Friday, October 29, 2010

10/29 Daily Commentary

Stock market remains mired in abc on the assumption that an ending diagonal is in progress. Our line is drawn in the sand as far as critical support. 10,119 - 1.35% is 9,980, but this is just the other side of 11,000 round-number support so let's say 9,975.  What bothers me is that everybody expects a new high here, even the bears (namely me).  AAII just came out with the latest sentiment and bullish % is 51.23, which is the highest since May, 2008.
I have an alternate count that is bearish for the stock market.
If this count holds true and an unexpected decline occurs it will need to go below SP futures 1163.50 to trigger a critical support break.  Early warning would occur at 1168.25.

99er posted a potential diamond top in the SPX in the comments to the 3:00 post. 
Dollar index futures closed at 77.35.  I sold DX futures and UUP, so I am flat all markets except for a small ZSL. I look for a spike low for the dollar which I will buy. 


This goes along with a spike high for gold breaking out of a wave 4 rectangle.  Gold is forming a wave 4 rectangle, so I want to stand aside of gold and the dollar until the gold top is in.  This top should occur Sunday night.

10/29 3:00

Stock market remains mired in abc, probably tracing out a B wave.  Our line is drawn in the sand as far as critical support.  10,119 - 1.35% is 9,980, but this is just the other side of 11,000 round-number support so let's say 9,975.
Gold is forming a wave 4 rectangle,  so I want to stand aside of gold and the dollar until the gold top is in. 

10/29 2:20

Expecting final high in gold.  Sold DX futures at 77.41 to await the stock and gold rally.

10/29 1:00

Covered gold futures at 1357.80 expecting 1 more nominal high.

10/29 12:50

I neglected to post a sale of DX futures at 77.48 prior to the latest buy at 77.38.

10/29 12:45

Bought dollar index 77.38.  Stop is 90-minute close below 77.32.

10/29 12:38

Shorted gold 1358.20.  Bought 2% ZSL 17.13.

10/29 10:35

Bought back DX at 77.41.  Will hold until a 90-minute close below 77.34.

10/29 10:00

Sold DX futures at 77.60 at the 10-minute M/A.  Having trouble loading images, will load it later.  Yesterday's decline counts best as a 5 down, so expect a low below 77.36 today.

10/29 pre-open

GDP report drove the dollar to retest yesterday's lows.  Stock indices were under pressure most of last night.  I'm taking it easy with a mildly rising I1 and an expectation of a diagonal high upcoming for a shorting point.  Looking to short gold on another rally. 
Critical support break point at 10,968 DJI.  Don't expect it but I'm a boy scount.

10/29 3:50am

I covered gold short at 1338.30.  Silver is making what appears to be a 4th wave rectangle so I want to step aside.

Thursday, October 28, 2010

10/28 Daily Commentary

Although I1 is in a tiny uptrend to a very low peak of only .53 on 11/5 I don't believe that the stock market will hold up until then.  Until SPX 1171.80 is violated a diagonal is the first most probable count.  This implies a rally to a peak from 1202-1208.  If the FOMC announcement occurs before 1202 is reached then a spike high is the probable outcome.  A DJ futures decline below 10,910 will be the equivalent of a critical support break. 
I bought the dollar on the reaction to the 90-minute M/A.  Currently at 77.50 it will rescind it's buy signal with a 90-minute close beneath 77.34. 
Gold will trade opposite the dollar.  Gold has a 5 down from it's all-time high, so I have a target below 1315.6. 
Other than that, just chewing up the clock waiting for either a stock rally to new highs or a decline below critical support.
The street is still looking for QE2 from 500B to 1T. 

10/28 1:35

I'm calculating the 5-minute, 370-unit EMA at the latest decline of DJI through it.  11,119 - 1.35% is 10,968 critical support.  This will allow the market to fluctuate around 11,000 round-number support.

10/28 noon

Three influences over all markets:
First I1 is due for a weak uptick through 11/5. I believe the stock market will not hold up after the 11/3 FOMC announcement. I will be shorting earlier than the I1 mini-peak.

Second, the dollar index looks like Minute 1 upward is complete. It also confirmed the buy signal with a daily close well above the 18-day M/A.
Third, DJI came down near it's critical support and is rallying off of this low. There could be an ending diagonal finishing with another nominal new high in SPX.

The dollar index came down very quickly to it's wave 2 bottom.  The stock market is starting to sell off since the dollar lows.  Taking out 11,000 seems doable here given any dollar strength.
The 90-minute close on the dollar will tell the tale of who is winning the battle, investors or the Fed.

10/28 11:30

The dollar index looks to have bottomed here at 77.40.  The signal is negated by any 90-minute close below 77.34.  A dollar rally has to be bearish for stocks.  Bought 4% UUP at 22.39.

10/28 10:35

Looks like the way up to the top of the diagonal will be a double-zigzag.  Should rally from DJI 11,091.

10/28 9:35

Bought the DX on the 90-minute M/A.  This buy signal will stand until a 90-minute close .45 below the M/A. 
Shorted gold at one of it's key M/As and the same time as the dollar index buy.  These are my only positions at this time.
Expecting the SPX ending diagonal to play out with a wary eye on critical support at 11,000.  

