Stock Charts: Stock Market Bulls and Bears Standing Hand-in-Hand at Lovers Leap

The $INDU finishes the month up 7%. The weekly time frame reflects a Doji on week volume.  We also have time frame indifference, more on that later.

I’ve highlighted a time symmetrical H&S pattern based on 68 days between the left shoulder and head, and the head and the right shoulder. See:  Stock Charts: Stock Market Trending for Time Symmetrical Head and Shoulders Pattern with Fibonacci Support.  That ending time frame is this Monday, maybe Tuesday.

Should the right shoulder be off roughly one week we have another Fibonacci time frame. 144 days from the left shoulder to a potential right shoulder is August the 9th. I raise this view because the price structure so far might need more time to finish the leg higher, if it’s a right shoulder.

$INDU:  The daily chart looks like it has more work higher.  The price structure down from the recent high looks like a little consolidation.  If we are to go higher, there's a cluster zone of resistance just above us.  The blue line is the 62% retracement level.  The upper black trend line is in the same vicinity.  And just about both is the upper Bollinger Band.  From the July low it's been 8 days up, 5 days down, 5 days up, and 3 days down.  2 or 3 days higher would seem to fit the Fibonacci rhythm.  That's next Tuesday for two days up.  Pure theory, but something to watch for at this point.

Mr. Market does what it always does, which is move price into a position of maximum stress for all participants. There are a lot of money managers waiting for the market to show a more definitive direction. The daily, weekly, and monthly times frames show this stress of uncertainty quite easily.

The daily chart above looks like a weak move higher, but has yet to finish a potential right shoulder and the MACD has yet to roll over. All of which leaves the door open for more work higher.

The weekly chart reflects the H&S pattern and the MACD has yet to turn higher, which leaves the door open for push lower and the MACD moving lower just like it did in late 2007.  But it's close enough to turn up and support higher prices.

The monthly chart reflects a trending channel higher, which is bullish until it’s not.

And that's Time Frame Uncertainty. The daily, weekly, and monthly tell a conflicting story.  Technically the market has pushed price into No Man’s land and anything is possible from here until more price defines the market.

The Bearish View: If this is a head and Shoulders Top, I want to discuss the concept of Bulls and Bears Standing Hand-in-Hand at Lovers Leap. If this is a top, it’s likely the bearish Elliott Wave count so many have highlighted is the end of Wave 2 higher and thus Wave 3 lower is about to begin. This is usually the most impulsive wave and will move swift and fast to the downside. It has everything to do with the bulls and bears in unity.

1) If the market trades lower from here, the bulls will get very nervous and begin to exit long side trades, or buy protection. That will drive stocks lower. And since the mutual fund complex has used up cash to buy stocks the past 15 months, it’s very easy for them to be big net sellers

2) Now let’s consider the bears, please see:  Stock Charts: Dow Puts in Doji Near Resistance

Investors are exiting bearish bets on global equities, pushing bullish wagers on stocks to a two- year high versus short sales, according to Data Explorers. 

The firm’s long-short ratio has risen to 9.5, having surged from 5.75 in September 2008 when Lehman Brothers Holdings Inc.’s collapse intensified the financial crisis, the London- and New York-based securities-research company said. The reading is the highest of the data that goes as far back as July 2008.
The collective market short position is at a two year low. There are few bears to squeeze out of the market currently.

If the market begins to decline the bears will come out of the woods of hibernation and begin to short this market.

It’s possible, that Bulls and Bears will both become sellers holding hands while jumping off Lover’s Leap that is the potential head and shoulders pattern.

The Bullish View: If the markets are to continue higher or base and go higher, the market has 11,700 as a target. That’s price support and middle trend line support. It’s also the Point and Figure target of 11,600.

My Market Health Indicators:

IBM:  We have big blue stuck in this narrowing wedge structure.  Looks weak the past few days.  If the market is going to finish moving higher in the next couple days, maybe big blue takes a weak stab at the top down rend line.  Have no idea what the MACD is doing.

JNK:   Dead sideways for a few days.  That suggests a little more upside.  Still looking for price to push higher with a weak test of the RSI overbought level.

$VIX:  The $VIX still looks like it has a little more down side work.  The lower trend line and bottom Bollinger Band are both reasonable near term targets.

IBM, JNK, and $VIX could all finish their near term price work in conjunction with the market moving higher the next 2-3 days for a potential right shoulder.

My Watch List: Thursday, I highlighted potential bearish trades to watch, which look like they have more work higher before they are worthy of a trade and nothing has changed. For the list See:  Stock Charts: Market stalls again, $INDU, $COMPQ, $SPX, $VIX, IBM and AAPL  We need to be mindful of the market at current prices because it really could go do anything.

From My Trading Desk: We made no trades Friday. It’s definitely a time to keep it very light and we have moved closer to home all last week.  Next week, especially Monday and Tuesday, I might not make any trades.

Summary of July Trades:

Long VSEC 1/3 Position Loss

Short CDE ½ Position Loss

Short BA ½ Position Loss

Short BIDU 2/3 Position Loss

Long NEM ½ Positions Gain

Long QCOM Full Position Gain

Long KO Full Position Gain

Long WMT Full Position Gain

Short NEM Full Position Gain

Long KO Full Position Gain

Long IBM Full Position Gain

Short BA Full Position Gain

Short MCK Full Position Gain

Long UPS Full Position Gain

Long WMT ½ Position Gain

Short RGLD ½ Position Gain

Short ABX ½ position Gain

Short ABX Full Position Gain

Short DAL ½ Position Gain

Inverse ETF SRS Full Position Gain

Trading Summary: We had 20 trades for the month, which is a very typical month. We had 16 gainers and 4 losers, or an 80% win rate, which is about our historical norm. We had a nice net dollar gain for the month, which again was about typical for our trading.  July turned out to be a standard month.

