Gigantic Bull Trap, Bear Market in 3, 2, 1...

Well, the markets broke pretty bad last week. I saw heroes stepping in to buy the dips on Monday, Tuesday and then again on Thursday but they were made suckers of by the market close on Friday. The fact of the matter is that these folks have been trained time and time again that this behavior will be rewarded. Those that have bought the breakouts have also been rewarded handsomely and all of this adds up to a market for the big stock holders to unload their shares onto (a requirement since otherwise they wouldn't sell). I've heard traders say that "from failed moves come fast moves" and that is exactly what we are seeing in the broad market right now. In the dow jones weekly chart below you can see that two recent breakouts to new highs led to swift high volume sell offs. This type of action is indicative of a top because now there are many recent buyers who are underwater and will be happy just to get out break even if the market should try to climb. It also demonstrates that the big money waited for suckers to jump in on the breakout before distributing their shares, in other words smart money trapped the bulls.

I am not ready to declare a full scale bear market yet, but we are getting pretty close. The dow closed below it's 200 day moving average for the first time since mid 2006 on Friday, and while it is not the end of the world it is a huge red flag. The media is trying to spin it like this is just another "10% correction" but two of these in four months? At some point I think this market is going to run away to the downside fast and everyone will be left staring with their jaws open. It might not be tomorrow, it might not be this year, but at some point there will be a wide scale realization that the US is headed into a recession and that we have actually begun a bear market. When that day comes I think the dow will drop 1000 points or more.

The cracks are certainly showing but the stock market hasn't really begun any major hemoraging yet. While the 20 week money flow has turned negative, this wouldn't be a big problem so long as it rebounds quickly. And although the dow closed below its 40 week (200 day) moving average, so long as it regains it quickly the slope should stay positive. Long story short (no pun intended), the market needs to rebound quickly from Monday's ensured big gap down. If it does not rebound, and there is no reason why it fundamentally should... the the last six months will look like a gigantic bull trap. I'm drawing the line in the sand at $126.62 on the DIA or 12,795.93 on the dow jones industrial average. A weekly close below those levels and I am going to declare a secular bear market for US stocks.


For traders looking for some action, I ran into this nice looking DECK chart over the weekend. I think it has opportunity for longs and shorts alike. It could rebound nicely from the trendline test that occurred Friday or it could pullback further to some the fibonacci levels shown above or even test the recent low in the 90's. Which ever direction it moves, there could be some big swings in DECK this week for options expiration. And speaking of which, we could see some major upside in the mortgage insures (ABK, MBI, MTG, RDN, PMI) on put covering.

Ok, that was a bunch of technical stuff, for the more fundamental types check out this video of Jim Rogers I linkjacked from Ugly:





Or theres even more charts here.

Disclosure: I own December DIA 138 puts

Saturday Rock Blogging: Land Down Under

Australian Dollar ETF (FXA 1.5 year weekly):


Australian Stock Market (EWA 5 year weekly):

(click on images to zoom in)

Chart of the day: NewHighs/New Lows Currency of the week: FXY

Video of the Day: Bernanke pwn3d by Ron Paul

Don't you just love that look on gentle Ben's face. Awwww, poor guy. Bernanke actually had some relatively responsible things to say today that Ron Paul didn't give him credit for, more on that here.

American Banks

There is quite a bit going on with each of the banks below, some are certainly in more trouble than others. But tonight I just wanted to post these six month charts because I get the impression the market is ignoring what is happening to America's top lending institutions. Things are getting ugly, real fast, and if you think the US economy is going to just keep chugging along all hunky dory without these banks, well, you are nuts!

Washington Mutual:

Citigroup:

Capital One Financial:

Bank of America:

Wells Fargo:

I'm actually pretty scared here and thats coming from a short. The way things are unfolding, it seems like the US is heading towards a deep recession and I am scared for the welfare of my friends and family. I have actually been telling my friends and family to not hold ANY US stocks or mutual funds for the long term for some time now. I have only grown more concerned over the last six months even as stocks mindlessly went higher.

Disclosure: I own BAC puts

The Royal Bank of Australia raises rates.

And the Chinese have "foot in mouth disease".

The Royal Bank of Australia just raised rates and all three of the C$, the Euro, and the AUS$ got on an escalator. If the ECB does the same on Thursday? Oh boy...

I'm not 100% certain that the ECB will raise rates, because the make up of the ECB isn't quite the same as that of the Australian or Canadian banks. Many of the members of the ECB don't even speak the same language, never mind subscribe to similar conservative fiscal policy. So we'll have to wait and see.

Still, the US dollar could become deeply unpopular but that would depend on some things that aren't very predictable. Like, how patient are the members of the Saudi royal family? Did you know they are the biggest shareholders in Citigroup? That investment hasn't been doing well and if you've been reading the Minyanville you'll understand that the Citigroup as such is in a fight for it's life at the moment.

Another unpredictable area are the Chinese. They hold over One Trillion in USD and if they were to engage in a hissy-fit over their suddenly lower buying power. the USD could become "deeply unpopular" overnight and it fact it did.

