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 May 2,
2010 Commentary (monthly edition)-
Wow, what a
month. I know I shouldn't be at all surprised by anything I see in any of the
markets, but I still am. Maybe I'm just a little slow to accept the surreal...
If you had asked me years ago what the chances are we'd see anything like what
we are seeing nowadays I'd have given the odds at essentially zero. Heck, I
joked with a buddy of mine who is a huge fan of AAPL about a bet I would have
made with him a year ago. I just heard that AAPL is on the verge of becoming
the biggest market cap company in the entire U.S. Bigger than MSFT, bigger than
IBM, bigger than WMT, bigger than XOM, bigger than anyone. I mean, AAPL is a
great company and all, but honestly, I don't own a single AAPL product, and
other than my one buddy, I don't know any person who owns one single AAPL
product. And they are on the verge of being the biggest market cap company in
the U.S.? Bigger than the biggest oil company? Bigger than MSFT?
So, I said to
my buddy I seriously would have bet him everything I own and all the revenues I
could generate for the rest of my natural life that AAPL would not achieve this
status. He said he happily would have taken the other side of that bet, right
at the lows of last year. I like to think of myself as being pretty good at
choosing my bets, and at sticking with my money management rules (like say
risking no more than 1% on any given trade), but this was so unlikely of an
event in my mind that I would have went 'all in' and violated all of my trading
rules. So, I sure am glad it never came up and I didn't happen to mention it to
him offhand at that time. Otherwise I'd be in impoverished indentured servitude
now for life, and he'd be telling me which AAPL long setups he wants in this
month's commentary for his website :-) The point is, I am seeing things that
are so far-fetched I can't even begin to comprehend them.
Now, I'm in
the mood to 'go off' and do a long tirade/ramble, but I'm not going to. I
promised my better half some time together tonight after I finish this long
commentary, which takes me an average of eight hours, and I can't start until
after the market closes. If I add on a long tirade, I'll have to let her down,
and I'd prefer not to do that. But, if I were going to ramble on, here's
the gist of what I'd say. The same crew of maniac analysts are still on the
idiot box, and they are all saying this 'bull' has barely gotten started. They
are talking about how incredibly undervalued it is, how earnings are simply
fabulous and growing rapidly, and how 1400 S&P will not even be a resting
place before 1500, 1600, and then it really gets going. In other words, same
old, same old from them.
I had just heard how many of the sentiment readings were
at extreme extremes (assuming what I heard is accurate). I can't quote any of
them off the top of my head, but like the NASDAQ cumulative tick, the relative
put/call ratio at the highest readings ever, one of the RYDEX fund
ratios was at an all-time bullish high, etc. So, some sentiment indicators are
higher than in March of 2000, in other words, people are more bullish now than
at the peak of the dot.bomb era. And on and on with the sentiment indicators
like this. Everyone is on the bullish side of the boat. And although I take
sentiment indicators very, very seriously, as long as the wanton money printing
goes on, the market will likely keep going up. It may go up until the next
bubble bursts. And speaking of bubbles, let's look at that real quick
like.
A bit over a year ago I was at a get together and I was talking
with a money manager. I was mentioning some of my thoughts on bubbles, and how
we had the dot.con bubble, and when that deflated we had the housing bubble and
the commodity bubble, and so on. Going from one bubble to the next, as that is
the only way they know how to keep this insane game going. I've heard a few
people say that at least we are out of bubble choices now, and maybe some
sanity could come back into the world. I thought 'No way, they'll simply find
something else to make a bubble out of.' So, this money manager asked me what I
thought the next bubble might be, and I said I thought treasuries were already
in a bubble, and it could possibly dwarf the other bubbles in my opinion. A lot
has happened since then, and we've seen things I never even remotely thought
possible, not even in my wildest nightmares.
I can now say I think the next
bubble is a variation of my initial treasury bubble thought. It's a sovereign
debt bubble. The governments of the world have inflated a debt bubble the likes
of which dwarfs anything we've ever seen before. And it had to be that way.
