I do not pretend to know what many ignorant men are sure of. -Clarence Darrow

This is the biggest block in our series on market manipulation.  We’re working toward an answer.  How do international banks manipulate the markets to service the U.S. war debt?  Make no mistake about the crash on Thursday.  That was no “fat finger” trader or an “M” accidentally being a “B” nonsense.  Unless you hear “international banks” and “leverage” and “unwind” in the same sentence, it’s not a valid explanation.  It takes hundreds of billions to make a wave in the equities market like that.  It was the fastest point drop in the history of the market.  Only something an international bank is capable of.  The rest of us are just trying not to drown in their wake.

How to Lose Money Betting the Market Will Crash on the Day it Crashes

If George Carlin could have designed an ETF it would be FAZ.  Maybe even with the same name.  It’s an ultra bear’s dream come true.  A way to profit as America circles the drain with financial Armageddon banker zombies roaming the streets while cities burn.  FAZ is a stock that can make +15% while the banks crash -5%.  You’d think it was the perfect stock to trade last Thursday.  It’s one of the fewer and fewer ways a retail trader can profit during a market crash.  There’s a catch.  The crash locked out anyone trying to exit with profit. By the end of the day, if you bought FAZ right before the crash, you actually had a loss.

How could this happen?  NASDAQ is the market maker for retail brokers in FAZ.  They control the bid/ask and retail orders go through them.  The problem is NASDAQ froze all exits on FAZ until the market closed.  They canceled trading in 256 names.  What is suspect is FAZ, and many other frozen stocks, are not on that list. The only way to exit FAZ was to sell in the after hours market on Thursday or wait for Friday’s open.  Essentially, Thursday’s crash created a no-bid market for FAZ and many other stocks.  How do you get zero bids on a stock that trades 165M shares in a day?

Max Keiser, the man who invented high frequency trading (HFT) source code, explains:

Remove all the buy orders that you control (since HFT traffic is 70% of the order flow, if you simply pull your HFT buy orders, you remove a huge chunk of the market – in a heartbeat – leaving a sudden price vacuum). If you wanted to scare congress to vote the way you wanted them to vote – a congress that is directly invested in stocks trading on the exchange and ETF’s tied to the prices on the exchange – just pull your buys. When they do what you want them to do–replace your buys. If you want to make the market go up–pull your sell orders. It works both ways. (It’s all detailed in my Virtual Specialist Technology patent–how to make markets in an ‘infinite inventory environment.’) (Huffington Post)

Keiser is describing a perpetual cash machine for market manipulators.  We’ll cover that later in this story.  Another method to lockout FAZ is this:

• A swap blows up
• The counterparty exposed to the swap blows up
• All swaps in that tranche are frozen
• The market crashes
• ETFs trading those swaps are locked out

The over-the-counter derivatives market could be a contributing reason why FAZ wouldn’t sell on Thursday.  Most ETFs are derivative products that mimic an index, which happen to trade on stock exchanges.  So you have an unregulated OTC instrument moonlighting on a regulated exchange.  If a swap blows up (as the Euro made a new low) it would logically effect ETFs.  Virtually none of the stock ETFs trade in equities.  They don’t own baskets of stocks.  They own baskets in swaps and futures contracts.

Fidelity has been marketing some 20 ETFs which their clients can trade for “free.”  How many of their clients got bent over a barrel this week?  The fine print is full of escape clauses.  These things aren’t insured and there’s no recourse if the exchange or the product fails.

Euro and Swaps

We’re facing a perfect storm loss/loss scenario from hedging activity.  It’s the same AIG shell game, just played on a different street corner that no one is watching.  It took people nearly a year to catchup and understand what subprime mortgage blow ups were doing.  Last week gave us a new bomb ripple in the subbasement of international banks.

Eurodollars are deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins.

The Eurodollar futures contract refers to the financial futures contract based upon these deposits, traded at the Chicago Mercantile Exchange (CME) in Chicago. Eurodollar futures are a way for companies and banks to lock in an interest rate today, for money it intends to borrow or lend in the future.  Each CME Eurodollar futures contract has a notional or “face value” of $1,000,000, though the leverage used in futures allows one contract to be traded with a margin of about one thousand dollars. Trading in Eurodollar futures is extensive, and the market for them tends to be very liquid. The prices of Eurodollars are quite responsive to FED Policy, inflation, and economic indicators.

CME Eurodollar futures prices are determined by the market’s forecast of the 3-month USD LIBOR interest rate expected to prevail on the settlement date. The settlement price of a contract is defined to be 100.00 minus the official British Bankers Association fixing of 3-month LIBOR on the contract settlement date. For example, if 3-month LIBOR sets at 5.00% on the contract settlement date, the contract settles at a price of 95.00. (source)

On Thursday LIBOR hit  0.373% the highest since last August.  On Friday it hit 0.428% while the Euro crashed to a 14-month low against the dollar.  The gigantic interest rate swap market is based on LIBOR.  When the spread jumps 14% overnight someone is taking a massive hit. This concept is to today’s market what subprime was to the crash in 2008.  Let’s explore why derivatives are so important.

