Saturday, April 25, 2009

Weekend Update…

I hope all you new bull market Sky Pilots are having a terrific green shoot weekend, I am reading about more and more “bears” who are becoming convinced that we have turned a corner. Even Prudent Bear’s Doug Nolan is sounding bullish, of course he understands at least the devaluation that’s taking place and that any growth that may be occurring is not real. Frankly, I think he’s just flat out wrong. The economy has not turned, it has simply found enough footing to stop the free fall and to give people looking for a bullish case enough hope to grasp onto. This is what bear markets do, they suck in money to be destroyed.

And to Doug’s credit, he is correct that credit spreads have come in. They have come in, though, not because of a fundamentally sound economy, or that people’s creditworthiness has improved, or that the banks creditworthiness have improved… THEY HAVEN’T. What they have is the government’s full FIAT backing – for everything. That’s why I’m considering taking out a very large unsecured line of credit that is backed by the government to buy gold! LOL, NO, not really (someone will write me and ask…).

Heck, even with the second largest REIT now bankrupt, the AAA CMBX index is coming up in price:

I’d like to know who falls into the AAA REIT category when the second largest one is in bankruptcy… anyone? Moving down the food chain to BB, you can see that prices and thus spreads are still in the gutter:

But there’s no doubt that Friday’s action was bullish. Bullish enough that it has me questioning whether that was an actual ending diagonal or not. However, until prices break the prior high, that scenario is still in play, but admittedly looking less likely.

Friday saw the DOW gain 119 points, the S&P gained 1.7%, the NDX flew 2.2%, and the RUT zoomed 2.6%. IYR defied gravity again – gaining 5.3% and breaking to a new high. That action sent SRS to a 23.66 Seth close which just goes to show you what a horrid and wicked trading instrument these leveraged ETFs are. I must say, however, that it’s getting close to being time for it to go the other way, IYR has come very far, very fast and that does not match the underlying fundamentals.

Internally advancing issues outnumbered decliners by a 3 to 1 margin and 74% of the volume was advancing on the NYSE. The VIX declined .9 and closed just beneath 37.

Let’s look a little longer term this weekend and see where we are. The two indicators I primarily use to determine bull or bear market are still solidly bearish. I think attempting to call a new bull market is as foolish as calling a top with every rally during a real bull market – what’s to be gained from doing that? Why not let the charts tell you.

So, DOW theory dictates that BOTH the Transports and the Industrials make new highs together to confirm a bull market. While we have just lived through the most powerful 7 week rally in history, we have yet to get close to a new primary high in either.

There are also several methods of using moving average crosses… the one most popular is the 8/34 moving average cross on a WEEKLY chart (green = 8, blue = 34). Here are both the SPX and DOW 2 year weekly charts. Note that once these crossed back in December of ’07 they have not crossed again. Also note that the weekly fast stochastic is overbought and that there is a positive RSI divergence developing in this timeframe as this peak is lower than the last, but the RSI is higher than it was at that peak:

Now let’s zoom in at a 3 month weekly chart of the SPX so we can see the latest candles real well. It’s been seven weeks of rally, this week was only slightly down but not on the NDX or Transports which put in their seventh consecutive winning week. This week’s candle is a pretty clear hanging man, but again, it’s not in a perfect position at the very top, so we’ll see:

And here’s the DOW weekly, same thing, and actually the third/fourth hammer in a row. The bulls keep trying but are having a harder time making progress the past couple of weeks. Note that we’re basically where we were two weeks ago:

Here’s a zoomed in 60 minute chart of the SPX… still building a rounded bridge trestle. Note the overbought 60 minute stochastic again, the 30 and 10 are also overbought indicating that some selling is likely on Monday. Also, you can see the red ending diagonal, it is not doing what I would expect for that type of formation. Ending diagonals usually break hard and then proceed to retrace all the way to the base of the formation at a minimum. Obviously hasn’t happened so far, but still could unless we proceed higher and break last Friday’s high, in which case we need to be looking for another formation:

Here's the big picture bear market in percentages to date:

And here's a daily chart of the dollar futures, /DX, showing that we are on the verge of breaking beneath a triangle formation:

This Friday’s rally broke some key areas on the P&F charts, whipsawing the DOW and S&P back to bullish targets again after having just issued bearish ones:




Below are the NYSE and Nasdaq Advance/Decline lines plotted against their respective index. The red/black lines are the A/D lines and solid black is the index. It’s odd in that the NYSE has produced a substantial divergence with the A/D line on top of the index which is a bullish indication saying that the move is wider based than the price would indicate:

Now on the Nasdaq it’s the opposite, meaning that the rally is being led by a narrow base and is considered to be a bearish divergence. Very unusual to have them split in opposite directions like that, but the Nasdaq has been outperforming the rest of the market:

So, there are many signs of life in the charts… GREEN SHOOTS if you will. Or even if you won’t. I don’t care, just don’t Bogart those shoots! In all seriousness, it’s a confusing picture to be sure, but I want to make it clear that I am as fundamentally bearish as ever if not more so, but I do see the potential in the charts to run higher here still. How high? Well, the upper trendline is about 890 right now on the SPX. That’s possible. It’s also possible that we are done and that those weekly candles are, in fact, hanging men.

Hey, you have to give Obama credit… Maybe somebody laced my green shoots but is it me or does he look just like Neo who single handedly stopped the economy from plummeting into the abyss? Naw, can’t be…

At any rate, there are signs that the market can move lower… no new high on the SPX this week, a potential hanging man, overbought short term stochastics. Additionally the volume, choppy trading, and insider selling are looking like distribution is occurring. And the bond market is breaking beneath trend on the long end of the curve. TLT closed beneath 101 (Bernanke’s line in the sand) and beneath the 200dma for the first time since August of last year.

Then, on the other hand, there are signs that it could go higher, irrational behavior, Goldman manipulation, people smoking green shoots, government stimulus, government guarantees, government backed credit spreads coming in, government backed auto industry, government backed housing industry, government backed insurance industry, government on the verge of default (oops, that one belongs in the bear category).

Yes, it’s been a terrific 7 weeks of lucky but highly skillful manipulation, err… I mean rally. Did you hear that the IMF is going to sell their own bonds? Yes, indeed. Debt by the central bankers for the central bankers to enslave the world via a new super currency. I warned about that, repeatedly, and now it’s here.
N.Y. Times - I.M.F. in Advanced Stages of Plan to Sell Bonds for a New Loan Program

…The idea for the new lending program is to provide flexible credit lines to poorer countries that found themselves blindsided by the sudden inability to borrow in global capital markets.
Perhaps with a new highly leveraged super duper world currency backed by IMF bonds, we can all work away our interest and fee paying lives away for no purpose other than to produce a meaningless Sky Pilot stock market rally!

The Animals – Sky Pilot: