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Murphy’s law would have it that I’m on holiday and away from a reliable internet connection on day to day basis during this market event. I knew we were entering a possible cycle turn, but I was hoping it would wait for my return…If only markets coud be so cooperative. The DOW failed another 20 DMA close and weakness was definitely creeping in before the Chinese rate crisis kicked in. We all knew another carry trade unwinding was just around the corner and it reared its ugly head once again. The exit door is just too narrow after a broad based parabloic rally and the end result is often brutal. The writing was on the wall, but the main events were repeatedly pointed out here: failure of NYSE at 100% projection 2000/2002, OEX struggle at 670 (61.8% 2000/2002), lagging OEX and NDX, nosebleed NDX bullish percent index and multiple 9 VIX readings. OEX puts are now definitely confirming their non-contrarian status. The one concern bears had was the persistent buildup of equity puts but all that meant was that we had much further to go in overall negative sentiment.

Where are we now? On the pivot front, we pan out to the monthly and it’s clear that YM (DOW futures) is the weakest on a relative basis. Monthly S2 is at 12301, for ES (SPX futures) it’s at 1399 and NQ (NDX futures) 1685. In fact. NQ found support (so far) at it’s monthly S1 (1743.75). Note that these are February pivots which expire today, the numbers change tomorrow. Since crude oil held its own and would normally help ES more than NQ, we can assume that leadership coming out of this correction could very well be in the tech sector and that would be healthy for the next rally, whenever that comes. Even though the selling might seem violent, the market is merely correcting to a more normal mean and we are getting rid of the excess. We should have further down to go if ES is unable to regain 1400 soon. Futures are above that level as I type.
QQQQ still has an old gap to close in the 41.90/42.10 area, it will be interesting to see if we get another round of selling after the obligatory reactive bounce. I certainly hope trading remains this volatile by the time I get back to the office. Hopefuly, some of the glory days with large intraday price swings are coming back. For those new to this, I will run through some basic set ups that take advantage of such an environment.

The DOW lost its 50 DMA (now shorteable resistance at 12541) and it could conceivably head down to the 200 DMA at 11775. For SPX, that would be 1343, which is a hair below the 10 month MA. Lasting bear markets only take hold if we lose the 20 month MA, now at 1302. Since that would be a 10% correction, it's not unrealistc as we are long overdue. ISEE is now below 100 and that should create a bounce. Trade this day by day, using the VIX as your guide (do not go long a rising inraday VIX, but if it drops and stays red, give it a shot, but only scalp it). As usual, use tight stops and book profits. The trend is now down, we are in short the rallies mode until proven otherwise (close back above 50 DMA's).

As for stocks, I have been waiting for iNTC to break its neckline around 20, if it does, 38% head and shouder retrace would have us near 19, a good spot to start accumulating this stock, which should do very well once Vista realy kicks in. Just keep that QQQQ gap at 42 on your radar.

I will try and check in tomorrow as I'm still on the road.

Quick glimpse at overnight action as I get sporadic internet access on the road. YM bids right back up above 20 DMA as the daily 2 period RSI bottoms out. Resistance will be 12708/12710, but the key level for bulls to regain will be 12734/12736. We will find out soon enough if this is just an oversold bounce or the start of another leg up. Regardless, any new rally that does not close OEX above 670 confirmed by NYSE +9455.30 will remain suspect. Look out above should we breakout out from those levels. Below that, we could be stuck in rangebound trading, or even correct further should the DOW fail to regain its 20 DMA at today's close of trading. Keep it simple.

I will be taking a couple of weeks off. Unfortunately, it's coming at a possible cycle turn in the markets, but the trip has been planned for some time and I will be away from the markets on a day to day basis. My return will be right before March option expiration week and there will be lots to write about I'm sure. In the meantime, I will respond to any e-mails. Be safe, and trade this market day by day.

There could be a stealth correction going on with the DOW. It closed below its 20 DMA and a big hitter component, IBM, faltered at a key multi-year resistance resistance level. When IBM drags the DOW down, you need to pay attention. Today marks the first day since August that this big tech closes below its 50 DMA. None of this has been happening with any serious downside volume, so it remains questionable. Nevertheless, should the DOW not hold its 30 DMA next week (now at 12617), bulls will need to play defense.
Yesterday's COMP doji/spinning top resolved to the downside. If this confirms another day, we could have seen the highs for now. I still remain troubled by the longer term relative weakness of both NDX and OEX, top 100 COMP and top 100 S&P respectively (NDX did do a minor new high, but it still lags the COMP which did close above it's earlier high, NDX did not). The complete failure of OEX to overcome 670 (61.8% 2000/2002) after repeated attempts this month, must be sounding some alarm bells amongst old-timers. I felt a few days ago that this market would turn bearish if NYSE fails at 9455 and OEX at 670 and that seems to be panning out, albeit in a very steady non-panicky style. Until these markers get taken out, my bias is neutral to bearish. Corrections don't need to start with a big bang. They can be multiple minor distribution days that eventually snowball.

