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
Here is the type of chart that I hate to show. One that has a bunch of different options on it. Frankly, looking at charts like this makes me want to puke. I find it far more distracting than either helpful or enlightening. I have stated before that I like to consider all the options behind the scenes and to present my preferred count, the one that I think is most likely and the one that I am trading.
But like I stated a week ago Ding-Dong, I no longer have a preferred count at the moment. The counts are sufficiently ambiguous to be inscrutable. Anybody who says they "know" what is going on here is smoking something (and if so, may I have the prescription?) or they are full of "it".
So, like I said, it pays to take a step back, not get too caught up in the squiggles, look at momentum and divergences and to look at the leading macroeconomic indicators to see what the intermediate term holds in store. The short term is an unreadable mess, but I think the intermediate term is down, as I reiterated on Tuesday Snack Shack.
I am short, and despite what the short term tape throws at us, I think the intermediate term direction is down. This is my story and I'm sticking to it :)
Anyways, here is the aforementioned chart mess. Lots of options. You like any one of these (or the more bullish options)? Pick one and roll the dice!
Still bearish, still short, still tired of the tape.
I still think the market is in the process of topping. Is it a H&S setup still in the works? I don't know, and I don't much care. The daily and weekly indicators are rolling over, we still have valid death crosses (the price can move back above as a reaction, but that signal has been sent and it can't be unsent) and a number bearish macro leading indicators (ECRI for example).
I still believe we are topping.
Move since the beginning of July does not read like an overall impulse. It reads like a 3 wave move. If this count is correct, then the target would be ~62% retrace for nearly all of the 6 charts shown above.
Wow, what a crazy ride from this chart. I have written on Hathor a couple of times over the past several months: Hathor Exploration and A Look at Two Junior Canadian Miners. This has been a hard chart to 'chart' because what I thought was a large triangle back in November, turned into a larger triangle in February and then an *even bigger* triangle in June.
But now I think it is done correcting. The triangle looks complete. It has an overshoot E but it does not go below C. And since then we have had a very decisive turn up. I have been holding this thing since November because I really like the company (mostly its potential) and the long term implications for the chart (again its potential).
Looks like it might start filling its potential now. Just a heads up.
For clarification purposes, some may interpret this post that I am no longer bearish based on my opening paragraph. This is certainly not the case.
When I say I don't have a preferred count, I mean exactly that. I have no idea what the short term wave count is telling me, but the overall trend and pattern is down, so I am short and staying that way. The macro is bad, despite a bunch of bull cheerleading.
So there is what happens in the time frame of 1-2 weeks and then there is what happens in the time frame of 1-2 years. The point of this post is to stay that the EW counts are sufficiently ambiguous that I no longer have a confident basis to have an idea what the next 1-2 weeks are going to do. This is why I state the I am watching momentum and divergences more closely instead of the squiggles.
In the bigger picture I am quite bearish and I am staying that way for the duration. The macro is horrible. If you look at my Caps Blog (which is also listed below on my blog roll), I point to a lot of articles that show deteriorating fundamentals. John Hussman's astute observations on the ECRI a few weeks ago is a prime example. So whatever the squiggles say for the short term, make no mistake that we are still in the middle (no where near the end) of a secular bear market.
What is my preferred count? .... I no longer have one. I suppose, by default, the 1-2, 1-2 is still my preferred count (I am heavily short and still haven't covered), I think the price the last few days really makes very little sense in that context anymore.
We do have a few things going for us (the bears) in this though for the near term: All of the moves up have been on very low volume and the breadth has not been hugely impressive. Throw in a few 2-3% gap up days, which of course begs the question: What type of markets do 4% up days happen in?. You know the answer. On top of that the move up the last 2 days has been on highly negative divergence. Now that doesn't mean anything yet because it is only potential divergence until we start to move down. But the observation is that the move the last two days is taking on a very distinct wedge shape.
What else? Oh yeah, the VIX continues to hold support at 22.50-23.00. If we break that key support then I think we will see a move up on the SPX, but so far that has not happened.
So right now I am still short because of all the very tired technicals in this rally. But right now all of the wave counts look like garbage and I am no longer gravitating toward any particular one. The next 2 weeks should really add some clarity (and if it doesn't then I start liking the theory that we are in a big triangle). But until then I am not getting too hung up on the squiggles and instead am watching momentum and divergences more closely.
