Traders' Library Blog

Stocata S&P 500 Analysis: September 28, 2013.

Last week I wrote: 
"Last week I mentioned: "Even thinking that a new top was not realistic, the new top wave 3.6 was reached. If you are following my weekly comments longer time already, and going back to the end of July, you will notice that I started mentioning 1730 as a top target already that moment in time. Again a confirmation that price moves mostly take much more time than you could imagine. The index turned at the upper side of the BBS volatility channel and close to the R2 monthly pivot resistance. Have we now reached the longer term top and must we expect a longer term correction? Not impossible! For the coming week I do expect a further correction towards the R1 and 50 day average support".

Last week I concluded: For the coming week I do expect a further correction towards the R1 pivot and 50 day average support. The low and closing of the week ended very close to this R1 pivot support, the 50 day simple average and the low side of the up moving pitchfork. Normally there will be some retracement now, but for the coming weeks I rather expect a further move down to the 100 day average and the low side of the BBS volatility band around 1650. At that level we must expect some retracement.

Sylvain Vervoort   http://stocata.org/

Is The Market About to Crash?

I co-wrote my first book back in 1979. The book was all about seasonal price tendencies for commodities. I had chapters on things we don't trade anymore. I miss the days when I could trade iced broilers and Maine potatoes!

I first discovered seasonals in the late 1970's and became fascinated with a technique that was showing a consistent gain or loss in the market. I figured that if a market made a consistent rally most years then I could find a way to make money from that tendency.

For example, what if corn consistently dropped into harvest. Shouldn't I be able to watch that seasonality and then use a technical method to enter short the corn market when the seasonality shows that the market will drop. Of course I could!

It turns out that the stock market is also highly seasonal during certain periods of the year.

My seasonal analysis tells me that the stock market will likely drop by about 5% during the month of October into the month of November.

I normally pay very close attention to seasonals, but I also try to find a fundamental reason to support that seasonal tendency. So what is it that might cause a 5% drop?

I think that the trigger will be one of two fact:

1. Fiscal Cliff. Now that Syria and Taper have faded from the headlines, attention has shifted to the Fiscal Cliff. Senator Ted Cruz' filibuster is getting live coverage and filling the airwaves and headlines with Fiscal Cliff news. I believe that is the main reason, along with profit taking, why the market is dropping over the last week.

The market has sold every time in the past when confronted with the Fiscal Cliff. And, each time, it rallies when a last minute deal is struck.

This time is a little different. Both sides are trying different tactics to muscle the other side to their will. I don't think either side will win and we will end up with the same conclusion: kick the can down the road. But the differing tactics will cause more attention to be focused on the issue than normally and this will cause a bigger reaction than normal.

2. Fed Talk. Secondarily, it is possible that some Fed official will say something to cause the market to drop. I consider this unlikely but possible.

Seasonal are powerful. We have a fundamental trigger. We have a currently weak market. I'm nervous. I'm starting to set up some hedges to use if I see any further weakness.

I don't think the market will crash. There are not the usual factors in play to cause that. But a 5% correction? Sure! That would be normal!

I'm not short the market but am very alert to get ready to hedge my long stocks.

Off the Ledger: The Man Behind the Trades

I've been in the US for about a month but am about to start another long trip overseas. This trip will take me to at least Hong Kong, Singapore, Sydney, and Johannesburg.

I love going overseas, except for the jet lag.

I love all the different cultures. Eating in the hawker stalls in Singapore. Riding the White Star ferries in Hong Kong. Basking in the beauty of the Sydney harbor.

I don't know Johannesburg well yet but am hoping to spend a week there on this trip so that I can get to see it better.

I'm working on a project to teach trading to a bunch of teenagers in South Africa. We are working on this project with the government. Who knows if we will actually get the project going, but I like the idea!

Why ZIRP is Nuts

I've recorded a short audio report for you to really understand the present and coming disaster of the current Fed policy. It's scary!

It will help you understand the current situation. This policy is going to affect your personally!

Just press play below to listen to this short audio.

 

Blog Post 130825

Good trading,

Courtney

P.S. I've been around the world, literally, three times so far this year. Exciting but tiring!

I've been able to go to South Africa for the first time and finally get to spend some quality time in Australia. I really liked them both but they are really different! It was crazy seeing herds of kangaroos leaping across fields! It was otherworldly!

