Tuesday, September 14, 2010

Divergences Pushing Their Way to the Larger Timeframes

Just a quick note showing that despite the market chugging higher, the technicals show the new highs are weaker than the previous since now the 30min and 60min divergences are now traveling over to the 120min charts.  And all it will take is a nice decline and close on a 4hr bar and the divergences will travel to the 4hr charts as well. 

The 2hr stochastics are showing a bearish divergence and are squiggling and getting pinched in the upper right corner as they are trying to cross down.  This is all of course bearish overall, but it is uncertain when price will ultimately fail and start its decline.

Also notice above the 2hr MACD on the Dow shows a squeeze occurring at the zero line.  The indicator suggests a breakout coming so you'd expect to see a triangle or sideways movement but instead price is diverging and making new highs.  Again a sign of weakness.  Also notice that we had a similar "squeeze" on the MACD histogram (blue/red bars in the middle) back in early August and price too was grinding higher before forming a major top.  With the MACD above the zero line and an overextended rally on our hands, this chart suggests the breakout will be to the downside.  These divergences are measured with momentum indicators, so they just show a weakening of momentum, but don't hint as to the good timing of a reversal.  But with the VIX stock market sell signal execution now in its 5th trading day, time is running out for the bulls in my view.


While we're waiting for a top, for those of you who haven't done so already, consider checking out EWI's free Ultimate Technical Analysis Handbook while it lasts.  Good free resources should always be taken advantage of in my view so I'm going to keep pounding this home until the offer expires.

I always get emails from folks who are trying to learn EWP.  I think the best way is to first follow real time analysis from any reliable source you can find, like this blog :-) and try to pick up the basics in real time.  I also recommend dipping your feet into EWI's free tutorial on EWP, and use it as a constant reference. 



PrincipleAnalysis_Blogspot_Com said...

Your story about paying down debt and lowering asset prices now is right on in my view and I’ve been telling everyone who will listen to me for the past 2 years to do whatever it takes to pay off debt. Some small businesses have responded to the cash strapped consumer by RAISING prices to compensate for their lack of revenues. This is similar to what our government is doing, i.e. raising taxes/fees locally and increasing federal spending. Our government is inherently stupid and can’t get out of its own way so I expect them do dumb things and waste our tax money, but I expect more from small businesses here in the States since they’re the backbone of our country. We need them. We need them to succeed and hire more people. Like your commercial real estate example, people are in denial about the price destruction and refuse to lower prices in some circles. But if they sell now at a 10% discount, they will do better than 6 months down the line where they will be required to give a 20% discount. They seem to always want more than what the market will give them now and it keeps them chasing prices lower as they hold on to a deteriorating asset. And the deflationary spiral continues to grind away. From what you’re describing, and what I see here, price pressures are going to last for a long time because sellers aren’t budging as much as they should, and they’re only causing the pain to last longer. Only banks and big corporations are cutting costs and prices.

As for your market outlooks it seems we’re on the same page in the coming months. As you may know, I feel a significant market top will probably start here in Sept. and work AT LEAST into October. But if the decline gets into the 900s like you say it will, I won’t be as optimistic about the ensuing bounce as you are, and I’m not sure the Fed has the credibility or ammunition to trigger such a big market move after that. But who knows, of course I could be wrong. And I’m actually surprised that the Obama administration hasn’t “rigged” more favorable economic data somehow to position his party better for the upcoming elections which should be a blood bath for him and his friends in Congress. And if the decline in the stock market is of the magnitude we expect then the November elections will be one for the history books………..an absolute slaughter for the incumbents, especially the Democrats. It’s already going to be a blood bath with the market holding up well here.
And I too am very bullish the dollar and bearish equities well into the future. I don’t plan on having mine, or my family and friend’s, money in any long term equity positions for the foreseeable future. The toxic BS in the markets needs to flushed out first. And I, like you, feel we’re only just beginning.
Thanks for sharing your outlook on the markets. I like the info. So do you have a price target for oil? I know EWI has mentioned a price target below $10 before a significant bottom and resumption of the uptrend. That sounds insane, but it also sounded insane when they called for like $80 oil when it traded up to $140 or wherever it topped.

