This market is what you call a meat grinder, unless you are nimble and quick, positions long and short are just being decimated, that is when it really pays off to step back from the noise and look at the trend. There are a lot of great examples of volatility, manipulation, head fakes and just general chaos that the market intentionally puts in your way. As emotional creatures, hours can influence our outlook, as traders we need to try to step away from emotion and sort out what is really happening and how we can use that to our advantage, the best way I know how to do that is to step back from the intraday and day to day trade and emotion and determine what is really happening. For example, last night's Market Breadth charts make the situation very clear.
BIDU shows a clear trend from 2009 through mid-2011, but by 2011 the volatility becomes obvious and the trend is no longer clean and stable, this is almost always a sign of a top. The large triangle that developed soon after is another sign. The fading volume as BIDU moved higher is one of the greatest central bank manipulations of the market I have ever seen. Without QE1/2 BIDU would probably be trading in the $25-$50 area. The lack of volume cannot be ignored when looking at the big picture, this is a clear sign traders are not willing to pay up for BIDU when they know it's a house of cards.
Money Stream confirms the trend up , but goes negative in 2011 and just gets worse from there.
As has been the case 80+% of the time, before any reversal, whether a 1 min chart or a 5 day chart, there's almost always a head fake move to throw traders off, to trap traders and add extra momentum to the reversal. In yellow this is the almost certain area of a head fake move. For a break out from such a big triangle, BIDU has gone nowhere since.
Here's an example of a head fake move on a 30 min chart, there's a clear triangle which is taken by technical traders to be a continuation pattern, they would expect a break to the downside, instead BIDU breaks to the upside in a head fake move, then sucks all the longs who bought the breakout down, likely many being stopped out, contributing to the downward momentum. Imagine the momentum on a daily chart for the hardcore longs.
Like many Tech stocks, the damage was done near the open, the momentum waned from there throughout the rest of the day. We have a "U" shape and a relatively flat area in BIDU through the afternoon.
When looking at the big picture if you want to step back and avoid all the volatility (although there' money to be made in this volatility), I want to make sure I'm short BIDU as it breaks below the $144 area and especially in to and below the triangle in the $130's. We always try for the best entry with the highest probabilities and last risk, but if I were a large hedge fund manager who had to put a position together in BIDU (which could take weeks), I'd essentially just short every day BIDU was up and keep accumulating the short position. As we trade in much smaller size, we can be more selective and typically have to be more selective as our funds under management and transaction costs can be prohibitive to such a strategy.
3C 60 min is negative on the BIDU breakout-tht is the point of 3C, to contradict price with solid signals. Since the breakout of the large triangle, BIDU has done nothing but chop. A real breakout would have seen BIDU making a new leg up long ago.
Intraday today the 1 min chart in BIDU looks like weakness was bought, a lot of the tech stocks look like that today. It is one of those things in the market that we don't easily accept emotionally, buying weakness and selling strength, but that is the way of the market.
The 15 min chart is in line, right now after having seen a positive and then negative divergence, this would suggest to me a short move in BIDU up, followed by continued downside until it breaks those support levels. It is these short term moves where we want to try to pick a position that is not only low risk by shorting BIDU at the highest point possible, but also doing it in a timely manner so we don't sit through a month of chop. The market is clearly moving toward falling off the edge of the cliff. Last week when the bounce started shaping up I thought two things, 1) incredible volatility which should translate in to very impressive price moves (such as last week's 2 day move up being the biggest 2 day move of all of 2012) and #2), this is likely the last bounce before the market snaps. There's just too much damage done to the underlying trade, to risk assets and credit, to market breadth and now the negative news cycle coming back in to play and Europe looking at a potential Spanish default which could be game over for the EU.
While I and many of you have used the volatility to great advantage using options to get extra leverage on otherwise very quick moves, the big picture is starting to move me away from options and I want to look at pure equity positions as expiration and options decay is not something I want to deal with when the market moves out of all of this sideways volatility and in to a trend.
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