A Technical look at Bonds and Interest Rates...

There has been a lot of chatter regarding interest rates of late, so I decided that I would take some time and look at the technicals along with the supply and demand patterns. Interest rates have moved considerably higher in the last few months which has many believing this environment is here to stay. Taking a look at the two charts above, we are following ticker symbol TNX, which tracks the yield or interest rate of the 10 year treasury bonds, which is thought to be the benchmark of interest rates.

The top chart above is a monthly chart going all the way back to 1998. On the chart I have highlighted the two significant bear markets inside the boxes. I have also highlighted the three significant bull markets by marking the low to highs with green horizontal lines, as well as annotations.

So let's walk through some of the characteristics of this price action starting from left to right. We have a bear market correction of 39 points (or 3.90%) from high to low. A bull market proceeds to push rates back up into the midpoint (gray horizontal line) of the prior trading range. The following bear market in rates proceeds to decrease interest rates another 3.90% (39 points), matching the previous. So now the technical signs seem to point to interest rates rising to at least retest the midpoint of this most current trading range at 3.55% (grey horizontal line-bottom right), just like it did from 2003-2007.

One thing we should also take away from this is the fact that rates did indeed rise almost the entire time of the 2002-2007 bull market in equities. I think there is a consensus building out there that rising rates would be crippling for the stock market. And maybe a parabolic move in interest rates would indeed be damaging. But a gradual rise in rates due to increased anticipation of real economic growth, in my opinion, should not scare you.

The bottom chart above is a weekly chart of interest rates showing short term support and resistance. Downside support should come in around the 2.30% range and if we can break above the 2.75% - 2.85% I would expect that retest of the trading range midpoint at 3.35% which would also match the size of the last bull market in interest rates. The last three bull markets in rates over the past 15 years have produced moves of 2.0%, 2.2% and 2.7% higher. I don't think we should expect anything less from this one as well.

This chart above shows the weekly price action in TLT, or long term US treasury etf, going all the way back to 2009. Bond prices and interest rates move inversely, as rates rise the prices of bonds drop and vice versa. The bonds with the highest durations or longest date to maturity usually get hit the hardest when rates rise. Bonds become cheaper because for example if rates were to move to 4.0%, all of a sudden your bonds paying 2.0% doesn't look so good. And less demand decreases value or price.

So the chart above shows the bear market that long term treasuries endured during the end of 2008 until 2010. I've annotated our current setup in TLT, which has now produced matching 17pt corrections from high to low. It has so far found support at the $106.50 level, resistance now stands at $114 - $116. I believe eventually TLT will find itself testing the downside support levels marked on the above chart which would match the size of the last significant bear market and also retest the breakout point in 2011. This area should become strong support for a move higher. I am not sure if we will ever see new highs again, but I think it would be a good spot to step in if you are looking for some bond exposure.

Let's conclude by taking a look at the performance of the different bonds year to date. The above chart actually shows that the high yield corporate, junk bonds and short treasuries are positive on the year while US long bond, TIPS and investment grade corporate are showing losses for the year.

Market Update and Analysis:S+P,Tech, Finanicials, Utilities, Transports + next weeks important events and econ data...

In last week's update and analysis post we talked about the potential of short term upside of the coming in around the 1693 level on the S+P, with the chance of a test of 1700. That's exactly what happened as we opened the week moving slightly above the previous week's high before experiencing a short term correction.

On the chart above I have annotated the fact that the 1676 low ended up being an equal sized correction of 22 points as that of the previous. Judging by Friday's price action into the close I would say there is a decent probability that Friday's low ended the correction and we are now headed well above 1700. But with everything related to the stock market, nothing is 100% guaranteed. So I have annotated on the above chart 2 levels below that should offer good support for a move higher. Whether it comes off of Friday's low or one of the two support levels below, I expect the markets to move much higher over the coming months.

I will reference back to this long term chart above of the Dow Jones Industrial Average for potential longer term upside targets. That target area now stands between approximately 16,580.58 - 16,711.22.

One thing that concerns me a little for the short term, is how the cumulative Advance - Decline line struggles to make new highs with the S+P and the Dow. This picture could easily change next week if some strong demand were to come in. But for now it is at least worth noting.

Taking a look at the year to date performance of each of the sectors in the S+P, we can see not a whole lot of change here. Technology has dropped a couple of places lower in the last couple weeks off the back of Microsoft's very weak earnings report. I like to pay special attention to the charts of the top performing sectors, oftentimes I see a rotation out of the best sectors precede a correction in the overall market. So let's take a look at a few:

Health Care, the S+P's best performing sector year to date, continues it's strong up trend. Well above it's 2008 high and most recent swing high earlier this year.

