The Knee Jerk Effect

Remember I've been warning about the knee jerk effect when it comes to F_O_M_C policy statements, all the bulls of Wednesday, where were they today?

Remember late last week we saw financials starting to go out of rotation and thus kick one of the 3 major legs of the market from under it? Well Financials had the worst day of the year 2 days in a row. Also out of rotation today were the other 2 legs, Tech and Energy. Utilities were the best performing in my sector rotation which speaks to a defensive market.

Treasuries performed relatively well, especially into the later part of the day, again, defensive trade.

The Dow was the best relative performing index on the day at a -.18% loss, even though 22 of the 30 closed down with the 23rd closing at 0%. Wouldn't you know it, CAT the second most weighted stock in the composite was one of two components closing up more then 1%, the other was the 6th heaviest weighted stock, 3M. Once again, defensive trade.

As was expected, the Euro did break that late day support it found, this is not constructive for a marker that has been virtually in lockstep with the Euro over the last week.

There's one more support area at $1.3044 then it's $1.30 and we're back off to the races.

As mentioned earlier, Portuguese 10-year yields hit 15%, unreal! However, after the Merkel announcement about considering making it illegal to sell bonds that have had rating's cuts and after seeing the ECB try to weasel out of taking a haircut on Greece debt, the minute Portugal said it may need another bailout, the first thing bond traders most likely thought of is the ECB/Merkel stance and the breakdown of equal protection for bond holders and Portugal is evidence of what I said would happen after Merkel made that statement. The bottom line is the ECB will have to step up Portuguese bond buying, which means when a debt restructuring comes, the private sector haircut will be exponentially larger in relationship to how much the ECB holds. The EU and world better pray that Greece doesn't stuff retroactive collective action clauses down bond holders throats with a back door exit for the ECB. And in the best case scenario, if the ECB does take a haircut with everyone else, wait for every EU Central Bank to take some sort of action (legal if possible as they will be stuck with the losses as well) against the ECB for violating the Lisbon Treaty. The EU has been in a damned if you do, damned if you don't situation from the start, they just keep adding more reasons to be damned.

SLV Update

With the dollar at a loss of about .09% and the Euro at a similar loss of .08%, I thought since there's no
FX correlation moving silver today and since the longer term 3C charts have had time to catch up to yesterday's move, "I wonder what SLV looks like today?"

 SLV is up .80% from a gap up, but has traded sideways today, not adding to the gains. The 1 min chart looks like there's been some selling going on.

 Here we see some positive divergences moving SLV higher and a negative leading 2 min divergence, agin suggesting some selling.

 For all intents and purposes, we can say the 5 min chart has confirmed the move up, today there's a pretty dramatic shift in 3C to a leading negative stance.

 The 15 min chart has also gone negative

 As has the 30 min chart (selling in to strength?)

The 60 min chart has been in line with the trend, is it now just putting in it's first real divergence? If the lower timeframes continue to deteriorate, SLV could be in for a rocky road.

Some Notable Lows

 AAPL just hit new lows on the day, this is the most interesting to me as AAPL long irk me. I love Apple products, it's the only computer I will ever use again and I don't mind trading AAPL long, but I will also trade it short. Many APPL longs don't just love their products, but made the mistake of falling in love with the stock. While AAPL is near new highs, it's always a mistake to fall in love with a stock, love you spouse, love your dog, love Apple products, but don't fall in love with a stock. Where are the AAPL longs today to buy this discount/sale?

 GOOG hits new lows

 Energy at new lows

 Financials at new lows

Technology at new lows, I could go on, but there's a definitive change in late day trade.

Some late day volatility

 The Euro has found some temporary support, it could certainly bounce off this level as is often the case once important support is broken.

 This is a closer view and there's the obvious market correlation, meaning the market could see an EOD bounce as well, it is FX based, that's it.

 The SPY has lost downside momentum and is near a support level as are several of the other averages.

 The 1 min hart shows a small positive divergence, so a bounce is likely through the close,  unless the Euro just slices through the current support level.

 The longer term 5 min chart has and continues to show further deterioration, this is a trend beyond an intraday bounce.

