more downside before this trend is complete. My $0.02.


I still like this count and will continue with it until I see strong evidence to the contrary.

Thursday, May 20, 2010

Still Doubt

There are still people doubting the validity of this move down. "looking for a bounce / double bottom / selling pressure easing up, etc.".

.... uhhh, this is for real

Look at the ES. Look at the bottom pane. That is heavy distribution. You want to step in a catch that falling knife, then power to you.

Flaming Moe?

This chart speaks for itself

Wednesday, May 19, 2010

Ugly Ugly

Moe: I've been called ugly, pug-ugly, fugly, pug-fugly ... but never ugly-ugly.

Moe is ugly. Moe starts with "M". Market starts with "M".
Coincidence? .... I think not!!!

Is correction done today? Could be.

If this is the case, and a 38% retrace was all she wrote, then we should expect a massive down day tomorrow. Retraces within extensions are typically 23-38%. Tomorrow might be real ugly. (and not pug-ugly, but ugly ugly).

Man, I *love* being wrong

I was saying that I thought the move yesterday was most likely a B wave. I was skeptical of a set of 1-2's based on the lack of dynamics (and I thought OPEX manipulators would give us a huge run up today). Market instead decided to start shitting a brick (question: if you have diarrhea and you are about to shit a brick, is it just clay?)

Just a question because the market is looking like a pile of loose stool.

.... Hey, I warned you *months* ago of my affinity for poop jokes. But you keep coming back for more!! MWAAAA HAA HAAAAAA!!!!

.... anywhoo .....

I am glad to be wrong in the count because this keeps getting more imminently bearish and my shorts are A-OK with that.

We are now back to where we were 1 week and a half ago, 1 trillion dollars poorer. No trader or fat-finger trade to blame the sell-off on.

This is not "evil short sellers manipulating the market down". This is the bulls getting a hangover from a year and a half of binge buying. This is not selling pressure as much as it is a lack of buying pressure. And when the dip buyers really give up ... watch out below.

Tuesday, May 18, 2010

Not a Boring Title #2

Strange day. Despite the reversal in both price and breadth, this does not look very impulsive. My current guess is that it is a B wave in a 2.

Monday, May 17, 2010

Not a Boring Title #1

... (thanks Col) :)

Sticking with the same count that I had Friday: Is this move "for real"? I say yes

Bigger Fish to Fry, and update to Moving Some Macroeconomic Deck Chairs: The Dollar, Dollar Swaps, Bonds and LIBOR

This is an update to the original post that I wrote in the beginning of April: Moving Some Macroeconomic Deck Chairs: The Dollar, Dollar Swaps, Bonds and LIBOR

I am going to stick with my intro from last time because it sets the stage:

I am bearish on the US Dollar Long Term. This is no secret and I have been an outspoken critic of US monetary policy for a long time. Will we get a continued rally in the Dollar for the short term (next few months)? Yes, I think that is likely. But even a few months is short term in the bigger environment.

Here is an in-depth macro analysis of the Dollar that I wrote months ago: Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog. Aside from the fundamentals, I think the technicals also paint a bleak long term picture for the Dollar:

And we are getting the continued rally in the dollar like I was saying a month and a half ago. I am a long term dollar bear, but I am certainly not short it at the moment.

But you ask:

"What about deflation"
"What about inflation"
"What about hyper-inflation", etc.

If anybody is subscribing to an "either/or" philosophy here with regard to the monetary outcome, they don't know what they are talking about. It will be a combination.

There is NEVER anything in economics and especially macroeconomics that has only one cause and one effect. There are always multiple effects with varying degrees of influence (both in absolute value and transience). There will be deflationary impulses and there will be extreme monetary inflation, the Fed will see to that. Which means that I think the most likely outcome will be a combination of the two: stagflation. Economically correlated assets go down in value (like your home and equities as a general asset class) and things you need to buy/consume (such as real assets / commodities) cost more. Really the worst of all possible outcomes. But before I start veering way off topic, I lay out the case for a simultaneous deflationary and inflationary (stagflation) outcome here: Debt Saturation - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428

In addition, see the link at the top of the page for a dollar / equity correlation chart that disproves the blanket statement that "inflation / a weak dollar helps stocks go up".

