Saturday, May 08, 2010


My favorite movie of course is TRADING PLACES, and that was a line from one of the Duke Brothers at the end of the movie. It was spoken after their attempt to Corner the Orange Juice market failed. They were upset that someone else discovered their attempt to rig the market and made money off of it. How ironic is it that Barry our fearless leader uttered those same words after his adminstrations attempt to rig the stock market got undone on Thursday. I would love it if an investigator would have the nerve to report back to him that the size limitations they have on the buy programs executed by the Federal Government in the Index futures, precluded them from being able to buy enough to stop this. Further, he would go on to recommend that they be given "Commercial" designation, so they could have unlimited position size. This would allow them to make every single day an up close if they wanted it to be.  As I have told people repeatedly, heavy volume selling cannot be stopped by the PPT and they have set the table for this inevitable outcome by doing what they have done the last year.

They have rigged the market for about a year now, and now he is ticked off that finally it stopped working? We are seeing things that I just thought I would never see in my lifetime. They literally want to control when we take a pee I think. God only knows what the outcome of this "investigation" will be but you can be sure of one thing, it will remain rigged and only one "rigger" will be allowed to remain, the PPT. I am sure there are very extreme threats in place to keep the people that execute these transactions quiet, so expect them to continue to be in place. However, as we have seen, they can only do what they do when the volume remains light.

Even if you were a believer that the PPT is an urban myth and does not exist, and the last hour rallies virtually every day out of the blue are just a coincidence, the chart pattern itself is problematic. This chart above leading up to the high looks more like a lightly traded commodity like OATS than a stock market. Those types of markets just creep along on light volume then all of the sudden have huge price spikes up or down. There are no prior major pivots that are obvious support points, so when you get a selloff going, there are not any obvious buy the weakness entry points. Hence, you get the vaccuum move like this. It the government had just allowed normal corrections, the structure of the market would be much stronger. They were so busy manipulating it to drive their socialist policies that they built a house of cards.


With all that aside, we are now down into a very interesting area. The 200 Day moving average is an area where the funds love to buy stocks, and we are basically right on it here. We should get a bounce here and I am hoping it will be sharp for a couple of days possibly three. If we can get back up to the area where I have marked as a sell area, you can see it will be a first reaction sell against a rolling over momentum line. I personally love these types of trades, especially after the move down is very sharp like this. One adage in trading is when you get a sharp move like this you always fade the first retracement. This is what I plan on doing with both barrels if we get this move in the next few days. If we just blow through the 200 here the game is over, and we will likely get a very large move down and it will be time to run for the hills is you are a long term holder.

As sharp as this move has been the weekly trend is still up so it is possible this could be a great spot to buy if you are bullish. I am not bullish since although I have commented on the strength of the trend, the highs were right into the lower area of the major price zone I have mentioned here for months, so I think this could be the top. I would prefer a rally into false breakouts to new highs that immediately reverse forming one of those megaphone patterns at the high, for it to be the ultimate top. Who knows if we will get that or not.

From a short term trading perspective, I am looking to sell a bounce if my patterns are there when it happens but will not go short right here into all of this support. I will also be looking for individual stock longs to play this bounce the next couple of days.


Here is the YEN which became the flight to quality vehicle along with Bonds this week. If you are bearish in stocks you might want to look at the long side here. On the daily chart I will be looking for a dip to buy into here. However, from a bigger perspective here on the weekly chart, this is setup as a pretty good sell. You can see the Momentum rollover that is happening and both the trend oscillators and indicating a down trend. We also have a rally into my bands. As a result, sell patterns should work up here. If they do that probably tells us stocks will bounce. If we just blow through these levels, it will be a definite buy the dips situation. For now I will be looking to short this rally or buy a dip, so a two way trade possibly.


This market is humming along nicely now and although the theories of why people have gone to this are not correct by historical precedent, the market continues upward. I just say that because there is no consistent correlation of a flight to quality in this market. Sometimes during crisis periods it has risen and other times it has declined. Further, there is virtually no instances where we had a major dollar rally and major gold rally at the same time. They typically have moved in inverse fashion as has gold with inflation. So what is happening has never happened before.

Nonetheless, if that is the reason you have parked your money here it has payed off even though I think it is an incorrect premise. As we have seen with bubbles, stocks this past week most recently, they can be inflated for longer and gain in price much more than anyone can guess before they finally burst. The end of this will be just like stocks thursday and just like Real Estate, and it will pummel millions of people causing billions of dollars of losses. However, it is anyone's guess as to what level that will happen from. Maybe it will be a drop from $3000 to $1000, who knows. Just know this, it will happen so have an exit plan especially if you are sitting fat on a big gain.

I was able to catch the last top due to spotting the huge spike in Small Spec buying. That is not really happening here yet. They are buying again, and their position is moving up close to it's max position, but it is not there yet. One very interesting thing is happening in the metals right now, Silver is lagging Gold by a large amount now like it did at the last top. One trade I am looking to make this week is to short Silver if it gets above it's recent highs then quickly reverses. I may also short it if fails when it tests those highs. I have to watch the daily patterns to see if it is setup. For now it appears that it will but time will tell. Since Silver in general is the more speculative of the two, it is a negative divergence when it is weaker. In summary, we do have something historically unique happening here in Gold, and for those who predicted it and are long term investors, good for you. I just don't bet on the once in a lifetime occurences happening, so I never get these types of things correct. I play high probability things and pass on the long shots.

