Thursday, January 31, 2008

Paul Volcker Endorses Barack Obama

Nice endorsement from the most respected living Fed Chairman. A man who fought and won the battle over inflation in the 70's.

Democratic presidential candidate Barack Obama won the endorsement of former Federal Reserve Chairman Paul Volcker.

``It is only Barack Obama, in his person, in his ideas, in his ability to understand and to articulate both our needs and our hopes that provide the potential for strong and fresh leadership,'' Volcker said in an e-mailed statement today.

Obama, 46, an Illinois senator, is locked in a tight race with New York Senator Hillary Clinton for the Democratic nomination. The two will meet head-to-head in more than 20 state primaries and caucuses on Feb. 5 after yesterday's withdrawal of former North Carolina Senator John Edwards from the race.

``This is a high-profile endorsement that is likely to strengthen Obama's credibility with respect to economic issues,'' said Costas Panagopoulos, director of the elections and campaign management program at Fordham University in New York. ``Given the growing importance of the economy as a top issue for voters, the Volcker endorsement can be very helpful.''

Paul Volcker, Former Fed Chairman, Endorses Obama

Wisdom of Crowds? Yeah Right

Every once and a while I come across something so stupid/crazy that I have to do a little research just to prove to myself that my intuition is still sound. Recently, I read something very stupid/crazy while visiting The Big Picture. (Barry Ritholtz pointed out a Bloomberg story about Barton Biggs' new book).

The book, "Wealth, War and Wisdom", tries to argue for the wisdom of crowds. How is this done? Here is a segment of the article.

The ``wisdom'' in the alliterative title refers to the spooky way markets can foreshadow the future. Biggs became fascinated with this phenomenon after discovering by chance that equity markets sensed major turning points in the war.

The British stock market bottomed out in late June 1940 and started rising again before the truly grim days of the Battle of Britain in July to October, when the Germans were splintering London with bombs and preparing to invade the U.K.

The Dow Jones Industrial Average plumbed ``an epic bottom'' in late April and early May of 1942, then began climbing well before the U.S. victory in the Battle of Midway in June turned the tide against the Japanese.

I could not believe such wild claims and suspected that Biggs had made the mistake of using "20/20 hindsight" and a poor understanding of the way markets move to reach totally ridiculous conclusions. Ok, there is my hypothesis. What does history say?

Below I have the weekly chart of the Dow 30 during World War II. Let's follow the time line of events. First you have the invasion of Poland. Due to a treaty, Britain and France respond with a declaration war, but neither want to fight and we enter the "Phony War" period. It looks like the market doesn't believe that a full-scale war will be fought as the Dow just meanders sideways (So much for the wisdom of crowds here). What happens next is the surprise invasion of France, which is promptly followed by a massive sell-off on huge volume.

This is the point where some understanding of how markets move is required. The most important fact is that markets never go up forever and they never go down forever (quote of Tom O'Brien). The reason why is quite simple. There are only a finite amount of shares and a finite amount of money out there. This fact is reflected in the volumes. When volume dries up at tops there is no more money to buy, when it dries up at bottoms, there are no shares to sell. During fast and furious sell-offs the market can quickly exhaust the amount of shares and bottoms are reached in a short period of time.

Ok, back to the chart. Look at the period after the invasion of France. The volume quickly dries up (selling exhaustion), resulting in bounce. So yes the market rose during the Battle of Britain, but this was merely a counter-trend bounce on light volume back up to the 50 period moving average. More selling would come, especially since the world's future looked very bleak.

The next big event was Pearl Harbor, resulting in another huge sell-off as America entered the war. All through the early part of 1942, while America struggled to learn how to fight in Africa and the Pacific, the market continued to fall on ever decreasing volume. Just like the markets always do, it started a counter-trend bounce when things look the darkest, this time just weeks before the decisive Battle of Midway. This was an obvious turning point of the war in the Pacific and gradually the markets began to gain confidence.

