The Great Experiment

The Secretary of Treasury finally revealed the highly anticipated TARP II bank bailout plan today. The Secretary said the new plan can cost up to $2T and will consist of many things, some of them will work and some of them might not. Obviously the market was very disappointed with the announcement because it lacked details, and it sounded like a great experiment of lets try different things and see what stick. With no great surprise, the financial stocks were sold off and the Dow dropped more than 380 points.

Last week in one of my post, I have allured a possible long trade for GS and MS. Today, that long trade came to an end. The following charts highlight the setup and exit I was monitoring for the trade on GS.


(click on the image to get a larger view)

In the GS daily chart, I use the January's high and low to establish the Fibonacci retracement levels for February trading. GS started to pullback near the end of January until the first bar (white arrow) in February, where it tested for support at the 62% Fib retracement. The 2nd candle in February, a hammer candle again tested the 62% retracement for support and presented the setup. A long position was triggered when the next candle (3rd bar in February) exceeded the high of the hammer candle (circled in red). The initial target is the 100% retracement level (red arrow) and the extended target will be the Fib Extension, 138% (FE, the most upper dotted line), while the low of the hammer will be used for establishing the stop loss level. On the 4th bar in Feb, it reached the initial target. Since this target is some distance away from the upper trendline, one could take a partial profit instead of exiting the position completely and leave a portion of the position to see if it can run up to the trendline. If it break through the trendline, then monitor it for possible move to the FE (138%) level. On Monday, the day before the TARP II announcement, a hangman candle was formed near the upper trendline. As the price started to retreat today and when it dropped below the lower body of the hangman, the position is closed. If one want to hang on for confirmation, then the position must be exited when the price dropped below the low of the hangman or risk in turning a profitable trade into a losing trade (circled yellow).


(click on the image to get a larger view)

In the 15 minutes intraday chart, an evening star reversal pattern was formed from the first 45 minutes of trading today (circled in red). This is a sign to get out, and when the price broke through the retracement zone, one shouldn't even have any second thought on closing out the position.

Until more details are presented for the TARP II, the financial stocks will most likely continue to be volatile. I will continue to monitor them for new trading opportunities.

On Our Way To 2,000,000,000,000

No, the 2 trillion (2,000,000,000,000) is not my forecast for the Dow...haha! This is how much we could ended up adding to our national debt next week after the $780B stimulus package passed congress, and our treasury's TARP II bank bailout plan revealed.

The word is an additional $1 trillion is likely to be requested for the TARP II on top of the remaining $300B left from TARP I. If that is true, the bank bailout combined with the $780B stimulus package will bring the total in the range of $2T (so its not exactly $2T, what is a few tens of billion dollars here and there in comparison to the total amount we end up spending..sarcasm). We should start conditioning ourself to look at the T for trillion instead of all those zeros, because we will see the trillion more and more in the near future. And I'm sure the politicians would prefer it this way, it is less shocking to the public when they don't see all those zeros. After all, for each change in the letter, it is a thousand times more of the previous letter value (sorry if I have shocked you).

So, since we already know the lawmakers in DC really don't care what you or I think of all this, and they will do whatever they want to do. Rightfully or wrongfully, the tone in DC is that the debate is over and its time to do something.

What will this massive amount added to our national debt will do? Inflation is one sure thing it will create for our future. Looking at the 20+ years treasury bond fund ETF, TLT, you will see it has been falling since the beginning of the year.
Granted, the initial run up on this ETF is flight to quality. But now money is exiting in anticipation of higher inflation to come due to all these extra liquidity the world's central banks and governments are injecting into the global financial system. On the inverse, you will see money is moving into the TBT, an ETF that bet the rate on the long term treasury bond will go up (the price of the long term treasury bond will go down).

Then you look at the TIP, an ETF of the Barclay (formerly Lehman) TIPS bond fund is getting set to move higher. The TIPS is a treasury bond with principal adjusted for inflation. As inflation increase so does the principal and vice versa.



All these ETFs are telling us we are no longer worry about deflation (as we were back in October/November 2008), instead, our concern is on inflation. If I'm planning to hedge against inflation, I would be putting some money on TIPS and on gold by buying their respective ETF, TIP & GLD.