PPT Trader - Navigating the Markets

Will Crude Oil Explode Higher?

2010-03-12T13:48:00Z

There is an intense debate raging surrounding the future direction of crude oil prices. The bulls say that the upcoming driving season will spur demand once again to give crude a push higher. The bulls also argue that demand from China and other countries with healthier economies than our own will continue to soak up supply. The bears on the other hand argue that China is in the process of draining excess liquidity to dampen speculation and apply the brakes on an overheating economy. The bears also contend that with our 'mirage' economy so weak (just watch the employment numbers) that demand in this country will tail off.

In cases such as these, the proper thing to do is to not get caught up in these fundamental debates, but to look at what the market itself is telling us. In the chart below I have plotted a spread between XLE (the SPDR energy sector ETF) and SPY (the S&P 500 or the broader market). When the black line is rising, that means that energy stocks are outperforming the S&P 500. When it is falling, energy stocks are lagging the S&P 500. The value in this analysis is that if commodity stocks lead the market, that bodes well for the underlying commodity represented by that particular group (in this case energy). I have also plotted the spot price of West Texas Intermediate Crude Oil in red.

Notice how when energy stocks lead the market (when the black line is rising), it is good for crude oil (the red line). In the fall 2008 there was such a shake up in the markets that crude oil plummeted, even as the XLE:SPY spread gained its footing. The price action in the spread and the price of crude oil were 'synched up' again in the spring of 2009 as the markets calmed down and since then there was a high correlation in their movements until December 2009. Notice then how the spread broke down to its early September 2009 low while the price of crude held well above its September 2009 low. Since then the spread has underperformed the price of crude oil which is not a good sign for crude oil prices going forward. Crude oil is once again challenging the high end of its range at 83 while the spread languishes near its September low. While there are many that think that crude oil will rocket higher from here, the energy stocks are telling a different story.

Market Showing the Same Characteristics as the 2007 Top

2010-02-10T13:25:00Z

As the debate rages on with regard to whether or not the Fed should begin to drain liquidity or if this economy can withstand a reduction in government spending, there are subtle things going on in this market that the fundamentalists are missing right now. Market technicians have a wide array of tools that they can apply which gives you a real time snapshot of the emotions and tendencies of investors.

There are many pundits who are calling for increased GDP numbers as well as improved earnings, but pure common sense says that none of that will happen while Americans continue to lose jobs. As these point-counterpoint discussions continue, we need to take a look at one telling sign that the party may be over for now. In fact, we could be in the early stages of forming another leg down.

One indicator I have developed is a 21 period normalized daily range indicator. It is simply the daily range divided by its 21 day moving average. Daily ranges should show a gradual increase in healthy trends whether it is up or down. As trends mature, the daily ranges contract due to the lack of euphoria and a smaller number of investors who are willing to jump in and push price higher.

Notice in the chart below that the daily range indicator is showing the same sharp contraction as it did in September/October 2007, followed by an increase in the daily ranges as selling pressure builds. That is a sure sign that the psychology of this market has changed. Whatever the reason may be for the selloff (Greece, U.S. banking issues, China and India draining liquidity, etc.), there is real change happening here. Now is not the time to get greedy, it is time to protect what you have.

China Breaking Down

2010-02-03T16:43:00Z

WIth all of the hoopla about economic recovery still filling the airwaves, it is curious indeed why the market is losing ground this earnings season when earnings are coming in better than expected across the board. The explanation is very simple. This rally since last March has been about the banks having access to free money and funneling it into the market through their trading desks. Earnings, GDP, etc. have nothing to do with it.

World governments have been trying to spend their way to prosperity, but of course that never works. The thinking was to keep things going until the world economy rebounded, but just one look at the U.S. unemployment rate shows that things are, in fact, not getting better.

China has been the leader in this recovery attempt due to their loose monetary policy and their propensity to stockpile raw materials. Two announcements in January, however, show that China is now beginning to tighten their monetary policy for fears of stoking widespread inflation. The draining of the liquidity pool is beginning to show up in the shares of the Shanghai Composite. In the chart below, I have plotted the Shanghai Composite (black line) along with the S&P 500 (red line).

Notice how the Shanghai Composite actually bottomed in October 2008, a full five months before the S&P 500. After testing the low in December 2008, the Chinese market began making a succession of higher highs and higher lows. Speculation ran rampant as liquidity flooded the marketplace. In August, the Shanghai made its final high. After a sharp sell off, the rally resumed, but the August highs were never eclipsed. That was telling is that something was on the way, namely tighter monetary policy. Notice how the S&P pushed out to new highs last month while the SHanghai was breaking down, making a succession of lower highs, forming a triangular consolidation pattern. Just this week the Shanghai broke down out of that pattern signaling trouble ahead. This is an important leading indicator for our market as the S&P 500 has been responding merely to excess liquidity, not market fundamentals. With India now saying that they are undertaking steps to drain liquidity, it is just a matter of time before other nations begin to tighten and this party is declared over.

Is The Rally Over?

2010-01-29T17:52:00Z

The recent selloff in equities has produced the worst market stretch since early 2009, before the liquidity induced rally began last March. Does this mean that buyers have finally exhausted themselves, or will free fed money continue to be funneled into this market?

One of the trademarks of this rally has been the lack of volume which has been pointed out on numerous occasions in this blog. The fact of the matter is that from a momentum perspective, this rally hit is peak last fall and the continued push higher over the last four months has been more of a drift higher than anything. The chart of the Nasdaq Composite below illustrates that point.

The chart consists of a daily price plot in the upper pane, with a 14 period money flow index (MFI) in the middle pane and normalized volume in the lower pane. Since money flow is price momentum multiplied by volume I thought it was the best tool to analyze the momentum of this rally as it allows volume in its calculation.

Notice first how the MFI peaked back in September and while price continued to grind and drift higher, the MFI made lower subsequent peaks before showing a very weak negative divergence which preceded the recent selloff. Now take a look at volume in the lower pane. The volume levels at the recent top and subsequent selloff are the highest since the rally began in March. This shows a change in sentiment among traders. The only question is will the selling run its course before one more push to new highs, or is this a signal that the rally is over? With the breakdown in the Risk Flow Indicator (see previous blog post), this may be the end of the line.

Risk Flow Indicator Topped One Week Before the Market

2010-01-26T13:52:00Z

When using technical analysis, one is prone to 'head fakes' and other situations that arise from using single dimensional analysis of prce and volume. A tool I have developed to allow a deeper look into the market is the Risk Flow Indicator (RFI). The RFI measures flows between sectors and groups to give a plot that easily identifies whether or not investors are embracing or moving away from market risk. Very simply, risk is the fuel that sustains rallies. When investors shun risk, rallies die. When they ambrace it, rallies flourish. Indicators such as this can help gauge the strength underneath the rallies to determine whether or not a rally is likely to continue or fail. Using simple technical analysis indicators can provide valuable insights, but are also prone to divergences and false moves lower as the rally continues.

In the chart below I have plotted the Nasdaq Composite along with the RFI in the lower pane. Notice how the RFI topped out on January 8 and began to deteriorate while the Nasdaq Composite struggled to post its closing high on January 19. RFI weakness told us that investors were shying away from risk, ths leaving the door open for sellers to take command just as we saw last week.

You can track the RFI each week with a free four week trial subscription to the Weekly Navigator.

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A market recap and index summary
The ten best and ten worst performing ETFs over the past week
Our proprietary ETF rankings to help you identify areas of market strength
Our proprietary Risk Flow Indicator (RFI) that identifies when it is safe to be in equities
Our automated market models which provide monthly picks in sectors, countries, currencies, and style
Our three managed portfolios for different risk tolerance levels

Housing Index Beginning To Falter

2009-12-31T17:04:00Z

The biggest driver of our economy historically has been real estate. In the past, consumers used their homes as piggy banks, cashing out funds as their values rose. We all know that the bursting of the real estate bubble is what brought our financial system to the brink of disaster. I believe we are still close to the 'edge of the abyss', in spite of what our government says. As I pointed out a couple of days ago, the bond market is suggesting that Fed manipulation of the money supply could careen out of control should they continue to try and hold rates down.

At any rate, the PHLX Housing Index (HGX) has moved lock step with the S&P 500 most of the time. When it diverges, there is trouble on the horizon. Notice in the chart below how the housing index hit its all time peak in the summer of 2005. At that time there was a frenzy of relaxed loan standards, with many banks and mortgage companies following the Countrywide model of simply writing the mortgages with no regard for the facts. That type of bubble mentality takes time to work through the system, which was evident by the S&P continuing on for two more years before the bubble finally burst. Take a look at October 2007 and you can see that as equities topped, HGX was already in a firmly established downtrend.

Now fast forward to today - you can see that HGX moved higher with the S&P off of the March low, making higher highs through this past summer. HGX is lagging which is not good news for the overall economy or for equities. Some may argue that this divergence can go on for a couple of years as it did in the past, but I believe it is 'different this time', to coin a popular phrase. Since last December, the Fed has injected trillions into the economy to keep it afloat. That activity compressed everything into a much smaller time window that will unwind in a much smaller time frame than when natural market forces have the S&P the inertia to continue higher even when cracks were evident. Given the fact that the government continues to support key industries while unemployment remains near all time highs, this is not our average garden variety recession. The housing market is saying that the government initiatives are running out of steam, and the bond market will tell us when the party is over.

Happy New Year!

Watch Bonds For Equity Market Clues

2009-12-29T15:12:00Z

As this remarkable equity rally continues seemingly unabated, there are warning signs in the bond market that the end may be near. Those of you who read the Weekly Navigator at http://www.marketperspectivesllc.com/ know that our proprietary Risk Flow Indicator (RFI) is still showing positive flows, so the long side should continue to be favored. There are signs, however, that interest rates will be heading higher soon as a pending breakdown in 30 year T-Bonds indicates.

The chart below is a monthly chart of 30 year T-Bonds dating back twenty years. I have also plotted a 90 month moving average which was briefly breached only one time back in late 1999. If that moving average gives way decisively, that is the signal that the rally in equities is finally drawing to a close.

Notice that historically equities continue to rally for an average period of 18 months to two years after bonds turn lower before either a significant correction or a trend change takes place. What is interesting in this case is that this latest equity rally was driven purely by the quantitative easing policy of the Fed, not due to honest earnings and economic growth. The easy money has found its way onto bank balance sheets and into treasuries and the equity markets. Consumer and small business loans? Why would the banks take that kind of risk when they could either take that free money and buy treasuries, or better yet take that money and keep pumping it into equities? So while the economy continues to struggle - just ask the millions of unemployed - the equity markets continue on their merry way. From the looks of things however, the clock may be ready to strike midnight and Cinderella may be stranded with no ride home from the ball.

For now the trend remains up as the risk flows are positive. If investors begin pulling back from risk, that is a sign that change is in the air.

Retail Stocks Are Not Forecasting a Joyous Holiday Season

2009-12-10T15:19:00Z

November retail sales showed a 0.3% decline over the year ago period according to the International Council of Shopping Centers, That number took analysts by surprise along with those that are wholeheartedly believing in the economic recovery story being spun by the media and the government.   As expected during a recession, sales increased at the discount chains, but dropped off sharply at the higher end stores.

One area that was most telling with regard to the economy was the steep decline in sales at stores that market teenage clothing and accessories. That shows two things. First, it shows that parents have less disposable income to keep their teens 'fashionable'. Second, it shows that part time positions for teens old enough to work may not be as plentiful as in years past. Neither of these scenarios scream economic recovery.

