This was a difficult week for some or maybe many of you being that our core strategy is bearish on the market. Many of you may know I advise two people with a relatively large sum of money in the market. That's where the term "core position" comes from; they are positions we hold through thick and thin and we don't sell them right before a bounce because as I told you on September 1, Smart money (I may call them smarties for short and retail money like us Joes as in the average Joe) "could" shut this bounce down today if they wanted to. I didn't say they would, I was rather trying to make a point and that was that they caused a huge false breakout that achieved the goals of getting shorts to cover, but in reality it probably was not long enough because the second goal was to get longs to enter the market. Because we can't be sure when they will slam the door shut, we hold our core position shorts and try to keep at least 25% in cash to trade bounces like this which also helps to hedge draw down on the short positions.
We Traded SOXL for this bounce and exited the last of our position Friday. We started exiting earlier in 1/3's. In effect we were doing the same as the smarties, distributing our shares into strength, but for different reasons. Institutional money has huge positions to distribute or when they are selling short (3C still reads that as distribution because both actions are still selling) so they don't want to move the market against them by putting in their entire order at once, dramatically shifting the supply/demand balance and sending prices lower; they HAVE to do it slowly so they don't drive prices down. We did it slowly because we can't be sure exactly when the bounce will end, we know that we are close and maybe can call it to the day with a very strong signal and confirmation in price action, but usually it's a bit more general then that.
Malicious Bounce ...
Please read the post linked to the above, it's from August 25th and talks about the idea of a "malicious bounce." Keep in mind this was before our bounce really got underway.
A key quotes from the August 25th article...
"I don't see this as a one day event but in my mind there are two distinctly different kinds of bounces. One is a pure oversold bounce and short sellers are taking profits, some long swing traders jump in and we have a little bounce and resume our trend. The second is a malicious bounce, it's meant to squeeze shorts, lead enthusiastic bulls back into the market and then slam the door in their faces and use their losses to propel the market lower in a fast and frenzied sell-off. I don't know what the intention is, I figure it's probably the second, but we won't know until we see the character, the length and the intensity of the bounce. I want you to see what some of these bounces look like so you are prepared."
When I mentioned waiting to see the character of the bounce, things such as "length and intensity" were two of the important aspects that would determine if this was a malicious bounce or a garden variety. So the duration and intensity of what we have seen should not be too much of a surprise, that is why I showed this chart (below) so you would have some idea of what to expect.
“This is USO and you can see a down trend has started. The first bounce in red nearly makes new highs, this is what I would consider an orchestrated malicious bounce. It squeezes out the shorts as they start to become unsure, they see prices nearing new highs, longs thinking the same are drawn in and when it's done, we get a pretty mean drop over the next 3-4 days. The second bounce in the yellow box is just a correction”
When looking at charts such as the one above, it is important for your understanding to try to put yourself in the moment emotionally. One of our biggest hurdles to overcome are our emotions. To correctly and effectively interpret a chart, you must see past the indicators and price patterns and put the chart into an emotional perspective. The two biggest drivers of the market and consequently our actions are not supply and demand, but rather fear and greed. When you can feel the emotion of a chart, you are well on your way to truly understanding the market. A chart shows you a lot of things, the most important thing is to be able to put yourself in the emotional state of retail (us) traders.
Below you will find comments from the same post of August 25th which reference the chart below
"the QQQQ-the NASDAQ and the Russell 2000 have been hardest hit in this decline, shorts are likely thick in both averages or the derivative ETF's ."
"There were very few days since the March 2009 rally that we even saw a solid up day on rising volume, to see it here and now, with this market's sentiment, has to be striking fear in the hearts of shorts in either average."
The implication here, after explaining what a malicious bounce is meant to accomplish for smart money, was that the NASDAQ and Russell 2000 would outperform the market in general, which they have and that we were already seeing indications that the move up would be starting shortly.
A Look Back to Move Forward...
