LVS Trade Follow Up

LVS was mentioned twice, once the day before earnings and then about 30 minutes before the close and earnings, both assessments were LVS would not react well to earnings and became a short trade.

Today was a good day for our short n LVS, down nearly 4% and off about -14% since we looked at the trade.

This looks to be a promising trade so we ant to manage it well.

 You hear the phrase "false breakout" a lot, but this is th typical reversal setup, whether it be an intraday move above a resistance zone or a bigger daily move like this one in which a breakaway gap was providing resistance. The fill of the gap which you can see above would have negated the "breakaway gap" which is a powerful gap for a reversal down. To see it filled, a lot of traders would have turned bullish on LVS. Luckily we not only had a good read on 3C, but a very typical earnings leak.

To the far left (I didn't mark it, but you should be able to make out the positive divergence at the lows), the positive divergence kicked off a rally that was used to sell LVS short by Wall Street on a pretty obvious earnings leak. Again, this is counterintuitive thinking, but to see LVS rally into earnings would have given a lot of traders a positive earnings expectation. This is one of the more typical negative earnings set ups I see, when earnings are going to be positive, often the stock will sell off into earnings if there is a leak so Wall Street can accumulate at cheap prices, this was the opposite. Since the false breakout followed by disappointing earnings, LVS gapped down and consolidated for a few weeks. The leading negative divergence did what it is expected to do, lead price lower.

Much like PCLN, we have a decent area of support coming up. Not only was this support level the end of a pullback, it also rallied well off the loss and closed near the top of the daily range. We're only a half a point or so away so this may hang up LVS in a consolidation/bounce. The one thing we have working to our advantage is today's higher volume move down which closed at the lows of the day, this could create follow through selling and slice through that support level. If you're in the trade, we'll want to watch how 3C reacts at support. Once LVS drops below $36, we should see some real downside momentum. In fact if we do get a bounce off support, LVS would be a good candidate to add to or to initiate a short on.


Just so you can see the potential..

Sub $20 is not unreasonable, even $10 is not out of the question. The $36 area I would consider as part of the top, so below $36, the pattern implied target is around $16!!!

PCLN Update

So far our short trade on PCLN from May 3rd is working out well. So far we've taken about 40 points out of the trade. However.... complacency is not our friend. Although the trade still looks good and longer term I think we have a lot of potential here, there are some short term areas coming up that we need to keep an eye on.

 Here's our entry on a move that turned out to be a small bulltrap. The first zone of support has broken, the next zone is upon us now, after a break of this level, we should see some downside momentum pick up. Remember that lower trendline...

 Here's that lower trendline on a 1 min chart toward the end of today. Notice the very brief dip below support which ramped volume up, shortly thereafter we saw a high volume bounce back above the trendline, these are the common games Wall Street plays. Most traditional traders would have stopped out of longs at the break of that trendline while others would have had limit short orders on it.

3C revealed a positive divergence on the break, so in essence, Wall Street stole a number of shares on the cheap. We need to pay attention to what they do with them at this point. It doesn't look like they distributed them into the close, but that support line provides them with a lot of leverage over tradition technical traders. A clean break below the trendline and the short position should be great, however there's a probability that we'll see more of this dipping above and below the trendline as it's a popular stock and an easy support line to spot.

If you're in this trade, keep in touch and we'll see if there's anything to this small bounce.