The weak November same store sales report was forecast by the drop in relative strength in retail shares vs. the broader market. In the chart below, I have plotted a spread chart of XRT (SPDR S&P Retail Index) vs. SPY (S&P 500). I have also plotted the XRT itself as the red dashed line as a reference. When the black line is moving higher, that means that XRT (retail) is outperforming or leading the broader market. When the black line is falling, XRT (retail) is lagging the broader market.

Notice how XRT led the market higher off of the March low as investors piled into retail stocks due to lean inventories and hope of an economic turnaround. That theme played on until October 26, when XRT hit its relative strength peak vs. SPY. Since then, as we have entered the most important time of the year for retailers, XRT has lagged, pushing the black line lower. That shows distribution in retail shares as the broader market has continued to push higher. The difference is really evident when the black line is compared to the red dashed line which is the actual price of XRT. Notice how XRT itself (the red dashed line) has traded in a range while XRT loses relative strength vs. the broader market (the black line is falling). This is not a positive signal for retailers or for the economic 'recovery' in general.

So while there are still many out there telling us how good everything is, let the subtleties of the market tell you how good things really are. Yes we have rallied tremendously off of the March low due to the cheap, easy money provided by the Fed, but what happens to the rally when the excess liquidity is reigned in?  That will be about as cruel to oblivious longs as kicking the crutches out from a one legged man.   The trend is still up and long positions are advised, but keep your hedges on and stay away from retail for now. The stock market is still the best discounting mechanism around and right now it is saying that this will be a dismal holiday season for retailers.

Dow Volume Patterns are Interesting

2009-12-03T16:16:00Z

On November 19, I wrote about the Dow being ripe for a correction based on the Fibonacci resistance band high at 10,466 and a weakening volume profile. Following the action of the last couple of weeks, that picture still has not changed.

Notice in the chart below that the Dow has not yet been able to break cleanly through the Fibonacci resistance band since entering the band on November 11. Now take a look at the volume oscillator in the window below price. This oscillator is simply the difference between the 10 day moving average of volume and the 25 day moving average of volume. When volume surges, the 10 day moving average moves higher faster than the 25 day moving average, causing the oscillator to move higher. When volume declines, the oscillator moves lower, as the 10 day moving average falls faster than the 25 day moving average.

The pattern being traced out by the volume oscillator is not encouraging for the bulls. Notice how the highs and lows from July through September (the black arrows) showed a normal, healthy volume pattern. The volume oscillator rose into the highs (higher volume on rallies) and dropped into the lows (lower volume on pullbacks). Now take a look at the two red arrows at the right side of the chart. See how volume increased heading into the October low, showing increased selling pressure, followed by a reduction in volume heading into the November high, showing weak buying interest. This flip flop in highs and lows on the volume oscillator vs. price is not a good sign as the Dow struggles to hold a close above 10,466 (the upper end of the Fibonacci price band). That fact coupled with the visible decline in daily volume (bottom pane) off of the October low says that there is more risk here than the media would have us believe.

The trend remains up, and as I have said previously, you can not fight the weak dollar, cheap money policy of the Fed, but the risks in this market are increasing.

Risk Indicator Foreshadowed Weakness

2009-11-27T17:03:00Z

One of the most maddening things about this advance off of the March low is that conventional momentum indicators have been showing negative divergences for weeks or even months while this market grinds higher. Volume analysis has also been an exercise in futility as liquidity just keeps being funneled into equities - common sense be damned.

Those of you who have read my posts in the past know that I like to use a wide variety of indicators that do not mimic each other. For example, I always try to use a volume based indicator with a price momentum indicator. I almost never use stochastic with an RSI, for example, because they measure the same thing - price momentum. A multi dimensional look at the markets is always best.

One of my favorite indicators over the years has been the Nasdaq Oscillator which measures the strength of Nasdaq advances and declines. That can give an accurate picture of the strength that is behind price moves. If prices are moving higher, yet the Nasdaq Oscillator is diverging, that is usually a good indication that a pullback is developing, as market internals are not backing up price movement. If any of you have paid close attention to this indicator, it tracks very closely with the 14 period RSI, yet it is based on a totally different data set.

