Triangle in S&P

Today's action has been quite interesting, I wanted to just note this triangle S&P is currently in.  It appears that it will terminate today however, ending the week caught in this still would make monday a gamble.
There is alot of news out.  Today there was a good Retail sales story which conflicted with a negative consumer sediment which doesn't really make much sense.

USD is up today, crushing oil and other commodities.  It is my expectation that QE2 will disappoint the markets, resulting in a painful correct. 

Look at the scenarios:

1) QE2 comes in as expected
Markets will remain flat and then ask "what next? QE3?"  if there isn't a real growth recovery occuring then then markets will begin to decline as the monetary fix has dried up
2) QE2 comes in better than expected
The world currency war begins as others will have to ease their own currency to protect their export market
3) QE2 comes in worst than expected
USD rebounds and stock markets and commodities get crushed in the correction

Even in the first case, a world currency war could be sparked.  It is interesting that the US government is going out of its way to brand China as a currency manipulator as it continues down the path of devaluation of the dollar for its own personal gain.  Also as the world reserve currency, making everyone holding dollars that much poorer which is the rest of the world and its citizens. 

It will be interesting to see how this day plays out.

CIENA update

Just a quick note on the CIENA chart.
Position: Put options at 14 strike price for November, purchases on Oct 5th.

The stock has had 3 days down on relatively strong volume.  A news article that is the likely reason for this sell off is Ciena Prices 320-Million 3.75% Convertible Notes

Why such a negative reaction?

I believe the reasoning is the massive amount of debt the company has been taking on.
From their Q3 balance statement we have the following

Convertible notes payable (debt)

October 2009..............798,000,000
July 2010 ....................1,174,580,000

Total stockholders' equity


October 2009..............455,838,000
July 2010 ....................228,295,000

This debt increase has occurred BEFORE the addition $320 million was announced a few days back.


The following information was taken from : Yahoo Finance
It is the entire communication Equipment industry ranked by LT debt to equity and guess who is topping the chart?

It is clear that Ciena is over leveraged and currently requires debt to finance its current debt obligations.

And one technical that has produced a Sell signal is the ADX as the DI- line has crossed the DI+ line today.  The ADX line which shows trend strength is above the 25 indicating a strong trend.

Continuation of parallel between this rally and April

I covered the Techincals in a previous post : October Looks Alot Like April
Lets look at each of these segments.  The formation of this up leg is very similar however in my opinion weaker than the previous one in April.  The notable sections are the second from the top.  These are sideways action consolidation paving the way for another push top the upside.  Which we have got today.  Well one thing that caught my eyes was April 16th..... The massive red candle signalled that something was amiss in the markets.  There was a final push to the upside and..... May flash crash.

So what is so important about April 16th??  It was options expiration day.  What is happening this friday in the exact same place in this up leg?  Options expiration (October 15th).

Coincidence ?  Probably however, it is something to be aware of.  A reason I believe friday will play out exactly the same way is that it appears that people are actually starting to believe the underlying fundamentals of the economy are better.  When people start believing that, smart money exits the market.  Remember that people that write this options do not want them to be exercised.  Which means that if everyone is optimistic, a collapse of the market on options expiration day catches many of the people playing it close to the strike place out of position.


Remember that for an economy to be healthy people require jobs.  The job situation has been stagnant, and September's employment situation resulted in 96,000 less jobs. 


Here is an article from bloomberg that baffles me : Fed Considers Raising Inflation Expectations To Boost Economy

"Federal Reserve policy makers may want Americans to expect inflation to accelerate in the future so they spend more of their money now."

I understand the economic principle behind this, however it is ridiculous.  There are millions of people getting homes foreclosed and large percentage of the population unemployed, discouraged, or underemployed, and the government wants to cause price inflation such that people will start to spend money they don't have. 