The bird life was also great, seeing wild parakeets and other super colorful birds.

I even took my life in my hands by driving on the wrong side of the road for the first time. Scary! Not for me but for all the other drivers on the road!

Top 10 Forex Events Outlook: Sept. 23-27

Sept. 22, 2013 (Allthingsforex.com) – Following the Fed’s decision to abstain from reducing the size of monthly asset purchases, in the week ahead traders will shift their focus from the U.S. dollar to the euro as the outcome of the German elections and economic data from the euro-zone offer more insights on the future policies of the leader of the union and the state of the 17-nation economy.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1.    EUR- Germany Federal Elections, Sun., Sept. 22, all day event.

At the time of writing of this article, the latest polls pointed to a clear win for Chancellor Angela Merkel- the country’s first female chancellor and only the fourth chancellor since World War II to win a third term. Ms. Merkel’s Christian Democratic bloc is set to take about 42.5% of the vote and that would give her a one-seat majority in the lower house of the Bundestag, just enough to govern without trying to find a coalition partner (although a coalition to assure more significant majority would likely be formed in upcoming weeks). A third term for Chancellor Merkel should be euro-positive as German policies remain unchanged. Germany is the biggest contributor in the 496 billion euro bailout fund and the current programs of austerity in exchange for financial aid will probably continue to be the blueprint of choice for German participation in future bailouts. The euro could extend its recent rally towards the 2013 high around $1.37.

2.    EUR- Euro-zone Manufacturing and Services PMI- Purchasing Managers Index, a leading indicator of economic conditions measuring activity in the manufacturing and services sectors, Mon., Sept. 23, 4:00 am, ET.

The chronic contraction in the euro-zone’s manufacturing and services sectors finally ended a couple of months ago and both indexes are expected to continue to improve. The Manufacturing PMI is forecast to register another positive month with a reading of 51.8 in September from 51.4 in August, while the Services PMI also heads higher with a preliminary estimate of 51.1 in September from 50.7 in the previous month. Solid PMI reports should keep the EUR supported.

3.    EUR- Germany IFO Business Climate Index, a leading indicator of economic conditions measuring the outlook of businesses, Tues., Sept. 24, 4:00 am, ET.

This could be yet another report that might give the euro a boost next week. The business outlook in the euro-zone’s largest economy is forecast to be more optimistic with the Ifo index forecast to rise to 108.4 in September from 107.5 in August.

4.    USD- U.S. Consumer Confidence, a measure of consumers’ outlook on the economy, Tues., Sept. 24, 10:00 am, ET.

In contrast to the euro-zone data, the outlook of U.S. consumers is expected to deteriorate with the consumer confidence index forecast to decline to 79.9 in August from 81.5 in the previous month.

5.    USD- U.S. New Home Sales, an important gauge of housing market conditions measuring sales of newly-constructed homes, Wed., Sept. 25, 10:00 am, ET.

Mimicking the jump in existing home sales, new home purchases in the U.S. are also forecast to increase to 422K in August from 394K in July.

6.    GBP- U.K. GDP- Gross Domestic Product, the main measure of economic activity and growth, Thurs., Sept. 26, 4:30 am, ET.

In the first quarter of the year, the U.K. economy managed to avoid an unprecedented triple-dip recession and expanded by 0.3% q/q. The economy grew at an even faster pace by 0.7% q/q in the second quarter and this number is expected to be confirmed as the final Q2 2013 reading. The report could serve as a reminder that the U.K. recovery is on the right track and could keep the GBP rally intact.

7.     USD- U.S. GDP- Gross Domestic Product, the main measure of economic activity and growth in the world’s largest economy, Thurs., Sept. 26, 8:30 am, ET.

There might be another upward revision on the horizon with the final Q2 GDP reading forecast to show the economy growing faster by 2.7% q/a in the second quarter, compared with the previous estimate of 2.5% q/a. The USD could benefit from accelerating U.S. economic growth which could raise the odds that, despite of the decision to sit on the sidelines in September, the Fed might announce the tapering of asset purchases before the end of the year.

8.    USD- U.S. Pending Home Sales, a leading indicator of housing market activity measuring pending home sale contracts, Thurs., Sept. 26, 10:00 am, ET.

