The Fizzle Point

I fizzled out in early March: inexplicable, terribly sudden disappearances are a bad habit of mine. But really, it’s tax season, though it isn’t about my own taxes. I’m not a CPA, and I do not work at an accounting firm. I’m not a quasi-CPA, bookkeeper, in payroll, etc. All the same, though…. Anyway, I think my spate of early-Spring sinus infections has ended, and my blogger batteries are recharged. So, until they die again….

This is a bit different: every now and again, I dip into the equity side of things, especially as there is occasion to call a reversal and gratify a barely latent desire to prove I’m right that is constantly nagging at me. Well: that’s only half-true.

A few things of note:

The next round, psychological markers occur at 850, 900.

Fibonacci Projection is the topic of the red Fib levels on the right side of the chart (ignore the blue fib levels, though they are an example of the same thing). The red fib lines in the middle, from 800-933 (real body low – real body top) measure a swing low to swing high. The red fib lines are a projection that correlates to the previous move: in fact, you’ll notice 681-816 (again, real bodies, on the weekly) is almost exactly the measurement of the previous swing. Taking the symmetry of those moves as an embarkment point, we can project likely reversal points on this move by measuring 127.2% and 161.8% of 133 (or 135) points. These projections hit at exactly 850 and 900.

AFP registers lower forkline resistance at ~850, median line resistance in the 900 neighborhood.

And (not pictured here) 78.6% fib retracement for 875-666 comes in at 830, a couple points away from where the index topped out Friday (that correlates to 7920 on the $DJIA).

There are a few positive divergence-type items around that make this a little tentative (the time to get very uneasy is when all points of your analysis are completely unanimous), but I do think the best staging point for bears to bring supply back in falls between 830 and 850-900. That’s a broad range, so if pressed I’d collapse it to 830-850ish. Unless there’s significant dislocation to the upside, this remains a bear market rally that I think is just about spent. Above 900 would cause some real head-scratching, and the corrective scenario isn’t really called into question until 1015+.

Retail Traders = Nefarious I-Bankers

At least, according to the tortured and dangerously ill-informed calculus of Rep. Peter DeFazio (D-Ore.)  As I mentioned a few weeks ago Defazio reintroduced a bill under H.R. 1068 on 02/13/2009 proposing a 0.25% “financial-transaction tax” that had fallen off the table when the previous Congressional session closed. In that post, I enjoined any U.S.-based trader (this may also extend to international traders that traffic in products or asset classes traded on U.S. exchanges) to write to their Congressmen/women to make their opposition known.

If you haven’t read the bill out of indifference or preoccupation and the above description is applicable to you (U.S.-based, or trade U.S.-originated instruments), think twice. You can find the bill here, a method for easily sending word to your Congressional representatives here, and important supplemental information blogged by Robert Green here.

As one of my favorite fellow bloggers TLT might note, I’ve done a pitiful job presenting both sides of the argument to this point; and that does the side I am a proponent of a disservice. Thankfully (this way I can salvage some intellectual integrity), Rep. DeFazio made a short circuit of the financial news channels last week, providing us with a concise formulation of the side he is championing:

Defazio on Fox Business

and

DeFazio on CNBC

Where does one even begin to begin? Anyone who trades multiple times a day is “churning”. Daytraders serve no economic function and add no economic value. Daytraders (or anyone trading on margin, apparently) are inherently gamblers. A comparable tax passed during the Great Depression didn’t impede the gains of the DJIA from 1932-1966 from 41 to 1000, therefore a comparable tax will not impede recovery now. China may ask for a refund. The number of people who trade at least once a day do not number in the millions. There is no sub-set of retail traders who aren’t destructive gamblers (because if there were, the argument would be blown to hell). This is an effective way to target Wall Street for recovery of TARP losses, lightening the already crushing load of the average American taxpayer. And on, and on: snarky replies, shoddy premises, frustratingly and staggeringly ill-informed.

There’s just too much to unpack and too many implications to state. A couple of things that do immediately jump out, though:

First, DeFazio is completely oblivious to the democratization of trading that has evolved since the last days of the Hoover administration. 80-year old quotes from a by-gone era do not carry compelling weight or serve as iron-clad justification for your bill just because they refer to a similar tax imposed in “bad” market conditions. Get a clue: the market has not stood still since your grandpa’s day.

