Charts I'm Watching: March 30, 2012

Original Post:

Two news items in particular are catching my eye this morning.  First, consumer spending continues to outpace personal income by a wide margin.  In February, spending grew .8% while personal income was up only .2% (an inflation-adjusted -0.1%, I might add.)  Because spending should track income over the medium/long term, this divergence is unsustainable. 

Second, the NY Times ran an article regarding Moody's downgrades at BAC, C and MS.  They touch on the impact this will have on derivatives in particular -- the one colossal danger hardly anyone is discussing.  As bad as the Euro-Mess and China's hard landing might be, I think the unraveling of trillions in derivatives stands to be the story of the year.

Zerohedge has done a great job of discussing the issue.  Here's the latest.  The average ratio of derivatives to total assets is over 30, with some banks such as C (47) and GS (54) coming in much higher.   Morgan Stanley is particularly susceptible to foreign exchange (98% of total), while virtually all the banks' derivatives are OTC.  

In other words, who knows what they're worth or how well they'll hold up in the event that one of more counter-parties, however many degrees removed from the originals, goes belly up.

And, lest we forget, derivatives/assets is meaningful, but derivatives/capital is the ratio that we should really worry about.

Charts coming.

All the Pretty Butterflies: March 29, 2012

In typical end-of-the-quarter fashion, the markets seem to be running in place.  But, by one measure, the melt-up might have already finished.

Recall we were looking at 1419 as one of two possible tops (the other being 1433) when SPX was at 1402 back on March 23 [see: The Tipping Point.]   I mentioned it as a target of certain harmonic patterns.  We also recognized it as the .886 Fib price level of a small rising wedge within a larger rising wedge.

There are actually three potential harmonic targets suggested by the Butterfly pattern that features 1074.77 as its Point A and 1292.66 as its Point B.  All of them assume the pattern completes at the 1.272 extension; but, keep in mind that Butterflies can also complete at the 1.618 extension.  If you have no idea what I'm talking about, visit Crabs and Butterfly Patterns Explained for more info.

Like all harmonics, Butterfly Patterns begin at a meaningful peak or trough (though frequently you can find smaller patterns within patterns.)  The primary requirement is that the Point B be at the .786 Fib level.  Here are my three candidates for the pattern we've been watching for the past several months.

#1 is the most bullish and begins at 1370.  I like the fact that 1370 was the high for all of 2011, back on May 2.  But, it leaves us with a slightly less than ideal Point B -- 14 points below the .786 (1292 v 1306).  It would complete at 1451.

#2 begins at 1356 on July 7 and features a Point B only 4 points below its ideal .786 of 1296.19.  It completes at 1433.  Closer still.

 

#3 begins at 1347 and (at an intra-day high of 1292) Point B is 4 points above its ideal of 1288.74.  The closing price of 1284 was 4 points below.   This particular pattern completes at 1421.05 -- just 1.90 from the Mar 27 high of 1419.15.

Could 1419 have been the end of this wave?

I always like it when one harmonic pattern matches up with one or more other harmonic patterns and chart patterns.  Here's a channel I just can't get out of my head.

Seems just a little too coincidental that a TL connecting current prices to the 2007 high would be exactly parallel (log scale) to a TL connecting the two major bottoms of the past decade -- all at a time when we're:

• at .618 (in time) of the huge rising wedge dating back to Mar 2009, and;
•  within a stones throw of the .786 or .886 retrace (take your pick) of the 2007-2009 decline.

Here's a couple of charts with the Fibs thrown in.

 

If you're an überbull, there's a potential silver lining.  The May 2nd 1370 peak -- a .786 retrace of the 2007-09 drop, could be the Point B of a much larger Butterfly pattern.  If it were, we'd have a 1.272 extension up around 1823 and a 1.618 at 2137.  And, if you are an überbull, you'll probably want to use the arithmetic instead of log scale and draw your channels more like this:

Of course, that scenario would probably mean $8 gas, 12% T-bills and $3000 gold to go with our $20 trillion in debt.  But, that might just be the price of a "healthy" economy, huh Ben?

The Big Picture in DJIA: March 29, 2012

Big Picture: 

These are the channels that make the most sense to me at the present time.  The purple TLs are all parallel to the one connecting the two tops, and the red TLs are parallel to the ones connecting the bottoms.

As most investors know, the Dow has outpaced SPX, retracing about 87% of its drop from Oct '07 to Mar '09 compared to SPX's 82.7%.  There was a bigger divergence, however, with the 2007 top.  DJI completed either a Crab and/or Butterfly pattern -- extending nearly to the 1.618 of its drop, while SPX formed a double top. [see: Crabs and Butterflies Explained.]