Bulls still have high equity put to call ratios to support them, so the jury is still out (ISEE closed at 101, growing bearish sentiment, CBPE equity put/call at .74, same thing). But they need a catalyst and soon. I for one can't wait for a higher VIX trading range. This stuff is for the birds.

In summary, bulls need to heed the warning signs and bears need to watch their step as they seem to have plenty of company and short covering rallies can pack a punch. The wonderful thing about daytrading futures is that you don't really care either way, but again, we could use more range.

Opening sell-off, that's three in a row for the DOW. YM find support at 61.8% February (12658). Given that it was also ES' S1, should the ADVDEC lines not deteriorate further, bulls have a chance of holding the fort here. Yields have dropped below 4.7%, the only concern at this point is crude. YM needs to get back above 12680, 20 DMA.

NDX bullish percentage index closed at 75, now in nosebleed territory. Note the bearish divergence off past highs. 73 was the 2006 high, 81 the 2004/2005 high, both pretty solid long lasting tops. Just keep in mind that NDX could be at 1875/1900 on another 80 read.

What a day. Bulls owned techs even as NDX still finds resistance at 1998 highs. But YM (DOW futures) took the real hit, at one point trading below its 20 DMA. It recovered into the close but did sell at its 10 DMA (12715), now resistance. Iran is cited, but I think it's more about rising yields (see TNX chart)and the threat to earnings going forward with the CPI numbers still fresh on everyone's mind. My reasoning is simple: traders flock to the safety of blue chips in a crisis. They are not doing so and that means that rates are the concern, not Iran. The speculative money is working the Nasdaq now, while prudent fund managers are going to cash, hence the drop in the DOW. Those guys typically don't own Nasdaq stocks anyway. The drop is not dramatic and therefore no alarm bells have sounded, but my criteria is now very simple and straightforward: as long as NYSE struggles with 9455.30 and OEX with 670, I will stay away from the long side with the DOW and even SPX. Let them prove to me that the selling at NYSE 9455 was not coincidental. OEX puts keep climbing, and everyone knows that smart money shorts OEX when they think we are going to tank. It happens every time, including March 2000. If you played contrarian with OEX option sentiment back then, you lost everything. However, and this keeps nagging the bears, equity pc ratios remain high enough to indicate a "wall of worry" support, although it certainly is not reflected in the cheap risk premiums of the ultra low VIX. A continuing puzzle, which is why I tend to shy away from too much option sentiment analysis. It's a useful tool, but it's only a two day rally away from a complete reversal.

The bullish story is the strength in the semis and if you want to know where support is coming from, look no further. The SOX has closed back above the 23.6% 2002 floor from 2000 (481), now support. INTC is still a disaster waiting to happen, but it keeps holding on to that intermediate trendline support, now at 20.82. Will I ever get my H&S projection target at 19.10?

Bulls would like the financials along for the ride and with yields rising, they are backtracking. A mixed bag, once again and another leap of faith many are not willing to take.

Overnight traders note that YM daily pivot is the same as weekly pivot (12717).

YM bounces off the 20 DMA once again as we get into the final hour. It will be interesting to see how it resolves.
Note: this blog is on Pacific time, but all market hours are given using Eastern.

Bears are winning the closing turn (2:30). ADVDEC lines now -744. NDX 1998 highs is still resistance and computers are noting. But frankly, I think NYSE 9455 triple top is what kicked in this selling.

ISEE at 105. The bear side is getting crowded. It can be a momentum indicator, so don't trust it completely as a bottom finding tool. It can get much worse, we had a 63 reading in August. But it is showing a wall of worry which normaly helps bulls. Shorts are still day trades. In fact, it's all day trades these days. link

Interesting read on margin levels: link. A bit of a perma-bear site, but data is data.

YM found support just above 38.2% 2007 and 20 DMA. Resistance is now 12722/12723 and 12736. ADVDEC lines -623, so no real panic. But that could change if YM trades again below 12672. Currently at 12683, a solid 100 point drop from highs. The SOX is up, which is normally supportive, but financials and banks are down. TNX has a bid above 47.20. If you are trading techs, keep an eye on INTC and trendline support at 20.81, must hold. It's a big SOX/SMH component.

YM loses 12736 and it could get ugly. Do not play hero today. IF it closes below 12736, NYSE 9455/9457 could have signaled the overall top for the markets. Perfect triple top with a move back below 5 DMA (9435). I showed that chart twice in the past three days, you should have made a note of it by now.

