Just 2 charts for now

Although I'll be looking very closely at the market this weekend to try to coax some secrets out of it, I'm first going to take the night off and clear my head, erase any biases, get grounded and look at the market with a fresh pair of eyes. I think it's important to step back from the market and clear your head.

I spent many years in meditation and boy was I surprised. I thought meditation was supposed to be relaxing, maybe some forms are, but the kind I was trained in, translated in English as "Just Sitting" was anything but relaxing. Try to sit perfectly still focussing on nothing but good posture for 5 mins, just 5 mins. While everyone's journey is their own, I can tell you a few things you'll probably experience:

1)The list-things on your mind, things you need to do, etc-CORRECT, go back to focussing on posture.

2) The song, just pray it's not "Inagodavida"- CORRECT, back to posture

3) The Itch, a phantom itch that just grows more and more intense as you try not to scratch it -CORRECT, reset.

4) Peaking at the clock thinking you are at 4 minutes when you are really only at 1 minute-CORRECT

5) The Victory, you have 30 seconds of quiet and good posture and you realize it "I'm doing it!" Duh-Ooops, CORRECT

It's not easy, but that's not the point, the point is our minds are so busy and powerful, they'll do just about anything to not relinquish control, even create a phantom itch or focus on a bead of sweat moving 1 centimeter per minute.

Trading has a lot to do with psychology and even when we believe we are at our most unbiased state, the truth is, it's probably not true. It takes work to really look at the market free of bias and put together the many data points you find without drawing conclusions too early, which only causes you to look for more data points that validate your conclusion and that is not objective analysis, so I know when I need to step back and let everything dissipate, successes, disappointments, fear, greed, etc.

Sometimes I think it's a lot easier being a Cramer-type guru, all you need to do is sound like you are 100% positive all the time and point to the times you were right and brush the other times under the rug and guess what? People will go along with it, they'll brush it under the rug with you because the market is very emotional and very uncertain and people want to hear certainty, so much so they are willing to brush a lot under the rug; that's not good analysis or good investing.

Luckily I feel like we have a great group of traders here that understand the market is uncertain and understand that the market is about probabilities and most of all, are willing to think for themselves rather than blindly follow a guru. Our members understand the market isn't conducive to Gurus, it's a lifelong learning experience. That being said, I think because of our approach as lifelong students, we have some great tools and have a much better understanding of the market than most traders who base everything they do on several of their favorite trading books or financial pundits.

So, I'll clear my head, and look at the pieces of the puzzle and see if there are enough pieces to say, "This is the most likely probability".

Until that analysis, I have only 2 charts to show you.

 First this is where we are, it looks like a rectangle here after an extended downtrend (on this timeframe), but it's really closer to a flag, a bear flag, which means most traders are viewing the immediate future as one in which the market will break down shortly and the NYSE record 2012 short interest speaks to that. I don't think I need to convince anyone of my bearish perspective, but I also know the market is not as simple as that.

Lets just take a look a several months and what the market did, what traders expected and how the market made sure it wasn't as simple as it appeared. First we had 3 bounces that made higher highs/higher lows (I believe we called all 3 from bottom to top and back to bottom again near perfectly). Traders would take this as an uptrend, that is what it is (higher highs/higher lows), but we had additional information and used those moves higher to start short positions, then instead of the trend continuing up, the market saw a sharp decline and formed a bear flag. Now traders see a bear flag and expect the market to break down, the market did (in the yellow box), but it was a head fake, drawing in shorts on the break and then stopping them out as the market moved higher, we shorted here again. In the orange box there was strong upward momentum, that same day that it started we not only predicted what would happen, but 3C confirmed it and that strong, bullish momentum fell just as quickly as it went up. Since then we've been in decline and have formed another bear flag. Technical traders will view this as a bearish lag that will break down to start a new leg down, but as you can see over the past 4 major moves, Technical Analysis said one thing and the market did the opposite in the near term. If you don't believe traders see this bear flag and are shorting it, just look at yesterday's 2012 record NYSE short interest.

If we follow what we have known for a long time, the probabilities are for a solid bounce knocking those shorts out again, making the average trader wrong again. That's where the signals have been lining up, that's where the market trend probabilities are.

The difference between now and all of the other moves that we got right and used to our advantage is an unstable situation in Greece that I don't think the market can discount as it is an organic movement, not something one of their ex-Golman Prime Ministers can tip them off to. That's where the danger to near term assumptions lies. This is the increasing unpredictability I predicted weeks ago, I just had no idea how bad the situation wold be. I'll address the Greek situation as it is part of what will move the market both in the long term and perhaps the near term.

