Financials Update

XLF decided to test resistance again today, thus far it's failed.

15 min XLF chart.

JPM also ran up a bit with financials and it also is showing signs of distribution on that run up.

USO update

USO shot up pretty god today as the dollar lost ground. Right now, it's looking like there's going to be some sell-side pressure into the close.

5 min negative divergence, seems to be starting a downside reversal.

WMT

Right now, WMT (as a short sale) is in a low risk, high probability area.

Here's the test of the neckline resistance from WMT's H&S top. You can see MACD is ticking down and the candlestick pattern is that of a downside reversal.

3C is also showing the test as failed with negative divergences building as the test proceeded, it's now leading negative so a trade in this area with a stop above yesterday's high is pretty low risk.

XING follow up

For those of you who may have traded XING recently, I thought you might find this chart interesting.

A big move like what we saw in XING often sees quick profit taking, I myself advocate taking profits on a big move like we saw in XING which was around 55%. right now the 5 min chart is showing some accumulation so we may see some more upside here soon.

PLM long

PLM is worth a look here as it attempts to breakout of a consolidation.

 The volume is up on the breakout attempt

The daily 3C chart looks very constructive, there's been good accumulation and no sign of distribution through the consolidation.

URBN on the Move

This is a short sale trade I've been watching; it's already in a downtrend-see the small red arrows marking lower highs and lower lows. There's a zone of support at the bottom trendline, although it doesn't look especially strong. Once that support breaks, the down trend will have resumed from this short lateral consolidation. I think the trade can be taken here with a stop above the recent consolidation zone (above the top red trendline).

The DOW and S&P in Decline

It's a little bit rare for the averages not to move together, the NASDAQ has been weak all morning, now the SPY and DIA are joining the NAZ. This may be simple year end selling, but the macro environment that I showed is last night's wrap post isn't looking to good either.

 DIA 10 minute

SPY 1 min

The Volatility Game

For the most part, that looks to be what's happening today with the exception of the NASDAQ 100 (QQQQ) which is severely underperforming the other averages. SMH is down, but I don't think that explains it in totality. AAPL carries the most weight on the NAZ 100 and it's struggling today. Semis, software and biotechs are struggling as well.

WG Set off an Alert

WG is just breaking out above some resistance. Take a look at the the long trade.

Goodbye 2010!

Tomorrow is the last trading day of the year. We have seen the volatility intraday as I thought we'd see this week due to extremely low volume, but for all of the volatility, the market mostly did nothing this week, perhaps Friday will be different.

The S&P-500 has logged a paltry .09% gain thus far for the week and was down .15% today. The Dow-30 is down -.03% for the week and down .14% on the day and the NASDAQ 100 is down .20% for the week and down -.27% on the day. As an aside, today's movement in the market was the biggest percentage move we've seen all week, a dull market indeed, but there's always a trade somewhere and we've had some great one-4 day returns chasing the Cats and Dogs rally. As I've noted, in the past, my experience has been the cats and dogs rally at the very end of a bull move so are we at the end of the September rally?

Despite the do-nothing market this week, we do have some interesting 3C charts that have developed, especially since the start of the December move up.

The line in the sand on SLV, $30 acting as resistance has held.

As you can see above, we had an intraday high of $30.08 and a close at $29.76 so once gain, SLV hasn't been able to cross and hold the $30 level. Perhaps JPM is indeed protecting a large short position in SLV as is rumored.

The SLV 10 min 3C chart best depicts the battle at resistance that the silver vigilantes are seemingly loosing.

Above you can see as SLV made higher highs this week, a negative divergence set in which is the same thing as distribution. On intraday charts all this week, we have seen distribution as SLV climbed higher, but the 10-min chart summarizes it best. Today SLV opened above resistance on a gap up, 3C logged a pretty serious negative divergence right on the open, distribution was there first thing in the morning defending the $30 resistance level and now it looks as if SLV will retreat to regroup, it may become more serious, but for now it looks like a pullback at least is in the works.

Semiconductors, one of the groups that supports rallies in the NASDAQ has been lateral for over two trading weeks now.