YM is testing 12736 and the VIX is climbing (bearish). ADVDEC lines are getting worse and negative volume is increasing. NQ (NDX e-mini) is still holding R1 (1850) and that is definitely averting heavier damage, but it looks tenuous. Big moment for bulls and bears alike.

Energy getting a lift as QM approaches the top of that triangle (see yesterday's chart).
ADVDEC lines are still neutral, so nothing dramatic on the horizon, at least for now. Keep a sharp eye on the VIX, still mildly supportive at this point. (the VIX intraday is not a contrarian tool). That can change very quickly , so if long, be disciplined with your stop (12736 is a must hold). Shorts should have stops no higher than YM 12783 at this point. If you got in at highs this morning, you might even lower to 12772, right above 50% yesterday and Monthly R1. Until bulls get back the old gap close at 12759, they will be on the defensive. I am quoting the DOW and its futures today because that is the one that is the most bothered by interest rates.
This market is proving once again that it is best to trade it day by day, but I sure wish we could get more volatility.

YM backs down below monthly R1 (12764) once again. They are trading those yields, watch TNX 47.15 level. The inflation boogey man is still with us, although gold is backing off because rates are finally rising and propping up the dollar. Rates go up, inflation is less of a risk, so gold finds weakness. It's the perception that nothing is done to fight inflation that gives gold a bid. Again, watch TNX 47.15/47.20 resistance. Newbie traders never bother to look at bonds. They better start now because it will be with us every day as long as yields rise. You can be as bullish as you want, you are fighting billions of dollars looking for the best return going forward. A TNX reversal down below 47.10 (50 DMA) would give equity bulls a lift again. Otherwise, it could be choppy and maybe even nasty.
Watch ER 828 on any drop.

YM (DOW futures) is finding heavy resistance at its 5 DMA and 61.8% 12779. Until the overnight highs get taken out (12782), it will struggle. TNX is back above 4.7%. NQ and techs are screaming, punching through resistance, but watch for a failure at R2 (1855.75). Internals are solidly bullish, but you get a sense the market wants a pause.
NYSE hit 9455 once again and backed off. Is that what the computers are programed at? Sell at NYSE 9455.30? (100% projection 2000/2002). If we ever close above that, look out above. If not, we could be in for some chop.

If QM (crude e-mini) can hold 59.40, it might be poised for a triangle breakout to the upside, with a target of 62.35 and above that, 63.50 by month's end.

Yields dropped back down below 4.7% and everyone is happy again. Techs charged into the close with NQ within 6 points of its November high. Since weekly R1 is at 1845.75 and we are right there, there is a shot at 1864.50, monthly R1. The DOW and YM are not quite as excited, now trading below the 5 DMA and monthly R1, current overnight resistance (12764). The tight range of the VIX kept sellers at bay and once we got past the first couple of hours, it became evident that shorts would not gain enough traction to threaten bulls. This low volatility logjam will have to be broken one day and I was hoping it would be today so that we could get 100 YM point trading ranges again (it was 80 today, but you had to be short from yesterday to catch that, which I gave readers at OI, short from 12807, exited at 12745 for +62). We will have to wait. We could even see two markets unfold, a stagnating range bound DOW and a high flying NDX. NYSE once again found resistance just under 9455 and closed at 9433. Still a number to watch. The QQQQ head and shoulder discussed yesterday is looking very unlikely at this point, unless of course we get another inflation scare. INTC closed below its 50 DMA, CSCO barely above. What saved the day was good old MSFT, GOOG and of course AAPL. Everyone wants to own AAPL now and since there is just not enough inventory to accommodate every single hedge fund in the world, the stock has to shoot up. That one looks like it's on its way to close its January 17 gap at 94.95. For bears and bulls alike, this is a market to trade day by day, although ISEE closing at 118 supports further gains from a contrarian point of vue. Funds and analysts might be uniformly bullish, but there sure are a lot of folks still buying equity puts.
If Feds keep up this silly dovish talk on inflation, gold will climb to 750 within weeks, if not days. It is utterly absurd and January's CPI numbers prove it. All they are doing is creating false hopes for rate cuts in May and a violent reaction from stocks one day, probably early March.

Feb. 21 (Bloomberg) -- Federal Reserve policy makers discussed dropping their inclination to raise interest rates, and then rejected the idea because inflation remained the ``predominant concern,'' minutes of the Federal Open Market Committee's January meeting show.

Keep in mind that this is a lagging piece of news.

THe VIX stayed at lows and the selling could not gain traction at the 2PM turn. Watch ES 1461.75 for any sign that bulls have taken over completely. For now, it's just chop under the earlier gap closes.

