Dow theory Update

This is what I said back on March 24, 2009 in the post titled Bear Market Rally:

Anyway the November 4th close of 4071.81 is the Key close at this point in the Transports. Both indexes need to take out these significant highs for a Dow Theory Bull Market signal. One is not enough. Both are needed. They don't have to be made on the same day.

This still holds true. Although the Dow sliced through its November 4th close with ease, the Transports have not. I think this is a significant tell, and I will not become a full fledged bull until it does. If the Transports take out 4071.81 on a closing basis before the Dow Industrials close below its August 17, 2009 close of 9135.34, then I'll flip. Simple as that.

It doesn't mean that I've been sitting on 100% cash the whole time. Not at all. I've been playing it safe with a nice cushion in cash (around 35%-65%), but using that cash to0 trade in and out of different positions. The two steps forward, one step backward approach. Also known as grinding it out. I don't see any great bargains out there anyway. In a perfect world, the Transports will give a confirming signal, the market will sell off significantly without giving a new Dow Theory sell signal, thereby allowing me to put a portfolio together that I can ride for a while. No way ,of course, it'll work out that way - it never does.

Dow Theory Still In Bear Mode

Although I haven't posted in a while, Dow Theory remains firmly in bear market territory. My thesis after the crash was that the stock market would remain in a long term trading range between 8000 - 9625. At one point, back in June, it looked like it would blast right on through to 10,000. Instead it rolled over for about 1000 points. We may see that again right now. If so, I'm looking for a drop to no lower than 8400 and a higher low than the July low. That would be very positive for a year end rally. My time frame is to around October 10th-15th when/if it bottoms out. This is the chart I put up back in April 2009, and we're currently at the upper end of the range of course.

The key buy signals are closes above the November 4th 2008 close. For the record, the S&P 500 and Naz Comp have taken out their Nov 4th highs. The S&P just barely accomplished the task. But for a genuine bull signal both the DJIA and Trans need to give new buy signals and so far neither has. That's why I believe that this is a bear market rally until proven otherwise. that means I'm trading in and out of the market, taking gains where Im getting them. Not believing -- Yes -- you can't be a believer in any of this or any of these companies because as they have proven all decade -- they'll kill you in the long run. I don't care what they blabber about on TV, I don't read any financial newspapers other than the Financial Times, no Barrons (which is a complete waste), don't care about conference calls or what the CEOs are saying. Who the F cares -- you going to believe them anyway?? I just look at the score board (the tape) and go from there.

Anyway, I won't loosen up from a defensive bias to a more openly offensive one until we get a bona fide Dow Theory Buy signal. And right now, we aren't even close.

Breaking Out?

The stock market does appear to be breaking out! It's hard to conclude otherwise. Today's action provided additionally strong evidence. The DJIA was down 100 most of the session -- closing +1. At one point it was up around 50 points. That market action is tough to ignore folks. You sure don't want to be net short with this sort of action. The following seven (7) indexes are now above their 200d sma - SPX, DJI, NYA, NAZ, RUT, VLE, and OEX. Three are still below their 200d sma - DJT, DJU, and DJA. Note the 200d sma and 55d ema triangle. Additional evidence - at least for those who want to trade the intermediate trend from the long side.

I know its hard to think long now, especially after 1) the sharp rise off the March low and 2) the preceding crash that we all experienced a very short time ago. That's how the market gets you and F's with your head. If it was easy, all those day traders and bloggers - pre-market melt down - would still be with us. Instead they are long gone and deservedly so. Bottom line is many of those folks making a lot of noise on the net didn't know what they were doing. Believe me - the market will let you know in due time. This is a very tough game... and a trader's primary responsibility should be position sizing, and playing defense. Not going on permanent offense and asking really stupid questions like, "did you make any money today". Losers talk like that.

The Primary trend is Down (via Dow Theory), and the intermediate and short term trends are pushing higher. Not a good idea to fight the market - and very frustrating as well. I still need to see breakouts in the DJI and DJT above their Novemeber 4th, 2008 closes to flip the Primary Trend to bullish (see earlier posts). Nevertheless it can be rewarding to try and hitch a ride on the Intermediate trend even though Dow Theory hasn't provided a new signal.