"Market players showed muted reaction to comments by a senior Chinese political figure who said that China should diversity (sic) its $1.43 trillion stockpile of foreign exchange by buying more strong currencies such as the euro."

That was from last night and that "senior Chinese political figure" might as well have yelled "fire" in the crowded theater. He apparently quickly retracted that statement as the exchange markets reacted. I'm watching the continuation of the market now, in Europe. So far, EURUSD has reached 1.47, in heavy trading.

In order to fight this, the FOMC would have to raise rates and kill the US economy for good. If the Fed doesn't fight this, the dollar will be comatose for a long time to come. Talk about a rock and a hard place.

(disclosure: I own FXECM, FXE 143 calls, expiring Mar08)

Freudian slip?

Or is she just mad C made her GS go down yesterday? Still funny.

Here's a nice linkfest I ran into tonight.

Who says we aren't in a bubble? (1.5 yr weeklies)

Here was my favorite chart in the blogosphere this weekend.

IBD Inflation

The top story in the Investor's Business Daily (IBD) weekend newspaper should have been about inflation because they hiked their cover price by 25% in the last week. I got the paper last weekend for $2.00 but today, just one week later at the same store, it cost me $2.50. Wtf? I can't really blame them since fuel and lumber prices are skyrocketing with all the other commodities, but still, thats a big jump. Indigo has noticed similar increased costs over in Germany.

Thoughts on LULU

Right now LULU Dec 60 calls are my largest position so naturally I am digging into the chart to figure out significant price points. Not coincidently, the fibonacci levels for the only two significant moves match up well with areas of congestion in the chart. I have the red fibonacci pullbacks shown for the entire move from IPO to peak and the less important blue fibonacci pullbacks for the most recent 50% move from $40.87 shown below. It looks to me like $48.44 is the most important price to watch and should act like resistance to upside but major support once we get above there. This price represents the 38.2% pullback for the entire LULU move from IPO to peak and the 61.8% pullback for the most recent move.


Well, we are currently below that level but fortunately LULU has a rising 50 dma at $42.91 and a trendline shown in blue just above. Those two levels should act as strong support for now and I'd be surprised to see LULU break $45 especially given the fundamentals but if it does I will likely hop out of these calls to buy some lower strike options at the 50 dma. If LULU breaks $40 I'm gone and won't look back for a while.

So why did LULU crack Thursday and Friday so bad? Well I have a few thoughts on this, first of all Cramer the clown came out Friday morning and said sell LULU because it could tank like CROX. Obviously, he just wants to buy back LULU cheaper after he sold early last week. Secondly, there was an extremely bullish push into the close on Wednesday and LULU moved almost 10% in about an hour on huge volume. My guess is that many of those buyers were technical traders that saw the fib bounce and the extreme uptrend that LULU is in. So I bet their stops were hit Friday morning when LULU cratered in the first 15 min. Finally, the entire market got slammed and retail was second only to the mortgage insurers for most pathetic stocks of the week.

I personally couldn't be more bullish on the fundamentals, especially given the strength in the Canadian dollar. Recall the press release a few weeks ago where LULU raised their estimates for this quarter, in part, because of the Canadian dollar's strength (earnings in Canada are now worth more US dollars). Well heres a look at the Canadian dollar over the last few months:


Maybe they should have raised guidance again? As far as I'm concerned buying LULU is a great play on the exploding Canadian dollar, what do you think indigo (currency trading Canuck) and betweenthebars (biggest LULU fan ever)?

Prior posts on LULU here.

Disclosure: I own LULU Dec 60c

On the Yen

I just came across this article on the yen's recent strength and I think it just about sums up why I am bullish on the FXY (Japanese yen etf):

"``The subprime problems are not over yet at all,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second- largest publicly traded lender by assets. ` The yen will be buoyed by risk reduction.''"

"``The yen is benefiting from this unwind in carry trade positions,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``There's more bad news out there and U.S. stocks were hit pretty hard and Asian equities will have a soft lead.''"

"One-month implied volatility for the yen rose to 9.35 percent today, from 9.05 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades."

"The Bank of Japan kept its benchmark rate at 0.5 percent this week, the lowest among major economies."

So the Bank of Japan really can't go any lower with their interest rates, that will support the yen. And as investors pull money out of US assets they will buy back yen to repay their ultra low interest loans. That is the nature of the unwinding carry trade. That is a pretty strong argument that the yen will appreciate faster than the US dollar, the other side of the trade involves the falling US dollar. If the fed were to slash interest rates further then the argument would be that the US dollar will depreciate faster than the yen. Seems like a win-win to me.

Disclosure: I am long FXY calls

Nightmare on Wall Street 2: Credit's Revenge

Scary stuff was going down today, I hope everyone was being safe. Rather than talk about it, I've just got a few charts for you that are simply breathtaking. For commentary, I think Tim brings up some excellent points today.

