I am going to refrain from commenting on the Mexico City Stock Market bomb threat that apparently sent the market plummeting in the late afternoon. It's a strange event and I'll leave it at that.
We saw late day accumulation Friday, it seemed we were past options expiration in which again, as usual the biggest open interest was pinned and call buyers of the SPY (and others securities)-especially $110/$112 lost their premiums as the calls expired worthless. It is a pretty well known fact, except for the most experienced options traders, that the juice in options is in writing them, getting the premium. As soon as you buy an option, the premium and time decay work against you and they work for the seller of the option. It appears to me smart money was on the writing side of calls for August (at least in our benchmark SPY). Also the Iranian reactor deadline came and went. It seemed as of Friday that the unusual institutional activity that suggested they were scared to death to hold onto any accumulated position last week had finally passed.
We saw a gap up today, that was quickly faded, this is usually market maker activity, even if they intend to close the market higher, they'll fill orders that us ordinary folks set before we head off to work, then they fade the opening gap, trigger some stops along the way and pick up shares that they sold at the opening highs at lower prices. That activity (buying the market by institutional money) seemed to kick in around 11:15 and again just before 2 p.m. today.
Here the red arrow clearly shows 3C's lack of interest in following the gap-this is the selling of the gap at the red arrow, a negative divergence. In the white boxes you see the accumulation areas I mentioned. The second one was right before the market headed up in a vertical accent and formed a bullish bull-flag/continuation pattern. I mentioned it earlier today in an update and the most likely outcome would be a breakout to the upside, especially considering the accumulation right before it took off.
Above is a close up of the 12:30- close timeframe today. You see that second small area of accumulation 3C picked up on right before the market broke higher and formed a consolidation/bullish continuation bull flag (in light red trendlines). Before the flag could breakout to the upside, the news of a bomb threat in Mexico City's stock market broke, this seems to clearly be the reason behind the dump in the afternoon (for more on this, read the previous post below). I'm shocked reading a few professional analysis sites regarding this incident, not a single one made that connection-one of our own members was on top of it minutes after it broke, but these sites have had the rest of the afternoon to put 1+1 together. Instead they give the hum-drum, luke warm analysis that investors were weighing the Monday morning merger and acquisition activity vs the overall market. This is a clear case of laziness in my opinion.
I have as recently as today told you about the correlation between the dollar and the markets. The chart below makes that clearly evident. Note the sell-off in the SPY (red) vs. the bump up in the dollar (UUP used as a proxy)-this is a pretty clear correlation.
As you can see below, the 3C hourly chart which as is evident, shows reversals via accumulation/distribution of fairly important swings. It clearly caught the bullish accumulation at the white arrow and now is showing bearish distribution into the red arrow. This is also part of the analysis as to why we might expect a market bounce and a move up in oil and certain commodities. The M&A activity in agricultural chemicals today (BHP/POT) may be an early indication of that.
The market (SPY as a proxy) across the board put in new lows for August-good for our short positions, not great for a bounce which may help our short positions, read last nights Judo comments about how the market uses it's opponent's own money against them. This is one reason I try not to trade around my long term positions, I use the 25% or so portfolio cash for that, but that's not the point.
This chart is what interests me. The VIX-Volatility Index gained today, it typically moves in the opposite direction of the market, but is not in the area of new highs for August. My interpretation of this is that traders (in general) are expecting less in the way of volatility in the near future then they were a few weeks ago. I'm not sure how to take this yet, as a contra-indication or as an anomaly, I am leaning toward a theory, you'll see shortly.
This is interesting considering volume on the NYSE, today is the 7th time in 2 weeks that volume has not broken 1 billion shares. I'd almost say there seems to be a malaise setting in. Remember, beyond a bounce, I m not bullish in the slightest and this could be the calm before the storm.
As Mark Twain said, history doesn't repeat, it rhythms. So I went back to the 2008 breakdown in the market, an exceptionally similar spot to where we now find ourselves. A Head and Shoulders pattern was there, the neckline was penetrated and we formed one last shoulder that ended in a bearish Ascending Wedge, just like now. I compared the VIX to the Dow 30 and found something interesting. The market made a new low that stretched over two months, the VIX however, just like now, did not make a new high. The high occurred almost two weeks earlier in June. The red arrow below shows the low in the Dow-30 (white line), the blue arrow and the red trendline drawn at the close of that day (the very last day on the chart) also showed a similar situation to what we now face. The date then was 6/24/2008.
Here's a follow up chart of the Dow 30 with the date 6/24/2008 marked by a blue arrow. Note the H&S top like now, the piercing if the neckline and an Ascending Wedge that has broken down-we have all of those things now. The blue arrow is the VIX anomaly I refereed to. From that point anyway, we saw about a 45% decline in the Dow. I placed the current SPY chart below for a rough comparison of the major events preceding the huge sell-off.
Now looking forward... Yes we did have several divergences, it seemed like a good place to bounce, it may still bounce, but anyone who has been here for any length of time knows that the main strategy is to take advantage of a decline, in my view, possibly a historic decline that is akin to the second shoe dropping. If there are high probabilities of a bounce occurring, and today until the Mexican Stock Market incident, I would say we did have pretty good chances of a bounce, I will give you the trades to take advantage of that. Right now it seems that this unforeseen event has put us into a situation where the probabilities of a bounce now need to be observed again, we need evidence of that being a high probability occurrence. Of course if you are in profitable long trades, please contact me so we can take a closer look and I can give you a second opinion. Long trades that trigger as well can be taken-it's up to you, but I'm always here for a second opinion.
We have a few things that standout that suggest the bounce may still occur-the negative divergence in the dollar should mean higher oil and market prices, this is still on the table but YOU MUST stick with your risk management plans. If you only lose a percent or two on a trade, you can always try that trade again, you also live to see the seven baggers and the gains that will make your portfolio's year. PLEASE do not forgo risk management under any circumstances and keep in mind what is tactical (like bounces) and what is strategic (like my long term bearish view).
The higher probabilities have always been of a move down. We try to take advantage of anything we have an edge on. Right now I don't feel the edge for a bounce like I did yesterday. So our strategy (the people I advise) has been to hold our shorts through the swings. I intend to stay on that path. If an opportunity in any one stock or the market presents overwhelming odds, then that will be listed. For now, until I see otherwise, I think we need to start thinking big picture again.
This means prepare your risk management. I prefer to have 25% cash on hand no matter what kind of market it is, it allows me to take advantage of high probability moves. As you see in the Dow chart above, there were several decent bounces that one could make some money off of. I also think until the $101 level on the SPY is taken out, I would not go swinging for the fences. There will be money to be made on the short side below $101. However, I would have some risk managed exposure to the market on the short side. Again tonight, I will list any trades that appear to be high probability. Things like today happen in the market, we must adjust quickly. That might even mean sitting it out for a bit until the trend re-emerges, each person will have their own style and tolerances. I am here for you in any way I can help, just an email away. If anything pops up, I'll update again tonight.
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