I have been wrong about this market, although I have made six figures shorting it so it is not a total disaster. I just did that by being able to pick the short term tops pretty well, which in general is not a good way to trade even though it is what I have done here. I just did it mostly based on the COT report, being bullish on the Dollar ( which has been correct ), and what I perceive to be a bubble. In reality, I have also had an incorrect premise also. It is better to do something for the wrong reason and be right than vice versa. Certainly, the greater money by far has been made on the long side. My patterns in general for buys just have not been there, although I have had a couple of nice long trades in Gold that I have posted here. None of them in the recent move up.

Summary - I am looking to buy stocks early in the week and hopefully ride a short sharp retracement back up where I intend to load the boat on the short side. I will be looking to buy dips and sell rallies in the Yen assuming patterns form up correctly. Also, I am looking to short Silver on a rally if we get it. There are some other things I am looking at also including shorting Lean Hogs but I have to keep some things to myself.

Good trading to everyone


jg said...

Nice summary, Chris. Thanks, and may your bets pay off (except your short silver one, as I'm on the other side of that).

Chris Johnston said...

There are no bets placed at this point, these are just setups I am looking for. They may or may not turn into trades. I wish I had a crystal ball to tell everyone when the metals bubble will burst, but burst it will it is just a matter of time. That time does not appear to be here yet, but it will come out of the blue when it does. It is a bigger bubble than real estate was, yet that one carried on for quite awhile just like this one is doing.

Just have a plan for exiting that is the best advice I can give. It will be obvious when this thing cracks because you will see consecutive $100 down days in Gold most likely. Either way you should always have your exit strategy determined when you get into something anyway.

Anonymous said...

Hi Chris,
Did you checkout the intra day action on the crash? I went through all the charts that the nasdaq cancelled trades on. Most were etfs. The most shocking was the qid and dog which are inverse etfs that essentially stopped tracking and went to 0 when they should have gone to the moon. If the market does finally top out here and go to stage 4 i'm concerned about how to profit from the downside if i can't rely on the inverse etfs. Any suggestions on how to play the down side of the market more safely (where safe means it does what it says it will do)? Oh also without getting into futures. Enjoy the insight you give.

Chris Johnston said...

I will talk about this in todays post

robert said...

re: you saying that gold is a bigger bubble than real estate was.

Chris, at the peak, the prices in U.S. housing market was a 3.5 standard deviation event

Are you saying that gold's SD is higher than that?

Chris Johnston said...

Yes Robert, Posted a chart showing this recently in here. It is more extended in that regard than Real Estate was.

Soros has joined me in this view, so I guess it is the two of us against 3 billion bulls now. I normally would not like his company, but in the trading world I do like keeping his company. I just don't like his anti-american stuff at times.

robert said...

re: gold chart > than 3.5 SD's

Chris, I don't remember seeing that chart. Can I have a link?

Adjusted for inflation in 1981 dollars, do you know that gold would have to rise to around $1,800 to take out the old high?

Chris Johnston said...

It was one of the weekend posts within the last month.

That skit with the inflation adjusted is used my academics, don't know a trader who ever even considers that.

You could have used that same argument to argue RE was not extended. I think the similarities to these two bubbles are incredible

Maybe it goes up another $1000 first, I have no idea, but the day of reckoning is coming here and it will look like last Thursday when it happens.

robert said...

re: gold would have to be $1,8000 today if priced in 1981 dollars

"You could have used that same argument to argue RE was not extended. I think the similarities to these two bubbles are incredible"

Chris, I agree that using Standard Deviations is a great tool for identifying bubble markets. We've discussed that before.

But inflation-adjusted real estate prices at the peak in 2006 were incredibly higher than at any other time in the past - even when adjusted for inflation.

That's what makes the 1890-2010 housing market chart from Robert Shiller so incredibly valuable.

The chart is adjusted for inflation, and the "real" price rise from 2000 to 2006 literally
goes vertical.

Adjusted for inflation, the price of gold today is about 30% less than the 1981 nominal price of gold.

If I've overlooked something, please advise.

Thank you.

Chris Johnston said...

Standard deviation analysis is done just based on price, no matter how you spin it, the move in gold is extended at historical levels. Could it keep going, of course. Bubbles can inflate far beyond what we can imagine. I don't care about inflation adjusted anything. I live my life in the money I have and make. Knowing whether it is or not good or bad relative to some past data point on an inflation adjusted basis to me is a waste of time.

I know of no valid trading techniques that use inflation adjusted data to make price predictions. I have never even heard of anyone actually trading like that. Certainly there are economists doing analysis using this type of approach, but I doubt any of them make a cent investing.

What tells me that we are close to the pop now is another very unusual separation that indicates rampant speculation devoid of tradional valuations. Gold is moving sharply higher while the Dollar is also moving sharply higher. This relationship is now approaching a historical deviation level.

More importantly, Gold is moving even in a more extended amount vs inflation. If you go back and study history, inflation has been the most closely correlated item to the price of GOLD. GOLD is now extending in the face of deflation. It has also been rallying in the face of very mild inflation numbers for quite awhile.

These two things to me indicate irrational exuberance, wild speculation. It could continue, but when the music stops I just hope I am short this sucker because it will be a drop to never be forgotten when it happens. It will be this way due to a record number of people panic selling once they realize what is happening.

I wish I had a crystal ball to say when, but I don't. You may be right about it going up alot more, I do not know. My point is that we are in the blow off bubble top stage and the air is getting thin.

I will put up a chart tommorrow with a devation band on it for you to look at.