Lets start with the Dow Jones etf over the last two days (5 min time scale):

Then CROX over the last five days on a 15 minute time scale:

My goodness, MBI over the last two months:

Then theres DSL, a "savings and loan" corporation over the last two months :

And the current king of carnage is bond insurer ABK on a six month daily time scale:
With people focused so much on tech stocks these days its easy to not notice the recession/bear market already occurring in some sectors of our economy.

Disclosure: I own DIA puts
A Nightmare On Elm Street 2 - Freddy's Revenge..... Trailer

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Musical Costume

The fed lowered interest rates by .25% today, as expected, adding further to upside inflationary pressure on commodities and other currencies. The stock market's reaction has thusfar been confused with some wild action in both directions. Clearly the leaders (ICE, LULU) popped big and the weakest stocks fell hard (ABK, MBI).

On a Halloween related note, here is something phish used to do on their 10/31 shows called a musical costume. They would play another band's entire album all the way through or in some cases just a few songs. The show that this clip is from was performed in Las Vegas on October 31st, 2005 where they played the entire White Album (The Beatles).

This one goes out to Ben Bernanke...

And now the lawsuits start

You knew this was only a matter of time...

Merrill hit with shareholder lawsuit over subprime

I'm sure this won't be the only one.

Nightmare on Wall Street

When the Ben Bernanke's FOMC releases their benchmark interest rate decision and statement this Halloween at 2:15PM ET something will die. The big question is, is it going to be the US Dollar or the US stock market? Recent actions indicate that Bernanke wants to be Freddy Kruger this year and shred the US dollar, which is already in free fall, by cutting interest rates. On the other hand, the fed knows inflation is picking up like crazy (look at food and oil prices) and there is always a possibility they could go back to their hawkish bias. A return to hawkish mode would send the stock market into a grave while saving the dollar. We will all be watching at that fateful hour but don't hold your breath for things to be all dreamy after they do whatever it is that they do do.



Disclosure: I am Long FXY (Japanese Yen) Calls, more on that later.

The Euro (redux)

Last weeks strong move by the euro, to new highs is continuing in early trading today. At the time I'm writing this one euro is buying 1.4417 dollars and the high for the day so far is 1.4436. The quote, in terms of dollars purchasing euros is well below the 70 cent figure at 0.6934.

What is unusual so far in todays trading is the lack of a big intra-day move in early European trading. Early morning moves of half or cent or more are common as the European exchanges open for business for the day, and we haven't seen that today.

The continuation of last weeks trading comes on speculation that the Fed will reduce benchmark interest at their Wednesday meeting. News from Europe and Germany in particular indicates that inflation may actually be accelerating, raising expectations that the ECB may be forced to raise rates at the November 8 monetary policy meeting.

In terms of the long-term chart, the euro has broken out of the channel that has been almost two years in the making. This weeks continuation could be considered confirmation of the breakout. In related news, Gold and Light Sweet Crude are trading at long terms highs today, as is the Australian dollar.


(disclosure: I am long the euro with FXE march 08 calls.)

Some Nice Looking Charts

Have I gone mad? (posting only bullish charts this weekend) No, I'm not bearish on every stock out there, just most of them. Each of these stocks has a great growth story and had some recent news to help create a breakout pattern . I don't have time to go into the details on each one, but they are worth looking into. They certainly each have a nice looking chart.

Disclosure: I own ICE and WFR calls.

LULU Under $50

Looks great for an entry next week but the options aren't cheap. I remember buying the Dec. 55 calls for 40% implied volatility less than a month ago but now they are twice as expensive at 80%. Probably the best way to play LULU here is to short the 50 puts or just go long the stock. However, being the option addict that I am I'll probably just buy some November or December 60 or 65 calls (I sold my previous position). Check out the daily chart above and the implied volatility below since LULU's IPO a few months ago.


Be aware that this is a volatile stock partially due to the growing bear camp on this stock. Technically it could fall as far as its rising 50 dma at $41.3 before ending the current uptrend but there are multiple support levels between here and there. In my opinion the best spot to load up on LULU would be around $47.50 but word is spreading about this stock and people want in so it might not get there. I think any price under $50 is worth nibbling, but really hope I'm not being too greedy here. As always YOU are responsible for your own investment decisions, I'm just telling you what I like.

The other side of the coin

Obviously I've been tracking the Eur/USD relationship for a long time, and at this time I'm long the Euro with FXE March calls. I posted earlier this month that 1.42 has become resistance, but that isn't quite true.

What I've discovered is the other side of the coin, the USD side. I tend to think of this exchange rate in euros because that's what I have in my pocket. For my one euro coin, I can buy $1.42 American. Many others think of this exchange from the other side.

An American with a dollar bill in his pocket would get 70 euro cents from me. And that's where the resistance is. It's not 1.42 or 1.43 American to the Euro. Resistance is the 70 cents round number that many American traders are seeing daily on their screens. Many can't believe that their dollar would only buy 70 euro cents, so they are buying when trading gets to this important level.

I believe that it is only a matter of time until this psychological barrier is broken. We should see a pretty good move at that point.

