Michael Jackson's Best Dance Moves

This is a tribute to Michael Jackson - Rest in Peace. I'm still in awe of the dance moves.

Setup of The Day - Long

The largest ES point setup was this morning's setup - The market made a strong rally in the overnight hours - it spiked up around 1am. It then proceeded to correct back down to the 892 level. Indicators lined up well - although it seemed that the MACD divergence was weak. It was not a super strong divergence. ; From this mornings openings the pullbacks were minor. Bulls seemed to be in control of this movement from the start.

Setup of The Day - Short

This setup presented above on the 5m ES chart was a short setup at the 917 level. It offered low risk reward. A stop could've been placed above the high of the day. All the signals line up perfectly ; Divergence on the MACD , CMF - heading below 0, Stochastics >80 and turning down and Momentum (price divergence) ; The stop above the high of the day would also have been above r3 pivot point. 917 could've been sold with an exit at 910-912 ; +5-7 ES points.

Weekly Claims

Weekly claims continue to rise ;

• The advance number of actual initial claims under state programs, unadjusted, totaled 566,586 in the week ending June 20, an increase of 8,548 from the previous week. There were 358,159 initial claims in the comparable week in 2008.
• Almost 6.8mm collecting un-employment +29k for the week (SA+ and NSA+)
  
• Weekly claims +15k
• Nothing good in these numbers - No "Green Shoots " !
  

Trade Analysis

I sold the top of the channel 904-905 and covered at 902ish ; Small profit.

• MACD Divergence on the 5m chart did not setup great.
• 13d EMA and MACDH were not in agreement
  
• CMF had moved up
  
• Stochastic was topping - heading lower
  
• Internals were strong - not conducive to short.
• Fibonacci = It was within 50-61.8 "ambush" area.

It was one of those.....Why did I do that ? I pulled the stop to break even quickly and then scalped out of it - as I re-considered my rationale for taking the trade. I think I may have been lucky, not to get tagged with a loss.




It appears that the decision was the correct one.

SP500 220 Coming ? -- '29 - '09 Comparison

I thought I'd take a look at the decline in 1929 and compare that to todays decline. ; In 1929 the market dropped roughly 86% from top to bottom. That would put the SP @ the 220 level when all is said and done.

There were two V bounces in '29-32. The first V bounce occurred roughly 3 months into the major event. The current V bounce ('07-09), began roughly 5 months into the decline.

I'm speculating that the fiscal stimulus has slowed the rate of decline. The current bounce and "June '09 High" (if it holds), took 3 months to build, versus 5 months in the '29-'32 event. The stimulus, most likely accelerated the '09 bounce.

Time will tell if we have further to go on the downside, but when you look at the scope of the '29-'32 decline, you realize, how long an event that it really was -86% from top to bottom. Also a major drop from the top of the bounce. If we had declines of similar percentages, then 220 is not out of the question......

Durable Goods - "Hard"..ly Encouraging

5 Year Treasury Auction Results

The Bid to Cover dropped and the rate moved higher on the five year. We'll see if this sets up the beginning of a trend. We've seen interest rates on the med to long term notes continue to drift higher while rates are next to nothing on the bills. Bid to Cover seems to be weakening a bit on the the term notes. We've got another auction tomorrow - 7 Year Note. It will be interesting to see how much participation there is in the auction from US Government.

Fed Day Statement 6/24/09

The economy is weak and they are going to continue to dump money on the fire for awhile - markets are reacting as expected
---------------------------------------------------------------------------------------

• Release Date: June 24, 2009

  For immediate release

  Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

  The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
  
  In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Still Distributing.....SPY 1m chart

Even with today's fed event on tap and the rally in the SPY - both the Accumulation Distribution Indicator and OBV - On Balance Volume indicators are suggesting that there is still more selling taking place at higher prices. ; This price divergence with the indicator is pointing to further downside in the indices. That could all change after the announcement - No Trading today for me.....learning and watching.