Consumer Discretionary sector also remains in a strong uptrend setup.

Financials remain strong on a technical level. I see near term resistance around the $22 level on the XLF. We have an open weekly price gap, prior swing high as confluence. And $22 level would yield an equal sized bull market off the 2011 lows to the bull market that started during the 2009 low to 2011 highs. An area to watch for going forward.

I mentioned the tech sector before and here on the chart above (XLK) we can see some near term resistance at the 38% retrace level taken from the 2000 high to the 2000 high to 2002 low.

Taking a look at the transports using the above chart, we can see still trading well above it's 2008 and 2011 highs respectively. It's next measured move target comes in around $7276. It's also important to note that there is a potential inverted head and shoulders pattern which would have an upside target of around $9000. But I think it's probably best in the short term, to take one upside target at a time.

The final chart I want to take a quick look at the Utilities sector using the DJU. Utilites have gotten no love of late, and for good reasons. In a rising interest rate environment Utilities is probably not the sector you want to be overweight. But should it be completely left out of your portfolio?

The above chart shows a long term chart of the Dow Jones Utilities. I have annotated on the chart how both bear markets of 2008 and 2000 produced almost equal sized corrections. And that even though Utilities have underperformed this year, they still remain in a nice uptrend. If they can find the strength to take out it 2008 highs you have, in my opinion, a high probability of over time, hitting it's next upside target of around $680. Which is still about 35% away.

Let's conclude with a look at next week's important events and economic data. This past week was loaded with important earnings while this upcoming week is loaded major central bank events and economic data. Among the ones that deserve the most attention would be Wednesday's FOMC statement by the Federal Reserve. I don't expect anything new to come out of this statement, but I am sure short term trader's will find some "spin" to take a position on.

Thursday the European Central Bank will hold a press conference. And Friday, the Non-Farm Employment and Unemployment rate data will be released in the morning, before the bell.

Amazon (AMZN)...

Yesterday after the closing bell, Amazon reported earnings that fell short of Wall Street expectations. According to CNBC "The internet retail giant reported a surprising second quarter loss of two cents per share, compared to forecasts of a five cent profit. Amazon also issued a cautious current quarter forecast, as it continues to invest in new areas like cloud computing services." The stock price has dropped as much as 6% in after hours trading.

Taking a look at the technical picture, we have a weekly chart of the price action in this stock price going back to 2010. We had a strong rally into 2011 that took the share price up roughly $140 points to it's swing high. The proceeding correction found support at it's midpoint of the range and continued moving higher. As of yesterday's close, the stock price had just finished a move higher that matched the previous short term bull market in length ($140 points). Shares of Amazon are set to open lower this morning.

Going forward I think the $280 level will be the next short term support area. The $265 area could come into play next, as support from the rising trend line below. The midpoint of this most current bull market comes in around $240 and that would be the area where I would draw my line in the sand. I would remain bullish/bearish below.

(EDIT: 12:31 PM EST: Amazon stock price has caught a significant bid since it's opening gap lower. It now trades above last week's high. I believe this means that Amazon is headed to it's next upside target projected at $325-$330.)

Facebook (FB)...

Facebook reported earnings after the closing bell yesterday. According to CNBC " The social media giant reported revenue of $1.81 billion, up 53 percent from $1.18 billion a year earlier." The stock responded very well to the earnings news, gaining as much as 20% from yesterday's closing price. As of right now it is looking to open up in the vicinity of $30-$31 share price.

In the chart above we take a look at the technical picture and the price action in this stock since it's IPO. Even with it's 20% gain today it still trades below it's $45 IPO price. In fact the share price fell some 60% in the months proceeding it's initial public offering.

The dark grey horizontal line points out the midpoint of the range from the all time highs to all time lows. As we can see on the chart after it's swing low in the $17 price range, the share price traded inside a roughly $7 point range, broke out to the upside and proceeding to climb to the top of the next projected range high roughly the same length in terms of points, as the first. This range high also coincided with the midpoint and provided strong resistance.

Support was eventually found at the trend line and 61.8% retrace level and with today's big open to the upside, I think it's a high probability that we end up at some point re-visiting the previous high at $32.50. The next measured move target above comes in around $37.50.

Support below now stands at $29 and $27 respectively.