The slight accumulation we saw at the 12/27 lows led to slightly higher prices, but once gain we see a 3C negative divergence into today's highs

Volume on the decline today during the last 25 minutes of trading was rather high and SMH looks as if it may start a series of lower highs and lower lows (a downtrend) at least intraday.

The 5 minute 3C chart for SMH which called the last intraday pullback on 12/27-12/28 is now signaling a worse negative divergence that has gone into a leading negative divergence-these are the worst kinds and tend to lead price lower.

The 15 min chart shows the same thing, but its implications are more serious then the above 3C charts.

As for the driver of the S&P, financials, today we saw a pretty distinct change in character.

Above you can see accumulation at a small double bottom in white at 11/23-11/29. There seems to be a resistance zone around the $16 level and while we saw a negative divergence at the 12/13 highs that led to a pullback, the distribution really kicked in as XLF moved toward the resistance zone. While price is higher then November, 3C is now at the November equivalent showing quite serious distribution, perhaps short selling in financials.

Two of the financial bellwethers we've been watching, BAC and JPM are also caught in this downdraft.

As I said earlier in the week, maybe last week as well, BAC is seeing resistance around the $39.40 level which has been an active technical level from early and mid July support, the break of that support in October and several recent attempts to break through and hold the level which BAC has failed to do

The 10 min 3C chart has shown this distribution at the resistance level, starting with the gap up on 12/28, distribution has been fairly steady.

JPM recently broke out of a multi-month rectangular trading zone. I warned this week that the breakout is in question and a false breakout can fall very fast.

A closer look at the breakout reveals a candlestick pattern that is associated with reversals, it's a shooting star-like pattern and we have seen a reversal thus far. Should JPM cross back below the support level around $41.50, the fall back to the bottom of the trading range could occur quickly so this is a trade you want to keep an eye on. As of now we can't call this anything more then a pullback on a successful reversal, but things could go south quickly.

The hourly 3C chart shows both the positive divergence/accumulation in late November that took JPM up through resistance, but now we have a negative divergence which suggests that support is not likely to hold.

A closer look using a 15 minute 3C chart shows the negative divergence since the breakout.

The 5 min chart look especially bad for the breakout.

Tuesday, during the trading day, as USO broke down from an ascending wedge, I suggested a short trade on USO (in the white box), since then USO has moved lower on a gap down today.

The 60 min USO 3C chart looks especially bad and a negative divergence took hold about the same time the ascending wedge formed, making this a fairly high probability trade. Of course USO isn't a huge mover and there are several leveraged ETFs you could use to increase the gains on the drop in oil.

The 30 min chart shows accumulation in white in November, however, 3C 30 min shows just how bad the distribution phase has been in USO, it seems they accumulated a position for the sole purpose of selling it, not because of any bullish sentiment in USO. The two negative divergences have both responded well with price falling on each. The 60 min chart above suggests this second fall will be worse then the first earlier in the month.

Looking at the averages,

The SPY 15 minute seems to be a more pronounced version of what I just said about USO. Distribution during the rally has been quite heavy.

The same holds true for the DIA, except here, once the initial shares were accumulated (and note accumulation takes place often in a trading range, they're buying up shares and trying to buy at the best prices, thus keeping the index flat while they accumulate shares.) distribution was underway here in the DIA almost immediately after they accumulated the shares needed to distribute into higher prices.

The Q's also show the same distribution through the same period.

My feeling is that we are seeing HFT traders simply forcing trades, accumulating, pushing up prices to distribute into. This is very much different then accumulating because you believe the market is headed higher. In that case distribution would not be so evident. It's been a low volume environment and making money is more difficult for these firms, but everything I see seems to be just manufactured trades, no real bullish outlook on the market whatsoever, just a way to make some money.

As such, and in light of the extreme bullish sentiment and the lack of reaction to the news (and why would there be reaction to negative news when these firms are pushing a manufactured trade?) I feel sentiment is at extremes and once volume enters the market again come next week, it will be very interesting to see if the negative outlook by way of distribution takes hold and accelerates early on in January. If so, there are plenty of good looking short trades (short selling), but I knew this week was not likely to produce that kind of environment and the cats and dogs were rallying, so why not make some money ourselves? There certainly wasn't much to be made for the average investor/trader by buying index funds, only those wielding massive leverage and near total dominance of the market.