Potential Setup - "Not Taken" - Fed Day

My rule today is not to trade on FED day. Too much volatility. I would consider the above setup as it did hit within my ranges that I had laid out in my analysis last night. It moved into the sweet spot of the FIBO analysis. There's also the possibility of a gap fill.

The Fed Effect - 4 Charts

The WSJ had a "weak graphic" that attempted to show how the markets performed on FED day. This information to me, by iteself was sort of useless.

I thought it would be more interesting to take a look at performance of the markets over a time period after the rate decision. That led me to compile the following charts. I think that these charts provide better evidence




Here's the near term impact from the 12/16/08 rate decision. It looks as though initially the markets loved the news and there was a large rally that took place. Within six trading sessions all of the rally effect was erased. The market then moved higher. January 6th proved to be an important "inflection" date. It was a swing point and high, just before a major correction took place that took markets to the March Lows.



Here's the impact from the 1/28/09 Fed Rate Decision - It was an initial rally, followed by a retest and then a selloff - carrying us towards the March lows. The market had declined almost 10% since the day prior to the announcement.



Here's the 3/18/09 rate decision - 10% increase after 16 days. ; Again a sharp rally on the day of the announcement ; followed by an increase.



The impact after the rate decision on 4/28 was UP - The markets were up over 8% within 5-6 trading sessions from the day prior to Fed day.

The main conclusions that I can draw from this analysis are as follows :

• Fed Rate Days have seen the markets move higher from the prior close.
  
  
• After the initial reaction the markets eventually reverted to following their intermediate trends.
  
  
• Within 14-16 days following the announcement, the markets had moved from 7-9% from the day prior to the announcement. Fed Day does create volatility and market moves.
  
  
• Yesterday's close on the ES was 890 ; Assuming an 8% range above and below, assume targets of 961 on the high side or 818 on the low side.
  
  
• Volatility Rules on Fed Day
  
  
• 3 of the 4 rate decisions provided retests within 5 days of the initial reaction
  

Tale of Two Depressions

This is one of the great sites I've stumbled across that compares the Great Depression of the 30's with the Great Depression of today. The authors have compiled a number of very interesting comparisons between the two events. Many of the conclusions drawn, suggest that the rate of decline in the current event is steeper than the former event. I would strongly recommend the read, as it provides great perspective, without the typical CNBC or Bloomberg spin.

New findings:

• World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
• World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.
• There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
• The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
• Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

Here's the Link (click below):

• This is an update of the authors' 6 April 2009 column comparing today's global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion --today's crisis is at least as bad as the Great Depression.

John Carter's Thoughts on The Fed Move Tomorrow

California Is Getting Broker - What's Up With Their Bonds ?

Tuesday - Best Setup of The Day

I think that this was the best setup of the day - Short at 894. The current trend is short. My trend is defined by watching the 30m chart and Daily chart determining the trend. In some of my earlier posts I've discussed my rationale for why I think that we are now correcting from the 950 level.

I was tempted to short at 894, but I expected a retrace to 900. When that didn't happen - I decided to be patient. The retrace never occurred. Stochastic and CMF both confirmed the MACD price divergence. I was satisfied with patience and discipline of not jumping in just to trade - although I didn't add to my equity today. I'm preserving and waiting for better opportunities.

What's the "Tail Drift" of EMA vs SMA ?

I did some analysis on the 200d EMA vs the 200d SMA. I was curious to see what sort of tail drift could be expected. To view this - I held price constant for the 200 days beyond today and ran SMA and EMA numbers. The only new data were the changes as the back end of the moving averages. I thought it might be possible to see how the recent past will impact the calculation of the respective moving averages.

Because of the calculation of the averages, the simple moving average will have the greatest impact, given the prior 200 days of data. 200 days ago, the date was 9/5/2008. The SPX dropped from September to March 6 2009 and then reversed and moved higher from that point.