UPDATE: 9:52 AM EST: Shares of Facebook have opened around the $34 price level. I think this means a move to $42.50 and higher is now underway. Support now stands most likely around the $31 level which represents the midpoint of the trading range.

Apple (AAPL)...

Apple came out with their Q3 earnings after the bell yesterday. Business Insider has some excellent in-depth coverage that I would highly recommend checking out in more detail. Basically the key takeaways were:
      
Revenue: $35.3 billion versus $35.18 billion expected by sell-side analysts. Whisper  was $37 billion. Apple's guidance was $34.5 billion (midpoint).
EPS: $7.47 versus $7.34 expected by sell-side analysts. 

From a technical/price action stand point, I have posted the above charts. The top most chart shows the decline in prices from $705 to it's most recent just under $400. It's interesting to note that there have been two separate but almost identical $200 point drops in the stock price that got us to those most recent lows.

I believe we are in the middle of a base building pattern that should conclude with a break out to the upside. The bottom chart above shows that pattern a little closely, it does appear to have a somewhat distorted inverted head and shoulders pattern. I think $420 below is decent support going forward and the real test will be can we take out that $465-$470 high.

If we can, a move back into $550 would be a high probability, which would coincide with the top end of a projected trading range and midpoint of the $705 highs to current lows.

I think any further weakness below $420 and of course $385 would send the stock price back down to $300. The bear market in Apple during the 2008 financial crisis sent the stock down over 61%, so an Apple stock price around $300 would about match that bear market drop in percentages. I would have to assume this scenario is unlikely but if it did occur, would make Apple a great buying opportunity.

It's always important to have a plan for both sides of the trade, it helps keep you from becoming "married" to one side.

Netflix (NFLX)...

Netflix (NFLX), the best performing stock on the S+P 500 year to date, reported it's earnings after the bell yesterday. According to Forbes "The company reported earnings per share of 49 cents on $1.07 billion in sales. Analysts had expected earnings per share of $0.40, on revenue of $1.07 billion. In the year-ago period, Netflix earned 11 cents per share on revenue of $889 million. The company added 630,00 U.S. subscribers in the quarter, boosted by the latest season of Arrested Development, CEO Reed Hastings said in an investor letter. Investors sold on the new subscribers number, which missed some analysts’ expectations."

This mornings price action in NFLX has been volatile. It opened up right around a strong support level indicated on the above chart as a prior swing high. It later retraced the full amount of the sell off, in turn closing it's price gap from yesterday's session. NFLX continues to be in a very strong uptrend, but on the flip side it's been up some 180% or so year to date, so it's probably not a name you want to chase too strongly.

If price is unable to hold the $248 support area, look for a drop to around the $227-$232 area which represents an equal sized drop as the last two sell offs in NFLX highlighted on the chart, matched up with a previously open gap and a prior swing high as confluence. As long as one of these support levels holds I don't see any reason why this stock can't hit it's next upside targets around $292-$300.

A failure at $227 would probably mean that a drop to $200 and lower is underway. As always, time will tell.

McDonald's (MCD)...

McDonald's reported earnings before the bell this morning. According to Barron's "The company surprised investors by reporting slower-than-expected earnings per share growth and shrinking profit margins. U.S. same-store missed expectations. And CEO Don Thomson warned that results for the rest of 2013 are likely to remain a challenge."

From a purely technical standpoint, the uptrend does appear to be on the exhausted side. We are seeing a pattern of lower highs as depicted by the trend line on the above charts. I'm willing to give the uptrend the benefit of the doubt above $96.50-$97. If we can hold that level a move back into Friday's range is on the table.

Failure at support and I would say a move back down into $93's and possibly as much as $88 seems like a realistic possibility.

Market Update: Analysis of the short and long term trend, S+P 500 and Dow...

 

This week we saw continued strength in the major averages. Both the Dow and the S+P 500 traded to new all time highs. The chart (60 minute) above depicts what I believe to be the short term trend of the S+P 500. Our first trading range became the initial rejection of prices below 1600 as we retraced back above and into the 1620's. Normally an equal sized move from the last swing low becomes the first minimum target, in this case we blew through that to the upside. That makes the next and usually the maximum upside target, the projected top of the next trading range which is computed by adding the full amount of the previous box trading range to the high of the range left behind. This equates to about 1693.50 on the S+P 500.

 

I think it is likely we see a retracement back down into support either from here or maybe after a test of 1700.  I have marked a couple levels which should come in as support, they are derived from taking the midpoint of the current trading range and matching them up to previous short term swing highs.

