Wall Street is NEVER As It Seems-NEVER

Very quickly, today's price/volume relationship was split between Price Up/Volume Down and Price Up and Volume up. The first relationship is that of a typical bear market and doesn't tell us much. The second though is quite surprising considering today's moves in the major averages which mount to nothing; it's the most bullish price/volume configuration possible.

 

The Headlines....

The Dow Jones 30 had its worst August in 9 years. Typically August is strong for stocks (summer rally, etc), September tends to be weaker. I would not be surprised if august was just the teaser to a horrible September.

The Russell 2k had its worst August in 12 years. Because the Russell is large and filled with the type of companies that make America run, it is a much broader measure of the economy. If we were in stage 4 decline, I may be inclined to say that we are nearing a bottom, but the fact is, we just rallied for a year, we are at a stage 3 top that has broken down in August, again, I think this is a teaser of much worse things to come. 

According to the media, stocks made early gains based on better then expected Housing, Manufacturing and Consumer Confidence reports. The drop later was attributed to the Fed minutes for the August Fed meeting which showed policy makers disagreeing over how to deal with the economy. Hmmm.

Today the Euro was up over the dollar. I have some interesting charts and comments below on this.

In other Headlines...

Government reports released today said problem banks hit the highest level seen since 1993 during Q2 2010. The number of banks were 2x more then what was on their watchlist a year ago. However the bank index, BKX was up  because banks collectively posted gains near 3 year highs. Is this chart of accumulation at yesterday's lows evidence of another leaked report?

3C is higher at lower lows the day before the report was released!

Onto Gold....

In another article, the most widely held future is the December $1500 options on gold. Their 18% higher then the June 21 record of $1266.50 and 21% higher than today's $1240 level.

Soros, one of the biggest buyers of gold, calls this “The ultimate asset bubble” and says “It's rational to buy at the start of a bubble”. For those of you who have been here for awhile, you know I've stayed away from gold, something does not sit right with me and I'll show you.

Interestingly, an August 16 SEC filing said that Soros sold 341,250 shares of the SPDR Gold Trust, the largest ETP backed by actual bullion, during the second quarter of 2010. Some funds are moving out of gold and into copper/silver fearing an equities sell-off will cause a gold sell-off as investors rush to raise cash.

Still, the biggest position in call options is gold  is at $1500 for November expiration. It's obvious there's huge bullish sentiment in gold with analysts and the releases of various firms all singing its praises. This is a trade set up for a fall in my opinion, even if it runs counter to typical market relationships.

Check out the charts...

This daily chart of gold shows 3C in lockstep with gold prices, however look at the leading negative divergence, even before GLD broke its uptrend line. Next and ascending wedge which is trying to break back above the trendline with no success. The move today in GLD, the breakout of an ascending wedge is exactly the Judo concept I've been talking about recently. At some point I may decide to enter this trade, but not yet. When I do, I suspect it will be on the short side as GLD is forming an obvious sentiment bubble.

The 60 min chart takes a closer look and confirms the daily negative divergence. There's accumulation at the start of the wedge-THIS IS TYPICAL WALL STREET ACCUMULATION for a position, later it is sold into higher prices. The breakout from the wedge sets up the Judo concept. I just don't see Gold making $1500.

If indeed, the Judo concept is at work in GLD, then today may mark the start of a fast and furious fall. Note the late accumulation yesterday on the one minute chart and the distribution into the gap up today. I've stayed away from this trade, but I'm going out on a limb and saying that we will soon see a drop in GLD.

More Headlines....

US auto sales in August were the slowest in 28 years, an 18% drop year to date and a 7% drop from last month Ford and Chrysler surprisingly are leading in sales, General Motors is expected to be the worst performer. This is an obvious sign of the economic times. Even more surprising, analysts expect Toyota, Honda and Nissan to perform the worst. What's the name of that Indian company selling $3,000 cars? I'd like to look at that chart. I'll try to do that tomorrow given the next headlines...

The Russian economy grew at 4% for the first half of the year, and is expected to maintain similar growth throughout the rest of the year despite a drought that destroyed ¼ of Russian crops, and raging wild-fires in western Russia forcing industrial companies to shut down and cut shifts as Moscow is covered in smog. Is Russia really outperforming the U.S.A.?

India growth rises 8.8% last quarter, the fastest rate in over 2 years. Again, what's that motor company?

