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BREAKING NEWS! ….more of the same craziness.

October 15, 2008
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Isn’t it amazing?  Not only is everything breaking news now, but every talk show and news show has a panel of 4-8 experts on round the clock.  They muse about whether or not the bottom was put in on the big up day on Monday?  I wonder if they think about how much wasted breathe comes out of their mouths?  Surely, they’re all pretty intelligent folks.

Today’s selling shouldn’t be a surprise.  Very natural in terms of a strong downtrend with a bear flag pattern that triggered to the downside.  The Question is whether it will test the low or go further.   There is a potential target using the flag pattern on the whole last run down from the high in mid September.  In that case, The pole is about 45 pts. on the spy, and counting from the breakdown of the flag at right around 100, the target would be 55.  Yikes!  Let’s hope not.

(Click on visuals to see them larger.)

For those that listened to the TOS chat with Tom O’Brien, he seemed to take comfort in the lower volume selling coming off the peak of this rally attempt from the bottom.  He points out that the key will be what happens, volume-wise when the low is tested, that 85 area.  If it breaks below on high volume, then there’s still plenty of sellers.  If it tests or even is violated a bit on low volume, then that should be a good sign that most of the sellers are done for a while.  Take not that you could call it relatively low volume on the closing hour today as well.

Fibonacci retracements are pretty amazing.  I can’t say I’ve studied them enough to speak authoritatively on them, but it’s just weird how the levels show up as significant so often, even after the move is done and it shows a level that had already happened.  Like the 62% line on the SPY chart above.

Also, notice that we’re fighting with the 78.6% retracement level from the last bull market.  This level is sort of the last hope for a rebound, as I understand it.  After that, next stop, 765, which strangely would not seem much more dramatic than the last few days.  Here’s a look at the SPX on a long term view and where we began trading the group account.

Market is down 39% versus our 24%.  We’re winning!  But even if a 24% loss doesn’t feel like something to celebrate, there are a few good lessons to take note of.  Firstly, above all, a sound money management system is crucial and means the difference between living or dying.  Second, a well thought out system followed with discipline will likely outperform over the long run even if applied to the wrong type of market.  That sounds a bit useless to say, but the gist of it is that the average investor actively trading on pure subjective guesswork throughout this time has probably been punished far more than our account and it’s 45 trades in that time.  (Note: Return to the first lesson.)  For a spreadsheet with the activity of the account since it’s start, go to the group’s Yahoo site file section and look in the Paper Trading Documents folder.

As for the official market posture at the moment, I’m bearish.  Indexes down on all time frames.  Market Posture intermediate term line(Green) still in the lower reversal zone despite the bullish cluster a few days back.  The Cluster could be played for a bull rally on a move above the 20 line for the green intermediate term line if you’re eager to buy.  Sentiment line also trending lower at this point.

The VIX Volatility index is well past any long standing resistance levels and still flirting with the recent top and potentially new highs.

This all adds up to a resounding Bearish Call for the intermediate term(1-6 months). You know what that means…….”BUY BUY BUY!”  🙂

Given how abnormally far below the 200, 50, and even 20 MAs we are on the major indexes, I wouldn’t be surprised to see a relief rally of some sort lasting anywhere from weeks to months.  So to echo the clarity we’re getting in the collective message from the “pros” on TV, it’s really anybody’s guess.  Hence, the high Volatility levels.  (Note the duration of time and number of big sell-offs it took to put in the bottom in 2002.  It took about 9 months and three major spikes to test the bottom.)

Meanwhile, back in Tokyo, Godzilla is gobbling up Yen perhaps in a massive effort to unwind the massive carry trade that went on for so long.  The FXY Yen tracking ETF is a bit jumpy being not the spot currency market itself, but still shows a pretty clear head and shoulders pattern.  It shows a height of about 5.5 pts. and a target from the neckline area of about 101, which it just almost nicked intraday a few days ago.  It may well come back to test the 96 area as new support or even get back in line with the new uptrend support from the bottom.  But it sure seems likely we’ll be heading toward 103 in the near future.

This ETF has an estimated annual operating expenses of .40%.

“About the Japanese Yen: The Japanese yen is the national currency of Japan and the currency of the accounts of the Bank of Japan, the Japanese central bank. As of April 2007, average daily turnover of the Japanese yen in the foreign exchange market is the third-most-traded currency in the world, accounting for 16.5% of global foreign exchange transactions. The USD/Japanese yen pair is the second-most-traded currency pair, accounting for 13% of the global foreign exchange transactions.”

Source: BankforInternational Settlements,
Triennial Central BankSurvey, 2007

Since the ETF is only a couple years old, here’s a look at another source for a longer term view of the YEN.

The dollar seems to have some intermediate term strength going, though the volume is much weaker on this second leg, for whatever that’s worth using this ETF as a proxy.

So for the near future, it looks like the dollar will continue to strengthen.  But the 20 year look at the dollar isn’t very reassuring for a major, lengthy and sustainable rally.

Can both the Yen and the Dollar continue to rise amidst this global crisis?  Well, I suppose that as two of the three most traded currencies in the world, it could make sense that they are both a flight to safety of sorts from all other currencies and economies less likely to weather the storm.  But in the end, between the two, it seems the dollar has far more working against it.

I’m still trying to figure out how to interpret the JPY/USD with respect to the Dollar and the Yen each as seen against the basket of major currencies.Here’s the long term MONTHLY chart for USD/JPY.  Looks like a weaker dollar to the yen in the years ahead if this support breakdown follows through with the bear flag of the last 16 months or so. It calls for a target of about 85.0 in perhaps nine months or so.

Gold?  Flight to safety?  Looks pretty bullish still, long term, though this Bull flag-ish pullback has been a bit sloppy.  Besides, I think this time frame may be a touch longer than what this type of pattern is best applied to.  Regardless, we’ll soon know whether the upward moment of the last three years will overcome the downward swinging of the last year.

Just to make things a touch more confusing, here’s the yield of the 10 Year Treasury Note, which goes up as the demand for bonds go down along with bond prices.  Usually bond prices go down when there is reason to move money out of “safety” and into stocks or something else with a higher yield potential.  It seems to me a bit early to tell what the true reaction will be to all this government action.  For the moment, I suppose a strengthening dollar and an iffy Gold market is enough to ease off on the buying of Bonds.  But this is definitely stretching the limits of my understanding of the “Big Picture.”

With the old “eye balling it” method, I’d say that the 10 Year Note yield is unlikely to rise meaningfully above the 43 area on this chart (4.3%).

Actually, now that I’ve bombarded you with just about any and all major market indexes, here’s a rarer known bonus.  The Baltic Dry Index – a shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and time to delivery (speed). Changes in the Baltic Dry Index can give investors insight into global supply and demand trends. This change is often considered a leading indicator of future economic growth (if the index is rising) or contraction (index is falling) because the goods shipped are raw, pre-production material, which is typically an area with very low levels of speculation.

It doesn’t look good.  But I wonder how much lower this can go?

Well, there you have it.  Entirely too much information for one blog post intended to simply put out the “Market Posture.”  I hope it was somewhat useful.

As I said once before, I won’t be sending out a daily market commentary for the group trading account.  As long as the posture is bearish and there are is no actual activity in the account, I won’t feel compelled to make a report.

Please feel free to chime in and educate me, question, or comment on any of the above.

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