Run Forrest, RUN!!!

Market action during last week was fast and furious, with major gaps to the upside likely due to short covering, Human and HFT (computer) trading. But, as you might recall from a previous post, the retail investor is heading for the safety of bonds and cash in a big way and market volume remains light. But the S&P closed above 1100, which was an important level of resistance that stood in its way and that cannot be ignored.

But the importance of this is that the market is attempting to nullify the Head & Shoulders formation, by creating an INVERSE Head & Shoulders, which could drive the S&P and DOW to break through the April, 2010 highs. It's also possible that, in a best scenario, it puts the markets into a wide trading range, similar to what has been seen in Japan, or during the '70's.

Now, Christian at PSA is warning Bulls not to believe this rally. But since I'm a day and short-term swing trader, we cannot ignore such a rally, which could take us up 600 Dow points from here. I'll confess I felt considerable pain in my TZA position before finally throwing in the towel and taking my licks.. Now I'm looking for direction and "hit and run" opportunities.

Christian brings up extremely valid points regarding the European "stress test", which I believe was financial "propaganda" to divert attention from the potential for sovereign debt default. But good propaganda is good propaganda and can mask the facts for awhile. He also mentioned North Korea, which has ALWAYS been a problem that could erupt at any minute. But those are bearish arguments that won't impact the markets until they impact the market.. ;0) And in between, being short this market is going to negatively impact your trading account.... lol!!

We're also entering a Full Moon phase, for those who follow the Moon Phase Trading System (MPTS) , and that has often led to market turns. In fact, this major rally BEGAN back on June, 26th, during the last Full Moon. You'll notice also in that link that the VIX is under massive pressure, now falling under it's 200 Day MA. And since the VIX is a strong INVERSE indicator of market direction (the lower the VIX, the stronger the markets), until we see it get back above the 200 DMA, this market is going to get stronger.

Bears BEWARE!!

But the KEY INDICATOR I think we need to watch is the S&P 100 Week MA. 1100 put the S&P 500 above that 100 Week MA and that's SIGNIFICANT. If the S&P can manage to drag that 100 WMA back above the 200 Week MA at 1150, it's "game over" for the bear case for a couple of months. Another indicator is that the Russell 2000 (RUT) has already achieved this (which is why I probably felt so much pain last week.. ;0) (insert RUT in that chart link).

Right now I'm starting to get less bearish in the face of extraordinary manipulation that is clearly going on in the markets from the High Frequency Trading platforms. I don't believe we're going to get much good economic news in coming months, but a savvy trader learns over time that "the market is always right", especially when money is involved.. ;0) The trend is your friend and that trend seems to be getting even more bullish and the shorts are getting scared.

How long will this trend last? It might end at 1150 on the S&P, which could prove to be a key reversal point. And that's why I included discussion of the RUT. If the small cap Russell 2000 can break that 100 WMA resistance, it stands to reason that the DOW and S&P will do the same.

Bear Case

Edit: I'll be accumulating some stuff to support the bear case. Right now it primarily revolves around the FOREX market response to the European "stress test". Bloomberg is reporting that the Euro is falling in response to lack of confidence that the tests were stringent enough. This is an argument, I might add, has a lot of credibility since they didn't count sovereign debt held to maturity, much of it from the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). The whole purpose of the stress test was to put to rest the opinion that some of these PIIGS might be at a point where they will need to default on their debt because they lack the economic growth to pay for it.

So how does a falling Euro affect the US? Cheaper Euro, Stronger Dollar.. they can sell more stuff to us than we can to them and that impacts US export profits. And as we saw from the previous crisis in the Euro, it led to global market sell-offs, so it's an "event risk" that can't be ignored and which could QUICKLY derail the bullish scenarios I mentioned above.

Euro falls on stress test concerns

And for those who watch the stars, supposedly Aug 1st will result in the "Cardinal Climax", which is series of 5 planet alignments that is apparently very rare.

And don't scoff!! There are a large number of market technicians who use Moon Phase Trading Systems and planetary alignments to confirm other indicators. And since stock market is based upon "herd mentality", if people believe something will come to pass (like that H&S formation I keep referring to), then it will. If you doubt the veracity of this, think about the origin of the word "Lunacy".. Yep.. it came from the observed propensity of people to act strangely during a full moon.