Dollar Swaps

I spent a lot of time in my last post discussing Dollar Swaps and the role that they play in the deleveraging crisis of 2008-2009. Here was what I wrote last time:

But we also have a very steep drop in LIBOR during the deleveraging crisis. Why is that? If everybody, most especially financials are scared, because there is a deleveraging and liquidity crisis, why would LIBOR go down?

Because the Fed was pumping the system with Dollar Swaps!!

**If you want the real reason for the "bottom" in March 2009, there it is.**

All arguments for compelling valuations are BS, or "once in a lifetime buying opportunities" are BS. We stopped the freefall NOT because the market said "no mas", but because the Fed stuck an inflatable pool halfway underneath the cliff divers trajectory. It forced liquidity into the system as it was seizing up. If you really want to understand this issue, read Kristjan Velbri's excellent post Dollar Liquidity Swaps & The Financial Crisis.

And in the context of Bigger Fish, the Fed after sucking up all of the open Dollar Swaps from the last crisis just rolled out a fresh batch of brand spanking new Dollar Swaps: http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm

n response to the reemergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the reestablishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.

Basically the idea behind the Fed is to head the next crisis off at the pass. The last crisis was a deleveraging and liquidity crisis. And the Fed wants to make sure that the crisis in Europe does not get amplified by a lack of liquidity in the reserve currency. And I am not faulting the Fed for this move. It makes a lot of sense. In fact, if I were in charge of the Fed I would fire myself... errr, I mean I would probably do the same thing.

But before everybody gets all ga-ga bullish about guaranteed liquidity, lets consider the context. The Fed stuck an inflatable pool halfway underneath the cliff divers trajectory when it forced liquidity into the system as it was seizing up during the last go around. That was a reactive move that prompted to the market to bounce off its oversold conditions. This is a proactive move, that while can be addressed as an act of prudence, speaks more like an act of desperation. The Fed is trying to stave off debt contagion. And since this crisis is sparked by sovereign debt worries and the the US debt sustainability issue resembles Greece more than it does Germany, the Fed and the Treasury have a very real reason to be afraid.

While this development is not immediately bearish, it is certainly in no way bullish.


Here is the LIBOR / Dollar picture from my April 6 post. Read the notes carefully:

And what does the picture look like today? Something very bearish. LIBOR is rising and accelerating. Fear is coming back en vogue. Contagion is the new 9-letter 4-letter word (...?!?!). A lot of people are saying "debt issues are overblown, buy the dip on the Euro". ... I am not so sure about that. Please see this EUR/USD analysis and projection that I put together back in March: Thoughts on the Euro, the Dollar, and a Long Term EUR/USD Count. The current EUR/USD is 1.23 which is about halfway down to my target from that post. So LIBOR, TED, the Dollar, Dollar Swaps, etc. are all saying it is time to be very cautious.

Some say wealth is an illusion...

[for any Arrested Development fans out there]

Give me a dollar, no! the twenty. This is gonna blow your mind. Some say wealth is an illusion, well let's just see. For one moment it's here and the next...

.. Monopoly. You don't have it do you?

George Michael Bluth: I think I might.
Gob: Thats good cause alot of the pieces are missing. Ah, to play monopoly with my family again. I'd give anything to be eight.
George Michael Bluth: I'm thirteen.
Gob: Nah, I wasn't crazy about thirteen. The acne, the self-consciousness, the erections. You okay?
George Michael Bluth: Yeah, I'm good
Gob: Hey! there's the man I came to see.
George Michael Bluth: Uh, Uncle Gob where's the twenty?
Gob: Hey! a magician never reveals his secrets, that's what I started the whole alliance about.
George Michael Bluth: I don't need the secret I just need the...
Gob: What you need to know...
[dramatic pause]
Gob: Is that it's magic.
George Michael Bluth: Wow... It's so much like stealing.

hmmmm..... Monopoly money, stealing, where have I heard that one before... oh yeah:

Sunday, May 16, 2010

A look at an old friend: Risk

There are many ways that we measure "risk" in the market. Most of it is actually not risk, but measures of volatility that people ascribe to risk. But things like the Beta and trends in the VIX are used to describe the risk environment (the volatility environment). I have talked about the VIX many times (such as Impressive VIX and VIX-Sentiment). And I am interested in another topic today.

