Just when you are not expecting it...a tale of two trades and one result - pending fireworks

Trade A

Well, well, well...that was an interesting maneuver. Somebody desperately needed or wanted to get out and/or get most people looking short treasuries and forced money out of the bond market yesterday and they did so again today. (I smell a significant leverage induced european banking insolvency which needed raise cash and close its leveraged bond positions and corresponding hedges including equities...I am sure we will find out more about that over the next few weeks) Of course the technical patterns in bonds had been weaking for a while now...but regardless of that, there is not a direct reallocaton that should directly drive equity prices or risk assets due to that occurrence...however, when you are leveraged trading other peoples money, who cares about things making sense or being rational... Got money...spend it, why don't you...or so it goes. The reality is that, given the looks of things, this is abut to get VERY interesting...although "interesting" may not be the right word exactly. The 30 year bond is about to trigger long and may likely follow through on my post from earlier today and take the yields much lower than the previous lows. I am, at this point, more intruiged by this scenario than I have been before largely due to the radical behaviour of market participants which in the end amounts to what I think is a trap.

Trade B

Then there is the other trade. Every trader and their mother has been preparing to short the end of Q/E. Q/E ended if you did not recall yesterday. Is it really like market participants in the know, to allow a bunch of rookies to short the end of Q/E without testing their metal? So, this week amounted to the required "gut check...market approved" stamp often required to make money. I think a lot of people bailed. As I indicated, my system added back sizable new short positions this yesterday and today...so, I can not be accounted in that group though I am certain to be counted in some other marginal group somewhere for this trade. However, I think that it is entirely ridiculous to think that the end of QE would allow so many traders to short on anticipation of it without having their conviction tested.

The results

I certainly "misunderestimated" the prospects of the 200 day moving average for a bounce. However, I did not have equities short exposure since I had covered earlier. I felt like Friday last week and Monday this week were make or break times for the market and highly precarious. I was wrong and I wish that I had not been. However, it is better to be careful or and considered than to be oblivious.

In the end what did we accomplish? Well we got all sorts of money losing managers trumpeting BS on CNBC and we got a totally unconsolidated rally that recovered what took two weeks to take down in roughly three days. That is NOT conviction its panic. Moreover, the reality of the situation is that there are a ton of things defective about the panic. Oil is in the middle of a catastrophic breakdown which will likely take it below 20. It is simply retesting the broken resistance right now. Silver and gold are being liquidated as are many other commodities and silver is likely on its way well into the single digits next year with a stop in the teens this year. However, this liquidation condition will spread to all risk assets...While the SP500 rose 100 points on Firda the Russell could only manage around 2 while the US dollar closed flat despite the ridiculous move in the equities and weakness in commodities. As you may be aware, I am long the dollar. You may find this post of interest http://macrostory.com/?p=4863. The Australian Dollar has bounced allot but printed a bearish pattern that will likely trigger a cycle short signal early next week into a trending move down. Put/Call and VIX are reflecting very poorly on the prospects for this move. Additionally, there was precious little volume. A look at the EuroDollar contract (not the currency - the rates contract) shows a failure pattern setting up there too - that could have significant implications coming up. Everywhere I look this thing reinforces the defects. So, just when no one is looking for down - that's precisely what they are going to get. Its not going to be pretty either.

I will post charts this weekend...just wanted to get this update out. Till then the video below is a must see by Miall Ferguson (I posted his Ascent of Money documentary recently) and discusses just why what everyone expects from the US is not likely the real story.



Here is the Ascent of Money - a great documentary

Negative or Positive Yield and US Monetary Policy - Nowhere else to go but the dollar

I have to say, watching the market action this week has been bewildering. I had covered almost all of my equity shorts a few weeks ago when the Russell was in the 790's...I thought that the weakness around the test of that 200 day moving average on the SP500 was high risk and that any bounce would be smaller rather than bigger. While our bounce has not been particularly big, it was big enough to get my new system shorts on the equity indexes once again - which I did not expect. But while watching all of this wacko behaviour, it has become more and more obvious to me that the markets are simply a leverage re balancing tool these days. Like water sloshing around in a bottle, when lots of people are getting blown out of long trades (via margin calls) they tend to think they need to use the precious remaining capital to reverse and then promptly get forced to take another blow out phone call from their broker. Essentially, one of the reasons that the market trades from one idealized extreme to another is because the market is so highly leveraged and people are being taken to max risk on both sides of their trades. Its kind of sad to realise that we really do not have people trading against people, we have debt trading against debt even in the equity and real asset markets. How can we expect reasonable market dynamics when so many people can get over leveraged on every side of a trade?

