Thursday, June 28, 2007

Stocks lead commodities

I finally learned how to make a hyperlink in this blog so I am a very happy camper to say the least ! Took me a while but I have arrived so as they say, to a man with a hammer, everything looks like a nail !

I wanted to touch on somethingthat is very important in my trading anlysis and that is the fact that stocks lead commodities. Now nothing is 100% certain (except death and taxes) but this does tend to hold true more often than not. For example, the gold stocks should lead the bullion, not because stock traders are smarter than the guys in the gold pit. To the contrary, the guys in the pit are some of the shrewdest and savviest around, rather the gold stocks are heavily levered to the price of the underlying. Therefore, when gold does move, profits flow to the stock's bottom line, assuming no adverse acts of nature. That's why I watch the Gold Bugs Index ($HUI) which should lead the bullion if a move is coming.

I had a lot of clients in resources stocks back in 1998-1999, yes a tough time I admit, I really didn't get it, or this time is different, so I was continually told. Sir John Templeton, who writings and thoughts you all should make yourselves very familiar with,often said "this time is different" are the 4 most expensive words ever uttered in history. Inco was a stock I owned that started coming out of the hole for ahead of the price of nickel and was swimming in dough due to their cost containment during the lean years as anyone who survived started printing money. Shell Canada was another example. The time frame with which stocks lead is subject to debate but what you want to see is leadership in this fashion.

Lets turn to crude of which you know I am a raging bull. I spoke with some friends back in early May who follow markets closely, and most were neutral, some short, and some involved in spreads with crude the short. I explained my position that as I saw it the Oil Service Holders (OIH), along with Amex Oil Index ($XOI) was leading the charge and this was a good indicator. As crude ($WTIC) looked like it was ready to break the OIH was making new highs and this is a good indicator and readers of my earlier post would know I call this a positive divergence. Crude itself should play catch up here to the stocks which would be healthy for this market.

This inverted head and shoulders on crude that I am enamored with implies a target of $80-85(actually $82 is my preferred number but 80-85 is close enough, like in horse shoes and hand grenades) so there is plenty room to run and with 3 carrier strike groups(thanks to Mike over a Futurejacked for bringing my attention to that) in the Persian Gulf, there is no telling how high crude can go. Pssst.... it has a 1 handle and 3 digits are involved. Now how is that for being bullish. I certainly don't want to be labelled a permabear. For those that need fundamentals to make the world go round, which I do, but I take em' with a rather LARGE grain of salt given the state of corporate ethics currently, the true big three the ones we should be familiar with are not GM, Ford and Chrysler but rather Ghawar, Burgan and Cantarell. I am waiting for Don Luskin or Ned Reilly to go on CNBC and tell us how higher oil prices are dis-inflationary and we have less to spend on other items !! and they hit the buy button on Nike and Best Buy, tragic if it weren't so comical.

Speaking of the large grain of salt I take corporate fundamentals for I am no C.A. but what for the life of me I cannot understand is how these mortgage outfits like Countrywide, etc treat revenue for neg-am ARM's. As far as I am aware, they are booking the entire amount as revenue earned even though the homeowner is only paying a fraction of it, and in all likelihood will not pay it. Ethics should be mandatory business school study instead of an elective. Good luck and good trading to you.

News conforms to the Tape

KBH reported numbers today and like Lennar yesterday the numbers are awful. Speaking of Lennar they lost $1.55, writedowns and other related debacles accounted for $1.33 so the loss was $0.22 and the street was expected a$0.05 profit. How's that for cutting edge analysis. Sounds more like 1 kid in the class did the homework, everyone copied his, (with some slight alterations mind you, remember this is Ivy League stuff!) and guess work its all wrong! I saw this happen before with Bre-X. Egizio Bianchini was the preeminent authority on it so everyone copied his work, its the only logical conclusion unless you consider outright fraud. The point I wanted to make when I started this rant is that when KBH was trading at its highs back in the summer of 2005 all the news was rosy then the stock started dropping yet all the while nothing but good news. This news comes out with the stock down over 50%. Same story goes for RACK, AMD, the list goes on. We now have the why. News conforms to the tape. Enough said.

The garage sale at GM continues. Bankruptcy dead ahead for this debt saddled shell of its former self pretender. The true car guys who started this thing must be rolling in their graves.