Why the ambivalence?  DJI put in two potential Point B's.  One was at the .382 (marked A) which would indicate both Bat or Crab possibilities.  Remember, Bats complete at the .886 and Crabs to 1.618 or beyond. 

But the next turn came at the .786, which is a Fib associated with Butterfly Point B's.  Because Butterflies complete at either the 1.272 or 1.618 extension, this possibility didn't really change much -- just alerted us to the possibility that the 1.272 was also a possibility.  DJI barely paused at the .886, so the Bat was off the table and we could look forward to a double-top or beyond.

DJI got a good reversal near the previous high, and for a while the double-top looked like a possibility.  But, a good bounce at the .786 sent it back above the the top.  At this point, the 1.272 was a real magnet -- especially since we'd had a Point B at and a back test of the .786 Fib level.  Sure enough, 2,200 points later we got the 1.272 completion of the Butterfly and still had enough gas in the tank for a run at the 1.618 for the Crab to count as well -- coming in just 366 points shy.


Medium Close-Up:

DJIA came within 28 points of completing a Bat pattern (an 88.6% retracement of the Oct ’07 – Mar ’09 crash) on the 16th.  To be that close, after a 7,729 point drop and 6,719 point rise — is probably close enough (it’s about 87%).  We haven’t gone higher since (and, in fact, had retraced .886 of the subsequent drop as of yesterday's close for a small Bat not shown on the charts.)

Close-Up:

DJIA clearly broke the small yellow rising wedge this morning, but we've been faked out a few times in this non-stop meltup.   Stay alert to the possibility of a broadening of the wedge.

DJIA is almost to the .886 of the smaller rising wedge in both time (Apr 9) and price (13,357).  The Butterfly Pattern completes at 13,548, but that's some distance away from the Bat Pattern off the 2007 high whose .886 is at 13,317.

It’s entirely possible we’ll get both — with a reversal at 13,317 in the coming days (if we haven’t already seen it) followed by a break of the small rising wedge and subsequent back test to complete the Butterfly at 13,548.   One key is 13,000, because a break would turn this morning's dip into something bigger; a hold would permit the just-completed small Bat (from Mar 16) to extend into a Crab at 13,465.

The Big Picture in SPX: March 28, 2012

Big Picture:

The past twenty years can be viewed in terms of channels (both red and purple) and rising wedges.  Here, we see the smaller yellow wedge set up within the larger red wedge.  Both are fairly advanced (especially the yellow.)

We also have a red channel line from the Oct ’07 high connecting with current prices. I believe these channels are valid because they’re exactly parallel a trend line connecting the 2002 and 2009 bottoms.

Overall, the red channel lines have had significant influences on prices — particularly short and medium-term turns.  The purple channel lines have influenced many of the major turns.  SPX is currently at the intersection of red and purple channel lines.

Medium Close-up:

Zooming in, we can see some meaningful Fib ratios in the chart:

(1) The apex of the yellow wedge is near the Fib .886 (purple) of the Oct ’07 to Mar ’09 drop; it tags the red rising wedge at around May 7 at 1462.  Rising wedges rarely make it to their apex but tend to fall out around the .618 mark (in time.)

(2) there is a nice looking Fib time series defining major highs and lows (red.)  The series completes at the apex of the larger (red) wedge.  We’re within spitting distance of its .618, which is also very near the apex of the yellow rising wedge.

(3) there’s a well-formed Butterfly pattern that began July 4 at 1356 and made its low at 1074.77 in October.  It’s visible as the yellow Fib pattern on the chart; the 1.272 Fib is just overhead at 1433.11.

Close-up:

Using the October 1074 low as “0%” and the yellow rising wedge apex as the 100% mark for the Fib time ratio, we are currently between the .786 (Mar 21) and .886 (Apr 12) levels.  From a price standpoint, we’re at the .886 of the 1074 – 1464 rise (the yellow wedge’s price range.)

While any jolt to the markets could unravel this hugely overbought market, it’s just as likely we’ll go on to complete the Butterfly pattern at 1433 sometime in the next two weeks.  If so, however, we should see a mild correction first.

The key is the yellow rising wedge.  The bottom trend line is currently about 1382.  If we can stay inside a little longer, 1433 clearly remains on the table.

What do Bankers Dream Of?

When Wells Fargo CEO John Stumpf sleeps, he dreams -- like all good bankers -- about numbers.  He probably doesn't dream about the number 600 -- the number of foreclosure packages signed each day by his robosigners.  He probably doesn't dream about 14,420 -- the number of conveyance claims fraudulently submitted to HUD in exchange for $1.7 billion from the FHA [Inspector General report.] 

