MACD negative on monthly S&P 500

I dont always keep track of monthly closes...or monthly charts for that matter...but times like these when nobody knows if we are cheap or expensive, oversold or just gettin warmed up...I like the perspective.

I also like simplicity when it comes to monthly charts...finally...the close is really just another trade...its not different at the end of the month than at the beginning of the next...but different people place different weight on the close...in reality its just another trade that just got executed at 3:59:59:59...and so on...BUT since many people believe the close is important...I use it in many of my analyses.

I also apply my favorite moving average (which also happens to be Alexander Elder's favorite...but it was my favorite long before I read his book)...the lucky 13 period EMA.

I like 13 because its a taboo unlucky number but also, its a fibonacci number...and it's a short enough period that it tells you fairly quickly that a trend is getting going, finding support, or switching to the other side.

The other indicator is simply MACD.

Here's what happens to the good ole S&P 500 as of this month's close (also a quarter close). We closed for the 2nd month well below the 13 EMA....ah...so what...well MACD historgram went negative...

Over the last 20 years...there are very few occasions that these conditions have been in place (closing under the 13 EMA and MACD histogram going/being negative)...but whenever it did happen it spelled bad news. Just as the opposite usually spelled good news.

If the index was above the 13 EMA and MACD histogram went negative it was usually a sign that the rally was having a retest and that was a buying opportunity.

However, if the trend is compromised by 2 closes under the 13 EMA...and momentum has also been slowing to the point of a negative histogram being in place...then this could spell major disaster.

In late 1999 MACD went negative and stayed negative as the index made less and less progress to the upside. When the index closed under the EMA...bye bye good times. The index didn't see the topside of the EMA untl May of 2003.

In December of 2007 MACD went negative...the index closed the year above the EMA but January 2008 was a bad month to say the least and it pushed the index under the 13 EMA...the Index wasn't going to see the topside of that EMA until July of 2009.

Well here we are again...now we have 2 closes under the EMA this month actually tested the EMA from below and failed miserably...closing near the lows of the month and forcing the MACD into negative territory.

From a candle perspective, these last 2 months look almost exactly like January and February of 2008.

That being said...after those bad months a relief rally ensued and the EMA was tested...so we may go to 1233 in the near future...but that's a great short-able number now.

In any case, I believe that we will test last year's lows around 1000 on the S&P 500...I am also thinking that it is likely that we will go beyond that and test the March 09 lows.

That will not be pretty for the world...I am hoping that doesn't occur. Either way...ugly times ahead...unless you are short of course.

Il Mercato...

First off.. today we had some quick trades from Grand Slam..

Yesterday got long JNPR calls, today sold'em for a 30% gain...bot'em for $3.95...sold'em for $5.45...across 14 contracts $1,800 this is in one day....sexy

Also got out of RIG calls for a small but decent profit...bought them for $6.10 sold'em for $6.65...across 9 contracts that's $495...not shabby for about 1 week holding

I am still holding TSL...though at some point I had similar action as that JNPR trade. It is currently at a minor loss...but I have limited confidence in it unless something major heats up on solar...nonetheless I have a few more weeks and theta isn't a factor yet...so I hold... Some technical breakdowns have occurred, but not the money management breaks...so I hold.

I know I just said "so I hold" twice...but this is important. I have seen many positions get better if I hold through one of the 2 loss prevention programs...some I have sold prior to money management stops being violated (i.e. my defined max risk not being triggered) due to technical breaks...others i have sold due to money management but without technical breaks...in this case I should have managed position size better...

In any case, TSL is a hold right now it has found some support at $28ish and my money management rules have not been triggered yet...its just painful knowing I could have taken a nice profit on this just last week...I was hoping TSL was going to make up for MCP...

Anyway TSL has retested on the daily time frame and it is back above the 13hr EMA...also found support at the 20 period SMA for the 4 hr chart...

