Greenback Bounce?

In today's column, I presented a case for a short-term bounce in the dollar. Will it happen? Maybe, maybe not but the evidence does at least give it a chance.

Sterling has broken down (see the chart of the day at the www.quicktakespro.com home page). The loonie has flattened out and and has room to go to short-term support. The Mexican Peso has been flat vs. the dollar since April.

These are warning signs of two minor and one mid level currency vs. the dollar index. The other mid-level is the yen and it remains in a strong rising trend. The 800 pound gorilla (or 57 stone gorilla for you pre-1985 Brits) remains the euro as it is about 57% of the dollar index. And it, too, remains in a rally.

I'll have more in my monthly Marketwatch column due out Thursday but I can say now that there are some momentum issues in yen and euro.

And just in case you think the entire weakness thing in since the greenback peaked in March is thanks to the yen, think again. The Aussie dollar is the thunder from down under. Watch for momentum issues here, too.

Filipino Ferry Boat

From a chat room, posted by Clayton Seitz:

At as Mike Epstein would suggest, this market is starting to feel like a Filipino ferry with an awful lot of folks on one side of the boat."

OK, it is a little insensitive to actual human casualties that occasionally occur in the less developed parts of the world but Mike was a trader, not a diplomat.

So what works?

I needed to sit down yesterday and probably needed a good single malt scotch. Good thing it was still 10 am and even I have standards.

I am going to withhold the names but rest assured I am not claiming any credit here.

• Gold rallies again to the grand mark and holds. Since I have never heard of a quadruple (or quintuple) top, this reeks of bullishness.
• A colleague points out a giant inverse head-and-shoulders pattern. Again this is bullish but requires a breakout before we take action.
• A gold stocks trader friend tells me all the signs are positive, from price action to Barrick Gold removing its hedges to the economy with the stimulus inevitably leading to inflation.

OK, back up the armored car. Let's buy!

Not so fast, Goldmember.

• Gold COT shows small speculators at a huge net long while commercials at a huge net short.
• Short-term gold cycle just peaked.
• Gold does not go up over the past few weeks in a meaningful way given all the bad news, stimulus money and talk of leaving the dollar in the circular file as a world currency.

OK, cancel that buy order.

Then an insider in the gold business tosses in his two ounces.

• Most of the real activity is done away from the exchanges and that means COT does not pick it up. The physical market is what counts.

OK, tape up that buy order and send it in.

The COT guy and the insider guy are like the irresistible force and the immovable object, they are that good. The rest of us are in a different league and caught in the epic battle between the two.

But wait, there is more! (quoted from "Off Kilter", a bagpipe led rock band in Disney World Canada pavilion)

A bearish one-day reversal on higher volume - like the one we had this week in the stock market - should be sold, right? That's what we are taught, at least those of us that took the time to get some actual chart reading training.

Nope. A few guys did some studies showing that on average the market was actually up over the next few days.

Wait a minute, a key outside-day reversal to the downside with heavy volume means the market will go up? Where is that single malt?

I really am having a hard time philosophically with all of this. What works? Is it nuts and bolts chart reading of trends? Patterns, breakouts, momentum, COT, you name it - are apparently all fluff these days. Breakdowns are fakeouts most of the time. Volume falls for six months as stocks rally 60%.

OK, I am done whining. Here is something possibly useful for those who read this entire post - the stock market is still in a rising trend. Breadth is still good. Rising trendlines are still intact. And for you fundamental types, the recent reversal pause and breakout in natural gas must be saying something positive. I don't care if it was a March 2009 stocks did not implode relief rally or a demand driven rise thanks to future economic activity, either.

The Future of Capitalism

I was rummaging through my document archives and found some notes I took on Lester Thurow's "The Future of Capitalism" waaaaay back in 1998. Given the unfortunate whispers of the decline of the United States as a global economic power I thought this might be of interest. Remember, these are just a few sketchy notes. And I have no idea what "Plates" are.