It’s obvious the 80% win rate has a lot to do with our success, but if you look at position sizing you'll see another important factor. In the 4 losses we had not one full position. We never really got caught heavily on the wrong side. We did have one short I had to hang onto for about a month before it turned into a gain, and sometimes we do that if I'm confident in the pattern and feels like squeeze.

You’ll notice on the gainers we had many full positions. Often this stems from starting with a fractional position and then filling it to full at a later date. We only had one big loss on BIDU. We had one big gain on SRS. The rest was a lot more nice gains versus a few minor losses. 

Overall, I'm very happy with July because it was a great month with good risk management using position sizing and good pattern recognition.

Happy Trading.

J.D. Rosendahl, Rosey

Public Union Insanity---Socail Unrest Springs to Life in St. Louis

A reader emailed me the following story in St. Louis: 

July 30, 2010:

Joseph Tracy said he’s tired of going to funerals. And now, he suspects he’ll be going to more of them.

"It’s open field day now," said Tracy, the pastor of Straightway Baptist Church here. "The criminals are going to run wild."

Gang activity. Drug dealing. Cold-blooded killing. Tracy worries that a decision to shrink the police force by almost 30 percent will bring more of everything.

The pastor voiced his concern on Friday at a raucous special City Council meeting at which East St. Louis Mayor Alvin Parks announced that the city will layoff 37 employees, including 19 of its 62 police officers, 11 firefighters, four public works employees, and three administrators. The layoffs take effect on Sunday.

Parks said the weak economy has robbed the city of badly need money. For example, revenue from the Casino Queen was $900,000 below budget expectations last year. There are no signs of improvement, Parks said.

"I want our citizens to know we have some of the bravest police officers and firefighters in the country," Parks said. "But we don’t have the money to pay them. We have to have fiscal responsibility."

City officials wanted police and fire unions to accept a furlough program that would have required employees to take two unpaid days in each twice monthly pay period. If accepted, emergency responders would have seen a pay cut of about 20 percent for the rest of the year.

For More See:  Layoffs to gut East St. Louis police force 

I want to thank the reader for emailing this story because it reflects something a little new in the budget deficit story across America. One final tidbit in that story:

On Friday, the city approved a proposal to defer bond payments until next year in order to free up $500,000.  "Next year is a different situation," Mayor Parks said.

My Observations: 

1)  You're going to see more and more crime not necessarily because there is less police, but because there's high unemployment and broke people need to eat.  This is just one part of the next big bubble, "Social Unrest".  And, it's the lower class so far that have been hit the hardest and they have nothing.  At some point you need to eat, but clothing, and yes drink or do drugs (vices).  That all takes money, and either you work and have it, or perform some illegal activity to obtain what you need.  It's just math.

2)  Policemen and there unions are going to blame city leaders for the increase in crime, but that is totally out of line and not accurate.  Policemen  no longer have the attitude that they work for the government and serve the people, but rather they work for the union and serve themselves. They're deflecting blame.

3)  None, absolutely none of these layoffs have to happen, if the public unions would take the necessary cuts in pay and benefits, and roll back income levels to when they didn't create a budget deficit we could save every job.  It's just math.

4)  The final decision is a poor one by city leaders.  They think they can lay people off and cure the budget.  Good luck, they'll have another budget deficit next year, and than what?  No no city leaders, you have to go the bankruptcy route to break all union contracts and reset all compensation and benefits.  It's time for a do over.  Strategic Bankruptcy, do it and do it soon.

If only citizens across America would truly understand the strategic and powerful tool that bankruptcy really is, and push city leaders down this avenue we could see a quicker resolution to the budget deficit issue.  The outcome is going to be the same regardless of the plan, going BK gets it over with.

Expect to see more and more crime and "Social Unrest" because it's just the product of the times we live in today. 


Hope all is well.

J.D. Rosendahl, Rosey

Wage Deflation Update: U.S. Cities and Counties Poised to Cut 500,000 Jobs-Report Finds

A couple days ago I wrote: Mustard Seeds For Deflation, The Deflationary Cycle Full Monty: Part 2. In that I discussed one of the key factors in the coming deflationary cycle will be wage deflation via the layoffs coming from municipal workers: U.S. Cities, Counties Poised to Cut 500,000 Jobs, Report Finds

U.S. local governments may cut almost 500,000 jobs through next year to cope with sliding property taxes, a decline in state and federal aid and added need for social services, according to a report released today.

The report, a result of a survey by the National League of Cities, the U.S. Conference of Mayors and the National Association of Counties, showed local governments moved to cut the equivalent of 8.6 percent of their workforces from 2009 to 2011. That suggests 481,000 employees will lose their jobs, according to the report, which said the tally may yet rise.

“Local governments across the country are now facing the combined impact of decreased tax revenues, a falloff in state and federal aid and increased demand for social services,” said the study said which was released in Washington today.

While a separate report by the National Conference of State Legislatures today said U.S. state revenue is recovering from the drop in tax collections caused by the 2007 recession and the slow pace of job growth since, the greatest blow to local governments will be felt from now through 2012, the local groups said.

They called on Congress to pass a bill that would provide $75 billion in the next two years to local governments and community-based groups to stoke job growth and forestall deeper cuts.

Property Taxes: The local groups said their budgets are likely to be hit by a drop in property taxes, which trail changes in home values because of the way assessments are calculated. Although prices peaked in 2006, property taxes paid to state and local governments kept rising until the first three months of this year, according to annual totals compiled by the U.S. Census Bureau.