 

 

Taking a look now at the Dow short term chart, we can see a very similar setup taking place. It's projected upside target has not quite been reached just yet, so there is room for some potential upside which could coincide with a test of 1700 on the S+P as well.

 

 

Now keeping in mind the longer term trend and the potential upside resistance that awaits us. If you recall this chart above from last week. I believe all signs point to an eventual swing high being put in somewhere around the above mentioned zone. I think it's futile and probably foolish to attempt to pick a top in a market like this, but I believe it's also good to have targets for all your trades/investments along with having price levels to be cautious when approaching. Once these upside levels are achieved I will begin to elaborate what we can expect for downside potential if these levels do produce strong resistance and a failure of the short term trend.

 

 

Lets take a look "under the hood" once again at one of my favorite indicators. This is one of the reasons why I believe a short term retracement to support is entirely possible. As you can see the cumulative advance-decline line is still below it's May 22nd top as the S+P 500 has exceeded it's. It's a minor divergence that after having a relatively uncorrected rally deserves some attention.

Finally let's take a look at the sector performance, the top chart shows 1 month performance. On it we see many of the cyclical sectors outperforming with a rebound in Utilities as well. The bottom chart shows year to date performance with Health Care leading the way along with the cyclical sectors. After this weeks performance in names like Microsoft, Intel and Google, the tech sector finds itself near the bottom of the list.







Largest Municipal Bankruptcies in US History...

In regards to the events that have unfolded in Detroit this week, 24/7 Wall Street ran a piece yesterday citing the biggest municipal bankruptcies in US history. They are as follows: (credit goes to Alexander E.M. Hess, Michael B. Sauter and Samuel Weigley for their excellent research)

5. Stockton, Calif.
> Amount of liabilities: $700 million (est.)
> Year filed: 2012

Stockton filed for bankruptcy protection in June 2012 when it had around $700 million of bond debt it could not afford to pay because of other obligations. Of this total, $147 million was owed to employees participating in the state’s pension program, broadly known as CalPERS. When Stockton filed for bankruptcy, it had approximately 292,000 residents, making it the largest municipality by population at the time to undergo reorganization. A year after going to bankrupt, Stockton City Manager Bob Deis told The Record that the city has cut $2.5 billion over 30 years by ending retirement contributions to city employees, negotiating new contracts with labor unions and settling expensive lawsuits, among other factors. An initiative to raise the city’s sales tax, which would help Stockton raise revenue, will also be on the ballot in November.

4. San Bernardino, Calif.
> Amount of liabilities: $1 billion (est.)
> Year filed: 2012

When it filed for bankruptcy in early August 2012, San Bernardino became the third California city after Stockton and resort town Mammoth Lakes to file for bankruptcy in the span of just several months. San Bernardino faced a $46 million budget deficit and over $200 million in unfunded liabilities to retirees for health care and pension obligations, among other problems. In all, the city claimed to owe over $1 billion in debt. However, a judge has yet to approve the eligibility of the bankruptcy petition. CalPERS, the city’s largest creditor, has argued that San Bernardino has failed to disclose key financial information in its bankruptcy filing.

3. Orange County, Calif.
> Amount of liabilities: $1.7 billion
> Year filed: 1994

Orange County declared bankruptcy in December 1994. At the time, the county had adopted an aggressive investment strategy. Attempting to make outsized gains, the county’s investment fund had relied heavily on borrowings. The city then used these funds to make bets on interest rate moves and to buy complex financial instruments. The county ended up with roughly $1.7 billion in losses. The county had to lay off 500 workers as part of the cuts it had to accept as a result of its bankruptcy. Former Orange County Treasurer Robert Citron was eventually convicted of defrauding investment fund members and misappropriating assets.

2. Jefferson County, Ala.
> Amount of liabilities: $3.2 billion
>  Year filed: 2011

Jefferson County, Alabama, filed for bankruptcy in November 2011 after plans to refinance an estimated $3.2 billion worth of sewer bonds fell apart. At the time, Jefferson County’s overall debt was $4.2 billion. The county is currently taking steps to exit bankruptcy this year, with a plan to raise sewer rates by approximately 7.4% annually for the next four years and nearly 3.5% a year thereafter. The county recently tapped Citigroup Global Markets to help refinance $1.9 billion worth of sewer bonds, while the county commission in June announced plans with the investment banks, bond insurers and hedge funds who hold much of the county’s debt to exit bankruptcy.