Perhaps there are some useful nuggets in there. I like the one about religious fundamentalism (remember, this is from 1998).

---------------------------------------
Surging inequality
China focus will change to India focus
Communism had good education
No competitor to capitalism now so it will not implode

Economic Surface of the Earth

End of Communism (Plate 1)
Offers lots of cheap labor

Migration (plate 4) pushes unskilled workers into 1st world

New technologies (plate 2) generates skill shift
Need to offset this (by massive skill investment) is resisted by the elderly (plate 3)

Global economy (plate 4) forces wages down

Without dominant power (plate 5) there is no economic locomotive.

Progress occurs when technology meets ideology

Inflation is extinct

Japan will crack
Europe is biased towards social programs so jobs will flee
Global bubbles burst together
Uncertainty breeds religious fundamentalism (its familiar in uncertain times)

Capital is human and no longer ownable

Need to spur long-term thinking and R&D - Government's only role

More on Why I am leaving Chase

Perhaps the CEOs of JPMorgan Chase and Bank of America read this blog and were very nervous. Naaaahhhh. But it is a nice coincidence that the news of a revised fee structure came out this week. Debit card fees were the exact reason I had enough of Chase.

Read the NY Times article:
http://tinyurl.com/nabljb

I am still leaving - unless they apply some of these rules retroactively to my accounts. Penny wise and pound foolish.

Podcast

I was interviewed today for the Market Technicians Association (MTA) podcast series. It is a general interview from getting into the TA business, how my day goes and what I think about the stock market. Subscribers and blog readers know what I think.

But if you are new to the business, looking for a technical analysis job or fresh out of school the first half might be interesting to you.

http://media.mta.org/podcasts/2009-SEP22-michaelkahn.mp3

Poll results

Now that I put the blog back to its regular color it may be hard to see the poll numbers on the right side of this page. Here they are in a nutshell:

Where will the S&P 500 top out in the next three months? Out of 123 responses it was a dead heat among 1200 or more, 1150, 1100 and "its there now." There is absolutely no consensus or even leaning among responders to the poll.

As for the next question - After the above, how deep will the next fall be? We had 104 responses and it was 38% for "respectable correction like July." That's on the order of 10% using round numbers.

28% went for "scary correction" and that is take to be on the order of 20% from wherever it tops.

What was interesting was the rather significant percentage of people looking for new bear market lows. Not enough to say anything contrarian but there are people out there that think this is the mother of all sucker's rallies.

What does it all mean for the buy, sell or hold decision. Of course, this is a tiny sample size but it does give us an idea for the mood out there. And it is not of much help in determining the buy, sell or hold decision.

It was a good try. Let's see how the mood changes when the expected 10% correction does finally hit. I bet it will sour in a hurry.

Why I am pulling all my business from Chase

JPMorganChaseWamuBankOneBearStearns pulled some crap on me this week and although this megacorp is one of the few financial companies still raking it in they make a good example of how a huge corporation fails to serve its customers.

Through mergers, I know have three personal accounts, three personal credit cards, one business account, one business credit card and one home equity loan with Chase. That's a lot of "relationships," as they love to say. Yes, it is still small change in the greater scheme of things but I generate enough deposits and interest payments to make it worth their while to have me as a customer.

I won't bore you with what they did - or should I say did not do - that is making me take all of my accounts and loans elsewhere. The point I want to make is that as I went up the chain of command from teller to officer to manager to central customer support to supervisor there was absolutely no flexibility on how they were going to fix the problem.

Before ending the call with the supervisor I asked, "so when I take my accounts elsewhere is there going to be someone there who cares?"

Think about this - nobody seems to have a vested interest in my business. Even the Dunkin Donuts shop down the block bent over backwards to fix an order error that actually cost him money. And we are talking about a customer who spends just a few dollars a week there. I pay Chase many hundreds in mortgage interest each month let alone what the deposits might generate for them.