Pending home sales in the United States are expected to register a smaller decline of 0.9% m/m in August, compared with the unexpected 1.3% m/m drop in July as a result of higher mortgage rates.

9.    JPY- Japan CPI- Consumer Price Index, the main measure of inflation preferred by the Bank of Japan, Thurs., Sept. 26, 7:30 pm, ET.

Inflationary pressures in Japan have been on the rise in recent months and could stay that way with the National core inflation gauge forecast to remain at 0.7% y/y in August, same as the reading in July. With the index exiting deflation territory and heading towards the Bank of Japan’s 2% inflation target, the report could reduce expectations that the Japanese central bank will need to step up its QE campaign, which could mean less pressure on the yen.

10.     USD- U.S. Consumer Sentiment, the University of Michigan’s monthly survey of 500 households on their financial conditions and outlook of the economy, Fri., Sept. 27, 9:55 am, ET.

After the disappointing drop in the preliminary estimate, the U.S. consumer sentiment index is forecast to be revised slightly higher to 78.2 in September, but still down from 82.1 in the previous month. The USD will continue to feel the pressure if the U.S. economic data weakens and eliminates the chance of a Fed taper in 2013.

Stocata S&P 500 Analysis: September 21, 2013.

Last week I wrote: 
"Last week I mentioned: "I do not think that a new wave 3, above wave 3.5 is realistic. There may be some more up reaction, but I do expect a further move down within the next 2 weeks". The past week was clearly an up move stopped around the R1 Monthly pivot. So, the turn back down must come next week. But there is still room for a further move up, apparently also confirmed by the weekly chart. What is coming next week? A double top? A new higher high? Or nevertheless a turn down? Or just some small trading range? Any possibility is close which makes it very difficult to predict the coming week. But I still see the longer term top not far away, be it a double top or a new high wave 3.6".

Even thinking that a new top was not realistic, the new top wave 3.6 was reached. If you are following my weekly comments longer time already, and going going back to the end of July, you will notice that I started mentioning 1730 as a top target already that moment in time. Again a confirmation that price moves mostly take much more time than you could imagine. The index turned at the upper side of the BBS volatility channel and close to the R2 monthly pivot resistance. Have we now reached the longer term top and must we expect a longer term correction? Not impossible! For the coming week I do expect a further correction towards the R1 and 50 day average support.

Sylvain Vervoort  http://stocata.org/

Summers Gone and the Markets are Yellen!

 

 

 

 

 

 

 

 

 

 

 

Who knew that Larry Summers was so powerful?

Just the mere mention that he doesn't want to be the Fed Head caused major moves in every key market. Turns out that markets felt that he would be a curmudgeon with Fed policy, as least compared with leading candidate, Janet Yellen.

The market views Summers as far more hawkish when it comes to monetary policy. They believe that he would taper quicker and bigger than Yellen.

They are probably right.

After all, Summers has actually had real jobs in his life so has at least a brushing acquaintance with reality. Yellen has been an academic or government worker for her whole life.

So it should be no surprise that she is supportive of a very easy monetary policy.

Some say she should be the next Fed Chairman.

Mark Gongloff, of the deep analytical publication, the Huffington Post, points out that she said, "Policy makers should be compelled to take action given the serious costs of long-term unemployment when overall unemployment is already high. A week of unemployment is worse when it is experienced as part of a longer spell."

Certainly, unemployment is one of the twin but often contradictory goals of the Fed. The other being a stable currency. And, certainly, I support lower unemployment!

But current Fed policy, which presumably Yellen supports as the vice-chair, is anti-unemployment. The Fed is buying virtually of the Federal Government debt under the idea that low interest rates will stimulate the investment and housing arenas.

However, this has not and will not happen due to a flawed understanding of how economies work.

1. Buying all Treasury debt keeps interest rates low. This helps our deficit now but masks the true cost to the economy. The Federal government is encouraged to borrow more because rates are low but is now building up unsustainable levels of debt that is creating an unsustainable level of interest costs. The Treasury NEEDS to have zero interest rates or Federal interest payments will become the second largest expense of the Federal government in just a couple of years. Compounding can be a heavy burden when it is working against you!