This is why I really need to have a clear head and look for any clues that are hiding in the data.

As for our bigger picture view, it's all good news and if you've been shorting in to strength you should feel pretty good about where we are right now, my short positions are all green, but I sure would like one final move to fill them out. This weekend I'll be looking for the evidence that give us the highest probability outcome. Right now I suspect it hasn't changed much, but that' exactly why I need to clear my head, focus on my posture and look at the market with new eyes.

Have a great weekend everyone.

Flight to safety TLT

There's some connection here I haven't quite put together, I'm sure it will come to me.

TLT/Treasuries-the flight to safety trade are much higher in price than the market correlation would imply and it is leading negative both in trend and intraday. Something isn't right with this chart.

Forgot this chart

This looks like the strongest force in the market, the Euro (SPY green / Euro red). Note the Euro turned down about 30 mins before the market hit resistance and intraday highs. The rest of the day the market has moved almost in sync with the Euro, yet it is higher than the Euro correlation.

I'm not going to read too much in to this, but a failure of resistance should have sent the market dropping hard if the shorts were in total control, instead it's been a steady decline in sync with the Euro.

Closing Market Update

I learned my lesson yesterday by trying to get this out to late and having upload problems, the last 15 - 30 minutes of trade are generally the most important though so I want to be as close to those as possible.

The intraday charts are looking scattered, but this is the closest thing to an accurate update considering the trends.

 DIA 3 min, the largest divergence is the one you can't completely see which was off the open.

 QQQ 1 min, I cold have used some longer term, but there's some detail here and some trend

 SPY 2 min, again the biggest positive divergence is the opening one, this is where Wall Street was most active today.

 Energy, this 1 min longer chart shows the concept above of the biggest divergence was on the open

 Financials, again, this is a huge relative positive divergence on the open, confirmation would have seen the orange indicator near the gap low on the open.


I used XLK 5 min to show where the largest positive divergences have been, on deep gap down opens/lows.

We'll look at the closing 15 min after the market.

Greek Political Theater Still in High Gear

There isn't much to move the market today as Europe is closed, the US only had 2 economic releases and they were this a.m.. In the first post of the day I wrote the following,

"Starting with the troublemaker, Greece...
The market may get a brief respite according to this article in Ekathimerini from Greece 

"PASOK leader Evangelos Venizelos will hold talks on Friday with his counterparts at New Democracy and the Coalition of the Radical Left (SYRIZA) with the aim of agreeing on a framework for a unity government after Democratic Left leader Fotis Kouvelis on Thursday backed the formation of an ecumenical administration.

Kouvelis had previously insisted he would not enter a coalition with ND and PASOK as long as the two parties remained committed to the austerity policies applied over the last two years. The Democratic Left chief now appears to believe that a unity government with a specific agenda could meet his two specific goals of keeping Greece in the euro and moving the country away from the fiscal restrictions of the program agreed with the European Union and International Monetary Fund."

I don't see the Trokia agreeing to anything less than the original terms, but for now, the crisis is a little less intense, what the goals of Syriza are in this latest endeavor are hard to ascertain, but this is obviously some set up to furthering their goals as they are only an election away from ruling the country. It may have something to do with Germany saying today that a Greek exit of the EZ is manageable, however Fitch disagrees and said if the crisis sees Greece moving out of the Euro, it will likely put ALL remaining Euro-zone countries on Credit Watch Negative-ALL!"

And the update:

"Tsipras says he will not join the coalition and Venizelos says that Syriza's participation is a prerequisite"


So the it's good to see the EU rumor mill is still functioning if nothing else.


Why would Tsipras join a coalition when his anti-bailout party is gaining 1% point a day in polling (at the elections they came in second place and anti-bailout parties carried 60% of the vote) and as of yesterday's polling, his party Syriza was already on track to gain more seats than New Democracy and PASOK (the pro-bailout parties and formerly two largest parties) together?


It didn't make sense this morning and now we know the truth, it looks VERY likely new Greek elections will be held in mid June.


Meanwhile as Greece has no effective government as the President, Venizelos can't do anything as parliament was dissolved before the elections, here's what Greece faces during the period in which they will likely have no government:


May 15th: $450 mn Euros of Greek International law bonds come due. These are the stronger bondholder protection bonds that did not participate in the PSI swap (which would have cost them 50% of the bond value right off the bat) and instead opted to holdout for full payment. If the payment is not made, May 16th Greece will likely be sued and likely will be considered in default.


May 18th: $3.3bn in Central Bank held bond redemptions-the Eco-Fin meeting for the EU will be held May 15th and while they would be shooting themselves in the foot, may decide not to give Greece the bailout money to pay these bonds.


