Some Information

If you haven't read Friday's After Market report on Trade-Guild, be sire you do before Monday morning. I also posted just now some neat ways to use the TICK and TRIN indicators to tell which way the market is heading both short term or intraday and on a daily basis. One indicator will actually tell you with a high degree of accuracy, which way the market will close the next day; I'd say about 85% accurate when it gives the signal I described. So check them out.

As for the trading week ahead, you need to do all you can to set yourself up to be able to hold positions long term, not that the market won't dive next week, it might, but the point is, the market direction is pretty much a foregone conclusion as far as I can tell and the post from yesterday afternoon explains why. The economy is stuck between a rock and a hard place and it is falling like a rock. The GDP report may be one of the biggest news items and most under-rated that we have seen in a long time. In 3 quarters we have gone from 5% to less then 2.5% and all of the stimulus is draining out of the system, there isn't much room to add more so double dip? Ohhhh. This next dip could be more lock a DROP in contrast to the first. The government and Fed have put themselves into a Chinese finger-trap and the more they try to do, the worse things become.

With all of the tx credits on homes, and other tax credits, the stimulus, all of the Fed measures, this economy can't hold more then a single quarter at 5%. To put that in perspective, to drop the unemployment rate a single percentage point, we need 4 consecutive quarters of 5% GDP readings, we're down to half of that in 3 simple quarters and while they may try to sell it as the economy has slowed, not a single one can say it won't go back into recession because not a single one saw this slowdown coming, not to this magnitude. And the upward revision of last quarter only makes this quarter look worse!

This is why we have been net bearish, it's all there in the charts. It's been there for a long time, even since before we took our first dive and as proof, I'd direct you to my 5-part You-Tube video series about "bubbles in the economy where I set targets that are much much lower then where we are at and keep in mind, THIS WAS WHILE PEOPLE WERE STILL CALLING FOR DOW 20,000!

Be ready, keep your eye on the ball because the prize follows it. Don't get worked up over volatile up days that don't mean a thing.

Watch for my post tomorrow.

3C is Working Again

Whooa, I have a bit of imagination, but this is based on the charts, events, how the market works and common sense.

We are in the land of bad is good and good is bad. Today's GDP report explained it all and this thing is bad, much worse then the number itself were the revisions, this is what I believe Smart money was missing, they knew the main number but I think they didn't have the revisions which may not have all been available. It explains why 3C stopped working and it puts my mind at ease.

I have it all up at Trade Guild, I'll be working on our end of things, but the bit of worry I felt about the last few days, is quickly dissipating as this economy is sooo much worse then we thought and the options available to fix it are few and many could make it worse. From an economics point of view, I think we are in better shape then ever.

Take a look at the post on Trade Guild. I'll be working on trades for next week and a new indicator for you that I've been putting together in my head. What happened at the EOD should put you at ease to some degree if you are heavy on the short side, I told you to watch for it, it came and came hard.

I'll be posting this weekend so check in and checkout the post. I learned some new things this week.

Range Broken

Things are happening fast right now, very strange. The a.m. range was broken to the upside just minutes ago, now it has to hold above that range at $110.65.

If we see a move below that range /support, watch for heavy volume as a sign of a false breakout. I wish we had another two hours today, but we don't so lets see what happens in the 30 mins left. Most likely algo-trading programs are running the show right now.

A Reversal of a Reversal?

The last positive divergence looked pretty strong, now we have (2 of 3) 3C 1 min charts in some variation of a negative divergence and for the first time we have the 3C 5 min charts with 2 of 3 in negative divergences and 1 inline with price. Finally some movement.

There's not a lot of time in the trading day left though and the 5 min divergences usually take at least an hour to materialize in price.

Update ...

In white, this is what I guess would be the a.m. trading range, the blue arrows and box show positive divergences and a leading divergence. We have to watch for a break above the range at the $110.70 area.

Currently the TRIN is at $1.29 which is within the rally range. So now it's a matter of resistance, if we break and hold above the range, expect a close higher. Watch for further updates and check out the longs I posted last night.

Afternoon Update

5 minute charts are strangely still not moving, but this one minute chart is about as unhealthy as you can get. It almost makes no distinction between rally and sell-off as its trajectory is solidly down, the same with the longer version in blue below it. Note the pick-up in volume recently as price crossed $110.

Update 1

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This is the first 1 min divergence in the SPY, as you can see I posted it a little late because I'm still waiting for there to be some action in the 5 min chart, which there is none, it simply follows price. I have not seen this before, it is not a problem with the indicator, it's as if only market makers are participating in the market, almost like smart money just disappeared. The only explanation I have is what I offered last night, that they are laying low being the end of the month window dressing and will become active again next week as the new month starts, however I would expect to see that more at the end of a quarter, not a month. In any case, I will continue to monitor it for you.

BE SURE TO READ THE LAST POST

As for trades tomorrow, 3C is not much help today as I explained in the last post at the end, but there are some bullish looking longs and just in case we do breakout to the upside, a lot of these should move well with the market.