And, he almost certainly doesn't dream about his share of the laughably small $25 billion penalty he and his fellow bankers might have to pay to slough off legal liability for the millions of Americans they've helped make homeless (don't know why they're bellyaching...they're all getting $2,000!)

No, I imagine the number he fixates on is 35 -- the third rail around which his stock seems to go into spasms every time it gets close.   I'm exaggerating, of course; it's only happened three of the last four times since November 2007.  The other time, in September '08, the stock soared right through 35 to nearly 45.  That would be great -- except it plunged to 7.80 six months later.

See that yellow resistance line?  At least that's what we call it.  To Stumpf, it's a 625-volt reminder of all the ugliness of the past five years: bailouts, Occupy Wall Street protests, and that humiliating testimony before Congress (what's a fella gotta do to buy off a few Congressmen?)

Stumpf might be dreaming about 35 a lot this week, as the stock's edging toward that buzzing rail yet again.  It's really crummy timing for the stock to have completed a bearish Crab Pattern.

And, darn it, did the SEC have to pick this week to file that subpoena to compel him to hand over the documents he promised in regards to a $60 billion fraud investigation?  Now, with earnings coming up in a couple of weeks?

 

 

That reminds me of another number, 13 -- as in the number of times WFC got zapped after reporting earnings in the last 17 quarters.  Earnings reports that came in the vicinity of that third rail have been particularly eventful.

Let's not forget 6,867,990 -- the number of shares of Stumpf's WFC stock and options that'll be worth considerably more if the 35 price point is breached.  A 22 cent bump will make up for the horrendous pay cut he's suffered over the past two years (from $21.3 million to $19.8 million, and we all know how tough it is to live on a lousy $54,000 a day!)

Hey, how about $85 million -- the amount the Federal Reserve Bank fined Wells Fargo last year?

And, $25 billion -- the low-interest loan the Fed slipped Wells Fargo a few years back when its survival seemed iffy.

Which brings to mind $29.4 million, the amount the money-center banks spent on lobbying in 2010 (not including the ABA.)

Then there's $19.8 billion -- the amount of hyper-hypothecation exposure on Wells Fargo's books,  17% of Tier 1 capital?

Which reminds me -- $1,274,000,000 in pre-tax trading losses for 2011.

And, lest we forget -- $2.8 trillion notional in derivatives on the books.

I could go on all night, but I think you see where I'm going with this.  We should all keep John Stumpf in our thoughts and prayers; with all those numbers to think about, the poor guy might have trouble getting a good night's sleep.   Somehow, I think he'll manage as long as he sees $35 in the rear-view mirror...and soon.

Lots More Where That Came From

Not to be outdone, GS just completed a bearish Gartley Pattern on (need I say it?) strong negative divergence.

And, because Morgan Stanley wants to be just like GS when it grows up (rumor has it MS is negotiating an exclusive deal with The Grouch)  it's .51 away from completing its own Gartley at the intersection of fan lines off its Jun '07 high and Nov '08 low.

 

And, speaking of fan lines...

More later.

End of the Line?

JPM has had a phenomenal run of late, but a long term fan line off the Mar 24, 2000 all-time high should put an end to all the fun. 

It doesn't help that JPM also just completed a bearish Bat pattern and is back-testing an internal TL that dates back to 1996.

And, that over the last week, JPM has completed a Crab pattern way up in the tip of the Bat.

Dimon's pulled off some pretty slippery tricks in his tenure; we'll see if he can beat the odds this time.

Charts I'm Watching: March 26, 2012

UPDATE:  5:15 PM

Just got an interesting daily update from ISE, which publishes a very cool version of the put/call ratio.

"The ISE Sentiment Index is a unique put/call value that only uses opening long customer transactions to calculate bullish/bearish market direction. Opening long transactions are thought to best represent market sentiment because investors often buy call and put options to express their actual market view of a particular stock. Market maker and firm trades, which are excluded, are not considered representative of true market sentiment due to their specialized nature. As such, the ISEE calculation method allows for a more accurate measure of true investor sentiment than traditional put/call ratios."

Today's closing value for "all securities" was 182 -- the third highest value in the past year (though the intra-day high was 284.)

It's not shown on the chart below just yet.  But, if it were, you'd see that it's the third highest value in the past year.  The only values higher were 184 on Feb 8, 2011 and 202 on Jul 20, 2011.

The equities-only index closed at 410, which is literally off the chart (dates back to Mar '06).  The previous highs were 348 on Apr 15, 2010 and a cluster in the mid 300's in Dec 2010-Jan 2011.  Hmm...

