"The third important point is that economic slowdowns usually
trigger massive reflationary responses from the Fed that reignite
inflation. Such was the response in 1958, then again in 1970 (not
described here), in 1974, 1980, 2001, and currently in 2007-2008.
Anytime the Fed has responded by massively reflating the economy,
the typical result has been stagflation."
is valid, I myself have in the past highlighted that.
The whole article is actually aimed at stagflation and neither
inflation or deflation, I just highlighted bits for my arguement
with Dodger...which has been going on behind the scenes. So USA
beats Spain 2-0
Current price inflation data confirm all trends and
expectations associated with monetary inflation. In recent years,
both the official and the alternative indicators of consumer price
inflation point steadily towards stagflation.
The price inflation chart above clearly indicates
that since 2002 inflation has been steadily accelerating.
At the same time, as you can see in the chart
below, economic growth has been steadily slowing since the
beginning of 2004. The last three years represent a period of
accelerating price inflation and slowing economic growth,
irrespective of whether one uses doctored government statistics or
the SGS-adjusted numbers.
Compelling evidence of stagflation has emerged from
the statistics so far this year. A sequence of weak jobs reports
have convinced many renowned economists that the U.S. economy
slipped into a recession either in December of 2007 or in January
of 2008, even though the mainstream continued to opinionate even in
August of 2008 whether the U.S. will slip into a recession. Most
likely, the U.S. economy has been in recession over the last 5-6
months, while at the same time inflation has been steadily rising
and approaching levels uncomfortable even for Wall Street and FOMC
members.
While many openly dispute the recession hypothesis
by claiming that the U.S. can dodge a recession, at this point
pretty much everyone agrees -- even Fed Chairman Ben Bernanke --
that the U.S. economy is stagnant, growing close to zero percent.
At the same time, observers across the board have acknowledged
rising consumer price pressures.
Literally every meaningful indicator is pointing to
continuous price inflation in coming years. The most obvious
indicator is inflation’s momentum. Despite macroeconomic stagnation
(or outright recession), inflation has continued to accelerate.
The second obvious driver of price inflation is a
steadily weakening dollar against all other currencies, despite the
dollar bear market rally during the last 3-4 months driven most
likely by Wall Street deleveraging. Since the beginning of the
Credit Crunch, the dollar has fallen between 10 and 20% against a
wide basket of currencies, suggesting steadily rising prices of
imports, while the recent relief rally will most like prove to be
an intermediate correction. More importantly, many exporting
countries, like China and India, are reporting accelerating
inflationary pressures in their economies, indicating rising prices
in their own currencies, which in turn will translates into even
higher prices in U.S. dollars.
The third driver is the rising price of energy on
international markets. Rising crude and gas prices will filter
eventually through consumer prices as production costs rise. In a
sense, the “Third Oil Crisis” is unfolding in slow motion as the
price of crude has doubled during the last year. Such a 12-month
increase in the price of crude has always resulted in a recession
coupled with rising price inflation, even though the price of oil
eased after the price spike. In other words, spiking oil prices are
highly stagflationary. While it is true that the oil has corrected
almost 50% in few short months, the price of oil will resume its
upward move; we have seen similar corrections many times before,
most notably in January of 2007.
The fourth driver is the evolving “Food Crisis”. In
my opinion, there is no food crisis and there is no shortage of
food. There has been a small decrease of output in highly inelastic
agricultural goods coupled with steadily rising demand that has
resulted in food prices almost doubling in a very short period of
time. This is a classic textbook example of basic Econ 101 that we
typically teach freshmen in their third week of the semester.
For example, in my home country Bulgaria, there is
no shortage of any agricultural commodity – any can be had, albeit
for a lot higher price than a year ago. Similarly, during the last
month I have been living in Saudi Arabia and I have never heard
once anyone mention anything about food “shortages”. It seems to me
that the journalists’ quest for sensationalism naively associates
rising food prices with “Food Shortages” or with a “Food Crisis”.
They show us images of emaciated children in poor countries caused
by the Food Crisis, while the simple truth is that these poor are
starving because their parents have low incomes and cannot afford
the rising price of food. The root of the problem is not the lack
of food, but the lack of income.
In reality, what has happened is that after so many
years, food prices are finally beginning to catch up with other
prices in the economy – with real estate prices and with stock
market indexes, for example. Essentially, the whole commodity
complex is making up for lost time during the 1980s and 1990s.
Commodities still have a lot to rise in order to realign their
values to stocks, bonds, and real estate; or alternatively, stocks,
bonds and real estate prices must collapse relative to commodity
prices. Here, I prefer a monetary argument: given that the Fed has
been flooding the markets with liquidity over the last 9-12 months,
it is unlikely that stocks, bonds, and real estate will adjust
significantly downward, but much more likely that commodities will
adjust upward, which spells even more consumer price inflation down
the line. Rising commodity prices, just like rising oil prices,
spell stagflation. Do not be fooled by the recent fall in commodity
prices.
The fifth driver is the rapidly rising inflationary
expectations. As an illustration, consumers feel that rice will be
more expensive next month or next year, so they decide to stock up
on rice, which drives its price much higher. Suddenly rice is hard
to find, so consumers begin stocking up on all sorts of foods. That
makes all food prices react violently upward, which in turn
triggers governments across the world to impose export quotas,
which in turn further feeds the buying frenzy. Now, consumers
seeing all sorts of prices rising (such as imported underwear and
apparel or necessities such as toothpaste and toilet paper) will
rationally decide to purchase many of them in advance, in
anticipation of more rising prices. The obvious result: even more
price inflation.
The sixth driver is the government’s stimulus
packages. This summer the consumer benefited from a few hundred
billion dollar stimulus package and Ben Bernanke testified again in
front of Congress in October 2008 that yet another fiscal stimulus
is necessary. The consumer has plenty of options, like paying down
debt and investing the money in stocks and bonds, but the most
likely outcome is that the majority of money will be spent of food
and energy, thus further driving their prices higher and further
exacerbating an already acute inflationary problem.
The above is sufficiently important to warrant a
detailed explanation. In essence, the current price inflation has
squeezed the consumer to the point where a much larger portion of
his income goes to food and energy. Demand for these two critical
items is very inelastic, so most extra income will be directed
towards them. The key to understanding the outcome is the fact that
food and energy supply is also very
inelastic– consumers can willingly pay higher prices, yet
businesses cannot respond with increased supply of food and energy.
The nature of providing (supplying/producing) food and energy is
such that it entails significant lags in time, often three, five,
seven or more years. Thus, increased demand for food and energy
driven by the Bush stimulus package(s) will likely result in
significant price inflation and little economic growth. As a
counter-example, consider that if consumers were to decide to spend
their stimulus package cash on massages and fitness trainers, it
would result in booming massage and fitness industries hiring more
massage therapists and fitness trainers to expand their services;
with food and energy this won’t happen—it won’t translate into jobs
or growth.
A host of other factors contributing to exacerbating stagflation
can be offered here, but the overall message should be clear. Price
inflation has strong, long-term drivers that are here to stay for
many more years. Unless another Great Depression truly chokes
consumer demand, inflation is only going to get worse.
Everything on the monetary side points to more
inflation in the future. Nevertheless, over the last half a
year—especially since the “Credit Crunch” has gained strong
momentum—deflationists have been emboldened to proclaim yet again
that the economy will spin into a dreadful deflation, dragging
everything in sight with it. I can understand the deflationist
warnings, as I was once a deflationist, schooled by Robert
Prechter, the Dean of the Deflationist School. His book
Conquer the Crashis the ultimate reference book on
deflations, The Deflationist Bible. Whether one believes in a
coming deflationary depression or not, one must nevertheless read
the book and understand its arguments.
