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Just a few days ago, I had discussed GOOG as a pullback play, when its chart looked like this:

Well, it did indeed break upward nicely from there, and now the chart looks like this:

A great little $20-plus move since the post, and about $15 above the trigger point of $530. I don’t have a rule in place for selling at a particular extension level on GOOG (”DSM I” only applies to the SPYders), so I’d fall back on the tried and true, and pull a Landry right here, which is to say, sell half the position and move my stop to breakeven. Barring a big overnight gap, that gives us a guaranteed profit of over 1R (our initial risk) on half the position, and leaves the other half in place with a stop at breakeven… in other words, a FREE RIDE. Sweet.

DSM I Targets for 7/6/07

The indecisive action and slightly lower finished changed the RSI(4) projections, and the targets are now as follows:

• Position: Long from 149.70 (this is still trade #2 since inception- the longer holding periods are good on commissions, hard on the nerves)

• Target: Exit at 153.35

• Stop: 149.60

Note that the stop has trailed up to the point where this is essentially a free position. That’s great, but we’re sooo close, and I’m really hoping to tag that target price first.

Bonds Did Bounce

In my most recent currency rant, I noted that the 10-year bond yield had pulled back to 5.0% and looked as if it may resume its climb. Looks like it did, with a bullet. Yields closed today at the very top of their range, at 5.14%. The dollar strengthened, but only very slightly. It should pick up some steam here, unless the Chinese or Japanese are intervening in the market. As I’ve discussed before, if they are, we’ll know by this tell-tale sign: bond rates will rise and the dollar will stay flat or even fall. Let’s hope that’s not the case, ’cause things could get pretty ugly pretty quickly.

I haven’t ranted about the dollar much since it finally hit that former all-time “weakness peak” of 1.3666 (or, as we like to say, a buck-thirty plus the devil) back at the end of April. The new all-time high (remember, on this chart, as the bars go up, the dollar is weakening) was set on April 26 at 1.3681.

What I want to note is the correlation between the value of the dollar and bond yields. The dollar’s strongest point recently, which was just below 1.33 dollars/euro, was hit in mid-June, just as the TNX (10-year bond yield) was topping up around 5.30%.

That’s no coincidence. Typically, as bond yields rise, dollars become “more attractive” as an investment, and their value is boosted.

What I want to note is the technical setup here. The TNX has peaked and retraced back down to 5 percent, coinciding with the dollar retracing back up to 1.36 dollars/euro.

These charts look to me like we may be near a resumption of the trend towards a strengthening dollar and a higher bond yield. What would that spell for the stock market? Stockey Markey Down, that’s what.

China’s Yuan-derful Manipulation

In addition, remember that there is still the Elephant in the Corner in the form of China, which has been responsible for much of the artificial strength of the dollar in the young 21st century. If they weren’t short-circuiting the normal cycle of currency value fluctuation which accompanies trade surpluses/deficits, the market would have adjusted for our spendthrift penchant for Chinese goods by now and we would have seen a weakening dollar and strengthening yuan until the imbalance self-corrected.

Instead, the Chinese government has kept currency revaluation from correcting the trade imbalance by using their dollar surpluses to purchase U.S. Treasuries rather than exchange them for the local currency. This has resulted in an artificially strong dollar and an artificially low bond yield, and explains much of what has happened in those markets recently. For example, how did the 10-year note yield manage to stay so low through, oh, over 4 percent of short-end raising by the Fed? Answer: China.

And here is where I get to link to my Photoshop doodle from last September which is a visual representation of the China phenomenon. Makes my version of what is going on a little clearer. At least it did for me.

And your point is what?

My point is, don’t forget that we could at any time be faced with the “worst of all possible worlds”… slow growth or recession over here, a weakening dollar, and paradoxically rising bond yields (and mortgage rates!) all at the same time, which could turn into a death spiral for our economy. All it would take would be for China to start selling their trillion dollars or so worth of U.S. Treasuries. So as I always say, Chuckie Schumer et al, I agree that China shouldn’t be manipulating the currency balance in order to keep our country hemorrhaging dollars into their system. However, we’re too far down the rabbit hole now, so don’t insist that they do anything about it too quickly.

A quick reminder before I head to the (ICK!) regular job for another day of fun: as I said in the post last night, the dollar is threatening a major breakdown against the euro. Enter “currencies” in the search box up top to see some of my previous rants if you want some background.

This morning the dollar is bouncing around at 1.354-1.355 per euro. The major, huge, mondo critical level to watch is 1.3666. (That’s easy to remember, just think “one-thirty plus the devil”).

If the dollar breaks, commodities will soar. I’m especially talking about gold and oil here. And it won’t be the oil getting more expensive; it’ll be the dollar getting cheaper. Don’t forget that either can happen, and the result is the same - more dollars to buy a barrel.