YM pushes up to 5 DMA resistance at 12783. Some talk out there that inflation wil back off and so will the Feds. I don't have a vested interest in keeping you fully invested so I can tell you the following: I have never seen a consistent core reading at these levels (and growing) not met with an interest rate hike. It doesn't matter where rates are, it means that they are not high enough to contain inflation. So maybe the Feds will err on the side of caution because of housing and leave them unchanged, but they will not lower given today's data. Expect more distribution and do not chase today's bounce.
ES closed its gap and now the markets are free to drop. Let's see how far they go. The VIX still looks supportive, so we might have seen the lows this morning. But if the ADVDEC line gets below -1000 again, be careful if long.

Bulls have stopped the bleeding at key levels, COMP 2500 and YM 12736, previous February high. The yield on the ten year found resistance at 50 DMA and that is giving hope to equity bulls. The Fed minutes are on tap at 2 PM.

QQQQ 44 March strike has 571K puts. I don't think I have seen that volume in quite some time. Massive hedging. With VXN at these low levels, they were probably bought very cheap.

The NQ gap close was sold pretty hard. ADVDEC lines are picking up steam to the downside. Watch NQ 1831/1831, key support. Overnight lows are at 1828.75. Bulls need to maintain control here. It looks like they are holding COMP 2500. Line in the sand today, it seems. The DOW is the weakest, no surprise there. Those big caps with slow growth can't handle higher rates as well as high beta techs.
Bond bears want to see TNX move back up above 47.05, 50 DMA. So far, it's resistance.

YM fails at a bounce attempt to 12764 as does NQ at 1836 (50% of gap and ex broken trendline resistance, now resistance again). The ADVDEC lines are now getting more negative, below -1000 as I type. MSFT is in the green as money flocks to the big guy with lost of liquidity. INTC at 20.80 is at trendline support and that will be one to watch.
Fed minutes at 2 PM, so expect some chop until then.
NQ closes its gap at 1838.75. Techs are looking the strongest thanks to MSFT and APPL. ADVDEC lines have stabilized to levels that are manageable by bulls. We will see how they do now that NQ closed its gap. Support should be 1836 if they mean business. AAPL got an upgrade and that is mildly supporting techs for now, but don't play hero: link

Watch ES 50% of gap at 1459.5 on any bounce attempt. Gap close is at 1461.75. The ADVDEC lines are not that dramatic, only -900, so bears should not count their chips quite yet. NQ above 1836 would give bulls a lift (ex-trendline resistance). Price to watch along with YM 12764.
The markets are awaiting the release of the Fed minutes later on. There is hope amongst bulls that it will be sufficiently dovish to counter-act this morning's news.
Yield on the ten year note has moved up above 4.7%.

Futures take a hit. Could it be that NYSE 9455 put in a top yesterday (see earlier post)? Still too early to tell, but there will come a time when the selling will not be bought. Watch YM monthly pivot at 12764 and further down, 12736. Small caps should theoretically take the biggest fall especially after hitting many targets yesterday including monthly R2 and fib projections. We have the same set up as last spring with a BOJ rate hike (they did it in July, but announced it earlier) and a threatening rise in core inflation (last June). Bulls are still in full control, but I this time I would be weary of any opening bounce. If NYSE ADVDEC line is lower than -2000, don't play hero. If it stays at -1000 or less, bears won't gain that much traction.
For now, we follow price and price alone. YM weekly pivot is at 12717 should 12736 fail. Bulls did manage a reversal at 12722 yesterday and that is close enough to 12717. Big test today of their resolve.

Feb. 21 (Bloomberg) -- U.S. consumer prices rose more than forecast in January as Americans paid more for food, medical care and airfares, suggesting inflationary pressures persist.

The consumer price index increased 0.2 percent after rising 0.4 percent in December, the Labor Department said today in Washington. Prices excluding food and energy rose 0.3 percent, the most since June of last year, after a 0.1 percent gain.

I have been saying for some time that the Feds are not about to lower rates and this will support that notion even further. This market has been in total denial.

Feb. 21 (Bloomberg) -- The Bank of Japan raised its benchmark interest rate to 0.5 percent after the world's second- biggest economy expanded at the fastest pace in three years.

Governor Toshihiko Fukui and his policy board colleagues voted 8-1 to increase the overnight lending rate from 0.25 percent, the bank said in a statement today in Tokyo. The benchmark remains the lowest among major economies.

The increase suggests policy makers are convinced rates need to rise to levels that prevent investment bubbles. Higher borrowing costs may discourage investors from borrowing in yen to buy overseas assets, the so-called carry trade that helped drive Japan's currency to a 21-year low against its trading partners.

The Bank of Japan is concerned that the longer it keeps rates so low ``the more it fuels the risk of overstimulating investment and growth,'' said Teizo Taya, who served on the bank's policy board until Dec. 2004 and now advises Daiwa Research Institute.

