After Hours

Just last night in my rambling, I talked about companies like AAPL being effected by a lack of production of high technology components, it seems Texas Instruments came in light on earnings and blamed it on guess who.

Here's the full story

As for the market's close, there was some distribution at the end of the day, but it wasn't too heavy and the market lost just a little ground on the afternoon rally. In after hours, it's giving up a little more ground.

Whoo, the market moves fast.

I just finish one post and need to put up another. I looked at breadth charts, they recovered between 1:30 and 3:15, now they are starting to fall apart a little bit. I looked at the TICK and it's starting to trend down a little bit as well. The DIA you know has a 1 min negative from the last post, the SPY just went negative. The IWM and Q's are still in line, volume isn't too heavy right now, but it appears there will be a little downside movement here toward the close.  What we want to be aware of is really nasty downside into the close like we saw in GOOG's 3C chart before earnings.

I'm still leaning toward my opinion in the last post.

We're at an important crossroads

I'm going to use the IWM as an example as it looked/looks the strongest.

 Here's the 1 min chart showing a positive divergence, earlier this morning I warned the market was way oversold on an intraday basis and we could expect to see a relief move, thus far it's in line with price and not turning negative.

 Here on a 10 min chart we have at least 3 days of accumulation that was starting a new up cycle, that was disrupted as I've shown you in several charts today and on Friday, it's obviously because news of the S&P downgrade was known on Wall Street Friday. However as I talked about last night, very rarely are cycles interrupted and just head down, there's too much money at stake in setting them up. So like the CAT trade I posted, the question that only the market will answer and I'm not sure the market even knows how to answer this one yet is this, do they lift the market back up and try to salvage what they can of this cycle or is the market now so fundamentally damaged that you have fear on Wall Street? A bad close today and a big day down tomorrow would suggest they lost control of this one, I'm not ready to endorse that idea quite yet. I think much like the CAT trade posted, they'll try to salvage some of this last cycle. This can be done a couple of ways, it's lost money that they need to replace, how they replace it can happen several different ways.

First they can lift the market, maybe by propping up some good earnings report or a Fed announcement or whatever catalyst is available and just run the market back up through the gap and try to finish the distribution side of the cycle into higher prices. They could also run it up a bit and get VERY short and drop the market. Like I say to people all of the time, just because you lost money in trade "A" doesn't make trade"A" the best place to make it back. In either scenario it would seem to me they need to at least fill the gap and then probably some.  Intraday I'm not seeing heavy distribution suggesting they just decided to go short here and let the market fall, although there are rare circumstances like the S&P downgrade in which they have little control.

Here's another view of the cycle started with no apparent "Cycle related" distribution, just the leak from Friday

Here are the 1 min charts of the other averages

 The DIA looks bad on this 1 min (large caps), but not so bad on a 5 minute.

 The Q's are better then confirmation here.

As is the SPY.

I would think if there was a fairly certain fear on Wall Street that they've lost control, we'd be seeing a lot more negative looking charts. Unless we see something really nasty toward the close, my guess is they try to salvage what they can of the last cycle that was in effect; that may cause it to be shorter then originally planned, but it also gives you the chance to let the trade come to you.

If tomorrow (and I don't see a high probability of this right now) the market falls apart, then the entire game changes and Wall Street would be in a position it's rarely in. So for now, my vote is that they'll try to regain today's lost ground. If that happens, then we'll have to see if they intend to continue with the original plan or if they will modify it by shortening the cycle (we'd see pretty heavy distribution) and try to make up the rest on the downside.

ACAD Breakout (long)

This one just set off an alert. ACAD has been inside of what appears to be a large ascending triangle base, I set an alert awhile back for a breakout and it just came through.

This is speculative, but it could be bought here with a stop around $1.80. Volume is rising today as well.

JRJC TRADE IDEA (LONG)

For all of you who are itching for a long trade, this may be it.