Off to work. Ya’ll kick some butt today.

We’re at a historically important crossroad right now for the U.S. Dollar. That crossroad is at the top of a jagged mountain, and we stand atop a precipice with a perilous plunge on all sides except for one narrow, treacherous path leading to safer ground (the path of solid, steady economic growth which seems so unlikely right now). And I’m about out of metaphors.

I’ve written sporadically about currencies and how important it is that we keep an eye on them. They’re not the tail that wags the equity dog. They’re the bank that finances the debt that built the home where the little equity dog lives out back. (Ok, so maybe I’m not out of metaphors). Point is, currencies are just that big a deal. As I’ve mentioned before, the currency market dwarfs both the bond market and the stock market by a considerable margin. The weakening or strengthening of the dollar, combined with the reasons for that weakening or strengthening (economic growth or lack thereof, Fed policies) influence global economic activity and account for the growth or failure of the companies whose stock we trade, and just as importantly, the companies who employ many of us.

Here’s a chart of the Dollar vs. Euro from last weekend:

The dollar “climbing” on this chart is actually the dollar weakening (more dollars to buy one Euro). If you’re not used to thinking “up” and “weakening” at the same time, here’s the same chart flipped, which makes the weakening even more obvious:

This chart, which goes all the way back to 2002, shows how the dollar weakened through the beginning of 2005, then drew a Head and Shoulders pattern through mid-2006. The pattern then failed as the dollar broke upwards (weaker) from the right shoulder.

We now sit between the critical levels of 1.3666 dollars/euro as the last line in the sand before a dollar plunge, and the 1.295 area as a support level which, if broken, would portend further strengthening of the dollar.

The main question is which one do we wish for? For me, the answer is that we wish for a stronger dollar to help offset the likely-approaching events which will serve to further weaken it, namely, lackluster economic growth, Fed easing and the continued strengthening of the Yen and Renminbi (yuan).

If the U.S. economy caught a little gust of wind in its sails and actually began picking up steam (which it most definitely has not, considering the unprecedented liquidity poured into it the last few years), the dollar would strengthen, we’d get a tad of inflation, life would be good. It may even allow enough breathing room for China to let the yuan strengthen a bit more without cratering the dollar.

However, the economy doesn’t seem to be “catching fire” at all, no matter how many trillions of dollars have been thrown into the tinder box over the last decade or so. That’s bad, bad news.

The late, great, brilliant economist Milton Friedman tied inflation directly to money supply. Flood the market with more dollars than the economy requires for current growth, and the result is inflation. Lots more dollars chasing a little more product. Those excess dollars sloshing around in the economy get spent and re-spent, increasing the velocity at which money flows through the economy. It’s that money velocity which results in upward-spiraling prices and wages, i.e. inflation.

Conversely, if the Fed were to start reducing the money supply, or even increasing it, but at a rate slower than required by current growth, money velocity would slow down, people would hold their dollars longer, those dollars would begin to increase in value… voila, deflation.

Deflation is not good. The ideal balance for economic growth and happy peasants… er, citizens, is what they call “a little inflation.” Maybe 2-3%. Why? That’s an article in itself, but the short version is that prices go up easily, but are “sticky” on the way down… they don’t fall in proportion to the decreased money velocity. Particularly wages. Would you be agreeable to having your pay cut during recessions (i.e. really tied to the “cost of living”)?? Nobody would. So what can happen is the dreaded deflationary death spiral, where people spend less- so money velocity slows- so economic growth slows- so people spend less… There is only one known way to (try to) abort such a spiral:

• The Fed floods the economy with money (by lowering the Funds rate) so that people loosen up and spend more

• The economy grows and people get jobs and buy houses and feel good (the intended effect), and we get some inflation from the excess money supply (a side effect)

• The Fed then steps in and gradually slows money supply growth by raising the Funds rate, ostensibly to fight inflation, its media mandate.

• If all goes well, we settle back in at 2% inflation and everything’s back on track. Right?

Right, in a perfect world. But that’s where we should be right now, after the hundreds and hundreds of billions of dollars added to the economy in recent years, which resulted in trillions of dollars of extra spending:

1. We had the LTCM debacle in 1998

2. The Y2K recession and stock market meltdown, and

3. 9/11…

In response to each of these situations the Fed, under Alan Greenspan’s leadership, did exactly what he and Paul Volker had learned to do after studying the mistakes the Fed made which deepened and prolonged the Great Depression… Greenspan’s Fed flooded the eoncomy with money- in the case of 9/11, by cutting rates by a half percent at a time and pouring liquidity into the market as fast as the 1s and 0s could cross the wires.

