Monthly Archives: August 2009

China’s Stocks Crash: Is The United States Next?

In the past three weeks alone, China’s formerly sizzling stock market has gone from bull market leader to bear market letdown. On August 30, the Shanghai Composite Index plummeted 6.7%, its largest one-day drop of 2009 so far. And, of the 89 global markets tracked by Bloomberg, the Shanghai index came in last place.

As for what caused the freefall, mainstream experts point their collective finger at one main factor: Growing fears that China’s monetary officials will turn off their easy-money spigot. Here, this August 31 BusinessWeek stands in:
“Investors began selling on concerns that banks will cut back on lavish lending that had helped push shares up by more than 80% since that start of the year.”
Here’s the thing: the drunken lending habits of China’s banks have been on the global Concern-O-Meter for quite some time now. And last I checked, its needle reading jumped from “Don’t worry be happy” — to — “Be Afraid, Be Very Afraid” many months ago. To wit: chinesestockmarket
  • May 2009: China’s deputy central bank governor seriously questions the “sustainability of the rapid growth in credit and its possible adverse impact,” and a Wall Street Journal piece warns that China’s stimulus spree is “pillaging bank balance sheets” as the quantity of loans vastly outweighs their quality.
  • June 2009: “China’s Banks Are Warned About Loans” (WSJ). China Bank Regulatory Commission issues an internal directive to commercial banks to “tighten supervision of loans” and ensure those loans serve the needs of the “real economy” and not “financial speculation.”
  • July 2009:“China Aims To Rein In Lending.” (Associated Press) China’s two largest lenders reveal they will “sharply slow credit growth.”
Yet during that time, the mounting anti-lending rhetoric failed to take the wind out of the Shanghai Composite Index’s sails. Prices rallied without resistance to new yearly highs until early August.
(China Falls: Bellwether, Or Blip? EWI provides multiple opportunities to stay ahead of the world’s leading markets. Our teams of analysts specialize in their region of expertise. For Europe, click here. For the United States, click here. For Asia-Pacific stocks, click here.)
So if the “fundamental” shoe doesn’t fit, what’s the real story here? Well, I’ll make it really simple: the Shanghai Composite Index has plunged more than 20% from its 2009 high on August 4. And, in the days leading up to the market’s reversal, China landed on the radar of several of EWI’s subscription-based publications. For our analysts, the time had come to stage a full frontal attack and warn of a major turn in China’s fortunes.
Here, the following catalogue of previous publications fills in the blanks:
August 2009 Elliott Wave Financial Forecast observes the unsustainable nature of China’s latest stock market rise and writes: “China’s debt bubble will succumb.”
August 14 Short Term Update: Presented the following close-up of China’s main stock market and wrote: “A break of the trendline will be the next important tip” that a larger decline is underway.
August 14 European Short Term Update: “Though not under our normal purview for ESTU, China has been the central source of liquidity…China’s sharp decline may be a case of the pin meeting the balloon.”
(Editors Note: As for the historic October 19, 2007 peak in the Shanghai Composite Index illustrated on the chart above, the September 2007 Elliott Wave Financial Forecast wrote: “The only bubble that continues to expand is that in the Chinese stock market. The following statistic suggests strongly, however, that its peak cannot be far off.)
Whatever the market, our team of analysts take their coverage to the next level: From confronting current changes in trends to anticipating those changes before they occur.
For European markets, European Financial Forecast
For Asian-Pacific region, Asian Financial Forecast

Market Recap

The NASDAQ 100 closed lower due to profit taking on Monday as it consolidated some of the rally off this month’s low. The low-range close sets the stage for a steady to lower opening on Tuesday. Stochastics and the RSI are diverging and are turning bearish signaling that sideways to lower prices are possible near-term. Closes below this month’s low crossing at 1561.25 are needed to confirm that a top has been posted. If September extends this year’s rally, the 75% retracement level of the 2008-2009 decline crossing at 1761.87 is the next upside target. First resistance is last Friday’s high crossing at 1668.50. Second resistance is the 75% retracement level of the 2008-2009-decline crossing at 1761.87. First support is the 20-day moving average crossing at 1617.51. Second support is this month’s low crossing at 1561.25. arrow-pointing-down2