Broad Market View

For the better part of this year, I've posted numerous times market breadth charts which have consistently shown breadth (a measure of the internal health of the market, i.e.- % of stocks participating in the rally through various measures). The breadth readings have been consistently bad, meaning fewer and fewer stocks have been posting new highs as the market was, more stocks were moving to new lows or falling below moving averages they had previously been above, etc. The way in which the market has kept moving higher despite poor market breadth has been similar to an accounting gimmick. The Federal Reserves' POMO operations have given billions of dollars in virtually risk free money to 42 Primary Dealers, the likes of Goldman Sachs and other large investment banks. In return for the virtually risk free money, they've been investing in stocks that are heavily weighted among the averages they belong to. This is one part of the equation. The second part has been revealed in Bank earnings in which their traditional core business models have performed poorly (consumer loans, etc), however their trading desks which have seen (in most cases) perfect trading records for the last quarter, have saved the day. Because of the Fed's loose monetary policy of 0-.25% interest rates, the banks have been able to access and leverage (once again) nearly free money. When the Fed started Quantitative Easing and low loose monetary policy, the idea that was sold to the public was that this would free up the credit markets, it would encourage banks to lend to small business and consumers. Of course the banks had a better idea, one in which they could invest in almost anything that returned more then .25% and they were automatically at a profit. This money didn't go to consumers or small business, I doubt the Fed really ever expected it to. It did however allow Bernanke to claim success in terms of economic recovery by pointing to what he termed "The Wealth Effect" created by higher equity prices. This of course is ridiculous as he even made the claim that inflation and other losses main street suffered (such as the loss of buying power and the loss of the value of savings as the dollar was destroyed) was offset by the "wealth effect" created by higher equity prices. Nearly everyone in the market knows that there are very few retail investors left in the market to benefit from this "wealth effect" and the return of retail investors (as usual) has come near the top of the market. The stock market has long been considered a "Leading Indicator" of economic conditions, so pointing to higher equity prices also allowed Bernanke to make the argument that the economy is showing "green shoots" or that it's on a slow, but steady path to recovery.

Of course one of the well documented side effects of Bernanke's policies has been that of rampant inflation in nearly every commodity. I've observed the gas inflation, but my wife does the grocery shopping. I just went shopping this week for the first time in a long time and was shocked at the prices. Since I haven't been to the store in a long time, the prices were dramatic from my perspective.

Now inflation is causing a problem called stagflation, a stagnant economic environment and jobs market combined with high inflation. Although inflation has been called "transitory" by the Fed, clearly they are now concerned with the effects that are hitting every sector from service to manufacturing.  While in the past Bernanke has vowed to keep all options and tools on the table, his most recent statements regarding further quantitative easing have shown his concern. When asked about the possibility of QE3, for the first time I can recall, his answer was, "the risks are starting to outweigh the benefits", thus the market is unwinding speculative trades everywhere, the dramatic sell off in commodities is one area this can be seen, the unwinding of FX carry trades is another, the sell-off in equities is yet another and perhaps the most obvious and unnoticed can be found in Central Banks across the world investing heavily in gold and silver to a lesser extent. Precious metals are a natural historic hedge to rising inflation and rising rates. Don't forget the Fed's Kocherlakota floating the idea of a 50 basis point hike to the Fed Funds Rate, a move that would put banks in a dangerous bind if they don't start unwinding their speculative and highly leveraged positions. It will also have a dramatic effect on consumers, business and housing, thus stagflation.

I've mentioned many times that I believe we are going to enter the first secular bear market in stocks that this generation has ever seen. There was one in commodities a few decades ago, but not in equities. This is where I believe spectacular profits can be made. Few traders have the disposition to sell the market short and even those who do will have to figure out quickly the new rules of the game. I think we have a big edge in this respect as retail traders still haven't adjusted to Wall Streets raids on traditional technical analysis which can be seen everyday in stops being hit and common  price patterns being broken up.

This is a macro view of the market and will hopefully help you understand more about how the market works.

DIA

 Does this price pattern look familiar?  This is the same triangle that we see in the SPY/S&P-500

 5-day 3C chart of the DIA. I rarely show charts of this length, although they contain the macro-trend, they aren't useful for timing. However, the chart goes from confirmation into early 2011 to a leading negative divergence-the worst kind. What you can learn from this chart is how Wall Street uses demand to sell into or to set up counter trend trades (shorts). It also shows you approximately when the market started growing concerned with the economic and policy environment.