When you address a bubble with another bubble, the nature of the Ponzi is such
that the next bubble must be bigger. When you realize the size of the housing
Ponzi, including the GSE's and such, you see just how big the next bubble would
have to be. And lo and behold, it is. The problem is, this all has a limit as
far as what is possible. So, without going into details (all the details one
could ever want are on Zero Hedge, Mauldin's Blogs, and many other sources,
just pick one and study up and you'll see), here's my thoughts.
Everyone is
wildly bullish, and the talk is only about how little the pullbacks will be on
the way to 1270, 1400, and then to new all-time highs (note that the Russell,
Midcaps, Retail Index, and many others are very close already). They do their
valuation models and such like nothing unusual is going on. They ignore that
the underlying issues we had when the entire planet almost melted down are not
only still with us, they are worse in my opinion. One figure I heard is
that there is $1.4 quadrillion of derivatives out there right now,
unregulated, off-exchange, with unknown counterparty risk, held by who knows
who. What is the exposure of any given institution? Who knows. Keep in mind
what a quadrillion dollars is. It's a thousand trillion. There are 1,400
trillion dollars in derivatives out there by this one estimate.
What that
means, in essence, is that 'people' have promised each other they will cover
$1,400,000,000,000,000 in losses if it comes to that. Now, what is the total
money supply right now for the world? The total 'GDP' of the world? It pales in
comparison to the 'promises'. And they are essentially all unregulated, not
traded on exchanges, and no one knows who has made what promises to who. In
other words, the 'counterparty risk'. And I'm of the opinion that almost no one
who has made these promises has anything behind them to back up those promises.
So, who cares you say, let them all just go bust. Yeah, fat chance. Who is
using them? Let's say, for example, your pension fund. Your municipality. Your
state government. Your bank where your money is. The company you work at. And
on and on.
Now, what happens if there is some 'event' and they call
up their 'insurance man', the derivatives guy, and say 'pay up', I have a
claim. Well, he can't pay. So now he's got trouble, and you've got trouble. But
he has many 'deals' out there, so his trouble then becomes the trouble of many
others, as yours does. This causes a multiplier effect, which is essentially
'the domino effect'. The entire planet is set up like 1.4 quadrillion dominoes,
and there is a lot of action all around the dominoes. And the analysts insist
this is the best time ever to bet on not only the security of the
dominoes, but in the growth of many more dominoes, and their likelihood of
staying upright. But, this sounds abstract. How about an example.
Okay, take
Greece. There is a lot of exposure all across Europe. So, we are right back to
bailouts, again, with plenty of the money coming from the U.S. taxpayers. Next
could be Portugal, or Spain, or Italy, or Ireland, or whoever. Like pigs
(PIIGS) at the trough, why not get a bunch of money you know you'll only pay
back with more loans down the road. We now live in a bailout world. And I don't
think it will stop until one and only one thing happens. We'll get to that in a
minute. So, as one sovereign has trouble, this creates trouble for others. But
their trouble causes trouble for others, and so on. The domino effect. This has
already started. Yet essentially no one has any worry about this when they talk
about ever higher stocks prices. I, for one, am gravely worried.
Now, Jim,
what is that one thing, and why are you so worried (other than you are just a
worrier by nature, as we have seen)? I think the nature of the power-mongers is
to keep the game going as long as possible, and to never do anything useful or
meaningful to fix the problems because that would disrupt the game. Even all
the things we see on television right now, to me, are just charades to make
people think something tough is being done. Meanwhile, they kick the can down
the road, play the 'extend and pretend' game. The market, the whole thing, it
will not end until the next bubble pops. That may be right now, and it may be
ten or twenty years from now. I rather suspect it can't go much more, but it is
amazing when people believe, and are fed propaganda 24/7, how long something
can be kept up.