Possible triggers for the event? The ECB is meeting tomorrow to decide on interest rates in Euro-land. The Fed meets next week to deal with their interest rates.

Housing Quotes

“We've never had a decline in housing prices on a nationwide basis. What I think is more likely is that house prices will slow, maybe stabilise.”

Ben Bernanke (2005), then economic adviser to the president, was asked about the possibility of a decline in house prices on CNBC. Source.

"But let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

Henry Paulson (2007), Treasury Secretary, in remarks prepared for delivery at Georgetown University's law school. Source.

"It could conceivably make [conditions affecting investor psychology] somewhat adverse because if you believe some form of artificial non-market force is propping up the market you don't believe the market price has exhausted itself."

Alan Greenspan (2007), Former Federal Reserve Chairman, comments on the proposed "Super SIV" - a $75 billion Master Liquidity Enhancement Conduit designed to take on the assets of troubled structured investment vehicles (SIV). Source.

MDC Holdings (MDC)

Nice long term chart huh? It seems to make sense to use a simple ABC target for this stock, like I did with DSL (very nice), because the last two waves were almost identical on a percentage basis. If MDC completes the C leg down it will touch $26.77. If we use the size of the recent triangle we get a target of roughly $17.50. Any way you slice it, a break of $38.50 on volume suggests a $10+ move to the downside.

How can a chart look so bearish? From yahoo:

"M.D.C. Holdings, Inc., through its subsidiaries, engages in building and financing homes in the United States. The company has two segments, Homebuilding, and Financial Services and Other. The Homebuilding segment builds and sells homes under the name Richmond American Homes in certain markets of the United States, including Arizona, California, Colorado, Delaware Valley, Florida, Illinois, Maryland, Nevada, Texas, Utah, and Virginia."

Yikes, these guys have been disappointing wall street analysts for years and their next report is on Wednesday Oct. 24th.

If you have been reading this blog then you know about how bad it is out there right now in the housing sector and it turns out these guys do business in the worst possible locations (in bold). We haven't seen a major homebuilder go bankrupt yet, but it can't be too far off. And when homebuilders start going under stocks like MDC will get cut in half over night. Or if they are the one going bankrupt I guess it would be more than half that gets cut.

Disclosure: I own MDC puts

Distribution

There are a few things that I wanted to post about this weekend and rather than do one long post it seems to make more sense to break it up. First, everyone is talking about how the market did a "re-enactment" of the 1987 crash on Friday (on the 20th anniversary Oct 19th 2007). The media is very good at making excuses, but the reason the market tanked really had alot more to do with disappointing earnings from major industrial companies like CAT (my feelings have not changed), MMM and HON rather than some superstitious traders. We actually had the cfo of CAT say the US is "near to, or even in a recession" led by an "ongoing recession in housing." Oh and thats not to mention oil at new record highs (priced in US dollars) and then theres crashing bank stocks. Well here's a look at the Dow Jones ETF (DIA):


For months now there has been significant distribution in the DIA with record volume days and no forward progress. The market has made higher highs but always on lower volume followed by much higher volume selling (and no net progress since late May). In the IBD method this type of action is very important to investment decisions and they track the number of recent distribution days as the "M" in the CANSLIM investing system. According to IBD:

"One way to spot that trend is to pay close attention to distribution days — days when the market is down more than 0.2% on higher volume than the previous session.

When the market piles up four or five of these over a few weeks, chances are that the market may reverse lower."

You can find their current count in the weekend issue paper and currently they show "4 for Nasdaq and S&P 500, 3 for the Dow." In other words we are getting there, and if you take into account the significant distribution that occurred in February and August then it certainly gives need for caution.

The DIA chart above shows that we smashed through support at $136, the 50 dma and lower Bollinger band to close down 2.8% Friday. Certainly, the action was intensified by options expiration and it is very rare for a trend to be sustained outside of the Bollinger bands. I suspect we will stabilize Monday but the Dow Jones is looking really toppy here, and why shouldn't we top?

Sure, US stocks are worth more as the dollar drops but it ain't dropping fast enough to make up for a recession. And inflation really is bad, by the way. From Wikipedia some of the negative effects include:

"

• Increasing uncertainty may discourage investment and saving.
• Redistribution
  • It will redistribute income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and profits which may keep pace with inflation.
  • Similarly it will redistribute wealth from those who lend a fixed amount of money to those who borrow. For example, where the government is a net debtor, as is usually the case, it will reduce this debt redistributing money towards the government. Thus inflation is sometimes viewed as similar to a hidden tax.
• International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be undermined through a weakening balance of trade.
• Shoe leather costs: Because the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. This imposes real costs, for example in more frequent trips to the bank. (The term is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank.)
• Menu costs: Firms must change their prices more frequently, which imposes costs, for example with restaurants having to reprint menus.
• Relative Price Distortions: Firms do not generally synchronize adjustment in prices. If there is higher inflation, firms that do not adjust their prices will have much lower prices relative to firms that do adjust them. This will distort economic decisions, since relative prices will not be reflecting relative scarcity of different goods.
• Hyperinflation: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply.
• Bracket Creep (also called fiscal drag) is related to the inflation tax. By allowing inflation to move upwards, certain sticky aspects of the tax code are met by more and more people. Commonly income tax brackets, where the next dollar of income is taxed at a higher rate than previous dollars. Governments that allow inflation to "bump" people over these thresholds are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate.

