I don’t write about the stock market too much on this site anymore, unless  something big is about to happen.  And right now it is.  You can follow my updates on this unfolding market at http://www.darkpooltraders.com/vb/stock-tips/104-stock-market-breaks-trend-line-support.html (Great site by the way!  You can talk with me or other traders, post questions, have discussions in the chat rooms or in the forums.  Check it out!)

But I will give you the basic snapshot here:

We are resting right on the “savage support line.”  Why the “savage support line?”  Well, if there is a legitimate break of this level the fall likely take us down about 10% from current levels.  You can see the target area on the chart below.  How the market reacts off that target area will determine whether we bounce, in which case we have an amazing opportunity to buy into one of the lowest risk areas of a bull trend, or we realize the governments screwed the pouch and we are retesting March lows. But that is a bit down the road.

The pivotal level right now though is 880 on the s&p 500.  A break below will sends us towards our target.  This market is in a trading range so the breakout may not happen tomorrow, but it may.  This is a big level and we closed right on it, so I owed it to you to least make you aware of it.

S&P 500 Daily - Free Stock Charts

Cory Mitchell, CMT
Chief Market Strategist
Remember, failed breakouts are tradeable too!

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The following is a newsletter article from Larry Levin of www.secretsoftraders.com and it touches on the ice berg of a major issue.  Some of this is opinion, although opinion from a successful trader who understands the markets.  That said, always read between the lines as numbers can be made to look pretty much any way the person making the argument wants them to look.  Yet the numbers themselves are there pointing to where we are, and they can’t be ignored.

Good article, and I agree with it.  So here is the piece from Larry Levin’s Nightly Newsletter

Bond Market to Feds: Drop Dead!

Today’s bond market action reminded me of the famous 1975 Daily News headline, “Feds to New York: Drop Dead.” At the time the federal government decided to reject a request for a NY city bailout, which prompted the headline.

However, times are different today: nobody is allowed to fail. Chrysler was allowed to keep its $11.4 billion “bailout” (that’s right US taxpayer – you were robbed!) and GM is said to be on the docket to receive ANOTHER $50 billion bringing its total to $69,400,000,000.00. Do you think GM will repay this money? Do you think AIG will repay? What about Shitigroup and Bank of America?

By the way, as of yesterday GM was worth about $800 million. Uh-huh, we’re giving GM $69.4 BILLION when its current net worth is almost 87 times less! What the hell kind of math is used to justify such nonsense? Oops, my bad – that’s Washington DC math.

Well, when you throw in the assured future handouts to insurance companies, commercial real estate firms, government run healthcare, State handouts, “free” college educations, etc the bond market is saying – no thanks. All of these so-called freebies are “budgeted” at today’s interest rates.

Like the fools that they are in government, they extrapolate funding this madness to infinity with ultra-low interest rates but forget that the bond market does not have to play along. The bond market is bigger than the President. The bond market is bigger than Tax-Cheatin-Timmy at Treasury. And although Helicopter-Ben doesn’t know it, the bond market is bigger than even the Federal Reserve.

Today the bond market may have said to all the aforementioned: DROP DEAD!

With today’s price collapse in the 10-yr Notes and 30-yr Bonds and commensurate yield spike, spreads widened. The 2yr/10yr spread is now at the widest spread ever. The 2yr/30yr spread is now just three basis points shy of its all time 1992 record. The 30-YR fixed mortgage rate on the eRATE real time mortgage quoter spiked a huge 28.2%! Yesterday it was quoted at 5.08% and today was quoted at 6.52%! Surely this was a knee-jerk reaction and will fall somewhat, but it should be a wake-up call.

So what happened? Today’s 5-YR Note auction went well – better than expected – and the bond market still crashed. Uh-O, good news and the market still drops thus increasing interest rates? That’s bad and why I say the bond market is getting tired of the bailouts. Remember, GM is only days away from filing BK and therefore another MASSIVE cash infusion.

Tomorrow brings us a 7-YR auction and thus perhaps more fireworks – or not. You see, it is the 7-YR that many believe is the cutoff between where the foreign central banks will slow or stop buying Treasury’s IOUs. The US is beholden to the kindness of foreign banks of China, Saudi Arabia and others. At the moment they seem willing to buy short term IOUs, but not the longer term junk, which is driving up interest rates.

Question: If long term rates continue to rise while Helo-Ben is powerless to stop them, how much of a so-called recovery do you thing there will be?

The government must STOP THE BAILIOUT MANIA NOW!!!