India is now the second fastest growing economy behind China. The growth is attributed to strong industrial and mining output. Industrial output up was up 12% and mining up 9%, hotels and banking up 10%! That's rather amazing and may signal a shift in global fund distribution. I see American neighborhoods and I think of India, maybe with an ignorant perception, but this just doesn't seem to make a lot of sense. Clearly this is something that needs some follow up investigation.

What surprised me is that services =55% and industry= 25% of output. I had a much different perception. The Reserve Bank of India is expecting 8.5% growth the rest of the year. The downside was inflation was over 11% last month so they are expected to raise interest rates to fight inflation, which may harm growth. They have raised rates 4 times already this year. Is there an opportunity there for investors seeking higher yields? Remember, I just put US bonds on the short list.

And Europe?

Europe is not faring well. A quick look at national debt as a % of GDP

Countries that have over 100% debt to GDP: Italy and Greece

76-100% Portugal, France and Belgium

51-75%% Austria, Germany, Cyprus, Netherlands, Spain, Malta, Ireland, UK, Slovenia, Slovakia, Finland and Luxembourg

Unemployment Rates in the Euro-zone: Spain 19.1%, Slovakia 14.1%, Ireland 13.2%, Portugal 10.5%, Greece 10.2% and France 10.1%

Europe's largest economy, Germany is seeing unemployment stabilize at 7.6%. This is the 14^th monthly decline with the rate nearing a 2 year low . Most of Europe is seeing higher unemployment rates. Germany posted record 2^nd qtr growth through strong exports and domestic consumption. I have a very bad feeling about the Euro and the Union should the US enter a double dip and multi-national corporations should be at the top of your short list research, they will be on mine.

In Today's Trade...

The TRIN Wins Again! Yesterday's close of 3.81 strongly suggested a higher close today, the Dow, S&P and Russell 2k just eeked out gains between .04% and .06%, only the NASDAQ failed to follow with a loss around a quarter of a point. Today's TRIN reading came in at .84% which is on the bullish side, but nowhere near the levels that would strongly suggest a close higher tomorrow. The TRIN is moving toward neutrality today so we don't have that to add in the stew.

Interestingly, 3C in the 1 min timeframe didn't show a lot, but there was one timeframe in all 3 major average's ETFs I follow that showed a positive divergence in all 3 versions of 3C, it was the 10 min timeframe. This is a period in which 3C uncovers institutional movement. Until recently I thought it was the earliest timeframe to uncover it until last week when 5 minute charts appeared to uncover some as well. 1-min 3C charts are still the home of market maker and specialist activity as far as I can tell. So in the 10 minute time frame we had 3 indicators and 3 averages which gives us a perfect 6 of 6 charts all showing the same thing at the same time, approximately 1:45-3:45.

Last night I warned that the daily charts were showing an obvious bull flag and to watch for a breakout or a breakdown-most probably a false move, I thought the breakout would be the more likely with the TRIN so high, but we saw a breakdown. This is the 10 min 3c chart of the SPY, the red trendline is the bottom of the daily flag. You can see we had a clear break below that support and it acted as resistance the rest of the day. However, as mentioned, look at the positive divergence that formed near the lows of the day at the end of the day. This is in all 3 versions of 3c and in the SPY, DIA and QQQQ

The dollar (UUP as a proxy for intraday data) lost a tiny bit of ground, but climbed off its opening gap down to close near its best levels of the day. Interestingly, all 3 versions of 3C also agree on a divergence in the 10 minute timeframe, all negative. This is what I wrote about the dollar last night,

“The dollar did close up today and that may have had something to do with it, but the dollar looks exceptionally vulnerable on the price chart of further downside (which is good for oil generally speaking). On one min charts there's confirmation with a negative bias, on the 5 min chart there's a clear negative divergence.”

“This is one of those moments that doesn't make a lot of sense. Both oil and the dollar seem to be under short term distribution, oil was effected negatively today, while the dollar seems as if it will be affected negatively shortly.” 

“the negative bias of the 1 min chart in the dollar suggests it may turn very soon, presumably good for oil. To further complicate matters, when looking at at the candlestick formations between the two, the dollar's short term is positive, while oil's short term is negative.” and....

“This is one of those moments where there is no clear edge as of now. If I had to absolutely bet on the short term direction within the next day, I would bet oil has another day of downside at least and the dollar has another day of upside-or at least that would be the first half of the day's trading. Notice I used the word “BET”.”

That looks like pure distribution all day today.

USO got hammered today, last night I wrote,

 “below you can see a very clear leading negative divergence on the 10 minute chart pulling prices lower”. 