The S&P 500 index closed lower due to profit taking on Monday as it consolidated some of this month’s rally. The mid-range close sets the stage for a steady to lower opening on Tuesday. Stochastics and the RSI are diverging and are turning bearish hinting that sideways to lower prices are possible near-term. Closes below this month’s low crossing at 975.80 are needed to confirm that a short-term top has been posted. If September extends this year’s rally, the 38% retracement level of the 2008-2009-decline crossing at 1044.11 is the next upside target. First resistance is last Friday’s high crossing at 1038.50. Second resistance is the 38% retracement level of the 2008-2009-decline crossing at 1044.11. First support is the 20-day moving average crossing at 1008.72. Second support is this month’s low crossing at 975.80.

The Dow closed lower due to profit taking on Monday as it consolidated some of this month’s rally. The mid-range close sets the stage for a steady to lower opening on Tuesday. Stochastics and the RSI are diverging and are turning neutral to bearish signaling that a short-term top might be in or is near. Closes below this month’s low crossing at 9116 are needed to confirm that a short-term top has been posted. If the Dow extends this month’s rally, weekly resistance crossing at 9653 is the next upside target. First resistance is last Friday’s high crossing at 9630. Second resistance is weekly resistance crossing at 9653. First support is the 10-day moving average crossing at 9453. Second support is the 20-day moving average crossing at 9377.


IN ONE HOUR OF TRADING YOU CAN MAKE MORE MONEY THAN MOST PEOPLE DO SLAVING AT A DEAD END JOB ALL WEEK LONG…
I didn’t believe it either until I saw the proof with my own eyes…

Click here for the full report

Genius chess player with a certified I.Q. of 157 unveils his ‘sneaky’ (and 100% legal) trading system which can…

… secure net profits up to $1250
… not in days or weeks
… but just 59 minutes or less

Click here for the full report

Dollar Carry Flips, VIX Now Tracking DXY, Stocks Pretending To Care About Bonds

Zero Hedge

Remember the JPY carry trade: long the Dollar and short the Yen? That was then. This is now.

Another interesting observation is that the VIX now seems to be tracking currency risk, instead of the market (seems nobody cares about equities any more).

Lastly, bond yields are hitting intraday lows while the stock market is being floored by HAL9000 thinking the sideways VWAP will persist until 3 pm (and is likely correct).

Crude Oil Falls the Most in a Month as Global Equities Slump

oil-prices-falling-7580901

Crude oil prices fell the most in a month as Chinese equities led a global slump on concern a slowdown in lending may derail an economic recovery in the world’s second largest energy consuming country. Oil futures declined for the first time in three days after the Shanghai Composite Index, China’s benchmark, tumbled 6.7 percent on a report that the nation’s banks cut lending. U.S., Asian and European stocks followed the Chinese market lower. “All of what we are seeing today can be blamed on the Chinese stock-market selloff,” said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. “The Chinese markets have helped support commodities. Price rises have been based on expectations of increased economic growth and demand in China”…..Read Complete Article

Citadel Terminates E-Trade 120 Million Share Sale Plan

225_etrade

Zero Hedge

Readers may have been curious what some of the things the OTS told Citadel to do, while it suspended the firm’s application to dominate 97.5% of E-Trade’s order flow. Well, one of them apparently was to stop the proposed 120 million share sale that Citadel was hoping to do and offload some of its toxic holdings in exchange for front-running a substantial portion of retail traffic flow.

From Reuters:

Citadel Affiliate Terminates 10b5-1 Stock Trading Plan in Connection with E*TRADE Investment

Citadel Investment Group, L.L.C., a leading global financial institution, announced today that its affiliate, Citadel Equity Fund, Ltd., has terminated the Rule 10b5-1 trading plan it entered into on August 11, 2009 in connection with its holdings of E*TRADE Financial Corporation (NASDAQ: ETFC) common stock.

No sale of E*TRADE common stock had been made under the Plan, which was to commence on August 31, 2009.

