BE SURE TO READ THE LAST POST

As for trades tomorrow, 3C is not much help today as I explained in the last post at the end, but there are some bullish looking longs and just in case we do breakout to the upside, a lot of these should move well with the market.

As for past trades that haven't triggered, keep an eye on:DRAM , DDE, CAM, FCX


And the trade I'm definitely putting an order in on tomorrow-it's listed, ESLR


Since 3C is in a market induced "FOG", these trades are based on my Swing Trade Strategy and many are low priced, low volume which makes them speculative which means you must absolutely follow risk management rules-see last week's post or email me if you don't understand. 


If we get any surprises in the market tomorrow, don't be too quick to judge, try to let the roning trading range set in and lets see where the VWAP takes the market. The Algo traders were out briefly today above the VWAP, maybe we'll see the same, either below or above the average.


MOST OF ALL RISK MANAGEMENT, PRESERVE CAPITAL, WE'RE STILL IN A VOLATILE TOP WHICH MEANS BOOK PROFITS WHEN YOU GET THEM AND STICK WITH YOUR STOPS OR LET GO OF SHARES TO GET YOURSELF IN LINE WITH THE RISK MANAGEMENT PRINCIPALS WE OR YOU USE. IT'S VERY IMPORTANT RIGHT NOW AND MORE SO THIS WEEK WITH THE END OF THE MONTH WINDOW DRESSING.

The POST that you'll need some time with

As many of you know, I taught Technical Analysis for about 3 years for our county's public school system in a program designed for adults called “The Community Educator”. There were all kinds of classes, over 60 spanning any hobby you can imagine. The last couple of classes I held were record setting in that we had to turn people away for lack of a classroom large enough to accommodate ll those who wanted to sign up. Until then it was the ESOL English classes that were the biggest. They say those who can't do, teach. That's a load of..... you know what, I found that in teaching I was not only able to feel good about helping others, I also found it was one of the best ways to learn and I learned that I will be a lifelong student of the market.

One of the lessons I passed along that didn't seem all that important at the time, was not to go around telling a lot of people your opinion on the market. Anyone who has spent a few weeks on the often childish Yahoo message boards will understand the reason why. The market is exceptionally dynamic and with manipulation of the market coming from about 2 dozen different sources I can think of off the top of my head, it's even more manipulated now then ever. The lesson though is a good “Human Lesson” as we all struggle at some point in this regard when we find a stock we like, it's hard to change your opinion of it no matter how badly it treats you. We don't like to admit we are wrong and when you have told your opinion to a lot of people like on Yahoo's message boards, no mattter what changed your mind, people there are childish and try to make you defend your original thoughts which you may not agree with anymore, and many times we will when we feel under attack. So I told students, "just keep it to yourself”, you have your hands full with that alonev.

Being the publisher of two websites, and one for probably about 5 or 6 years, I've been wrong, I've changed my mind and I've had “those people” who act childishly and go on with “But I thought you said....”, etc.

If you want to be a good trader in the market you not only need to overcome that struggle with others, but the internal struggle within yourself when you've taken a liking to a stock that doesn't seem to care to much for you.

I received this email last month and I hope the author who is a member doesn't mind me sharing it with you. I've cut out a few personal parts.

“Your style of trading i.e. taking a position with respect to your market evaluation is quite radical and as you, again, often repeat must be risk-managed carefully and perhaps nimbly. Not everyone will have the skills or understanding or temperament to be able to pull it off. Plus, follow along-my-trades is NOT the type of service you are providing although there is a taste of that as well.”

it continues...

