A quick recap (and virtually nothing has changed since it was first laid out Monday, fleshed out Friday and Sunday before that)...
The general idea here is that Technical Analysis is so predictable that it is used against technical traders every day in every timeframe as the market is fractal, meaning the same patterns you see on a weekly chart act the same on a daily or even 5 min chart, it's just human nature and emotion. A daily (longer trade) is no less emotional than a short term options play.
Most traders came to Technical Analysis when the Internet became a household staple and cheap online brokers were everywhere. The appeal to all of these new technicians was simple laziness and they've gotten worse since the late 1990's. For example, a H&S top is said to be one of the most reliable patterns in Technical Analysis, I agree that it use to be. This pattern is so simple to verify, but it is essential that it is verified using volume analysis. Traders have become so lazy that they see something that looks like a H&S and assume it is, they don't verify the volume, some don't even care that the pattern is found in a downtrend, they still see it as a top even though a prerequisite is that it be preceded by a decent uptrend.
Prime example of a H&S that cooked a lot of shorts in 2010, early in the trend...
The SPY and other market triangles shown today (as well as Monday/Tuesday-again linked above) are too big to be consolidation/continuation patterns. My prediction was, technical traders who see a triangle don't care about the size, they assume it's a bullish continuation pattern and even though it seems like a life time ago, it was just a week ago that everyone was still a raging bull.
My prediction was that the triangle would not breakout or breakout and fail and Technicians would go short as I put it in this post from Monday,
"When a technical pattern fails, TA teaches to reverse your position which means they all went bearish as our earlier sentiment report made clear, THIS IS LITERALLY WHAT T.A. TEACHES TRADERS!"
The fact that this pattern worked so well for me is proof enough it was a set up. These failed bullish (or bearish) patterns are what use to be an easy short, you'd wait for a return to resistance (especially on H&S tops) and when you confirmed that it failed to break resistance (in this case the lower triangle trendline or the apex of the triangle) you sell short, it use to be a low risk trade entry. The thing is, these patterns haven't worked since 2003. In fact, one of our best short entries on a H&S top is wait for the break down, wait fro the test of resistance at the neckline and then wait for price to blow through resistance shaking out all of the shorts, then enter as that move starts to fail.
So we have our shorts in place, as admitted Monday, this is the general idea, specifics are difficult,
"*This is what I see as the most probable outcome, some details may differ a bit as there are a lot of dynamics in the market, but that's the gist of it.
Now we have seen this so many times that this is why it is what I'd expect, but the market is as dynamic as anything you can imagine, millions of extreme emotions all being pulled in different directions and we have a big hedge fund, SAC capital that has to sell a lot of stock to meet redemptions, so while this is what I expect, if I see something change or something different, I'll let you know."
The only thing that is different than what I expected was the degree of the volatility, but the point of the set up is to change sentiment, to turn traders overwhelmingly bearish and these moves are almost always more extreme than you anticipate, especially when 1) volatility in increasing and 2) this may indeed be tied to a specific dat such as the NFP tomorrow.
However to be honest, looking back o the pattern now, it seems very reasonable in the downside move.
So nothing at all has changed since the concept was laid out Monday (perhaps even Sunday and the previous Friday).
I don't think this is the final break as the Trend Channel is still in play, I do believe the ultimate decline will be much bigger and more volatile, but I still think the same concepts from Monday are in play.
The Trend Channel hasn't been broken with a close below the lower channel so it is still in an uptrend according to the market's normal behavior over this timeframe. You can see volatility has increased substantially below the price window.
The idea is still this...
*The problem with the triangle is it's too big, a consolidation triangle is rarely more than a few days, larger triangles are tops and bottoms depending on the preceding trend, but even this one alone isn't big enough to be what I'd consider a top by itself.
B) When the triangle failed to breakout to the upside it was considered a "Failed" price pattern, as mentioned above, one of the basic concepts of Technical Analysis is, "When a pattern or indicator like a MACD divergence fails, reverse your position", that would take bulls and turn them in to bears.
C) Is a concept that worked well before 2000, before TA became mainstream, the "Test of resistance", a failed test is your cue (according to T.A. dogma) to enter a short trade.
From there we only had 1 day down, so looking back, this decline wasn't unreasonable at all, I think even I may have got a little "lost in the lines" of intraday trade.