As the unregulated derivatives market grew the money that was in equities left for greener pastures.  Basically, the U.S. stock market is like the post-apocalyptic landscape in the movie Terminator.  It’s wounded, illiquid, and controlled by Skynet’s hunter-killer HFT drones who prowl for resistance money.  On Thursday the computers drove the market into a no-bid situation that blew out tons of retail money.  In the vacuum of the program trading nuclear blast Skynet computers, doing one million orders per second, jumped into the void making billions of dollars at our expense.

Swap Market Size

The European derivatives market is a complex mass that’s difficult to understand.  This is precisely why you never get an explanation about it from the media–until it’s too late.  Let’s go through some basics.  This is the largest cash market in the world.  It is growing exponentially as European governments fall. And it can take the U.S. equities market down with shock and awe.

NYSE Euronext European derivatives products ADV in April 2010  increased 51.5% compared to April 2009

NYSE Euronext U.S. cash products handled ADV in April 2010 decreased 26.6% compared to April 2009.  Year-to-date, U.S. cash products handled was down 34.3% from prior year levels.

NYSE Euronext U.S. matched exchange-traded products decreased 42.8% compared to April 2009.   Year-to-date, NYSE Euronext U.S. matched exchange-traded products was 45.9% below prior year levels. (source)

Money is flowing out of U.S. equities and ETFs and into European interest rate swaps.  It’s now the biggest game in town.  The following graph shows who the main players are in OTC derivatives, which are mainly interest rate, commodity, and currency swaps.

Large firms like Goldman Sachs are taking on more risk while smaller firms are cutting back.  Right now 41% of all swaps are backed by $USD.  This is a massive market that can react violently to ripples in interest rates.

The global equities markets are currently worth $45T.  Roughly half the value prior to the 2008 crash. That money did not come back. Compare that to amounts outstanding of OTC single-currency interest rate derivatives by currency (source):

Notional amounts outstanding
Euro $160,646B
US dollar $154,167B

Gross market values
Euro $6,255B
US dollar $6,473B

2009 Interest rate futures
N. America $600T
Europe $550T

The Number of Collateral Agreements in use in the OTC derivative market grew 14 percent over the past year. (source)

What are Swaps

Essentially, it’s the revamped bond market from the ’80s.  Instead of being long Euro bonds the banks turn them into insurance contracts at reduced cost and risk.  If you can borrow Euros cheaply and think the Euro is going up, and LIBOR will stay low, you sell that interest rate swap, or currency futures swap, or options swap, or you name it.  There’s dozens and dozens of ways to game the market with swaps.

In an interest rate swap, each counterparty  agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty. The fixed or floating rate is multiplied by a notional principal amount (say, USD 1 million). This notional amount is generally not exchanged between counterparties, but is used only for calculating the size of cashflows to be exchanged.

The most common interest rate swap is one where one counterparty A pays a fixed rate (the swap rate) to counterparty B, while receiving a floating rate (usually pegged to a reference rate such as LIBOR).

At the point of initiation of the swap, the swap is priced so that it has a net present value of zero. If one party wants to pay 50 bps above the par swap rate, the other party has to pay approximately 50 bps over LIBOR to compensate for this.

The interest rate swap market is closely linked to the Eurodollar futures market which trades at the Chicago Mercantile Exchange.  (source)

How LIBOR is Created

Each cash desk in a contributor bank has a Thomson Reuters application installed. Each morning between 11.00 and 11.20 [London time] an individual at each bank, typically the currency dealer, takes their own rates for the day and inputs them into this, which links directly to the fixings team at Thomson Reuters.  Banks cannot see each others’ rates as they submit, only after final publication.

This was first developed in the 1980s as demand grew for an accurate measure of the real rate at which banks would lend money to each other. This became increasingly important as London’s status grew as an international financial centre. More than 20 per cent of all international bank lending and more than 30 per cent of all foreign exchange transactions now take place in London. (source)

Greek Netting

There’s tons of white papers presented to the Fed’s board of directors (prior to 2008) that say risk in swaps is low because it’s a new market and nothing has blown up yet.  This was an interesting statement:

The interest swap market has been increasingly taking on a benchmark role in the broader fixed income market that had previously virtually been the exclusive domain of U.S. Treasury debt securities. Given its greater prominence for the financial markets as a whole, the question of assessing the ability of the swaps market to continue to function without major impediments–such as heightened concerns about counterparty credit risk–when other (less liquid) markets are disrupted gains special significance. (source)

Here’s where Greece comes in.  It’s been on the verge of bankruptcy for two years, but was able to maintain a reasonable credit rating until last week.  Much of the swap market is built on the assumption of equal liquidity.  A practice called “netting” is used to mitigate risk.

Netting: Rather than exchanging fixed and floating payments on the dates specied in the swap contract, the values of the two payments are netted, and only the party with a net amount due transfers funds to its counterparty. (source)

This is good in theory, but the reality is most firms rehypothecate.  Basically they take all the money that netting is supposed to protect and often bet it against that same contract as a hedge. Division A does one thing and Division B bets against it, and neither knows.  Such was the case with AIG blowing up.  In the case of Goldman Sachs, they know and decide to commit fraud anyway.

