Old Timer Trading Tip #1

One old timer I spoke with last week said that he has been trading since the 40’s … and that he was trained by a very successful trader at that time.  (He said that he was in his late 80’s and trading kept him young.)

I asked him, “What do you think is the most important thing you were taught that is still just as valuable today?”

He paused and with his old gravely voice said, “Money.”   “That’s what I was taught”, he said, “money …. money flows in, markets go up … money flows out, markets go down”.

In our charts, we call it “Liquidity”, but the reality is that we are talking about “Money“.    If money is flowing in, it obviously means that investors are buying, and if money is flowing out, it means that investors are selling.

During the entire Bear Market we recently had, money was not only flowing out, it was at a level where Liquidity was in Contraction.   And then, in April 2009, Liquidity started to increase its inflow, rose above a resistance line, and the went into Expansion from there.

The market has been a little volatile in the past few days, but Liquidity is still flowing in, and at a high expansion level.    And that the old timer said … was making him happy.

posted by Marty Chenard  www.stocktiming.com

The economic and market landscape is changing …

The economic and market landscape is changing …

Today, I believe a verbal update of global economic and legal changes are a little more important that one of our regular charts.   Things are changing … some of them very important with long term implications and for 2010.

We will discuss 3 change topics today:
1.  Government inflationary fears plus Banking risk aversion equals “contraction”.
2.  The Supreme Court gives new Powers to lobbyist.
3.  FIve trading days away to a new SEC Short Seller Trading rule?

1.  Government inflationary fears, plus Banking risk aversion equals “contraction”.

Last week, China made an announcement about cutting off or curbing lending at some banks.   Things were heating up too much and they were afraid of inflation, they said.   On Thursday, they raised the interest rate on its 3-month treasury bills for the 2nd. time in two weeks to cut down on  lending.

While they expected us to focus on their smart moves to combat inflation, the real problem may be about Chinese “banks in trouble”.    It turns out, that at the same time, Chinese banks were ordered to increase their capital reserves which decreases the amount of money they can lend.  The reason here was not about inflation, but about mounting “bad debt fears” due to consumer spending sprees on housing and autos.

The Chinese banking problem is about unsatisfactory capital reserves.   For instance, the Bank of China looks like it is doing great … after all, it new loans increased 38% last year.  What’s the problem with that?   The problem  is that the bank only has a capital adequacy ratio of 11.63%.   The “new” Chinese regulatory minimum being planned is 12%.   So, the Bank of China wants to sell $5.9 BILLION in convertible bonds, and selling more stock to cover the possible Regulatory violation.  The problem is that Credit Suisse has estimated that even with the bond sale, the Bank of China could still end up at a capital ratio of 11.36% by the end of 2010.   Trouble in China’s banking system is probably a more serious problem now, than their inflation down the road.

Bottom line:  China is triggering “liquidity contraction” actions that could spill over into other countries, including the U.S.    The stock market liquidity levels in the U.S. dropped sharply last week and is getting very close to going into “Contraction” if something is not done.   At the same time, the Fed wants to start reigning in the excessive liquidity they created so that puts them and the market in a bind.   This is not the way to start 2010 … and not the way to help a fragile economy recover.

2.  The Supreme Court gives new Powers to lobbyist.

As swarms of lobbyist descend upon Washington, and Davos this week, lobbyist have been given incredible powers over our elected officials.

Last Thursday, the Supreme Court ruled that corporations may spend as freely as they want to support or oppose candidates for president and Congress, easing decades-old limits on business efforts to influence federal campaigns.

Essentially, the Supreme Court ruled that companies can dip into their treasuries to spend as much as they want to support or oppose individual candidates.