1. Detroit, Mich.> Amount of liabilities: $18.5 billion (est.)
> Year filed: 2013

With more than $18 billion in liabilities, Detroit’s recent bankruptcy filing is the largest in U.S. history. Detroit’s problems are hardly new. The state appointed noted bankruptcy lawyer Kevyn Orr as emergency manager for the city in March, giving him the authority to sell its assets and restructure its labor deals. But already at the time, the situation looked bleak. Orr himself described Detroit as “the Olympics of restructuring,” and whatever hopes there were of saving the city were quickly wiped away as unions, retirees and lenders all failed to make concessions. Meanwhile, because of its shrinking population and past financial mistakes Detroit could not cover its debt using tax revenue.

The thing that stands out to me is that Detroit's bankruptcy is not only the largest in US history, but the largest by over almost 6 times the amount (in terms of liabilities) of number two on the above list. I hear many experts say this was to be expected and largely priced in, I think only time will tell for sure.

Update on Google (GOOG) and Microsoft (MSFT)...

This week some earnings of note came out for some of the big tech names. Let's take a look at the fundamental and technical pictures for both. Let's begin with Google (GOOG), earnings were released on Thursday after the closing bell.

Siting source: Barron's

"Shares of Google (GOOG) are down $12.86, or 1.4%, at $897.86, after the company last night missed Q2 revenue and earnings expectations, with a quarter-over-quarter decline in ad dollars from partner Web sites, and a 6% year-over-year decline in cost per click, the price Google charges advertisers, on average.

The stock hasn’t received any ratings changes from the main brokers today, and although estimates are going down, many bulls are maintaining or even raising their price targets, advising investors to look past the disappointment."

So it appears Wall Street remains bullish on this name, and for good reasons, it is still growing. Even from a valuation stand point after this amazing run up that nears $1000 share price point, the stock still remains only about 1% above it's 5 year price to earnings average and almost identical to it's 5 year price to book average.

Now from a technical perspective I have shared the above two charts. The top chart is a weekly chart going all the way back it's IPO in 2004. On it I have annotated the fact that above $900/share we have now matched the size of the 2004-2007 bull market in terms of points. Now this can be taken as a caution point, but the way I see it there is no reason to be bearish the name until/unless it breaks below that long term trend line currently coming in at just above $705.

For the short term, the bottom of the two charts shows a daily chart that has been annotated to depict the recent price action. Since we held the high of the last trading range box after matching the measured move, a maximum upside target for the short term would come in around $980-$1000. Support stands around the midpoint of this recent trading range, which is approximately $845.

The other big tech name with earnings this week was Microsoft (MSFT). Again siting source Barron's

"Shares of Microsoft (MSFT) are down $2.16, or 6%, at $33.27, after the company this afternoon reported fiscal Q4 revenue and earnings per share well below analysts’ estimates, citing the impact of the decline in PC sales, but noting strength in corporate and cloud computing software."

Also adding in conclusion:

"On a phone call following the report, Microsoft’s head of investors relations, Chris Suh, was kind enough to step through the results briefly to underscore certain items. He pointed out that on the plus side, “unearned revenue” was at an all-time-high in the quarter, at $22.4 billion. He confessed the Windows and PC side of the business was a “mixed bag,” reflecting what the company believes was single-digit growth in business PC sales, but declines of more than 20% in consumer PC sales. He said the company still hoped that its update to Windows 8, the dot-one release, will lift PC sales. But he also said Microsoft recognized it needed to do a better job in tablet computers."

By the close of Friday's trading session MSFT shares ended down over 11%, coming in as one of the single worst day's on record for Microsoft. From a technical perspective a dramatic move on high volume has to be respected. This is probably not a name I would be "knife catching" anytime soon. However this drop does come after a very nice run up in it's share price, right into strong resistance.

The top chart shows that strong resistance coming in around $37 and change which is both the 2007 highs and the midpoint of the 2000 all time high to 2009 lows. For the short term the bottom of the two charts shows a couple potential support zones going forward.

Things ARE getting better...

Shortly after the close of yesterday's session, the news came out that the city of Detroit had indeed filed for Chapter 9 bankruptcy. Many professionals in the industry have stated that this was always just a matter of when, not if. Regardless this is the biggest municipal bankruptcy in US history, there is just no easy way around it.

However, I for the most part, happen to be a contrarian and an optimist. So I thought this would be a good time to point out some positive developments as well. I am not an economist, I am a technical analyst that has been very bullish on the macro picture in terms of equity prices. With increased central bank intervention I believe the ride could be a volatile one, but it is a ride that I believe will take equities much, much higher over the coming years and decades. About a month ago I came up with a post entitled "Are you ready for Dow 150K?!". In case you missed it, click on the link to check it out. The only thing I may have some regret about in writing that post, was the title. I think the title got people to either write it off completely or end up focusing on the 150k Dow target and not the meat of the message. I don't regret writing the post at all, it's the way I feel whether we hit that target or not. And it offered a perspective unfamiliar to these investing times.