The real issue is that the government is stuck with no where to go.  My solution has and will continue to be bailout the population with a specified amount of money.  This money has to go towards debt if the receiver has debt.  The money will flow back to the bankers however it will reduce their profits as they are not skimming off the people at the margin.  People will again start to spend money because their interest payments are not eating up all disposable income.

It is impossible to get through this by maintain corporate profits.  The top 1% of the western world requires pay cut, then and only then will the situation become sustainable.

Oil entry and CIENA

I entered a position in oil a couple days back at the purple line in the chart above.  The Stop would be above the cyan line as it is above the a previous high. I am using an ETF HOD by Horizon BetaPro.

The MACD histogram is rolling over in oil, indicating that momentum is fading.  Watch for a cross of the MACD line for confirmation of a sell signal.

The Slow Stochastics has failed to embed and fell below the 80 line today. This signals the momentum is down.  The next quality buy opportunity would be when the yellow line gets below the 20 line and breaks above it as it did the last week in August.

I have a horizontal trend line that I believe will be retested within a month or so.  The other trend line I believe if broke will result into a move down to 72-73 level.

I would like to point out a bearish divergence on CIEN.  This indicates that the momentum has shifted bearish however, price action is still remaining neutral to bullish.  It is then expected for price action to drop at least to 14.88.   In addition the top trend line was put in at the beginning of October and has again came into play today when the price retreated after touching it.  The candle stick formation is again a shooting star which is a sell signal.  Confirmation tomorrow would indicate a reversal on this stock.   It appears that the 20 MA is providing support and the trend line sloping down is the resistance.  This stock has to break out of this within the week.

Well technicals proved to be correct on Ciena. it broke down today and as of 11:30, A bear flag pattern has been created.  I would expect a break down unless the markets magically surge on no news which seems to be the norm.  The news article that caused Ciena's gap down was the issuance of new debt. 

S&P 500 October looks alot like April

Daily Chart:

Let start with the fundamentals.

1) Jobs report on Friday October 8th - From Bloomberg
Released on 10/8/2010 8:30:00 AM For Sep, 2010

	Consensus	Consensus Range	Actual
Nonfarm Payrolls - M/M change	-8,000	-75,000  to 25,000	-95,000
Private Payrolls - M/M change	85,000	0  to 100,000	64,000
Unemployment Rate - Level	9.7 %	9.6 % to 9.8 %	9.6 %
Average Hourly Earnings - M/M change	0.1 %	0.0 % to 0.2 %	0.0 %
Av Workweek - All Employees	34.2 hrs	34.2 hrs to 34.3 hrs	34.2 hrs

2) Currency War
See a previous post on recent  Japanese intervention 
But in addition to this look at today's major news headline on Bloomberg.
Finance Leaders Call for IMF Role in Averting Protectionist Currency War

"Global governments called on the International Monetary Fund to calm the recent outbreak of tensions over currencies, which they warned risk triggering a protectionist backlash"

Speaking of protectionism : US House passes China currency sanctions bill 

Euro zone currency : Euro zone chief says currency too strong


A possible scenario I am looking at is that the market has priced in a significant part of QE2 and that is why the S&P is still climbing.  The real question that has to be asked is..... What if they don't do QE2?  Look at the instability in the Currency market.  The US 99% of the time will do what it needs to do, however, if there is some pressure to stop debasing currencies they might not have the political will to do another QE round.  IF that is the case, what QE has been priced into the market will quickly evaporate. 

Now if QE does happen then we will could still see a slow crawl up however, turning to some technicals it is interesting to see the similarity of technicals between April +/- a month, and October +/- a month.

ADX: The ADX line is decreasing showing a Weakening of trend.  As the Red and Green lines get closer watch for cross overs for potential turn date.

MACD: Both in April and in October the MACD histogram has had an extended period of positive ticks.  However, the MACD line is still >0 which is still bullish.  Watch for strengthening red bars on the histogram for a potential momentum shift.

