The Market Ticker - Technical Analysis

CAUTION: Carry Correlation Update

nospam@example.com (Karl Denninger) — Fri, 20 Nov 2009 12:14:00 -0500

Be very cautious of any thesis you have on continued advancement of the market based on "dollar depreciation."

This is the correlation chart from today thus far:

This may be a one-day anomaly. But it is the most-serious break of the correlation that has been deteriorating for the last two days.

If it breaks entirely the reaction in the market is likely to be extremely violent.

Carry-based asset "appreciation" is inherently unstable, much as is juggling bottles of nitroglycerine.

All is well provided you don't drop one.

Forewarned is forearmed.

Trading For The Lazy and Ignorant

nospam@example.com (Karl Denninger) — Wed, 08 Jul 2009 11:47:00 -0400

And soon-to-be-broke, it would appear.

One particular clown decided to try to "deconstruct" the last point in my attack on Dennis Kneale, who I called flatly full of used dog-food. His "logo" includes the title of this entry as the "grab line", and (rather humorously, given the accuracy of his call) includes a picture of a carny fortune teller, complete with booth.

There were several problems with his attack, chief among them the "curve-fitting" he did by adding conditions that were never at issue originally, then claiming "success" trading the inverse of a signal that was never put forward as a signal by myself!

The problem with removing an argument from its context is that you reach bad conclusions, and relying on technical analysis alone is like trying to determine which direction you should walk from a windsock - its giving you a piece of information, but only one piece, and must be interpreted in context (like, for example, "which way is north"?)

What was the primary point in my Kneale hit-piece? This:

Recessions cannot end until the conditions that caused the recession are removed from the economy. This is elementary logic and obvious to anyone with an IQ larger than their shoe size.

For an inventory recession growth returns when enough capacity is destroyed through layoffs and inventory selloffs to bring capacity and demand back into balance. Employers then hire new workers and the economy recovers.

For a credit recession, however, there is a much larger problem: The reason real interest rates went negative is that debt has a carrying cost and consumes free cash flow; so long as the debt taken on in the credit binge remains the cash flow impact also remains.

Default and bankruptcy clears excessive credit (debt) from the system - if it is allowed to occur. But if it is not, then the bad debt remains on the balance sheets somewhere and the cash flow impact remains in the economy. Employment remains weak, capital spending restart attempts falter as demand fails to return and credit quality continues to remain insufficient to support new credit demand.

Now here's the problem - the "windsock" provided by technical analysis is always right, but only in context.

Ever notice how patterns sometimes mean the opposite of what they look like to those who blindly look no further than the pattern itself?

Technical analysis calls this a "pattern failure."

Nonsense.

The pattern didn't fail - you read it wrong because you failed to properly consider the context.

The most stubborn of "analysts" will not only refuse to look at the context of an argument and pattern, they will stubbornly increase positions into a bad chart, thereby deepening (perhaps by a LOT!) their losses.

Woodshedder has done exactly that. On June 30th, when I made my argument, the SPX closed at 919. It has since lost nearly fifty handles, or five percent, and I have been short for the entirety of it.

Why? Because I look at the context of a pattern, not just the pattern itself. And the context of the rise in the market since mid-March has told me that there is no way that advance was sustainable, it was not the end of the recession and it was not the end of the Bear Market.

How do I know this? Among other things I know it because the NYSE credit and margin debt table continues to show that during the advance margin balances have increased while credit balances have decreased. This is backward, and tells me how the advance has been powered.

See, if I buy 1,000 shares of some stock on margin and it goes up in price, my credit balance increases and my margin debt decreases. Why? Because my equity improves in the position as the price goes up, and thus my margin debt goes down while the liquidation value rises.

This is the normal circumstance in any advancing market. Yet it is exactly the opposite of what happened.

Why?

This advance has been powered by people doubling into the advance in a furious (and futile) attempt to regain losses from last fall, increasing their leverage as the market rose! This means they not only poured their "winnings" back into larger positions but in fact increased their debt load to "double down" at an even more-furious rate!

This is not bull market behavior. It is the mark of irrational and extremely dangerous gambling. If you've ever seen a guy at the blackjack table in Vegas who triples his bet every time he wins (that is, he stacks the winnings back on the button and adds more to it) you've seen this behavior in a casino, and in virtually every instance a gambler who does this will go broke.

So where does this lead us to today?