I have also paid attention to how firmly market participants are embracing risk by measuring money flows underneath the market between sectors, styles, and even fixed income. After much thought and trial and error, I have developed an indicator that I believe quantifies these flows. It is an indicator that trends well, gives great signals on trend line and support/resistance breaks, and has certain bull market and bear market characteristics.

In the daily chart of the Nasdaq Composite below, first notice how the risk indicator fell out of bull market territory (below the green dashed line) right off of the market top in November 2007. That showed that investors were moving away from risk even as the market pushed to new highs. The risk aversion among investors kicked off the horrific decline that culminated in the now famous March 2009 market low. The indicator then gave a buy signal in March when it broke above the reactionary high it posted in early January. Since then the risk indicator has trended higher right along with price until it broke its uptrend line about a month ago, and is now in danger of sliding back into bear market territory. Since then I have been advising my newsletter readers to reduce overall equity market exposure. Today the market opened to news that Dubai is having major financial difficulties, but it remains to be seen how this plays out.

Will this be THE top? My gut says no, that the world will once again crank up the printing presses to cover up yet another global financial mess. This can only go on for so long, however. If they can once again push this market higher good for them, but based on investors once again moving away from risk I want no part of it.

Dow Ripe For A Correction

2009-11-19T14:13:00Z

I know that many have been reluctant participants in this eight month old uptrend (including me), but I believe there is enough hard evidence to believe that a correction at at least equal in magnitude to the June-July correction is ready to unfold. Calling for corrections or reversals during this uptrend has made many an analyst look bad and this rally has no doubt cost some in the industry their jobs if they did not fully participate in the move.

This rally started in March when the mark to market rule (FASB #157) was abolished for banks, allowing them to set whatever value they wanted to the worthless debt clogging their balance sheets. The world of make believe combined with massive liquidity injections by the Fed have proven to be a lethal combination to any rational players looking for ebb and flow in this market.

Now that economic reality finally seems to be setting in again (no economic growth without massive government spending along with continued job losses), let's take a technical look at the Dow which has been the market leader. The mere fact that the Dow has been leading over the past month is a huge red flag on this rally as small caps and tech (measurements of risk tolerance in the market) have faltered badly in comparison. The outperformance in the Dow is driven by those looking to benefit from a weaker dollar and also looking for the 'safety' of highly liquid multinationals.

In the chart below I have plotted a daily chart of the Dow with the Fibonacci support/resistance bands I have shown in the past. These bands are not retracement levels, but are computed using actual swing points in the market. In the windows below, I have plotted normalized volume, which just means that volume is scaled differently so the 50 day moving average looks like a straight line across the volume histogram. This gives an easier 'at a glance' look at volume to determine whether or not volume is above or below average. I have also plotted an standard 14 period RSI in the middle window along with a volume oscillator in the lower window. the volume oscillator is simply the difference between a 10 period moving average of volume and a 25 period moving average of volume. Volume surges cause the oscillator to move higher, while tepid or weak volume cause it to move lower.

Notice how the June - July correction was started when price rallied into the Fibonacci resistance band in the 8775 - 8934 range. Notice also how volume was weak heading into the high and both the RSI and volume oscillator were showing negative momentum divergences. Price corrected 10% over the next four weeks. Now fast forward to today. You see that price has managed to rally up into the next Fibonacci resistance band on weak volume and momentum divergences. We will see how this next correction unfolds. For now I would suggest keeping your strongest longs but using hedges for protection. This market looks ready for a correction but it is hard to fight the easy money/weak dollar policy of the Federal Reserve.

November 16 Weekly Update

2009-11-19T12:58:00Z

November 16 Weekly Update

The Nasdaq is at a Critical Juncture

2009-11-03T14:27:00Z

Recall last week I wrote about the Nasdaq having a support band in the 2040 - 2070 area. The support in that area produced a weak bounce on Thursday, due to the rigged GDP numbers. That bounce was surprising due to the weak effort put forth by the bulls, which gives more weight to the argument that the whole psychological makeup of this market has changed.