I want to review with you what the whole idea of what this bounce was/is because I'm getting emails from people who are having doubts and fears, I don't blame them, but to best help you we need to go back a bit in time.
The idea of the “Malicious Bounce” was brought up on August 25, here's what the chart looked like and 3C was showing signs this was bounce was coming.
As you can see, we had been in an extended downtrend at that point. That being the case, shorts were surely thick in the market. The smarties exploit imbalances in the market, remember, this is a zero sum game, it's not a market where everyone can all make money together. For someone to make money, someone is usually going to lose money-generally speaking. At this point (late August) we had a sentiment imbalance, as you can see by the downtrend in prices. Most were bearish which gives the smarties an opportunity to make money by knocking the shorts out of their positions. Whenever there's an imbalance and a strong prevailing view, you must always be ready for some kind of trick or counter trend move from the smarties. If too many of the Joes are lined up on the right side of the trade, then the smarties have less opportunities to make money and often they will do something to put the majority in the red.
On August 30, at 12:31 a.m. (before Monday's open) I wrote this about the following in the article "The Weak Behind, The Week Ahead"
“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.”
I posted this chart with the following comments...
“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.”
This chart below was also posted (it is the same time period as the one above, just an hourly chart rather then a daily chart) with the following comments....
“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.”
Keep in mind these charts and the commentary were still before the bounce got started.
“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.”
and finally some other comments from the Monday, August 30th article...
“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.”
"Tomorrow" meant Monday as this was posted at 12:31 a.m. Monday morning-still Sunday night for me... :)
“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.”
Here's what the chart looked like on Monday August 30th at the close-we did see the weaker day I mentioned above...
The chart below is current, but shows what 3C was indicating on Monday- which was accumulation and made me believe that we would see a “malicious bounce” rather then the garden variety bounce.
Note the accumulation at the white arrow from 8/25 through 8/31. The Red Arrow shows the rest of this week's 3C action which is distribution. If price action alone is not enough to confirm the "Malicious Intent" of the bounce-to trade the other side of mass sentiment, then the negative 3C divergence into higher prices all of this week should be convincing that this indeed was their plan. The shares accumulated were to 1) turn the market up from it's down trend and 2) accumulated to be sold into higher prices for a profit.
Remember, they accumulated over 5 market days, it's impossible to know "how much" they bought, but obviously they could not sell it all in a day, at least not at a profit. They must feed the shares out slowly so they don't overwhelm the market with supply and send prices lower which would defeat their purpose entirely. The shorts who were forced to cover into rising prices (losses for them) provided the buy side demand that the smarties needed to sell their accumulated shares. As the market gained more ground, longs entered thinking this is a legitimate move up, providing further demand. When the smarties have liquidated their long position, they continue to sell to the buyers and shorts that were covering, at this point they are entering their own short position for a market reversal down when the bounce ends-MORE MONEY FOR THEM-they control the bounce so they can't lose.
The chart above makes perfect sense, it is exactly what I warned a malicious bounce would look like BEFORE it started, BEFORE we were able to see it's character.
The next post, "The TRIN Wins" which was the nightly wrap for Monday, August 30th, I showed you three charts, the NASDAQ-100, the Dow-30 and the S&P-500, all 3 had bear flags present.
Here's a chart of one of the bear flags with comments...
“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.”
Continuing...
“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.”
Here is the chart as of now, this shows the exact scenario described above. Technical traders expected the bear flag to work (for the market to break lower) as they have been taught, this would put many traders in short positions. The smarties plan was truly an amazing insight into how the market truly works and how manipulated it is. They say, "The job of the market is to make as many people wrong as possible at any one point in time." The malicious bounce and false breakout above the bear flag that I mentioned as a strong possibility is exactly what happened, thus far the scenario is correct and the timing “lasting through the week” is correct.