And 3C on ES has been confirming the downtrend all day

Bear Market Counter Trend Rallies

During the bear market after the 1929 crash in the Dow, we had at least 5 counter-trend rallies, the first is always the strongest as it seeks to cause doubt, sucker in longs, squeeze out shorts and make the most amount of people wrong at any one time. They blur the line between a bull and bear market and cause uncertainty, they are designed to do that and to do that, they have to be convincing.

In a little piece I lifted from another site, the bear market counter trend rally is addressed.

"Roughly a century ago, a notorious Chicago con man was asked who his favorite victims were.

 

He named a particular professional group with a reputation for being austere, conservative and cautious.

 

"Why?" asked the interviewer.

 

"Because they think they're so damn smart," came the reply.

 

In a bear market, big countertrend rallies are like that con man. They can falsely assure even the most cautious individual. Many investors want to believe. And many succumb.

 

"By the time [particular] rallies in bear markets end, the pessimism that coincided with the first wave lows is reversed to optimism. Investors become convinced that the former rally phase is back on track and the market is heading to new highs."

 

After the Dow Industrials rallied 330 points on Oct. 10, market observers on CNBC were saying:

 

"...the market could potentially explode [to the upside]"

 

"'Hope should keep the market afloat and that suggests a risk-on rally.'"

One of the most notorious countertrend rallies occurred after the 1929 market crash.

After the initial crash, the market rallied 44% only to carry on to make a 90% decline. Fortune were made and lost, one of the most notorious was the fortune made by Jesse Livermore. Jesse came from humble beginnings but during the 1929 bear market had made over $100 million dollars (in 1929) selling the market short and holding to his convictions. JP Morgan (the man) had to step in to avert a total financial system collapse as well as the collapse of the NYSE, but he could only do it after he pleaded with Livermore to cover his shorts.

Most of what you see in the market is a deception, that's the simple truth.

Here is a chart I've posted a lot lately, hopefully it helps you keep your eye on the forest.

 The bear market rally in 2008, which is very similar to market conditions since August of 2011 through the present.

This is today's action, a lot different then yesterday's F_O_M_C knee jerk reaction that I warned about.

Is this the absolute top? Of course only history can answer that question, but if you ask me if this has been a bear market counter trend rally, I would say YES and that is not a gut feeling, it is based on hundreds of observations.

Nobody ever said trading was easy and this has been one of the most insane markets anyone can remember, however as I said in a 5 part video series I recorded in 2007 when CNB was still screaming "DOW 20,000!", this is likely going to be one of the worst bear markets the world has ever witnessed and in that there is great opportunity. 

If making money in the market was easy, there would be no Wall Street firms raking in hundreds of billions of dollars and producing no tangible product. It's a zero sum game.

FAZ Update

 FAZ and Financials in general have been posted about a lot recently as Financials have finally started moving out of rotation, you could say the same of Technology as well. The long term chart pattern here is very bullish, a descending wedge. The rule of thumb is, "Wedges retrace their base".

 It looks like while financials DID NOT see confirmation yesterday, FAZ was accumulated on the intraday lows and throughout the rest of the day as it is in a leading positive position.

 Here's the same on FAZ's 2 min chart

 As well as the 5 min chart

 It is leading positive on the 15 min chart

 As well as the 30 min chart. Whatever has been going on here (and that seems obvious), it's been going on for awhile and in large proportions. Like I said yesterday, while 3C can show us underlying trade, it can't tell us why, but we usually find out the reasons later". The positive bias of these charts are only equaled by the negative bias in the market charts I have been warning about.

While we're looking at ETF's, here's the same long term view in TZA as compared to the Russell 2000, not a perfect ETF for the R2k, but they do have small caps in common.

 The same bullish descending wedge with 3C leading on a 30 min chart as well as a 60 min chart below.

Below is the IWM/Russell 2000 on a 30 min chart, I haven't marked the divergence because it is plain to see. The area in which I have been saying, "The market looks very dangerous here, like a thin ledge" should be obvious on the price chart as well. Interestingly, it looks very much like a bearish ascending wedge, the mirror opposite of TZA.

And below the 60 min IWM chart.

FX

I set an alert on the Euro that just went off, this move will not be helpful for market bulls.

Government Pensioners Can Breath Easy For Another 7-8 Months

The Treasury had blown through the debt ceiling weeks ago and the Treasury has been robbing, I mean borrowing, or rather not contributing to the government pension system as a work around. That just ended in the Senate where a party line vote allowed the debt ceiling to be raised to $16.4 trillion dollars, which is about $1 trillion in debt capacity. The average debt per month has been running around $125 billion so we get to watch Congress fight over this all over again just around the time of the election.