So, what is the one thing? Global reset. All the fiat
currencies go to essentially zero and are reissued, and all the sovereigns
default on their debt. An entire global reset, back to zero. I won't even get
into the social unrest this may cause, the possibility of literally being
thrust back almost to the stone age as power grids go down, fuel production and
supply is nonexistent, food can't be grown or transported, and so on. I don't
want to be an Armageddon doomsdayer, but I have done the math, mathematics is
my background, and I literally have a huge stack of legal pads covered on every
page with endless calculations, and I can't find any solution other than global
reset. My calculations remind me of the computer in the movie 'War Games',
where it kept trying every scenario it could and every last one resulted in
total annihilation. The computer smartly concluded it made no sense to play
that game. My notepads have driven me to the same conclusion.
The curious
thing, to me, is what happened when the general thought the crisis had passed,
and then they found out it hadn't. He then remarked about how it looked like
they still had to go through this thing after all. You see, in my opinion (and
all this is only my opinion, based on information I have read that I feel is
accurate, but may not be), we are already dead. We passed the point of no
return many years back, way before the first shockwave hit us. We can't be
saved, although we all think, now, the crisis has passed. We are in the eye of
the storm, and the first wave weakened everything. When the next wave hits,
there isn't any structure left able to withstand the pummeling. For you Elliott
guys, the 'credit crisis' was 'Wave 1', we are in 'Wave 2', and 'Wave 3' is
coming. I don't mean on the charts, I mean in term of financial
meltdown.
And, like any bubble (and this one is a whopper), when it goes, it
can go in a flush. Is Greece about to set it off? Who knows. Bubble pops are
all about confidence, or lack thereof, and trust. Trust in the counterparty,
and one's belief they will be there to fulfill their obligation. Once that goes
for one, the contagion can take over very fast. You wake up one day and it's a
global reset. I know this sounds almost 'biblical' (hey, wait, isn't 2012
coming up???), and I apologize for bringing everyone down, but if we really
were headed for something much worse than the Great Depression, wouldn't you
want to at least be thinking about some options (as if there were any...)? I,
for one, can't just be led up the ramp, listening to the gunshots and the
'thuds', and mooing all the way up about how great life is and how all the
benevolent leaders really have my best interest at heart. I want to know and
understand, and pass that along to others, imploring them to study and try to
come up with some ideas.
Again, I apologize for using this commentary to talk
about things outside of trading (wait, it's my website, I can talk about
whatever I want...). One of the biggest regrets I have about my journey into
trading, with my mathematical approach, is how I have leaned about all this
stuff and basically made myself miserable. I'm not trying to share the misery,
or make anyone else miserable, but only to try as hard as I can to get the word
out, to try to make a positive difference, and to work on a future we can build
upon, not this insane, sick, twisted one the power-mongers have created. I hope
I'm wrong. I hope we get through this without a scratch. I hope I can be a
trader (and live in a free society) for a long time. I want nothing more than
to be totally wrong. After all, when you bet that the sun will blow up, and it
does, what do you win?
All right, now that everyone is either thoroughly
depressed, has already clicked off the website, or has given up hope for any
market left to trade in, let's get to some charts. I just knew I was in the
mood to go off, and now I have to let my better-half down, and try to explain
to her why it really was important that I write all that up... Well, despite
all the doom and gloom, I'm pretty excited about this market and the charts
I've put together for our work today. Until they blow it all up, I think we
have as good a market for trading as I could ever ask for. With all that said,
let's get to it. Fasten your seat belt.
We'll start with those 10-year rates, on a
daily chart.
Source:
QCharts.com
Here's where we left off with last month's commentary.
Let me quote from last month: "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.", and:
"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."
I suggest everyone go back to last month's commentary and look over
all of what I wrote. The point is, I was thinking the most likely scenario was
up and over, and then they game it. There was very little chance the obvious
was going to happen, and that's a break of the area and just up it goes. So
let's take a look and see if they gamed it.
