Typical

That may be your first reaction to the story below, "Typical". When the Fed wants the market up, everything is overstated only to be revised lower the next week, month or quarter.  This one is a doozy though and a shows gross negligence, this isn't off by a few percentage points, it's off big time.

However instead of the reaction we might be inclined toward, "Typical!" perhaps we should look at this story and ask why now? Why at all? Subtleties make the Fed go round and when a doozy like this is let out of the bag, you have to let that trader's paranoia kick in just a little to question and look a little deeper then a, "Typical!"

Here's the story

WASHINGTON | Tue Feb 22, 2011 12:22am EST

WASHINGTON Feb 21 (Reuters) - A U.S. housing trade association is examining the possibility that the data it releases underestimated the collapse of the housing industry, the Wall Street Journal reported on Monday.

The National Association of Realtors, which issues the monthly existing home sales report that is closely watched by economists and financial markets, may have over-counted home sales dating as far back as 2007, the newspaper said in an article posted to its web site.

NAR's home sales count was at odds with calculations by CoreLogic, a California real estate analysis firm, according to the report. CoreLogic says NAR could have overstated home sales by as much as 20 percent.

An over-count of home sales may mean that there is a bigger backlog of unsold homes and that it will take longer for the U.S. housing sector to climb out of the deep hole it is already in, dragging on the broader economic recovery.

The crash of U.S. housing markets, in part because of shoddy lending practices, was at the heart of the economic meltdown that started in the United States and spread around the world.

The U.S. recovery has been held back by the slow healing of housing markets, with high foreclosure rates hold down home values and sales.

NAR said the data could be revised downward this summer, the newspaper said. (Reporting by Mark Felsenthal; Editing by Kim Coghill)

Argument for a bounce

At least in the earlier part of the day, if not a green close. This will give those who want an opportunity to get in on a position a chance.

 DIA 1 min positive divergence

 DIA 60 min negative divergence mostly formed today

 IWM 1 min positive divergence

IWM 60 min negative divergence

 QQQQ 1 min positive divergence

 QQQQ 60 min negative divergence

 SPY 1 min positive

SPY 60 min negative

What we are seeing is the longer ore significant timeframes all going negative, but in the short term an oversold condition seems to have developed which calls for a relief rally, which is actually good for a trend (down trend in this case). Don't be surprised to see strength tomorrow, but don't take it out of context either. It may be a great chance to add to shorts and other positions.

A Surprise?

Recently any down day is somewhat surprising considering the Fed's self appointed mandate which stands out on a chart like a soar thumb, however, there were several charts last week, I won't run through all of them, that have given us a peak into a change of character that has been taking place. Taken together with Fed comments, PIMCO's repositioning of it's portfolio and deleveraging, the high margin debt of traders and various other issues like the strange activity in the bond market, there have been many hints that something was brewing which is what led me to make the recent videos warning of the downside dangers in this market that are without precedent.

Here are a few select charts that show  radical change in character. While looking at these charts, remember that the market rarely goes from a bullish mod to a bearish mood in a day, it takes time to de leverage, set up shorts, distribute longs, create the game board so to speak so the market's recent inability to discount world events as of now, doesn't seem like it forgot, just that it took some time to get the pieces in place.

Here are the charts that shouted something was up... (recall Friday's end of day post in which I said 3C showed significant weakness going into the close-which manifested today-again, it takes time to set the board).

FXP 15 min chart with over a week's accumulation .

 FAZ's 60 minute chart  with nearly 2 weeks of accumulation-don't forget about Friday's XLF chart starting to look bad.

USO 2 weeks of accumulation into the dip as expected, the idea was "oil is going up, but they will build a position before they allow it to move higher, they built that position into lower prices".

These charts show the way the market works in real life. Study them and understand them. Understand how smart money isn't going to let an opportunity go by without taking advantage of it and this is why the market often seems to behave in strange ways.

DIA and Q's Showing some 1 min-5 min strength

Meaning, we may have reached an oversold level in a day and may expect to see some strength tomorrow on a corrective move.

MRVL Trade (Short)

MRVL has taken out significant support, the stop allows for some room for volatility and if proper position sizing/risk management is used, this could be an excellent trade.

 MRVL breaking support

Trend Channel Stop allowing for volatility.

Unreal

Here's the SPY 1 min where the downdraft is confirmed throughout the day in 3C

What is "unreal" about it, is that every other timeframe from 1-60 minutes (60 minutes rarely are moved in a day) have all moved to confirmation of the downtrend today, some even have outpaced it. I hope during the last few weeks you've had an opportunity to pick up some of the short trades that were in good risk:reward positions, you never know if this is the crack that breaks the damn. In any case, we haven't seen a move down like this in quite some time suggesting as many of the charts featured over the last week have, there's a change in character underway.

BDCO Follow up

For those who took the trade signal on BDCO this morning, you've netted 10% today thus far. 3C looks fairly strong, volume is high. If it should close near the top of the range, there's a decent chance of follow throw buying tomorrow.

