NEW TRADES ARE UP

Reality Is NEVER As It Seems in the Stock Market

Here's a reminder... August we were in a pretty nasty decline. Short interest was high and rising toward the end of the month, but for several days as the market declined, 3C started making higher lows indicating accumulation. Several days after that we started the September rally. So for those 7-10 days reality was that the market looked like this-

but the true reality was that all the hopes of the bears about cracking the $104 level had already been decided by smart money and those plans weren't in the cards. (See below-white arrow=accumulation)

So as I wrote last night, “It's Precisely When Your charts Don't Make Any Sense” I was trying to convey to you that all that you can imagine now and all that seems obvious now, is likely nothing at all like reality.

For instance, "if" I were to “speculate” about the Fed's shady POMO, I might look at some of the numbers I wrote about in last night's article, how much money has fled the markets, how many insiders are selling and what we already know- how few retail investors and traders remain in the market, and then look at this story today....

“Mega Hedge Fund DE Shaw Cuts 10% Of Staff Following $7 Billion In Redemptions”

And I might think, “The end of the quarter is coming this week, if the market were to show anymore weakness, there will likely be even more redemptions”. Redemptions mean selling of stock (more supply-lowe prices), they mean work force layoffs, they threaten Wall Street financial firms again much as it was in tatters in 2008. Being money is exiting the market from every direction, what is holding it up? The bullish inverse bottom? No, we saw that breakout 7 trading days ago, if bulls were excited we'd see follow through by now and while today was strong, it failed to set a new closing high.

We all went through economics 101, “supply and demand”. What happens when you have a market with little to no bids (demand)? The ask (supply) must be lowered until they find a level in which there are bids, but there will only be a limited number of bids there, so when those dry up, the ask must be lowered again until the next patch of buyers are willing to step in, but remember, sentiment is going south, there are few participants left meaning the pool of demand is greatly diminished.

Imagine this, the market left to its own devices with the outflows of capital and participants, more firms laying off workers and price discovery leads us down a path that falls well below $104, even below $101. Heck maybe in a matter of days we have price at $85 on the SPY. Does that seem like such a far fetched idea? So in the absence of bids, the Fed steps into the market to wear the shoes of the bidders that aren't there. We've already seen proof today that the September rally did nothing for consumer confidence, but what would a plunge of 15 or 20% do to consumer confidence? What about the pension funds that are already broke and have their models set to ridiculously high 8% a year returns? Could it be 1929 all over again? I submit to you that it could be worse. Why do you think the SEC is expanding its circuit breaker program and expanding other initiatives? I believe that it's possible, even likely that the Fed got a lot of calls from a lot of their former Wall Street co-workers letting them know that if something isn't done and fast, that were going to have a real situation on our hands.

So is it the Fed's objective to rally prices higher, to create (I mean that literally) a bull market? I don't think so. I think what we are seeing is damage control. I think the distribution we are seeing is partly outflows and partly smart money understanding what is about to happen. Could the end of the quarter be D-Day? Possible. I just know that what we are seeing does not have the hallmarks of accumulation in any fashion whatsoever. I believe the more you manipulate a market, the worse the eventual reckoning will be.

As for the markets..

As you can see above, AAPL has had near perfect correlation with the SPY, it's obviously been used recently because of it's hefty weighting on multiple indices.

The parabolic move with few pullbacks is also reminiscent of program trading.

Today though we took a turn down a different path. Semiconductors were used, why, I don't know but look at today's correlation between the SPY and SMH

As to why we see an afternoon ramp up on POMO days, I can only speculate, but there has been a trend among black-box systems to be in the market at very particular times and out of the market the rest of the time. So assuming (and I know for a fact that at least one system runs from 3:30 to 4 p.m. Only) they can get price to a level in which it will trigger a black-box algorithm, that black box system will due the rest of the buying into the close.

As for 3C today, the 1 min chart did a fantastic job at what it is supposed to do, call swings intraday

As for the longer view....

This 5 minute chart shows the first relative divergence that ended at 2 p.m. And the decline it caused after that. Looking at the longest arrow, it shows us a leading negative divergence, suggesting we are getting closer to a more serious decline.