June 30th-Greece to implement the Troika Memorandum Bailout plans, meaning more harsh austerity cuts. If Syriza wins mid-June elections and forms a government which is almost certain, they WILL NOT honor the agreement and will not make the cuts, putting the entire bailout in jeopardy, which is a mild word.


You saw Tsipras's letter to the Troika elements yesterday, does that sound like a man who intends on abiding by the obligations set forth in the memorandum?

AAPL Update

 10 min chart with a triangle with what may be at least 2 head fake moves- 1 is for certain. A symmetrical triangle has no bull/bear bias of its own, it all depends on the preceding trend which in this case was up. That means the triangle (according to Technical Analysis) should have been a consolidation/continuation pattern and should have broken out to the upside and started a new leg up. Look close, AAPL did initially break out of the triangle to the upside, drawing in longs, when price fell below the triangle's apex, longs would likely stop out. TA teaches traders to take the opposite position on a failed pattern meaning they would have gone long, stopped out and then gone short, a move back above the triangle would stop them out a second time. Wall Street knows the game, traders haven't adjusted.

 Today's gap down open wold have brought in additional shorts, the weak shorts would have covered on the momentum move up this a.m., stronger shorts will hold out unless the triangle is broken to the upside. This dip in AAPL today looks very much like a typical rounding consolidation, volume confirms it, it has a bullish bias.

 The 2 min chart intraday has gone leading positive in to the rounding consolidation.

 This is the 2 min chart's trend, leading positive and even higher today.

 That has bled in to the 3 min chart which is also going positive in to the rounding consolidation.

Here's the 3 min chart's trend, again a new leading positive high today.

Keep an eye on AAPL, Tech is the closest thing to a leader today and AAPL moving higher would greatly influence Tech's leadership.

Quick Market Check

 From a psychological point of view, shorts are feeling emboldened by the market's pause and pullback at resistance, this would be taken as confirmation of resistance holding and an ideal spot to add to shorts, some of which may have been closed earlier on the market's aggressive early momentum. Additionally in the Q's intraday, a series of lower lows/lower highs would add to bearish confidence, as you can se though the Q's are flirting with moving above that channel.

 The 1 min QQQ chart was the first to show any signs of a positive divergence in to the pullback, that timeframe has built on the initial, tentative looking divergence showed to you earlier. We'll have to see how this turns out to know for sure, but the negative divergence at resistance may have had very little to do with retail shorting and may have been more controlled by Wall Street in trying to trap more shorts. A move above the intraday highs would tend to confirm that theory and you would see yet another example of Wall Street's tactics.

 The QQQ 2 min chart has seen the 1 min strength bleed over in to the 2 min which is also positive and pretty much at a new leading high on the day. Although it has largely been a gut feeling, my feeling has been since the bounce started at the April 10th lows (obviously not as clean of a bounce as the previous shorter ones-but again volatility, amplitude and unpredictability were all expected to increase), I have suspected the last sector to rotate in and lead the market lower wold be Tech. Last night JPM gave an initial confirmation of that theory, the market will have to prove the rest of it.

 The SPY pulling back from resistance has been enough to get shorts entering the market, but it is nowhere near conclusive so the move below intraday support would add to their confidence and if you look VERY closely at the white arrow, you'll see volume tick up several hundred percent higher than nearby volume and you'll also see the 1 min candle just barely pierced the intraday support line. This is a fundamental flaw in Technical Analysis in thinking that support/resistance are EXACT levels, they are created by emotion and in no way can be exact unless you think every single trader has the exact same emotional response to market stimuli. However, traders in trying to be "too technical" still hold the view that support and resistance are exact levels, the volume surge on the slight break of intraday support is limit orders being triggered as they were set to trigger if intraday support was broken.

The SPY 1 min is just starting to show a positive divergence right around the brea of intraday support. If you look at a 1 min chart of the SPY the exact same concept happened again at $136.07, there was an intraday support area formed by a hammer at 1:48 today and as soon as that level was crossed at $136.06, volume surged again.

These are the VERY predictable responses from technical traders, doing the same thing they've been doing for nearly a century. Wall Street has adapted to TA and knows what will set off orders (if you place a limit/stop order with your broker as many do thinking it is good risk management, Wall Street and every trader with access to the book knows exactly where the bulk of orders are and they'll shake them out almost every time. This is why, even though I was never a large trader, I NEVER place orders the market can see, I use market orders when I'm ready to execute a trade.

The last stop limit order I used about 5 years ago was a protective stop as I was on vacation (I should have closed the position), the stop was hit, it was also the absolute low of the day and the stock took off from there. I haven't used a limit/stop order since.