Ever since the Helicopter-Ben fueled up his money-helo, long term interest rates have been going up – slowly. That was not supposed to happen. Ben thought he could wave a magic wand and make everyone do his bidding. He was wrong. However, the bond market is massive and cannot be turned around like a Ski-Nautique boat; it’s more like an aircraft carrier. Therefore, I believe we have time to avoid the worst possible outcome: Jimmy Carter era interest rates. Call Congress and demand an end to the madness.

We should consider today’s action a shot across the bow. If the Treasury and White House do not cure their bailout psychosis, the USA will become the ultimate subprime borrower. “Change you can believe in.”

Sadly, I believe the current changes in the bond market have to do with; systemic structural weakness in the US financial system, the gross amount of government debt, and obscene fiscal irresponsibility. The lofty yield curve is a vote by the trading community that the US economy is a massive systemic risk, with a real possibility of core failure.

The USD/JPY pair broke above the 99.50 resistance level a few days ago, and has since retreated. The retreat took the pair back to a low 99.30 – right near the top of the old resistance area. The fact the market held this level, combined with a strong day today which is pushing the price back above 100.00, provides a potential swing trade to the upside.

If the old resistance level continues to hold we have a potential trade.  Currently the pair is trading at 100.47.

We have two potential entries. The first entry is a daily close above 100.42. This is a more aggressive entry in that the market will have not yet proven it is going to resume the uptrend, but has simply given us strong indications that it will. That said, the risk in pips for this trade will be lower.

The other possible entry is a daily close above the recent swing high at 101.42. The higher entry price shows the market is continuing the uptrend (higher highs, higher lows), yet, our stop in pips will be increased due to the higher price paid.

Here are the setups for both trades:

1.     BUY on a close above 100.42 (this could be soon)

Stop at 99.25.  This is a risk of 117 pips (assuming an entry around 100.42).

Profit Targets at 104.80 and 109.00.  This is a reward of 438 pips and 858 pips approximately.  It is approximate because we do not yet know our exact entry price which will be based on an upcoming daily closing price.

OR

2.     BUY on a close above 101.42

Stop at 99.25.  This is a risk of 217 pips.

Profit Targets at 104.80 and 109.00.  This is a reward of 338 pips and 758 pips approximately.  It is approximate because we do not yet know our exact entry price which will be based on an upcoming daily closing price.

Downsides of the trade:  The upside of the trade is that we have seen a pull back and thus far a successful hold above the old resistance level (now a support level).  The downside is that that this pullback was relatively small compared to other pullbacks we have seen in this pair.  With the pair still showing some signs of being overbought (this is not a bad thing in and of itself, it is actually a sign of recent/current strength) the danger is that we could still see a pullback possibly back into the 98 area.

-On the flip side, strong trends generally always show oscillator type indicators nearer to overbought levels.  Also a small pull back can be a sign of strength as the market was not able to push prices much lower before moving back higher.

These comments are made not to confuse, but rather to help you gain an understanding of the thought process you should go through before you a choose to incorporate a certain strategy into your trading plan.  For information on building a trading plan please see my article in the March issue of Technical Analysis of Stock and Commodities magazine, or you can find an abbreviated version here on the site: http://vantagepointtrading.com/tips-and-tricks/trading-plans

The amount of pips multiplied by the number of lots should not exceed 3% of your total account balance (less is even better).   For example if you have a mini account, each pip movement is approximately $1 US.   If you have $10,000 in your account you can risk 3% of $10,000 which is $300.  That means you can take 2 mini lots for the first trade and risk $234 (derived from 2 X 117).  If you take 3 lots your risk would be $351 which is more than 3% of your account balance.  If you take the second entry you can only take 1 lot.  Bottom line control risk on every trade if you want to stay in this game for the long term.

~Cory Mitchell
Market Strategist

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View last post for this trade here: http://vantagepointtrading.com/archives/1071

Original post can be viewed from that post. Entry was at 1.2719

This trade has already realized a 500 pip profit on part of the position. Profit targets hit so far are 1.2430 (a 289 pip profit). We have also hit the target at 1.2200 (a 519 pip profit).

Currently we are trading at 1.2290 – well onside. Yet the large drop has also caused a short term oversold condition (13 on RSI), while prices have so far held above the former swing low. This does not mean we are about to head higher but it makes it less likely we will head lower in a hurry.

Bring in trailing stop to 1.2377. But we want a close above this level. If you use a different time frame on your charts than I do, at least make sure the US market close is above this level.  If we do continue lower, next profit target is 1.1850.

(square box is our entry, circles are profit targets hit so far.  Black line is current trailing stop – based on a closing price)

~Cory Mitchell
Market Strategist

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Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open a Standard account and receive up to a $1,000 bonus.

