DBA, what else?

A long idea for a change. DBA, an agricultural ETF (a commodity play, what else?), has been in a sustained long-term uptrend as evidenced by its sharply rising 200-day simple moving average (blue line in the chart above-click to enlarge) but has been consolidating for the past few months.

It certainly looks like the consolidation is over after this week's explosive bull move. DBA decisively broke out above its now rising 20-day and 50-day moving averages and above resistance at 40. A new high above 43.50 should be in the cards soon with a workable protective sell stop right below 37 where both the 20-day and the 50-day are now residing. Keep in mind that the sell stop should be moved up every few days or so to follow either the 20-day moving average or the 50-day moving average if you feel as I do that this position needs more breathing room.

Relative Double Top

Isn't this chart a beauty? If you didn't know anything about anything, you would still spot an almost too perfect double top. It's actually the chart of QQQQ (the Nasdaq 100 ETF) relative to (divided by) SPY (the S&P 500 ETF) and it's interesting to note how the Nasdaq led the S&P during the entire spring rally. It then proceeded to reverse at the exact same spot (again we're talking relative values here) it was at in late October 2007, right before the market meltdown.

The Nasdaq was one of the rare bright spots of the last three months and it took the market higher with it. The fact that it's leading the market lower now can't be a good sign and adds to the weight of evidence in favor of a resurgent bear.

Without getting into much detail, it's safe to assume the much too much-anticipated next leg of this bear market is definitely under way. I still had some legitimate doubts because of the resilient Nasdaq and the low volume of the last couple of weeks but today's 400 point destruction on high volume (click on chart to enlarge) leaves none. A test of the January lows is now just a matter of time.
I can't resist relaying this gem from CNBC.com:
"Friday's wild selloff in stocks, which many analysts saw as an overreaction, could set up a perfect opportunity for investors to go bargain hunting."
What else did you expect from CNBC?

Currency Upmanship

If Ben Bernanke's goal with his remarks on last Tuesday was truly to strengthen the dollar, he should have made sure that his European counterpart Jean-Claude Trichet was not going to steal his thunder and mess it all up 3 days later.

In what seemed like an exercise in one-upmanship between the two central bankers, Bernanke's assured his audience on Tuesday that, "in collaboration with [his] colleagues at the Treasury, [he] continues to carefully monitor developments in foreign exchange markets" and that he will be "ensuring that the dollar remains a strong and stable currency".

This came as quite a shock to most market participants as that was the first time the Fed chief had ever mentioned the dollar. Talking up the dollar has traditionally been the job of the Treasury Secretary, most recently Hank Paulson with his robotic, repetitive, ineffective (and maybe a tad insincere) declarations that "we believe in a strong-dollar policy". The thinking went that, if Bernanke himself was saying it, it probably meant some kind of shift in Fed policy was in the making and a decent dollar rally ensued (see EURUSD chart above).

But then what do you know, a few days later, Trichet, not to be outdone and ditching his customary ECB-speak for once, all but telegraphed a July rate hike "to prevent [the dreaded] second-round effects and ensure that risks to price stability over the medium term do not materialise" (this part was ECB-speak). This, needless to say, sent the Euro flying and the dollar diving, reversing the Bernanke dollar rally as can be seen in the 30-minute chart above.

Lo and Behold: A Non-Random Walk Down Wall Street

For those technical analysis haters out there (and there are lots of them), Dr. Andrew W. Lo's presentation titled "Technical Analysis: An Academic Perspective" at the MTA Symposium on May 16 must have come as quite a shock. Here was a distinguished academic, a professor at MIT with impeccable credentials who has over the past 2 decades not only produced numerous seminal papers disproving the random walk theory (most notably Lo & MacKinlay (1988), a paper pointedly titled "A Non-Random Walk Down Wall Street") but also proved the utility of technical analysis (Lo, Mamaysky & Wang (2000)).
More on this presentation in future posts.

Re-enter the Bear

The 30-minute chart of SPY (click to enlarge) shows that the strong uptrend that started on 3/17 and took the S&P ETF from 126 to 144 (a bear-wounding 14% pop) has received what might turn out to be a lethal blow yesterday on significant volume. If we break the previous local low of 138 and then start making lower highs and lower lows, then the bear rally theoreticians (and practitioners, yours truly included) will have come out on top, barely, hanging on by their fingernails, but victorious nonetheless. Obviously that's a big if and the shorts have been wrong and bloodied for the past 2 months so we'll have to follow this very closely.

I just finished reading When Genius Failed by Roger Lowenstein about the rise and demise of Long-Term Capital Management. Great book. I absolutely recommend it to anybody with even a remote interest in markets and particularly their psychology. It's crazy how none of the lessons of that whole saga were actually learned and pretty much the same thing happened again 10 years later with the subprime debacle. As Lowenstein says:
"One can be big (and therefore illiquid); one can (within prudent limits) be leveraged. But the investor who is highly leveraged and illiquid is playing Russian roulette. [...] On Wall Street, though, few lessons remain learned."

Time to Stay Short (maybe)

Quick update on my short call of a few days ago.
Obviously,I was a little early but I still haven't folded. All my arguments are still valid. The Dow did break intraday above its 200-day Moving Average on 5/2 but then ended up forming a bearish shooting star candlestick formation. After that, it stayed just below the falling 200-day MA.
Today was a good start if this market is going to break down from here as I expect it to but it was hardly sufficient. Should the DJIA not follow through on the downside and end up blowing past its 200-day MA (now sitting at 13,034) and its 5/2 high (13,132) then I'll give up on that short trade. The market has shown a lot of strength lately and some serious selling fireworks of the type we witnessed today must materialize in the next few days to change that.