How much weight does fundamental analysis have in a medium term trade?The shorter the time frame, the less irrelevant fundamentals are.

The folks in Washington continuing to try and arrive at some conclusion how the debt ceiling issues should be resolved. Currently the powers to be are scrambling to finalize a debt deal. The futures market will open soon as well as foreign markets. Until this deal is done the uncertainty has and will weigh on the markets. Once a deal is done a relief rally is likely to ensue. Once the deal is done the market will focus more if the economic slowdown continues.If a debt deal gets done and the markets do encounter a relief rally will it be a rally to sell into or a rally to buy for the next intermediate bullish cycle?Many traders, investors and Institutions follow the 50 and 200 day moving averages. The SP500 tested its 200MA Friday, while the DOW and NASDAQ are very near its 200 MA levels.

Either Tuesday’s election or Wednesday’s Fed announcement could trigger a major market move in either direction. However, overall, we are experiencing one of the most extraordinary events in financial history. There has been an unprecedented effort to inject liquidity into the markets. The central bankers are intent in preventing the current “Great Recession” from becoming the “Second Great Depression” and have launched a Herculean battle against deflation.The weapon of choice is the US dollar, the international currency for commodities–the basis for life and the raw materials for economic activity.As the dollar gradually declines, commodities rally providing a stabilizing effect for the economies of emerging nations. Of course, the dollars’ decline also creates rallies in silly things like gold, which as no intrinsic value except jewelry. The spillover for the stock market is that as more and more traders grasp this declining dollar/massive liquidity injection, the more embolden they become. When traders puff up, they slowly take on risk and their willingness to take on risk is the key element to pushing banks to lend, deals to get made, companies to hire, people to spend, and eventually to pull the world’s economy back from the brink of deflation and despair, first to stabilization, then slowly to growth.Currently, it looks like we’re in the stabilization phase of the world’s economy. It also looks like the US Fed and Bernanke have decided to push down hard again on the liquidity injection/dollar decline lever with a new round of easing. Probably, this is being done with the agreement of the G-20, since the central bankers appear to be working together against deflation. As traders we need to understand the dynamic, focus on the best vehicles to exploit the dynamic, and make logical, calculated trades. In this current scenario, we should be looking for stocks or ETFs that best react to the declining dollar/rising commodity dynamic.The first chart I’m posting shows the SPY’s rally (lead by stocks like FCX) and the rally in commodities (RJA) moving in the opposite direction of the dollar (UUP ETF). The movement has been almost in lock step since September. We are most likely at a pivot point in the market, depending on how the market handles next week’s events. October’s market was strong enough to break price out of the symmetrical triangle on the SPY’s monthly chart. Coupled with a monthly MACD that is gaining momentum (this is an old, and venerable market indicator that still works), it would be reasonable to conclude that we have entered a new bull phase.Some suggestions: For those looking to hedge long positions going into the election, the VXX is the ETN of the VIX or Volatility Index. Volatility tends to rise when the market has a sharp decline and this ETN is highly leveraged. Of course, index puts are also an idea. Personally, I drop my trading load to the bare minimum at times like these. If the dollar continues to decline, there are numerous ETFs available that track commodities, or mining stocks. GDX, XME, GLD are a few. Also, a declining dollar is good for emerging markets like so ETFs like EWZ, ECH, FXI are all worth a look.

All,I thought I would start up a blog to solicit trading ideas on the LONG side once the market correction is over. I know there is some disagreement about whether this is just a correction in a new bull market from March 2009 or whether it’s just the next leg down in a bear market with the prior one year rally just a technical rally within a bear. But regardless of which it is, at some point, near or far, the bull will return and when it does – where to invest?My idea is to solicit LONG trading ideas based primarily on valuation and fundamentals not technically. Meaning, you have a stock that is fundamentally strong, undervalued, but may not technically be in position for a LONG purchase – yet. Well, what are they? One of the great things about Spiketrade is the vast industry experience of the group.

Recently I read a highly respected trader comments about how his quantified studies showed that indicator divergence was a Wall Street myth. It stopped me cold since I use weekly MACD-H divergence. I decided to reexamine the concept, and went back to the weekly SPY data since late 1999, using Alex’s classic definition–a higher high in price with a lower high in weekly MACD-H, separated by a retracement below the zero line that “breaks the back of the bull”. I used Alex’s traditional, 8,11,15 calculations. Bullish divergences are reversed. I think of weekly MACD-H as institutional accumulation–if it rises, the Generals are buying, if it declines the Generals are selling. So, a bearish divergence means the Generals have tucked in and are probably distributing shares or locking in profits. Starting in late 1999, I counted 13 distinct bearish weekly MACD-H divergences, including 3 that marked primary market tops–Jan 2000, Oct 2007, and April 2010. Each of the 3 primary tops formed complex divergence patterns that involved multiple lower MACD-H highs, and each were also major 1,2,3 Top patterns.There were 3 bullish divergences, July 2002, July 2008, and Jan 2009. July 2002 and Jan 2009 were major bottoms, July 2008 was an intermediate bottom. While there are probably different ways to interpret these events and clarity is often elusive; simply shorting the SPY at each divergence would have been very profitable. After this little study, I’m more confident than ever in the weekly MACD-H

