Financials: End of the Line...Again?

Financials have had a great run ever since we called the June 4, 2012 bottom [see: So Crazy, It Just Might Work].  But, all good things must come to an end.  I'd give them another few days/points at most.

I had jumped on the short side Mar 27, 2012 [see: End of the Line and Lots More], riding GS, MS and JPM down around 30%.

JPM:       46 – 32 = 31%
GS:       127 – 92 = 28%
MS:    20 – 12.50 = 38%

On June 5, we loaded up on the long side.  Our targets, as posted that day:

JPM:  today’s close = 31.99, price target = 38.69 (+21%)
C:       today’s close = 25.75; price target = 34.79 (+35%)
BAC:    today’s close = 7.10; price target = 11.34 (+60%)

Obviously, those targets proved to be a little conservative.  JPM reached its target by Aug 21, consolidated for 2 weeks, then zoomed even higher - reaching 49.31 today and finally (after 4 near misses) reaching the .886 retracement of its 53 to 14 plunge.

C reached its 34.79 target on QE3 day (Sep 14 -- lovely being able to dump all those crappy MBS on the Fed) backed off a few points, then proceeded to rally up to today's high of 44.50.

It only ever recovered 7.95% of its 2007-2009 plunge from 570 to 9.70 (adjusted for reverse splits) and is struggling to reach the .786 of its swan dive from Jan to Oct 2011: 51.50 to 21.4. If the .786 at 45.06 doesn't do the trick, the .886 at 48.07 should.

And, just today, BAC came within a nickel of the 50% retracement (12.39) of its post-2009 high.  It reached our 11.34 target in mid-December.

If it gets past 12.67, it could still take a run at 14.13.  But, it won't be easy.

Most of the financials are in a similar situation -- at or near major resistance either from Harmonic or Chart Pattern targets.  But, it's XLF itself that looks shakiest.

continued on pebblewriter.com...

AAPL: Breaking Out?

~reposted from pebblewriter.com

AAPL has bounced nearly 50 points since its Jan 25 low, leading many to wonder whether the worst is over.  When I started this post about a week ago, all the talking heads were talking "breakout."  We'll give the old crystal ball a polish and see whether that's likely.

When I posted that AAPL seemed to finding support back on the 24th, it was because of the long-term channel (in purple, below) that's guided its upside since the year 2000 [see: That All You Got?] The top of it, by the way, is up around 1775.

AAPL bottomed the next day at 435 (one point from our Nov 27 forecast), and obviously still hasn't broken that channel.  The channel top, by the way, is currently up around 1880.

As we've noted before, there are other long-term channels at play, too.  Note the white channel casts a rather bearish pall, while the yellow channel promises at least a bounce here.  So, which to believe?

GETTING HERE


We've been very fortunate in forecasting AAPL over the past several months, calling several significant tops and bottoms with decent accuracy.

Nov 8:  Harmonics Are Your Friend:  

It looked like AAPL was about to bottom out, followed by a sizable bounce.

"AAPL should get a brief bump higher as SPX does — perhaps to 600 or 620.  Of course, if it stalls there, it will have formed 5/6 of a huge H&S pattern... "

It bottomed 6 sessions later when the S&P 500 dropped down to tag our 1344 target  [see: Charts I'm Watching Nov 15.]  From there, we were looking for a bounce to 600.

Nov 27: Update on AAPL:

As AAPL approached our 600 target, I anticipated a reversal and completion of a Head & Shoulder Pattern that would bounce first at the neckline before plunging below.

"A reversal here could quite likely spell a return to the channel bottom — which will be around 434...
...it’s easy to imagine a scenario where prices drop to [the neckline at] 500 into the end of the year, but can’t quite seal the deal on the H&S pattern...
If, on the other hand, AAPL breaks down below [the neckline], look for a back test followed by a more serious plunge."

AAPL topped out two sessions later at 594 and plunged to the neckline at 501 where it failed to "seal the deal,"  bouncing for two weeks before finally falling below the neckline on Jan 15.

It back-tested the neckline for a week before taking a "more serious plunge" down to 435, one point from our original Nov 27 target.