Aaron over at ML Implode-o-meter, who does excellent work digging up the pieces of the housing bubble reports that as of now 91 lenders are bust. Yeah the sub prime problem is contained, just keep repeating it over and over again and maybe they will start believing it, by the way its Merrill's turn today. A friend of mine in politics ofter says to me if you're explaining, you're losing. While we're on the subject of lenders, in what has to be filed in the category of balls of you know what, the former execs of belly up MLN had their license application for a new home mtg company turned down by state regulators in Connecticut. You would think they would lay low, stay out of sight, with a low profile. Nope, right back at the trough again. Gotta hand it to em', hubris of the first order. Just shows you the arrogance of invincibility in this market environment.

The Dow (see chart above) - numbers to watch 13,250 and 13,200 short term. This would penetrate and prior reactionary low and also the 50 day MA. A move thru 13,693 would break this rectangle and the bulls get new wind and another lease on life but really don't have to wait for that as 13500 should contain the upside here if this thing is ready to move down.

Crude is thru $70 which is nice for us bulls. The 7 handle should get a lot of air time on bubble vision aka CNBC. I play USO and OIH due to the nice liquidity. OIH led the run up here and is catching its breath. Deep down I feel the commodity is the way to play because if guys like Matt Simmons, Colin Campbell, and Samsam Bakhtiari, are even halfway correct regarding peak oil, governments are going to be stepping in and confiscating (oops nationalising) energy interests all over the globe and I just don't mean places like Venezuela and Russia, but across the spectrum. It is too valuable an asset to have in the hands of the private sector. They will need assistance getting it out of the ground, so I continue to favor the companies that provide equipment, services and expertise as opposed to the explorers. Call me crazy but this is my simple minded thinking and I definitely need to keep it simple.

Most of you heard what the BIS had to say yesterday so all I can add is caveat emptor.

My grand father loved commodities due to the fact all you had to worry about about was supply and demand(for the most part) and a little weather. He was simplifying things for me but he felt with commodities you never woke up to management embezzlement or options backdating. As if the marketplace itself wasn't bad enough Beazer shareholders can add this to their list of worries. That's it for today, good luck and good trading.

Wednesday, June 27, 2007

Bonds - Checking in on the Lehman 20yr bonds fund also known as the TLT's this rally looks like it is about to fizzle out. Volume has been very light and we are now into heavy resistance area of June 7 gap down. (mind the gap) High tick that day was $84.71 so this is looking like a nice short entry point. Conversely the 10yr yield ($TNX) is pulling back to the gap up support zone. Bond yields will go much higher than anyone currently believes possible. Look no further than how bond rates fell further and far longer(the better part of 2 decades) than anyone would have thought possible. You would have been laughed out of business suggesting buying long term bonds in 1980-81. This is a sea change event with this yield rally, govern yourself accordingly. By my count 5 descending trend lines on the $TNX have been broken.

They are in order form high point:
158.40 (15.84%) on Sep 1981
139.90 on May 1984
102.30 on Oct 1987
80.20 on Nov 1994
67.80 on Jan 2000

SRS - sticking with it even with potential outside reversal bar in progress on heavy volume. I was shaken out of my DIG position Ultra oil and gas proshares prematurely by not being patient with my winner, and it cost me. Entry was 76 and yours truly got shaken out at 86. Yes I know it went to 105, hence we must remember Livermore's advice to be extremely patient with your winners and inordinately impatient with your losers.

For you buy the news traders, (even though I cringe at the thought) ORCL is at major resistance of $20. You will need a 15 yr chart to see it but its there. For you MOT bulls I know a lot of hedgies(SAC especially) and even some value players have some decent long positions in this one. The tape continues to point down though. The gap down Jan 5 this year thru the trend line coming from the April 2003 lows was not a good sign. And speaking of SAC, SHLD better hold 165. A trendline form 2003 was broken thru $170.

Japanese Yen - thru $82 would make me happy as it would break the downtrend line from March 28 this year(yes I am a stickler on trend lines, from the highest high touching the highest high before the lowest low, no cheating). The inherent attraction in this trade for me is that I think we can count on 2 hands how many yen bulls there are globally. I mean really is there a trade out there more one sided?

