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 April 4,
2010 Commentary (monthly edition)-
Another
month, and another slew of amazing market action, in my opinion. Lots and lots
of new highs for the 'bull' market, and lots and lots of hype and hoopla about
how fantastic the economy/market is. And how undervalued the market is. You
know how you can tell an analyst is a 'top analyst', the ones you can expect to
see on financial television regularly, and the ones that make obscene amounts
of money for their 'analysis'? See if they are saying the market is 20%
undervalued at this level (regardless of what the level is...). Somehow I just
don't think I will ever be in the club that says I make multi-millions per year
for providing the invaluable service of saying the market is '20% undervalued'
here, no matter where 'here' is, or what the actual conditions are. But these
people do...
Myself, I think I have a realistic overview of this nightmare mess
that they have created. And how they have not only not done the things that
needed to be done, they kept up the status quo and are still milking/destroying
the system on a daily basis. I saw one survey that showed that well over 70% of
Americans feel the entire economy could collapse. As in complete and utter
collapse. What do you suspect the average percentage is on a survey like that
in more usual times? 5%? Less? Given the overly optimistic nature of people,
especially Americans, one can quickly see we are in a very unusual situation,
and people are sensing the gravity of the situation, even though they are
mostly in the dark about what is going on behind the scenes.
As I have
said, I read Zero Hedge to get the scoop. I have no affiliation with that
website, and there are several other good sources for this type of information.
The point is to pick one and get informed. Get your information somewhere, but
get it, and make some well-thought-out decisions. If you are using the
information the propaganda machine feeds you in the mainstream media, I think
you will more than likely be making some bad decisions. That's just my opinion,
so take it with a grain of salt and decide for yourself after doing your own
due diligence. But do that due diligence!!! These are not normal times, these
are times they may study for centuries to come, I think. Just my two cents in
the way of a warning.
Understand, too, I am talking about life
decision, not trading decisions, although some of this may apply to longer-term
position trading. I fully grasp the difference between trading off the charts,
and what underlying 'fundamentals' may imply for the system at some point. I
have no intention to ever fight the charts, and those charts are saying 'up'.
Perhaps way up for quite awhile. It depends on the level of manipulation that
we have going forward, and what events unfold that may trigger a potential
collapse. The bottom line is that it matters little to short-term trading
whether the market is going up because of manipulation, fraud, a completely and
utterly broken system pumping insane liquidity in, or whatnot, or for 'pure'
reasons. Only the charts matter, and I don't fight that. But for our lives as
citizens, and for our 'portfolios', I think this stuff matters tremendously,
and that's why I harp on getting informed. Enough said.
I don't
really have any items of business today, so we're going to get right to the
chartwork (I can just hear the collective sign of relief as the readership
realizes Jim isn't going to ramble on with a long tirade again this month). I
never know how well (or 'not well') a commentary will go until after it is
done, but I do the charts first, and that can give me an indication about how
well my ideas may translate into a written piece. And today I think things are
going to flow nicely, with some interesting points developing. We'll see. As I
have said in the last few commentaries, I'm trying to have a 'theme' each time.
Today's theme is going to be 'critical market junctures', especially as applied
to intermarket dynamics. Let's see how that unfolds.
We'll start
with those 10-year rates, on a weekly chart.
Source:
QCharts.com
Recall how important I thought the area shown on the
chart at that .886 and dual line convergence was for rates. After that ABCD rates jumped up to the line
and started to come back in. They did this after what looked to me on the daily
chart to be a 'wave 1 and 2' sequence. I suspected the pullback may act like a
'wave 4', and then up and over the key area it goes. Those upper areas are
likely to act as magnets, in my opinion. We can look at this again when we get
to the daily chart next, but rates pulled back a bit more than I at first
thought they might, but still within the realm of what I find acceptable for a
'wave 4'. And right up they went from that point.
Now they are knocking at that line
with somewhat of a 'cup and handle' look to them. I actually see this as a
'dual cup and handle', nested together, with the bigger handle being the
smaller cup and handle in its entirety. Many don't think much of cup and handle
type formations, but if they are in the 'context' of my existing work, I
certainly find them of some use.