Above you can see the red trendlines tracing out the bear-flag and the price move above that flag. According to the teachings of technical analysis (now the preferred form of analysis for most traders-the Joes), a bear-flag is a continuation pattern, which means traders using technical analysis all expected the exact opposite of what happened, this is why I tell you that Wall Street uses conventional technical analysis against traders who use it.
Technical analysis' popularity is another form of "mass sentiment" and it makes Wall Street's job of manipulating the market a lot easier because they know technical traders are all looking at the bear flags and all are expecting them to break to the downside as they have been taught for over a century. The smarties once again took advantage of "mass sentiment" and did the opposite.
Also posted on 8/30 was this chart...
“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).”
This means that despite weak prices, the one hour chart stayed positive, contrast that with this, the current hourly chart from Friday's close.
Above in white is 8/30's close, the hourly chart remained positive because they were getting ready to move the market higher. If the market were healthy, the one hour chart would have advanced with price this week to higher levels. Instead we see a negative divergence in 3C (slanting red arrow) as the rally advanced and the current 3C position is actually lower then it was on 8/30 even though prices moved more then 5% higher-this is another sign of distribution into higher prices and fits perfectly with the malicious bounce scenario.
Regarding the Dollar, posted on 8/30 with comments to follow....
“the dollar looks exceptionally vulnerable on the price chart for 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.”
And the dollar's chart as of Friday September 3...
In white, you can see August 30th when I posted the highlighted comments above. Remember that the dollar typically has an inverse relationship with the market. A declining dollar usually means an advancing market and when the dollar rises, the market typically falls. There are a lot of reasons for this, but one of the most obvious is that it effect's the earnings of multi-national corporations such as McDonald's or Coke. When the dollar is worth more, foreign currencies generally speaking are worth less which makes American products more expensive in foreign countries.
The next chart is a current 5 minute 3C chart of the dollar as of this Friday. There was a negative divergence since August 30th (which you can see below) so as of August 30th, we expected the dollar to turn down soon which it did on 9/1. We have to watch for the first signs of accumulation in the dollar which would lead to a reversal ending downtrend and sending the dollar higher, this would imply that the market should reverse and turn back down.
The chart above not only shows the negative divergence from August 30 which reversed the uptrend preceding August 30th, but also shows the dollar moving down with 3C which is confirmation of the downtrend. Even though we had strong market day on Friday, the dollar put in its first sign of a positive divergence since the call for a decline in the dollar back on August 30th.
This chart also shows a leading divergence on Friday September 3rd. The dollar is one of the first places we'd expect to see a positive divergence and there it is, a powerful leading positive divergence. It is a leading divergence because as you can see to the far right, the dollar ended Friday at the lows of the day, but 3C is higher then it was as far back as the end of day on 8/31 when prices had not yet declined.
Divergences are hard to understand at first, but the idea is we are seeing accumulation right now in the dollar. Accumulation simply means buying. Most people believe that big money is buying when prices advance, THIS IS 100% WRONG; they buy when prices are depressed and if they can, they will send prices lower to buy at even lower prices. When the trend reverses and the dollar heads up, it means they make a lot more money.
Considering the dollar trades inversely to the market, one may be excused for assuming this is a bad development for the bulls in the coming days and I use “days” loosely as it could shift to the upside as early as Tuesday.
Considering we are seeing the start of accumulation in the dollar, we would expect to see something similar in the market, except it would be a negative divergence because of the inverse relationship between stocks and the dollar.
This is a 3C chart of Friday, September 3rd's close.
This chart will take a little longer to understand with all the annotations.
The chart above doesn't look exactly the same (exactly opposite) does it? This is because of the entire concept of a malicious bounce. There is a negative divergence into the 8/30 highs (see the red box and arrow to the left), this is distribution otherwise know as selling/short selling-as I mentioned earlier, they are both the same, they are both selling.