The funny thing is, the volumes, and thus crowds, do not significantly increase until months after the Battle of Midway. So much for the "wisdom of crowds". Moreover, the "epic" bottom can only be defined after several years of perspective, well past the point where the outcome of World War II was in doubt. Just because there was an exhaustion in selling pressure and a counter-trend bounce just weeks before Midway does not mean that the markets predicted the war's outcome.

It almost seems silly to point all of this stuff out because it is so obvious. It looks like Biggs was fooled by randomness.

One last thing, Biggs says that the markets "then began climbing well before the U.S. victory in the Battle of Midway in June turned the tide against the Japanese. " I really don't think one month or 20 trading days can be considered "well before" an event, especially when Biggs is defining it as a multi-year bottom. What a joke.

The selling is done

Here is my current thesis. The selling is done and the bad news is already baked into the market. It will take some time for the leaders to emerge, but buying index funds and market ETFs is a good strategy right now. Be ready, because when those new leaders emerge some serious money will be made.

Here is a great quote from Tom O'Brien during his conversation with Ken Shrieve of Investors Business Daily.

"Its Armageddon everywhere, but we'll see if the market cares about Armageddon at these lows."

Wednesday, January 30, 2008

DePaul Basketball

I will not be posting anything tonight as I went to see Syracuse beat DePaul tonight. It was an ugly game with poor officiating but, overall I was entertained.

Monday, January 28, 2008

Tom O'Brien is a giddy bull

"The bullhorns are out!"

These are the words of Tom O'Brien, a man who has been bearish since March 2007. What was funny is that the day before he flipped bullish he sounded about as grim as I have ever heard.

Tom is not only looking for a Dow 15,000, but he also predicts that Ben Bernanke will trade in his helicopter for a fleet of B-52's to drop cash.

Sunday, January 27, 2008

TLT Short

I have been watching the meteoric rise of bond prices and have been looking for a spot to get in on the short side. The 20 year bond ETF, TLT, has finished a TD Sequential sell signal and recent price action has indicated that we are at some serious resistance. That resistance is much clearer in the long term chart below.

I would honor a stop loss if the price closes above 97.05.

Futures Blowup

By now you have probably seen this guy. He was long 10 Russell 2K contracts into the MLK weekend. Here is a pretty funny remix of his own video post. I guess he sold for a 31K loss just minutes before the Fed emergency rate cut. 31K isn't all that much, but it was obviously too much for him.

Here is his blog.

The dude in the video is getting tired of all of the attention and it reminded me of this REM vid.

Politics on Saturday

Congratulations Barack Obama and South Carolina. I was absolutely convinced that, while disgusting and shameful, the Clinton's tactics would prevail. Such negativity just always seems to work (especially in South Carolina) and this time it backfired. Thank God.

Who would have thought that the state that instigated the Civil War would be the state that restored my faith in American democracy.

The bottom line: I now consider myself a former Bill Clinton fan and will either vote for the Republican candidate or not vote at all if Hillary Clinton wins. Lets hope it doesn't come to that.

If you happen to be undecided about which candidate to vote for on February 5th, just take a look at the breakdown of Obama's and Clinton's constituency. I don't know about you but, if you take out the gender difference, I wouldn't want to be grouped together with Hillary Clinton's voters.

The contest from now on, Layman said, will be "a battle between distinct and fairly evenly-matched constituencies....with Obama doing better among blacks, men, younger voters, better-educated people, and independents (in open primary states), and Clinton doing better among whites, women, older voters, lower income and less-well-educated voters, and staunch Democrats." The results he said, are likely to "be just as confused on the night of Feb. 5 as they are right now."

No wonder why Bill's efforts to pin Obama's as "the black candidate" failed. All of the ignorant bigots were already voting for Hillary.

Source: This Now Becomes A Real Delegate Fight

Thursday, January 24, 2008

The market's new and old leaders

Two days up does not make a new bull market. We need to watch for an IBD style follow-through day and watch for breakouts from sound bases. This market needs to prove itself so don't get too comfortable.

This doesn't mean that it is time relax, however. Keep a look out for new leaders and stay away from broken down former leaders. Take for example the two charts below. Chipotle (CMG) has held up reasonably well and looks to be forming a nice base.