The Dollar

Yesterday I showed you the intact downtrend in the Euro, the Euro accounts for 50% of the US Dollar Index so which ever way the euro moves, you can just about count on the dollar index or UUP moving the opposite way. It seems there is an effort to accumulate dollars or the Dollar Index, this is not in my opinion because of the United States' strong economic situation, but it's the lesser of two evils as the euro zone seems to crumble more and more everyday. How long Italy's economy can withstand the lack of oil needed as it remains one of the cotagionized PIIGS is a startling question and one the bond vigilantes will act on, which may hop-scotch Italy up to the front of the crisis bailout line.

In any case, good bad or indifferent, if smart money seems to be going there, there's a reason.

Here's UUP's recent charts and it has remarkably held together rather well ll things considered. Now with Germany's Merkel at the mercy of the German voters who are sending a clear signal, "No more bailouts" the whole contagion mess just got a lot messier.

 The now common bullish wedge, turned into a base before breaking higher.

 A closer look at the base reveals an area of support, even when we saw  breakdown we were quickly able to identify it as a false move (in the red box), today, once again support.


3C hourly trend shows growing positive divergences and once again in the red box, the positive divergence that showed the breakdown to be a false shakeout.

It seems whether the dollar is a good investment or not, it's better then the Euro, that seems to be the message of the market.

BA Short Just Triggered

BA was on the trade list Feb 7th on a limit trigger at $71, it just triggered. Last night I ran through 200+ industry groups and airlines were  common theme on the negative side. I suppose reduced consumer spending power with tighter margins all around are finally squeezing airlines and the makers of aircraft.

Check out BA (short)

Some of our favorite Leveraged ETFs and their counterparts as pure shorts are flying today

Here's a small sampling of some of the favorites...

 EDZ leveraged Bear on Emerging Markets +9.78% today

 FAZ, leveraged bear on financials which were highlighted last week on Friday as showing weakness, today FAZ is up +7.55%

FXP were we have all kinds of reasons to believe this as well as the others mentioned above will perform well over the long haul, is up +7.3% today. All of them are up on rising volume.

POMO comes in at 3.07x

This leaves the Primary Dealers with cash in hand, here's the NY- FEDS POMO operation link for today


The question remains, does the plunge protection team step in as usual when the submitted:accepted is blow 4.1x? We have been seeing strange behavior in the bond markets, by PIMCO and some strange statements from the Fed itself, enough to wonder whether they are trying to unwind themselves from QE2 in some manner. Perhaps they recognize the asset bubble they've created as well as the commodity bubble and the inevitable effect it will have on inflation and stocks sooner rather then later?


Here's the 3C 1 min charts...

 The defining feature of all 3 charts is the weakness seen on Friday-see Fridays last post about it. The DIA shows a negative divergence this morning and is so far in line with price. If the POMO money is going to show up, it hasn't yet in a meaningful way here yet.

 The 's are the same as above with a question as to the most recent 3C reading, whether it's just catching up on the downside or showing the start of some positive divergence.

SPY shows the broad Friday afternoon weakness a negative divergence this morning at the high, and what appears to be the start of a positive divergence. POMO may come in two ways, the typical "close the market green" or the Fed may be taking a different position, that of a "controlled fall". We'll see
or it could be that 6-8 billion is just not enough.

A Reminder to the Buy the Dip Crowd

There's one entity that fights the Fed and wins just about everytime and it's the market. What goes up, goes down twice as fast.

For all those players on huge margin that I showed you last week, here's the result:

 The CRB Index-not even commodities are safe and this is where the volume has been so it's safe to say this is where the majority of pain is being felt with margin calls rolling in.

 The DIA managed to pull off the Wedge head fake and too bad for anyone on margin caught buying that long as all the technical analysis books would have you do, their hurting thus far.

 Margin or not, this is why I've been warning to be careful about trading the averages' ETfs, their way over-extended and when they drop, you'll feel it, almost 2% on an unleveraged QQQQ

The SPY also pulled the bull trap off and now it's also down as traders margined up to September 2008 highs.

Oil Just Got To be a Stickier Mess

Especially for the already embattled Italian government and economy which relies heavily on contracts with an Italian -part government, part private oil firm. Libya just declared Force Majeure on it's 1.5 billion barrels of oil a dat that are exported.

We'll see how the rumor mill turns with regard to an OPEC emergency meeting, so far it's been shot down as a non-starter.

ATEC LONG

This was a featured trade back in January with a alert or limit to be set at $2.86, it's just moved through that.

Take a Look at ADLR long

BDCO long

Watch this one for a breakout, it could be significant.

VERY HAPPY TO REPORT

One of our members stayed with the USO trade and picked up options on USO Friday, he's made 150% since Friday until this morning when he sold some, but still has plenty left to ride. Congratulations S.Y. !!!

Too Much To Cover in One Post

However this morning our TGT short is getting traction off of WMT's earnings as the margin squeeze is a self evident truth and one the Fed is not facing up to very well.

Our thesis of the market not having discounted the importance of events in the middle east and how "This is the start, not the end" which I said many times after Mubarak stepped down, is paying off as the market which first gave us the upside head fake out of the ascending wedges as expected, has now blown past all support around the wedges and is down over 1% right off the open. Apparently today's POMO will show us something regarding the Fed's intensions in a quiet way.

As I've said many times, you can't get lost in the lines and our oil trade is proof positive of that. Apparently our hypothesis regarding what would happen with the pullback in oil has come to fruition. Now, it's just managing the trade.

I'll be back with more as there is plenty to cover today and new ideas to trade.