No Kidding.

Bulls want a QQQQ move above January highs soon in order to negate a right shoulder formation. NQ trading up after-hours (for now, but YM and ES are down), which is a relief for tech longs after the HPQ release which beat on earnings but showed declining margins link .

NYSE monthly chart with the 100% projection 2000/2002 mentioned earlier (9455.30). We closed at 9453.93 and it will be interesting to see if bulls can manage a close above in the coming days. This is a big deal. The chart tells you how powerful this bull market has been since 2003, with NYSE doubling in value since the 2002 low and now culminating in eight positive months in a row, a feat never accomplished by this index. For a slowing economy (do not compare to 1995 which had an expanding economy and was the beginning of a four year bull), it's quite amazing. Don't fight the tape but always be aware of where it is.
A helping hand for bulls? ISEE prints a close of 127, hardly a picture of unbridled enthusiasm. Link .

NYSE 9458. This is it, folks. The big enchilada, double off 2002 lows and 100% projection 2000/2002. Bulls want to close above 9455.30 and bears want to kill it right here.

Starting to see some bear flags off highs for YM. Needs to hold 12793. 12803 is resistance.
We are going to find out very quickly if the QQQQ rally is only part of a right shoulder from the head and shoulder started in November or the start of something really big.

The Yen is dropping and if BOJ does not raise rates, US equities will rally.
Watch RUT 825, 61.8% projection January. It could be pretty strong resistance. NYSE (NYA) 9454 is 100% projection 2000/2002, and almost a double off 2002 lows, a MAJOR event if hit. How equities react there will be telling. So far, NYSE high is 9447.

Top money managers have turned sharply more bullish since the start of the year. But with that comes a problem: Inflation fears, they say, are back on the table.
"Asset allocators increasingly believe that the Fed should be more concerned about the risk of higher inflation than about the risk of slower economic growth," says Merrill adviser David Bowers, who produced the report.
The money managers have dropped their cash balances to some of the lowest levels since Merrill began tracking the figure back in 1997, and they haven taken on more risk, and more equities, in their portfolios.

The dollar has been on a steady drop ever since Bernanke gave his "not so hawkish speech". As you can see, 200 DMA was steady resistance for an entire month and the failure has bearish implications. Current resistance has dropped to the 50 DMA, now at 84.30. This is another reason why I think the Feds will not lower rates anytime soon. In fact, we could get some Fed speak in the coming weeks that will try and counter-act the bond bullishness creeping back in.

No talk of $100 oil from Russia. In fact the government forecast is for an average price of $50 by 2010 ($54 Nymex).

Feb. 19 (Bloomberg) -- Russia, the world's largest oil producer after Saudi Arabia, cut its forecast for economic growth this year after lowering its estimate for crude prices.
The Economy Ministry forecast today that oil prices will drop to $55 a barrel in 2007 from $61 a barrel. The government calculates its budget according to the price of Urals, Russia's benchmark blend of crude.
Urals is currently trading at about $55 a barrel, a 7 percent discount to futures on the New York Mercantile Exchange. Oil prices will drop further to $53 a barrel in 2008, $52 a barrel in 2009 and $50 in 2010, the Economy Ministry said.

Markets are closed Monday, but Globex is trading and Europe just drove NQ up to a gap close. Any doubts that bulls are still in charge have quickly dissipated. What SNDK warning? We will probably pull back at the close of trading, but the action tells you that bulls are chomping at the bit and they want Nasdaq 2500 in their rear view mirror as soon as possible. More merger news is fueling the buying, including talks of GM acquiring Chrysler. Getting rid of that dog is good news for Daimler, but I'm not so sure it is for GM. A lousy car company buying another lousy car company. At least Daimler saw the light. Who knows how they will spin it on Tuesday.
Crude is dropping so I'm not sure the ES rally will hold at highs. Keep in mind that these shortened session bids often reverse to the mean by the close.
I'll be in Europe from Feb 25 to Mar 8 and I will enjoy trading the US overnight session with my breakfast.

Carry trade update (Bloomberg radio): link

Since OEX (S$P 100) is on everyone's radar, here is a VXO daily chart of recent action. No comment (just click on the chart) other than it will be interesting to see if OEX can breakout above a critical fib with a VXO reading in the 9's.

