Thrilling Thursday – Drama at the Strong Bounce Lines – Money Talk Portfolio Review

Related imageSchrodinger's Market.

The bouncing cat is either dead or alive at S&P 2,800 and we won't really know which is which until the weekend as the S&P failed to hold it yesterday and our 5% Rule™ demands 2 full days over the strong bounce line (2,800) before we can put our rally caps back on.  Strong bounces are NORMAL – it's what we expect on the way down as each 5% move lower is followed by a 1% (weak) or 2% (strong) bounce in a healthy correction.  The downtrend isn't broken until the strong bounce line is held – a very simple way to tell whether or not it's a good time to jump back in.

Of course, Schrodinger contended that the market was neither dead nor alive until you observed it but the act of observing it causes the outcome to change – that's very true in a bot-traded market where an act of programming made 6-18 months ago determines the movement of the market today as thresholds are crossed on various trading programs which, upon observation of the action, then cause the market to be more alive or more dead as they too kick in and start trading.  

That's why we have the 2-day rule, you have to let the various cross-currents play out before you can say you are really recovering.  Take the Shanghai Composite, for example.  China's market looked like it was bouncing in 2015 but went lower and then made another protracted bounce that collapsed early this year and now it turns out we've been consolidating for a move lower for 3 years. 

I know – who cares about China?  What happens there doesn't affect us, right?  That's the same thing I heard back in 2006 when I told people that we should be very concerned about a slowdown in China.  It took a while, but it did matter in the end…    

Does Europe matter?  Last Wednesday, we were right on top of shorting the market BECAUSE Germany's DAX Index was going to fail the 11,800 line and I pointed out that, in 2015, the DAX had a 20% correction after failing that mark.  Traders may not remember these things but TradeBots never forget! …
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Will We Hold it Wednesday – Markets Forced Over Strong Bounce Lines, Now What?

Crazy!

The Dow finished up 547 points yesterday and that was AMAZING – almost as AMAZING as that day we fell 843 points, way back on…. Wednesday of last week.  But hey, 547 points is only 296 points short of catching up to a one-day drop so – RALLY TIME!!!  Right?  No, not right at all – especially when last Wednesday's down volume on the S&P was 275M shares and yesterday's up volume was 118M shares.  If the stocks were really so attractive – what happened to the other 157M shares worth of buyers?  

The thing is – those sellers took their money OUT of the market and yesterday's buyers decided to build things up with a MUCH WEAKER foundation than the one that collapsed last week.  So, while a bounce like we had yesterday is good progress on the way to a hopeful correction – it don't mean a thing unless we can spend two full days over the strong bounce lines which are:  Dow 25,700, S&P 2,800, Nasdaq 7,250, AAPL $226 and Russell 1,630.  

We're already having a bit of a pullback in the Futures and the Dow is below, S&P barely holding, Nasdaq way above, AAPL below and Russell way below – not exactly the stellar performance you would think we are having if you listen to the talking heads on CNBC and Bloomberg, who are paid by the investment banks that advertise on their show to tell you what a great idea it is to put your money in the market.

 

IN PROGRESS

 

 

 

 

 

Tempting Tuesday – Nothing has Changed but Markets Move Higher

Looking good this morning.

As of 8am, the Dow Futures (/YM) are at 25,386 – almost to our weak bounce line and the S&P Futures (/ES) are at 2,768, not at 2,775 but the Russell (/RTY) is back over the DOOM!!! line at 1,552, now 1,561 and the Nasdaq (/NQ) is actually over the weak bounce line (7,100) at 7,150 but AAPL is still warning us to be cautious at $219, still shy of it's weak bounce at $223.50.

The bounce lines of our 5% Rule™ prevent us from running in and buying dips prematurely.   While we do love making bottom calls at PSW, it's best not to do that when the entire market is down – as there tends to be no safe haven in a major sell-off.  While the S&P hourly chart looks like it might be moving higher, it's really just a matter of having low expectations as the index has barly moved off the bottom and, since last Thursday, we've been making lower and lower highs – that's more likely to be consolidation for a move down than up!  