Consumer Goods - $62 is the line in the sand for IYK. Again my preferred vehicle is the Ultrashort proshares ticker SZK, and no you news traders, a good report from Nike does not change my opinion, actually emboldens it because I am not looking in the rear view mirror, which is what I think of news.

A few blog entries back I wondered aloud on the Saudi equity market (TASI) and the 65% drop since early 2006. Standing over an uphill 6 footer for par (which I don't mind saying I made, need those, keeps ya comin' back) I got to thinking about the decline and the state of the Saudi economy, which is exactly what it is, the state, and it got me to thinking. The nationals of any country regardless of standing and status internationally(1st or 3rd world) are usually in the know. It seems to me that they have been selling and if they are not selling then they sure as heck are not buying( it takes a lot of buying to put a market up it takes a mere lack of buying to put a market down.) Take this a step further why are they not buying do they fear a royal family overthrow. Do they poor economic fundamentals on the horizon, or do they the ones in the know, have any insight as to whether the Kingdom's stated oil reserves (remember these are unaudited and unverified by any outside independent sources) are baloney or not? Something to consider.

I saw a piece over the weekend showing a BP Statistical Review that during the Iran-Iraq war Iran's stated oil reserves went from 60 to 90 billion bbls which represents a 50% increase. Iraq's stated reserves went from 30 to 100 billion bbls. which represents a 233% increase. Now this is during a war that ravaged both countries. Anyone who still believes in the sanctity of these stated reserve numbers of which OPEC member production quotas are based, well then I have a bridge I would like to sell you. Insults what little intelligence I have. Good luck and good trading to you.

Tuesday, June 26, 2007

According to Soros

I read a piece some years back where George Soros was once quoted as saying successful investing is being able to recognize the trend whose premise is false, ride that trend, and step off before it is discredited. Boy o boy is that applicable today. It seems to me than any educated fund money manager worth his salt is fully cognizant of the risks in this market. Just as I believe they were prior to the tech blow up of 2000. I was a retail broker during that debacle, (with minimal tech exposure I might add, needless to say that was not the way to the chairman's club but I digress) and read many interviews with mangers. One I remember in particular was with an old hand at Fidelity whose name escapes me at this moment, anyway he complained about how that market was completely off its rocker, yet he was fully invested. He needed to be to keep his job. Furthermore, and here is the kicker, he was short with his own money. Now forget the conflict of interest this presents but the guy you have managing your money thinks the market is crazy overvalued and is short with his bread, yet is pedal to the metal long with YOUR money! So the question you ask is if they are fully aware of the risks why are they doing what they are doing, seems counter intuitive, to put it politely. Many other market observers have speculated as to the why they do as they do, so I would leave that to a clinical psychologist. I want to go back to Soros comments about recognizing a trend whose premise is false, riding it and stepping off before it is discredited. If we accept the fact that the street attracts very bright people then the street is littered with people who believe they are smarter than everyone else, hence the phrase 'smart money'. Side note, I have been on too many conference calls listening to the so called smart money, and this I can tell you, it is not always all its cracked up to be. I was told long ago by someone far wiser than myself that often you can learn more about someone (their acumen) via their questions. Now this intellectually superior smart money would explain the mentality that even though a trend is widely known to be false, we now have all these very bright people who expect to be able to step off the train before it derails. I don't know if this is naivete, bravado, or sheer stupidity. The one thing I do know for sure is that everyone will not be successful in their escape. The laws of nature wont allow it. As for the pundits of the major houses who continue to talk up this market as they did in 2000, well lets just say that their interests and yours are not always in alignment.

This is 2 days in a row where they have ramped the market up only to see it give it all back before the end of the day, not what the bulls want to see. Remember though this bull has more than 9 lives and every drop is a buying opportunity. Gets everyone to thinking they can't lose, remember the movie The Sting with Newman and Redford, they sucked that mobster in good and tight, till he was convinced he couldn't lose. The market is very similar, wants everybody in and all naysayers discredited before it will break. Lets let the tape tell us where to go. We want to put our rocks in the wettest bags as they break easiest. Translation don't bother shorting Apple, Google, and Baidu, they're not worth the stress.

Power shares agriculture fund. ticker DBA is pulling back nicely after an above avg. volume break out thru 26. I am in thru $26, so if you missed the first thrust up it is testing the breakout area now on light volume, and adding thru 28.50 which should really ignite a move up.