So keep the alerts set for the C&D trades that still have not triggered. If you are in any of the trades, feel free to email me for the most current outlook. Over the weekend, I'll be preparing a list of real trades, trending trades that I believe will do well once volume has picked back up and traders return from vacation.

XLF holding at resistance

See earlier post on financials-

EOD ramp

Not sure if this end of day ramp in the averages is going to hold. The Q's are confirming, but the SPY and DIA are bot negatively divergent.

 DIA 1

 QQQQ 1

SPY 1

Chicago PMI

Last night I went through a laundry list of negative events in the market, as they say "it's not the news, but how the market reacts to the news. The point being last night, sentiment has reached an extreme and extremes in the market have a tendency to revert back to the mean, actually they tend to swing way too far in the opposite direction as it takes extremes usually to turn things again.

Today the Chicago PMI came in very bullish, you can get a synopsis of the report HERE from ZH.


I'm not sure if the volume is too low or it's just machines trading algorithms right now, OR if sentiment has reached such an extreme that it is in the process of shifting. Either way, the market didn't have much of a reaction to the unexpected strong report. Then again, this isn't the most useful economic indicator and it's a drop in the bucket.

Cats and Dogs Trades Results This Week Thus Far

THIS WEEK UNDER THE CATS AND DOGS TRADES, WE'VE HAD 17 TRADES TRIGGER AS OF YESTERDAY'S CLOSE.

Of those 17 trades, 10 have offered gains , 6 have had losses and 1 is around break-even. Where you entered and exited is a function of your particular % P/L. A lot of you have contacted me for 3C intraday charts to gauge where the trade was and some of you have had excellent exits. I'm not aware of anyone who has given up a gain for a loss. As far as losses, we've talked about risk manageent on these trades so whatever the actuaul trade loss, no losses should have represented more then 2% of portfolio and as I have stated for trades like these, I prefer to keep the 5 risk of portfolio between 1-1.5%, it makes taking the trades worthwhile and with a majority having offered gains, it's a good strategy to keep losses minimal while being able to hit some big winners.

We started off the Cats and Dogs trades last week with a 4-day 215% gain in XOMA.

This week thus far ( gains /losses were compiled this morning ) looked like this:

CRIS    +8% intraday as high as 12.5%

DSCM  +3%

OPXT  +14% as high as 16.7%

URZ     Up to +15% 1 day gain

WEST Up to +10% gain

CFW    +24% 1 day gain, as high as 26%

XING   As high as +85%

EEE     +27% 1 day gain, up to +35% intraday gain until present

ATEC  +8% 1-day gain

FBP which was an earlier trade- the only person I know of I believe exited yesterday as there was a loss of momentum. FBP offered gains of +60%

STEM was at last check trading about break-even

As for signal trades at a loss we had 5 under a 2% loss and one at a 6% loss.

The trades that triggered today have not been figured in as of yet.

XING

Know when to hold and fold, this is a personal decision, but XING , a trade that triggered Monday, just added another 16+% today. Right now it's up about 74%

GAZ LONG TRADE

This is along the lines of LNG as LNG is a Natural Gas company.

on an hourly chart we see a double bottom, volume is perfect for the pattern, light on the second test of support, then it broke above a resistance zone moments ago. This looks like another high probability trade, this isn't quite a Cats and Dogs trade and may offer a little longer term horizon.

SLV-FALSE BREAKOUT

REMEMBER, I'M NOT OPPOSED TO A TRADE IN SLV ON THE LONG SIDE, JUST NOT BEOFRE IT CAN BREAK THE RESISTANCE AT $30 I'VE BEEN TALKING ABOUT ALL WEEK.

HERE'S THIS MORNING'S ATTEMPT TO BREAK RESISTANCE AT $30, A QUICK MOVE ABOVE AND THEN ONCE AGAIN T IS FORCED BACK DOWN.

