Slope Of Hope with Tim Knight

Testing the 200 DMA (by Springheel Jack)

2012-06-04T05:37:25-07:00

SPX closed below the daily 200 SMA (200 DMA) on Friday, though not yet with a conviction break. If we see more downside today then I have two main support levels below before we see a test of channel support from the 2009 low in the 1180 area. The first is in the 1250-60 area, which was support for the 2011 H&S, and the next is in the 1210-20 area, with the 2010 high at 1219.80, key resistance last summer before the October low, and the technical target for the bear flag on SPX that broke down last week. I've marked these on an updated version of the weekly chart that I posted on Friday morning:

On the SPX 60min chart I don't yet have a decent declining resistance trendline, and I'm reminded of the comment I made last time SPX was in this area in December that this is often a sign that the trend is still in too early a stage to have developed a decent support or resistance trendline, but I do have a decent quality support trendline in the 1270 area today. If we reach it and bounce there I would be looking for a test of declining resistance in the 1300-10 area, with possible resistance on the way at 1292 broken support:

We have reached an area where I'm looking for signs of a swing low, but there is of course quite a bit of reason to think that we will go lower first. The H&S on RUT has not yet reached target at 720, and there is also a double-top on TRAN that would suggest more downside as well. Here's the updated H&S on the RUT 60min:

On the Vix the first of the two overhead unfilled gaps was filled on Friday, and the IHS target is in the 30 area, where there is some decent resistance. Vix isn't a traded instrument of course, but this IHS has been a good performer so far with a nice retest of the neckline which then held as support while the bear flag formed. It may well reach the target before we see the next swing low:

I posted the USD IHS chart on Thursday morning with the observation that if we are to see a reversal there to retest the IHS neckline, then the most likely place to see that reversal would be at decent resistance in the 83.5 to 84 area. That was tested on Friday and I'm watching for possible short term failure there:

I posted the 5 year TLT chart on the same day showing the test of 5 year rising channel resistance there. That broke with great conviction over Thursday and Friday and is no longer resistance. I have next possible trendline resistance in the 133 area:

Now that has broken, it's time to have a look at the very big picture on bonds, which is the 26 year (seriously) declining channel on 30yr treasury yields since 1985/6. I posted this three weeks ago with the observation that there was a triangle target at 20 (2% yield), and that channel support was somewhat lower in the 1.7 to 1.8 area. Those targets looked wildly ambitious then but obviously much less so now. we are seeing a test of the 2008/9 lows at the moment and if that breaks I am obviously still looking for a lot more downside. We might not see those targets hit of course but the pattern setup is solid and I wouldn't be betting much that we don't:

Obviously I've been giving ambitious upside targets on USD and downside targets on bond yields, and reaching those targets would make most sense in the context of a large and general equities decline, which would be supported by the many huge topping patterns that I have been posting on world indices. Here is another that I haven't posted since January, with a huge H&S mostly formed on copper. The neckline is a very decent support trendline so a break below it would look doubly significant if we see that. The H&S target is somewhat below the 2008 low:

In summary bears are in control and the trend is down. SPX is however testing support around the 200 DMA, and that hasn't yet been broken with conviction. Until this is broken with conviction and SPX spends several days below it to consolidate the break and turn the 200 DMA into resistance, this is a high probability area to see a short term low. at or above the 1250-60 support level. If that level is lost then I'd expect a move to the 1210-20 area.

Rocket Comment Cleaner

2012-06-03T20:03:00-07:00

The latest Evil Plan is getting hammered with comments, so although you probably should be on SocialTrade like all the other cool kids, you could hang out here and chat with Slopers. I'm just slapping down a bit of what I did this Sunday.

The Nazi Nail Biter..................Evil Plan 65.0 (by BDI)

2012-06-03T13:19:17-07:00

Well my fellow Slope-a-Dopes, it appears Angela has the whole world in her hands (or should I say by the balls). What will she do next with those stubby Germanic mitts of hers? Let us carefully examine the recent photograph above for any clues. She is throwing her hands up in the air, with a look of abject frustration & exasperation, almost as if she is ready to give up, wash her hands of it all, and hand over the whole oppressive problem to someone else's capable hands. Perhaps even more telling, she clearly has been seriously biting her nails on those ravaged wrinkled hands. Nail-biting (onychophagia) is a common stress-relieving habit. Is she about to lose it? That face sure looks ready to explode. What pray tell will she do next? My gut tells me that she's about to throw in the hand towel?

