January 2011

The gnarly, un-intuitive pattern shown in the chart projects to 27.285, and I'd suggest preparing yourself psychologically or otherwise for the fall. Camouflage shorts should reference the 28.565 midpoint, implying you could initiate a trade either on a breakdown abc pattern, or on a failed abc rally.  Alternatively, a robust bullish reversal would be signaled by a print at 30.145, a look-to-the-left peak made January 4 on the way down.

Yesterday's bull-trap high on the opening bar set the scene for a day of backing and filling.  The process looks like it will take the February contract down to at least 1362.20, and you can bottom-fish that Hidden Pivot with a stop-loss as tight as 0.30 points.  The target lies within two ticks of a 1362.40 midpoint of a larger downtrend identified during yesterday's tutorial session.  Of course, it would be a negative for the short term if both of these supports give way easily. _______ UPDATE (9:49 a.m. ET): This morning's vicious selloff has brought clarity to the lesser charts, which all but ordain a bottom at either 1340.60 (A=1392.90 on Jan 13); or if any lower, at 1322.20 (A=1423.40 on January 3).  Most immediately, the most bullish thing that could happen would be for the futures to start impulsing bullishly on the 15-minute chart or higher without having reached the 1340.60 target. The low so far has been 1343.10.

The futures have had little trouble creating fresh impulse legs on the hourly chart with each new thrust, so look for this rally to show some staying power.  Traders should nevertheless expect a show of resistance at 1.3603, a Hidden Pivot that is my minimum upside target for the near term.  On the pullback in motion at this moment, night owls can try bottom-fishing at 1.3412 using a 1.3413 bid and a four-tick stop-loss. The pattern is shown in the chart. ______ UPDATE: The futures took a 105-tick leap from an overnight low of 1.3413 (!), so in theory this trade would have been a solid winner for anyone who followed my instructions mechanically.

Stayed tuned for intraday guidance. I detailed plans here earlier to leverage an expected rally to 136.25 by buying the Feb 133/136/139 butterfly spread. (You can access the full strategy by selecting "DIA" in the "All Picks by Issue" pulldown.)  We'll back away for the moment, however, since recent weakness hinted of an imminent fall. If so, that would allow us to put on the butterfly more easily at attractive prices.  We could also try legging into the position if DIA rallies, shorting the Feb 133/136 vertical bull call spread to start. _____ UPDATE (January 25):  We'll put this trade on ice for the moment, since it's just too darned hard to buy bull spreads at bargain prices if stocks only move in one direction day after day, week after week, month after month.

We were in and out of the futures during Wednesday morning's tutorial session, looking for a tradable low that never came. When the dust had settled, however, sellers had failed to drive this vehicle beneath last Friday's 1274.25 low. My hunch is that they'll succeed today, given the way the futures easily broke minor supports yesterday.  In any event, the selloff would need to hit 1249.25 this week -- about 30 points below current levels -- to generate a bearish impulse leg on the daily chart.  This is by no means a longshot bet, and I would therefore encourage night owls to take every good opportunity that comes along to get short.  As of 8:14 p.m. ET, there was a minor 'd' rally target at 1282.25 on the three minute chart that could be shorted with a 1.00-point stop-loss. _______ UPDATE: 1281.50 was as high as the little sonofabitch got before selling off 14 points to an intraday low Thursday at 1267.50.   Shorts who negelected to cover on weakness got hung out to dry when the obligatory end-of-day short squeeze brought the futures back to unchanged.

Our friend, colleague and charter Pivoteer Sean Rakhimov, an astute observer of the bullion world, is out with a very bullish forecast for Silver.  Don't take this correction too seriously, he says, since 2010's highs are not going to endure. One force that will be pushing prices to new highs is the emergence of some new sovereign buyers.  For the complete interview, click here.

We often disparage the Wall Street Journal for being too spineless to tell it like it is when reporting on the state of the economy, but with last Friday’s lead story, New Hit to Strapped States, they pulled no punches. You can almost pick a paragraph at random and get a sense of how serious the cities’ credit problems are. This paragraph, for instance “Municipalities borrowed $122 billion of variable rate demand debt in 2008, roughly twice the amount of these types of loans borrowed the year before…”  How did they get in so deep?  The answer lies in the way they navigated the shoals of 2008. While most muni-bond debt is long-term, scads of jerry-rigged credit deals were struck that year to get municipal borrowers past the crunch.  For the most part, this involved the use of so-called letters of credit – guarantees by large banks to backstop municipal borrowers when they were having trouble raising cash via bond auctions. Under the circumstances, noted the Journal, “Many municipalities scrambled to convert the debt into other instruments, including variable-rate demand obligations, which are long-term bonds with interest rates that reset periodically. For a fee, big banks guaranteed many of these deals.” Now, the letters of credit are expiring, and although borrowers must have believed in 2008 that it would be easy to renew them a few years hence, this has not proven to be the case. In fact, if banks are willing to issue letters of credit at all, it is at prohibitively steep premiums.  For municipal borrowers, the only alternative is to pay increasingly punitive auction rates at a time when they are struggling just to pay their bills.  On Friday, those rates hit 5.01 percent for 30-year, Triple-A general obligation bonds, reflecting a ratcheting up of perceptions of

A friend of mine is a top trading system developer. I asked him for his thoughts on high-speed trading, and he responded as follows: "Without really diving into the entire issue with both feet, my random comments would not do justice to this topic. I write code, not books, as you know. I might say that Goldman Sachs (GS) is not the only player in the box. If Sergey Aleynikov [a former Goldman employee accused of stealing trading software] could get code out of Goldman, there are probably others. I'd hate to be on the (GS) receiving end of a really dedicated counter-predatory 'market harvester.'  I doubt that the markets will become the war zone with collateral damage with the magnitude that [some believe].  [Hedge fund] LTCM had Nobel laureates on board and they blew up. "High frequency trading (HFT) is the most profitable category on Wall Street right now, however.  News is still moving the markets, and machine-readable news can be hooked up to algos. By the way:  GS does not have our algo unless they are stealing patents.  We make this algo [commercially] available to ALL traders, and we are not alone. Circuit breakers will probably increase in use and regulation will probably increase. "Regulators are not real happy with GS, in my humble opinion.  The Bloomberg-tapping trader in Bermuda shorts trading FOREX is simply being replaced by the shorts-wearing FOREX trader running his own personal algo. More sudden market moves have happened due to fat-fingered errors than algos. The leverage unwind set upon us by us helping people get into houses that they could not afford has hurt us more than GS's algos. We can do much by voting in leaders that have common sense. Who really wanted to 'Equalize Housing' in an unequal world? "My advice: Work hard, act

We found an E-Mini bottom to trade during this session, since the futures had plummeted 12 points, to within a hair of an opportune midpoint pivot identified that same morning in a tout. After the trade triggered, we followed it to the point of “success,” i.e., to the C-D midpoint, where we were able to cash out half of the position. Moving on to other charts, we found some good technical reasons to be untroubled by bullion’s weakness. We also saw, in real time on the Diamonds’ weekly chart, why stock market bears should brace for more upside of as much as 900 points.