Back Into The Triangle...

I had 2 really good questions tonight. The first was basically a question regarding the outflow of money we are seeing in the market, particularly in pooled managed assets like a mutual fund. The question was more or less "how can the market advance when we have huge sums of money exiting equities?"

My answer, although there could be several, is this:

For the sake of example only, lets assume the Dow 30 is actually the Dow 10 (so I don't have to list all 30 stocks). The stocks in the Dow-10 would be IBM trading @ $126, MMM @ $82.75, AA @ $11.07, BAC @ 13.37, GE @ 15.70, PFE @ $16.65, INTC @$17.90, CSCO @ $20.64, MSFT @ $23.93 and T @ $27.39. That is our fictional Dow-10, but using the real closing prices today.

The averages are weighted according to price, not Market Cap. If they were weighted by Market Cap the market would be much lower.

In our fictional scenario, MMM and IBM both gained 1% and all of the other 8 stocks in our Dow 10 lost 1%. The breadth would be extremely negative, we'd have 1 advancer for every 4 decliners, our A/D line would be very ugly. THIS IS WHY I PAY ATTENTION TO MARKET BREADTH. The Dow-10 would actually close higher for the day unbelievably because the net gain of the two advancers would have been $16.85. The net loss of the 8 other Dow-10 components that each lost -1% would be a loss of $15.16 so our net gain would be positive by $1.66. The Dow-10 would close higher even though we only had 2 advancers and 8 decliners. We know there's manipulation in the market place and the money that was flowing out would not change anything if the smarties moved only 2 stocks higher and it's not hard to do. Market makers could work the bid/ask higher, perhaps there were good earnings in IBM and MMM, whatever the case, the outflow of money would not effect the Dow's actual gain or loss. On the opposite side of the coin, we could have those 8 stocks all advance 1% and the 2 decline 1%. We'd have 4 advancers for every 1 decliner and the Dow would close lower for the day. This is a house of cards, eventually it will come tumbling down if not for that reason alone. There market is thin and has been getting thinner ever since the 2009 bear market rally kicked off.

The other question put to me was the market tonight is trading higher in after-hours, and “do I think there's a leak of the Jobless Claims data that is causing this?” I don't know what is causing it, I didn't see anything that stood out to account for it.

However, to answer the question, I'd say there are tons of possible reasons why, but I can think of one that I witnessed and was a part of that would perhaps indicate the very opposite, that the jobless claims would be negative if leaked. Understand I'm not making a statement of what I think jobless claims will come in at, I'm just giving a hypothetical answer based on experience.

I had an order once in after hours when I was relatively new to trading, the market is very thin in after hours and a lot games are played. I don't recall the stock or price, just the situation. I wanted in bad. I put in a market order for 100 shares of a particular stock (currently most after hours trading is now limit orders only). Because after hours volume is so thing and your options for routing orders through ECNs can be severely restricted as is your view to what is actually available at what price and quantity, I had a situation where I had a market order of 100 shares. They filled at my price, but only for 5 shares, the rest of the shares were filled at a significantly higher level, this can happen in certain orders in the regular market but it's or it was, much more likely in the extended market. They can change the bid/ask size in micro seconds. There are a lot of variables depending on your broker, what they will allow, the ECN you are routed through, its access to other ECNs and in what stocks they will allow it. Truly, depending on your broker and a lot of other variables, there are tons of variables unlike regular market hours. Many will only fill round lots like 100 and most require limit orders now. This can lead to you missing an entry and if you want the trade, then you may be forced to chase it higher, especially if you show your hand of how many shares you want. They'll just keep moving the ask up.

Now, here's what happened which could be contrary to the idea of the jobless claims coming in with a good number.

I owned a bio-tech stock and the next day they were to receive an answer from the FDA regarding whether their new drug would be accepted or not. I think it closed around $10 during regular hours. I got a call from a friend who put in an order to sell in after hours at a price of maybe $10.50 hoping to catch some newcomer during the extended market, his order was filled. So I looked and saw there were 5000 share bids and they were hitting orders at $10.50 and higher. I put half of my shares out at $11 and I got filled, then the bid came back down to $10.50 so I put the rest of my shares out and sold at $10.50. They kept flashing large bid sizes of 5000 and 10,000 blocks. Soon the market became very active, the spreads between the bid and ask were very wide and eventually the price ended up around $11 as this market got very active. We had a 10% gain in after hours. The assumption was there was a leak regarding the FDA letter and it would be good for the stock so people saw these bids and often they'd disappear and reappear, but the market climbed and retail Joes were buying up the stock left and right. Come the morning the FDA letter was released and the drug was not declined, but the FDA rather said they wanted to see more tests. The stock the next day in regular hours was cut in half-trading 50% lower. The smarties knew about the letter alright and they hit a few 100 shares asks at higher prices and enticed the Joes to enter the market on the buy side creating a buying frenzy, at the same time apparently, the smarties bought enough to get the frenzy going, but they spent the rest of the session selling to fill the Joe's orders. So the game left a lot of Joes holding the bag as they saw their investment get cut in half the next day. Sp we had a very active after hours market with extreme gains, but in the end it was a trap.

