S & P Futures.... The Future?
Buy or Sell?
The chart above is of the Bernanke 500 formerly known as the S & P 500. For those not familiar with my work, I have renamed this index after it's new controller since it is no longer controlled by the 500 companies in it's index. We do have some conflicting signals here. First we have the Commercials clearly staying heavily on the sell side even as we decline. In a normal world this would be very bearish. The problem is that we don't know now where the Fed's transactions are being classified and that has led to the commercials net position not being nearly as meaningful as it used to be with this market. As I have pointed out this market stands out as the one where the COT data has gone completely off the reservation in it's predictive value in the last several years. It is my suspicion that there is incorrect recordings of the players positions whether it be intentional or an honest mistake I have no idea.
If you look at all the dishonestly that is going on in the last month with the government I don't think it is much of a stretch to lean to the non-accidental side on this one. Net net, we cannot rely on the COT data for the stock indexes anymore. The Larry Williams commercial proxy and large trader indexes are the best surrogates that are widely available to work with. Readers of the newsletter know of the proprietary tool I am using which is a little different than any of these. If we look at the proxy index it is quite bullish here and we are still in an uptrend via my bands. As a result, I am looking for a rally here that will allow me to establish a short in the Nasdaq. I say the Naz because that market has turned into a down trend via my bands now and it is much weaker than the ES at this point. I always want to sell the weak and buy the strong.
The large trader index in the chart above always looks great when you have these large swings but can be a bit choppy when we get into non-trending markets. It is really just fancy moving averages so it is not great invention anyway. If you look it pretty much just tells us what we can plainly see in the price action itself. It does show we have crossed down now into a down trend. When we see the proxy as a buy and the large trader index as a sell what do we do? For me it is pretty simple, wait for them to come in line with each other. From a larger time frame standpoint even the post election sell off has not changed this long standing up trend to be broken..... YET.
I do not suggest getting tied up in the fiscal cliff dialogue. Even if you were to be able to figure out exactly what is going to come of all of that there is no guarantee the market reaction you would pick would be correct anyway. It would just be a guess. I don't guess when trading. I would rather rely on the tools I use to make the calls and live with the fact that they are going to be wrong at times. I know over the long run they work. I am about as sure as I have been about anything I have ever predicted in life that the election results are devastating economically for the future of the whole world. However, that has nothing to do at all with how I will trade the markets. My technical tools will guide me to where I click the mouse. Even though we all know the end of the movie we do not know how long it will be and timing is everything.
It is my feeling that the tax and spend binge that will now go on completely unabated will create some huge economic swings that we can take advantage of in each direction.
Here is the bond market and just like you would expect it seems to be the opposite picture. We have the proxy index just creeping into the sell zone. We have the seasonal still telling us to look up. I have marked where the typical selling point for this market is in January. It looks to me like we will still move up here for a bit but we may get some different feedback if we get up and test the highs. If we are to get a failure there and turn down, in January, and the proxy gets deeper into the sell zone, we could have a good selling opportunity on our hands.
There are many who think this market is a bubble and for all I know they are right. However the biggest challenge with bubbles as we have seen with real estate, stocks, and Gold, is timing them is very tough to do. There are many smart people who were a few years early in real estate and stocks, and Gold still has not popped. When manipulations of pricing are going on to the degree they are now timing bubbles is very challenging. It is easier to just wait for the trends to change and play the first pullback. That is what I am doing with both stocks and bonds. Short term trading is another matter, these are comments about bigger picture moves.
Enjoy your weekend