“I never saw anything where you said do this or do that

specifically (except to reinforce risk management and position sizing issues in a most

kindly and untiring fashion) nor did I read any claims of perfection... Not likely, but hell

you could even be wrong about your major predictions. After all, you are making a

forecast about the future based on the CURRENTLY available data. I am sure that

like any good scientist, you'd be the first to revise your hypothesis if data does not

verify it. That's all that can be asked “

And in that spirit I'm sharing a discovery that has just come to light. Don't go hitting the panic button, I'm not saying close everything you have tomorrow and go in the other direction. However, it would be irresponsible of me to see something and not bring it to your attention as a “possible” scenario because of my market beliefs which have been quite strong. This is the kind of service and respect you deserve, not a stubborn ego-based approach. I also hope it serves as a lesson and an example of how you can have a strong opinion, but still be open to the possibilities of an ever changing market. 

As a trader, you want to be able to imagine as many possibilities as you can and have a plan in case “A, B, C or even Z” occur. You'll never be able to imagine them all but knowing what you will do in the middle of a 9/11 type event beofre it ever happens, will allow you to act quickly on a decision that was made in the past so it's likely more objective then a decision made while the event unfolds.

Here's what we have ben watching and this is part of the basis of a strong bearish bias.

This is a daily chart of the DOW and 3C, if I zoom out a bit you would see that the decline from May to July is all well beneath the neckline (bottom red trendline) of this pattern, indicating a high level of distribution. You can see the positive divergence between the June and July lows that kicked off the most recent rally, and even though 3C appears to be leading right now, if it i, it only started in the last day or two as prices have been higher at the July top. This also raises some concern for me. Although it is fairly rare for a VALID, well formed top to fail, they do fail a small percentage of the time. One thing you must understand is that the market will show signs of recovery about 6 months ahead of the economy so we must watch this carefully.

Here is what is causing me some concern, it is the right shoulder portion of the current H&S top. "A" is the first right shoulder "B" is where the market, especially the SPY, violated the neckline and rallied from there to create another, higher shoulder, which is okay as H&S tops tend to show symmetry. Without that shoulder it would have been a strange looking top. "C" is where we are currently and there is some chance that "C" will continue to rally making a higher right shoulder then the one found around "B". In most Technical Analysis books they publish the one perfect head and shoulders chart out of 1000 and people believe that is what a H&S top should look like. They don't have the real world experience to know what is a valid top and what isn't. During May-July 2009 many people thought the price pattern alone made that a valid H&S top, it was incorrect and pure laziness as they never checked the volume which is as essential as the price formation itself-they were wrong.

And if point "C" rallies higher then the previous right shoulder, does that void our top? According to the academics it does, but look at this....

Even though the Q2 2008 last right shoulder was higher then the Q1 2008 (this is a 4-day chart so it is compressed), the volume was correct and those that gave up their shorts at a loss and went long, did so near the final top before we saw a decline of over 50%. H&S tops just do not look like the textbooks in real life, but my concern is that we will see a repeat of 2008 with point "C" on the chart above rallying to a new high. We can keep watching the cumulative volume indicator I created, but our risk grows everyday it moves higher and we do not have a guarantee of what will happen in the end.

Again we are looking at the right shoulder on the current top. The white line is an indicator I created that just totals volume. For this top to be bearish, the volume or the white line should go down when price goes up and it should go up when price goes down. You can see that clearly is still the case, this is why I'm not panicked about this but want to get it out on the table so you understand.

What happenes after the head is formed is the most important.

Here's a successful top from 1962. Note that we saw a warning early on when successive new highs were met by successive lower volume counts as indicated by the white custom indicator. After that, price behaved normally with volume rising on the advance to create the head and volume falling as the rally from the head pulled back, but it kept pulling back right into the rally to create the left shoulder-this was bearish confirmation. When the rally to create the right shoulder was complete and the decline set in, notice how volume started to rise dramatically. Sellers were panicked and volume skyrocketed -again, understanding a real world head and shoulders top can only be done by looking at charts for yourself, not textbooks.