The quintessence of Prechter’s book is that
inflationary booms cannot last forever; here Austrians will eagerly
agree. However, Prechter argues that inflation cannot last forever
and that deflationary forces will overwhelm the financial system,
so that the economy will tailspin into deflation; here Austrians
will disagree, as they admit to the possibility of an inflationary
bust, i.e., a stagflation.
Prechter provides (in Chapter 13, p. 130) three
limits to credit expansion that we can actually observe. With
these, we can determine whether monetary inflation can continue or
not. His first limit on credit expansion is the rising price of
gold; the second is the falling dollar, and the third is rising
interest rates (due to rising inflationary expectations) and
corresponding falling bond prices, which in itself is strongly
deflationary. In Prechter’s terms, the three countervailing forces
to inflation come from the gold market, the bond market, and the
currency market.
Over the last six years, I have found these
criteria to be extremely helpful, especially in determining whether
the environment would turn deflationary any time soon. It is easy
to analyze each and see if any currently represents a genuine limit
to credit expansion.
Price of Gold:The price of gold has been steadily
rising for the last seven years and it has not yet deterred the Fed
from inflating. Clearly, whether gold rises to $1,000 or $2,000 or
more, the Fed will remain unmoved by its rise. Also, just because
the price of gold has been correcting for the last 3-4 months does
not mean that deflation is here. An intermediate correction does
not make a secular trend!
Dollar.Moving to the second limitation, apparently
the Fed pays only lip service to the government’s Strong Dollar
Policy. In reality, the Fed seems to like the idea of a falling
dollar, as long as the fall is orderly. The Fed would most likely
be pleased to see the dollar a lot weaker in the future, provided
again that the devaluation is “orderly”.
Interest Rates.This third limitation is no
limitation at all to an Inflationist Fed hell-bent on preventing
deflation. The Fed has devised a number of ingenious approaches to
support the long bond and has even stated in public that, if
necessary, it will monetize the long end of the curve to support
high bond prices and respectively low bond yields.
The deflationist arguments resting on gold, the
dollar, and the long-bond yield apparently present no problems for
the Fed at all. In reality, the Fed can inflate at will, and this
is exactly what it’s doing!
At this point, there appears one, and only one, limitation
that will force the Fed to slow down its monetary inflation and
compel it to raise interest rates – a Dollar Crisis associated with
a flight out of dollars and a panic in the currency markets,
triggering a colossal currency derivative crisis.
Nothing short of this will constrain monetary
inflation. At this point, it is my opinion that so long as the
dollar devalues in an orderly manner, or the dollar actually rises
against other fiat currencies, the environment will remain strongly
inflationary.
Other deflationists have raised a very powerful
argument in their favor. Typically during an asset deflation, where
the prices of stocks and real estate fall, there are no willing
lenders and no willing borrowers, no matter how low the Fed lowers
interest rates. This is dreaded condition is known as “pushing on a
string”. The classic example is Japan since 1990.
The counterargument is straightforward: in modern
fiat monetary systems: the Central Bank is always a willing lender
of last resort and the Government is always a willing borrower of
last resort. In order to prevent contraction of credit, the
government can always borrow and the Fed can always monetize –
credit contraction and deflation do not have to occur when the Fed
and the government do not allow it to happen.
So far, it is more than obvious that the Credit Crisis has not
prevented the Fed from its inflationary course, despite the
rhetoric to the contrary. In reality, the Credit Crunch combined
with a contrived deflation scare and a rising dollar has provided a
cover for the U.S. government to increase its budget deficits and
an excuse for the Fed to inflate further. All monetary indicators
confirm that the Fed has been successful in this regard
Until this past October the growth in the supply of the monetary
base (i.e. M0) in the U.S. over the previous 48 years had averaged
6% year-over-year (YoY) and had seldom exceeded 10% although it did
grow to 15.8% YoY during the pre-Y2K period. Indeed, during the
first half of 2008 it was actually trending lower averaging 1.2%
growth before all hell broke loose.
In October, however, as a result of a number of major fiscal
developments, the Fed took it upon itself to solve the major
problems with the economy by expanding the M0. To say they didn't
act in half measure is putting it mildly - very mildly!
As Adam Hamilton reports in a recent article, and his chart
below depicts, the Fed increased the M0 by 25% (36.7% YoY) in
October to more than twice the level seen in the previous five
decades; by a further 27% in November (73% YoY) and another 15% in
December to 98.9% thereby doubling the U.S. monetary base in just 4
months. Such action was unprecedented and put the country into
unchartered inflation territory. But it didn't stop there. In
January the Fed increased the YoY monetary base to 106%, increased
in yet again in February, and again in March, and again in April
(the May numbers are not yet available) to an unbelievable YoY of
111.0%. That's right. 111% when the norm over the previous 48 years
had been just 6%! Surely this monumental increase in America's M0
will have a
majoraffect on
real prices.
The monetary base numbers are shown in red above and their YoY
growth rates in blue.
As consumer spending recovers and bids on now-depleted
inventories rebound prices will also rise for pure supply and
demand reasons says Hamilton maintaining that "we're probably
facing a perfect storm of inflation." I couldn't agree more! As
inflation becomes more obvious to the masses inflationary
expectations will soar and investors will seek assets that thrive
in inflationary times i.e. commodities in general and gold and
silver in particular and their stocks and associated warrants.
Inflation is dead - long live inflation! We hear about the
threat of
hyperinflationin the media - is this for real, can it
happen in the U.S.? Are we hyping up the word inflation, is it an
inflationary play of words to grab attention to discuss the threat
of hyperinflation? Let's deflate the hype and put inflation where
it belongs... at the forefront of your concerns.
Stop right here. In the words of European Central Bank (ECB)
President Jean-Claude Trichet, what we suggest is "
extraordinarily counterproductive." Discussing how
policies pursued by the Federal Reserve (Fed) and other central
banks might lead to inflation makes the job of central banks more
difficult. That's because the best predictor of future inflation
may be inflation expectations. If people think there will be
inflation, they are likely to have higher wage demands; similarly,
businesses that believe inflation is baked into the system may
continuously try to push for higher prices. The head of the ECB
recognizes this and is rightfully concerned that this talk about
inflation may lead to, well, inflation.
In contrast, the Fed wants to make us believe that there is so
much "slack" in the economy - economists call this the output gap -
that there is nothing to worry about, inflation won't happen. What
the Fed and the ECB have in common is a "trust us" attitude,
telling us that as long as we put our faith into the mighty hands
of central bankers, we will be fine. And that's where the
fundamental problem lies: rational investors ought to make
investment decisions based on an evaluation of facts, not based on
nice talk by central bankers. At least the ECB talks straight; the
Fed, however, started out by trying to square the circle. As
squaring the circle may be impossible, the Fed is likely to add a
dimension, possibly turning the circle into a balloon - inflation
if you will. If the balloon pops, we get hyperinflation.
The squaring of the circle is the phase we are in right now. A
massive monetary and fiscal stimulus has been initiated to counter
market forces. As a result, home prices have not fallen enough to
be sustainable by incomes without substantial government subsidy -
this may be the root of a most unstable situation that may lead to
a fragile recovery at best. With interest rates low enough, the
economy may indeed bounce from the bottom - economic activity had
fallen to such low levels that many businesses had seen their
inventories completely wiped out; if businesses wanted any sales,
they had to buy at least some supplies.
But in our humble opinion, the squaring of the circle is doomed
to fail and the first signs are showing up in the bond market.
That's because the government piled on trillions in debt this year
in addition to running the printing press in high gear. Investors
are becoming concerned that this magic wand might just be
inflationary down the road. If, and that's a big if, there is
confidence in the Fed that it can engineer an economic recovery
that is not inflationary, then the bond market will behave; once
the economy is back on track, the Fed will mop up the liquidity it
has poured into the markets; the administration will scale back its
spending programs and present a balanced budget; and we will have
Martians visit planet Earth. The likelihood of each of the
aforementioned happening may not be identical, but listing the
Martians in conjunctions with the remainder may give you a sense of
our confidence in any or all of these being realistic.