As for past trades that haven't triggered, keep an eye on:DRAM , DDE, CAM, FCX


And the trade I'm definitely putting an order in on tomorrow-it's listed, ESLR


Since 3C is in a market induced "FOG", these trades are based on my Swing Trade Strategy and many are low priced, low volume which makes them speculative which means you must absolutely follow risk management rules-see last week's post or email me if you don't understand. 


If we get any surprises in the market tomorrow, don't be too quick to judge, try to let the roning trading range set in and lets see where the VWAP takes the market. The Algo traders were out briefly today above the VWAP, maybe we'll see the same, either below or above the average.


MOST OF ALL RISK MANAGEMENT, PRESERVE CAPITAL, WE'RE STILL IN A VOLATILE TOP WHICH MEANS BOOK PROFITS WHEN YOU GET THEM AND STICK WITH YOUR STOPS OR LET GO OF SHARES TO GET YOURSELF IN LINE WITH THE RISK MANAGEMENT PRINCIPALS WE OR YOU USE. IT'S VERY IMPORTANT RIGHT NOW AND MORE SO THIS WEEK WITH THE END OF THE MONTH WINDOW DRESSING.

The POST that you'll need some time with

As many of you know, I taught Technical Analysis for about 3 years for our county's public school system in a program designed for adults called “The Community Educator”. There were all kinds of classes, over 60 spanning any hobby you can imagine. The last couple of classes I held were record setting in that we had to turn people away for lack of a classroom large enough to accommodate ll those who wanted to sign up. Until then it was the ESOL English classes that were the biggest. They say those who can't do, teach. That's a load of..... you know what, I found that in teaching I was not only able to feel good about helping others, I also found it was one of the best ways to learn and I learned that I will be a lifelong student of the market.

One of the lessons I passed along that didn't seem all that important at the time, was not to go around telling a lot of people your opinion on the market. Anyone who has spent a few weeks on the often childish Yahoo message boards will understand the reason why. The market is exceptionally dynamic and with manipulation of the market coming from about 2 dozen different sources I can think of off the top of my head, it's even more manipulated now then ever. The lesson though is a good “Human Lesson” as we all struggle at some point in this regard when we find a stock we like, it's hard to change your opinion of it no matter how badly it treats you. We don't like to admit we are wrong and when you have told your opinion to a lot of people like on Yahoo's message boards, no mattter what changed your mind, people there are childish and try to make you defend your original thoughts which you may not agree with anymore, and many times we will when we feel under attack. So I told students, "just keep it to yourself”, you have your hands full with that alonev.

Being the publisher of two websites, and one for probably about 5 or 6 years, I've been wrong, I've changed my mind and I've had “those people” who act childishly and go on with “But I thought you said....”, etc.

If you want to be a good trader in the market you not only need to overcome that struggle with others, but the internal struggle within yourself when you've taken a liking to a stock that doesn't seem to care to much for you.

I received this email last month and I hope the author who is a member doesn't mind me sharing it with you. I've cut out a few personal parts.

“Your style of trading i.e. taking a position with respect to your market evaluation is quite radical and as you, again, often repeat must be risk-managed carefully and perhaps nimbly. Not everyone will have the skills or understanding or temperament to be able to pull it off. Plus, follow along-my-trades is NOT the type of service you are providing although there is a taste of that as well.”

it continues...

“I never saw anything where you said do this or do that

specifically (except to reinforce risk management and position sizing issues in a most

kindly and untiring fashion) nor did I read any claims of perfection... Not likely, but hell

you could even be wrong about your major predictions. After all, you are making a

forecast about the future based on the CURRENTLY available data. I am sure that

like any good scientist, you'd be the first to revise your hypothesis if data does not

verify it. That's all that can be asked “

And in that spirit I'm sharing a discovery that has just come to light. Don't go hitting the panic button, I'm not saying close everything you have tomorrow and go in the other direction. However, it would be irresponsible of me to see something and not bring it to your attention as a “possible” scenario because of my market beliefs which have been quite strong. This is the kind of service and respect you deserve, not a stubborn ego-based approach. I also hope it serves as a lesson and an example of how you can have a strong opinion, but still be open to the possibilities of an ever changing market. 

As a trader, you want to be able to imagine as many possibilities as you can and have a plan in case “A, B, C or even Z” occur. You'll never be able to imagine them all but knowing what you will do in the middle of a 9/11 type event beofre it ever happens, will allow you to act quickly on a decision that was made in the past so it's likely more objective then a decision made while the event unfolds.

Here's what we have ben watching and this is part of the basis of a strong bearish bias.

