Saturday, April 17, 2010


We have had some breaking news stories in the last two days that need to be discussed. My review of trading strategies will be resumed Monday.

The Goldman Sachs story is a big story in many ways beyond just it's on the surface impact. On the surface they developed a product that was sold to the public and buyers of that product lost money. I guess I am just stupid because I do not understand why investment vehicles are now guaranteed to make a profit. The whole idea of investing is risking your hard earned money in a way you judge to fit your own investment goals. Risk by definition means there is a possibility the outcome will be a loss. If we are going to move into an era where there is no risk, the returns will be no good. You cannot expect to get an above average return without taking any risk.

If people were dumb enough to not see the most obvious bubble in US History, the housing market, they deserved to lose money investing in it. Is it Golman Sachs fault that people are stupid? Apparently so. Crafting a product for people to invest in a market that was the talk of every us citizen who could speak english, was something done by many investment firms. Guess what, most of those investments that were sold to the public for the real estate sector lost most of their principal. I personally sold my Newport Coast Mc Mansion at the end of 2005 and rented for 2 years knowing the market was going to crash. I made over 1 Million dollars on that buy and sell, and it was the easiest decision I have ever made. It is not my fault or anyone else's for that matter, that many people did not see what was so obvious.

Here is what I think is really going on here with this suit. This is a shot across the bow by the government to a few groups of people. I have been aware of the PPT for quite some time, and I think now many people are now seeing what those of us have been barking about for so long. Recently a trader from JP Morgan has brought forth a story about how the PPT guaranteed their losses shorting the metals markets in an effort to keep prices down and the dollar up. What a coincidence that he was at the last minute taken off the witness list before the congressional hearing. They certainly would not want that type of information being thrown out in a televised hearing would they? Think about that, these guys could short like drunken sailors and have the comfort of knowing that all the losses on short positions would be made whole by the PPT. Guess what, these guys get bonused based on profits, so essentially they have guaranteed profits, hence guaranteed bonuses in a sense.

This is not a bad situation is it? Not a bad incentive to keep your mouth shut is it? One other thing to consider is that two main sources the PPT operates through are rumored to be Goldman Sachs and JP Morgan, along with one other place which I won't mention. Again these are rumors. However, when you now put all this together here is what becomes clear to me. We have an insiders club in virtually everything in our country today. The trail of GS to the whitehouse is pretty well traveled. Life is good for all of these guys/gals, mostly guys. GS reports earnings soon and we will see that they will dwarf what a 1.8B suit from the SEC is bringing to bear. We also have had a break from the ranks here with the JP Morgan guy ratting them out.

It is my contention that this suit is a warning to people to keep their mouths shut, plain and simple. The suit itself is ridiculous, but there is a hint that the government is not going to allow anything to get out. It is more than interesting that they are not charging Paulson of anything. My suspicion there is that because he is a wealthy hedge fund manager who is not part of the club, they really have no leverage over him like they do with GS. He could decide to just give a legal team 20M bucks and just tell them to have at it with the government and cause them all kinds of problems. However, I do not think they are going to be able to keep this quiet forever. Once one person breaks the code, it is going to be hard for these guys to contain this. It will be fun to sit back now and see where all of this goes. Does this effect the stock market? No not in my opinion but it depends on whether it winds up bringing an even greater discontent with the government. If that were to happen it could have a large negative impact eventually.

Now let's look at yesterday, was this break the beginning of something bigger?

Looking at the daily chart here, we have both the momentum oscillators in up trends. As long as this holds, dips are buys. If we were to continue down enough to get these back under their trend lines, then rallies would be selling opportunities. This out of the blue selloff once again had a chance to get going and was saved late in the day. This has to be 50 late day saves it seems like since the lows were made last March. Call it what you will, but the reality is the market forces are just not going to let this sucker break without a real fight. Deal with it. I do not like one way markets, they are very difficult to trade. 38 of the last 50 days have closed up, 76%. This is not a market to short in general from this standpoint alone, but as we all know, you cannot always look at things one just one dimension.

Let's look at something very significant that has just developed.

Tom Demark who is a well known brilliant market technician, has methods for picking major highs and lows in markets. My favorite tool of his is his Sequential pattern. You can read about it elsewhere on the web or buy his book that desribes it. This method gave us a sell signal beautifully on Thursday of this past week. This does not mean on that day you just short the market. It means that the pattern is now in place, now you look for a break to enter. Had my trend oscillators been in sync with it I would have been selling with both hands on Friday. Since they were not, I am still dancing carefully here. This has been an incredible run here spiking up into what does appear to be a blowoff top that is forming. Blowoff tops can form over a long time, GOLD last year to name one recent example. The market extending vertically for months before finally peaking. It was 2 days from a Sequential sell when it finally peaked. Net net, these are good areas to look for reversals.

The other thing I like about this is that it came out of the blue just when everyone was waving to the crowd. We also had a sequential buy in the Vix about a week ago ( again this is a sell for stocks ). So, we have alot of things telling us this could be more than a small pullback. Sequential is designed to pick major highs and lows not just wiggles, which is why it does not speak too often. Now the last piece of this discussion is Larry Williams market forecast. He has a few that are a bit different from one another, but there is one that had 4/16 as a high point for a significant decline. Keep in mind that date was thrown out by Larry in this forecast released in January, and here we were with a big down day right on that very day. Incredible is all I can say.

He had several different forecasts, and one that actually was a composite of all of them which has a 5/28 peak. In that forecast he has the low in Feb much more dead on than this one has, so that is the one I had been following. However, this still shows a move up during this recent period. The way to use these is to watch markets that are following these maps closely and ignore the ones that do not. Since this has now pegged this last decline right to the exact day, it is time to favor this one. If we get new highs I will defer to the late May time frame which I have alluded to in other posts.

When we look at all of this together I think this tells us it is time to be looking for short trades. One day can change alot of things. In this case that one day served as confirmation of alot of other things that are out there saying we have trouble now. We are also basically in the price zone I have been talking about for awhile now, 1229 - 1235. Yes we are shy of it technically, but just a rounding error basically. There is not any magic to that number, it is just a price zone.

Since I need patterns to back my setups, I am pouring through my charts to try and find some places to get short. As far as the indexes go, the patterns are not there yet so I am sitting tight waiting with them. I doubt I will buy a dip now based on these other things I have just discussed.

Have a great weekend

1 comment:

jg said...

Thanks for the update, Chris.

I look forward to hearing when you go short the indices.