Weakness Developing in the Equity Market

Since the March low, the stock market has been in a upward trend for about eight months. But some weaknesses developing now might sign a deep correction is near.

1. Divergences in market breadth and price, both NY A/D ratio and High/Low ratio.

2. Divergences between price and volume. While the prices are moving into new highs, the volumes are decreasing. When the prices come down, the volumes are increasing.

3. More and more stocks break down.

4. Major emerging market indexes and leading stocks show bearish volume patterns

Markets to Watch

Crude Oil has the potential to break out for a up leg. It might break low to shake followers out before it moves upward.



I like breakouts from the short downward trendlines of tight patterns. Long-term moving average crossover is a plus.

Divergences in the Equity Market

1. Divergence between NY A/D line and Dow Index.

2. Divergence between S&P price and volume

These divergences show some weakness in the broad markets now. The market might strengthen again and make them go away. Or these divergences stay for a quite long period of time until the market starts to break.

Baltic Exchange Dry Index, Commodity Prices, and Global Economy

First here are some background and explanations of Baltic Exchange Dry Index:

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange, which traces its roots to the Virginia and Baltick coffeehouse in London's financial district in 1744.

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand). The supply of ships (cargo transports) is much less elastic than the demand for them, so the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, crude oil, metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

Now, let us look at the index chart below from InvestmentTools.com.



The index is free falling like a waterfall. It penetrates three major bottoms from 2008, 2005 and 2001 respectively. It is really ugly.

Below are charts of CRB index and Gold (GC) with the index.

BDI and CRB



BDI and GC



It looks like commodity prices still have rooms to go down. How about the global economy? Good Luck to us.

Unprecedented Volalitity

The market volatility this month is unusual both in concentration and in magnitude. There are four large moves that are more than 7%, two upside and two downside. This kind of market behaviors happen only during the Great Depression era.



From the chart above, I wonder whether this kind of market volatility might stay with us for a relative long period of time. The chart below also shows the unprecedented volatility happenning now in the current market. Bands in the chart marks two standard deviations.

Money As Debt

I just finish watching the video "Money As Debt". It is the best work I have ever seen in explaining how money works in the current society. You might like it too.

Dramatic and Sudden Events

In daily life, we are used to normal events and average changes. They make us feel comfortable and safe. So our minds are programmed to think in a normal and average way. But things that cause fundamental changes in all aspects are sudden and dramatic events.

This principle applies to the trend-following trading very well. The trend-following trading uses sudden changes of market behavior, such as breakout, to enter a trade; it ride along to expect a dramatic trend; and it uses a sudden abnormal reaction against the trend to exit a trade.

Also trend-following uses the stop loss to control the risk. So if a dramatic and sudden event is against a trade, the trade has a small loss. If the event favors a trade, it has a huge profit.

Currently, a dramatic event are developing in the global financial system. The following chart gives us a nice picture of it.



Where does this event leads to us? No one knows. But I feel the interview below is very interesting.

RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.

Here is the pair's sobering conversation on what may lie ahead.

PAUL SOLMAN, NewsHour Economics Correspondent: One of the world's hottest investment advisers these days, Nassim Nicholas Taleb, author of "The Black Swan," who's been warning of a crash for years, betting on one, and winning big.

He's been ubiquitous in the financial media of late, from cable TV's "Colbert Report" to the BBC's "Newsnight," where he was infuriated by what he called "bogus accounting."

NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.

PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they're both scared.

NASSIM NICHOLAS TALEB: I don't know if we're entering the most difficult period since -- not since the Great Depression, since the American Revolution.

PAUL SOLMAN: The most serious situation we've been in since the American Revolution?

NASSIM NICHOLAS TALEB: Yes.

PAUL SOLMAN: Professor Mandelbrot, can that possibly be true?

BENOIT MANDELBROT, Mathematician: It's very serious.

PAUL SOLMAN: More serious than the Great Depression, possibly?

BENOIT MANDELBROT: Possibly. I hope not.

...... See the source below for the full interview.

Source: PBS: Top Theorists Examine Rippling Economic Turbulence

Pivot Points

Pivot points are turning points in price movements. They are places where buyers or seller give up their positions, so they involve emotions. The more intense the emotions are, the more important the pivot points. At extreme cases, one pivot point, such as price spike or crash, might define the turning point for a secure long term trend. Most of cases, more than one pivot points connect to a trend line. The break of a trend line may decide the direction of a trend.

So pivot points and trend lines are important tools to use to decide the entry and exit of a trade. Here are three steps that Jesse Livemore used to enter his trades.

