If This Doesn't Get You To Set Alerts, I don't Know What Will

The GOK Trade 

Jackson Hole

Tomorrow morning the Commerce Department is set to revise Q2 GDP which came is at 2.4%, it seems that the market has already anticipated and accepted that GDP will be revised lower. These things, unless they come as a huge surprise, are generally priced into the market already. It may be a shock to main street, but it's not likely to be a shock to Wall Street.

It will be difficult for Bernanke to standby idly as he did at the last FOMC meeting and announce half measures in the face of a GDP number revised lower, there will be an expectation at least from main street that he's going to be more aggressive about it. However, most on Wall Street already know that there are few tricks left up Uncle Ben's sleeve, especially when considering all that has been thrown at this economy already. Perception of the general public will be important, even if the measures announced in reality do not add up to an empty glass in the middle of the desert. The last thing the Fed wants to see is consumers running in greater fear,  not to spending, not purchasing homes, small businesses laying off more employees; I think Bernnke understands he's going to have to put on a show. Will Wall Street buy it? I think the answer is they know the truth and literally have already bought it (see 3C charts).

A hyped up bunch of main street investors may offer Wall Street an opportunity to make a little extra money and set up the game board to their advantage. Nothing passes by Wall Street without some bright mind figuring out a way to take advantage of it.

So the positive divergences that have been seen on recent 3C charts suggest Wall Street may be trying to use this opportunity to do what they always do, make money and set up small investors for the fall, holding the proverbial bag.

As you can see by today's charts, it appears that there wasn't a panic sell-off, it appears that the market makers and specialists worked the bid and ask lower all day until the ultra important and absolutely meaningless, Dow $10,000 level was breached, which also happened to coincide with a support level in the SPY that was breached at the exact same time.

What happens below $10,0000? As I've expressed many times, the human mind gravitates toward whole numbers and Dow $10,000 is the Royal Flush of whole numbers, but beyond that, can anyone tell me why $10,000 is an important level to our society? I bet you can't, there's nothing anymore special about $10,000 then there is about $10,019.21; it's simply in our minds-just like the $9.99 sale rack-retailers don't want you thinking in whole numbers because that extra penny makes a big difference in our minds. The market has a lot to do with our minds, we create these meaningless benchmarks and when they are broken, we act on them. Look at the volume as 10,000 was breached-whatever majority of longs were left in the market they set stops and were stopped out. The salivating shorts jumped in on the short side, after all.... “WE BROKE 10,000!”

While all this was happening, 3C was one of the only indicators probably in nearly all of technical analysis that was on a steady march north, this is a positive divergence and implies healthy accumulation, but this isn't the first time we've seen that recently. Think of the unthinkable rally in oil yesterday.

I'll explain my “JUDO Concept” one more time. It boils down to the simple exercise of using one's own momentum against them. For instance, short sellers below $10,000 are salivating at the chance to make quick profits as the market heads lower in their collective imaginations, but what if... the market headed higher? Retail or regular guy perception of short selling is very badly flawed, even for those who participate in it. There's a bigger fear of being short then long and it is totally unfounded, but it is what Wall Street has sold us for decades because the simple fact is, the products that they are able to sell to the middle class masses do not include short selling; on a managed account basis, that is reserved for the elite who are called “Qualified investors” and invest in Hedge Funds that can go short. It's all marketing.

So assuming our market goes higher, between the real losses short sellers will feel and the instinctive fear of losses greater then what is actually possible, we get a “short squeeze” which simply means the shorts try to mitigate their losses by covering their positions and covering a short position is in reality, buying the equity back or put another way, it alters the supply demand dynamic and shifts it toward an imbalance that is heavy on the demand side. When we have more demand then supply, we see rising prices. The more prices rise, the greater the loss for remaining shorts, they then cover and increase the demand, prices move higher and the cycle continues. At some point in that cycle, the average investor, whose psychology is arbitrarily and inherently bullish (again, this is due to decades of Wall Street brain washing) becomes fearful, fearful that they are missing out on a real rally, “maybe this is the bull market” they tell themselves and they further throw off the supply demand dynamic with their buying. Before you know it, we have a real bounce and the further this bounce can carry, the more it favors the game board Wall Street has set up. If the bounce can break some technical levels or show extreme momentum, even the hardcore shorts are forced to cover. Technicians now look at the market and see a technical breakout. Really though, of you are biased enough, the market will show you what ever it is you want to see. As Wolves, you job is not to see what you want to see, it is to look for what really is. A wolf would never imagine a rabbit, but if it sees one, it surely will give chase.

This is the scenario that I hypothesis is taking shape. As I said, it's a guess, but everything we do in the market is a guess, the only difference is whether it's an objective, or an arbitrary guess. That last sentence is the difference between gambling in the market and trading/investing.

