Crucial Market Pivots

Not only is the stock market at a crucial area, but the Euro, which is almost synonymous with the market.

So far on the first day of the week, the WOWS model portfolio starts out in the top 10!

While I'd love to see a bounce for many of our members, I have held all of my short positions because of what 3C has been telling us, despite the rumors of this and that, EU rescue summits and the current 'Santa Claus Rally", only adding to a few on market strength. As I explained during the move higher which ertainly wasn't fun holding leverged shorts during, I have been in this situation so many times I can't count, when everything seems to suggest I should cover, exept 3C and I can't remember the last time it failed me on an important decision like this, even when I don't understand what the dynamics are. I've often found if you wait for the explanation of why 3C looks the way it does, or you wait for confirmation of the bad news, YOU MISSED THE MOVE. This happened when oil crashed in 2008 and 3C called the end of the 5+ year bull market in oil down to the week. I went short, I had email after email telling me that oil is going higher, peak oil, and even the very same week that I went short and put out the short call, Cramer was on TV telling all his viewers to buy the next oil inventories report if it disappoints as a CONTRARIAN TRADE because according to Cramer, oil was going higher! This is surreal on a couple of levels, millions of Cramers viewers all doing the same thing is a contrarian trade? And no, I couldn't tell my readers why oil should head lower, why this was a top, all  could do was show them the 3C charts.

Here is what happened to oil the very same week I posted the oil bubble is about to pop and Cramer said it was going higher (I suspect to give his buddies at GS a herd full of sheep willing to buy a position they desperately needed demand to get out of).

 This was the week of the USO short, although 3C had been warning for over a month, the same week Cramer came out with his "Contrarian trade", which still gives me a chuckle (how millions of viewers all doing the same thing can be contrarian!).

 Here's what happened to oil after, an 80% decline, nearly parabolic!

 Here was USO at the time, you can see the daily negative divergence, but what was convincing was the intraday timeframes lining up.

AMR-American Airlines was another controversial all that stands out (based on how many reader emails I received ). I had said AMR was under accumulation and would pop soon, why? I had no idea beyond what 3C had been saying and as I recall, airlines weren't popular at the time as you can see by the preceding decline.

 The result, over the next few months a 200% advance.

 This was the daily positive divergence, although the intraday charts made the case more compelling, 3C even gave us the exit signal.

DXY-The Dollar Index was a tough call... There was no reason for the dollar to go up, it had been in decline for 9 months, 3C saw something that couldn't be explained.

 The result, a huge 20% rally for the Dollar Index (this may not seem like a lot compared to equities, but for the dollar a 20% move was huge).

Here was the 3C signal. A few months later, news broke that the US was going to pursue a strong dollar policy and a few other news items that explained the move came out. The point is, insiders on Wall Street know this stuff way before we do. If you have ever seen my year 2000 charts showing huge accumulation for homebuilders while tech was all the rage, you would understand that Wall Street is years ahead of the curve on occasion. Any way, the point being, 3C has brought me through some tough areas, even when I didn't understand what could possibly move the market, later it emerged, but later would have been too late, this is why I've held my shorts the last few months.

In any case, the point being, the FX and Equity market are at a critical pivot.

 Today toward the EOD, the Euro/USD broke the important $1.30 level, it tried to test it and failed, since this capture it had 1 more failed test then broke above $1.30 only to fail again.

 On a daily chart, the last level of support before $1.30 (which has a huge allotment of long contracts), bounced 1x and then failed, $1.30 failed soon after. Currently in blue we have something that looks like a bear flag, this could be used as a head fake to break to the upside, but that is assuming that the manipulators haven't lost control of the market, a situation in which the fundamentals overwhelm their ability to run short term manipulations as every time they try, sellers overwhelm the effort.

Here's a longer look at the  Euro, this is important support, if broken it will start or already has started a wave of liquidations of the $1.30 long contracts.

 Longer term we have lower lows and lower highs in the EUR/$USD which is better known as a downtrend, this is why a failure of $1.30 is so important as it will likely make a new leg lower and continue the downtrend.

Here's 3C for the Euro

 Compare this daily 3C chart to the one above, it is the same price pattern with 3C negative divergences at the tops and a positive divergence at one of the lows.