The Plan provided for the sale of up to 120,000,000 shares of E*TRADE common stock, representing slightly over 10% of Citadel`s holdings of E*TRADE common stock on an “if and as converted” basis. Citadel owns in excess of 1.1 billion shares of E*TRADE Common Stock on such basis, in addition to its existing debt holdings.

Citadel believes that the termination of the Plan at this time is in the best interests of E*TRADE and all of its stakeholders. Ken Griffin, Citadel Founder and CEO, has consulted with E*TRADE`s Board of Directors and they have been fully apprised of Citadel`s decision.

One always loves when Ken Griffin is so concerned about the interest of the stakeholders of the companies he provides rescue financing to only to obtain unprecedented visibility into their business model, core products and order flow. One however wonders what the true motive was for this action, and just what other requirements the OTS likely listed before they allow this retail investor “trade facilitation” to proceed as scheduled. Btw, one wonders what the update on the Citadel-Malyshev litigation is these days… Also, just who is it that runs Citadel’s High Frequency Trading desk these days?


IN ONE HOUR OF TRADING YOU CAN MAKE MORE MONEY THAN MOST PEOPLE DO SLAVING AT A DEAD END JOB ALL WEEK LONG…
I didn’t believe it either until I saw the proof with my own eyes…

Click here for the full report

Genius chess player with a certified I.Q. of 157 unveils his ‘sneaky’ (and 100% legal) trading system which can…

… secure net profits up to $1250
… not in days or weeks
… but just 59 minutes or less

Click here for the full report

Xie: Chinese stocks are a Ponzi scheme

The Mess That Greenspan Made

Former Morgan Stanley Chief Asia Economist Andy Xie says the Chinese stock market is still in “deep bubble territory”, noting that the Shanghai Composite Index would have to fall another 25 percent to get to fair value.

IMAGE Click to play in a new window

He also noted that real estate sales account for 10 percent of GDP and half of all local government revenue. Earlier today, China’s stock market fell seven percent, the sharpest decline since June 2008, and is now down about 23 percent from the early-August peak.

Monday Mandarin Market Meltdown

Courtesy of Phil’s Stock World
The Shanghai Composite fell 6.7% this morning!

I mentioned our love of FXP (ultra-short China) in our August Market Review and the short sale of FXP puts (a bullish play) was our primary cover in the last $100KP since early August for exactly the reason we are seeing play out today.  Of course China’s problems were my theme on Friday and on 8/16 we warned that China’s GDP wasn’t real and on 8/7 we pointed out that China’s 2009 growth was nothing more than an accounting trick after my August 6th article in which I pointed out that GS was desperately working to pump China up at the top (likely while they were dumping their own shares on unsuspecting suckers).  Do fundamentals matter?  Sure they do — evenutally.  But we had to roll and DD our August FXP short puts (big winners now) as it always pays to remember the words of John Keynes: “The market can stay irrational longer than you can remain solvent.”

We nailed the move in the Shanghai, which is now down 25% since we turned negative on it but the Hang Seng, which is much easier to manipulate as it’s controlled by foreign IBanks (our beloved gang of 12), has mysteriously flatlined near their August highs, maintaining the myth of the Chinese recovery so Uncle Rupert could run his almost daily articles telling you how great the global economy is on the other side of the world, where you can’t see it.  Interestingly, in China he’s running stories telling them how the US economy is leading the way back and in Europe he has total control of the media so whatever he wants to tell them is the truth anyway.

By the way, this is your LAST week to get Stock Market Truth with a FREE Trial Subscription to the PSW Report

China stocksLer’s see how rational the markets get as mainland China falls to it’s lowest level since May and let’s keep in mind that “limit down” on the Shanghai is 10% so a 6.7% drop in one day indicates that scores of companies were likely halted at 10% down.  It’s going to take some really big plate spinning by GS et al (already attempred by GS last night with this idiotic release calling China a “bright spot” and raising outlook 50%) to get this one back on track.  As I keep saying – the one thing “THEY” can’t fight is a volume sell-off, that is just beyond their physical ability to manipulate so we’ll be keeping a close eye on market volumes to see to what extent the US markets are likely to participate in a correction.

