TRADE ARE UP

EVEN WITH THE MARKET DOWN TODAY, WE HAD A FEW TRADES THAT MADE MONEY. Tonight I have used a slightly different method for the trade, I believe there are some great trade ideas there. Many are limit so they have something to prove before you enter, a few are at market and it's because they look really good to me. There are also several trades from the recent past that re making money and deserve a second look. I say this often, but use something like www.FreeStockCharts.com and enter these limit trades in the system so you know when they trigger, it gives you a great entry set-up and there are some great possibilities there you'd miss otherwise.

I list quite a few longs and shorts so either way the market goes you have a chance to profit. I also list them so you can check to make sure you don't have too many trades in closely correlated industries, that is bad risk management.

If you have questions on the trades let me know.

Tomorrow I'll be watching the market like a hawk for any signs of direction. On the face the market did what we expected, it seemed it would continue, we had en event that was not foreseeable and that made the market look pretty weak. It may have been weakened for a bounce, it's been weak for the longer term, so take a look at the trades, using proper risk management, there should be no reason you can't try any one of them.

See you in the a.m.!

Who Would Have Thought... Mexico City Stock Market?

I am going to refrain from commenting on the Mexico City Stock Market bomb threat that apparently sent the market plummeting in the late afternoon. It's a strange event and I'll leave it at that.

We saw late day accumulation Friday, it seemed we were past options expiration in which again, as usual the biggest open interest was pinned and call buyers of the SPY (and others securities)-especially $110/$112 lost their premiums as the calls expired worthless. It is a pretty well known fact, except for the most experienced options traders, that the juice in options is in writing them, getting the premium. As soon as you buy an option, the premium and time decay work against you and they work for the seller of the option. It appears to me smart money was on the writing side of calls for August (at least in our benchmark SPY). Also the Iranian reactor deadline came and went. It seemed as of Friday that the unusual institutional activity that suggested they were scared to death to hold onto any accumulated position last week had finally passed.

We saw a gap up today, that was quickly faded, this is usually market maker activity, even if they intend to close the market higher, they'll fill orders that us ordinary folks set before we head off to work, then they fade the opening gap, trigger some stops along the way and pick up shares that they sold at the opening highs at lower prices. That activity (buying the market by institutional money) seemed to kick in around 11:15 and again just before 2 p.m. today.

Here the red arrow clearly shows 3C's lack of interest in following the gap-this is the selling of the gap at the red arrow, a negative divergence. In the white boxes you see the accumulation areas I mentioned. The second one was right before the market headed up in a vertical accent and formed a bullish bull-flag/continuation pattern. I mentioned it earlier today in an update and the most likely outcome would be a breakout to the upside, especially considering the accumulation right before it took off.

Above is a close up of the 12:30- close timeframe today. You see that second small area of accumulation 3C picked up on right before the market broke higher and formed a consolidation/bullish continuation bull flag (in light red trendlines). Before the flag could breakout to the upside, the news of a bomb threat in Mexico City's stock market broke, this seems to clearly be the reason behind the dump in the afternoon (for more on this, read the previous post below). I'm shocked reading a few professional analysis sites regarding this incident, not a single one made that connection-one of our own members was on top of it minutes after it broke, but these sites have had the rest of the afternoon to put 1+1 together. Instead they give the hum-drum, luke warm analysis that investors were weighing the Monday morning merger and acquisition activity vs the overall market. This is a clear case of laziness in my opinion.  

I have as recently as today told you about the correlation between the dollar and the markets. The chart below makes that clearly evident. Note the sell-off in the SPY (red) vs. the bump up in the dollar (UUP used as a proxy)-this is a pretty clear correlation.

As you can see below, the 3C hourly chart which as is evident, shows reversals via accumulation/distribution of fairly important swings. It clearly caught the bullish accumulation at the white arrow and now is showing bearish distribution into the red arrow. This is also part of the analysis as to why we might expect a market bounce and a move up in oil and certain commodities. The M&A activity in agricultural chemicals today (BHP/POT) may be an early indication of that.

The market (SPY as a proxy) across the board put in new lows for August-good for our short positions, not great for a bounce which may help our short positions, read last nights Judo comments about how the market uses it's opponent's own money against them. This is one reason I try not to trade around my long term positions, I use the 25% or so portfolio cash for that, but that's not the point.

This chart is what interests me. The VIX-Volatility Index gained today, it typically moves in the opposite direction of the market, but is not in the area of new highs for August. My interpretation of this is that traders (in general) are expecting less in the way of volatility in the near future then they were a few weeks ago. I'm not sure how to take this yet, as a contra-indication or as an anomaly, I am leaning toward a theory, you'll see shortly.