With many of the European indexes approaching and in some cases surpassing last summer's lows, one can expect more heroics out of the embattled Eurozone any minute now. New ECB liquidity injections are probably a given. FED/ECB currency swap lines will be stepped-up again, and possibly be made permanent. The much maligned ESM facility may now be given the authority to inject capital directly into the banks, bypassing the Sovereigns all together. There could well be a new LTRO 3.0 announced. The formation of a centralized Eurozone banking union, with the establishment of a federalized bank deposit insurance agency is on the table. An actual EU wide fiscal federation is even in the works, leading to a new authority in the euro zone, which would harmonize national budgets and manage the European debts via the issuance of Eurobonds.

Many of these all important fiscal unity measures are now being openly championed by the major EU players such as; Hollande, Monti, Rajoy, Barroso, Van Rompuy, Juncker, and even the head of the ECB Draghi. They also have the firm support and backing of the USA & the UK. Obama & Timmay are desperately working the transatlantic cables. Only Merkel and a few of her northern allies stand in the way of signaling the all clear, and giving the go ahead on a new all encompassing EU fiscal federation. Without unanimous consent from all the member states, the Masstricht treaty can not be amended so as to implement such far reaching goals. It's not that Merkel is opposed to a more centralized fiscal EU, in fact, quite to the contrary she is all for it. However, she wants it rooted in the conservative school Austrian of economics, and definately not in liberal Keynesian economic theory. This epic stalemate lies between; on the one hand those nations that have reached critical unsustainable debt levels, and thus are more than willing to give up their fiscal sovereignty in order to obtain structurally sound & more favorable financing terms through the EU as a single fiscal entity, and on the other hand those nations with balanced budgets, whom understandably do not want to cede sovereignty, and are thus unwilling to participate in a fiscal union which would increase their financing costs. In simple terms, the prudent and responsible do not want to be penalized by the imprudent and irresponsible. Is it really that clear cut? Is all the blame to be placed solely on the debtor nations, and unilaterally shouldered by them, while the creditor nations continue to prosper from a broken disjointed EU monetary / banking system, which in large part is directly responsible for bringing about the great divide between the center and the periphery? Of course not! George Soros eloquently elaborates on this very point in a speech given yesterday, at the Festival of Economics in Torento Italy:

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

The eurozone is now repeating what had often happened in the global financial system. There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role. The details differ but the idea is the same: the creditors are in effect shifting the burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Just as in the 1980’s all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is now sign of this happening.

It takes two to Tango. The south has certainly over spent, but the north has clearly over lent. Take one good look at the average taxi I rode in while in Athens, and you will get the picture. The cozy cabs waiting for you at the airport are all either BMWs or Mercedes. The following quote from a well respected professor at the London School of Economics neatly sums up this untenable Eurozone duality dilemma:

The excess debt accumulation in the South is matched by an excess accumulation of claims in the North. The correct response would be to force the deficit countries to reduce and the surplus countries to increase spending. The European Commission’s strategy, however, forces all the adjustment on the deficit countries without imposing a symmetric and opposite adjustment on the surplus countries. As a result, the Eurozone is forced into a deflationary straitjacket.

Sure the north is more industrious than the south, that goes without saying, has always been the case, and probably always will. Must have something to do with the weather, and all that fun in the sun. However, that is not the principal reason the European nation states currently find themselves with intractable trade & current account imbalances. It is the flawed monetary structure / broken banking system of the EU itself that is at fault. Further compounded by the mismanagement of the crisis, which has brought Europe to its knees, at the precipice of the next financial crisis.

We all know now, and were actually warned from the outset, that you simply can not have a common currency monetary union without a corresponding fiscal union. The bold but ill-conceived EU experiment has obviously failed for all to see, and in so doing has put the entire global economic order at risk. The financial markets certainly have spoken. Global equities are crashing, the USD is soaring, Treasury & Bund yields are flatlining, the EURO is flailing, the EU periphery's yields are exploding, and their CDS spreads are blowing out....etc......

So now that the fuse has been lit, what comes next? We are clearly at a critical crossroads, the time to ponder is over, the road forward must now be taken. And in my view, one of two things will happen very quickly here.