2. Low interest rates are killing employment! You see, every business makes the decision when they are growing to either hire more people or buy a machine to increase productivity of the existing employees. Low interest rates have caused a huge shift to machines and away from hiring people. Low interest rates make it more attractive to boost productivity of the existing employees rather than hire people. So Yellen's idea is totally idiotic if she really cares are unemployment.

3. Low interest rates have helped the housing market but it took years to see that help. Low interest rates cause the real cost of owning a house decline, thus boosting housing demand. So let's count this as a check in Yellen's favor. But the cost is so high that I am not pleased by this false boosting of demand. The problem is that every element that caused the housing crisis IS STILL IN PLACE! So Yellen's policies will eventual lead to another housing crisis within the next ten years!

The bottom line is that the Fed is trying to play God with our money. The twelve academics on the Board of Governors of the Fed have proven themselves to be incompetent. Yellen will just be the latest.

In the meantime, we can clearly see that the market is simply being supported by the Fed, not economic fundaments. Fed tightening will lead to at least a 10% correction in the market and more likely a 20-30% correction.

I'm not Yellen.

Stocata S&P 500 Analysis: September 14, 2013.

Last week I wrote: 
"With the US markets closed on Monday, Tuesday was positive for some time, but closed below the 100 day average. Wednesday and Thursday brought price up to the PP pivot level of the new month of September. Friday finally the index could not break the 50 day average, closing the week below the PP pivot level. I do not think that a new wave 3, above wave 3.5 is realistic. There may be some more up reaction, but I do expect a further move down within the next 2 weeks. The high wave candle on Friday shows a lot of uncertainty. If you do not have any short position yet, wait a bit longer. I estimate that the index should turn back down the latest against the resistance of the R1 Pivot resistance. If the index does not turn at that point, a further move up becomes the new realistic future".

Last week I mentioned: "I do not think that a new wave 3, above wave 3.5 is realistic. There may be some more up reaction, but I do expect a further move down within the next 2 weeks". The past week was clearly an up move stopped around the R1 Monthly pivot. So, the turn back down must come next week. But there is still room for a further move up, apparently also confirmed by the weekly chart. What is coming next week? A double top? A new higher high? Or nevertheless a turn down? Or just some small trading range? Any possibility is close which makes it very difficult to predict the coming week. But I still see the longer term top not far away, be it a double top or a new high wave 3.6.

Sylvain Vervoort   http://stocata.org/

Stocata S&P 500 Analysis: September 7, 2013.

Last week I wrote: 
"The reaction up only reached 1670 and Tuesday there was a big move down with consolidation the rest of the week. The index fell to the S1 monthly pivot support. The index is closing below the 100 day average and below the low side of the up moving pitchfork. We must expect a further move down to the 200 day average and the low side of the longer term trading range at 1560. I still have the open short position".

With the US markets closed on Monday, Tuesday was positive for some time, but closed below the 100 day average. Wednesday and Thursday brought price up to the PP pivot level of the new month of September. Friday finally the index could not break the 50 day average, closing the week below the PP pivot level. I do not think that a new wave 3, above wave 3.5 is realistic. There may be some more up reaction, but I do expect a further move down within the next 2 weeks. The high wave candle on Friday shows a lot of uncertainty. If you do not have any short position yet, wait a bit longer. I estimate that the index should turn back down the latest against the resistance of the R1 Pivot resistance. If the index does not turn at that point, a further move up becomes the new realistic future.

Sylvain Vervoort   http://stocata.org/

Top 10 Forex Events Outlook: Sept. 2-6

Sept. 1, 2013 (Allthingsforex.com) – Although shortened by the Labor Day holiday, the week ahead promises to deliver a busy start to the month of September as traders watch the monetary policy decisions by five major central banks and dissect the results of the U.S. Non-Farm Payrolls report to gauge the odds of a taper announcement at the Fed’s upcoming September 17-18 meeting.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1.    AUD- Reserve Bank of Australia Interest Rate Announcement, Tues., Sept. 3, 12:30 am, ET.

After reducing the benchmark rate by 25 bps last month, the Reserve Bank of Australia will not be in a hurry to cut rates again in September. But this doesn’t mean that the central bank is completely done with the rate cuts going forward, especially if the “two-speed” Australian economy continues to underperform because of slowing demand from China and other big trading partners. If this is the case in the months ahead, the Reserve Bank of Australia could be forced to announce another 25 bps rate cut by the end of the year. The Aussie dollar has fallen significantly in recent months and could stay under pressure if the central bank makes it clear that policy makers are keeping the door open to further monetary policy easing.