Flotek Industries (FTK) is a different story. I know this company very well as I owned it way back in June 2006 and sold around February 2007 (Yes it was painful watching the run that followed). I had to laugh though when I read that they blamed their recent earnings warning on "bad weather". That is what they said just before that big dip in 2006. It looks like the market will once again punish FTK severely. This is going to take a long time to recover (probably over a year) but I wouldn't be surprised to see it hit 55 again. Flotek went too far and too fast and I think the management started to believe their own hype for a little bit.

This is a trade...repeat, this is only a trade

I bought the QLD @ 73

Sell at 94 with a stop loss of 65. I am risking 8 points with a possible reward of 21.

Wednesday, January 23, 2008

Back up the other side

Now that was a reversal that I can get behind. Now we just have to watch how things trade when we get back up 1425 on the S&P.

Tuesday, January 22, 2008

Wake Up Call

I just talked to my Mother. I've been advising her on an exit strategy for her long positions. During the conversation she mentioned that she was surprised by the emergency rate cut today and noted that "wow, things must be really bad".

Like a majority of Americans, the reality of the credit crunch hasn't penetrated into my Mom's everyday life. So it seems that the Fed's cut, while easing Wall Street's fears, has just given Main Street something else to worry about (as if the falling price on their home wasn't enough).

Goodbye American consumer. It was a good run.

Mark Hulbert talks about this unintended consequence in this interview.

MGM Short Entry or Long Exit

When TD Sequentials are completed, a break below their stop loss points are usually a very bad sign. One thing that I have observed (and posted about) is that a retest of the breakdown point usually follows, giving one a second chance to get out. The retest can also give one a chance to get short that equity.

One of my favorite things to do in technical analysis is to use several techniques to arrive at the same conclusion. As the charts of MGM show, both a retest of the TD Sequential breakdown and a return to confluence lines up at almost the exact same place. (see previous post on confluence)

If we bounce back up to the 80 price point, use 84 as a stop loss for a short entry.

Making a short list of shorts

Looking for a fabulous short? Again, we can use confluence to spot low risk entry levels. Be patient and wait for the XLF to climb back up to 28.80 level and then look for a rejection of price levels. Look how nicely confluence worked back in early December.

If you really want some action, buy the SKF, which is the 200% inverse of the financials.

Bad Timing Ben

So I was watching the TV this morning when Helicopter Ben announced the rate cut. First off, considering all of the crash talk out there, I was not surprised. After about 10 minutes of letting it sink in, I realized what an lame move this was. I would have preferred a climactic sell-off and complete wash-out. The Fed could have kept their finger on the trigger and announced a 75 basis point cut if things got out of control.

Oh well, easy for me to say.

All this means is that I will short this market at the lower levels of confluence as we have many more weak hands than we would have had if a full capitulation took place.

Monday, January 21, 2008

Price Projections for "Black Tuesday"

The Asian markets are down again and the US futures are down huge! What should we expect for tomorrow? Below are the ABC Fibonacci expansion projections for the S&P 500, Nasdaq 100, Russell 2000, and Dow 30.

In every chart we are already into the 1:1 expansion point, which means that the next level will be the 1:1.618 level. The areas are shaded in grey. If we hit those levels on some panic type selling and bounce, that will be a good sign. If we go down to the low end of the shaded areas and stall, we are probably building cause to break below them. That will not be good for anyone (except for any greedy/piggish bears out there).

The Line in the Sand:
S&P 500: 1248.53
DOW 30: 11395.16
Nasdaq 100: 1728.54
IWM (Rus 2000): 60.59

Confluence and New Short Entries

So you are watching the collapse of the financial markets, the rising probability of recession, and a stock market staring disaster in the face. What to do?

Well first of all, if you are not short here, you should by no means get short now. You missed your chance on this leg. The good news is that, if this is a serious bear market, you will have many opportunities to get short again.

One of the best tools that I have found to pinpoint entry levels for short positions is Fibonacci confluence. The method is pretty simple and projects both short entry points and stop loss levels.