 JRJC daily MoneyStream positive divergence and STOCH/RSI buy signal

 A triangle with correct volume, but JRJC is watched by momo traders so the possibility of a false breakout before a real move up is quite possible or even a false breakdown.

 There seems to be a big cycle in play here on this hourly chart.

 The 15 minute chart is confirming and positive al the way up and into the consolidation.

Here's the Trend Channel stop. I only see two ways to play this, buy now and position size correctly so that you can use the wider stop, or wait for a confirmed breakout and or I suppose you could buy a breakout and put a stop inside the triangle.

CAT Trade-Idea (short)

Here's an idea that may play right into your hands. SOME OF MY FAVORITE TRADES ARE THE ONES THAT COME TO YOU. Too many traders chase, they chase moves up, they chase moves down and usually they get in right near the end of the move, but being patient and waiting for the setup to come to you, is by far your greatest advantage as an independent trader, PATIENCE.

 Here's CAT on a daily chart forming what may be a H&S top or perhaps a broadening top, depending on how much time it has (largely determined by the market). It's looking a bit oversold in price and volume.

 The daily 3C chart moves from the end of a long term accumulative cycle with distribution and then posts a worse negative divergence that sends it lower, in fact a leading negative divergence. STOCH/RSI are on a sell signal of what appears to be a major top as well and it's certainly a large cap.

 Here we see distribution and then a new accumulative cycle begin, it's a fairly large cycle in terms of days, but....

 Friday on a 30 min. chart it went negative with the rest of the market as you can see. I'm sure word of the S&P downgrade was out Friday. So what can they do? They can sell some shares short, take the hit today and regroup.

 The 10 min chart confirms the same, an accumulative cycle that was confirmed turned in to a negative divergence Friday. Basically, I'd say the cycle was cut short, which tells us something else about the market; as I said last night, they don't usually let these cycles fail, so events may no be spinning out of Wall Street's control or we are seeing the start of that process.

 Today's 5 min positive leading divergence suggests they intend to try to recoup a little upside in CAT, so why not let the short come to you? We will most likely be able to see when they have juiced the upside for all they think they can get from it and then we can put on a short at a better price point and a much higher probability with less risk.

The trend channel has tracked CAT very well, so the white box area is the stop, anything we can get as close to that area as possible would give you  much lower risk profile.

If you like the trade idea, keep in touch and we'll monitor this one.

Revisiting Friday's Action

Remember this post on Friday when all of the sudden 3C had a lot of clarity, breadth fell off a cliff and the move in 3C and market breadth was described as,

"The 5 min is what gives me a little more confidence in my opinion.

Because breadth deteriorated so badly during the divergence, but price didn't move down much, however, distribution on the 1/5 min charts did, it's my opinion that today was used for short selling into some strength. Earnings I think have disappointed beyond expectations and we haven't even gotten into the heart of companies that face margin squeezes like manufacturers, retailers, etc.

While we're just negative up until the 5 min chart, the breadth charts deteriorating and how rapidly they did so, suggests to me that there was a target zone that the market needed to be lifted to, that's where they wanted to put on shorts and the deterioration in breadth would suggest that they did so pretty quickly."

Well it turns out there was a reason for that; the White House knew about the S&P downgrade Friday which means all of Wall Street knew moments later or before.

Here's the complete story 

MMM Follow Up

MMM was a trade idea from 4/13

Here are the current charts. Remember that large caps have been getting picked on. We talked about BGZ as an ETF for broad coverage for shorting large caps, but I also don't like to use ETFs only, there's advantages of a pure equity short that an ETF doesn't afford you and there are sticky areas with ETFs, so I prefer a blend.

 The daily chart again with a negative MoneyStream divergence as well as the STOCH/RSI sell signal

 In last night's late post I talked about how the distribution cycle has begun, but they distribute into higher prices, often you'll get some lateral movement and then a false upside breakout before a reversal. This is a perfect example of that concept. The first red arrow shows the distribution process in the cycle starting, it goes a bit higher and then goes lateral, then we have 1 false upside breakout in the red box that breaks resistance and fails, then the downtrend or reversal starts. You might even want to print this chart out to understand the cycle process, it's very common.