A plausible scenario is basically financial Armageddon. Should the impasse between the solvent states and the insolvent states remain unresolved, and no structural fiscal union is introduced, the Eurozone in its present form simply unravels, and promptly breaks apart. Spain & Italy's soaring sovereign bond yields quickly freeze them out of the capital funding markets all together, taking down many of the EU's under capitalized banks with them. Multiple bank runs will be met by emergency nationalizations, and one by one the nation states will turn inward on themselves, as the situation spirals out of control. In this scenario, the european banking system simply collapses on itself. Clearly the international banking cabal that runs this entire theatre of the absurd, will not let that happen. They will force the unwilling political hold outs on to center stage. Merkel will be made to sing the chorus line, you can count on that, as the alternative is just not contemplated in the global banker's playscript.

The road the Globalist are about to take us down was identified last Summer in Evil Plan 3.0:

In our world today, it is indisputably clear for all to see, that a globe made up of individual sovereign states governed by nationally elected statesmen has almost completely ceded way to a new paradigm. The international banking & corporate titans are now the real powers directing world affairs. To understand what comes next in our economic outlook, and how the market may react to it, it is essential to think about what these new centers of power are interested in.

The first order of business for our new masters, is to take full advantage of the sovereign debt crisis now imploding in Europe. Rahm Emanuel's mantra comes to mind "never let a major crisis go to waste". One could even go so far, as to make the case, that the current debt crisis now engulfing Europe was actually initiated by the financial oligarchs themselves, so as to further consolidate their grip on the independent nation states. After all, it was the financial & commercial elites of the world, that most fiercely advocated for, and imposed the EU & EURO on to the Sovereigns.

Saving Italy & Spain from financial collapse, and protecting all of Europe from descending into a great debt depression will no doubt be sighted as the reasons for their bold actions. But the real and much more sinister motivation, is to use this crisis, to further consolidate the powers of the EU & the international banking cabal over the Sovereigns, by creating a Pan European bond market. The final result, will be the near total evisceration of the national right of a country to direct its own monetary & fiscal affairs. Out with Sovereign democracy, in with Corporate kleptocracy. http://slopeofhope.com/2011/08/the-globalist-take-charge.html

In an insightful article from Eurointelligence, LSE professor Paul de Grauwe specifically lays out the precise steps the Globalist will take to finalize their evil EU plan:

The correct response to the crisis consists of three elements, all of which are key. First, the ECB should step in to stop panic and fear from undermining the stability of the Eurozone. It can do this by announcing that government bond rates of solvent but illiquid nations (Spain, Italy, Portugal, Ireland) will not be allowed to exceed a certain level (say, 300 basis points above the German government bond rate). The ECB is the only institution that can guarantee this, and that can stop the spread of existential fear that destroys the Eurozone. The EFSF and the future ESM have limited resources and cannot credibly commit to such an outcome.

Second, the European Commission should tell deficit and surplus countries alike to make the necessary adjustments. For the deficit countries this means austerity, albeit spread over a longer period. While the European Commission travels to the deficit countries and preaches austerity, it should also go to the surplus countries and urge them to stop trying to balance the budget when the Eurozone risks moving into a recession. The European Commission’s message should be that budget deficits in these countries are good for them and for the system.

Finally, a budgetary union is a key ingredient of a sustainable monetary union. Budgetary union, however, is a long-term prospect. There is little prospect for achieving it quickly. What can be done quickly, however, is the issue of common Eurobonds. This approach has the merit of signaling to the market that irreversible steps towards budgetary union are being taken today, thereby eliminating the existential fears that destabilize the Eurozone.

Team Global's Goalkeeper made the first game saving stick save last year with the formation and implementation of the ESM, EFSF, LTRO & FED/ECB currency swap blue lines. A massive liquidity wave of global QE icing was unleashed, and the refs handed out a few austerity penalties for too much cross checking. Now that the Zamboni has resurfaced the rough ice for the new season, and the centers are to face off once again, they will double down on the puck with much of the same hockey tape on their sticks. The game winning slapshot will be delivered by the bankster's defense-man during a Eurobond power play, and the commission will order the refs to refrain from calling further penalties on the periphery.

