Reality Is NEVER As It Seems in the Stock Market

Here's a reminder... August we were in a pretty nasty decline. Short interest was high and rising toward the end of the month, but for several days as the market declined, 3C started making higher lows indicating accumulation. Several days after that we started the September rally. So for those 7-10 days reality was that the market looked like this-

but the true reality was that all the hopes of the bears about cracking the $104 level had already been decided by smart money and those plans weren't in the cards. (See below-white arrow=accumulation)

So as I wrote last night, “It's Precisely When Your charts Don't Make Any Sense” I was trying to convey to you that all that you can imagine now and all that seems obvious now, is likely nothing at all like reality.

For instance, "if" I were to “speculate” about the Fed's shady POMO, I might look at some of the numbers I wrote about in last night's article, how much money has fled the markets, how many insiders are selling and what we already know- how few retail investors and traders remain in the market, and then look at this story today....

“Mega Hedge Fund DE Shaw Cuts 10% Of Staff Following $7 Billion In Redemptions”

And I might think, “The end of the quarter is coming this week, if the market were to show anymore weakness, there will likely be even more redemptions”. Redemptions mean selling of stock (more supply-lowe prices), they mean work force layoffs, they threaten Wall Street financial firms again much as it was in tatters in 2008. Being money is exiting the market from every direction, what is holding it up? The bullish inverse bottom? No, we saw that breakout 7 trading days ago, if bulls were excited we'd see follow through by now and while today was strong, it failed to set a new closing high.

We all went through economics 101, “supply and demand”. What happens when you have a market with little to no bids (demand)? The ask (supply) must be lowered until they find a level in which there are bids, but there will only be a limited number of bids there, so when those dry up, the ask must be lowered again until the next patch of buyers are willing to step in, but remember, sentiment is going south, there are few participants left meaning the pool of demand is greatly diminished.

Imagine this, the market left to its own devices with the outflows of capital and participants, more firms laying off workers and price discovery leads us down a path that falls well below $104, even below $101. Heck maybe in a matter of days we have price at $85 on the SPY. Does that seem like such a far fetched idea? So in the absence of bids, the Fed steps into the market to wear the shoes of the bidders that aren't there. We've already seen proof today that the September rally did nothing for consumer confidence, but what would a plunge of 15 or 20% do to consumer confidence? What about the pension funds that are already broke and have their models set to ridiculously high 8% a year returns? Could it be 1929 all over again? I submit to you that it could be worse. Why do you think the SEC is expanding its circuit breaker program and expanding other initiatives? I believe that it's possible, even likely that the Fed got a lot of calls from a lot of their former Wall Street co-workers letting them know that if something isn't done and fast, that were going to have a real situation on our hands.

So is it the Fed's objective to rally prices higher, to create (I mean that literally) a bull market? I don't think so. I think what we are seeing is damage control. I think the distribution we are seeing is partly outflows and partly smart money understanding what is about to happen. Could the end of the quarter be D-Day? Possible. I just know that what we are seeing does not have the hallmarks of accumulation in any fashion whatsoever. I believe the more you manipulate a market, the worse the eventual reckoning will be.

As for the markets..

As you can see above, AAPL has had near perfect correlation with the SPY, it's obviously been used recently because of it's hefty weighting on multiple indices.

The parabolic move with few pullbacks is also reminiscent of program trading.

Today though we took a turn down a different path. Semiconductors were used, why, I don't know but look at today's correlation between the SPY and SMH

As to why we see an afternoon ramp up on POMO days, I can only speculate, but there has been a trend among black-box systems to be in the market at very particular times and out of the market the rest of the time. So assuming (and I know for a fact that at least one system runs from 3:30 to 4 p.m. Only) they can get price to a level in which it will trigger a black-box algorithm, that black box system will due the rest of the buying into the close.

As for 3C today, the 1 min chart did a fantastic job at what it is supposed to do, call swings intraday

As for the longer view....

This 5 minute chart shows the first relative divergence that ended at 2 p.m. And the decline it caused after that. Looking at the longest arrow, it shows us a leading negative divergence, suggesting we are getting closer to a more serious decline.

Longer...

Just like it took 7 market days of accumulation to produce the September rally, it will take time for the decline to begin. 3C shows us one important thing, the rally is not being bought so I'd be very skeptical of being long here when this could reverse any day. What it shows is distribution into higher prices and this one chart explains exactly how the market works. Most people think rising prices are a function of smart money buying the rally, WRONG! As you can see, smart money bought on the decline, getting a better and better average entry price each day. The same is true of the rally, they sell into demand, therefore they get better and better average exits prices. Typically when they are done distributing shares they'll establish a short position for the next decline, that may be under way now or finished-both distribution and accumulating a short position are both acts of selling. So what determines the reversal on these longer charts? A) How big of a position they had to distribute B) How aggressive buyers were C) How much volume/demand was present during distribution D) How big of a short position are they accumulating E) Volume and Supply at higher prices. Once all of this is complete we see a reversal. The key information that 3C provides besides a look at how the market really works is to know whether smart money is supporting the rally or selling it.

Personally I feel that if the goal was to take the market higher, they had several opportunities to do so on breakouts that failed and failed on big volume as if they were being pushed down. Remember, the higher they take it the further it has to fall.

So for now I haven't changed my stance, objective data suggests to me that this market is teetering on the edge of a huge sell-off. There are a lot of unknowns, but as I said in last night's article, when I have strong 3C signals and nothing can be rationalized, we're usually near a turning point and only later will we understand the reasons. Stay on top of risk management, set the limit alerts for the trades, many have triggered and many are doing quite well.

I'm going to run some scans and see if anything pops up. Good night.