Basically the message comes down to the facts that are #1) major averages are coming off historically oversold levels after declines not seen since the great depression. #2) the two major sectors of the US economy (tech and financials) have both seen 80% drops as a sector on separate occasions in the last decade. #3) We have been in a period of historically low sentiment regarding the US financial system as a whole. So much so that after making new all time highs in every major average, most people are still, 5 years after the financial crisis, looking for a major stock market crash right around the corner. Call me crazy, but as a contrarian play alone, this market has seemed like a screaming buy for me the last few years.

But maybe I am crazy. As I said I am a technical analyst that looks at charts at patterns. I am not an economist, I would be well out of my league to even attempt to make off like I was. That is why I want to reference a couple guys in this industry I really like and admire a lot. There are only a handful of guys that I follow and these two happen to be on top of that list.

 

 

Scott Grannis a chief economist at Western Asset Management from 1979-2007, has a tremendous blog I follow very closely for my macroeconomic data. In his post Budget outlook improves dramatically he has laid out a very informative look at the federal budget deficit. I highly recommend you follow the link and read the entire post for yourself. The above two charts are his main charts that portray this message.

He goes on to say and I quote:

"Over the past four years, and especially in the last 12 months, there has been a dramatic improvement in the federal budget outlook. Revenues have grown at double-digit rates of late, while spending has slumped. As a result, the budget deficit has plunged, both in nominal terms and relative to GDP. Almost two-thirds of the decline in the burden of the deficit since 2009 has come from the spending side, and that is good news since it leaves more room for the private sector—the source of most productivity gains—to expand."

He concludes:

"From a supply-side perspective, it's refreshing to see how much can be accomplished by the private sector in the face of serious fiscal headwinds (e.g., big increases in regulatory burdens and rising marginal tax rates): even just 2% GDP growth per year can solve lots of problems if the government gets out of the way.

This is all very encouraging because the huge decline in the deficit—which is now back to levels that are quite manageable—all but eliminates the need for still-higher tax rates. Indeed, it even opens up the possibility of lower tax rates in the future. The bi-partisan tax reform effort now underway, led by Sen. Max Baucus and Rep. Dave Camp, could produce dramatic pro-growth results if done correctly. That would be the best news I could hope for, outside of a permanent delay to Obamacare, which would almost certainly boost federal spending with little or no benefit to the economy."

Next there is Cullen Roche from Pragmatic Capitalism. Cullen is another good guy in the business, he is always very helpful with visitors and followers. And I find him to be very objective and genuine, really looking to help people get good information as opposed to pushing an agenda.

He also had a fascinating post today on how as of now, the fear trade has been demolished. I would highly encourage you to follow the link and visit his site as well. One of the main points he makes I could not agree with more, and unfortunately I find this prevalent in today's investing world.

He says and I quote:

"If you’ve been paying attention over the last few years, you probably remember how many people predicted hyperinflation, surging bond yields, soaring gold prices, a cratering US Dollar and a collapsing stock market.  This was the fear trade.  You overweight gold, short US government bonds, short the USD, short equities and laugh all the way to the bank.  Parts of that trade have worked out OKAY (like the gold portion over the years), but on the whole that trade has been a big disaster.  In other words, fear lost out – again.  And I think a lot of people who bought into the fear mongering nonsense are angry.  They’re angry because they backed their political beliefs with their wallet.  They’re angry because they listened to so-called “experts” peddling their political beliefs as an understanding of the monetary system.  They’re angry because they read scary websites that claim to have predicted the crisis, but have gotten almost everything wrong since 2008.  They’re angry because they let their emotions get in the way of sound analysis.

Look, there’s plenty to be upset about.  I am not here to claim that all is well in the economy and in the USA.  In a lot of ways this country feels as disjointed as ever.  But I see a lot of people who seem to be upset for reasons that can be pinpointed to little more than their ideological beliefs.  If I am right then these people have no one to be upset at but themselves for constantly buying into this fear mongering nonsense.  You have to be very careful approaching the monetary system and the economy with an ideological or political bent.  It will lead you astray at times.  I know it has certainly led a lot of people astray in the last 5 years…."

