Sell-off, Disconnection and Negative Yield?

The way I see it, we are setting up for a sell off in the equity markets and that any event driven dollar volatility will end up reversing hard and crushing the EURO. The reality is that the EURO is trading at 1.4236 right now versus the dollar at 74.79...given recent relative prices the EURO should be trading at 1.4486 right now to offset with the dollar here. That is  HUGE under performance. These markets are coming unhinged and the central planners are planning something ugly indeed. It looks to me like there could be an event driven move selling both the dollar and the markets off...followed by a mammoth reversal in the dollar and a disconnect in the risk asset markets...ironically, it seems to me that the world does not have a lot of great choices...and that makes negative yield on US treasuries look better than a hell of a lot of the alternatives...and it sounds to me like a reasonable way for the US to reduce the whole politcal theatre regarding the debt cieling and default...anyway you cut it, the 5, 10 and 30 year bonds all made new highs (lows in yield) over the last few days as I had indicated I thought would happen in precious posts.
So, at this time, I have less than two hundred short contracts on the index futures left right now in my portfolios and am nearly flat - just waiting for systems to trigger new entries in the currencies and indexes. Right now, after a very rewarding two months, watching from the sidelines and awaiting any event driven volatility seems just fine to me.

A relook at our long-term pattern potential...

I want to be clear, this is an option. My personal view is that when a continuation pattern reverses and goes the opposite direction we will likely continue in that direction. However, the triangle pattern that the dollar and the EURO made turned out, more or less, as anticipated for a first move. They produced A-B-C patterns that were very symmetrical. One of the things about these kinds of zigzags is that the three wave patterns show a high level of stress and a lack of commitment to a move...given that the moves out of them are less probabilistic...this is why I trade extreme price movements and not wave patterns. But they are a good guide and I am putting this one up because it is nagging me. The fact that the upper trendline (black) is an exact symmetrical distance away from the bottom of the "b" wave of this zigzag is highly curious and something that everyone should pay attention to.

No matter if this pattern were to play out there is no where else to go but the dollar. Kamakazi Ben BURNanke can not change that no matter how he tries and the moves in Gold and Silver are an extreme reaction that has officailly escalated into a rediculous consenus that make absolutely no practical sense. Additionally, silver is trading within the patterns as presented in my last Silver chart.

The world has officially disconnected...

...people are actually thinking that bankrupting shorts by eliminating the capability to borrow shares will keep the markets up again...that one worked really great in 2008. But that harebrained idea not being enough, they are pushing even more credit onto over burdened people and economies and think that will work too...

While there may be a forced deleveraging here of shorts as central planning plans its own demise...however, it is incumbent on the shorts to have conviction in their positions, allocate position size with the awareness that these idiots are going centrally plan a disaster for eeryone and to take profits prudently so that there is plenty of room in their book as an overleveraged system will seek to bankrupt everyone - long or short.

We had a tremendous week covering big shorts for big profits on Monday and Tuesday...the currencies as always appear to be the key to the unwind that I have been talking about...with the focus on the Euro and the Dollar. The Euro is setting up a idealized zig-zag bounce and is near the target zone. Perfect symmetry occurs at the thick horizontal target line on the chart...though we do not have to make it there.

Short-term pattern on the EURO...

This is the minimum of what I am expecting from the EURO...and inversly the dollar. It could get much uglier, but they can also attempt to rally hard from the measured target and the support at the trendline.

A detailed analysis of the Dollar and the Euro

I will be adding charts to this post over the weekend...please check the post for the additions.

Below is a very large and detailed chart of the dollar index full history daily bars inverted. This means up is down. In this view the dollar is at it highs right now which just gives us a different vantage point for its posture.Please click on it for a detailed view.

To download a very high resolution file of this chart click here.

To download a very high resolution file of this chart click here

This time its different...the popcorn has butter, salt and cheese and what's more its good for you

A nearly 100 point move in the Russell 2000 in a matter of days is an absolute anomaly especially when it is on relatively innocuous news flow and thin participation.  TF is up 9 days in a row and that represents a panic and hysteria to get into this market long - or as is more likely the case, to get out of it short (remember everyone was trying to short the end of QE) and then flip long for the elusive huge miracle trade is just astonishing and at the same time patheric. All in all, as has been confirmed over and over in our market...momentum trading does not work. The realities are most likely the same now as they have been for a long time...prices will take out the maximum stops and entice the maximum buyin and then close the trapdoor. This is why retraces of 88.6% and 112.8% are the most common spot for reversals in our markets over the last few years. Insolvency, or fear of it, seem to be the primary conditions driving our markets, and you can expect anyone stupid enough to be trapped in that psychology will be a good candidate to be trapped in this one.