Longer...

Just like it took 7 market days of accumulation to produce the September rally, it will take time for the decline to begin. 3C shows us one important thing, the rally is not being bought so I'd be very skeptical of being long here when this could reverse any day. What it shows is distribution into higher prices and this one chart explains exactly how the market works. Most people think rising prices are a function of smart money buying the rally, WRONG! As you can see, smart money bought on the decline, getting a better and better average entry price each day. The same is true of the rally, they sell into demand, therefore they get better and better average exits prices. Typically when they are done distributing shares they'll establish a short position for the next decline, that may be under way now or finished-both distribution and accumulating a short position are both acts of selling. So what determines the reversal on these longer charts? A) How big of a position they had to distribute B) How aggressive buyers were C) How much volume/demand was present during distribution D) How big of a short position are they accumulating E) Volume and Supply at higher prices. Once all of this is complete we see a reversal. The key information that 3C provides besides a look at how the market really works is to know whether smart money is supporting the rally or selling it.

Personally I feel that if the goal was to take the market higher, they had several opportunities to do so on breakouts that failed and failed on big volume as if they were being pushed down. Remember, the higher they take it the further it has to fall.

So for now I haven't changed my stance, objective data suggests to me that this market is teetering on the edge of a huge sell-off. There are a lot of unknowns, but as I said in last night's article, when I have strong 3C signals and nothing can be rationalized, we're usually near a turning point and only later will we understand the reasons. Stay on top of risk management, set the limit alerts for the trades, many have triggered and many are doing quite well.

I'm going to run some scans and see if anything pops up. Good night.

There's Definitely More to This Story

If you haven't already, first read my article last night, then read THIS

KFN

Just triggered what I suspect may be a false upside breakout. You may want to wait for a little more downside, but this looks like a big top

Correlation Between the SPY and SMH

Well that SMH pattern broke down, just to show you that SMH is being used today to move the market, look at the correlation, SPY in green, SMH in red

Interesting Dollar chart

UUP is showing signs of life.

SMH

Keep an eye on SMH, this could take the market down with it.

3C's Update

SPY

DIA

QQQQ

Another Reason For Stops on the Close

I doubt this was a "fat finger trade", nevertheless, I can imagine there are a lot of AAPL longs who were stopped out and not very happy about it. SKY NET seems to be operational.

Dollar Update

This is a very slight positive divergence, so slight that it may be erased soon if the dollar doesn't pull it together. Despite the Treasury/Fed's statement of a strong dollar policy in early 2010, I don't see the support for the dollar which leads me to believe it was all just to chase the banks out of the risky dollar carry trade. Now we have the makings of a currency war underway with each country trying to devalue their currency. Japan has already intervened at least once, more likely twice but they won't admit to the second intervention. How the US responds is an unknown. Do we still care what China thinks about our currency printing?

I'd like to see at least one reversal candle formation set up before looking to the short term 3C charts. A move above $23.35 would be a huge plus for the dollar appreciating, but I don't feel very strongly about the possibility of that happening. If you are wondering what this means for the market, it could mean next to nothing as correlations are falling apart everywhere you look, most probably due to Fed intervention. It isn't the first time correlations have failed so it's not something new.

Keep an eye on SMH

It just broke out of an obvious ascending triangle, could make for a quick short day trade.

TLT-Head Fake or Breakout

20 year Treasury bond fund seems to be breaking out of an OBVIOUS pattern. Lets see.

Maybe another round

of accumulation in AAPl and AMZN building here. I'll keep an eye on it, they may try to go for a leg higher.

Semis Getting Hit Too...

Who's the Frontrunner?

Last night I speculated that the face of POMO run-ups may quickly change. On Wall Street, as soon as behavior becomes predictable, it will be taken advantage of.

Looking at the charts that are reported to be the beneficiaries of POMO, it seems as soon as they get in now, they look to be getting out just as fast.

First Negative Divergence of the Bounce

in DIA, it's nearly leading, the others should follow suit soon.

You Never Know When the Music Stops.

