6/24 Blooming Bear

Written on June 24, 2010

Last thought-

I was a little ticked to see the Brazilian Head cozying up to the Iranian Head of State. In this case Two Heads… make a knucklehead.

So, with the help of my able assistant Salem, I offer a him a blessing in Arabic.

اتمنى ان يقع الجمل الذي تركبه عليك ويسحقك

Roughly translated it means (thank you Salem) . “May the camel you are riding, fall over and crush you.”

Twenty five years ago I read Edwards and McGhee’s classic, Technical Analysis of Stock Trends in a shiny page version printed in the late 40’s.

Pg. 157 The Orthodox Broadening Top-

There is one particular manifestation – a special case, as the mathematicians might say – of the Broadening Price Formation… This particular form appeared at the 1929 Tops of many of the active and popular stocks of that day…it is known under the specific name ofBroadening Top,… The Orthodox Broadening Top has three peaks at successively higher levels and, between them, two Bottoms with the second Bottom lower than the first. The assumption has been that it is completed and in effect as an important Reversal indication just as soon as the reaction from its third peak carries below the level of its second Bottom…Such a recovery (and failure) will be attempted, according to our experience in at least four out of five Broadening Top Patterns , and may not fail until it has regained two thirds of the preceding decline, although it usually peters out around or even below the halfway mark…it is a pattern characteristic of the last stages of a Primary Uptrend. Edwards and Magee pg. 157

This is a long way of saying this but over the last 10 years the Brazilian Stock Market (Bovespa) has outperformed the blown by the SP500 by 280ish% and the DJIA by 250ish%. The sad thing is that the old technicians would tell you, “Stick a fork in it. This one is done. The larger implications are big. The commodity based economies are rolling over as demand slackens. Higher taxes, austerity programs and higher unemployment are not doing anything to boost final demand.

Bovespa 1 yr

Bovespa since 2004, this is a classic double top…

How now Dow…The Brazilians may have a long way to go down…at least they have some gains to give back…

If you want to take a flyer Brazil moving lower…Options on the iShares MSCI Brazil Index (EWZ) are a good way to play and the options have cheapened nicely into the recent rally.

Buy the JAN 2011 60 puts near 5.33 and sell the SEP 2010 60 puts near 3.00. You are out $233 per and you get the downside from September through January.

When the market leaders roll over and die, bear markets begin in earnest.

My pal Ty just wrote to me and said “The new normal is stable and defensive. Why risk capital until demand shows signs of life?”

WHY INDEED?

Keep cash for the crash and be careful,

Leon