I have been really thinking about the VIX and what it is trying to say. Just because the wave structure of equities is an impulse does not mean that the VIX needs to be one too. Look at P1 and both the SPX and VIX. They did not move in lock step making 1-2, 1-2's together.
So if this triangle pattern is right on the VIX, we would have a few more weeks of decreasing volatility (or more correctly put, the volatility will be approximately constant). That would mean roughly that we would expect to see moves up and down of the magnitude that we have seen the last 2 weeks, and not moves of the magnitude of the flash crash, until the triangle finishes up. And then an explosion up in volatility as the price starts to crash.
So while this does not give us insight into the specific wavecount per se, if this triangle pattern is right (a big if), it is suggesting that the really impulsive part of the next wave down is maybe a couple of weeks away.
Just making some observations and sharing a few thoughts.
Well, that was a crappy day, no doubt about it. But here is the deal. We still have the 50 day MA above us + resistance at 1100. We have been making lower highs and lower lows since April and today did not break that trend. If we break back above 1100 on the next wave, then my primary count is seriously threatened. Until then, this is just low volume volatility in a larger downtrend and I intend to keep trading with the larger trend.
See this original post for why I am fundamentally and technically bearish on the US Dollar for the long term: Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog - Sep 17, 09. And per my Dollar/Equity correlation charts, this does not make me "bullish" on equities. What this is illustrating is a loss of confidence in US Sovereign debt, the US currency and the US financial markets at the same time.
My contention is that this can absolutely all happen at the same time. And the question is not one of simply "inflation or deflation".
I have been hammering on the topic because it is the critical issue to understand how all of the advanced economies government's action will not only fail to produce the desired effects, but will more importantly make matters worse. The main issue is Debt Saturation - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428. It is critical to understand that an increasing debt load has decreasing marginal utility and there comes a point due to servicing requirements that all new debt has a negative economic impact. This is why we were NEVER going to be able to borrow and spend our way out of a crisis that was caused by too much debt to begin with.
This sets up an extreme deflationary environment (this debt load is unsustainable) within which the Federal Reserve will monetize unprecedented amounts of debt at unprecedented rates. Which will result in a simultaneous deflationary and inflationary outcome: stagflation. 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.
I do think that most inflationists discount the amount of debt that is collapsing (even though most deflationists use measures like M2 and M3, which have a lot of non-monetary components to prove their point) while at the same time most deflationists discount the amount of monetary inflation the Fed can generate (they argue that the Fed creating base money is like pushing on a string because the banks don't have to lend, even though I am many others have pointed out that the Fed has gone around the banking system and has started monetizing private sector debt directly, which is a trend that is likely to increase not decrease). Most people on either side of the debate is not considering strong evidence that both forces are significant.
So in short, I not only think it is possible that we have falling equities and a falling US Dollar at the same time, I think it is likely.
Current thoughts. I am following my count from yesterday. I think this might be a B wave, which is slowing down the price action and allowing the indicators to roll over. If we see a slow move tomorrow up to 1100-1105 on negative divergence, I will feel much better about this wave being done.
VIX is saying it is time to start looking for a drop.
Larger count. Would love to see some larger negative divergence on the 60 minute charts.
The Aug 104 SPY Put is also looking like the market wants to ponder topping here :)
Current thoughts. Breakout today is not in the context of an Ending Diagonal overthrow (IMO). I think there are a few more days of pain. It is negotiating the 50 day MA right now and will be retesting 1100 (psychological) and 1105 technical next if it makes another run up. We also have the 200 day MA (1110) right above that.
Okay, I am going to put down a few thoughts that I have been noodling around with for awhile.
But first things first: My Primary Count. This is and continues to be my primary count. I put the odds on this count. And even if we are not in a Minor 3 down yet, the risk (and all the surprises) will be to the downside. So this is the count I think is most likely and the one that I play until proven otherwise
Is this count a slam dunk or a sure thing? ... No. No count is, not ever. I always have alternate counts. I only ever show my preferred count, because despite having alternate counts (and I have between 2 and 6 going at any one time) you can only trade one. Yeah, yeah, you can hedge against various options (especially with options), but my strategy is to trade a count that I think is most likely but to be cognizant of other alternatives.