Real estate continues to tank with the IYR making new lows. The 50 has crossed the 200 on the downside. Good news for us realty bears. I missed the homies and did not want to be fooled twice. My favoured play on this the SRS is making new highs and volume is starting to swell.

Consumer goods head and shoulder continues to develop a break below 62 on IYK would mandate entry. My preferred vehicle of choice on this would be the Ultrashort consumer goods proshares ticker SZK.

Gold is right on its 200 day and needs to be watched closely. Could be margin call selling, could be the games big boys play, who knows, who cares, we will find out later. Trend line from summer of 2005 lows is still intact so we will watch close.

Silver got shellacked today and is inherently much more volatile than gold. No need to ask questions they will be answered later. We need to concern ourselves with the tape and today's action is NOT good. Trend line support from June/06 lows has been broken on heavy volume if you look at SLV the etf. If we break $12 then $10 is the next stop. Now this could be a con but discretion is the better part of valor and above all we want to live to trade another day. I love the fundamental case for silver but unfortunately my margin clerk doesn't care a whit, besides we can always get back in later.

Crude is consolidating above the breakout and still looks good. 3 carrier strike groups in the gulf, peak oil, supply demand fundys spell higher prices.

Natural Gas ($natgas) has some support about $7 just wondering if they are shaking out latecomers to the party. One of my favourites is Natural Gas Services NGS which broke out (I missed it!) and is now pulling back to the breakout area of $16.50 which is where I get in.

Japanese Yen is drifting lower. This could be the the nitroglycerin of the subprime housing cocktail. Lots of these fund managers have been using the Yen carry trade to finance all the crap they've been buying so continue to watch close.

Merrill Lynch should make a run for $77 the old low back in March. Volume has picked up since MER broke $87. Good for bears bad for bulls and very bad for Mr. Market.

Good luck and good trading to you.

Monday, June 25, 2007

Deja Vu

Deja Vu according to Wikipedia is a french for already seen, also called paramnesia from the Greek word para (παρα) for parallel and mnimi (μνήμη) for memory) describes the experience of feeling that one has witnessed or experienced a new situation previously. We often get this feeling of deja vu in the markets where a scenario has played out sometime before in history. The story (pattern) remains the same but the names change. Jesse Livermore the great trader said "there is nothing new in the markets because speculation is as old as the hills. The same mistakes made before will continue to be made again." This is why charts are such a valuable tool. Now for the application, you are familiar with the Dow Jones U.S. Real Estate Index ($djusre or IYR) from my previous posts but just in case here goes. It represents an extremely good looking head and shoulders pattern with the neckline now clearly broken and lower prices in sight. Now punch up the Dow Jones U.S. Consumer Goods Index ($djusnc or IYK). I had to do a double take at first but don't worry its not an error, you did not punch it in wrong, it is the consumer goods chart you are looking at. They look eerily similar do they not. The neckline on the IYK would be approximately $62.25 and on $DJUSNC would be just north of 310. Watch this level and then expect the traditional test from underneath along with a possible whip up thru the neckline just to shake out the late to the party, poorly capitalised, like they did with IYR. An aggressive was to play this is the Ultrashort consumer goods pro shares (ticker SZK). A move thru $69 here should suffice. Remember this one is thin so trade small (pyramiding up) and let it get insulated first.

I was told long ago that a great way to keep yourself honest, we all have a hard time looking in the mirror and identifying our deficiencies(especially male traders, lol), is to print a bunch of charts and cut the names and do your analysis. Unfortunately when we are bullish on something we see it the way want to see it and this is not always as objective as we need to be. This is a good exercise to periodically do just to make sure you're not playing favorites.

