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ES and the Great POMO Rally
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ES and the Great POMO Rally

  #151 (permalink)
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Day 3 of selling on the ES has resulted in taking out all of February's gains so far. We haven't come into the 50 day MA yet but came close two times. At least there was an afternoon ramp up because for a while there, I was afraid the Fed may have lost control .

Still no change yet as we are above the 50 day MA and MACD is still well above the zero line. If it drops below 5, things could really start to get interesting though. I can also see if this is a breakdown, the market could chop around for a while until we see some MA's cross over and start acting as resistance. It's all too soon to tell though.

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  #152 (permalink)
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Private Banker View Post
Day 3 of selling on the ES has resulted in taking out all of February's gains so far. We haven't come into the 50 day MA yet but came close two times. At least there was an afternoon ramp up because for a while there, I was afraid the Fed may have lost control .

Still no change yet as we are above the 50 day MA and MACD is still well above the zero line. If it drops below 5, things could really start to get interesting though. I can also see if this is a breakdown, the market could chop around for a while until we see some MA's cross over and start acting as resistance. It's all too soon to tell though.

I think you might be right on a technical point of view. but if I look at fundamentals, the value of the market is at best just slightly overvalued. of course there are some concerns like usd, dept etc. but one factor we should not forget. the companies have a lot of cash. and if there is a breakdown, what smarter could they do than buying their own shares back? that would make the valuation even more attractive. nothing more important than shareholder value.

the selling we're seeing is not fundamental, it's simple fear imo. so the next few days will be interesting. will there be more selling or are we going to see some bargain hunters?

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  #153 (permalink)
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Return of the Zombie


As I figured, yesterday's bounce appears to have exhausted all of the selling (at least for now). ES has now retraced half way back from it's top and is at a decision point zone. Will we see renewed selling next week or are we going to continue marching along at 1 -2 miles per hour back up along the 10 day MA?

I did add a long term trend line on the MACD just to see market reaction. If you notice that back in Nov '10, the market almost broke down and the MACD bounced off of the trendline. When looking at it now, it has completely blown through it. I'm not saying it's a change in trend entirely but just an interesting thing to watch going forward.

Next week will be interesting for sure.

Cheers,
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  #154 (permalink)
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elof View Post
predictions based on fundamentals has nothing to do with trading.

Markets are dynamic, they are regularly changing, based upon shifts in interest rates, currencies, macro- economic conditions, commodity prices, sentiment, and institutional and retail participation. In the final analysis though, the laws of supply and demand will eventually determine what is fair value.

So, I have to disagree with you, because fundamentals do indeed have something to do with predicting what is going to happen with the markets. However predictions, in of themselves, have nothing to do with trading. A trader does not predict the market, in so much as he observes and identifies what is doing and then reacts accordingly. This means keeping an open mind to market action and being ready to switch from long to short as conditions dictate.

So one must keep an open mind to the fact that, stocks have recovered, but the economy has not. And that stocks have rallied 106%, and retail money is finally flowing back into the market.

While the market did hold last months high, the monthly R1, and the bottom of the Bollinger Bands on the ES daily, GDP was revised for the worse, and the responsibility is now on the bulls to prove they can still shrug off bad news. Today's rally does suggest that we will test the 1340 level, however this may only serve to relieve the oversold condition, shake out the shorts, and trap some new bulls in the process.

Anyone with half a brain realizes that the only reason we are trading at current levels is because of the melt-up supported by the liquidity provided by QE2. However, the last 2 weeks, banks stashed $122MM at the Fed. Total POMO Treasury purchases were consequently only $48 billion. This resulted in a net liquidity drain of $24 billion. This is a trend that has continued for 6 weeks now.

Considering that entire rally was fueled by the POMO purchases that were made possible by the Fed's creation of liquidity, what happens when that liquidity disappears or the PDs decide not to buy anymore high beta tech stocks and stock index ETFs?

BTW: I am not predicting anything...just making an observation.

http://finance.yahoo.com/tech-ticker/bob-prechter-we%27re-still-in-a-massive-bear-market-and-stocks-will-crash-to-new-lows-535963.html?tickers=^dji,^gspc,spy,^ixic,qqqq,gld


Last edited by tigertrader; February 25th, 2011 at 09:29 PM.
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  #155 (permalink)
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I agree that if we don't have QE3 and QE4, then we're in for a bad, bad ride down. We've pretty much painted ourselves into a corner where we have to do something next, more money to PD's to buy everything in sight.

So if we commit to QE3 and QE4, and try to taper it off a bit each time, I think it is still bad news because the dollar is so devalued that there will at some point be a breaking point.

