Stocks lower, Malaysian Ringgit at multi-year high against US Dollar

spy0228.pngStock indexes rolled over a bit today. The chart to the left is the S&P etf with the longer term standard error band trend indicator over the prices. You can see the downtrend in effect with prices coming right up to the declining mid-point line in the last couple of days. Prices tested the pivot from the first of the month. So far that pivot is not being taken out, and momentum has turned back down from the over-bought area. So far this looks like a sideways trading range developing, with the Nasdaq in an even tighter sideways move. With higher lows on each of the impulses the price action has been somewhat constructive, but there needs to be a higher high to confirm a change up in trend. It looks like the market wants to retest back down. If previous lows hold and another attempt up takes out the pivot from the first of Feb than one can assume further upside. Until that happens I must assume the downtrend to still be intact. The Nasdaq formation is a very symmetrical pendent. The most probable breakout would be a continuation to the downside. Since that pendent seems to be getting a lot of attention, it wouldn’t be a surprise to see a fake out break out to the downside followed by a breakout to the upside. The market has a way of trying to trap traders on the wrong side when these patterns are too obvious.
Above is a chart of the last few months of price action in the Chicago Wheat market. I don’t trade wheat and don’t discuss grains much here, but thought this chart was interesting. I’ve been warning of bubbles for some time on this blog, and wheat has certainly been one of the bigger bubbles. Since last fall I’ve warned of bubbles in stocks such as Google and Apple, among others. Those bubble popped. But at the very tops of those bubbles there were analysts on CNBC every few minutes telling listeners that these stocks were just getting started and much more room to move on the upside. Now that those stocks have collapsed those analysts are nowhere to be found. Those stocks are rarely mention now that they are down. Instead there are analysts on CNBC every few minutes promoting various commodity markets. So far they have been correct, just as the Google and Apple promoters were last fall. They are saying the same thing. That gold is just in the first inning and $1500 is right around the corner. That oil will certainly go the $150 any day now. Fundamentals don’t seem to matter just like facts don’t seem to matter in politics. Every analyst I listen to can spout out all the reasons why a particular market has already gone up. They are not reasons to project prices in the future. Momentum can feed on itself when large traders and hedge funds pile onto a trade. The wheat chart above is a classic example of a parabolic blow-off. Prices start building on rising momentum and everyone want on the bandwagon. Range and volume increase to the point where prices are near vertical. Observe the last four bars to the right of the chart. A new all time closing high was followed by an expanded limit up move. The second to the last bar was another nearly limit up move with a near limit down move, with a close right in the middle of the range, all on the same day. The range was larger than wheat usually moves in an entire year. The the very last bar on the right was the trip back down today. Bulls will argue that the trend is still sharply up, which it is as can be seen by the blue trend indicator lines, and the dark red standard error bands. There will likely be more rally attemps. There will have to be extremely bullish fundamentals to drive prices up over that spike bar. Maybe it will. I don’t really know what’s going on in this market. I just wanted to show what can happen when prices go parabolic. Everybody wants in, and then out, of the market at the same time when momentum gets to extremes. I heard many analysts in the last week calling for $20 wheat. I can see this type of action in many other commodity markets that seem to be in bubbles, with prices being driven beyond fundamentals by pure momentum buying. Commodities have a habit of reversion to the mean, at least eventually, as supply can increase with high prices, or be cut off with low prices. Stock are not quite as mean reverting since earnings changes can have a longer lasting fundamental effect.