Don't underestimate the Fed, though: unless the public and
foreign lenders completely lose confidence in the Fed, it has the
power to control inflation expectations in the medium term. That's
why the markets react to Fed talk - when the Fed says all will be
well, the gut reaction in the markets may be a sigh of relief. Even
when Fed Chairman Bernanke warns Congress about unsustainable
deficits, the markets seem appeased as if to express that Bernanke
will impose discipline on Congress through higher rates if
necessary.
The real question, however, is whether the Fed is going to
follow through on its promise to keep inflation in check; a task
that has been made ever more difficult as the Fed has piled up
mortgage securities on its balance sheet that may be difficult, if
not impossible, to sell again; or at least neutralize the economic
stimulus created with this and other "credit easing" programs. The
challenge is that inflation may show its ugly head well before we
have a sustainable recovery. As pointed out earlier, even if we
have economic growth, we don't think any recovery is sustainable if
home prices continue to be only affordable at interest rates that
are highly subsidized. That's where the squaring of the circle is
likely to fail.
The Fed may actually want to have inflation to push up home
prices; remember that inflation bails out those with debt (and
punishes savers). Fed Chairman Bernanke has repeatedly argued that
going off the gold standard during the Great Depression and
allowing the U.S. dollar to fall versus other currencies was the
key to ending the Great Depression. The Fed's credibility is in
jeopardy as it increasingly attracts political scrutiny; that's
because the Fed is meddling with fiscal policy these days: rather
than "merely" printing money and setting interest rates, the Fed is
providing money to specific sectors of the economy - the various
lending and credit facilities, as well as active purchase programs
of mortgage backed securities, amongst others, is squarely in
fiscal territory, something that should be governed and supervised
by Congress, not a central bank.
Some central bankers are so frustrated with this talk about
inflation because it further undermines their credibility - and
credibility is key for central banks to get away with the policies
pursued. There's a simple solution to this mess: have central banks
stop the printing presses, have central banks stop meddling with
fiscal policies. If the Fed were to stop being engaged in the
pursuit of what we believe may be highly inflationary policies, we
wouldn't need to warn about them in public! We are not alone in our
calls: German Chancellor Angela Merkel recently received worldwide
attention when warning central bankers that they must stop the
printing presses. The warning carried all the more weight as it is
most unusual for a German Chancellor to interfere with the
independence of central banks; please
view
a replayof our discussion of the episode with Neil Cavuto on
FoxBusiness TV.
The reason why our calls may fall on deaf ears at the Fed is
because the Fed is concerned that a premature unwinding of its
programs could throw the economy into a depression - all the work
to date to stabilize the markets might be in vain. We respectfully
disagree in particular with the latter. Last October, the guarantee
of the banking system ensured that the potential of a disorderly
adjustment of the U.S. and global economy was averted; it opened
the opportunity for an orderly adjustment.
Orderly adjustmentis a nice phrase for what may be a
depression, but the alternative, inflation with the threat of
hyperinflation may be, in our humble opinion, the worst of the
alternatives.
Now we mention it again: hyperinflation. So is it a real threat?
The simple answer is: it depends on how the dynamics play out. What
we do know is that all hyperinflation in the world has started when
a country's central bank prints money to finance government
spending. The Fed adamantly denies that that is what it is engaged
in, but when something looks like a duck, swims like a duck, quacks
like a duck, we call it a duck. We intentionally use such strong
language to send a strong signal that the policies pursued, in our
view, are reckless and dangerous.
We are based in California where, when one plays with fire, a
lot of damage can result. Incidentally, California's budget woes
show just how serious the financial situation of many states is.
State and local taxes are likely to go up, budgets will be cut
further. Everyone is screaming for money; while even the Fed may
not be able to save California, the Fed may be extremely reluctant
to stop its accommodating stance given the grave situation so many
consumers, municipalities and states are in.
In our assessment, the scenario the Fed would favor is a
prolonged period of elevated inflation; some estimates are from 4%
up to 7% or 8%; others higher - that's the circle turning into a
balloon. But the Fed cannot allow inflation to grow that high
without a serious plunge in bond prices, pushing the cost of
borrowing for home owners, as well as the government, to very high
levels. We would like to point out that the government currently
pays fairly little in interest expense since the government played
the same "adjustable rate mortgage game" consumers did; remember
how the government phased out the 30 year bond ("long bond") during
the Clinton administration? Well, the "long bond" is back, but 40%
of the federal debt is maturing this year and has to be rolled. It
has been puzzling that the government has not taken more advantage
of the low long-term rates; a strategy we believe will exacerbate
the cost of government debt in the long run.
Back to what the Fed may be most concerned about: the economy,
in our view, is likely to stall with long-term rates going up much
further, if the Fed is not able to keep mortgage rates low. Right
now, the Fed is very actively subsidizing this market, printing a
lot of money in the process. At some point, we are concerned market
forces will overwhelm the Fed. Right now, the Fed insists it is not
trying to keep rates down; it is merely "facilitating" the flow of
credit. We believe such comments undermine the Fed's credibility
as, for example, the massive purchases of mortgage-backed
securities, are in our view clearly aimed at keeping rates low.
Nothing during the financial crisis seems to have worked as
planned by the Fed. Policies have been far more expensive as the
Fed's credibility has eroded. The Fed has repeatedly shown that it
completely underestimates the political dimensions of its policies.
Will the market really buy its tough talk? And if not, what will
happen? If the Fed substantially increases its market interference,
it can lead to hyperinflation down the road. How likely? We are
reluctant to quantify it, but the risk is real. The appropriate way
for the Fed to regain credibility may be to not only announce that
there is a viable exit strategy to the policies that have been
pursued, but to embark on it. So far, this hasn't happened, the
printing press continues to be very active with the Fed's balance
sheet growing steadily. We hope the balloon won't pop, but hope is
not a strategy.
Needless to say, these policies may be detrimental to the U.S.
dollar because foreigners may have little interest in buying bonds
with artificially low yields due to the Fed's activities; while the
U.S. should be able to finance its massive deficits, lenders want
to be compensated with free, i.e. market-based prices. Did we
mention that we believe the Fed may favor a weaker dollar? It might
just be getting more than it is bargaining for.
WASHINGTON -- The Federal Open Market Committee issued its most
upbeat statement about the economy in recent memory on Wednesday,
saying that the downturn is slowing and deflation is no longer a
big threat. In a statement, the Fed stayed the course on interest
rates and Treasury purchases, as expected. The Fed highlighted
rising energy and commodity prices, but said inflation was likely
to "remain subdued for some time." Fed officials pointed to
improving conditions in financial markets.
Gap trading is a simple and disciplined approach to buying and
shorting stocks. Essentially one finds stocks that have a price gap
from the previous close and watches the first hour of trading to
identify the trading range. Rising above that range signals a buy,
and falling below it signals a short.
A gap is a change in price levels between the close and open of
two consecutive days. Although most technical analysis manuals
define the four types of gap patterns as Common, Breakaway,
Continuation and Exhaustion, those labels are applied after the
chart pattern is established. That is, the difference between any
one type of gap from another is only distinguishable after the
stock continues up or down in some fashion. Although those
classifications are useful for a longer-term understanding of how a
particular stock or sector reacts, they offer little guidance for
trading.
For trading purposes, we define four basic types of gaps as
follows:
A
Full Gap Upoccurs when the opening price is
greater than yesterday's high price.
In order to successfully trade gapping stocks, one should use a
disciplined set of entry and exit rules to signal trades and
minimize risk. Additionally, gap trading strategies can be applied
to weekly, end-of-day, or intraday gaps. It is important for
longer-term investors to understand the mechanics of gaps, as the
'short' signals can be used as the exit signal to sell
holdings.