That gave American corporations the right to unlimited political spending for personal benefit in order to “control or sway the decisions of our elected officials“.   I’m not sure how different that will end up being relative to lobbyist legally having the power of extortion.   Threatening a government official to destroy his upcoming campaign if he doesn’t vote “the right  way” should be against the law.   Companies like Morgan Stanley, and other Wall Street firms are already out of “Bonus” control. How can Washington reign them in when Lobbyist have more power over our politicians than “we the people”?    Unless changed, this will have very negative results over the long term for our economy, banking system, and consumers.   This is not the way to start 2010 … and not the way to help a fragile economy recover.

3.  Five trading days away to a new SEC Short Seller Trading rule?

How did that happen?  Over the weekend, the SEC announced that they may “adopt a new rule in February”.   A rule restricting the execution of short trades when the market is going down … a rule that starts in February.   For a moment, don’t get caught up with whether its a good idea or not.

Instead, ask yourself how or why would the SEC make that announcement last weekend.   It takes months for the SEC and the Government to decide on anything.   How could they have come up with a new shorting restriction within 48 hours after the market dropped?    Were they already on the alert to put a rule in place to protect the market from falling because the Fed told them they were going to start reigning in the excessive liquidity they pumped into the system?   Our indicators saw the largest two day liquidity drop last week that we have seen in months.  This is not the way to start 2010 … and not the way to help a fragile economy recover.

How to use the TICK for an entry point or day trading …

How to use the TICK for an entry point or day trading …

If you have ever looked at the TICK, it pretty much looks like “noise”.   With extremely lengthy bars on minute to daily data, it seems like useless data to many.   Chart 1 below is an example of TICK data.

While doing research a few years ago, we tested moving averages on the daily ticks as well as many time intervals in minutes.

It was always useless data UNTIL … we viewed the TICK in “1 minute” intervals and then set a smooth moving average of 80 that magical data appeared.

Take a look at the second chart below.  It is a 1 minute chart over a 3 day interval.   Actually, it is the SAME chart as above, except we show a “smoothed moving average of 80″ instead of the ticks.   And then, we drew two horizontal lines at the zero level.

Above the horizontal &line is positive, below is negative, and on the line is neutral.

In the chart, we overlaid the action of the SPY so that you can compare the 80 SMA TICK movements to the index.

Note the blue arrows … when the 80 MVA green TICK line rises above the horizontal lines, it is a trend change signal for the SPY to reverse its trend.

When the 80 MVA green TICK line moves below the horizontal lines, it is a trend change signal to the downside.

As an intra-day trend change indicator, it isn’t perfect, so we use additional indicators with it.   But, even as shown below, it has a pretty neat correlation relative to the SPY and other indexes.

Do not trade against this indicator …

posted by Marty Chenard from www.StockTiming.com

Increasing Product Demand, Higher Product Prices …
Increasing Liquidity in the Market, Higher Stock Market Prices …

Both are true if Supply remains the same or less.   Some things like stock buyback programs reduce supply because shares are re-absorbed into their respective companies.   We searched for on-going stock Buyback programs in effect for December and found 52.

This is not a huge number, but none-the-less, a good number.  So the question is, “what is happening to Liquidity levels in the stock market?”    Is Liquidity flowing in, or out?

The answer is found in today’s chart … shown below.

The first two basics are: If Liquidity is in Expansion, the market goes up.  If Liquidity is in Contraction, the market goes down.

The second two basics are:  If Liquidity is moving up, stock prices have to increase. If Liquidity is moving down, stock prices have to decrease.

Common sense isn’t it?    Now, with those basics, take a look at today’s chart and draw your own conclusion relative to “what Liquidity is doing in the market right now”.  

(Out of respect for our paid subscribers, today’s chart is only shown occasionally as a courtesy to our free members.  This chart is posted everyday on our paid subscriber site.)

from www.StockTiming.com

The MOST Important Index to Watch…

Which Index is the Most Important to watch??

Here are some of the most common indexes investors watch along with their differences:

-  The DJI (Dow Industrials) has the big multi-national companies … but only 30 stocks.

-  The S&P 500 has the broadest group of Sectors and is considered a good measure of the
    economy by big Institutional Investors.