Rehypothecate:  Involves the re-use of securities delivered. A dealer receiving securities as collateral may re-use the same security, to collateralize its own exposure with its counterparties for example. In the case of cash collateral, rehypothecation involves either using the cash received as collateral to buy investment securities, or to lend on to others, or to collateralize other derivatives exposures.

Forty-four percent of all respondents and 93 percent of large dealers report rehypothecating collateral.  Over 80 percent of collateral is in the form of cash deposits. (source)

Counterparties depend on the solvency of each other.  That solvency is put into question when the cash deposits are used to place more bets.  Risk is layered on more risk.  Then when a credit rating is dropped it triggers termination clauses.  This creates a run on the banks.  This happened in the mortgage backed securities market a couple years ago.  It’s a perfect example.

What Blow Ups Sound Like

One of the best authors on bond market blow ups is Michael Lewis.  He just wrote a great article in Vanity Fair about Michael Burry, the first man to short subprime.   Here’s an excerpt.

On June 14, 2007  the pair of subprime-mortgage-bond hedge funds effectively owned by Bear Stearns were in freefall. In the ensuing two weeks, the publicly traded index of triple-B-rated subprime-mortgage bonds fell by nearly 20 percent.

Just then Goldman Sachs appeared to Burry to be experiencing a nervous breakdown. His biggest positions were with Goldman, and Goldman was newly unable, or unwilling, to determine the value of those positions, and so could not say how much collateral should be shifted back and forth. On Friday, June 15, Burry’s Goldman Sachs saleswoman, Veronica Grinstein, vanished. He called and e-mailed her, but she didn’t respond until late the following Monday—to tell him that she was “out for the day.”

“This is a recurrent theme whenever the market moves our way,” wrote Burry. “People get sick, people are off for unspecified reasons.”

On June 20, Grinstein finally returned to tell him that Goldman Sachs had experienced “systems failure.”

That was funny, Burry replied, because Morgan Stanley had said more or less the same thing. And his salesman at Bank of America claimed they’d had a “power outage.”

“I viewed these ‘systems problems’ as excuses for buying time to sort out a mess behind the scenes,” he said. The Goldman saleswoman made a weak effort to claim that, even as the index of subprime-mortgage bonds collapsed, the market for insuring them hadn’t budged.

What this Means

See the parallels here?  Subprime bonds fell 20% creating a squeeze on credit.  We have LIBOR rising which is putting a squeeze on–basically everything. Instead of power outages we have lockouts and canceled orders.  The same ridiculous excuses are given to obscure reality.  Fat fingers with Bs and Ms?  Thursday’s crash is wake up call for complacency.  However, it’s being sold as an opportunity for dip buying.

The stock market is a perpetual cash machine for international banks (IBs).  It’s a game invented in the 1700s by London stock manipulators (see story).   Make the market go parabolic, then crash it to pay off war debt and protect Treasuries.  Dr. Ellen Brown has one of the best explanations for what’s going on:

The Wall Street Ponzi Scheme

The Ponzi scheme that has gone bad is not just another misguided investment strategy. It is at the very heart of the banking business, the thing that has propped it up over the course of three centuries. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top.

The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.

The problem is that banks create only the principal and not the interest necessary to pay back their loans, so new borrowers must continually be found to take out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. The scramble to find new debtors has now gone on for over 300 years – ever since the founding of the Bank of England in 1694 – until the whole world has become mired in debt to the bankers’ private money monopoly. The Ponzi scheme has finally reached its mathematical limits: we are “all borrowed up.” (source)

First time home buyer credits are now expired.  The Fed can’t lend money for free indefinitely.  Soon the U.S. will be forced to raise cash.  The Fed will have to raise the prime rate and it will stress the system.  Unless prime dealers (IBs) unload their leverage without tanking the market.  This is the cornerstone.  Banks are levered up on low interest rates. Those swap positions have to unwind without creating cascading sell-offs.
Much of the recent rally was short covering.  New highs on very low volume.  That’s not new money buying up the market.  We know European derivatives volume is up 50% and U.S. stocks and ETFs are down 50%.  The 2010 rally was a short squeeze used to cover real distribution by large banks.  They have to unwind before interest rates are raised.

Think GLD is Safe?

There’s one last concept that is important in this pyramid.  People invested in GLD/SLV in lieu of owning the real metal are directly exposed to blow ups in the OTC derivatives market.  Another no-bid scenario like Thursday could wreak havoc in commodity ETFs.  This is a partial list of the major ETFs that were locked out:

Earlier Sunday, Nasdaq OMX announced it has canceled trades made Thursday in 12 additional stocks in which prices were at least 60% above the prior number, or at least 60% less than the earlier price. The additional names mostly included exchange-traded funds and notes, following estimates of 4,000 canceled trades across nearly 300 symbols previously announced. (MarketWatch)

The largest gold ETF is GLD with their vaults sitting in London.  It’s run by a mining consortium, backed by HSBC London, and Bank of NY Mellon as trustee.  Between 1999 and 2002 Gordon Brown sold 60% of the UK’s gold reserves at $275 an ounce.  The year he sold that final ounce the World Gold Council formed. It’s difficult to find out exactly who they are.  It reads like the early history of the Council on Foreign Relations.