Now to summarize we are concerned with two things, one that point"C" on the chart above will rally to an even higher high, which as I have shown you, des not negate our top, but it does throw the top into question. The second thing that would be more troubling is if this pattern coming off a steep decline could possibly be an inverse head and shoulders bottom or base. Personally I think it is highly unlikely; a H&S inverse bottom is a base or stage 1, we haven't even seen stage 4 decline yet so making a base now is premature, the pattern, if it materializes is simply in the wrong spot. Much like a H&S top, volume is even more important to confirm  H&S bottom. We have not seen anything yet that looks correct, here's what a correct volume pattern on a H&S bottom looks like

Again, what happens after the head is critical. For a bottom pattern we should see volume increase on the rallies and decrease on the corrections. If you follow price and the volume line, you will see this is a prime example.

The 3rd component we should see is accumulation, it is a bottom pattern and that is the point of a bottom pattern. Look at the DOW 1947 3C chart

At each an every point, 3C went higher, this clearly demonstrates accumulation and look how much easier it was to identify back then before all the manipulation.

Here's another 3C chart of the Dow 1942

And if you wonder if we can still identify accumulation in a Inverse H&S base, then look at this next chart:

It certainly is not as clear, but it does not take more then a quick glance to identify the leading divergence to the upside making new highs in the Dow at the start of the 2009 rally.

This chart is from 1946 and sor ot identifies my concerns

This chart is over 60 years old, but is similar to the current situation. We have a nice Head and Shoulders top, then price breaks below the neckline mid July (odd timing), the hoizontal trendline at the top identifies a potential new pattern. The differences being we had a much more severe sell-off from out April highs-20.36% in the IWM from highs to lows (the media loves the 20% figure as the definition of a bear market, but it has nothing to do with it whatsoever. This is part of the culture of misinformation traders and investors have been raised with. The other difference is we have rallied from that sell-off low to create a higher right shoulder, our point "C" from earlier, so we have a developed formation that looks like an inverse head and shoulders. We have a hefty sell-off that could create a temporary bottom.

As another point of interest having to do with the culture of trading, everyone knows there is nothing magical or statistically important about the 200 day moving average, it is just traders believe that it holds specil significance so they breate  self-filfilling prophecy with it.

Here is what traders would respect as a known relationship between the SPY and the 200 day moving average. Note how it forms both support and resistance. Because traders hold it up to be important, a break above the 200 day moving average may lead to an increase in buying, thereby creating the situation I'd prefer not see unfold.

In trying to determine whether or not prices will rally higher, I'm looking at all the 3C charts, here's an influential 30 min intraday chart of the SPY.

Here in green we see the "potential" inverse H&S in price (green) note the two left shoulders, the head below the red trendlines, the first right shoulder and the unkonwn at $110.81. This could move higher nd above the $112 area, create a breakout or it could move down to the $104 area and providing it didn't break below $104, it could for a symetrical inverse Heand and Shoulder-looking pattern.  This is why what happens next is so important. We see positive divergences at all of the crucial levels on the 30 min chart. So the first obstacle to having a clean, easy strategy is that we not move up significantly higher. A False breakout is a possibility, maybe even a probability, but that's not the same as a real move higjer. The next hurdle is to see a sell-off to $104, what happens next will be important. If we bounce off $104 I may reccomend selling some short positions, adding longs for the bounce and seeeing what happens if we reach the $112 area again. If prices slice through $104, it's pretty smooth sailing for our strategy. A move from here above $112 and each person will have to decide based on their exposure, their entry levels, and many other variables so no one answer is right for everyone, but I'd be looking to phase out of the short position incrementally and add Ultra/3x leveraged longs or equities, this way I can begin hedging but not jump the gun and overreact based on a day above $112, when the next day we could see a 4% sell-off.

As for 3C which we didn't talk about as of now on this chart, we do have a relative negative divergence, it's not a huge deal, except for the fact that it occurred on an impressive 30 min chart. We also have something of a small leading divergence. Considering the volume at EOD and the lower prices if after hours, it makes sense. 