On an hourly basis, 3C has shown distribution in the Euro and is now leading negative making a new low.

Here's the critical SPY/S&P-500 hart, ready to break a trendline that happens to fall at the same area as the 100-day moving average and more importantly the psychologically important $1200/$120 level.

Later I'll try to put up the chart of 2008 in which this entire last few months has looks almost exactly the same, it was the model and the basis for many of our ideas about what the market would do and thus far has been incredibly accurate. History may not repeat, but it does rhythm , especially in the market where human emotions which never change are responsible for the bigger price action trend.

Good for a laugh while exemplifying the joke that is the EU

Earlier in the day I mentioned how the UK is likely (now definitely) not going to provide the $30.9 bn in aid to the IMF so the IMF can turn around and bailout the very same countries providing the aid, but if that were not surreal enough, get this...

Italy is probably the one PIIGS that can bring the entire system down, they have huge debt they need to rollover and can't seem to do that without paying an unsustainable 6-7% on 10-year BTPs, translation, Italy needs a bailout.

We already knew that Germany was providing the most to the IMF, $41.5 bn and France, which should be downgraded any minute now is providing $31.4 bn, the UK for the second time since December 9th has given the EU the shaft and won't commit to the $30.9 bn in IMF aid which is desperately needed to bail out Italy, but what we didn't know until now is that Italy will be contributing $23.5 bn in IMF aid to bail out Italy!!!

Since the day the EU had the first Sunday summit after the G-20 gave them an ultimatum, it has been an absolute circus and thus anyone and everyone who was committed to helping (mainly China and the other BRICS) is now running for their lives away from any bail out as each summit, each press conference does nothing more then to revel how absolutely inept the EU policy makers are.

I have long thought, "They know something we don't and that is why this looks ridiculous, but they have something up their sleeve", each time I have been proven wrong for giving these policy makers the benefit of the doubt; but how in the world can one give them the benefit of the doubt when Italy is now contributing $23.5 bn to its own bail out?

Seriously, I feel like I'm missing something here, can they be that inept? Credit and now the formerly sugar rush addicted market seem to agree, "Yes, they really are that inept".

Don't be surprised to hear that Germany has been put on negative credit watch just for advocating and participating in something this.... (you fill in the adjective).

BAC Keeping the whole market under pressure

Every day there's a fulcrum stock, today we are seeing a huge fulcrum in BAC, which has the entire market under pressure. Earlier today I said the line in the sand for BAC is $5.00 and that it is a major hedge fund holding. Well, see what 1 stock can do to not only an Industry group, but the entire market.

 BAC breaks $5.00 and instantly volume spikes on stop-loss orders. NEVER put your stop-loss at a whole number, it's just way too obvious and way to easy for the middlemen to run you out.


 Look what it did to financials at the very same time...

And the 22% financial weighted S&P-500....

I would dare to guess that BAC is being moved off hedge funds positions so they don't look like morons with the next quarter's prospectus. Warren must be VERY happy he capitulated to Obama's request.

In any case, it probably doesn't need to be said, but funds will be looking for ANY strength in BAC to unload before the 27th of this month.

VALE Short Trade Idea Follow Up

VALE is a trade I like for 2 reasons, it's a play on weak commodities and from what I understand, 60% of their revenue comes from China, it's also a bit of an Emerging Markets play.

 Here's a weekly chart of VALE, see the top and the break, this has already done the volatility move after the break, so it's in a much better position for a trending trade.

 It's been heading down since it was featured here, but also kind of in a bullish descending wedge, there may be a false break below the wedge if enough people see it, but in any case, the rule of thumb is "wedges retrace their base", so that unfilled gap in yellow does not look likely to be filled, meaning it would be a break away gap and add an extra element of bearishness to this trade. So if we get a bounce here, which would set up a nice short for those who are interested or an add to for those who are in, the target area would be around $22.50-$23 or so, I can update you if we reach that level as far as 3C charts and entries.

 The 5 min chart has shown a positive divergence right at the wedge, so that makes some sense.

