MCP's earning miss provides a good example of the false breakout

They just missed in AH, pretty badly too.

 on a daily chart, note the big volume breakout above resistance, this sets up a type of bull trap. any shares that need to be unloaded or shorted are done here into demand and what creates the demand? The breakout above a known resistance level on decent volume. The next day we have a slightly higher open and then it all falls apart.

On an hourly chart,  the negative divergence into the breakout tells us this is not likely a true breakout, but rather the often seen false breakout before a reversal.

And that's an example for those of you who haven't seen it before. I'm not saying every breakout i a false breakout, but I will say that most reversals start with a false breakout. How do we know if a breakout is real or false, volume , price action (there was no follow through) and 3C helps as a true breakout would have moved 3C higher with price.

A look at the close

In case you didn't catch the significance of the article I posted toward the end of the day, it was simply this, in a low volume trading environment, Wall Street looses one of their avenues of revenue, volume rebates, a kickback to send their order flow through certain channels. With the SPY being close to an area in which limit orders are piled up and in a low volume environment, it doesn't take a lot of money or expertise to trigger those orders, this making a few bucks on the volume, but for our purposes, this also is a good place to sell or short into retail demand crating a sort of bull trap, this is why reversals are so commonly preceded by a false breakout. Even without a healthy supply of shorts, the losses incurred by longs as price breaks back below the trend line (breakout zone) creates a supply, snowball effect. In an environment where there's little short interest you can magnify that effect as there aren't any shorts to provide a bid in a falling market.

Take a look at the end of the day breakout via volume and 3C in the SPY where it appears most of the spark was provided.

 Looking at a 1 min chart, nothing jumps out at you with regard to volume during the late day rally.


 Expand the view to an hourly chart and a volume price pattern emerges, the downside or lateral volume is twice that of the breakout/rally volume.

 a 15 min chart provides a bit more detail. After the breakout, volume declines. Any healthy rally should see expanding volume. When price gets to the white arrow it forms a star and volume picks up, this is churning. After that (even though volume isn't as important on a decline), volume picks up into declining prices near the close.

 as for 3C, it makes the lowest low of the day on a 1 min chart...

 Here's the same chart zoomed out a bit for perspective so you can see it was already in a bad position and the low in 3C is a multi day low (I can only zoom out 2.5 days, so the low could have been even greater then 2.5 days).

On the 5 min chart, we saw an early change in character mentioned earlier today, but look at the continuous lower highs/lows even into a late day rally.

From what we see here, it looks like this rally was used for what I assumed it was used for when I first mentioned it and that would be distribution into demand and setting up a little bull trap. The only way bull were buying was if a significant technical level was taken out, I showed you this was not just an intraday high, but a multi day resistance point so it looks like it's served its purpose.

This Short Article Sums It Up

And this is how the game is played.

Market Breakout

Picking up where I left off, people are often confused by 3C signals and price behavior, such as now when price makes a breakout move. If you have been around long enough, you probably have observed that most reversals are preceded by a false breakout above a technically significant level, or breakdown in the case of upside reversals.

 Looking at the 1 min chart, we have a volume surge and a breakout through today's intraday highs.

Looking at an hourly chart, you can see this is a more important resistance level. Now we watch for signs of distribution into the breakout and ultimately a reversal below the breakout point, this is also a pretty accurate timing indication of a reversal.

Some Leveraged ETFs

When something seems like it's moving in a direction and there's enough evidence to consider it to be a valid assumption, I try to look for contradictory evidence, yes contradictory. When you have an assumption, you often look for supporting evidence of that assumption and that's similar to indicator fitting which is another way to squeeze the information out of the market that you want and if you look and try hard enough, you can always find what you want. The key is not, "not having an opinion", it's in being open to information that contradicts your opinion. High probability trades don't come from a few observations, but multiple observations that seem to reinforce the original observation.

This is one reason I use 3 differently coded versions of 3C and why I look at multiple timeframes. I decided to look at not just the regular SPY, IWM, QQQ, etc, but also their leveraged counterparts to see if there was confirmation between those as well.

 QLD-leveraged long ETF for the NASDAQ 100 with a 10 min negative divergence.

 Compared to QID, leveraged short for the NASDAQ 100, the inverse, a positive 10 min divergence.