This is today's 1 min 3C divergence on the SPY. At 11:53 I posted "The First Signs of a Bounce" - about 10 mins. later we had a bottom in. By the time I put out the update the TRIn/ARMS Index had been hitting levels above 1.50 (remember in a bear market anything above 1.10 on the low end can produce a bounce-a close above 2 is almost destined to produce a close higher the next day , 1 is neutral, around $.75 and we can expect a sell-off). As of the close we had a negative divergence in place.

Evidence that the situation may or may not unfold.

On the may not side of things:

Here we have the SPY daily with Worden's very successful MoneyStream indicator in red. The top between June and July is in a negative divergence. Even though the mid-July pullback

was higher then the June low, MoneyStream was lower at mid-July meaning a negative divergence again.

Here we have TSV55, again the mid-July pullback shows a negative divergence and the top side is slightly negative as prices are higher right now then in June. If this was a bottom formation,we'd expect to see accumulation, especially at the lows around June/July, but nothing!

This variant of 3C on a 30 min chart shows positive divergences in the white boxes and negative n the red, it's the only place we see accumulation during the possible inverse H&S head. The current close has formed a negative divergence as marked by the red arrow.

Another variant of 3C on the SPY 1 min chart

As I mentioned in the "Afternoon Update 2", the 1 min divergence remained persistent throughout the dy, the close was especially bad here.

Here we have our cumulative volume line again and you can see to the right, the advance, which is especially important for an inverse H&S pattern, to the right of the head, is showing a decline into the advance-this is bearish.

As mentioned early on, the 3C daily chart is in a leading negative position

Finally, this is my only truly appropriate concern, the daily chart is the most potent except for multi-day charts and in this SPY 3C daily chart, this one IS showing a leading positive divergence, however, again, there is NO accumulation on the daily charts at the lows where we would especially expect to see it.

I know there are a lot of charts here and I hope that I have accurately portrayed my concern in a way that is packed with proof and easy to understand. 

To summarize:

We have made new closing highs in July over June's, this as of now is not a problem, it doesn't not void our H&S top chart. Although I DO NOT WANT TO SEE IT, as I pointed out with the 2007 H&S top, we can rally higher and make a significantly higher right shoulder and still have a valid H&S top as long as volume confirmation is there, which is to sat, volume declines on advances as traders back away from rising prices and volume advances on declines as traders get panicky in a decline a start selling in bigger lots. So that is a situation that we'd have to deal with if it comes to pass, but unless we break above the head formed on April 23-26, the top can remain valid. 

If we do get a selloff to the support at $104, we have to watch it, either it breaks down nd we are in a hugely profitable position or it perhaps bounces in which case we will sell some of the shorts at a profit and ride the bounce with longs, when the market reverses, we add out shorts back in.

The urgency of this post is just to deal with the fact that we are close to the point of a July rally, in which case we must take measured, but effective action. If we continue to sell-off, then all is fine and we needn't be concerned with tactics again until SPY $104. That's the gist of it!

As for today and what we can expect tomorrow:

I wouldn't say we saw a DOMINANT  P/V relationship today, but in a couple of averages we did see 2:1 or better and in most averages we saw Close Down and Volume Up. I think we are too early for that to be an oversold statement especially because there was no real dominance, instead I feel it shows traders trying to get out of the way of something and pretty quick.

Reporting tomorrow, Chevron, a host of foreign corporations-including a lot of banks, Merck, Oppenhiemer, and I'm sure a few I missed, but it's relatively light with the big boys.  Economic events include: ADV GDP, EMPLOYMENT COST INDEX, CHICAGO PMI, AND UNIVERSITY OF MICHIGAN SENTIMENT.

The TRIN Index closed today at 1.15 so there may be some strength coming from that although it's no where close to an extreme reading. The VIX was actually down today about half of a percent while the SPY was down about 1/2% so traders were a bit complacent about today's decline. 

