Duuuuuude's Corner Office

For Market Direction, Look To Money Flows

Money Flows rule the stock market today.  You may recall the post I made on April 27 about how money the Fed was printing found its way into various asset classes.  It seems that neither fundamental analysis or technical analysis really matter any more.  It is all about tracking where the money is flowing.  The Wall Street Journal Market Data Center prints money flows daily.  It is as accurate of an indicator of market direction that I know of.  For example, the last time it gave a sell on strength rating, notice what happened.

OK, so the money flow ran dry on the SPY on February 14, 2010, just before QE1 ended.  There is one other indicator which has nailed the S&P spot on since the beginning of the rally back in March of 2009.  That is the Fibonacci Time Series.  Combined with money flows and QE programs, this seems too easy.

If past performance is indicative of future results, August 8 will be when QE3 gets announced, but who really knows.  Just so you know, Thursday's money flow looks bad, but could have something to do with the Fed announcemnt.

 

Time to Buy Treasuries?

QE 2 is ending in June.  It would probably help your trading to recognize what affect this program has had in various markets you might invest in.

In the chart below, I have outlined the effects the Quantitative Easing programs have had on various asset classes.  It is easy to recognize the beneficiary of easy money.  Looking ahead, I expect these asset classes to continue to work in a similar fashion.  These asset classes behave in a particular way with stimulus, and without stimulus.

Looking at how strongly correlated US Treasuries are to Quantitative Easing, I would not want to own TBT here unless  for some reason treasuries break down here.

 

Why I Shorted the $RUT Friday With TZA

What I have outlined below is a simple trade plan I innitiated last week.  I like trading off the $RUT.  For me, it trades truer with my charts than does the $SPX.  On Friday, I liked the price action pushing up against resistance on the $RUT chart.  This is what I saw.

Longer term, we are at a nearly 3 year long resistance area at 645.  This area has been significant for a very long time for swing traders.

So when I looked at TZA, I should not have been surprised to see that it was at support.  Right on it, so I bought a position at 31.  The news last week was very bullish if you recall, but it always gets that way at these extreme areas.  These areas are where you must take some risk if you are a trader. 

This is an easy trade to manage.  We just filled a gap on TZA as you see above, so I could take some profits here, but look at all the wide open space above.  We could certainly challenge 40 in the next few weeks, which would provide a huge return.  I chose to go for that with a tight stop.  My stop is not on TZA however, but contingent on the $RUT not exceeding the 648 area.  Time will tell if I am right or not.  If I am wrong, I won't be hurt too badly.  I like the reward for the risk.

Euro Bounce Achieved

This post is a follow up to the Euro Bounce I mentioned a week ago which has completed as it moved exactly to the area I had forecast. 

 

The S&P has also moved into the area I had picked where I intended to be completely out of my longs.

Is it time to short stocks?  Perhaps with tight rules, but I was positioned long and for now feel comfortable taking profits here at the very least.  I have a bearish bias, but realize the market could make a push higher. 

The dollar has pulled near its 50 day moving average which has served as support on numerous occasions.  These bounces have been accompanied by drops in the euro and an accompanying drop in stocks.  Doug pointed out on the ETF corner this morning that this relationship seems somewhat uncoupled as of late so caution is advised for any short taken here.

I am expecting at least a short term pull back from here.  At the moment, I am in cash.

Euro Set To Bounce

I think we are at a substantial support area on the euro.  Economist such as Robert Prechter and Jim Rogers agree.  My reasons are purely technical as this long term chart is fairly obvious.  A bounce to $1.25 would seem completely reasonable to me.  In the grand scheme of things, that is not very much.

The last time the euro was at 1.25 was on May 24, and the $SPX was around 1090 which is where we are today.  A bounce in the euro here could push the $SPX back upwards towards 1140.

I did say towards 1140, but I doubt we get there.  I took long positions last week in FAS, JJG, and TNA which are doing well.  I practice safe trading rules, which means they are all protected with stops.  My profits are locked in, and we have already reached my first target, yet the euro has yet to break out above 1.21.  I see two targets ahead.  1109 which is the first gap fill, and 1130 which would be the descending resistance line since this sell off began in late March.

As we pass through 1090 and 1109 I will tighten my stops, and expect to be out if not completely short by 1130.