The need for state and local governments to balance their budgets has weighed on the economy, damping the recovery. Spending fell at an annual pace of 3.8 percent during the first three months of this year, the steepest drop since the onset of the recession, according to U.S. Commerce Department. By June, local governments had cut their payrolls to 14.4 million from 14.58 million a year, according to the U.S. Labor Department data adjusted to take account of seasonal variations.

The fiscal strains have pushed some local governments into distress. In 2008, Vallejo, California filed for bankruptcy protection. Reading, Pennsylvania last year sought refuge under the state’s program for distressed municipalities. This month, a state appointed receiver took over in Central Falls, Rhode Island, a cash-strapped town of 19,000.

Observations:

The budget deficit issue is now being reported by just about everyone. It’s nothing new but what no one is talking about is the real issue stemming from correcting budget deficits. While it requires layoffs and cuts to remaining employee salaries and benefits and potentially retirees, it creates wage deflation. That's one of the key components of a deflationary cycle. It’s wage deflation that's one of the important parts of the coming deflationary cycle.

The current estimate of 481,000 layoffs is just for the following year. There are roughly 20 million municipal workers in America. Laying off 10% of those over the next 3-4 years adds 2 million to the unemployed, and that doesn’t even address cutting salaries and benefits to remaining employees. This problem grows sharply well past next year because we face budget deficits coming each of the next few years.

I’m going to say something I’ve said before: Where does a fireman or a policeman go to work post layoff and earn $100,000 plus overtime and other pay and outrageous benefits? They do not. When they hopefully integrate back into society, it will be at much lower compensation levels = Wage Deflation!

Decreased Tax Revenues? Again, as these people are laid off, they will lose their homes which will end up eventually as financially distressed real estate on the market. Those being laid off will have reduced real estate affordability in the future. Both of those factors place a negative impact on real estate values over time, which in turn pressures real estate tax collections lower. As those people get laid off, their consumer spending will decline, which pressures retail sales tax collections lower. Lastly, those being laid off will negatively impact income tax collections. Thus, municipal layoffs have a negative impact on future tax collections and will once again pressure budget deficits in the future, which pressures more layoffs and cuts. Wage deflation is the cycle of deflation in earnest.

Uncle Sam to the rescue: I personally hate this idea, but I do expect pressure from Governors and Mayors on Obama and Uncle Sam to come to the rescue. The reason I hate this idea is because one government agency that is broke is asking another government agency that is broke to save the problem. Where in this insanity is the tax payer’s best interest? Some day, this has to be paid for, and the plan only makes that payoff in the future worse.

The budget deficit issue requires “Wage Deflation” to move forward in the United States. As it does, it places pressure on consumer spending, real estate values, and future budget deficits. It’s more of the very same issues we have today. This is the deflationary cycle in real time. It’s just beginning.

Hope all is well.

J.D. Rosendahl, Rosey

Stock Charts: Market stalls again, $INDU, $COMPQ, $SPX, $VIX, IBM and AAPL

$INDU: Another stall day right below resistance. It still looks to be forming a high below the upper Bollinger Band, a development worth watching for the next several days.  I still think it has a little more upside.

The 60 minute chart highlights an ABC pattern.

$SPX:  On the 60 minute chart the $SPX actually tested the up trend line today and tested it's prior peak of several days ago.  I can pencil the ABC has finished but I still think a push higher is viable.

$COMPQ:  The weekly chart shows declining volume during the formation of the H&S pattern.

$VIX: Tried to bounce, but like I suggested last night, it looks like a little more work lower. Bottom trend line and lower Bollinger Band likely targets.  Daily MACD not quite on the turn.

IBM: More of the same with this stock. Very weak and tired move the past few days. A rollover is very bearish.  MACD ???

AAPL:  I've pencilled in what I would call pure theory.  The price structure looks to be forming some kind of top and I've pencilled in what I think might happen.  Just concept for now.

My Watch List: Since the potential for a Head and Shoulders Top is ahead of us I thought we’d look at bearish charts for potential trades.

BRCM:  Divergences forming.  Bollinger Bands pinching.  The stock has moved a tad lower testing its prior peak.  Could have one more little push higher, but it's beginning to look tired.  MACD on the turn down.

CTSH: We have a little back and forth testing support. No technical damage yet. The bearish trade is at least a definitive break below the support. It still could go higher one more time. Divergences every where.  Volume declining.  MACD on the roll.

SRS: Doesn’t look finished to the down side. Price has traded along the lower band and the MACD is no where near turning higher yet. A little more downside is the preferred view.

JNK: Looks very labored the past several days but a little more upside is in the offing. Looking for a weak test of the over bought level on the RSI.

DAL: Nothing has changed on this since we closed our short weeks ago. It’s still trading above the neck line. I want to see a little more decline in price before trading back into it.

CAL: Many bearish divergences on this one. Looks tired heading higher. A little more upside near term and then I want to see the MACD roll over.

BLL: I want to see the MACD roll over with price. I probably won’t short this until it shows more technical damage. It’s on a strong run and a market favorite, so I don’t want to be early.

Weekly chart shows a stock peaking above a prior peak into new high territory.  Any reversal below that prior peak is a bearish clue.

 CAT: Weak move higher. Probably creates another divergence with a little more upside.

WRLD: It is moving higher out of a H&S with a target of $46ish.  Very labored price structure moving higher. I want to see one more push higher into this wedge looking structure and then the MACD to roll over. Divergences on WRLD forming too.

 Weekly chart shows the stock moving into major resistance.



We see a common thread in that we seem to have a little more price work before these are more viable bearish candidates.  BLL, CAT, WRLD look like market favorites, so I want to be very patient and not be early on these.  The others look a little more ripe but not yet.

From My Trading Desk: We closed our 1/3 position long VSEC.  We had 6 gainers in a row and time to take a small loss. I'm sure it will report earnings and the stock will pop. That said, I want to be very light. Outside of a couple small positions on 2 speculative trades we are long free.