Each of the four gap types has a long and short trading signal,
defining the eight gap trading strategies. The basic tenet of gap
trading is to allow one hour after the market opens for the stock
price to establish its range. A Modified Trading Method, to be
discussed later, can be used with any of the eight primary
strategies to trigger trades before the first hour, although it
involves more risk. Once a position is entered, you calculate and
set an 8% trailing stop to exit a long position, and a 4% trailing
stop to exit a short position. A trailing stop is simply an exit
threshold that follows the rising price or falling price in the
case of short positions.
Long Example:You buy a stock at $100. You set the
exit at no more than 8% below that, or $92. If the price rises to
$120, you raise the stop to $110.375, which is approximately 8%
below $120. The stop keeps rising as long as the stock price rises.
In this manner, you follow the rise in stock price with either a
real or mental stop that is executed when the price trend finally
reverses.
Short Example:You short a stock at $100. You set
the Buy-to-Cover at $104 so that a trend reversal of 4% would force
you to exit the position. If the price drops to $90, you
recalculate the stop at 4% above that number, or $93 to
Buy-to-Cover.
If a stock's opening price is greater than yesterday's high,
revisit the 1-minute chart after 10:30 am and set a long (buy) stop
two ticks above the high achieved in the first hour of trading.
(Note: A 'tick' is defined as the bid/ask spread, usually 1/8 to
1/4 point, depending on the stock.)
If the stock gaps up, but there is insufficient buying pressure
to sustain the rise, the stock price will level or drop below the
opening gap price. Traders can set similar entry signals for short
positions as follows:
If a stock's opening price is greater than yesterday's high,
revisit the 1-minute chart after 10:30 am and set a short stop
equal to two ticks below the low achieved in the first hour of
trading.
Poor earnings, bad news, organizational changes and market
influences can cause a stock's price to drop uncharacteristically.
A full gap down occurs when the price is below not only the
previous day's close, but the low of the day before as well. A
stock whose price opens in a full gap down, then begins to climb
immediately, is known as a "Dead Cat Bounce."
If a stock's opening price is less than yesterday's low, set a
long stop equal to two ticks more than yesterday's low.
If a stock's opening price is less than yesterday's low, revisit
the 1-minute chart after 10:30 am and set a short stop equal to two
ticks below the low achieved in the first hour of trading.
The difference between a Full and Partial Gap is risk and
potential gain. In general, a stock gapping completely above the
previous day's high has a significant change in the market's desire
to own or sell it. Demand is large enough to force the market maker
or floor specialist to make a major price change to accommodate the
unfilled orders. Full gapping stocks generally trend farther in one
direction than stocks which only partially gap. However, a smaller
demand may just require the trading floor to only move price above
or below the previous close in order to trigger buying or selling
to fill on-hand orders. There is a generally a greater opportunity
for gain over several days in full gapping stocks.
If there is not enough interest in selling or buying a stock
after the initial orders are filled, the stock will return to its
trading range quickly. Entering a trade for a partially gapping
stock generally calls for either greater attention or closer
trailing stops of 5-6%.
If a stock's opening price is greater than yesterday's close,
but not greater than yesterday's high, the condition is considered
a Partial Gap Up. The process for a long entry is the same for Full
Gaps in that one revisits the 1-minute chart after 10:30 am and set
a long (buy) stop two ticks above the high achieved in the first
hour of trading.
The short trade process for a partial gap up is the same for
Full Gaps in that one revisits the 1-minute chart after 10:30 am
and sets a short stop two ticks below the low achieved in the first
hour of trading.
If a stock's opening price is less than yesterday's close,
revisit the 1 minute chart after 10:30 am and set a buy stop two
ticks above the high achieved in the first hour of trading.
The short trade process for a partial gap down is the same for
Full Gap Down in that one revisits the 1-minute chart after 10:30AM
and sets a short stop two ticks below the low achieved in the first
hour of trading.
If a stock's opening price is less than yesterday's close, set a
short stop equal to two ticks less than the low achieved in the
first hour of trading today.
If the volume requirement is not met, the safest way to play a
partial gap is to wait until the price breaks the previous high (on
a long trade) or low (on a short trade).
All eight of the Gap Trading Strategies can also be applied to
end-of-day trading. Using StockCharts.com's Gap Scans, end-of-day
traders can review those stocks with the best potential. Increases
in volume for stocks gapping up or down is a strong indication of
continued movement in the same direction of the gap. A gapping
stock that crosses above resistance levels provides reliable entry
signals. Similarly, a short position would be signaled by a stock
whose gap down fails support levels.
The Modified Trading Method applies to all eight Full and
Partial Gap scenarios above. The only difference is instead of
waiting until the price breaks above the high (or below the low for
a short); you enter the trade in the middle of the rebound. The
other requirement for this method is that the stock should be
trading on at least twice the average volume for the last five
days. This method is only recommended for those individuals who are
proficient with the eight strategies above, and have fast trade
execution systems. Since heavy volume trading can experience quick
reversals, mental stops are usually used instead of hard stops.
If a stock's opening price is greater than yesterday's high,
revisit the 1 minute chart after 10:30 am and set a long stop equal
to the average of the open price and the high price achieved in the
first hour of trading. This method recommends that the projected
daily volume be double the 5-day average.
If a stock's opening price is less than yesterday's low, revisit
the 1 minute chart after 10:30 am and set a long stop equal to the
average of the open and low price achieved in the first hour of
trading. This method recommends that the projected daily volume be
double the 5-day average.
Members of StockCharts' Extra service can run scans against
daily data that is updated on an intraday basis. This is perfect
for finding gapping stocks. Simply run the pre-defined gap scans
using the Intraday data setting around 10AM Eastern.
StockCharts.com also publishes lists of stocks that
fully gapped upor
fully gapped downeach day based on end-of-day data. This is an
excellent source of ideas for longer term investors.
Although these are useful lists of gapping stocks, it is
important to look at the longer term charts of the stock to know
where the support and resistance may be, and play only those with
an average volume above 500,000 shares a day until the gap trading
technique is mastered. The most profitable gap plays are normally
made on stocks you've followed in the past and are familiar
with.
In simple terms, the Gap Trading Strategies are a rigorously
defined trading system that uses specific criteria to enter and
exit. Trailing stops are defined to limit loss and protect profits.
The simplest method for determining your own ability to
successfully trade gaps is to paper trade. Paper trading does not
involve any real transaction. Instead, one writes down or logs an
entry signal and then does the same for an exit signal. Then
subtract commissions and slippage to determine your potential
profit or loss.
Gap trading is much simpler than the length of this tutorial may
suggest. You will not find either the tops or bottoms of a stock's
price range, but you will be able to profit in a structured manner
and minimize losses by using stops. It is, after all, more
important to be consistently profitable than to continually chase
movers or enter after the crowd.
The community is delayed by three days for non registered users.
fwiw
The Deflation Scare
Posted by ravun on 24th of Jun 2009 at 04:36 pm
"The third important point is that economic slowdowns usually trigger massive reflationary responses from the Fed that reignite inflation. Such was the response in 1958, then again in 1970 (not described here), in 1974, 1980, 2001, and currently in 2007-2008. Anytime the Fed has responded by massively reflating the economy, the typical result has been stagflation."
Your point on Japan
The Deflation Scare
Posted by ravun on 24th of Jun 2009 at 04:32 pm
is valid, I myself have in the past highlighted that.
