S&P up gold relativelly flat

Just wanted to bring to your attention the following.  An identical pattern is forming and the ADX and MACD are following the same patterns.

I have been out of the market until today and picked up some Oil using HOD at 9.14.  with a loose stop.

Gold did not rebound today, so it will be interesting to see how it behaves over the next 1-2 weeks.

Ciena was still weak.  The stock is still stuck under the 50 MA.

Again the importance of trendline analysis.  The 50 MA would be a very good scalp trade to the downside.

Market update & Ciena break down

Short post as I have an exam tomorrow I haven't really concentrated on.

I will start with Ciena to demonstrate how Technical Analysis is useful and especially for explanations why prices day to day act the way they do.

Now, I am a believer in Technical Analysis however, looking over my previous posts I always attempt to justify my TA reasoning with Fundamentals as I believe both are extremely important.

So lets start with the trade I made.  As I don't have the best Broker shorting specific stocks are not an option as they don't have the inventory of them.  So I use inverse ETF for indexes / commodities or Put Options for stocks.

Why did I purchase my Put Option on Oct 5th?
Well the technicals told me to. (Not shown but accessible here )

First sell signal was a MACD cross over.  this happens when the MACD line crosses below the signal line.
This indicates momentum has reversed.
Second sell signal is that the Slow stochastics broke below the 80 level after been embedded for a few weeks.  This indicates that momentum has shifted and the stock is overbought.

Now comes the confirmation, the sell volume started to pick up.  The first day should be signal enough to turn short on this given the fundamentals. 

Speaking of fundamentals an announcement that they were taking on more debt started to complete collapse.  One could argue that the stock may not have rolled over if that announcement was not made.  I agree and honestly expected a longer timeframe for the pull back we have seen however the sell signals gave an appropriate entry.  Entering long at that point would be foolish and the probably with following fundamentals only is that you are shooting blind for entry and exits as you are not paying attention to the current price action.

Regardless look at how POWERFUL moving averages can be.  Since this type of action happens so often it is again foolish to cast moving averages as witchcraft or voodoo.

Lets see what happen.  At the 20 MA a gap down occurred the following day on strong volume (confirmation of the move, since "smart money" was willing to be on the short side of the market).  A logical place to stop would be the 200 MA.  That day we broke below it however last part of the day we see that it just managed to close above it and where did it bounce off?  The 50 MA almost perfectly.  Now part of trend analysis is that pierced trend lines will generally break down.  That means that on the day we pierced the 200 MA the damage was down and since there was strong volume on the move one should look for a shorting opportunity.  That came on the marginal up day that follow which is expected since 200 MA is a powerful trend line.  Now other people state that the best way to break a moving average or trend line is a gap on strong volume.   Look where the gap started right on the 50 MA and the break down continued to the downside.   As of now, there is very litter support under this stock, the purple line at 12.50ish is a triangle I have drawn in and I am looking for a possible bounce off that.


Now the over all markets

I have been pretty bearish and I can't claim that this is going to be the massive breakdown I believe is coming (similar to flash crash) however, what is happening is the same as the Ciena stock.  The MACD has crossed over today, the ADX appears that is will cross this week, the Slow stoch appears as if it will fall below the 80 level this week.  These, of course, do not have to signal anything however when 3-4 signals are screaming sell plus volume behind this move was strong then you have to take a step back as say .... should I be going long?  if you don't believe the markets are going to crash then stay neutral until things stabilize.


Two things to note however, Monday night there was a mini flash crash on SPY ETF which is one of the most traded stocks.  This ETF in less than a minute dropped 10%..... This type of action doesn't make sense in an efficient market. Of course the price quickly came back and 50 billion worth of trades was canceled.  This brings another question, does canceled trades make sense in a "free market"? That discussion I will leave for a article I am planning on writing.

Second thing to note is the POMO which are Fed bond purchases.  These happen on Monday , Wednesday and Friday.  Last Friday the markets looked like they were about to roll over and Monday was one of the largest POMO purchases in recent months at 6.3 billion "free money" in the system.  This, of course, pumped the market up.  Today there was no purchases and look what happened.  Tomorrow there is bond purchases so I 100% expect a rally tomorrow unless the invisible hand finally over powers this unsustainable rally.  I think a bounce is likely and I will at the end of the day hopefully pick up some shorts as thursday I expect another day like today.  The big line to watch is the 20 MA breaks below that virtually promise a test of the 200/50 MA exactly like Ciena's case.  Stay tuned for this bumpy ride.  I am currently sitting mostly in cash as I didn't get any entries today, a Gap down in HOD by passed my buy limit. 

