A Matter Of Trust

From either the long or the short side, this market is very difficult to trust. Whenever we get signals in one direction or another, the breakout or breakdown fails.



For example, I would have thought a breakout on FXY on strong volume the other day would have been a good long idea as well as a good indicator of risk aversion. Of course, the breakout immediately failed.



TLT was chugging along nicely too from an inverse head and shoulder breakout. The bull market in risk aversion has failed in literally 3 days. Treasuries were a disaster today.

The one thing that made today not too bad for me was that I had many positions which were close to stop outs yesterday. Many of my shorts therefore were taken out early this morning. The following were stopped out at the following prices:

GS - $151.36
FDS - $51.96
BDK - $29.74
FXP - I sold it a $11.76
PNC - $39.20
FXY - $105.28

I am now 17% invested.

I did a quick post this afternoon because I thought today presented us a great risk/reward opportunity.

I added the following short positions:

EEM - $33.01 (stop at $33.30) [close below right shoulder]
XLE - $47.36 (stop at $48.05) [retracement of H&S]
MON - $76.17 (stop at $79.85) [retracement of H&S]
FCX - $50.64 (stop at $53.05) [close below right shoulder]

All of these names have clean stops.

Sure, bulls can celebrate taking out the right shoulder on $SPX. But, the bulls are now bumping up against the June highs.



Also, my fib lines on my SPY chart have been very much on target and I still have us between the $87-$93.60 range. Why not take a shot at some of the good short setups by shorting at the top of the range today? It was hard to do if you've been short and getting knocked around the last few days, but I think it was a great opportunity today if you had the stomach to take the trades down. Until the market tells me otherwise, I will assume we'll be in $87-93.60 trading range.

MON, FCX, XLE, EEM

I'm placed a short trade on FCX. I'm using the July 1 high as a stop. If this H&S does not get invalidated and does breakdown, this is a nice spot to enter.



I placed a short trade on MON. I'm playing the retest of the H&S breakdown.




XLE is another retracement from a breakdown. If the market holds resistance right here at 925 on the S&P, this is another good short opportunity. Lots of potential to short some stocks/indexes right here with a tight stop.



EEM is right near its recent high at $33.20. Can enter here at $33 with a stop just above those levels. A high probability chance you get stopped out but a nice risk/reward.

We could very well rocket higher, but the risk/reward from the short side is attractive on many stocks/indexes right here.


Also note the low volume and that the VIX is actually up today. Low volume combined with put buying doesn't sound like conviction to me.

Head and Shoulders Not Worth It

This ES chart reflects the juice from the "good" Intel earnings report. We'll all be watching 925. I think this ends up breaking down, but not before shorts and longs alike get knocked around.

I will only be taking my highest quality setups until we get out of whipsaw mode. The head and shoulders in itself is somewhat of a bad trade because even if it breaks down the target is only 800-820 on $SPX. If the downside target was bigger, I think sticking with it and pushing through this whipsaw action might be worth it. There might be a nice reward for sticking with it. It seems that even if you end up hitting the trade, all the little stop outs before we get there will make it nearly impossible to realize a gain on it.

From the bullish perspective, it is hard to get serious about being long with the head and shoulders out there.

So for the immediate term, my 19% invested actually might be too high!

Today I got knocked out of ESI, XLI, QQQQ, and XLY. I did add a GS short at $150 after getting stopped out at $151.1. My new GS short position is double the size of the position which was stopped out (I think it is about a 1.4% position size). Looks like I'll likely get blasted out of this one in the morning.

As I mentioned, my account size is now down to 19% invested. And this includes a generally low beta long FXY position which I added today.



Speaking of FXY. Was the big breakout a fakeout or is this a nice retest opportunity? The bigger question might be whether the currency market was right about the short term direction of things or whether the stock market is correct? I'm still putting my bet on the currency market (albeit, at 19% invested it is not much of a bet at this point).

The bears held their ground today. No breakout on GS. XLF and IAT also stayed in check. However, today is old news right now because with the after hours blast off these guys may invalidate their bearish patterns tomorrow morning.