 TWM  leveraged short on the Russell 2000 with a 10 min positive divergence.

 UWM leveraged long on the Russell 2000 with a 10 min negative divergence

 SSO, leveraged long ETF for the S&P-500 5 min negative divergence

and SDS, leveraged short on the S&P-500 with a 5 min positive divergence.

Not only do these match up with the earlier market update, but each one is the exact inverse of the other. This lends more credibility to the assumption that there's a bearish move underway in the market today. As a reminder, a divergence is not a signal to buy or sell, it's telling you what the underlying action is in an equity. So today as most of the market is up, it's telling us that there's bearish undertones and that the price appreciation is likely being used to exit long positions or enter short positions. When we have multiple timeframes all confirming the same thing up to the 15 minute chart, then we are usually close to a reversal, although price confirmation is the ultimate confirmation.

Market Update

DIA 1 min, The 5/6 divergence was accurate, but not as sharp as the current divergence

 To see a negative divergence this sharp, this quickly on a 10 min DIA chart is a bit unusual.

 The Q's 1 min

 QQQ 5 min

 But look at this QQQ 10 min chart, that looks like a real change in opinion to see a 10 min divergence this deep this early.

 Here's the SPY cycle, remember yesterday I used PCLN as an example for a break of a major or important trend line and how we should expect a bounce. The 15 min chart here is already moving into a negative divergence.

 The 5 min chart has also gone negative

The same for the 1 min chart into higher prices today.

 However, the WM may be the most dramatic change, here's the 5 min chart.

This 10 min chart of the IWM is probably the most interesting.

Whatever the case may be, a cycle typically has a bell shaped curve to it, this particular cycle looks like it's being cut short and the change in character seems as if it occurred overnight. It is possible that stocks are being sold to meet margin requirements in commodities (silver/energy) or it may be just a change in the overall view of extended leverage in what some may view as an unpredictable environment. There are a lot of possibilities, but for now, what I'm seeing is what I expected to see for the most part, I'm a little surprised about the changes in equities, but just a little.

More on the Copper Relationship

A friend just sent me this article from Stock Growth Wire. Make sure you take a look at the next post, there's some unusual activity today. Here's the article re: Copper's relationship to the market.

The breakdown in copper last week is a bad sign for stock prices.

Copper and the S&P 500 have been trading in tandem for the past few years. In fact, the price of copper seems to lead stock prices by about two weeks. Traders can use the action in copper to gauge buy and sell signals for stocks.



I wrote about this relationship several weeks ago. Back then, the S&P 500 had just suffered a sharp correction. But copper was bouncing off its lows. That was a good indication the stock market correction had run its course. Here's what I wrote at the time…

If you want to know where stocks are headed next, keep an eye on the chart of copper. Right now, copper's bumping into resistance near 440. If it breaks above that level, it should be able to challenge its February highs, and stocks should continue to rally.

On the other hand, if resistance holds, support at 420 becomes the critical level. But if copper fails to hold at support, the rally in stocks should fail as well.

Copper didn't hold up. It broke below critical support at 420 and is now resting on secondary support near 400. Take a look at this updated chart…


This is a bad sign for stocks. With copper now trading below its March-correction low, the S&P is likely to follow suit.

In other words, last week's selloff in stocks isn't just a one- or two-day affair. It's probably the start of a several-week correction that should push the S&P 500 below its March low of 1,254. Based on the following chart, 1,225 looks like a reasonable downside target…


Stocks have bounced a bit over the past couple days. And there may be a little more upside to the bounce – if only to work off the oversold condition created by last week's decline. But unless copper rallies hard immediately, traders should sell stocks into any strength and use this as an opportunity to add short-side exposure.

It looks like there's more downside ahead for the stock market.

Best regards and good trading,

Jeff Clark

Possibilities...

Remember last week I mentioned what I said looked like a stealth move into TLT-the 20 year Treasury Bond Fund?

 When I mentioned it, I don't think TLT has quite broken out above the trendline and the breakout was very quiet volume wise. The pullback over the last few days has also been quiet.

 The 10 min chart shows a positive divergence into the pullback

So does the 5 min chart...