So GLD is sponsored by World Gold Trust Services, LLC, or WGTS, which is wholly-owned by the World Gold Council, or WGC, a not-for-profit association registered under Swiss law. The Sponsor is a Delaware limited liability company and was formed on July 17, 2002.  Two years later they create GLD investment trust, formed on November 12, 2004.  The closing price on GLD that year was $44/shr.

The Trust Indenture was amended on November 26, 2007 to reflect the transfer of the listing of the Shares to NYSE Arca.  The close that year was $83.  Today it’s at $118 with a gain of 168% in six years.  In the same period, since Gordon Brown sold his last ounce, gold has gained 340%.

Holdings of the world’s largest gold exchange-traded fund, the SPDR Gold Trust (NYSE:GLD), jumped nearly 20 tons to a record 1,185.787 tons on Thursday. Year to date, however, (GLD) holdings has gained just 50 tons. (Reuters)

They sucker retail investors by marketing GLD as the paper equivalent of owning real gold.  This is a misconception held by gold/silver ETF owners. In GLD you need to own $11.8M in shares to convert the certificates into deliverable gold.  With SLV the number is $850k. The primary banks holding GLD/SLV use it for collateral to short COMEX futures. How many GLD owners know their position is bet against them in a leveraged market? Their $1 in GLD can turn into $15 COMEX shorts suppressing the price of gold.

The indisputable conclusion is that these three banks dominated the market to the extent they represented two thirds of the entire net short position of the commercials and as such they controlled the price of gold which is illegal…

When the derivative positions of the banks are examined it becomes clear that JPMorgan Chase and HSBC together dominate the market. In 2008 they held close to 100% of the entire bank derivatives market in gold and precious metals.  -Adrian Douglas

How JPM Crashed Silver

The manipulation of SLV is more egregious, due to a smaller market, and primarily done by JP Morgan.  The DoJ is in active anti-trust investigation of JPM right now, which they named publicly (source).  JPM has a reported $70T in silver derivatives shorting their own product (SLV) which has a value of $5.2B. During the Bear Sterns take down JP Morgan bought control of Bear’s silver positions. Silver was nearing $21/oz. and about to bankrupt Bear with their short position.

Andrew McGuire, an independent London silver trader, became a whistleblower on silver manipulation.  In March, just prior to a CFTC hearing on gold/silver position limits, he and his wife were victims to a hit and run driver in a London shopping district.  They survived and the perp was caught after a high speed chase.  Testimony was given of this being an assassination attempt. Few details have been published.

McGuire wrote numerous emails to the CFTC warning and explaining how gold/silver manipulation worked during the February low.  He had evidence that JPM and HSBC were driving out long call option holders (source).  The above chart shows a 20% drop in SLV in the two weeks during McGuire’s warnings.  Here is an excerpt:

Thought it may be helpful to your investigation if I gave you the heads up for a manipulative event signaled for Friday, 5th Feb. The non-farm payrolls number will be announced at 8.30 ET. There will be one of two scenarios occurring, and both will result in silver (and gold) being taken down with a wave of short selling designed to take out obvious support levels and trip stops below. While I will no doubt be able to profit from this upcoming trade, it is an example of just how easy it is to manipulate a market if a concentrated position is allowed by a very small group of traders.

Scenario 1. The news is bad (employment is worse). This will have a bullish effect on gold and silver as the U.S. dollar weakens and the precious metals draw bids, spiking them higher. This will be sold into within a very short time (1-5 mins) with thousands of new short contracts being added, overcoming any new bids and spiking the precious metals down hard, targeting key technical support levels.

Scenario 2. The news is good (employment is better than expected). This will result in a massive short position being instigated almost immediately with no move up. This will not initially be liquidation of long positions but will result in stops being triggered, again targeting key support levels.

Both scenarios will spell an attempt by the two main short holders to illegally drive the market down and reap very large profits. Locals such as myself will be “invited” on board, which will further add downward pressure.

The question I would expect you might ask is: Who is behind the sudden selling and is it the entity/entities holding a concentrated position? How is it possible for me to know what will occur days before it will happen?

Only if a market is manipulated could this possibly occur.

I would ask you watch the “market depth” live as this event occurs and tag who instigates the move. This would surly help you to pose questions to the parties involved.

This kind of “not-for-profit selling” will end badly and risks the integrity of the COMEX and OTC markets.

I am aware that physical buyers in large size are awaiting this event to scoop up as much “discounted” gold and silver as possible. These are sophisticated entities, mainly foreign, who know how to play the short sellers and turn this paper gold into real delivered physical.