The charts below show three separate short entries predicted during the bear market of 2000-2002. Basically, one takes the Fibonacci retracement levels of two separate trends and look for their overlap, or confluence. See how nicely all three retracements stopped when they hit these levels. The uppermost retracement level acts as a stop loss. Some other examples can be found here.

Patience is the key here and don't forget to stay disciplined.

Black Tuesday?

There is a lot of talk out there about "Black Tuesday". Will this be the washout that everyone's been looking for or will this be something far worse? I fear that with everyone looking for bounce we are indeed set up for a crash of 1987 proportions.

I can't get the Gene Wilder line from Willy Wonka out of my head!

"The suspense is terrible, I hope it will last."

Good luck out there.

Sunday, January 20, 2008

More on the Credit Default Swaps

I was watching Bloomberg this weekend and witnessed the interview of two money managers who were touting the market's compelling valuations. It was the same-old same-old. You know, stocks are cheap and this correction represents a buying opportunity.

I am just totally baffled by such arguments. This bear market is not about valuations or earnings! It is about the end of a credit cycle. A credit cycle that, up until now, had totally ignored risk. The "repricing of risk" was thrown around in August to explain the markets initial losses, but even though you do not hear it as much anymore, that process is still taking place. Just look at the credit default swap markets.

The other day I pointed out a post in the The Big Picture that quickly explained the lunacy in the monoline insurance biz. Today, I read an even more in depth piece by John Mauldin. Here is an excerpt from the article.

As noted above, I said three weeks ago that the big story for 2008 would be the counter-party risk for credit default swaps. That story is coming faster and larger than I thought. Bill Gross of Pimco suggests that the ultimate cost could be another $250 billion dollars on top of the $250-plus billion in subprime losses. That means we have only seen the tip of the iceberg in write-offs in the financial sector.

The real problem is the "monoline insurers" like ACA, Ambac, and MBIA. Here's a quick primer on how they work. Let's say you are a small municipality and want to borrow $10,000,000 for a bond offering to build a road or a water treatment plant. If you went to the market with your credit rating, it would be a low rating and the cost of the money would be high. But if you get one of the seven monoline insurers to guarantee your bond, then you get whatever their credit rating is. The fees for such insurance are lower than the savings you get on the bond, so everyone wins.

But over the years, most of the monocline insurers went from boring municipal bonds and jumped into the mortgage-backed security markets, selling credit default swaps that significantly juiced up their earnings. But it also added a lot of risk that they clearly, in hindsight, did not understand.

ACA has already seen its rating go from A to CCC, which is basically junk. This puts it out of business, as no one will pay to be rated as junk. ACA now has only $425 million in capital to cover the $69 billion in mortgage and corporate bonds they insure. Interestingly, they added $20 billion of that between April and September of last year. Talk about doubling down on a losing trade. Merrill wrote down almost $2 billion in bonds that were insured by ACA. They will not be alone.

Very scary stuff!!!

Source: More BLS BS by John Mauldin

Larry Pesavento Update

Tom O'Brien talked with Larry Pesavento again this last Friday and clarified his doomsday market call the other day. Larry believes that this current bear market will be longer than two years.

So as I assumed, he judges the severity of bear markets on the basis of time rather than price. Don't expect at 70% + decline.

In an interesting side note, Pesavento uses cycles in much the same way that Charles Nenner does. Nenner has predicted a choppy up-and-down market for 2008.

January 18 2008 Pesavento Interview

Saturday, January 19, 2008

IBD Big Picture Gives Excellent Advice

I don't subscribe to the print version of Investors Business Daily (IBD). I find most of the articles juvenile and an insult to my intelligence. I do, however, subscribe to the, where I keep track of the IBD 100 and read the daily market update, The Big Picture.

Say what you will about IBD's bullish bias (look at any long-term chart and you'll see why that is a good idea), when the market turns they will never tell you catch a falling knife. Cash is king and they respect that.

In this weekend's IBD Big Picture article, Jonah Keri gives some excellent advice to those who might try to ride out this downturn because they own "high quality" stocks.

Individual stocks continue to tumble. Stocks that led the market's most recent rally have fallen especially hard. It's odd, then, to see analysts upgrade leaders that have started breaking down.