This isn't really news because had the Republican led initiative to block the latest tranche actually passed the Senate, Obama would just have vetoed it, it's all for show leading up yo November.

PLCE Swing Short Idea

PLCE has a few features that you don't see very often and thus caught my attention.

 The first of which is an Island top, which by its nature means there's a very bearish breakaway gap that hasn't been filled, both are rare to see in the market recently. A common occurrence on a strong breakaway gap like the one that created this island top is heavy volume, which you can see i also present. PLCN has bounced in a bear pennant and today has so far put in a bearish engulfing candle which is breaking just below the pennant's support level. Island tops make for interesting shorts because of their huge amount of overhead resistance. Everyone who bought in the Island area and are still holding will eventually add supply as the market moves lower, the reverse of a short squeeze. A stop could be placed just above the consolidation pattern around $52-ish (not at $52 exactly).

 The longer term charts show the island top falling apart with distribution.

 As well as the pennant now seeing the same.

 The daily Trend Channel has held the entire down trend including the recent consolidation, so it would be my choice for a stop in a position trade, again the stop level is right around $52, in this case slightly below.

My custom X-over screen used to prevent false crossover signals is also giving a short signal with the first pullback to the 10-day average and the second to the 22 day average as is normal.

I would certainly consider PLCN as a short candidate, especially on a close below the pennant around $50.30.

THE PARABOLIC MOVE / SPY UPDATE

This is what I was talking about yesterday, these vertical, parabolic moves; I find them to be unreliable or perhaps you could say reliable in that they usually end with a similar decline.

 Throughout the entire day 3C refused to move with price, thereby confirming the move, we have seen 3C confirm price in several stocks we have been watching like UNG and URRE, but not in the market averages. The benefit of the short term charts is that they have a fast reaction and can confirm a move or call it out as a likely problematic move. The parabolic nature of yesterday's move alone was bothersome. We'll see if we get the same kind of downside resolution as we saw to the upside yesterday, but generally speaking, these moves whether on intraday charts, daily charts or even weekly charts are unreliable and usually a warning.

The 5 min 3C chart didn't confirm either and is now moving to new leading lows.

EIA Nat Gas Report / UNG

Released on 1/26/2012 10:30:00 AM For wk1/20, 2012

Prior Actual Weekly Change -87 bcf -192 bcf

Natural gas had a draw of 192 bcf on consensus of 180 bcf.

 15 min UNG shows a small negative divergence, along the lines of today's pullback.

 The longer term 60 min trend is unaffected and remains positive.

Thus far the 10-day average is acting as support, I'll be watching for any accumulation in to the dip.

New Home Sales Miss Big

Prior	Consensus	Consensus Range	Actual
New Home Sales - Level - SAAR	315 K	320 K	309 K to 326 K	307 K

Among the ugly details, new homes in the south have swung lower, this is the most important region for new home sales. There is now 6.1 months of supply, making this the first time in 6 months that this measure hasn't improved. Median Home Price also fell -2.5% to $210,300, on a year on year basis, this is a 12.8% decline, the worst reading since the "recovery". Lower prices as well as lower mortgage rates have failed to keep this report's head above water.

SPY

 While there are several ways to draw the trend lines on the above chart, the general theme is a thinner and thinner market, this is the area I have been saying, "This area looks very dangerous, like your walking out on an ever thinning ledge" or I have described it as "Picking up coins in front of a steam roller".

Are we seeing the F_E_D knee jerk reaction realign?

BDI New Lows

I see some larger sites are picking up on the Baltic Dry Index which we have been watching for several weeks as it continues to make new lows. I believe the last time I posted the BDI it was at 1014 making new lows going back to 1/27/2009.

Today we are at 784, a new low back to 12/24/2008!

This is an excellent measure of true economic demand and it is at levels when last seen, the U.S. was in a recession.

URRE Follow Up

 This is the accumulation we wanted to see in to the pullback.

 This is what trend confirmation looks like, something we haven't seen in the broad market.

On a daily chart, these two accumulation areas are likely 1 larger base.

I would think a breakout above the trendline will set URRE on a path to mark up, that's the easy money.