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

  #321 (permalink)
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Tiger, how do you see the market going from here? Are there any indicative signs of which direction most traders are betting on?

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  #322 (permalink)
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jonc View Post
Tiger, how do you see the market going from here? Are there any indicative signs of which direction most traders are betting on?


As I stated previously, this week is a slow news week and earnings announcements begin to come out next week. However, April is a month with an attendant bullish seasonality, so the market could have surprised, and taken off this week, leaving the momentum chasers playing catch-up. Instead the market has stalled and is chopping around in a relatively narrow trading range. We've already tested the top of the trading range on very light volume, so I wouldn't be surprised to see the market sell-off and test 1300 once again. As hard as it is to justify fundamentally, price action and market structure is bullish, and it is up to the bears to prove the bulls wrong. As you can see from the charts below the put-call ratio reflects a short options bias and the chart of the COT shows that both large specs (smart money) and to a greater extent, small specs (dumb money) are short, while the commercials are long. At least from a sentiment standpoint, the market is not overbought, and has room to move to the upside if the bulls wish to mount an offensive.

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ES and the Great POMO Rally-sp500-vs-put-call-ratio-equity-50d-rsma-params-3y-x-x-20ma.png   ES and the Great POMO Rally-72dd72b2ed31066256914450fa38f308.png  
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  #323 (permalink)
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Took profits on my longs this morning against my 1337.00 upside target, and I am beginning to build a small short position. Still a cautious bull, intermediate term, but believe there may be an opportunity here for a quick contra-trend, short term trade. A break below the RTH only R1 at 1332.50 within the first hour of trade would confirm the short play and warrant an add to the position. Will also be keeping an eye on the TF and 6J, as the small caps continue to make new highs. The current rally seems to have taken on another source of strength besides the Fed's POMO based asset purchases. The carry trade has shifted back to the yen from the dollar (for obvious reasons) and domestic small caps,(instead of emerging country investment) now appears to be the place where hot money is flowing.


Last edited by tigertrader; April 6th, 2011 at 10:49 AM.
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  #324 (permalink)
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ES came within 2 ticks of reaching the 1337.00 target that I had been looking for since last Friday, and as anticipated, sold off early in the day filling the day gap to the tick at yesterday’s low of 1327.00. The market then staged a 7 point afternoon rally which tested the low of the opening range, only to sell off after the end of the cash trade to close in the lower half of the day’s range. Bonds were destroyed, as was the bearish sentiment in equities that I highlighted last night. In the latest Investor’s Intelligence survey, bears declined by 32% from 23.1% to 15.7%. As was mentioned in the Bespoke article, "Going back to 1975, there have now been just 16 other periods where bearish sentiment declined by more than 30% in a single week." The chart below illustrates the S&P’s performance following these large drops in bearish sentiment the past 11 times they occurred. The average performance over a 1-10 week period was -0.92% to -2.07%. I have also included a chart of the market leading TF to demonstrate a confluence of Fibonacci levels at the 860.00 level. Along with the 61.80 Fib extension that is shown in the chart, is an even more important 1.27 Fib extension, from the January lows to the February highs to the March lows, that comes in at 860.00 also. However, in direct opposition to the possible-market-top theory, is a chart of the 6J that shows a dramatically falling yen, which should insure the yen-carry-trade remains strong and further funding for the U.S. equities rally will continue. That being said, earnings season begins next week and it is still very early in the month of what is a seasonally bullish month. Therefore, there is still plenty of time for the bulls to assert their dominance. If indeed, this is not the top, then based on today’s price action I would expect a quick flush of the weak longs down to at least the weekly pivot @1320.00 if not all the way down to the low 1300’s, followed by an immediate bull reversal. 1300.00 should be the last line of defense for the bulls.

Attached Thumbnails
ES and the Great POMO Rally-investors-intelligence040611-bs.png   ES and the Great POMO Rally-returns-bullish-peak_0.jpg   ES and the Great POMO Rally-tf-06-11-daily-4_6_2010-4_7_2011-rut.jpg   ES and the Great POMO Rally-6j-06-11-daily-4_6_2010-4_7_2011-yen.jpg   ES and the Great POMO Rally-dow.jpg  

Last edited by tigertrader; April 7th, 2011 at 10:08 AM.
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  #325 (permalink)
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As witnessed, we've seen a significant bounce in equities off of the 100 day moving average. The volume has been dismal however and we may be seeing a round top forming on the ES which is about halfway through that potential formation. Should this follow through, we could see selling pressure coming back into the market.

At this point, I'm neutral with no swing position in place after being stopped out on my last remaining small swing short position. Should we see a follow through in this potential set up, I'll be looking to establish another short position. The timing could coincide with the Fed's announcement of providing further liquidity to the market via QE3. If that does not come to fruition (no QE3), there may be a knee jerk reaction and see major selling in equities and treasuries. The Fed has painted themselves into a corner and will need to be careful with their next step.