This is a daily chart of the DOW and 3C, if I zoom out a bit you would see that the decline from May to July is all well beneath the neckline (bottom red trendline) of this pattern, indicating a high level of distribution. You can see the positive divergence between the June and July lows that kicked off the most recent rally, and even though 3C appears to be leading right now, if it i, it only started in the last day or two as prices have been higher at the July top. This also raises some concern for me. Although it is fairly rare for a VALID, well formed top to fail, they do fail a small percentage of the time. One thing you must understand is that the market will show signs of recovery about 6 months ahead of the economy so we must watch this carefully.

Here is what is causing me some concern, it is the right shoulder portion of the current H&S top. "A" is the first right shoulder "B" is where the market, especially the SPY, violated the neckline and rallied from there to create another, higher shoulder, which is okay as H&S tops tend to show symmetry. Without that shoulder it would have been a strange looking top. "C" is where we are currently and there is some chance that "C" will continue to rally making a higher right shoulder then the one found around "B". In most Technical Analysis books they publish the one perfect head and shoulders chart out of 1000 and people believe that is what a H&S top should look like. They don't have the real world experience to know what is a valid top and what isn't. During May-July 2009 many people thought the price pattern alone made that a valid H&S top, it was incorrect and pure laziness as they never checked the volume which is as essential as the price formation itself-they were wrong.

And if point "C" rallies higher then the previous right shoulder, does that void our top? According to the academics it does, but look at this....

Even though the Q2 2008 last right shoulder was higher then the Q1 2008 (this is a 4-day chart so it is compressed), the volume was correct and those that gave up their shorts at a loss and went long, did so near the final top before we saw a decline of over 50%. H&S tops just do not look like the textbooks in real life, but my concern is that we will see a repeat of 2008 with point "C" on the chart above rallying to a new high. We can keep watching the cumulative volume indicator I created, but our risk grows everyday it moves higher and we do not have a guarantee of what will happen in the end.

Again we are looking at the right shoulder on the current top. The white line is an indicator I created that just totals volume. For this top to be bearish, the volume or the white line should go down when price goes up and it should go up when price goes down. You can see that clearly is still the case, this is why I'm not panicked about this but want to get it out on the table so you understand.

What happenes after the head is formed is the most important.

Here's a successful top from 1962. Note that we saw a warning early on when successive new highs were met by successive lower volume counts as indicated by the white custom indicator. After that, price behaved normally with volume rising on the advance to create the head and volume falling as the rally from the head pulled back, but it kept pulling back right into the rally to create the left shoulder-this was bearish confirmation. When the rally to create the right shoulder was complete and the decline set in, notice how volume started to rise dramatically. Sellers were panicked and volume skyrocketed -again, understanding a real world head and shoulders top can only be done by looking at charts for yourself, not textbooks.

Now to summarize we are concerned with two things, one that point"C" on the chart above will rally to an even higher high, which as I have shown you, des not negate our top, but it does throw the top into question. The second thing that would be more troubling is if this pattern coming off a steep decline could possibly be an inverse head and shoulders bottom or base. Personally I think it is highly unlikely; a H&S inverse bottom is a base or stage 1, we haven't even seen stage 4 decline yet so making a base now is premature, the pattern, if it materializes is simply in the wrong spot. Much like a H&S top, volume is even more important to confirm  H&S bottom. We have not seen anything yet that looks correct, here's what a correct volume pattern on a H&S bottom looks like

Again, what happens after the head is critical. For a bottom pattern we should see volume increase on the rallies and decrease on the corrections. If you follow price and the volume line, you will see this is a prime example.

The 3rd component we should see is accumulation, it is a bottom pattern and that is the point of a bottom pattern. Look at the DOW 1947 3C chart

At each an every point, 3C went higher, this clearly demonstrates accumulation and look how much easier it was to identify back then before all the manipulation.

Here's another 3C chart of the Dow 1942

And if you wonder if we can still identify accumulation in a Inverse H&S base, then look at this next chart:

It certainly is not as clear, but it does not take more then a quick glance to identify the leading divergence to the upside making new highs in the Dow at the start of the 2009 rally.

This chart is from 1946 and sor ot identifies my concerns

This chart is over 60 years old, but is similar to the current situation. We have a nice Head and Shoulders top, then price breaks below the neckline mid July (odd timing), the hoizontal trendline at the top identifies a potential new pattern. The differences being we had a much more severe sell-off from out April highs-20.36% in the IWM from highs to lows (the media loves the 20% figure as the definition of a bear market, but it has nothing to do with it whatsoever. This is part of the culture of misinformation traders and investors have been raised with. The other difference is we have rallied from that sell-off low to create a higher right shoulder, our point "C" from earlier, so we have a developed formation that looks like an inverse head and shoulders. We have a hefty sell-off that could create a temporary bottom.

As another point of interest having to do with the culture of trading, everyone knows there is nothing magical or statistically important about the 200 day moving average, it is just traders believe that it holds specil significance so they breate  self-filfilling prophecy with it.

Here is what traders would respect as a known relationship between the SPY and the 200 day moving average. Note how it forms both support and resistance. Because traders hold it up to be important, a break above the 200 day moving average may lead to an increase in buying, thereby creating the situation I'd prefer not see unfold.