Clever comments on the Fed.   November 3rd is the third repetition of Groundhog Day.  The only policy response is to do that which did not work the last time, over and over again. 

10/28 pre-open

Bought 1% DX futures 77.72.  Shorted 1% gold futures 1336.5.

Wednesday, October 27, 2010

10/27 Daily Commentary

Today was the second day of an I1 double-bottom.  I sold most positions before 9am and covered DJ futures position around noon, which is the normal behavior if the stock market low occurs on the second day of a double-bottom.   For this I1 cycle the peak was 10/8 SPX 1165.15 and the bottom today SPX 1182.45.  17.30 points up over 13 days is .11% advance per day.    This is identical to the .11% daily advance during the last I1 down cycle.  Outside of I1 down the SPX has been advancing .24% daily, compliments of Uncle Ben.  I took a minor loss on SDS held and DJ futures short held through the cycle but earned a multiple of that on trades both in stock index and commodity ETFs as well as futures trades.   With the amount of Fed money printing over the past 2 months this is a winning strategy.

Earlier in the year, after QE1 started wearing off and I1 was not fighting the Fed, I was told in my comments that I would make more money if I just sold big at I1 tops and bought big at I1 bottoms.  For the last 2 I1 cycles,  while the Fed was ramping up it's asset purchases, I've been told that I1 is dead and that it doesn't work.  I made money in both periods because I stopped believing in a simplistic world in my 20's.   If exogenous market events occur I am not naive.  When the Fed knocked down rates by 3/4% at a pop in 2007 I did not believe that I1 being in a downtrend would overwhelm the short-term effects of such shocks.  If war were to break out I would not think that I1 would determine the trend.   The Fed is in the process of removing itself from market support.  Today Bill Gross weighed in with condemnation of Fed policy comparing the government’s trillion-dollar efforts to stir job growth to a Ponzi scheme run on bondholders and warning that the combination of zero interest rates and massive asset purchases by the Fed has created a black hole, a liquidity trap where the lack of consumer demand means neither borrowing nor lending is stimulated.

China also spoke out against the effects of unrestrained U.S. money creation on their economy. These effects are not just Chinese but throughout the world.


Commodity markets have already turned and stock indices are tracing out what is turning out to be the final 3-wave up for the bull move from August. 

There is a confluence of I1, dollar index, and stock indices that should play out over the next week.
First I1 is due for a weak uptick through 11/5.  I believe the stock market will not hold up after the 11/3 FOMC announcement.  I will be shorting earlier than the I1 mini-peak.
Second, the dollar index looks like Minute 1 upward is complete.  It also confirmed the buy signal with a daily close well above the 18-day M/A.
Third, DJI came down near it's critical support and is rallying off of this low.  There could be an ending diagonal finishing with another nominal new high in SPX.


Going forward, I am flat in all markets.   I still believe that the dollar will drive all markets and is due for a wave 2 retracement down to at least 77.91 ranging down to 77.70.  This retracement will not take until 11/3 to occur.  I look for the wave 2 bottom to occur at roughly the same time as the final high in the ending diagonal.  This is the point at which I'll go short gold, stocks, crude and long dollar index.
Until that time upward retracement and/or consolidation in commodities is expected.
If I am wrong and DJI takes out 11,000 then I'll look for an entry point to go short after a bounce.  If the decline occurs overnight SP futures 1162.25 will be the flash point.

10/27 2:00

I had to change the DX count.  I count it as completing it's Minute 1 with one more nominal high.

10/27 1:00

I covered 1% DJ futures at 10,985.  I am now flat.

10/27 11:00

Dollar index coming back in wave b to test the high.
If the DJI comes down to critical support, which is at 11,000, I expect a round-number rally to allow me to short at a better price.

10/27 10:30

Dollar completed the b wave of wave 2 abc.  Still looking for 27.79 and I'll hold powder dry until then unless DJI 11,000 is taken out.

10/27 9:42

I also sold 2% SCO at 12.80, again waiting on the dollar wave 2 to complete.

10/27 pre-open

Dollar index completed it's first 5 up last night.  It has a 38.2% retracement at 77.79.  Stocks and commodities fell as it rallied to the top.  Once the wave 2 is in they will fall again.  Until then I covered my gold futures at 1328.10.  I also sold 2% QID at 13.09 and 4% DXD at 22.93.  Sold 2% ZSL 18.48.
 I'll put these trades again when dollar index makes it's wave 2 low.
SP futures hit support at 1174.25.  
If I'm wrong about the dollar and stocks keep falling then critical support is broken at 10,995.
Here is the I1 chart:

Tuesday, October 26, 2010

10/26 Daily Commentary

I spent a couple of posts today describing the Fed behavior in light of the dollar and the dollar's impact on stocks and commodities. These are re-posted at the bottom tonight.
I1 bottoms either today or tomorrow. 
Dollar index produced a buy signal based on it's 90-minute M/A.  It also completed a 5 up from it's low of 76.875 yesterday.  Because it completed a 5 up it must now perform a 3-wave retracement to about the 77.30-77.40 area.  So although the 5 up and the buy signal are enormously helpful for weak stocks and weak commodities, the near term will be the opposite due to the requirment of a retracement downward. 