We have invalidated the "alleged buy" from the so-called "Golden Cross", having closed the SPX under the 200MA. Worse, we're now solidly below the "entry" propounded by that so-called "Golden Cross"; I hope you had a stop and got stopped out without (much) loss. The question now is, "which way Mr. Magoo?"

That's simple: This was a bear market rally, and there is a high probability it is over. The Bulls will not give up without an attempt at a fight, however, and nothing goes in a straight line.

I expect the market to trend generally downward until somewhere around the 14th (to perhaps a week later), making a short-to-intermediate bottom in the area of 844, 811, or in the extreme case, in the high 700s around 770.

Why those levels? They're Fibonacci levels from the rally off 666, the time relationships from the top around 955 are right, and they also are areas with strong volumetric chart support. It would also not surprise me if we try to "kiss back" the broken neckline in the Head and Shoulders pattern that was confirmed the other day before the full extent of that downward move expresses itself. Finally, this move could come faster than anyone would imagine, as that NYSE Margin Debt can easily turn into a MARGIN CALL, and cascading margin calls is how you get the sort of damage we had last autumn.

COULD we stop here? Yes. It is possible, and if I see signs of short-term stabilization or reversal I will pocket my short-side profit and saunter off on my way. But this is not the odds-on play.

This move down has already sucked in a lot of people and will probably continue to - those who will bet on a break of 666 - here and now. A big part of why I got moderately short is that I recognize the potential for the unwind of that margin debt to get very disorderly, and if it does, I don't want to be out, as there will be little opportunity for an entry.

Beyond that, I do expect one more good thrust higher; unfortunately for The Bulls I do not expect the 950 level to fall. Those who bought up there are going to be grasping for that "get me out even" one last time as the real ugly comes back this fall when it becomes apparent that the entire so-called 'green shoots' game was nothing other than smoke and mirrors, and the stock market's advance was driven by nothing more than a tawdry attempt to play with leverage once again.

This, my friends, is why those who worship at the unbridled altar of technical analysis without looking behind the patterns on the chart will often find themselves on the wrong side of the trade, and if they're stubborn about it, ruinously so.

As for Dennis Kneale, he's still incapable of admitting he was full of it, and yet nightly tries to attack those in the "alternative media". He still hasn't responded to my rebuttal, nor do I expect him to respond to this one - putting me on the air opposite him would force his lack of intelligence and analysis out into the open where it would be instantly visible to all. That just won't do when your job is to bamboozle the public into hitching their capital to a losing proposition.

I publish my thoughts daily (well, most days) while the market is open over on Tickerforum, with limited free access to all and full access available to Gold Donors, as well as putting together a nightly recap video. Come on over, sign up, enjoy the free areas (the majority of the forum) and see the FAQ if you're interested in donating to the operation of the system (and the enhanced access it offers.)

Disclosure: Short the broad market (still), ~20% position

What Was THAT? (Friday Market Close)

nospam@example.com (Karl Denninger) — Fri, 29 May 2009 23:56:00 -0400

Friday's close was "interesting", to put it mildly.

Here's a chart of Friday's price action in the /ES, the S&P 500 "Electronic" Futures:

Notice the huge volume spike (the blue underlay) on the chart at the close.

There were 146,083 contracts traded in that one-minute period between 14:59 and 15:00 (Central); the next minute, when the real dislocation hit, traded 91,774 - after the cash market bell had rung.

The closing bell is usually busy. But this sort of volume is absolutely unheard of. To put it in perspective yesterday the same time recorded 26,540 contracts, and 36,642 the minute after.

Volume was light all day, as is somewhat common in the summer on a Friday. The close started its usual increase, and was up to 23,000 contracts at 14:57 with two minutes remaining.

Then all hell broke loose.

"Paper", or institutional representation, was stalking the close; the pit audio feed so stated. Directly in front of the bell 1,000 contracts were bought - as near as I could tell at the market.

Those are "Big" contracts, each being 5 of the /ES minis; this was, in effect, a 5,000 contract /ES market order.

The reaction was instantaneous. The offer side of the market collapsed and the /ES rocketed higher. In the pit, trades went off as high as 925, but on the E-Mini trades were recorded as high as 927.75. As quickly as it got there, it collapsed back to 922 - a nearly six-handle (3/4 of one percent) straight-up and down spike.