Given that the OTC market (where a lot of the selling occurs) runs on a fractional reserve basis and is not backed up by 1-1 physical gold, this leveraged short selling, where ownership of each ounce of gold has multi claims, poses a very large risk. (source)

JP Morgan controls 80% of the world’s gold and precious metals derivatives.  Through monopoly control of the market they took silver under $15/oz.  JPM is the custodian for SLV, the silver exchange-traded fund.  People who own shares in SLV think they own certificates representing silver for delivery.  This has been proven to be a fraud.  JPM does not have the actual silver deposits for delivery.  What they have is $70T in silver derivatives.  Nothing real is exchanged.  At one point, COMEX silver short contracts totaled twenty times the value of the world’s entire silver supply. (source)

Conclusion

Hopefully this lengthy article placed some bricks in alignment.  Bricks that form the foundation of the ongoing Wall Street pyramid scheme.  We learned that the U.S. stock market is illiquid and run by computers that can crash it faster and farther than ever.  We learned that ETFs designed to profit from those crashes don’t work.  They don’t work because they’re based on interest rates products so massive the slightest spike causes market instability.  We also learned that gold and silver products, used for such protection, are manipulated by the very same banks selling them.

There are two main power structures in the U.S.  The formal power resting in D.C. and the real power resting in NYC.  Most people are unaware of how the real power structure works.  We’re talking about shadow banking, the Council on Foreign Relations, old money families, corporations profiting off terrorism, secret global meetings, etc.  Policies and programs designed to squeeze credit and game the system in every way imaginable.

It is a mistake to look to the formal power structure for solutions.  Fundamental problems can never be resolved in that system.  It’s a total illusion to depend on a corrupt political system to solve problems it is complicit in creating. The solution is to attack the real power structure.  Their power can be marginalized.  The more people educate themselves and their friends the less that power is held over us.

Illegal manipulation of capital markets is done in concert with central banks to suppress precious metals, which supports a “strong” dollar.  It’s part of the larger matrix of control in Western finance.  A staggering amount of arbitrage, naked shorts, and other cross trades are designed to support the velocity of credit.  When that velocity nearly stopped in 2008, and credit dealers issued margin calls, it brought the financial system to the edge.

We are living with the same power structure America fought for independence against.  Sam Adams, John Hancock, and much of the Continental Congress were at times violently opposed to New York stock jobbers, the Crown’s money influence, and international bankers.  They did everything they could to insure fellow citizens would not be owned by international banks.  How would they respond to, “We’re all borrowed up.”

Today confirms the theory that international banks will begin to delever and unload positions ahead of a Fed rate hike.  The following was written by GTM on Sunday April 18, 2010 (source).

The SEC has been sitting on the GS indictment for nine months. They finally decide to release during market hours on a Friday OPEX–curious. Was this done to mask distribution?

On Thursday [04/15/10] GS traded 7M shares and on Friday it was 100M. Compared to GOOG that did 6M and 12M or BAC’s 240M and 590M. C had 1.8B shares traded on Friday. Citigroup and Bank of America stock are looking more and more like war debt service vehicles.

A working theory is major banks are being used to service the U.S. debt. Primarily the war debt created by an expanding corporate empire. In 1720 England used stock in the South Sea Company to offload its war debt on the investing public. It was the first major financial scam to coin the term “bubble.”

Read more here:  Where the New PPT Hides

International banks (IBs) are now sitting on $1,200T in interest rate swaps. That’s $1.2 quadrillion dollars. It has peeled back $300T from last year. A squeeze on JPM alone could bankrupt the system. There is not enough free credit in the world to deliver on their $70T swap positions. There’s also not enough silver in the world to deliver on the total COMEX silver short position. It represents 100% of the total visible and recorded silver bullion in existence (source).  Owners of silver futures alone could squeeze the world’s largest bank by demanding delivery. Think of it. A new Sons of Liberty movement could once again stick it to New York stock jobbers. People could squeeze JPM just by asking for delivery on their silver. That’s a nightmare scenario for them. Why give you something real, with real value, when we can convince you to trade it for worthless paper instead.

Everyone is now learning how JPM illegally manipulates the precious metals market to suppress inflation. How about GS and their monopoly control of the stock market. Goldman Sachs is behind 1 out of every 10 trades on the NYSE. Is it unreasonable to think they would manipulate equities in the same way?

The Fed can’t lend money for free indefinitely. Soon the U.S. will be forced to raise cash. The Fed will have to raise the prime rate and it will stress the system. Unless prime dealers like JPM, GS, MS, UBS, etc. unload their leverage without tanking the market. This is the cornerstone to understand. Much of the recent rally is short covering. Look at the short % of total float on major names. Many stocks are near 20% short. We’ve seen higher highs on very low volume. That’s not new money buying up the market. It’s basically a short squeeze that can be used to cover real distribution by the IBs. They will have to unload somehow before the rates are raised. There’s a strong connection between this concept and silver manipulation. Friday’s selling was a warning that distribution is taking place.

Notice today’s crash happened right after 2:30pm where a halt would not happen.  Now active traders need to be aware of upcoming PPT action.

A 6:1 negative day (or greater) has not reversed in the last five years without PPT intervention. In order to bet on something like that, the market has to be making a scary new low. If we revisit January lows start looking for a PPT day that can reverse the most obscenely negative NYSE A/D.