Hope all is well.

J.D. Rosendahl, Rosey

Foreclosure Filings Rise in 75% of U.S. Cities on Unemployment

Bloomberg reoorts: Foreclosure Filings Rise in 75% of U.S. Cities on Unemployment

Foreclosure filings climbed in three-quarters of U.S. metropolitan areas in the first half as high unemployment left many homeowners unable to pay their mortgages, according to RealtyTrac Inc.

The number of properties receiving a filing more than doubled from a year earlier in Baltimore, Oklahoma City and Albuquerque, New Mexico, the mortgage-data company said today in a report. Notices of default, auction or bank seizure rose more than 50 percent in areas including Salt Lake City; Savannah, Georgia; and Atlantic City, New Jersey.

“Foreclosures are spreading out from areas that had been hardest hit,” Rick Sharga, senior vice president for marketing at Irvine, California-based RealtyTrac, said in a telephone interview. “We’re dealing with underlying economic weakness as opposed to unsustainable home prices and bad loans.”

The real estate issue is in deed spreading like weeds across America. Increased foreclosures spreading across American will pressure real estate values down across the land in the coming months.  It will create an entirely new segment in the real estate "Upside Down Club."

Let me state something again as said in:  Mustard Seeds For Deflation, The Deflationary Cycle Full Monty: Part 2 

Declining real estate values plus wage deflation are the cornerstones of a deflationary cycle. The most important parts are heading towards deflation.

Hope all is well.

J.D. Rosendahl, Rosey

Investing for Deflation Part 2: More Reader Questions

As many of my readers know, I’ve been running a deflationary investment model for my parents since 2003. Please see: How I Saved My Parents a Small Fortune! And the Advice I've Been Giving Them!

And in that strategy we have a definitive goal of moving money outside of the financial system. A few weeks ago I wrote: Investing for Deflation: Reader Asks the Question of the Decade. That blog generated a lot of very good questions for deflation investing better answered in a follow up blog. Here they are with my answers:

Hi J.D.

Thank you for publishing your investment thoughts and strategies. I live in Australia. I have already purchased a significant quantity of gold and silver coin. My problem is the relative strength of $A and cost of gold in $A.

My question is do you see your strategy working the same all around the world or should it vary from country to country?

Regards

JOHN

This is an interesting question. I’m not a currency expert nor do I really follow them and in part it depends on your cost basis. However:

My parents and I discuss a concept I call relative performance. In a deflationary cycle I doubt I can bullet proof every red cent. In one form or another, the market, the government, or ill-liquidity of some form, will cause some kind of loss. However, if I protect their wealth and only sustain minor losses compared to the situation where most people lose the majority of their wealth, have we not gotten richer than everyone else? The answer is yes.

Relative out performance is our bottom line strategy. If I can make money off the market melt down that’s coming, well great. But relative out performance and retaining the majority of our wealth is the focal point.

In that context, I don’t think it really matters what any local currency does. One needs to bullet proof their net worth, and having some metals is a key part of that diversity of assets and having some form of cash equivalents.

From Deb

What I would like to know is how your model has considered something like this massive expansion of the monetary system?

If history is any guide the government will probably continue to print and issue more money. It has been their only tool for the most part and they fail to recognize nothing works forever. Nor, do they really care about the long term ramification. It’s a self serving trading now for later policy for political motivations. Unfortunately, the greater public doesn’t see the crisis it has and will generate.

For us, it really doesn’t impact our deflation strategy for the very same reason as the prior question.  Again, we are structured for relative out performance.

Hi Rosey,

Could you try to explain a little more how you are removing things from the financial system? You say you vault your metals "off-site." Do you mean "off shore?" Do you mean actually in a private vault, or in an off-shore bank, etc? What are some practical options for removing investments from the financial systems?

Thanks. Always enjoy your common sense approach to investing/trading.

Fox

We have been averaging money out of the financial system for the past 4-5 years. We have been doing it slowly in small amounts over time. We dollar cost averaged into precious metals in 2003-04 and held that in a safety deposit box. Cash in a safety deposit box. We currently own a house free and clear. We own tax receipts. And we are looking to move sizable money in the next couple months into short term treasuries at Treasury Direct. All of those represent money outside of bank and brokerage accounts and money outside of insurance companies. We are about 50% outside the financial system and look to push that to 70-80 percent if possible.

We hold nothing off-shore, but I’m not adverse to that. I just haven’t had the time to research something that makes me totally comfortable.

Hi J.D.

Thanks for your thoughts on the market and investing at Safe Haven and your Rosey's Outlook. I have also followed a similar path of shifting resources to cash or short term instruments. I also agree that precious metals should be allocated in one's portfolio in the current train wreck environment.

I have a question on the storage of MM's. No, not the candy M&M', but the "Mattress Money" to which you aptly referred. What recommendations do you have for storage of cash and metals if it is not in the two of the three FIRE (finance, insurance and real estate) dogs?

Besides everyone wearing sandwich boards, what elements do you believe will signal the eventual shift to an inflationary phase and the ending of deflationary conditions?

Regards-Richard

I love the term Mattress Money. My grandfather grew up in the great depression, and when he passed away in 1998, we found cash in socks, coffee cans, dresser draws, etc. It was literally like an Easter egg hunt. This is where I got the idea of moving money into the category of Mattress Money, only before not after deflation. So, where to keep your mattress money? You don’t have a lot of choices: Safety Deposit Box, T-bills at Treasury Direct as a portion, Buried somewhere safe on your property, or in a safe on-off site. For now the safety deposit box is the easiest. We are actively looking at Treasury Direct to move money in the next couple months. Cash or cash equivalents are king, so it’s cash, gold and silver, and T-bills.