-  The NASDAQ 100 is a nice mix of stocks but it doesn’t represent Financials and Oil stocks.

-  The NYA (NYSE) stock exchange has a huge variety of a couple of thousand stocks, and it also
   recognized for where the “program trading” occurs. (According to the New York Stock Exchange,   
   program trading accounts for about 30% to 46.4% of the trading volume on the NYSE every day.

So, the NYA or NYSE index is the index where the big money plays and executes large transactions or “basket of stocks” transactions.  

The DJI and the NASDAQ 100 are more specialized and focused compared to the NYA.  The NYA has more diversity and big players.

Since Institutional Investors are more likely to be initiating program trades and large size transactions, it makes sense to track the “core holdings” held by Institutional Investors … since that would tell you what Institutions are doing relative to “most of their invested money”.  

And … since they are responsible for over half of the daily volume in the stock market, it makes sense to watch and follow them for the market’s direction … which is why we post such a large variety of data and charts on our paid subscriber site.

So, let’s look back over the past 6 weeks to see how each index has actually performed.  

In the chart below, we calculated the percent move from November 16th. to December 29th.  Here is what we found:

Surprisingly, the NYA and the “Institutional Index of core holdings” have had the smallest rises.   Since Institutional Investors are responsible for over 50% of the market’s volume, let’s dissect what they have actually been doing since November 16th. in today’s second chart …

Chart 2:  Below is our hourly chart of Institutional index movement since November 16th.  

When looking at the Institutional chart below, you will see a wedge, or megaphone pattern that actually started on November 16th. … after the index made it up to our projection level on November 11th.

What is amazing about what has happened since then, is that the Institutional index has oscillated above and below our projection level in a higher-lower pattern that has formed the megaphone pattern.

What is this saying?

It is saying that Institutional investors have essentially been in a sideways trading range for the past 6 weeks.   

The Institutional Investors are NOT going to stay in that pattern.  There will be a breakout that will initiate a trend and not a trading range.   Yes, the trend is your friend, but  the current Institutional trend is really going sideways. 

What investors are REALLY waiting for, is which way this pattern will breakout.   The breakout and continuation direction will the investable trend and it will occur soon.

http://www.stocktiming.com/Stock_Market_Models_and_Reports/Institutional_Index.htm

posted by Marty Chenard from www.StockTiming.com

Watch the Dollar …

The Stock Market and the Dollar …

Most investors say that a lower Dollar is a positive for the Stock Market.   Others, like Art Cashin at UBS Financial Services, recently said that “if there is a real rush to the Dollar, it could produce a 1,000 point drop in a day … (on the DOW)”. 

The reality is that it is often the “speed” at which something happens that determines what happens to the stock market.    Most market related events have what is called an associated “absorption rate”.  

If for instance, the Dollar took a year to rise 5%, then the probability is that the stock market would absorb the “shock effect” because it was happening at a slower pace than the improvement of market fundamentals.

However, if the Dollar were to rise 10% in two days, then that would create an imbalance that the stock market couldn’t absorb that quickly and that would be a negative influence.

So, why are we even discussing this?

Because the Dollar has been trying to establish a ” base” since the end of last October.   Last Friday, it made significant strides in that basing process.  On Friday, the Dollar closed at 76.55  … just below a critical resistance level of 76.82.

Take a quick look at today’s chart below …

Our two indicators are showing that the bias is for further upside on the Dollar.   The Dollar’s RSI has moved up above 50 which is bullish, and our Hybrid S.T. Accelerator is strong and trending up. 
When we close above 76.82, be observant of the speed of the rise, as it will be important.

posted by Marty Chenard www.StockTiming.com

RSI Chart: Risk levels for investors are increasing

Imagine this …

John is hiking up a 5 mile mountain.   After each mile hiked, he notices that he is tiring and that he needs more time to rest.  