Now here's the problem:

For me to believe this was "organic", that is, this was an un-forced order, I have to believe that someone wanted to go home net long the equivalent of 5,000 /ES contracts into the weekend at a severely disadvantaged price. The market had been calm all day; if you wanted to buy 1,000 spoos (equivalent to 5,000 E-Minis) there was plenty of opportunity to do so all day long. This sort of market order was guaranteed to dislocate the market - so the buyer had to simply not give a damn what sort of price they got.

How bad of a fill was this? To put this in perspective each /ES point is worth $50 per contract.

Each single point that was disadvantaged to the buyer by this execution cost him a cool quarter-million bucks, and on average, the "disadvantage" was likely around five full handles, meaning that the buyer of these contracts, if this was an "organic" order, willingly ate $1.25 million dollars.

I don't believe for one second that is what happened.

There are only two possibilities that I can come up with, and both demand answers:

"Someone" was forcibly liquidated out of a short position - a fairly big one. 1,000 S&P "big" contracts has a maintenance margin requirement of $22,500,000 - that's not a small position, and each point, as noted, has a $250,000 move associated with it. Who was it and why?
"Someone" who didn't give a damn if they lost a sizable amount of money intentionally wanted to shove the cash market up through the 200DMA, a critical technical level. They were 1 minute late; they succeeded in doing so in the futures, but not the cash!

#2 makes for great conspiracy theories, but my money is on scenario #1 - someone got forcibly liquidated into the close, perhaps a big customer, perhaps a hedge fund, but someone.

Whoever it was the coupling between the pit and the Globex futures guaranteed the result. There are computers and traders looking for differences between the pit and E-minis every day who try to pick up those nickels in front of a steamroller. When the offer side collapsed the computers took over and stops got run all the way up to 927.75 before quickly collapsing back down to 922.

Here's the cash chart, as of the close this afternoon:

That's a very pretty potential double-top in the oval, and it coincides with the 200MA.

This is not to say that this level will necessarily hold. We are, in fact, only at the 38.2% retrace from the decline that initiated last fall! It would not be unusual for a bear market rally to go as far as the 61.8% retrace before its over, which is up around 1060ish, or the 50% retrace around 990.

What does this all mean? A few things:

The stops up there are gone. They were potential rocket fuel for next week and the propellant to take us to - and potentially through - the 200DMA on the cash.
A bunch of someones had a lot of contracts that were short taken out on them. Those nearly 250,000 E-mini contracts did change hands, and odds are a very large percentage of them constituted stop-loss orders on contracts sold short from when we were up toward 933 a few weeks ago. Those traders are going to be quite pissed off, but that's the risk of the game.

Next week is very likely to be extraordinarily violent, especially Monday. /ZN (10 year Treasury futures) has seen an insane drop in open interest over the last few weeks. This little game undoubtedly severely damaged open interest in the E-Mini /ES contract.

Thin markets are dangerous markets. While the E-Mini still is very liquid, the removal of these stops from the order book leaves the door open for both little resistance if the market decides to move higher early next week, and also provides the potential for irritated shorts to re-establish their positions short, driving the market lower. Those who wound up long during that little ramp job are likely to be rather nervous as well.

For my part I shorted that spike. Not large, and I am fully prepared to hedge it Sunday evening if necessary or just take it down, as there is every possibility, this close to the 200MA, that we will at least hit it on the cash, and blowing through it on volume and continuing higher cannot be ruled out.

I will note, however, that the last time we saw this sort of dislocation activity start up into the close it it too began with these sorts of "rocket shot" moves higher - and once the shorts were all blown out by having their stops run, the market essentially pancaked.

Look sharp - the sharks are in the water and you taste good.

Disclosure: Mildly short (~5% position) the broad market.

The Case For Getting Short

nospam@example.com (Karl Denninger) — Thu, 07 May 2009 12:42:00 -0400

Ok, I think there's an argument for it here - getting short, that is.

Here's the general setup:

That's three channels, each at a higher slope. This is the marker of a parabolic blow-off top.

There is the time factor - about two months since the bottom at 666, roughly the maximum expected for a bear market rally.

There is the fact that in general, new bull markets don't start with a parabolic blow-off after the initial reflex move off the bottom, and yet we got one here - the original move off the bottom, but again here.

Those are characteristics of a blow-off parabolic top - or a bear rally, as people are sucked into being forced to cover as the market rises and the Margin Monster comes knocking.