I don't have any data on this for
Friday, the trading holiday, but I did see one quote and it was at 3.93%, the
high for the move so far off the ABCD, having popped up on that jobs report.
This looks like a coiled clockspring to me, about to get popped free of its
housing. The main issue I have is that everyone sees this. Everyone, and I mean
every last trader and analyst I have seen, is watching 4% and saying it is the
line in the sand. I just saw an analyst showing the 10-year futures contract (I
follow the ZN), and how it is right on 'support', as he discussed the critical
nature of this area.
So, if this acts like a 'wave 4' in here it may shoot
up, perhaps to the 1.272 area off the ABCD, and that will take out the line
area and 4%, suck a lot of breakout players in, and then it comes back in to
start the whipsawing process. That may finish it as they come up with a new
program to artificially drive down rates, or it may be the start up of an
inevitable move higher. All that would take, I think, is one failed auction.
So, I just want to point out some potential scenarios I am watching, as I
present the concept of a 'critical area'. And if you don't think the stock
market, and your ES, CL, or GC contracts, are correlated to rates, you'd might
want to think that one over some more.
Let's look at the daily chart on this
one.
Source:
QCharts.com
When I look at this chart all I can see is an impending
upside breakout coming. Look at that series of higher lows. But, as I said,
since that low last year in the market I have never seen such a streak of
failed 'classical patterns' since I started following the market. If it is
'obvious' and if you read about it on blogs and forums and hear about it on
television, you can just about be sure it is going to fail. Maybe it just
outright fails, or maybe they game it (which, it seems, is the far more likely
outcome for these obvious patterns nowadays). But I am surely aware of how
'clear' this is to everyone. What I want to know is how this fits into the
intermarket dynamics we have been discussing, as things seem to be lining up at
similar times.
Now, one last thing before we move on. I still see this as having
an Elliott 1-2-3-4-and now into 5 count. As I have said endless times, I am not
a strict Elliottician, I take from Elliott theory that which I find practical
and useful for me, and disregard the rest. Yes, 'wave 4' did trade into 'wave
1' a little bit here, but this is a rate chart, not the actual trading
instrument (it's more like an index chart). And I'm just not so strict that
such a small move into the previous wave has any real meaning to what I am
doing with this layout.
So, if you are a strict Elliott-waver, please don't send
me e-mail explaining why my 'count is wrong'. I'm not doing any real counts
here, I'm just mentioning that as I see it the move off the ABCD is acting
impulsively, unfolding in a 5-wave looking sequence so far, and it begs to bust
out over this key area and trigger some big games and intermarket
dynamics.
Let's move on to copper, the 'metal with a Ph.D. in economics' as
they say, on the daily continuous contract.
Source:
QCharts.com
Recall when we left off I was showing how copper was
bucking up against a critical area, the 'last chance' for it to turn down
before an upside breakout would take place. After 'consolidating' under that
key sliding parallel in red there it finally 'broke out'. I can vividly recall
when this sold off so sharply to that low in February how they all said metals
are done. Copper, gold, silver, all of them are toast. I guess it was betting
on that that created the fuel for the V-spike reversal and new highs for the
move now. Kind of reminds me of all the market top callers and 'wave 2' callers
when the market came back in a bit.
The world is pumping out insane liquidity,
and it is flowing right into stocks and many commodities. Take a look at crude,
it finally took out that previous high, and is now in that fresh year and a
half new high territory, just like many market indices, in a position where
every new high that gets printed increases the time duration since that level
(XYZ is at a new 548-day high, XYZ is at a new 549-day high, XYZ is...). Until
the money printing stops, I don't see anything to stop this trend.
Now, imagine
what could happen, as they argue about deflation, to the price of crude,
unleaded gasoline, copper, and so on, if we had true demand expansion from a
very strong economic recovery. And imagine how easy it would be here for the
same shysters who ran oil to almost $150 to run it up once again (personally, I
think they will). For those that think all this is fine, look what happened to
the economy and people's budgets when gas at the pump started to
rise...