On a shorter chart (15 mins.) you can see the overall negative tone moving into the top. Before the triangle began, Wall Street was already moving out of positions and likely phasing into large short positions. This gives you some idea of how far the market must drop for these short positions to be profitable and that's just the start.

 On a very short term chart (1 min.) you can see where the support line of the triangle was broken today as volume swelled as stops are triggered. This is also an example of how retail trade has not adjusted to Wall Street's propensity to use traditional technical analysis against its practitioners.

 In blue, my trend channel automatically adjusts to a stocks 10-bar volatility, it's more dynamic then traditional price channels, but more useful in determining a trend then Bollinger Bands. When this channel, which held the entire Jackson Hole/QE2 trend, broke below the lower channel on a close on March 16th, something big changed in the market. For that channel to break, the 30-day typical volatility of the market was exceeded by more then 2 standard deviations. That break was the end to the easy money uptrend and introduced the volatility of a topping market. ADX also turned down shortly before, which is another sign of a trend coming to an end. Interestingly, according to the 3 day 3C chart, distribution started between mid-February and early April, which coordinates well with our Trend Channel break in mid-March, signaling the trend had started to change.

IWM

 Once again, does this price pattern look familiar?

Once again on a 3 day chart of the IWM, the heaviest distribution started between mid-February and early April. Since then it's entered a leading negative divergence.

The 60 min IWM chart also shows heavy distribution moving into the price triangle.

 The IWM 3 day trend channel which held the entire QE2 rally also broke in mid March, the 16th to be exact like the other averages. This is a significant break and a definitive change of character in the trend. ADX also turned down shortly before like the other averages.

 QQQ
 The long term 3C chart of the Q's also started showing heavy distribution in mid-February to April 1. Again, since then it has deteriorated much more rapidly into a leading negative divergence. To illustrate the distribution involved in the area of the leading divergence, the QQQ percent change over the period covering Feb. 17 to May 11 was -.17%. During these 3 months, the QQQ literally went nowhere, the 3 month period before this the Q's gained over 14%.

 The Q's on the 3 day trend channel also gave a signal that a change of character in the trend was under way on the exact same date, March 16th.

SPY

 Again the SPY/SP-500 shows the same triangle and negative divergence, at April 1st and a current leading negative divergence.

 Here's the hourly chart falling apart in the triangle.

 Here's the 5 min SPY 3C chart showing several positive divergences along the lower support trendline.

 Here's today's intraday action which again shows a mass of stops being hit exactly at the support line. There would also be short selling at the level as well, but it illustrates the misconception of support and resistance being at exact levels to the penny as we often see multiple shake out moves that trade slightly above and below support.

And once again, March 16th  gave us a signal that the trend was undergoing a change-right in the middle of the bulk of the first major negative divergence.

So it's no surprise that the market looks the way it does. The deleveraging in the market is well underway and although the tops were all broken today, there's more then likely a lot of downside to come in a bear market move down.

Looking forward...

The market has been very predictable in reversal behavior. A straight break of a top like we saw today follow by a downside reversal is very unusual. These obvious triangle price patterns are more often then not, shaken out in several different ways. The first and most common is a false breakout to the upside, drawing longs into the market before dropping the curtain which causes the snowball effect of a rapid sell-off. The second most common shakeout is what I call the "Crazy Ivan" from the movie, "The Hunt For Red October" in which Russian Submarine captains reverse course 180 degrees to try to determine if they are being followed closely in their prop wash where it is difficult to pickup the sound signature of another submarine shadowing it. If we are to see a false breakout to the upside at this point, it would be the Crazy Ivan type, starting with a breakdown of the uptrend, then the 180 degree reversal to a false upside breakout, before returning to the original course of down. This can take place in a matter of hours, but more commonly over a period of days. The more convincing the shakeouts, the more velocity we see in the resumption of what would be a down trend in this case.