Bonds appear to have started a new round of selling with the MACD crossing above and back below the zero line with the moving averages crossing back over to the down side. This could be in anticipation of the Fed's announcement as well. The USD is following suit however and hovering around it's recent low. I was anticipating a bounce but there appears to be no interest in taking it higher at this point.

Meanwhile, energy commodities and precious metals have continued to take higher levels out as inflation in the things that actually matter are ripping higher in the face of the Bernank.

Like I've said before, what we are seeing in today's markets will go down in history.

Best,
PB

Attached Thumbnails
ES and the Great POMO Rally-2011-04-07-es.jpg   ES and the Great POMO Rally-2011-04-07bonds.jpg   ES and the Great POMO Rally-2011-04-07-usd.jpg   ES and the Great POMO Rally-2011-04-07-cl.jpg   ES and the Great POMO Rally-2011-04-07-gold.jpg   ES and the Great POMO Rally-2011-04-07-silver.jpg  

Last edited by Private Banker; April 7th, 2011 at 09:33 PM. Reason: Typo
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  #326 (permalink)
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As was anticipated in last night's commentary, the market flushed out the weak longs, stopping short of the weekly pivot @1320, as the low 1320's were aggressively bought and finished off with an immediate bull reversal. There have now been 5 days where the market traded above 1330 and failed, leaving us with the burning question, "Are we stalling at the highs, or refusing to pullback even enough to fill last Wednesday's gap up opening (before moving higher)?

As short interest has dropped off significantly and today's flash break was far too quick to trap any new shorts, it does not look like there will be any kind of short squeeze taking place. Therefore, we must still remain vigilant of another shakeout that would fill the previously mentioned gap and perhaps test the 20EMA@ 1315.00, (with the last line of defense still @1300.00 at the confluence of monthly PP and 50EMA). The dollar still looks poised to test 75.00 while today's quake in Japan will put more pressure on the yen, both of which are short term bullish U.S equities and supports the view for new material highs.

While QE2 may end in June, the Fed’s near zero interest rate policy(ZIRP) may continue ad infinitum, or at least until inflation is actually the result of income growth and economic growth instead of monetary policy. Once again, Keynesian money printing/credit creation has been substituted for actual wealth creation. And once again, it has led led to massive debt across private and public sectors, as nominal income not only remains flat, but in real terms is contracting at a 2.3% annual rate. True, corporate profits are up and are close to all-time highs as a percentage of GDP, but this does not necessarily reflect a robust economic recovery as evidenced by the still depressed housing market. Strong control over the balance sheet and cheap labor costs due to wage concessions and layoffs, has resulted in lower unit labor costs and higher productivity. However, while there has been an extraordinary recovery in corporate profits, top line growth has not been spectacular, and bottom line growth has not led to job creation.When QE2 ends, the business cycle should return to normal, and just like the market does so often, profits should revert back to their mean, leaving nowhere for valuations to go, but down. The burning question now is, " Is that going to happen tomorrow, April 27th, the end of June, in 6 months , or a year from now.

Attached Thumbnails
ES and the Great POMO Rally-es-06-11-daily-4_8_2010-4_8_2011.jpg   ES and the Great POMO Rally-es-06-11-135-min-4_7_2011.jpg   ES and the Great POMO Rally-tf-06-11-daily-4_7_2010-4_8_2011.jpg   ES and the Great POMO Rally-es-06-11-weekly-week-15_2006-week-14_2011-week.jpg  

Last edited by tigertrader; April 7th, 2011 at 11:05 PM.
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  #327 (permalink)
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tigertrader View Post
As was anticipated in last night's commentary, the market flushed out the weak longs, stopping short of the weekly pivot @1320, as the low 1320's were aggressively bought and finished off with an immediate bull reversal. There have now been 5 days where the market traded above 1330 and failed, leaving us with the burning question, "Are we stalling at the highs, or refusing to pullback even enough to fill last Wednesday's gap up opening (before moving higher)?

As short interest has dropped off significantly and today's flash break was far too quick to trap any new shorts, it does not look like there will be any kind of short squeeze taking place. Therefore, we must still remain vigilant of another shakeout that would fill the previously mentioned gap and perhaps test the 20EMA@ 1315.00, (with the last line of defense still @1300.00 at the confluence of monthly PP and 50EMA). The dollar still looks poised to test 75.00 while today's quake in Japan will put more pressure on the yen, both of which are short term bullish U.S equities and supports the view for new material highs.

