Jackson Hole

Tomorrow morning the Commerce Department is set to revise Q2 GDP which came is at 2.4%, it seems that the market has already anticipated and accepted that GDP will be revised lower. These things, unless they come as a huge surprise, are generally priced into the market already. It may be a shock to main street, but it's not likely to be a shock to Wall Street.

It will be difficult for Bernanke to standby idly as he did at the last FOMC meeting and announce half measures in the face of a GDP number revised lower, there will be an expectation at least from main street that he's going to be more aggressive about it. However, most on Wall Street already know that there are few tricks left up Uncle Ben's sleeve, especially when considering all that has been thrown at this economy already. Perception of the general public will be important, even if the measures announced in reality do not add up to an empty glass in the middle of the desert. The last thing the Fed wants to see is consumers running in greater fear,  not to spending, not purchasing homes, small businesses laying off more employees; I think Bernnke understands he's going to have to put on a show. Will Wall Street buy it? I think the answer is they know the truth and literally have already bought it (see 3C charts).

A hyped up bunch of main street investors may offer Wall Street an opportunity to make a little extra money and set up the game board to their advantage. Nothing passes by Wall Street without some bright mind figuring out a way to take advantage of it.

So the positive divergences that have been seen on recent 3C charts suggest Wall Street may be trying to use this opportunity to do what they always do, make money and set up small investors for the fall, holding the proverbial bag.

As you can see by today's charts, it appears that there wasn't a panic sell-off, it appears that the market makers and specialists worked the bid and ask lower all day until the ultra important and absolutely meaningless, Dow $10,000 level was breached, which also happened to coincide with a support level in the SPY that was breached at the exact same time.

What happens below $10,0000? As I've expressed many times, the human mind gravitates toward whole numbers and Dow $10,000 is the Royal Flush of whole numbers, but beyond that, can anyone tell me why $10,000 is an important level to our society? I bet you can't, there's nothing anymore special about $10,000 then there is about $10,019.21; it's simply in our minds-just like the $9.99 sale rack-retailers don't want you thinking in whole numbers because that extra penny makes a big difference in our minds. The market has a lot to do with our minds, we create these meaningless benchmarks and when they are broken, we act on them. Look at the volume as 10,000 was breached-whatever majority of longs were left in the market they set stops and were stopped out. The salivating shorts jumped in on the short side, after all.... “WE BROKE 10,000!”

While all this was happening, 3C was one of the only indicators probably in nearly all of technical analysis that was on a steady march north, this is a positive divergence and implies healthy accumulation, but this isn't the first time we've seen that recently. Think of the unthinkable rally in oil yesterday.

I'll explain my “JUDO Concept” one more time. It boils down to the simple exercise of using one's own momentum against them. For instance, short sellers below $10,000 are salivating at the chance to make quick profits as the market heads lower in their collective imaginations, but what if... the market headed higher? Retail or regular guy perception of short selling is very badly flawed, even for those who participate in it. There's a bigger fear of being short then long and it is totally unfounded, but it is what Wall Street has sold us for decades because the simple fact is, the products that they are able to sell to the middle class masses do not include short selling; on a managed account basis, that is reserved for the elite who are called “Qualified investors” and invest in Hedge Funds that can go short. It's all marketing.

So assuming our market goes higher, between the real losses short sellers will feel and the instinctive fear of losses greater then what is actually possible, we get a “short squeeze” which simply means the shorts try to mitigate their losses by covering their positions and covering a short position is in reality, buying the equity back or put another way, it alters the supply demand dynamic and shifts it toward an imbalance that is heavy on the demand side. When we have more demand then supply, we see rising prices. The more prices rise, the greater the loss for remaining shorts, they then cover and increase the demand, prices move higher and the cycle continues. At some point in that cycle, the average investor, whose psychology is arbitrarily and inherently bullish (again, this is due to decades of Wall Street brain washing) becomes fearful, fearful that they are missing out on a real rally, “maybe this is the bull market” they tell themselves and they further throw off the supply demand dynamic with their buying. Before you know it, we have a real bounce and the further this bounce can carry, the more it favors the game board Wall Street has set up. If the bounce can break some technical levels or show extreme momentum, even the hardcore shorts are forced to cover. Technicians now look at the market and see a technical breakout. Really though, of you are biased enough, the market will show you what ever it is you want to see. As Wolves, you job is not to see what you want to see, it is to look for what really is. A wolf would never imagine a rabbit, but if it sees one, it surely will give chase.

This is the scenario that I hypothesis is taking shape. As I said, it's a guess, but everything we do in the market is a guess, the only difference is whether it's an objective, or an arbitrary guess. That last sentence is the difference between gambling in the market and trading/investing.