There's the possibility that the market has lost control and the ability to effect these shakeouts, but in my experience, it would be pretty rare as Wall Street is usually in full control of accumulation and distribution cycles as can be seen in this chart of our earnings trade of LVS

The white arrow is an accumulation zone, the green arrow is confirmation of stage 2 or mark up, at the red arrows we have distribution sending prices lower, at the yellow arrow we have our false breakout right into bad earnings. In May a leading negative divergence drags prices lower.

So while the downside breakout lessens the probability of a shakeout somewhat, we have to be aware that this is a common occurrence and it would only take a move of about 2.5% to effect a false upside breakout/shakeout from our close today.

I think if you account for  the possibility of a shakeout occurring, this market could be shorted here and now as there's not a long distance to travel (thus not a lot of upside risk) if an upside shakeout or Crazy Ivan were to occur.

Positions that have been established at favorable price points I would personally keep open and deal with any potential drawdown as these positions are already at a decent profit, this would include the May 3rd inverse ETF trades and equity shorts such as LVS, PCLN, BIDU, FXP, EDZ, FAZ. Of course if a move back into the triangle occurs, you can reduce these positions or exit them and re-establish them at better price points.

Just try to keep in mind the bigger picture, whether you chose to short now/maintain current shorts or if you wait a day or so to see if a shakeout will materialize. The fact is, a bear market decline will likely erase much of what has been gained since early 2009. A secular bear market has the potential to take  the averages to unthinkable lows, for instance, the Dow could be trading below 5000 within a year or so. Markets fall a lot faster and further then they climb.

Member Question About AAPL/GOOG Freefall

While I haven't looked into the GOOG chart yet, todays extraordinarily busy with emails, the AAPL question is a bit simpler to answer.

For those who have been trading AAPL, you'll probably remember, I've been expecting AAPL to fall back into the channel for sometime now, which it has today. It's likely to see a move toward the bottom of the channel shortly.

Here's the daily AAPL 3C chart, it never made a higher high in 3C despite price doing so, major negative divergence on an important timeframe.

If you are trading Silver, you should check out this interview with Eric Sprott

Sprott as in PSLV (Sprott Physical Silver Trust)

Here it is 

USO UPDATE

For all intents and purposes, everything I just said about silver can more or less be said about USO, they look very similar.

 The same lateral range is developing, the volume on the decline is interesting as it may be short term capitulation.

 The hourly chart looks nearly identical with the same positive divergences near the bottom of the range.

 The 15 min chart shows the same divergences again at the bottom of the range.

On the 1 min chart, its been mostly inline with price today, which isn't always a bad thing, it could be leading negative which would be a problem.

So I would approach USO the same way as Silver, try to buy (if you are interested in USO) near the bottom of the range and reduce you position risk, while maximizing position size.

PSLV

What a voltile day, which is pretty much going nowhere in terms of breaking significant levels, just a lot of chop and an ugly intraday trading environment.

I was just answering an email from one of our more active silver traders. Here was the gist...

 It is a little difficult to see with the chop today, but there's a lateral trend in PSLV, a wide one at that, but it's there.

 What I pointed out was the positive divergences that occur at the bottom of the range. Silver fundamentally is speculative because of the unknown factor of whether there will be another margin rate hike. However, the positive divergences keep showing up near the bottom of the range in SLV.  This is where I would look to put  a position on or accumulate a position because if theres a break below, your stop is rather close and you can mitigate the risk.

While the trade today in silver has been all over the place from a gap down to unchanged to a nearly 4% move down, looking at the daily chart nothing of significance has really happened today. There's no new intraday low, it doesn't appear that there will be a new closing low, so nothing technically significant has happened.

On the hourly chart, there's a pretty nice looking positive divergence in the trading range, I would think it is taking shape from the positive divergences near the range lows. So again, while fundamentals remain speculative in silver, buying near the bottom of the range seems to be a pretty decent risk:reward trade.

