XLF holding at resistance

See earlier post on financials-

EOD ramp

Not sure if this end of day ramp in the averages is going to hold. The Q's are confirming, but the SPY and DIA are bot negatively divergent.

 DIA 1

 QQQQ 1

SPY 1

Chicago PMI

Last night I went through a laundry list of negative events in the market, as they say "it's not the news, but how the market reacts to the news. The point being last night, sentiment has reached an extreme and extremes in the market have a tendency to revert back to the mean, actually they tend to swing way too far in the opposite direction as it takes extremes usually to turn things again.

Today the Chicago PMI came in very bullish, you can get a synopsis of the report HERE from ZH.


I'm not sure if the volume is too low or it's just machines trading algorithms right now, OR if sentiment has reached such an extreme that it is in the process of shifting. Either way, the market didn't have much of a reaction to the unexpected strong report. Then again, this isn't the most useful economic indicator and it's a drop in the bucket.

Cats and Dogs Trades Results This Week Thus Far

THIS WEEK UNDER THE CATS AND DOGS TRADES, WE'VE HAD 17 TRADES TRIGGER AS OF YESTERDAY'S CLOSE.

Of those 17 trades, 10 have offered gains , 6 have had losses and 1 is around break-even. Where you entered and exited is a function of your particular % P/L. A lot of you have contacted me for 3C intraday charts to gauge where the trade was and some of you have had excellent exits. I'm not aware of anyone who has given up a gain for a loss. As far as losses, we've talked about risk manageent on these trades so whatever the actuaul trade loss, no losses should have represented more then 2% of portfolio and as I have stated for trades like these, I prefer to keep the 5 risk of portfolio between 1-1.5%, it makes taking the trades worthwhile and with a majority having offered gains, it's a good strategy to keep losses minimal while being able to hit some big winners.

We started off the Cats and Dogs trades last week with a 4-day 215% gain in XOMA.

This week thus far ( gains /losses were compiled this morning ) looked like this:

CRIS    +8% intraday as high as 12.5%

DSCM  +3%

OPXT  +14% as high as 16.7%

URZ     Up to +15% 1 day gain

WEST Up to +10% gain

CFW    +24% 1 day gain, as high as 26%

XING   As high as +85%

EEE     +27% 1 day gain, up to +35% intraday gain until present

ATEC  +8% 1-day gain

FBP which was an earlier trade- the only person I know of I believe exited yesterday as there was a loss of momentum. FBP offered gains of +60%

STEM was at last check trading about break-even

As for signal trades at a loss we had 5 under a 2% loss and one at a 6% loss.

The trades that triggered today have not been figured in as of yet.

XING

Know when to hold and fold, this is a personal decision, but XING , a trade that triggered Monday, just added another 16+% today. Right now it's up about 74%

GAZ LONG TRADE

This is along the lines of LNG as LNG is a Natural Gas company.

on an hourly chart we see a double bottom, volume is perfect for the pattern, light on the second test of support, then it broke above a resistance zone moments ago. This looks like another high probability trade, this isn't quite a Cats and Dogs trade and may offer a little longer term horizon.

SLV-FALSE BREAKOUT

REMEMBER, I'M NOT OPPOSED TO A TRADE IN SLV ON THE LONG SIDE, JUST NOT BEOFRE IT CAN BREAK THE RESISTANCE AT $30 I'VE BEEN TALKING ABOUT ALL WEEK.

HERE'S THIS MORNING'S ATTEMPT TO BREAK RESISTANCE AT $30, A QUICK MOVE ABOVE AND THEN ONCE AGAIN T IS FORCED BACK DOWN.

Financials Update

I've been dying to bring you these trades as I've watched 3C signal them, but as always, price is the final arbitrator in the market.

Here's XLF-the ETF representing financials.

XLF has broken the first line of resistance, as I write this, it just broke the second line as well.