Take this thing called “electronic trading”, for example, and the discount brokerage industry’s highly competitive commission structure. The number of retail participants has exploded in the past 10-15 years alone. Back then, the “little guys” were Jesse Livermore-types, hanging out in bucket shops. Today, everybody from that guy delivering cases of beer to your corner convenient store to your assisted living facility-bound great-aunt trade stocks, daily. The demographic has changed entirely, and so this bill’s impact will reach far beyond the nameless mass of “churning” denizens who sit around in front of their monitor banks at home in the den in their underwear all day, along with those slimy CDS/SIV/MBS-creating hyper-leveraging I-bankers…oh, and the short sellers, too. They’re all the same, a troika of financial terrorists; and now they’ll pay with a draconian tax. As DeFazio more-or-less puts it, to hell with that miniscule contingent of “daytraders” who may get snuffed out.

And how about mutual funds, since the holders of MF shares are who you’re truly worried about? Do you think fund managers do not trade large blocks of stock daily? Think the fund is simply going to eat the obscene expense this tax would generate? Not at all: maybe we’ll see the reintroduction of loads by all those families that got rid of them in the last 5-10 years, or a 5 or 10-fold increase in expense ratios. Or you could legislate a cap on those, too, to keep those greedy fund managers at bay – that wouldn’t be very obtrusive. Wolves at the door, everywhere!

Second: buy-and-hold investors good; traders bad. B&H contributes economic value because these are people who take stake in the ownership of a company, thereby helping that company raise funds to grow, compete, develop products and services, etc. Traders “churn” (DeFazio is evidently unaware of what the SEC definition of “churning” is); they gamble and as a class have now victimized countless homeowners and unemployed individuals. In other words: investing as DeFazio defines it is a civically responsible and thus meritorious practice, while trading is just the opposite, and – if we’re truly honest – a worthless, almost reprehensible act for which he shows pure disdain that ought to be taxed into oblivion because – let’s face it – it’s the damned traders (none of whom do their thing on “Main Street”, as we know) who are responsible for the mess that necessitated TARP in the first place.

I feel like DeFazio is leveling a moral judgement in there, somewhere; but it may just be me. Maybe we’ll all wear a scarlet “T”? And why not throw in some accusations of “financial witchcraft” to go along?

The Ayn Rand Bandwagon

In the habits of fragmentary treatment and erratic frequency characteristic of this blog – especially when I find myself here on Saturdays – we continue the analysis of whatever vaguely market-related subject happens to capture my attention within an indeterminate period previous to writing. This time, it’s Ayn Rand.

I alluded to Ein some weeks back as the posthumous perpetrator of a petty mindcrime against a former acquaintance of mine. Still an acolyte, Rand simply convinced him to light candles in front of his own mirror rather than the Pieta.

Those memories were evoked by a randomized turn-of-the-dial listen to conservative talk radio host Glenn Beck during the morning commute: what I heard was veneration of Rand, Atlas Shrugged and WSJ Op-Ed writer Steve Moore for his 01/09/2009 piece “‘Atlas Shrugged’: From Fact to Fiction in 52 Years”.    That column’s abject paucity of trenchant analysis, highly selective treatment of AS and Randian heroine worship were simply terrible.  Beck’s total lack of cognizance that the object of his adulation uniformly averred ethical premises – as sine qua non for the success of capitalism - I’m certain he’d find repugnant was embarrassing; but brought to my attention a fomenting undercurrent I’ve noticed among pundits on the Right and marginalized self-styled philosophers and…traders: that Ayn Rand was magnificently prescient, a grand prophetess and first-rate philosopher who had all the answers half a century ago. 

Goddess Ayn, Progenitress of the Objectivist Faith

I am not an irrational Rand-hater; I know better: nothing would be easier for an Objectivist interlocutor to belittle and neutralize in their customarily supercilious manner.  And yes: Rand’s critique of statism carries important observations.  She was intellectually formidable and a talented writer (though agonizingly loquacious and not gifted) and a fair philosopher in some regards.  

But in other areas (for her, those areas that mattered most), I think she fared quite poorly: epistemologically (UGH!), ethically (GASP!), logically (BLEH!), even (a)theologically (SHRIEK!).  I’ll not go into it, unless someone prefers that I did; but I hesitate to here, because I don’t invite nor do I accept invitations to engage in what amounts to the interminable pissing contests so typical of philosophical pedants on the Internet. 

Perhaps traders don’t care about all of that: they’re simply content to appropriate from and make lists of Rand’s pithy little truisms a la Nietzsche’s Beyond Good and Evil in support of their chosen profession.  As a recent, high-profile example, take Santelli’s “At the end of the day, I’m an Ayn Rand-er” comment during his one of his recent rants.  Really, Rick?  Just what are you actually talking about?  