Concerns about a glut of Chinese stocks come as investors have become increasingly worried that Chinese banks are turning off the gusher of credit opened earlier this year to help jump-start the economy. Much of that credit is believed to have found its way into the stock market, powering a furious 103% rebound in the Shanghai index from its low in November 2008 through early August.  The market’s swoon since then “confirms speculation that bank liquidity had been going into the stock market,” says Citigroup head of China research Lan Xue. She says the market’s retrenchment will likely force some of the planned stock offerings to be delayed.

The August decline possibly signals a realization that while China’s economy is recovering before the rest of the world, it is not going to reach the same heady, export-led growth rates as in years past.  “People have it in their heads that the conditions of the boom years are normal, ” said Arthur Kroeber, managing director of Dragonomics Research & Advisory. “It will take a while for people to readjust to the new reality.”

Another reality people need to adjust to is the reality of the global markets.  China cannot “decouple” from the US and save the universe much as your tire can’t decouple from your car to avoid an accident.  Unless you turn the wheel and get the whole car moving together, that wall you hit is going to hurt either way!  China and India, which account for roughly 40% of the world’s population, consumed about $2.5 trillion of goods and services.  The US, with 4.5% of the world’s population has $10Tn of consumer spending.  A 10% drop in US consumption would need to be offset by a 40% increase in China and India’s consumption – it’s not going to happen folks!  Just this weekend, in Member chat, our main topic was dead and dying malls (anecdotes by members) and poor retail sales.  China can’t keep manufacturing goods if no one is buying them – Economics 101.

My favorite article of the weekend that was ignored by Mr. Murdoch, his oil-pumping friends at CNBC and most of the MSM (who collect a lot of money from oil advertisiong) is a report that China has put foreign banks on notice that Chinese State-Owned Enterprises my UNILATERALLY terminate derivative contracts that provide over-the-counter commodity hedging services.  It did not name the banks or the firms in question but cited a SASAC official as saying that almost every SOE involved in foreign exchange or trade had some exposure to derivatives such as crude oil, non-ferrous metals, agricultural commodities, iron ore and coal, although only 31 SOEs were licensed to do so.  Remember all that copper stockpiling we said would come back to  bite traders in the ass?  Time to cover boys!

Of course, you can’t blame Chinese investors, those poor bastards are having a Financial Forum on September 23rd and being presented to them as a Keynote speaker on the global economy, right up there with Bill Clinton and Desmond Tutu is everybody’s favorite moose hunter, Sarah Palin, who will “enlighten” the masses at what is called: ”Asia’s premier investment conference.”  Palin – who’s never been to East Asia and isn’t exactly famous for her mastery of public speaking or her expertise in finance and international affairs, will address 1,300 global fund managers from 32 countries, representing more than $10 trillion in funds under management.  CLSA spokeswoman Simone Wheeler says that orators at the forum often come from outside the securities industry. “Our keynote speakers are always notable luminaries.”

Speaking of losing politicians in Asia – Japan’s ruling party was shown the door this weekend in a landslide defeat after almost 50 years in charge.  The DJP (Democratic Japan Party) is big on stimulus, wants to fight global warming and increase Japan’s military role in the UN.  ”For now, the highest priority in conducting policy is to make sure the nation exits completely from the economic crisis,” said Mr. Mitarai, head of the Japan Business Federation, or Nippon Keidanren, a business lobby.  ”We need to see changes,” said Kunio Takahashi, 65, who backed the DPJ. “Although we still don’t know how it will turn out, it’s better that a different party will try to change our government.”

Consumer prices in Europe fell another 0.2% in August despite rising energy costs and Germany’s Conservative Party took heavy losses in regional elections against the left-leaning Social Democrats with a month to go before the general election.  Sunday’s elections were a triumph for the Left party, an alliance between the heirs of East Germany’s former ruling Communists and radical leftists from Germany’s West. The Left’s popular leader, former Finance Minister Oskar Lafontaine, helped the party win more than 21% of the vote in Saarland, his home state, and beat the Social Democrats in Thuringia and Saxony.