The SPY was mixed on 3C 1 min with in line, a slight negative divergence and a slight leading negative divergence. The Q's 1 min showed a slight relative divergence and 2 leading negative divergences, the DIA had one of each but was moderate. The IWM was inline and 2 leading negative divergences. On the 3C 5 min almost everything was in line with a couple of slight relative divergences. This timeframe has to move for us to see something more then mediocrity. The 10 min halted it's downward slide to try to move inline, although still in a leading negative position. The one exception was the IWM which actually formed one relative positive divergence.

My take on this is the downward momentum was lost today at 12:30 and I don't see any real activity. It could be end of month window dressing, and if I took a wild stab at it, considering we saw 3 down days, at the start of August we may be in for some buying unless sentiment sours or something breaks.

So I'm looking for early morning weakness, but how long is up in the air unless that 5 min 3C takes a stand one way or the other. That's what I'll be most interested in around 10:30-11 tomorrow.

I'm going to throw some new trades up now, a few did trigger today like MCD, did anyone take it?

The divergences haven't changed

but the song's not the same. We're still negative now on 3/3 1 min and a mixed bag on the 5 min. the only thing is volume just went negative and price is somewhat lateral. It's either consolidating for a move higher or is reversing. It's that ambiguous right now so follow price until further notice.

Resistance is between $46 and $46.29

Afternoon Update 2

There's still  1-min. negative divergence in 3C on the SPY, there is also an in-line with price trend and a nearly positive 1-min divergence. All the 5 minute charts are pretty much inline with price, so I do not see anything as of yet that would lead me to believe that a reversal in near yet.

Afternoon Update

This is the very first sign of a negative divergence I have, it's not really strong yet and the 5 min chart doesn't confirm it, but this is the best we have to go with right now.

First signs of a bounce

We knew $110 would be a strong level of support so a bounce from there makes perfect sense. The TRIN levels were hitting above 1.50 so that makes sense too and 3C is just starting a 1 min divergence.

MCD was the short that triggered the limit order, this bounce may provide a decent entry into MCD if you otherwise like the trade.

MCD Just Triggered a Short

Check the Spread Sheet, MCD is now a short sale trade. 3C is also in a leading negative divergence, $110 will be tested.

***MCD***
Sorry, I was up too late last night.

Update

As I warned, there was a good chance of the market rallying this a.m. as high as $112 before hitting a wall, it didn't quite hit $112, but it did hit a wall.

Yellow=positive divergence red= negative divergence. As you can see, the divergence was fairly large so yesterday's price climb didn't do it for me. If you see where they started accumulating, it was higher then price reached yesterday. Yes they accumulate on the way down and therefore have an average cost that is lower, but I assume that price will usually go higher then the first prices they paid. You can also see the brick wall. Right now 3C is going through it's typical ups and downs, but it's at a juncture like this that 3C makes positive divergences or just heads lower to confirm price action-we'll see and I'll let you know ASAP. I just wanted you to see what I saw at 4 a.m. this morning.

Discourse

While I won't bore you with all of the Breadth readings, suffice it to say it was a down day with decreasing volume which tells us we are in a bear market still. Essentially this relationship tells you nothing, but a majority of stocks were down. Whether on rising or declining volume, it's a bit higher, 4:1 in many cases and that is a sign the market is treading closely to oversold, even though we haven't travelled all that far down.

The Trin was at 1.27, which is above neutral and close to being, again... oversold as 1.10 is about the start of oversold and 2 is a slam dunk reversal. So it's not real high, but higher then I'd like to see this early on in a reversal.

I guess Bernanke could not sit before a Senate committee and claim the economy was coming up roses when the Fed Beige book released today seemed to hint the economy was nearly under a patch of roses... a volatile market requires a volatile quote from a volatile man, “I'll put you under a bed of roses, because I'm capable of that-”Mel Gibson.

Interestingly, housing remains sluggish and those stocks reacted well, the beige book noted softness in the housing and construction markets and still those stocks by and large. That may be something to keep an eye on.