That brings me to another point. Yesterday, the bond market failed. I had been watching a pattern which generated a "three strikes and your out" move on the upside and was expecting that the very labored rally move in bonds was going to end and possibly reverse. I do want to discuss something that keeps worrying me...just like some of the huge dips (mini crashes even) that we have had in the equity indexes over the last few years...the reality is that people who bought the dips and the crashes did quite well. I can't help but wondering about this gargantuan move in the bond markets. Seems like just enough to get everyone on the take bonds short band wagon...and that bothers me. It bothers me from a technical perspective and it also bothers me because I think that this point, the US and its minions of central planners know that they need to get bonds yielding less than ZERO. This is a great solution for the US especially since the European banks (and many others too) are much higher leveraged and more risky than their already insolvent US brethren. So, people have not place else to go but the dollar. What would it take to make this happen? Well, two things would be ideal:

1. Find a way to get lots of participants leveraged short US bonds
2. Crash the stock market

I think that policy makers have a high probability of taking the above approach. Getting people looking short will get make it much easier to kick the can down the road for an extended trip to below ZERO yield on bonds and crashing equity markets will accomplish two things reflect fundamentals and bail the US out of a debt issuance problem. People will be forced to buy US treasuries whether they like them or not.

I am not playing the rates trade as I have said, because it can go either way...I am slightly favoring this scenario...but I see the trade as a momentum trade. If we break out in on direction or another that trend is likely to stick for a while once its confirmed. If we can sustain higher rates then we very well may get both a crashing stock and bond market. If we can get back to bull moves in government bonds then we will most likely get a sustained foray into zero yield which would be extremely convenient for the US Treasury and Banks.  I am just throwing this out there...as I said, I do not have an edge in this trade but I think its good to think of some of the outlandish possibilities that could be irresistible for the mind of a policy maker.

Indexes at major resistance...

EURO - close up...pushing Major resistance

While Greece burns, Central bankers fidget...

Greece is on fire...

Dollar and EURO will tell the story...

While there may be some more deleveraging and volatility here both to the upside and the downside moderately, the dollar is showing a propensity for strength and bullish behaviour and the EURO the opposite. The dollar could continue its consolidation here for another 10 to 20 cents but looks set to resume its advance - possibly starting strongly sometime as soon as tomorrow.

Indicators

As many of you are aware, I operate a software analytics business that is primarily focused on systematic trading. A very few early licensed clients run my systems, technology and infrastructure to trade their accounts, currently all new clients are handled by mq38, which is both an advisory and a hedge fund. These vehicles have been performing exceptionally well and that is where I need to and want to keep my focus. I do share quite a bit of information via this blog and I do attempt to give my best analysis. If those efforts are deemed valuable that makes me happy and will continue in the same spirit going forward. I am passionate about trying to make the world a better place - especially the financial world - so, all my clients are important to me...including ones who have purchase indicators via the BPT store in the past.

I do not have the motivation nor spare cycles to continue development of retail products...however, I wanted to reach out to you so that you all know that I will do my level best to ensure that the products I have released via the BPT store will continue to be viable. I have received quite a few emails asking me about this over the last weeks/months and wanted to publicly address the issue and my intentions. This means that I will, as reasonable, adapt versions for upgrades to Multicharts and Tradestation. I will provide significantly more capability for Multicharts versions because that is my chosen platform and the one I use trigger my systems through and I do use most of the indicators that I have written on Multicharts. Tradestation is a great platform but since I use Multicharts for to trigger my trades it gets the majority of my focus.

If you wish to use either Tradestation or Multicharts, I will offer a cross-grade to assist you in that transition and I can assist you in getting a discount for a purchase of Multicharts. I can tell you that, in my opinion, it is most worth it to make that transition - especially with the addition of their manual trading functionality. In addition, I will release on occasion enhancements to existing products. Specifically, I have a significant enhancements to the switch which greatly simplifies it and adds new capabilities and will offer that for Tradestation and Multicharts at this time. I do not, however, at this point, plan on offering new or existing products for sale on the open market in the future for my indicators and analytics. However, I am extending an offer to anyone who wants to purchase any modules and who has not been able to, an opportunity to do so. The retail software market is not my core business, however, I am making this effort at this time to close down this retail effort by giving any existing clients or ones who wanted to purchase but were unable to do so at the Internet store, a chance to do so. I will keep this offer open for the next 2 weeks and anyone who wants to enquire can do so at m3analytics@gmail.com.

Again, I will be, as is reasonable, supporting and enhancing existing products and I want to thank all of you for your interest, business and for reading my blog.

A rush out of risk leaves almost NO choices

What does the collpase of debt money look like and how bad can it get...well just look at Iceland...