Don't get me wrong my fellow Dopes, I am under no illusion that any of these measures will prevent the nuclear debt bombs from detonating. Make no mistake, the western world's rapacious banking elites have unwittingly assembled weaponized financial instruments of mass destruction, and the fuses are now lit. Simply pointing out that the global banking pyro-technic kleptocrats still have a few more firework displays lined up on the barge, which will be set off between now and the 4th of July, before we see the grand finale this Fall.......

The banksters will kick the Euro trash can once again, and live yet another stinking day, but the noose around their necks keeps tightening. Rest assured, greed and hubris will soon take them down, same as it ever was.........it's just a matter of time.

Evil Plan 65.0 let the final bounce begin........EURO Pop to 1.28, Market snap back to 1338

BDI SOH's Idiot Savant

One MILLION Comments

2012-06-03T08:24:07-07:00

Long-time Slopers know what a crucial element the comments system is to the zeitgeist of this blog. Comments represent the lifeblood of Slope of Hope. It is where people share, learn, get to know one another, and help build a community.

I made the investment (of both time and money) creating my very own comments system a couple of years ago. I did so because I wasn't satisfied with the existing offerings and felt I could do a better job with my own vision of what a system would be like. At the time, I thought I could make a business out of it, but the world seems content with the likes of Disqus, so I cheerfully have kept my creation as the exclusive purvue of The Slope of Hope. And, hey, we've even got badges!

Some weeks ago, Iggy pointed out to me that it wouldn't be long before we had our one-millionth comment (hats off to Iggy for even paying attention to such things; I was clueless). So, week by week, we've been keeping an eye on when the blessed event would occur. So - - here we are today - - one MILLION comments have been posted into Slope's own system!

The lucky Sloper who made the comment was Clint AKA Fabio, and here it is, in all its glory:

Most financial blogs garner maybe a couple dozen comments a day. Here at Slope, the metric is consistently in the four-figures. I want to thank all Slopers - - especially the lunatics below who constitute the most active commenters on the site.

+ MarketSniper
+ BDI
+ Iguanadon
+ Clint
+ Your beloved host (me)
+ Buddhaboy
+ Cool_Beans
+ mmTesla
+ zStock
+ Dollar

Thank you, everyone! Now let's get cracking on the next million comments! (Oh, and sign up for SocialTrade!)

Better Be Lucky Than Smart

2012-06-03T06:29:05-07:00

We are standing at a very interesting fork on the road. Which way will it go and which road shall we take. This is important because we want to be where the puck will be next. At the same time we are aware of the danger of front running. The mind keeps telling that we are missing the last great opportunity. The meltdown is here and if we do not join, the train will leave without us. Our job is to rationally analyze all the arguments and see which one has better odds. Wining is not guaranteed. Never. That is why it is said that “better be lucky than smart”.

Back to the markets. Few days back I wrote that 1283 will be a good support area and ( http://bbfinance.blogspot.ca/2012/05/same-boring-stuff.html ) unless we see the range broken either way, it is better to sit in cash. Luckily, there is no penalty for sitting on cash, at least not yet. But now that 200DMA has been broken, will it open the floodgate to lower price? Lets us see the both sides of the argument.

Yes we will see much lower price:

200 DMA has been broken and the selling momentum is strong.
Europe is getting worse and there is no sign of any intervention from ECB.
Economy is stalling here in USA.
Unemployment remains a major problem in USA.
China is heading towards a hard landing.
Commodity sector is in bear market territory.

No, we will see a bounce:

The sentiment is too bearish.
Commodities and Euro is over sold.
This is an election year and election year price movement patterns are different.
Greece is not going to leave Euro-zone because everyone knows that a Grexit will be the disaster which will make Lehman look like a trailer.
The Fed will intervene. Bad news is good news.

These are some which I could come up with and I am sure there are many more on both sides. Given all that information, what is the verdict?

As you know, I am a believer of cycles. They come in various forms, short term, intermediate term, long term. The intermediate term cycle does not bottom till Mid-July but very short term cycle is bottoming just about now. When I combine the cycle analysis with the technical analysis I get the following picture:

The next level of support is around 1260 and below that 1200.
It is not going to be one straight line down.
I expect to see a bounce starting next week but it will be just a bounce. Max. upside target remains 1360-1380.
Selling is not over yet.
There will be QE3 or 4 whatever you call it. But Bernanke has only two possible dates to announce, June 20 or August 1. I think it will start from August 1.