Research In Motion, (RIMM) Potash (POT) and Fluor (FLR) each garnered upgrades Friday. All three stocks fit the profile of the leader that has started to crack in heavy volume.

Analyzing the market's past winners shows how and when leading stocks top and start to roll over. These diving leaders are exactly the sorts of stocks you should be selling to protect your capital. Yet Wall Street continues to tout these names.

No one can know with absolute certainty which way the market will turn from day to day. But it's worth remembering the lessons of the past.

When Cisco Systems, (CSCO) Microsoft (MSFT) and others started selling off in 2000, many analysts urged investors to grab them each time they fell to new bargain prices. Those that heeded that advice learned a painful lesson: When the market goes into a downtrend, the only absolutely safe place to be is in cash.

Trying to outsmart the market has proven fruitless lately. Even defensive stocks like utility, food and beverage firms have gotten slammed. As it stands, this market has few, if any, safe havens.

S&P 500 and Dow 30 Break TD Sequential Stop Loss Points

As if we needed another bearish sign out there, the S&P 500 and Dow 30 both closed below their TD Sequential stop loss points. We should all be familiar with the consequences of that. DeMark says that such a failure in price represents a change in the market and is another bad technical sign for the bulls.

I'm sure they won't be discouraged, however, as they will continue to trumpet the "low valuations" of the market. If there has been anything that I have learned in my studies, it is that P/E ratios are totally worthless!!! SHORT THE BOUNCE!!!

Friday, January 18, 2008

Larry Pesavento Predicts Worst Bear Market in 10-15 Years!

I still listen to Tom O'Brien just about everyday. He has been WAY ahead of all of this financial pain, predicting the subprime bank loses, state investment fund failures (Florida), and laughing at all of the sovereign wealth funds that have come in to provide a stay of execution for the banks. (Tom believes that these funds will lose their money.)

For a few weeks now, Tom has been harping on the next shoe to drop in the financial markets, which he predicts will be credit default swaps. This market is absolutely huge and is so complicated that most people do not fully understand or grasp the true danger it presents. Today there was a post on the The Big Picture that also points out this danger. It is a quick and understandable explanation that should be read by all.

Back to Tom O'Brien for a moment. He is pleading for buy-and-hold people to do something to protect themselves. Just the other day he was interviewing Larry Pesavento, a well-respected currency trader, who also had some very disturbing things to say.

Here are some highlights.

"We are predicting a major bear market in stocks, the worst in 10-15 years."
(yes even worse than 2000-2002)

"We feel that subprime is just the tip of the iceberg."

You can listen to the entire interview here.
Tom O'Brien Interviews Larry Pesavento

UPDATE: Barry Ritholtz makes a good point in the comments and it got me thinking. Since there has only been one undisputed bear market in the last 10-15 (and it was a doozie), I'm sure Larry Pesavento must be talking about the worst bear market since the 70's, because he clearly states in the interview that this bear will be worse than 2000-2002.

Larry is a bit of an old timer and he must be forgetting that this is 2008. The mid-70's were 30 years ago. I must admit that I do the same thing every once and a while.

Way to be on top of things Marcy.

This clip is sad and disturbing. Let's hope this crisis doesn't get any worse.

Thursday, January 17, 2008

Doug Kass Rule #11

11. Buy when your hands are shaking; sell when you become overconfident and complacent.

Wednesday, January 16, 2008

This is getting boring

Still, there is no fear out there. The indices seemed to hold up, but all of the high quality growth stocks took a real beating. It was what IBD likes to call a stealth down day.

I have to say, being almost completely in cash feels pretty damn good right now. All I own are free shares that I have no problem holding onto through this pain.

Tuesday, January 15, 2008

Show em' how its done Joe Pa

Will you bulls finally throw in the towel?

I need a shortable bounce!

The image “” cannot be displayed, because it contains errors.

Monday, January 14, 2008

Chindex International (CHDX) Breakout

Here is an interesting breakout. It might be worth throwing a little money at to see what happens. I would honor a stop loss on a close below 33.