EU markets are trading down about a point ahead of the US open with the FTSE closed today for a holiday.  That gives us an interesting dynamic because, if we close lower than Asia probably follows through to the downside and then the FTSE, who normally lead the EU markets, will open trying to catch up to the downside tomorrow so things can get really ugly tomorrow if we can’t hold our levels in today’s trading.

We’re still looking to see how our upper levels hold up:  Dow 9,400, S&P 1,010, Nasdaq 2,000, NYSE 6,600 and Russell 575 and below that is another 2.5% drop, back to 9,100 on the Dow and 984 on the S&P.  That would be back to the top of our expected range and a positive test there could still lead us to raise our mid-point so let’s keep an open mind.  As I said in my “Rangeish” article, it’s not that I’m long-term bearish, I just felt we had risen to far, too fast and a little correction is just what the markets need.   We are 100% prepared for this drop and now we can just sit back like we have front-row seats at a concert and just see what happens next.

There were big merger deals announced today by BHI and DIS, both of which make for nice buying opportunities in those companies as they are very good purchases.  DIS stole MRVL and we’ll be buying them at the bell ($26.30) and working into a buy/write later.

Phil’s Stock World provides frequent intraday news updates similar to this one to members. As part of a special opportunity, readers of The Market Guardian blog are offered a free subscription. Use referrer code “Braunie” (which is included in the links here) and select the $49 per month option and – using my code – your $49 subscription will be free (monthly fee will be waived) and you will receive a 20% discount on premium services, should you find Phil’s Stock World to be a valuable resource. Click here to sign up.

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US Equity Markets Look Dangerously Wobbly As Insiders Sell In Record Numbers

Courtesy of Jesse’s Cafe’ Americain

“Investors Intelligence’s latest survey of advisory services showed an impressive 51% bullish and a meager 19% bearish…the spread hasn’t been that wide since November 2007.” Alan Abelson, Barrons, Aug. 29, 2009

Next week we move into September, the riskiest month of the year for financial markets, with the federals escalating preparations for a flu pandemic, while Congress considers legislation providing a ‘kill switch’ on the Internet for President Obama to use in the event of ‘an emergency.’ There are widespread rumours of a bank holiday lasting one week after a market meltdown begins in the US, during which the banks would be restructured.

Risky times indeed, and those in the best position to know what is happening behind the scenes are hitting the exits in record numbers right now, running to cash, and hard assets and currencies.

As TrimTabs reports in the attached news release, insider selling is reaching record levels, even as more speculators borrow to go long stocks. There are some obvious bubbles already formed in certain insolvent financial stocks like AIG, with disinformation rampant in the Wall Street demimonde.

The Obama Economics and Regulatory Team, in conjunction with the Federal Reserve, have accomplished no serious reform of the fiancial system. They have enabled the type of market inefficiency, soft fraud and price manipulation that is undermining global confidence in the integrity of US markets and financial products. And they have advanced a proposal to consolidate a huge amount of regulatory power under the Federal Reserve, a private banking agency that was at the root of our unfolding financial crisis.

The time has passed when Obama could have pointed to the past mistakes of his predecessors as the fault for our problems. Thanks to Tim Geithner, Barney Frank, and Larry Summers he now owns the financial crisis, and the coverups, policy errors, scandals, conflicts of interest and bailouts that have occurred since he has taken office. His reappointment of Ben Bernanke as Federal Reserve chairman most surely tied a bow on his ownership package for the crisis, which is in danger of becoming his ‘financial New Orleans.’

Wall Street insiders and their enablers pig out on public money while the nation suffers. This is not change, this is business as usual.

TrimTabs
Insider Trading and Investor Sentiment Signaling U.S. Stock Market Top

Insider Selling in August Soars to 30.6 Times Insider Buying, Highest Level Since TrimTabs Began Tracking in 2004. NYSE Short Interest Plunges 10.3%, While Margin Debt Spikes 5.9%

SAUSALITO, Calif., Aug. 28 /PRNewswire/ — TrimTabs Investment Research reported that selling by corporate insiders in August has surged to $6.1 billion, the highest amount since May 2008. The ratio of insider selling to insider buying hit 30.6, the highest level since TrimTabs began tracking the data in 2004.