We see a decline in prices right after the negative divergence on 8/30. Then on 8/31 during the end of the day sell-off (white box and white arrow) we see smart money accumulating/buying near the lows, preparing for the bounce. On 9/1 the market gaps higher and finishes higher, our bounce has begun. It is at this point that I have to start looking for the character of this bounce. Remember I said there are two kinds of bounces, the harmless, normal garden variety of simple profit taking and a "malicious bounce" that is a tactical means to a strategic end. You may recall before the bounce started I said that I believed it would be a malicious bounce, but until we see the character of it, I would not know for sure. One way to determine what we were facing was to look for institutional selling which would show up on a 3C chart as a negative divergence into higher prices. Or in other words, market prices would advance and 3C would fall.
After the 9/1 spike in 3C, you can see the rest of the time they are distributing/selling/selling short as you can see by higher prices (the green arrow) and the negative divergence in 3C (the long red arrow in the same time frame). This distribution initially would include selling the shares they bought at the 8/31 lows and before and then when those shares are out of their inventory, they'd continue by selling short into higher prices. The mechanism that allows this is both short covering (buying) and as prices advance, the hopeful long traders buying into the move up.
As humans (at least in the market), we have a bias toward thinking that the way to make money is to buy long, most people are afraid to short. This is why you can count 5 bear market rallies after the Crash of 1929 and during the Great Depression. At a time when the economy was on it's knees and unemployment was 25%, people could still be fooled into buying what is called a bear market rally-we just saw one that started in March of 2009. People by their nature are hopeful, even in times as bad as the Great Depression. This is another way Wall Street takes advantage of how we are emotionally hard-wired and how decades of misinformation have shaped our view of the market.
Imagine the downtrend after 1929, at some point the only majority left in the market was the short sellers, Wall Street will always take advantage of a ship that is listing to one side because everyone is piled up on the same side of the trade and that is not conducive to the smarties making money.
Lets take a look at 1929
This 2-day chart of the Crash of 1929 shows the Dow-Jones Industrial average lost 89% from September (interesting coincidence) of 1929 through July of 1932. What took 14 or more years to build was destroyed and then some in less then 3 years. There are 5 white boxes, each one is a bear market rally. The first bear market rally lasted nearly 6 months. Our recent bear market rally lasted an incredible 13 months-the reason why I will save for another post, but suffice it to say that the Federal Reserve had not yet received some of the powers conveyed in the 1935 Banking Act.
There is one last rally right around 1932 that I did not count as a bear market rally because it did not qualify by definition:
"A sharp move up in the context of a larger bear market."
The media has attached an arbitrary 20% standard to qualify as a bear market rally, this has no real value in judging a bear market rally. The effect of the rally is what matters. The reason I did not include the last move up around 1932 is because it was not a "sharp rally". Bear Market rallies are also called "A sucker's rally" because they are used for the sole intent of getting investors to buy the rally with the hope that it is the start of a new Bull market. Just for your information, I can't think of one major market bottom that began with a sharp move up. Bottoms are a process, much like tops-not an event.
You can see why smart money perpetuates these rallies. In a bear market there isn't a lot of investors left in the market, thus there's not a lot of money in the market and for the smarties to make money, they need to attract money back into the market. What we saw this week was a micro-version of a bear market rally, the net effect was the same: We had an overwhelming bearish bias in the market, the smarties needed to squeeze shorts-creating buying and to attract long investors creating additional buying. The duration and the percentage advance is what attracted long buyers into the market. They may not have believed this to be the start of a new bull market, but they may have viewed it as an intermediate trend reversal that they could trade on the long side.
Do not forget that the smarties need demand from us-the Joes- to be able to do this. The first way they created it was to break the bear flag pattern, which would cause shorts who would now be at a loss to buy to cover their short positions. Don't be confused by "buy to cover", in the market it is simply the same as buying. This initial trap to squeeze the shorts was accomplished by breaking out of the bear flag that we have been conditioned into believing will result in a break to the downside. Once they saw the bear flag fail, they were at a loss and started to cover shorts, which created buy side demand and helped to push prices higher.