D) People believe in oversold and overbought markets, they believe that these conditions have to be worked off with a bounce or correction, I do not believe in this, at least not any more. I have backtested EVERY trading method / system I have ever read about and have had the ability to re-create in StockFinders, "BackScanner". I haven't found 1 system that is reliable in a robust way through various markets. The only two systems I have found to have some use are a long term moving average system that would typically have about 1 trade a year, but I believe no one would have the emotional discipline to stick with it through draw-down periods and the second system that has had excellent results is using a longer Stochastics and going and staying long when Stochastics are "Overbought" and embedded above 75 and going short when Stochastics is oversold and embedded below 25, this is the exact opposite of the way you are suppose to use Stochastics, you are suppose to sell when overbought and buy when oversold!
The point is... Overbought and Oversold are outdated concepts, in my view the only reason for a move down like this is to create an emotional shift (and that happened in less than a week on a 2.75% decline so its not hard) and that emotional shift is used as a set up to a larger trade.
E) In this case, all of the retail shorts act as fuel in a short squeeze to run the market above the triangle, creating ANOTHER emotional shift in what will likely be a stronger, more volatile move that will turn traders bullish again.
F) As we have seen, retail can rarely see or think about what is happening more than a day ahead, they are swayed by the moment. If we get a 2+% day up with a candle that looks like this...
...watch how quickly traders turn from bearish to neutral or bullish. If you don't think a candle like this can occur in a day, consider the volatility indicator above showing increasing volatility, think about this entire pattern being set up for this very reason, short covering fuels the advance, it can easily happen.
After we have again swung sentiment and traders have been ground to pieces, we have the fuel needed to create the downdraft at "F" and I'd guarantee the Trend Channel will be broken.
For our purposes, we already have built a lot of short positions meant for this move, there are some that I and each of you want to fill out, for example AMZN or GOOG. The extreme in sentiment sending the market higher, fueled by short covering is simply a tactical opportunity or a gift that allows us to finish initiating or adding to positions for our longer term strategic out look. The "Call" positions from this week are a secondary trade, they hedge shorts, they make money as hitchhikers and when they are closed, we know we are in the area in which we can finish our strategic planning/positioning.
As for tonight/tomorrow and next week...
I honestly don't know what the catalyst is, from the timing and the way the market acted today when the USD/JPY fell hard and the market failed to make a similar fall and then advanced from the lows to close green, I'd say we are at the catalyst.
Tomorrow's Non-Farm Payrolls (NFP)? NFP is released by the BLS (Bureau of Labor Statistics) at 8:30 a.m. tomorrow, this is a huge once a month event that is already well known to have leaks in fact, the BLS is installing new press computers to mitigate leaks so the press can continue to write articles on the embargoed information before its release while reducing the chances of a leak, I'll leave my tin-foil hat off for this one.
We already know the F_E_D clearly leaks material, they even have a mailing list of who to leak it to such as the minutes sent a day and a half early to 154 big banks and private equity trading firms. A Mailing list? Really?
Expectations for the NFP... There's consensus and then there's a whisper number so it's impossible to say how the market reacts, but anything that comes in weaker than expected is the "Bad news is good news" effect for the QE crowd which will take it to mean the F_E_D can't back out of QE later this month at the June F_O_M_C meeting. A better than expected report will likely raise expectations that the F_E_D will begin tapering and the market won't take that well.
I don't know what it will be, although from what I've seen the last week, it seems like the market will respond well. Yesterday I said the most effective short squeeze would be a gap up, with the data out an hour before the open, that is a possibility and any covering in pre-market would just make the gap bigger as it is a less liquid market with worse fills.
It's possible that the market reacts horribly at first and then reverses, anything is possible. This is why I'm curious to see if there are any give-aways in after market trading or in overnight/pre-market trade.
Where we are now... From Equity Index Futures, it seems likely to me that after hours trade will see a decline, here's why...
However, whatever may happen overnight or on the NFP release, I'm not concerned.
Other than all of the data collected all week in the market, these charts give me confidence I'm on the right track-ALL Equity Index Futures have these divergences to different degrees, but they are all focussed on this week in particular.
Don't get me wrong, there are plenty of charts that show this market is done, baked, fried, OVER, however, one bridge at a time.
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