Update: The breakout failed. I didn't buy, but it might be worth keeping an eye on this one.

A wishy-washy Nasdaq analysis

The Nasdaq and Nasdaq 100 have a very interesting setup. If we continue to bounce up, especially on lighter volume, look to go short at the 2580 and 1985 price point for the Nasdaq and Nasdaq 100, respectively. This is a classic "support becomes resistance" situation. There is added validity to these resistance levels as both are TDST levels.

I wouldn't jump in with both feet, however, as the sentiment out there has gotten extremely bearish. I wouldn't be surprised if this bounce went a lot higher than people expect, especially with some big interest rate cuts on the way.

Sunday, January 13, 2008

Combo MACD: A new technical indicator

With the markets in such a sad state, I have been playing around with some numbers trying to come up with a new way to spot turns in the market. I would also like a nice way to define both bull and bear markets. In this post I will present a new technical indicator that has the same peaks and valleys as the Moving Average Convergence/Divergence (MACD) indicator, but differs from it in one important characteristic, namely, that it is independent of the stock chart being examined. This important difference makes it possible to directly compare the indicator values of a basket of stocks, instead of just looking at one at a time.

The first chart shows the chart of AAPL with my indicator (I call it Combo MACD) directly below it and the original MACD at the bottom. What I want to show is that if one compares the peaks and valleys of both indicators, one will see that they match up pretty well. The advantage of the indicator can be seen in the longer term chart of AAPL. Due to the way the Combo MACD is constructed, there is no dependence on the current price of AAPL. The Combo MACD indicator oscillates between extreme readings of +5 and -3, while the original MACD is highly dependent on the underlying price.

The independence of the Combo MACD makes it possible to scan for stocks that are acting bullish (above 2) or acting bearish (below 0).

Applying the Combo MACD to the broader markets seems to identify bull and bear markets. Look at the long term chart of the S&P 500. During the bull markets of the 90's and post 2003 the Combo MACD bounced between 0 and +5. Corrections brought the reading down to 0 for short periods of time, but the Combo MACD usually bounced right back. One can see that during the transition to the great bear market in 1999 the indicator never got much higher than a reading of +2. Finally, as the market turned down, the Combo MACD plunged down and bounced between value of -3 and 0. The pattern of the bull market then returned after 2003. Notice how the original MACD does not display this kind of range bound behavior.
Finally, since it is possible to compare the Combo MACD values of many different stocks, it should be possible to define the percentage of bullish or bearish stocks in an individual index. The chart below gives the percentage of S&P 500 stocks that are below 0 (bearish) and the percentage of stocks that are above 2 (bullish). What it shows is that we are at extreme readings that have been consistent with short term market bottoms. The Combo MACD reading of the S&P 500 itself is also showing that we should bounce back a little. Whether this is the beginning of a new bear market will rely on how far the market can bounce. If we just get back up to a Combo MACD reading of +2 and then head down again, we might be in for a long bear market instead of a short one.

Science Debate 2008

I just leaned about a fantastic idea. It is a call for a presidential debate about science and technology. As a part of the scientific community, I have witnessed the low moral that has been caused by steep budget cuts. Enough is enough and it would be nice to put the future president's feet to the fire.

While I think a debate regarding American science is bound to have some stiff opposition, if we can make this a big issue, anything is possible.

Go check it out.

Saturday, January 12, 2008

Mastercard break

More discipline was tested today as Mastercard (MA) closed below my stop loss point. This was particularly discouraging given MA's ability to hold up in the face of all of this ugliness. Take heart, the lower this market goes the more money there will be made when it comes back up. Remember, markets don't go down forever.

Friday, January 11, 2008

Looking for shorts after the bounce

When a TD Sequential triggers the stop loss point, it is usually a good idea to start thinking about shorting that stock. I have discussed this in previous posts.

As the market bounces a little, I will be posting some charts that look shortable. Here is MGM. It triggered its stop loss and is now bouncing back up to towards that important level. Look to short in the shaded region.

