I have a few shorts up for you, looking at the charts, I'm just so hesitant to put up a lot of shorts here because so many look like they will bounce and if they do so, they are in nearly perfect position to enter with such minimal risk. This market is truly in trouble. When AAPL is on your short list, you know the market's in trouble and these trades that I have for you are not already half way through a down trend, they are sitting just below major tops. If you had a high risk tolerance as I do, I'd short many of them right here and now and ride out any bounce, but that's not what is good for most people and it's the easy way, the cheap way out. Most of the trades would succeed, but you'd end up being stopped out and looking at them saying, "I could have made so much money if I wasn't stopped out on that bounce". So lets give tomorrow a chance to show us something, if we get what I think the highest probability is (unfortunately I don't feel a high degree of confidence in that probability), then we'll have amazing trades that are textbook. If the market just falls part, then we still have plenty of room to make money.
Note several trades are reminders, we've already made decent money in them and still look good. This raises the point, when you have a chance look at the trades on the short side on the list from the last few weeks, there are gems in there. Email me if you see something you like and I'll give you the update on them, just don't look at the most recent because many of those trades were waiting for something to happen that may be close to happening and others, if you have the risk tolerance are worth a shot now. Please set alerts on limit trades, please review the members only video for the SWING Entry 1 set up and PLEASE, review and stick to a risk management plan. I have a link again at the tip right of the site of how I handle risk management, it's so important and if done correctly, you could enter anyone of the shorts I out up tonight-even the limit orders, at market in the morning and still not risk more then 1% or 2% of your portfolio.
Best to all and to all a good night
Monday, August 30, 2010
The TRIN WINS
The TRIN Index in simple terms to understand works like this, a close below .70, the lower the better, the chances are good for a close lower the next day. Friday night the TRIN Index was at .56 which suggests a probability of a close lower the next trading day-(today). At 1 it is neutral. At 2 or greater it strongly suggests a close higher the next day. Today it closed at 3.81-a very high number with a strong indication of a close higher Tuesday. As of Friday though, before the market closed I had updated and told members they may want to take some profits because I had a feeling today would either be down or kind of go nowhere. The TRIN can not be used to predict anything beyond a day so it is not a concern for long range planning.
Interestingly, the market internals were extraordinarily strong on Friday, today they were extraordinarily weak, almost as if the market is entering 1-day overbought, oversold levels. The dominant price volume relationship was pretty useless, stocks down, volume down, it is the most typical relationship seen in a bear market, one thing it does tell us though is that today was not characterized as a panic sell-off, in that case volume would have been higher today.
First, lets just put this bounce in perspective-it's a bounce, not a market trend and as I warned, I would not go swinging for the fences here, but 3C still does show some revealing character about it. I just want you to understand the larger plan and strategy is a bear market strategy and this bounce's primary function or usefulness to us was not as a long trade, but to set up high probability/low risk short trades and to perhaps get the Judo concept rolling. This is not off the table as today took back about half of Friday's gain, it didn't set new lows, although it could. In that situation most of you have short positions in place by now and it would still be good for us. Now as to the analysis...
As I noted in an earlier update, gaps provide some of the strongest and most reliable support and resistance, today's highs were halted right at the gap resistance seen below in this chart
Also, as I looked at the approach to resistance tonight I saw this Ascending Wedge which is bearish.
Wedges are known to retrace their base, today's close did exactly that.
As I mentioned several times today, we did see several nice 1-min 3C divergences that were positive, a few that were negative (red=negative, white=positive). The posture below is indecisive as it could lead to a positive divergence from it's posture, but also it confirmed most of the trend today which suggests that smart money was not active and was more or less letting the market do it's thing. As I have said many times, the initial reaction to the Fed is almost always reversed with in a day or two, Friday's reaction was bullish, today obviously that reaction was reversed. Keep in mind, these 1 min. positive divergences are usually market makers (on the 1 min time frame). So what we may be seeing here is a series of accumulation at lows by market makers, then they sell into the high, operating as day traders. With seemingly little institutional orders to fill, it would make sense that they are just trading their own accounts. It's said up to 30% of the volume in a stock is the market maker trading their own account.
What was interesting was that the 5 min also confirmed the downtrend, again suggesting no real interference on the part of smart money. See above-3C is in almost lock-step with price.