As for the market. Bullish day, bullish internals, volume. Slight uptrend in VIX was crushed today with lower low and lower closing low...However, caution is warranted as a major short squeeze is on...witness the commercial hedger on the NDX....Also it appears that rallying in the off season (vis-a-vis earnings) means the on-season will fizzle.

Regardless, a breakout like today has to be respected. So near-term...mooo...at least until earnings season or even election day.

Are we Turning Japanese?

So I had a thought yesterday about yields on the 10 year dipping to under 2.5% and all this talk about Japan. So I thought...why not try to figure out if bonds are really in a bubble or if we are turning Japanese...
My buddy GX has access to a bloomberg so I asked him to send me a chart of Japanese 10 year yield during the lost decade and I asked him to overlay Japan's GDP:

Yields are in Orange, GDP in White...the little spikes at the top of the GDP curve are at around the 2.5% area.

So then I was like...well where the hell are we on this chart? If we are turning Japanese we need to figure out where we are on this chart to really decide if Bonds are in a bubble of if we will go below 2% and reside there for a decade or so...

The instructive part of this exercise is to look at the ranges..Japan's deflationary spiral started in the early 90's then really took flight after a little double dip followed by a bigger double dip...but they never got over 3%ish on GDP growth during much of the 90's....that's when yields really took off to the downside and stayed well below 2% for the decade to come.

As the old addage goes..."OK the world is going to end...so what's the trade"...well that's of course why I go forth on these stupid academic exercises...and bug my friend's with bloombergs to make stupid charts for me...

GX...overlay the Nikkei:

Green is the Nikkei.

Given our GDP growth rate (sub 2%) and the current yield on our 10 year Treasuries (2.5%) I would say we are either in 1994 or 1997 in Japanese years. Which definitely means we are looking at a deflationary spiral and our rates are going lower and they probably will stay there for a long long time.

All of this being said...Bonds have more room to run if we are indeed turning Japanese, also, Stocks will be fairly choppy for the next few years trading in a range that continues to decline overall...however at the bottoms and tops of these ranges vast quantities of money can be made...you just gotta go long and short.

For now...I guess you can still chase treasuries...

Market musings...

Not that my opinion matters, markets got killed today and the low volume saviors didn't show up.

I will say that on the way home today I was listening to Pimm Fox and his "taking stock" show and wouldn't cha know it...Bob Prechter was on spewing his usual shit and how he just called this top last week...(hat tip pennyman for the link)

Pimm of course didn't ask him about all the million other erroneous top calls Prechter has made in the past.

Last night I attended a not so useful discussion where Sam Stovall of S&P gave a talk about whether or not diversification failed. He says no, if you had a 60/40 mix of equities and bonds...you would have only lost 13% or something at worse in the big bear of 2008.

But more of his talk was nice to hear. He mentioned statistics about the number of 2% days in market history...I forget the exact numbers but up until 1996 or so these events were rare...extremely rare.

Sam Stovall last night said that since 2000 we now have more than 2 times the number of 2% days on average per year.

Yesterday I got lucky and found an opportunity in ETP to go short something decent since I was totally exposed to the long side. This was a bit of luck, but also took guts...I can't remember the last time I put on a counter trend trade at a level close to resistance. I feel like this was one of my best trades this year...not so much because of the money involved, but because I acted on a good setup and knew to ignore new longs and put on a short.

In any case, after hearing those stats from Stovall last night, its good to remember that days like today are now becoming commonplace thanks to the computer trading and the Hal 2000s. Volatility seems like it is here to stay and this is the new normal. If anything is for certain this is it.

And for Sam Stovall to be preaching buying and holding last night...with this piece of knowledge in his head just made me less inclined to believe his philosophy.

I say this. Buying and holding is fine if you are a multimillionaire and have a small piece of your fortune in the market just to help pay for the servicing of your yacht and summer homes.

For everyone else, you best consider shortening your holding periods and using options to help cushion falls.

But today isn't that rare of an event anymore and we are now at a crucial support level, right now I am with Alphahorn...this is probably just another buy-able dip.

But tomorrow will tell us for sure.