In the daily chart of the Nasdaq below, I have once again plotted the Nasdaq with the 2040 - 2070 support area along with normalized volume, the Nasdaq momentum oscillator, and money flow index. Notice how price is once again sitting in the band with no real effort to push higher. This is the sign of a weak market as support is not providing a push higher, it is merely keeping prices from pushing lower for the time being.

Now take a look at the Nasdaq oscillator (just below volume) which is constructed using advances and declines on the Nasdaq exchange.  I have drawn a dotted line to mark the lowest point of this indicator since the March low, which occurred at the low point of the June/July correction.  Just last week the oscillator broke that line and on Thursday just managed to jump up and tag it from underneath. Money flow, which is based on price momentum and volume is showing he same sluggishness. This is real weakness folks. It says that 2040 probably will not hold.

If that level gives way. where do we go next? There is another Fibonacci support band in the 1748 - 1768 area. First, however, there is a previous short term top at 1880 that should provide some support. There is also an open gap in the 1800 area that could also be a target before price hits the next Fibonacci band.   The bottom line is that a more defensive posture is warranted here as tech is being sold.

November 2 Weekly Update

2009-11-02T00:28:00Z

November 2 Weekly Update

Hooray! Only a Half Million Americans Lost Their Jobs Last Week!

2009-10-29T18:02:00Z

Time for a rally! Today's 'strong' GDP number proves that indeed short term stimulus money was dispersed as promised, and of course it is time to celebrate because the pace pf job losses is no longer growing. A half million Americans out of work each week is good news to the economists. They see economic recovery, I see a shorting opportunity. That is what makes this country and the free market system great.

The mood of this market has changed as sellers have taken charge. Below is a daily chart of the Nasdaq Composite with an indicator that I developed (I am sure it is not an original idea). It is a 21 period normalized daily range of price. There are a few points worth making here:

- Notice how the daily ranges expanded on selloffs and contracted on rallies during the spring of 2008 at the left side of the chart. That was a sign that we were entering a strong decline phase.

- Now notice how weak the daily ranges are compared to their average (the straight blue line) these last few months. Bull markets have a greater feeling of comfort and confidence, so the daily ranges are naturally not as wide as they are during panic declines, however the daily ranges during rallies in August and September were positively anemic.

- Now take a look at the most recent activity to the right of the chart. Price has broken its almost eight month old trendline off of the March low as daily ranges have expanded.   The last push up to the October highs saw weak participation by any number of momentum indicators, including the 21 day normalized daily range.

So while this rally contains some who are celebrating the fact that we are still on pace for 'only' 2 million new job losses per month, the stock market is showing that there is reason to believe that the current valuations on equities may be out of line.   You think the economy is recovering? Just go to a restaurant and mall and see how much traffic is there. This economy was built on the backs of consumers like you and me and as long as this many workers are losing jobs every week, any 'recovery' will be anything but robust.

The Nasdaq will try to rally up into the 2130 - 2140 area before sellers get serious again. In yesterday's piece I called for a bounce in the 2040 - 2070 range and we got it. Now it looks to be one more bounce higher before the mettle of the buy and holders will be tested in earnest.

2040 - 2070 Is a Key Range On The Nasdaq

2009-10-28T14:46:00Z

Those of you who read my weekly updates know that the money flows away from risk have been building for weeks. This rally has continued higher in what looks to be simply an absence of buyers as the liquidity surge provided by the government may be coming to an end. Since the bull run is over for now, where do we look for support?