There was a 90-minute M/A buy signal last week but it was cancelled due to the dollar weakness attributable to the G-20.  There will be further confirmation on a DX close > .50 above it's 18-day simple M/A.  Tomorrow that should be roughly 77.10. 
The dollar has been the main casualty of Fed operations.  When international capital flows into the dollar then I will know that the Fed has lost the initiative and market forces have taken over.  This will be very bearish for stocks and commodities. 

After the close SP futures came up to their 30-minute M/A (blue line on chart) at the same time as hourly stochastic registered a high reading of 93.  A stochastic at this level does not mean that a rally if over but in combination with resistance it increases probabilities greatly.  Looking at the hourly stochastic is does serve as a rather good overbought/oversold indicator.

Due to the fact that I1 double-bottoms today and tomorrow I sold 6% SDS at the close for 27.24. I still hold 4% DXD and 2% QID.


Here is a repost of comments on Fed action and the importance of the dollar index.

In essence the Fed has been monetizing the federal debt. By not selling the securities to the public Treasury has made the Fed a major buyer of federal debt. Unlike other buyers when the Fed buys treasuries it makes magic money (not credit). The Fed has been taking advantage of the treasury buying by slowly cutting back on it's crap holdings, leftover from Bear Sterns, MBS, etc. However, the net effect has been to slowly increase it's balance sheet (make magic money).


The Fed last did this in the late seventies. Back then the bad side of money creation was inflation. This time the bad side of money creation is protectionism, which is increasing worldwide. If the Fed does not put the brakes on promptly the U.S. will be facing trade barriers and beggar-thy-neighbor with it's partners, deteriorating relations at all levels of their governments, and the potential loss of reserve currency status which would be devastating.

I posted the Daily last night that QE is neutralizing market sentiment. That seemed to have bothered some. I have been making money throughout the QE acceleration of the past month. QE is not creating credit, which is how fiat economies grow. QE is creating money which is depreciating the dollar and artificially increasing the nominal value of dollar-denominated assets. The marginal demand that drives the markets are hedge funds and carry trade. Borrowing dollars for nothing and throwing them into non-dollar-denominated markets suppresses the dollar due to the exchange. This is what has driven commodity markets to double since the 2009 low. CRB from 150 to 300 which in the Weekly I marked as a completed abc following the 5-wave 2008 commodity bear market from 500 to 150.


Although I did not like Greenspan's rate policy I believe that he would never have embarked on QE except in the most limited sense. Bernanke-style QE will not be a permanent part of the monetary landscape. It is a temporary phenomenon that will be discredited once the full ramifications of it are felt. The whispers on the street are that another big round of QE is coming. I don't believe this will happen because enough of the impacts of original QE are being felt and are creating an economic island U.S. This is what the socialists want, to erect fences around the economy to keep out the bad and only allow the good. So a falling dollar is seen as a good to them, but the bad aspects have yet to be felt. So far inflation at wholesale and consumer level has not responded to the panacea. The prices of commodities have gone up but these have not filtered into final goods costs either here or overseas. The trading partners do not perceive this as a good because they pay double, with increased commodity costs which are difficult to pass along into product pricing and a rising currency at the trade table. I actually heard a $2 trillion number floated for QE2. How preposterous! The final number will be much smaller and probably incremental. QE will fail and be shown as bad policy, but markets have to wait for the fallout to occur. William Miller was Fed chairman in 78-80 when the dollar tanked as a direct result of radically misguided Fed policy. The result was not economic good, but evil itself. We've seen an increase in gold to 1350 as scared investors seek to avoid inflationary fallout. Yet that inflation has yet to occur. Why? Because nobody wants to go further into debt and banks don't want more loans on their balance sheets. So the majority of this money has gone into leveraged speculation. The unwind will be legendary and will discredit the Fed, along with the increasing ire of our trading partners. This is Greek-style monetary policy and the Germans are not amused.

So I1 measures market sentiment toward the most sensitive litmus, the stock market. However, a falling dollar prevents that sentiment from translating into lower nominal prices. Hence, watching the dollar as a cue that the Fed's effect has worn off. If the dollar can have a sustained rally then market forces will be shown to overwhelm Fed action. The amount of Fed action is miniscule given the volume of international dollar flows, in and out. However, by enabling the carry trade and hedge funds the Fed multiplies the effect, not into the real economy, but into speculation. It never ends well.


10/26 3:10

I count DX as requiring 1 more minor new high to complete it's 5 up.  After that a decline large enough to support stocks and commodities would bring it back to the Sub-minuette 4 bottom around 77.30. 

10/26 2:30

DX futures have given a 90-minute buy signal with a 90-minute close above 77.90.  They are currently finishing a 4th of 5 of 5 up to complete Minute 1.  I'll be waiting for the abc pullback to 10-minute M/A to buy dollar, sell stocks, sell commodities.