This is the road map I have in mind but the market is the boss. If it keeps going down next Monday or Tuesday, I would not fight with it. But if you have been in cash, like I have been writing all these days, you will have enough fire power to get in at excellent prices. I think we are not at the end game stage yet and we will see one more upswing before everything starts to unravel. If 1283/1285 level holds on Monday, I may do a bit of bottom fishing but that is for traders who can get in and out quickly. Absolutely not for investors. Investors better wait for good trends to develop. Do not underestimate the powers of the CBs and I think we will again see concerted efforts by all the central bankers to re-inflate the balloon.

I would like to share a chart from Bespoke. It is a kind of analog and I do not have much faith in analog. So take this with a pinch of salt.

I personally think we are following the old script of 2010 and 2011 with minor variations. Let us see how the story unfolds this year. Patience is the key.

Hope you are enjoying the weekend. Thanks for reading http://bbfinance.blogspot.com/ . Please forward / re-tweet / post it on your wall and invite others to join. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

Money Flow for May Week Five

2012-06-02T16:37:40-07:00

Further to my last weekly market update, here is a summary of where money flow ended for Week 5 of May 2012.

The Weekly charts below of YM, ES, NQ & TF show that they all closed lower than the prior week...on slightly higher volumes on YM & ES and on slightly lower volumes on NQ & TF. With the exception of the NQ, the others have closed below their lower Bollinger Band, their weekly 50 sma, and trendline or price support...the moving average and trendlines are now near-term resistance. The NQ is still just within its rising channel from the 2011 low.

As I mentioned in my weekly market update of April 13th, I'm assigning a weekly bullish or bearish rating on YM, ES, NQ & TF until the end of the year. Please refer to that post for the parameters, and to the Weekly charts below. As of this past week's close, the ratings for next week are as follows:

YM = bearish (approaching MAJOR BREAKDOWN)
ES = bearish (approaching MAJOR BREAKDOWN)
NQ = mildly bearish (approaching moderately bearish)
TF = MAJOR BREAKDOWN (anything below 740.00)

The 4-Hour charts below of YM, ES, NQ & TF show a Fibonacci retracement from this year's high to the lows that were made up until the end of Week 4, as well as a downtrending channel. I left the Fibonacci drawing unchanged so that you could see that price closed below that low and appears to now be on its way to the external 127.2% Fibonacci level of 12015 for YM, 1251.25 for ES, 2376 for NQ, and 712.80 for TF. I would continue with the SELL rating on all of these as long as price continues to trade below the lower one-third level of the Fibonacci retracement (lower horizontal yellow line)...as such, price action is subject to further volatile bearish influences until it breaks and holds above with conviction and higher volumes.

The three Daily charts below depict support and resistance levels on the percentages of Stocks Above 20-Day, 50-Day, and 200-Day Averages.

Stocks Above 20-Day Averages closed lower than the prior week at 15.27%.

Stocks Above 50-Day Averages closed lower than the prior week at 15.93%.

Stocks Above 200-Day Averages closed lower than the prior week at 41.14%.

I'd conclude that, in the short and medium terms stocks are a SELL below 20%, and in the longer term are mildly bearish below 50% to 40%...as has been the case for the past ten weeks, all are still on negative watch for further potential weakness.

The VIX rose on the week by 22.52%, as shown on the graph below.

Further to the comments in my last weekly market update, the Daily ratio chart of the SPX:VIX shows that the SPX fell back and closed below the 200 sma, as well as the prior swing low. The RSI, MACD, and Stochastics indicators have all hooked down again. Near-term support is at 40.00. Near-term resistance is at 50.00, followed by the 200 at 57.08, then 65.00, then the 50 sma at 73.77.

The Daily chart below of the VIX shows that price closed at Fibonacci confluence. A move above that level could send the VIX up to the next confluence level of 30.50ish, or higher.

In addition, I would remind you of the comments made in my post of February 28th, in which I concluded that the odds of another spike in the VIX this year were running around 80% based on my analysis of the past four years of historical data, price levels, and price movements from those levels on the VIX and the SPX. My conclusions remain unchanged.

As shown on the graph below of the Industry Groups, the only group to gain on the week was Gold/Silver. Larger losses were made in Biotech, Oil Services, Semis, and Banks.