Equity Risk

Looking at the movement of Small Caps relative to Large Caps can be very informative. Small Caps are much more volatile and during the good times can juice your returns (and during the bad times can crash like, well ... small caps during 2008).

But these moves are based on herd behavior. The herd is always very bullish at market peaks and very bearish at bottoms. So looking at when Small Caps are richly valued relative to Large Caps describes when bullishness becomes uber-bullishness and can be the precursor to a trend change. This is another indirect sentiment measure that I like.

In particular, when I look back over the last few years, the ratio of the Dow Industrials to the Russell 2000 reaches a certain level when trend changes occur. The ratio is at that same level currently. And the market is saying "I AM SUPER BULLISH!!!". Lots of talk about going to new highs is funneling money into more speculative issues, like junk bonds, homebuilders and yes small caps.

Which says to me: The risk environment is extreme.

Good luck out there.

Saturday, May 15, 2010

Natty: It's a Gas!, a Review of ATPG, and a look at SWN

It is irrelevant to look at Natural Gas stocks without understanding the movement of Natural Gas. I am very bullish on Natural Gas for the long term. But I am very un-bullish / borderline bearish on it for the short term.

My first chart is a long term monthly chart of Natty. Natty is volatile and this one removes the noise. The long term technical indicators here are weak. The bottom made a few months ago was *not* made on positive divergence. The bounce up since then has been pretty anemic. It just barely touched the large support zone at 2.00-2.50. The chart stinks quite frankly and I don't like it. This is not a bullish chart. Not yet, it has a lot of potential. But I want to see a bottoming stance and this chart is not displaying it.

However: If we get back down to 2.00-2.50 again, I think the monthly MACD will be sporting positive divergence. That would make me *very* bullish: a commodity that I am bullish on for the long term and a chart that displays a real bottoming stance. That would be a winning combination.

So I think Natty has more to go in terms of a correction. This is why I am bearish on most Natty producers for the short term. In general I am bullish more on raw commodities than I am the producers at current market valuations. I owned *a lot* of oil producers in Dec of 2008 because the valuations were ridiculously low. COP is one of the few oil producers I am still bullish on at the moment (Disclosure: I am long COP). But I think the whole oil and gas industry needs a correction. And when it has one, I will be scooping them up again.

So first up ATPG

Disclosure: I have a small, but profitable, short position in ATPG

I have written about ATPG a few times.

- Analysis Update: ATPG and AMX
- Analysis Update: ATPG and AMX (Feb 5)

Let me be clear, I am not long term bearish on ATPG. In fact I am long term very bullish. I think the management has made some smart long term strategic purchases. But their debt load is high and their stock ran up too far *way too fast* since this last correction.

But there is another aspect: My previous counts had ATPG in a very long term correction. We had a 5 up and a 5 down. But something about the count never sat right with me. So the most recent price action made a definitive higher high and the move up since the bottom looks like a very clear impulse up. This caused me to review the larger count and it makes me think that the lows reached in March 2009 were the result of a *completed* expanded flat (not the A wave of a larger correction). This makes me happy because I do not think ATPG will make lower lows again. But I do think it will correct. The last major correction in 2008 was very deep (~90%). Based on the bounce down off the downtrend line, the fact that Natty needs to correct, and severely overbought and downtrending weekly technicals, I think this correction could be a 78% correction (Fib ratio).

In my last post on ATPG, I identified two support levels, both of which are near a 78% retrace. I think ATPG would be a very compelling buy at either of these levels if it reached them with positive divergence on a weekly chart

Next is SWN

SWN is another Gas producer that I am long term bullish on, but short term bearish on. The move off the bottom for SWN has not been impulsive. In fact it has been very corrective. The possible pattern and count could be a long term flat. If it does pan out and reaches the $16/$18 level again, I will become *very* bullish. (Disclosure: I have no current position in SWN but have been long SWN previously)

Friday, May 14, 2010

Is this move "for real"? I say yes

I think this definitely has the makings for a very severe selloff in the coming weeks. Per my posts the last couple of weeks, I have been counting this as an impulse down with more more down to go. I will update my counting in a moment, but first here is a chart of the ES

More down volume today than there has been during the up days of the last 3 days. And the down candles the last 3 days are also the ones with the largest volume. But pay close attention to the volume based accumulation / distribution (bottom line). It has already made lower lows! Smart money seems to be selling this pig (IMO).