Here are several areas of possible support in which MMM could bounce a bit. Again, if you like the trade for large cap short exposure, then you could build a position on any strength adding a bit at a time, or you can wait for the last support level to be taken out and take a position there.

USO

Here's one of those market cycles that won't react to news, but Wall Street is using it to accumulate. The Saudi's slashed oil output saying the market is over-supplied. Here's a look at USO's 1 min chart.

It looks like a pretty strong positive divergence.

TIME FOR SRS?

SRS is an Ultrashort ETF on real estate, I've watched this ETF for quite some time and have been very interested in a position for SRS, but even in the midst of a double dip housing recession, it's really not done much of anything.

 This bullish descending wedge has broke and travelled laterally, which is the new norm for these patterns. It looks like SRS has been building a base during this time. If SRS takes off to the upside, then the pattern implied target is a lofty double. What could take housing lower or at least housing equities? A few things can, 1) the banks (big banks) have survived purely as a result of their trading desks, and many of the large banks are also primary dealers so the Fed must buy treasuries from them to moetize them as they can't buy directly from the treasury. If the QE/POMO process is not renewed and there's little evidence now of that coming, then a major source of risk free income disappears. They took the money from the flipped bonds which was essentially billions of risk free dollars from the fed and just invested in risk assets and did well, the market is looking different now though and it seems that is being discounted right now when you look at say, JPM, MS or GS.

2) If they lose the free Fed money for flipping bonds, then what are they left with? A lot of toxic debt and lawsuits for years to come and another round of foreclosures that may be pretty intense. I had a brief discussion this morning with a corporate CPA and he made mention of some advantage of foreclosing on your home before 2012, apparently there's some tax advantage now when the banks file a 1099c which will end in 2012, at that point whatever the 1099c comes in at, will be taxed as income. I didn't have long to talk about it and it's the first I've heard of it, but the gist is, if you are upside down on your home and want out, do it now before 2012, so he's expecting a lot more foreclosures this year.

3) 14 major banks were just hit with a self-imposed audit that they must carry out, any funny business that took place when they foreclosed on homes will be penalized and they'll have to pay some sort of restitution to homeowners.

4) Apparently the Fed (and I haven't read up on this) is now instituting changes that are supposed to cut down on mortgage/foreclosure fraud, but the end result according to the opinion piece is that it will kill the housing market.

5)There's the very real chance that inflation will cause the Fed to raise rates, many Fed governors and regional presidents have already said as much, this too will kill the housing market.

6, 7, 8, 9 and 10- There are many other reasons, it's not really important that I cover all the fundamentals, what is important is the general theme and the charts, so lets take a look at SRS.

 The daily chart of SRS and MoneyStream showing a positive divergence into the second bottom in the lateral base area, also my STOCH/RSI indy showing a buy signal here of some importance.

 The accumulation here is the first bottom, the distribution isn't heavy, just enough to take SRS back down to cheap levels in which accumulation can take place again. Please do note the red box on price as this is the very often seen "false upside breakout" before a move down, it comes complete with its own little negative divergence showing distribution into the breakout-I mention it just as part of the learning process of the market and what you can expect on a fairly regular basis.

 The 5 min chart had some accumulation on Friday, so it seems something was being discounted or perhaps a leak.

Today we have a negative 1 min divergence so SRS may pullback a bit. I do prefer a solid breakout here before committing to a full position, leveraged ETFs in a choppy market can be dangerous.

So this is an ETF that we want to keep an eye on, it has good profit potential and the fundamentals seem to be lining up to create the perfect storm.

AAPL

AAPL will be reporting this week, I believe Thursday. If I had to make an earnings call on AAPL right now, it would be a negative call, but as we saw last week with GOOG, the distribution was VERY HEAVY and VERY FAST and occurred in the last hour of the day before they reported, so Thursday is a ways off for me to be making earnings calls on AAPL, although I do suspect that they'll have problems.