Just noticed this post on Zerohedge that echoes these same sentiments.  A couple of the pretty pictures...

First, looking at Mutual Fund 1 Month Rolling Beta vs S&P 500 -- at record highs and well over 1x...

And, surging insider selling at record breadth...

Check out the Zerohedge article for more charts and interesting discussion.

UPDATE:  3:15 PM

SPX mainlining now, up 18+ and closing in on the .886 Fibonacci (1419.87) of the current rising wedge (with apex of 1464.27) we discussed last week.  There's also a channel line intersecting there, not to mention the .886 of the Fib time series of the wedge.

Up ahead, 1433 represents the 1.272 of the large Butterfly off the Jul 7 (1356) to Oct 4 (1074) decline.

Either target looks capable of being realized without upsetting the bearish divergence on the daily RSI - expanded in the chart below.

UPDATE:  2:15 PM

VIX is showing resiliency here, with the RSI channel theorized about a month ago and the RSI TL dating back to Oct 07 still holding.

UPDATE:  10:25 AM

From the bizzaro files, Fed Governor Plosser just quoted as saying GDP is on track to grow 3% and unemployment should fall below 8% -- but it'll be a challenge to get rates back up: "it's much easier to cut rates than it is to raise them."  Also, "inflation is unlikely to bit in the short term."   Really, Charles?  Call me naive, but I think rates would be very simple to get back up; the Fed could raise the discount rate and stop buying up every bond in sight.  The reality is that higher rates would swiftly destroy everything the Fed has worked to put into place.  Higher rates = music stops.

FLASH: Dallas Fed Manufacturing Activity in at 10.8 versus expected 16, prior reading of 17.8.

More from Bernanke's speech:  the nation's "weak housing market might be playing a role in holding down the labor market, but it is hard to see any concrete evidence of this in the data."  Since the surge in housing prices a few years back led to rapid growth in credit expansion/consumer confidence/retail sales/employment, is it that big a stretch to believe that a massive contraction in prices would lead to the opposite effect?

It doesn't take a PhD in economics to understand that Americans regarded their home equity lines as piggy banks to fund the purchase of everything from automobiles to big screen TVs, vacations to college degrees.  With more than a third of homes not worth the debt against them, of course spending is going to contract.  And, of course a consumption-driven economy is going to see negative employment effects.

The real question is whether Americans and American businesses can be tricked into believing the prophecy that things are on the upswing long enough for the prophecy to become self-fulfilling.  Regarding QE, the real question is how long the Fed can keep squirting lighter fluid into the fire before the fire travels up the stream and explodes the can in their face. 

Markets seem content to ignore the danger -- for now.  But, any significant shock could have disastrous results if the markets believe it will interfere with the Fed's ability to keep the game going.


ORIGINAL POST  8:30 AM

Bernake is speaking to the National Association of Business Economists this morning, expresses concerns about whether the employment picture will continue to improve.  Market picking it up as a sign of additional easing, with eminis up 9 and GC up 15, DX down .20.   Bonds not crazy about the idea, with the 10-yr tagging 2.30 a few minutes ago.  As discussed last week, this is the conundrum the Fed will increasingly face:  any move to stimulate the economy (or even hint at accommodation) threatens to boost rates at a time when we can least afford it.

Meanwhile, positive business sentiment numbers out of Germany (in major conflict with atrocious March PMI numbers), where Merkel floats the idea of maintaining the 200-billion euro EFSF to run alongside the 500-billion ESM after it's up and running.  This is a trial balloon that will be roundly criticized by Merkel's political rivals.  Tongues are wagging as to whether anyone other than banks benefited from LTRO.

More later.

A Tipping Point: March 23, 2012

Bears are understandably shell-shocked after the past three months.   Top picking has been a frustrating and humbling experience, as markets -- like an addict in search of his next fix -- have ignored everything but the promise of additional QE.  But, the improbable low-volume, non-stop melt up might finally be at a tipping point.

As noted in yesterday's post, several key indices have finally reacted off their harmonic pattern targets.

RUT completed a Crab Pattern within the last leg of a Bat Pattern and has yet to clear a key trend line off the May and July highs.  COMP completed a tiny Crab within a little Butterfly pattern and tagged a key trend line off the 2007 highs.  DJIA completed a Crab pattern just a few points away from completing a Butterfly pattern and large Bat pattern.

Each of the indices is showing bearish divergence on the daily time frame within an overextended rising wedge that's in danger of being broken -- but haven't broken yet.  In spite of the completed patterns, there are some potential bullish patterns, such as the Dow's Bat and SPX's Butterfly, that might take prices just a little higher.

