Today the market did or at least got
started doing exactly what we expected back on April 10th,
everything that has happened thus far happened according to our
analysis of April 10th and most of that was before 3C
started to confirm that analysis later that day. This is how
predictable Wall Street has become and it is simply because technical
traders are so predictable that Wall Street uses that against them.
The market was up pretty dar big today,
was it the falling yields in Spain overnight? Why didn't the miss in
Industrial production and the slide in housing starts create head
winds and send the market lower? Even the EUR/$USD pair wasn't as
supportive today as it was yesterday, yet we had a big move. For
those of you who remember, we saw the rotation/accumulation in Tech
yesterday and that was well before Yields in Spain fell and the
economic bad news didn't matter, Wall Street had already set up the
game board and they moved their pieces as they planned to. This is
why I have to chuckle when someone says, “The market was up because
of XYZ”. You know if the market was down today they would have
blamed Industrial production, people want reasons; it all comes back
to, “Do you want to be right or do you want to make money”,
because they are not one in the same.
How is it that on April 10th
we could have predicted where the market was going in the near term?
I don't have a crystal ball, it's just observation and evolving with
the market, being a lifelong student.
How did I know to take profits in USO
this a.m. As it slid the rest of the day? That was 3C, we have the
advantage of seeing what smart money is doing a lot of the times,
however if we wait for the reasons why, we miss the $$$. The rotation
in to tech was another big call and AAPL was another that we hit
right on the nose, again, Wall Street showed us something and 3C
picked up on it.
How did I know volatility would
increase weeks ago? That's just study of past charts and
understanding where the market is, if you caught any of the recent
market breadth posts, the market's position right now is clear as
day, it's in huge trouble. We can't account for what the F_E_D may or
may not do or whether the market will care, we can only make
decisions with what we know today and luckily the last month or so we
have had some really great signals to guide us and during this time
of extreme volatility and 2-3 day moves, we have had great success in
adapting to the environment and making 7%-200+% in 1-4 day quick
trades, while most everyone else chases each move up and down and is
stopped out on huge volatility moves like today.
This has to be one of the most
difficult markets I've seen in a long time, yet I've been getting
more emails then ever from members who have adjusted quickly and are
off making their own trades armed with a simple market update, I
couldn't ask for anything more and I'm invigorated to now that Wolf
members are not sheep, they care about learning, they learn, you
adapt and you make the trades your own. Think about the name of the
site and my intensions when purposely choosing that name. I have come
to see my members go from random luck in the market to making their
own purposeful and profitable trades, I can't take credit for that, I
can only thank the lord that I have such a fantastic group of traders
that really aren't looking for anything more than the chance to learn
and apply the concepts we unveil every day to their own trading. I
am so proud to be blessed with such incredible members and it makes
me want to work all the harder to make sure I don't let you down.
Just keep in mind through these
volatile days, that this is the biggest exercise in emotional game
playing that we have seen in a long long time. When you find you are
getting too close to getting caught up in those emotions, look at the
longer term charts, look at the breadth posts, keep your eye on the
ball. We knew what Wall Street was up to before it even began and it
was all based on creating an emotional response, that's why I said,
“There's no point in even running this bounce if it doesn't break
the resistance levels and create an emotional response from both the
bulls and the bears”. So don't get caught up in it, we knew why it
was going to happen before it even started, remember that and keep
your bearings.
Today (Tuesday) an oversold Europe
(that's hard to say-oversold when looking at the trend since
December) saw its best day in 5 months after turning down much
quicker than the US markets, why, because Spanish 10 year yields fell
below 6% for a day and they had a few auctions that were less than
the 3 year LTRO that came in better than expected? I don't think so,
how could 3C show us the bounce and rotation to tech a full day
before that happened? No, this is all shakeout and volatility that
is associated with market tops. As mentioned earlier, last week we
saw the biggest 2 day gain of all of 2012 and ended the week with the
largest weekly loss of all of 2012. I feel bad for those who are
still wondering where the market is going and those who chase
breakouts and breakdowns as they have been slaughtered in this
volatility, while we put on trades and close then 2 days later for
30% gains. The big picture though is what is really important and
using price strength for tactical trade entries. It's a lot of fun to
make 30 or 50% in a few days, it's even better when the market really
starts to trend and leave this choppy madness and just as we adjusted
to this madness, we will adjust to what the market throws at us next
and I think we all have a good idea of what that will be.