The whole article is actually aimed at stagflation and neither inflation or deflation, I just highlighted bits for my arguement with Dodger...which has been going on behind the scenes. So USA beats Spain 2-0
PA
Posted by ravun on 24th of Jun 2009 at 04:28 pm
It was unsigned, cos I cut and paste bits from it
Lets go there again
The Deflation Scare
Posted by ravun on 24th of Jun 2009 at 04:26 pm
http://www.wintersonnenwende.com/scriptorium/english/archives/articles/hyperinflation-e.html
http://www.marxists.org/history/etol/revhist/backiss/vol3/no1/jones.html
http://www.geocities.com/Athens/Cyprus/1169/Weimar.htm
http://www.mwsc.edu/eflj/german/gc/inflation.html
http://www.schillerinstitute.org/economy/phys_econ/worldeconomiccrisis.html#Typical Collapse Function
http://www.historylearningsite.co.uk/hyperinf.htm
http://www.zum.de/whkmla/region/germany/turm2023.html
http://www.wibemedia.com/german_inflation.html
http://www.hitler.org/speeches/09-12-23.html
http://www.usagold.com/GermanNightmare.html
http://www.marxist.com/germany/chapter5.html
http://www.kdhs.org.uk/history/as/as_unit2/hyp_effect.htm
http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html
http://www.inaxis.org.uk/history/weimar.html
http://economics.about.com/library/termpapers/bltermpaper-germany-a.htm
A couple of months old, but still valid
Posted by ravun on 24th of Jun 2009 at 03:47 pm
Current price inflation data confirm all trends and expectations associated with monetary inflation. In recent years, both the official and the alternative indicators of consumer price inflation point steadily towards stagflation.
The price inflation chart above clearly indicates that since 2002 inflation has been steadily accelerating.
At the same time, as you can see in the chart below, economic growth has been steadily slowing since the beginning of 2004. The last three years represent a period of accelerating price inflation and slowing economic growth, irrespective of whether one uses doctored government statistics or the SGS-adjusted numbers.
Compelling evidence of stagflation has emerged from the statistics so far this year. A sequence of weak jobs reports have convinced many renowned economists that the U.S. economy slipped into a recession either in December of 2007 or in January of 2008, even though the mainstream continued to opinionate even in August of 2008 whether the U.S. will slip into a recession. Most likely, the U.S. economy has been in recession over the last 5-6 months, while at the same time inflation has been steadily rising and approaching levels uncomfortable even for Wall Street and FOMC members.
While many openly dispute the recession hypothesis by claiming that the U.S. can dodge a recession, at this point pretty much everyone agrees -- even Fed Chairman Ben Bernanke -- that the U.S. economy is stagnant, growing close to zero percent. At the same time, observers across the board have acknowledged rising consumer price pressures.
Literally every meaningful indicator is pointing to continuous price inflation in coming years. The most obvious indicator is inflation’s momentum. Despite macroeconomic stagnation (or outright recession), inflation has continued to accelerate.
The second obvious driver of price inflation is a steadily weakening dollar against all other currencies, despite the dollar bear market rally during the last 3-4 months driven most likely by Wall Street deleveraging. Since the beginning of the Credit Crunch, the dollar has fallen between 10 and 20% against a wide basket of currencies, suggesting steadily rising prices of imports, while the recent relief rally will most like prove to be an intermediate correction. More importantly, many exporting countries, like China and India, are reporting accelerating inflationary pressures in their economies, indicating rising prices in their own currencies, which in turn will translates into even higher prices in U.S. dollars.
The third driver is the rising price of energy on international markets. Rising crude and gas prices will filter eventually through consumer prices as production costs rise. In a sense, the “Third Oil Crisis” is unfolding in slow motion as the price of crude has doubled during the last year. Such a 12-month increase in the price of crude has always resulted in a recession coupled with rising price inflation, even though the price of oil eased after the price spike. In other words, spiking oil prices are highly stagflationary. While it is true that the oil has corrected almost 50% in few short months, the price of oil will resume its upward move; we have seen similar corrections many times before, most notably in January of 2007.
The fourth driver is the evolving “Food Crisis”. In my opinion, there is no food crisis and there is no shortage of food. There has been a small decrease of output in highly inelastic agricultural goods coupled with steadily rising demand that has resulted in food prices almost doubling in a very short period of time. This is a classic textbook example of basic Econ 101 that we typically teach freshmen in their third week of the semester.
For example, in my home country Bulgaria, there is no shortage of any agricultural commodity – any can be had, albeit for a lot higher price than a year ago. Similarly, during the last month I have been living in Saudi Arabia and I have never heard once anyone mention anything about food “shortages”. It seems to me that the journalists’ quest for sensationalism naively associates rising food prices with “Food Shortages” or with a “Food Crisis”. They show us images of emaciated children in poor countries caused by the Food Crisis, while the simple truth is that these poor are starving because their parents have low incomes and cannot afford the rising price of food. The root of the problem is not the lack of food, but the lack of income.
In reality, what has happened is that after so many years, food prices are finally beginning to catch up with other prices in the economy – with real estate prices and with stock market indexes, for example. Essentially, the whole commodity complex is making up for lost time during the 1980s and 1990s. Commodities still have a lot to rise in order to realign their values to stocks, bonds, and real estate; or alternatively, stocks, bonds and real estate prices must collapse relative to commodity prices. Here, I prefer a monetary argument: given that the Fed has been flooding the markets with liquidity over the last 9-12 months, it is unlikely that stocks, bonds, and real estate will adjust significantly downward, but much more likely that commodities will adjust upward, which spells even more consumer price inflation down the line. Rising commodity prices, just like rising oil prices, spell stagflation. Do not be fooled by the recent fall in commodity prices.
The fifth driver is the rapidly rising inflationary expectations. As an illustration, consumers feel that rice will be more expensive next month or next year, so they decide to stock up on rice, which drives its price much higher. Suddenly rice is hard to find, so consumers begin stocking up on all sorts of foods. That makes all food prices react violently upward, which in turn triggers governments across the world to impose export quotas, which in turn further feeds the buying frenzy. Now, consumers seeing all sorts of prices rising (such as imported underwear and apparel or necessities such as toothpaste and toilet paper) will rationally decide to purchase many of them in advance, in anticipation of more rising prices. The obvious result: even more price inflation.
The sixth driver is the government’s stimulus packages. This summer the consumer benefited from a few hundred billion dollar stimulus package and Ben Bernanke testified again in front of Congress in October 2008 that yet another fiscal stimulus is necessary. The consumer has plenty of options, like paying down debt and investing the money in stocks and bonds, but the most likely outcome is that the majority of money will be spent of food and energy, thus further driving their prices higher and further exacerbating an already acute inflationary problem.
The above is sufficiently important to warrant a detailed explanation. In essence, the current price inflation has squeezed the consumer to the point where a much larger portion of his income goes to food and energy. Demand for these two critical items is very inelastic, so most extra income will be directed towards them. The key to understanding the outcome is the fact that food and energy supply is also very inelastic– consumers can willingly pay higher prices, yet businesses cannot respond with increased supply of food and energy. The nature of providing (supplying/producing) food and energy is such that it entails significant lags in time, often three, five, seven or more years. Thus, increased demand for food and energy driven by the Bush stimulus package(s) will likely result in significant price inflation and little economic growth. As a counter-example, consider that if consumers were to decide to spend their stimulus package cash on massages and fitness trainers, it would result in booming massage and fitness industries hiring more massage therapists and fitness trainers to expand their services; with food and energy this won’t happen—it won’t translate into jobs or growth.
A host of other factors contributing to exacerbating stagflation can be offered here, but the overall message should be clear. Price inflation has strong, long-term drivers that are here to stay for many more years. Unless another Great Depression truly chokes consumer demand, inflation is only going to get worse.
Title: The Deflation Scare Everything on
Posted by ravun on 24th of Jun 2009 at 03:44 pm
Everything on the monetary side points to more inflation in the future. Nevertheless, over the last half a year—especially since the “Credit Crunch” has gained strong momentum—deflationists have been emboldened to proclaim yet again that the economy will spin into a dreadful deflation, dragging everything in sight with it. I can understand the deflationist warnings, as I was once a deflationist, schooled by Robert Prechter, the Dean of the Deflationist School. His book Conquer the Crashis the ultimate reference book on deflations, The Deflationist Bible. Whether one believes in a coming deflationary depression or not, one must nevertheless read the book and understand its arguments.