Several points that significantly undermine this popcorn move:

1. 5, 10 and 30 year bonds are not confirming this move in equities
2. The Dollar is not confirming this move in equities
3. Most commodities are not confirming this move in equities
4. EURO is not confirming this move in equities
5. The Australian dollar is not confirming this move in equities and is about to trigger short
6. Oil is not confirming this move in equities and is about to trigger short
7. VIX is not confirming this move in equities

Points supporting the market:

1. All in all thin support from names like AAPL, Netflix, Priceline and a not too large assortment of other names that are confirming the move in equities
2. News flow has been interpreted positively

And yes...this time its really different...that's why my systems will be adding shorts today and likely into tomorrow if the opportunity presents itself.

Below are the transports:

Popcorn is popping...and the butter is VERY VERY hot

If you recall 2007, you will remember that the world had been shocked by the disorderly unwind of the internal Bear Stearns hedgefund and numerous negative events related to the credit markets...this took the markets on a signficant drop...not all that different from the one we have recently had. Now what was interesting to me was that people got really scared on that drop, but when the market rallied to subsequent highs in the Dow and S&P500 they lost that fear and a last dip was an all out party when it was bought. Every second, third and fourth rate name was bought and if you recall mostly Solar and China names were the absolute epitome of the rage. I recall a solar stock that I traded for a few bucks in a single day that I was quite happy with that ended up rallying something well over 200% in that day (and I only got a few points). I recall quite a few popcorn names in the china space rallying sometimes over 300% in a single session. Below is an esample you may remember of a company hyping china hyperbole and you can see how that turned out:

Well, the attitude that "there was no risk that was not worth taking" in those types of names ended up demonstrating just how disconnected the markets became and how toppy and flimsy the basis for attitudes attempting to levitate the markets. What I see right now reminds me of that period exactly. People are popping popcorn and having a party...the feeling that risk can endup being dangerous is a "subject for another time and definitely not THIS market" - according to the current market collective. The important thing is to understand that "IT IS NEVER DIFFERENT THIS TIME" and the results of this hysterical, manic behavior I am seeing via the deleveraging and momentum crowd seeking to participate in hyped names seems to be fever pitch...so, it looks like we are Dec 2007 all over again, except this time all the problems are much to big to fail. Right?

The butter that may get poured on this popcorn poping fest is likely to be scalding hot...

Bill Still says it EXACTLY like it is...

Charts

Everyone is so focused on not getting short and run over by a truck again that there virtually no credible talk regarding the head and shoulders pattern that is clearly setting up. Instead any excuse to look higher is the theme of the day. Of course rising wedges have been the theme for the market for the last several years...and I show one of these diagonals on the S&P500 weekly linear scaled chart below. However, there are two things to note, advanced diagonal patterns rarely make it to the extreme trendline on the last wave, especially when a huge breakout maybe setting up out of such a pattern. This is a whacky market, so nothing can be ruled out entirely...but the pattern is not my preferred because everyone is looking for new highs - they are NOT looking down. When everyone is looking one direction they are likely to get the very thing they are not looking for - stage left.

Secondly, the resistance that we ran into is formidable and the price patterns indicated a major deleveraging was taking place...most likely either a large institution in Europe or some more central planning intervention. I believe that a (or several) large European institutions is (are) failing and were required to liquidate their US Treasury assets and the equity hedges against them. As I said earlier, I think this is a trap and that the results of the highly leverage financial system are that people are not chasing good investments they are chasing momentum caused by liquidation and insolvency due to leverage. Market participants are chasing other peoples misfortune whether they realise or not. Once that entity or individuals misfortune is liquidated the pattern will stop until a liquidation cascade develops in the other direction. This is what credit and leverage accomplishes - the exact inverse of what we feel is happening. It feels like buying...but is it? Certainly short-covering qualifies as buying...but a liquidating short-seller does not qualify as a strong hand...and a market with strong momentum needs strong hands to keep it going. Sadly that is not the case here and you can squarely blame the over leveraged financial system and its promulgators at the central banks for it.

With China actually on a US Treasury bond buying spree over the last couple years, they have been significantly benefited by the fear was it was otherwise. In fact, China is still accumulating more US debt than published in secondary markets and foreign markets intermediaries. So, the question is, just who was selling Treasuries last week? It certainly was not the Chinese.

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.