 3c 5 min negative divergence


  3c 10 min negative divergence

  3c 15 min negative divergence

  3c 30 min negative divergence

 3c 60 min negative divergence

All of the 3C timeframes have lines up showing distribution in the lateral movement the last few days.

 Above is the 15 min 3C chart for FAS-Ultralong financials, it looks just like XLF 15 min

Above FAZ-my favored trade here, ultrashort Financials (you buy this long), the 15 min 3C is showing big accumulation here, the mirror opposite of the Ultralong

 Here is BAC, remember I said it was going to have a difficult time breaking resistance at $13.40 and hold it on a close, it has not been able to do so. This is another possible play short.

JPM broke out of a trading range, but the last few days have set up a reversal signal to the downside and if it breaks support near $41.50, then it's a false breakout and JPM should fall quickly toward the $36 area initially. 

If you like any of these trades, I'd not waste too much time. It's been awhile since anything other then Cats and Dogs trades have lined up so well, and even better in 3C.

LNG Trade Triggered

LNG was added to the list yesterday, this morning it has triggered a long trade.

UTX and MRVL Trade Ideas

I've had both on a watchlist and they both just triggered levels I consider to be important. Both are short trades as well.

 UTX is breaking down out of a wedge like pattern. The initial breakdown and period just after can be volatile so if you enter the trade, I would give it room on the upside for the stop as a false upside breakout is not out of the question. Initial target of at least $74.

MRVL short, has also broken support, this is a small rectangular top and the distance for a 2nd test of resistance wasn't as far to go as the first, that was the first failure, the lack of even an attempt, then the break of support, I like this trade a little better of the two, but there in totally different industry spaces so they offer some diversity.

WHAT MOVES MARKETS?

The most common answer would be supply and demand. What drives supply and demand? Fear and Greed. What causes fear and greed? Market sentiment. So it can be said that markets are not moved, not at least in a macro way, by earnings, P/E ratios, news, etc; markets are moved by mass sentiment. I consider there to be 3 ways to analyze markets: Fundamental Analysis which I believe is inherently flawed and grossly misleading. Technical Analysis which has its flaws, but if you understand the limitations and think outside of the box, TA can be useful. And last, mass psychology. In a way, technical analysis is about mass psychology. So with the markets being so thin right now, volume so low, price discovery non-existent, I look to sentiment to understand what I see on the macro charts and for those of you who are new, what 3C has shown is distribution into higher prices, sentiment can be said to be negative in that respect. This seems to be at odds with prices at or near recovery highs, but distribution occurs into higher prices-it's a counter-intuitive reality.

For over 6 months we have seen massive and consecutive outflows of money from domestic funds, causing many to go belly up this year. Investors have fled the market, yet we have some of the most bullish sentiment seen in quite a long time.

Today the NYSE released data showing that investors are going long the market on increasing levels of margin, this shows investors have little fear as they buy stocks on borrowed money. This is a continuation from the previous month of October which also saw a rise in margin debt.

Compare low margin debt and high margin debt with the S&P, what you'll find s low margin debt at the start of major rallies and high margin debt at the start of major market tops.

Tuesday it was revealed that NYSE short Interest hit lows for all of 2010

As I showed last night, the Baltic Dry Index is slipping to new lows, meaning there's little demand for shipping, this is not economically bullish.

Tuesday we saw Consumer Confidence come in at a huge miss, consumers are worried, but the market? No negative reaction, this is an example of bullish sentiment.

Also on Tuesday, the Case Shiller Home Index missed big showing 4 months of housing declines and what is now a double dip recession in housing underway. The market's reaction to the news (and it's never the news that is important, it's the market's reaction to the news)-muted, really just whistling past the graveyard-no cause for concern. It wasn't even enough to move SRS, the Short Real Estate ETF. Again, bullish sentiment as the market ignores the news.

Housing is down more then 30%, yet property taxes are on the rise.

