Absolutely Whacky Day

Today's underlying action is way more whacky than price itself, so much so this update is going to have to be done in multiple parts.

First lets go back to yesterday morning's "Head Fake" Post

Even though yesterday was a pretty bullish day with many of the averages up over 2%, I had a pretty good idea that there would be some craziness or as I put it, "game playing". My intention in posting this was simple, "My hope is that this post will show you how Wall Street operates, what we can expect moving forward and kind of anchor expectations so you can make plans" . In other words, give you some idea of what was likely to occur so you weren't thrown for a loop or surprised. This is all pretty much based on observations of the market, how traders think, how Smart money uses their assumptions against them.

I gave several examples of this behavior in GLD and BIDU and then posted this chart with the following commentary below it.

"Here are the areas where we may see some action, the apex of the bear pennant is thought to be resistance, bears will look for a failure at that point, any backing off from that area and shorts will see it as a shorting opportunity, the next area they'll be watching is the major trendline resistance, this is the last stand for bears, we may see some game playing in that area, but as soon as that area is broken, the short squeeze should be in full effect."


Today's market...

This chart shows a short squeeze move yesterday as the bear pennant's validity was questioned. The bear pennant broke down as traders expected, what they didn't expect was a move higher, they expected the next leg lower. The second area I highlighted yesterday is exactly where price ended up today. The thinking goes like this: 1) Almost EVERY TIME important support is broken (as it was above when prices broke below the trendline), there's almost ALWAYS a volatility shakeout. The more bearish the crowd is and the more obvious the set up is, the more likely this shakeout which typically moves pretty far above major resistance before continuing lower.


We've had a pretty good move up off the 6/4 lows, over 3% in 2 days, but it doesn't seem to be on par with the size of the divergence in the market.

This is the SPY 30 min, for newer members this is a significant timeframe and the size of the divergence is significant. Just looking at the size of the negative divergence on May 1 and how much downside damage that did and comparing with the size of this divergence, a 2 day move doesn't seem like that's the end of the move. There's a question still about the positive divergence from the 7th to the 15th in some cases, the entire pennant area is in a leading positive, the recent lows have a large positive and the current divergence is at a new leading high. If Wall Street simply wanted to shakeout the pennant, they could have done that without the positive divergences before June started. They could have done that with accumulation from May 31-6/4 (3 days) and all they'd need to do is go out to a 15 min chart positive divergence. So the size is important here.


The fact we saw "game playing" right where it was expected is something that makes me feel a bit more comfortable that we are on the right track. However there were signals all over the place today so I'm still putting a lot together and I'll post it in digestible pieces. 


The point of a failure near resistance like we saw today is to feed the expectations traders already have, to get them to commit to shorting the market as that is eventually used against them as a primer in a short squeeze, that's what I was trying to pass on to you yesterday in the post above.


From what I see from today, my guess is that we will see downside tomorrow, which would further lock in shorts, but we need to keep an eye on as much as possible to make sure we are in line with the path of highest probabilities.


More coming...