As shown on the graph below of the Major Sectors, losses were made in all of them, with the largest in Energy, Financials, Consumer Discretionary, Industrials, Materials, and Technology. The defensive sectors, Health Care, Consumer Staples, and Utilities, lost the least...the markets are still playing defense.

As shown on the graph below of some of the ETFs, the biggest losses were in Commodities (DBC), followed by European Financials (EUFN), U.S. Financials (XLF), Agricultural (DBA), Emerging Markets (EEM), and Chinese Financials (GXC).

Please see my post of May 30th, which compares the SPX with European indices. I concluded that I expect further weakness in all of these indices (including the SPX) until I see evidence of a reversal of price and indicator trend, a retest, and a subsequent rally with the backing of powerful financial, monetary, and fiscal cohesiveness...until those materialize, I doubt we'll see much of a sustainable rally.

Also, the Daily charts below the graph provides an update on price action on DBC and AUD/USD since my post of May 24th. DBC has closed below its 2011 low, while AUD/USD came close to a retest of its 2011 low. They're both trading under the bearish influences of a moving average "Death Cross" formation, and, as such, will likely continue to exhibit volatile (and possibly, choppy/whippy) price action for awhile. Ones to watch in the days/weeks ahead, as they will likely affect equity markets, as well.

As shown on the graph below, there were gains in Gold and Silver, and losses in Oil and Copper.

The following four Weekly charts of Gold, Oil, Copper, and Silver show support and resistance levels...ones to watch, particularly Oil and Copper.

As shown on the graph below of the Major Indices, the Russell 2000 lost the most, followed by Dow Transports, S&P 500, Nadsaq 100 & Dow 30 are tied, and Dow Utilities. There were also losses in the High Dividend-Paying Stocks ETF (DVY), Corporate Bonds (JNK), and the Emerging Markets ETF (EEM).

As shown on the currency graph below, money continued to flow into the U.S. $ and out of the British Pound, Canadian $, Aussie $, and the Euro.

The Daily ratio chart below of the SPX:U.S.$ shows that the SPX broke below its recent consolidation and continued its decline from the beginning of May. The RSI, MACD, and Stochastics indicators have hooked down again, after failing to break and hold above their downtrends. Near-term support sits at 15.00 and resistance at 16.00. This ratio pair is worth watching to see if the momentum continues to accelerate to the downside, which would indicate increased selling pressure in equities.

The next chart of interest is the Weekly chart below of the 30-Year bonds (ZB). Price has broken above its confluence of trendline and Fibonacci levels...what was resistance is now near-term support.

In summary, I'll be watching to see whether more volumes enter the markets next week during intraday action, and in which direction they dominate (and whether they can be sustained), in order to judge relevant moves with conviction. As well, I'll be watching for either rising or declining volatility (as depicted by the VIX), and money flow into/out of the U.S. $, Bonds, and the Financial stocks (which have resumed their correction, as shown on the chartgrid below). Any meaningful and sustainable stabilization of the bank stocks will require the solid backing and implementation of unified government monetary and fiscal policies, both domestically, and globally, as I discussed above...otherwise, expect further choppiness and volatility in the markets (particularly the financial markets). The difference between last year and this year is that there is evidence of economic contraction in, not only the European countries, but also in China, Australia, and now the U.S. and Canada...this makes my prior statement all the more important.

Enjoy your weekend!

Hedging Update: Social Media Stocks After Facebook's IPO

2012-06-02T10:37:22-07:00

Hey fellow Slopers,

Last time we looked at the costs of hedging social media stocks, I mentioned Tim's bearish post on Facebook's upcoming IPO, and a bearish article by Bloomberg, citing doubts about the company by institutional investors. The bears have so far proved prescient, of course, as Facebook's stock has continued to deflate following its fizzled IPO. But this week I spotted one Facebook bull on Twitter, early stage tech investor Dave McClure:

market closed, FB @ $28.8 -- bears r fucking idiots. best time 2 buy FB since 3-4 yrs ago when it was $3-5B on 2ndry. wake up muppets. @dhh
— Dave McClure (@davemcclure) May 29, 2012

McClure bet 37 Signals partner David Hansson (@dhh) a beer that FB would close at $40 or above on the anniversary of its IPO. In response, I noted the high hedging costs of Facebook suggested Hansson was more likely to win that bet:

.@davemcclure @dhh The steep cost of hedging $FB now suggests that @dhh has a free beer in his future: stks.co/41IH
— David Pinsen (@dpinsen) May 29, 2012

May 29th was the day options started trading on Facebook, and the article I linked to in the tweet above showed a cost of 19.9% of position value to hedge Facebook against a greater-than-20% drop at the time. The cost of that level of protection on Facebook declined slightly by Friday, to 16.6%, as the stock continued its slide. As expensive as that is, a couple of social media stocks that went public last year are now too expensive to hedge against a 20% drop now. The table below shows the costs, as of Friday's close, of hedging Facebook, LinkedIN, Zynga, and Pandora against greater-than-28% drops over the next several months, using optimal puts.