Many people attribute the 2009 bear market rally to after hours activity and manipulation. Look at the chart, the entire rally was on lower and lower volume, but all they needed was an earnings report or some kind of news to drive prices up in the extended market. The next day the market/stocks gapped higher as retail investors rushed into the market after seeing the AH trades.

In after hours there's very little volume and the spreads can be huge. The flashed bid and ask sizes make Joes think something is going on and they chase these wide bids higher, but it doesn't mean that good news is coming out, it's just the game that is played and the players are smart institutional players who have been doing this a long time before the general public was given the ability, about a decade ago to participate in extended trading.

So there's a lot of unsavory characters out there and a lot of manipulative tactics. I avoid extended trading altogether and don't put much thought into the prices I see as far as my analysis goes. Unless you specialize in this kind of trading, I'd stay away.

So I don't know why it's up tonight, but I'm not too concerned.

As for today, I warned something like this could happen, over the weekend and last night. To be honest though, I expected a much bigger scare move up, we may still get it?

As for the market today, the Beige Book in reality showed what we've known since Q1 2010 when GDP fell off from 5%. The reality is different from the perception being sold. The perception is we have growth, it's just slowing. The reality is the economy is tanking and heading dangerously toward a double dip. There's no sign that growth is slowed, but stable. Growth has slowed and continues to slow.

Here's our daily chart.

We got the close higher, but the long wick on the candle showed it to be a day that wasn't likely to create the false break out I mentioned.

We have some interesting 5 minute 3C charts showing apparent positive divergences like this one of the DIA

However the 1 minute came in a bit differently...Here's the Q's hitting a new daily low in the 1 min chart.

Then we have the more significant SPY 10 minute chart showing a leading divergence that is near the levels before the bounce started. This suggests to me that nor only did they sell all the inventory, but put in a decently large short position.

Right now there's a lack of consistency and I'm not sure what's behind it. I'm thinking we still may get that new high head fake like we saw in MSPD

The yellow box is the head fake and it led to lower prices, I believe it will tank soon, especially when it breaks the support level of the bear flag.

MSPD is still a trade I like a lot. It does appear we'll see some early strength in the a.m. which may be a good time to enter or add to that trade. There are several 1 min positive divergences there, the 5 min is showing a lot of distribution, but that doesn't mean it won't gap up and test resistance perhaps as high as $7.50. Still the 5 min negative divergence ultimately trumps any 1 min move.

More appropriately, the same chart I showed you last night of the SPY in June.

Note that we had a poorly formed hanging man, the reversal set up we have now is much stronger, but that day with the arrow was the head fake that made a new high and then came crashing down. Anyone who has studied traditional candlestick charting knows that this is not the expected outcome and this is precisely why Wall Street perpetuates these manipulations.

Tomorrow is probably going to be a bigger release then today's with the 8:30 release of Initial and Continuing Claims. We also get the Trade Balance at 8:30 and Crude Inventories at 11:00 a.m. so there are a lot of important, market moving releases tomorrow. However in the long run, the GDP falling and the employment picture is simply the high man on the Totem Pole. Traders can't ignore the long term implications for short term, volatile reports that refuse to form a trend that shows improvement. They can however use them to set up head fakes and bull traps. Remember that a failed move almost always reverses and quickly and falls far.

I don't see anything in USO that suggests we'll see a rally in oil tomorrow, at least nothing consistent. It's one of those charts where if it doesn't jump out at you, I pass it by. So I'm not expecting much there on the upside. There's only 1 one minute chart showing a positive posture, the rest are showing negative divergences.

In fact most 3C charts are nearly lateral or in line with price. 3C does not always have a finding in a chart every time. It picks up on unusual activity of accumulation/distribution. This suggests to me that smart money is not always active in the market. It may be that they have set up their position and are just waiting for it to play out. They don't need to be active everyday, just as you set up a trade and wait for it to play out.

So given the uncertainty in the charts, all around(in the short term only, the longer term is still solidly bearish), my best “Guess”, and it has nothing to do with after hours, but more to do with the 5 min positive divergences, is that we will see a volatility move higher, perhaps a new high which sets up a bull trap and reversal with extra momentum to the downside. The close of the TICK Index seems to support the view of higher prices in the a.m., but this isn't an especially strong signal, it's just another piece of the puzzle that fits with the 5 min negative divergences.

Back to breadth...

Look at the NASDAQ Advance/Decline ratio for today-it wasn't positive and we've had days of this, price moving up on fewer and fewer stocks.

As for the Price/Volume relationships, the overall market closed up on declining volume-this is as bearish a relationship as you get. The exceptions were the NASDAQ 100 that closed up on advancing volume (very bullish)-but did so on fewer stocks for the !/D chart above into the close, the Dow also had a bullish P/V relationship as well as the S&P. . The broader Russell 2000 and 3000 both closed up on lower volume (very bearish). If this seems confusing, that the NASDAQ closed up on higher volume and it's dominant P/V relationship internally was strong as compared to the a/d line, remember that the A/D line is looking at 5-minute intervals and how many stocks are participating in each interval.

This is one of those strange Bermuda Triangle days when I wish I could tell you, we have XYZ telling us the highest probabilities are “XYZ”, but that is simply not the case today and beyond what I have said, anything else would be pure conjecture with no objective basis. These periods happen and I'm not sure why, but they typically pass within a day or so.

Tomorrow should be exciting.