Slow Stoch: Bearish Divergence in both cases as indicated by the line. The rally continued for about 20-30 days after divergence until the breakdown occurred.  It could be argued that the Slow Stoch is at or almost at its turning point.  Whipsaw in and out of the 80 zone (over bought condition) usually doesn't sustain.  It appeared from the chart when the the yellow line dips twice under the 80 line a breakdown is likely on the third drop below the 80 line.  Watch for the yellow breaking below the 80 zone for a potential momentum shift down.

Similar to the flash crash, this rally has its base build on top of a bearish divergence. This rally can still continue however, the higher it goes up the larger the potential for a strong bear move in the future.  The trigger of this could be a postponing of QE2, it is thought that November 2nd's FOMC meeting will be the timeframe QE2 is announced.  If this is the date that the market has also priced in the announcement, if it doesn't come then prepare for the market to adjust back to reality.

HFT.....

Jp Morgan Equity Derivative Strategy team was the topic of this article 
There are some mind blowing graphs such as S&P Correlation vs Volatility 

An interesting excerpt

"We believe that High-Frequency Trading activity has increased correlations, reduced volatility, and increased the intraday tail risk. In order to understand how HFT activity can impact the market, we will look at two common HFT strategies: index arbitrage and optimal execution of orders. Index arbitrage is an example of HFT arbitrage trading. As shown in Figure 5, current index volumes are significantly larger than total cash volumes, and a good amount of index derivative volume (Futures, ETFs) will not be directly offset by trades in cash securities. If the index price diverges from the prices of underlying constituents, index arbitrage HFT will act to realign them. For instance, if a group of stocks outperforms the index, an arbitrage program may sell these stocks and buy the index, causing their prices to realign. This trading activity will dampen the volatility of stocks and increase their correlation to the rest of the stocks in the index. HFT index arbitrage also facilitates the transfer of the market impact on futures and ETFs to the underlying stocks, thus providing a link between the high percentage of index trading and correlation of individual stocks. Another HFT trading strategy is a statistical arbitrage. A simplified example is a pair trade between two correlated stocks. If the price of one stock increases relative to the other, an arbitrage program will sell the outperforming stock and buy the underperforming one, thus reducing the volatility of both and increasing the correlation between the two."

S&P 500, Monthly chart 1995 until 2010

I was reading this article on Zerohedge.com and saw a monthly from the S&P 500.  I thought i would just comment on how important the Month of October is to this chart.

Dating back to 1995 you can see the 15 year history of the S&P 500.

Looking at the current level, it coincides with the downward sloping trend line from the previous 2 tops.  Also is approximately the 61.8% level from the highs to the lows in 1995.  The price action is sandwiched between the 20 + 200 monthly MA and the 1150 level.  This month would have to end above 1150 level this month before it runs into another major level at the 50 MA which is approximately the 50 monthly MA. The price will have a massive break up or down over the next few months.  We are currently down 0.80% for the month however, that is basically flat on this time frame and since there is still 15+ trading days left.

This is another example that shows that technical analysis creates a compelling picture of trend lines and moving averages that simply seem to align very well.

One more scenario to look at.

This is a possible triangle that is forming that could last until mid - 2014, it would imply that we are going to have a struggling economy at least for the next 3-4 years. The reason is that there is a definitive cap on upside potential as that top cyan line should not break.  It would also implies that there is a definitive bottom that has formed until this triangle is broken.

It could be a stretch however, I will continue to look at this scenario and hopefully I remember to post updates if the triangle has been broken, which could be this month if the markets continue to the upside.

Lastly.....A little Japanese Market Intervention to start the day

See Article from Bloomberg: BOJ Steps Up Asset Purchases
Literally 100 points in 3 minutes. 

It is my continued belief that a currency war / crisis may breakout as lower currency = greater exports and that is what everyone is banking on as their way out of the global recession. However, high unemployment in the US will continue to squeeze import demand.

Needless to say with where we are with the markets and where we are with the fundamentals of the global economy, an interesting time lies ahead over the next few months and years.