The hourly chart above where the positive divergence seen for a bounce was strongest did not loose any ground today and still remains in a positive posture (see above). From what I see for the most part, it does not appear as if there was much interaction between smart money and the market today at all.
USO-or oil was a bit different. Here's the long term chart where the positive divergence was spotted and consummated.(see below)
However, below you can see a very clear leading negative divergence on the 10 minute chart pulling prices lower (below)
The dollar did close up today and that may have had something to do with it, but the dollar looks exceptionally vulnerable on the price chart of further downside (which is good for oil generally speaking). On one min charts there's confirmation with a negative bias, on the 5 min chart there's a clear negative divergence. (below)
This is one of those moments that doesn't make a lot of sense. Both oil and the dollar seem to be under short term distribution, oil was effected negatively today, while the dollar seems as if it will be affected negatively shortly. The trouble is that direct comparisons between the two commodities can not really be made with 3C. It's just telling us that there's distribution, how long, how much, how deep, we can't know with precision, although the negative bias of the 1 min chart in the dollar suggests it may turn very soon, presumably good for oil. To further complicate matters, when looking at at the candlestick formations between the two, the dollar's short term is positive, while oil's short term is negative.
This is one of those moments where there is no clear edge as of now. If I had to absolutely bet on the short term direction within the next day, I would bet oil has another day of downside at least and the dollar has another day of upside-or at least that would be the first half of the day's trading. Notice I used the word “BET”. When I trade, I don't bet, I look for high probabilities and I don't see them here right now. There's long term 3C room for more upside in oil, but as I mentioned, there's no way to know how much their average accumulated price is, therefore no way to say, “They must take oil to $XYZ to make money on this trade”.
Looking purely at price action, being I can't find a strong edge in the mixed readings (which can be a function of the short term charts leading in the probable direction while the long term charts take longer to turn) I see very bearish looking patterns in all 3 major averages, it's a daily bear flag. Being an obvious pattern it is susceptible to a false breakout to the upside, which would make sense with our analysis up until today-that is what we were looking for-a malicious bounce. A bear flag is a bearish, downside continuation pattern and is obvious in all the charts below.
There is no real support anywhere to stop these averages from crashing. A false breakout-the malicious bounce or Judo Concept- would fit perfectly into this scenario. Again, this is why I stressed that the bounce for our purposes is not so much about a long play as it is to set up the bigger short play picture. If tomorrow, we do see a breakout above these flags, I would seriously consider selling short into it or at least getting my positions started, or add to them if they are in place. On the other hand, we also must watch for a false breakdown and then a rally back into the flag, in my opinion it is the lesser probability. If prices broke down from the flag, I would be very tempted to increase my short holdings.
There are very few long term 3C charts that do not look bullish for a bounce, however, as I explained, the change in character will always start in the shorter charts and filter it's way into the longer charts unless there is intense institutional activity which I did not see today. On the other hand, we can see short term moves that take the market lower with the short term charts negative all so they can accumulate positions at lower prices for something like a bounce, the difference is, at some point, we must see the short term charts turn positive indicating that the accumulation has begun. So you could say we are at a cross roads of the unknown at this point.
In cases like this, I want to be prepared, but I don't want to commit or over commit until the probabilities have lined up in my favor. We do have the high TRIN reading, it could produce a false upside breakout tomorrow and the short term 3C charts are not so far gone that they could not produce that bonce with a close higher tomorrow. The downside projection of the ascending wedge was fulfilled. As you know from my analysis last week, I expected this bounce to end at some point this week- many of you who have emailed me have received that response. This is what makes logical sense to me, but I want proof.
So, if there is a bounce tomorrow and I had any long positions in the market-oil needs to be evaluated separately, but it it also true to a degree- I would be looking to unload them into strength, Furthermore I'd be looking to go short into strength. I would not at this point be chasing any more long trades other then those that trigger, look good and you understand and treat them as counter trend trades with excellent risk management. For that reason I will be adding short ideas to tonight's trade list.
One last chart that suggests some earlier strength in the a.m. which could lead to further strength, as price sold of into the close, you can see in the blue box a strangely positive looking Tick Index. (Tick is in green, SPT in Red-red arrows are tick negative divergences, white are positive divergences). See below
On one other note, I have heard from several people, mostly dealing with Scottrade that they have had positions, profitable short positions that are being closed by Scottrade. The only way around this that I can see is to buy inverse ETF's, meaning you are long the ETF, but you have short exposure to the market. They can not call back a long trade for a lack of shares to loan. Understand though that I do prefer a mix of inverse ETFs and real shorts as each have their benefits and short-comings.
