Overview

As I said last night, expect a bounce today, but even if it had retraced all of Tuesday's loss, it's still a single tree in the forest as breadth has deteriorated badly. Tuesday's end of day 3C suggested a bounce as did the breadth readings which were so bearishly lopsided, they by themselves put the market in a one day oversold situation.

I also explained that tops and bottoms are a process, not an event, whether it be a top that lasts months, weeks or days, very few are "V" shaped and most are "U" shaped. This chart illustrates what I meant.

In white are the typical "U" shaped reversals, there's one in a red box that is very close to a "V" shape reversal, but they are not common, so imagine if today was a continuation of a big sell-off (see red arrow), it would be rather unique, besides, we had objective data that suggested otherwise.

Speaking of the lopsided bearish trading stats, yesterday's price-volume relationship on a down day was very lopsided to the bearish side, while today's relationships are different and we had a close up, I'd be hard pressed to say they were less bearish. Here's how today's Price/Volume relationship for the averages broke down:

All NYSE Stocks tracked...

Close Down/ Volume Down:  817 stocks This is the most common relationship seen in a bear market and  doesn't tell us much.

Close Down/ Volume Up: 797 stocks This can be an indication of capitulation, but where we are now it is taken as an indication of panic selling when it is dominant.

Close Up/ Volume Down: 3345 stocks This is the most bearish of the 4 relationships

Close Up/ Volume Up: 1609 stocks This is the most bullish of the 4 relationships.

Clearly you can see today's dominant price/volume relationship was close up/volume down which is the most bearish

Dow Jones-30

Close Down/ Volume Down: 2 stocks

Close Down/ Volume Up: 1 stocks

Close Up/ Volume Down: 20 stocks

Close Up/ Volume Up: 7 stocks

NASDAQ-100

Close Down/ Volume Down: 9 stocks

Close Down/ Volume Up: 6 stocks

Close Up/ Volume Down: 62 stocks

Close Up/ Volume Up: 21 stocks

Russell 2000

Close Down/ Volume Down: 248 stocks

Close Down/ Volume Up: 173 stocks

Close Up/ Volume Up: 378 stocks

Close Up/ Volume Down: 1137 stocks

S&P-500

Close Down/ Volume Down: 28 stocks

Close Down/ Volume Up: 37 stocks

Close Up/ Volume Down: 314 stocks

Close Up/ Volume Up: 114 stocks

As you can see, today's price/volume relationship was dominantly bearish.

As for the SPY, DIA and the QQQQ

 The DIA was, like the others, was plagued by a negative divergence nearly all day-this is distribution into higher prices-bot buying by smart money. In the afternoon the averages started downtrends, defined as lower highs/lower lows.

 The QQQQ's divergence and it's downtrend which started earlier.

And finally the SPY and a leading negative divergence that led to a downtrend-lower highs/lower lows.

It seemed much of the EOD action was dictated by the EUR/USD FX pair.

 Above is a one minute chart of the pair, you can see a triangle consolidation formed, as per usual we saw a false breakout to the upside and just shy of the market close, the Euro broke down out of the triangle.

Here's the hourly chart with the trend in green. The first 3C warning came last week and we saw the euro break down against the dollar. It rallied since to form the triangle which broke to the downside late in the session. If you look closely, you will see that the Euro is in a downtrend as well, lower highs/lower lows and appears as if it will make a topping pattern as it already broke support from the first breakdown-this is bad for Gold, many commodities including oil and stocks.

Here's today's GLD 60 min. chart.

You can see the negative divergences on Monday-60 minutes is a serious time frame. Also today it hit resistance from yesterday's highs and 3C went into a negative leading divergence (in the red box).

The daily GLD chart...

Here you can see the trendline of resistance from yesterday's highs, this still looks like a serious break.

The NASDAQ has been the leader lately whether it be to the upside or the downside and it lagged both the DIA and the SPY today. Semis didn't look to good.

Here you see the white arrow showing accumulation and the red arrow showing distribution and a reversal in SMH as well as a leading negative divergence in the red box.

Surprisingly UUP held up today

As I showed you this screen last night, I mentioned after the first breakout, the first pullback usually runs back to the 10-day moving average which you see here in yellow, it usually makes for a good buying opportunity, but in this case, it shows UUP holding up pretty well.

Today seemed to be more about financials then most other groups. Here's XLF vs. FAZ

 As you can see, although FAZ pulled back, it held support well and with a positive 3C divergence on a 15 minute chart which had progressed from shorter charts during the day.

XLF failed to challenge resistance and ended with a 3C negative divergence on a 15 minute chart. These two look almost exactly the opposite-that is to be expected of price, but not 3C unless there is true confirmation there.