And it worked. Sort of. The economy didn’t go into a death spiral, and it even began to grow a little. But not nearly as much as it should be growing. We should have nearly- out- of- control inflation. Fed with Funds rates at 8% trying to calm the flames. Pay skyrocketing due to job demand created by the surging economy.

That is not where we are right now. We have an economy frothing with money, but no growth to speak of (compared to what should be expected).

What we have is an economy that’s trying to stall in spite of all the excess money. What happened to all that money, and where’s the inflation? That money caused a vast inflation in home prices, in case you didn’t notice. Why didn’t that show up in the CPI so that we’d all hear Maria moaning about it on CNBC? Hint: they don’t count it because it would look too bad. We might think our economy wasn’t as “stable” as it so obviously is. Wink. Nod. Consumer prices have been very stable, except for the stuff we don’t want to count.

Including home prices, we would have been showing outrageous inflation over the past 5 years with very very little economic growth. Stagnant, even. Bingo- stagflation.

Now we have the beginning of the collapse of the real estate bubble. Not the end, not the middle. Remember when the “experts” were all chirping about how home prices may “slow in their rate of increase,” but would never go down overall. I remember, because I laughed at them. Not only that, I went on the record and wrote one of my first soapbox articles on Dummyspots about it.

Well, those same “experts” are the ones pronouncing the collapse over, that we have or are near a soft landing, etc. And they’re still just as wrong.

As home prices continue to decline, people will stop spending, not because they’re responsible, but because their ATMs (i.e. cash-out refi’s) have been taken away. Money velocity is decreasing. Economic activity is waning.

If this continues, all the Fed can do is pull the same rabbit out of its hat- the rate decrease. The bond market is already predicting a decrease.

But this decrease won’t be very effective. The Fed doesn’t have the power, with rates at only 5.25%, to drop them far enough to re-liquify to the economy and abort the spiral.

Without some serious economic growth, and seriously quickly, we’re the next Japan of 1988. And the chart of our stock markets may very well look like the chart of the Nikkei in the 90s.

What to do? Watch your charts. Watch your stops. Hope for economic growth. (click) Economic growth.(click) There’s no place like home. Here’s to hoping…

Geez. I’m dyin’ here. The temp has dropped 40 degrees since lunch. My cat met me at the door and said “meow?,” which, translated, meant “Dude, WTF??“. Tonight I could really use a cup of warm apple cider with just about that much Jim Beam stirred in.

Ok, November’s over. EOM markups, if there were any left, are done. Let’s get ready for activity to pick back up.

Also, something I’ve neglected to point out thus far- the action in the VIX. I had a post back waaay back in January talking about the VIX Fade Trade. Well, you’ll note on the chart below that on Monday the VIX hit 12.33, or about 15% above its 10sma:

As usual, the rubber band has snapped back, and we’re back to a point in the middle of the median of the average, where the market can comfortably surge in either direction as far as Uncle Vix is concerned.

Apple is set up for a nice trade. Here’s a chart of the rangebound action of the last five days:

We could trade a break of this range in either direction. Me, I’d prefer down because as you know (or in case you didn’t know), it is my destiny to short AAPL. Long uptrends in Apple aren’t money-making opportunities for me; they’re pauses between short sales. It’s not logical, it can be downright crazy, but like the Queen and her Skoal, it’s my own little indulgence, with proper management it costs me virtually nothing (and one day will make me the King Of The World HA!), and I long ago stopped trying to make sense of it.

The dollar broke (weaker) from its little pullback I mentioned yesterday, and of course, so did gold. Unfortunately, gold and [insert name of your favorite gold stock here] gapped up and didn’t give us a clean entry:

What to do? If tomorrow opens inside today’s range (63.90-64.43), then walks through the top of it, I wouldn’t at all mind going long at 64.44 with an initial stop of 63.89, for an initial risk (tah-dah! “R“) of 55 cents per share, with a position size chosen accordingly, based on how much I’m comfortable losing.

To the Qs!

It’s been a while since I’ve followed an ongoing swing trade day- to- day. I forgot how much fun it is. All that sh*t that looks so clear and certain in hindsight can cause some butterflies as it’s unfolding, can’t it?

The Qs printed a little doji with (just barely) the narrowest range of the 3-day “up” move:

If I had no position, I’d see this as a prime trade setup:

• If it opens within today’s range and heads down through today’s low, I’d use it as a pullback- into- a- downtrend shorting opportunity, with a stop either at 1) the top of today’s bar if I were feeling aggressive (usually am) or 2) the top of the recent uptrend (44.86), with a correspondingly smaller position size based on risk (less aggressive, wider stops, looking for longer-term gains… the “sensible” alternative)

• If it opens within today’s range and heads up, I’d let it be. Wait for a break of 44.86, maybe a little thrust- and- pullback action, then get long.

• If it gaps in either direction, we’re in daytrade territory, with a possible swing trade entry to boot, depending on the action.

