Sorry for the delay in the post, we (my wife and I) did some house hunting and ran into the absolute worst rain storm I've ever seen about an hour and a half away from home, it also takes me several hours to put together an update like this.
So last week I hope we all learned something about the market. We saw oil under accumulation, horrible economic news which does not benefit oil much and then a US Oil Inventory report that was so far from consensus, it's absolutely amazing it didn't break down and sell-off. We saw accumulation into the lows and I know many of you bought them on the updates (that's great-you conquered fear) and we saw one of the most improbable rallies in oil I've ever seen. The dollar was even up the first day so it didn't contribute to the oil rally (a sinking dollar can rally oil). The only explanation I can think of is the accumulation we saw days earlier. Smart Money bought and they were taking oil higher, THEY DON'T LOSE. They set the game board.
Here we see the early warning I told you about with accumulation seen on this 15 minute 3C (version 2) chart as early 8/18 and a huge spike on Wednesday the 25th at the initial sell-off lows. Like I said, they had the game board set, it was going up one way or another, this chart makes their intentions clear.
Then we saw nearly the same thing in the market, economic news coming out was one bad story after another, but we had been seeing the same tell-tale signs of a bounce brewing. They (smart money) broke the market below $10,000 on the DOW which is a huge psychological area for investors and the media, but in reality in means nothing. Dow $10,000 is no different then $10,017.11. This is part of the game, part of how Wall Street and their pals in the financial media brainwash us to do what they want; they know the human mind gravitates toward whole numbers and they make $10,000 a big deal so they can take advantage of it. Why do you thing a retail outlets always sell something for $9.99? It's psychology, that $.01 deep down in our subconscious makes $9.99 sound like a much better deal then $10. So when they broke $10,000 on the Dow Jones-30, stops were hit, short sellers jumped in, we saw accumulation and I know many of you bought for the bounce down there below $10,000 where Smart Money was buying (again, great job in controlling fear and using risk management). The average trader thought that the market broke such an important level, surely they believed it had to keep going down, but it didn't-it went up. Again, the game board had been set up in advance. Last week, those two calls I had to make were extremely difficult for me to publish. 3C said it was true, but everything in my mind, had I not seen 3C, probably would not have agreed. It was a major test for 3C and it passed and I breathed a big sigh of relief-these were very strange rallies to see.
The SPY 60 minute 3C chart above (3C in blue-version 3) shows distribution (red box) from about 8/2-8/9.Price is headed higher as you see with the first red arrow and 3C does not go higher-this is a sign of institutional distribution or selling, what we call a "negative divergence". We see what happens with the second red arrow-prices fall, but it's not long before they (smart money) start buying cheaper prices as you see 3C rise at the white arrow while prices fall-this is an accumulation or an institutional buying signal. Look at the two white boxes, at the lows in price, 3C heads consecutively higher showing even more accumulation and then prices jump.
This is the same chart but the DIA ($100 on the DIA=$10,000 for the Dow Jones-30). Note the same sell off at the highs, and the same accumulation as price declines. Note the white boxes, both times Dow 10,000 is broken (under the red vertical trendline) and 3C moves higher-then, the price reversal up.
So now we have this bounce that has started and where it will go is unknown as of yet. My first impression is that it is there for a reason and my impression is that the reason is it will be used as a scare tactic, a short squeeze and to bring longs back into the market. That's another lesson to understand; humans generally speaking are hopeful in the market. We want to believe the market will rise and that's how to make money. One reason is because Wall Street has done such a good job in scaring people to go short a stock. People have an irrational fear of being short, they believe that losses can be unlimited while the potential gain is limited to only 100% (that would be if the stock went to zero). They also make it seem confusing by letting us know what the mechanics of being short are. They are simple, you hit the “Sell Short” order, your broker will do the rest. You don't have to worry about the mechanics. Your broker will also stop out your position or issue a margin call if it goes against you, losses won't be unlimited because they'll cover the position themselves and you should NEVER meet margin call with cash in my opinion-you close the trade. This article from Trade Guild will show you that you CAN make more then 100% being short.
And this chart will show you that you can make money much faster being short then long. Why? Because fear is the strongest emotion in the market.
It took 4.5 years for the SPY to rally, in 1.5 years that entire rally and more was destroyed. You see how being short can make you more money, faster?
Why does the market want you to fear being short? It's simple, most Americans or many more then you'd think, participate in the market through things like 401k plans at work. Even though they may not be the active traders and investors like you who watch over your portfolio, they are tricked into buying Mutual Funds with names like “High Growth” or “Low Risk” or phrases to that effect. Whenever you have money in the market, it is always at risk, why would you not want to make as much as possible considering it's at risk anyway? For decades Mutual Funds were only allowed to buy stocks long, it was relatively a short time ago when this ban was lifted. So there were decades of Wall Street brainwashing to make people afraid of being short for the simple reason that if people had known the truth, it would be harder for them to sell their products. They demonized short selling as un-American, risky, complicated, etc. That stereo-type has stuck and Wall Street knows it's still embedded in the mass collective cultural thinking of Americans.
Back to the bounce this week....