Thursday, January 10, 2008

Arizona Rep. Russell K. Pearce Responds

I have really tried to keep politics off of this blog. The one time I did post anything political it had a definite connection to economics and the free market. If you didn't see it, I posted something about the Arizona Representative Russell Pearce. I was merely pointing out the fact that he was introducing laws that put artificial constraints on his state's economy and then claiming that, since his state was a "free market", it would adjust. I didn't think he would appreciate the irony I was pointing out.

Well today I received an email from Rep. Pearce. It was long and very strange. Here is how it begins. (Oh, did I mention that the underlying issue is immigration?)

You should understand our "Sovereign" rights as a nation. The Rule of Law. The damage to America and Americans.

26 AMERICANS DIE DAILY AT THE HANDS OF THESE "ILLEGALS" EVERY YEAR. 25 EVERYDAY, 12 BY STABBINGS AND SHOOTINGS AND 13 BY DUI AND OTHER RELATED CRIMES. APPARENTLY YOU AND OTHERS COULD CARE LESS ABOUT....AND OUR GOVERNMENT WILL SHED NOT ONE TEAR OVER THIS..THIS IS FROM A CONGRESSIONAL REPORT. (AZ Officers murdered, Officer Atkins, Officer Erfle, Officer Martin, Officer Eggle, and the list goes on!!!!$2 billion annually in Arizona to educate illegal alien children in K - 12.

The email goes on and on and on. I was absolutely shocked by the ranting and raving of the email. This is a paid Representative of the Arizona State government. Just amazing.

I was obviously sceptical about Pearce's claims (even if they didn't agree from one sentence to the next) and decided to do a little web research and some grade school level arithmetic. The plot below is data from the FBI and gives the murder rate (per 100,000 people) for several states. I chose these because they have experienced the largest increases in migrant workers and illegal immigrants.

I have to say that I was surprised by the falling murder rates across the board. It also seems to say that if illegals are responsible for so many murders, their population must be falling too.

I'm sure the anti-immigration camp doesn't believe that, so I looked up their numbers. According to the Center for Immigration Studies, the illegal population stood at 8 million in 2000 and was 3.5 million in 1990. This is a increase of 500,000 a year. So using the FBI murder rates and a US population of 300 million, I put together a daily murder rate.

You can reproduce the graph on your own. Just divide the total population by 100,000 and then multiply that number by the given murder rate. Finally, take that number an divide by 365 to get the murders per day, which is shown on the chart.

What is obvious is that, although the illegal immigrant population has grown by a rate of almost 1400 per day (according to the census bureau) the murder rate has gone from 61 per day in 1996 to 47 per day in 2006. The data seems pretty obvious, the murders per day have declined while the number of illegals entering the country has increased. Clearly, murders committed by illegal immigrants is a non-issue.

I think the FBI's data is a little more reliable than Rep Pearce's. Using his number, 30% of all murders in the USA are by illegal immigrants. That is insane and so is Rep Pearce.

Wednesday, January 09, 2008

Oversold Bounce

What I'm showing is the number of Nasdaq 100 stocks that have closed below their volatility channels. As you can see, once 50% of the stocks close below their channels a bounce usually follows. Don't expect a big bounce and don't expect it to be immediate. I'm only pointing out that we need to wait to initiate any new shorts.

Below is a closer look at the 2006 correction. I looks like the index tends to bounce up to the upper channel and then heads down again. Don't forget to keep an eye on those follow-through days and new emerging leaders. They will signal a new uptrend.

Tuesday, January 08, 2008

Stop Loss Triggered

While I'm convinced that we are on the verge of a nice little bounce, both of my TD Sequential trades closed below their stop-loss points. I have to be disciplined in this ugly market so I closed the trades. Bummer.

Laying low

I am a political junkie. I love election years, especially ones where it is an all out fight among and between the parties. Lucky for me all of these political distractions are coming at the right time, as this is a treacherous market and being in cash looks to remain the good strategy for the next few months. I'm looking for a bounce, but expect much lower lows to be recorded before a meaningful bottom is reached. As Tom O'Brien has been pointing out recently, there is yet to be any real fear and panic shown by market participants. When that time comes, I'll be buying.