Last note is mining stocks, they rally hard and get crushed hard.  One of my favorite stocks SBB is down 18% in 3 days.  This is obviously due to gold dropping 30+ dollars as the USD has rallied.  Which as everyone the USD suppression due to the POMOs have been the reason markets and commodities are rallying.  Looking for a top in this market will provide an amazing entry to gold / silver plays in the future however this could be days, weeks, months away. 

Financials getting crushed and Oil turn date?

Lets start with Financials,  this is FAS which is a 3x bull ETF that tracks Financial institutions in the states.  The counter part of the ETF is FAZ which is a 3x bear.

Chart Link
The first thing to note about this chart is it isn't following the general market.  It turned sideways at the end of september as the general market has climbed to new recent highs.  I have heard some arguments that say that the general market should be following a similar trend as the fundamentals are not there to support a rally.

Speaking of fundamentals, what is happening with financial institutions?  The main concern right now people are calling robosigning or mortgage gate.  There are hundreds of stories out there so I will not talk about the details of this please see google news search for more information

In a nut shell, banks were foreclosing homes they techincally didn't have the right to foreclose as they didn't have the proper documentation leading to some home owners "taking the law into their own hands" by squatting in their previous owned houses.  The implications are devastating as foreclosed home sales make up 1/3 of existing homes sales and they have effectively been halted until this mess is cleared up.  Also think about it from a buyers perspective, there is a chance that the home you purchase may be subjected to repossession if the bank didn't technically own the house it sold to you. 

Any ways that is the fundamentals behind this sideways action on FAS.  Now..... Techincals are have just began to scream sell.

ADX has crossed over which is a sell signal.

MACD histogram has turned negative signaling downward momentum.  And the likelihood is that the MACD line will break the 0 level by next week reinforcing the fact that momentum is to the downside.

Look at the sell volume the past 2 days, this is what you want to see as confirmation of a trend reversal.

Slow Stochastics have turned down sharply confirming momentum has shifted.

Lastly, the 20 MA was broken and resistance was found at the the 50 MA.  However, the candlestick formation is a continuation pattern and with the other technicals pointing south expect the 50 MA to be broken next week as well.

The implications of this may be severe.  As the general market heading higher, there is some disconnect that will be corrected. Tech stocks led the charge in the nasdaq namely Google and Apple.  In addition to American Financial companies, looking at the FTSE, which tracks Europe financials, the chart pattern appears to be weakening also.

Remember what got the world into this recession, mortgage crisis and banks tanking.  So be wary in the general markets.  A notable stock that got hammered last week was JP Morgan in 3 days the stock went from $40.50 to $37 dollars.  Friday the stock was down  4.29%

Another interesting Chart is the following plotting FAS and S&P 500. Since FAS is 3x bull of the financials it moves much faster than S&P.  However look at the broken correlation.  The link of the chart is below if you want to check other time frames however FAS and S&P tend to follow similar patterns.  The last 2 day the market remained flat and FAS tanked.  How will the market correct this correlation?

Link to chart

Chart Link
Oil has been ranging between the Cyan lines.  Sometimes breaking above and other times breaking below however the range has been approximately 73- 83 since June.   The USD has been getting hammered giving rise to all commodities (gold touched 1390 recently).  The USD has been falling because of QE2 expectations.  The currency war is being perpetuated by multiple counties and QE2 could solidify this "race to the bottom" as weak currency = stronger export sector.  I find it interesting that the US has been calling out China on "currency manipulation" as it has continued to devalue its own currency to prop up its export sector.  Anyways it is my belief that QE2 has been overpriced into the markets and when the announcement comes which is expected to be at the FOMC on Novemeber 2nd the market will correct.
My reasoning is simply that just the mention of QE2 has done what the FED wanted.  Keep the market from collapsing.  By holding back on the amount of QE, it allows for more room to navigate the next downleg in the market.

Anyways back to OIL.
Friday was strong selling a drop of 1.74%.  The top of the range was hit around $83.  I expect the Dollar to rally and oil to head back down into this range.  However, all moving averages have are contained so strong resistance around the 77- 78 level.  Breaks of these moving averages especially the 200MA will result in a retest of the lower bound.
An indication of the momentum shift is the MACD histogram which appears like it will turn negative next week. In addition, on the 11th, the Slow stoch broke the 80 line and began to head south, confirming a momentum shift is underway.   A strong sell signal will be the DI- crossing the DI+ on the ADX.  This appears to still be a few days away if selling continues next week.

Lastly, the purple lines are a triangle that has been formed from the highs / lows in the May flash crash.  It will be interesting to see how well the price action respects this triangle going forward.