Very strong words indeed, and he concludes with some very helpful lessons we all can benefit from, not just in terms of investing. He states...

"The good news is it’s never to late to learn from mistakes.  I’ve made plenty of mistakes over the last 5 years.  But I always try to learn from mistakes.  So the question is, will people actually try to approach the monetary system and the economy objectively, rationally and apolitically?  Or will they continue to expose themselves to the same biases and ideological pitfalls that have led so many people to fall for the fear trade?"

So there you have it. Some good food for thought to counteract all the noise that will inevitably continue after developments in Detroit, Fed tapering, take your pick. Hope you enjoyed.

An Update on Oil and Gold...

Last week on StockTwits I posted the top chart above. I have been following Gold rather closely as I am sure many of you have been too. So I figured I would throw out some observations. In the top chart above I mentioned how I was not sure if the bear market in Gold was completely over just yet. But that I thought the risk vs. reward was really starting to favor the bulls. I believe at the very least a retest of the  $1525 low area seems like a pretty high probability.

As for the downside I noted the nearing measured move target below and the matching percentage drop of the 2008 bear market, which has now been achieved, as potential signs of an oversold condition. The bottom chart above drills down a little closer, using the daily chart of the GLD (Gold Trust Etf). Here I have noted the short term roadblocks that are keeping this trend down.

The $127.60 area would match the size of the retracement rally of April of approximately 13.5 pts. The $129 level is the midpoint of the April drop from $143.43 to the current swing low at $114.68. Lastly and maybe most importantly, the $130.50 which would represent the open breakaway gap in June, a double bottom and swing low and most likely by that time 50ma resistance. I would venture to say that any continued strength above that zone would make $1525 and maybe more, a very realistic probability.

As for Oil, the top chart above shows weekly price action all the way back to 2009. We have had a trading range for the most part between $80-$100 but now find ourselves trading above $107. The bottom chart shows daily trading and what I perceive to be the current technical setup. We have had a significant box trading range of approximately 8 pts in length and a maximum range of 12.75 pts which is approximately the range from this years high to low. Adding these amounts to the breakout zone can give us a clue about potential upside targets/projections.

As you can see 8 pts added to the breakout zone gave us the $107.25 zone that provided us some resistance at least in the short term. A next measured move upside target would then come in around $112. Which would come by adding the 12.75 pt length to the $99.25 breakout zone. Also note from the top chart the swing high left behind in 2011 which comes in around $114. I believe any further strength above $107 would mean the $112-$114 level would be next. Continued strength even above that zone could have us going to $120 next. But we'll see how it all plays out.



Market Update: Resilience Continues to Amaze!

Last week we talked about how this week's price action would likely be pivotal to the short term trend. We would either break out to the upside of the price channel or continue the sell off into one more lower low. Well we got our answer this week as the market continues to show it's strength and resilience.

The chart above (S+P 500 daily chart) shows what I presume to be the current technical setup. I find that often times when price really takes off well above a previous swing high, it is better to look at retracement levels starting from that swing high left behind to the last swing high, instead of the traditional low to high setup. And that is exactly what I have done in the chart above. I've also noted how the last two major rallies off the November 2012 low have equaled between 190-200 points, that would now give us somewhere in the vicinity of 1750 as a potential measured move target above. Support below, as I see it, now stands in the 1630 and 1600 area going forward.

I want to reiterate how futile it is to attempt to pick a top in this market environment. What I am attempting to do is locate potential high probability targets for longs and an area to be cautious going forward. It's not recommended as an area to reverse 100% short with as much leverage as possible.

 

So staying with that theme of spotting potential upside targets and "caution areas" let's take a look at a pattern in the Dow Jones Industrial Average that I have been keeping an eye on. This chart above is the monthly chart of the Dow Jones Industrial Average going all the way back to the 1990's. I have highlighted each bull market high and the interesting pattern I see here is how this major average has been making new bull market highs of almost identical amounts above it's previous bull market high.

 

The difference between the 1998 and 2000 bull market high was about 2400 points and the difference between the 2000 and 2007 bull market high was again approximately 2400 points. So I have taken the liberty of adding that amount to the 2007 bull market high to come up with a potential area to watch out for. There is also some added confluence with that trend line above that connects the previous two bull market highs.

 

Now let's talk about "time cycles" for a minute and see if we can come up with some more potential confluence. The last major bull market lasted approximately 5 years (2002-2007), although the bull market that began in 2009 began after a deeper sell off than the 2002-2007 bull market, it's 5 year anniversary comes March of 2014. One other thing of note would be the difference between the last two bull market highs (2000-2007) comes in around 7 years. So adding that amount of time to the last bull market high in 2007 would also give us the year 2014.