I mentioned “freindly trading environments" the last two days of the three day move. This is where the market acts like technical analysts believe it should act, it gives them the confidence to buy as everything they believe about technical analysis is working out perfectly for them. This was the second component of a malicious bounce that I had described on and before August 30th. First the shorts were squeezed, second the long buyers were attracted into the market by seeing the market act in a manner that they have been trained to believe it should act-strategically it is exactly what I described, what I expected and is an amazing insight into the way smart money operates.
The market under normal circumstances would never allow this, they create traps, false breakouts, etc, but their goal was to keep retail traders buying so they could sell their shares short to retail at progressively higher prices. When the market falls, this is an absolute advantage for smart money, they have sold short at high prices, the same thing we want to do in successful short selling. So they create an environment where longs are comfortable, all their moves seem to be right and they continue to buy, this chart makes clear that institutional money is using our (the collective average investor) buying demand to sell short. It makes perfect sense and is what I meant when I said (after the bounce started) "distribution is what we will have to be on the lookout for to confirm our hypothesis of this being a malicious bounce" as well as intensity and/or duration. Smart money is only going to sell short at higher prices if they know that they will make money and for them to make money, the market has to go lower!
Beside the buying, which wasn't very strong because it is only retail money-no institutional money as I showed you Thursday night by the overwhelmingly bearish Price/Volume relationships and the negative breadth charts
It was very clear that the market was being driven up. The price volume relationship was about as overwhelmingly bearish as I've seen as were the breadth charts. Regular traders alone could not create these gains, it took the help of market makers influencing the market higher by working and raising the bid/ask. I believe they also lent support at times and this is why we saw some positive short term divergences, the market makers were ensuring the trend continue up through the bid/ask and small strategic investments to support price and create breakouts that contributed to the "friendly market" conditions witnessed.
This chart shows you the market makers at work helping institutional money drive prices up .
I know it's a little confusing, but this is a 1 min chart of the SPY, this is the time frame where we can see the actions of market makers and specialists and see swings in the intraday trading. In the white box, market makers (I'll use that term to include specialists as well-they do the same thing it's just whether they do it on the NASDAQ or the NYSE) accumulated to push prices higher, they also would have accumulated in a form of front running. Remember that market makers also trade their own accounts so if they know an institutionally sponsored bounce is coming, as they would because they'd have been the ones to fill institutional orders, they'll surely stock up on some longs to sell into the bounce. You can see the price advance they created by the green arrow. However, on Friday they didn't continue to move prices higher with accumulation, they started selling their long inventory and going short as early as of the morning of 9/2. The gap up Friday a.m.was sold by market makers as you can see the at the red arrow which is a 3C negative divergence and the rest of the day when we saw higher prices, the market makers shift their inventory from long to short, why would they do that? Remember the dollar chart that trades opposite to the market under accumulation-this chart is the opposite of that and what we are looking for as the first hints of a downside reversal. Both the market averages and the dollar confirm this.
In The post from Thursday , I said this after showing the breadth charts. Market breadth is the internal health of the rally or a market. Strong breadth readings indicate a majority of stocks are moving the market higher. Weak breadth readings are a negative and you should always be suspicious of rising prices on poor breadth; it means that only a few stocks (usually bigger stocks that have a heavy weighting on a market average like the S&P-500) are advancing while the rest are either falling or failing to keep up with the market's overall pace.
In that post I said,
“All of these taken together show a market that is advancing on bad breadth. It's not a robust or health bounce, but we never expected it to be, we expected selling and shorting into it, that was the entire point of the bounce, so it is not the start of a healthy move, it is what we expected.”
If you have time, take a moment to review the breadth charts again.
The TRIN reading is not perfect but usually works fairly well, it has failed to work well recently. Why would that be? I can think of one very good reason, the market is being manipulated, news doesn't matter, the TRIN apparently doesn't matter because institutional money and the market makers are working together to impose their will on the market.