So I'm looking for stimulus that triggers upside momentum, a scare rally (which will not scare me out of my shorts as I have no objective data to suggest this market is or is about to tun bullish). At some point it will end and now the bulls, the longs will be the ones being setup. The market declines (remember that initial Fed policy statements are almost always reversed within days. As the market heads lower (and the bounce will set up hundreds of high probability , low risk shorts) this time the supply demand equation will be shifted toward supply and the further it falls, the more supply there will be, this equates to lower prices. This will probably be the last Hurrah before the market takes out it's last bastion of support and when that happens, we enter a trending market, with our portfolios stuffed full of short positions that gain every penny the market drops.

I also believe-bounce or not, we will enter a new kind of market that most people have never seen, a secular bear market. We've been in a secular bull market since the early 1980's. Most traders have never experienced such a market and all of their concepts of the market will be in direct contrast to reality, this is why I say over and over that we have a historic opportunity to make money.

Now, I was asked has 3C ever been wrong before, the answer is, I think so. Whether 3C is wrong or whether smart money changes it's mind, I can't tell, they do change their minds and smart money is not always so smart, think Lehman Brothers. However I do not recall ever seeing a divergence this complete fail. If you study the charts that I post you will see a nearly perfect correlation between divergences and reversals. IT tracks smart money, it does it better then anything I've seen in well over a decade of studying and teaching technical analysis. The biggest drawback to 3C is user error, not understanding it's complexities or looking for what they want to see rather then looking at what is.

Tonight I'm not listing any trades. We have plenty in place and I've given you many ways to play the bounce. You don't have to make this harder then it needs to be. Consider the longs from last night which are all short squeeze candidates or just use a simple leveraged market ETF-I prefer ones based on the Russell 2000 or the QQQQ. Here are a few symbols: UPRO, QLD, UWM, SOXL, URTY, TQQQ, FAS and UDOW. Keep in mind that if you play this bounce (or what I believe the odds favor as a bounce) that this is a quick counter trend trade and should not be a huge position. You may even want to consider a 1% rule. Keep your eye on the real prize and those are the short positions that are for long term trending, the positions we'll probably hold for 6 months or longer. I want to enter those positions on market strength and a little at a time to get exposure, but take advantage or rising market prices if possible-sometime you never know when that turn will be exactly and how far the first day of it may carry the market down.

Here's an update on the dollar. I feel longer term the dollar has more upside, but in the near future I believe it will take a hit. Eventually I feel it will go down. So maybe it's best to say long run down, midterm up, short term down.

This is a daily chart, you can see the red negative divergence and the white positive divergence.

This 15 minute chart is a little more difficult to understand, but just remember this, if 3C confirms a trend, there is no accumulation or distribution and it does almost exactly what price does. However, when price moves lower and 3C either moves higher or fails to move lower, you have a positive divergence or accumulation. When prices move higher and 3C fails to do the same, you have a negative divergence/distribution/selling. In the box, price is close to a new high, 3C is making a new low, or vice versa, this is the strongest divergence.

Also, the longer the timeframe chart, the more serious the divergence.

Here's an update on Oil.

This is a 30 minute chart so it is significant. The July market rally was caused by a 30 min divergence.

Here we have a 5 min chart of USO, it's the earliest timeframe that can still show direct institutional investment. Note that it started in a positive divergence as we had already been seeing that days before in the 30 min chart above. The second arrow makes particular note of the accumulation that happened after a horrible inventory report and at the lows of the downtrend. You can see, 3C confirmed the uptrend today and of note at the far right is the pullback in the late afternoon today, 3C carried on higher to form a leading divergence. IT appears the oil trend has more room. I think I published a rough VWAP estimate of the target yesterday on a daily VWAP chart.

Today's market....

SPY 1 minute. As you can see, the gap higher was immediately sold off. The second red arrow shows the highs of the day, sold off-remember this is the market maker/specialist timeframe-part of their job is to accumulate positions for institutional money, the lower the price, the better. After the highs were sold off we saw a moderate, but persistent downtrend in price, 3C was slanting up the entire time. And the second white arrow shows where the Dow broke 10,000-no selling by the market maker, just accumulation of the supply that was available when supply outweighed demand as sell- stops were triggered and shorts sold. Finally as the Dow plunged in the last half hour or so of the day, 3C went into a leading positive divergence.

If it were just one chart and 1 3C version, I may not feel as confident, but here's the DIA and a different version of 3C, I didn't draw any lines because they are exactly the same as the SPY chart above. What are the random chances of that?

And here's the institutional 5 min chart of the QQQQ

Questions about the market's bearishness?

NASDAQ 100

S&P-500

Dow Jones 30

Nuff said?

How About The Oil Trade? Anyone Make Some Money There?

A lot of analysis went into that one and a big step out on the proverbial limb. Please tell me someone made some cheese there?

