Go With What You Know

That is the best you can do, make decisions based on what you know RIGHT NOW, not yesterday, and certainly not tomorrow. The only certainty in the market is after the move has occurred and usually there's not a lot of $$ to be made at that point although as I have been saying recently, "Get your toes wet-not dive in full force". I want to remind you we have had 11 days of market action in this "Bounce". Of that 6 days have contributed to the advance. While it seems like forever (and that's probably my fault for speculating with regard to "when"), this is not an extremely long move considering the average leg recently up or down- July was 25 days on it's advance.

I also want to remind you that 3C caught this bounce/rally-(it's semantics) as early as August 25th, maybe a bit earlier. It took that much time between when we first saw accumulation and the trend up to start, that is because accumulation takes a little time, as does distribution. If you are Goldman Sachs and want to accumulate a 30 million share position, you can't just go and buy 30 million shares on the market, you'd quadruple prices, even if someone got wind of the fact you wanted to do that. At the same time it takes DEMAND and time to sell those shares, and if you want to establish a short position, even more time. As trading has unfolded over this bounce, so has the bullish motivation regarding the "perceived" H&S bottom pattern. I posted a chart earlier that shows when bulls entered the market, it was when the SPY was above the neckline around $113. So the first part of the demand equation is met by accumulating a position and driving prices up forcing the shorts (which increased their short position quite dramatically the second half of August) to cover-cover means to buy, thus they can unload. The further up prices travel, the fewer shorts there are to cover so you need to open a new line of demand and that seems to only take place above $113, this the market penetrating that level numerous times this week. Why don't they take the market down big after that, maybe because they haven't filled out the short position size that makes the trade worthwhile. Any dip that carries down too far will cause those longs to sell, if you are doing what I have suspected since before the bounce started, then you don't want that, you want them in that trap. Otherwise you get a half hearted move down.

One last thing I want to remind you of, before this got started, I told you "this is going to be scary", I posted example charts of what it may look like and asked you to try to put yourself in the emotional moment of those charts to prepare you for what was coming, so I'm not real surprised by the reaction some people are feeling. The market mechanically is driven by supply and demand, but what creates supply and demand are emotions. Count your losing trades that would have been winners if you didn't react emotionally. Just today I received probably 10 emails from people in WOWS making money because they jumped into emotionally difficult trades and stuck with them in tough times. EMOTIONS DO NOT SERVE YOU WELL IN THE MARKET WHATSOEVER.

So there's only 1-2 people that I really read and have a very high opinion of, 1 is Don Worden because he is one of the great innovators of technical analysis throughout the 60's and 70's. His indicators were used by Wall Street firms, his indicators were the basis for some of the more well known indicators out there (whoever publishes first gets the credit and he didn't publish). So here's what he had to say about the market tonight and I show it to you because it's in line with my findings.


The Worden Report (Thursday, September 16, 2010)


Smokin' Down Deep


      Well, of course, it was time for a negative day. It was easy to see it coming, since yesterday was a modestly positive day. The day before that was modestly negative. It's all summed up in the pulsating buzzing of a snare drum. The beat isn't actually that rhythmic, but it is rhythmic enough to put a snap in your step as you plod from day to day.
       I must admit the market was unusually forthright about its mood today. The balance of activity was definitely on the negative side. Twelve of the 16 Breadth Groupings were Negative, two of which were Super-Decisively Negative, with another four Decisively Negative. That only left four more Groupings, one of which Super-Decisively Positive and another Decisively Positive. That made for a pretty Negative impression overall, but nevertheless half of the 16 were Indecisive, the same type of thing we have been seeing. Not something to be basing big wagers on.
       The Ten Important Averages moved an average of a tiny -0.26%. 
       The Dominant PV Relationship was PDVD (1283 stocks), another ho hum reassurance that somewhere underneath everything going on is a quietly smoking bear market. 
       There were no changes in the Trend Table. -DW


SO HERE'S WHAT I FOUND TODAY....

AAPL is definitely the heaviest weighted stock influencing the SPY, today they were nearly a spitting image of each other. Tonight I created a version (since NASDAQ won't tell you the formula for weighting) of the NASDAQ 100 weight, it came close to what I know AAPL is weighted at. I took the float and multiplied it by price- AAPL was weighted 7 times heavier then the #10 stock in the top 10 and about 14X heavier then the average component. So what's going on in AAPL?

Above, the 3C chart (Daily for AAPLAAPL. At new highs, both indicators should be at new highs just for confirmation.

A Check of 3C vs. Don Worden's indicators, MoneyStream shows the same as does Time Segmented Volume so this is no 3C anomaly.

Here's today's 1 minute as it seemed the SPY was desperately being pushed into $113, it appears the market makers weren't willing to take AAPL into their inventory once it passed $274-negative divergence-possibly going short. You can see the 2 pm positive divergence used to kick off the move in both AAPL and the SPY at the white arrow. You can also see 3C's effectiveness in the only other 2 divergences on the chart-yesterday's close which pushed AAPL higher this a.m. and the negative divergence that put it into a late morning trading range.

Onto the SPY

The hourly shows the August highs negative divergence/reversal, at the white arrow the accumulation before the bounce started and the continued distribution/sell side trades.

A quick check of another 2 versions of 3C for confirmation , both showed all the major events above, note this is purposefully written differently so I get confirmation only if it's there.

Finally the 15 minute confirmation.  What we see on the hourly. From the accumulation before the move to the selling during it.

Here's a triangle on the 15 min chart of the SPY-traders are looking for a breakout above-the bulls any way, it's a continuation pattern of the uptrend. Perhaps the rush to push the SPY in the final hours of the day was to give the impression of a breakout of the VERY OBVIOUS triangle. We know what happens to obvious patterns, we see it multiple times a day. As soon as the market closed, the wide spreads and thin liquidity of after hours trading immediately took the SPY up, within a second of the close. Again, I don't want to create anticipation by speculating too much, but what better way to get longs in at higher prices then to throw them a bullish breakout going into the over priced after hours market.

As for the Q's that have been stealing the show-if you know about Dow Theory you know 3 other averages have not confirmed and being the Q's are the least influential, the implication is they'll get hammered back down. On a reversal, shorts on the Q's will be a clear edge. One reason though to run the Q's up is to create a bullish atmosphere. Clearly it only takes a couple of stocks to do it and AAPL has been on a tear.

So the NASDAQ....

The hourly NASDAQ 100 A/D Ratio, note the huge drop off of participation into today, the white arrow marks the start of the bounce.

Here's the Advance/Decline ration for the NASDAQ 100 today, clearly confirming the hourly chart as we saw more stocks declining then advancing into the final hour.

This indicator is used by NYSE traders to measure money flowing in and out-below 0 it's flowing out, above 0 it's coming in. The trend on this 15 minute chart though clearly confirms the charts above.

And here's the same indicator (hourly) on the SPY-white is where the bounce began. Same trend. It seems AAPL has a lot of uses.

As for internals, of the DOW top 10 weighted stocks, 4 were up, only 1 was up on higher volume, the other 3 showed the most bearish price/volume relationship possible. The major price/volume relationship for all stocks was close down/volume down, this is the hallmark of a bear market.

So that's what I've got for you tonight.

I could speculate as to what an opening gap higher in the a.m. might lead to, but I'm going to let the market show us what's what in the morning. One thing I feel pretty strongly about is this does not look like the strength one would expect to see going into a potential H&S bottom. Retail traders do not run this market. If the notice of the bounce coming a week before it came isn't enough to convince you who really runs this market, I don't know what will convince you. Retail traders are good for 1 purpose on Wall Street.