PrincipleAnalysis_Blogspot_Com said...

Well I’m quite surprised equities have held up so well for so long too. And you don’t need to be a professional economist to know that Bernanke, and the Fed as a whole, has got to be one of the most useless and corrupt organizations in this country that do cause further chaos like you say, and disrupt the natural flow of the markets with all their intervention. And it’s that intervention that’s ultimately at the cost of average taxpaying Americans too. This really upsets me. They serve only themselves, our government, and their fat cat corporate friends while average Americans get hosed. And they’re very secretive, which most Americans can’t stand, including me. Lawsuits have been filed so far to make the Fed more transparent and show their money trails more clearly, but they’ve all failed so far. Our government has no right to be “tampering” with our free markets, and then not being transparent as to what exactly they’re doing. So right now those clowns are the biggest financial power in our country and we the people have no idea what they’re really doing with all our money. But whatever they’re doing, it better lead to success, because if it doesn’t you will see that the American people will rise up and demand that Congress finally abolish the Federal Reserve altogether. And if that happens, which I think it eventually will, I’ll be the first in line to help tar-and-feather Bernanke and carry him through the New York streets like the turkey that he is.

And what you say makes sense about what composes this market right now. True investing does seem gone as buy-and-hold is dead, and as Prechter always says, optimism is so high that dividend yields are extremely low relative to most times in the 20th century. So people are just buying stocks for the capital gain potential, which is basically more speculation than true investing much like you said. And it also makes sense as to why this market has held up so well as it has with real estate still destroyed, the euro down over 2,000 pips and on its way to parity, and credit spreads widening again.

The oil picture always bothers me since we’re so dependent on it and we are pretty much at war, or always close to it, with the main countries that supply it to us. Throwing any chaos into the oil market will probably not have a pleasant outcome geopolitically. I also think oil will fall hard again as demand here in the US should fall hard as the economy breaks down again, and the US dollar continues its push significantly higher. Below $10 seems like Armageddon though, but something in the $20 area very temporarily seems more plausible. I personally don’t trade real commodities, but will sometimes dip into the silver and gold markets. But I do like to follow commodities to see where the inflation/deflation argument is at the time, and oil just has so many global ramifications I can’t help but follow it.

I’m not sure what you think Friday and early next week will hold for us, but it seems in the next few days things can get kind of wild in the markets. If not, I’m going to have to buy more glass cleaner to wipe off all the oily spots on my computer monitor from banging my forehead on it when I keep falling asleep watching these boring markets.

Eat_My_Shorts said...

Yep, I would think that the western world being more market savvy (in general), you would face a steeper asset price reduction than emerging markets because people with debt on their hands (or deteriorating assets) realize that a bird in hand is worth two in the bush much faster than over here. By this I mean to say that you should, in my view, be more inclined to dispose of assets to cover your debts, even if it means taking a hit on the asset value. Over here, people are psychologically married to the idea that asset prices can only grow and never fall. That is way things are crawling to a standstill. Yes, everything is for sale, but people can't accept the fact they have to sell at a price that is lower than yesterday, even when they are still making a profit. Case in point - we have a client who was selling a fully tenanted A class office building in central Moscow for about $250m in november of 2008. Over the course of 2009 he gradually reduced price to $150m, even as the people who were potentially interested in this asset kept lowering their bids. As of today, price is down to just over $100m. After almost two years the guy still can't accept the fact that we are facing severe asset deflation, and he still doesn't want to accept a lower offer.... even though his cost was about $75m and has been largely recouped over the last several years! Go figure... a year and a half ago I had a real estate fund looking to get it at $200m... And its the same just about everywhere.