Now imagine that happening again, to even higher levels, and how
the economy would fare given where it sits now. Yet I think when the time comes
for those in power to gun this, we'll have to face it. We'll get royally
screwed, and all we'll hear on television is how there is no manipulation, it's
demand driven (from China, they'll say), and we'll just have to accept it. Then
they'll say we need a big tax on gasoline (you know, on top of the $5, or $7,
maybe $10 per gallon we may be paying), to cut demand. Sorry, but I can see how
easily all this could happen, and I'm frustrated as a citizen.
Let's jump up
to the weekly chart on copper for some perspective.
Source:
QCharts.com
Excuse all the lines on there and focus on the current
area. Copper had all the chances in the world to turn down, but it had no
intention to do so. Just like the stock market at the key area I have been
showing in the chart of the month. I didn't think there was essentially any
chance the market would turn down at that key area, but I knew it was one to
watch. See the similarity with copper here? How about with rates? How about
with many other issues? If every last thing is going up and up and up except
home prices and wages, do you have inflation, or deflation? Recall awhile back
I coined a new term, with some other possible variations. Here's what I had to
say in the June '09
commentary:
"So, just as in the 70's we had a new term,
'stagflation', to describe inflation and a slow economy (stagnant economy),
something that was, by definition, not supposed to be possible, we now need a
new term for something equally impossible. We now have inflation (soon to be
hyperinflation in my opinion) and deflation at the same time. I propose we call
this 'Indeflation'. I was also thinking of 'Dehyperinflation', and
'Hyperindeflation'. Or 'Deinflation'. You tell me. The first one? Any other
thoughts? Mark my words, before this is over, they'll have a new term for
this."
Let's move on to silver, a real mover, on the daily continuous
contract.
Source:
QCharts.com
Let me quote from the February 7,
2010 commentary: "Take a look at silver. Talk about getting crushed.
Silver would have to get blown up and reinflated by a super compressor just to
be back at the level of 'crushed'. But, if you do the work, silver has a major
area where? Right here. Another coincidence." I marked on the chart
where that commentary was posted. Not too bad, eh? Mentioned in advance.
Did you do the work? Did you follow along in real time, practicing your skills?
That's a big reason why I mention certain things.
So, I put some of the work onto the
chart that I was using to form my potential trade area (PTA). As I always say,
this is a framework shown here, not a full, working chart. I put on a key
median line set, a very noticeable trendline, and some key Fibs off major swing
points. The area is clearly defined with nothing more than I have shown. I also
noted a time symmetry in this ABCD pattern here, with both legs being eighteen
days. It should be quite clear why I was excited by this area when I saw many,
many things hit into areas at this same exact time.
Ah, those
intermarket dynamics. Risk on, risk off. They buy it all, or they sell it all.
Not much of an in-between nowadays. Notice, too, the nice little ABCD on the
way up, as shown by the last green hash mark. And notice how many times that
red median line was approached, from above and below (think that line is
significant to me?), and how this last ABCD came off that, and how silver is
right back to it again.
Let's drop down and look at that ABCD on a 240-minute,
continuous contract chart.
Source:
QCharts.com
The run up we looked at started at that February low on
the bottom left of the chart, and here silver is pulling back in an ABCD. This
is what I look for, regardless of the timeframe. If I can get certain Fib configurations together,
giving me a confluence I like in the area, I'm that much closer to an
acceptable PTA. Then I try to find some key lines that also support the area.
When I get all these things coming together I feel I have a potential synergy, and that's the basis for
my PTA. Let's do some work on this area and see what we can find. Understand
that although I'll add quite a bit, it will still only be a framework. I can
only do so much in here, timewise and as far as producing a small format chart
that is still legible.
I'll add some Fibs, and some lines.
Source:
QCharts.com
I added some very basic Fibs on there, a key .382
retracement, an .886 retracement, a 1.272 price projection, and so on. I also
added a median line set and trendline that are very similar to what I did on
the higher timeframe (notice the thin blue lower parallel, and the thicker red
trendline, and their relative placement), further demonstrating to me the
fractal nature of the market, and of this approach. I also added a 'crazy'
trendline on there, although it's not truly a 'crazy' trendline because it
doesn't cross through any price action. Perhaps this one is better called a
'slightly unconventional' trendline.