Updated Breadth Charts....
As you can see above, the NASDAQ Advance/Decline ratio (advancing stocks minus declining stocks for the NASDAQ 100) ended worse Friday then Thursday despite higher prices, it actually ended negative showing more stocks being sold then bought in the selected 5 minute timeframe, meaning the advance occurred because of a handful of stocks, not a broad market rally.
Look at the new highs (above in green) for the 5 minute time period, this is the same chart I posted Thursday night in the post linked above. Market price went into new high territory Friday, but showed the lowest readings of new highs that have been seen in the last 3 days of the bounce. Again, this is bearish and in a healthy move, especially this earlier on (3 days) this should be making new highs.
Don't forget the VIX....
The CBOE Volatility Index (VIX) has made a new closing low that is now the lowest since early May. Low readings in the VIX show complacency and lead to sell-offs, high readings are fear and lead to rallies, the VIX trades inversely to the market. The close today is very bearish for the market.
Above the VIX is in green and for comparison of it's effect on the market, I have included the SPY (fuchsia). There is no exact number in which the VIX can be used for a guaranteed reversal, it has more to do with extremes in sentiment. On this chart, reversals are common when the VIX is 25 or below, it's now 21.31. Right now we are seeing an extreme and judging by history, we are close if not at a reversal. Note what I said about how the VIX trades opposite the market. Friday's close was a 4 month low-that's an extreme reading.
The Hanging Man...
Finally today formed a very reliable bearish candlestick reversal pattern called a “Hanging Man”. I'm actually an acquaintance with Steve Nison through YouTube. Although the Japanese have been using Candlestick charting for hundreds of years, Steve is credited with the most authoritative body of work on the subject, virtually introducing candlesticks to the United States. There are hundreds of candlestick patterns and the Hanging man is considered to be in the top 12 most reliable. The further the Hanging Man gaps up, the higher probability of a reversal and the further down the reversal will go. Increased volume also enhances these odds.
On Friday we not only had a perfectly formed Hanging Man, but we had a big gap and increased volume. Look at recent Hanging Man reversal signals and the effect they had on prices within 1-2 days. Note also that many of these are close to a Hanging Man, close enough to consider them as such, but on this chart, only this Friday's is perfectly formed.
Nearly every Hanging Man on this chart lead to downside reversal. This particular one on Friday is one of the most well formed and serious signals on this chart. *Read More About the Hanging Man Here
I warned (above) before this bounce even got underway that it would be scary for shorts, it would play into the inherent bullishness of the general population given their fear of short selling and on their hopes; it would go far enough to squeeze shorts out of positions and force them to cover-adding more demand and ultimately longs would gain the confidence to enter the market. Unfortunately for them, when the reversal/trap is sprung, they will be left holding the bag and the Judo Concept comes into play. Smart money will be heavily short and the losses experienced by longs who bought near the top as it takes time for them to gain confidence in the bounce (and that's why I believe they made the market friendly for technical analysts-so they would buy), would fuel the downside momentum, shorts would enter the market further fueling downside momentum and the smarties will have done what they set out to do, to take the market down with almost no investment of their own-retail traders would do the work in pushing the market lower-The Judo Concept.
Retail traders are also going to start taking profits as they believe the market is overbought-this is a completely arbitrary judgement as there is almost no such thing, but many of the indicators that they have come to depend upon (the same ones Wall Street uses against them) are now entering the overbought levels. This will also add fuel to a downside move as they will begin to take profits based on their indicators reading “overbought”
These are the typical tools most technical traders use. In yellow is Williams %R, below that is Stochastics and in the bottom window is Wilder's RSI. For technicians using these tools, all show the market now being in an overbought situation. I personally don't believe in these indicators because one of my best performing, back-tested trading systems only buys overbought stocks and only sells short oversold stocks. Overbought and oversold are totally relative/arbitrary terms, but as I said, technical traders use these and believe in them. As you can see above, they can be useful, but an oversold/overbought condition can last a day or it can last months. Above all indicators are now registering over-bought so many technical traders will be selling their longs and initiating shorts, this only helps the smarties create a downside, snowball effect sell-off.
