Sunday, October 02, 2011


The above chart is that of the SP 500, and what I think is potentially setting up as a great buying opportunity. We are not there yet, but there are a few very positive things going on. First, the Advance/Decline line has held up remarkably well. It still has a reading higher than what it had much earlier in the year, while stock prices are sharply lower. This is a significant divergence. The Bond market is also as everyone knows very strong. Strong bonds into stock declines are very bullish situations. Money tends to flow to the higher return potential, so when rates are very low like they are now, generally money migrates to stocks and vice versa.

We also have the typical seasonal low time approaching. In addition to that, that goofy chart I showed a couple of months back is also calling for a low this week. We also have the 3rd year presidential cylce influence, which is very bullish. One could argue that is generally caused by lower rates to help re-election campaigns. This is most likely the cause, and the rates are already so low how much lower could they go? However, low rates are in place and that is all that matters.

In the near term, we have significant distribution going on, so I don't think the low is here yet. The sell the VIX trade will be in place if this week closes down a couple hundred Dow points. That is another buy signal for stocks. I also like the fact that the indexes are holding up much better than so many other markets. We are getting the late day declines, which is bearish in the near term. However, we are not getting the wash outs I had expected. In terms of full disclosure, I did exit all of my shorts in the middle of the day session on Friday. We ran into another terrible situation with one of my animals, and I was just too upset about it to trade, so I wanted to be flat. I am sure this cost me some lost profits, but you have to have your head clear to trade. It was a miracle that I made decent money this past month with all of the problems I have had with my beloved dogs.

In summary, we have a big buying opp coming but I don't believe it is here quite yet. The next chart is where I do think we have an opportunity right here, the Ten Year Notes.

I have been talking about this for a few weeks now. I think it is clear that this is the weaker of the two markets, with the other one being the 30 Year Bonds. We have that trap pattern right at the highs that I pointed out a few days ago, and now we have moved down right into a pretty clear trendline from below. A break below this could result in a nice decline, one worth trying to play. I also find it somewhat bearish that with the late Friday market crash, the two interest rate markets did not react up that much. One thing of course that could happen here is that if we have a big stock rollover, it could create a little more of the flight to quality trade we typically see, and these prices will rise. However, in the last few days we have seen some pretty significant equity drops without much upside movement here.

Here we once again have the worlds favorite market, Gold. This market appears now to be setup pretty well on the weekly chart for a rally. I do not have any buy signals on the daily chart, in fact a bounce looks more like a sell at this point. However, normally the larger moves come in conjunction with a higher time frame pattern. I do think the game has ended here but that does not mean we cannot make one last run before going back down to $500 or less. This is where we are going here based on the studies I referenced the other day. Do the math on what an 86% retracement of the up move would be. That is the average for hyperbolic commodity moves.

In the interim though, we have a strong uptrend that is hanging on by a thread, and quite a bit of commercial buying going on, with the seasonal also saying upward. I think the Gold Bugs are going to be handed one last hope of this rally staying alive for a bit longer. How to trade this on a short term basis is at times different than the bigger picture. Silver is of course the much weaker market, so that is where sells if they are entered, should be done.

Here is Crude Oil, a market with mixed signals. First we have a downtrend in price, and also a seasonal tendency for a decline. This is pretty bearish. We do have the commercials buying this decline steadily. This is not that unusual and not a reason to buy stand alone. However, what has caught my interest here is the accumulation going on with the POIV index. Notice how much stronger the purple line has been than the price. I think this is going to trigger a rally here at some point, but I am not sure when.

Sadly, I must announce the passing of the greatest rescue success we have ever had. My oldest dog and longest living rescue at 6 years from the time we got him, Jackson has passed away. The picture below is how he looked when we got him 6 years ago. Although you cannot tell from the picture, he was 40 lbs underweight at the time we got him, and had heartworm. His prior owners could not afford to treat it so they just took him to a shelter. What a beautiful soul he was. He was such an incredible combination of all the traits a Saint Bernard should have, and I can only hope we are lucky enough to meet back up with him again in some other stage of life. Universal Studios was in line to get him for movies because of how handsome he was, but fortunately for us we got the folks at the rescue to let us have him. What an incredible blessing it turned out to be.

We had been living on borrowed time with him as he had some ailments that should have taken him from us long ago. Utlimately they were just too much for him. I cannot express the love and thanks I have to whatever cosmic power put him with us for the time we had with him. In a world where the standard view is how lucky dogs are to be rescued, I think it is me that is lucky to have them.

Farewell sweet Jackson, thank you for allowing us to share your life with you. I pledge to save as many of your brothers and sisters as I can before my time is done.


Robert said...


Sorry to hear about your dog--been through it a number of times over the years with our family pets --
Do you really think gold will see $500 again any time soon--I know its probably due for a correction but $500 seems awfully low .With all the problems going on now I would think gold will be going up soon , not down .
I know you are not a big fan of gold ,but gold has never been in a bubble .If you owned a stock and it went from $3 to $18 in ten tears would you call that a bubble, probably not --but that is the same percentage move that gold has made the last 10 years--
sure gold had a good run for a few months but has since corrected --a bubble no way

Patung said...