Review of what is required:

* Market at new lows/breaking point
* Relatively high VIX
* High CBOE Put/Call Ratio
* Major pressure on the Financials [banks -20%]
* Negative NYSE Internals [worse than 5:1]
* Political pressure
* Fear/Panic

Read more here: Anticipating PPT Days

Review of NYSE Cicuit Breakers:

http://www.nyse.com/press/circuit_breakers.html

Spotting Tops

One of the really good clues that the indicies were topping out was found in internal volume numbers.  The blue oscillator is called four volume.  It’s a combined average based on the up/down volume ratios of the Dow, S&P, Nasdaq, and Russel 2000.  The area marked in yellow shows a divergence.  As the S&P pushed to a one year high the market’s internal volume was not confirming the move up.  The prior weeks had consistent selling during the opening hour.  That was a clue that big money was bailing.

One Year Lows

The question now is whether this is a change in trend or a spot for dip buying.  Bank of America is one of the leading NYSE stocks.  It and several banks compose more than 50% of NYSE trading volume.

Using linear regression we can see BAC is at a one year low and looks due for a bounce:

BAC 1yr

However, the two year channel still shows plenty of room to the downside.  The overriding bear market is clearly visible:

BAC 2yr

Lastly, the five year channel appears more bullish with upside potential:

BAC 5yr

There is no definitive way to know where the market is heading.  In the short-term many stocks look poised for a bounce.  Spotting sector trends with linear regression is often useful.  Right now banks, retailers, and gold miners look poised to resume upward gains.  The leading names like BAC, M, and FCX are mean reversion candidates.

Taken out of a pool of over 400 names here is a list of 70 bounce candidates.  They are at or near one year linear regression lows.  To see so many names at a range extreme is quite compelling.

Gallery of 70 Longs

Using mean reversion these stocks should return to a median price.  Is a one year low a good bounce point?  Not if the market is preparing for a two or three sigma move down.

Inflection Point Update

This strategy is similar to one used in Oct. 2009  (see story).  Back then a handful of stocks were at 60 day lows.  Here is where those 14 longs sit as of Friday’s close:

The maximum profit/time was 5 days after entry.  That exit earned 13% or $19,000.  A more patient exit was three months later.  At the peak this portfolio reached $40,000 profit.  Holding from Oct. 2, 2009 until Jan. 19, 2010 would have seen those gains.  Without profit stops the last three days of selling wiped out $14,000.

Retail HOLDRS

Here is a five year chart of the RTH:

We can see price is near the first regression line.  Volume is also getting thin as price pushes higher.  This is a good clue to look for other inflection points in retail names.  Current names in the Retail HOLDRs.

Nine Month vs. Two Year

Right now it appears the nine month and two year channels are in play.  There are many retailers near nine month lows.  Macy’s is one example:

The caveat is the broader market.  Right now retailers are a mixed bag.  Many of the smaller names are at two year highs, and several of the larger names are near nine month lows.  Also, dip buyers have been getting weaker.  What has been consistent is to short stocks as they near two year channel highs.

Looking at Macy’s on a two year chart shows a clear downtrend.  It’s also at a one sigma regression line.  So the question is:  Does Macy’s rally to the upper channel or slide back to the middle?

Timing

So the trick is to find that slice of time where you have a 95% chance of being right.  Mean reversion traders look for price near high/low channel lines. Price matching on multiple time frames can provide some great low risk entries.

Gallery of 37 Retail Names

Here is what a scan of 113 retailers produced.

Retailers for Xmas

A list of 37 names near various inflection points.  The two year charts trump the nine month charts for longer term swing trades.  Hopefully this will be useful to you in your trading.

Wishing you a wonderful winter season!  -GTM

Finance is a closed system.  It’s not run by a perpetual motion machine.  So the famous up arrow always stalls somewhere.  What we want to know is just where is price in relation to time? The probability of price correcting back to an average value eventually becomes more and more certain.

The chart above is that last two years of the Dow using linear regression.  Here’s a list of the current Dow 30 names.  Out of those thirty companies some are stronger and some are weaker.  So this isn’t a definitive science.  It’s an art, but it is finally a spot to take notice.  Let’s dig more into linear regression to see why it can be so useful.

68-95-99.7 Rule

In statistics, the 68-95-99.7 rule, or three-sigma rule, or empirical rule, states that for a normal distribution, nearly all values lie within 3 standard deviations of the mean.

About 68% of the values lie within 1 standard deviation of the mean (or between the mean minus 1 times the standard deviation, and the mean plus 1 times the standard deviation). In statistical notation, this is represented as: μ ± σ.

About 95% of the values lie within 2 standard deviations of the mean (or between the mean minus 2 times the standard deviation, and the mean plus 2 times the standard deviation). The statistical notation for this is: μ ± 2σ.

Nearly all (99.7%) of the values lie within 3 standard deviations of the mean (or between the mean minus 3 times the standard deviation and the mean plus 3 times the standard deviation). Statisticians use the following notation to represent this: μ ± 3σ.  (Wikipedia)

Timing

So the trick is to find that slice of time where you have a 95% chance of being right. Year to date we are approaching a two standard deviation move in three months. Mean reversion traders look for price near high/low channel lines. Price matching on multiple time frames can provide some great low risk entries.