As to our market view, we're very bearish. Having successfully predicted and timed the 2008 collapse and the 2009 rally we see major exhaustion across the board. Sure, its being held up by excess liquidity, and no, we don't know when the bottom will drop out of this sorry excuse of a market. But our internal house view is that the Fed won't intervene until the shit hits the fan, despite the looming elections fiasco in november. In our view it should take a bigger event for them to announce QE2, simply because everyone knows what happed to version 1 and without a major market contraction there would be little point in this excercise. Therefore we expect a quick correction to about 900 in the SPX within sept-mid oct, and then a rebound to at least the current levels and higher throughout Dec-jan. The rebound is most likely to be Fed-driven, but shortlived, as the economic statistics are expected to finally paint a very grim picture that will withdraw support from equities completely. IT will also mean that a lot of investors will move out of treasuries and bonds in general into equities as soon as QE2 is initiated, making sure the market later wipes out a greater share of wealth in the correction that is sure to shortly follow. So Feb 2011 onwards - a drawn out decline that should take us way way low somewhere in 2013-14. Through it all we're very bullish on the dollar, despite staying out of the FX market altogether.

Thats the view in a nutshell. It may well change many times over as new data emerges. We don't like to stick to any opinion if there's no support for it in the market, so a 180 degree turnaround in out views is possible at any moment :) But personally, I feel that 2008 was a walk in the park compared to whats ahead. With asset prices in decline, commodities should also tank, and the Russian budget is dead without strong oil. Even now we need oil to be around $120 for several months just to break even. Since that's not happening, we see growing debt and a collapsing rouble dead head. Not a pretty picture, to be sure.

PrincipleAnalysis_Blogspot_Com said...

Wow, that's quite a contrast to what I see here. Interesting..........and yes indeed that does sound like toppish behavior. And that credit spread data is key if a major decline is to get underway. As a bear, I like it!

PrincipleAnalysis_Blogspot_Com said...

How about the credit markets? What do you see as the condition there? In the States, I know credit lines are being slashed drastically from people with good credit, and interest rates still remain fairly high compared to the Fed rates. Although mortgage rates have been falling hard lately.
Funny you mention housing because I just dipped into the market this weekend with some house shopping to get a feel for the market. It seems in my area, the San Francisco and Bay Area, California, that home builders still have pricing quite high for this market and they are barely lowering prices. The same for private sellers. But the bank and stressed home sales are significantly marked down, and have been for years yet the homebuilders and private sellers really aren’t budging much.
My friend is trying to short sale his house. He put it on the market at $475,000, and in just 5 months he’s had to lower it to $395,000 to keep up with the market’s decline and to try and entice buyers. The only potential buyers he’s had have failed to come up with adequate financing. So credit still seems tight for housing unless you’re super qualified. He now doubts the bank will approve the price of the short sale and he’ll end up going into default. Yet during those last 5 months, new homes in my area built by Lennar have fallen from the $625,000 to an astonishingly low $620,000 (sarcasm). That’s a price decline of a whopping $5,000. I mean are you kidding me? I would imagine that eventually home builders and private sellers will have to lower their prices significantly or there will be just way too big of a price gap between their houses and the bank/stressed sales.

PrincipleAnalysis_Blogspot_Com said...

Type your reply...The bond markets do seem like bubbles at this point. The “window dressing” you describe with politicians and government putting on a brave face while behind the scenes the average folks are struggling here in the States. On the ground, people are hurting, yet the government and politicians continue this “recovery” talk. I’m so tired of hearing it and I think most people here are too. People want jobs, they want consumers to start spending again, and housing to bottom. It’s not happening though. The government only stimulates government to make it more bloated and more consuming of private wealth. And the housing market continues to slump, which was once little personal ATM machines for many Americans. All that’s gone and not getting better from what I see.
Thanks for the info. I’ve been wondering what’s really going on in other markets/economies like Russia. It seems we have a similar problem here in the States, although I think there’s more price destruction in real estate and retail here.
So when will the ice break friend? That’s the million dollar question. How are you playing the markets right now? Do you trade currencies? Big movements in the yen last night into today with the BoJ intervention.

agnes1938 said...

well the spreads from the PIIGS against the bund are close to their max....so credit markets are forecasting big trouble.

The housing bubble is worldwide: China, Canada, Australia....

Housing here in Belgium is EXTREMELY expensive when looks at average income....yet there is this strong belief among the population that housing will never go down. Kind of like japan in 1989...

I tell you, most people here absolutely do not have a clue on what is probably in store (which is logical considering the social mood is always euphoric at tops)