S&P The Plan is Coming Together

On Thursday, May 19th, I talked about the probability of a good shakeout/head fake before the market moves lower.


Talking about the attempted breakout that day, that 3C revealed that particular move as "not going to make it", I said, " The 10 min chart is falling apart so if /when we do get an upside shakeout, I am just as certain now as I was then that this will be a head fake. So it seems likely if, and I would be surprised to see a reversal without it, they push through the upside head fake, it'll have to wait until after options expiration tomorrow."


 I've had that opinion since this triangle formed in the SPY.

 When prices broke down last Monday and fell out of the triangle, most traders would have went short then and there, I have maintained since then that the most likely outcome will be for the SPY to push through $135 creating demand in the market before the next and most serious leg down.





 On Monday the 23, the day the market fell out of the triangle, 3C 15 min had a positive divergence suggesting that the probability for the upside shakeout/head fake was still there. In the meantime we've been able to occupy ourselves with a few long plays to make some money in an otherwise very uncertain market.

On May 19th I also said, "This is all short term maneuvering for us and hopefully getting a little better positioning and timing on short positions and inverse ETFs., but still the bigger picture for now is the sad state the market is in and the very likely and ugly decline which should make us some quick short side money." The Daily MoneyStream chart above shows how bad a shape the market is truly in. As does the 2-day 3C chart below.

The concept here can be somewhat summed up in a chart of ADM.

There are several variations of the theme of false breakouts or head fake moves, above is the most simple. A large triangle is usually a top or bottom, depending on the trend in price preceding it, they are too big to be consolidations. In the case of ADM, it was a simple breakout which failed (head fake or false breakout), but what it did was create demand on the part of bulls. Most retail traders have an inherent bullish bias, some won't short stocks at all because of the misrepresented and overblown fears Wall Street has created, the reason.... most 401k funds are long only funds and to keep the massive 401k money flowing into those funds that are not allowed to go short, Wall Street created a stereotype of short selling and short sellers that is unfounded and based on irrational fears.

How often do you hear Cramer say, "This stock is a short!"?

Back to ADM, the demand that the breakout created allows Wall Street to short into that demand, when things fall apart, the long retail traders are left holding the bag and it creates a downside snowball effect as they book their losses.

The SPY shakeout is of a different variety, I call it the "Crazy Ivan". For new members, I get the name from the movie, The Hunt For Red October. It's a Russian submarine tactic in which they make a 180 degree turn to clear their baffles, their baffles are where enemy submarines shadow them as they can't be heard in the russian submarine's prop wash. The market pulls a similar maneuver to shake out positions long and short.

This is a bit more complicated, but the triangle is shaken out in both directions, a "Crazy Ivan".

Tomorrow we should see a move north of $135 in the SPY (it's already there in after hours trade), but will that be all it takes, a 1 day move? It's difficult to say. You have to understand the reason for the move to gauge how long it will persist. What needs to happen is Wall Street needs to make the market seem sufficiently bullish enough to attract retail traders back into it. Maybe $135+ does it, maybe a new high above $136 will be what it takes. Often the market will act more extreme then we imagine and we may very well see that. We may see a move that has us questioning whether a new bull move is taking place. Just remind yourselves of what the daily charts look like and how bad a shape this market and worldwide economy are in. There were signs of distribution taking place today, but remember that distribution takes place IN TO HIGHER PRICES, not on declines. Distribution which includes short selling, needs demand to take the other side of Wall Street's massive trade.

So far the idea has held up, even in the face of a market breakdown which by most measures would induce panic and follow through selling, especially in the delaveraging environment we find ourselves in.

So now is the time to start cleaning up speculative long positions, taking profits on strength, getting your short list together and above all, using the 1 edge you have over Wall Street, patience and waiting for the trade to come to you.

I can't say at this point what this is going to look like, but with the dollar starting to accumulate, I feel fairly certain that whatever bullish activity we see tomorrow or in the days ahead is a set up for a very bearish fall that will be coming next and that's the trade we are looking for-high probability, low risk. As I showed you earlier today, gold also is setting up for a move down, whether it will be to $145, $140 or a shakeout below $140, again it's hard to say at this point, but accumulation in the dollar is a hint that equities, precious metals, oil and equities are about to take a hit.

The market will tell us when to make out move. Until then, we'll be taking advantage of short term trades and putting together our list of the highest probability candidates.

If you have questions about any of this, email me. The concept is crucial to understand because it takes place every day in every time frame. Understanding how Wall Street operates will give you an edge that most retail traders still have not recognized.