Temporary hiring was well received, but as someone in business, before I go hiring temps, I'll give hours back to the employees that have hung in there with me, I'd expect to see the average work week increase before I applauded temp hiring.

The view coming from the Fed seems to be the economy is still on pace but a slower pace. There isn't a hint of urgency which means traders are probably not expecting much out of the Fed in the way of assistance. I personally think the Fed doesn't even want to open that can of whatever is in there or more importantly, as the question that was not asked before the Senate, “what's not in there”. I've said several times the Fed has run out of bullets. Unfortunately, (if you red Trade Guild tonight you will see that our debt is rising compared to our GDP, it's near World War 1 levels which means the government doesn't have a lot of room to maneuver should it be needed and economic hard times breed economic disasters. With the government loaded with deficits and the Fed loaded with red ink, I think they're trying to keep under wraps just how impotent they really are. Unless something big is about to breakdown, I'd say the course is going to be hands off and “lets not say anything that might result in a question we do not want to answer. The Fed is concerned with the economy, when they had a lot of firepower they could afford to support the markets, but now, unless we go into free fall, I think they won't interfere nearly as much as they did.

Two days now we have seen consecutive reports of slipping consumer confidence, which probably means more saving and the banks will continue for now to enjoy the interest paid on reserves, but I think if there's any policy action to come, it'll be on that front by lowering or suspending the reserve interest payments to try to force banks to lend. This all means that once we clear earnings, I think we'll start to see the market marked to sentiment which of courses is souring. As long as the decline doesn't trip the circuit breakers every other day, the Fed is likely to let the market free up a little to be a free market.

The tragedy of the story is a president bent on getting his signature, legacy legislation in place, but what they did was not what the country was saying, “we need” and the cost of what they did was a lot, it leaves the government in a place where they have no choice but to run up the deficits because spending is all they know how to do. What in the world would they do on the hill if they had no checkbook?

The operative words coming in from all the districts are: softening, slower pace, discouraging and considering what Bernanke said before the Senate, it appears to my less then higher-learned mind that they were expecting better then what we have, which begs the question, is this a slowdown in the recovery or like any market indicator that acts the same way, are we leaning toward a reversal? In either scenario the first thing we'll see is a shallower trajectory and it's clear that's what we have.

That's a lot said for someone who is not really interested in the economics, I'm interested in the charts, but the thing that leads the charts is sentiment and as of now it is, as the Kansas City Fed district has shown between this book and the June 9 book, “less optimistic” which doesn't at all sound like something anticipated. Back to those 2 words”Unusually uncertain “ and those two words match up very well with a head and shoulders pattern on the charts. If we were optimistic we wouldn't see such a pattern.

As I showed in one of the last updates, we had a minor negative divergence that led to a wave up, but there was a bigger positive divergence that was underlying in the one minute chart, so my view is that we will see this continued bounce off support at $111 (SPY). Since we have a number of trades triggering or near it, I'm going to leave it at that for tonight. I moved a bunch of stops, you'll see the notes highlighted in yellow where I made changes, but most of it was tightening stops. We have to see what this bounce is before I go issuing new directional trades. So keep an eye out tomorrow as I will add positions intraday if this is just a quick run to resistance and back down. If that happens then we are looking at $110 next and that is the level that should cause some real movement. I think we could run up to $112. tomorrow before hitting a wall, I want to see that before I add trades.

15 min and longer charts have continued to move lower so I think we are just seeing volatility and this is the reason I try not to over trade. A lot of traders can't hold a position longer then a day before they get knocked out of them and that is the meat grinder we are trying to avoid-thus the wide stops. Even if I changed them to tighter ones, it's up to you and whether you have a profit or your trade hasn't really hd a chance to move yet.. So decide for yourself, they re just suggestions.

I'll update in the a.m. but for now don't be surprised to see a move higher. Pay attention to any ranges that develop in the am, like today, a morning range formed and the breakout of the range suggests strongly the direction of the close.

See you in the a.m.