Housing - Look I am not gonna beat a dead horse but here is a quickie on whats going on in the housing market. The estimates are that there is about 6 trillion is mortgage backed securities out there with about 800 million being sub prime. About 13-15% of this 800 million is in default and the foreclosure numbers are soaring. Approximately 2 trillion of the 6 are of the ARM(adjustable rate mtg) variety that have been, are, or will be re-set to higher rates ( Libor plus 250 beeps which would put a high 7 handle on their rate, can you say OUCH). Home prices are falling, inventories are rising and to this we are expected to believe the governments May jobs report showing construction jobs essentially unchanged. I was born at night just not last night. It doesn't take a rocket scientist from NASA to figure out that when mortgage equity withdrawals (MEW) account for 30% of new car purchases in California and 16% in Florida the housing debacle cannot and will not be contained, no matter what Fed governor or treasury official says to the contrary. These are people who if they were exterminators coming to your house would see 1 cockroach, kill it and say that's it, problem contained. As my friend Dennis Gartman likes to say, there is never ever just 1 cockroach. The markets, like mother nature just need to run its course and any manipulation by outside forces (the FED, PPT or otherwise) only delay the inevitable and in many cases exacerbate the results. The spillover to the consumer is going to be disastrous when you consider that the consumer accounts for approximately 70% of the domestic economy, to claim otherwise is naivete of the first order. Trust your own judgement, do your own homework, you will be thankful you did. Good luck and good trading.

Thursday, June 21, 2007


I wanted to touch on a subject which I think is under appreciated and underutilized. As you can tell I am trying to satisfy the frustrated English major in me with some multiple syllable words, but that's a completely different story. Basically what we are looking for with divergences is similar to what a detective would be looking for in solving a crime, such as inconsistencies, contradictions and breaks with the norm(assuming we know what normal is). As you know I consider price and volume paramount in my decision making, all else is fluff. It helps that I have been fooled and duped into believing so many other indicators in the past that have led me astray more ofter than I care to relive. If you still don't believe me on this then just try explaining to your margin clerk after a margin call that the MacD or RSI is positively diverging, as the position continues to crater. Odds are you will hear uncontrolled laughter on the other end unless, that is, you are the Bear Stearns Toxic Crap Hyper leveraged fund but I covered that one already. What we want to be on the lookout for is things that should be happening given a technical circumstance but are or are not. Speaking of MacD and RSI you can watch these momentum indicators for positive divergences, they are making higher lows when price is not and vice versa. These can be clues that a trend reversal may be at hand. A breakout thru clear resistance which reverses with little follow thru. Imagine you are going on a long trip with young children, and a couple of days before you leave your car hiccups and stutters while driving, no biggie you think to yourself, you're in a rush and you brush it off. Big mistake, as the odds are there is a problem somewhere in the system and it will rear its head at the worst possible time and you will curse yourself for being so stupid to ignore it. Well, same thing in the tape action of the stock, just because the tape did this doesn't mean you need to panic but you need to be paying higher attention.

I mentioned in an earlier post how closely I follow Merrill Lynch as I believe it leads the market and is one of my favorite indicators. Well we have what I feel is a serious negative divergence going on currently with MER and the overall market as Merrill has failed to better its old highs even as the overall market has. Many would point to this as inherent strength where I would politely disagree and counter that this is in fact a major contradiction or inconsistency. The bulls always want it both ways and you will never change their mind but our job is not to be on the bull or bear side but the right side! If you look at a daily chart of the Dow (top left) you see as the Dow tested its early June highs last week we can see the negative divergences occurring with RSI and MACD as it did. If you now compare the Dow action with the Merrill daily chart(top right) you can see Merrill failing at a lower high and now turning down. This what I would call a good example of negative divergence or put another way non-confirmation. As I am writing this Merrill broke its early June low of $87.07 which is not a good sign for the bulls. I am long the Ultrashort Financials (SKF) to play this breakdown.
Before I go I wanted to touch on the Bear Stearns thing again. I think the thing to take away from the Bear, Merrill situation is that Merrill is auctioning off about 100 mill of about 850 mill. What this means is that a very illiquid non-quoted market now will have some recent pricing and this could have some extremely serious repercussions across the sub-prime alt -A spectrum. I have no inside details but sometimes all it takes is one domino. Complacency is extremely high as all sell offs are viewed as buying opportunities and the bulls are really emboldened. Everyone on the street knows the sub prime stuff is crap but as long as no one upsets the status quo everyone keeps collecting mangement fees for doing jack and praying nothing upsets this fairy tale. Remember, he who panics first panics best. I think the bond market smells trouble and is selling bonds, raising rates to compensate for risk. Yes, I mean to remind you that the word still does exist. Good luck and good trading to you.