Here’s the Dow for the last two months.  You can see it’s in a nice up trend, but the larger two year trend is going to put pressure on this short term trend.  There’s obviously wiggle room here.

Catching a reversal near an extreme is key.  Like after a 200 point Dow day.  Two weeks ago there were 22 stocks aligned at 20/40/60 day lows.  Three months of price coalesced into a single inflection point. From that list the 14 cleanest charts were picked.  And these weren’t cherry picked later.  These names all came from charts posted here on October 1st (see gallery). This method made 13% in a week.  Going long the Friday after a -200 point drop (see story) was a low risk strategy using linear regression.

Went long Friday’s open on Oct. 2nd and sold at the close on the next Friday:

Referring back to the two month Dow chart we see there was still plenty of upside after the Oct. 2nd push off the lower channel.  Price ran back to the median line and moved higher.  However, holding two weeks into the next Friday’s close on Oct. 16th did nothing for the portfolio.

Trailing every name that made more than $500 profit with a $500 stop would have grossed $16,000 in one week.  That left only RIMM and CAKE as open positions.  The risk of holding for one extra week would not have made much of a difference.  The ultimate intraday high of this portfolio was $20,000 which happened five minutes before the close on Thursday the 15th.  Good luck timing that exit!

Note: these are examples of trading a mean reversion strategy.  They are theoretical and not trading advice.

Sixty Names

Going through two year charts tonight shows a ton of potential shorts coming. A push or another 200 point day to put the market near the top of the two month channel would be an ideal setup.  The more time frames that line up the better odds for a reversal.  A scan of roughly 400 active stocks shows there are sixty near two year highs:

Gallery of 60 Stocks Near Two Year Highs

At or very close to two year channel highs:

BLK IOC CLNE BZH JADE SRZ PCLN GOOG BAC GE CAT CBI SLB

Just hit two year line and failed:

BIDU WDC WYNN

Pattern to Watch

The stock NTES has already completed a move we’re looking for.  Price reached a two year high, failed, then returned to the median line in a clean trend with a clear exit.

NTES 2 year

Price tested the two year high twice then failed back towards the median line.

NTES 20 day

This one month chart is an example of how to stay in the trend. Price failed on every one sigma test with a nice clean exit on the lower channel.

NTES 3 month

Using 20/40/60 day LR lines shows an inflection point to short the stock. The spike above the channel was a great low risk entry. The spike below was a great exit.

Note: There is an art to the best time frame entry using this trading style. Also, shorter term channels adjust constantly. There’s wiggle room on the sixty names. What LR channels clearly show is the trend and where price lies within that trend.

Shorting the extreme high/low is often a low risk entry. The odds of price gaining more momentum to push above a two year channel are less than the odds of price reverting back to an average.  Mean reversion is going to come into play soon with every major index. Because there are so many names setting up this points to shorting certain highs as a very good risk/reward.

As stated before there are no guarantees in the market.  It can do anything at any time.

Valid at close Wed. Oct 7th

Clues to Exit

So where do we exit these trades?  The first is break even profit stops.  Some of these names are barely holding on after a three day push in the overall market.  It’s prudent to put tight reins on them and not let a small gain turn into any kind of loss.  The bigger profits can be given wiggle room.  When price runs back to the median line of your preferred time period a profit stop should be tightened.  The optimal exit is when price runs to the top of the channel.  Look at FCX:

For short term swing trades the 20 day channel is very useful.  A tight profit stop here at the top of the channel is often ideal.

Shorting Gold Miners

Using this method several gold miners look ready to go short: AEM TLR VGZ THM and KGN are all at new year highs.  The trick is getting price and time to align for maximum profit and minimum risk.  Let’s look at AEM:

YTD

Price is near the top of the year to date LR2 channel. It's a 2 sigma move that should come back down, but there's some wiggle room.

60 Day

The lowest risk entry would be around $76 at the top of the channel. On a smaller time frame there's much more finesse to maximize the setup.

More Names for this Week

Keep an eye on FCX.  It’s a great industry leading stock that will give clues to how gold and the miners will trade.  The following names might be a little early to short.  They are junior players that all made new highs today.  Gold is a very difficult sector to trade and there’s lots of wiggle room.  On the first sign of weakness these low risk trades could turn into quick profits.

KGN

THM

TLR

VGZ

Caution

These are probabilities not known outcomes.  The market can do anything at any time.  This concept assumes there will not be major news events or supply/demand shocks to upset the concept of mean reversion.  The odds of price retreating from range extremes outweighs the risk of shock events.  However, a maximum loss market stop is always necessary to protect one’s capital.  It’s vital to use concrete money management discipline.  Many swing traders will not risk more than 2% of their cash per week.  If you’ve got $50,000 taking a $1,000 draw down is the max loss per week.  That’s the cutoff point.  It proves the trading edge for that week is wrong.