Around 12:00 today I posted that USO was struggling to gain a foothold, then a negative divergence-all on a 1-minute chart- led prices lower as I suspected last night. The drop, while extremely ugly on the chart, did enough to trigger stop loss orders apparently from 12:20-12:41 that were probably placed near the tweezers bottom support of July 2/6. Another round of stops appear to have been hit below $32, an obvious stop level around 2:29. The $32.00 stops were probably placed because of the perceived support of the lows of 8/27 (lows of $32.06-many traders would have placed stops at $32 given our affinity with whole numbers). There were end of day positive divergences to a much lesser degree on the 5 and 10 minute charts. While the hourly chart did move down today it's still in positive territory.

While USO's price action today was violent, it did not make new lows to erase the original rally that started last Wednesday. It took out stop levels-remember, most of the time you place a stop with your broker, except for a few brokers that claim to keep them in house until triggered, that stop will show up in the specialists book-THEY SEE YOUR ORDERS-DON'T PLACE STOPS WITH YOUR BROKER UNLESS YOU ABSOLUTELY MUST-keep them as mental stops. 

One of two things is happening here, the bounce in oil is done and it will most likely remain locked in it's trading range, or something in tomorrow morning's US Oil Inventory report sets up an upside move after USO pulled what I call a “Crazy Ivan” (a reference to "The Hunt for Red October" when Russian submarines turned 180 degrees to clear their baffles and see if they were being followed by other submarines). I use the term "Crazy Ivan" as a price movement like this to clear out all the stops, take out as many longs as possible before rallying higher. Basically it's another scare tactic to grab shares on the cheap. 

Using conventional analysis, it looks like the trade in USO is dead. However, considering what the dollar looks like and the report tomorrow, plus some accumulation although I would not call anything other then the hourly chart convincing, it could be the setup to a move higher. Tomorrow will tell. This was a difficult trade from the very start, why should it be any different now? Tomorrow should answer the question definitively. 

If this trade goes higher, I'll be amazed, not that it went higher because last Wednesday we saw what seemed to be the impossible and called it in a timely fashion, but at the degree of aggressiveness being utilized by Wall Street. It seems they are getting more bold, more aggressive and if the trade goes higher, it would be another example of the leaks that Wall Street utilizes. The unfortunate thing about this is that the US government would be complicit in stealing American citizen's money and obviously favoring Wall Street over main street. I'd love to see this trade move higher, but it will be disappointing considering the last sentence. However, I've seen evidence leading me to believe that government reports have been leaked for a long time, so it would not be surprising, just disappointing.

Again, let me reiterate, the bigger picture here is and has been since WOWS inception, the absolutely bearish posture of the market. The strategy has been to accumulate short positions which we have been doing since SPY $118 and occasionally play counter trend moves. To be very clear, I do believe we are on the edge of a complete melt down and I do believe that we will see lows not seen in over a decade. In addition, I also believe that the secular bull market is dead and for the first time in most people's lives we will see a secular bear market in equities. Trading and making money in the market will be a completely new experience as most people trading today have never seen or traded in a secular bear market. I believe this is a huge opportunity for those who are first in figuring out the new game, I think we have the tools needed to do so, but this will be uncharted waters which will put a select few in a position to make money from the masses which will be at a total loss with regard to how to deal with this new dynamic. Trading isn't an easy thing. when you enter the market, you enter a zero sum game, for you to make money, someone is going to lose it. However, when we enter the market we should all be pretty well aware of that fact. I'd rather take Smart money's capital, but the fact is we'll probably be taking money from ordinary people like us. That's the game.

On a personal note, WHAT A WOLF PACK! I wrote my schedule for this week so you would understand what was happening, where I'd be and when I'd be back in full swing. I received a lot of emails from many of you that were incredibly kind. I am humbled, touched and deeply appreciative of your well wishes. This is a huge ordeal for us, it's my wife and my future together and I didn't mention it for any other reason then to be honest and responsible. Your emails have moved us both and I am reminded of the quality people here at WOWS and it makes me want to work 10x harder to see you succeed. I humbly and graciously thank you from the bottom of my heart as does my wife who was equally amazed. So instead of my usual "risk management!" sign off, I just want to say THANK YOU. It gives me the calm that I really need right now as this is an anxious few days.

I have a feeling something profitable is about to unfold. I got home very late, about 9 p.m. tonight as out lawyer is an hour and a half away and I had to make a stop so I'm pretty shot as I've been working on this post since I walked in. I'll be posting trade ideas throughout the day tomorrow. After Thursday everything will be back to normal. Thank you again.