10/26 1:40

In essence the Fed has been monetizing the federal debt.  By not selling the securities to the public Treasury has made the Fed a major buyer of federal debt.  Unlike other buyers when the Fed buys treasuries it makes magic money (not credit).  The Fed has been taking advantage of the treasury buying by slowly cutting back on it's crap holdings, leftover from Bear Sterns, MBS, etc.  However, the net effect has been to slowly increase it's balance sheet (make magic money). 
The Fed last did this in the late seventies.  Back then the bad side of money creation was inflation.  This time the bad side of money creation is protectionism, which is increasing worldwide.  If the Fed does not put the brakes on promptly the U.S. will be facing trade barriers and beggar-thy-neighbor with it's partners, deteriorating relations at all levels of their governments, and the potential loss of reserve currency status which would be devastating.

10/26 1:30

The 90-minute DX signal would be confirmed by a close above 78.15 which is .50 point above the daily short-term M/A (red line).  This would be the first daily signal since the c wave began.

10/26 1:25

I believe that the dollar is on the threshhold of a buy signal.   Once more new high breakout from an ascending triangle will confirm both a 5 and place it in position for a 90-minute close > 77.90.  This is a signal for both short stocks and short commodities. 

10/26 12:55

I count the wave 1 down for DJI at 11,182 and for SPX at 1188.11 with a wave 2 high of 1191.44.  This keeps alive the possibility of a 3rd down until the wave 1 lows are violated. 

10/26 11:45

I posted the Daily last night that QE is neutralizing market sentiment.  That seemed to have bothered some.  I have been making money throughout the QE acceleration of the past month. QE is not creating credit, which is how fiat economies grow. QE is creating money which is depreciating the dollar and artificially increasing the nominal value of dollar-denominated assets.  The marginal demand that drives the markets are hedge funds and carry trade.  Borrowing dollars for nothing and throwing them into non-dollar-denominated markets suppresses the dollar due to the exchange.  This is what has driven commodity markets to double since the 2009 low.  CRB from 150 to 300 which in the Weekly I marked as a completed abc following the 5-wave 2008 commodity bear market from 500 to 150. 
Although I did not like Greenspan's rate policy I believe that he would never have embarked on QE except in the most limited sense. Bernanke-style QE will not be a permanent part of the monetary landscape. It is a temporary phenomenon that will be discredited once the full ramifications of it are felt. The whispers on the street are that another big round of QE is coming. I don't believe this will happen because enough of the impacts of original QE are being felt and are creating an economic island U.S. This is what the socialists want, to erect fences around the economy to keep out the bad and only allow the good. So a falling dollar is seen as a good to them, but the bad aspects have yet to be felt. So far inflation at wholesale and consumer level has not responded to the panacea. The prices of commodities have gone up but these have not filtered into final goods costs either here or overseas. The trading partners do not perceive this as a good because they pay double, with increased commodity costs which are difficult to pass along into product pricing and a rising currency at the trade table. I actually heard a $2 trillion number floated for QE2. How preposterous! The final number will be much smaller and probably incremental. QE will fail and be shown as bad policy, but markets have to wait for the fallout to occur.  William Miller was Fed chairman in 78-80 when the dollar tanked as a direct result of radically misguided Fed policy. The result was not economic good, but evil itself. We've seen an increase in gold to 1350 as scared investors seek to avoid inflationary fallout. Yet that inflation has yet to occur. Why? Because nobody wants to go further into debt and banks don't want more loans on their balance sheets.  So the majority of this money has gone into leveraged speculation.  The unwind will be legendary and will discredit the Fed, along with the increasing ire of our trading partners.  This is Greek-style monetary policy and the Germans are not amused.
So I1 measures market sentiment toward the most sensitive litmus, the stock market.  However, a falling dollar prevents that sentiment from translating into lower nominal prices.  Hence, watching the dollar as a cue that the Fed's effect has worn off.  If the dollar can have a sustained rally then market forces will be shown to overwhelm Fed action.  The amount of Fed action is miniscule given the volume of international dollar flows, in and out.  However, by enabling the carry trade and hedge funds the Fed multiplies the effect, not into the real economy, but into speculation.  It never ends well.

10/26 11:25

Pima suggested a possible Ending Diagonal in SPX.  We'll see what the low today actually is as wave iv.

10/26 11:15

The dollar index futures are currently 77.85.  A buy signal will be in effect when a 90-minute close > 77.90 occurs.  Since this signal level is so close I am selling the 5% UUP at 22.52.  I will repurchase immediately when the signal occurs.

10/26 11:05

Here is the current critical support M/A:

10/26 10:45

I am currently 1% DJ futures, long QID, SDS, and DXD.  I'll increase short stocks and long dollar when dollar index has a 90-minute close > 77.90.

10/26 10:40

Covered 1% DJ futures 11,104.  Dollar failed to thrust through to 90-minute buy signal.

10/26 10:20

Shorted 1% DJ futures 11,111.

10/26 9:35

I came in this morning short 2% DJ futures, short 1% gold futures, long 2% QID, long 4% DXD, long 6% SDS, long 5% UUP, long 2% ZSL, long 2% SCO.
I covered 1% DJ futures 11,065.
SP futures broke their 30-minute M/A but I am short enough with all of the double-short ETFs.  Waiting for DJI 10,993 as break of critical support.
I1 bottoms either today (preferable) or tomorrow (a double-bottom slightly higher than today).
If critical support is broken then I'll hold short stocks.