I suppose this is another possibility. Obviously we have a debt ceiling breach that is imminent. The Fed also talked last week about a 50 basis point hike, which would require the Fed to sell assets on their balance sheet. Bill Gross also came out yesterday talking about the scenario that would have to occur for him to start buying treasuries again, an odd statement from a Treasury Bear as of late and a very vocal one.

What is the Fed not only took down commodities, but also went for equities? What's left as a safe haven flight? And wouldn't that also benefit the Fed, even more so?

Copper and the Market...

I've been having some discussions with different members this morning and I should probably just get it all out there in the open for everyone. This is speculation and speculation is not something I care to engage in, I prefer hard facts. However, I think somethings that I've noticed should be pointed out.

The essence of the Bernanke Chinese finger trap has been the rising input costs or inflation. Clearly his language during the last FOMC policy statement and Q&A after showed some concern about inflation, although he considers it to be transitory.  Fed policy actions could be taken to curb or try to curb inflation, but that would generally require that they raise rates, which has been floated since the FOMC meeting. However that would have profound consequences on the economic "recovery". As you saw by the chart I posted, most consumer credit is coming straight from the government while banks have turned their backs on the traditional business models in this environment of free money. Whether Bernanke actually intended or believed zero to .25% interest rates would spur consumer lending by the banks, I don't know, but the banks smartly took that cheap money and rather then invest it in consumer lending which has obvious downside risks and limited upside potential in the economic environment we are in, decided rather to send that cheap money to their trading desks. Of three major banks combined, Goldman, JP Morgan and Bank of America, they only had 1 day in which their trading desks took a loss over an entire quarter.

Obviously a large bulk of the near free money went to the areas in which thy could get the most bang for their buck, which would be FX and commodities. This has turned around and bit Bernanke and many US companies in the rear end through rising input costs.

In my experience in the market, I can't recall a time in which we saw so many margin hikes so quickly. I also don't see highly convincing evidence that Wall Street knew these hikes were coming. So at this point it seems like Bernanke has found an unofficial policy tool to effect his predicament. The fact that some very big players lost some very big money over the last week or so also points to the probability that they were not aware of margin hikes, as unbelievable as that may sound. The one thing Wall Street hates is uncertainty and if they are highly leveraged in the commodity complex and seeing these ruthless margin hikes (it was nearly every other day in silver and a huge one time hike across a large part of the energy sector) they are in a state of uncertainty and would probably reduce their leverage rather then chase gains and risk losing their fund. This is still a speculative idea, but once again, the fact that so many big players were hit so hard seems to indicate they didn't know this was coming and just in case they are thinking about riding it out, they can look back to the silver hikes which came at the pace of about 1 every two days with each one increasing the margin amount. That may have been their warning and they may be thinking if they don't take action as the Fed would like to see, that the hikes will continue.

So one member I talk with often asked me to look at the relationship between copper and the market with the idea that copper leads the market (stock market). I couldn't find an index long enough for copper quickly, but the one I did compare s below.

 The Dow Jones Copper Total Return Index is in green, the S&P-500 is in red. Note the copper index bottomed out nearly 4 months before the market did (December 2008 vs. March 2009). There's an obvious relationship between the two and again in 2010, copper topped several weeks before the market.

Here's a closer view of recent activity in which copper has broken a top 4 days ago, so does the S&P follow?

This is an interesting question. Before the FOMC meeting,  said two things, 1) that the initial knee jerk reaction is almost always reversed within days, I showed you last week that was the case this time as usual. The other thing I said was I think we are about to see something very big happen, that very big thing didn't appear in the official FOMC policy statement, although there were a few interesting nuggets, but since then these margin hikes have been a pretty big deal.

My questions are the following: Are we going to see mass deleveraging in the commodity complex? Did this catch Wall Street by surprise? And, what is the Fed's objective? If the Fed really doesn't care about banks returning to more traditional business models (i.e.-lending), then they won't mind if the banks continue to use the cheap money to make obscene trading profits, just not in commodities. So where would they go? Equities are not known to cause inflation and we've seen no hikes in equity margins. In fact Bernanke likes to point to the stock market as a barometer for the wider economy, his words I believe were the stock market's "wealth effect". So this "may" be a game changer. I have a lot of asset classes to watch and see if any of this speculation is close to true.