In trying to determine whether or not prices will rally higher, I'm looking at all the 3C charts, here's an influential 30 min intraday chart of the SPY.

Here in green we see the "potential" inverse H&S in price (green) note the two left shoulders, the head below the red trendlines, the first right shoulder and the unkonwn at $110.81. This could move higher nd above the $112 area, create a breakout or it could move down to the $104 area and providing it didn't break below $104, it could for a symetrical inverse Heand and Shoulder-looking pattern.  This is why what happens next is so important. We see positive divergences at all of the crucial levels on the 30 min chart. So the first obstacle to having a clean, easy strategy is that we not move up significantly higher. A False breakout is a possibility, maybe even a probability, but that's not the same as a real move higjer. The next hurdle is to see a sell-off to $104, what happens next will be important. If we bounce off $104 I may reccomend selling some short positions, adding longs for the bounce and seeeing what happens if we reach the $112 area again. If prices slice through $104, it's pretty smooth sailing for our strategy. A move from here above $112 and each person will have to decide based on their exposure, their entry levels, and many other variables so no one answer is right for everyone, but I'd be looking to phase out of the short position incrementally and add Ultra/3x leveraged longs or equities, this way I can begin hedging but not jump the gun and overreact based on a day above $112, when the next day we could see a 4% sell-off.

As for 3C which we didn't talk about as of now on this chart, we do have a relative negative divergence, it's not a huge deal, except for the fact that it occurred on an impressive 30 min chart. We also have something of a small leading divergence. Considering the volume at EOD and the lower prices if after hours, it makes sense. 

This is today's 1 min 3C divergence on the SPY. At 11:53 I posted "The First Signs of a Bounce" - about 10 mins. later we had a bottom in. By the time I put out the update the TRIn/ARMS Index had been hitting levels above 1.50 (remember in a bear market anything above 1.10 on the low end can produce a bounce-a close above 2 is almost destined to produce a close higher the next day , 1 is neutral, around $.75 and we can expect a sell-off). As of the close we had a negative divergence in place.

Evidence that the situation may or may not unfold.

On the may not side of things:

Here we have the SPY daily with Worden's very successful MoneyStream indicator in red. The top between June and July is in a negative divergence. Even though the mid-July pullback

was higher then the June low, MoneyStream was lower at mid-July meaning a negative divergence again.

Here we have TSV55, again the mid-July pullback shows a negative divergence and the top side is slightly negative as prices are higher right now then in June. If this was a bottom formation,we'd expect to see accumulation, especially at the lows around June/July, but nothing!

This variant of 3C on a 30 min chart shows positive divergences in the white boxes and negative n the red, it's the only place we see accumulation during the possible inverse H&S head. The current close has formed a negative divergence as marked by the red arrow.

Another variant of 3C on the SPY 1 min chart

As I mentioned in the "Afternoon Update 2", the 1 min divergence remained persistent throughout the dy, the close was especially bad here.

Here we have our cumulative volume line again and you can see to the right, the advance, which is especially important for an inverse H&S pattern, to the right of the head, is showing a decline into the advance-this is bearish.

As mentioned early on, the 3C daily chart is in a leading negative position

Finally, this is my only truly appropriate concern, the daily chart is the most potent except for multi-day charts and in this SPY 3C daily chart, this one IS showing a leading positive divergence, however, again, there is NO accumulation on the daily charts at the lows where we would especially expect to see it.

I know there are a lot of charts here and I hope that I have accurately portrayed my concern in a way that is packed with proof and easy to understand. 

To summarize:

We have made new closing highs in July over June's, this as of now is not a problem, it doesn't not void our H&S top chart. Although I DO NOT WANT TO SEE IT, as I pointed out with the 2007 H&S top, we can rally higher and make a significantly higher right shoulder and still have a valid H&S top as long as volume confirmation is there, which is to sat, volume declines on advances as traders back away from rising prices and volume advances on declines as traders get panicky in a decline a start selling in bigger lots. So that is a situation that we'd have to deal with if it comes to pass, but unless we break above the head formed on April 23-26, the top can remain valid. 

If we do get a selloff to the support at $104, we have to watch it, either it breaks down nd we are in a hugely profitable position or it perhaps bounces in which case we will sell some of the shorts at a profit and ride the bounce with longs, when the market reverses, we add out shorts back in.

The urgency of this post is just to deal with the fact that we are close to the point of a July rally, in which case we must take measured, but effective action. If we continue to sell-off, then all is fine and we needn't be concerned with tactics again until SPY $104. That's the gist of it!

As for today and what we can expect tomorrow:

I wouldn't say we saw a DOMINANT  P/V relationship today, but in a couple of averages we did see 2:1 or better and in most averages we saw Close Down and Volume Up. I think we are too early for that to be an oversold statement especially because there was no real dominance, instead I feel it shows traders trying to get out of the way of something and pretty quick.