10/26 pre-open

Covered 1% DJ futures at 11,065.  If SP futures can get a 30-minute close below 1177.75 then I'll short again.  Currently 1176.50.

Monday, October 25, 2010

10/25 Daily Commentary

The G-20 gave a tacit rubber-stamp of Fed money creation.  On Friday I stepped aside after the SP futures diamond broke upward at the close.  I shorted DJ futures, gold futures, and crude futures Sunday evening.  Today I bought 4% DXD when DJ futures approached but did not touch April highs and covered the crude futures in anticipation of an afternoon rally which materialized.
The effect of monetary manipulation front-running the election has negated I1, which measure market sentiment.  If the Fed is not content with market sentiment, which is deflationary, then it has within it's means the ability to create money.  This money weighs on the dollar and inflates assets denominated in dollars.  Since the dollar is the current reserve currency asset prices around the world also inflate in dollar terms.  The G-20, by not condemning the Fed for inflating their currencies relative to the dollar, has given tacit consent.  This means there is little international pressure on the Fed to eliminate or reduce the amount of QE it intends.  The German central bank is the most outspoken on the blatant dollar debasement and all parties turned a deaf ear to Geithner's proposal to reverse gravity.  Setting currency purchases by governments and central banks to achieve artificial current account surpluses and deficits is central management at it's worst.  Currencies convertible into nothing have limited impact on long-term economic trends.   See The Gold Standard later in this post.
So, today was a profitable day, as all futures trades as well as DXD purchased are all well in the black.  I1 has slowed but not stopped the general market inflation brought about by money creation.
The following table shows I1 values and SPX values with bottoms (B) and tops(T) marked.
                           I1      SPX
20100901 25.28408 108029
20100902 25.06659 109010
20100903 25.51281 110451
20100907 27.91625 109184
20100908 29.58433 109887
20100909 31.06375 110418
20100910 32.49334 110955 T
20100913 32.15619 112190 T
20100914 31.46442 112110
20100915 29.76997 112507
20100916 27.14117 112466
20100917 24.71507 112559
20100920 22.96243 114271
20100921 22.29074 113978
20100922 21.8606   113428
20100923 21.19671 112483
20100924 21.17547 114867
20100927 20.82228 114216
20100928 20.55654 114770
20100929 19.79494 114473
20100930 18.6971   114120  B
20101001 19.4164   114624
20101004 19.8343   113703
20101005 20.45848 116075
20101006 20.9075   115997
20101007 21.40699 115806  
20101008 21.63835 116515  T
20101011 19.81698 116532
20101012 17.54623 116977
20101013 13.80057 117810
20101014 9.866532 117381
20101015 6.519855 117619
20101018 3.461369 118471
20101019 .8808112 116590
20101020 -1.812707 117817
20101021 -3.515924 118026
20101022 -5.542804 118308
20101025 -5.851898 118562
20101026 -6.125878               B
20101027 -6.012274               B

As can be seen I1 did a good job advancing into the SPX high 9/10-9/13, a double top.  From 1122 on 9/13 I1 did slow the advance to a .115% daily average into 9/30.   The top 10/8 saw another period of slowed advance into today's 1185.62 of .16% daily average with another 1 or 2 days to the bottom. 
Friday offered an opportunity to step aside during the G-20 whose outcome I called as inflationary (in dollars) on Friday. 
In addition to the G-20 the estimate of Fed bond purchases has been ratcheting up over the past month.  I have no doubt that the Fed is facing political pressure to maintain bouyant markets in advance of the election and that is affecting the statements issued.  It has been obvious that the Fed for the past month has been pulling out all the stops to attempt an inflationary outcome both to overcome economic weakness and to avoid market meltdown prior to elections.  To maintain other than minimal stock short positions until evidence arrives of the bearish trend is howling at the moon.  The evidence of trend reversal lies in the DJI 5-minute, 370-unit EMA which is at 11,139 and would be broken at 10,994. 

Last week my position was 6% SDS and 1% DJ futures. Currently it is 6% SDS, 4% DXD, and 2% DJ futures. I also hold short gold futures. 
The dollar rallied last week beyond the buy signal level in it's 90-minute M/A.  It then reversed that signal after the G-20.  So currently we have 3-waves up and down from last week's low.  Heavy resistance exists at 77.48-77.55.  This is top of wave 1 down and the 90-minute M/A, currently on a sell signal.

Dollar index is in a potential 5-wave down to finish it's decline as long as 77.48 is not violated by more than 3 ticks.  What I have a hard time explaining to some followers is the effect of dollar weakness on stock prices.  As long as dollar is weak stocks will avoid any waterfall decline.  If a new buy signal is issued in the DX 90-minute M/A by advancing .45 beyond the M/A on a 90-minute close then stocks should already be approaching their own critical support break. 