Its like underwear. You (hopefully) own several pairs, but you only wear one at a time (again hopefully).
So what is my leading alternate count?
A Leading Diagonal. ... I expect I am hearing groans about this one. My old preferred count was a leading diagonal. See this post: A Third Look at "Always Another Option". I left it as a preferred count, but I never left the idea. alphahorn and I have had a number of good conversations about this (he was the first one to come up with the idea as a count and to observe the pattern weeks ago). alpha has made the comment that this could be a larger LD at play, once the previous one was broken. That has stuck with me the last couple of weeks. alpha is still observing a diagonal take shape on the TNX.
So I am revisiting this one as a thought experiment.
Potential evidence #1: Volume and daily indicators
The volume (and the breadth as you can see on the first chart above) has not been accelerating down as time goes on. The opposite is true. This is not really what you expect if a 3 of 3 is starting to build (unless, of course, it is faking people out). But it would make sense if we are in the middle of a diagonal. Also the daily indicators are starting to slow down and converge, which is the behavior we typically observe in diagonals. Again, it could be the calm before the storm (these divergences aren't confirmed yet, they are still just potential divergences at this point).
Potential evidence #2: VIX
The VIX is slowing down. It is not consolidating at the top of the range (which is the behavior we would expect for an upside breakout). It looks ... lazy, just sort of moving sideways. The VIX is a weird animal to begin with, and doesn't always move how you would expect, but this is not really jiving with a 3 of 3 windup.
So here is what the count might look like. Read the notes on the chart, they are very useful.
Okay, so here is the big question. What am I doing about this count?
Like I said at the beginning, I show my preferred counts to you guys, because that is what I am trading. However, that said, I would take the same action with this count that I am taking with my preferred count.
We still will make a lower low in either case (down to 1000 at least). Which means for either count, I would stay short anyways.
But here is why I am showing this count:
If the next wave down does not accelerate, if we don't get a large volume and breadth spike down, especially as we near 1000 on the SPX, then I would start to seriously ponder the leading diagonal.
If my preferred count is correct, then the consolidation the last several weeks is burning off oversold to make room for a large spike down to 900 in a very short period of time. So this is why I keep harping on *potential* divergences. They are not divergences yet (on the daily chart).
However, if it starts stalling at 1000, then I suspect these divergences will be confirmed.
So I am staying short in either case, and just keeping an eye on how the next wave down behaves. Just sharing some thoughts.
Here were my observations and chart from the last post:
This week it confirmed the downtrend by breaking through its first small support. Larger support lies just a little bit below that. If the next support is broken ... look out below.
Additionally, I am continuing with the "Leading Indicator" pun for the BDI. Some still maintain that it is a leading indicator (which is debatable), yet it began its turn down nearly 2 months before the current correction in the equity market. So again I ask, if it is a leading indicator, what direction does it seem to be forecasting?
Well, the support zone that I was referring to back in January is now broken, see this updated chart:
This is the perfect illustration of why I am not getting too hung up on the squiggles or the possibility of bounce, no matter how big its "potential" is. If this is a Minor 3 down (and the odds on that are *NOT* trivial), all of these bounce setups will be truncated, reversal candle sequences will be invalidated at the last minute, playing divergence setups will fail because they are not confirmed.
The more I think about it, the more I think this wave won't "crash" (huge gap down impulses that are easy to count), it will show potential setups that crush the bounce-timers, eating up bulls the same way the move ate up the bears from Feb to April. When you zoom out, the wave will be clearly down, but if you stay zoomed in, the squiggles will fool you.
Will it happen this way? I have no idea. But it is worth pondering. And if you are a bear in this market (and I am) is it worth it to time these fakeout bounces? Answering for myself: No. I am short and very comfortable with my position.
And you know what, if we rally 50-70 points from here, I will still be comfortable with my position. Because I know why I have my positions, and have my reasons for thinking what the Primary, Intermediate and Minor trends are. And potential divergences and the promises of capturing part of a bounce are small potatoes compared to what I believe this wave will yield to the downside.
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The binve standard disclaimer:This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions. Any actions taken based on the views expressed in this blog are solely the responsibility of the user. In no event will MTaA or its owner be liable for any decision made or action taken by you based upon the information and/or opinion provided in this blog or in any associated RSS or Twitter Feeds.