BigTrends

What  a great Super Bowl!  The Colts gave the Saints all they could handle and then some, but it was a late turnover and some aggressive calls by Coach Payton that was the difference.  Many expected a huge score with a lack of defense.  The overs were 57, and it was thought that number could be exceeded in the first half alone.  As usual, those expectations were squashed.  It was a classic game won by execution, gamesmanship and patience.   I think we as traders could learn some valuable lessons from the World Champs, read on below:

The hourly charts offer some of the best chances to latch onto short term trends, especially good for option trades.  I primarily use these to find the most persistent trends and ride them out over the shorter timeframes.  Price Headley is also keen to the patterns, but some years ago he showed me a very reliable trend with VIX:  The 15 minute chart.  It is this timeframe that dictates action intraday, and so many times this is a great predictor of price action toward end of day.

One of the clues to finding turns in the market is to identify the subtle clues of the market.  Price action is always king and volume is the queen.  So, we have a chart below with notes that tell you how this got started.  Institutional distribution is slow and methodical but very evident if you take a step back and look.  The blue arrow was the day after Thanksgiving..big sell day.  Oh sure, the mkt rallied from there, but the big players were taking $$$ off the table.  You didn't know it, but it happened.

Ok...now, next levels if the spx closes UNDER 1072?  We're looking at minor support at 1055, then stronger levels at 1030.  Note, this market is now correcting in time AND price, which means swift moves down to counter the long grind higher.

That's right folks, the recent selling pressure has the market average closest to the 200 day MA (exponential) since July.  As it stands now we are about 2% above the key trendline, which rests at $104.79 on the SPY.  At first glance it looks longer-term bearish, however, that's not the case if the market holds above this level of support.  Odds are that this will be a solid level for value seekers to enter the market.

The argument is two-fold, it's trend based and volatility based.  Take a look at both charts below–the S&P500 and CBOE Volatility Index both show that the market has 2-3 percent MORE to lose before finding a short-term bottom.  Of course, if we break below the 200 day for two or three days I'll update the post as it would alter the outlook in a meaningful way.

Click on the images to expand

S&P500 Daily (200 EMA)

CBOE Volatility Index

We previously examined the performance of various country-specific ETFs in 2010 and Japan (EWJ) and Russia (RSX) were standouts.  This trend has shown no sign of abating, and may well continue throughout 2010.  In particular Japan, which has been a "dead money" market for about 20 years now, may be poised for relative outperformance gains in 2010 vis-a-vis some other major country ETFs.

The other international ETFs profiled in the chart include India (PIN) in purple, Canada (EWC) in white, Australia (EWA) in blue, China (FXI) in green,  Germany (EWG) in orange, and Brazil (EWZ) in yellow.  Brazil is the laggard of these countries thus far this calendar year.

If you don't buy my assertion that Japan may outperform this year and prefer to bank on a rebound by the current bottom performer Brazil, then one could attempt to "fade" the current trend by going long EWZ (through stock or options) and shorting EWJ for roughly the same amount.  That would be considered a "paired" or hedged trade.

Examining the Top 10 holdings of the iShares MSCI Japan Index (EWJ), it looks to be a pretty well-diversified ETF.  Only 1 of the Top 10 holdings is over 3% of its assets, that being Toyota at 5.4% as of the latest reporting.  Certainly the recent troubles of Toyota USA should be taken into account when trading or investing in the EWJ.



ETF Relative Performance Chart

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Damned if you do, damned if you don't!  That seems to be what I'm seeing out there in this environment.   The premium sellers are worried and nervous while the buyers of premium are scared.  Not a way to make money or be confident with your trades, now is it?  When recognizing this condition, I prefer to err on the side of caution.  Even when the 'risk taker' in me comes out I still desire better conditions than we have now.

Call me chicken?  Sure, I don't mind...however I can recognize when I do not have an edge at the moment with my trading style and will wait for better trading conditions.  On the side for a long time?  Hardly so....as I'm watching the action constantly as things change.  I'm not bashful about saying it's not my time to trade.  It's those who need the constant action who are soon separated from their wealth.  Protect precious capital is priority ONE!

So, it seems P-Phil says six more weeks of winter...gee, why am I not surprised?  If any of you saw the movie Groundhog Day with Bill Murray, you recall his life relives the same day over and over again.  He changes each day but the rest of the world does not, and eventually he gets used to it.  Many times this happens in markets, too....as we get used to certain patterns playing out, we capitalize on them and basically rinse and repeat.  And wouldn't it be nice if the best trading day you have is repeated each time you wake up?  On the other hand, how about making the same mistakes over and over?  Happen to you?

I can tell you the winners in markets identify patterns and play them  until they don't work and then move on.  My friend Helene Meisler, who writes a column for http://www.realmoney.com/ (her fabulous product is at http://secure2.thestreet.com/cap/prm.do?OID=006788), tells us over and over again to be wary of being complacent when it comes to patterns.  To quote her, 'the market teaches us lessons and how to act, then it changes on you without notice'.  It's what we do when change occurs that separates the true winners from the forever losers.  I'm not talking about a significant change, rather a conscious recognition and action to adopt to a new pattern or condition.

Pattern recognition is a key survival tool in markets.  Make sure you separate yourself from the emotions.  I hope you get a chance to read more of Helene and learn from her years of experience and lessons learned. 

The emotional levels charge up with every big market move.  Up or down, the 'juices get flowing' as the wonderment and curiosity are piqued.  How do you feel when the Dow moves up 150 points?  The same as when it moves down 200 points?  Of course not, but the adrenaline rush may be equal, yet our emotions at different ends of the spectrum.  We talk in terms of fear and greed, and this is plainly seen and measured using the VIX.  This volatility measure actually TELLS us how players are feeling at moments in time, a sort of temperature gauge.

We've seen alot of movement lately in the VIX.  How do we interpret the recent moves with the market and moreso how do we determine the next move?  The extreme move in a couple of days in the VIX was just two weeks ago, and for some it seems like ages.  The move was sharp, up more than 50% in just the two days, an amazing run that was a statistical anomaly.  That was quite the spike and moved the needle to heavy fear.  Since then that fear has subsided but so has the complacency increased.  Should the market be worried about unseen blows?  Certainly so, and if not then those playing will eventually be punished like Jan 21/22...unannounced!

This week's worry is about jobs, and of course that data comes it's way each day from Wed-Fri, with ADP's report, jobless claims and the ultimate:  employment from the government.  I'll be watching the VIX over the next couple of days as this will be a short term clue as to the market's reaction to these big reports.  If the VIX collapses more the market is comfortable and sanguine, but if it rises say, past 25 after the release of numbers...we could see something more serious developing. 

Take a look at the ETF heat map below - we're looking at January performance (or YTD) so this gives you a solid idea of the winners and losers so far in 2010. I suspect there is a positive correlation between the overall market and individual sectors with respect to the January Barometer. That said, we may be looking at the strongest and weakest sectors of the year.

Here's what I see (sound off in the comments below if you notice anything else!): (Click to enlarge pic)

• 90% of World Market Are Negative (Majority of Green are Short/Inverse ETFs)
• The Worst Performing Group Looks Like Basic Materials (XLB, GDX, XME, SLX)
• The BEST Performing Group is REGIONAL BANKS (KRE, RKH, IAT)
• Other Notable OUTPERFORMERS Include Japan (EWJ), Homebuilders (XHB), Russia (RSX), Global Shipping (SEA)

ETF HEATMAP (Close of January 2010/YTD) From FinViz