Open a SuperMini or Standard account now and receive a 100% cashback worth up to $300.
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Since most of the posts refer to GMT, the time zone for the site has been updated to reflect GMT. This should make it less confusing. If you notice on the last post the time the post was made now corresponds with the time frame of the trade. For example: The day trading signals are for trading after 7:00 AM GMT and the post time now corresponds with that. Trading signals will normally be posted by about 7:10 AM GMT and are valid till canceled, stopped out, profit target hit or till 9:30 AM GMT.

With some major rate action coming from the FOMC announcement on Wednesday, I am going to update the Longer Term trade setups I have mentioned.

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First, recently I wrote of a potential trade in the USD/JPY pair.  The trade was a potential upside breakout.  See original post here: http://vantagepointtrading.com/archives/1061.

This set up did not develop, as we have fallen well off the upside resistance area between 99.50-100.00.  The pair is currently trading at 96.30.  The Cup and Handle chart pattern is still present, but currently we have retreated to the lower range of the handle.  Thus this trade was never triggered.  Take this trade out of your “pending” trades inventory.

A completely new signal may be close at hand in this pair, which will be posted shortly.

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The USD/CAD trade (last update is here http://vantagepointtrading.com/archives/938 and you can link to original post from there) was triggered on 03/13 with a closing price of 1.2719.  This was our entry point.  Currently this trade is over 200 pips in the profit.   The first two profit targets have already been hit.  Stop should now be moved to breakeven.

PLEASE NOTE, for my own analysis my daily bars close at 24:00 GMT.

~Cory Mitchell

Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open an account and receive a cashback bonus (up to $300 or $1000 depending on the account).

On Wednesday after the market closed, everyone was talking about a market rally (from the reports I saw/read). Up 130 points was just the move that was the result of restored confidence, but not only that, it was going to trigger further rallying. Well, Thursday showed market participants that the bear is still more likely to eat Goldilocks than give her some porridge (or money for that porridge).

While short term traders should play both sides of the market and make money in any which they can, investors should not be buying. I have said that investors for the most part (unless you need to buy a few million shares) can slip easily into the market, so there is no reason to buy until there is a significant move upwards. A 130 point move up, despite what the many of the news reports seemed to think, is not a significant move.

From an investing standpoint, we are a ways away from an entry point, which I would view as a reversal to this bear market. Thus I won’t even publish an entry point for the long positions. No point losing money when you can just keep it as is for the moment.

There is no need to pick bottoms to make money.

But lets look at the broader picture of the market once again. From Jan 1942 to 1965 the market went from approximately 100 to 900. It multiplied by 9X in 23 years. Then from 1982-2007 it went from 900 to 14000. It multiplied by over 15 times in 25 years. Thus in about the same amount of time, gains were accelerated by more than 50%. That is quite an improvement. What caused this massive acceleration? (I have left out 1965-1981 as the market was range bound during this time and did not reflect any growth, actually negative growth when factoring for inflation, over that 16 years)

In my opinion, perception. Perceptions changed. Just as in the microcosm the 90’s investors believed we had entered a new era of unlimited potential prosperity and perpetual growth, the last 25 years has been filled with this new era type thinking. Market participation has increased in terms of volume which then created a need for government and businesses to focus on short term gains. With a the seeming positivity bias built into the market, participants chased short term gains to higher and higher prices (on the aggregate over the last 25 years). But when major catalysts changed that sentiment and major fundamental flaws were revealed it became apparent this market was in severe trouble. Hence, why I use technical analysis for trading and talk about fundamentals for fun.

Are these numbers I used above somewhat arbitrary? I suppose on could argue so, but looking at a multi-decade chart I picked the major trends since after the great depression. The point is that there has been a major acceleration of growth in the stock market and now we are seeing a major acceleration to the downside to correct for this.

I am currently sticking to my target of 6000. The Dow closes at 6594 on Thursday. I will reconsider this downside profit target if a close above 7000 occurs anytime soon.

The Non-farm Payroll Report comes out on Friday, always a big mover, so watch for that as it could take us a lot close to either of these levels.

~Cory Mitchell

A proposed House of Representatives bill-HR 1068 would tax each buy and sell order by up to 25 basis points of the transaction value.  While it is hard to say at this point whether the bill will be passed I encourage active traders and investors in US markets to do what they can to oppose this bill.  Here are some of the reasons why this will affect everyone.  But first, granted it is possible that as traders and investors we can always trade a different market, but foreign investments are capped (as far as I know, I am not a US citizen so I can not say that with absolute certainty), and also the flow of funds out of the US to foreign markets hurts the US economy.  But here are some further reasons this bill should not go through.