Can you see now how manipulated the market is? Just as last Wednesday we saw a rally in oil on bad news for oil, they control the market and can rally or sell it off-even in the face of contradictory news. That is how much they dominate the market's movements.
Tuesday the market will be back to full strength, it's well known that summer volume tends to be low as summer historically has not been an active or very good trading period, thus professional traders go on vacation but after Labor Day they are back in full force. The unemployment report today seemed benign on the face, dig deeper (I posted it Friday) and the most robust measure of unemployment for judging the economy can be found in the little known U6 number which showed a rise, it's not any better off then a year ago and only a half of a percent from the all time highs.
3C can show us a lot, but it's not a crystal ball, I can only assume at this point that perhaps they wanted to drag the retail traders/investors higher until the professionals return in force. It seemed today by the positive divergence in the dollar, the weakening of the 1 hour 3C charts, the market makers shifting into distribution or rather unloading long inventory in their portfolios and the horrible breadth we have seen, that perhaps it's Tuesday they are waiting for. That's just speculation though.
What I want you to remember most are the things I told you before this bounce even started (when I saw the divergences in 3C that led me to believe we would see a malicious bounce).I don't say this to brag, I couldn't if I wanted to, I say it so you remember what we were looking for. In a nutshell, I told you, the bounce would be scary if you were short, it would probably last throughout this week, and emotionally it will cause you second doubts. We have all the objective data before us. Everything I said to look for has occurred, it is clear to me why this bounce occurred and the reason was so the smarties could set up shorts and a fast sell-off. So if you read back around the end of
August, you will see that I warned you about what this would likely look like, it has done just about everything I suspected it would. If you are fearful because you are holding short positions, remember that Wall Street uses your emotions against you. Emotions are one of the best indicators you have at your disposal. When you feel the market is going to keep on going and you want to cover, that is the emotional response they wanted to create. However, the objective data I have shown you should give you some peace. I even posted charts of what it would look like and asked you to try to put yourself in the moment, emotionally when something like a new high false breakout occurred. I tried to prepare you for this bounce knowing it would be emotionally difficult. Objectively though it is what I have expected, therefore we have entered shorts, closed out longs and are waiting for the reversal.
I must give you another warning though of what could happen as 3C has shown us how the smarties operate. This is an example, not something I expect, but something that could happen. We could see the market sell-off on Tuesday or Wednesday, we'd feel good and maybe enter shorts or add to them, then the next day they could rally the market to make a new high and then from there sell-off the market. Their objective is to trap as many of you as possible so you must be prepared for anything. However, when you look at the forest and you understand the things that occurred were expected, it may allow you the confidence to understand how the game is played and not fall victim to the traps, manipulations, emotional roller coasters and doubt that they seek to cause.
I'm sorry this is such a long post, it's taken me well over 20 hours to put it all together for you so I hope you will read and re-read if needed to understand what I have laid out. If you have questions, please feel free to ask. Fear is your enemy and they are doing everything they can to exacerbate that emotion knowing that many in the market were short at the start of the bounce.. Check your risk management, try to get it in line and above all, don't let your emotions control your decisions, let objective data do that. Finally one last time-REMEMBER THAT THIS IS WHAT WE EXPECTED AND WHAT I HOPED FOR DAYS BEFORE IT ACTUALLY BEGAN.
Here are some potential targets for a reversal in the order of what I believe to be the most likely first:
-Tuesday, as many of the things we saw in this post point to a reversal and price is at the 100 day moving average where it has seen resistance recently.
-The SPY $111.30-111.80 area which includes gap resistance and the 200 day moving average.
-$113 as there is a resistance trendline there.
HAVE A GREAT HOLIDAY WEEKEND.
