Wednesday, November 23, 2011

Thanksgiving's Roast - 24 Nov 2011

Happy Thanksgiving to all!

Today, the US markets will be closed and on Friday, it opens for the last day of the week, albeit with expected low volumes. Over the weekend, there would be results of Black Friday known and Monday may react to the this piece of news. Black Friday is traditionally the start of the shopping sales season and it is taken as an indication of consumer spending strength, as most retail stores get back into the black (accounting term) from this Friday onwards, if it so happens. Therefore, it might become a significant event either way... up or down.

Meanwhile, here is some good weekend reading:
A very good piece to read about knowing the background of this European Debt Crisis (EDC).
I personally like John Mauldin's piece titled Print or Perish, as it outlines why the EDC is one huge gorilla in the room, and how it really can be sorted out, albeit selfishly for the rest of the world, as well as how it is a lose-lose situation for Europe.
Note that the title was tagged from the academic phrase of "Publish or Perish".
Having read these two articles, you should have a think about the year ahead... the picture would be pretty clear.

Now, I already had been bearish longer term since end July, preferring to be "risk off", and previously tracked the current technicals compared to that of early 2008. At some point in the last two weeks, I noted that the market had deviated from that track a little after the second dip. The bounce was magnificent, to say the least, and the ES hit the daily 200MA in half the time it did in early 2008! For a while it looked as if the similarities were broken, and a couple of days later after testing the 200MA twice, it failed. This was the "last station before the train falls over the cliff" as outlined in a my blogpost two days ago.

And in the past two days market action, it is raising some alarm bells...
The US markets have a tendency to rally pre-holiday season. Last two days had weak bull activity and the bears clobbered the bulls really swiftly. This looks as if there is offloading at every opportunity, particularly a fear of holding anything over the holiday season.
The thing is, when observing the intraday charts in comparison, it is a little un-nerving.

Here's why...

Below is a SPX chart compared with TLT (Treausries ETF) and VXO (The old VIX that comprises of large caps only - my preference as I observed it to react faster than the widely used VIX).
From the 15 min intraday chart, in the past two trading sessions, there have been two occasions where TLT makes a higher high BEFORE the S&P500 (/ES, SPX, SPY) starts tanking. For TLT, making higher highs at this level is significant as it is pushing towards historical highs. And the correlation to its indication of a the equity market tanking shortly after is almost 100% since July 2011.
The VXO, however, has stopped being such a similar indicator as it was in August and September 2011. This is telling of money movements into Treasury bonds (likely by big players), without triggering a mass sell-off as indicated by the fear indexes (VIX/VXO).

On the daily SPX charts, there clearly were ice-hole failures on the 200MA, and a critical level is identified at 1130.
Despite the rather significant October rally, the TLT retraced and continued to uptrend, potentially to be rejected or breakout into historical higher highs. By the time the SPX is at 1130, the TLT should be at historical highs, given the current trend momentum.
Similarly, the VXO is no where near the August-Setpember highs, but looks set to breakout of the smaller October range highs.
By mid-next week, it would be obvious.

Below are the /ES charts, weekly (left) and daily (right).
If this week closes at the current levels, the MACD indicates are bearish crossover in bear territory, which may mean a farewell to the Santa rally next month. Remember 1130 on the daily chart? It is coincidentally the weely 200MA support. That's how critical that level would be in the weeks to come.
On the daily ES chart, as described previously, a technical breakdown that included 200MA failures, channel breakdown, and Sell signals all occured last week. The last two trading sessions saw a MACD bearish crossover into bear territory, but price is still not reflecting an extreme breakdown - yet.
The TTR model, which compares the ratio of the TLT/TIP ratio is warning of another downleg.

Yesterday, European news that caught my eye included Dexia's bailout that itself was in trouble, and particularly significant, the German bond auction technically failed. With stuff like that happening over the Thanksgiving seasonal holidays, it is little wonder that the US Treasuries will be attracting more funds. Furthermore, Fitch and Moody are reviewing European ratings, particularly that of France, and so is S&P of the US.

Thee various "signs" are omnious... there will be more to come... watch the train fall off the cliff, and if you didn't get out at the last station, be ready to jump out of the train or go down with it!

The MadScientist
24 November 2011

Note: ALL material posted here is from my personal opinion, and my opinion may differ or change without notice. These do NOT constitute as solicitation, investment nor financial advice. By reading the materials presented here, Readers acknowledge the awareness that the materials are intended for educational purposes only. For investment(s) advice, related decisions and/or actions pertaining to investments, always consult your own qualified financial advisors, brokers, etc.

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