I prefer PSLV over SLV because of the controversy surrounding SLV. It would be a shame to see a move in silver negated by business practices within the ETF itself. This however creates a problem for those wanting to trade options as PSLV is not optionable.

SIVR is optionable, but a little low on the volume side.
ZSL is a Proshares UltraShort which is optionalbe, the volume is good there
AGQ is a Proshares Ultra (long) which is optionable with decent volume
DBS PowerShares  is also optionable with ok volume

By the way, they all look similar in terms of the 3C 60 min chart, with the Inverse ETFs showing the inverse 3C chart.

QQQ/IWM Chart Request

On Friday of last week I mentioned that the QQQ are not looking too good and off doing their own thing as opposed to the other averages.

Heres the SPY for comparison

 As of Friday last week, the SPY saw consecutive positive divergences at the lower triangle trendline (divergences marked with arrows, the areas of divergence in the boxes).

 The IWM has been a bit more neutral then the SPY, but nothing like the Qs. The posture of the 3C charts can clearly be seen in the % moves today in each average with the Q's being hit the hardest, the IWM in the middle and the DIA/SPY being the closest to unchanged. The 5 min chart above of the IWM doesnt look particularly good right now.

 The IWM 1 min chart makes a bit more sense, you can see the positive divergence late Friday and into this morning's open which lifted it into the green for a bit this morning. At a 1 pm there was another positive divergence lifting the IWM a fraction of a percent. Right now it appears a negative divergence may be early in the making.

 Contrast the above, especially the SPY chart with the QQQ which has been negative since Wednesday with NO signs of anything like a positive divergence.

On the 1 min chart, there was no opening positive divergence like the rest of the market saw, there was the 1 p.m. divergence, but that's the extent of anything positive. Right now I'd call the current divergence negative as it has moved down further since this screen capture.

The NASDAQ is performing roughly in line with the technology sector-See the last chart in this post covering XLK showing it's very negative disposition.

 In the post linked above, I mentioned the breakaway gap in XLK from Feb. that remains unfilled, which is very bearish.

 Compare to the 5 min QQQ chart and you will see every rally attempt in XLK has been met with selling. Both rally attempts here are very close to the resistance of the breakaway gap which is difficult to see, but it's the red trendline at the very top of the chart.

The longer term view on an hourly chart of XLK is also very bearish. Again, note the distribution at the attempts to fill the breakaway gap (in the white box-the same attempts seen above on the 5 min chart).

Economic Data

We'll start with the Empire Manufacturing Index, this was a HUGE miss. This month it was nearly cut in half coming in at 11.9 from a previous 21.7 with consensus coming in at 19.55.  While everything pretty much came in disappointing, from new orders to rising inventories and declining business conditions, the real problem (which is part of a long standing trend) was the prices paid input costs which climbed to the 2nd highest ever reading. Prices received remained unchanged.

This is the Bernanke Finger Trap with inflation soaring. I was a bit surprised that prices received hadn't seen price hikes passed onto consumers, but it can't be far behind.

While we could consider the above data "Bernanke's left finger caught in the trap", the Treasuries TIC data released this morning might be called "Bernanke's right finger caught in the Chinese Finger Trap" which is appropriately named since Chinese holdings of US debt have fallen for the 5th consecutive month, a drop of approximately -2.6%. This may not seem like a huge drop, but when you consider the amount we are talking about, it may equate to a drop of hundreds of billions of dollars. This is China alone, I'd be interested to see what Japan's holdings look like as the BOJ and insurance agencies have been selling USTs to finance rebuilding.

If Bernanke is going to end his path of monetizing debt, (the Fed is now the second largest holder of US debt) as he has suggested, their going to need to find a buyer for these auctions pretty quick. The fastest way to achieve that would be an interest rate hike, which is interesting as the Fed's Kocherlakota has twice floated the idea of a 50 basis point hike in the last week.