Let's look at
the same daily chart current as of this writing. I'll also add a few things
onto the chart.
Source:
QCharts.com
That gap up on the jobs report was it. Rates have been
moving down since then. It was a 'false breakout', just as I suspected. I
thought it might get higher, but notice it went right to the 1.272 area off
that last substantial pullback. That's a great spot for it to run out of gas.
Now, I also added a key line in blue, and a major .382 retracement. Notice how
after bouncing at that trendline in red and then taking it out it hits into
this area I have. As always, I only have the smallest framework on there, and I
have a few things just below here (not shown), but this is the general area I'm
watching next.
If rates move up, then they are selling treasuries. They usually
sell treasuries when money is moving in to stocks. But they could also sell
treasuries if they are losing confidence in them. Just look at Greece, or some
of the other PIIGS. But this is a small area, and we are a long ways from loss
of confidence in U.S. treasuries right now, so I'd expect stocks to move up
here, or rates to drop down through this area (unless we get a decoupling,
which can happen). We'll explore this more when we get to the ES
shortly.
Let's move on to silver on the daily, the same chart as last month,
with a few things added.
Source:
QCharts.com
Silver has kept moving up since last month, and is at a
new high for the move since that Feb commentary and setup. Notice how it has
come back twice to that obvious trendline in red. I added on a key downsloping
line I have (the dotted gray line), and some key price levels. Everyone should
look at gold, too, and see how it has been playing out off its relative setups.
So, with silver, I am watching the area above, near the level of the December
high, and the next area after that, at the level of the all-time high.
What is
really curious to me is how the techniques I use, which generally have to do
with sloping lines and Fibs and patterns and such, in this case point to two
areas, and those areas are both key swing-high levels, too. The upper area,
also, is a 1.618 time retracement of that ABCD pullback So, will silver hit
either of those two areas? I have no idea. If it does, will it react there, or
blow them out? Again, I have no idea. On this timeframe the trend is up in my
eyes, the setup was for a long, and my interest in these areas is for management purposes.
So, are there
any implications from this? Perhaps. How come if the dollar is actually
strengthening gold and silver are going up so strongly? I thought gold was
'done'. Headed for eight-something, or even six-something. My personal opinion,
take it with a grain of salt, is that gold is going to $2,000, then $5,000,
then $10,000. But since gold is such a manipulated and controlled market
(again, in my opinion), this can only happen in conjunction with a currency
collapse. So, if my sun blowing up intro scenario happens, then I'd expect gold
to go to at least $10,000 (before they make ownership illegal and confiscate it
all).
Point is, maybe gold does get manipulated down to the levels those
bears say, but in the meantime, it's one good (bad?) day from a new all time
high. And take a look at gold in Euros. I wish I had a chart to show you. It's
smokin' off at new all-time highs. Point is, even fighting the dollar
strength gold keeps on going up. The dollar may be strengthening with respect
to some other currencies right now, but for the most part all the fiat
currencies are dropping like a rock thrown down off a tall bridge.
Again, are
there any implications for all this? Well, maybe if confidence in fiat money
starts to wane, we could see not only higher precious metal prices (and crude,
and gasoline, and foodstuffs...), but we may see that lack of confidence that
could kick over the dominoes and bring down the house of cards. The point is
not to be a doomsdayer, but to at least look at some of the possibilities,
instead of being a blind follower who can only say 'Market: bull, bull, bull,
up, up, up' and 'Gold: down, bear, down, down, big bear.' Use your gray matter
and think this out. Study what is going on.
Let's move on
to everybody's favorite, the S&P, this time with the ES continuous
contract, on the 480-min all-sessions chart.
Source:
QCharts.com
Here's the insane ramp up since that February
correction. A couple of things pop out at me. First off, everyone everywhere
has been talking about S&P 1219, mostly referring to cash, but the values
are close enough that the area is clear. After that the main area discussed is
1270, with a few 1235/1240 calls in between. All I can say is that would
seemingly negate those areas as likely areas for anything big to happen from.