-day traders and market makers who make money on thin margins already would be forced out of the market.

-65% of liquidity comes from short term traders squeezing small profits.  If these traders leave for other markets, liquidity dries up and everyone suffers.  Spreads widen, and transaction costs increase.  This cost is not going to be assumed by brokers, but rather by investors (the ones remaining).  Trading costs would likely increase because mass liquidity allows for smaller charges per transaction.  Decrease the number of transaction and brokers will raise prices to compensate.

-Price transparency and thorough analysis is generally reserves for high volume stocks.  If you have every traded an illiquid security, you know that prices can be very random and hard to analyze.  A decrease in volume would create this environment in many many more securities.

-Traders would avoid the tax, and hence the US market.  This will pull funds out of the US economy and those funds will go into foreign countries.

-Companies are more likely to list on foreign exchange, or move their current listing to foreign exchanges so that their securities can be traded actively as they are currently.

-The tax will not generate the revenues expected by the government.  Projections for profit are based on current market conditions, but the tax would impact market conditions and change them overnight.  In effect, the money brought in would be nothing what is expected thus making the tax pretty  much null and hurting a lot of people in the process.

Likely this bill is too flawed to pass.  But with the current crisis it is just possible that something which is so obviously ignorant as this is could be pushed through.  Asinine decisions are being made all over the place in the current economic situations (and it was dimwittedness that got us into the mess in the first place), therefore it is more prudent to be proactive and than to sit on ones hands thinking this bill is too stupid to pass.

If you work for a firm, I encourage your office to voice concern (for your own sake), or do what you will to prevent his bill from going forward.  I like in Canada, and I trade currencies, so this would not directly hurt me.  I write this so you are informed of something that is occurring and can make your own decision on it – and I do encourage you draw your own conclusions, these are simply mine.

~Cory Mitchell

http://everythingdaytrading.com (another site to check out)

The market rallied today up more than 230 points on the Dow Jones Index to close around 7,350.  It is possible that the break below 7,500 was a bear trap.  But with confirmation from so many indexes, it is more unlikely.

Rallies occur in bear markets all the time, it is whether the upward pressure can be sustained that we need to focus on.  A move above 7,500 would signal the breakout was likely false and we will test moving back up to 7,800 and if that is surpassed we will likely test the 8,400 level.  If we can not break and hold above 7,500, this would signify that we are indeed headed for another leg downwards to 6000.

~Cory Mitchell

I have talked about the Dow Jones Index going to 6000 for quite some time.  From the first time we tried to break down to this level we saw a rally, but that rally was stifled on multiple attempts to break above 9000 with any conviction.  The market again broke lower and has now failed on two small rallies to break above 8400.

Friday saw the Dow break below the November lows signaling the market is still very wary of current economic conditions.  The target for this breakout is 6000 (this is calculated by taking the range 9000-7500=1500, minus the breakout point which is 7500-1500=6000).  This target is medium term target and could take place over a couple of weeks or several months.

In this market environment a V-bottom is unlikely.  A V-bottom is where prices drop rapidly and then recover very quickly.  Based on the charts it may be difficult for the markets to see a quick recovery because there is simply so much resistance.  In other words, expect the market to remain in the 6000-8500 range for quite some time.  Trades if made should be kept short term.  Long-term investing is not yet required until we see some sort of definitive move higher.

There is some upside resistance at 8000, but more significant resistance to a move higher will be seen at 8400, 9100, 9600, 9800, 10 000.  A move above 9100 in current conditions is unlikely.

Do We Have Confirmation?

The break below previous lows has not been confirmed as of yet by the S&P 500.   If the Dow Jones Index is in fact due for another leg lower to 6000, the S&P 500 will also experience another leg lower.  If the S&P does not break its Nov. lows of 750 it would signal a divergence and that the Dow breakout is false.  Currently the S&P sits at 770.

Market Confidence

The market is unlikely to make any sustained move higher until confidence is restored in the markets.  This could take some time.  During times such as these people tend to horde their money which causes further lack of confidence because private investments and spending fall creating a further decline in jobs.  This creates less tax revenue and means that governments need to dip further into coffers which are empty to begin with.  Digging into money that was not there in the first place is what got us into this mess in the first place.

The market needs to stabilize naturally.  Government expenditures and bailouts are not likely to work as it is equivalent to trying to push a wet noodle – it simply crumples.  The current problems are built on long term cheap money and a separation from conservative investment ideologies.  Investors, business and government has become to focused on short term gains (leave this to day traders – but governments, business and investors are not day traders and should not be acting as such) and now the financial markets are paying the price. Of course this last part is just an opinion and my view of the situation.