The bounce lines tell us whether or not a move is real and, for the S&P, 2,775 is weak and 2,750 is strong (see Thursday's Morning Report for how we got there) and, although we use a chart to illustrate it, it has nothing to do with those squiggly lines – it's just math!  Math tells us 2,775 is the first inflection point and, other than a brief spike over on Thursday – we've failed at that line Friday and yesterday.  That's NOT a sign of strength – especially when it's the weak bounce line that's failing…

When and if we take back 2,775, we'll begin looking for the strong bounce line at 2,800, which has obviously been significant during the downturn and should be again if we begin to recover.  Once we are over the strong bounce, we can make bullish plays using that as a stop line but, until we are – it's best to just watch and wait and gather more data.

Earnings Data is good this morning with Morgan Stanley (MS) and Goldman Sachs (GS) both turning in very good reports and…
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Monday Market Movement – Looking to Regain Some Upside Momentum

The turmoil continues

Already this morning the Futures were down 100 points but back to flat into 8am.  Of course, nothing that happens on a Monday has any meaning for the Markets as it's generally a low-volume affair with little news or data driving things towards real change.  We laid our our bounce lines for the major indexes last Thursday and congratulation to those of you who followed us into those longs and caught that nice rally into the weekend.  The summary of our bounce levels is:

  • Dow (/YM): 25,450 (weak) and 25,700 (strong) – now 25,317
  • S&P (/ES): 2,775 (weak) and 2,750 (strong) – now 2,766 
  • Nasdaq (/NQ): 7,100 (weak) and 7,250 (strong) – now 7,157 
  • Apple (AAPL): $223.50 (weak) and $236 (strong) – now $222 
  • Russell (/RTY):  Anything below 1,552 is catastrophic – now 1,545

That's right, I forgot about the Russell.  It was the small caps index that gave us the early indication the rally was breaking down and now they are going to give us an early indication as to whether this is the end of a small correction or just the beginning of a larger one.  

As you can see from the daily chart of the index, there's no recovery here at all in the broadly measured 2,000-stock index and these are the companies that are least able to adjust to the damage caused by Trade Wars and slowing US Consumer Spending so they do give us an early glimps of the things that will begin showing up in the S&P 500 over time.  

Meanwhile, we're skeptical about recoveries that occur on low-volume and without actual reasons – we much prefer to see the market move on upside reports or at least upside earnings surprises and not from single companies or even single sectors – like Friday's bank-driven rally.  For example, one of the recent hedges we added to our Short-Term Portfolio was featured in the 9/27 PSW Report, which was:

As I noted on Tuesday, we are already getting swamped by companies who are issuing negative guidance


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Flip Flop Friday – Bank Earnings Boost Confidence

Don't be fooled by weak bounces.

The Dow may be up 370 points at the open and that seems like a lot but we closed near 25,000 and, as noted in yesterday's PSW Report, we were expecting a bounce off 25,175 back to 25,450 just to complete a WEAK bounce off the 5% correction (which we also predicted) and yesterday's failure at the bounce line does not make a second attempt today more impressive.  As we discussed in Wednesday's Live Trading Webinar, it's not just making the bounce lines that matter but making them in the same time period that we fell.

It took rwo days to hit 25,175 and yes, we did bounce back in one day yesterday but that failed and got worse and now it's day 2 and all we're doing this morning is making another run at 25,450 and that is not going to be enough to flip us bullish – now we need to see the strong bounce level at 25,700 taken and held – along with the levels we set for our other indexes as well.  We called this in yesterday's report, of course and I'll repeat it again because we're looking for the same factors in play:

Nothing has happened to support the markets so far but here are some of the things that can turn things around – at least to create a dip-buying rally but whether or not that's enough to crack the strong bounce lines remains to be seen:

  • Trump could stop calling the Fed "crazy" (not likely, he needs someone to blame for the market sell-off since he's been using the market rally to measure his success)
  • The Fed could capitulate to Trump and say they won't raise rates anymore (not likely as yesterday's 10-year auction was not pretty – even at 3.25%. 


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$5,000 Thursday – Cashing in Our Shorts and Looking for the Bounce Lines

Wheeeee!  

I love a good correction, especially when we call it.  Yesterday, in the Morning Report (which you could have in your hands every day, pre-market for just $3/day), when the Futures were UP, I said:

We also have a potential 1,000-point drop in the Dow (/YM) to look forward to if it fails at 26,250 so yes to Futures shorts below that line if it fails, with tight stops above.  If the S&P is below 2,860 and the NYSE is still below 13,000 and the Nasdaq fails 7,275 and the Russell is below 1,620 – that's going to confirm a bearish market and we'll get more aggressive on our shorts but, so far, we're pretty well-balanced in our 5 Member Portfolios and we will review them today in our Live Trading Webinar.