On a personal note, as you may know, my wife and I are going through the immigration process, so I will not be around tomorrow after about 2:30 until after the close. Thursday we have our interview at 10 am, I'd hope to be home with great news by 12 pm. She's very patient with the time I put into the market and WOWS, so I hope you can be patient with me for these two days. So that is my schedule this week. Please wish us luck!
TRIN INDEX
As a member just pointed out the TRIN is nearly at 2, typically a TRIN reading of 2 sees a close higher the next day.
Update 2
Update
Update
3C is still pretty much in line with price action, there's no short term positive divergence yet really that would turn the intraday-1 minute trend up. There's a support zone at $106 on the SPY, which makes breaking that and triggering stops an attractive option for market makers/specialists. Whether they do or not, I do not know. If they did, I would think we would see some sign of accumulation in that area. IT may accumulate before then too, I just can't say until I see it.
Actually we just got something that looks a little positive as a possible 1 -min positive divergence. Let's see how it develops.
Actually we just got something that looks a little positive as a possible 1 -min positive divergence. Let's see how it develops.
Still There
That negative divergence is still there, I would not like to see the SPY cross below $106.25.
This is still early trade and I shouldn't be hitting alarm bells or anything, but this could be in relation to the low TRIN results from Friday. The Tick index started looking more positive around the 10:30 lows, there were also a few positive looking 1 min divergences, but nothing that has turned the 5 min chart yet.
This is still early trade and I shouldn't be hitting alarm bells or anything, but this could be in relation to the low TRIN results from Friday. The Tick index started looking more positive around the 10:30 lows, there were also a few positive looking 1 min divergences, but nothing that has turned the 5 min chart yet.
Resistance Zone
We have some shorter term negative divergences that seem to fall at a decent area of resistance. Being it's still early trade, the market makers tend to rule this portion of the day and they have a million games. It's difficult to judge as of yet whether this has any broader implications for the bounce or is just normal morning action.
The first trendline shows an intraday low on 8/20 acting as resistance and the more important in the higher trend line as it is gap resistance which in my opinion is some of the strongest resistance and support, that's at the 8/23 close.
The Weak Behind, The Week Ahead
Sorry for the delay in the post, we (my wife and I) did some house hunting and ran into the absolute worst rain storm I've ever seen about an hour and a half away from home, it also takes me several hours to put together an update like this.
So last week I hope we all learned something about the market. We saw oil under accumulation, horrible economic news which does not benefit oil much and then a US Oil Inventory report that was so far from consensus, it's absolutely amazing it didn't break down and sell-off. We saw accumulation into the lows and I know many of you bought them on the updates (that's great-you conquered fear) and we saw one of the most improbable rallies in oil I've ever seen. The dollar was even up the first day so it didn't contribute to the oil rally (a sinking dollar can rally oil). The only explanation I can think of is the accumulation we saw days earlier. Smart Money bought and they were taking oil higher, THEY DON'T LOSE. They set the game board.
Here we see the early warning I told you about with accumulation seen on this 15 minute 3C (version 2) chart as early 8/18 and a huge spike on Wednesday the 25th at the initial sell-off lows. Like I said, they had the game board set, it was going up one way or another, this chart makes their intentions clear.
Then we saw nearly the same thing in the market, economic news coming out was one bad story after another, but we had been seeing the same tell-tale signs of a bounce brewing. They (smart money) broke the market below $10,000 on the DOW which is a huge psychological area for investors and the media, but in reality in means nothing. Dow $10,000 is no different then $10,017.11. This is part of the game, part of how Wall Street and their pals in the financial media brainwash us to do what they want; they know the human mind gravitates toward whole numbers and they make $10,000 a big deal so they can take advantage of it. Why do you thing a retail outlets always sell something for $9.99? It's psychology, that $.01 deep down in our subconscious makes $9.99 sound like a much better deal then $10. So when they broke $10,000 on the Dow Jones-30, stops were hit, short sellers jumped in, we saw accumulation and I know many of you bought for the bounce down there below $10,000 where Smart Money was buying (again, great job in controlling fear and using risk management). The average trader thought that the market broke such an important level, surely they believed it had to keep going down, but it didn't-it went up. Again, the game board had been set up in advance. Last week, those two calls I had to make were extremely difficult for me to publish. 3C said it was true, but everything in my mind, had I not seen 3C, probably would not have agreed. It was a major test for 3C and it passed and I breathed a big sigh of relief-these were very strange rallies to see.