“The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon,” said Charles Biderman, CEO of TrimTabs.

TrimTabs’ data on insider transactions is based on daily filings of Form 4, which corporate officers, directors, and major holders are required to file with the Securities and Exchange Commission.

In a research note, TrimTabs explained that insider activity is not the only sign the rally is about to end. The TrimTabs Demand Index, which tracks 18 fund flow and sentiment indicators, has turned very bearish for the first time since March.

For example, short interest on NYSE stocks plummeted by 10.3% in the second half of July and margin debt on all US listed stocks spiked 5.9% in July, while 51.6% of advisors surveyed by Investors Intelligence are bullish, the highest level since December 2007.

When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock,” said Biderman.

TrimTabs also reports that the actions of U.S. public companies have been bearish. In the past four months, companies have been net sellers of a record $105.2 billion in shares.

“Investors who think the U.S. economy is recovering are going to get a big shock this fall,” said Biderman. “Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes.”

TrimTabs Investment Research is the only independent research service that publishes detailed daily coverage of U.S. stock market liquidity–including mutual fund flows and exchange-traded fund flows–as well as weekly withheld income and employment tax collections. Founded by Charles Biderman, TrimTabs has provided institutional investors with trading strategies since 1990. For more information, please visit www.TrimTabs.com.

Survival Of The Biggest

Courtesy of MISH

On account of Fed sponsorship, Banks ‘Too Big to Fail’ Have Grown Even Bigger.

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

“It is at the top of the list of things that need to be fixed,” said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. “It fed the crisis, and it has gotten worse because of the crisis.”

Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.

Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation’s deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice’s antitrust guidelines typically allow, Federal Reserve documents show.

“There’s been a significant consolidation among the big banks, and it’s kind of hollowing out the banking system,” said Mark Zandi, chief economist of Moody’s Economy.com. “You’ll be left with very large institutions and small ones that fill in the cracks. But it’ll be difficult for the mid-tier institutions to thrive.”

“The oligopoly has tightened,” he added.

Last October, when the Fed was arranging the merger between Wells Fargo and Wachovia, it identified six other metropolitan regions in which the combined company would either exceed the Justice Department’s antitrust guidelines or hold more than a third of an area’s deposits. But the central bank thought local competition in each of those places was sufficient to allow the merger to go through, documents show.

Camden Fine, president of the Independent Community Bankers of America, said those comments reveal the government’s preferential treatment of big banks. He doubted whether the Fed would approve the merger of community banks if the combined company ended up controlling more a third of the market.

“To favor one class of financial institutions over another class skews the market. You don’t have a free market; you have a government-favored market,” he said. “We will never have free markets again if you have the government picking winners and losers.”

At times Shelia Bair seems to have a clue, other times not. Judging from her comment on too big to fail: “It fed the crisis, and it has gotten worse because of the crisis”, she once again shows signs of intelligent thought.

There’s lots more to see in the article including a link to charts showing Residential Mortgage and Bank Deposit Market Share.

For more on how too big to fail is creating winners and loses, please see Tale of Two Economies.


IN ONE HOUR OF TRADING YOU CAN MAKE MORE MONEY THAN MOST PEOPLE DO SLAVING AT A DEAD END JOB ALL WEEK LONG…
I didn’t believe it either until I saw the proof with my own eyes…

Click here for the full report

Genius chess player with a certified I.Q. of 157 unveils his ‘sneaky’ (and 100% legal) trading system which can…

… secure net profits up to $1250
… not in days or weeks
… but just 59 minutes or less

Click here for the full report

How to Day Trade and Swing Trade GLD Spot Gold Chart

Over the past couple of months, gold and silver have been uneventful. In this report I have posted weekly charts to show the larger trend of gold and silver. Also I have provided small charts of the US and Canadian gold stock funds GDX and XGD.

Because this report has weekly charts, which are a slow and dull time frame to follow, I have added another one of my Kitco Spot Gold Overlay trades, which is a short day trade to liven things up.

GLD ETF – Gold Bullion Price Action – Weekly Chart
I spoke with a few members last week, who wanted me to change my analysis for gold, which I agree with. So I would like to address this now to keep everyone on the same path.