It seems that a lot of traders were stunned that the market crashed last week. I was on the sidelines, overwhelmed with a work project and missed most of the events–didn’t even know that the market went down 1,000 points Thursday, until my son called mid-day and asked if I was buying anything (I did buy some QLD, fortunately). As Alex has said repeatedly,”the market speaks, it is up to us to listen.” So, I went back to my charts to see if the market did speak last week, and why weren’t more traders listening? Of course, like always, greed or fear had clouded reason and vision. This time it was greed, people kept buying the highs, the Greater Fool theory at its worst. In hindsight, last week’s top and market reversal was very clear, and those who misplayed it, or didn’t play at all (me), missed a very profitable opportunity. The weekly SPY chart shows a classic MACD-H bearish divergence, something Alex has been writing and talking about since Trading for a Living. The daily chart shows another MACD-H bearish divergence, this time on a short-term MACD-H. We also had a 1,2,3 Higher Top that was screaming at us. To make matters worse, we had one of the oldest trading tools in market history, a moving average cross-over yelling that bad stuff was imminent. So, this top/reversal was definitely Old School, and pretty basic, and I shiver over how many articles I’ve read about indicator divergences not working, or why moving average crossovers never did. Like Voltaire, I need to tend my own garden, and my garden is old school technical tools.

As a group, I don’t think we’ve given the correlation between the dollar and stocks the attention it deserves. However, since Daniel from Brazil has posted a chart of the dollar with comments, I thought I would jump in with a couple observations. The rally off the market bottom was fueled by central banks pouring liquidity into economies with the hope of averting a fiscal meltdown. The US took the lead, pouring billions of dollars into the markets. As the Treasury poured, each dollar got cheaper.Consequently, as the dollar dropped in value, investments with a higher level of risk–commodities, stocks, gold, etc, went up. Astute traders, like Goldman Sachs, figured out that shorting the dollar and going long risk was blissful, and they and others piled in, creating the “carry” trade–short the dollar, go long commodities, stocks, etc. There are now so many folks, and so much paper profits in this trade that the correlation between the dollar and the S&P has reached an extreme, seeming to move inversely tick by tick. The Forex guys goose the dollar, stocks sell off; they take profits, the dollar falls and stocks rally. You can see this correlation in the comparison chart. It shows two ETFs–UUP (long dollar) and the SPY (long S&P) and the inverse comparison is remarkable.While at the moment it looks like the dollar and the S&P are drawing together (perhaps seeking value as Alex often points out), I find myself wondering how and when this enormous bubble of a carry trade gets resolved. Like all bubbles, once it blows a lot of people are going to lose, and a tiny few will profit. I prefer to be in the latter group instead of the former. If this carry trade does unwind with a jolt, the dollar will soar as the shorts cover, and the S&P will plunge. If this happens, I’ll be short the indexes via the inverse ETFs.Until this intense inverse correlation between the dollar and the S&P resolves itself, I’ve pretty much given up on individual stocks. I find it simpler and safer to trade the index ETFs, mostly SPY, SSO and SDS, and some of the foreign country funds like EWZ. Though they are very thin, I’m also trying small bets in the currency ETFs, like ULE and EUO. I plan to trade for many more years, and even though this volatility is exciting and compelling, I’ve cut my trade size back and watch drawdowns like a hawk. Remember, the Forex markets are traded around the clock and morning gaps in either direction can be brutal. To compensate, I’m buying weakness on the close, selling quickly into strength and using tight stops.

“This comes from Stephen M, a very active SpikeTrader whose performance won him an award for Q2-2009” – AlexCharles Biderman, CEO of TrimTabs was interviewed by Bloomberg on Aug. 28, 2009. Here’s what he had to say, “Investors who think the U.S. economy is recovering are going to get a big shock this fall,” said Biderman. “Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes.” His company, TrimTabs has reported that the actions of U.S. public companies have been bearish. In the past four months, companies have been net sellers of a record $105.2 billion in shares.He also said, “The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon. When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock.”Now 5 days later, we have witnessed a 4 day selloff, a sharp surge in the VIX and a tripling of the volume as the SPDR GOLD TRUST has gapped and ran. This move is occurring despite a lack of significant selling of the dollar.Gee, I wonder where all of that big “insider money” is going? What do they know that we don’t? Will there be a replay of last Fall? Is a major bank in trouble? FAZ anyone? How bout some GLD?

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For many, the news becomes just another comedy show. There is a lot of talk about what should be done, yet when we see the plans, they are just more of the ‘same ole stuff’ – handing out billions of dollars to the Establishment corporations.I hate to get on my soap box, but the backbone of the American economy has been and always will be small business. If you want to get this economy perking up, then give a shot of adrenalin to the core group of this country. How about a real change – give a trillion dollars to those who will do something with it. Can you imagine what would occur if savvy young entrepreneurs were funded? If small business could invest this money in new business and technology I guarantee you would see an impact within 12 months, not decades.Disclaimer: I have been a small business owner since my early 20’s and I am highly prejudiced when it comes to small business…. AND A COMMENT by a Spiker Deb W:

Your comments regarding small business strike me as very astute. I’ve been ranting to anyone who would listen since the details of the stimulus package were released that all spending does not stimulate economic activity. If job creation is the solution then small business is the answer as these nimble operators quickly respond to new business opportunities with new hiring.Trouble is our legislators don’t have any direct incentive to do what works, since they get paid whether they’re successful or not, unlike those of us who get paid when our solutions work.Now I’ll just turn off the news, turn on my charts and get back to what works in my worldDeb