It's all they talk about on every forum and blog I read. Keep in mind, too, no
one says anything as drastic as a 10% correction could happen, heaven forbid,
just another nice little dip to buy, on the way to 1400, then new all-time
highs, then higher.
Notice, next, how much this looks like a topping
formation. Perhaps a classic 'head and shoulders'. Observe, on a smaller scale,
how much this looks like the 'top' before that wicked January/February drop.
Also, though, notice how many clear swing lows (I count four) are at or about
this level. Just using standard lateral support, this area sure has it. As we
will see shortly, I also have some things in here. So, it would not only be
curious to see it drop below here without at least a bounce, it would also take
out some serious run-of-the-mill support, and perhaps catch a ton of stops. It
has the makings of a great stop run that gets a lot of shorts on board thinking
this is the big '1219 correction', and they just hammer them with a run up.
Just something to watch. We'll take a look at one way that might
unfold.
Let's look at the ES continuous contract on a 120-minute,
all-sessions chart.
Source:
QCharts.com
The first thing I want to point out here is that I have
had this set on my chart for months now. Take a look at how it is using those
lines. This is why I like to leave useful sets on my charts sometimes. When I
look at this I see several patterns, several additional line possibilities,
some Fib areas, and much more. This is the type of layout I really like to see,
rife to me with almost endless possibilities. I hope you are seeing at least
some of them. Let's explore just a few. Do you see the most obvious one? Think
pattern.
I'll add a few things onto the chart, and we'll discuss
them.
Source:
QCharts.com
I hope you spotted the potential ABCD pattern that may
be setting up. I added the 1.000 price projection onto the chart. Look at how
it hits at that lower line for a set that has proven itself to me over a period
of months. But also notice the potential 'retest' of a proven line right here
at that .786 internal retracement, marked with the question mark. Very curious
area right here indeed. My students should recognize several things going on
right here that makes this area especially interesting. The ES sure did 'see'
the area, as it stopped the intraday free-fall dead in its tracks.
Will it
bounce here a little, head up to new highs for the entire 'bull' market, roll
right over and down to the ABCD, or something else entirely? I have no idea. I
don't feel I need to know to trade. I can make some probability estimates,
watch price action for clues, and come up with some trade premises. Then things
do what they do. I don't need to know what they are going to do in advance in
order to trade. No one knows the future (well, unless you are a corrupt
insider...).
Given that was just a very simple framework, for clarity, let me
add a bunch of things on and beef up the area.
Source:
QCharts.com
I added a slew of Fibs off key swing points on there.
This may seem like a wide, disorganized area, but I see it as three clear
'sub-groupings', and given the size of the run up and pullback, quite tight.
Think areas, not exact spots. The important thing for me is that the area is
hitting in conjunction with several lines and a pattern. I added on a
downsloping median line set, which really adds to the layout. Notice the double
touch on the thicker gray division line, the rollover at the C point, and how
it sits now at the intersection of the red median line with that upsloping gray
division line. Coincidence? Perhaps, but that's not my opinion.
And notice
where the thicker gray division line hits. Right into the area, adding to the
timing factor. I also added a thicker red trendline on that also goes into the
area. Finally, I left a .300 retracement on from one of my brackets to show how
the B point also hit right at that very key level. It may seem hard to believe,
but even this is only a framework for me, as I have a lot more on my working
charts. There are some remarkable harmonicities and symmetries coming together.
Now I see if it likes this current area, or this lower one, or perhaps
something altogether different. Let's move on and finish up by examining
that.
Let's jump up to the daily timeframe and see what there is to see
there.
Source:
QCharts.com
Here's the daily chart, with some very key lines I have
on my working charts. Each one is derived in a different manner, so they are
not minor variations of the same lines. I also added a standard median line set
on there. This is some of my work if a bigger drop does ensue. I know, fat
chance of that. We are going up forever, the market is 20% undervalued here,
it's the best bargain it's ever been, and Greece will work out fine, there will
be no contagion as I heard from Europe today (Uh-oh, when you hear that...).