The trend in US economic data has
either changed for the worse or has just been uncovered for what it
really is as the early part of the year, the seasonal adjustment
fudge factor allowed the government and F_E_D to hide a lot.
Europe was out of the news for a while
giving the markets a break, I warned about 3 weeks ago that the EU
was about to come front and center again and weeks later Spain, the
one “S” in “PIIGS” saw their 10 year yields hit 6+% with
Italy not far behind. I'm not sure even the EU gets it, most US
pundits don't seem to understand that 6% is where debt is
unsustainable, it's the yield that caused Greece, Ireland and
Portugal all to seek bailouts. The problem is the EU doesn't have a
firewall or a rescue mechanism big enough to contain Spain. Once
Spain goes, the EU goes and we are already seeing contagion of the
core, France is no longer FrAaance, but rather FrAance. For Germany
the Eu only makes sense as a free trade zone, when it costs more to
keep the EU together than they make in exports, the EU will see
Germany quietly looking for the exits. Did anyone see the Reuters
piece today that said, "Italy
will delay by a year its current plan to balance its budget in 2013,
according to a draft forecasting document to be approved by the
cabinet on Wednesday." ? Or how about the Bank of Spain quietly
putting the bad news out on a risk on day that Spanish banks face a
$29.1 bn Euro capital shortfall? I wonder how Germany or rather
Germans feel about footing the bill for Spanish banks, because if
they don't do it now, it will just cost a lot more later? It's funny
how bad news gets buried on days like today where the headlines are
all about what AAPL did. I'd be willing to bet that more people are
aware that Spain had a few successful auctions today (of course all
shorter than the 3 year LTRO loans) than know about the Spanish
banking crisis emerging and today's news out of Spain.
China has been a known problem to us
way before it was a known problem to the media. Months ago we
speculated that the weakness in commodities could be traced straight
back to China, we received confirmation over the next two weeks on
sub “50” ISM prints in manufacturing and services. Why? China's
biggest trading partner happens to be none other than the EU. So
using simple common sense, where do you think China is heading?
EU banks have huge gaping holes in
their capital structure and even if there were a 3rd LTRO,
what assets do the banks have left to pledge and what happens when
the 3 year LTRO is over? Where do the banks get the money to repay
those loans as austerity drags their economies down further along
with continued contagion? The best is yet to come in the EU, not that
we can say the US is much better off after everything the F_E_D has
thrown out there in the way of liquidity. One of the stupidest things
I've heard Uncle Ben say was that QE created a “Wealth effect”
for Americans. What a laugh. How many unemployed or struggling
Americans are successfully speculating in the stock market? For once,
the “dumb money” is actually heading for the exits and has been
doing so for nearly a year. Insiders, those that know their company's
potential better than anyone have been selling at an increased pace
and why? Not because they think they will get more for their shares
next month than this month.
I don't speculate too much on what the
F_E_D may or may not do, but for those hoping for QE to save the day,
just look at oil prices during QE1/QE2 and look at the price of gas
and food inflation right now. It would seem to me that putting a
bunch of liquidity out in the market to bid up commodities (evil
speculators-created by the F_E_D) is probably counter productive and
I'd say a good argument could be made that QE did very little for
Americans and did a lot for bans that may have otherwise needed some
help.
Well on to today. As noted above, European equities had a good day, after all, Spain did sell some debt and what's better than being able to add more debt successfully to your already overburdened debt to GDP load?
The European top 100 bounced 2.12%, but still notably below the 50 day average that is turning down and hey, after retracing nearly all of 2012's gains, even the EU gets a bounce once in a while.
However, equities are just the market's way of taking money from average citizens, tif you want to know what is really going on, pay attention to the credit markets, as I have shown, they lead equities. EU credit markets were not as excited as EU stocks. European Credit went sideways with a drift downward, of course this is exactly what we expected to see, even though we are watching the US markets more specifically.