This is why I prefer a longer term strategy.

This morning consumer confidence did a double back-flip with a 2 1-2 twist, just the entry into the water caused a bigger splash then expected. CC came in at 48.5 nearly 4 points lower then consensus and certainly lower then July's 53.2. So the message to the government and the Fed.... the rally isn't doing anything for consumer confidence, but  I suspect it didn't have much to do with that.

Since POMO's effect on the market isn't having an effect on voters, I wonder how long it is before the program is modified?

Now, take a look at the Richmond Fed's business activity Index and then take a look at expectations below... hold on for this one.

It's Precisely WhenYour Charts Don't Make Any Sense....

That's what I've noticed about big reversals, nothing makes sense vs. my chart. Everyone is bullish and my chart is bearish or the other way around and you just can't justify it; that' when I've seen the most significant turns in the market. And single discrepancy, without fail could not be explained at the time; only days, weeks, or months later.

The market is LARGELY about sentiment and creating sentiment. Fundamentals compared to sentiment, it's not even a comparison worth making. In addition, as I have shown you, even by our simple call for the September run, Wall Street controls the swings in the market and they control the sentiment. Look at last Friday's rally, the “Tepper Rally”. Last night I said the timing and the medium in which his comments were made, were NOT coincidence.

Today we had John Paulson making the case for stocks and ironically after my afternoon post on gold, it turns out that apparently 80% of his assets are in some form of gold denomination. Who's it going to be tomorrow? Friday Tepper, Monday Paulson, you see a pattern emerging here? These guys are out there telling you how to become rich like them because.....?

And by the way, here's a 3C chart of GLD and exactly why I WILL NOT buy into this gold frenzy. I wonder how much of Paulson's assets are in gold denominated assets today?

Speaking of patterns, how about these patterns?

Two nearly identical Head and Shoulders tops

Note the custom indicator I made for you that cummulates volume so you can see the volume trend more clearly. What's happening on these tops? What's the difference between these tops, 1 of which already broke and the perceived H&S top many were fooled by in Q2 2009? It's right there on the chart in the volume. One of the many problems with Technical Analysis is everyone's search for the “Easy indicator” , the “Holy Grail” and they forget the second most important indicator you could ever put on a chart.... volume. The volume on the last two tops, unlike the volume of the perceived H&S Q2 2009 top, confirms the H&S patterns, Q2 2009's volume DID NOT confirm, but people see the price pattern which was random and call it a top. It's pure laziness.  The chart above shows volume is shallow on the rallies and increases on the declines. A Head and Shoulders top or bottom is not just a price pattern, VOLUME MUST CONFIRM and we have confirmation now, just like we did on the 2007 top.

Here 3C is showing immense distribution into the top. This is a leading negative divergence and it's worse then the 2007 top.

While we're on the topic of patterns, there have been a lot of patterns emerging lately. I told you last week about the disproportionate number of insider sales vs. buys. Last week there was $1.4 million dollars of shares bought in 7 companies. Compare that to the $441 million dollars of insider sales in 91 companies; a ration of 290 shares sold for every 1 bought. The week before there were only $332 million in shares sold, but the ratio of sales to buys was 650:1 ! This week Bloomberg reports that we had a total dollar volume of insider sales of $417,595,727.00 in insider sales compared to insider buying in 3 companies totaling $295,921.00-just over a quarter of a million dollars vs over $417 MILLION dollars in sales. The ratio this week, 1400:1 ! How's that for a trend?

Above is ORCL's 3C chart for the week-the red trendline (not the arrow) shows the average price the shares wee sold.

Contrast that with this week's biggest buyer, DELL. Dell bought 16,090 shares @ an average of $12.42 for a total of $199,917 they other two together totaled $96,004 vs. $417,595,727 of insider selling!

Granted, there are a lot of reasons insiders sell, but there's one reason they DO NOT SELL, they do not sell because they think their stock is going significantly higher!

Some other trends... Cash in Mutual Funds in 2000, the year of the Tech crash was 4%, at the top of the last bull market in 2007, 3.5% and right now, 3.4% and that number is expected to be less when the official new report comes out in a few days. We're already at a RECORD LOW.