With a Simple moving average, we're dropping larger data points (1240-1250's) than the current (880-900) ; The impact or "drift" in the average is fairly significant over time. The drift factor of the SMA will be most pronounced over the next 30 to 50 days. Assuming that the SP500 was unchanged, you could see the SMA move lower initially and then higher as a result of the tail drift.

Conversely , the EMA tends to be a more stable moving average with regard to the tail drift, as more weight is given to the more recent observations. That is not to say that there will not be drift, but it will not be as evident in the EMA, as the drift is a more continual linear form.

In my opinion the EMA and the SMA will provide different types of information dependent upon the direction of the market. In a sideways market the tail drift will look different dependent upon the moving average that is being used. Even when the market is not moving down, it's possible that the SMA/EMA's are moving higher or lower as a result of the drift.

2 Year Auction Bid to Cover Strong.

The bid to cover on the 2year auction has moved higher. The Treasury has held the size of the auctions the same, signifying the demand to shift to the shorter end of the curve. ; You can see that rates have held the same, and even moved up a hair. Much demand to be on the shorter end of the curve.



The high yield on the 4w auction was .15% which is next to nothing. The bid to cover on this auction has been declining - as the size of the auctions have also been declining.

Shorting 905

Today I'm looking to short 902-905 area. Market had a big drop yesterday - will most likely retrace some of the drop - Bond Sales today could depress the US dollar - eventually I believe that we'll see another selloff into the close.

"Day After" Returns after -2.5% Drops in SPX January 2005 to June 22, 2009

I thought it would be interesting to compile recent daily data on the SPX. I looked at 2.5% losses and larger on a daily basis. I think looked to see what the following days' return was. I compiled the numbers in a histogram to get an idea of what the likelihood that tomorrow will be a down day ; It was interesting There were 32 occurrences of 2.5% or less return and they were followed by declines in 75% of the cases. There were eight "days after" that had returns greater than zero. The day after returns were measured from the close to the close. Odds are good that tomorrow will be a down day. ; It may pay to short the rallys.

I thought it would be interesting to look at the size of the range following 2.5% drops. The ranges tended to be rather large in size.

Transports Broke Swing Point w/Volume

Transports were down 4.6% today. They took out the most recent low swing point with heavier volume, suggesting that this correction may have further to go.

NYSE Adv/Decl (Issues) Rolls Over

This above graph of the NYSE Advancing Issues - Declining Issues (cumulative) shows that the AD has rolled over and a correction of sorts has definitely begun. Today the SPX was down 3.06%. Volume was heavier than it has been, but it was lighter than Friday's, which was quadruple witching hour.

Lowest Bid:Cover on 13w TBill Since January

Bid to Cover ratios on the 13w and 26w Tbill auctions were the lowest that they've been in awhile. The rates are also inching up. Is this an indication that short rates are going to be moving higher ? This would be a negative for the equity markets. It would attract money into safer lower risk assets - unless - the credit backdrop of the country worsens significantly, then would could witness a situation whereby the US dollar drops faster than rates are increasing. If the US dollar starts to drop dramatically, then the FED will be induced to raise rates.

Bid to Cover on the 26w was also lower than it has been;

COT Report

WSJ Reports Increases In Welfare roles

WSJ reports the change in the welfare rolls amongst the 30 most populous states.

Friday Morning Presented Great Short Setup

I'm going to work to review each day's 5 minute charts more closely. I tend to spend a majority of time reviewing the daily charts for ideas or clues about direction, but have not spent enough time watching the shorter term charts. Friday's 5 minute chart presented a great setup that would have been a profitable short trade. You had MACD divergence and CMF divergence (Chaikin Money Flow) ; Price was making a "flat top" after an increase. I didn't see this setup as it was occuring, but I need to be better at seeing and identifying these setups.



The result of the setup was a strong down move to the 911 area from the 923 area, resulting in +12 ES points. That was the best setup of the day. I'm going to spend more time evaluating the best setup of the trading day and looking at indicators that help to reveal those setups.