Last week I mentioned AAPL looked like t would hit the bottom of the linear regression channel, it did so today.

In doing that, AAPL created a third lower low and in in a primary downtrend, for anyone who takes a longer term perspective, this is for all intents and purposes a major stock that is actually trending from $360 to $322 and doing so in a wide, but orderly fashion.

The other result of AAPL's break to the lower chanel today is a break of some important support.

You can see a clear top and it's broken today. As I just wrote to a member, it's now time to start looking at whether we can hold trending trades, because up until now, whether you were long or short, it's been tough to hold anything for a week, but once the market begins to trend as it did in the 2008 decline, you won't want to be trading around the position too much as you'll likely miss the big days down in the trend. Are we there yet? Today surely makes me want to say yes, but one day doesn't make a trend.

Because AAPL is such an important part of the market and because it is so close to broken support, it's the perfect canary in the coal mine to see whether they'll keep playing the games they've been playing in which an upside move above support would occur or whether the market is really terrified now and is liquidating risk assets, in that case, AAPL would continue its fall, far enough away from resistance that it would be cost prohibitive to try to move it above resistance, that's when we'll have a good idea of where this market stands and if we need to shift tactics to a more trending type of trade, which I would prefer.

Here's the rest of the 3C AAPL charts

 Hourly with negative divergences at the tops which create the downtrend (lower highs, lower lows)

 The 15 min chart is confirming the downtrend.

Here it looks like a very weak attempt so far to get some intraday relief.

BGZ/TZA follow up

Last week I noted several times that large caps were getting bullied around, especially in afterhours, where I suspect some of the trade there that is traditionally of very little interest to me, is being carried out by smart money, I'm not sure why, but the after hours action vs the daily action seems to show there's something going on in AH. I'll have to look more into this as this would be a new theme and one that I personally don't understand.

As for our quick pick for coverage on large caps (short), BGZ has been the trade I've mentioned many times last week, just do a search in the upper left corner of the blog for BGZ. I was suggesting you use the weakness in BGZ to start building a position (once again, if you like the idea of the trade). Today you'd be at a decent profit on BGZ up 5.5% today, a decent profit for a one day move.

TZA has been the broad coverage pick for small caps, that one is up over 6.5% today. If you are in either trade and want to talk about how you want to play them, just shoot me an email.

Following Up

Spain had a very weak auction of 12 and 18 month bills, forced to pay higher interest rates then what was paid at a similar auction just a month ago, so contagion fears ARE back on the table, I talked about this last night. Where Spain goes, Italy goes, thus the domino effect or contagion.

In Greece a two year bond was issued, get this, the yeild... 20% There's talk of restructuring Greek debt from Germany today with a deadline for the end of summer, however there are many who fear Greece will be down the tubes by then and paying 20% interest for a 2 year note is just amazing.

Here's what FXE, the Euro trust looks like this morning...

If that's not falling of the face of a cliff, I don't know what it is, a swan dive maybe? A swan song?

Here was the last update on the Euro/USD

Here's the USD via UUP this a.m.

Remember in general a rising dollar is bad for equities/commodities including oil and precious metals

With respect to precious metals, there is the chance of a flight to safety, however this a.m. GLD is barely up and SLV is down.

But all is not well at home, you've probably already heard that the S&P ratings agency downgraded the United States this morning in what many feel is a shocking move, but is it really? I don't think so. I'm not going to get into all of this right now except to say we have problems here in the US of course and the next auction should be interesting. China is at least doing something, but they have massive inflation problems and a housing bubble, the MENA region- ugh... however bad it is now, just look at Iraq and Afganistan's attempt to form a capable, legitimate government with all of the US and coalition troops backing them, then imagine the rest of MENA minus peacekeepers. This wil be a mess that escalates for years, maybe decades if recent history is our guide. Japan.... Well they still haven't contained the nuclear leaks, so I can't see Japan having a very good year, and that filters through the entire economy, take AAPL for instance, they get advanced technology from Japan for I-pads/Iphones and other products, they can't get what they need. That' just one small example.

