The head fake

This is as good as time as any, although we are still not at the place in which we can take a victory lap, but thus far our expectations have been pretty darn spot on regarding the tactics Wall Street uses to manipulate the markets and especially traditional Technical Traders because of their predictability.

Lets start with two of my favorite head fake trades recently because we called the entire set up before it even began, which gave us a game plan, as long as you were patient, you could execute the game plan easily and get great positioning, low risk and a high probability trade. My hope is that this post will show you how Wall Street operates, what we can expect moving forward and kind of anchor expectations so you can make plans. Most importantly, it's the concept as you can use it on nearly any timeframe and any kind of trade.

 You can't see the entire BIDU run up, but  there was more on the left side of the chart. When we see big triangles like this (depending on the preceding trend) they are almost always tops or bottoms, not consolidation/continuation patterns; in BIDU's case a top. 3C confirmed the negative divergences in the BIDU top, but from experience we suspected before any major downside reversal there would be the all too common head fake breakout to the upside first. Shortly thereafter the short 3C timeframes started showing small accumulation for that breakout move, our entire plan was to short the head fake breakout move and this was before we even saw the first signs of 3C confirmation that it was coming. The breakout to the upside came, this caused traders to doubt the top. TA teaches, "When a pattern fails, reverse your position", so any shorts entering on the triangle top not only covered, but went long; this was the same spot we were shorting BIDU. As usual the larger pattern is generally correct, it's the manipulation of that pattern that you have to watch out for or use to your advantage . When BIDU broke below the breakout area it fell quickly and that's the reason for these head fake moves, the shorts lost money on the breakout, went long and lost money on the subsequent failure of the breakout; their selling added downside momentum to the move and the BIDU core short position which I decided to hedge rather than cover is still at a +17% gain.

 GLD had a similar large triangle, I never like shorting the first breakdown as it almost always gets shaken out. GLD was showing signs of distribution in Feb., but before it would reverse to the downside again we suspected a head fake breakout above local resistance, the breakout came, we saw distribution in to it, shorted GLD with puts and made nearly 215% in 3 or so days. Similarly, after a downtrend a bearish descending triangle (bearish consolidation/continuation pattern) formed, technical traders expect this price formation to break to the downside, but on May 30th we saw a huge positive divergence and two days later GLD made the biggest move up since January of 2009, again what technical traders expect and act on was used against them.

 The SPY 30 min 3C chart with distribution at the May 1 top, that strange bout of positive divergences/accumulation seen in so many assets and averages from May 7th through the 15th area and a leading positive position as the bear pennant formed, hinting strongly another head fake of this classic pattern was coming as we have been expecting.

 Point A is the Bear Flag/Pennant which is another consolidation/continuation pattern technical traders expect to break to the downside. We talked about the various ways head fakes could play out, but this was a Crazy Ivan (shakeout in both directions), at point "B" there was the upside breakout, as I warned, bearish traders would be looking for a failed test of resistance and point "B" was it, point "C" was an ambiguous break that didn't close below the pennant, point "D" not only closed below the pennant, but another closely watched indicator, the 200-day moving average, a perfect head fake set up and all the while the 3C positive divergences were building in that area. Point E gave us a bullish hammer and since then it's been higher, allowing us to enter speculative longs at excellent prices with lower risk.

Here are the areas where we may see some action, the apex of the bear pennant is thought to be resistance, bears will look for a failure at that point, any backing off from that area and shorts will see it as a shorting opportunity, the next area they'll be watching is the major trendline resistance, this is the last stand for bears, we may see some game playing in that area, but as soon as that area is broken, the short squeeze should be in full effect.

Market Update and FX updates coming...