As far as IBM and AAPL being taken to the woodshed yesterday, neither gained much traction today.

 AAPL

The same is true of IBM. If both or either of these stocks fail to fill that gap, then it will be considered a breakaway gap and should start a downtrend as they are reversal gaps.

Tomorrow we'll be looking at stocks that have earnings before the close. The last quarter I did this 3C nailed something like of 19 of 22 correctly. If you have a stock that reports after the close, go ahead and email it to me.

Here are a couple that reported today, one miss and one beat, look at the 3C signals that showed what is most likely leaked numbers to smart money as they acted before the earnings were released.

 Ebay beat, you can see a negative divergence that led to a reversal back in March, then accumulation that led to the rally in June, the fact 3C is so much higher now then the top of the April Rally puts it in a huge leading-positive divergence considering price is a few points lower. These are the kinds of things I look for in earnings plays.

Seagate missed, you can see a long stretch of distribution as they distribute stage 1 inventory during stage 2 mark-up, but the serious signal that hinted at a problem was the recent negative divergence, it actually went into a leading negative divergence. This would be the kind of thing I look for. You never know where of which stocks you'll find them in, but when you do find them, they tend to stick out like these two.

I may add some stocks to the list tonight, I still like FAZ a lot where it is, there's a great risk:reward ratio there. Also earnings plays will be up for stocks that report after the close tomorrow.

Sticking with a Faded Rally

It takes time to get these out to you so I'm just using the DIA for example....

This is the 1, 5, 10 and 15 minute DIA 3C charts, all in negative divergences, I continue to believe this rally is being used to sell/short into and will be faded.

In Suport of my last post...

Detecting accumulation in FAZ and distribution in XLF, seems they've been selling into the rise and buying the dip on the inverse ETFS.

Today's POMO

Didn't go well. The auction was for TIPS and didn't even come in at a billion dollars, but rather $660 million was monetized. As of yesterday 3C had shown the bounce, there's still negative divergences so my opinion at this point is all the front runners may very well end the day seeing this move up faded to the downside.

Update

 DIA 1 min

 DIA 5 min

 QQQQ 1 min

 QQQQ 5 min

 SPY 1 min

SPY 5 min

It looks like we are seeing the possibility of some 5 min negative divergences starting (these are the first signs of such and very early) , I'd expect an intraday reversal off that kind of a divergence.  So we'll see if they develop further and change the intraday uptrend.

Morning Update

Remember yesterday I said there were positive divergences, expect some strength at least early on, maybe into the close. Except that 1 min positive divergence didn't show up on the DIA. It turns out the DIA is the first this a.m. to put in a 1-minute negative divergence.

FAZ is one I've been saying, look for a pullback, we've had two days of great opportunities right at support, it's still in a decent position so long as you use risk management/position sizing (read my risk management link at the top right of the site with the other links.

I'm not sure how Ambac Financial fits into this, but something told me to look at their chart. This is a momentum crowd favorite and can really move as you'll see.

Here's my crossover screen to avoid whipsaws-3 buy signals. A pullback to the 10-day moving average in yellow would be a nice place to open a position. However, you may want to consider opening a small position now, get your toes wet as this has so much momentum, it may not pullback to the 10-day average again before it starts another leg up. The 22-day average in blue should serve as a stop, just beneath it actually.

Another day in the woodshed for BAC...

You can clearly see the top, this one is broken. Sometimes you just have to go for it, lower lows and all. I am a fan of building a position, getting in or getting my toes wet on a day like today, but saving 50% or more of the position to add on any strength. It's dollar cost averaging, but for the right reasons.

 Here's the trend channel with a stop for swing traders.

 Here's the trend channel with a stop for trend traders, it will move down pretty quickly (the trend channel) and the beauty is it locks in gains every day as the stock moves down and even keeps you in the position during most consolidations-this is an excellent tool for anyone with TeleChart or StockFinder-I'll be glad to send it to you.

GLD

Again, you can get your toes wet in GLD if you believe in the position, but a break of the pink 30 day moving average for me, seals the deal and that's where I want my position to be pretty much filled out on the short side.

So the DIA put in a negative divergence, this may just be a speed bump, I fully expect some more strength out of today, but for day traders this information should be helpful. Don't forget to check out the TICK chart, draw some trendlines and when they are broken, you can expect a change in the intraday trend many times.

Bill Gross, Unofficial Spokesman for the Fed?

Ever since Bill Gross let some info that only the Fed would know about, out ahead of the report, LIVE on CNBC, there's been a lot of speculation that he has an inside line into the FED. Again, they don't call them smart money for nothing. Going all out on margin to buy the same MBS that the Fed is buying is another curiosity. By the way, what Bill Gross let slip on air (I can't recall what it was at this moment), came true.