I've spent the past several days wandering the charting desert in search of some sign of things to come.  I posted a bit the other day about the SPX wedge within a wedge and how we're at Fibonacci levels of time and price in each.   I started by charting some basic channels and fib levels, along with the rising wedges.

As we discussed the other day [see: Big Picture, Part 2], the smaller yellow wedge apex is not only right at the .886 of the 2007-2009 price decline, but also the .886 fib levels of the larger rising wedge apex.  On top of all that, it's also at the .618 of the large rising wedge in terms of time.  This is significant, because rising wedges commonly give up the ghost around 61.8% of the way to their apex.

And, within the smaller rising wedge, we can also see we're at important fib levels -- .786 in terms of price and .886 in terms of time.

All this is well and good, and we clearly got the reaction we were looking for when we were looking for it.   The key level coming up is the small rising wedge bottom at 1374.   If we take that out, we could find our way down to 1300 in a jiffy.  And, the bottom of the large red rising wedge is currently all the way down at 1165.

I know I don't have to remind anyone here that rising wedges can hang on for a long time -- especially lately.   And, as mentioned earlier, there are still some potential bullish harmonic patterns that could fulfill to the upside -- notably SPX 1419 and 1433.  And, sometimes harmonic reactions are pathetically small bumps on the road to bigger and better things.

************

Thus, the days spent wandering the desert.  And, let me be clear, this is pure spit-balling folks.  I've been looking at long-term patterns in the markets, trying to discern similarities that might offer a clue as to the big picture.  One era that fascinates me is the 1970s.

We had a decade-long war in Vietnam and an oil shock when OPEC imposed an embargo in response to our military support of Israel in the Yom Kippur War.  Oil prices went from $3/bbl in 1970 to nearly $40 in 1980.  The following chart, from the EIA and posted on Wikipedia, shows the blow by blow.  (For history buffs, there's an interesting chronology available here.)

Inflation went from 3.6% in 1973 to 11.8% in 1975 and 13.9% in 1980.   P/E ratios went from 17.7 in 1970 to 6.7 in 1975.  The 1-yr went from 4.62% in 1972 to 11.03% in 1974.  And, stocks were all over the map.  After gains of 25% from 1970-72, the S&P 500 had losses of 23% in 1973, 29% in 1974 and 14% in 1977; and, gains of 29% in 1975.

In short, it was an important inflection point. To Elliott Wave guys, it was an important turn in wave counts.  To all the rest of us, it was the payoff to The Great Crab.

What?  You don't remember The Great Crab?  Okay, so it's possible I just made that name up.  But, it's kinda catchy.  And, more importantly, it fits.

First, well... it's a Crab pattern.   It features a point B at about 50% of the XA price difference (for those who skipped the lesson, go back and read: Crab and Butterfly Patterns Explained.)   Second, it began in the Great Depression, so that gives the name a ring of authenticity.

And, finally, what else would you name a pattern that in 1937, after a 90% drop, 300% rally and subsequent 60% drop, pretty accurately predicted the following reversals at key Fibonacci points?

                                                       Fib.          Year       Decline

                                                      1.618         1956        19%
                                                      2.618         1961        28%
                                                      3.618         1969        36%


All that coolness aside, I believe the 1970s offer important clues to what lies ahead.  I'm doing some research that I'll publish in the next day or two that, quite frankly, is knocking my socks off.

Stay tuned.

Charts I'm Watching: March 22, 2012

ORIGINAL POST:

We're finally seeing reactions on the harmonic pattern completions we've been watching for what seems like forever [see: Everything's Coming Up Crabs.]

RUT completed a Crab Pattern (in red) within the last leg of a Bat Pattern (purple) off the 2011 highs.  It never has cleared the TL off the May and July highs.  The May 2011 high was a double-top to 2007's.

COMP completed a tiny Crab within a little Butterfly pattern and tagged a key trend line off the 2007 highs.

I call it a trend line because it's exactly parallel to the line connecting the 2002 and 2009 lows.  A reversal here would make for four touches -- i.e. a channel.  But, COMP could continue bucking its bearish divergence and go up to complete the larger Butterfly pattern (purple) at 3250-3295.

DJIA still hasn't made a new high since completing a Crab Pattern a stone's throw away from a Butterfly Pattern (purple) completion at 13,338.64.  We're still watching for a clean break of the rising wedge in the price chart and the trend line in the RSI chart.

 

 

Though, it's important to note that, at these prices, we came within 28 points of completing a Bat pattern (yellow) at the .886 (13,317) in the weekly chart.  That would make for a logical back test if/when the rising wedge finally breaks.  It might also be the 5th and final wave target if today's move stays within the wedge itself -- which is just as likely.

Coming up....SPX.