The chart below is a daily chart of the Nasdaq Composite. Below the price plot, I have plotted 'normalized' volume, which is sometimes an easier way to analyze volume in relation to its 50 day moving average. Notice how the scale has a horizontal line at 100. That level represents average volume, so if the volume line is above 100, that means volume was above average for that day, and if it was below 100, volume was below average for that day. Below normalized volume I have plotted the Nasdaq oscillator that I use that measures momentum not by using price, but by using daily highs and lows. The bottom most plot is a 21 day normalized version of intraday intensity which was originally developed to track block trading by institutions. It is a very good short term momentum indicator in that is uses BOTH price and volume in its calculations..

The first thing to notice is how the volume pattern changed as the Nasdaq pushed out to its final October high. On previous pushes to corrective lows, volume dried up, coming in at below average levels as noted by the double ended arrows. As price pushed higher the final time recently, volume dipped on buying just as it did previously when selling was drying up. The market complexion has changed.

Next take a look at the two momentum indicators (the Nasdaq Oscillator, and intra day intensity). Nether one confirmed this most recent push to new highs. When momentum indicators that measure different aspects of the market confirm each other, that is a strong signal that the buying is over for now.

So where is support? Look to the 2040 - 2070 area, which is the lower yellow band. Not only is it where a previous short term high was formed, but it is also the area where two Fibonacci levels come into play. These are not retracement levels, they are computed using the May 2008 high and the March 2009 low. This gives bands that act as support and resistance. You and see that the band has already provided resistance in late August and support in early October. This is an area where we can expect a bounce and maybe one more run at the highs. If this area gives way, however, the bull run us definitely over.

October 26 Weekly Update

2009-10-28T12:39:00Z

October 26 Weekly Update

October 19 Weekly Update

2009-10-19T02:15:00Z

October 19 Weekly Update

JP Morgan Is Showing Major Fatigue

2009-10-17T14:11:00Z

It has been a while since I have posted as I am helping a good friend write a book describing his trading methodology. I felt compelled to pick up the pace of my posts here on the blog because it finally looks as if irrefutable cracks are showing in this seven month old rally.

Those of you who have been following my posts know that I have been reluctantly going along with the trend even though there is no concrete evidence of economic growth other than the fact that governments world wide have had the currency printing presses going 24/7. All anyone has to do is look at our nation's 17% unemployment rate as evidence that the consumer will not be able to hoist the economy on his or her back as in decades past. That leaves more government chicanery and spending initiatives to stimulate growth, which is always temporary and leaves us worse off than if they had done nothing.

The financials have been the darlings of this rally, especially the large banks. Regardless of what they or the government say, they have an endless supply of taxpayer dollars at their disposal along with their ability to move the market with their trading divisions (JP Morgan and Goldman Sachs especially). When the odds are so tilted in the bank's favor, they should be rocketing to the moon, unless there is trouble ahead.

In the chart below, I am taking a technical look at JP Morgan which has rallied 217% off of its March low. I have also plotted three volume based indicators. The top indicator is a 21 day normalized version of intraday intensity (an indicator developed to track institutional block trading), the middle indicator is standard 14 period money flow, and the bottom indicator is an 8 day volume rate of change smoothed with a 3 day simple moving average.

I have shaded the area in yellow where volume was healthy as demonstrated by the expanding volume rate of change in the bottom window. That meant that there was ample participation to push JPM shares sharply higher. Following the initial push higher off of the July lows, something happened to the level of participation. Notice how in early August (the end of the yellow shaded area) how the peaks in the volume rate of change (bottom indicator) began to turn lower accompanied by drops in intraday intensity and money flow even as prices pushed higher. That was the first sign of trouble. As prices pushed out to their September high, only money flow confirmed that move. Prices have since corrected, and have pushed out to their latest round of highs, but volume rate of change continues to contract while the other two indicators are showing very prominent bearish divergences.

These types of negative signals are all over the market now as volume is drying up and momentum wanes. I am not saying that we are headed for a crash here, but I believe at the very least a healthy correction may finally be ready to unfold. Let;s see if the market can continue to be propped up or if some semblance of reality sets in.

October 12 Weekly Update

2009-10-16T18:08:00Z

October 12 Weekly Update