I'm still in my Goodyear (GT) and Cisco (CSCO) trades and will unload when that bounce comes. Mastercard (MA) has yet to breakdown so I will continue to hold. I was stopped out of Bidu yesterday. I still own free shares of UXG and GBN and will hold for much longer.

Sunday, January 06, 2008

Obama Breakout!

With all of this market ugliness, I decided to post some charts of a different kind. They are from and are the bets people are making on the upcoming New Hampshire primary. Looks like a nice breakout with volume for Obama and some serious problems for Hilary.

Friday, January 04, 2008

Stop Loss Error

I just realized that I have been making a mistake with my stop loss points. The true range should be calculated from the lowest point on the setup-countdown series. This puts the stop loss point for Cisco at a close below 26.07.

Thursday, January 03, 2008

Range Trade with Goodyear (GT)

In this choppy market we have breakouts failing and new lows being established. I think it is time to keep it to the TD Sequential trades. Goodyear tire is coming into support and has a relatively tight stop-loss on the other side of the red TDST line.
Play it for a bounce up to 30.

Tuesday, January 01, 2008

TD Sequential Details Explained

A reader just left a comment asking me about the TD Sequential buy signal I posted for Cisco. Instead of just replying, I decided to dedicate an entire post to the question because it points out a common occurrence in TD Sequential analysis and highlights the importance of using all of Tom DeMarks techniques.

Basically the question was, shouldn't the TD buy setup be ignored because it was followed by another TD sell setup? In most cases this would be true, but the CSCO chart is an excellent example of when one should ignore a setup.

First, there has to be a confirmed break above the intraday true high of the buy setup for the preceding setup to be voided. Quoting from New Market Timing Techniques, "to confirm a TDST upside breakout indication, first of all, the opening price on the trading day following a TDST breakout must NOT record a gap downside, and the high on the day following the TDST breakout MUST BE succeeded by a higher high." As you can see on the chart above, CSCO closed above the TDST buy line on Nov 6th and did not gap down on the following day. However, it did not record a higher high on Nov 7th, thus nullifying the TDST breakout.

Quoting DeMark again, "It is possible that the forces of supply and demand may have been been in disequilibrium the previous trading day and, as a result, the closing price may have misrepresented the true dynamics of the market at the time of the market's close."

How true this turned out to be when the Cisco came out with earnings and warned about slowing US sales the day after the failed TDST breakout.

The second reason why I ignored the TD Seq sell setup is because there was no obvious continuation of the upward trend that should follow a real TD Seq sell setup. This was confirmed when there was confirmed break below the red TDST sell setup line. If you happen to have DeMark's book, look to Figure 2.10. It shows the price action of Dec 96 Gold and displays many of the details explained above.

One other thing about the CSCO chart. The day after the original post it perfected the TD Sequential buy signal. The stop loss is now triggered by a close below 26.48. This looks like a very low-risk trade.

The cool thing about DeMark is that he has already run into and analyzed just about every issue that one might face when using TD Sequential. There is no need to reinvent the wheel.

I hope my explanation was clear. If not, do not hesitate to ask a follow-up question.

Breakouts of Terra Nitrogen (TNH) and Jinpan International (JST)

Here are a couple of interesting breakouts. Terra Nitrogen (TNH) has broken above the resistance of climax top that occurred back in late June. The volume relatively weak compared to the volume earlier in the year, but it is still 1.5 times greater than the 50 day average volume. The relative strength of TNH is really what has me excited.

Jinpan (JST) is a pure China play. It is a little choppy but the technicals still look ok.

TD Sequential Buy for Semiconductor Holders Trust (SMH)

For all of the talk out there about "tech stocks", you rarely hear anything about the semiconductors. I guess this shouldn't be a surprise considering how poorly the semis have done in recent months.

If you want to anticipate a trend reversal, TD Sequential says that the time to get long is now. I would buy here and respect a stop-loss of 31.4. Look to see how the SMH acts while it goes into the first TDST resistance level of 34.48. If it stalls out there, take profits. If not, let it ride to the 37.90 level.