"
On the other hand, tech stocks remain strong and for good reason it seems. GOOG posted blowout earnings last week with other tech bellwethers reporting strong growth. The Nasdaq 100 tracking ETF QQQQ looks much better than the DIA but also shows clear signs of distribution. The QQQQ could fall quite a bit further before it started to look toppy like the DIA, heres a 2 year weekly chart:


More later.

EURUSD at 1.42 has become a resistance point

EURUSD at 1.42 has become a resistance point on the charts. Whenever the dollar has gotten to this point lately, buyers have stepped in. I certainly did. I bought a small number of US dollars in order to buy a leveraged options position against the dollar. Here is my thinking on the issues.

Interest rates here in Europe will have to rise in order to combat inflation.

Europe's September Inflation Rate Rises Above ECB's 2% Ceiling

Energy costs in particular have spiked here in Germany. Eon and RWE, two of the biggest gas and electricity distributors have just announced price increases of 8.8% and 9.9% respectively. Don't even get me started about the price of gas for the car. (EU1.399/liter, approx. 4 liters to the gallon, 1.42 euros to the dollar. You can do the math.)

The members of the European Central Bank have been preparing the way for a rate increase in regular comments to the press, "ECB president Jean-Claude Trichet reiterated that economic growth in the eurozone remained robust and that inflation was subject to upside risks."

And from ECB board member Axel Weber, "...the bank may need to raise interest rates to a level that restricts economic growth in order to keep price increases under control." The Wall Street Journal sums it all up nicely, in one article. Interest rates have been held steady for now, but don't expect that to continue. The next meeting of the ECB will be on the 25th of this month.


While in the US there is a completely different situation going on. The problem of the subprime mortgages isn't going to go away any time soon. Over just the next 3 months there is something like 150 Billion dollars worth of adjustable rate mortgages to be reset to current interest rates. There is a superb chart floating around the internet apparently from Credit Suisse, who've had their own problems the with subprime market.

Foreclosure rates are already at twice the 2006 rate, and by the looks of that Credit Suisse graphic this tidal wave is only just starting. Mortgage rate resets will continue well into 2008. US interest rates will have to come down in order to protect both the borrowers and the lenders. It's only a matter of time.

Treasury Secretary Henry Paulson may be saying that he "has no interest in bailing out lenders or property speculators", but he may not have any choice. In fact, a certain level of bailout may be exactly what he's planning, in co-ordination with several of the largest banks in America.

The idea floating around is to build an 80 Billion dollar fund to be used to purchase the credit worthy mortgages, but the problem is not the credit worthy mortgages. Besides the problematic subprime mortgages total more than 80 Billion dollars worth.

What we have here is in fact a risk to the capital base of several large banks, should they have to sell off risky mortgages at fire sale prices. I guess it would be a good idea to have cash on hand, in order to cherry pick the portfolio when the selling really gets going. Apparently Hank Paulson thinks so too.

Let the Crash begin! (or the Fed can lower interest rates, save the financial system, and devalue the dollar).


A devalued dollar will have plenty of side-effects, all over the world. Exporting nations (Germany and the rest of the EU) will be badly affected, as will those who depend on US tourists. Those nations who peg their currency to the dollar (China, Saudi, and other oil producing nations) will have to do some hard thinking too.

With a devalued dollar, European economic expansion will have to come from lower government debt, and corporate cost controls and careful investment. New markets will have to be found for exports because the USA cannot be "the customer to the world" any longer. It won't be easy.

The USA has already overspent and those countries who's currencies are pegged to the dollar will either have to give up that peg, or be willing to import US-related inflation to their own markets.

Some of those countries are already moving away from their currency peg, The Chinese have held steady so far, but even the Chinese know that they cannot afford hyperinflation. They need to be able to buy resources that they don't already own, and they will need a balanced, tradeable currency to buy what they need. So far, they've been buying those resources with US dollars, earned from trade with the USA.

With the dollar in decline, how long do you think they will maintain their own currency peg, when the dollars they own are buying less and less product every day? I'm not expecting that soon, by the way. Just sooner, or later.

In the mean time all the world will continue to play the biggest game of "pass the buck" that has ever been seen. It is a game that is attracting fewer and fewer players every day, as the value of the dollar drips slowly away.

Country Fried Financial T-Shirts

Its a funny graphic to post on a blog but who in their right mind would go around wearing the t-shirt? I can understand people getting excited about the money they made shorting that thing at $40 but sporting that shirt is just poor taste. And I don't think the "I watched the US mortgage market implode and all I got was this stinking t-shirt" argument works here. Plus I'd be at least a liitle worried about getting knocked out by some guy who recently got foreclosed on by Countrywide, its not as funny to those folks.