Inflation: I'm assuming we are talking about a period of higher interest rates and not the flooding of new currency into the system. The trigger I think that is a clear signal we are about to embark a high interest rate environment is the breaking down of the US Treasury Long Bond market. I'm looking at the break below of the bottom channel line as a signal it's coming.

From a friend, S.G.

I greatly enjoy reading your posts at Safe Haven. A recent post, “Investing for Deflation”, mentioned “Mattress Money”, money vaulted off site. How does one find a non-bank safety deposit box?

Any suggestions you might offer would be greatly appreciated.

You state “We have and are continually moving money outside of the financial system”. “Outside the financial system” are the key words.

I do not like bank safety deposit boxes because at present if the owner should die, the tax man must be present at the opening. Any official seeing a hundred thousand dollars in a lock box is going to initiate a full investigation. Also according to Bob Prechter, many banks are going to fail in the coming years. If that is correct, one can only imagine the huddles trying to get to your lock box; one will be lucky to get inside the bank. The safe storage of greenbacks is a huge problem. Having greenbacks will most likely be one of the very best investments in the coming deflationary phase. I expect the purchasing power of ‘held’ greenbacks to increase by a factor of “five”.

Since I believe you read Bob Prechter’s work, you and I are on the same page. The safe off-site storage of greenbacks is very important to me.

Thanks again,

Yes, I have read Prechter’s work. I agree with his premise that the end of the major cycle and deflation is upon us. I view the deflationary period coming as a cycle:  Mustard Seeds For Deflation, The Deflationary Cycle Full Monty: Part 2


Storing cash in the safety deposit box: It’s a safe place for now. Instead of moving big sums of money triggering notification to the government, we have been using smaller amounts and building it over time. I agree that it will need to be moved prior to the expected banking crises, which is not now but coming. I don’t mind using a safety deposit box for now. This may sound a little weird, but I’m using the stock market as a guide or trigger when to move. Something like the stock market breaking below the 2009 lows. That is a serious confirmation of deflation. So, when we move out one of the stressful decisions is where too? The obvious choice is home in a fire proof safe. I doubt we’ll keep it all in one place, and we might use my home with a safe too. The only other choice I can think of is burying it on your property. Depending on your property, I'm not adverse to that.

Also, we have everything titled in a family trust and LLCs. If one person should pass away there are others in control of accounts and deposit boxes. There will be no tax man present. If you do not have one, I highly recommend a trust for many reasons. Please see a trust attorney.

J.D.

I believe you live in the SF Bay area, as I also do to. I am considering vaulting my gold and cash at Los Altos Vault and Safe. Do you use them, and if so, are you happy with them? If not, whom do you use? I want to get my assets out of the banking system.

Thanks,

J.G.

Yes, I live in the Bay Area, but my Parents are in the Midwest. No, we use a safety deposit box for now. Just like above, we will need to move it at some point. I prefer to keep it in my control entirely. At the end of deflation the world is going to be so weird with Social Unrest, I won't trust anyone but mom and dad, so I don't want our wealth in someone else's hands.

I really enjoyed getting those questions and they are worthy of a serious conversation of investing for deflation. I’ve tried mostly to give real answers within what we are doing. It’s not the only choices in this world, but it's live money management being used as part of our deflationary investment model started back in 2003.

I have a couple of final thoughts not mentioned in my first blog. If there is one asset I wished we owned: It’s a small farm or ranch of 100-500 acres. We had the chance to keep one several years ago from an inheritance but chose to sell it.

Why a small farm? A 100-500 acre farm in a remote part of the United States that has private wells for water, the ability to raise some live stock and chickens, and grow crops or have a garden. It may seem totally ridiculous. However, when the deflationary cycle comes and social unrest is the new bubble, food and water channels may be disrupted. And a farm in the middle of nowhere will remove you from the big city Social Unrest, which will be crazy.

Lastly, this is going to sound ridiculously stupid, but something I’ve been telling my parents for the past five years is at some point we want to have a stash of $1 and $5 dollar bills and a lot of coin (quarters). I laugh every time I think or write this one. But essentially, if you have stored wealth and you're rolling around this world in deflation with your $20 and $100 bills, and driving a new BMW, and sporting new clothes, you will be one big target in “Social Unrest.” You want to look dirt poor and blend into the world. Old clothes and nickel and dimes look as poor as you can get. I’m still laughing................but count on it.

Hope all is well.

J.D. Rosendahl, Rosey.

Stock Charts: Mr. Market Stalls

The DOW stalls just like I suggested last night. Today, I want to focus on a few thoughts presented in recent blogs. If we're working under the concept of: Stock Charts: Stock Market Trending for Time Symmetrical Head and Shoulders Pattern with Fibonacci Support, then to again paraphrase Bollinger on Bollinger Bands, "we should expect the right shoulder to finish beneath the upper band." Take a close look at the price structure of the DOW below. We see price stalling below the band. We also see a move up that looks a lot like a simple ABC pattern.

If we switch to the SP500 and NYSE, we see markets with little Doji's yesterday followed by a down day.  I'm going to assume for the time being that it's not a topping candlestick pattern but just a warning pattern.  We frequently see that before a real top.  We also see a change beginning in the Bollinger Bands, as they are no longer widening.

$BDI:  The Baltic Dry Index is something I consider to be a leading economic indicator.  It essentially represents the cost of shipping rates to move goods from country to country.  If the price is down, one can infer demand to ship is down, which then indicates the real economy will soon decline because there are less goods begin shipped because there are less goods being bought to support manufactures and consumers.  The index has all but collapsed out a head and shoulders pattern.

IBM: The stock continues to reflect weaker price structure moving higher.  Any decline of size will force a cross of the 50 and 200 day MA, a bearish confirmation.