The Dow (/YM) Futures did indeed bottom out this morning at 25,174, past our 1,000-point goal and this morning, in our Live Member Chat Room (which you can also subscribe to) I sent out a Trading Alert to our Members at 7:49 saying:

I think 2,750 on /ES is the best long line with tight stops below and 6,780 on /NQ should be fun if dip buyers come in with a stop below 6,775 (Nasdaq loves those 25-point lines) and then we'll watch the rest of our bounce lines to see if we're going to add more hedges or take profits on the ones we have.  

Things are already off to a good start with the S&P flying back up to test the 2,800 line and S&P (/ES) Futures contracts pay $50 per point so a 50-point move would be good for gains of $2,500 per contract on the bounce but, now that we're testing 2,785, we need to keep a stop at 2,780 and settle for a $1,500 per contract gain if the market is simply weakly bouncing pre-market.

I don't usually do this but I put a lot of work into the morning Alert for our Members and there's nothing more important this morning than discussing the bounce lines so I'm going to…
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Will We Hold it Wednesday – DAX 11,800 Edition

Usually, we don't care so much about Europe.

However, Germany's DAX index is critically testing the 11,800 line, which would be it's lowest point since early 2017 and, in 2015, DAX had a 20% correction after failing at this mark – all the way to 9,000 so failing here would be extremely significant and the Euro Stoxx Index faces a similar test at 3,200 – but it's still 100 points above that line – a larger percentage (3%) than the DAX (1%) has to fall.  

Brexit, of course, remains the big story over in Europe but Italy is also falling apart and, just this morning, the Parlimentary Budget Office said the Government's forecast of 1.5% growth next year was exaggerated, indicating deficits will be larger than projected and far afoul of EU regulations.  Italy's debt is already 130% of GDP and that's considered a crisis – said the writer in a country who's debt is 110% of their GDP and also has BS inflated Government projections for economic growth.

Image result for italy deficitEU authorities are expected to declare Italy in violation of the bloc’s rules on fiscal discipline unless Rome changes course. Leaders of the League and 5 Star have defiantly denounced EU officials, raising the specter of a monthslong confrontation.  Last Friday, the EU’s executive arm criticized Italy’s budget plans, saying they represent a “significant deviation” from recommended fiscal policies.  Skeptical investors have dumped Italian bonds and stocks, especially banking-sector shares. The yield on Italy’s benchmark 10-year bonds touched a four-year high of 3.7% on Tuesday.  

3.7% is off the chart and that chart is up over 100% since May!  By comparison, Germany is still borrowing money at 0.55%.  Italian Finance Minister Giovanni Tria said the government is worried by the “unacceptable” bond yield spread, which on Tuesday was near the widest in more than five years.  "If the spread reaches 500?” Tria said in response to a hypothetical question. “The government will do what it does in an unexpected crisis, because we aren’t expecting that.”  That's not actually reassuring since Italy in the 70s and 80s massively devalued their currency and engaged in hyperinflation to pay off debts (ie. pay debts with worthless currency to pretend they aren't…
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Tumblin’ Tuesday – Dollar Up, TBills Down, Markets Look for a Bottom

Image result for monks roller coasterWheeeee!

Sell-offs are so much fun when you are ready for them.  We added Delta (DAL) yesterday as a Top Trade Alert since we like the sale price ($52) and were able to construct a nice income-producting trade while we wait for earnings on Thursday.  We can afford to do that because we always hedge our portfolios and keep plenty of cash available for bargain-hunting while others are panicking.  Times like these are when we like to do our shopping!  

Futures are down again this morning as the IMF cuts it's forecast for Global Growth due to the escalating trade wars to which we say – DUH!  To this day what surprises me most about traders (and my fellow analysts) is how oblivious they can be to macro changes until someone of authority points it out for them.  Who could have possibly believed trade wars would be good for the Global GDP?  Only someone listening to Trump and his team of Economorons with no logic filter could possibly think what they are doing is pro-growth.  