Here's the bigger picture for anyone considering or preferring trending trades (that would be me). 3C went negative at the 2007/2008 top and VALE fell apart, it also went negative at the 2010 top and has fallen apart, but the easy money is in the snowball decline like in 2008 which VALE has not entered yet, so in my opinion, an entry on a little strength sets VALE up as a great trending short sale candidate.

If you haven't already, I have a link from an old article I wrote at my free site, Trade-Guild about how you can make more then 100% on a short as people are not generally aware that you can make more then 100% on a short. Here's the link, it's a bit old, but still relevant.

Making More Then 100% on a Short

Trade Idea Follow Up: AMZN

 Here's the daily on AMZN, the area in white is ugly and I believe I mentioned AMZN is a candidate for a phased in short position-THIS IS NOT DOLLAR COST AVERAGING!  DCA is a losing strategy of adding to a losing trade, phasing in is a plan that you make BEFORE you enter the trade. The reason I would consider AMZN for a phased entry is because it is in such a weak position right now, I'm not comfortable saying, "Wait for a bounce". There are a lot of ways of doing this, but an east example would be to figure your stop and how many shares you can afford near that stop (the 2% rule/position sizing) and take maybe 1/3 of a position here, add 1/3 when/if AMZN bounces and the bounce is under distribution meaning the bounce looks like it is nearly over. Add the final 1/3rd when you have downside confirmation , like when AMZN breaks below long term support around the $175 area. With this kind of entry you have a position in case it just breaks down, but you also have allowed enough room in your risk management to add to the position at better prices and you aren't at risk of a large loss as you have already made risk management plans based on higher levels (bounce levels).
Ultimately you are leaving room to get better positioning and finally you are entering the full position when you have confirmation on your side. There's plenty of room below so trying to time the top of a bounce is just ego, it's not good trading strategy.

 The daily 3C chart of AMZN shows distribution in the top and from there, AMZN broke down below support and saw the typical bounce that we often see on an important break of support. It remains in a leading negative position which is deadly for a stock when this happens on a daily chart, that's a lot of distribution which includes institutional short selling.

 The 2 min chart doesn't show a very strong likelihood of a bounce.

 The 5 min chart rolled over on the bounce after the break of support on a negative divergence, currently there is a small positive , relative divergence in a flat area of trade, so this is the best case bounce scenario.

The two areas I would be paying attention to on any bounce would be the $190's area where there is a small gap and then the $200 area which would be a psychological area as it is a whole number and would also leave open the possibility of a head fake. If there were a head fake around that area, I would consider that a strong short signal and maybe even enter the remaining 2/3rds of a phased entry right there as a head fake is almost always the last thing we see before a stock makes a major reversal.

So we want these trades to come to us, not to chase them and be right on direction, but get stopped out on a bad entry.

Keep AMZN on your radar. I'm nearly sure the holiday season for retail including Black Friday is going t be a big disappointment.

Market Update

 DIA 1 min leading positive

 2 min also leading

 5 min DIA is about in line, seeming evidence of a small bounce, not a Santa rally.

 QQQ 1 min looks a lot stronger

 so do the 2 and 5 min above and below.

 The SPY 1 min had a small positive I said would be enough to get it to consolidate intraday, that has strengthened

 It has even bled in to the 2 min which is leading.

 Financials are seeing a little intraday accumulation here

 The 2 min chart agrees.

 And the 5 min is seeing some too, not along the lines of a Santa Rally though.

 XLK-Tech is looking stronger like the QQQ

The 5 min has had a nice flat price range, this is often where accumulation occurs and a nice 5 min divergence.

Credit/Risk Indicators

Here's the Risk/credit basket

 Commodities intraday performed BETTER at that second bounce attempt this morning, remember in the last post I showed you a 3C chart where the second bounce had a better looking 3C chart, here's the answer as to why. Right now commodities intraday are at parity with the S&P. Remember the market almost ALWAYS has the heaviest gravitational pull on any stock and second the Industry group, that is why I say most traders have it all backwards as they look for stock picks, the first thing you should be looking at is the market, then the industry groups, that will tell you where the opportunities are and then look for specific stocks. In any case since August that has been very little rotation in industry groups, I said when we get closer to a trend we will start to see rotation and that is why we don't have such a strong emphasis on market specific trades, like trading the SPY long or short, but are now looking more specifically at stocks as rotation is starting to emerge again, rather then just everything moving altogether. In August-October, you could pick nearly any ETF, the SPY, QQQ, DIA, Financials, etc and they would all move together, that is starting to break up and rotation is emerging. You'll see an example of this below for today.