But the fact remains -- as traders -- trade what you see. Yes, I see the economy is in the gutter. But I am not trading "the economy", I am trading a specific set of instruments. It does not matter "why", it only matters "what". If the S&P 500 is making new highs, you can't short "the economy is going to take a nose dive again". You should be long until the the S&P is no longer making new highs. Maybe you call it a cautious long, but you definitely don't call it a short

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  #156 (permalink)
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I agree that if we don't have QE3 and QE4, then we're in for a bad, bad ride down. We've pretty much painted ourselves into a corner where we have to do something next, more money to PD's to buy everything in sight.

So if we commit to QE3 and QE4, and try to taper it off a bit each time, I think it is still bad news because the dollar is so devalued that there will at some point be a breaking point.

But the fact remains -- as traders -- trade what you see. Yes, I see the economy is in the gutter. But I am not trading "the economy", I am trading a specific set of instruments. It does not matter "why", it only matters "what". If the S&P 500 is making new highs, you can't short "the economy is going to take a nose dive again". You should be long until the the S&P is no longer making new highs. Maybe you call it a cautious long, but you definitely don't call it a short

Mike


I agree with, both your thoughts on the market and on trading methodology, but disagree with your approach, which I find can be somewhat limiting.

True we are technically still in the midst of a very strong cyclical rally, and the probability of the market trading higher after Friday's action is relatively high - let's say 70-80%.

So in the absence of any more bad news, bullish momentum intact, the odds are in favor of the trend continuing.

On the other hand, if there is more negative geo-political news, the potential move to the downside could be dramatic, while the potential move to the upside seems very limited after having already rallied over 100%.

The most probable outcome is the market goes up, but the expected value is quite negative, because the outcomes are asymmetric. The bullish outcome may have a high frequency, but the expected value is negative.


Market goes up - 70% probability +3% outcome +2.1% expected value
Market goes down - 30% probability -25% outcome -7.5% expected value
Total - -5.4% total expected value


This not to say, that in anticipation of price exhaustion in the SPX, and the potential for another collapse, I am going to trade the market solely from the short side, or load up on a short position. But to take advantage of my perceived negative expectancy, I will put on a relevant options position, as a speculative adjunct to my "normal" intraday trading methodology. If I buy premium, my risk is defined, and in a low volatility environment, my opportunity for profit has increased beyond the mere directional play of the underlying. If the trade works I stand the very real chance of making 20X-30X and if it doesn't, I lose the 1% or 2% that I risked when entering the speculative trade. Assuming a normal probability distribution, this strategy should work 20% of the time. However, It's not the frequency of the correctness that matters, but the magnitude of the correctness that matters.


Last edited by tigertrader; February 27th, 2011 at 10:25 AM.
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  #157 (permalink)
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Interesting day for equities. ES chopped around before making a gap fill followed by an afternoon ramp. Definitely no surprise by that however. It is clearly evident that the only concern by the Fed is to keep propping up the stock market. Meanwhile, the USD has broken below support and could be in big trouble now.

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  #158 (permalink)
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Private Banker View Post
Interesting day for equities. ES chopped around before making a gap fill followed by an afternoon ramp. Definitely no surprise by that however. It is clearly evident that the only concern by the Fed is to keep propping up the stock market. Meanwhile, the USD has broken below support and could be in big trouble now.


Going into today's trade in the ES there was an 80% chance of a range day. Market opened higher between the R1 and R2 leaving us with an only 30% chance the market would test the R3. Taking this into account along with the bearish seasonality associated with the last day of the month; the sell-off made sense. Conversely, strong bullish seasonality associated with the first day of the month, meant the market would probably rally late today, or in the evening.

Of note is the continued positive correlation with treasuries, and as you noted the US Dollar Index, which is close to making new lows. ISM tomorrow, Humphrey-Hawkins bullshit fest next, Unenjoyment on Friday, and of course the ever present chance that the other sandal will drop in the Middle East/ North Africa.

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tigertrader View Post

Going into today's trade in the ES there was an 80% chance of a range day. Market opened higher between the R1 and R2 leaving us with an only 30% chance the market would test the R3. Taking this into account along with the bearish seasonality associated with the last day of the month; the sell-off made sense. Conversely, strong bullish seasonality associated with the first day of the month, meant the market would probably rally late today, or in the evening.

Of note is the continued positive correlation with treasuries, and as you noted the US Dollar Index, which is close to making new lows. ISM tomorrow, Humphrey-Hawkins bullshit fest next, Unenjoyment on Friday, and of course the ever present chance that the other sandal will drop in the Middle East/ North Africa.

Well said! I agree with those thoughts. This should be an exciting week. "The Bernank" will be in the hot seat tomorrow and Wednesday. There was a great post on Zerohedge that summarizes the POMO thus far.

Cheers,
PB

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  #160 (permalink)
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1313.00 (ESH) is a critical area....must hold for the bulls to remain in control, otherwise it's lights out!

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