Now Bill is saying that GDP will disappoint and basically slip down the slippery slope and come in UNDER 2%. I've been saying the same thing, a trend like that, that big, is not easily turned around, especially when fundamentally nothing has come in significantly better. His forecast for GDP?  1.75%-under the important 2% the Fed has forecasted.

Here's the story:

http://www.bloomberg.com/news/2010-10-20/pimco-says-u-s-economy-will-disappoint-with-1-75-growth.html 

And why would the Fed share this with Bill Gross, well only because he runs the behemoth fund, Pimco. If Bill ever was irritated with the Fed and wanted to go toe to toe, he might not win, but he'd cause a lot of havoc that might cause the Fed to win the battle but lose the war. I wouldn't be surprised if they sought out his council as well.

I recall Pimco's mixed bond equity fund going from 65% equities to under 30% before the April equities sell-off.

The Wrap...

Just last week I told you that the Fed seems to be intent on buying MBS, Pimco went on margin, buying MBS. Today the headline came out that the New York Federal Reserve, Blackrock and Pimco (among others) are all said to be looking to force BOFA to repurchase bad loans packaged into MBS. This would explain quite a bit, including Pimco's margin buying of MBS. This could be anywhere from $45 billion dollars to hundreds of billions of dollars, this could take BOFA down. The argument is Countrywide Financial didn't live up to their obligation as the servicer of the loans. In the end, it'll come down to repurchase demands and/or lawsuits.

The gist is there's a consortium of interests on the verge of suing BAC to buy back Billions of dollars in mortgages. The interesting thing is that BAC owns 34% of BlackRock and ironically BlackRock owns the biggest chunk of BAC, 5.35%-what a conundrum! Also an apparent conflict of interest, but Wall Street will eat their own young so that will be interesting to watch as it unfolds. The Proverbial Second Shoe? And it's second verse same as the first-MBS (MortgageBacked Securities)- back to where it all started.

Here's more from Bloomberg:

http://www.bloomberg.com/news/2010-10-19/pimco-new-york-fed-said-to-seek-bank-of-america-repurchase-of-mortgages.html

On GLD/Gold...

As 3C has been showing, GLD has been under distribution, gold itself was slammed today; it lost $38.70 an ounce. This in large part had to do with the Euro/Dollar, which I posted charts of earlier today-3C has also been showing negative divergences in the Euro and positive in the Dollar Index. The Dollar index (as posted earlier today) finally and decisively broke the downtrend and did so convincingly. Crude lost $3.50 a barrel- again another effect of the stronger dollar.

To put this into perspective, GLD lost 10 days or two weeks worth of gains today alone. USO lost more then 12 market days of gains today alone-both on increasing volume. UUP (proxy for the dollar) regained 10 market days or two weeks of losses, again just today and on huge volume, as noted Friday, volume had been rising in the Dollar/UUP. This is a classic Bull Trap.

On China...

China today also threw some noxious bull repellent in the stew by letting their benchmark rate slip 25 basis points, a symbolic move, but one that benefited the dollar and raised questions about growth in China-this is probably why, when I listed the bullish/bearish ETFs by 3C standards,  FXI-China 25 Index ETF was on the distribution side and the ETF that is short the index was showing accumulation. This of course brings commodities into question as they are a major if not the major consumer of commodities and we saw, as mentioned above, commodities get hit. Think back to Yellen's speech last Monday and last week when I said, "that may have been the most significant event of the week". Specifically her talking about speculative asset bubbles and taking away the “punch bowl” and those who have been making a lot of money in those markets “not being happy about it”.

That's not all China did today, apparently certain rare minerals have been blocked from being shipped to Japan for about a month, guess who else was put on the embargo/ blacklist... The US of A. So we'll be watching to see which of these metals is about to surge as others may fall by the wayside. Anyone heard of Samarium Oxide? I'd like to find out which if any public companies mine this stuff. Here's more from the NYT:

http://www.nytimes.com/2010/10/20/business/global/20rare.html?_r=2&hp

On the Fed, Questioning the Fed...

Also today a bevy of Fed officials slammed Fed policy, such as Dallas President Fisher who openly questioned if Fed actions have done anything but create bubbles? Here's a few excerpts:

"In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places." 

 "A great many baby boomers or older cohorts who played by the rules, saved their money and migrated over time, as prudent investment counselors advise, to short- to intermediate-dated, fixed-income instruments are earning extremely low nominal and real returns on their savings. Further reductions in rates earned on savings will hardly endear the Fed to this portion of the population."

“The problem is that, presently, the efficacy of further accommodation using nonconventional policies is not all that clear.”