What I worry about with the buy signal for October is that we are now below the 20 month sma, it's a bear market, so you'd be trading against the overall trend. Recent years suggest that once below the 20 month ma then any rallies back up there, 1200 ish, will get sold off for some time to come.

Chris Johnston said...

Robert, just statistics as far as the gold goes, not an opinion. THe study Briese did that I referenced the other day that on average hyperbolic moves in commodities retrace high percentages of the moves almost 90% of the time.

Commodities are not like stocks for one very important reason, they do not have a long term underlying up trend like stocks do going back to 1900. If you just go through charts without any bias eiher way, you will see how commodities markets are prone to huge spikes both up and down, and always retrace these moves.

You may be right in Gold being an exception, I am just basing those comments on that study which quantifies what I have anecdotally observed over time. I did say I think we are setup for a rally right now. How far that goes who knows.

Chris Johnston said...

As far as the comment about the moving average with stocks. I think if you look at most stock rallies that have started in October, they have all had the condition you mentioned at the time since there is a seasonal tendency to decline into that date. There are a couple of exceptions where the market was strong heading into the fall.

I do agree that the first look on any substantial rally has to be the fade it until it breaks out significantly. However, I will play the daily look for all entries anyway at the time we get there. We also have the presidential as well as other bullish cycles coming due here soon.

As I always say, I could be wrong and that is what stops are for. I am wrong often enough to not get too hung up on offering my views. I know a good portion of them will be correct and some will be wrong.

Alain said...


As every Monday, had an extended look to markets. Blastoff suggests upside coming across markets on weekly & daily basis. PP arrows missing on charts. As I noticed, dry up may suggests market turns.
I am not bullish or bearish, I take what is setup and this will likely need a couple of days before any action can be taken.
Did not get the point in last night's weekly TV message. Never mind, market will talk early enough.


Anonymous said...

Again I am so sorry to hear about the loss of Jackson. You have had one hell of a rough year where your rescue dogs are concerned. It has to get better.
As for the Buys Coming there was a piece in Bloombeg today about the VIX hitting highs not seen since 2008 and closing over 40 fairly significantly. So even though the charts are very bearish a low and tradeable rally is coming.
As for gold, to me it comes down to the definition of hyperbolic. At its worst the week of the high in gold, the price peak was never more than 9% above a 10sma. I personally don't think of that as hyperbolic. Granted from peak to trough it is closer to a 20% drop but was it really ever hyperbolic. Silver on the other hand at its peak price was a full 25% away from the 10sma which I would consider hyperbolic.
One's view also has to be tempered by whether one is a trader or has purchased the metals as a crisis currency for very long term holding. In fact as a trader when my physical metals start to take a hit I jump on the 2x short silver ETF - AGQ or the gold equivalent GLL. That way you get an insurance policy while you continue to hold the physical metals which I personally don't intend to sell for at least 5 years. The fundamentals are just too strong but as traders we trade on technicals and don't give a hoot about the "story". That's the "sizzle" used by stock brokers
and PM salesmen.
Don in Virginia

Chris Johnston said...

In his study he had very specific parameter for % price increases during a certain time span. I do not have them handy. This way he objectively identified all moves that had moved a certain percentage over a short period of time. There was no subjectivity to it. I like studies like that, since it removes biases.

You might be able to find it on the internet under Steve Briese or Insider Capital if you are interested in reading it.

Silver has already dropped very close to 50% off it's high. I don't know if Gold will or will not. My main basis for pointing these things out in here is just to keep people from being brainwashed. I don't hold things for a long period of time anyway so it really does not matter to me.

I have observed over the years these huge moves like this in many markets, and most of the time they had a story accompanying them about why things had changed and the moves would continue. I just think this is the same from that stand point and that study supports that notion.

However, I could be wrong and I know I can't persuade people on this. I couldn't persuade them in Real Estate either when I told everyone the sky was falling in late 2005 and sold all my real estate and went into rental mode for awhile. This just seems the same to me being the simpleton that I am.


John M said...

Your comparison between metals and real estate is interesting, and maybe not perfect, but perfect enough. Aside from the gyrations, I've been looking at silver in the teens since the parabola broke. It's just what makes sense on the charts. There's even a shot at sub-$10, though I'd say that's far from a sure thing. Gold is a little different, but another hundred or two down wouldn't surprise me.

People gotta do what makes sense to them, but I've never seen the value or wisdom in piling up the actual metals in a vault somewhere. There's a reason they are lumped into a trading category called 'commodities.' The idea that we'll all be trading gold bits for sandwiches at some point in the future has always made me laugh. Gold and silver are much like fiat currencies: they're worth what people think they're worth. Unlike foods and water and, to a lesser degree, oil, they have no more intrinsic value on a practical level than quartz. But, I've been wrong before.

I know what you mean about being lucky to have your rescued dogs rather than them being lucky to be saved. And I'm very sorry you've lost Jackson, he looks like an amazing guy. If only they were able to live as long as we do and stay with us. But the time we get with them is really a gift. Hang in there.