I can take my business elsewhere but nobody will see a demerit on their record for it. Not the branch. Not the company. Not the loan officer.

I liked the branch I used - and it was Washington Mutual - as they knew me and provided excellent and friendly service. Their tellers were creative in solving any problem I had and I felt good banking there. Enter Chase and the place is now a cookie cutter, by the book robot.

Too big to fail? Oh, they will, at least as a retail bank. But then again, maybe that was their plan. Scoop up WAMU for nothing and use their assets to make sweetheart deals elsewhere.

Silly American taxpayer, we don't give a @#$%^

The Sprit of the analysis

A few weeks ago, I wrote about some changes in the stocks that were getting way too much share of the market's daily volume. One of them was Citigroup (aren't they like Village-group by now?) and I said it had an island gap reversal.

One reader commented that I was wrong about the pattern since it did not conform exactly to the rules. My reply was that it met the spirit of the analysis if not the letter of the law. It also had a small RSI divergence so it was good enough for me.

As we can see in this chart two weeks later, it worked quite nicely.

The moral of the story is once again to use a fat crayon and not a fine point pen to draw technical patterns.

Apologies for the Blog Color

I changed the background color for the blog so everyone can see the poll results better. Apparently, blogger does not give as much color control as we need and for some reason puts the poll results in white color. Why on Earth?

If anyone knows how to change that away from white, please let me know.

Results so far - absolutely no concensus on where the market is going over the next three months but if it tops a slightly bigger than June-July correction is expected.

So far, these polls are more bull than bear although obviously too small a sample at this time.

Take the Polls

There are two polls to the right. The first asks how high the market is going before correcting within the next three months. The second asks how bad the correction will be, again assuming it happens within the next three months.

If you think the rally will last into next year without an important pullback, choose 1200 or more and just a few percent dip.

Rant on Market Analysis

This is an excerpt from Monday's Quick Takes Pro newsletter.

We’ve been thinking a lot about market analysis over the past few weeks. Why has what we’ve had great success using stopped working?

Yes, we know markets evolve and we need to adapt but this is not what we mean. We know that not every chart pattern works as intended but over time, and using appropriate risk anagement, the odds of making money are pretty good. Or at least they were.

Now, we see things like a shooting star candle, complete with a confirming next day decline, lead to a new high immediately after that. Again, it happens but not day in and day out like it has this year. What about falling volume over the course of the rally and how rallies need fuel – volume – to continue?

We’ve seen technical analysis “events” that were extremely flawed just keep going as if they were textbook. The golden crosses come to mind here, as the simple average crosses should not have meant anything but then the exponential Nasdaq cross soon developed. The Nasdaq signal has a mediocre track record but then the S&P cross happened.

Then Dow Theory supposedly signals a buy but the sentiment was all wrong. It was like water torture as a parade of bad signals marched by, each flipping us the bird. Had they been bunched closer together then maybe their sum total would have been enough to provide a more classic signal by a confluence of indicators.

But no, they were spread out far and wide. What bothers us now is the lack of credibility that technical analysis – and all analysis, by the way – has developed in August and September. Sell in May? No way! Sell at resistance? No chance! (OK it was a very weak rhyme). Sell on a divergence? Forget it, we cannot even begin to rhyme that one. (Suddenly Alice Cooper lyrics come to mind.)

So what is going to happen when the signals for a true change in trend pop up? Will we notice them? Will anyone listen if we report them?

In order to cope with this we are going to have to look at different types of data generated by the market and the actions of those within. It is still the basic definition of technical analysis but we are going to have to forego chart patterns and momentum and all the other traditional trappings. This market is not trading as a fully free and fully functional market should. Not with all that liquidity being pumped in via free money at the Fed window. Not with governments stepping in to prevent capitalism from working by culling the herd of ineffective users of capital – like AIG, General Motors and the like.

