MARKET ANALYSIS & COMMENTARY

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For the sixth consecutive day, the market revisited the 1333-1336 area, only to be summarily rejected and sent packing to lower levels, coming within a few ticks of filling the aforementioned gap and testing the 50% retracement level (1300-1337). This of course leaves us wondering, “ Are the bears finished, or is there more to come?” In any event, the bears must certainly feel emboldened after today’s performance, as they head into next week’s earnings season, options expiration, and CPI report.

Meanwhile, the dollar continued it’s descent and closed near the 75.00 level, while bonds found support near the monthly S1, and in what may be considered a very liberal interpretation of an inverted H&S formation, may be hammering out a short term bottom.The bulls meanwhile, might be starting to doubt themselves with crude topping $113.00 a barrel, gold reaching 1475.00, and the CRB index making new all time highs.

If bonds firm up and accept, and rates fall while the Fed maintains it’s near ZIRPolicy, then equities and commodities will still make sense to own from an asset allocation standpoint (for the near term), and barring any surprise disappointments in earnings, the market should make new material highs next week. Technically, the market is very strong across all time frames. Price has been in a virtually linear advance since last July, and is now hovering just below the next Fib level (see chart above). Since the post crash bottom was made in 2009 price has been turning at major Fibonacci retracement levels, and a break above that level would be near term very bullish, with little to no resistance clear on up to the 2007 top. But, on the other hand, a turn down from that Fib level would mark the end of this uptrend.

MARKET ANALYSIS & COMMENTARY

As was anticipated in last night's commentary, the market flushed out the weak longs, stopping short of the weekly pivot @1320, as the low 1320's were aggressively bought and finished off with an immediate bull reversal. There have now been 5 days where the market traded above 1330 and failed, leaving us with the burning question, "Are we stalling at the highs, or refusing to pullback even enough to fill last Wednesday's gap up opening (before moving higher)?

As short interest has dropped off significantly and today's flash break was far too quick to trap any new shorts, it does not look like there will be any kind of short squeeze taking place. Therefore, we must still remain vigilant of another shakeout that would fill the previously mentioned gap and perhaps test the 20EMA@ 1315.00, (with the last line of defense still @1300.00 at the confluence of monthly PP and 50EMA). The dollar still looks poised to test 75.00 while today's quake in Japan will put more pressure on the yen, both of which are short term bullish U.S equities and supports the view for new material highs.

While QE2 may end in June, the Fed’s near zero interest rate policy(ZIRP) may continue ad infinitum, or at least until inflation is actually the result of income growth and economic growth instead of monetary policy. Once again, Keynesian money printing/credit creation has been substituted for actual wealth creation. And once again, it has led led to massive debt across private and public sectors, as nominal income not only remains flat, but in real terms is contracting at a 2.3% annual rate. True, corporate profits are up and are close to all-time highs as a percentage of GDP, but this does not necessarily reflect a robust economic recovery as evidenced by the still depressed housing market. Strong control over the balance sheet and cheap labor costs due to wage concessions and layoffs, has resulted in lower unit labor costs and higher productivity. However, while there has been an extraordinary recovery in corporate profits, top line growth has not been spectacular, and bottom line growth has not led to job creation.When QE2 ends, the business cycle should return to normal, and just like the market does so often, profits should revert back to their mean, leaving nowhere for valuations to go, but down. The burning question now is, " Is that going to happen tomorrow, April 27th, the end of June, in 6 months , or a year from now.

THE MEAN TRADE

Chart 1: 15M w/ VWAP and 3SD - ZBM from yesterday, which was a typical trend day down. The market opened near it's high price of the day session and worked it's way lower through the day, closing near the low of the day. The market stayed below the VWAP for most of the day and the VWAP had a downward slope.

Chart 2: 15M w/VWAP and 3SD - ZBM from today, which was a typical range day. The market traded around an average price value with relatively low volatility (traded evenly +2SD or -2SD) through the day, closing close to both the opening range and the VWAP. The VWAP was essentially flat through the day.

THE MEAN TRADE

Of course, we would all like to be able to buy the low and sell the high of every move, but this is a reality that can only be realized when practiced in hindsight. In real-time there are very few traders that can pull this feat off with any kind of real consistency. To catch the beginning of a trend implies that we must either anticipate price exhaustion and the subsequent reversal of the previous trend, or anticipate and catch the breakout from a trading range. What makes this task so complicated and frustrating is that there are so many false reversals and false breakouts.