Tuesday, June 19, 2007


Lots of people have been chiming in with their 2 cents worth on the formerly known as Bear Stearns High Grade Structured Credit Strategies Enhanced Leveraged Fund margin call debacle. Before I go off, what I want to know is who came up with that fund name. They shoulda called it the BS Toxic Crap Hyper Margined Fund. Well, the word is that Blackstone is riding in there at the last minute telling everyone (included Merrill which was pulling the rip cord) to hang on, the white knight has arrived. These guys running these funds have been sitting on this CDO (collateralised debt obligation) crap and won't mark it to market(actually last bid if they could get it is probably weeks old) so everything looks great. The rating agencies are scared to downgrade the garbage, (which is what it is) for fear of offending their masters, but one day someone wakes up and wants out and the next thing you know a panic ensues and it all starts to unravel. I have some advices for the hedgies out there, well its not mine but grandpa gave it to me, he who panics first panics best. Remember a problem is never a problem till its a problem. Good luck to you guys, it couldn't be happening to a nicer bunch.

Crude - nice breakout thru $67.50 on the daily and weekly,(weekly breakout carries significant weight), and we are getting some follow thru after the fact. Charts look very bullish on all fronts, short medium and long term. How crude at $7something or even higher is good for the market and the economy is beyond my comprehension but mark my words, some shill (probably Don Luskin or Ned Riley) will be on TV harping about the bullish effects of $80 crude. Maybe CNBC will change their theme song to, Dorothy singing we're off to see the wizard.

Real Estate - sub prime, alt-A, neg am, adjustable rate ( shall I go on ?) debacle is well documented, the market cares not a whit for now, but believe me it will and when it does you won't want to be anywhere near it, unless you're short. The IYR has broken the neckline and is testing the old low for a 3rd time. the 50 is headed down but yet to cross the 200 and coincidentally this is happening right at the former neckline of the H&S. Stay short or long the SRS. The IYR had a 3 day rally last week on light volume and cracked down again on heavier(150%) volume

10 year note - sea change event here with major downtrend lines being broken. Expect backing and filling, to shake out the nervous nellies. The news is a smokescreen and as I have said before conforms to the tape, which is what you should be watching. They (the enemy) will say many things but their actions will be reflected by the tape.

Merrill Lynch - still has not bettered its old highs, the bulls need to see $95 then $98. 75 taken out. It does look tired but need to let the tape tell us. A break below $87 would do it.

Spider Financials - The XLF has all the makings of a double top on the weekly. Financials have taken a back seat and that is not a good omen for the bulls, but they never need them in the first place. Good luck and good trading to you.

Wednesday, June 13, 2007

All that shines is not gold....... maybe its silver !

Well time is running out. The pattern above is going to resolve itself one way or the other. I know that we must wait for the market to tell us what it wants to do (by its action) rather than trying to anticipate. The problem here is that the resolution could be an enormous gap. The fundamentals for silver are very compelling. Demand far outstripping supply, the enormous short position on the Comex, rumored to be held by 4 major players(broker-dealers). Ted Butler does more homework on this than anyone I know so read his stuff. James Turk offers some valuable insight as well, along with the fact that silver has many more commercial applications(compared to gold). For those unaware they are now using silver in athletic wear as an inhibitor to body odor, no joke they really are !!

The daily silver chart (above left) shows silver in its latest consolidation pattern. The 50day is still north of the 200day and both are flat lining here, they need to rectify this for the bull case. There is the risk that silver breaks the 200day and falls out of bed here, then we are looking at $10/oz pretty quickly. Momentum doesn't seem to be breaking down here so this is a positive. The weekly chart (above right) shows it holding the 40 week MA. What concerns me here is the bearish engulfing candle back in March, which if you punch up the silver ETF (ticker SLV) that bar shows some volume. I would feel much better if and when that gets taken out to the upside, until then we watch and wait.

Crude- $67.50 is still the number. If you are playing USO then the upside number is 53.50(inverted h&s). Staying with USO we absolutely need to see 47-47.50 area hold or the Jan low around $40 is in play. The floor traders could do a real whip job down there is we have to cross that bridge and that's why keeping initial positions small and pyramiding up is they key to 1) preservation and 2) success. Good luck and good trading to you.

Thursday, June 7, 2007

Those Who Don't Learn from History.....