 

 

Now if you have followed my analysis before you know how I like to look for patterns and I am especially fond of studying the technical structure of our last long term trading range between the years 1966-1982. The chart above shows that trading range in the S+P 500 and how it played out.

 

Again I have annotated the bull market highs and the length that each new bull market high exceeded the last, as well as the time cycles in between. Notice the similar patterns displayed above to the one we currently find ourselves in. It will be interesting to see if this current pattern plays out like it did in the past and I think it is something we should be cautious about for the near future.

 

Next we take a look at the cumulative advance-decline line. We can see some divergence here now, as the SP 500 (top) is making new closing highs the NYAD (bottom) is not confirming. This will be interesting to watch as we approach and possibly take out the previous high on an intra-day basis. This indicator may very well be telling us that it doesn't have enough short term strength on first attempt to push right through. In that case I believe a drop into support below would be necessary before proceeding higher.

Now we take a quick look at the sector performance since the May 22nd correction began to the swing low in June. The relative strength continues to be seen in the Cyclical, Technology, Health Care, Financials and Industrial sectors.

 

 

Lastly I've decided to add a new section where I display a list of 20 stock picks. The approach is rather simple, I take a top down approach and look at the sectors displaying the most relative strength. Then I attempt to screen for names in those sectors that display growth potential, a good balance sheet, and not trading at a premium from a price-earnings perspective.

 



Market Update: Analysis for week of July 8th...

This week we saw some range bound trading early on that ended with a strong rally on Friday in response to the Non Farm Payroll or employment report that came out in the morning. Both the Dow, S+P 500 and the Nasdaq all came away with gains of around 1.0% on the day. Looking forward, this next week sets up to be a key week for the short term direction of this market.

This chart above is the daily chart of the S+P 500. With Friday's rally it puts us right at the upper trend line resistance of the price channel. A little above that is also a broken up trend line which should now become resistance. My view remains the same, I still believe any further upside will be limited to these resistance points and produce a swing high below the 1654 swing high highlighted on the chart above. The next big move would then be a drop to the vicinity of the 1530 area also highlighted on this chart above. Also bear in mind our key turn date is the week of July 22nd, which I have explained in a previous post.

What would it take for me to abandon this thesis? A move above the 1654 high would in my opinion shift the odds in favor of the bulls and most likely mean the correction ended at the 1560 low. At which point any further weakness would most likely end above 1600 and begin the process of rallying to new bull market highs around 1750 or so.

 

Taking a look now at the 60 minute chart of the S+P 500 to gain a little clearer picture of these resistance levels above. You can also see where the previous drop really took off, leaving very little if any retest. This also leads me to believe this week's move may very well be more of a "back and fill"  into the next short setup as opposed to a new short term bull market. These two resistance levels above and ultimately 1654 will be the final judge.

 

 

 

Taking a look "under the hood" at the New York Stock Exchange advance versus decline line we can see a nice rally but ultimately falls short of making a new higher high so far. This indicator plots the daily difference between how many stocks are advancing on the NYSE minus the stocks that are declining. And it's reading are set to a cumulative setting to show trends. I like this indicator as a supplement because it tends to do a good job of identifying trends. We noted a few weeks ago how this indicator was falling sharply and thus in turn boded poorly for short term stock price performance. Which is exactly what happened.

 

 

Our last chart takes a look at the sector performance relative to the S+P 500 since the May 22nd top. It's always a good idea for a starting point, to get an idea of what sectors are outperforming the broader market especially on corrections. At that point you could choose to overweight those sectors by either picking individual names that also have good relative strength, dividend yield, strong balance sheet and any other fundamental approach one feels most comfortable with. Or simply buy the SPDR etf or low cost index fund that tracks those particular sectors. So we see from this chart above that as of Friday's close the top performing sectors remain the Consumer Cyclicals, Financials, Industrials and Technology. We also find the weakest sectors to be the Utilities, Materials and Consumer Staples.

 

So in conclusion, we should still be expecting some more downside in the broader markets over the next couple of weeks. I expect the ultimate swing low to come in around the 1520-1530 vicinity for reasons I have mentioned in previous posts. Once this swing low is put in place a move to new bull market highs will proceed. I fully expect to see the Dow trading around the 16,500 level by next year. Once we get close to achieving that upside target I will explain in more detail how I arrived at that particular price level and what we can expect after it is attained.