Market Trends

Lately, like last Friday afternoon and last night, when I'm talking about market "Trends", I've tied to make clear I'm talking about the behavior of the market or the games Wall Street plays rather than price trends.

On Friday at the end of the day I posted 2 charts, last night I re-posted those same 2 charts with the exact commentary from Friday, I did so for a very specific reason, I wanted to show you the "Market trends", I mentioned above, the behavioral trends.

Here are those two charts and commentary from last Friday and last night one more time, not to beat a dead horse, but I want to make sure everyone understands the reason I posted those charts twice (now 3 times) as they relate to the market's behavior.


Here are the 2 charts and the same commentary from Friday. The reason for posting these is not to try to convince you of anything relating to near term market action, but just to make the trends that have effected near term market action clear. I've highlighted the most relevant parts in bold.

  " First this is where we are, it looks like a rectangle here after an extended downtrend (on this timeframe), but it's really closer to a flag, a bear flag, which means most traders are viewing the immediate future as one in which the market will break down shortly and the NYSE record 2012 short interest speaks to that. I don't think I need to convince anyone of my bearish perspective, but I also know the market is not as simple as that."

 "Lets just take a look a several months and what the market did, what traders expected and how the market made sure it wasn't as simple as it appeared. First we had 3 bounces that made higher highs/higher lows (I believe we called all 3 from bottom to top and back to bottom again near perfectly). Traders would take this as an uptrend, that is what it is (higher highs/higher lows), but we had additional information and used those moves higher to start short positions, then instead of the trend continuing up, the market saw a sharp decline and formed a bear flag. Now traders see a bear flag and expect the market to break down, the market did (in the yellow box), but it was a head fake, drawing in shorts on the break and then stopping them out as the market moved higher, we shorted here again. In the orange box there was strong upward momentum, that same day that it started we not only predicted what would happen, but 3C confirmed it and that strong, bullish momentum fell just as quickly as it went up. Since then we've been in decline and have formed another bear flag. Technical traders will view this as a bearish lag that will break down to start a new leg down, but as you can see over the past 4 major moves, Technical Analysis said one thing and the market did the opposite in the near term. If you don't believe traders see this bear flag and are shorting it, just look at yesterday's 2012 record NYSE short interest.

If we follow what we have known for a long time, the probabilities are for a solid bounce knocking those shorts out again, making the average trader wrong again. That's where the signals have been lining up, that's where the market trend probabilities are."

Here's where we are now on a SPY daily chart with a 50-day moving average...

Below is a current 60 min chart, note the same bear flag formation that is mentioned in the two charts posted Friday/Sunday, although this bear flag is much smaller, being visible on a 60 min chart (the last one was larger and visible on a daily chart).

 As far as the market's behavioral trends, as noted in the charts posted Friday and last night, nearly every major reversal had some kind of head fake move before the reversal, but specifically the large bear flag on the daily chart saw a break below the flag before reversing to the upside- we are at that same point right now with today's open. The last one saw 2 days below the flag before a reversal, but that was also a much bigger flag and longer timeframe.

This is the flag from before on a daily chart, note the break below the flag as traders would expect before the upside reversal.

I wanted to post this one more time so I'm sure that everyone is clear as to why I posted those charts. This will be an important test as we are obviously in a much more unpredictable market environment, but we'll know very soon whether Wall Street is still in control of near term market cycles or whether that final change in character has arrived, which would be sort of like the Lehman moment of 2008, just this time it's the EU uncertainty driving the market.