Saturday, October 29, 2011

When will the chickens come home to roost?

Living in California is almost like living in Greece. What I mean by that is that it is inevitable that a bankruptcy will occur, and there is basically an attempt to shift as much money as possible to the unions and others on the public dole away from the people that do currently have it. I rack my brain constantly trying to figure out a macro way to play what is in my mind inevitable, a bankruptcy filing. One way that some people think is counter intuitive, is to buy bonds when they can be bought at fire sale prices, assuming that the outcome will not be as bad as some think, and the bonds fall too far in value at certain times. That to me is a problem because when you see the GM and the Greece bailouts, you see the bond holders get completely wiped out.

I have no idea how in the world the governments strong arm these bond holders into taking losses of this magnitude. Taking a 50% loss on a bond is something that is unfathomable to me. Why in the world don't these people sue these governments, I guess I am just stupid? Some of the big funds that held GM bonds that got wiped out when they basically gave the company to the unions and told the bond holders to piss off, have substantial money. Why in the world did they go so quietly?

It is those types of scenarios that make me stay clear of trying to buy bonds at fire sale prices. The alternative situation is also at hand in the above chart. If you think the European situation is a bad one, shorting the Euro is certainly one way to play it. Had you been doing so you have certainly had a rough ride in the last couple of months. Every time it seemed to be lights out, a huge rally took place. We have had one such rally this past week on the bailout news. However, now we are in a prime sell zone once again for the Euro. You can see the commercials are heavily long, but.....

Look at how bullish the sentiment is for this market and what has happened the prior times sentiment has reached similar levels. We have had big declines each and every time, and I expect this time to be no different. I still cannot fathom how in the world we get out of this global mess when the solutions they are choosing are more of what got us here, loaning too much money to people who will never ever be able to pay it back. We are expanding credit again, inflating another bubble. However, virtually 70% of the people on the planet know this, so that is not enough to guarantee a winning trade. So, just knowing that is not enough.

It is very difficult to time bubbles as we have all seen in the last decade. The governments of the world do everything they can to extend them. It is interesting to me that Greenspan, the KING OF BUBBLES, is commenting on the European situation in negative fashion. Has anyone ever gotten a bigger hall pass than this guy did? I do think from a bigger picture perspective, it is a lead pipe cinch that the whole European situation blows up for real at some point and it won't be in the too distant future. Of course the question is when, and I do not know the answer. What I do know is that it is likely to be at a time where we have excessive bullishness in a downtrend like what we have right here.

The Euro is a sell in this price zone


I did make a losing trade in the 10 year Notes this past week trying to take advantage of what I perceive as a good buy setup. I covered that here, where I went in, why I bailed out of it quickly, and the net result. The problem of course is that when the stock market rallies 20 percent in a couple of weeks, the bond market is going to be hard pressed to move up. The whole world is being driven by stock prices, so that always has to be kept in mind. The daily charts do not show anything close to a long entry opportunity yet, so this is more of a larger picture setup that is in place. If you notice the last time we had a setup like this we did rally for 2 or 4 weeks. The main driver of this setup is the sentiment is very bearish, which is of course bullish, along with a seasonal up bias.

This next market is the Canadian Dollar, which is setting up a good short entry possibility.

Once again you can see the very bullish sentiment reading here and the seasonal coming due for a decline. The commercials are heavily on the long side, but remember I alluded recently to a very prominent newsletter writer about the COT report. He has once again swung and completely missed across the board on his reading of the recent decline, having called for more. The point is if he can't get this correct after all these years, it is not the end all what the Commercials are doing. Regardless of the commercial heavy long position, this market on a weekly basis is close to being a sell setup.

This is all I have for Monday, there are not any immediate daily setups I can't live without right at the moment. I do think we are going to retrace some in the stock market since we have risen 20% just vertically for the last few weeks, and that is unsustainable even though overall I think we are going to rally through the end of the year.

Good Trading


ya said...


Agree with your view on euro even though after attempting to trade USD from the long side over last few months it is pretty certain in my mind that eur/usd is one of the main fields of action by ppt/fed with all the related correlations.
What is the source of data for LW indicator on your chart? Also was curious to your opinion on how CFTC rules changes may effect markets. Thank You

Chris Johnston said...

LW indicators are in the genesis software. I recreate them typically with the same composition but in my own code so I can tweak them. They are password protected in their software. Sometimes they are exactly the same as LW's sometimes they are different

CFTC changes will have no effect in my view. The PPT already gets a pass on the rules anyway, so the CFTC will always allow certain people to ignore any rules they have in place if it suits what they want

Alain said...


thanks for your inside on the last article - you as trader. A lot of professionalism is required to answer them right! A question which is also asked often: how long does it take until one makes consistently performance?

There is not too much around right now.
I am with you on bonds.
A first sign that SPX may run into problems will be a close within the 1250 area - it may continue higher after for some swings but not too much. Technically, TF seems setup better for a short term down side trade. The area I look to is 738.
Wheat looks setup for lower prices as well, but must drop to validate action as well. A move against the setup could hold prices up into mid Nov.
Other markets lighter setup to the down side: HO, RB, NG, Corn.

Since EUR, CAD and commodities move closely often, I feel being on the same page.

Where these may go? Well, I assume it may clear the way for a buying opportunity rather than a shorting opportunity except for markets clearly setup.

Thanks again Chris for all the work you are putting in to this for everyone!


Chris Johnston said...

Agree with you on most of those setups you mention. As to how long it takes? That varies from person to person. It took me awhile to get comfortable with what approach I wanted to run with. Then once I settled it took me awhile to get consistent with it after that. Then I have made subtle changes to it over time and am always doing so.

The one thing I see people doing constantly, and I have people I know personally who do this, is changing their approach constantly. Every time I talk to them they are citing another persons opinion or another entry technique justifying the trades he is making. Guess what, they lose money trading, what a shock.

This is a difficult business to say the least, and it takes time to hone your techniques. If you constantly change from one thing to another, you will chase your tail your whole life. What ever approach one chooses, they need to stay with it until they get it, and it may take some time, even a few years. I can promise one thing, if you jump around, you will never get it and you might as well do something else.

Put your nose down and grind it out, that is what I do.