“The vexing question is: Why isn’t this liquidity being utilized to hire new workers and reduce unemployment? “

“In my view, changes in monetary policy may be desirable, but they should be used only to a limited degree in attempts to control movements in demand arising from non-monetary sources.”

and finally....

“

That's the Fed, doubting the Fed. The optimistic Fed outlook didn't stop there as Chicago Fed's Charles Evans said among other things:

1) It's likely the US in a liquidity trap, first time since Great Depression

2) He sees the US unemployment rate above 8% through 2012-now that is optimistic!

3) He says “temporarily boosting inflation may be hard pill to swallow, but potentially beneficial” Tell that to the 17+% U6 unemployed/underemployed/stopped looking for work altogether!

And GDP...

Certainly GDP, which is going to be very interesting, is clinging to the 2% mark, as I've said, a trend in motion is hard to reverse and there's not been much evidence that we can expect any better from Q3 2010 then what we saw in Q2 2010, which was a continuation of the slide since GDP hit 5% Q3 of 2009; it has been straight downhill from there. A trend in motion....

The $USD...

More specifically on the Dollar which may be at the last stage of a huge inverse Head and Shoulders top, and I thought this was going to be a rather small move compared to 2009. Take a look at this 5 day chart of the Dollar Index.

As the daily 3C chart shows, there is a bigger then I realized divergence present at the bottom of this right shoulder, this is an entirely possible outcome. You can see the last (the first white arrow to the left of the chart) was a very successful positive divergence leading the Index much higher. I added blue arrows so you can see the outline of the inverse H&S pattern. And just in time for the posting of this chart, “Little Timmy” speaks some surprising words that haven't been heard since the last divergence took hold and the index rallied. Here they are, hold onto your hats.

http://www.reuters.com/article/idUSTRE69H4VO20101019?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+reuters/topNews+(News+/+US+/+Top+News)

On Today's Market Breadth...

Don Worden talked about the market's breadth today, and to put it succinctly he said, “Trading stats today were about as negative as I've ever seen them”.

All ten of the important averages were down all over 1% and two over 2%. All 16 breadth groupings Don uses were for the first time I've ever seen, Super Decisively Negative. Two thirds of the Russell 2000 closed down on rising volume indicating panic selling.

Price Volume Relationships tell the story...

All NYSE stocks tracked...
Close Down/Volume Up: 3686 stocks     Indicates Panic Selling

Close Down/ Volume Down: 1836 stocks Thematic relationship of a Bear Market

Close Up/ Volume Down: 458 stocks        Most Bearish Relationship

Close Up/ Volume Up: 608 stocks             Most Bullish Relationship

The DOW Jones-30

Close Down/ Volume Down: 5 stocks

Close Down/Volume Up: 23 stocks

Close Up/ Volume Down: 0 stocks

Close Up/ Volume Up: 2 stocks

The NASDAQ 100

Close Down/ Volume Down: 24 stocks

Close Down/Volume Up: 67 stocks

Close Up/ Volume Down: 2 stocks

Close Up/ Volume Up: 6 stocks

The Russell 2000

Close Down/ Volume Down: 492 stocks

Close Down/Volume Up: 1322 stocks

Close Up/ Volume Up: 100 stocks

Close Up/ Volume Down: 30 stocks

The S&P-500

Close Down/ Volume Down: 101 stocks

Close Down/Volume Up: 358 stocks

Close Up/ Volume Down: 9 stocks

Close Up/ Volume Up: 24 stocks

In summary, the dominant and I mean DOMINANT, Price volume Relationship was Close Down and Volume Up, which at this stage indicates panic selling. In my opinion and from what I saw in 3C and the retracement of the Euro tonight this is enough to put the market into a short term oversold condition so I still would not be surprised to see a bounce. However, as I have been highlighting all this month, the breadth readings (internal health of  rally) have been bad and have continued to deteriorate so no matter what we see tomorrow, even a complete retracement of today's weakness, it is just a tree in the forest.

For those wondering, "Is this the reversal", I'd say yes with the caveat that a top or bottom reversal, large or small, is a process, not an event.

I think strength or bounces in the market can be used to get your toes wet in positions, but we ultimately need to wait for price to go through the top process and confirm the reversal. There's plenty of room on the downside, now is not the time for swinging for the fences, but you also get paid to take risks -so long as they are calculated ad the odds are in your favor. PLEASE, BEFORE ENTERING ANY POSITIONS, READ OR RE-READ THE ARTICLE I WROTE AND LINKED AT THE TOP RIGHT SIDE OF THE SITE ON RISK MANAGEMENT-THIS IS THE "HOLY GRAIL OF INVESTING".

Until tomorrow.