BOND UPDATE

We have had a substantial move down in the bond market this week. As you can see, we have broken through the 2.0 standard deviation bands (the blue lines). There is really no magic to these lines, other than they tell us when a short term move has traveled more than a normal amount. I have covered this in past newsletters.

However, it is still a nice visual aid to help with a larger picture perspective on things. I suppose the more positive than expected economic news is the explanation for this move, but I could care less. You could also argue that the rise in gold, was the primary cause.

With the primary seasonal tendency for a decline at this time of the year, combined with the well defined downtrend in prices, we should be looking to sell rallies against the trend. Buying oversold conditions for reversions is another strategy that can be employed, but it is not for the faint of heart. My short term system will do that in the trading service, but I do not suggest that the average person do this. Staying in sync with the primary trend of the markets, is where most of the money is made.

BONDS

Here is a weekly chart of Treasury Bonds. As you can see we have had a decent sized decline recently, right after the PIMCO bullish comments were made. At this point we are still technically in an uptrend, but a very choppy one that is difficult to trade. Trading retracements this deep with trend trading techniques, makes for sleepless nights.

We are still holding above support (marked by the red horizontal line). The RSI is reading 49.90 with is neutral. Due to the seasonal down tendency during the first half of the year, I expect this market to head lower overall by mid year, breaking this support level. If this happens, that would mean higher interest rates. It does seem at the moment that the Fed is determined to not lower rates, so this kind of makes sense. However, be clear, that I do not get tied up in "THE STORY." Those are just observations only.

I look at fundamental conditions and mechanical measurements of things to tell me where we are. I only mentioned that because it ties in what appears to be a broader economic situation, with the mechanical conclusion I spelled out initially.

STOCKS

We are getting close to a bigger picture sell signal in the stock market. I have a proprietary indicator that is fundamenally based, that has been declining, and is close to going negative. The commercials are also heavily in the sell territory as you can see.

When these two things combine at the same time, moves lasting longer durations, and also of larger magnitudes begin. You can see that it triggerred the sell signal in May that I pointed out the day before it happened. It also indicated the buy in July/August.

The way that it triggers makes it likely that the end of next week would be the soonest it could give the final confirmation of a sell. It may not, but it is certainly something to be on the lookout for. We also have to watch the commercials to be sure they are still short if the Magic Potion indicator crosses into the red. If the commercial buying picks up it would nullify the short signal.

DYKSTRA SAYS BUY................

Well I guess we should buy, Lenny Dykstra says so. I heard on CNBC yesterday that former major leaguer Lenny Dykstra is a fund manager and is buying Oil stocks right now. I heard the interview, and he sure sounds like he has no business running a fund. This has bad ending written all over it. Maybe I will find a way to short him!

Buying into these huge declines can at times be rewarding, but it is catching the falling dagger. I had my head handed to me more than enough times in my early days, to not try this any more. I have no idea where the bottom is, but I will throw this out there: since we rose on no fundamentals, why can't we decline the same amount, due to the same lack of fundamentals?

The hard demand numbers never justified the exponential rise and now the fraud in gasoline pricing is becoming clear. Gas prices are not dropping, I wonder why? The fact of the matter is that these speculative price moves that we often see in Oil, Metals, Real Estate, are the result of basic human emotions acting collectively. As a result, it is impossible to measure when these momentum driven price moves, like this one downward, will run out of steam.

Stick with the trend, short the rallies and do not be a hero catching the knife.

CRUDE OIL

Last week I posted a chart of Crude Oil saying that it was setting up as a sell, but might just roll over. This is what happened. When you are in a strong trending market, surprises generally happen in the direction of the trend.

It is impossible to determine exact price targets. For now the trend is down, so trading should be done on the shortside on reactions upward against the trend.

HAPPY NEW YEAR

Do we have a stock drop coming to welcome in the New Year? I think we do for several reasons. First, bonds have weakened considerably in the last 30 days. Second, there has been a seasonal tendency for a decline in January the last 5 years or so. Third, the VIX continues to be at a very low level.

The blue line on the chart represents Bonds, and you can see the downward move that has taken place. I have drawn in the wedge formation in red, which does not mean much. All this shows us is that recently, prices have been contained in a narrowing range. There is no magic to these lines at all contrary to what many people have written about them. However, they do graphically depict the support area short term in prices.

Now that the year end bonus game for fund managers is over, there is no reason to just blindly support any dip with buy programs in the futures.

As a result, if we do get a break down, it will not likely get the immediate snap back that we saw during the 4th quarter. Sorry for the poor formatting in terms of paragraph breaks and spacing, the new version of blogger is not letting me edit this post for some reason.