Comparisons

For comparison purposes, I've added the Global X Social Media Index ETF (SOCL) and the PowerShares QQQ Trust ETF (QQQ) against the same decline. First, a reminder about what optimal puts are, and a note about why I've used 28% as a decline threshold this time; then, a screen capture showing the optimal put to hedge one of the comparison ETFs, QQQ.

About Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor (available on the web and as an Apple iOS app), uses an algorithm developed by a finance Ph.D to sort through and analyze all of the available puts for your stocks and ETFs, scanning for the optimal ones.

Decline Thresholds

In this context, "threshold" is the maximum decline you are willing to risk. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position).

Often, I use 20% thresholds when hedging equities, but two of these stocks were too expensive to hedge using 20% thresholds (i.e., the cost of hedging them against a greater-than-20% drop was itself greater than 20%, so Portfolio Armor indicated that no optimal contracts were found for them). There were optimal contracts available for all of these names using a decline threshold of 28%, so that's the threshold I've used below.

The optimal put to hedge QQQ against a greater-than-28% drop

Below is a screen capture of the optimal put option contract to buy to hedge 100 shares of QQQ against a greater-than-28% drop between now and December 21st, 2012. A couple of notes about this optimal put and its cost:

To be conservative, the app calculated the cost based on the ask price of the optimal put. In practice an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask (the same is true of the other names in the table below).
Hedging costs for QQQ have been climbing. Recall that last time we looked at hedging QQQ (using a slightly smaller decline threshold, 27%), the cost as a percentage of position value was only 1.42%.

Hedging costs as of Friday's close

The table below shows the costs of hedging these names against greater-than-29% declines over the next several months. Costs are presented as percentages of position value. Given the high cost of hedging some of these names, if you own them as part of a diversified portfolio, and are content to let that diversification ameliorate your stock-specific risk -- but are still concerned about market risk -- you might consider buying optimal puts on an index-tracking ETF (such as QQQ) instead, as a way to hedge your market risk. Or you might consider just selling them.

Symbol	Name	Hedging Cost
	Social Media Stocks
FB	Facebook, Inc.	9.56%*
LNKD	LinkedIn	15.1%**
P	Pandora Media, Inc.	28.1%*
ZNGA	Zynga	25.8%*
	Comparisons
SOCL	Global X Social Media Index	10.6%*
QQQ	PowerShares QQQ Trust	2.00%*

*Based on optimal puts expiring in December

**Based on optimal puts expiring in January

The Best Pattern For Profits In A Downtrending Market

2012-06-02T07:05:44-07:00

As we go through the charts of the daily indexes and individual names we see a lot of Pullback Off Lows (POL) patterns emerging. Much like in uptrending markets Pullback Off Highs (POH) patterns are the only pattern you need to know the opposite applies in downtrending markets where POL patterns are all you need to know for shorting. Those POL's are also the what to watch out for if you are long. That all said below are the daily charts of the indexes.

As you can see from a daily chart perspective each of the above has broken the Pink POL, Snapback rally, D wave, Bear channel call it what you will to the downside. Does that automatically mean this is it? Meaning a retest of recent lows? No, at this point all it means is that its initially broken to the downside and it's all about follow through from here. We'll take it a step at a time as usual.

The Russell 2000 shown below tagged its neckline (resistance) of its head and shoulders top and one could say and rolled right back over.

This all said? So far so good.

Now let's take a look at HIBB. It triggered a short sell trade today by breaking below the pink POL channel. The notes in the chart say it all.

Awesome Interview from Tastytrade

2012-06-01T15:52:23-07:00

Tim Knight

A Great Start to a New Month

2012-06-01T13:00:08-07:00

Tim Knight