I believe it may be a scare tactic. The market does bounce as a normal function of profit taking by shorts and enthusiasm by long traders. However, what we saw this week was very well thought out and planned in advance. I even talked about what might happen on Friday with the revision of 2010 Q2 GDP and Bernanke's statements in Jackson Hole, WY. I said this was likely a catalyst to start a bounce, even though his statements meant nothing and... the market rallied. Think about this for a second, GDP was revised DOWN from 2.4% for Q2 to 1.6% and the market took that as good news and rallied all because the analysts and economists of Wall Street had set the stage for expectations to be lower. So the GDP that was revised down to 1.6% was taken as good news and sparked the rally according to the talking heads-however we know that this was a setup because we saw them setting it up before hand. Can you imagine, GDP went from 3.7% in Q1 to 2.4% in Q2 and then was revised even lower to 1.6% and Wall Street had people fooled into thinking this was good news because “it wasn't as bad as expectations” that Wall Street set in advance? The economy is flat-lining, it's nearing a double dip. Look at the GDP, 5% , to 3.7% to 1.6% in 3 quarters. Does that truly seem like good news? Again, I repeat, Wall Street set expectations lower and created a bounce on a HORRIBLE revision, they set up the game board and the bounce.
Again... why? I think it is what I would call a malicious bounce that will scare people who are short, bring in the longs and when it goes high enough they'll drop the market and use what I am now calling the “Judo Concept”.
The Judo concept is when Wall Street uses your actions, against you to achieve their goals. Imagine that they can get the market up higher by creating a lot of demand from both shorts that are buying to cover and long traders who are hopeful that this is a recovery in the market. At some point smart money goes short and they drop the market. The longs are now selling and the shorts are now re-entering the market. Their using us to create the snowball effect both up and down as they play the opposite side of the trade. In Judo (a form of martial art), the Judo practitioner uses their opponent's own energy against them.
Above is a version of the “Judo Concept”. In the blue box the market makes a new high on relatively lower volume, a new high should see buyers aggressive, the lower volume shows them backing away from higher prices-this was a warning. The red box shows two days of “Doji-reversal candles”-there's no momentum left on the upside and volume is rising here on the sell-side. The next day the S&P-500 makes a new high on even lower volume (yellow box)-this is the false breakout, the Judo Concept. Buyers enter the market buying a new high, institutional money goes short selling short to the average Joe long buyer. Then they take the market down the next day. The longs from the previous day are now at a loss, short sellers think this could be a false breakout and enter the market, you can see what happens next, supply overwhelms demand and the market falls. Institutional money didn't have to do anything other then create a slightly higher high and the Average Joe did all the rest of the work.
Here's an hourly chart showing Institutional money selling short into the higher prices (this is the same period as the chart above, just on an hourly chart).
So we have to watch this bounce, understand that this may be the plan and do not panic if we do see a big bounce up (if you are short) and not get overly optimistic if you are long the bounce. The idea in the end will be to bring the market down quickly and far, that is my opinion as of now.
However, we did see a very low TRIN reading Friday of .57. A reading this low often means the market will close lower the next day, but not always.
Look at this chart of the TRIN Index (above) in green and the SPY in red. We see a red square with a reading of .38 and the next day the market was down. However, in the blue square we see a reading of .29 and the market was not down the next day. The difference between the two is momentum; early July was the start of a strong rally and late July was near the end when momentum was fading. Friday was strong momentum, so while there's a statistical chance of a down or weak day on Monday, I wouldn't be too concerned about it.
So now we watch for distribution, it may give us an excellent opportunity to get into excellent short positions at great prices, with much lower risk-if this is a scare bounce, it will only help us and I have hundreds of shorts lined up for this. If you want to play the bounce, on Friday I listed a number of leveraged ETFs (UPRO, QLD, UWM, SOXL, URTY, TQQQ, FAS and UDOW) that would be better then most stocks. The reason being is stocks are subject to sector rotation, some are in favor while others are out of favor. However a broad market ETF will rise with the market, there's no need to worry about sectors. I'd recommend not taking this bounce too seriously, I would not invest a lot on the long side as it can turn quickly and it is counter trend, however, if you can watch the market and updates you may be able to make a decent little profit, just don't get greedy and don't be fooled into thinking that this is a new bull market.
Right now 3C is a little mixed very short term, so I'm not making predictions on tomorrow, but both the market and oil have several 3C charts that are in line with price, meaning making new highs with price or confirming the uptrend. A couple are lagging, but none are showing anything ugly that suggests the bounce is over. I believe even if we have a weaker day tomorrow, the bounce is just getting under way. My guess is that it lasts throughout the week.
PLEASE, set alerts for the stocks on the watchlist. You can use www.FreeStockCharts.com if you don't have a charting system to do it with. These are REAL-TIME charts, are one of the only free real time charting systems I've seen. Or you can check out TeleChart and StockFinder (the software I use) by clicking the tabs for them at the top of the page.
If anyone has stock specific questions or any questions about the risk management I use (links are at the top right of the site- RISK MANAGEMENT) please email me. If you email me during the trading day and it's urgent, please put “URGENT” in your subject line.
Have a great week, lets hope this is a scare bounce as it will do wonders for our core short positions. After all, our main strategy is short this market.
I apologize for the late post, now I have to apologize to my wife :)
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