Time to Go Out on a Limb

I hate doing this without really clear evidence. I have that on the 1 min 3C, the 5/10 min are mixed, the 15 is positive.

Bernanke is the big deal tomorrow. I always assume that what he's going to say for the most part has already been leaked to the market.

Today we saw the retail gap up and a slow, steady descending channel down right through Dow 10,000. The way the channel moved down slow and steady leads me to believe it's the work of market makers just adjusting the bid and ask all day to bring prices down, right until they cracked Dow 10,000. At that point volume picked up for two reasons, any longs most probably put their stop at that level-it also correlated with a support line in the SPY/S&P. Once broken longs stop out, shorts dive in. I would think if I were institutional money and what Bernanke was going to say was going to move the market down, I would want to keep prices elevated all day and short into them. The fact they moved prices down and 3C moved up, suggests they were accumulating today and drawing shorts into the market. This is the Judo concept.

So don't take this as the gospel and don't send hate mail if I'm wrong, it's my working hypothesis and it's the most likely course that I see right now. As the market moves off Dow 10,000 higher, the shorts are squeezed, they cover adding to demand which=rising prices.

That's my take. You have to decide whether it sounds whacky or plausible and what you'll do about it. Remember-CASH IS a position.

Now Above Dow $10k

This smells like a fishing expedition for stops under an obvious $10k Dow. Lets see what kind of momentum we get.

I can't Believe I Missed This

Even more important, the break at the same time took out the 10,000 level on the Dow-30, volume increased dramatically. Remember what I say about putting stops at whole numbers and that is the most obvious whole number in the market.

Gunning For Stops?

This is today on a 1-minute chart, note the descending channel the SPY has been trading in since about 11:15 a.m. The lateral trendline is the close two days ago, which was resistance before yesterday, once broken it becomes support and a very obvious area for stops to congregate. If you look at the intersection of the channel and that support zone, that is where the market broke out of the channel, the increased volume is order flow, probably mostly stops.

 All 3 versions of a 1 minute 3C chart show a positive divergence at the break-really a positive divergence throughout the descending channel. My interpretation is this is accumulation into lower prices and especially when the stops were triggered, someone has to absorb the supply and we didn't get a negative divergence there so it would seem again, they took shares on the cheap. This is also the false breakdown concept I talk a lot about, sometimes I call it (the Judo concept) of using your opponents energy against them, in this case, if it is indeed a false breakdown as the charts seem to imply, then we would expect to see a move up very soon that is fueled by this false move down. We will know very shortly.

SPY, Isn't It Your Turn?

A Leading Divergence is All it Takes

The Bond Bubble

One thing about bubbles is they go on a lot longer then you expect. I recall looking for a house around 2002-2003. There was one particular neighborhood I really wanted to live in, we drove that neighborhood every weekend for close to a year. We were inside every house that had been for sale, we had contracts 3x that all fell through for one reason or another. At the time, the median price was around $220,000-some at $175,00, some on the water at $350,000.

In any case, real estate wasn't really hot at that point and many houses had been for sale for over 6 months or more. I recall one small house only 100 feet from the beach, just cross the street, it needed work, but my father was a general contractor and I had worked with him growing up, I'm pretty handy. The house was $187,000.

We went on a 3 week vacation to Europe and when we got back, we drove the neighborhood as we always did each weekend. None of the houses we had looked at had sold, but they were now at least 30% higher in a matter of a few weeks. We didn't get it. The house I was partial to by the beach was sold, several months later a builder squeezed a 2 house town home on the tiny lot. Then slowly they started selling, the prices kept going up and soon you couldn't find anything for less then $300,000. Houses on the water started at $500,000. We had a fantastic, large apartment on the beach so I was in no hurry to move, I told my former wife that this was clearly a housing bubble and we should wait it out. Then it seemed like it would never end, prices were getting ahead of what we were willing to pay and we finally settled on a fixer-upper, but it had a large lot and it was in east Boca Raton, a fairly prestigious area. We bargained and after an inspection report that gave us some leverage, we got the house for $205,000. Within the next 18 months, you could virtually sell the lot alone for $400,000+. McMansions started popping up all over my neighborhood. Around 2007 I did a 5 part series on bubbles, the housing bubble included. I remember saying, "If you find yourself at a barbecue and everyone there is a real estate speculator (as everyone was) you know the end is near." This was the video I released while CNBC talking heads were still pumping the idea of Dow 20,000. I had a very different target, if I recall correctly, I said before this is all over, I believe the Dow will be trading at 5500. I know, pretty extreme, but this is the nature of the market. Soon the market topped and broke down and my site received a lot more traffic. I don't believe CNBC was unaware of the truth, I just don't think they were quite speaking it. I have nothing to gain by pumping or bashing, only by giving factual, unbiased and objective analysis.