Purchases in JUNK bonds are at a 10 year high. By the way, the record setting JUNK bond auction I mentioned several weeks back, do you remember what most of the companies did with the proceeds? They used them to pay special dividends. Of the companies mentioned in the article, I don't recall one that used the money to restructure or to do anything with the money to streamline or make the company more competitive. So what happens when all these companies have no choice but to default on the debt? If they can't even pay dividends, how will they repay the bonds? There's an implosion just ticking away as people and pension funds flee the market and chase yields.

I mentioned how sentiment moves markets, it's also used against you. In August bearish sentiment was very high as the short interest increased, and what happened? During this horrific decline this little space on the internetCNBC was talking about how, “This time it's different”, “housing prices are going to continue to rise”, “We're headed for Dow 20,000!”. Much like our now daily commentary from the likes of Tepper and Paulson. "This time it's different", the Fed and their POMO won't let the market fall and the thing of it is, it's believable, it's rational, it makes sense. Ask yourself though, what did the stimulus package due for the economy? After all they boasted about, what did it really due? It gave us ONE quarter of GDP at 5%. We need 3 consecutive quarters of 5% GDP just to bring the unemployment rate down by ONE percentage point. And ever since Q4 2009 when we hit 5% (which was revised down, another building trend of releasing better numbers and revising them down weeks or months later) we've seen GDP falling off a cliff. Unemployment is trending upward recently. They threw everything at this economy for 1 quarter of 5% GDP?

The trend right now is front running the POMO. How long do you think the market is going to let that obvious trend continue before they flip these easy money riders on their heads?

The churning we've seen in the market, I noted the other night that typically churning is a sign of a downside reversal, but guess what? In a market with few participants, certain entities are making up their own games to make money-almost out of thin air... READ THIS.

I've already commented on the Black-Box trading systems looking for obvious patterns to manipulate and we saw it what, 3-4-5 times today in one stock alone? I estimated 80% of patterns will fail, I truly feel like it's closer to 95% and then we hear about these Black-Boxes meant to due exactly that. Pay attention to the market, everything you need to know is on the chart.

This market in manipulated from every direction, you need to be paranoid about what you hear and see. Almost everything short term is a deception. Look at today's trading action breaking to new highs to steam roll the longs that bought it in an afternoon sell off. Do you still believe Tepper and Jones are out there for your good? What did I say, 80% of Jones' assets were gold denominated and he's pushing gold on CNBC....

Again, the 3C GLD chart...

It sure looks like someone is using this rally to sell off their GLD positions.

I can't connect all the dots, I doubt I'd be able to even create a flow chart that big (it would probably look like the wiring schematic for a Boeing 747), but there are some very obvious discrepancies, contradictions and counter-intuitive trends that have in the past preceded massive declines. How, Where, When? I can't answer.

The action in GLD right now looks just like the top of the oil run, the H&S top right now is proportional to the advance and looks a whole lot like the last decline which cut the market in half. I'm not a fan of Elliot Wave Theory, but Robert Pretcher has had some impressive calls and he's now calling for Dow $1,000 -no, I didn't forget a zero or misplace a comma-one thousand! Before the top in 2007 came crashing down I did a lot of analysis and made a 5 part video series, it was some time ago but I believe I had figured by the price patterns and historical tops, that we were looking at a Dow target in the $5,000 area.

None of this is making sense right now and I've found when 3C look like this and nothing seems to make sense, I'm better off ignoring everything but the chart.

I'm not going to try to reason myself into confidence. I've seen enough charts, enough breadth readings, I've heard enough from the pundits, I've seen the underlying trend so I'm going to patiently wait for what the chart is saying, not what Jones is saying, unless I have an objective reason to change my stance.

Here's some AAPL for you since it's been the market's Patron Saint of Bullishness. Take a look at the daily trend, looks a whole lot like program trading.

AAPL 1-minute chart. Red arrows are distribution, white arrows are accumulation-nearly every turn is called.

AAPL 30 min chart

Today's intraday action.

See you in the a.m.