On Monday, the Dallas Fed's Texas Manufacturing Index is another big downside miss with expectations of a print of 17 with the index coming in at 12.8. Behind the headlines, rising material cost, rising labor cost and falling orders/demand. Did the market sell-off? No. Once again, an invincible euphoria fills the market.

Along those lines, commodity inflation is here.

Over the Christmas Holiday, China, hikes interest rates for the second time in less then 3 months as they try to reign in the global growth engine, does the market care? Nope.

The Fraud perpetrated in foreclosure, which is gaining in intensity should be sending banks to the abyss, yet this week we see a rally in financials.

No one wants to touch US Treasuries so the Primary dealers buy them and then sell them back to the Fed, effectively monetizing our debt, but the key here is there is no confidence from outside or inside the US to own American debt. Cause for concern? Not as long as the Fed keeps monetizing the debt.

The ECB in their own white-wash version of buying up debt and then trying to get it off their balance sheets, sees a lack of demand to complete the white wash job-no one wants to hold European debt and Shanghi has it's own failed auction of short term debt and last week, despite Chinese support, the Spanish have an ugly debt auction. Is the market concerned? Not a bit.

Last week New Home Sales misses expectations and the previous month is revised lower. There's now over 8 months of supply on the market to be worked through, the market remains indifferent.

Existing Home Sales comes in at a miss, expectations of 4.75 million, comes in at 4.68 million with 9 and a half months of overhang/supply.

Michigan Consumer Confidence seems to come in okay, unless you read beyond the headline, the report shows inflation expectations rising. We already know that food and gas prices are rising, in other words those things that we use everyday.

Also released last week, the AAII sentiment survey shows the highest bullish sentiment since November of 2004; jumping from 50% to 63%, bearish sentiment drops from 27 to 16%, the lowest level since November 2005. The difference between the two is the highest since April of 2004.

December 22, the Fed admits housing prices are slipping, there is no stabilization in home prices, there is a huge amount of “over-supply”, over 6 MILLION properties are behind 60 days or more, in foreclosure, have been foreclosed or are already in bank supply and the kicker-”With nearly half of total bank assets backed by residential real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines”.

On the 22 of December, Q3 GDP final revision comes in lower at 2.6 on expectations of 2.8%. Inventories are up, consumption is down.

Also last week on the 22^nd, The Mortgage Bankers Association Index -mortgage applications are down nearly 19% from the prior week and refinancing down nearly 25% from the prior week, with one of our own members in the industry saying that on the ground where he works, those numbers seem light-in other words, from his first hand experience at his bank, things were worse then what was being reported.

For months now and I'm not sure how many but many, consecutive months we have seen a huge disparity, consecutively between insider buying and insider selling, with the ratio even reaching the 5 digits to 1 at one point. Insider selling has been unrelenting. Maybe they know something we don't, but does the market care? You know the answer.

We have been seeing outflows of high grade bonds and now we are seeing a mass exodus from municipal bonds. Default seems inevitable without some very big and very direct intervention as the supply on the market from bond holders is huge, new issuances will require rates so high, there would have to be an eventual default.

2010 has been the worst year for bank failures since 1992.

As for stock participation in the push higher in the averages, I posted a breadth report a few weeks back, it's not just bad, but getting worse, I'll post another soon.

And today, we see for the first time in an inflow into domestic funds after 33 consecutive weeks of outflows. Retail investors have returned.

And why not? The perceived risk in the market is very low, look at the VIX.

This is complacency and it's been in place for sometime. Now with retail entering back into the frey, I can think of one word, I can't help but think of this word-”Contrarian”. The sheep have returned to graze. Sentiment is clearly at an extreme. Could this time rally be different?

Ashton Crutcher doesn't think so, he' preparing for the end of times.

For now, keep those alerts set and take what the market gives us, but be on your toes and don't fall in love with an idea that seems ingrained permanently into the investing fabric of US equity markets. Change sometimes occurs suddenly and often when that happens, violently.