And USO

 Here's the accumulation cycle in USO on a 15 min chart, it is rather small, but with the uncertainty, I wouldn't expect a large position to be put on. The red trendline is about where mark up would begin.

And the 1 min chart.....

PSLV

Remember I said that the shortening of the cycle up should be fairly obvious...

 Here's a 15 min. chart of PSLV showing accumulation in white (on the order of a decent bounce), once above the red trendline PSLV has entered the mark up stage and this is when distribution begins, it usually would take several days, the idea is to accumulate, push price through mark up above your average accumulated position and then start to distribute that position into rising demand.

This 1 min chart of PSLV shows this morning in the white box, does anything standout about 3C in the first hour of trade?

Here's the Consumer Credit Chart I Was Looking For

The War On Commodities

Yesterday a not totally surprising event took place, it's one that commodity traders have feared, the CME raised margin requirements on Crude/Brent oil by a quite sharp 25%. They also hiked some FX margins and a lot of other petrochemicals such as propane, butane, iso-butane, natural gas, bio-deisel, e-mini gasoline futures, e-mini heating oil futures, naphtha, as well as many others and all kinds of derivative contracts in associated trading of the above. So as you can see, it wasn't a pure hike in oil only. Again, this has been a fear suspected by commodity traders once Comex went down the silver hike road.

This appears to be a blatant organized move to hit all types of commodities, one after another. Remember last week were were seeing broad weakness across the entire commodity sector. It seems many specialized funds were caught off-guard and sustained massive losses. This appears to be the strategy, create uncertainty about the commodity you may be trading whether there's been a hike or not, you simply don't know (as a fund manager) when the next hike will hit your portfolio and how many hikes will follow in rapid succession.

Once again, I believe this is centrally planned, the Obama administration has made no secret that they were going after "speculators". These broad hikes seem like an attempt by Bernanke to wiggle himself free of the Chinese Finger Trap he created. It also seems they've found a new policy tool in the exchanges and even brokerages.

When asked by a silver trader yesterday whether I believe the SLV low around $33.60 would hold, I said that PSLV (as I've been following PSLV more closely then SLV lately) is in the middle of a cycle up, it's underwent the accumulation phase, it's well into the mark-up phase and I believe they will hasten the distribution phase and try to get out of the current cycle quickly. Thus my opinion is that there is mass uncertainty on Wall Street as hard is that is to believe, but to tip off Wall Street would allow these funds to position accordingly and avoid massive losses. It would seem massive losses among several funds would make commodity based funds re-evaluate their spec positions and whether they believe they can ride them out without losing their fund or a big portion of it. For most decent funds, risk management is the first rule and uncertainty is the enemy. The Fed/US government, or whatever combination of powers that be are behind these margin hikes can do a lot more with a lot less if they introduce uncertainty.

The question of whether or not there's a bubble in silver would depend on whether you believe gold's price is in a bubble. By historic and geologic measures, silver, while it was frothy over the last month, is still way below the historic value as compared to gold. The other thing to consider is the extent of a bubble, maybe gold is in a bubble, however I believed and still believe housing was in a bubble as early as 2003, that bubble lasted several more years. Bubbles almost always are extreme so while silver was certainly frothy, I don't think I would characterize it as a bubble.

Thus far today, as in AH trading last night, oil has taken the hike in stride. If there's a warning being sent out, then perhaps t follow the silver example in which the initial hike was about 9% if I remember correctly, then another hike a few days later, a few percent higher, and another higher, and another even higher. There may be a message being sent and silver was the example. These funds are like supertankers and can't just sell their position in a single trade and walk away like most of us. So if they take the silver example and take it seriously, then they should probably  start unwinding their spec positions in commodities or at least the CME hiked ones, today if they want to avoid the fate of several other large funds.  We'll be watching the underlying action across the commodity and FX complex and see if there's any real movement, it should be fairly obvious.

However, let it also be said that the Fed may very well be helping the banks by not using official policy to halt the commodity run, but this will effect the banks and their nearly perfect record of profits. I mentioned that if you take away the banks trading operations, their results don't look very god. We received confirmation yesterday that the biggest creditor to the American public BY FAR, is the US Government, a traditional bank profit role. This means the banks have not returned to their normal business model and instead have found their own way to make profits. The Fed may be killing a few birds with one stone if they are indeed behind these margin hikes.