We not only told you so but we showed you!
That’s right – Last week (and what a great week it was!) we closed out a week of pattern watching with Friday’s "Pattern Recognition 101" class, where we put up the graph of THE FUTURE, which is actually a graph of the past but, since it accurately predicted our sharp recovery off Friday’s gap down open AND predicted the strong gap up this morning – perhaps we should take it seriously:
This is the HFT recovery program we call "Omega 3" at PSW that seems to be running as the markets move off the bottom (which we also predicted) of our long-standing trend lines. Today we are hopefully going to stick to the Feb 16th plan and finish just short of our breakup points so we can have a successful "Testy Tuesday" tomorrow. If you look over our SUPER BULLISH positions in the Weekly Wrap-Up, you can see how happy that will make us so keep in mind that we are unusually biased this week as our usually market neutral stance has tipped as bullish as it gets the past two weeks.
We’re just following through on my Friday morning game plan, where I said: "It will be kind of funny if we get that big gap down at the open and then recover to even to end the week right back in the middle of the low end of our range. I think I would have to go a bit bullish into the weekend if that’s the case!" Head bone-caster, David Fry, had this to say about the action that day:
There wasn’t really a story in markets Friday. The news items, mostly bad, didn’t register as such. The machines have things under control and spent the day cherry picking news they liked (slightly better Consumer Confidence) and ignoring news they didn’t (horrible Retail Sales data). Some, like permabulls at CNBC had to dream-up ways to rationalize poor Retail Sales against Consumer Confidence. Frankly, it’s a laughable exercise; but, they have soap to sell.
So when folks ask, "what moved markets today?" The only intelligent answer is "nothing" except perhaps some program trades, high frequency algos, trading desks and hedge funds. The rest of us are left to scratch our heads watching another end of day light volume jam job.
In fact, volume is roughly 30-40% below normal and this allows a few players with their HAL 9000s to manipulate prices all they want. The market now has become a private casino for a few with machines, formulas and cash to push things around.
Our test lines are going to be critical for our short-term bets. For our long-term plays, we actually would prefer if the market went down or stayed range-bound, so we can accumulate more stock at great prices, but it was the concern about things getting away from us that led us to take UPSIDE "Disaster" Hedges last week, with the goal of "Turning $10,000 into $50,000 by Jan 21st." (Members Only) We haven’t run a series of aggressive upside plays like that since last February and those plays were cashed out at "just" 300% on 4/24, when we decided the market was toppy and the risks of leaving 300% gains on the table outweighed the additional 200% reward we hoped to get ("Should We Take Profits at 300%?").
That’s a big mistake traders often make. Sure we WANT to make 500% on a leveraged trade but that’s a decision we made based on incomplete data (see "The Microwave Oven Theory of Investing Behavior"). Just because you set out to make 500% or 1,000% on a trade, doesn’t mean you should sit on your hands a couple of months later when the trade is halfway to goal. You need to ALWAYS re-evaluate your positions Profits you make along the way add to the risk you are taking and need to be taken into account and PROTECTED.
Protecting profits is why we are going to be looking for new disaster hedges but I will urge Members to keep in mind that our goal line for re-establishing the TZA dn SDS hedges tomorrow’s test levels at: Dow 10,250, S&P 1,100, Nas 2,260, NYSE 6,820 and Russell 666. Looking back at my Feb 16th morning Alert to Members, I see that our lines to get bullish at that time were: Dow 10,165, S&P 1,088, Nas 2,200, NYSE 7,000 and RUT 620 – other than the NYSE, we hit all those levels last week and it’s the NYSE that needs to confirm a move up here.
As we had hoped, nothing blew up over the weekend but oil pushers from Iran have jammed up the price of crude by "vowing to challange Israel’s blocade" of the Gaza and that has sent oil back to $75.70 in the futures, up from $73.50 on Friday. Wow, that’s strong stuff, but why do I have a feeling I’ve heard this all before? Let’s see, when is the last time oil was dropping and Iran was worried about maintaining prices? Oh yes, it was January! And what did Iran say on Sunday (it’s always Sunday if you want to manipulate oil prices), January 4th? "Gaza will be a graveyard for Israeli troops, warns Iran."
