November 2013

Where do you think the broad averages will be trading at the end of 2014? Will stocks be in the throes of a devastating bear market?  Or will the Dow be galloping blithely higher, on its way to 20000 and beyond?  Clearly, Wall Street doesn’t seem to care whether the economy remains in a wallow. Shares have moved relentlessly higher despite the fact that GDP growth is stuck in a rut, wages are stagnant, and deflation has come to rule the budgets of states and cities, if not yet Washington. We had thought Obamacare would be the straw the breaks the camel’s back, since it represents the biggest new tax ever imposed on the American Middle class. It also comes at a time when the average American household can ill afford the 25%-or-more annual rate increases that have become a regular feature of the private insurance market. Incredibly, however, the stock market has continued to ascend, borne aloft by strong corporate profits that have in no way benefited the labor force. Equally astounding is that consumer spending has not collapsed. We attribute this to a shadow economy that exists and flourishes beyond the range of the tax collector.  Professor Edgar Feige, using estimates of currency in circulation both in and outside of the U.S., has estimated its size at $2 trillion. If so, it would help account for the resilience of retail sales, including autos and other big-ticket items, as The Great Recession drags on. For our part, we’ve grown tired of playing games with the bull. It has been our practice to attempt getting short at Hidden Pivot rally targets of significance. Although these targets have generally worked, accurately catching tradable tops, both pleasure and profits have been short-lived.  Indeed, targets that have taken months to reach give way

If you've tried to trade the E-Mini S&P using camouflage, you'll know that it has been getting tougher and tougher to spot the sort of patterns we thrive on.  My hunch is that there are no longer any humans trading it, only algorithm-driven machines. I would not have predicted a couple of years ago that this would make a difference, but it has.  By comparison, trading GOOG, PCLN and some other wacky high-fliers is far easier -- almost as though it were mostly rubes who are trading those vehicles.

I'd forecast a squall ahead if the futures took out a midpoint support at 1773.75, but they went no lower than 1275.75 overnight, once again denying bears a little respite.  This vehicle used to be an easy trade using camouflage, but no longer. In fact, it's become such a nasty, machine-traded little s.o.b. that even applying hindsight in places where we might have expected a price reversal, it's extremely difficult to find a 'camo' entry opportunity (see inset). I'm not going to drop coverage of the E-Mini, but because it has yielded so very few decent trading opportunities lately, I'll feature it less often.

Next stop on the way down:  1212.80, the second of three descending targets we've been using to gauge the bear's continuing strength. (The third lies at 1195.40.) The one at 1237.40 hit yesterday was two months in coming, and although it was exceeded by just $1.60, the pattern that produced it was so precise that the target shouldn't have been exceeded at all.  Things are never quite so dismal, however, as to be hopeless. But it would take an upthrust to at least 1268.00 today to give bulls a fighting chance next week. Failing that, look for 1212.80 to produce a tradable bounce, followed by a relapse to 1195.40.  My big picture target for the bear market is still 1125.  (Note to scalpers: 1228.30, a minor hidden support not mentioned earlier, can be bottom-fished with a stop-loss as tight as four ticks.)

The December Comex contract has fallen to within $4 of the 1237.40 Hidden Pivot we've been using as a minimum downside target. You can bottom-fish there with a stop-loss as tight as five ticks, provided you've been short on the way down. Keep in mind that if the stop-loss is tagged, odds would shorten for a continuation of the downtrend to at least 1212.80, the next target in the sequence.

Copper has been struggling since May to reverse the damage caused by the breach of a long-term midpoint support, to little avail. Now it looks like a fall to the 2.7780 target associated with that Hidden Pivot is all but certain. That's a decline of 12% from these levels, but it wouldn't necessarily mark the end of the bear market begun nearly three years ago.  More likely is a strong (and tradable) bounce from 2.7780, then a resumption of the downtrend to 2.4435, a target derived from sliding point A to a higher peak (A2). ________ UPDATE (November 26 4:10 a.m. EDT): The futures deserve the cautious  benefit of the doubt at the moment, since they've turned from well above the target given above. However, the rally would gain more credibility if bulls are able to pop this vehicle above the two peaks shown -- and the sooner the better.

The strong bullish impulse leg that greeted the day turned out to be a rather nasty bull trap.  Because the impulse leg looked so promising, and because the subsequent reversal generated a bearish leg on the hourly chart, the yellow warning flag is out. My outlook had been bullish for the both near- and intermediate-term, but no longer. DaBoyz had an excellent opportunity to distribute stock when short-covering drove stocks toward the previous day's highs on the opening bell. However, rather than exploit the squeeze for a while, they pulled their bids and let the futures fall. The result was the bearish impulse leg shown (see inset). It targets 1765.75, predicated on a breach of the 1773.75 midpoint support. Scalp from the short side, but note that either number can be bottom-fished with a stop-loss as tight as three ticks. If you use a straight bid rather than camouflage, limit position size to a single contract.

I've revisited the long-term chart of the Gold Bugs Index (HUI) today, since it is one of many bullion vehicles that will be fighting gravity to avert a return to 2008's watershed low. As the tout notes, it would take a 31% rally merely to get out of trouble, never mind signal a return to the good old days.

Like so many other gold vehicles, this one looks unlikely to avoid a test of 2008's watershed low at 150.  It has likely become magnetic by now, and although we needn't attach much significance to a breach of the low, assuming one occurs, the short-squeeze that follows a running of stops just beneath it would need to be a humdinger to power HUI out of the hole. What would it take to annul this very bearish outlook? Answer: Nothing less than a rocket ride exceeding 291.07 -- a 31% rally from here.