The setup is not quite complete tho - here's the one-hour:

Notice that we're sitting right on the second (less parabolic) channel top. That must fall, and the danger is that it does, you short, and the trendline you're using for a stop runs away from you.

So the gambit here is to do it on the break downward but be prepared to stop out at whatever your predetermined pain threshold is, enter that as a mechanical stop in case you're wrong and do not move it.

You have to accept the risk of a pip, because you might get one.

You also have to watch the bottom of the final parabolic channel and then the second level one under it. Either could hold, and if it does, you want out.

In the first case you probably get a big fat nothing out of the short position by the time you react. In the second, however, you get a decent profit.

If the second channel goes down then the odds are good we're haded back into the mid 800s near the confluence of that diagonal down around 860.

That's a damn nice trade and you can reassess there.

Daily stochastics are supportive of this if the break comes; trying to front-run it is dangerous as the market can (and sometimes does!) stay overbought or oversold for an insane amount of time, so being "early" can be very expensive.

Disclosure: Short small the /ES futures; if we get cranking I will likely add.

Potential Breakout Intermediate Term

nospam@example.com (Karl Denninger) — Mon, 23 Mar 2009 10:37:18 -0400

Watch the 800-805 level on the S&P 500:

Very nice double-top the other day, now being challenged. If it breaks, here's why its important:

The next real solid upside resistance is at 875!

Come on over to Tickerforum if you're interested in real time (most days anyway) technical analysis not only by myself, but also by a number of other traders. Free access memberships (just sign up) get you access to most of the forum, and with "Gold Access" you'll find even more opens up to you, including a most-trading-nights technical analysis video and real-time running commentary.

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Beware The Sharp Snapback

nospam@example.com (Karl Denninger) — Tue, 03 Mar 2009 07:30:29 -0500

The last couple of weeks have not been good to stocks.

You've seen several of my recent charts going back to Obama's inauguration, and they've been ugly.

Today's current headline on Yahoo Finance in their "index" section says it all:

"FTSE drops to six-year low as fear grips market"

Beware.

Have a gander at the following chart:

The top "banded area" is the first part of the "really scary" selloff we experienced, starting last summer.

The bottom banded area is the most recent selloff.

They are both almost exactly 240 "handles", or SPX points.

Both moves are also almost exactly two months in duration.

The "middle" ugly/nasty from September and October is 560 SPX handles.

Charts are not always symmetrical, but it happens often enough that you should be aware of it when it occurs. And right now, we are sitting right on that area.

Second, during the "big bear markets" of history, including the 1930s Depression, there have been multiple rallies back to the 200 daily moving average. In this bear market there has only been one, and it was early on during last year.

If you have made lots of money short over the last year but still have those positions open, you need to be aware of this. If you're late to the party, coming in here and trying to "short the hole" that has developed, expecting an imminent collapse, you may be served up a truly ugly surprise.

Bear markets are known for bankrupting both bulls and bears. Contrary to popular belief bear markets are not just "short it and walk away" events; if you pick the wrong time to short it, you will get your face ripped off.

Let me be clear: I do not believe the bear market is over. Quite to the contrary; I believe we are in the beginning stages of an economic depression, right here, right now. The same mistakes that were made back in the 1930s are being made again - ramping government interference in the market, refusing to get rid of "The Bezzle", and next will come rising Treasury interest rates, which everyone will blame on "The Fed" when in fact it is deficit spending and collapse of credit that will cause that move. Sentiment is insanely negative, with everyone and their brother crying on national television and looking at their 401k statements in horror. While I believe we could bottom here, I don't believe we will - policy mistakes up and down the line will cause that not to be the case, and my annual target of 500 from the 2009 prediction Ticker remains, with a high probability that we will bottom with an 80-90% collapse - meaning an SPX somewhere between 150-300.

But - the easy money on the downside, for the moment, has been made. If you're looking to get short, in my opinion this is the wrong place and time for it. We are in a place where we can crash outright, but we're also in a place where we could easily see a 50% retracement of the collapse thus far - which incidentally, puts the SPX up around 1070 and is right near the 200 day moving average.

I do not have a crystal ball or a time machine. But I do note that the first "phase" of this bear market ended with a retrace back to the 200MA, and that was followed by the current collapse pattern we are in. I also have noted the time and price symmetry.

Of course if we "fail" fast and hard here this all goes out the window, but beating the market averages over time is about risk and money management, not trying to swing for the fences.

Something to think about on a day when everyone and their brother is talking about "gripping fear."