Its funny how Angelo Mozilo actually looks as fried (tan) in real life as he does in that image, heck I'd be pretty tan if I was making as much money as he is. You know on second thought it really isn't all that funny.

Ouch! (VLO Today)

If you bet Valero (crude oil refining and retailing) would drop today on the bad refining margin news by Chevron or their pre-open lowering of earnings forecasts, you thought wrong. And you got killed.

JASO Set Up

After recently breaking out of a perfect cup n handle, JASO has run into a confluence of bad news and counter trends. To start with, they announced a secondary offering to be priced based on today's closing price ($40.98). Second, Chinese solar plays have fallen hard as LDK Solar has been accused of cooking the books and essentially lying to investors. Barrons did a chop job on all Chinese solar this weekend and after recently exploding, many China stocks got hit today. All this bad news has merely pulled JASO back to the "neckline" of the cup n handle. From a chart perspective, this move looks like a typical throwback and a great low risk entry point with a measured rule target near $55.

And for anyone trying to call this a hype/momo/bs play as opposed to a true growth story, just take a look at some of these numbers.

Disclosure: I own JASO calls

Interesting Articles

• The Dow Jones Priced in Commodities
• Austrian Business Cycle Theory
• FDIC to mortgage servicers: Freeze ARM rates

The container is still leaking....

You hardly have to blog these things anymore. Just get up in the morning, scan the headlines, pick one, post it, and wait for the meltdown. You know it's coming.

JPM and BAC to write down $3 billion in loans

A Thing of Beauty

Isn't it?

In the News This Week

• Subprime Delinquencies Accelerating
• U.S. Initial Jobless Claims Rose 16,000 to 317,000 (higher than expected)
• Analysts Predict Even Larger Losses for Countrywide Financial (up to 4B$ in write downs)
• Washington Mutual Sees Profit Down 75%
• Merrill Lynch to Post 3Q Loss Up to 50 Cents Per Share After Taking $5 Billion in Writedowns
• August Factory Orders in U.S. Fall More Than Forecast
• China Enjoys Ben-Carry Trade Thanks to Bernanke
• Oh, and to be fair The Dow Made a Record High Monday
• Then, The S&P Hit an All-Time High of 1,561.91 Friday

Pay no attention to the economy behind the curtains, helicopter Ben will save us!

More from the Alien: Consumer borrowing up sharply in August

and that quite frankly is so freaking nutso, that we aliens are thinking to leave this particular Solar System.

DSL Long Term Chart

A few months ago DSL broke down out of a two year symmetric triangle. It dropped 42% on increasing volume to find a low at 43.55 on record volume. Since then, a mild euphoria has swept over share holders of the savings and loan company as it climbed 45% to touch the bottom side of the triangle at 63.17. If this 45% rule continues and the stock completes something of an ABC correction, then it could see 36.64.

Of course that might be alot to expect out of any ordinary stock, but then again...

Acording to yahoo, DSL "originates and invests in loans, such as residential real estate mortgage loans, investment securities, and mortgage-backed securities; and originates and sells loans to investors in the secondary markets." Oh, you know, that sector of our economy which has completely fallen apart this year as the housing market tumbled. And while wall street likes to huddle around and sing kumbuya to their god, Ben Bernanke, the fed's desperate rate cut to save the markets isn't going to reverse the popping housing bubble. Just wait until earnings start coming out for these mortgage companies. Did no one listen to what Citibank said earlier this week? Good grief!

Dunno, it looks like a golden short to me so I bought some 60 puts.

I rarely use charts alone

As the title says, I rarely use charts alone for my trading signals. In the case of FXE, the Euro CurrencyShares fund, I'm using the chart to keep me away from a stupid entry point.

Looking at a weekly chart for the last two years, every single technical indicator that I see says that the relationship between the Euro and US Dollar has topped, for the time being at least. FXE exceeded the top of the Bollinger Bands. Common wisdom says that it will retreat at least to the midline between the two outer edges, which coincidently at this time is also the level of the 20 week moving average. For the last two years FXE has reacted exactly like a stock bouncing off an important moving average, in this case the 40 week moving average, which is almost exactly the value of the 200 day moving average on a daily chart.

Of the other common momentum oriented calculations, RSI, CCI, and all the stochastic measurements are signaling a top, and for all of these reasons I'm holding off from buying the FXE calls that I was looking at. There should be some consolidation here, over the next few weeks and I intend to look at market sentiment again, shortly before the next Fed meetings at the end of this month.

Overall I am bullish on the Euro vs USD, but the continued "higher highs, and higher lows" trace out a beautiful channel that can be traded back and forth in the short time frames, but also suggests more strength to come in the FXE product.

Unlike Pythagoruz, I prefer the long setups. But I don't like buying at the top any more than anyone else, so I'll let the usual chart tools line up before I enter. I'm looking for $138 for an entry long, when the rising SAR meets the price figure.