2.    USD- U.S. ISM Manufacturing Index, a leading indicator of economic conditions measuring activity in the manufacturing sector, Tues., Sept. 3, 10:00 am, ET.

Manufacturing activity in the U.S. has regained traction after the index unexpectedly dropped in contraction territory with a reading of 49.0 in May, but we could see a small pullback to 54.2 in August from 55.4 in July.

3.    EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Sept. 4, 5:00 am, ET.

In the second quarter of the year, the euro-zone economy finally ended the six quarters long recession. The revised estimate is expected to confirm that the economy returned to growth and expanded by 0.3% q/q in Q2 after contracting by 0.2% q/q in the first quarter. The end of the recessionary period and the expansion of the manufacturing and services sectors have managed to instill optimism that the economy might be turning a corner. The EUR could continue to benefit from such expectations until the Fed begins to reduce the size of its monthly asset purchases.

4.    CAD- Bank of Canada Interest Rate Announcement, Wed., Sept. 4, 10:00 am, ET.

The Bank of Canada will not be an exception from all other major central banks that are not in a rush to call the end of the easy monetary policy cycle. Policy makers will be likely to leave the benchmark rate at the current 1.0% level. Compared with the rest of the major central banks, the Bank of Canada and the Reserve Bank of New Zealand still remain as the most likely candidates to hike rates. However, such decisions would probably be pushed further into 2014, maybe even 2015.

5.    JPY- Bank of Japan Interest Rate Announcement, Thurs., Sept. 5, around 12:00 am, ET.

Economic conditions have improved and inflationary pressures have risen in the last couple of months, creating an environment in which the Bank of Japan wouldn’t need to get more aggressive for the time being. However, the central bank will be likely to reaffirm its commitment to open-ended QE until the 2% inflation target is in sight. As the monetary policies of the Fed and the Bank of Japan diverge in the months ahead, the U.S. dollar should be able to resume its bullish trend against the yen.

6.    GBP- Bank of England Interest Rate Announcement, Thurs., Sept. 5, 7:00 am, ET.

With the U.K. economy and its largest trading partner the euro-zone improving, the Bank of England has no urgency to ease monetary policy further and will maintain the benchmark rate and the size of the Asset Purchase Program unchanged in September and maybe into the final quarter of the year. The bank’s forward guidance will keep the pound’s future direction closely linked to the results of upcoming economic data, with the GBP strengthening on good reports and facing weakness if the data disappoints.

7.    EUR- European Central Bank Interest Rate Announcement, Thurs., Sept. 5, 7:45 am, ET.

Activity in the euro-area has been picking up, ending the chronic contraction in euro-zone’s manufacturing and services sectors. But the 17-nation economy is still struggling with record high unemployment and such economic backdrop will not be supportive of the European Central Bank tightening monetary policy anytime soon. The USD should be able to regain its strength against the EUR as the Fed gets ready to take the first step towards monetary policy tightening while the European Central Bank remains stuck in an easing mode.

8.    USD- U.S. ADP Employment Report, a measure of job creation in the private sector of the U.S. economy, Thurs., Sept. 5, 8:15 am, ET.

Following the increase to 200K in July, job creation in the U.S. private sector is forecast to slow to 180K in August. A better than expected data should set an optimistic mood going into the non-farm payrolls report on Friday and could give the USD a boost.

9.    USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions measuring activity in the services sector, Thurs., Sept. 5, 10:00 am, ET.

A sequence of softer ISM reports throughout the week could continue with a retreat in the Non-Manufacturing Index to 55.2 in August compared with a reading of 56.0 in July.

10.    USD- U.S. Non-Farm Payrolls and Employment Situation, the main indicator of U.S. economic health measuring job creation and unemployment, Fri., Sept. 6, 8:30 am, ET.

After a weaker than expected reading for July and the downward revisions for May and June, we could see stronger job creation in August with the economy forecast to add up to 180K jobs compared with 162K in the previous month, while the unemployment rate stays at 7.4%. An upbeat NFP report could trigger a U.S. dollar rally on expectations that tapering of monthly asset purchases may be announced right after the Fed’s two-day meeting on September 17-18.