JNK: It looks like its loosing steam. Any kind of fall should turn over the MACD.

$VIX: Beginning to reflect a little bottoming here. All we really need is a good 1-2 day push higher and a turn up in the MACD.  I've labelled what might take place if we still have another pusher higher into Friday or Monday.  Above the down trend line should be bearish for Mr. Market.

Summary: Here’s what I’m thinking: The clues supporting a right shoulder include an ABC pattern about done, a potential right shoulder finishing beneath the upper Bollinger Band, and as presented in the prior market update:   Stock Charts: Dow Puts in Doji Near Resistance, we have very low collective stock market short positions. Plus, the $BDI indicates a fundamentally weaker economy coming down the road.  All of that seems to reflect early signs of a right shoulder top.

In addition, we have IBM and JNK reflecting weak price structure moving higher and all that’s needed is a turn down in price and MACD. The $VIX is close to turning up.

None of this guarantees a right shoulder top, but collectively it’s beginning to support that structure in the near future.  The data is beginning to favor that versus a continuation higher.  If we are to move higher over the right shoulder, Mr. market has to get back up on the horse and power higher soon recapturing the upper Bollinger Band while pushing it higher.  I'll believe it when I see it.

My Watch List: While there’s an opportunity to make a few more little grinding long trades, I really wanted to focus on the big picture today.  Last week I said, “I wanted to get light heading into this coming Friday and Monday, and watch the market heading into a potential right shoulder.” That’s still my plan. I still have this Friday or next Monday, maybe Tuesday as a turning period.

From My Trading Desk: I closed our short of NEM. My entry price was just okay and the intraday structure said to close for a tiny gain. I hope I can stay light tomorrow. This little stalling structure may continue for some part of tomorrow, but we should get one more push higher.  I'm thinking Monday could be a reversal candlestick type day.

If there’s one thing I could see doing tomorrow it’s increasing my short on JNK. I doubt it will happen because to fill this to a full position, I have a trigger price. JNK has price support and trend support in the same area. Breaking those should roll the MACD over. That's the price I want to focus on for my trigger, and I doubt that happens tomorrow, even if it does fall in price.

Happy Trading.

J.D. Rosendahl, Rosey

Just How Strong are Retail Sales?

All Liz Claiborne outlet stores to close

The New York-based apparel retailer said it would close its name brand outlet stores nationwide to cut losses and redirect capital.

Liz Claiborne Inc. stated it will offer its Liz Claiborne and Liz Claiborne New York brands for exclusive sale at other retailers. The company’s Web site said all Liz Claiborne apparel, accessories and luggage will be available at JCPenney in August.

After 10 consecutive quarters of losses, Liz Claiborne Inc. (NYSE: LIZ) expects that the closing of its Liz Claiborne outlets will result in the company posting an operating profit by early 2011.

The sales normally being done at these closing stores will flow to other retailers and get trumpeted as an increase in same store sales.  While it technically is, it's just sales shifting from one retailer to another.  Yes, those will be an increase in same store sales to other retailers, but not to the implication total retail spending is improving. 

Those 89 store will create some empty retail space in an environment where there's already too much vacant retail space, and displace some retail workers to unemployment.

If the economy was really healthy this wouldn't be happening. We've already seen Mervyns and Circuit City go out of business and now in an attempt to save the business Liz is closing all stores. In the bubble days of consumer spending, specialty clothing stores like Liz Claiborne were all the rage. But in a lower sales environment and stiff competition, Liz has learned it's easier to make it but sell it through major department stores (the old model). There's just not enough business to go around for all the specialty retail boutiques. It's a sign the economy is not healthy.

Hope all is well.

J.D. Rosendahl, Rosey

Stock Charts: Dow Puts in Doji Near Resistance

DOW puts in a little Doji. The DOW tested the first level of resistance I highlighted last night, which is the prior peak. Last night I presented an update:  Stock Charts: Stock Market Trending for Time Symmetrical Head and Shoulders Pattern with Fibonacci Support.  We're working in that context for the next week or so.  Please review that chart if you haven't seen it for more details. 

This is an opportunity for the market to stall for a day or two at the prior peak.  We got a little bit of that today.

When we look at the intraday chart on the 5 minute scale, we see a market trading essentially sideways, which doesn’t look bearish at all. So, we should expect a little more of this as part of the short term stall, but another push higher should be expected.

Stock Short Sales at 2-Year Low, Data Explorers Says

Investors are exiting bearish bets on global equities, pushing bullish wagers on stocks to a two- year high versus short sales, according to Data Explorers.

The firm’s long-short ratio has risen to 9.5, having surged from 5.75 in September 2008 when Lehman Brothers Holdings Inc.’s collapse intensified the financial crisis, the London- and New York-based securities-research company said. The reading is the highest of the data that goes as far back as July 2008.

As we head into a potential right shoulder the collective long-short ratio is at a two year high. I’ll take that as a bearish sign for the markets and a little confirmation the right shoulder is viable for now. There’s virtually no shorts to squeeze, so the market must move higher on pure bullish buying activity if it’s going to continue past the potential right shoulder.  That's going to require individuals to sell safe haven assets like bonds and gold and move into the stock market.  Could happen, but I'll believe it when I see it.

$VIX:  Hits the bottom trend line of a potential wedge, which is also a key support line going back many months. All waves in the wedge look like ABC patterns. Maybe a little splash below. We need to watch this closely for a potential change.

IBM: The move up is beginning to look labored and tired. See the volume.  Price structure doesn't look that hot either.

JNK:  I’ve said it before, “As goes JNK so will the market”. Why? If the market participants are overall bullish on the economy and company prospects, than it makes perfect sense to buy junk bonds. The opposite is also true.