Financials Update

I've been dying to bring you these trades as I've watched 3C signal them, but as always, price is the final arbitrator in the market.

Here's XLF-the ETF representing financials.

XLF has broken the first line of resistance, as I write this, it just broke the second line as well.

 3c 5 min negative divergence


  3c 10 min negative divergence

  3c 15 min negative divergence

  3c 30 min negative divergence

 3c 60 min negative divergence

All of the 3C timeframes have lines up showing distribution in the lateral movement the last few days.

 Above is the 15 min 3C chart for FAS-Ultralong financials, it looks just like XLF 15 min

Above FAZ-my favored trade here, ultrashort Financials (you buy this long), the 15 min 3C is showing big accumulation here, the mirror opposite of the Ultralong

 Here is BAC, remember I said it was going to have a difficult time breaking resistance at $13.40 and hold it on a close, it has not been able to do so. This is another possible play short.

JPM broke out of a trading range, but the last few days have set up a reversal signal to the downside and if it breaks support near $41.50, then it's a false breakout and JPM should fall quickly toward the $36 area initially. 

If you like any of these trades, I'd not waste too much time. It's been awhile since anything other then Cats and Dogs trades have lined up so well, and even better in 3C.

LNG Trade Triggered

LNG was added to the list yesterday, this morning it has triggered a long trade.

UTX and MRVL Trade Ideas

I've had both on a watchlist and they both just triggered levels I consider to be important. Both are short trades as well.

 UTX is breaking down out of a wedge like pattern. The initial breakdown and period just after can be volatile so if you enter the trade, I would give it room on the upside for the stop as a false upside breakout is not out of the question. Initial target of at least $74.

MRVL short, has also broken support, this is a small rectangular top and the distance for a 2nd test of resistance wasn't as far to go as the first, that was the first failure, the lack of even an attempt, then the break of support, I like this trade a little better of the two, but there in totally different industry spaces so they offer some diversity.

WHAT MOVES MARKETS?

The most common answer would be supply and demand. What drives supply and demand? Fear and Greed. What causes fear and greed? Market sentiment. So it can be said that markets are not moved, not at least in a macro way, by earnings, P/E ratios, news, etc; markets are moved by mass sentiment. I consider there to be 3 ways to analyze markets: Fundamental Analysis which I believe is inherently flawed and grossly misleading. Technical Analysis which has its flaws, but if you understand the limitations and think outside of the box, TA can be useful. And last, mass psychology. In a way, technical analysis is about mass psychology. So with the markets being so thin right now, volume so low, price discovery non-existent, I look to sentiment to understand what I see on the macro charts and for those of you who are new, what 3C has shown is distribution into higher prices, sentiment can be said to be negative in that respect. This seems to be at odds with prices at or near recovery highs, but distribution occurs into higher prices-it's a counter-intuitive reality.

For over 6 months we have seen massive and consecutive outflows of money from domestic funds, causing many to go belly up this year. Investors have fled the market, yet we have some of the most bullish sentiment seen in quite a long time.

Today the NYSE released data showing that investors are going long the market on increasing levels of margin, this shows investors have little fear as they buy stocks on borrowed money. This is a continuation from the previous month of October which also saw a rise in margin debt.

Compare low margin debt and high margin debt with the S&P, what you'll find s low margin debt at the start of major rallies and high margin debt at the start of major market tops.

Tuesday it was revealed that NYSE short Interest hit lows for all of 2010

As I showed last night, the Baltic Dry Index is slipping to new lows, meaning there's little demand for shipping, this is not economically bullish.

Tuesday we saw Consumer Confidence come in at a huge miss, consumers are worried, but the market? No negative reaction, this is an example of bullish sentiment.

Also on Tuesday, the Case Shiller Home Index missed big showing 4 months of housing declines and what is now a double dip recession in housing underway. The market's reaction to the news (and it's never the news that is important, it's the market's reaction to the news)-muted, really just whistling past the graveyard-no cause for concern. It wasn't even enough to move SRS, the Short Real Estate ETF. Again, bullish sentiment as the market ignores the news.