Reporting tomorrow, Chevron, a host of foreign corporations-including a lot of banks, Merck, Oppenhiemer, and I'm sure a few I missed, but it's relatively light with the big boys.  Economic events include: ADV GDP, EMPLOYMENT COST INDEX, CHICAGO PMI, AND UNIVERSITY OF MICHIGAN SENTIMENT.

The TRIN Index closed today at 1.15 so there may be some strength coming from that although it's no where close to an extreme reading. The VIX was actually down today about half of a percent while the SPY was down about 1/2% so traders were a bit complacent about today's decline. 

The SPY was mixed on 3C 1 min with in line, a slight negative divergence and a slight leading negative divergence. The Q's 1 min showed a slight relative divergence and 2 leading negative divergences, the DIA had one of each but was moderate. The IWM was inline and 2 leading negative divergences. On the 3C 5 min almost everything was in line with a couple of slight relative divergences. This timeframe has to move for us to see something more then mediocrity. The 10 min halted it's downward slide to try to move inline, although still in a leading negative position. The one exception was the IWM which actually formed one relative positive divergence.

My take on this is the downward momentum was lost today at 12:30 and I don't see any real activity. It could be end of month window dressing, and if I took a wild stab at it, considering we saw 3 down days, at the start of August we may be in for some buying unless sentiment sours or something breaks.

So I'm looking for early morning weakness, but how long is up in the air unless that 5 min 3C takes a stand one way or the other. That's what I'll be most interested in around 10:30-11 tomorrow.

I'm going to throw some new trades up now, a few did trigger today like MCD, did anyone take it?

The divergences haven't changed

but the song's not the same. We're still negative now on 3/3 1 min and a mixed bag on the 5 min. the only thing is volume just went negative and price is somewhat lateral. It's either consolidating for a move higher or is reversing. It's that ambiguous right now so follow price until further notice.

Resistance is between $46 and $46.29

Afternoon Update 2

There's still  1-min. negative divergence in 3C on the SPY, there is also an in-line with price trend and a nearly positive 1-min divergence. All the 5 minute charts are pretty much inline with price, so I do not see anything as of yet that would lead me to believe that a reversal in near yet.

Afternoon Update

This is the very first sign of a negative divergence I have, it's not really strong yet and the 5 min chart doesn't confirm it, but this is the best we have to go with right now.

First signs of a bounce

We knew $110 would be a strong level of support so a bounce from there makes perfect sense. The TRIN levels were hitting above 1.50 so that makes sense too and 3C is just starting a 1 min divergence.

MCD was the short that triggered the limit order, this bounce may provide a decent entry into MCD if you otherwise like the trade.

MCD Just Triggered a Short

Check the Spread Sheet, MCD is now a short sale trade. 3C is also in a leading negative divergence, $110 will be tested.

***MCD***
Sorry, I was up too late last night.

Update

As I warned, there was a good chance of the market rallying this a.m. as high as $112 before hitting a wall, it didn't quite hit $112, but it did hit a wall.

Yellow=positive divergence red= negative divergence. As you can see, the divergence was fairly large so yesterday's price climb didn't do it for me. If you see where they started accumulating, it was higher then price reached yesterday. Yes they accumulate on the way down and therefore have an average cost that is lower, but I assume that price will usually go higher then the first prices they paid. You can also see the brick wall. Right now 3C is going through it's typical ups and downs, but it's at a juncture like this that 3C makes positive divergences or just heads lower to confirm price action-we'll see and I'll let you know ASAP. I just wanted you to see what I saw at 4 a.m. this morning.

Discourse

While I won't bore you with all of the Breadth readings, suffice it to say it was a down day with decreasing volume which tells us we are in a bear market still. Essentially this relationship tells you nothing, but a majority of stocks were down. Whether on rising or declining volume, it's a bit higher, 4:1 in many cases and that is a sign the market is treading closely to oversold, even though we haven't travelled all that far down.

The Trin was at 1.27, which is above neutral and close to being, again... oversold as 1.10 is about the start of oversold and 2 is a slam dunk reversal. So it's not real high, but higher then I'd like to see this early on in a reversal.

I guess Bernanke could not sit before a Senate committee and claim the economy was coming up roses when the Fed Beige book released today seemed to hint the economy was nearly under a patch of roses... a volatile market requires a volatile quote from a volatile man, “I'll put you under a bed of roses, because I'm capable of that-”Mel Gibson.

Interestingly, housing remains sluggish and those stocks reacted well, the beige book noted softness in the housing and construction markets and still those stocks by and large. That may be something to keep an eye on.

Temporary hiring was well received, but as someone in business, before I go hiring temps, I'll give hours back to the employees that have hung in there with me, I'd expect to see the average work week increase before I applauded temp hiring.