Market Update

That intraday oversold is starting to go lateral and losing downside momentum, now we'll see what the bulls have.

Here's the DIA which is the most advanced

So we have a 1 min positive divergence developing for an intraday move.

USO

As for USO we have a decent move down today which was not unexpected, the update on Thursday last week ended with this:

I still believe there's a decent probability that this will still be the zone in which they try to accumulate shares of USO, we're seeing a little pullback right now. This is why I said yesterday to start building a position if you like the USO trade idea."

So I can't say I'm surprised, I also warned I didn't think they accumulated a position as big as they'd like and there would be more games ahead. So we'll keep an eye on USO for accumulation to start as it will probably be a decent area to continue building a position if it's a trade you like.

Market Update

OK, thus far from last night's look at the stocks reporting this am, we have AMTD who actually had a good quarter from what I see. AMTD had a negative bias and is down nearly 2.5%. C had a positive bias and although it looks like they didn't have a complete beat, they're up 1.15% in an overall market that is down badly. GWW beat and is up over 2%, I had a negative bias on GWW. Hal I had as a positive bias, they doubled their profit and have recovered off the opening to nearly break even. LLY I had a negative bias on, it looks like their report wasn't great and they're down 1.61%, so all in all, I feel pretty good about what was published on these considering none looked overwhelming. Remember that when I'm using 3C for earnings, I have no idea what the actual earnings will be, I just have an idea of how the stock will react which may sound strange, but we've all seen a solid beat and the stock sell off or a miss and the stock rally, so this isn't about being right about the report, it's about direction.

The Friday afternoon distribution that I noted as intensifying and happening quit quickly seems to have manifested itself in the market tumbling this a.m., I don't know if this is due to overall earnings or whether there was a head's up on the PboC RRR hike, which the market didn't seem to care for last night.

The market is certainly in oversold territory on an intraday basis with the SPY down 1.75%, I do believe it will get some sort of relief before too long but as of now there's nothing indicating a divergence in the SPY yet, there is a little in the DIA and the Q's look as if they'll attempt soon.

OOPS China Did It Again

That's the 4^th Reserve Requirement Ratio hike for the PboC for 2011, as predicted they keep coming hot and heavy as China's Real Estate market is looking like ours circa 2007-another reason I'm not a fan of China-inflation there is running high and the Chinese tend to put out what they want as far as economic reports so it could be a lot worse then what we're being told. Dow futures are off 24 points in screen trade the last I looked, most likely digesting the PBoC rate hike, but as always, a lot can happen overnight and especially in the a.m. as we have a pretty heavy load of companies reporting pre-market.

I've picked 5 companies this earnings season and have hit them all, several seasons ago I decided to show readers how often earnings were leaked. I picked 22 stocks, 20 were correct. The thing though is I looked at probably well over 100 companies, and only decided on 22, that's because I'm looking for overwhelming evidence of a leak, I have no interest in trying to guess or seeing what I think "might" be good enough to call earnings. However, with the companies reporting pre-market, I had to take a look. I'll preface this by saying, I wouldn't pick any as earnings plays, but I will give you the general bias I feel is most likely on them as they do have the capability to influence the market, or at least the open.

AMTD-negative bias

C- surprisingly positive bias

GWW-negative bias

HAL-very little clarity, but leaning positive

LLY surprisingly negative bias

MMR-no opinion

So we have a mixed bag here. I'd guess C would be the fulcrum, unless the theme becomes “inflationary margin squeezes”, then a bad report from GWW that talks about rising costs could be a problem.