While QE2 may end in June, the Feds near zero interest rate policy(ZIRP) may continue ad infinitum, or at least until inflation is actually the result of income growth and economic growth instead of monetary policy. Once again, Keynesian money printing/credit creation has been substituted for actual wealth creation. And once again, it has led led to massive debt across private and public sectors, as nominal income not only remains flat, but in real terms is contracting at a 2.3% annual rate. True, corporate profits are up and are close to all-time highs as a percentage of GDP, but this does not necessarily reflect a robust economic recovery as evidenced by the still depressed housing market. Strong control over the balance sheet and cheap labor costs due to wage concessions and layoffs, has resulted in lower unit labor costs and higher productivity. However, while there has been an extraordinary recovery in corporate profits, top line growth has not been spectacular, and bottom line growth has not led to job creation.When QE2 ends, the business cycle should return to normal, and just like the market does so often, profits should revert back to their mean, leaving nowhere for valuations to go, but down. The burning question now is, " Is that going to happen tomorrow, April 27th, the end of June, in 6 months , or a year from now.

I just wanted to thank you for your analysis, it seems like you really have a grasp of what is going on.
I look forward to your future posts
P.S I know Pb will see this and I wish to thank you as well

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  #328 (permalink)
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For the sixth consecutive day, the market revisited the 1333-1336 area, only to be summarily rejected and sent packing to lower levels, coming within a few ticks of filling the aforementioned gap and testing the 50% retracement level (1300-1337). This of course leaves us wondering, “ Are the bears finished, or is there more to come?” In any event, the bears must certainly feel emboldened after today’s performance, as they head into next week’s earnings season, options expiration, and CPI report.

The dollar continued it’s descent and closed near the 75.00 level, while bonds found support near the monthly S1, and in what may be considered a very liberal interpretation of an inverted H&S formation, may be hammering out a short term bottom.The bulls meanwhile, might be starting to doubt themselves with crude topping $113.00 a barrel, gold reaching 1475.00, and the CRB index making new all time highs.

If bonds firm up and accept, and rates fall while the FEd maintains it’s near ZIRPolicy, then equities and commodities will still make sense to own from an asset allocation standpoint (for the near term), and barring any surprise disappointments in earnings, the market should make new material highs next week. Technically, the market is very strong across all time frames. Price has been in a virtually linear advance since last July, and is now hovering just below the next Fib level (see the last chart below). Since the post crash bottom was made in 2009 price has been turning at major Fibonacci retracement levels, and a break above that level would be near term very bullish, with little to no resistance clear on up to the 2007 top. But, on the other hand, a turn down from that Fib level would mark the end of this uptrend.

Attached Thumbnails
ES and the Great POMO Rally-es-06-11-daily-4_9_2010-4_9_2011.jpg   ES and the Great POMO Rally-zb-06-11-daily-4_9_2010-4_9_2011.jpg   ES and the Great POMO Rally-dx-06-11-daily-4_9_2010-4_9_2011.jpg   ES and the Great POMO Rally-cl-05-11-daily-4_9_2010-4_9_2011.jpg   ES and the Great POMO Rally-crb.gif   ES and the Great POMO Rally-gc-04-11-daily-4_9_2010-4_9_2011.jpg   ES and the Great POMO Rally-es-week-14_2011fibonacci.jpg  

Last edited by tigertrader; April 9th, 2011 at 12:06 PM.
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  #329 (permalink)
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Just a technical note

When comparing absolute values over a longer period, merge-backadjusted charts can be misleading. Although they display the relative size of swings accurately and can be used for Fibonacci analysis, they do not display absolute levels in a correct way. The effect is worst for contracts that are rolled monthly and have a permanent contango such as CL.

But even for DX I would not trust in a backadjusted contract, although it is only rolled every 3 months and the offsets are probably small as they are result of different interest rates, which have all come down recently.

Therefore for charts with a lookback period longer than 3 or 4 contracts, it is probably better to rely on continuous contracts.

The chart below shows a continuous contract for DX. I think that it will probably hit the first target and then may test the lows of 2008.

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ES and the Great POMO Rally-dx-weekly-week-45_2007-week-14_2011.jpg  
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POMO Rally and the Fundamentals


Some links allowing a fundamental view on the Dollar Index.

http://www.cbo.gov/ftpdocs/117xx/doc11705/Budget_Chartbook_Show_SlideShare.pps

http://www.cbo.gov/ftpdocs/117xx/doc11705/Economics_Chartbook_Show_SlideShare.pps

The Only Two Charts That Matter For The US, And A Q&A On The Fiscal "Debate" From Goldman Sachs | zero hedge

For 2010:

-> Net Business Investment below 1% for the first time during the last 60 years
-> Highest Long Term Unemployment since 60 years
-> Highest Vacancy in Housing Units since 45 years
-> Worst Budget Deficit since 40 years exceeding 10% of GDP
-> Stocks and Commodities are rallying

Can you imagine a US Dollar Index at 40?

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