SNX as a long idea.



A breakout from a cup and handle on good volume and after earnings.

Giving GS short another try. Using today's high as a stop.

Stopped out of GS, XLI and QQQQ. I am now only 18% invested.

Goldman Earnings; Execution/Protrusions

Well, as I mentioned on Friday (http://chartsandcoffee.blogspot.com/2009/07/goldman-sachs-earnings.html),it seemed almost like destiny that GS would make a run up to resistance at $150. I couldn't predict that Meredith Whitney would come out before the bell today and talk up financials (or at least, this was the way the media reported it). We're now at $150 a day earlier than expected. If GS blows through $150, expect the bearish charts on financials to be blown up. If GS tops out right here at resistance, expect today to be a one day wonder. Oh yes, we're at another "action point."

I purposely did not post it earlier today, but I decided to short a little GS at $149.50. But for the earnings announcement and the probability of a gap up, this would be a nice trade. I have my stop just above $151. I'll take 50/50 odds anytime if I can have a good/risk reward setup. Of course, the gap up possibility eliminates this from being a good setup since my stop out price may end up being much higher. Anyway, this little bet will make things interesting tomorrow morning.




My next topic is what I call protrusions. My example is IAT. This is a good looking chart for the shorts. A head and shoulders like formation and a descending triangle. Then today we get the little protrusion above resistance. This gunned out some stops including mine. This is why only half of trading is the planning. Being able to execute well is the other half of the equation. It would be quite typical to see IAT drop like a rock immediately after getting stopped out.

My only defense against this kind of thing is diversifying similar positions rather than just allocating all of position into one ETF or stock. An example of this is that in addition to my IAT position which I lost today, I still have my PNC short position. And of course, I have my new GS position. I wish there was a better way to fight against these protrusions.

I'm keeping it short tonight (pun intended). No point guessing what will happen tomorrow. The bears have to defend their turf tomorrow. If not, we'll likely move up to the top of the right shoulder on the Dow (8500) and SPY (930).

In the meantime, I entered a short ES trade at 894.75.

Sunday Night Coffee - 7/12/2009

I mentioned back in May that I was watching Google Trends as a market sentiment indicator. This is the first week in which I can actually apply the concepts discussed in that post (click on Google Trends under labels to view the post).

I find it interesting that the search volume for "bear market" is back at 2004-2007 levels. Whenever the search volume has decreased to these levels in 2008-2009, there has always been a subsequent drop in the market and a renewed interest in the term. I throw this out there not because it is scientific, but I find it quite interesting when coupling it with other sentiment indicators like the VIX. I would argue that we have complacency in the market coupled with charts which show a lot of vulnerability to the downside. To me, this is a recipe for a move lower (I'll get to the charts in a bit). In a sense, I am also saying that Google Trends is a lag indicator. As one might expect, the panic searches for "bear market" do not start until the move lower is already underway.

In trying to get a handle on the market, I think that the answer may lie in the direction of the US Dollar.



A chart of UUP (dollar v. a basket of major currencies) does not really help me. A deeper looks is required.



The Euro looks vulnerable right here. It looks like a descending triangle might be forming. Dollar strength?



FXB is also looking toppy here. It doesn't seem that it has enough power to take out
$1.65. We've already run from $1.37 to $1.65 so the fact that the pound is starting to weaken against the Dollar is not a big surprise.



The Aussie Dollar also looks quite weak against the US Dollar.



The Yen/Dollar pair is perhaps the most interesting. FXY has recently broken out over $106. My hypothesis is that money is flowing into less risky and lower yielding currencies such as the Yen and the Dollar. The fact that the Yen is moving higher against the Dollar leads me to believe that this is not just an issue with the Dollar but part of a greater flight to quality.

Google Trends is a lag indicator but the currency markets are already showing a "flight to quality."



Of course, the completion of the inverse head and shoulders on long term treasuries (TLT) confirms the flight to quality that we see in the currency markets.

So what about the bond markets other than treasuries?