So what then? Insider actions can be one way to cope. Market sentiment can be another
and we don’t mean the VIX. Indicators based on options, volume and tick are all suspect in a world where price changes are razor thin, firms front run the “book” and we have no idea if a trade was a hedge or an actual expression of bullish or bearish opinion. Did I buy a put option because I was bearish or to lay off risk of the long ETF I bought because I am bullish?

Time to end this rant but before we do we want to get across the message that we are indeed adapting to the new world order. Perhaps leapfrogging might be a better term as we are not adapting the indicators but rather we are adapting the entire concept of technical market analysis. Sorry Edwards and Magee, your time has past.

In this blog, I wrote that I thought stock trading has jumped the shark. When football coach Jimmy Johnson is touting a stock trading software package and using incorrect terminology to boot I have to believe that this industry is pulling out all the stops as it dies.

All of that money being pumped into the economy has created an overall stock market bubble once again. It is not going into the economy as jobs continue to disappear. Yeah, yeah at a slower rate but disappear they do. So where is the money going? Into stocks.

And what happens after bubbles burst? Well, you know. The problem is that bubbles can last a lot longer than we can fight them.

The worst case scenario

I remember giving a speech to a technical analysis group in 2001 and a speaker before me was talking about a giant head-and-shoulders pattern where the 2000 peak was the head. I did not see the shoulders but I imagine the 1998 peak and the post 9/11 rally peak were supposed to be them.

Anyway, the projected a downside target for the S&P 500 to something like 200 - near the end of the 1987 crash. As we know, it reached the 700s.

But now, we have the same grizzlies looking at the giant double top and projecting a drop down to the same levels. Why not? Same peaks and same giant movement as before.

I do not use linear charts for downside projection. I use log scaling and that brings me to my worst case projection. Based on basic pattern measurements, I get about 400 as a low - and that is if the depression-meisters get their unfortunate way.

I have said all along - for the past year - literally - that we would undercut the November low (hello March) and then come back one more time to scare people without setting a new low. Under this scenario, we get a nice base and the giant decade long trading range can continue with the next mega bull market - that will not set a significantly higher high.

Yes, I wildly underestimated the current rally. Let's get over that already.

We remember

On this most solemn of anniversaries, I would not be part of the New York community and an American if I did not acknowledge it here.

I was already working at home full time by Sep 11, 2001 so I was not in danger personally. However, the year before I was working in the World Financial Center and my morning commute took me through the twin towers perhaps 10 minutes before the first plane hit. From my 27^th floor window, I would have been watching debris falling before they gave the order to evacuate.

Needless to say, 9/11 affects me. And like so many Americans I remember exactly where I was, what I was doing, to whom I was speaking and what the weather outside was doing.

I also remember that the work world stopped and we were glued to the television screen. What may be surprising to many is that my preferred TV source was CNBC. I found them to be extremely professional, knowledgable and connected to downtown New York.

I also remember trying to keep order in my life by doing "normal" things. That day, I happened to need to bring my car stereo in for repair. The TV was on at the shop and the faces of the people working there spoke louder than words. They were in shock and doing normal activities, like fixing a radio, was the best option to keep them from breaking down.

Here is what I wrote in my Sep 26, 2001 Barron's Online column - the first one we did after the attacks:

"Much has been written about how the tragic events of September 11 will tip the economy over the brink and into recession. That shouldn't be too surprising. For the first time in recent memory, people were just plain scared -- about their safety, about the U.S. going to war, about the stock market's record-setting drop last week."

The word "scared" gives us the main point. Today, eight years later we are no longer scared and that should speak towards our collective spirit. That we continue to have anniversary ceremonies means we will never forget and we will always remain unified, not matter what partisan garbage happens in DC and everywhere else.

I Can Make it Say Whatever I Want

Don't you love data analysis? How about statistics? or (shudder) charting? And let's not forget the barrier to entry in the market analysis business (that would be none).

