Today was a surprise as I expected the market to sell off hard and fast and to see strong positive accumulation by now, but that was more me putting the different pieces together then it was 3C telling me, "The market will fall hard and fast". Friday we expected Monday to be down and it was, Monday we had a signal that the market would rise so I and many of you covered a portion of our shorts and then entered them at higher pries, which made us some more money. However today was not on the radar. I think it's one of a couple of things: 1) Overnight the European action changed the value of the Euro dramatically from yesterday's close 2) It could have been part of Wall Street's tactics (tactics are a means to a strategy), 3) Saturday's post may have been right on and we may have seen a shift in what Wall Street was doing, perhaps the Fed hanged course over European events. Remember, Geithner was just over there and to tell them what they had to do? That could have been done by a press conference. In any case, 3C straightened out the day and gave the direction of the market and all was well again, however, my thoughts about the FOMC are not in alignment with the 3C signals. The weak part of Saturday's analysis was always the timing. The market would have to sell off VERY hard and we'd have to see very strong accumulation in 2.5 days, that hasn't happened.
If I had my way, the market would drop 6% tomorrow morning, I'd cover 3/4 of my short and let the rest rise having locked in a profit.
However, we are dealing with the FOMC, first what will they say? Second, what will the knee jerk reaction be? There's almost always a knee jerk reaction and it's almost always wrong. Third, what will the real reaction be?
We've had 2 Fed events in which we have been told by the analysts and the media, "If the Fed doesn't give us QE3 tomorrow, the market will fall 600 points". Both times the Fed gave us just about nothing and both times the market was fine. Actually the first time launched the first rally after the August decline! So lets say the Fed gives us substantially more then in the past 2 meetings, a trillion dollars of QE3, but the market expects 2 trillion, well, the market could sell-off. What if they Fed gives the $hypothetical $2 trillion the market wants, then the market say, "Oh boy, we got it, we must be in bigger trouble then we thought" and again the market sells off. Or the Fed says, "We're still watching the economy with a lot of tools" and that's it, who knows, maybe the market rallies. As you can see, besides point 1, 2, and 3, we have what drives the market, sentiment and that can be unpredictable. I find the best way to play the market is to do what smart money is doing and as of today, it looks like they are in distribution mode or just finished it and getting ready for a solid decline. This is part of my Saturday theory, the short interest is so high and the margin interest, a break to a new low and a rally after that (a head fake) would do the most damage and make Wall Street the most money. This may still happen.
Heck, one year we got the signal that smart money was running from the market at 12 p.m. right up to 2:15 on a FOMC announcement. My theory, someone leaked the embargoed announcement from the media to Wall Street so we may still get some signal that points to direction.
Beyond that, 3C looks very negative at this last cycle top and a new low makes sense with what 3C is showing. Last week this was about the average size top/distribution event within the last 6 weeks, as of this week, it s the largest we have seen since the market fell from the late July top.
I showed this chart earlier, but here it is again...
It seems Wall Street is getting ready for a new low which will lock in just about every trader in to a short position. Furthermore, the Bear Flag that was present last week has now taken the shape of a bearish ascending wedge, traders are keying off the price pattern. To take the market to new lows would set up a historic bear trap, then to lift the market from there as we have long term indications that may be the plan, would force a massive short squeeze as margin and short interest is at multi year highs according to the NYSE.
The Dollar-
As of this moment, the dollar is trading a bit weaker then the close on Euro strength.
Another correlation is between Copper and the market.
Here's a look at why I think we could see a huge short squeeze in the not too distant future...
A head fake by setting a new low and setting a bear trap would create a VERY strong short squeeze that would send the markets much higher, for a time at least. Nothing will stop the eventuality we face on the downside.
So why would I prefer to take substantial profits early tomorrow and leave only a fraction of my shorts in place? Quite simply said, the volatility around FOMC decisions. As I mentioned, the knee jerk reaction is almost always wrong. I would rather reposition myself after the volatility, but I will most likely hold if we do not get the chance to take the kind of downside profits 3C seems to be indicating are on their way, I'll be sure to let you know.
Tonight Republican leaders have sent a letter to Bernanke and the rest f the FOMC board members, you can find the text here.
If anything exiting pops up before turn in, I'll be sure to let you know.