Housing is down more then 30%, yet property taxes are on the rise.

On Monday, the Dallas Fed's Texas Manufacturing Index is another big downside miss with expectations of a print of 17 with the index coming in at 12.8. Behind the headlines, rising material cost, rising labor cost and falling orders/demand. Did the market sell-off? No. Once again, an invincible euphoria fills the market.

Along those lines, commodity inflation is here.

Over the Christmas Holiday, China, hikes interest rates for the second time in less then 3 months as they try to reign in the global growth engine, does the market care? Nope.

The Fraud perpetrated in foreclosure, which is gaining in intensity should be sending banks to the abyss, yet this week we see a rally in financials.

No one wants to touch US Treasuries so the Primary dealers buy them and then sell them back to the Fed, effectively monetizing our debt, but the key here is there is no confidence from outside or inside the US to own American debt. Cause for concern? Not as long as the Fed keeps monetizing the debt.

The ECB in their own white-wash version of buying up debt and then trying to get it off their balance sheets, sees a lack of demand to complete the white wash job-no one wants to hold European debt and Shanghi has it's own failed auction of short term debt and last week, despite Chinese support, the Spanish have an ugly debt auction. Is the market concerned? Not a bit.

Last week New Home Sales misses expectations and the previous month is revised lower. There's now over 8 months of supply on the market to be worked through, the market remains indifferent.

Existing Home Sales comes in at a miss, expectations of 4.75 million, comes in at 4.68 million with 9 and a half months of overhang/supply.

Michigan Consumer Confidence seems to come in okay, unless you read beyond the headline, the report shows inflation expectations rising. We already know that food and gas prices are rising, in other words those things that we use everyday.

Also released last week, the AAII sentiment survey shows the highest bullish sentiment since November of 2004; jumping from 50% to 63%, bearish sentiment drops from 27 to 16%, the lowest level since November 2005. The difference between the two is the highest since April of 2004.

December 22, the Fed admits housing prices are slipping, there is no stabilization in home prices, there is a huge amount of “over-supply”, over 6 MILLION properties are behind 60 days or more, in foreclosure, have been foreclosed or are already in bank supply and the kicker-”With nearly half of total bank assets backed by residential real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines”.

On the 22 of December, Q3 GDP final revision comes in lower at 2.6 on expectations of 2.8%. Inventories are up, consumption is down.

Also last week on the 22^nd, The Mortgage Bankers Association Index -mortgage applications are down nearly 19% from the prior week and refinancing down nearly 25% from the prior week, with one of our own members in the industry saying that on the ground where he works, those numbers seem light-in other words, from his first hand experience at his bank, things were worse then what was being reported.

For months now and I'm not sure how many but many, consecutive months we have seen a huge disparity, consecutively between insider buying and insider selling, with the ratio even reaching the 5 digits to 1 at one point. Insider selling has been unrelenting. Maybe they know something we don't, but does the market care? You know the answer.

We have been seeing outflows of high grade bonds and now we are seeing a mass exodus from municipal bonds. Default seems inevitable without some very big and very direct intervention as the supply on the market from bond holders is huge, new issuances will require rates so high, there would have to be an eventual default.

2010 has been the worst year for bank failures since 1992.

As for stock participation in the push higher in the averages, I posted a breadth report a few weeks back, it's not just bad, but getting worse, I'll post another soon.

And today, we see for the first time in an inflow into domestic funds after 33 consecutive weeks of outflows. Retail investors have returned.

And why not? The perceived risk in the market is very low, look at the VIX.

This is complacency and it's been in place for sometime. Now with retail entering back into the frey, I can think of one word, I can't help but think of this word-”Contrarian”. The sheep have returned to graze. Sentiment is clearly at an extreme. Could this time rally be different?

Ashton Crutcher doesn't think so, he' preparing for the end of times.

For now, keep those alerts set and take what the market gives us, but be on your toes and don't fall in love with an idea that seems ingrained permanently into the investing fabric of US equity markets. Change sometimes occurs suddenly and often when that happens, violently.