Dow 200 days

Legend

• TDU Trend Day Up
• TDD Trend Day Down
• x:x positive/negative NYSE Adv/Decl ratio (Yahoo)

Twenty-two Names

Out of a couple hundred active stocks today there are 22 names sitting on 60 day LR2 lines. This means they’ve had a 2 standard deviation move down and should return to the middle of their price channel. Half the names line up cleanly on all three (30/60/90 day) time frames. There are also several (not as clean) at the 50day sma. This is a clue that we either resume business as usual tomorrow, or early next week, or this is a major trend change. From this scan there are few juicy shorts other than these same names. Often the best swing shorts are stocks at their lower channel line.

We’re looking for a return into the channel or acceleration out of it. It’s make it or break it time!

See Chart Gallery

Cleanest symbols: CAKE HIG LEN LNN LVS LZB MA OII TNA V ZN
50day smas: DVN EGO FCX OII TNA

Examples

Here you can see all 3 time frames line up: 90bar 60bar 30bar

V didn't close cleanly on the line, but that's one fat hammer on x2 avg volume. Looks like a strong reversal might come.

Linear Regression Channels

Parallel and equidistant lines are drawn two standard deviations above and below a Linear Regression trendline. The distance between the channel lines and the regression line is the greatest distance that any one closing price is from the regression line. Regression Channels contain price movement, the bottom channel line provides support and the top channel line provides resistance. Prices may extend outside of the channel for a short period of time but when prices remain outside the channel for a longer period of time, a reversal in trend may be indicated.  (Prophet.Net TA Glossary)

Watching oil last week there were many names that looked overextended.  We’re talking about short-term trading here.  Using a 50% linear regression channel can give us an idea of just how far price has gone.  The beauty of LR channels is price reverting to the mean.  There is finesse on entering with the most powerful time frame, but these give high probability setups.

The previous Friday RIG closed above a three month channel line.  Then it collapsed on Monday with a gap down open.  That was a missed trade.  Tuesday gave another opportunity to short RIG at the close and it worked on today’s open.

So on Tuesday it couldn’t close above the prior high, even with volume coming in.  There is a divergence in OBV on the 60 day chart, which trumps the 10 day trend in on balance volume.  The larger time frame also shows declining volume with higher prices.  Usually a good warning sign.

Here is the intraday chart for reference.  Price tested the prior day’s close and immediately failed.  It was fast easy money.  Low risk traders took their profits.  Does RIG have more downside potential?  It’s probable, but the easy trade is now over.

ThinkScripter Indicators

If you use the ToS platform visiting ThinkScripter is a must.  The /ES chart uses these indicators:

http://www.thinkscripter.com/2009/05/13/four-volume/
http://www.thinkscripter.com/2009/03/12/previous-days-regular-hours-highlowclose/
http://www.thinkscripter.com/2009/02/23/tick-trin-indicator/
Heikin-Ashi bars

S&P 500

This chart should be fairly self-explanatory.  One of the things that stands out is the Four Volume divergence.  As the market was pushing higher, after the FOMC “no change” announcement, internal volume was turning down.  This was a very good clue to look for a reversal.  A low risk countertrend entry was to short at the 1075.75 pivot. Heikin-Ashi bars are useful for staying in the trend or seeing a trend more clearly.

Using LR channels we’d know that TNA was getting overdone and could look to long TZA soon.  Check out that hammer on TNA’s weekly chart.  The small yellow circle is from Sept. 1st when TNA touched the lower three month channel (see chart).  That coincides with the median line on the entire price history channel.  Pretty sweet huh!

Here’s the TZA intraday chart for trading FOMC news.  The first entry was right off a Person’s Pivot.  The tick high at 1300 also gave a low risk countertrend entry.  The sharp upturn on CCI was also a good clue to get long.  Lastly we see Alexander Elder’s famous “kanagroo tail” pattern.  That’s four strong signals to get in the trade.

This site’s database failed late at night on Sept. 11th.  The admin was on vacation and unfortunately the site was down for a week.  It is still unclear whether the database failure was organic or malicious.  However, an unauthorized admin account was created listing:  jyoti_anju2000@yahoo.com.

Just before the site went down an unresolved IP (that didn’t include Bulgarian, Indian, or Chinese net providers) was:

(unresolved ip)    Pages    Hits    Bandwidth    Last visit

217.169.236.12    25    408    4.75 MB    11 Sep 2009 – 03:22
ISP:    Defensie Telematica Organisatie
Country:    Netherlands
City:    Maasland

What is also interesting is the high level of hits received on Sept. 17th while the site was inactive:

89.111.144.26    67    442    9.54 MB    17 Sep 2009 – 13:17
ISP:    Garant-Park-Telecom
Organization:    Garant-Park-Telecom
Country:    Russian Federation
City:    Moscow

12.47.208.86    111    369    7.42 MB    17 Sep 2009 – 02:21
ISP:    AT&T WorldNet Services
Organization:    GOLDMAN SACHS COMPANY
Country:    United States
State/Region:    NY
City:    New York

This marks another record month for Dutch spies visiting GTM.    Read all about them here.  So was the database crash accidental or intentional?

[Update: 9/20]

After going through months of logs it appears an RSS error caused a recurring failure that eventually overloaded the database.  This doesn’t explain the peculiar email address fixed to a new admin account, but it explains the crash.