$GOLD: The gold market declines today by almost 2%.  We've dropped below the 1st and 2nd up trend lines.  The next key support area is price support in blue which is also the 200 day MA.  If we get below that, we have a more bearish view on gold.

Watch List: Back on the watch list is bearish views of CDE, NEM, and GLL. Also back on the watch list as short candidates are BRCM and CTSH.

NEM: The stock broke down today out of a little flag.  Ironically it closed right at price support, the up trend line, and the bottom Bollinger Band.  Next couple days should be key.  RSI supports lower pricing.  However, big volume down days (like today) on this stock occur at or near short term bottoms. 

CDE: Still looks like a head and shoulders pattern. A little more down side is required.  Waiting to see it happen to enter a position.

GLL: This thing is cracking me up. It finally broke higher, but the price structure leading into today’s move was challenging for me. Maybe it's a little 1 and a 2, and a 1 and a 2.

BRCM: The stock rolled over pretty hard today. Almost enough to damage the chart on price structure. We have another set of new divergences building.  MACD about to turn over.

CTSH: Same as BRCM. Look at the price structure the past few weeks, that looks labored and not very impulsive.

KO, T, and VZ: All testing price resistance with RSI at overbought levels.

FDX and ONXX: Both failed to create an inside day and both failed to muster any real follow through.

Earnings Watch: The following stocks report earnings tomorrow.

ConocoPhillips COP  $1.56 08:30 Est. am ET

Newmont Mining Corporation NEM $0.84 Est. Before Market Open

Lam Research LRCX $0.97 Est. Time Not Supplied

Visa Inc. V $0.93 Est. After Market Close.  Chart below.  So far, the pattern does not look bullish, it needs to move soon if it's bullish because it looks a little bearish.

From My Trading Desk: We opened a half short position on NEM today, see chart above. Today we closed our position on QCOM. I got a little impatient, but a gain is a gain and that’s 4 in a row on some very easy Big Cap (KO, WMT, UPS, and QCOM) trades. Now I have less money committed to the market heading into the potential right shoulder.

VSEC:  We still own a third of a position.  Earnings in a couple days.  The stock opened lower but not much damage.  We are a tad early ahead of earnings.  A very thinly traded stock, so the move in either direction post earnings could be big.  Pins and needles!  Obviously, I want to see it above the down trend line just like KO.

Speculative Trades: LPTH and NANX, nothing new to report.


Final Thoughts: If I trade tomorrow, I'm probably looking longside at ONXX or VSEC. ONXX if it's down I will turn to the intraday chart for structure. VSEC above trend line on good volume. Outside of that, maybe short CDE if it falls. I'd prefer to keep it light though. A lot of traders on the Street are keeping it light waiting to see what the market does with the potential right shoulder.

Happy Trading.


J.D. Rosendahl, Rosey

Obama Pushes on a String With Stupid Plan

Obama continues to push for bad policies in the face of a slow economy.  It's obvious just how desperate top government officials really are when they support issuing more leverage into the banking system to support bad lending:   Small-Business Aid May Create $300 Billion of `Junk' Loans

President Barack Obama is on the verge of creating as much as $300 billion in credit for small businesses as bankers raise doubt about whether there’s demand for new loans and how much will be repaid.

As a business banker, I can tell you loan demand is off from 2007 levels. In an economy that's well off from peak levels in 2007 there’s less demand for financing because there’s truly less growth to finance.  It's really that simple.

Most of the new loan requests I get are those seeking to move away from banks that are reducing lines of credit or restructuring loan terms, and that's just replacing an old bank with a new bank on the same debt.  Outside of that, the second largest part of demand is from those who truly lack creditworthiness struggling to stay in business.  There's very little new creditworthy business right now.

The U.S. Senate may vote this week on a bill to funnel $30 billion of capital to community banks, whose business customers typically are small firms. Banks could leverage the sum to make $300 billion in loans that create jobs, according to a Senate summary. That could more than double the commercial and industrial loans at eligible banks as of the first quarter, according to data compiled by KBW Inc.

This one irritates me the most. We want to add “leverage” to a fragile banking industry at a time when commercial real estate will continue lower in a sharp decline:  Commercial Mortgage Backed Security Delinquency Rate Rising Fast.  Small banks lend heavily on commercial real estate, so existing commercial real estate loans will further pressure small bank balance sheets.  The question really has to be:  Is this new money being disguised for lending just capital to repair small banks?

Bankers say the problem isn’t scarce credit, it’s lack of demand from creditworthy firms in a weak economy. The result may be more loans given to distressed firms and higher losses. While bank regulators don’t compile default rates, the biggest lenders have charge-offs of 4 percent to 14 percent tied to small businesses. Eliot Stark, managing director at Capital Insight Partners Inc., said their credit record resembles “junk.”

Creditworthy firms is the key. There’s been a sharp decline in collateral values for the small business, whether it's the business assets or personal assets of a business owner. There’s simply less collateral to justify a business loan, thus fewer creditworthy borrowers.  This is why banks are cutting back lines of credit or restructuring loan terms.  I see it all the time. Even Bernanke contradicted himself recently and said the same thing:  Banker's Corner: Bernanke Says, "Creditworthy Small Businesses Can't Get Loans" 

Bank of America Corp., the biggest U.S. lender, is trying to “make every good loan we can,” said David Darnell, president of global commercial banking, in a June 3 statement. “Our clients are telling us that until they see sales pick up, they are reluctant to hire and invest.”

Wells Fargo & Co., which says it’s the biggest small- business lender, is “sitting here with tons of liquidity and we’re marching double time in search of more loans,” Chief Executive Officer John Stumpf said in an interview. “In most cases when I hear stories about small businesses not getting loans, it’s the case that more credit will not help them. They need more equity, they need more profitability.”

