I'll Try to be Succinct

For one reason, I'm very tired, but I do have a lot to cover. For newer members there's a lot of past reading you can do to give you an insight as to how things develop.

I try to be as objective as possible, that's hard when you see a bunch of signals that tell you one thing and price action that shows you another. One of the key faults with technical analysis is letting price determine your course of action. Four years ago I'd have a very different outlook on the market right now, but since seeing Wall Street's manipulation and corruption in action, I know that price movement can not be trusted. How many head fakes on intraday charts and even daily charts do we see per week? Enough to know that Wall Street uses Technical Analysis' affinity with tradition and price patterns against them.

So lets look at objective data once more to try and determine our most likely probability.

First we must deal with the growing bullishness in the market and sentiment. I don't know how anyone can buy based on the Initial and Continuing Claims reports in which the largest state in the Union guesstimated as well as Virginia and 7 others let the Federal government guess for them.

So this bullishness has led to a number of analysts to see this head and shoulders bottom. I will tell you a couple of known facts, one is that H&S bottoms are typically larger then H&S tops and as with tops, volume confirmation is important as many traders found out when they failed to look at volume and called an otherwise random price pattern a H&S top during the bear market rally around May-July of 2009. Even more important is the fact that volume in confirming a H&S bottom is even more crucial then a top, yet the bullishness persists.

Here's some charts.

Okay, it looks like a bottom, but these are typically bottoms of importance, just as the tops are. The decline from the April highs is hardly a bear market downtrend, soon you'll see it in a different perspective. The bottom also is not all that big, as they tend to be.

Here's the H&S top, to the right with the two trend lines is where the bottom all the bulls are watching is located. Just in terms of perspective, the advance (bear market rally) from 2009 is about right to produce a top of this size. You can see where the bottom is actually part of the right shoulder side of the H&S top, does the decline that preceded the H&S bottom look proportional? Not really. There is that July low sticking out below the top's neckline, but I've seen many H&S tops with the same including to a lesser extent the Housing Bubble top.

Now volume...

I created a cumulative volume indicator so you can see the trend of volume relative to prices. In a top it's fairly simple, you see declining volume on the rallies (red arrows) and advancing volume on the declines (green arrows)-it just makes sense, traders are scared, they're selling hard and barely buying and that is what we see here in the top. For a bottom the opposite would be true, but two opposing ideas can't be true at once, and the top shows the proper volume.

The further the H&S bottom or Inverted Head and Shoulders develops to the right, the more important volume becomes. The most crucial area is the advance toward and through the breakout, it shows that bulls are getting very active and excited, jumping in.

However, as you know, we saw the current September bounce being setup with accumulation by smart money in advance. The reason? The "Listing Boat". During the second half of August, the net short side activity increased by 4.5%. This is why in my opinion smart money was active at the end of August, they were setting up a short squeeze.

The 60 minute chart above is where it was noted and where we have followed smart money's moves. Note the negative divergence at the August top, then the decline, toward the second half even more shorts piled in and around the end of August we see smart money setting the trap for the short squeeze with accumulation at the white arrow. It was mentioned here on August 25 and 30th before the September rally even started. Since then, smart money has been selling that position into higher prices, not accumulating for a H&S bottom. In fact look at 3C's current leading divergence level. Prices are higher, 3C is almost where it was before the bounce began-a negative leading divergence.

And this is where your answer is as to why we have seen this rally on low volume, there hasn't been an abundance of buyers, it's mostly shorts covering, thus the low volume.

However, before the bounce got started, we already had an idea what to expect, a short squeeze and what I called a "scary move up" which will draw in longs as institutional money sells short to them.

Green Shoots
I think we all remember the "green Shoots" phrase that was largely behind the 2009 Bear market rally, but look at this chart....

Above, the "Green Shoots" rally as the public believed we were on our way to recovery. Contrast that with the July 2nd closing low that was the time of fear of the Double Dip Recession. Price levels between the hopeful , "economy is recovering rally with 5% GDP" and the price at July 2 2010 with GDP falling off a mountain, we have the same price levels. does this make sense?

Back then the Fed had all kinds of things they could do-or so we were led to believe, read this quote by someone with a track record...

“Nouriel Roubini, thrust into the forefront after predicting the chaos wrought by the subprime mortgage crisis and the collapse of the housing bubble.

"The US has run out of bullets," Roubini told an economic forum in Italy earlier this month. "Any shock at this point can tip you back into recession."

That's a pretty big shift is the outlook isn't it?

Today's big gap up was "apparently" due to economic data out of China-nothing against the Chinese people, but their government hasn't been known for transparency on these issues, for that matter neither has ours. So we got a gap today from almost nowhere. I think there's more to it, I think it was just a reason or a way to justify the move. You know I've been looking for a head fake, the bigger the better and with smart money going short I believe they think the same. So they squeezed the shorts, the second part was to pull in the longs and create a bull trap. With all of this sudden interest in the H&S bottom consider this chart and whether a move around or above the neckline might just do it...