My theory of the market getting bogged down in the trading range, although still in tact, appears to be falling apart by the day. But that's OK - so long as I adjust accordingly. In this game, you're going to be wrong a lot and it's how you adjust to being wrong that really matters. Here's the Dow chart I posted back in April. They're taking out every resistance with ease. Next stop 9000 followed by the Nov 4th close. If it cuts through 9000, I wanna be long the intermediate trend. Let me re-phrase that - I wanna be long the Intermediate trend NOW - which I am but not nearly enough. My hedges have been puttin a hurt on me of late, which I seem to be reducing by the day. They've cost me. Took off some more DXD, REW, SZK (all short ETFs) today and last week. There isn't much left of this position. One bright spot is that I've been riding the British Pound trade for several weeks and added a bit today. I now need for the FXB to go to the 165 - 170 area to confirm my bullishness.

Why is this market pushing higher without a sharp sell off that I expected? Probably the money on the sidelines is coming in, late in the day, as is noted commonly noted in the various media outlets. But it probably goes to the broader Keynsian economic issues. There is a massive, massive expansion by the world's central banks of the money supply. No secret there. Nothing profound. Just fact. This expansion is beyond huge folks. It's gargantuan and the world central bankers got their sights set on re-inflating the economy. That's why the dollar is getting debased (which is probably a good thing), and commodities are strong. On sell offs I want to get into things like grains, sugar, cotton, oil, even gold, silver, paladium, alluminum, etc.... Stocks like AA, IGE, ELB, JOYG, FWLT, etc...

Is it going to work? Yes I believe so. I think the central bankers will get want they want in the near term, but in the long term they may be sorry. Hell I'm no policy maker - I'm just trying to trade this thing without getting my head cut off. But you've got central planning every which way going on here. They are going to make mistakes -- Big mistakes. That's why the Bond market is falling (another mistake I made, but corrected). They can't tinker w/ the long end of the yield curve like they can the short end using monetary policy. Deficit spending -- forget it -- it's a nightmare. Bottom Line -- there will be a mis-allocation of capital with this current interventionist policy before all is said and done. Where does it all end? I have now idea. Where's the next giant bubble? Don't know. But there will be another bust, somewhere, down the road that's going to make this past one look like a small ripple.

Greenspan engineered the last great capital misallocation by dropping the fed funds rate to 1% after the tech bubble burst. That misallocation of capital found it's way into many a numbskullian's hands who vastly overpaid for single family homes. It also found it's way into the sub-prime market, and the coifers of Bear Stearns, Lehman, AIG, and Citi who virtually annihilated all the wealth they built up during the past 100 years. Presently there ain't no invisible hand guiding the way, but rather a very visible one from Washington that's going to get a bunch of things wrong. Greenspan will be remembered as one of the worst cental bankers in history.

Here's my Bond trade from several weeks ago where I got long and was dead wrong. Again I show this because there's nothing wrong w/ being wrong. It's part of the job. The trick is to adjust. I'm currently long the TBT and have been trading it as such since I changed my view. Over the longer run of course the short Bond trade will likely be massive. I, along w/ millions of other traders, are looking for a massive down trend in the long bond as this interventionist policy plays out.

Here's the chart I posted when I went long the TLT. (See earlier post for why) The last chart is what happened. That's why you have to adjust. You can't just sit in this stuff, pieces of paper, to "see what happens". That's loser talk. I also got out of the DZZ when it became obvious that short Gold wasn't working. I have no Gold position currently, but have a bias to the long side.

Double talking Sam

A lot of charts look like this. Closes well above the upper bollinger band. Too me it looks like a late inning blow off. Markets often move in one direction longer than seems possible or logical. But we all know that they do.  And that's what I think is happening now. What's causing the blow off? Economic data and earnings have been better than expected. But it really comes down to the psychology of the insitutions who influence and set the stock prices. Mutual funds and pensions funds are getting back in. Running scared in the name of relative performance - the yard stick of incompetents. I think they were sitting on the sidelines w/ their doomsday opinions, and for the last 6/7 weeks the market went against them.  They are almost always wrong at the turns and I don't think this will be an exception. . In the beginning, the the brain trust was confident; 1) waiting for a new low, 2) a test of the low, 3) claimed it was short covering, 4) argued that the economic reality did not support raising prices, and so forth. You read the WSJ, marketwatch, etc... and the constant opinions from the so called experts. We've also got the other rats coming out of their nests making  rounds.  This clown (double talking Sam) is popping off:

....... several strategists say in notes that they see stocks still moving higher. Citigroup's stock strategist Tobias Levkovich warns the market's naysayers could be proven wrong, and this could be an above-average bear market rally.