Addition 3:20 - Current count

Addition 3:25 - Larger Degree count

This is my BOOMSTICK!!

So I am looking at Smith & Wesson Holding (SWHC). I have not done a single drop of fundamental analysis on this company and I had not looked at their chart in years (back when it was crashing). But I am looking at it now, and it looks good. Real good. "Good. Bad. I'm the guy with the gun." And in this case, it looks like guns are good.

This chart has definitely piqued my interest.

Shop smart. Shop S(WHC)-Mart. You got that!

Thursday, May 13, 2010


This is the count variation that I still like as my preferred count.

No Whammies!

We have a triple whammy on the daily chart: 20 day MA, 50 day MA, and bonking its head on the broken trendline from the bottom.

..... go bulls.

Whatever the count actually is, it doesn't look healthy

Break and no recapture yet. Momentum keeps dropping. And the volume? fuhgeddaboudit!!

Wednesday, May 12, 2010

Fractal 2's, I really like this

I am showing an ending diagonal count in my last post as an alternate count. That is now my preferred. And the more I look at how similar this was to the two previous 2's of smaller degrees, the more I *really* like this count

I was counting the original 2 with an ending diagonal weeks ago: Boring Title #7

I still like this spot here for a turn

Building off the counts from the last couple of days: Updated Count and Current Count. I still like this spot for a turn. I think the move can be counted as done in a number of ways.

ES also looks very unimpressed. The Acc/Dis at the bottom is *pathetic*.

Tuesday, May 11, 2010

Update on Short Term Gold Count

Refer to my last large update on Gold here: binve's Gold Foil Hat Zone: More Thoughts on Gold's Massive Bull Market, and in particular, here is my update to this chart.

From my last chart I was targeting 1230 as an inverse H&S target which we basically reached and then moving up to ~1300-1350 to the upper channel line before putting in another correction.

How much will gold correct? Again, I think quite honestly gold is in a massive bull market. This war is about the confidence in sovereign debt and the integrity of fiat currencies. It is about real money vs. fiat money. Nothing in this crisis has made the Dollar any stronger fundamentally. So the Euro vs. the Dollar, while interesting, is a sideshow. Gold is at or near all time highs in nearly every major fiat currency. So the correction may not be that dramatic. Wave 2 pullbacks within extensions (and my position is that gold is in a massive Wave 3 extension right now that started since 2000) are usually only 38%. Not advice. But I also bought gold at much cheaper prices so I can afford to be patient and pick up oversold entries whenever they occur.

May 14, adding Gold/Equity Correlation chart

Updated Count

From my count yesterday: Current Count, I was projecting one more move up to 1170 on negative divergence. We just got that. I like this spot for a turn. We will see what happens.

Lets look at some more Accumulation / Distribution (emphasis on the latter)

There was a reason why I said yesterday looked more like a reaction rather than a new impulsive spike up: What type of markets do 4% up days happen in?.

Look at the Volume based Acc/Dis on the ES (bottom line)..... go bulls.

Monday, May 10, 2010

Current Count

I don't love this count ... but I don't hate it earlier.

I do find the super-spike to be a 3 with a highly truncated 5th to be a compelling explanation. I put some fibs together and I like here for a consolidation target with a stab up to 1170 on negative divergence to the next fib confluence as the end of 2.

What type of markets do 4% up days happen in?

I will give you a hint: it's not bull markets.

Huge up days are most likely reactions within bear markets. We had a shitload of them in P1.

So as a bull, days like today (despite a nice bounce to kick the bears in the crotch for a few hours) are *not* what you want to see. Besides, the bears got wise and started wearing a cup.

Addition - very nice chart