The Gold Standard
In convertible markets the inelastic supply of gold would alter the general price level of all countries to achieve equilibrium in manufacturing and services sold.  High imbedded costs meant a general decline in the level of prices for all goods and services for a country because the level of imports would exceed the level of exports and gold would flow out.  The amount of money would decrease and every product would decrease in price in terms of specie per unit sold.  This would also have a depressing effect on the overall level of economic activity.   If government programs were a source of increased imbedded costs due to programs redistributing wealth then government revenues were themselves merely a flow of specie and if the costs associated with the programs exceeded revenues then bonds were sold not convertible into specie directly.  However, the amount of debt issued increased the manufacturing costs because taxes would be increased to pay the increased interest expense and debt repayment.  This would have the effect of causing gold to flow out as exports decreased and/or imports increased and would suppress the general price level and overall economic activity.  Thus, it was a given that increased debt as a % of GDP had the effect, after the initial purchases of goods, of diminishing economic activity.


The Uncle Ben Standard
When the Fed seeks to influence market sentiment by money creation it has the power to do so until the Fed itself becomes over-extended and reduces it's market operations to neutral. In the history of the Fed this is the first period of prolonged money creation without a bear market as a justification. Since the 1930's, loan activity followed Fed rate policy and open market policy (credit followed money). Ben is a student of the 1930's and is doing what academics have published should have been done in the 1930's. The fact that this is a different economic environment is irrevelant. By 1937 debts had been liquidated and the overall level of indebtedness was very low. Today debt is increasing from an historically high base. Credit is not the solution since lenders and borrowers do not wish to increase their already high risk. If credit is not the solution then money is not the solution, if economic stimulation is the goal. The other effect is to suppress the dollar. As long as the balance between excessive money growth and external capital flows rewards dollar outflow then stocks and commodities will catch bids by leveraged speculators playing the carry trade. They borrow money cheap in dollars that are depreciating and buy anything that trades in dollars, anything. How long this game can go on is dependent on how long they have ready access to ultra-cheap dollars. The catchup in carry trades happens overnight with leveraged positions unwound in global futures and currency markets. Left to their own devices the markets would have already been flowing into the dollar as dollar-denominated markets declined.

10/25 1:15

Crude just completed a 5 down and I covered short at 81.60.

10/25 1:05

Dollar index just hit 77.41.  Overlap with wave 1 down occurs at 77.49. 

10/25 12:45

I still expect the dollar decline to resume until DX futures clear 77.40.  This implies a stock rally to potentially DJI 11,235.

10/25 12:30

I've been looking for some topping pattern to indicate distribution in stock futures.  It's possible that DJ futures have completed a H&S.
However, until DX futures clear 77.40 I expect the dollar decline to resume.

10/25 12:15

Dollar decline should correspond with stock mini-rally.

10/25 noon

Still expecting a rally to complete an abc up in stock indices.  It should stop well short of the highs.  Left shoulder of DJ futures potential H&S is 11,186.  This is roughly 11,236 in DJI.

10/25 11:45

5 up, possible head-and-shoulders in DJ futures on a rally to 11,180 to complete an abc.

10/25 11:35

Stock indices have a 5 down and are in wave 3 of c upward.

10/25 10:15

DJ futures came up to the April high, 11,200 today vs. 11,206 then.  Bought DXD 4% at 22.40.

10/25 9:45

Crude's been making slightly higher highs forming 3-wave up in the topping process.  All I can do is allow the top to form.  Current stop 83.325

10/25 pre-open

Short crude, gold, and DJ futures overnight.   Moved crude stop to 83.275.
I believe that there will be one more low in the dollar index which should be the bottom to buy.  There have already been big rallies in stocks and commodities so there may be a disconnect with the dollar. 

10/25 4:00am

Top will be confirmed only by SP taking out 1186.50.
Stop on crude at 83.25

10/25 3:35am

Shorted DJ futures 11155
Count appears complete.

Shorted GC futures 1344.42
Gold retraced to prior 4th wave down. 50% retracement is at 1352, max is 1357.

Shorted CL futures 82.475 Crude counts complete.

Until dollar index finishes a 5 down to low below 76.20 the above can trade higher.   I see stocks confirming high is in place with SP futures below 1187.

Sunday, October 24, 2010

10/24 8:40pm

Changing the SP short to DJ futures at 11155

10/24 8:40pm

Changing the SP short to DJ futures at 11155

10/24 8:00pm

Orders:
Short SP futures 1185.75
Short GC futures 1344.42
Short CL futures 82.475

10/24 1:00pm

Markets open in a few hours.  In the midst of a blatant currency devaluation the U.S. points it's finger at China.  Meanwhile, G-20 ministers dither and no perceivable change has occurred.  Germany is now proud of the UK for it's budgetary austerity and continues to rein in the EU golden shower on it's profligate southern members.  I'm sure the stronger G-20 members were exchanging notes on how to best sterilize the Fed and Treasury money creation and prevent their currencies from appreciating further.  I'm stepping aside from currencies until the dollar takes out it's low.
Near the close Friday I increased my stock shorts and short crude.  The market upticked out of the diamond and I brought my stock exposure back to Thursday's level.  I count a b wave up ending and the c started at and after the close.  If this is the case I can short stock, silver, and crude futures at higher prices.  Since commodities are looking like a retracement rally is in store this supports the prospect of a Sunday evening pop up in stock index futures.  I'm looking for nominal new highs, if any.  I'm currently flat all futures except for a tiny DJ futures longer-term position.