A week later, Israel blocked an Iranian ship 20 miles off the coast of Gaza (it takes 2 weeks for the trip). Mission was accomplised though and the price of oil was bouncing off the $70 mark so Iran’s supreme religious leader, Ayatollah Ali Khamenei, called for Muslims to boycott products linked to Israel. Ooh snap, as they say – that will show them not to mess with Iran! Don’t you think that Israel would love an excuse to turn Iran into a golf course? Am I the only person who remembers the Six Day War, where Israel defeated Egypt, Jordan and Syria, who were being supported with troops from Iraq, Saudi Arabia, Sudan, Tunisia, Morocco and Algeria – IN 6 DAYS?!?
That wasn’t a fluke, 6 years later pretty much the same group thought they could catch Israel by surprise by attacking them on Yom Kippur, which is their holy fasting day. It did sort of work as it took Israel 20 days to kick their asses that time but, to be fair to Israel, Russia was helping Egypt et al that time. That was a FANTASTIC war for the price of oil – changing it from a relatively cheap and reliable commodity to a speculators dream as Egypt proved they could disrupt the supply of oil by blocking the Suez canal for more than a week. That was the old Egypt of course. Anwar Sadat made peace with his neighbors and was, of course, killed for it but too late to stop oil from slipping back to normal commodity ranges until…
Iran is nothing more than Rent-A-Rebel on a national scale. Amadinejab NEEDS oil to be above $75 a barrel to keep the peace in his own country and the great Western PR machine that is funded by oil interests is very happy to blow this threat completely out of proportion in order to drive profits into our own local oil cartel. You may not be able to get consumers to buy new bathing suits or gas grills if they are not in a spending mood but you can sure as hell shake them down for money at the pump – especially as we come into summer driving system. This activity is so disgustingly predictable that we are doing very well on the oil and gas plays we picked up over the past two weeks so we are financially satisfied but still morally outraged as this global con game is allowed to continue. If you need any proof of what BS the Iran threat is – just look at the price of gold today!
Speaking of special interests who hijack our country and manipulate the people, sacrificing the health and safety of our union in order to pad their profits with money they pick from the pockets of working Americans – Mark Ames has a great follow-up piece on the Tea Party and how their oil-backed PR firm has gone into quiet mode as "Drill Baby Drill" just isn’t ringing with quite the same tone as it did during the 2008 campaign.
Asia had a fine morning with markets up across the board but the Shanghai is still not looking too perky, up just 0.29% on the day (2,569) and still looks bearish as the rapidly descending "death crossed" 50 dma flies down to intercept the fractured index. The Hang Seng gained 0.9% (179 points) and broke over the 20,000 mark but lost ground during the day after a gap open to 2,100. The Nikkei also gained 174 points but that was up 1.8% on the smaller index, to 9,879 and we don’t like to see too much divergence between the Dow and the Nikkei as the stronger index tends to snap down and, right now, they are 6% apart so we need the Nikkei to get it in gear if we’re going to have a global recovery.
While all Asian exporters are still very concerned about the crisis in Europe, at least Japan’s quarterly business sentiment index is picking up and mainly due to strong overseas demand from the rest of Asia! The quarterly business outlook survey’s large company business sentiment index was 4.0 in the April-June period, compared with minus 2.4 in the January-March quarter. It was the first positive reading in three quarters. Firms said they will increase capital spending by 9.2% in fiscal 2010 ending in March next year. Manufacturers said they will increase such investment by 12.5%. Non-manufactures expect their spending to increase 7.5%, the data showed.
Europe is off to a fine start this morning as well with reports that Euro-Zone Industrial Output is way up and Ireland claims to have a handle on their banking losses. The markets there are up about 1% just ahead of the US open and, as I said last week – all they had to do was not mess up over the weekend to give the global markets a boost and the World Cup made that unlikely as pretty much everyone in Europe is watching soccer this weekend and didn’t have time to screw up the economy. The danger comes as teams start getting eliminated and depressed economists turn their attention back to the bigger picture.
So it’s going to be a race to amass enough good news before the first round of FIFA eliminations puts the EU back to work, which will coincide with the G20 meeting at the end of the month. It was very easy for us to be very bullish last week, now we have good enough news where not breaking our levels (which are, I will remind you, the LOWER levels of our ranges) will be a very serious sign of trouble so the theme for this options expiration week for our bullish plays is likely to be: "Take the Money and Run" unless we can decicively punch through our levels.
Enjoy your week,
– Phil