You read it here, folks, I can make a chart say whatever I want it to say if I torture the data long enough. Here is a chart I saw posted by a chart watching analyst.

According to his analysis, the market is finally hitting a real resistance level. Real? Are you kidding? What makes this resistance? Where is the justification from a psychological point of view to make people want to sell stocks and raise supply of shares in the market?

"Regular" resistance, or horizontal resistance, arises from the market's memory. It was a price in the past that brought out the sellers, either because they thought it was expensive or it was a place they could get out at break-even after a lousy purchase decision.

To be fair, trendlines do persist and come back into play after the market leaves them. People can get it in their heads that prices change at a certain rate so they might view certain levels as attractive or unattractive over time.

But some random line drawn on a chart is not necessarily a trendline. Look at the next chart.

Here, I left the top line in place as both the other guy and I agree that it is a valid bear market trendline. But instead of cherry picking the bottom line I dropped a parallel down and lo and behold it hits the market four times! Three were bottoms and one was a top (in June).

Using this analysis, the market had a major breakout in July through "regular" resistance and the lower trend channel line. The target theoretically is the upper line.

All of this is great in markets gone by but after last year these sorts of simple chart scribblings don't have the same efficacy. Too many people are watching and the market is still too unstable with the three-month T-bill still down there near zero (0.135% as of the close today).

You know what is really scary? This analyst may turn out to be right but not for the reason he cited. That would be enough for unsuspecting investors to subscribe to his services and get turned into market chum next time around.

Gold Shines and Implodes

Gold was one hot commodity over the past few days thanks to a perfect storm of fundamentals, technicals and the dollar. But don't let the edited title of today's column fool you, I am looking for higher prices.

So why title this post "shines and implodes?" Because the yellow metal hit resistance and retreated - in a big way.

Check out this chart from Futuresource.com.


That is one intraday failure, boy howdy! Given that it took place at resistance and with a huge fanfare of hitting the 1000 mark - which is nothing but a number on the chart, BTW - I have to think that we will get a better chance to enter long.

For disclosure purposes, I have owned gold since 570 and again somewhere in the high 800s (I think). Anyway, that it fails to hold above 1000 again will make the armchair technical analysts say "I told you so! Deflation is coming."

However, 1000 is just a round number and not a place where true technical resistance exists. A pullback now, maybe 50 bucks, would shake out the weak hands and set the stage for a true upside breakout.

Time for a Break

Ladies and Gents,

I am truly tired. It was a rough summer of fighting the tape and this week was just a whole lot of noise. Big news and opposite reactions. I've got nothing clever to say today other than a recommendation to take the weekend off.

No, not the "duh, its the weekend so no work" type of off but the "time to recharge my batteries and not even think about work" off. Take advantage of the long weekend and holiday to reconnect with what is important. The markets will be there when you get back.

Wake me up when September comes

Summer has come and passed
The innocent can never last
wake me up when September ends
- Green Day

I love all the experts coming out of the woodwork to explain why September is a nasty month for stocks. Some even deny that it is because there is no direct link to the economy or other funnymentals.

Yet there it is - with a track record.

Why does it provide bumps and bruises most - not all - of the time? How about "who cares?" It just does. Check this reasoning from a strategist to remain nameless:

"There is a reason why September has such a negative history," said Mr. X. He boiled it down to a question that market pros often confront about this time each year: "When you're a portfolio manager and you have gains for the year, do you pass that tax liability along to your customers or sell something you have a loss in?"

Uh, what does that have to do with it? You are selling something and that means supply in the marketplace. And what about 2008? Nobody had any gains going into September yet the market not only went down, it crashed!

September is a bad month because it is. Are you going to stand on ceremony or make money knowing that fact?

Quote of the....forever

Anytime I have found myself calling on myself to be patient about a move it was because I was fighting the damn thing.

Patience = I am wrong

-Ralph Vince