The market is still at weekly resistance on SPX:
I1 is declining through Tuesday or Wednesday.  I have a ton of buying power and will use it in the following way:
Short gold futures 1% at 1344.90
Short crude futures 1% at 82.47
Short SP futures 1186.
If SP does not reach target then shorting at 1176 stop.

Friday, October 22, 2010

10/22 Weekly Commentary

The market was very quiet today, no doubt waiting for nectar from the gods who break bread in Korea this weekend.  A very nice diamond formed over the past 2 days and at the close it broke to the upside.  Futures followed through into the 4:15 close.  I entered shorts at the top of the trendline but reversed them on the breakout.

So far the stock indices have traced out 5 up going into today, so if there is weekend buying it should be another 5 up to complete an abc. The last rally into the close was a 5 up, a reaction and the beginning of the 3rd up.

Which comes first, chicken or egg?  What drives what,  currencies drive stocks, commodities drive bonds, bonds drive stocks?  To my mind, it's the same impulse driving markets.  Markets can either run on their own or be "assisted" by fiat money.  Commodities have had a good run since March, 2009 due primarily to the Fed.  At what point do the markets assert their own authority.  Economic activity, even in China, does not support these commodity price levels.  The markets are being driven by cheap money, with hedge funds and carry trade borrowing cheap and leveraging up to buy commodities, stocks, and whatever.  I am tired on not being able to increase my short levels beyond entry level, but I can't until the risk acceptance turns.   The weekly S&P GSCI gives the picture.

Commodities have already turned.  Analysis of silver and crude have revealed they have already made their tops. I'm sitting on a large amount of buying power and am getting frustrated, along with you guys.
The dollar had a washout after the stock market closed, collapsing to 74.60 before recovering to 77.26.  I levelled my stock shorts today to yesterday's 6% SDS, buying 2% QID at 13.16 and selling at 13.14 and buying SDS 77.42 and selling 77.36.  I covered the silver and crude futures shorts.  Sunday I want to get short crude again.  There should be some announcement from Korea and futures reaction.  Meanwhile I have to assume that the breakout upward at the close indicates the outcome will be reflationary.  If SP futures decline below 1176 then I'll short futures.
The April top in the DJI is 11,258.  This is 45 points above Thursday's high.

10/22 4:12

Covered the silver short 23.26.

10/22 4:10

Discretion got the better part of my valor.  Sold the SDS I just bought for 27.35.  Covered the crude short 82.00.  Futures are staying above the upper trendline. 

10/22 3:51

Bought 2% SDS 27.42 at top of diamond trendline.

10/22 3:49

Shorted crude futures 81.925.

10/22 3:35

Bought 2% QID 13.16.

10/22 3:10

Normally a diamond is a top pattern. Selling at SPX 1179.50 and 1178.75. Also at DJI 11,049.  With I1 down through Tuesday-Wednesday I have to believe the next move is down.
Small increments 2%.

10/22 2:50

Last hour's normally exciting.  Today was a POMO day but the pop just wasn't there.  The gang in Korea might say something.  I thought the opening was enlightening.  Futures were up 5 SP just before the opening but the cash market allowed nothing more.  All I can do is trust that the next move will be down and buy on the first hint of a downturn.  I have support at 1175 and 1173 SP futures because the market has gone nowhere the past week and these longer M/As have caught. 
Sometimes, you just have to cut the crap and make it simple.  Here is a descending triangle in SPX:

10/22 2:15

Here's Jack's SML chart, no new highs.

10/22 1:10

Here is an OBV chart for SPY.

10/22 1:00

My action point for 2% DXD is DJI 10,985.

10/22 12:55

Shorted SI  futures 23.15.  Hoped for a bounce to 23.40-60 but never made it.

10/22 12:20

The market is standing right above key support levels.  Since the market has gone nowhere these M/As have been catching up for a week.   Breaking 11,036 DJ futures is a sell signal.

10/22 12:15

Geithner wants G-20 to come up with sustainable trade surpluses and deficits and then set exchange rates to maintain them.  Cart before horse, again.  Socialist thinking.  If a country's cost structure, it's price structure, has been distorted by misplaced government actions then that country should pay the price in trade.
German Economy Minister Rainer Bruederle said he was opposed to numerical goals.

“Macroeconomic fine-tuning and quantitative targets are not the right approach in our view,” Bruederle said.
There you have the great divide.  Wacky ideas from U.S. and head-shaking from people grounded in reality.

10/22 noon

DJI is only 16 points from critical support M/A at 11,103.  The diamond breaks at 1175.25 but I have to wait until it takes out yesterday's low and then 10,960 to get bad with shorting.  Buying 2% SDS on 1175.25 break.

10/22 10:50

The probability for the 90-minute M/A to reverse is 20% on the average.  The flash point for reversal is close by at 77.22 90-minute close.  On a daily basis I use the following for confirmations.  The hourly channel shows support right here.

The daily channel shows DX ready to re-enter the channel with resistance at 80.50.

10/22 10:40


The dollar index is at support at 2 different M/As.  The 90-minute M/A will only be broken on a 90-minute close < 77.22. 

10/22 10:20

My thanks to Carl for the diamond idea.