The view coming from the Fed seems to be the economy is still on pace but a slower pace. There isn't a hint of urgency which means traders are probably not expecting much out of the Fed in the way of assistance. I personally think the Fed doesn't even want to open that can of whatever is in there or more importantly, as the question that was not asked before the Senate, “what's not in there”. I've said several times the Fed has run out of bullets. Unfortunately, (if you red Trade Guild tonight you will see that our debt is rising compared to our GDP, it's near World War 1 levels which means the government doesn't have a lot of room to maneuver should it be needed and economic hard times breed economic disasters. With the government loaded with deficits and the Fed loaded with red ink, I think they're trying to keep under wraps just how impotent they really are. Unless something big is about to breakdown, I'd say the course is going to be hands off and “lets not say anything that might result in a question we do not want to answer. The Fed is concerned with the economy, when they had a lot of firepower they could afford to support the markets, but now, unless we go into free fall, I think they won't interfere nearly as much as they did.

Two days now we have seen consecutive reports of slipping consumer confidence, which probably means more saving and the banks will continue for now to enjoy the interest paid on reserves, but I think if there's any policy action to come, it'll be on that front by lowering or suspending the reserve interest payments to try to force banks to lend. This all means that once we clear earnings, I think we'll start to see the market marked to sentiment which of courses is souring. As long as the decline doesn't trip the circuit breakers every other day, the Fed is likely to let the market free up a little to be a free market.

The tragedy of the story is a president bent on getting his signature, legacy legislation in place, but what they did was not what the country was saying, “we need” and the cost of what they did was a lot, it leaves the government in a place where they have no choice but to run up the deficits because spending is all they know how to do. What in the world would they do on the hill if they had no checkbook?

The operative words coming in from all the districts are: softening, slower pace, discouraging and considering what Bernanke said before the Senate, it appears to my less then higher-learned mind that they were expecting better then what we have, which begs the question, is this a slowdown in the recovery or like any market indicator that acts the same way, are we leaning toward a reversal? In either scenario the first thing we'll see is a shallower trajectory and it's clear that's what we have.

That's a lot said for someone who is not really interested in the economics, I'm interested in the charts, but the thing that leads the charts is sentiment and as of now it is, as the Kansas City Fed district has shown between this book and the June 9 book, “less optimistic” which doesn't at all sound like something anticipated. Back to those 2 words”Unusually uncertain “ and those two words match up very well with a head and shoulders pattern on the charts. If we were optimistic we wouldn't see such a pattern.

As I showed in one of the last updates, we had a minor negative divergence that led to a wave up, but there was a bigger positive divergence that was underlying in the one minute chart, so my view is that we will see this continued bounce off support at $111 (SPY). Since we have a number of trades triggering or near it, I'm going to leave it at that for tonight. I moved a bunch of stops, you'll see the notes highlighted in yellow where I made changes, but most of it was tightening stops. We have to see what this bounce is before I go issuing new directional trades. So keep an eye out tomorrow as I will add positions intraday if this is just a quick run to resistance and back down. If that happens then we are looking at $110 next and that is the level that should cause some real movement. I think we could run up to $112. tomorrow before hitting a wall, I want to see that before I add trades.

15 min and longer charts have continued to move lower so I think we are just seeing volatility and this is the reason I try not to over trade. A lot of traders can't hold a position longer then a day before they get knocked out of them and that is the meat grinder we are trying to avoid-thus the wide stops. Even if I changed them to tighter ones, it's up to you and whether you have a profit or your trade hasn't really hd a chance to move yet.. So decide for yourself, they re just suggestions.

I'll update in the a.m. but for now don't be surprised to see a move higher. Pay attention to any ranges that develop in the am, like today, a morning range formed and the breakout of the range suggests strongly the direction of the close.

See you in the a.m.

Bounce

There's a 1-min positive divergence and a 5 min positive divergence, it seems unlikely we'll break $110 today and may rally back up to $111 where we'll see if resistance holds.

Afternoon Update

The SPY here on 3C ver. 2 5 min are telegraphing  a possible bounce intraday. I see this in the DIA, XLF, DIA and IWM but not the Q's

DRAM

Short term speculative long position listed on the Spread Sheet- DRAM is breaking out through our buy limit order and this on weakness. This is a "cats and dogs" trade, as you may remember, C&D trades come near the end of a bull move and they ma be trying to get this long off before the broader market tanks

UPDATE

Here you see the SPY the last few days on a 15 min chart which shows institutional money. This is a significant timeframe. First, the top red trendlines trace out a bearish Descending Wedge, this can function as a top and volume (not on this chart) confirms the pattern.

3C is in a huge leading negative divergence, you can see the highs at 7/26-7/27  and 3C went divergent there. It's currently leading below $110 which will be the during on the bull trap. TSV55 which is a long version and doesn't react to minor noise is also below it's moving average and just about below the zero line.

Watch for the break of $111, the next stop will be $110 if that happens soon. On the other side of the coin, there's always the chance of a false breakout, but because this is a 15 minute chart, I hardly would label this as an obvious price formation, I doubt many technicians see it.