LQD tracks an investment grade index and is the least risky out of the 3 bond funds I track (LQD, HYG and JNK). LQD is moving higher and the chart appears to be in good shape.





JNK and HYG which track riskier higher yielding bonds. Again, we see the shift to quality assets. LQD is continuing to performing while JNK and HYG are showing weakness.

So my prediction is that Google Trends catches up with what the currency markets, bond markets and the stock market is already showing us.

Now let's take a look at the stock market.



I would argue that the Dow has already broken support. I would expect to see DIA fall to $77-78 based on measuring the peak to the neckline of the head and shoulders on DIA and the support at the $77-78 level.



The first breach of $35 on the QQQQs could be viewed as a little fakeout retest with the potential for a move higher. Now we have a second and deeper breach of prior support. I view this second breach as the real deal.



In addition to the Dow and the QQQQs, we have XLE which has clearly breached prior support. I think it is a tough argument to make that the Dow and the QQQQs are just fakeouts when other sectors have already shown their cards. Especially in light of the currency markets and the bond markets confirming this price action.

More examples of weakness in various sectors below.



XLY is at its lowest levels since April and looks like it is about to punch through support at $22. I could argue that it has already broken support.



XLI has several industrial components in common with the Dow. Like the Dow, it is already broken.



Biotech (IBB) had been hanging in there for a while. The trendline has been broken and it looks like the right shoulder of a head and shoulders pattern may be forming.



With energy falling, it is not surprising that the solar ETF looks like it is about to breakdown.



The REIT ETF (IYR) has been defying gravity for a while. Everyone knows that commercial real estate is a mess. Yet, IYR has been hanging in there. Friday was the lowest close on IYR since the end of April. The head and shoulders pattern looks like it is about to confirm on IYR too.



I have been mentioning the weakness in the banks for a while. It seems unlikely that the market will move higher with the banks looking so sick. IAT is one of my favorites because it can be viewed as a head and shoulders breakdown and as a descending triangle breakdown. This one has already confirmed.



XLF also is looking like a descending triangle and looks almost ready to confirm.

For those that are looking for a more fundamental view of what might be going on with the banks, I recommend reading Karl Denninger's post on the current state of the banking sector.

http://market-ticker.denninger.net/archives/1206-Banks-Here-Come-The-OptionARM-Blowups!.html

Another interesting read is that former junk long portfolio member CIT Group is in the process of filing for bankruptcy. It is no accident that I bailed on the junk long portfolio. There will be more to come.

http://online.wsj.com/article/SB124726834760725751.html

FCX and WFT are a couple of nice bearish setups although with so many short opportunities on the major indexes I'm not sure if anyone needs to look too hard for short ideas.



Awaiting a break below $45 on FCX.



Awaiting a break below $17.5 on WFT.

And a few bullish setups:



I can't say I'm enthused about taking long positions, but APU is a nice opportunity because it is easy to manage risk with a stop at $33. I'll be looking to get into this one.



I bought AVAV last week on the pullback. It is easy to manage risk at $29. This one exploded higher after earnings and it also may have a good fundamental story behind it since it is in the Aerospace/Defense Sector.



I originally entered this one on the breakout from the descending triangle at the end of April. I sold it during the consolidation phase between $28-30 and jumped back in when it broke $30. Another one which is easy to manage with a stop at about $30.



The Indian Enron was once a higher flyer and perhaps has some "alpha" potential since it is so beaten down because of fundamental issues with the company rather than just being down because of the overall market. This one brokeout from a cup and handle back in June and held support at $3. I'm already in this one with a very small position. This is a riskier position because the stop is not so clear. One place would be $2.95 but that is a big drop. You can play it tighter but with a volatile stock you run the risk of getting hacked out of the trade.

I think everyone knows my thoughts on the market. There is no hedging my thoughts this week. I'll be updating my C&C Portfolio Holdings shortly. You will see that I have fewer positions than I have had in the past. I'm currently only 27% invested.

Also, make sure you keep track of the earnings calendar!