GOING FORWARD


The purple channel has done its job so far.  Can it continue to stave off the damage of the completed Head & Shoulder Pattern?  H&S Patterns commonly back test their necklines.  Back tests can even exceed the neckline, as has AAPL's in several cases.

As we've discussed many times, AAPL has been in a fairly tight price channel all the way down from 705 (below, in white.)

The upper bound of this channel intersects with the H&S neckline at about 498-500 around Feb 19 (there is some wiggle room, depending on exactly how the channel is drawn.)  This likely represents the extent of any short-term upside.

As for the downside, the white channel midline intersects with the purple channel at about 450-452 around Feb 20.  The white upper bound intersects with the purple channel bottom  465 on Mar 18.

But, note the large red falling channel.  It's dicey to consider it well-established, since the "top" consists of only one tag.  But, it looks to me like it has potential over the medium-term.

Today, AAPL is testing its 25% line; and, a close above 473 or so would be positive -- arguing for the more bullish of the two scenarios above.

The daily RSI recently poked up through the white midline and the yellow 75% line, but appears to be backtesting both.  This would be consistent with a dip to 450, where AAPL could back-test the white price channel midline and the purple channel bottom (the purple circle.)

From there, the top of the yellow RSI channel beckons -- which probably corresponds with a return to test the neckline around 500.  As noted above, this could occur as soon as Feb 19 if prices are to remain in the white channel.

And, what if prices break out of the white channel?  Keep an eye on the RSI.  A break above the neckline would probably require a break out from the yellow RSI channel.  While, remaining in the yellow channel probably means a period of consolidation until early May, when the purple channel and neckline intersect at about 490.

One other issue often discussed is the expiration of the 30-day wash sale period.  The biggest volume spikes in the past few months were the plunges of Nov 16, Dec 6, Dec 14 and Jan 24-25.  So, the only remaining relevant buyers who might rush back in are those who sold in the 435-465 range on Jan 24-25.

Since the stock has gained a few points since then, these sellers might be expected to believe the worst is over and that it's safe to re-enter at these levels -- especially since the rest of the market is setting new highs.

continued on pebblewriter.com

Is It or Isn't It (a Recession)?

~reposted from pebblewriter.com...

ECRI's Weekly Leading Indicator (WLI) came out Friday at 130.2 -- up from 129.6 the week before.  Further, they reported that the index's annualized growth rate increased from 8.2 the previous week to 8.9% -- the highest since May 2010.  I wondered: are they retracting their Sep 2011 recession forecast?  Are things really getting better?

CAN'T WE ALL JUST GET ALONG?
There's currently an argument raging between various economists and analysts as to whether the US is still in/dipping back into a recession or is on the mend. ECRI is pretty sure we're in one, while folks like Doug Short and, of course, the mainstream media think not.

There's no question that we've seen an uptick in several economic measures. My own thesis is that most of these have been not secular, but cyclical swings.  In other words, I don't yet see evidence of a sustainable trend change, only natural swings from one side of a channel or wedge to the other.

Here's an example I posted last week. Total Confidence has traced out a pretty solid-looking channel, while the Present and Expectations indices have formed expanding wedges (and are nowhere near their upper bounds, especially given the recent downturns.)

 

Hardly a day goes by when I don't second guess myself.  Is all the "good news" just one big, well-coordinated head fake or am I missing something?  I spent much of the weekend studying ECRI's historical WLI (who says technical analysts don't live exciting lives!?) and found a lot to think about.  First, a brief primer on Harmonics.

HARMONICS

Regular readers of pebblewriter.com (heck, even the irregular ones) know all about Harmonics and that the corrections experienced in April 2010, May 2011 and Sep 2012 correspond to the important Fib levels of 61.8%, 78.6% and 88.6%.

For the uninitiated, measure the drop from SPX 1576 (Oct 2007) to 666 (Mar 2009) and multiply it by a Fibonacci 61.8% and you get 1228.74.  SPX reached 1219.80 in April 2010 (within 10 points) and promptly sold off by 17% over the next three months.