The quintessence of Prechter’s book is that inflationary booms cannot last forever; here Austrians will eagerly agree. However, Prechter argues that inflation cannot last forever and that deflationary forces will overwhelm the financial system, so that the economy will tailspin into deflation; here Austrians will disagree, as they admit to the possibility of an inflationary bust, i.e., a stagflation.
Prechter provides (in Chapter 13, p. 130) three limits to credit expansion that we can actually observe. With these, we can determine whether monetary inflation can continue or not. His first limit on credit expansion is the rising price of gold; the second is the falling dollar, and the third is rising interest rates (due to rising inflationary expectations) and corresponding falling bond prices, which in itself is strongly deflationary. In Prechter’s terms, the three countervailing forces to inflation come from the gold market, the bond market, and the currency market.
Over the last six years, I have found these criteria to be extremely helpful, especially in determining whether the environment would turn deflationary any time soon. It is easy to analyze each and see if any currently represents a genuine limit to credit expansion.
The deflationist arguments resting on gold, the dollar, and the long-bond yield apparently present no problems for the Fed at all. In reality, the Fed can inflate at will, and this is exactly what it’s doing!
At this point, there appears one, and only one, limitation that will force the Fed to slow down its monetary inflation and compel it to raise interest rates – a Dollar Crisis associated with a flight out of dollars and a panic in the currency markets, triggering a colossal currency derivative crisis.
Nothing short of this will constrain monetary inflation. At this point, it is my opinion that so long as the dollar devalues in an orderly manner, or the dollar actually rises against other fiat currencies, the environment will remain strongly inflationary.
Other deflationists have raised a very powerful argument in their favor. Typically during an asset deflation, where the prices of stocks and real estate fall, there are no willing lenders and no willing borrowers, no matter how low the Fed lowers interest rates. This is dreaded condition is known as “pushing on a string”. The classic example is Japan since 1990.
The counterargument is straightforward: in modern fiat monetary systems: the Central Bank is always a willing lender of last resort and the Government is always a willing borrower of last resort. In order to prevent contraction of credit, the government can always borrow and the Fed can always monetize – credit contraction and deflation do not have to occur when the Fed and the government do not allow it to happen.
So far, it is more than obvious that the Credit Crisis has not prevented the Fed from its inflationary course, despite the rhetoric to the contrary. In reality, the Credit Crunch combined with a contrived deflation scare and a rising dollar has provided a cover for the U.S. government to increase its budget deficits and an excuse for the Fed to inflate further. All monetary indicators confirm that the Fed has been successful in this regard
Matt/Dodger...boxing gloves..Queensbury rules please
Posted by ravun on 24th of Jun 2009 at 03:32 pm
Until this past October the growth in the supply of the monetary base (i.e. M0) in the U.S. over the previous 48 years had averaged 6% year-over-year (YoY) and had seldom exceeded 10% although it did grow to 15.8% YoY during the pre-Y2K period. Indeed, during the first half of 2008 it was actually trending lower averaging 1.2% growth before all hell broke loose.
In October, however, as a result of a number of major fiscal developments, the Fed took it upon itself to solve the major problems with the economy by expanding the M0. To say they didn't act in half measure is putting it mildly - very mildly!
As Adam Hamilton reports in a recent article, and his chart below depicts, the Fed increased the M0 by 25% (36.7% YoY) in October to more than twice the level seen in the previous five decades; by a further 27% in November (73% YoY) and another 15% in December to 98.9% thereby doubling the U.S. monetary base in just 4 months. Such action was unprecedented and put the country into unchartered inflation territory. But it didn't stop there. In January the Fed increased the YoY monetary base to 106%, increased in yet again in February, and again in March, and again in April (the May numbers are not yet available) to an unbelievable YoY of 111.0%. That's right. 111% when the norm over the previous 48 years had been just 6%! Surely this monumental increase in America's M0 will have a majoraffect on real prices.
The monetary base numbers are shown in red above and their YoY growth rates in blue.
As consumer spending recovers and bids on now-depleted inventories rebound prices will also rise for pure supply and demand reasons says Hamilton maintaining that "we're probably facing a perfect storm of inflation." I couldn't agree more! As inflation becomes more obvious to the masses inflationary expectations will soar and investors will seek assets that thrive in inflationary times i.e. commodities in general and gold and silver in particular and their stocks and associated warrants.
Title: Inflation or Hyperinflation? Inflation is
Posted by ravun on 24th of Jun 2009 at 03:19 pm
Inflation is dead - long live inflation! We hear about the threat of hyperinflationin the media - is this for real, can it happen in the U.S.? Are we hyping up the word inflation, is it an inflationary play of words to grab attention to discuss the threat of hyperinflation? Let's deflate the hype and put inflation where it belongs... at the forefront of your concerns.
Stop right here. In the words of European Central Bank (ECB) President Jean-Claude Trichet, what we suggest is " extraordinarily counterproductive." Discussing how policies pursued by the Federal Reserve (Fed) and other central banks might lead to inflation makes the job of central banks more difficult. That's because the best predictor of future inflation may be inflation expectations. If people think there will be inflation, they are likely to have higher wage demands; similarly, businesses that believe inflation is baked into the system may continuously try to push for higher prices. The head of the ECB recognizes this and is rightfully concerned that this talk about inflation may lead to, well, inflation.
In contrast, the Fed wants to make us believe that there is so much "slack" in the economy - economists call this the output gap - that there is nothing to worry about, inflation won't happen. What the Fed and the ECB have in common is a "trust us" attitude, telling us that as long as we put our faith into the mighty hands of central bankers, we will be fine. And that's where the fundamental problem lies: rational investors ought to make investment decisions based on an evaluation of facts, not based on nice talk by central bankers. At least the ECB talks straight; the Fed, however, started out by trying to square the circle. As squaring the circle may be impossible, the Fed is likely to add a dimension, possibly turning the circle into a balloon - inflation if you will. If the balloon pops, we get hyperinflation.
The squaring of the circle is the phase we are in right now. A massive monetary and fiscal stimulus has been initiated to counter market forces. As a result, home prices have not fallen enough to be sustainable by incomes without substantial government subsidy - this may be the root of a most unstable situation that may lead to a fragile recovery at best. With interest rates low enough, the economy may indeed bounce from the bottom - economic activity had fallen to such low levels that many businesses had seen their inventories completely wiped out; if businesses wanted any sales, they had to buy at least some supplies.
But in our humble opinion, the squaring of the circle is doomed to fail and the first signs are showing up in the bond market. That's because the government piled on trillions in debt this year in addition to running the printing press in high gear. Investors are becoming concerned that this magic wand might just be inflationary down the road. If, and that's a big if, there is confidence in the Fed that it can engineer an economic recovery that is not inflationary, then the bond market will behave; once the economy is back on track, the Fed will mop up the liquidity it has poured into the markets; the administration will scale back its spending programs and present a balanced budget; and we will have Martians visit planet Earth. The likelihood of each of the aforementioned happening may not be identical, but listing the Martians in conjunctions with the remainder may give you a sense of our confidence in any or all of these being realistic.
Don't underestimate the Fed, though: unless the public and foreign lenders completely lose confidence in the Fed, it has the power to control inflation expectations in the medium term. That's why the markets react to Fed talk - when the Fed says all will be well, the gut reaction in the markets may be a sigh of relief. Even when Fed Chairman Bernanke warns Congress about unsustainable deficits, the markets seem appeased as if to express that Bernanke will impose discipline on Congress through higher rates if necessary.