We knew Monday Tech was coming in to rotation today, the positive divergences were very clear, however what we have expected is distribution in to higher prices, here are just a few examples in the Tech arena...
I threw WMT in there just because it looks so ugly.
Monday I showed you the CONTEXT model and how it was supportive of further market gains, but warned, it would be flipping to a negative divergence soon, that happened today.
ES can certainly diverge more than this, but it has started.
Commodities leaked off during the afternoon...
All of this weakness was not $USD related as I have added the Euro as it is easier to see than the inverse $USD relationship. Even as the Euro bounced around 2 p.m., commodities continued to slide. The plain and simple fact is a risk on rally should see risk assets rally, including commodities. To give you an idea of how hollow this entire rally has been and how bad things are in China, take a look at commodity performance over a longer period.
Enough said... Well, maybe I should add, "Think China" and don't let those be good thoughts about their future.
While High Yield Corporate Credit still is hanging in there with the 15 min positive divergences...
On a daily chart, there's a big difference. All you really need to remember is that Credit leads equities and Credit has been selling off for some time making a recent new low. The other thing to remember is the concept of reversion to the mean. Credit should give us a clear signal when the bounce is truly dead.
The marke today was rallying a lot stronger than the implied $USD legacy arbitrage correlation, like I have shown you many times before, when Wall Street sets up a bounce, they will run it, FX correlations be damned, but the divergence is still a warning and if it gets worse, it's just another piece of the puzzle alerting us to the end of the move in stocks.
The $AUD has been an excellent leading indicator for the market as it is a carry trade currency.
Here are the last several bounces in the market, note the $AUD has alerted us by way of negative divergence to the reversals every time. Today as the SPX moved above the highs of 4/12, the $AUD did not, it made a lower high and thus has started another negative divergence just like the las three that have given us warning to the market's reversal from risk on to risk off.
Yields serve the same purpose for us as the $AUD and looked a whole lot like the $AUD.
Note where Yields are over the last several days in the red box, they have come unhinged from the SPX-another warning signal.
High Yield Credit (the same concepts apply to HY credit as HY corp. Credit) was supportive of the market this week, not today.
The funny thing is, for large institutional trades, HY Credit is extremely cheap, yet they aren't biting.
ES, the S&P E-mini futures are basically flat so far, but Europe opens in a few hours.
ES closed at 4 pm at $1385.75, it's roughly flat since the close.
As you know, 3C on ES is one of the very best intraday indicators, calling moves very well. The only time I have seen 3C in a persistent negative leading divergence in ES, has been during the last 3 bounce that all failed, this tells us that ALL price strength in ES is either being sold or shorted.
And there it is, I've only seen this a handful of times, the last three times were the last 3 failed bounces in the market.
As for the market, I've shown you where we are, we are seeing negative divergences wherever there is price strength. We still have 15 min charts that look decent, these can fail in a matter of hours so that's what I'll be watching. Other than that, in my opinion it's all about phasing in to shorts on price strength here. Breadth is worse now then it was at the October lows even though the market or the SPX is over 26% higher, once again I remind you of the concept of reversion to the mean.
We've had excellent results calling the moves in this very choppy, volatile market. I said on April 10th, from looking at market breadth, I believe this is the last bounce we will see before the market breaks. Where do I think we head, I think we take out the October lows. Over the long haul, I have maintained for some time that I believe we will be the first of any humans alive to witness a secular bear market in equities and ultimately, that is where the greatest opportunity is. Whoever figures out how to trade that market first, wins and looking at technical traders, they haven't adapted to the changes on Wall Street over the last decade, I don't think they'll adapt to a secular bear.
So tomorrow, and for however long it takes, we'll be looking for the definitive signal of the reversal of the bounce. I'm willing to start building short positions here as I started today with XOM. You must have wider stops initially, but I don't want to miss the first big crack down and my risk management is wide enough that I can ride out any short term draw down, in fact I'll just add if that is the case.
Enjoy this relative chaos while it lasts, the market is about to get a lot uglier which is fine with me, Fear is stronger than greed which means markets fall a lot faster and harder than they rise, don't believe me? Look at the 2002-2007 5 year bull market, the entire thing and then some was destroyed in 18 months with most of the damage in 8 months.
See you tomorrow!
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