However, I do have a dog in this race and a horse in this fight. I’m short with a stop of 44.62. That stop will not move, as today’s low was a higher low, and I don’t move short stops on higher lows. Second basemen either.

What I will do is quite simple: 1) get stopped out or 2) add to my position on a break of today’s low with a simultaneous lowering of my stop for the overall trade to keep my risk constant. I fully expect to have this dilemma resolved within the next couple of days, most likely tomorrow.

Cheers. Where’s the blanket?

• Listening To: The Essential Charlie Rich
• Temperature Outside: Cold as my ex-wife's short little feet

First, let’s look at that swing short trade on the Qs. It’s looking anemic:

The price action could pass for a pullback into a new downtrend, and so it may be. But that volume spike today tells me there are still a significant number of buyers who see this dip as an “opportunity.” Darn them all to heck. Since today did not print a “lower low,” I’ll leave the stop alone, at 44.62. See yesterday’s post for the cold, scientific method I used to arrive at that number.

And how about the Gorilla in the Corner, Cisco:

As you can see from the flag by Advanced Analyzer, today’s bar completed what’s called a Three Outside Up Bullish pattern. That’s a little wordy for me. And I think a clearer name would be “Bullish Engulfing Confirmation,” since that’s what it means.

A quick look at the Oil Services ETF, which broke out nicely today:

Twenty dollar oil. Yeah, right.

And I certainly can’t overlook gold, seeing as how it’s so closely related to my favorite soapbox, currencies. Is the gold going higher or are the dollars going lower? Well, in this case, it’s the dollars going lower, which means it takes more of ‘em to buy an ounce of gold:

That little pullback on the upper right edge of the chart perfectly matches the minor pullback the dollar has had since it broke down over $1.30/Euro. I know “down” and “over” may seem to contradict, but remember: more dollars per Euro means weaker dollars.

• Listening To: Leonard Cohen
• Supper Tonight: Hot dogs and Shiraz

From my post Dollar at Inflection Point two weeks ago:

And now from Thanksgiving day:

The dollar is trying to break down. Why? Here’s a quote from the Bloomberg article Dollar Declines to 19-Month Low:

People’s Bank of China Vice-Governor Wu Xiaoling said East Asia needs to reduce its reliance on dollar inflows because of the risk of a further slump in the currency. China’s foreign- exchange reserves exceed $1 trillion, the world’s largest.

Wu’s comments were released today in an article circulated during a press conference in Beijing.

“China holds most of its reserves in the dollar and these comments may lead to speculation they will sell,” said Tohru Sasaki, a strategist in Tokyo at JPMorgan Chase & Co…

Ya’ll know my site is filled with currency rants. I believe the effect of currency values on our economy and the severity of the Real Estate Crisis are the two most understated and under-reported phenomena relating to our finanancial (and even political) futures today.

As the dollar fails thru the top of that right shoulder (on the H&S) and threatens to spiral to multi-year lows, here are a few of my recent mumblings on the subject:

The most recent was the above post from only two weeks ago.

Back on October 29 I wrote this post as the yuan hit another new high.

And then from September here is the article where I tried to show, at least to my understanding, how China and Japan have been manipulating their (and in turn, our) currencies for some years now.

Milton Friedman, my Favorite Economist of All Time, died today at 94. A close friend gave to me as a gift just a couple of months ago a copy of Freedom to Choose signed inside the cover by Friedman in 1982 with a cute little note ending in “Your good friend who you like to eat with, Milton Friedman.”

The following lines are from an excellent synopsis of the man and his work published in the Financial Times today. I’d highly recommend the entire article:

Both his admirers and his detractors have pointed out that his world view was essentially simple: a passionate belief in personal freedom combined with a conviction that free markets were the best way of co-ordinating the activities of dispersed individuals to their mutual enrichment.

It was in the late 1950s and 1960s that Friedman developed the monetarist doctrines by which he became best known. He treated money as an asset. The public desire to hold this asset depended on incomes, the rate of interest and expected inflation. If more money became available the effect would be initially to raise real output and incomes, but eventually just to raise prices more or less in proportion.

Reading Freedom to Choose today is astounding because Friedman’s observations, especially regarding Social Security and other entitlement programs, are even more relevant than they were then, and often you forget the work is 25 years old until you run across a reference to President Carter or Nixon or the then-recent 1973 oil crisis.

I rant (at every opportunity) about the Fed’s unprecedented flooding of the economy with new money, and how anyone celebrating the string of “Tame PPI” reports is severely misled, and will be caught off guard by the coming economic troubles. We should be fighting runaway inflation, and the fact that we’re not is very troubling. I believe that because of Milton Friedman, and I think in the future much of his work will be looked back upon as prophetic.