The real question, however, is whether the Fed is going to follow through on its promise to keep inflation in check; a task that has been made ever more difficult as the Fed has piled up mortgage securities on its balance sheet that may be difficult, if not impossible, to sell again; or at least neutralize the economic stimulus created with this and other "credit easing" programs. The challenge is that inflation may show its ugly head well before we have a sustainable recovery. As pointed out earlier, even if we have economic growth, we don't think any recovery is sustainable if home prices continue to be only affordable at interest rates that are highly subsidized. That's where the squaring of the circle is likely to fail.
The Fed may actually want to have inflation to push up home prices; remember that inflation bails out those with debt (and punishes savers). Fed Chairman Bernanke has repeatedly argued that going off the gold standard during the Great Depression and allowing the U.S. dollar to fall versus other currencies was the key to ending the Great Depression. The Fed's credibility is in jeopardy as it increasingly attracts political scrutiny; that's because the Fed is meddling with fiscal policy these days: rather than "merely" printing money and setting interest rates, the Fed is providing money to specific sectors of the economy - the various lending and credit facilities, as well as active purchase programs of mortgage backed securities, amongst others, is squarely in fiscal territory, something that should be governed and supervised by Congress, not a central bank.
Some central bankers are so frustrated with this talk about inflation because it further undermines their credibility - and credibility is key for central banks to get away with the policies pursued. There's a simple solution to this mess: have central banks stop the printing presses, have central banks stop meddling with fiscal policies. If the Fed were to stop being engaged in the pursuit of what we believe may be highly inflationary policies, we wouldn't need to warn about them in public! We are not alone in our calls: German Chancellor Angela Merkel recently received worldwide attention when warning central bankers that they must stop the printing presses. The warning carried all the more weight as it is most unusual for a German Chancellor to interfere with the independence of central banks; please view a replayof our discussion of the episode with Neil Cavuto on FoxBusiness TV.
The reason why our calls may fall on deaf ears at the Fed is because the Fed is concerned that a premature unwinding of its programs could throw the economy into a depression - all the work to date to stabilize the markets might be in vain. We respectfully disagree in particular with the latter. Last October, the guarantee of the banking system ensured that the potential of a disorderly adjustment of the U.S. and global economy was averted; it opened the opportunity for an orderly adjustment. Orderly adjustmentis a nice phrase for what may be a depression, but the alternative, inflation with the threat of hyperinflation may be, in our humble opinion, the worst of the alternatives.
Now we mention it again: hyperinflation. So is it a real threat? The simple answer is: it depends on how the dynamics play out. What we do know is that all hyperinflation in the world has started when a country's central bank prints money to finance government spending. The Fed adamantly denies that that is what it is engaged in, but when something looks like a duck, swims like a duck, quacks like a duck, we call it a duck. We intentionally use such strong language to send a strong signal that the policies pursued, in our view, are reckless and dangerous.
We are based in California where, when one plays with fire, a lot of damage can result. Incidentally, California's budget woes show just how serious the financial situation of many states is. State and local taxes are likely to go up, budgets will be cut further. Everyone is screaming for money; while even the Fed may not be able to save California, the Fed may be extremely reluctant to stop its accommodating stance given the grave situation so many consumers, municipalities and states are in.
In our assessment, the scenario the Fed would favor is a prolonged period of elevated inflation; some estimates are from 4% up to 7% or 8%; others higher - that's the circle turning into a balloon. But the Fed cannot allow inflation to grow that high without a serious plunge in bond prices, pushing the cost of borrowing for home owners, as well as the government, to very high levels. We would like to point out that the government currently pays fairly little in interest expense since the government played the same "adjustable rate mortgage game" consumers did; remember how the government phased out the 30 year bond ("long bond") during the Clinton administration? Well, the "long bond" is back, but 40% of the federal debt is maturing this year and has to be rolled. It has been puzzling that the government has not taken more advantage of the low long-term rates; a strategy we believe will exacerbate the cost of government debt in the long run.
Back to what the Fed may be most concerned about: the economy, in our view, is likely to stall with long-term rates going up much further, if the Fed is not able to keep mortgage rates low. Right now, the Fed is very actively subsidizing this market, printing a lot of money in the process. At some point, we are concerned market forces will overwhelm the Fed. Right now, the Fed insists it is not trying to keep rates down; it is merely "facilitating" the flow of credit. We believe such comments undermine the Fed's credibility as, for example, the massive purchases of mortgage-backed securities, are in our view clearly aimed at keeping rates low.
Nothing during the financial crisis seems to have worked as planned by the Fed. Policies have been far more expensive as the Fed's credibility has eroded. The Fed has repeatedly shown that it completely underestimates the political dimensions of its policies. Will the market really buy its tough talk? And if not, what will happen? If the Fed substantially increases its market interference, it can lead to hyperinflation down the road. How likely? We are reluctant to quantify it, but the risk is real. The appropriate way for the Fed to regain credibility may be to not only announce that there is a viable exit strategy to the policies that have been pursued, but to embark on it. So far, this hasn't happened, the printing press continues to be very active with the Fed's balance sheet growing steadily. We hope the balloon won't pop, but hope is not a strategy.
Needless to say, these policies may be detrimental to the U.S. dollar because foreigners may have little interest in buying bonds with artificially low yields due to the Fed's activities; while the U.S. should be able to finance its massive deficits, lenders want to be compensated with free, i.e. market-based prices. Did we mention that we believe the Fed may favor a weaker dollar? It might just be getting more than it is bargaining for.
iSPLAT
SPX
Posted by ravun on 24th of Jun 2009 at 03:06 pm
where u been...down he brauhouse again?
Compq
If you haven't noticed
Posted by ravun on 24th of Jun 2009 at 03:02 pm
still leading
Fed
Posted by ravun on 24th of Jun 2009 at 02:19 pm
WASHINGTON -- The Federal Open Market Committee issued its most upbeat statement about the economy in recent memory on Wednesday, saying that the downturn is slowing and deflation is no longer a big threat. In a statement, the Fed stayed the course on interest rates and Treasury purchases, as expected. The Fed highlighted rising energy and commodity prices, but said inflation was likely to "remain subdued for some time." Fed officials pointed to improving conditions in financial markets.
15 min QQQQ's flag
Posted by ravun on 24th of Jun 2009 at 02:13 pm
could move us out of the 60 min channel.
Fed news just now
A reminder to the newbies
Posted by ravun on 24th of Jun 2009 at 01:31 pm
FWIW..from stockcharts
Posted by ravun on 24th of Jun 2009 at 12:45 pm
Gap trading is a simple and disciplined approach to buying and shorting stocks. Essentially one finds stocks that have a price gap from the previous close and watches the first hour of trading to identify the trading range. Rising above that range signals a buy, and falling below it signals a short.
What is a Gap?
A gap is a change in price levels between the close and open of two consecutive days. Although most technical analysis manuals define the four types of gap patterns as Common, Breakaway, Continuation and Exhaustion, those labels are applied after the chart pattern is established. That is, the difference between any one type of gap from another is only distinguishable after the stock continues up or down in some fashion. Although those classifications are useful for a longer-term understanding of how a particular stock or sector reacts, they offer little guidance for trading.
For trading purposes, we define four basic types of gaps as follows:
A Full Gap Upoccurs when the opening price is greater than yesterday's high price.
In the chart below for Cisco (CSCO) , the open price for June 2, indicated by the small tick mark to the left of the second bar in June (green arrow), is higher than the previous day's close, shown by the right-side tick mark on the June 1 bar.
A Full Gap Downoccurs when the opening price is less than yesterday's low. The chart for Amazon (AMZN) below shows both a full gap up on August 18 (green arrow) and a full gap down the next day (red arrow).
A Partial Gap Upoccurs when today's opening price is higher than yesterday's close, but not higher than yesterday's high.
The next chart for Earthlink (ELNK) depicts the partial gap up on June 1 (red arrow), and the full gap up on June 2 (green arrow).
A Partial Gap Downoccurs when the opening price is below yesterday's close, but not below yesterday's low.