 Longer term as you have seen many times, commodities are severely dislocated from equities and this was our first hint that something was amiss in China.

 Short term today, high yield is outperforming the S&P a bit, which would still tend to suggest that a bounce is brewing, it's not a huge move, but it didn't sell off with the market today either.

 Longer term there is a severe dislocation, and you an see what happens when credit is not following an equities risk on rally to the left in the red box, the market drops pretty fast as credit leads.

 Yields look to be in sync today with the S&P, stocks gravitate toward yields.

 However over the last week or so, while the market has been somewhat lateral, yields have continued selling off.

 Longer term, big trouble in little China and China and the S&P. Look at the former dislocations to the left and what the green S&P did.

 The bigger picture between the Euro and the S&P, there should typically be nearly a 1.0 correlation (tick for tick) between the two, the Euro has been telegraphing weakness, leading to the break of $1.30, as far as the HFTs go, stocks are going to look expensive to the algos with a chart like this, arbitrage should send the market lower.

 The Euro recently, espeially today, has held up better then equities, there's a reason for this.

 Take a look at Bank of America, firstly it way underperformed the S&P during the Helicopter Ben phase of the market, formed a top and broke below it, because of liquidity, this is a stock in nearly every hedge fund's portfolio. Remember Warren Buffet's conversation with Obama and the news said it was because Warren was giving Obama economic advice. The next trading day Buffet bought $5 billion in BAC and BAC said they didn't need it. What do you think that conversation was REALLY about, especially given Warren's distaste in banking stocks? In any case, a few months pass by and all of the sudden that money that BAC didn't need, but welcomed, wasn't enough and they planned to raise more through an offering. Bottom line, BAC is in trouble and is a prime contender for window dressing (The Art of Looking Smart) as funds likely will not want BAC on their prospectus. Five dollars is the line in the sand for BAC. BAC is in trouble today and I would guess we are seeing window dressing in financials like BAC today, the sector is down and even decent financial stocks will feel the gravitational pul of a weak financial sector today.

 Here's BAC closer on a daily chart, remember that October rally? Look at the price formation in BAC, anyone who has studies the basic technical price formations knows this is a very bearish consolidation and ironically, guess where the break down point is? $5.00!

 I often warn that after the initial break from a top that we see volatility bounces and in this case, it would be a 'Kiss the top goodbye", that's exactly what XLF (financials) have done. I suspect there was a fair amount of institutional selling during the bounce, as a matter of fact we have seen it on 3C charts.

 As for the daily action, the financial heavy S&P is faring worse then the tech heavy NASDAQ, XLF has some gap support nearby, when that breaks, financials are done.

Here's my sector rotation map on a 1 min chart, the white trendline is today's open, look at financials in green at the bottom. This chart shows each Industry groups's relative performance vs. the S&P. Note Tech looks better since the opening-this is the rotation I referred to earlier.

Below is XLK (Technology)

 Note Tech hasn't sold off as bad as Financials or even the S&P and is also sitting right at some gap support. This means tech is a better place to be looking to add to shorts today as we want to add on some price strength. Take a look at AAPL below, it's actually green on the day and this is one that we have been watching since last week for a place to add.

 I could see AAPL moving to the $392 area, maybe even a head fake move above that, this is why I prefer a phased in entry approach right now rather then all at once, by the way, that's the same way Wall Street enters and exits trades as we have seen thousands of times, albeit for different reasons.

 HYG-High Yield Corporates are also showing relative strength today, which also suggests a bounce in the near/short term.

This is Financial momentum , it sold off at the second a.m. bounce attempt and is why the S&P which is heavier in financials then the NASDAQ is performing worse today. For the reason, just go back and look at the Financial industry group today.

 Over the last week or so, financials have seen a lot of pressure, which fits with what I said above about financials rallying to kiss the top goodbye.

Longer term, they are in ever increasing trouble and leading negative vs the S&P