1. Watch the tape.


2. Establish your pivot points.


3. Be ready to trade along the line of least resistance.

Pivot points are easy to see in hindsight but difficult to spot when they are developing. It is even hard if you like to have information from media and your mind is strongly biased.

Keep your mind open, clear and objective, then pivot points and lines of least resistance come to you. you go with the flow.

Below are some charts with clear pivot points and lines of least resistacne. I feel disappointed I find them in hindsight but not they come to me natually.

Japanese Yen



Australian Dollar



Canadian Dollar

Dollar and Other Currencies

Last Friday, Dollar had a largest upside move in many years. It also broke out a six-month base. Other major currencies, such as, Euro, Australian Dollar, Canadian Dollar, British Pound, Swiss Franc had the largest one-day drops within years.

Dollar Index



Euro

Cut Loss Short and Fast

In trading, cut loss short and fast is one of principles to achieve consistent and profitable results. Following this principle is one of the common attributes of successful traders, though, they might implement it in different ways.

Here are my understandings of this principle and I like to follow them consistently in my trading.

• Always have a stop loss in place.
• In a trading session, I enter a position but I have a loss around the close of the session. I close the position.
• After I enter a position, I have profits for a while. Then the market stalls, goes again me, and gives me a loss. I close the position.

It seems that traders have tendency to let loss run. They are unwilling to experience feelings of loss. They hope the market can come back to their way again.

The Postive Intentions of Failure and Loss

Failure and Loss normally bring people negative feelings, such as pain, anger, frustration, and so on. People also are unwilling to experience those feelings, so they regard failure and loss bad and try to avoid them.

But negative feelings of failure and loss have positive intentions:

• They tell us that something is not working or doesn't function properly any more, let it go.
• We might be able to learn something from our mistakes that cause the failure and loss.
• We might study more in the areas that we are undertaking.
• Others.

Failure and Loss are the part of a process. We might embrace them. Willingness to experience feelings of failure and loss gives us the courage to trial and error and can help us to learn from failures and to grow. A Chinese saying that I like:

Failure is the mother of Success

Refllatio

Source: London Banker

Alpha to Beta

Facts You May Like To Know

There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion.


Source: MISH'S Global Economic Trend Analysis

The Quote of Today

"Capitalism demands the best of every man – his rationality – and rewards him accordingly. It leaves every man free to choose the work he likes, to specialize in it, to trade his product for the products of others, and to go as far on the road of achievement as his ability and ambition will carry him."

-Any Rand

Some Thoughts on entries and exits

There are many ways to evaluate market conditions. Personally, I think relative strength, sentiment, and market correlation dynamics are three most important factors. I use them to evaluate market and sector conditions, then use the price action of individual markets to choose markets for entries. Here are my three ways for entry:

1. Regional breakout.

2. Relatively strong in a weak market (accumulation) and relatively weak in a strong market (distribution).

3. Extreme reversal.

One thing that is very important to the entry is to choose a right time and a right price to enter a position, a right position. If a position has a good profit right at the start, it means I have a right position with the market. Then I hold the position. If the position has a loss or struggles to have a profit after I enter it, the market tells me that I have a wrong position. Then I exit it.

Ways for Exits are much more challenging and difficult to define than those for entries. Here are my three ways for exit:

1. one of effective ways to exit is to close a position when a market has a extraordinary move with a huge volume (at least more than 10% price move and more than triple average volumes) in my favor direction. This kind of move is normally an exhaustive move. Also I have a windfall profit, then take it.

2. Swing high/low stop.

3. Multiple ATR trailing stop.

The Quote of Today

"The secret of happiness is freedom. The secret of freedom is courage."

-Thucydides

Loan Pawns Have Good Business

When the economy conditions are tough, lots of people sometimes don't have enough income sources to support their daily life. They also have difficulties to borrow money from credit lines. So they might temporarily take loans from loan pawns, even pay quite high interest rates. Look at the stock chart of a loan pawn below. It seems prospering.

EZPW

Short Selling and Market Behaviors

Short selling can drive the stock price sharply low, but it also work as a support force when the short covers. From this point of view, the short selling might make a stock more volatile.

XLF



I wonder what happens when a stock doesn't have the support force from either inside buying or short covering with poor general conditions. It might just keep drifting down.

Divergences Between Commodity and its Commodity Stocks

Today, Crude Oil, Soybean, and Copper close to all time high. But most of commodities stocks, which are also recent leaders of stock market, close sharply lower. This type of divergence happens not quite often.

Copper and FCX





Soybean and a Fertilizer Company





Crude Oil and a Energy Company