LINTA

LINTA has just triggered a limit order, this two was listed on the new July/August Trades Spreadsheet. Take a look.

On the SPY, we saw the first hit of the $110 level when it was breached around 10:35, volume picked up a lot. So this is certainly an important level, if we continue lower and 3C seems to be suggesting we may bounce around the $111 level for a little bit, then the next important level to break will be $110.

When you see volume pick up on breaks of whole numbers like that, you know that there were a lot of retail stops piled up there. This is exactly why I encourage you to stay away from obvious levels and whole numbers which the human mind gravitates toward.

Update

KIRK can be found on the list from Sunday or Monday night, it has triggered the short level limit just a bit ago. Take a look.

A Couple of MArkets Worth Watching.

I read an article today that basically said we are in for a bull market, nothing like the last, much shorter, but more upside. This assessment was based on things like this-BP has been taken down to low and the sector with it. I don't know what the appropriate valuation should be for BP, there's things in the news this week like doctored photos of the spill, etc. The Us has satellite reconnaissance capabilities as does NOAA and dozens of other agencies. I seriously doubt pictures were doctored without the approval of administration higher ups. Thereby giving meaning to my moniker of, "Never believe what you hear" and in this case, what you see as well. Who knows how many more secrets lurk beneath the proverbial oil slick?

Wikileaks produced thousands of documents this weekend and NY Times released their stories covering the leaked information on Sunday. I'm sure it came as a surprise to many Americans, that our great ally Pakistan's secret service or CIA equivalent had been coordinating and conducting planning of terrorist mission with the Taliban and apparently the old grey bears surrounded by hundreds of AK-47's which would imply Al Qaeda . So things are never what they appear, but back to where we were.

The things that convinced the author of  raging bull at the gates were these several events:

1) Europe learned from the US crisis and made all of the right moves. Yet there's Greece, Spain, Portugal, Hungary and perhaps Germany herself as well as others that all face their own debt crisis and are bound to a limited tool box of a phillips head, a flat head screwdriver and maybe  a money wrench as they have no ability to inflate or deflate themselves out of crisis being they are bound to the Euro (Hungary isn't yet). 7 of 91 or 93 banks failed, not bad, but taken with the fact that all of the hard situations that could really cause a bank to fail were conveniently left out of the test-they learned something from us alright!

2) 2nd Quarter Earnings have been great and the sentiment pendulum has swung to bullish sentiment. First of all, it's not what you have done, it's what will you do and retail doesn't understand this. No doubt this is why we see the early morning bid up as pseudo traders place their limit orders and head off to their 9-5, causing a massive morning mark-up. However, the "BULLS" that run Wall Street seem to be content to invest just enough to keep the trend from falling apart as they continue to distribute (which can also be selling short-there's no way to make the distinction). Considering last quarter and YTD, it's not hard to come in above.  Again, it's what they say they will do, which brings me back to the days of massive loan write-offs and the CEO's decelerations, "We have no exposure to that market" or "We expect this to be our last charge off" only to see bigger charge offs the next quarter. Show me a CEO who shoots it straight as an arrow and I'll show you a former CEO.  And exactly when did  the market swing so far on the bearish side of sentiment that the expression, "pendulum" which brings up connotations of extremes, used? As far as I can tell it;s been fairly down the middle with the exception of one sell-off and recently, as in most of July, it's been pretty darn bullish. I will admit that I believe most analysts sided on the side of pessimistic caution, which makes a surprise beat, a fairly easy thing to accomplish.

3) The leaders to the downside have stabilized GS and BP.

Time to whip out  chart or two...

This has to be one of the biggest tops I've ever seen and the volume-is that capitulation that ends a stage 4 decline or just a high volume breakdown from the incident? I can tell you for sure IT IS NOT FINAL CAPITULATION, perhaps enough to let a relief rally carry it to the neckline+.

I think stage 4 which is a decline will be a bit longer than a few months considering the size if this top. This is not capitulation. the triangle to the right is a continuation pattern, in bull markets (as it is bullish) they tend to be more reliable then in bear markets, but t could breakout or create  false breakout. This is certainly not the end of the story for BP. I will say there are a few in the group that were drug down with BP that may very well rally.


As for GS...

Again, a break of support of capitulation? And does it just rally through 10 months of sellers?

As you can see, there's no stage 4 so there can't be capitulation or a beginning to base a new bull trend which is a process, not an event. The triangle (much like BP's) right under the neckline could breakout for a false move, or it could fail, but this is hardly the picture of a chart that is out of the woods.

4) The First higher low and higher high are in place.

TRUE! The higher low is in yellow, the higher high is in blue.

This is the right shoulder of a recent H&S top and it made not only a first higher low and high, but a series of them. Pretty bullish huh? Lets see what happens next...

5) Dr. Copper and Oil are forecasting a strengthening economy.

There are a lot of indications forecasting a weakening economy, but I digress.