If I were to pick one chart that exemplifies the true potential for a runaway rally from here or a decent pullback (2% or more), it would be OEX (S&P 100)and the 670 level. This is why I posted Keene's OEX EW analysis the other day and I'm putting up my own chart once again. Every time we get near this important mark (61.8% 2000/2002) the market enters into distribution mode, see Jan 24th and Feb 5th. Are things changing? Thursday and Friday saw another pullback from 670, but bulls quickly caught the drop to 10 DMA and saved the day. We are still hovering below 670, after one brief headfake Wednesday but let price decide. If we breakout above 670, next stop is 673, but it could be a temporary respite and would signal a green light for a huge rally. Do not short such an event! If we lose Wednesday's low at 665.67, we will head down and test trendline support once again and if that breaks, the bull market is over. The chart is still in a solid uptrend and as all daytraders know, you can only get repealed at resistance so many time. There is nothing wrong with shorting resistance, just don't get greedy and be ready to flip to the long side on a pullback that holds or a breakout above. Traders who do not have quick hands (or the time to be around their monitors) should stick to buying pullbacks as long as the uptrend remains in place. We could still get a wild 2% correction even with the current cautious sentiment level (only because the VIX is ready for a bounce and those bearish divergences are all over the place), but until ISEE closes above 200, I consider short plays to be swing trades only. Use futures and book profits at support.

That is not to say the markets can't fall apart here, just let price show you the way and remain nimble. If all hell breaks loose, it's a long way down and you will have plenty of entries. After all, we might not even see an ISEE close above 200 this year, so don't base your entire trading strategy on sentiment alone (or seasonality, that has been all skewed lately as the pre-election year rally started very early). Price matters and computers will trigger sell-stops or buy-stops on that and nothing else. They don't sit around and quibble over who is short or who isn't.
Some long time bears such as Bernie Schaeffer and Francois Tahan have now suddenly turned hysterically bullish and that worries me more than a few equity puts still lying around.


Futures traders keep and eye on YM 12764 support. A push below would give shorts a trade to 12736. If it holds next week, we will move up to 12831, 50% projection January and 12869 which is right at DOW 23.6% projection 2000/2002 (12824.70, set your alerts on that one).

As for a rate cut, don't put me in that camp quite yet. There is so much liquidity out there that the only concern for Bernanke right now is inflation, not a blip in the economy. And I don't see inflation ticking down. It might not be jumping up from here, but core is still on a steady rise. Why should he cut? Maybe if GDP gets a massive downward revision, but even then, he might look at it as a bottom. He is perfectly happy to let housing prices fall to where it becomes affordable for the average American.

Now for the bull side. For those of you who did not read the Wells Fargo analysis from last month, here it is: PDF file
It basically states that bears have been fighting an excessive amount of liquidity in no small part brought about by an almost hysterical reaction to a recession and terrorism. When Greenspan engineered the rate drop to 1%, he must have know what was going to happen in a very short period of time, especially since he kept it under 2% for close to three years. The bull market is not rolling over quite yet and shows no sign of letting up because we have never been awash with so much cash, despite a steady rise in rates over the past two years. It has not been a truly aggressive tightening cycle (although steady) and the bond market has refused to get spooked as long term yields still remain at multi-decade lows. The constant worry over a housing meltdown (probably justified) has actually kept a bid on bonds and equity bears short the market. But until the cash dries up, or the perception that it will, it will be hard for a correction to gain any meaningful momentum. Runaway inflation and a lower dollar would be the only catalysts that would trigger a liquidity meltdown. The Feds would resume their tightening cycle and markets would feel the pain. We could have a 1987 scenario this year, but the markets could be much higher from where they are now.

Merril economist sees a 50% chance of a recession: PDF file
(courtesy The Kingsland Report)

ISEE closes at 156, on an uptrend. Getting more bulls on board, but not enough to call it frothy. CBOE equity put/call closes at .55, in the optimistic zone, but again not excessive. We are due for a pullback to the 5 day moving averages on the majors.

Option expiration week is over and there should be a slight hangover, although HPQ is on deck Tuesday and that could get the juices flowing either way. Some optimism on that one as nearby March calls total 69k versus 43k puts, .62 ratio ( 40, 42.50 and 45 strikes link ), It's a solid company, so bears should not get their hopes up, but we are are close to many price targets.

Techs in general are in a strange spot. The Nasdaq is climbing back up to its highs, but the actual leaders, such as GOOG, MSFT, CSCO, AAPL and INTC are lagging and in the case of GOOG, MSFT and AAPL actually trading below their 50 DMA's. Vista was supposed to offset the seasonal funk, but even that is being played down by MSFT. The Q's will need a catalyst and I don't know where it will be coming from. Maybe GOOG will resume its climb. They are now pushing telecoms, since nothing else tech works. QCOM looks bullish. We have SNDK warning after the close, so the enthusiasm might not last.
IBM is the one big tech that is trading near its highs, but it's not a Nasdaq stock. The price weighted DOW can be very thankful for that, since it is a 99 stock. In fact, IBM could be ready for a significant upside move if it can decisively crack its January 2004 closing high (99.23).