In practice then, catching the beginning of a trend may not really be the optimal entry. If you are going dance with the market, you want the market to lead. So it is often best to wait for buyers/sellers to make their move and show their hand before you enter the market. That doesn't mean you chase highs and lows; rather you buy/sell the first pullback from an initial push as your entry. Of course, you always buy weakness in a strong market, and sell strength in a weak market. If you're patient and wait for after the initial thrust that kicks off a trending move, you have a natural stop loss point: if market participants are truly rejecting price at the start of that move, you shouldn't see that price again.The key to making this execution approach work, is being patient enough when you're a buyer to let sellers "take their turn", and when you're a seller to have the patience to wait out the buyers' next bounce. You want to see those sellers and buyers get trapped on the next leg of the trend so their exits will help your position.

Unfortunately though, markets are in a trading range 80% of the time, which means that markets are trending only 20% of the time or approximately 4 days a month. Markets like the ES and ZB which are heavily arbed and dominated by HFTs and algorithmic trading, are often lacking volatility, and are choppy and directionless. This has proven to be a major challenge for short term traders, who often find themselves faked out on seeming moves that reverse. It would make sense then, that following a momentum based strategy as the mainstay of your methodology would not be optimal. It would seem that not only including, but concentrating on a strategy that offered you the opportunity to capitalize on current market conditions would be economically prudent.

The general idea is to find points in the market in which bulls or bears are trapped. They have committed to positions, but can no longer move the market their way, and the market has become over-extended. They then have to exit out of their positions and the market reverses which provides a trading opportunity. Because traders often presume that breakouts will continue in their direction without actively planning for the possibility of retracement, we should take advantage of this dynamic and actively build a scenario for a possible reversion trade.

As a rule traders are drawn to movement and momentum. They like to trade breakouts from ranges, and they like to see clear signs of strength or weakness before they buy or sell. A lot of the passive algorithms are programmed to take advantage of these tendencies by selling the new highs and buying the new lows. Now consider that there are thousands of these programs on thousands of computers, and each one is programmed to work offers at X period highs and work bids at X period lows--and if you imagine X as scalable across all time frames, then you can get a sense for what drives markets over the short time frame when directional, institutional traders are not active. Small wonder why the markets rarely trend, and are often range bound instead!

The predominant benchmark for AT is the VWAP or volume weighted average price. The VWAP is simply the average price of a security traded over a period of time. It is essentially a tool for investors that want to be passive in their execution, and are seeking the average price based on volume, i.e., a guaranteed VWAP execution. The implementation of the VWAP was in response to the decimalization of the market and the proliferation of algorithmic trading that resulted from this change, and became popular as a way to reduce transaction costs and the impact of large institutional orders on the market.

Knowing where we are trading during the day relative to that day's VWAP is very helpful in identifying the kind of day that we're in. The VWAP can be thought of as the market's evolving estimate of value. In a weak trending or non-trending market, we will tend to move away from VWAP to probe trader/investor interest. If that interest is lacking, we will tend to gravitate back toward that VWAP value level. In weak trending markets, you want to be fading moves away from VWAP. In a good range trade, we'll tend to see a narrow value area (volume will be transacted within a narrow price band) and moves away from value will tend to return back to (and usually through) VWAP. In a true range trade, we'll also see little slope to VWAP, as we transact volume relatively evenly above and below that average price. We can take advantage of this tendency for the market to move 1, 2, or 3 standard deviations away from the VWAP and then revert back to the mean, by fading the moves away from the VWAP and covering the trades when they return back to the VWAP.

