Thinking Out Loud

OK, I have seen this volume pattern playout before, diminishing volume on a rally with the dominant p/v relationship as the most bearish Price Up/Volume Down. In a few instances more recently it led to a reversal to the downside. In one instance back in February of this year it kicked off a monster rally, the difference is the maturity of the top, the increased volatility that started in late April and continued through May, that wasn't present back in February. Today's candle, as the last 3 candles before it, all show diminished momentum-the gain today really came in the gap on AA earnings news, the rest of the day, we didn't see strong performance. This candle taken as is would be called an evening star which is the first of two candles in a downside reversal, the next would be a close lower which serves as confirmation, why is this different then the preceding 3 that look similar? Because of the gap, that's what makes an evening star reversal candle more powerful, although the rise in price (in the gap) makes that seem counter-intuitive, several hundred years of Japanese candlestick charting show this is a higher probability reversal. However, we already know INTC came out with good earnings and it looks (as of now) like we'll see another gap up tomorrow if after hours trade is any indication, which may setup another evening star reversal. 

What will become worrisome is a strong trading day (a wide bodied candle) like the one on July 7^th. The volume picked up today and breadth was strong everywhere, but we still have to take this in context, it's largely based on retail traders bidding up the market based on AA's earnings and now INTC's. The market already knew what AA would come out with, they are privy to the whisper number so it is in fact already discounted into price.

As I suspected, AA's trading was horrible today, a high volume gap that was promptly closed and a close lower then the open. It had every chance to run off that gap, it didn't. Volume was high-which suggests churning, for all the retail buyers, there were plenty of institutional sellers. The S&P-500 gained 1.54%, AA's Beta compared to the S&P is over 2, meaning you'd expect to see a move of at least 3% in AA today-not so.

This 3C v.1 30 min chart has done an excellent job historically calling the moves in AA.

Note that the last several days (with the market) AA has been rising. At the start of July there's accumulation (pos. div) and then price confirmation. This a.m., on the gap up, 3C confirmed my analysis above, distribution right off the bat, it continued down as well. Look at the volume (click on the chart for an expanded view) on the open of this 30 min chart! So is Wall Street buying into the idea that the economy is much better and AA is leading the charge? It doesn't seem like it, they just used the earnings to make money off retail traders that still don't get two things, 1) Wall Street already knows the earnings before they are revealed most of the time. If they (institutional money) were behind AA, then there would be big accumulation and they'd use that gap up to push prices, not sell into them. 2) People don't get that earnings are in the past, they don't matter anymore, only guidance and sentiment does. Based on the intraday and end of day action today, what was the sentiment on AA?

INTC?

Something is strange with INTC today. This 4C 1 hour chart shows the selloff-negative divergence from 6/15-6/21 and the accumulation 6/30-7/2 (note: because institutional money wants to accumulate at low prices, volume tends to be low-they don't want to attract attention and be forced to pay high prices so accumulation generally ocurs on light volume). 

However, from 7/8-7/13 4C makes NO progress? That's distribution and again-look at the volume at the end of day. This is a wild guess, but could they believe that the rally won't hold long enough to liquidate their position and have started selling early and into the higher prices on INTC today? It's a possibility and one that suggests they (smart money) don't have faith in the rally? Could they know something about the next companies to report and perhaps those reports will crush the market? Or maybe something else?

Compare to the SPY 1 hour 4C chart-same thing.

And the DIA? Same thing-distribution all day.... why?

Look at 3C on the Q's past on this 1 min chart, we know it's working fine, look at the distribution into the close. Even a higher high at the close is sold off.

So what could throw a lemon in the stew tomorrow? Why does it seem that strong guidance is not being bought? 

Retail Sales are announced Wednesday at 8:30 a.m. This is a biggie! Why? It accounts for 2/3 of our GDP. Paper, rock, scissors-Retail sales trumps any guidance INTC gave. Is there a possible leak from the government? I've commented just in the last few days about how not only earnings, but Federal Reserve directives and government releases have all shown evidence of having been leaked.

Looking with a quick glance and one that left me scratching my head, I was surprised to see this kind of action in these stocks and ETFs of the averages. After hours are up because retail trader's are bidding them up based on INTC guidance, but retial traders wouldn't have access to a leaked Retail Sales report, Wall Street very well may.

OK, that's enough for tonight. I've put together a possible scenario and we'll know in several hours from now.

Here's the alternative, retail sales blow away the market, we get a monster rally. Our key level on the SPY is $113-$114-at that point we likely blow the H&S top and have to start all over. My hypothesis is just that, a hypothesis so time to talk about plan “B”. 

Considering my hypothesis I'm not throwing trades out there, I did plan to throw some longs (AMPL made good progress today, I still like it long) out, but I'm holding off on that.

If retail sales are good, not average, not pretty good, but good, then we need to look at what's in the future in earnings, but also have to take action to protect portfolios. You have to do what your risk management plan dictates, but I'm looking at selling off 30% of the inverse ETF's and adding 3x leveraged UPRO (long ETF on the SPY). If the market continues to look bullish toward the close, either at the close or Thursday that will go to 50%. It's very aggressive considering a long trap can unfold in 30 minutes and I do not like the idea one bit, it seems reactionary and emotional at that, but price is king.

If what I laid out does not come to pass, then we'll also be talking about the options on the SPY and the possibility of them being pinned as we saw last month, that might call for the market to keep up some strength until next Friday, or at least above or around the highest open interest and where the volume is flowing in the option chains.

Check in the a.m., I'll have an update after the figures come out.