He just finished his third mile, and he is starting the next mile with less energy … but he still has energy left.   The reality is that with each additional mile hiked, his energy is lessening. 

Questions …

1. Will John be able to reach the top and climb all 5 miles?
2. Will his dropping energy lead to fatigue and a retreat before the top?
3. Are the odds increasing or decreasing for him to make it to the top?

Why all these questions and why do they relate to the market now?

It is because the analogy fits today’s chart shown below.   The picture of the progress on the trip “up the mountain” is depicted by the SPY’s upward price movement on the chart.

The C-RSI (Relative Strength) depicts the decreasing amount of strength as each new mile is climbed.   The amount of strength is still positive … but it is continuing to decrease, so the odds are getting worse for each new mile (each new high) being attempted.

What message is this sending?   That each new high is becoming more difficult, and that corresponding risk levels for investors are increasing.  

What would it take for an energy (strength) rejuvenation for the upside to occur?  The C-RSI would need to break above its black resistance line at label 1 on the chart.   

(For an in-depth explanation of the C-RSI, please click on this link:  “The C-RSI explained“

posted by Marty Chenard www.Stocktiming.com

Out of Balance Alert …

Who’s going to tell you? … It won’t be the main stream media, or myopic Wall Street analysts who don’t look at the Global picture.

What am I talking about this morning?  …  A problem that appears to be brewing on the Transportation Index, the Dow Jones Industrials, and the Japanese TX100 index.

So, today’s update will be longer than usual as we explore how the U.S. stock market and Japan’s TX100 correlate. 

________________________________________

Let’s start today, by looking at the U.S. side, and specifically at the Dow Jones Transportation Index. 

Note today’s Transportation index chart below.  Two important things are obvious.
1.  The Relative Strength has been moving down with lower tops, and it is negatively divergent with the Transportation Index.  (The RSI is still positive, so one does not know for sure if the RSI will move down and make a lower low, or break up past the resistance line.)
2.  The Transportation Index just made a “triple top”.   That is significant because that represent 3 attempts where it could not get past a 3 month resistance level. 

Everyone understands the relationship between the Transportation Index, goods that are shipped, and retail sales.   If the Transportation Index were to fail to the downside, it would suggest that the economy was weakening because of a decrease in products being shipped.  A break to the upside would suggest the economy was getting stronger because of an increase in products being shipped. 

So, the upcoming breakout will be important, and it may be that Institutional Investors are waiting to see the consumer’s Christmas buying behavior before they decide on how to play the Transports.

*** In any event, this triple top is a CRITICAL testing level that will affect the other indexes.  Now, see the next chart …

Now, let’s move abroad and take a look at Japan’s TX100 Index.   A few people are saying that Japan may be rolling into a slow crash.

From our view point, Japan’s market just broke below a Head & Shoulders pattern.  The downside implication of this is for it to fall to just above the 500 level which would be above its March low.  So, Japan’s stock market is in trouble and falling now.   See the next chart …

This next chart shows the correlation between our Dow Jones Transportation Index, the Dow Jones Industrial Index, and Japan’s TX100.

I inserted labels 1 to 4 in order to make the comparison easier.   Here are the past correlations:
1.  At label 1, the Transports, the Dow, and the TX100 made simultaneous peaks.
2.  At label 2, it was a little different.  The Dow reached its peak first, and it was a few weeks later that the Transportation index and the TX100 finally reached their peaks.
3.  At label 3, all three indexes reached a market bottom simultaneously.
4.  At label 4, all three index reached a pull-back bottom simultaneously.

Those two years of correlation came to an end in August. 

Now, about three months later, we have the following:
1.  The Dow is still trending up.
2.  The Transports have stalled with a “triple top”.
3.  And, the TX100 is having a correction.

There is now no correlation between any of them.   They are out of sync.  

They are out of balance with one another, and balance will be re-established.  This means that we will see some very unusual market activity in the coming days or weeks when balance is re-established. 

