For many months traders/investors have been trying to understand the markets move to current economic conditions, many have wondered how a market can continue to rally in face of a weak economic rebound. First one must understand that the current DOW move back to 10,000 level is basically not the same representation of the 2008 market. The 2008 move to DOW 10,000, and the current move to DOW 10,000 does not reflect the same stocks that made 2008 highs. If one were to look at the original DOW stocks in 2008, the DOW would NOT be at a new high. The indexes conveniently remove the weakest stocks that drag the indexes down to lower levels and replace them with stronger stocks.The 2008 DOW index is well below the 10,000 level. When the DOW replaced the three weaker DOW components of GM, C, and AIG, with stronger participants, it allowed the indexes to make new highs quicker. As Traders we are taught to “dump the losers” and “ride the winners” this holds true for the Indexes as well. The indexes all rebalance every few years and some more than others. This is one reason why you can see an index improve and march to new highs when the economy is not in sync. Technicals get us in the game early and fundamentals follow breathing life into long lasting trends and mutli year bull markets. We have seen the early technical signs and if we are in a new bull market cycle that is to last for years (3 -5) then we should see improvements in the economy as the market continues its uptrend. If the fundamentals cannot support the move, then the market will begin to discount this information and the probabilities increase we could see weaker prices in the future.

As many of you know, I used to work as a lawyer and senior vice president of purchasing for the parent of Western Union (WU).

Many investors hold long positions as August ends–some because they sell calls against stock, others because of asset allocation, still others because they aren’t paying attention, etc. For those thinking about hedging a long portfolio, here’s an idea that might help. For others, like myself, who are die hard volatility traders, this idea will work almost as well as options or inverse index ETFs. The VXX is the ETN of the VIX and trades about 3X the S&P. The common method of measuring volatility in the stock market is the VIX, an index based on a ratio between purchased calls vs. puts. Mostly the VIX declines when the market either rallies or goes into a period of complacency or reduced movement. Sort of what happens during the summer months as the big boys go off to the Hamptons to relax. Eventually, they come back and more often than not, they reverse August’s action and jam the market into a decline.The VIX, and the VXX, goes up as a sort of “Fear” indicator (more puts being purchased than calls). This is how the Sept-Oct. period got the nick name of the “Death Season”. Now, I have no idea if history will repeat itself and fireworks will replace August’s inaction, but it is my nature to bet against the extremes. Since the market is at an extreme with complacency or lack of volatility, I’m interested in the other side of that trad, and will use the VXX to implement that strategy. The one thing I’ve learned about volatility is that it is “extreme” reverting, not “mean” reverting as most of the trading books claim. Price is much more likely to revert to the mean, or an average, and volatility seems to seek the extremes, sort of like water in a pan that is tilted back and worth so it laps at the edges.

Stephen is one of the top-performing SpikeTrade Members. In this post he shares a trading idea with the group – AEThis setup is ringing the bell for me. I call it my BIG MAC play, or more specifically: BIG MAC-Summer, 5/5, C&H . Summer refers to the identified market season as indicated by the weekly MACDH. 5/5 indicates:

The markets have been on a killer run. The earnings are coming in better than expected for many companies. All earnings are not created equal, and we need to ask ourselves – Where are these earnings coming from?The earnings are driven primarily by cost cuts and reductions in workforce. If I look at my own steel business, net earnings were phenomenal in the 1st and 2nd quarters. They were great because of a huge reduction in workforce and massive overhead cuts that we made in 4th quarter of 2008. This is why I can tell you that no way we will meet or beat the earnings we saw in 1st half of the year going forward.Here is the chart I receive each month from our freight companies, reflecting what is called the Freight Indexes. They measure the demand for Truckload services compared to the number of trucks on the road. The index begins in April 1994. When a reading is above prior years’ level it means there is more freight demand relative to available capacity. When a reading is below prior years’ level, it means there is less freight demand relative to available capacity.As you can see, 2009 (Red Line) is down by a huge margin. Although we saw an uptick in May and June it is nowhere close to average.The private company I am involved in has only recently seen the slightest of upticks in business activity – while selling for minimal or no profit margins. The steel companies have recently worked off old inventory and now they will need to see demand in order to replace that inventory.For now that demand is seen only in a few small areas – it is not broad based. This appears to be a rebound from cost cuts and not demand-driven. Cost cuts have a one-time impact on profits until demand reappears. It should be interesting to see how things will develop now that Q2 earnings come to pass and we must look forward to Q3.

Hell for me would be forced to trade large when the SPX closes to the 200 SMA. I hate it! Now, there are many theories about why the market jerks and chops as it bounces around the 200 SMA–big institutions, hedge funds, etc. Doesn’t really matter. I just know that chop and churn is what we’re in for when the SPY comes within 5 % of the venerable 200 SMA, so I try my best to stay away, to “sit on my hands” as Alex says.Here are two charts that show this behavior. The first is from May 2008 as the SPY closes on a flattening 200 SMA. Note the price candles with shadows and tails and nothing much happening–this is churning–up big in the morning, selling off in the afternoon, or the next day, down in the morning, up in the afternoon. Notice too, that momemtum is ebbing, and we have a triple bearish divergence on the MACD-H leading to evenutal price failure. This time around, we’ve spent a month churning in a consolidation, then popped through a declining 200 SMA. Things look a bit shaky now; we may have a false break out developing. Note again the triple divergence in the MACD-H.I’ve noticed this chop and churn behavior around the 200 SMA over the years and always wondered what causes it–maybe some day, I’ll find out, but I just know that I’m better off trading small or staying away until prices clear in one direction or another from the 200.

FSLR = Double Top + Island ReversalHeads up all.This is a great short setup with a technical footprint similar to the chart shared by Alex in his SpikeSpeak this last weekend where he showed a false breakout with a missing right shoulder for a short set up.FSLR has the potential – with the bad news release today – to gap down below it’s trough and slow EMA and form an island reversal for a quality short play. I plan to let it gap and retrace to the pivot, then short.Stephen M

Good morning, Alex and Kerry,I have enjoyed seeing the equity curves published as I looked at them in a slightly different view than the quarterly competition. With the quarterly competition, one can become a little more reckless or conservative the last few weeks of the quarter, depending on where one is in the standings. The equity curves, though, show whether one or two huge gains or slow and steady gains have them at the top of the “rolling quarter” standings.Since one is not competing for prizes with this, I have used the curves to pay particular attention to those Spikers who have had consistent winners, limited losses, etc. The curve shape, unless I’m misreading something, tells me something about the targets, risks, that the trader has taken to achieve their performance. Does that fit my trading style? Should I follow their picks closely or look for someone with whom I’m more comfortable? I realize more bookkeeping to do the equity curves for you folks but if possible to keep it as a regular, even if not weekly, feature, I’d vote for that and use it.This is going to be difficult to appear as an “unbiased” comment on the equity curves since I’m lucky enough to be there but “scout’s honor”, I had begun to use them. Thanks, as always, and hope you all had time to enjoy the long holiday weekend.john t

Double Top anyone?Where is the market headed and what is the potential degree of the move? Here are the characteristics that need to further materialize to confirm a double top:

• The subsequent decline from the second peak should witness an expansion in volume with acceleration of the descent.
• Completion and confirmation occurs when prices break through support which is the lowest point between the peaks. This also shows an increase in volume.
• The potential price target is determined by the distance from the support break to the peak.

This would complete at approximately 402.