Levkovich said a few metrics have encouraged him, including the prospects for a likely earnings recovery for late 2009 and 2010, and an improvement in bank lending standards, likely by late 2009. Another positive is a likely moderation in inventory reduction, which would create a production pickup and that would help earnings. - cnbc.

The strategist vermins' job is to go on TV and drum up commission business for the street. They'll surely get some folks to drink the newly made kool-aid. They always do. Fear and Greed. people and their emotions never change. If you're not in, it's tough watching this thing run away without you. It's so tough to sit and watch that  some folks have to join in. The temptation is too great. Usually w/ dire consequences and certainly  piss pour timing. 

Anyway, here's the chart from April 9th. Today's close is the red line just below 8500. we've now punched into this big heavy resistance area Trading Range. For the Dow Industrials to give a bullish signal, my belief is that a close above the Nov. 4th close of 9625.68 is required (red arrow). The transports would also need to confirm (not necessarily on the same day).

This run up has been great. Happened!!  For me, it appears to be getting a little long in the tooth. Remember of the 3 trends -  the most deceptive is the secondary reaction, which is what I think we're dealing w/ right now. This sucker could be dangerous.  Bottom Line - the risk reward stinks. 

I've been selling longs into the strength. A while back I picked up a nice representation of once pretty good names selling in the single digits. Companies like CBG, AA, IP, GCI, URE, FITB, MTW. Kind of along the lines of John Templeton after the 1930s massacre. So far so good. I plan to hold these through the recovery - whenever that is. This move is likely part of it. I've added to my hedge today using the DXD. My objective is to eventually get long a bunch more of these cheapies. That's where one could really out perform the market in a big way. There will be some 3, 4, 5 baggers in there. Some will go bankrupt but not all. There are so many still. My positions include being long TLT put on Friday, long DZZ,  GS short late today and BNI, short AAPL last week.

Fed Speak

The market has been in a bit of a holding pattern the past few sessions. I'm not sure whether that's about to change but we're sure to get some volatility spikes tomorrow afternoon.  I'm still following my take on things laid out in the prior posts. Essentially 1) I think there is lots of overhead resistance into a wide overhead Trading Range (see below), 2) I'm looking for a pullback of at least 33% - 50%, and then a subsequent advance above this trading high to confirm the move off the bottom, 3) and I believe it's a bad idea to chase this market since its going to be bobbing about in the trading range for quite a long time.The Dow it's having a tough time so far breaking 8000 and staying in the T Range for starters. 

The SPX has held the upper end of the band, which is a plus, but we know how quickly that can change. Look for support at the 55d ema (blue), then the low band, followed by 775. I think 800 is going to hold, which could set up the a nice trade to the 9 handle. 869 has been a solid resistance level so far. I need to see it get through 869 first, along with the upper band and prior trading highs at 875. Tomorrow we may see a push up above 875 only for it to reverse. So stay on your toes.

Other areas to keep an eye on. The 30 year bond (USB) sold off sharply and broke support. Its currently at its 200d sma @ 124. I'm actually looking for a sharp reversal higher during the Fed speak. The Fed's going to try to talk the bond yields lower. There's a lot of folks betting on a turn around tomorrow - something that they are either counting on or more likely praying for if they're loaded long. If the Fed doesn't firmly address  their desire for lower yields, there will be a blood bath for the longs. In the very least, I'm looking for a short term long trade w/ a move back to 127.50 believing that 200d holds. Note that it's only an initial plan subject to change. I'll work off a long Bond bias  and adjust accordingly in real time. Depending upon what the tape is saying. For instance if it's weak as hell, I'll throw out the idea of going long and may buy the short 10 year (TBT).  