Update: I have bought a small position in the FXE Mar 08 $143 calls. With the Fed minutes coming out today, and Poole talking about "fragile financial markets", it seemed to be time to get into this market.

The container is still leaking

It was a couple of months ago now that Hank Paulson, Secretary of the US Treasury made that famous quote telling us that the subprime problem was "largely contained", or something to that effect. I blogged it on 8/3, right here on StockGeometry, and while the I article I linked to at the time has gone dead, I've found the exact quote again on an MSNBC.com page. Specifically, he said;

"...that the market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades."

I bring this up today because of new reports from Switzerland where banks are now coming clean about their exposure to the problem, and the losses they're experiencing. On a combined basis UBS and Credit Suisse are going to be writing down close to 5 Billion dollars worth of assets. For UBS this will be the first quarterly loss in 9 years.

But this doesn't affect real people, right? The problem is contained? Tell that to my mother-in-law, who has about 25 thousand euros invested in a Credit Suisse bond fund. That's about 1 years worth of retirement income for her, and she's madder than a wet hen right now because she can't get even an account manager on the phone. Those guys were probably cleaning out their desks last Friday and while sympathy may be difficult, those are real people too.

The container is still leaking.

What Happened to the Kingsland Report?

There aren't many sites that I make sure to check everyday and The Kingsland Report was one of them. Jim Kingsland is a great writer and has a very honest "tell it like it is" style to his posts. I also share his interest in the options market and have found his insight very helpful.

Well about a week ago he made a short post about a special assignment and not being able to do his usual daily commentary. This was the last thing he said and then today when I went to the site was redirected to jimkingsland.com where there was a short note:

"Welcome to Jimkingsland.com!

The Kingsland Report blog is no longer in operation. Email me at the address below and I will keep in touch. Thank you for reading the Kingsland Report!

If you would like to contact Jim Kingsland, email him at jkings1@optonline.net"

Bummer. I wonder what happened that required the entire blog to be removed, with no archives or anything. It just disappeared. Thank goodness we have the Wayback Machine.

So how can we play this USD move?

The fact that the US dollar is under pressure is indisputable. On Aug 15 I moved a large portion of our family liquidity out of the US dollar, into the Euro. Since then the euro has moved from 1.346 to the dollar to almost over 1.42 today, and I expect this trend to continue.

In my opinion, the US Federal Reserve isn't going to have much choice with interest rates in the near future. Rates are going to have to come down to protect the US economy from the fallout of this sub-prime lending debacle. But at the same time the European Central Bank is facing an inflation problem here, and rates will have to be raised. It's only a matter of time.

Long term debt investors looking to increase returns will be buying Euros in order to invest in the European debt markets, and the volumes involved are more than enough to affect the Euro:USD exchange rate. As I write this, clever European exporters are hedging their USD accounts receivable and future sales against this likelihood. One way to do this is with CurrencyShare funds such as FXE. There is a similar fund for the Canadian dollar too, FXC.

As a retail trader who is not adverse to risk, it is my opinion that the options chains on these funds is the best risk/reward trade to be made today. As an example the FXE Dec 145 call are quoted at $1.05/$1.50. This, at a time when FXE itself has moved from $134 to $142 in just 5 weeks. There are 11 weeks ahead of us, before the December options expiry.

If you are concerned about the volume of trading in FXE options, you might be better trading the FXC options chain. Canada is Americas largest trading partner, so hedging and trading of the currencies far exceeds that of any other currencies. This means that spreads are narrower, liquidity is better, and trading should easier if the market goes against you.

Disclaimer: I have no positions in these products, at this time. But that could change today.

ERTS Chart

This 3 year weekly is showing some improvement and what looks like a symmetric triangle breakout, volume is weak however. I was also thinking it could be a great Christmas for video games since everyone got the new consoles last year, including yours truly. I got a Nintendo Wii of course.

Slowing Consumer Spending

In another sign of the slowdown in consumer spending, orders for durable goods declined by almost 5% in August, the biggest decline in several months.

To me this is just confirms what I've been thinking and reporting on this blog recently.

In combination with that report on problematic credit card debt from two weeks ago, we seem almost certain to be coming to the end of "consumer spending as the basis for the American economy".

In the mean time, the vast majority of adjustable rate mortgages have yet to be reset, and foreclosures are accelerating. The Fed may have reassured the markets that they are attending to the situation, but continued "attention to the situation" can only result in reduced interest rates, and dollar exchange rates.

It's an interesting decision. Which is more important? The American consumer led economy, or the value of the dollar?

WFR Long Set Up

WFR is a stock that I was bearish on a few months ago when the steep uptrend in MEMC Electronics broke. The pattern began to look more and more like the Oneil proper short sale point with the stock vascillating about it's 50 dma. While the stock has been in this pattern is has consistently found support just below in the $50-55 range and it is about unchanged from where I became bearish. If WFR can break this series of lower highs and get out of the current range that its in, then there could be a nice move to the upside.