Any way, as I have been going on, it looks like the market is moving.

Risk Assets

 The CONTEXT model is negative for ES, still we saw a nice early momentum move, but the underlying conditions shows the market rallied against the correlations it typically moved with, that wreaks of Wall Street manipulation. It looks lie most of the weakness is in currencies.

 Commodities aren't moving nearly as much as the SPX did, most likely due to the tighter currency correlation.

 This is the same chart with the Euro added in blue, you can see stocks moved despite the weak Euro, commodities are more in line with the Euro.

 High Yield Credit has rallied today, usually this will be pretty negatively divergent by the time a bounce move is over, but we saw this in an earlier posting in which High Yield credit was moving while Investment grade was selling off.

 I'm surprised yields aren't more supportive today, they are pretty negative here, which makes this morning's move up even more impressive at least as an example of what Wall Street can do in terms of short term manipulation of the market.

 The Euro vs the SPX is still low today, it looks like there may be a triangle consolidation forming, if that breaks out to the upside, it will lend the market some strength.

 Again High Yield Corporate credit is moving with the market, and again usually this will start selling off and be negatively divergent at the end of a bounce, right now it still looks supportive. HY Credit is riskier, thus the reason it usually sells off before equities do.

 This is the same chart, just a bit longer, HY Corp. Credit broke out today.

 Sectors are fairly weak compared to market momentum, Energy seen above is most likely weaker because of the FX/USD correlation.

 Financial momentum is not there, you can guess why.

 Tech looked a lot worse yesterday, today early on it was showing momentum, it's probably the closest to strength in the 3 major groups and ironically was the sector I expected to be the last to move before a market collapse.

Sector rotation from yesterday to today shows Financials way off, although building a little as the afternoon goes on (relative to SPX momentum). The Defensive sectors are still in rotation, although Staples are losing some ground. Industrials are in rotation today, remember I said the Dow has to make up for earlier relative weakness vs the other averages. Tech looks to be coming in to rotation, there's better momentum there than yesterday and Consumer Discretionary is showing better momentum.

From what I see above, the weakness in CONTEXT (which is proprietary, but I suspect heavily weighted toward currencies) doesn't seem to be coming from Credit, more so from yields and the Euro.

So long as credit remains relatively strong, I would venture to say the risk on environment can continue, although it would be very helpful for the Euro to breakout.

ES Starting to lead now too

For most traders they are just seeing price, moving averages, MACD, etc and looking for this to turn down, few are seeing stuff like this, ES is leading positive now as well.

This is increasing the probabilities of a breakout move from resistance, such a move should lead to another short squeeze.

Example

This isn't the best example because the market conditions are vastly different, but it should be close enough.

 On May 2nd and 3rd the market tested resistance and failed, this is what shorts are looking for right now.

Fast forward, the conditions aren't the same because we were coming off a failed bounce that we already knew was failed on May 1st. Since then a lot of shorts have come in to the market, thus the 2012 short interest highs in the NYSE from yesterday. We have positive signals right now, the market has already declined, but the shorts at this moment are likely shorting in to this strength today on what they so far are reading as a failed test of resistance. This obviously would bring more shorts in, maybe some who covered earlier in the day will re-enter in this area. At the same time the momentum chasing crowd or the few who have been expecting a bounce are discouraged that the market hasn't broken through resistance, it's a strong area of resistance and will take a little goosing from the market to break it.

Psychologically that's what is happening right now.

Early signal?

The DIA as mentioned the last several days was the worst 3C performer and had some ground to make up, it has held pretty well here at this resistance zone which I think is a little psychological test of the shorts and the momentum crowd as mentioned before. The Q's seem like they are the first to start working on a positive signal at the resistance zone.

 While the DIA has a relative negative divergence (the weaker of the two), it has held here better than any other average.

The QQQ showed a stronger negative divergence, but now looks to be starting a leading positive divergence, if this continues to build and we see it in the other averages, then it' likely they'r getting ready to push the market through resistance which will have consequences for the shorts as it is the momentum chasers that are being run out of their positions now and the shorts emboldened.

Keeping it Real

It's no secret I'd love to see a bounce hit a new high and be able to short in to that move-the last part is the important part-"Short in to that move".

In that spirit, I don't want to confuse or mislead anyone in hoping to see the market move higher, the only reason is so I can or we can execute tactical trades based on our strategic outlook and this chart is 1 simple chart that wraps up the big picture (strategic outlook) in a nutshell.