Today's candle doesn't look good to me, but could this or a move slightly higher be enough to finally pull those longs in if they haven't already started filing in the market?

You know I was looking for a head-fake to end this rally that looked like this

The one in the bow with the arrow is what I'm looking for, we had a couple of close, but not quite there days last week. The other arrows all show declines that started with head-fakes. Each one posted a new intraday high, then the market came down trapping the bulls that bought the new high as evidence to them of a continuing trend.

I think I said last night that a good bounce play would be semiconductors, they were the #2 performing industry group today out of 239 industry groups, the reason for me... because they have been one of the worst performing groups and people gravitate toward a sale. It also has another more sinister meaning, they are the worst performing recently for a reason, so if you wanted to go short semis, wouldn't you want to do it at the most favorable pricing?

These next two charts are kind of enlightening...

History, learn from it. Above is the 30 year bond yield in green vs. the S&P-500 in red and below is the 10 year yield in green vs. the S&P in red. Note that when yields top out and the market tops out, we get a reversal, just look at price action after the white arrows. It's not so far fetched that  the April highs were our top (coincidentally that is the head of the H&S top). Just another coincidence or are these the objective pieces of the puzzle?

Next the VIX(CBOE Volatility Index or the "Fear Index". The VIX trades inversely or has an inverse correlation with the market and we just set a new intraday and closing low today.

The VIX in green, the SPY in red. Note extreme lows in the VIX produce sell-offs in the market. Extreme highs in the VIX produce rallies, we are at lows not seen since the April decline that ended with the flash crash. Plus you saw the charts I posted of accumulation in the VIX, the last time we saw that it produced the April decline.

All Rallies Are Not The Same...
The difference in the quality of a rally from one to another is market breadth or the internals. Here's a look...

First above in green is the advance/decline line for the Russell 3000. The line takes advancing stocks and subtracts from that declining stocks, so in a healthy trend it should rise, but you must compare it to similar points in price, the Russell 3000 index is in red. Note that the Russell 3k is at a level of resistance it has rallied to 3 times, but look at the slope of the advance decline line, fewer stocks are participating in the rally which is not surprising given the market data for August below...

The SPY alone accounted for 10% of the total trading volume 10%. Remember this weekend I wanted to work on an indicator that can see the weighting of each major market average and see where the money is flowing as it would be easy to keep a market up in a low volume environment so long as you invest , support or drive up the ask on the stocks with the greatest weight. So I find it interesting that 112 stocks account for half of the day's total trading volume in August and presumably September. 1029 stocks account for 90% of the total trading volume and the last 17,349 account for 10%.

Back to breadth...

Note recently where the Russell 2k (one of the broadest measures of the market and economy) advance decline line is (green) compared to the index (red), it's quite a bit lower, again showing fewer stocks participating in the rallies, this is what you call a thin market and it is bearish.

This is the entire NASDAQ Composite in red, it's not hard to see the trend in the advance decline line (green) vs. the index. The trendlines I've drawn make this clear.

Another measure of breadth, the percentage of stocks 2 standard deviation above their 40 day moving averages in green vs. the S&P-500 in red. Note the S&P is virtually at the same level as it was in August (white arrow), at that point 38% of stocks were above the moving average, now at nearly the same price level only 23% of stocks. Again, this does not show a bullish market, it shows a market rapidly falling apart.

This is similar except instead of 2 SD above the 40 day moving average, it's only 1 SD above the average. Again, a huge drop at relatively the same price level (the S&P-500 is in red, the indicator in green).

I show you this chart almost every day, it's the advance/decline ratio for the NASDAQ 100 component stocks. Almost everyday we see the same, fewer stocks participating into higher prices, again, a bearish, thin market.

Now a closer look at today's action...

Here we see a possible reversal in UUP (the dollar which is bad for the market). You see the positive 3C accumulation before UUP heads higher (white arrow), the red arrow shows where prices retreated into a bullish bull-flag consolidation. The last several days we see accumulation again in UUP as it may have shown us a false breakdown below the support line of the flag, which would be expected before a reversal for reasons I have outlined many times.

Above is today's price action in the SPY, we see a bear flag form from the opening gap up, then a possible false breakout-we can't say until we see tomorrow's open, but the volume into the close looks pretty bad.

Here's the 15 minute 3C for the SPY the last week or so, note the trend in 3C indicates distribution by institutional money. More importantly look at 3C's behavior today (red arrow to the right) and that into higher prices.

One more time, the DIA hourly chart... Again, note the most recent behavior in 3C compared to the DIA, it's distribution into higher prices. This is everything we expected to see BEFORE the bounce even started.

It is for these reasons, I can not be objectively bullish over the market. The puzzle is all coming together and strongly suggesting lower prices. Until then, please be sure to use appropriate risk management. If this market breaks that H&S top there will be plenty of profits to make.

It's been a long day and night, I've been non-stop since 8 a.m. and my wife has had dinner ready for hours now. So I'm going to glance at the emails in about 30 minutes, if it is urgent, please send "Urgent in the subject line"