More on "Cardinal Climax"

That's all I have for now.. I may add/edit this post later this weekend.

Scrutinizer

Retail Investors CONTINUE TO RUN from this market, yet the computers drive the market higher!!

Mutual Fund outflows continue for 11th week

As I posted on 7 July, it had appeared that outflows were declining, but that's no longer the case.

ICI reports that the week ended July 14 saw another massive outflow from domestic equity mutual funds of $3.2 billion, bringing the July total to $7.3 billion, and year-to-date equity outflows to a stunning $37.5 billion.

It would seem that outflows are INCREASING as that $7.3 billion is a BIG CHUNK of the past 7 months of data.

How can we have a "bull market" when money continue to flow out of it and 10 year Treasury Bond yields are still under 3%?

It's another reason the "little guy" hasn't trusted the market since the May 6th "flash crash"

Scrutinizer

China's Real-Estate Ponzi scheme, revisted

Mish did a pretty good write up on China's "Shark Loan" Ponzi scheme yesterday. Essentially is suggests that a great deal of China's internal economic growth has been fueled by a scheme where people take out Home Equity Loans against houses that have ballooned in value over recent years. They then loan that money back out to "Shark Loan" entities at higher rates of interest.

Much of this relies upon China's "shame" based culture, where severe loss of face (and maybe limbs/digits.. ;0) is incurred when a loan is not repaid.

This also corresponds when one of Mish's articles discussing the pressure Chinese men feel in buying their own homes. It seems that Chinese women won't date a man who doesn't have the "nest" already lined up for their future spouse. What incredible pressure these poorly paid men must be feeling in a country where men already outnumber women.

Chinese gold diggers say "show me the house"

Be sure to check back later.. I may add to this post.

Aug 2nd, 2010 EDIT:

Interesting new reports of growing civil unrest in some Chinese cities over the collapse of Real Estate Ponzi Schemes:

Chinese gov't fear civil unrest over collapsed Ponzi schemes

Scrutinizer

Why the developed world's worst performing economy has such a strong currency

A good friend of mine, who lives in Japan, was commenting on how the Yen had appreciated against the USD in recent months.

No yearning for Yen?

Thought it was very interesting that the "curse" of not having a widely held currency equates to strengthening of such. While the US and Europe are waging "currency wars", with China trying to disentangle itself from the USD peg), the Yen is reacting to internal dynamics. A stronger currency often translates into a lower equity market (the value of each gets priced in stronger currency and therefore "deflates").

Here's another article from ZeroHedge that discusses Japan's mounting national debt and what it means for Western investors, as well as Japanese savers.

Japan: Land of the Rising Debt

As for today's market action, it was a complete "whipsaw" that shocked even myself. I'm seeing a lot of chatter tonight amongst bulls and bears about what the significance of today's action means for the rest of the week and thereafter.

Here's an interesting discussion that I thought put it into perspective, given the lack of volume to suggest a new bullish phase:

Rally at highs sets up reversal

And, of course, Christian from PSA remains bearish on the overall trend of the markets, and especially makes a point about the light volume. But he does admit that we may be looking at a short-term bounce (which he says we should short):

It's just a bounce, stay short

And Daryl Guppy gives us an interesting read on the currency fluctuations in the USD, which likely had a lot to do with today's rally. He believes the recent sharp downward move is nearing a bottom (which likely means the Euro is nearing a top) and that could put pressure on the US equity markets.

USD finding support @ .82

Now.. I'm extrapolating the stock market possibilities from Daryl's comments.

Now.. put on your tinfoil hats and get ready for some true "Rod Serling" material:

TZ theme

I have a follower, and participant on the Yahoo TZA thread you has posted this incredibly interesting chart that compares the market movements of the current S&P 500 to that of May, 1936. It's DOWNRIGHT UNCANNY how closely it's followed that period:

S&P 500, today and "yesteryear"

Now I have NO EXPLANATION for this occurrence, which would make any Conspiracy Theorist literally drool over the irony. It's almost like someone's plug in the 1936 market program into the High Frequency Trading computers to create a near perfect emulation. Now I don't seriously recommend that anyone use this as a trading guide, but it certainly is one of those "things that make you go hmmm... "... ;0)

Hang tough traders.. Tomorrow will be an interesting day.. Watch China and Europe for clues.

Scrutinizer