The red, green and blue lines are equities and high yield credit (HY Credit is a cheap way for large institutional traders to take advantage of a swing up in the market). The one that is maroon colored and not moving up with the rest is the higher quality Investment Grade Credit. The rule of thumb is "Credit leads equities". On a day like today you'd expect a little movement out of the safer assets like IG credit in to the higher beta High Yield Credit, but that's only part of the story-the flight from safety to risk.

The bigger picture here is IG credit is selling off, this is not good for the market's big picture. As most of you know it has been my gut feeling we'd see one more decent bounce, but after that, the market is in trouble.

Be ready for when market trouble come swinging back around, it is likely to be faster and more furious than anything we have seen in the last 3 years.

I'll be taking a look soon at our Risk Asset Layout as well.

Market Resistance

 Wall Street wants to make as many people wrong at any one time, the shorts have felt it this morning and even though price hasn't crossed above serious resistance where shorts would really feel the squeeze, the momentum alone this morning wold be enough to scare them in to covering. As for those benefitting from the short squeeze, Wall Street isn't going to let you off the hook either, they'll look to cast doubt in every direction. We are clearly pulling back/consolidating/losing momentum as resistance is hit, this is solid resistance and this is the shorts hope, that resistance will fail. Above resistance, their not likely to hold much longer, so psychologically a couple of things are happening, the shorts are thinking that maybe this move isn't strong enough to squeeze the shorts who have rode this out so far, it's also casting doubt on the move up for any momentum traders and traders expecting a bounce.

 The 3 min intraday chart shows the backing off at resistance

However the same charts longer term trend looks like resistance will be taken out. Those are the probabilities.

ES Summary

If that's not a short squeeze, I'm not sure what is. Note the drop in ES only lasted about as long as after hours trade was still open so the shorts could pile in on the JPM news (which is another BlackSwan situation entirely). After AH closed ES was listless, one of the things we've thought is that a short squeeze wold need to be powerful and quick, it's not even noon and we have broken above yesterday's close, but are now near yesterday's highs and we didn't get any help from the Euro which is lower right now than it was yesterday, that means this move is disconnected from the legacy FX arbitrage, which means it's market manipulation.

Here's the SPY (green) vs the Euro (red)

Yesterday the market tracked the Euro fairly well, today the market is totally ignoring the Euro and doing as it pleases.

Just more information about the character and reality of Wall Street.

NFLX Shorts Getting Crushed

If you want to see what a short squeeze looks like, take a look at NFLX, up +7.5% this morning.

 Daily chart and gap area-possible target...

 10 min chart, I don't usually trust parabolic moves, this however is a short squeeze, the lack of any pullbacks and the jump in volume at key levels make it east to identify.

 On a 5 min chart the first intraday consolidation level was taken out on short covering as volume jumped, from there each time NFLX hit the resistance zone on the chart above this one (seen on this one), volume surged, these are shorts getting squeezed.

 The 1 min 3C chart...

 Note the recent trend of the 5 min chart in NFLX, now look at the SPY below...

Similar...

As some of you know, I use to get trading research reports from a MAJOR Wall Street firm, I can't tell you how as they were for internal use only, I did not do anything illegal though. I thought I had a gold mine on my hands and read every one throughly, but in trying to follow the ideas put forth I was coming up totally empty-handed  or worse. I finally gave up on them and just figured I wasn't smart enough to understand the nuisances of these research reports distributed to the trading desks. However when I found them on my computer six months later during some routine cleaning of my desktop I took a look again and nearly everything in those reports had come to pass, it just took a lot longer than i had assumed initially.

The lesson I learned way back then was that Wall Street works far out in to the future. What we see today may have been planned weeks, months and in some cases years ago. I have posted the homebuilders charts several times for you to see, HOV in particular was being heavily accumulated during the 2000 Tech bubble crash. It would have made no sense at all at the time, we just started the tech revolution, we didn't even have smart phones yet, it was dot.coms. Everyone at the time expected the next bull market would be another tech revolution, instead it occurred in the least likely of places, housing! Besides the housing stocks like HOV which gained about 2500% from the accumulation to the top, the entire bull market rally was supported by consumer spending which was supported by their home equity lines (abundant supply of cash). Of course this didn't end well, but the point is, after having just gone through the tech revolution and biotechs, who in their right mind would have thought housing which maybe was appreciating 2-3% a year on average was about to become the next bull market bubble. I know what the official stats say about how much housing gained since 2003 and how much it lost, I can just tell you our house was worth about 250% more than what we bought it for within a year and a half and when we bought it, we were already in the housing boom, we could have bought the house for 30% less a month earlier. This is the nature of Wall Street, they aren't reactive for the most part, they are proactive and acting on information that we'd have no way of getting.

Ask yourself, how did smart money know they should be accumulating housing stocks in 2000?