Maybe intellectually irresponsible, but good because while I’m not out to alienate or anger anyone reading (mostly traders), I’m also going a bit out of my way to convey that as a formerly intensive student of the above philosophical sub-disciplines, I find most of the content of Rand’s oeuvre to be atrocious, and the quasi-apotheosis to which she has been subjected by her superficial admirers and obsessive Objectivist lackeys to be loathsome.  If you’re a big fan of Rand’s “novels” and non-fiction works, think of yourself as adherent of Objectivism, think Leonard Peikoff (or David Kelley, for that matter) are nigh-unto-infallible, believe implicit subscription to Rand’s ideas would revivify our politico-economic system, or are any other variant on the hopeless-sophist-Rand-devotee archetype, “obsessive Objectivist lackey” probably means you.

This all means that as of this moment I’m inaugurating a 30 minute cessation of the Eulogy to lament the decline of the market, which has brought about government intervention (about which I’m ambivalent) and the secondary effect of a resurgence in the popularity of Rand’s work.  Foreclosures, layoffs, and now, perhaps worst of all: increased sales of The Fountainhead by those who will never read it, or who will read it cover-to-cover and then cradle it in their arms as they sleep at night.  I guess we can blame all this on Obama, too.  

Now that I’ve gotten that off my chest, I’ll go back to enjoying a beautiful afternoon.

Lament over.

Capitulation?

At the current levels, the market is crumbling with an even more dramatic parabolic angle and velocity of movement than that with which it built higher and higher through the mid-1990s. Unsurprising, but the sheer relief of peak to elusive trough is enough to leave me aghast. Co-workers and clients I speak with have the pall of despondency, resignation and brokenness cast over them. Hope ebbs low.

I came across this pile of journalistic garbage from Businessweek the other day. After laughing at it and brutally criticizing it with others, an interesting conversation ensued, regarding something made mention of here-and-there but which isn’t getting much play, if any at the moment.

That’s the idea of capitulation: relinquishment of heretofore tenaciously-held long positions, shaking those who’re on the fence about riding the bear off, and a generally massive wave of liquidation that is event-driven: a major bankruptcy (GM and GE come to mind), a sovereign default (Eastern Europe), or some other devastatingly bearish event.

Nothing technical has stanched the bleeding, and that’s simply because below Dow 7200 there’s is virtually nothing wide enough to land on until 4k. There are points of varying noteworthiness: 6300-6500, 5800, 5275, 5000; but nothing persuasive. Below 610 (and there is a cluster of support 610-680), the S&P offers nothing in terms of support before 475-500.

But 4000 and 475? Not impossible: those levels represent about a 70% decline peak to trough: the Nikkei suffered worse in the nineties, and the Dow suffered far worse in the early thirties. At this point, all that I see averting an irrepressible sell-off is a capitulative market event. The sentiment is there: of that I’m certain. All that is lacking is the token catastrophe that changes the game and raises the volume.

Oddly, that all sounds optimistic.

Bank of England Slashes Rates, GBP Falls

The Monetary Policy Committee (MPC), the British equivalent to the FOMC has cut the UK’s overnight lending rate from 1.0% to 0.5%. Apparently this is the lowest rates have been in several hundred years, going back almost to the inception of the bank in 1694. Accompanying the rate cut, the BoE following after the Federal Reserve announced it will begin engaging in quantitative easing through the purchase of $75B medium and long-term gilt over the next several months to combat deflationary pressure.

GBP has responded this time around in intuitive fashion: GBP/JPY, GBP/USD and GBP/CHF have each sold off 125-200 pips since London opened, while EUR/GBP has rallied 80 pips as it continues to wind through a symmetrical triangle begun 4 weeks ago.

Next up in just a few minutes the ECB will make their own announcement….

GBP/JPY, EUR/JPY: Turning Bullish?

The Guppy has been staging something of a rally on the back of a bit o’ risk appetite seeping back in and ahead of the all-but-certain BoE/MPC rate cut (consensus is held at 50bp from 1.0% to 0.5%), vaulting out of a symmetrical triangle yesterday (about which I almost posted, but life somehow got in the way) from the low 138’s around 24 hours ago to the present level, where the pair is yet again approaching a retest of 141.65.

This session brings with it a retest and tentative breakout from an ascending triangle above 140.75. With room above of 100 pips, the pair should tag the 141.35-141.65 region with little difficulty, but with a rate cut in the offing in several hours a break above this level (in place since early January) is anything but assured.