The SPY 60 minute 3C chart above (3C in blue-version 3) shows distribution (red box) from about 8/2-8/9.Price is headed higher as you see with the first red arrow and 3C does not go higher-this is a sign of institutional distribution or selling, what we call a "negative divergence". We see what happens with the second red arrow-prices fall, but it's not long before they (smart money) start buying cheaper prices as you see 3C rise at the white arrow while prices fall-this is an accumulation or an institutional buying signal. Look at the two white boxes, at the lows in price, 3C heads consecutively higher showing even more accumulation and then prices jump.
This is the same chart but the DIA ($100 on the DIA=$10,000 for the Dow Jones-30). Note the same sell off at the highs, and the same accumulation as price declines. Note the white boxes, both times Dow 10,000 is broken (under the red vertical trendline) and 3C moves higher-then, the price reversal up.
So now we have this bounce that has started and where it will go is unknown as of yet. My first impression is that it is there for a reason and my impression is that the reason is it will be used as a scare tactic, a short squeeze and to bring longs back into the market. That's another lesson to understand; humans generally speaking are hopeful in the market. We want to believe the market will rise and that's how to make money. One reason is because Wall Street has done such a good job in scaring people to go short a stock. People have an irrational fear of being short, they believe that losses can be unlimited while the potential gain is limited to only 100% (that would be if the stock went to zero). They also make it seem confusing by letting us know what the mechanics of being short are. They are simple, you hit the “Sell Short” order, your broker will do the rest. You don't have to worry about the mechanics. Your broker will also stop out your position or issue a margin call if it goes against you, losses won't be unlimited because they'll cover the position themselves and you should NEVER meet margin call with cash in my opinion-you close the trade. This article from Trade Guild will show you that you CAN make more then 100% being short.
And this chart will show you that you can make money much faster being short then long. Why? Because fear is the strongest emotion in the market.
It took 4.5 years for the SPY to rally, in 1.5 years that entire rally and more was destroyed. You see how being short can make you more money, faster?
Why does the market want you to fear being short? It's simple, most Americans or many more then you'd think, participate in the market through things like 401k plans at work. Even though they may not be the active traders and investors like you who watch over your portfolio, they are tricked into buying Mutual Funds with names like “High Growth” or “Low Risk” or phrases to that effect. Whenever you have money in the market, it is always at risk, why would you not want to make as much as possible considering it's at risk anyway? For decades Mutual Funds were only allowed to buy stocks long, it was relatively a short time ago when this ban was lifted. So there were decades of Wall Street brainwashing to make people afraid of being short for the simple reason that if people had known the truth, it would be harder for them to sell their products. They demonized short selling as un-American, risky, complicated, etc. That stereo-type has stuck and Wall Street knows it's still embedded in the mass collective cultural thinking of Americans.
Back to the bounce this week....
I believe it may be a scare tactic. The market does bounce as a normal function of profit taking by shorts and enthusiasm by long traders. However, what we saw this week was very well thought out and planned in advance. I even talked about what might happen on Friday with the revision of 2010 Q2 GDP and Bernanke's statements in Jackson Hole, WY. I said this was likely a catalyst to start a bounce, even though his statements meant nothing and... the market rallied. Think about this for a second, GDP was revised DOWN from 2.4% for Q2 to 1.6% and the market took that as good news and rallied all because the analysts and economists of Wall Street had set the stage for expectations to be lower. So the GDP that was revised down to 1.6% was taken as good news and sparked the rally according to the talking heads-however we know that this was a setup because we saw them setting it up before hand. Can you imagine, GDP went from 3.7% in Q1 to 2.4% in Q2 and then was revised even lower to 1.6% and Wall Street had people fooled into thinking this was good news because “it wasn't as bad as expectations” that Wall Street set in advance? The economy is flat-lining, it's nearing a double dip. Look at the GDP, 5% , to 3.7% to 1.6% in 3 quarters. Does that truly seem like good news? Again, I repeat, Wall Street set expectations lower and created a bounce on a HORRIBLE revision, they set up the game board and the bounce.