Look at the 10 year yield which is pressing resistance at 3%. Higher yields, above 3%, spells trouble for a recovery and low mortgage rates. A higher yield on the 10 year, obviously, is not good for the stock market. My initial bias is long the TLT or a declining yield. Subject to change in real time.

On a side note, I'm short gold (DZZ) and we could see a huge sell off. If I'm wrong, I'll get out. 

The Summation Index (an advance/decline) indicator has put in a strong run from the March low @ -1000 to +836. That is a big move folks. This is hard to trade off of though and tends to lead one astray. It's past history  and it appears to have made it's run for now. But it shows supportive breadth and that in itself is good. Bottom line - there should be some good trade set ups approaching with fat risk reward parameters. Make sure that you employ good risk control techniques and avoid the gonzo trade, which usually doesn't work anyway, during big time volatile moves that will reverse in a blink on an eye. Gonzo trades, or over sized positions, relative to your account, is stupid trading. 

SPX

Today we say a sharp sell off with the SPX -37.21 or 4.28%. The pile driver closing  we've grown accustomed too was back in effect. We'll have to see what happens from here with an eye on the recent lows at around 830 and 780. Watch the 55d ema (817.40), to see whether that level holds.

Last week on the trend following front, I got a bunch of long signals in the various indices. I don't get a lot of signals from the "indicie" data base so I'm not ready to discount it so readily. Sure trend following systems give signals after strong runs in either direction, and are prone to whip sawing. Signals were given across the board in DIA, OEX, SPX, DJI, NYA, and RUT. Just saying that if the 55d holds, I'll be looking to establish a long position on the dip based on a TFing philosophy for a trade. Only after this plays out will we be able to determine whether the March rally was a bear market rally or start of something else. 

Trends I'm following are long Sugar and Copper. Been in these awhile. Potential new trades that I received a signal and am looking to initiate include: Long Soybeans, Soymeal, British Pound/FXB, LD, Paladium (PA - futures). Short Gold and Wheat. 

Fast Money

The talking heads at Fast Money friday Night were down right giddy about this "so called" new bull market. Najarian was jumping out of his seat . Teranova the liquidator  was spieling about how the market must go higher. Question: has Teranova ever been right about anything. I mean most folks couldn't be more wrong than this cat if they tried. He loved oil all the way down, anticipated a rebound in Nat Gas that  sinks endlessly, bulls stocks like XOM, and COP every chance he gets, not to mention every other nutty idea that pops into his  wet noodle. Seems like a nice enough guy, just ignore his hyperbole. Same goes for Najarian. Nice guy to have a beer with but I'd bet dollars to doughnuts that his income comes mostly from talking and selling options advice than it does from trading. A few weeks ago, Najarian was bulling POT after a nice run up to around the 90 level. He loved it. I was short the stock . After hearing Najarian's bullish thesis on POT, I liked my odds even more, and POT subsequently sank below 80. Thanks Naj for convincing me to hold on. Adami - the general  I think they call him. He seems OK and has a decent idea now and then. Ignore the rest of what he says. I'm not a huge Karen fan either. Every time she gives a stock pick or opinion it's like she's doing it while undergoing root canal. Sort of the reluctant talking head with 101 stock ideas.  Then there's Macky. He's the one I like the most. He's also the most cynical, throws in negative Buffett comments once in a while . Hasn't Buffett's blabber mouth about holding onto "great" stocks forever crushed enough people for a generation. Mackey goes with the flow,  speaks his mind, and says shit against the establishment. He's the tape reader of the group, as far as I can tell, with no real agenda.   

Bottom Line: the giddiness at Fast Money is a good contrary indicator and suggests a sharp pullback is near. For the time being I stand by my prior comments about 1) there being plenty of time to join the bullish band wagon, and 2) buying in on your terms not the market's. For the record, Adami did say, the other night, that this rally is in the 7th or 8th inning. I agree with the General on this one. 

The NYA weekly pivot numbers are:

5700 5620 5540 5400 5320 5190 5100   ----- Friday's close 5454.

The weekly Pivot range is 5380 - 5420.  Look for support in this area. If it breaks through this range the market could be heading lower to at least S1 at 5320. I keep an eye on these levels every week for some trading perspective and support/resistance levels.