This is interesting considering volume on the NYSE, today is the 7^th time in 2 weeks that volume has not broken 1 billion shares. I'd almost say there seems to be a malaise setting in. Remember, beyond a bounce, I m not bullish in the slightest and this could be the calm before the storm.

As Mark Twain said, history doesn't repeat, it rhythms. So I went back to the 2008 breakdown in the market, an exceptionally similar spot to where we now find ourselves. A Head and Shoulders pattern was there, the neckline was penetrated and we formed one last shoulder that ended in a bearish Ascending Wedge, just like now. I compared the VIX to the Dow 30 and found something interesting. The market made a new low that stretched over two months, the VIX however, just like now, did not make a new high. The high occurred almost two weeks earlier in June. The red arrow below shows the low in the Dow-30 (white line), the blue arrow and the red trendline drawn at the close of that day (the very last day on the chart) also showed a similar situation to what we now face. The date then was 6/24/2008.

Here's a follow up chart of the Dow 30 with the date 6/24/2008 marked by a blue arrow. Note the H&S top like now, the piercing if the neckline and an Ascending Wedge that has broken down-we have all of those things now. The blue arrow is the VIX anomaly I refereed to. From that point anyway, we saw about a 45% decline in the Dow. I placed the current SPY chart below for a rough comparison of the major events preceding the huge sell-off.

Now looking forward... Yes we did have several divergences, it seemed like a good place to bounce, it may still bounce, but anyone who has been here for any length of time knows that the main strategy is to take advantage of a decline, in my view, possibly a historic decline that is akin to the second shoe dropping. If there are high probabilities of a bounce occurring, and today until the Mexican Stock Market incident, I would say we did have pretty good chances of a bounce, I will give you the trades to take advantage of that. Right now it seems that this unforeseen event has put us into a situation where the probabilities of a bounce now need to be observed again, we need evidence of that being a high probability occurrence. Of course if you are in profitable long trades, please contact me so we can take a closer look and I can give you a second opinion. Long trades that trigger as well can be taken-it's up to you, but I'm always here for a second opinion.

We have a few things that standout that suggest the bounce may still occur-the negative divergence in the dollar should mean higher oil and market prices, this is still on the table but YOU MUST stick with your risk management plans. If you only lose a percent or two on a trade, you can always try that trade again, you also live to see the seven baggers and the gains that will make your portfolio's year. PLEASE do not forgo risk management under any circumstances and keep in mind what is tactical (like bounces) and what is strategic (like my long term bearish view).

The higher probabilities have always been of a move down. We try to take advantage of anything we have an edge on. Right now I don't feel the edge for a bounce like I did yesterday. So our strategy (the people I advise) has been to hold our shorts through the swings. I intend to stay on that path. If an opportunity in any one stock or the market presents overwhelming odds, then that will be listed. For now, until I see otherwise, I think we need to start thinking big picture again.

This means prepare your risk management. I prefer to have 25% cash on hand no matter what kind of market it is, it allows me to take advantage of high probability moves. As you see in the Dow chart above, there were several decent bounces that one could make some money off of. I also think until the $101 level on the SPY is taken out, I would not go swinging for the fences. There will be money to be made on the short side below $101. However, I would have some risk managed exposure to the market on the short side. Again tonight, I will list any trades that appear to be high probability. Things like today happen in the market, we must adjust quickly. That might even mean sitting it out for a bit until the trend re-emerges, each person will have their own style and tolerances. I am here for you in any way I can help, just an email away. If anything pops up, I'll update again tonight.

Mexico City Stock Market Bomb Scare

As one of our members pointed out, there was a bomb scare in Mexico City's Stock market. Searching Reuters, who seems to have broken the story, the earliest reference I can find to it was at 3:14 pm our time in the market-Here's the Story.


Looking at the chart below, you can see a red arrow at that exact time.

A sell-off like that, similar to a rally like that, near vertical, has the earmarks of a computer trade program, it may or may not have been, in either case we didn't get the all clear until  Reuters released a follow up at 3:45 which correlates with the SPY price of $107.15. The trend line drawn in red across the chart shows the lows of the day and where likely stops were placed, thus all the volume. Once the SPY moved below that level sell orders were triggered and filled. I can't say that this is not helpful to smart money in accumulating a position as we had seen Friday and today, however, with all of the orders needing to be filled, a recovery back above the $107.30 area (the trendline) I guess was an unlikely chance.

The SPY hourly which may not be fast enough to react, shows no real damage done to a potential bounce.