In previous reports I have pointed out the reverse head & shoulders pattern in this weekly chart below. But to be honest, it is not a reverse head & shoulders, which everyone is saying it to be.

Why is gold not in a reverse H & S pattern? Because a reverse H & S pattern is just that, it means the price will reverse from the previous trend. A reverse H & S happens after a downtrend, which forms a bottom and the trend is not moving higher.

Gold has been moving higher, which you can see in 2007 and this large pattern is more like a Cup & Handle pattern – extremely bullish.

Trading Spot Gold Chart – Weekly

Trading Spot Gold Chart - Weekly

SLV ETF – Silver Bullion Price Action – Weekly Chart
Silver is trading a little different than gold. As you can see the price is trading much lower than the 2008 high. There are also two small patterns forming, which are a small head and shoulders top or a bullish pennant.

Last Friday we saw gold and silver prices jump, but until we get a low risk entry point, I continue to watch these commodities move inside their large weekly price patterns.

Spot Silver Chart – Weekly

Spot Silver Chart - Weekly

US & Canadian Gold Stock Funds
These small charts show how bullish the price action is this year for gold stocks. But the exciting part, which is tough to see here, is that the Canadian fund is starting to show bullish price action. When both the US and Canadian gold funds are moving together, it means there will most likely be some tradable moves in the near future. Let’s keep focused and ready to take action in the coming weeks, as these bull flags near the end of their cycle.

US Trading Gold Stocks

US Trading Gold Stocks

Canadian Trading Gold Stocks

Canadian Trading Gold Stocks

Day Trading Spot Gold – Day Trading GLD ETF
I will keep this short because I have written about this once before and below is the link to read my gold trading strategy in detail.

Day trading spot gold using the real-time kitco overlay chart is what I use to identify a possible day trade. The shaded box below shows a simple waterfall sell off and when I see that price action, I will generally take a position the next day around that time for a short trade in GLD.

I did not think to save this kitco chart until the following day so the waterfall price action was miniaturized because of Fridays rally. Also I would like to note this waterfall pattern happened 3 times in a row last week and I took advantage of them.

My Basic Strategy
Gold tends to move similar to what it did the previous day and traders know this, which is why the patterns starts 5-30 minutes earlier the following day, as we anticipate the move. Moves tend to repeat for up to 3 days. So you identify a sizable move and take action on it the following two days, as long as the rest of the day trades similar to the previous days. I like to scale into positions and once I see it going my way I add one final position to increase my exposure.

I am sure some of you are wondering how I traded GLD at 8am ET?
I trade with an online broker that allows me to trade pre-market and post market hours. Not very often these setups happen before 9:30am ET but last week it did.

Important note:
Once you see the price of gold making opposite moves of the previous day, minimize your position or don’t take the trade. As you can see in this chart below, the red line is starting to move the opposite way of the previous day (baby blue line) and later in the afternoon it was completely the opposite. This is a warning that there is a shift in the buyers/sellers and you can see the next day prices spiked higher in the opposite direction.

Day Trading Spot Gold – Day Trading GLD ETF

Day Trading Spot Gold - Day Trading GLD ETF

Read my previous Gold Day Trading Guide:
http://www.thegoldandoilguy.com/articles/spot-gold-price-charts/

Technical Gold Trading Conclusion:
Overall precious metals are trending sideways in their bullish patterns and we are waiting for some low risk entry points.

During slow trading times, which we are currently in, I like to look for other profitable positions to satisfy my need to trade. As a full time trader, it is important to have a few styles of trading, which allow you to profit in any market condition. My main focus is on the commodity ETF’s, with low risk setups, but I also day trade GLD when opportunities arise and I also trade extremely over bought/oversold index plays using the leveraged ETF’s and focusing on my Active Trading Partners stocks trades, which provides profitable trades week after week. Combining these trading styles allow me to pull money from the market week after week without forcing any positions. I just let perfect setups unfold and I take advantage of them.