Global Groth is still 3.7%, which is not bad but it's worse than the 3.9% forecast they had just 3 months ago and, since trade tensions are getting worse and since Trump is still threatening to ratched tarriffs up from the current $110Bn to $500Bn – we can expect the IMF to downgrade the growth forecasts another couple of times down the road.  Will this also shock and surprise traders?  

Oddly enough, the US and China's forecast is steady, though Trump will be disappointed to miss his 3% promise.  Europe and the Emerging markets are suffering so far but the IMF indicates escalating Trade Wars could knock another 0.8% off the global total – which would be a disaster.  The IMF has already cut the US forecast to 2.5% next year so the trend is down – even at the current trade levels.  

Meanwhile, things in Europe are getting even more stressful as French President Emmanuel Macron, who just won last year with 66% of the vote, now has his support at just 34% followiing a recent poll after a series of scandals and a government shake-up.  While
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Monday Market Misgivings – China, Italy, Bonds, Brazil & Brexit

Problems, we've got problems

They're not new problems and trade issues and bond issues are self-inflicted problems but, as was made obvious by the Kavanaugh confirmation this weekend – these self-inflicted problems aren't going to go away soon.  If America is indeed on the wrong path – the wheels are being locked in with lifetime appointments that insure these policies will last long after Trump has gone to pasture.  

As you can see from the chart on the right, other than Israel, Kenya and, of course, Mother Russia, other contries' view of America has been deteriorating rapidly since Trump took office – worse even than Trump's poll numbers at home.  People in other countries consider the United States, not Russia or China or Iran – to be the single biggest threat to World Peace.

Meanwhile, Trump's rollback of Obama's Climate Policies and withdrawal from the Paris Climate Accords has, according to the new report from the United Nations, set us on a path for Global Catastrophe as soon as 2040 which, in case you are not good at math, is only 21.5 years away.  

The report, issued on Monday by the Intergovernmental Panel on Climate Change, a group of scientists convened by the United Nations to guide world leaders, describes a world of worsening food shortages and wildfires, and a mass die-off of coral reefs as soon as 2040 — a period well within the lifetime of much of the global population.

The report “is quite a shock, and quite concerning,” said Bill Hare, an author of previous I.P.C.C. reports and a physicist with Climate Analytics, a nonprofit organization. “We were not aware of this just a few years ago.” The report was the first to be commissioned by World leaders under the Paris agreement, the 2015 pact by nations to fight global warming.

Image result for us rogue nation climateLook, I know you don't want to hear this stuff on a Monday morning but we are talking about a major global crisis and WE ARE MAKING IT WORSE, not better, not even the same, because we have "leaders" who are not only ignoring the problem but ACTIVELY working
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Faltering Friday – Rally Retraces from the Top

It's not much in the grand scheme of things.

As we noted and predicted on Tuesday, the Russell Index is undergoing a long-overdue correction to the 1,640 line from 1,705 and, as noted on Tuesday – it's not really bearish unless we fail to hold 1,640.  So far, the other indexes have not really followed suit – yesterday's 200-point drop in the Dow was nothing – not even 1% of it's 26,825 start to the day.  BUT (and it's a big but), if the Russell does fall into a proper correction and fails to hold the 1,640 line – then we can look for all the indexes to begin correction and THEN things can get very interesting.

We calculated the retrace zones for the other indexes in yesterday's Live Member Chat Room and they are:

Still looking for 1,678 (weak bounce) on /RTY going back to Tuesday's notes and below 1,670 is more likely that we're legging down to 1,640 (strong retrace from 1,700) and then we can expect the other indexes to AT LEAST weak retrace from their highs.

That's off the year runs so, for the Dow, we're looking at 25,000 to 27,000 which is 2,000 points so 400-point retraces are 26,600 (weak) and 26,200 (strong):

/ES is essentially the same /10 so 2,700 to 2,900 means 2,860 and 2,820 and, since /ES is still at 2,923, it makes a great short below the 2,920 line with tight stops above.

/NQ 6,400 to 7,600 is 1,200 so 240-point retraces and Nas loves 25s so call it 250 to 7,350 and 7,100.

We hit 26,600 on /YM yesterday and our /ES shorts paid $1,650 per contract at 2,890 but that's still not a proper correction on the S&P and we can re-short it on a move back below 2,900 with very tight stops over
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