The red arrow on the chart for Offshore Logistics (OLG) , below, shows where the stock opened below the previous close, but not below the previous low.
Why Use Trading Rules?
In order to successfully trade gapping stocks, one should use a disciplined set of entry and exit rules to signal trades and minimize risk. Additionally, gap trading strategies can be applied to weekly, end-of-day, or intraday gaps. It is important for longer-term investors to understand the mechanics of gaps, as the 'short' signals can be used as the exit signal to sell holdings.
The Gap Trading Strategies
Each of the four gap types has a long and short trading signal, defining the eight gap trading strategies. The basic tenet of gap trading is to allow one hour after the market opens for the stock price to establish its range. A Modified Trading Method, to be discussed later, can be used with any of the eight primary strategies to trigger trades before the first hour, although it involves more risk. Once a position is entered, you calculate and set an 8% trailing stop to exit a long position, and a 4% trailing stop to exit a short position. A trailing stop is simply an exit threshold that follows the rising price or falling price in the case of short positions.
Long Example:You buy a stock at $100. You set the exit at no more than 8% below that, or $92. If the price rises to $120, you raise the stop to $110.375, which is approximately 8% below $120. The stop keeps rising as long as the stock price rises. In this manner, you follow the rise in stock price with either a real or mental stop that is executed when the price trend finally reverses.
Short Example:You short a stock at $100. You set the Buy-to-Cover at $104 so that a trend reversal of 4% would force you to exit the position. If the price drops to $90, you recalculate the stop at 4% above that number, or $93 to Buy-to-Cover.
The eight primary strategies are as follows:
Full Gaps
Full Gap Up: Long
If a stock's opening price is greater than yesterday's high, revisit the 1-minute chart after 10:30 am and set a long (buy) stop two ticks above the high achieved in the first hour of trading. (Note: A 'tick' is defined as the bid/ask spread, usually 1/8 to 1/4 point, depending on the stock.)
Full Gap Up: Short
If the stock gaps up, but there is insufficient buying pressure to sustain the rise, the stock price will level or drop below the opening gap price. Traders can set similar entry signals for short positions as follows:
If a stock's opening price is greater than yesterday's high, revisit the 1-minute chart after 10:30 am and set a short stop equal to two ticks below the low achieved in the first hour of trading.
Full Gap Down: Long
Poor earnings, bad news, organizational changes and market influences can cause a stock's price to drop uncharacteristically. A full gap down occurs when the price is below not only the previous day's close, but the low of the day before as well. A stock whose price opens in a full gap down, then begins to climb immediately, is known as a "Dead Cat Bounce."
If a stock's opening price is less than yesterday's low, set a long stop equal to two ticks more than yesterday's low.
Full Gap Down: Short
If a stock's opening price is less than yesterday's low, revisit the 1-minute chart after 10:30 am and set a short stop equal to two ticks below the low achieved in the first hour of trading.
Partial Gaps
The difference between a Full and Partial Gap is risk and potential gain. In general, a stock gapping completely above the previous day's high has a significant change in the market's desire to own or sell it. Demand is large enough to force the market maker or floor specialist to make a major price change to accommodate the unfilled orders. Full gapping stocks generally trend farther in one direction than stocks which only partially gap. However, a smaller demand may just require the trading floor to only move price above or below the previous close in order to trigger buying or selling to fill on-hand orders. There is a generally a greater opportunity for gain over several days in full gapping stocks.
If there is not enough interest in selling or buying a stock after the initial orders are filled, the stock will return to its trading range quickly. Entering a trade for a partially gapping stock generally calls for either greater attention or closer trailing stops of 5-6%.
Partial Gap Up: Long
If a stock's opening price is greater than yesterday's close, but not greater than yesterday's high, the condition is considered a Partial Gap Up. The process for a long entry is the same for Full Gaps in that one revisits the 1-minute chart after 10:30 am and set a long (buy) stop two ticks above the high achieved in the first hour of trading.
Partial Gap Up: Short
The short trade process for a partial gap up is the same for Full Gaps in that one revisits the 1-minute chart after 10:30 am and sets a short stop two ticks below the low achieved in the first hour of trading.
Partial Gap Down: Long
If a stock's opening price is less than yesterday's close, revisit the 1 minute chart after 10:30 am and set a buy stop two ticks above the high achieved in the first hour of trading.
Partial Gap Down: Short
The short trade process for a partial gap down is the same for Full Gap Down in that one revisits the 1-minute chart after 10:30AM and sets a short stop two ticks below the low achieved in the first hour of trading.
If a stock's opening price is less than yesterday's close, set a short stop equal to two ticks less than the low achieved in the first hour of trading today.
If the volume requirement is not met, the safest way to play a partial gap is to wait until the price breaks the previous high (on a long trade) or low (on a short trade).
End-of-day Gap Trading
All eight of the Gap Trading Strategies can also be applied to end-of-day trading. Using StockCharts.com's Gap Scans, end-of-day traders can review those stocks with the best potential. Increases in volume for stocks gapping up or down is a strong indication of continued movement in the same direction of the gap. A gapping stock that crosses above resistance levels provides reliable entry signals. Similarly, a short position would be signaled by a stock whose gap down fails support levels.
What is the Modified Trading Method?
The Modified Trading Method applies to all eight Full and Partial Gap scenarios above. The only difference is instead of waiting until the price breaks above the high (or below the low for a short); you enter the trade in the middle of the rebound. The other requirement for this method is that the stock should be trading on at least twice the average volume for the last five days. This method is only recommended for those individuals who are proficient with the eight strategies above, and have fast trade execution systems. Since heavy volume trading can experience quick reversals, mental stops are usually used instead of hard stops.
Modified Trading Method: Long
If a stock's opening price is greater than yesterday's high, revisit the 1 minute chart after 10:30 am and set a long stop equal to the average of the open price and the high price achieved in the first hour of trading. This method recommends that the projected daily volume be double the 5-day average.
Modified Trading Method: Short
If a stock's opening price is less than yesterday's low, revisit the 1 minute chart after 10:30 am and set a long stop equal to the average of the open and low price achieved in the first hour of trading. This method recommends that the projected daily volume be double the 5-day average.
Where do I find gapping stocks?
Members of StockCharts' Extra service can run scans against daily data that is updated on an intraday basis. This is perfect for finding gapping stocks. Simply run the pre-defined gap scans using the Intraday data setting around 10AM Eastern. StockCharts.com also publishes lists of stocks that fully gapped upor fully gapped downeach day based on end-of-day data. This is an excellent source of ideas for longer term investors.
Although these are useful lists of gapping stocks, it is important to look at the longer term charts of the stock to know where the support and resistance may be, and play only those with an average volume above 500,000 shares a day until the gap trading technique is mastered. The most profitable gap plays are normally made on stocks you've followed in the past and are familiar with.
How successful is this?
In simple terms, the Gap Trading Strategies are a rigorously defined trading system that uses specific criteria to enter and exit. Trailing stops are defined to limit loss and protect profits. The simplest method for determining your own ability to successfully trade gaps is to paper trade. Paper trading does not involve any real transaction. Instead, one writes down or logs an entry signal and then does the same for an exit signal. Then subtract commissions and slippage to determine your potential profit or loss.
Gap trading is much simpler than the length of this tutorial may suggest. You will not find either the tops or bottoms of a stock's price range, but you will be able to profit in a structured manner and minimize losses by using stops. It is, after all, more important to be consistently profitable than to continually chase movers or enter after the crowd.
SPX 5 min target hit
Posted by ravun on 24th of Jun 2009 at 12:26 pm
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Daily SPX
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Daily SPX
Posted by ravun on 24th of Jun 2009 at 10:13 am
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A Weekly
Alan Farley
Posted by ravun on 24th of Jun 2009 at 09:45 am
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Alan Farley
Posted by ravun on 24th of Jun 2009 at 09:38 am