Soon I will be providing these gold day trades and index trades for members, which I think is very exciting. If you would like to receive my free weekly trading reports please visit my website at: www.GoldAndOilGuy.com


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U.S New Home Sales

Sales of new homes rose for the fourth month in a row in July, increasing an estimated 9.6% to an annual rate of 433,000, the Commerce Department reported Wednesday. The seasonally adjusted sales rate was the highest since last September. The fourth consecutive increase in sales adds to the growing body of evidence that the market is finally expanding again after sinking to a record-low sales pace of 329,000 in January. Sales for last month, while 13.4% lower than in July 2008, are up 31.6% from the January bottom, the data showed.

homesales2608

The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery “The Elliott Wave Principle,” and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott’s work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost’s forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

  • Disbelief – that markets are patterned and largely predictable by technical analysis alone
  • Joyous “irrational exuberance” – at having found a “crystal ball” to foretell the future
  • And finally the correct, and useful response – “Wow, here is a valuable new tool I should learn to use.”

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices.

Natural systems, including Elliott wave patterns in market charts, “grow” through time, and their forms are defined by interruptions to that growth.

Here’s what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this “punctuated growth” appears in market data is only natural – as Robert Prechter, Jr., the world’s foremost Elliott wave expert and president of Elliott Wave International, says, “Everything that thrives must have setbacks.”

Basic Elliott Wave PatternThe first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: “impulse waves,” and “corrective waves.”

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or “correction,” of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don’t let your Elliott wave education end here. Join Elliott Wave International’s free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

How IRAs Can Tie Investors’ Hands — and What To Do About It

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It’s a blessing and a curse. IRAs, 401(k)s, thrift plans — some of the best ways to save money for retirement (the blessing) can tie your hands when you invest that money (the curse). Most savers didn’t recognize the cursed side as the markets generally trended up over the years, increasing their nest eggs’ earnings. But after a year like 2008, savers everywhere absorbed the shock that they couldn’t protect their retirement savings from a bear market. Now, the real moment of truth arrives: EWI forecasts that the market will again turn bearish. How can you protect what you’ve got when your plan doesn’t have any options for short-side investing? Bob Prechter addresses that question in his most recent Theorist.
* * * * *
Excerpted from The Elliott Wave Theorist, by Robert Prechter, published August 5, 2009
Investment Vehicles and Government-Regulated Plans
We receive many emails from subscribers asking specific questions about investing [such as,] “Is it O.K. to invest in such-and-such short fund if that is my only short-side option?” Again, given the market-tracking mechanics of such funds, the only answer we can give in good conscience is “no.” … But every question prompts others. Why is this our friend’s “only option”? The funds mentioned are the only ones in which a “long” is really a short, so we would guess that our friend has some sort of government-regulated retirement plan that allows only “long-side” purchases.
Others with retirement plans similarly complain that their plans do not include the option of owning Treasury-only paper and ask if such-and-such other money fund is safe enough to buy. In our view, most money funds assuredly do not offer the level of safety that we advocate. Moreover, such plans are often administered by brokers, and brokers will be in chaos during wave 3 down.

These questions reveal just some of the problems an investor encounters when playing the government’s games. Conquer the Crash (see Ch. 23) recommended taking every opportunity to cash out of IRAs, Keoughs, company-provided plans, etc., all of which are government regulated, thereby freeing up your money so that you would have full say over its use.

By signing up for one of the government’s “deals,” a potential short seller now has no good choices and is therefore effectively barred from selling short. A prudent investor who wants to own the safest debt may likewise be barred from buying T-bills if he participates in a government-regulated, company retirement plan. Should he buy the only money fund available and cross his fingers? Government rules often force people into bad decisions. In this case, the “good deal” the government engineered for your retirement is a trap that prohibits you—at the most important time in modern history—from buying the safest debt instruments and from making money in a bear market….

Irony attends both financial markets and government plans. Put them together—as we have witnessed throughout the financial crisis so far—and you get Kafka.

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Prechter Publishes Interim Theorist. Bob Prechter has sent a one-page note and chart to subscribers of his Elliott Wave Theorist, explaining an important turning point in the markets. You can take action now with your investments by getting more information on how to subscribe to the Theorist here.