ES stays in the channel/wedge and does look ready for a slight breather, although it almost came down to touch its 5 DMA today. We will have to follow price on Tuesday, but 2 period RSI looks ready for a drop. Bulls want to crack 1460.50 on the close and get out of the wedge. Watch the VIX during Tuesday's session. If it starts a real bid, it could break the coil ES has been stuck in for two days. I sure hope so, because daytrading the past two days has been a complete bore and not worth anyone's time. Today's range proved once again that it is best to take opex Fridays off after 10:30.

You can see exactly what is going on with QQQQ. Option sellers do not want to pay all those puts at 45 and they are doing their best to wipe them out. They were broadsided by MSFT last night, but they sure are doing a good job getting as close to 45 as possible: option chain

A very interesting development has occurred. ISEE spiked to 199 and CBOE equity put to call dropped to .50. This means that sentiment has become excessively bullish in a very short time (all the headlines). This could be option expiration week related, but if that is the case after three DOW new highs, then bulls could be in for a negative surprise. Stay tuned, we will watch the closing sentiment numbers. But this is quite a reversal from last week. So bulls get added herd momentum and support, but it also means they are waking on thin ice. I know there is lots of talk out there on option sentiment being too negative but that seems to be changing. We have not hit any extreme levels yet, so bulls should keep chopping higher. Just be aware of the dynamics. HPQ next week will have to help tech bulls, now that MSFT just warned to lower expectations. Aside from short covering and option expiration traps, that is all the catalyst left. Unless of course Bernanke suddenly lowers rates ahead of schedule. But with core still climbing, I doubt it.
If I see an ISEEE closing number above 200, I will start thinking aggressively short. For now, shorts are still swing trades only.

The only spiders up at this time of day are consumer staples, so regardless of option noise, the market is thinking major slowdown and heading for the safety of that group. link (this is a dynamic graph so it could change later, even with the same link).

Bigger gap down coming all of a sudden. The overnight bid is all but gone. Watch YM 12764 and ES 1456 key support levels. Resistance is YM 12685 and 12693, for ES it's 1457.75 and 1459.75. Small caps are doing better on the lower yields. Watch TNX 46.95 during the session.

The 50 DMA for the ten year yield is at 46.95 and the drop below created some overnight buying in stock futures after what appeared to be a big gap down from the MSFT news. But the core rate of inflation is rising, even if it is modestly. Couple that with the huge housing slowdown and we could see talks of stagflation re-appear. Keep in mind that energy has risen since the government did this report, adding some mild inflationary pressures. Watch oil and the 58 level. A move above might be welcome news to energy stocks, but not for the overall health of the economy. This is not the 90's, with fast growth, no inflation and crude below 30. But it doesn't matter if the market is delusional, the reality is that it does not have any alternative for investments and all that liquidity (sick of hearing that word)needs to go somewhere. Eventually, the house of cards falls, but not until everyone is fully invested, including your local pizza delivery man.
On the liquidity note, the YEN keeps rising. All those carry trade players are watching nervously as the billions they borrowed at low BOJ rates could loose leverage.

Oil reversed and is now heading higher as I type. This gave NQ an immediate drop.

The market is torn between the ok PPI numbers (core is still moving up bit, but I guess they are not worried about that)and the dismal housing starts. We are getting a big drop in yields, so that is good news. But too much slowdown fears are also keeping things in check. Of course, we have the option expiration shenanigans. watch YM 12793 resistance. CAT and GE are down pre-open, these stocks are sensitive to economic weakness. IBM is one of the few tech stocks, along with GOOG, that is up. Why XOM is up is a mystery with the drop in crude overnight (options pin?).

WASHINGTON (MarketWatch) - U.S. home builders started the fewest homes in nearly a decade in January, as housing starts plunged 14.3% to a seasonally adjusted annual rate of 1.408 million, the Commerce Department reported Friday.
It's the lowest rate for starts since August 1997. Housing starts were down 37.8% compared with January 2006.
Building permits dropped 2.8% to 1.568 million in January, 28.6% below the same month a year ago.
The starts figure was much lower than expected on Wall Street, where economists were looking for a 2% drop to 1.60 million annualized units. The permits figure was close to the 1.58 million expected by median forecast in the MarketWatch survey of economists.
The stunning drop in home building indicates that builders are scaling back their plans on a massive scale to work down the excess inventory of unsold homes on the market. Hopes that a bottom in the housing market has been reached will have to be re-evaluated

Feb. 16 (Bloomberg) -- Prices paid to U.S. producers declined in January, held down by lower petroleum costs and cheaper cars and trucks. Prices excluding food and energy rose.

The 0.6 percent drop followed a 0.9 percent increase in December, the Labor Department said today in Washington. The so- called core rate, which excludes food and energy costs, rose 0.2 percent for the second consecutive month.