As for the market, going into Friday it looked like a distribution cycle had begun in the DIA/SPY. Understand however, distribution occurs into rising prices and we've only had 2 days up, that's a pretty short cycle. The other consideration is that it seems to me that reversals (in this case a downside reversal) is preceded by a false breakout about 85% of the time. An argument could be made that the SPY/DIA both filled the April 12^th gap and then some, but in my opinion it's not a very strong argument as the market typically has these over-reactive moves. The IWM, unlike the others does have an identifiable accumulation cycle that kicked off the move up on Thursday/Friday. If anything, the IWM is the one I think looks the strongest right now, which is interesting because I mentioned last week the beating large caps were taking in after hours.

I need to think about as many scenarios as possible, there are a lot. Another one worth mentioning is the earnings season thus far has kind of been a bomb. Since we've been able to call 5 of the major earnings, it would seem that the market would be aware of this, except possibly in the case of GOOG which had a very strong and late day round of distribution just an hour before they missed, so that one I still wonder if it was a media embargoed report that was leaked late in the day. I think I've mentioned this before, but what's been interesting is the market's lack of reaction to these bad earnings, after all, it was up Thursday and Friday. I have also stated (a very good example was oil's lack of reaction during the escalating problems in Egypt) that I believe once the market puts a cycle into play, they are not going to let that cycle fail, they may choose to rethink the next cycle to reflect events, but I believe they intend to see them through. When they've started a cycle, I'd think billions of dollars go into accumulating, so it's no small thing to let one fail and that may very well be the reason that we aren't seeing the reaction we used to see on bad earnings. With the lack of volume and market participants, the market HAS CHANGED and they play the game differently. I can remember not so long ago when a bad report from the likes of a GOOG would send the market plummeting, now it just kind of keeps tip-toeing past these events.

Oh, one last thing I've mentioned, there's also the possibility (especially in the market where bad is good and good is bad) that they could be taking the market up a bit precisely because of the bad earnings. Because the market liquidity and structure is so different then say 3 years ago, the game is played differently as the income is coming from different sources now with less retail in the market. So the point would be this, to set up a short on the market, they'd need some strength to short into. They don't make their money going short a falling market, they short strength and make their money in the falling market. The question becomes, how long can you keep a market up with bad news coming in from every corner of the globe? In any case the cycle of distribution looks like it's underway already, it started pretty quickly, but we are not yet to the 15 min chart where the reversals become very likely, however, with the speed seen in the market on Friday and more impressively, how quickly this occurred in a huge stock like GOOG, suggests the possibility for a shortened cycle. It use to take a week to hit a 15 min chart, now it can happen in a day.

Friday I mentioned the very real possibility of the EU imploding over the lack of consensus toward expanding their bailout facility, which Portugal should eat up whatever is left "IF" they get a bailout. The German people aren't electing anyone who supports an expanded bailout facility and a nasty message was sent to the Greeks and the other PIIGS when no one showed up to save the day on a badly failed auction in Greece. The EU has either decided to let Greece fail or is letting Greece sweat it out to send a message.

The Euro on opening FX trade, has continued the slide started on Friday and why? It seems it's not just the Germans who have had enough of bailing out other countries in the EU, Finland's parliamentary elections gave the True Finns party a huge boost and they may have enough pull to veto the Portuguese bailout. Remember why I was talking about the importance of all of this, the EU's structure has made it exceptionally vulnerable to the “domino effect”, just think about it, it wasn't even a year ago that Greece got their bailout, since then the Irish who were quite adamant that they didn't need a bailout had to seek one and now we are at Portugal with Greece already in default of their bailout terms. The big problem becomes Spain and Italy. So what we end up with is a very nasty recession in Europe and then you have that whole “Butterfly flaps it's wings in...” and you get a world outlook that is exceptionally bleak. And we haven't even covered the 3^rd largest economy in the world, Japan or one of the most politically, geographically, religious, makeovers of an entire region in the trouble in the Middle East and North Africa which is making its way down the coast and further south in Africa and further north and east in the Middle East. I don't know how I went from Monday morning to “World Outlook”, but it's all relevant.

See you in the a.m.