But, just in case it does go down a bit, here's what I am watching.
Notice how I have three groupings
coming together right into three line intersection areas. Keep in mind, there
is nothing magic about the line intersection areas. This thing could go to
another grouping (not shown) that hits one of the two upsloping line areas, and
ignore the downsloping set lines. This would be a lesser probability event in
my experience, but the market does what the market does. I have to see how
things unfold, if a pattern develops (which may give me clues as to a potential
completion area), what price action does, and so on. As I have said many, many
times, the potential trade area is only 10%-20% of my comprehensive 'Trading
Plan', not 90%, 95%, or 99% that many vendors, charlatans, and dream merchants
make it. I just need to have some areas to work with, then I can 'go to work'.
Observe, too, how close that upper division line (the upper dotted gray line)
is to the much smaller ABCD we were looking at on the lower timeframe.
See, too,
what a tiny correction that would be after that monster run up from the
February low? And if you look at the run up from the March '09 low, you can see
how small that February correction actually was, and how horrendously overdue
this thing is for a 'real' correction. Even a drop to that lower area at 1000
there would not be a very big correction for that run up. It could hit that and
not even be a full 20% 'bear market'. But we all know it's done going down now
and will soon be setting new 'bull market' highs, right? After all, these
surely are bull market conditions we have, right?
So, what are the implications of
all this? Can we tie this together with any potential scenarios? If the market
goes down hard and shoots for any of these areas, then bonds should go way up.
If they go up, rates would go down. That minor area on the rates chart will
easily give way, then, as it shoots for lower areas. And what about metals?
Well, normally there is a flight to safety when the market goes down, and
although that can sometime be to the precious metals (recall that
monster jump in gold when the entire world was melting down?), it's
usually mostly to treasuries. So, are the PM's (precious metals) overextended,
or will they get a big flight to safety push? I suspect people are so wary of
fiat currency that the PM's could get a big pop to those upper areas. All I can
do is see how they act, and respond accordingly.
The currencies, too, are quite
interesting. Look at the strength in the Aussie and the Loonie. Did you do the
work I suggested last time? Is the Euro going to break down to the 1.00-1.10
area and complete the big ABCD at the key line down there? (I personally
believe 'fair value' for the Euro is just a tad under parity, but 'fair value'
has about zero to do with prices things trade at. And I also personally
believe, and have since inception, that the Euro will not survive, but look at
how little of that belief is priced in...). Or is the Euro going to jump up in
here on great news about the Greek bailout and no contagion with Portugal or
Spain or... This may be a bit news dependent. All I can say is the news is
usually in line with what the charts imply. It's not that the charts can
anticipate news, it's that if the market want to go up bear items are ignored
and bull items played up, and the opposite if the market wants to go down. Only
the news that lines up with the market's plan is noticed, and the market's plan
is in the charts, in my opinion. Just some things to ponder.
Okay, my
hands are totally seized up, I've been at the computer for like fifteen
straight hours, and my better half just grumbled something like 'dinner is
completely ruined now...' or some such thing, so that's all I have to give. I
hope everyone enjoyed the work today as much as I did. I think it was a real
good overview of some of the things I am looking at, and some of the techniques
I am applying. This market may be totally manipulated, run by robot drones, and
all the other wacky things that are going on, but it seems to have very clear
frequencies and rhythms, and I feel I can find some of them with my tools.
That's not a claim, just a statement of what I believe. I don't think I have
never seen a better trading market. Perhaps that is because my skills keep
developing over time, or perhaps that is because it truly is 'poetry in
motion'. Likely it is a combination of both. As I've said before, though, if
you can't find what you need in this market, study yourself and your 'Trading
Plan'.
The next commentary will be next month's edition, posted by Sunday
evening, June 6, 2010.
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