Here was the flag, an upside continuation pattern that I mentioned, the question is, would this have broken out to the upside had the Mexico City Stock Market Bomb scare not have occurred?

Right about where we'd expect a breakout and about the time smart money starts working in the market, we got this scare.

All indicators get a little whacky inside a consolidation like a flag, but looking at the 5 min 3C to uncover the trend, it seems pretty clear that it was holding up fairly well.

It's conjecture, you can come to your own conclusions, but I'm going to guess that we would have closed higher. Now I'll need to start over. This is nothing like 9/11, but these types of events are totally unforeseen (at least we hope they are) therefore it's difficult to analyze them and put them into context.

We have the last half of Friday and about half of today contributing to accumulation in the market, we don't know how much of that position could have been sold off in the late afternoon, so this kind of puts me back to square one with analysis. I'm going right back to work, looking for signs of anything helpful and I'll put anything I find in tonight's wrap up.

What a strange occurrence.

Sorry About all the updates.

The Q's do have a small divergence just forming, there's not enough time in the day for a proper positive divergence to form, but all of the averages still maintain a rather positive stance even on the 1 minute chart. So the action into the close will be important, any move up on volume will be a positive sign for a bounce. Right now, that $107.30 area on the SPY is acting as resistance. Relatively speaking , below resistance there's quite a bit of volume and not the same degree of price decline you'd expect so this is pretty much the opposite of churning just discussed.

Stops hit

I'm playing a little catch up here, but the Qs are a good example, but it's apparent in all of the averages, stops have been hit on the intraday lows. This is important to watch and see if we get a move on the SPY back above about $107.30 as that will set up a possible false breakdown. I' want to get this out to you quick, I will update if I see the divergence warning of that.

OIL UPDATE 2

This may be something, I just looked at USO, that's a strong positive divergence, the hourly chart above shows a strong momentum move, it's lacking volume, but that may come into play around the breakout near the $33 area (a bit above)

The Dollar and Oil

Remember, when we talk about the dollar, you have to keep in mind that it tends to have a strong correlation with oil, the market and certain commodities. Since oil is sold in $USD, any drop in the dollar makes oil cheaper so to compensate, oil prices rise. The same is true to a lesser degree, but still a pretty strong correlation with the market.

So lets look at UUP which is an ETF I use as a proxy for the dollar since dollar data isn't useful in 3C intraday charts.

While my long term outlook on the dollar is still fairly bullish, in the mid-term, we see the last two days (thus far) not making any forward progress off the open and volume is relatively high. It may be too soon to say for sure, but it does look like a sign of distribution that is known as churning, shares are exchanging hands but price is not appreciating, it's a form of distribution.

This UUP hourly chart which has good correlation with 3C signals, seems to confirm what I suspect above, you can see the indicator suggesting distribution into higher prices. The Red box is a leading divergence.

Contrast that with the DBO hourly chart, which again shows good results with 3C divergences, and we see a positive divergence or apparent accumulation into lower prices. Being this is on an hourly chart, it is pretty serious and suggests that the move could be strong to the upside.

Again, DBO 15 min chart (I believe we first saw this happening on a 10 minute chart, a 15 min chart is more serious) shows apparent accumulation into the lows-and good working correlation with 3C. It has even crossed into a leading positive divergence.

DBO 5 min chart. Again, here on the 5 min chart we are seeing the same-around the same time the market appears to have started its accumulation today.

Considering the Dollar's stance and Oil's stance, it seems likely that there is accumulation for a move higher. I'm not sure what the impetus will be, perhaps a falling dollar, perhaps something else, but it seems pretty likely that will be the most probable outcome from what the charts are showing us. As to when, I'll have to be on the lookout for a strong 1 min positive divergence, I haven't seen that yet, that seems to be the best bet.  Usually that move will begin a move up in the issue-oil. We just have no way of knowing how much they intend to accumulate as they will try to sell into higher prices. It seems rational that the more they accumulate, the higher and longer they'll need to push the oil rally to unload the shares.

QUICK UPDATE

IN EACH OF THE FOLLOWING THREE CHARTS OF THE SPY, DIA AND QQQQ WE CAN SEE SELLING INTO THE GAP UP. This is a typical play we see, most likely market markers and specialists are making retail pay up for a security, they sell them the security at the higher price, in effect go short and cover and buy at lower levels, this is why I say it's tends to be retail or regular people trading in the am and the pros in the afternoon, this is just a quick payday for the market makers and has no bearing as far as I've ever seen on the day's results. Between 11-12 the process of accumulation according to 3C began. Go to the fourth chart.