Again... why? I think it is what I would call a malicious bounce that will scare people who are short, bring in the longs and when it goes high enough they'll drop the market and use what I am now calling the “Judo Concept”.
The Judo concept is when Wall Street uses your actions, against you to achieve their goals. Imagine that they can get the market up higher by creating a lot of demand from both shorts that are buying to cover and long traders who are hopeful that this is a recovery in the market. At some point smart money goes short and they drop the market. The longs are now selling and the shorts are now re-entering the market. Their using us to create the snowball effect both up and down as they play the opposite side of the trade. In Judo (a form of martial art), the Judo practitioner uses their opponent's own energy against them.
Above is a version of the “Judo Concept”. In the blue box the market makes a new high on relatively lower volume, a new high should see buyers aggressive, the lower volume shows them backing away from higher prices-this was a warning. The red box shows two days of “Doji-reversal candles”-there's no momentum left on the upside and volume is rising here on the sell-side. The next day the S&P-500 makes a new high on even lower volume (yellow box)-this is the false breakout, the Judo Concept. Buyers enter the market buying a new high, institutional money goes short selling short to the average Joe long buyer. Then they take the market down the next day. The longs from the previous day are now at a loss, short sellers think this could be a false breakout and enter the market, you can see what happens next, supply overwhelms demand and the market falls. Institutional money didn't have to do anything other then create a slightly higher high and the Average Joe did all the rest of the work.
Here's an hourly chart showing Institutional money selling short into the higher prices (this is the same period as the chart above, just on an hourly chart).
So we have to watch this bounce, understand that this may be the plan and do not panic if we do see a big bounce up (if you are short) and not get overly optimistic if you are long the bounce. The idea in the end will be to bring the market down quickly and far, that is my opinion as of now.
However, we did see a very low TRIN reading Friday of .57. A reading this low often means the market will close lower the next day, but not always.
Look at this chart of the TRIN Index (above) in green and the SPY in red. We see a red square with a reading of .38 and the next day the market was down. However, in the blue square we see a reading of .29 and the market was not down the next day. The difference between the two is momentum; early July was the start of a strong rally and late July was near the end when momentum was fading. Friday was strong momentum, so while there's a statistical chance of a down or weak day on Monday, I wouldn't be too concerned about it.
So now we watch for distribution, it may give us an excellent opportunity to get into excellent short positions at great prices, with much lower risk-if this is a scare bounce, it will only help us and I have hundreds of shorts lined up for this. If you want to play the bounce, on Friday I listed a number of leveraged ETFs (UPRO, QLD, UWM, SOXL, URTY, TQQQ, FAS and UDOW) that would be better then most stocks. The reason being is stocks are subject to sector rotation, some are in favor while others are out of favor. However a broad market ETF will rise with the market, there's no need to worry about sectors. I'd recommend not taking this bounce too seriously, I would not invest a lot on the long side as it can turn quickly and it is counter trend, however, if you can watch the market and updates you may be able to make a decent little profit, just don't get greedy and don't be fooled into thinking that this is a new bull market.
Right now 3C is a little mixed very short term, so I'm not making predictions on tomorrow, but both the market and oil have several 3C charts that are in line with price, meaning making new highs with price or confirming the uptrend. A couple are lagging, but none are showing anything ugly that suggests the bounce is over. I believe even if we have a weaker day tomorrow, the bounce is just getting under way. My guess is that it lasts throughout the week.
PLEASE, set alerts for the stocks on the watchlist. You can use www.FreeStockCharts.com if you don't have a charting system to do it with. These are REAL-TIME charts, are one of the only free real time charting systems I've seen. Or you can check out TeleChart and StockFinder (the software I use) by clicking the tabs for them at the top of the page.
If anyone has stock specific questions or any questions about the risk management I use (links are at the top right of the site- RISK MANAGEMENT) please email me. If you email me during the trading day and it's urgent, please put “URGENT” in your subject line.
Have a great week, lets hope this is a scare bounce as it will do wonders for our core short positions. After all, our main strategy is short this market.
I apologize for the late post, now I have to apologize to my wife :)