In May 2011, SPX peaked about 10 points away from the 78.6% Fib level (completing a Gartley Pattern) and plunged 21.6%.  And, in September 2012, SPX reached the 88.6% Fib level (completing a Bat Pattern) and corrected by almost 9%.

Those of us who follow Harmonics were well aware of each of these downturns well in advance [see: HERE, HERE and HERE] and profited nicely from the market's plunges.  Those who rely solely on fundamentals or [involuntary shudder] the mainstream media...not so much.

THINGS THAT MAKE YOU GO "COOL!"

While I had noticed the WLI's channel-like general decline before, I never noticed that it also complied with the rules of Harmonics.  From its all-time high of 143.73 in Jun 2007, the WLI plunged to a low of 105.40 in Mar 2009.

Like SPX, it found its footing (thanks to QE1) and started higher.  Its first big pause was in Oct 2009 at the 61.8% Fib level.  It paused again in Jan 2010 near the 70.7% Fib, and eventually reached the 78.6% level in April -- completing a Gartley Pattern as SPX had finally retraced 61.8% of its drop.

One could infer from the mismatched Fib levels that the economy -- as measured by ECRI's leading indicators -- was ahead of the market at this point. The WLI had retraced 78.6% of its drop, while SPX had only retraced 61.8%.  In any case, they both suffered from the removal of the QE drip - SPX shedding 17% and WLI 11%.

When the Fed realized their patient would flatline without more QE, they were back with QE2.  The market took off, reaching the 78.6% Fib in May 2011.  This also completed a Crab Pattern, a 161.8% extension of the amount of the Apr-Jul 2010 slide.

The WLI, however, retraced only 78.6% of its slide since its 2010 high.  In other words, the market was now officially ahead of the economy.

Following the expiration of QE2, SPX plunged 21.6% to 1074 through October 2011, while WLI gave up 8.9%.  From there, SPX climbed to 1474 primarily on Fed jawboning and promise of more QE -- which it finally delivered the day before the 1474 high.

The timing was no doubt an effort to send the SPX soaring right through the 88.6% Fib retracement of the 1576 - 666 crash.  I seriously doubt that "two points over" was what they had in mind (the market sold off anyway, correcting a respectable 8.8% to 1343.)

The WLI, in the meantime, topped out at 127.77 -- only an 88.6% retracement of its decline from its previous high in 2011.  Again, the market was outpacing the economy.

IS IT OR ISN'T IT?

The world of market prognosticators is, as always, divided.  There are those who believe the economy is improving, and the market - as a leading indicator itself - is all the proof we need.  Then, there are those who believe the market is priced well in excess of levels justified by the underlying economy -- which remains in or is dipping back into a recession.

Whether QE has "saved" the economy or not, I don't know of any respected economist or technician who doubts that it has significantly goosed (i.e. "manipulated") the markets. And, we should pay attention to the disconnect between the markets and the economy as evidenced by the SPX/WLI comparison.

The WLI just hit an important Fib level (88.6%) after demonstrating that it does, indeed, pay attention to such things.  This occurred at the same time that the S&P 500 hit several important Fib levels and is thus, by my reckoning at least, poised to correct [see: Satisfaction.]

We all know the old truism "the market isn't the economy." However, another quarter of negative GDP following the tax hikes recently enacted and spending cuts in the works would certainly remind investors that the market and economy are, indeed, joined at the hip.

I care about the economy because I have children.  The Fed's unprecedented experiment in QE will quite possibly end very badly for the country, for my children and for yours.  But, there ain't much We the People can do to influence Fed policy.  They don't answer to us or our political "leaders." So, we play the cards we're dealt.

As an investor, my goal is to capitalize on whatever the market throws at us -- regardless of how manipulated it might be, and regardless of what economists call the current business cycle. If depression or hyper-inflation come along, we'll hopefully see it coming and be well-positioned.

Are we still in or dipping back into a recession? Will the current QE4-ever result in another 2009-2011 run, or does the market's yawn last September signal the end of QE's effectiveness?  We'll find out in time.  In the meantime, we have some very good tools at our disposal that have provided excellent returns in a very difficult market.  I'll continue to call it as I see it, and appreciate having you all along for the journey.

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