Back Into The Bermuda Triangle...

3C divergences when they appear, are usually followed sometime later, days, sometimes weeks with the real reason that the market was taking covert action, that is what accumulation and distribution is, covert action, it's not easily or readily apparent on charts because that would defeat the purpose of the action. For instance, selling into strength by institutional money is distribution, they sell into higher prices, that is good for them. It's covert because if everyone knew they were selling into strength,( and many technicians believe that it is apparent on charts through volume alone-this is very old school and no longer applies) well then everyone would be a seller and with all that supply on the market, institutional money would sell into lower prices. This doesn't work, just look at GS bonuses, they do what works and they make good money for it.

We are seeing horrible economic news and what seems like systematic accumulation into that news, it's counter intuitive, but most things on Wall Street are. However, it does suggest that there's something in the pipeline that will spark buying that has yet to break, but they know about it. Why else would we see charts like these....

I'm using the Q's because I'm getting consistent results with 3C between the Q's, DIA and IWM, the SPY is not giving the same consistent results today. This is a 1 min. chart, red=distribution and white=accumulation. This is the timeframe that you are most likely to see market maker activity, but market makers often are filling large orders for institutional investors. You can clearly see cause and effect here-distribution and a downside reversal, accumulation and an upside reversal.

A 10 minute chart of the Q's. both charts above show positive divergences at the 10:30 lows this a.m. In an afternoon update yesterday I said to watch for a strong or weak close, a weak close would imply a gap down tomorrow meaning that they were not ready to let a bounce run yet. there could be several reasons for this. 1) 3C shows accumulation/distribution but it can make no assumption on how large of a position they intend to acquire, therefore it can be tricky to identify when they are done keeping the market in their buying range and when they are ready to let it tun. However, we've had two solid days of bad news, other then the gap down, the market has not sold off huge intraday as sentiment would seem to demand, this of course implies that there is an external force supporting the market, the most obvious would be accumulation of institutional money at lows like this am's. Their buying absorbed the supply and when the supply was absorbed, the only thing left are buyers, the market heads higher.

Crude Inventories came out this morning, the number was much higher then anticipated, at least by retail analysts. This is not bullish for oil, why would we see accumulation and a leading divergence this morning off the lows?

Looking at a daily chart from this morning, we see USO is actually trading up on the day? And look at the volume thus far! Compare that to The dollar...

These we taken within a minute of each other, the dollar (as represented by UUP) is trading up as well, not on the same volume. It would make some sense if the dollar was trading down, USO would be trading up, but the only plausible reason at this time is institutional money is driving the prices up-retail (excuse the phrase) or dumb money isn't excited about the report. Remember we've been seeing this pattern of accumulation in oil for several days, maybe a week now.

Looking closer at the dollar...

We can see it gapped up as the market gapped down today-that relationship makes sense, it traded higher as the market traded lower, but the market saw accumulation into the lows, the dollar saw distribution into the highs. Is something coming out, maybe the employment numbers that will get retail behind a bounce?

Here's a 10-min chart-a substantial timeframe (I have seen 10-minute divergences fuel week long reversals)-again, 3C divergence cause and effect can clearly be seen -white=accumulation, red=distribution.

Usually by now a the cause of a divergence will have revealed itself, we had some unexpected events that I doubt-or at least would like to doubt that Wall Street would have no way of knowing about-specifically the Mexico City Stock Market bomb scare. This may have altered the course and the plans of smart money to some degree as the sell-off hit a level of support where stops were piled up, they may have had to let go of some of their accumulated position as they are obliged by law to be the last resort, other-side of the trade at market.

The truth is, I just do not know what is driving this and where it is going at this point.As I write this, USO is overtaking yesterday's opening gap down, quite a recovery thus far. The SPY has reclaimed most of the losses from the gap down and is near the unchanged mark.

There's one possibility that I have not explored yet, but before I mention it, I want to say that we should not forget what the real opportunity is before us, it's on the short side. I've spent a lot of time on this potential bounce recently, I don't want you to lose sight of the short side opportunity before us. I do believe when books come out in the future, they will look back at this period as one of the great market crashes and probably the first secular bear market in stocks that most people have ever seen. That is the real opportunity.

Now, the possibility not explored yet and it is because I have never seen this in action through 2nd party participants (smart money). I have told you in my major market analysis that the Fed seems resigned to the fact that the other shoe is dropping and there isn't anything they can do to stop it. With everything the government and the Federal Reserve (two entirely different entities-don't let "Federal" in the name fool you into thinking they are a government agency) have thrown t the first shoe, the efforts did not stop what seems inevitable. So I said that I believe the Fed is resigned to the fact that the second shoe will drop, BUT I also said that I think they will use whatever tools they have at their disposal to make this an "orderly decline" if that is really possible.  When looking at the market behavior the past few days, considering the news, yes, we saw gaps down, but we did not see the intraday panic selling that we have seen in the past with sentiment so sour. I have to consider the possibility we are seeing something completely new to this market, Federal Reserve intervention through 2nd or 3rd party activity.

We will know soon enough and if so, we'll get up to speed and identify the markers, if this is what I spoke of, some markers are already extremely apparent.

This in now way changes the fact that there are good trades that can make a lot of money and it throws a new dynamic into the mix which could benefit us even more-The inevitable law of unintended consequences that plagues Fed policy action. Right now as we speak, there's a new bubble in treasuries being created. Even scarier, there's an apparent bubble starting in junk bonds as investors seek higher returns then treasuries can provide-especially as interest rates are driven down as more bonds are purchased. It all makes you wonder about our system and how it truly operates, even with what we have uncovered. Oh, I wanted to tell you, the junk bond bubble is really scary because most of the proceeds went to pay special dividends, not to shore up finances or invest in the company. I think a default is inevitable and I have a feeling I know who is buying up those junk bonds. If I'm right, it will just push the economy and the market lower.

As I've written this, the SP-500 is approaching highs of the day, the NASDAQ 100 is in the green, the Dow is approaching the highs of the day, The Russell 2000 is green, and USO is not only green, but has nearly engulfed yesterday's trade-curiously, while the dollar still sits in the green. It is obvious now that accumulation of oil has taken place.

This is why I say we have a historic opportunity right before us, happening now. Trading and specifically trading the short side, may be one of the only recession proof jobs left.