So we have another bubble-I call the man at the Fed, Ben "Bubbles" Bernanke, although in fairness it's just a matter of Fed policy no matter who the Fed president is.

So look what we have, a possible bubble forming in treasuries.

Above is a negative hourly divergence in the Bull ETF for 30 year treasuries.

Above is the bear ETF (short treasuries) with the same hourly 3C, but in a positive divergence.

It seems that we will see this bubble burst as well, we can see the ground work being laid for it, the question is, id the Fed (Bernanke will be speaking this week) about to do something to impact treasuries negatively? Or can this bubble keep on going far beyond what we may have imagined?

In any case, keep your eye on this and those of you in the Wolf Pack that have a lot of experience in economics, or anyone with an opinion, please leave a comment. It's difficult to know what's going on, but we can obviously see that something is going on here.

The market may actually be in a holding pattern right now because of the pressure on Bernanke to act and his speach coming up tomorrow I believe.

USO Update

Price has drifted lower in a tight range after the initial morning push, you can see price's trend by the green arrow. 3C the white arrow, has been on a steady march upward, this is a positive divergence, if this continues uninterrupted, I'd be watching for a breakout to the upside in USO.

The dollar is nearly the mirror opposite.

Fractals

You may have heard me mention that technical analysis is fractal in nature meaning that you can see the same price patterns on 1 day charts, 1 month charts or 1 minute charts. The only difference is the time span. This is because the price patterns we observe in Technical Analysis are in truth, reflections of human emotion, this is why the patterns have not changed in over a century and why we see them on different length charts.

Look at this morning's chart of the QQQQ...

The first yellow arrow to the left is in the middle of a slanting H&S top. The measured move or price implication of such a pattern can be measured from the neckline (slanting red trendline) to the top of the head, in this case it is roughly $.30. The second arrow pointing down shows the break of that neckline, our implied target is $.30 lower from the break, price nearly hit the target exactly. In the large yellow box is a what may be considered a bottoming formation (I say may because depending on how it develops it could also be a consolidation pattern, but I believe it looks more like a bottoming formation based on the spike in volume. It's initial implied move is the distance between the top and bottom of the box once price where to breakout above the top line-approximately $.20 taking the Q's to the $44.20 area. This is not a final target, just an implied move where we may see some consolidation, depending on the sentiment. The point is not to make any proclamations about today's trading action, it is to show you the fractal nature of technical analysis and when we see these patterns, that you understand they are generally created by human emotion. Try to put yourself in the emotional spot of a long or short position with each swing. The more you imagine you have to lose, the clearer each swings emotional make up will be.

Here is a chart of the SPY 1 min. 3C. Thus far today it has been very accurate in calling each swing.

DIVERGENCES

I have now, several positive divergences through 3 versions of 3C in the 1-5 min time frames-they are positive and found in the DIA, QQQQ and SPY. They are not as consistent as I'd like to see, but it is the best I've seen as of yet and it's near a support zone. If they improve, I will send out another update. The longer term divergences are pretty much in-line with price action.

Update

There's been some 1 min negative divergences near the tops today, it looks a lot like a morning trading range is settling in. This doesn't tell us much yet, this is just the volatility of intraday listlessness. A breakout from the range will be something to pay attention to. It's still very early on though.

All Will Be Revealed In Time-or at least some

So, remember I said something about we may see a reason for this bounce in the days to come, it's likely to be something that will spark some buying interest, but in the big picture, it's insignificant; ergo the Jobless Claims Report this am that came in a little better then expected.

I don't know, I post so much and write so many emails, but I do believe I have said or am about to, "Very few things happen in the market that were not pre-planned". In other words, leak on the jobless claims or what they were going to look like, most likely. Market just rising out of nowhere for no reason, not likely. That is how manipulated this market is, this is why Wall Street almost always wins, they write the game as we go along. Luckily for us, they leave little bread crumbs we can follow and maybe catch a sneak peak of what their up to as the busily set about their business of shaping the market.

I know it's hard to believe, even for me, but we see the evidence of it so often, how we can we just shut our eyes to objective data, even if it points to a world in which we suspected may exist, but had no idea that it was so much further along then we had ever imagined?

Stay Tuned.....

As for the market right now, it appears those who set their buy orders and headed off to work were made to pay a premium, those orders filled, the retail demand drops off, maybe even a few get taken out the same day on a stop order on the pullback. It's typical market maker stuff and shouldn't be read into for much more then what it is. 3C showed the pullback off the gap, but it happens quicker then I can type it. I'll keep you up to date, lets see what the tricks will be today.

PLA long triggered, also I got a trigger for IBCA but I need to look it up on the spread sheet.

Check Your Trade Triggers

I have at least these that triggered today GMT, HAE, HAFC, NXTM and WABC