I also have a dotted gray line on there
marked 'Big set line'. This line comes from a bigger set from that daily chart.
I didn't show anywhere near all my work on that daily chart for clarity, but
since this line was crucial for this setup, I put it on this chart. Now I have
a quadruple line convergence here with a pattern and key Fibs. I have my
synergy. Note how similar this is to the daily silver chart, and to most of the
work I show.
Let's see how silver played out off this area. I'll add one more
retracement onto the chart, and a trendline.
Source:
QCharts.com
Silver came in and 'tested' the area multiple times
before it took off like a rocketship. My mentor students should see something
about the price action into and in the PTA that just jumps out at them. Now,
what about silver's position right now? Notice the trendline coming down into
this area. This is an obvious trendline from the daily chart. It should be easy
to find. I also added a 1.272 external retracement onto the chart.
Notice the
convergence of the two median lines in red (the thin lines), the trendline (in
thicker red), and that 1.272 area. The one median line is the one I mentioned
from the daily chart. Will that stop silver? Well, look at the 'context' of the
daily and weekly charts. I don't want to bet against that uptrend right now on
that timeframe (I can still find certain countertrend setups on lower
timeframes if I'm cautious and know that I am looking countertrend). But for a
play I may be in now, I surely want to watch this area very closely in here for
management purposes. And I
surely recognize how silver may have just completed 5 waves up off its ABCD
from that daily chart (wave 1 of 5?).
What I really want to keep an eye on, though,
in keeping with our theme, is how do the other issues look in here. Look at
silver, at this spot here, just as rates may explode up and over and then
perhaps dump in a big trap. Look at crude 'breaking out' to new highs for the
entire 'bull' (and think about stop run traps, too). Look at those currencies.
Look especially at the commodity currencies like the Aussie and the
Loonie.
Look, I can't do the work for you. Even if I could, I wouldn't.
You need to do the work. I believe firmly in that old adage about giving a
man a fish and he eats for a day, teach him to fish and he eats for a lifetime.
That's why I have the mentor program, for that small handful of students that
really find this approach suited to them, and who like to do hard work. I then
try to assist them in their own unique process of finding a 'Trading Plan'
suited to them, by trying to teach them to think (among other things, like a
good work ethic).
Now, I'm not mentioning this here because I am 'hawking for
business'. I have as many students as I can handle, which is a small number due
to the intensity I put into my teaching. I believe in quality, not quantity. I
bring this up here to emphasize doing the work. I mention many things before
they happen, and give clues as to what I am watching. I discuss intermarket
dynamics, and aspects of the work that should be done to be ready to practice
as things unfold, whether they unfold in the manner I'd prefer, or not, just as
one would be faced with in real trading.
For me, it's about the work. The
work to develop the necessary skills, and then the work needed to be prepared
for trading. I'm here trying to assist in that learning (better called 'work')
process, not to give 'picks' or to try to brag on whatever skills I feel I may
have. Try to think about that as you read and study my commentaries. I think
that may give you some useful insight into why I present things as I do, and
what my 'message' is.
That's it for today, folks. As I have said
before, I think this market, if you are doing the work and looking at many
liquid issues across many timeframes, is offering up a lot of potential trading
opportunities, and if you are not seeing them, study your 'Trading Plan'. If
ever there has been a time when one is struggling and 'it's not the market',
this is it. There is 'action' all over the place. If it's slow in one area,
it's hopping in another. Just a little something to ponder and study until we
meet next. Remember, it's all about the work, the studying. You don't get to be
a professional athlete, a doctor, and architect, a commercial airline pilot,
and so on, without a lot of work and practice, by simply going to a weekend
seminar and reading things free in a forum. You pay your dues just to even have
a shot at success. Do the work!
The next commentary will be next month's
edition, posted by Sunday evening, May 2, 2010.
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