Boy o boy could I write a novel on that subject. But rather than get on my soapbox and pontificate about why you should vote for Ron Paul, which you should by the way or at least give him a token consideration first rather than let the mainstream or editorial page choose your candidate for you. They say that the market doesn't repeat history exactly but sometimes it rhymes so today I want to talk about the repetitions we see in chart patterns. If we compare the real estate i-shares (IYR) with a daily chart of Continental (CAL). In the matter of full disclosure I was stopped out of a short in CAL back in April and am currently long the ultrashort real estate (SRS). If we examine the chart of CAL we can see a nice H&S formation break in late February, rally to test the neckline from underneath fail and head down again. April 3 had heavy volume and broke a descending trendline from the old high of $52.40. The subsequent rally in April broke the neckline and for most (I'm included) invalidated the pattern. This is where some would say technical analysis is part art part science. This invalidation would be what I call the art part in that a line in the sand has been crossed and you now have to listen to the market which never lies, but I would argue doesn't always tell the truth immediately. It takes some cajoling and prodding to get it to show it's hand. For me the action April 3 was strike 1 and the neckline break was strike two, time to protect the plate so to speak. Time has gone on to show us that that invalidation was just another complex H&S formation and the bear in continental still reigns. Move over to a current position, short IYR or long the SRS. Here we see a nice H&S neckline on the daily IYR broken to the downside a rally up, failure and head back down. The rally of late May to the 86 area broke the neckline of the original H&S, an invalidation for some, but the downward trendline for the high of $95 acted as resistance and contained the rally. The rally also lacked the volume I try to watch for to indicate a change in the type of buying. May 21 and May 24 volume occurred in the downtrend and we not eclipsed on the rally. I tried to learn from the action on CAL and as of today am still long SRS. Hope this shows that by examining past pattern progression we can look for clues so we can anticipate what may unfold and make sure we wait for the action to occur and not predict. Yes I know the whipping becomes almost intolerable at times but is part of the process and as I was told long ago, if you can't take the whipping, get the hell out the market, its not for you.

Crude - I continue to watch crude closely. The daily chart above ($wtic) consolidation since early April is building and building compression and makes the $67 area key. We could get some real action once we punch thru this level. The news will conform to the tape. I know the wires are talking about the Turks in northern Iraq with the Kurds. The news is your bull market ally and may be the trigger to push it thru. Personally I would like to see crude push thru on its own and then have the news come out to confirm and push it further. Yes Goldilocks so to speak! Remember the fundamentals support the bull in energy, and the technicals and still in bull mode. The Saudi's won't let anyone verify reserves and on that topic why aren't the spigots wide open with prices at these levels. Is the water cut so high they are maxed out on production. A lot of people much smarter than myself (not hard) think so. Cantarell in Mexico is in decline, Bergin in Kuwait is in decline, Daquing in China is in decline, and Iran in the same boat as Saudia on reserves. The Canadian oil sands are great along with the North Slope in Alaska but Ghawar or Bergin they are not. Govern yourself accordingly. That's it for today, good luck and good trading

Wednesday, June 6, 2007

Financial Leadership... or lack thereof

You can slice and dice a market any number or ways. You rationalize away concerns to fit your belief. We have all done this rightly or wrongly. My friend Dennis Gartman always says its not to be on the bull or bear side but on the right side !! Very wise advice from a wisened cat. For me I always go back to the financials. They should be leading the market and when a traditional general is not out in front leading the troops as opposed from a bunker 200 miles from the front I pay attention. The financials are lagging this market and unless they start to behave properly there could be some major problems. The financial select spidre (XLF) may have stalled here. It has broken the uptrend line from the Mar 14 lows today. The Dow Jones Financials $DJUSFN daily chart tells a similar story, it has failed to make a better high and is turning down. The weekly version of this chart shows negatively diverging momentum along with a possible bearish engulfing candle if we finish the week here. I like the Ultrashort Financial SKF as a play on this.

I came across something I thought I would share with you. I was reading some comments from Marc Faber, which by the way if you can he is worth the read. Along with managing money he publishes the Boom , Doom and Gloom report. He recently opined that wall street pundits often implore the public that crashes and panics offer excellent buying opportunitie ergo bubbles or buying panics should offer excellent selling opportunities. Something to ponder. Good luck and good trading to you.