10/22 10:00

The rally from yesterday is complete as an abc.  Confirmed if SPX declines below 1177.60.

10/21 8:35am

Stocks completed a 3-wave up yesterday and overlapped the 3-wave down from Wednesday.  If SPX, DJI, and Comp complete a 5-wave up then I'll wait for the correction and the subsequent completion of another 5 up to go short. This is the most probable scenario.
If, however, these indices do not complete their 5 ups I'll wait for a decline below yesterday's wave 1 highs to go short.   I'll use DJI 11120, SPX 1177.50 as break points for this contigency.

10/22 pre-open

Last night I posted silver was in 3rd or 3rd.  I sold SI futures on decline to 22.95, which was completion of the 5 wave and decline to the channel bound.  I'll wait on a bounce to at least 23.60.

The stock market has remained range-bound since last Wednesday.  Whether I1 stopped the market in it's tracks or the market stopped I1 in it's tracks is semantics.  The fact is that small position was taken and I'm awaiting next Tuesday or Wednesday when I1 bottoms. Yesterday DJI exceeded the orthodox high last Wednesday by 60 points.  The market is only 50 points from the critical support M/A and 190 points from breaking it.  Since it's so close I've reduced my current exposure is 6% SDS.  If DJI hits yesterday's high or slightly exceeds it in line with a 3-wave count then I'll increase SDS.   

Thursday, October 21, 2010

10/21 Daily Commentary

It's reality vs. Ben.  U.S. credibility with the world's central bankers and their governments is falling like a stone.  Geithner either is the most duplicitous speaker to greet them or is dumb as a rock.  Every statement that he makes is in direct contradiction to the evidence.  Now he says that the U.S. is not bringing down the dollar.
Ben has prodded them into "quantitative easing" and encouraged stimulus along with Geithner which have gotten many of them into tight spots.  Between the lies and the poor judgement it's amazing that they allow either of them the privilege of speech.
Within the markets it's again reality vs. Ben.  He is goading markets higher with his speech and buying Treasuries,  but the markets are refusing the cattle prod.  Soon the markets will recognize him as an academic incompetent and Geithner as a forked toungue.  Meanwhile if you're a bear you are fighting the Fed.  10 years ago this was a prescription for disaster but we are in a brave new world, where markets are slowly taking control of politicians, not the other way around.
DJI 5-minute, 370-unit EMA is at 11,097 with a break occurring at 10,952.  Since this is so close I scaled back my ETFs to 6%. 
Overlap occurred on the rally from today's lows with this morning's decline from the highs.  I do not require precision in EW.  In the old days charts and EW worked with a fair degree of precision.  Now the markets are not as crisp.  However, there was some overlap in all the indices so it can't be ignored.  The test will come tonight.  If SP futures can decline by more than a point below their late afternoon high it will confirm that the rally was a 3 and therefore the odds increase of a 5 down.  The high was 1174.25.
However DJ and SP futures are forming possible rectangles.  If they continue forming they are a classic wave 4 pattern.
 
The SPX rally yesterday produced what appears to be a 5 up, so a 5 up from here would be a bad sign.


The dollar index rallied hard off of this morning's low.  If the stock market rallies tonight this will cause a pullback.  DX futures below 77.40 would change the picture back to uncertain.  The index failed to break it's key M/A by a 90-minute close .45 points below.  However it's rally is riding the underside of this M/A.
I exited the short crude position pending a return to 82.  I hold 2% SCO the short crude ETFs.
I still hold short silver futures, which I believe are in a 3rd of 3rd to the downside:
Just for the record, for the benefit of detractors, I have made great money with short silver, short crude, and long DX trades.  I1 has stopped the stock market in it's tracks, but has allowed the commodity sector to deflate. 

10/21 3:59

Sold 4% SDS 27.55.  Overlap occurred in too many indices.
Wave 5 confirmed in futures markets with SP > 1178.

10/21 3:28

So far, Nasdaq Comp has no overlap and SPX has trivial overlap.

10/21 3:20

Bought 2% SDS 27.56

10/21 3:10

Upward abc looks done.  SPX 1180 is bottom of wave 1, so must remain intact.

10/21 2:00

Market completing (iii) or c at support.  The rally from here will tell if the downtrend is real. Critical support broken at DJI 10,954.  Chart support at 10,920 is just beneath it.

10/21 1:45

Looks like SPX is forming either (iii) or c here.

10/21 1:30

The rally in SPX yesterday looks perfect as a 5 up.  With only a 3 down today caution is in order. 

Exited crude short at 80.60.

10/21 1:10

Sold 1% DX at 77.625 on the completion of the 5 up.

10/21 12:50

Dollar index is in 5th wave up. 

10/21 12:30

pima
Do you count SPX as 5 down?

10/21 12:10

Crude, silver, and dollar futures have been making money.  I stepped out of 6% SDS at a small loss.  Sold my QID for almost break-even.  Short-term target is SP futures 1172.50.  This decline was an abc.
Here is the dollar chart with it's key short-term M/A.  90-minute close < .45 below M/A is trigger. 

I don't have a target for silver.  As long as it does not rally .70 beyond the blue line I'll stay in it.