So I'm looking for stimulus that triggers upside momentum, a scare rally (which will not scare me out of my shorts as I have no objective data to suggest this market is or is about to tun bullish). At some point it will end and now the bulls, the longs will be the ones being setup. The market declines (remember that initial Fed policy statements are almost always reversed within days. As the market heads lower (and the bounce will set up hundreds of high probability , low risk shorts) this time the supply demand equation will be shifted toward supply and the further it falls, the more supply there will be, this equates to lower prices. This will probably be the last Hurrah before the market takes out it's last bastion of support and when that happens, we enter a trending market, with our portfolios stuffed full of short positions that gain every penny the market drops.

I also believe-bounce or not, we will enter a new kind of market that most people have never seen, a secular bear market. We've been in a secular bull market since the early 1980's. Most traders have never experienced such a market and all of their concepts of the market will be in direct contrast to reality, this is why I say over and over that we have a historic opportunity to make money.

Now, I was asked has 3C ever been wrong before, the answer is, I think so. Whether 3C is wrong or whether smart money changes it's mind, I can't tell, they do change their minds and smart money is not always so smart, think Lehman Brothers. However I do not recall ever seeing a divergence this complete fail. If you study the charts that I post you will see a nearly perfect correlation between divergences and reversals. IT tracks smart money, it does it better then anything I've seen in well over a decade of studying and teaching technical analysis. The biggest drawback to 3C is user error, not understanding it's complexities or looking for what they want to see rather then looking at what is.

Tonight I'm not listing any trades. We have plenty in place and I've given you many ways to play the bounce. You don't have to make this harder then it needs to be. Consider the longs from last night which are all short squeeze candidates or just use a simple leveraged market ETF-I prefer ones based on the Russell 2000 or the QQQQ. Here are a few symbols: UPRO, QLD, UWM, SOXL, URTY, TQQQ, FAS and UDOW. Keep in mind that if you play this bounce (or what I believe the odds favor as a bounce) that this is a quick counter trend trade and should not be a huge position. You may even want to consider a 1% rule. Keep your eye on the real prize and those are the short positions that are for long term trending, the positions we'll probably hold for 6 months or longer. I want to enter those positions on market strength and a little at a time to get exposure, but take advantage or rising market prices if possible-sometime you never know when that turn will be exactly and how far the first day of it may carry the market down.

Here's an update on the dollar. I feel longer term the dollar has more upside, but in the near future I believe it will take a hit. Eventually I feel it will go down. So maybe it's best to say long run down, midterm up, short term down.

This is a daily chart, you can see the red negative divergence and the white positive divergence.

This 15 minute chart is a little more difficult to understand, but just remember this, if 3C confirms a trend, there is no accumulation or distribution and it does almost exactly what price does. However, when price moves lower and 3C either moves higher or fails to move lower, you have a positive divergence or accumulation. When prices move higher and 3C fails to do the same, you have a negative divergence/distribution/selling. In the box, price is close to a new high, 3C is making a new low, or vice versa, this is the strongest divergence.

Also, the longer the timeframe chart, the more serious the divergence.

Here's an update on Oil.

This is a 30 minute chart so it is significant. The July market rally was caused by a 30 min divergence.

Here we have a 5 min chart of USO, it's the earliest timeframe that can still show direct institutional investment. Note that it started in a positive divergence as we had already been seeing that days before in the 30 min chart above. The second arrow makes particular note of the accumulation that happened after a horrible inventory report and at the lows of the downtrend. You can see, 3C confirmed the uptrend today and of note at the far right is the pullback in the late afternoon today, 3C carried on higher to form a leading divergence. IT appears the oil trend has more room. I think I published a rough VWAP estimate of the target yesterday on a daily VWAP chart.

Today's market....

SPY 1 minute. As you can see, the gap higher was immediately sold off. The second red arrow shows the highs of the day, sold off-remember this is the market maker/specialist timeframe-part of their job is to accumulate positions for institutional money, the lower the price, the better. After the highs were sold off we saw a moderate, but persistent downtrend in price, 3C was slanting up the entire time. And the second white arrow shows where the Dow broke 10,000-no selling by the market maker, just accumulation of the supply that was available when supply outweighed demand as sell- stops were triggered and shorts sold. Finally as the Dow plunged in the last half hour or so of the day, 3C went into a leading positive divergence.

If it were just one chart and 1 3C version, I may not feel as confident, but here's the DIA and a different version of 3C, I didn't draw any lines because they are exactly the same as the SPY chart above. What are the random chances of that?

And here's the institutional 5 min chart of the QQQQ

Questions about the market's bearishness?

NASDAQ 100

S&P-500

Dow Jones 30

Nuff said?