The TRIN WINS

The TRIN Index in simple terms to understand works like this, a close below .70, the lower the better, the chances are good for a close lower the next day. Friday night the TRIN Index was at .56 which suggests a probability of a close lower the next trading day-(today). At 1 it is neutral. At 2 or greater it strongly suggests a close higher the next day. Today it closed at 3.81-a very high number with a strong indication of a close higher Tuesday. As of Friday though, before the market closed I had updated and told members they may want to take some profits because I had a feeling today would either be down or kind of go nowhere. The TRIN can not be used to predict anything beyond a day so it is not a concern for long range planning.

Interestingly, the market internals were extraordinarily strong on Friday, today they were extraordinarily weak, almost as if the market is entering 1-day overbought, oversold levels. The dominant price volume relationship was pretty useless, stocks down, volume down, it is the most typical relationship seen in a bear market, one thing it does tell us though is that today was not characterized as a panic sell-off, in that case volume would have been higher today.

First, lets just put this bounce in perspective-it's a bounce, not a market trend and as I warned, I would not go swinging for the fences here, but 3C still does show some revealing character about it. I just want you to understand the larger plan and strategy is a bear market strategy and this bounce's primary function or usefulness to us was not as a long trade, but to set up high probability/low risk short trades and to perhaps get the Judo concept rolling. This is not off the table as today took back about half of Friday's gain, it didn't set new lows, although it could. In that situation most of you have short positions in place by now and it would still be good for us. Now as to the analysis...

As I noted in an earlier update, gaps provide some of the strongest and most reliable support and resistance, today's highs were halted right at the gap resistance seen below in this chart

Also, as I looked at the approach to resistance tonight I saw this Ascending Wedge which is bearish.

Wedges are known to retrace their base, today's close did exactly that.

As I mentioned several times today, we did see several nice 1-min 3C divergences that were positive, a few that were negative (red=negative, white=positive). The posture below is indecisive as it could lead to a positive divergence from it's posture, but also it confirmed most of the trend today which suggests that smart money was not active and was more or less letting the market do it's thing. As I have said many times, the initial reaction to the Fed is almost always reversed with in a day or two, Friday's reaction was bullish, today obviously that reaction was reversed. Keep in mind, these 1 min. positive divergences are usually market makers (on the 1 min time frame). So what we may be seeing here is a series of accumulation at lows by market makers, then they sell into the high, operating as day traders. With seemingly little institutional orders to fill, it would make sense that they are just trading their own accounts. It's said up to 30% of the volume in a stock is the market maker trading their own account.

What was interesting was that the 5 min also confirmed the downtrend, again suggesting no real interference on the part of smart money. See above-3C is in almost lock-step with price.

The hourly chart above where the positive divergence seen for a bounce was strongest did not loose any ground today and still remains in a positive posture (see above). From what I see for the most part, it does not appear as if there was much interaction between smart money and the market today at all.

USO-or oil was a bit different. Here's the long term chart where the positive divergence was spotted and consummated.(see below)

However, below you can see a very clear leading negative divergence on the 10 minute chart pulling prices lower (below)

The dollar did close up today and that may have had something to do with it, but the dollar looks exceptionally vulnerable on the price chart of further downside (which is good for oil generally speaking). On one min charts there's confirmation with a negative bias, on the 5 min chart there's a clear negative divergence. (below)

This is one of those moments that doesn't make a lot of sense. Both oil and the dollar seem to be under short term distribution, oil was effected negatively today, while the dollar seems as if it will be affected negatively shortly. The trouble is that direct comparisons between the two commodities can not really be made with 3C. It's just telling us that there's distribution, how long, how much, how deep, we can't know with precision, although the negative bias of the 1 min chart in the dollar suggests it may turn very soon, presumably good for oil. To further complicate matters, when looking at at the candlestick formations between the two, the dollar's short term is positive, while oil's short term is negative.

This is one of those moments where there is no clear edge as of now. If I had to absolutely bet on the short term direction within the next day, I would bet oil has another day of downside at least and the dollar has another day of upside-or at least that would be the first half of the day's trading. Notice I used the word “BET”. When I trade, I don't bet, I look for high probabilities and I don't see them here right now. There's long term 3C room for more upside in oil, but as I mentioned, there's no way to know how much their average accumulated price is, therefore no way to say, “They must take oil to $XYZ to make money on this trade”.

Looking purely at price action, being I can't find a strong edge in the mixed readings (which can be a function of the short term charts leading in the probable direction while the long term charts take longer to turn) I see very bearish looking patterns in all 3 major averages, it's a daily bear flag. Being an obvious pattern it is susceptible to a false breakout to the upside, which would make sense with our analysis up until today-that is what we were looking for-a malicious bounce. A bear flag is a bearish, downside continuation pattern and is obvious in all the charts below.

There is no real support anywhere to stop these averages from crashing. A false breakout-the malicious bounce or Judo Concept- would fit perfectly into this scenario. Again, this is why I stressed that the bounce for our purposes is not so much about a long play as it is to set up the bigger short play picture. If tomorrow, we do see a breakout above these flags, I would seriously consider selling short into it or at least getting my positions started, or add to them if they are in place. On the other hand, we also must watch for a false breakdown and then a rally back into the flag, in my opinion it is the lesser probability. If prices broke down from the flag, I would be very tempted to increase my short holdings.

There are very few long term 3C charts that do not look bullish for a bounce, however, as I explained, the change in character will always start in the shorter charts and filter it's way into the longer charts unless there is intense institutional activity which I did not see today. On the other hand, we can see short term moves that take the market lower with the short term charts negative all so they can accumulate positions at lower prices for something like a bounce, the difference is, at some point, we must see the short term charts turn positive indicating that the accumulation has begun. So you could say we are at a cross roads of the unknown at this point.

In cases like this, I want to be prepared, but I don't want to commit or over commit until the probabilities have lined up in my favor. We do have the high TRIN reading, it could produce a false upside breakout tomorrow and the short term 3C charts are not so far gone that they could not produce that bonce with a close higher tomorrow. The downside projection of the ascending wedge was fulfilled. As you know from my analysis last week, I expected this bounce to end at some point this week- many of you who have emailed me have received that response. This is what makes logical sense to me, but I want proof.

So, if there is a bounce tomorrow and I had any long positions in the market-oil needs to be evaluated separately, but it it also true to a degree- I would be looking to unload them into strength, Furthermore I'd be looking to go short into strength. I would not at this point be chasing any more long trades other then those that trigger, look good and you understand and treat them as counter trend trades with excellent risk management. For that reason I will be adding short ideas to tonight's trade list.

One last chart that suggests some earlier strength in the a.m. which could lead to further strength, as price sold of into the close, you can see in the blue box a strangely positive looking Tick Index. (Tick is in green, SPT in Red-red arrows are tick negative divergences, white are positive divergences). See below

On one other note, I have heard from several people, mostly dealing with Scottrade that they have had positions, profitable short positions that are being closed by Scottrade. The only way around this that I can see is to buy inverse ETF's, meaning you are long the ETF, but you have short exposure to the market. They can not call back a long trade for a lack of shares to loan. Understand though that I do prefer a mix of inverse ETFs and real shorts as each have their benefits and short-comings.

On a personal note, as you may know, my wife and I are going through the immigration process, so I will not be around tomorrow after about 2:30 until after the close. Thursday we have our interview at 10 am, I'd hope to be home with great news by 12 pm. She's very patient with the time I put into the market and WOWS, so I hope you can be patient with me for these two days. So that is my schedule this week. Please wish us luck!