The NAHB Home Builder Confidence came in unchanged, which is a miss as consensus was looking for a more positive outlook-just waiting for that SRS trade to set up...

As a corollary to the conditions in China that have FXP (Ultrashort FTSE/China 25) on our long trade list, 2 short term Chinese bond auctions failed today. The problem is the yield on the bonds is not seen as worthwhile considering the rate of inflation in China. China is seeing wage inflation, of course the same rising input costs and a housing bubble much like our own in 2007 in addition to consumer inflation.

On the very bizarre weekend news concerning Dominique Strauss Kahn's arrest in NYC for rape allegations, we have another woman stepping forward in France claiming to also have been abused at DSK's hands. So effectively, DSK has nowhere to hide, not in the Washington based IMF, nor his homeland of France. Although that doesn't seem to matter much at this point as bail has been denied. Other then being a curious news story (you'd think he could pay for his sexual misconduct or at least abuse his position of power), this may have serious consequences for debt structuring/restructuring for Ireland, Portugal and most importantly, Greece as the clock is ticking. DSK had a more tolerant disposition toward Greek debt restructuring. Whether his predecessor will or not remains to be seen. However perhaps more importantly in the Greek situation is the ticking clock.

And finally, the Treasury Department confirms that today, the debt ceiling will be breached, which will certainly not help those UST auctions. In reality once you got past the creative accounting, the debt ceiling was actually breached last Monday. The Treasuries answer to this, as Congress certainly hasn't provided one, to dip into the Federal Pension Fund. So not only is Social Security insolvent, along with most state pension funds as well as corporate pension funds, now the Treasury will start to inflict damage on Federal Pension funds.

It's absolutely amazing that the US is still able to sell treasuries (even with monetization), and what will happen once the Fed curbs quantitative easing? I'd expect to see rising rates. Take rising rates and add them to an inflation trend that has proven to be more then "transitory" and the US starts to look amazingly like Greece, except Greece has actually implemented austerity measures!

None of this bodes well for the market and most likely explains the following charts...

 The current negative divergence in which Wall Street has had plenty of warning and an environment in which to sell into thanks to the Fed's POMO operations.

The above chart looks a little like the 2007 top. OF course the more drawn out nature of the current divergence is due to the Fed's extraordinary loose monetary policy, giving Wall Street plenty of time to prepare.

Follow Up on the Morganza Spillway

Last night I listed the energy companies that would likely be impacted by the opening of the Morganza spillway over the weekend. You may recall that there was a short term positive divergence throughout the sector (in both stocks effected and not effected by the opening of the spill way). Here are the stocks listed last night and what they look like this morning.

APA

 Heres APA's 1 min 3C chart this morning, it gapped lower only to head into positive territory for the day, since a negative divergence on the 1 min chart has set in and APA is back in the red.

COP-This one would have been effected either way, but it seems the opening of the spillway is more advantageous as their downstream production which would have been effected should the Morganza remained closed is about 247,000 barrels a day as compared to the site which could be effected by the opening which produces about 2600 barrels a day. Still, theres been a short term negative divergence and a slight pulback, although COP remains in the green.

CVX-

 CVX is right at the last level of support for the top. This intraday chart depicts 4 attempts in the last 3 days to break above that resistance. Each one has been met with a negative divergence sending CVX back below the important support line. Although CVX gapped lower on the open today, it did make another run above that support level, only to see another negative divergence turn it back down below the support level. This seems like a good candidate.

 PQ has seen a nice move off the positive divergence.

 PQ also happened to be one of the stronger positive divergences as you can see on this 10 min chart.

SFY

 SFY also gapped lower and headed into the green, most likely off that short term positive divergence. Right now, although its still in the green, there is a leading negative divergence.

SGY

 SGY, like most others, also opened lower and moved higher, again most likely off the short term positive divergence noted last night. Since a negative divergence has set in. This is also another that showed a more positive disposition then the rest of the group as you'll see below.

a 15 min 3 day positive divergence.