As you may have noticed, solar stocks have been hot lately (see JASO and LDK) as the demand for solar power is exploding. Currently the industry is unable to meet demand because there is a shortage of polysilicon supply, the primary semiconductor used in large scale solar cell manufacturing. MEMC Electronics (WFR) is one of the largest producers of poliysilicon and single crystal silicon in the world, so they stand to benefit greatly from the rapidly increasing price of the undersupplied polysilicon. In addition, the semiconductor sector has been showing signs of strength lately, so the stock may get some boost from that action too.


After doing a little digging I found out that the reason why WFR's run had paused was because they will miss expectations in the next quarterly report to be filed in November. They had some electrical problems during the expansion of one of their foundrys (material production plant). It sounds like an engineer hooked up a transformer backwards causing a brief power outage which led to a week long setback. If people are interested I can get into this into more detail, but generally speaking this minor setback should be viewed as a buying opportunity.


Ok, I usually don't like to get too deep into the fundamentals, but it just so happens that I actually know quite a bit about microfabrication as I am working on a PhD in electronic materials. Anyways, I think the stock is a buy on a clear close above that blue down trendline or during an intraday break of $62.50. The November $65 calls are attractive to me and I'd get out of those if the stock were to close below $55.

A new link in the Blog Roll

I'm adding a new link to the Blog Roll, in the sidebar. Minyanville.com gets my thumbs up for informed and balanced financial commentary.

As I live overseas and changes in the dollar exchange rates are particularly important to me, I greatly appreciate the sort of commentary from the likes of Todd Harrison. I've been reading his articles for a while now, and only just looked up his biography. He actually started Minyanville and he's an ex-TSCM type. Go figure.

As for his take on the dollar? This article explains it all. The title "Cracks in the Dollar", dated Sept. 13. Oh boy.

Self Similarity in SIRF

I love it when I see a pattern like this in a chart. Check out the CCI back in Feb and March on SIRF which has been in a steady downtrend all year long. The pattern looks very similar to the one formed over the last two months. If the pattern unfolds in the same way SIRF could fall by 1/4 in the next few months and easily break recent lows.

SIRF's 50 dma has acted like resistance the whole way down from $34 and may have just stopped this swing at $20. The next level of resistance would be near $22 where puts would be very attractive to me. If SIRF broke that red line connecting the highs I would bail, but otherwise anywhere in here looks safe.

Back in early April when the previous pattern completed, SIRF hovered below the 50 dma for a few weeks but never moved above. It then gapped down on earnings and has been below its 200 dma ever since.

Note, technically this is not self similarity because the size magnitudes of the patterns are the same here. In a true self similar stock pattern the 5 min time scale might look the same as the daily time scale. I think the phrase might still apply here somewhat though.

Implied Volatility

Next week has the potential to be a wild one with the FOMC rate decision on Tuesday and September option expiration on Friday. Opinions about the stock market tend to be passionate and extreme right now. The bulls think that a big rate cut will explode the market higher on a monetary expansion by the fed and the bears see recession and more falling shoes, shoes bought with credit cards. It all seems to revolve around the fed and whether or not they are capable of saving us from the financial crisis that has been developing over the last six months. Whatever your opionion is, and I have my own, we can all probably agree that volatility is likely to be very volatile this week.


This is a very important fact for options traders because implied volatilities and hence the premiums are likely to be all over the place. In this environment it is more important than ever to be mindful of the option you are buying and how its pricing compares to historical and recent levels. A great resource for historical implied volatilities and their trends is IVolatility.com. If you buy an option on a implied volatility spike it can be deadly in a matter of minutes. You can watch the option drop dramatically in value even while the stock doesn't move an inch. I have found that a great way to protect yourself is to plot the option last, bid, and ask next to the recent stock price movement for comparison to the current pricing. You will see periods where the option price changed quickly, for example during a company announcement or at the beginning or end of the day. Those are the periods when you can either find a great bargain or get screwed big time. You can find implied volatility quotes here. I don't know of a free resource for intraday option charting but Interactive Brokers will do it and they also provide live implied volatility quotes. Also, if you want to see some interesting daily option scans, I enjoy perusing the IB Options Intelligence report each night.

The safest thing to do is to wait until Wednesday, after all the FOMC hoopla dies down, to trade September options. Or, just stay away from front month options all together, they do expire Friday after all. I have been very hesitant to trade at all until after this fed meeting is over with because market participants are so wound up about it.

But I do have a few ideas for the week.


GRMN has formed a nearly perfect rising wedge. I'll do a more thorough post about GRMN's fundamentals at a later date, but I find the bulls argument very uncompelling. For now, I think it should at least test that 50 dma and Bulkowski's measured rule suggests a target of $90 which still seems conservative to me. The pattern has to be confirmed with a close outside of the trendlines but that should happen soon with the apex approaching this week. The September 105$ puts could do well.

I had more ideas like SIRF for a swing trade, but I'm tired. I'll probably do another post after the fed meets Tuesday. Good luck out there!