*** Feel free to share this page with others by using the “Send this Page to a Friend” link below.  (Also, if you find that you enjoy our updates, please at least consider joining us as a paid subscriber.)

posted by Marty Chenard www.stocktiming.com                 ________________________________________________

Liquidity Chart: Keep an Eye on Money Flows …

Keep an Eye on Money Flows …

Some time ago, I heard a story about one of Warren Buffett’s early mentor’s.   As the story goes, he was told early in his career, that the stock market was about money.   When money was moving into the stock market, it went up.   When money was moving out of the stock market, it went down.

Sounds too simplistic, doesn’t it?  

Then again, it is just too true to ignore.   How many investors actually bother to try and measure true money flows moving in and out of the stock market?

We have always felt that the directional flow of money was a key, and more importantly, the relative amounts of money flowing in or out.   From data we collect, we recognize that there are only 4 possible conditions worth noting relative to money flows.

-  First, money is in either a state of Expansion or Contraction in the stock market.  When they are in Expansion, they are above our horizontal line on today’s chart.   When money flows are in Contraction, they are below our horizontal line. 

The impact of money flows is very logical.  In an Expansion modality, the market goes up as more and more money chases stock prices … and that pushes them higher.   When money Contraction occurs, investors are cashing out, and it takes lower prices to find a buyer in those environments. You can see those conditions happening in the chart below.

So, that explained 2 conditions, what are the other 2 conditions? 

The other two conditions have to do with trending and patterns.   Even though money flows are in Expansion or Contraction, the inflows or outflows have short term changes of direction as part of their trend.  

For example, look at the far left of the chart.  You can see that April and May of 2008 showed a trend reversal to the upside.  When the trend reversal started, money-flow levels were still in Contraction.  However, that up trend continued, carrying the money flow levels up into Expansion territory.    Later … that upward trend line was broken to the downside in late May, and then money flows fell back into Contraction, and stayed there for months while the stock market plummeted.

So now, money flows are in Expansion again, and at a high level of money flowing into the market.   But, there is also something else going on that is worth observing and it has to do with labels 1 to 4 that we posted.

So, what is going on at labels 1 to 4?

Each label shows that when money is flowing out, that more flows out than the previous time.   That is telling us that, as this rally matures, more and more profit taking is occurring.  If this continues, it will increase the downside pressure in the market as outflows fall to lower levels.  

For now, things are okay, but risk levels are starting to slowly rise due to this activity. 

P.S.  This money outflowing pattern is coinciding with waves of Institutional selling activity that we are seeing.

This Chart on Long Term Liquidity Flows is posted everyday on our Subscriber Site at www.StockTiming.com

                 

posted by Marty Chenard www.StockTiming.com

Is there a Negative RSI Divergence problem?

What is a Negative RSI Divergence and why should you care?

A Negative RSI Divergence is a condition where the underlying stock or index is moving higher, while the Relative Strength is moving lower.

So what is happening, is that each up move in the market is being made with less strength.  Eventually, there is not enough strength to match the amount of an upward movement, and then the market or stock falls.

No one knows for sure exactly when “divergent strength” will hit is limit relative to a stock or index rising.  But what one does know for sure, is that the “amount of risks” one is taking in a trade is increasing as that happens.   Many hedge funds and money managers look for those kinds of market behaviors as a sign that they should reduce their exposure through hedging or start taking profits on part of their positions.

So, why discuss Negative RSI Divergences this morning?

Because that is what is happening on the NYA Index and our Institutional “core holdings” index.  

Take a minute and observe the chart below to see the Negative Divergence that is developing now.   Unless this pattern changes soon, the negative divergence will become too large to sustain the market’s desire to move higher.

(In our charts, we use a C-RSI which zero bases the Relative Strength so one can interpret it easily and quickly. An explanation of the C-RSI can be found at this link:  C-RSI explained.) 

posted by Marty Chenard  www.StockTiming.com