There's a high degree of correlation between copper and the SPY, sometimes the SPY leads, sometimes copper leads. You can see copper has broken out of a downtrend and a slanted inverse H$S. At the same time the SPY and market have all advanced creating what I believe, at this point anyway, to be bull traps. In order to do that, they too needed to breakout from a similar pattern. I'm not sure I would say this is a solid case for copper demand forecasting strength in the economy.

This chart of JJC (Copper) is overlaid with Worden's MoneyStream. Does it look like MoneyStream is confirming the trend? No, in fact what we see is a negative divergence further lending to the possibility of a bull trap.

And the Black Messy Stuff that you really don't want spewing unchecked from the ocean floor-oil....

In green we have Light Sweet Crude Oil, in light blue we have the U.S. Dollar Index. A quick look and you will realize that oil and the dollar have an inverse relationship, when one is up, the other is down.... Why? Crude oil contracts, for now anyway (Chavez, you wish!) trade in $US Dollars. So if the value of the dollar drops, the price of crude must go up accordingly to make up for the loss of value in the dollar. This is why we saw such a huge rally in oil under the Bush administration as their wide-out-in-the-open "POLICY"  was that of a weak dollar. I bet that one was hashed out in that first meeting between Dick and his Pals in the second week of the administration, So yes, the recent weakness in the dollar has led to crude oil appreciating, it is not necessarily ot because of consumer demand as the author points to.

This is USO and it is sitting in a triangle below a substantial uptrend in a very nice trading channel stretching back over a year. The breakdown out of the channel on heavy volume can no way be construed as a healthy, bullish development. As we know, nothing goes straight up or down in the market for long and USO promptly formed a symmetrical triangle just below the resistance of the channel. Today it almost appears as if we got confirmation of a false upside breakout from that triangle.-Volume was heavy on the downside today. It's important to remember that symmetrical triangles are neutral and only take on meaning when found after a preceding trend. In this case it is a bearish continuation pattern meaning that the expected move is to the downside.

Here's a 30 min chart close up of the breakout of the USO sym. triangle. The 30 min chart in 3C is very powerful and can define swing trends of days to weeks. Here we see not only 3c version 1 i yellow negatively divergent at the breakout, but also the very long term 3C chart in blue at the bottom in a full downtrend, it didn't even hiccup during the breakout.

So... why am I tearing apart someone's bullish analysis. I know that the market, despite the probabilities we see, can do anything it wants. It could launch the mother of all bull markets tomorrow, but we deal in information we have at hand right now and 3C even has a predictive nature to it, so we even have that edge. We try to find the highest probability and make our assumptions based on that and we must be ready to change when the data changes-sometimes even smart money is not all that smart uuhhh..uuuummLEEMANouhhh! Bless me, thank you!

The point is, you can't take what you read and just assume it's got to be the truth because someone wrote it and it appeared on Yahoo Finance. You should fact check everything including me, I miss stuff too. However looking at this article that was long on assumptions and short on objective data I decided to dig a little, it's good to exercise the mind.

As to the market today...
As I pointed out yesterday, the VIX/TRIN combination is quite reliable and we got what it implied, we didn't get the break of support that would have made today truly meaningful, but trades have been backing away from rising prices this entire rally. It's been a rally marked by bullish sentiment in the little guy camp that drives up the market early on limit orders as most retail market participants work a 905. So the market makers mark up prices, make them pay up for the shares and the rest of the day we have been seeing distribution with just enough support to hold the markets lateral to up and an end of day push to get retail peeps getting bull crazy and the cycle starts again, every day. Today, the TIN and the VIX broke that cycle, for how long?IDK (text vernacular for I don't know in case you don't have kids).

For whatever it's worth, large caps finally outperformed small caps and midcaps as well, that's a big shift considering the Russell 2 or 3k's recent performance. It may be the end of the "Cats and dogs trades" -under $5 longs I've been posting that tend to end a bull move. Perhaps a flight to quality? Maybe just earnings, I haven't looked at them.

The MDY ETF for midcaps put in a small "Dark Cloud Cover"-you can tell by it's name it's not bullish, in fact it's a reversal signal of an uptrend. It also did so on a decent rise in volume. The SPY was 75% there to putting in a hanging man, not quite though, again on higher volume. The Dow 30 put in an "evening Star" reversal on higher volume, the DIa almost a hanging man on higher volume, the Q's were almost there too for a hanging man on higher volume, the NASDAQ composite just about put in a Dark Cloud Cover.

Judging by the SPY and 3c 1-5 min charts, it seems we will see some strength in the am, I'm not sure I'd bet on it holding though. A beautiful day tomorrow would be a gap up with a close below todays close causing an engulfing pattern; in ant one of the averages this would be a solid, reliable reversal signal.

You have a lot of trades out there already. I'm going to add a few more to tonight's list, but I'd like to see where things lead tomorrow before getting overly aggressive and sending a bunch of directional trades your way.

We'll see tomorrow. By the way, if you have TeleChart, use the alerts feature for the limit trades I set up last night.