Option players are hard at work in the overnight session trying to counter act the MSFT news by driving up futures as much as possible. YM and ES found support at monthly R1's and they pushed them up from there. Same with NQ, even though all major NDX stocks are down pre-open, except for GOOG which is getting a bump.
There is also a big drop in yields ahead of the housing starts at 8:30. That could also explain the futures push up from the lows at after the close.

Feb. 15 (Bloomberg) -- Michael Steinhardt, the investment pioneer whose hedge funds returned more than 20 percent a year for almost three decades, says the bull market in U.S. stocks may be coming to an end after more than four years.

``Very few people have the ability to pick a high, and I don't think that this is the exact moment,'' Steinhardt, 66, said in an interview yesterday in New York. ``One stays long, but one becomes very sensitive. You say to yourself that the next major, major move is going the other way."

Bullishness on stocks is at a 10-month high, according to a Merrill Lynch & Co. survey of fund managers released yesterday.

YM hits weekly R2 (just shy 12804) and retraces rather abruptly after the close, now trading at 12766, just above monthly R1. ES did the same snap back after making a slight higher high from yesterday. SPX options expired today and after doing the usual run-up, they sell off futures after the close. Welcome to option expiration week. It will be interesting to see where they try and pin NDX. For now it looks like they don't want to pay 1825 calls. I put in a YM short signal at OI this time around, 12801 stop 12811. It was a contingency call should any short at monthly R1 (12764) get stopped. So far it looks promising, but my guess is they will hold 12734 on any retrace. Shorts these days are not love affairs.
Volatility compression (.27 VIX range!) made for some difficult day trading, the key was to patiently wait for extreme signals, such as weekly R2 for YM, or weekly R1 support for NQ.
Overnight traders will take note of YM monthly R1 at 12764 and ES at 1456, both current support. I am not so sure they will hold.

CBOE equity put tocall ratio hit a very optimistic .52 at the close and it looks like the herd is jumping in. link

MSFT Balmer comment sends the stock down to 28.95 after hours and that could be a real stinker: link

From my friend Keene Little, who graciously allowed me to pass on this thorough EW analysis of OEX:

Since I've been making reference to OEX several times lately I thought I'd show more reasons why I think we're topping out here around this 670 level. We'll start with a weekly chart and move in closer.

I'm starting with the premise that the move up from the 2002 low is a correction to the 2000-2002 decline. I can say that with a fair amount of certainty because of the corrective wave structure and because of the total lack of impulsiveness in the techs (and a whole slew of sentiment indicators for this rally). A new high for the DOW doesn't change that since an A-B-C correction can have wave-B (the rally off the 2002 low) make it higher than the previous high--it's called an expanded flat correction in that case).

First we have a 62% retracement of the 2000-2002 decline at 670. For the "bounce" from 2002 we have a complex correction in that it's basically a double zigzag up (two A-B-C's separated by an x-wave). There are several ways to label it and not be wrong and this chart shows one of them. After the pullback into August 2004 we've had the 2nd A-B-C move up and equality within that move is at 673. Nice correlation with the 62% retracement.

Zooming in to look at the leg up from July 2006 (wave-C) this shows the wave count for that move. Since the pullback into the low at the end of November we've been in an ending diagonal 5th wave: Link

Projecting where wave-5 will equal wave-1 in the run up from July we get 670. Again, nice correlation. Each of the waves inside the ending diagonal is a corrective move (so a 3-wave move or something more complex). The move up from January 26th looks like it will be an a-b-c move. So zooming in on that move this 30-min chart shows how it's developing: Link

Equality in the move up from January 26th is at 672. So you can see how every step of the way as we zoom in closer and closer to the move all the way back from 2002 has the Fibs pointing to this 670-673 area as a potentially very important Fib level. I don't think the OEX will make it through it.

I show the wave count for the c-wave, the move up from February 12th, as complete at Wednesday's high. It failed short of the top of its parallel channel and the 672.83 equality level. I don't have any heartburn whatsoever about that considering the longer term pattern is running the show here. But if the current pullback since Wednesday should lead to another push higher then watch that 672-673 area for a shorting opportunity. This happens to be one of those once in a lifetime (maybe twice) shorting opportunities and it's why I'm working so hard in identifying the top.

I gave the bear caution (too many equity puts), now here is the bull caution. NDX bullish percent is coming up to where we have seen sizeable corrections in the past. The reading is 72. Note that 73 saw the November top and last January's top and 82 saw the December 2004 top. There is enough pessimism to move us above 73, but bulls are on borrowed time whenever we get above 70. If we rally hard from here, you can bet sentiment would change very quickly and an even higher BP reading with optimism would then be quite a strong sell signal. Just another reason to trade the markets day by day. Watch NQ (NDX futures) 1818.75, weekly R1. Support below that is 1814, fo