Below is the DIA (ETF for the Dow -30) and we see a bull flag, which is a bullish continuation pattern as it breaks out to the upside. We see these on all time frames like this one minute chart or daily charts or even longer. Always watch for the price consolidation to take place in a parallelogram that tilts away from the preceding trend, which is the flag pole or the vertical ascent up on good volume. During the consolidation of the flag, we also watch for diminishing volume, most of the time the breakout to the upside will occur on heavier volume.  since all 3 charts above have a form of a leading divergence as compared to the opening gap up, it appears that our bounce theory is on target.

I wanted to get this out to you, but I have more analysis to do so I will be following up with another update shortly.

Update

I just wanted to get one update in before I have to get ready for my appointment. Thus far we have seen a small pullback, this is profit taking as far as I can tell. 3C, looking at 6 possible combinations is showing 1 that is in line with the pullback, the rest are still marching steadily higher. I'd expect, with what we see now, although it's very early on, to see higher prices. Watch for a trading range to develop between the open and say 11 am, typically the first breakout above or below the trading range is a good indication of where the market will close-at least the direction. If we see strong momentum there will be no range, but a range does offer institutional money an opportunity to accumulate so it would not mean the market is going to reverse. Thus far, there's no indication of that. Some of the trades posted last night are already off to a decent start.

For a strong momentum day to accomplish a short squeeze, I'd think the market would want to run up to the $109.50 (SPY level). If this is to be a bigger bounce and prices don't move much, but accumulation continues, then I'd expect to see something possibly approaching $112. It's conjecture right now, we're not even an hour into trading and most of this is retail trading. I'll update as soon as I return and watch my email when I'm out.

Talk About on the Fence

This is an excerpt from an investment newsletter that I have no idea how I ended up with, I don't read other's analysis because I don't want to influence my own, but after the first few paragraphs, it's clear to me why people keep losing money with these services. Here's the start of it,

"It’s a tough call to predict the markets’ direction in the week ahead. XYZ Analysis can make a case that stocks are oversold, and just as easily make the case that stocks are not low enough.

Looking at index charts, they look less than attractive. This is when a bounce usually occurs. We see the indexes trading below their 50 day-moving-averages, the short-term averages crossing below their longer-term cousins and everyone and their cousins see the same thing-where's the edge?, the MACD lines pointing straight down… and yet, according to Bollinger Bands, the Dow, NASDAQ and S&P are nearing oversold levels." There truly is no such thing as oversold, not that's useful. One of my best performing systems only buys overbought stocks and sells short oversold stocks. Their reliance on moving averages, MACD and Bollinger Bands ansures that they don't see anything unique, the rest of the market is all looking at the same things, thus the herd/sheep mentality that gets led to the slaughter.

It's not fun for me to rip someone else's analysis, I just want to show you how pervasive the status quo is and why investors and traders lose over and over again. This particular letter's first sentence was to hedge their analysis. Of course you want to be prepared for anything as the market can throw anything at you, but this was like it's partly cloudy and whether it rains or doesn't, their still right. However, it doesn't do much to help their readers.

One Other Thing... Forget Sales

Human nature is to want to buy on sale, if a stock listed on the SS is up this am, don't let that deter you from buying, many times those are the stocks that finish the strongest and getting in early is typically the right thing to do. Be sure your risk management is in place, nd don't be afraid to buy  a stock that is gapping up. You will never be able to capture a stock that is making higher highs if you are not willing to jump in at some point. We are very early on in this bounce-if in fact it lasts tha majority of this week as it seems to indicate as of now, so get your risk management together and consider getting your feet wet if you like the stock. I wouldn't let a gap up deter me, it's a step in the right direction.

Blah, Blah,Blah

That's what I think reading this morning's financial news, the market is up because of a return to Monday morning merger and acquisition activity, the elections in Australia, etc, etc.

The market is up because the powers that be wanted it up, we saw it first on Friday, I posted the chart, stocks were under accumulation and all of the reasons the media can think of really don't mean a thing. All the M&A activity didn't just get decided this morning, it's been in the works for sometime and thus most likely already discounted into price. Look at the gain in PAR, which is at the center of a bidding war between HPQ and DELL.

So this is another lesson in the market if you didn't see the crash series I did showing none of them were a surprise to insiders that had been moving out of the market months before they occurred. It's the same idea at work here.

Please, be skeptical of what you read, it's entertaining and it lets you know what was behind something big that might have happened, but it's usually too late to be worth anything more then entertainment value.

On another note, thank you for the well-wishes today, I'll be thinking about all of you and getting back to work ASAP.

Have a profitable week!