After 0700 ET I’ll be monitoring for a break above, but wonder if a rate cut will hamper the lift necessary to get over the hump. If that break occurred, the next area of interest lies at 143 and then ~144.50.

EUR/JPY and GBP/JPY have show a tight correlation, with similar consolidative constructions occurring in tandem on both pairs. Not coincidentally, the ECB also has a rate decision today, with a 50bp cut widely expected. The levels on EUR/JPY to break above are at 125.50, followed by 126 and then 128.20, the latter of which would bring the pair back to resistance set in early January, correlating to the 141.75 level on the Guppy. Past 128.20, the field is wide open to ~131, as denoted by the 261.8% fib projection line (purple)/horizontal resistance line (white) in the upper-right corner of the following chart:

Both pairs look poised to continue their corrective action to 141.75 and 128.20, which represents 100% retracement of the January highs to the lows set out in February. A break above there (of which I’ll have no certainty until it sets up on a TF that’s tradeable for me) throws the medium term bearish scenario on each pair into serious question.

Rules of Trading

Another week of scant posting: tax season is killing me already, and there’s still six hellish weeks left! Been making the rounds this evening to catch up on all I missed while discussing the market all day (funny thing, that), I came across a reference from Barry Ritholtz over at TBP to Dennis Gartman’s Not-So-Simple Rules of Trading. These lists are usually a-dime-a-dozen full of mind-numbing and painfully obvious bromides, but I quite like Gartman’s.

1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!

2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher.Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.

6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.

7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.

8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.

9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.

10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!

11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”

12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.

13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.

14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.

15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.

16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.

Words to live and die by….

GBP/JPY: Inverse H&S?

Thinking, that’s all; without a solid fundamental impetus behind such a move, the case for a break of 800+ pips upside is one I choose not to make; nevertheless it appears plausible and my trades have led off in this direction.  Assuming a breakout above horizontal resistance at 141.75, under this scenario upside targets come in at 145.75, 148 and 150.

Say NO to H.R. 1068: Trader’s Tax

A post from Robert Green of Green Trader Tax on his blog yesterday indicates the “Financial-Transaction Tax” proposed during the last session of Congress has been reintroduced in the House of Representatives as of last Friday, 02/13 (coincidence?).

I’ve found that most traders I’m acquainted with are oblivious to this proposition, and the few forex traders with which I am both personally acquainted and who have learned of it seem indifferent because “forex” is nowhere explicitly mentioned. But as anyone trading spot forex ought to know, the IRS has very little explicit guidance overseeing the categorization and taxation of spot specifically. Tax professionals (such as Green) knowledgeable of what can and can’t be reasonably inferred from how forwards and currency futures are treated will tell you spot forex’s identity as futures product for purposes of inclusion under any tax is very easily accomplished. Conflating spot forex with futures if it means subjecting forex traders to the tax, if it means further revenue…uh, “reparations appropriated from the nefarious speculators responsible for our present economic crisis” is not something a cash-starved government is likely to pass by, negligible as the retail forex trader demographic may be next to equity and futures traders.

Given the presence of uncertainty but potential that the bill, once passed, could exert a highly adverse impact on domestic retail forex traders, I’m passing along my own recommendation to read Green’s informative post here and then become conveniently but critically involved by signing the petition and sending emails/letters to your Congressmen/women here.

Chicago Tea Party!

I heard snippets of Rick Santelli’s…ecstatic utterances from yesterday last night on the way home from the office but didn’t catch up on the bruhaha until today.

I don’t watch CNBC (I don’t even subscribe to cable) but occasionally find a clip entertaining. I agree with Santelli in principle (assuming there’s a principle somewhere beneath Santelli’s rhetoric), even while I find his manner of speech is delightfully absurd. Kudlow, somehow, comes off as more of a buffoon, though. Mercifully – though satire is my favorite type of humor, so maybe I am missing out on something truly wonderful – I’m unfamiliar with the rest of the pundits and empty skirts on the channel.

One fascinating aspect of all this is the galvanization of the Right – Santelli’s rant tapped the disenchanted conservative zeitgeist with startling effectiveness, doing something off the cuff and with relatively no expense that McCain/Palin weren’t capable of during back in the Fall. Take this for example. Of course, they didn’t have a tanking stock market on a Democratic president’s watch or quite so many trillions of dollars of debt to rally around. Whether this will truly mobilize anyone and to what effect remains to be seen – but I’m highly doubtful.