MARKET ANALYSIS & COMMENTARY

WEDNESDAY - APRIL 6, 2011 -  MARKET ANALYSIS & COMMENTARY

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ES came within 2 ticks of reaching the 1337.00 target that I had been looking for since last Friday, and as anticipated, sold off early in the day filling the day gap to the tick at yesterday’s low of 1327.00. The market then staged a 7 point afternoon rally which tested the low of the opening range, only to sell off after the end of the cash trade to close in the lower half of the day’s range. Bonds were destroyed, as was the bearish sentiment in equities that I highlighted last night. In the latest Investor’s Intelligence survey, bears declined by 32% from 23.1% to 15.7%. As was mentioned in the Bespoke article, "Going back to 1975, there have now been just 16 other periods where bearish sentiment declined by more than 30% in a single week." The chart below illustrates the S&P’s performance following these large drops in bearish sentiment the past 11 times they occurred. The average performance over a 1-10 week period was -0.92% to -2.07%. I have also included a chart of the market leading TF to demonstrate a confluence of Fibonacci levels at the 860.00 level. Along with the 61.80 Fib extension that is shown in the chart, is an even more important 1.27 Fib extension, from the January lows to the February highs to the March lows, that comes in at 860.00 also. However, in direct opposition to the possible-market-top theory, is a chart of the 6J that shows a dramatically falling yen, which should insure the yen-carry-trade remains strong and further funding for the U.S. equities rally will continue. That being said, earnings season begins next week and it is still very early in the month of what is a seasonally bullish month. Therefore, there is still plenty of time for the bulls to assert their dominance. If indeed, this is not the top, then based on today’s price action I would expect a quick flush of the weak longs down to at least the weekly pivot @1320.00 if not all the way down to the low 1300’s, followed by an immediate bull reversal. 1300.00 should be the last line of defense for the bulls.

Justice Will Prevail !

Above consensus payroll numbers extended gains in equities as hope continued to spring eternal on Opening Day. Although, it was the first day of what is traditionally, a month associated with bullish seasonality, there is cause for concern that Mr. Market may be pulling an April Fool's joke on all the bulls. The rally continues to be on waning volume and flat open interest, while the bond market appears to be pricing in an end to QE2, as the yield curve continues to flatten in expectation of the Fed’s need to control inflation.

An end to QE2 followed by a Fed tightening would raise short term rates and as inflation concerns abated, long term rates would fall, flattening the curve even more. While we have only one marker to compare where the Fed cut back on quantitative easing, the results are not confidence inspiring for the bulls. Post QE1, the S&P dropped from 1217 down to 1064, and commodities and crude were also hit hard, while rates rose. Is the economy strong enough this time around, to continue it’s “growth” without stimulus? Or does the Fed, extend the easing cycle with QE3 and we see $150.00 crude and $5+ gas at the pumps this Summer? I'm betting on the former, which is going to make me ever so vigilant of the possibility, that this April's market could be a contra-seasonal one. 

That being said, QE2 may end in June, but the Fed’s near ZIRP may continue ad infinitum, or at least until inflation is actually the result of income growth and economic growth instead of monetary policy. In the meantime, equities are still a better place to be than cash, and the real momentum chasing may still be forthcoming in April. If the powers-that-be can manipulate an entire market, and engineer one of the greatest bull market rallies of all time, during a time when the economic fundamentals have been absolutely horrid, and global headline news is about one disaster after another, then yes, they just might be able to perpetuate the current asset inflation a little while longer. 

Nevertheless, Keynesian money printing/credit creation has been substituted for actual wealth creation, once again. And just like before, it has led led to massive debt across private and public sectors, as nominal income not only remains flat, but in real terms is contracting at a 2.3% annual rate. True, corporate profits are up and are close to all-time highs as a percentage of GDP, but this does not necessarily reflect a robust economic recovery. Strong control over the balance sheet and cheap labor costs due to wage concessions and layoffs, has resulted in lower unit labor costs and higher productivity. While there has been an extraordinary recovery in corporate profits, top line growth has not been spectacular, and bottom line growth has not led to job creation.

When QE2 ends, and the business cycle returns to normal, logic dictates that profits will revert back to their mean, leaving nowhere for valuations to go, but down. The Fed can only use the “forward looking” rationale for so long, before the laws of supply and demand catch up, and mete out economic justice, once again.

CYRX - Ready To Rally!

Cryoport ( CYRX:OTCBB) appears to be poised to rally above $2.00 after having tested and held the 50 EMA on the daily chart @$1.25, and then rallying to close even on the day, but under the 20 EMA. A close above the 38.20% Fibonacci extension and intermediate term double-top @$1.55, would confirm the up move, which would carry with it a minimum measuring implication of $2.05