Obama and his followers are simply not listening to the industry. Two of the largest banks are saying the same thing:  Clients don’t need more money.

Other gauges show higher defaults, with the SBA reporting a 6.8 percent rate this year on its main “7(a)” loan program through May, higher than junk bonds. Defaults on U.S. corporate speculative-grade debt since 1981 averaged 4.5 percent, according to Standard & Poor’s.

The government has turned the SBA lending program into the business lending version of Freddie and Fannie.  Loan defaults in this arena will be high for several years.

More than 240 banks have failed since the start of 2009 as consumers and businesses fell behind on loans. Most of the failures were community lenders.

Again, Obama wants to add leverage into a fragile community bank segment. Maybe it’s not to lend but to clean up balance sheets under the disguise of lending.

“We can create lots of jobs making bad loans,” NFIB chief economist William Dunkelberg said. “We did that during the housing bubble.”

That last quote almost sounds a little sarcastic, I can't tell.  The reason it worked in the bubble is because the economy was already trending higher, and more and more credit was desired as people kept up with the Jones fueling the bubble.  It won't work in this environment because people don't see the need for more debt. 

And that’s where the rubber meets the road, why would anyone even the President want to make bad loans, for any reason.  Obama has it totally wrong again.  You don't create sound economies by lending to less creditworthy borrowers. What is it about the recent past has he not learned via Fannie and Freddie?  Obama is stuck on the idea banking/lending creates economic growth.  Its bad policy in the long run and the President fails to understand sound economic policies. It’s a stupid plan.

Hope all is well.

J.D. Rosendahl, Rosey

Stock Charts: Stock Market Trending for Time Symmetrical Head and Shoulders Pattern with Fibonacci Support.

It was another solid day for the DOW but I’m still trying to keep my positions light. If the right shoulder is to occur, I’ve got Friday or next Monday as potential turn days. The time between the 2007 high and the 2009 low is equal to the time between the March 2009 low and this Friday.

The time difference between the left shoulder and the head is 68 days or 34 * 2 (both Fibonacci numbers). 68 days from the head to the potential right shoulder is the following Monday. None of those require a market failure, but it does provide a window of opportunity.

I’m looking for some clues to confirm this pattern. Declining volume is the most obvious. Paraphrasing Bollinger on Bollinger Bands, ideally we want to see the right shoulder finish beneath the upper Bollinger Band.

If it’s to be a right shoulder, I’ve labeled key pricing areas for this to occur in cluster resistance. The green line is the prior higher. The blue line is the 62% retracement level. The red line is the left shoulder.

I prefer the two later price areas (blue and red lines).

Why? I like the idea of Mr. Market placing maximum stress via fear and greed on bull and bear investors. If there’s one thing I do not like about the current head and shoulders pattern, it’s that every bear is trumpeting it as a certainty.

The DOW chart above reflects a 3 White Soldiers candlestick pattern. Typically a better pattern out of a low, but it is what it is, the DOW is moving upward.


Transports: The index is actually leading the market higher. Pushing outside the upper Bollinger Band.

$VIX: Looks like its just waiting to drop to the lower Bollinger Band. We should know very soon.

IBM: Same as it’s always been, Same as it’s always been.

Watch List:  Plenty of stocks to chose from.

KO: Another push higher as the stock performs very well. Volume is trending light heading into near term resistance with RSI at over bought.

UPS: Stock still moving higher and Bollinger Bands still widening. I still think the bias is higher. RSI suggests that and the next price resistance is $68.

FDX: Pops out of consolidation and channel just like KO.  Widening bands and the RSI reflects more room to run on good volume today.  I like it.  I would like to see an inside day for a buying opportunity. 

WMT: I can only say I’m glad we closed this position Friday for gains. A little luck never hurt anyone. I’m a little surprised no follow through on another up day.  I still think the second down trend line will be tested.

QCOM: No damage so far. I still think the 200 day MA is in play and soon.

T & VZ: Both moving higher and closing in on price resistance as the RSI is overbought.  We should test resistance soon.

VECO: I highlighted this yesterday as an earnings watch.  After the bell today:  VEECO Announces Record Second Quarter 2010 Financial Results.  Stock up in after hours. 

ONXX: I would consider this a speculative trade.  Jumps over down trend line on strong volume.  RSI already overbought. 

MNTA: I would consider this a speculative trade.  Weekly chart reflects a big move over down trend line.  Over bought on the weekly.

Tomorrow's Earnings Watch:  I’ve charted the stocks that look most interesting.

AmerisourceBergen ABC (Estimate = 0.49) Before Market Open

Broadcom BRCM (Estimate = 0.61) After Market Close

Panera Bread PNRA (Estimate = 0.84) After Market Close

World Acceptance Corporation WRLD (Estimate = 0.97) Time Not Supplied

PNRA: Looks like an ABC pattern. We should know after earnings.

WRLD: Looks like an H&S turning into a cup. Both bullish pattern structures.

From My Trading Desk: Today we closed our position on UPS. We filled the 2nd half on QCOM. And we opened a third of a position on VSEC. UPS still looks good, but once again I want to keep it light and take gains heading into this weekend.

VSEC: The stock moved higher from Friday’s big move. We bought a third of position ahead of expected earning after the bell which is a tad aggressive.  Earnings will be announced in 3 days. 

Speculative Trades:

LPTH: The stock tried very hard today to wash out investors. It opened down hard but finished higher. In No Man's land.

NANX: Weak move higher. We might see another push lower. We should know soon.

Final Thoughts:  If I'm putting money to work tomorrow, I like the idea of FDX or ONXX on any kind of weakness if we get it.  If it looks like an inside day I will jump to the intraday price structure for a possible trading opportunity.  If QCOM pushes the 200 day MA I might take my gains off the table.

Hope all is well.

J.D. Rosendahl