Daily Wrap

I want to start kind of where we left off last night, there were several signals including some improved 3C signals in to the closing hour and 5 min positive Index Futures, we had a F_E_D inspired knee jerk reaction so I really expected the market to open higher this morning, but I didn't think we had enough improvement to do it without some help so my exact words in last night's daily wrap were...

"I showed late in the day how the averages suddenly started to improve, they have some work, but perhaps some late night Yen slam or EUR/JPY carry lifts the market"

So I more or less guessed a Yen slap down would drive the typical carry pair of EUR/JPY and do the rest of the heavy lifting for US futures in the middle of the night when volume is very low.

I really can't say for sure whether I really expected to be right, but the manipulation of the market has been so blatant, throwing the idea out there was not out of the realm of reasonable possibilities and don't you just know it...

 At 1 a.m. that's exactly what happened, not only was the Yen slapped down in the middle of the night (1 a.m. EXACTLY), but...

The second half came true as well, the EUR/JPY in red/green candlesticks got a lift at 1 a.m. and the SPE (ES) futures which had been heading down all night finally got a lift right around 1 a.m. as the Yen was down, the carry pair was up and futures gains exactly as mentioned last night. I wouldn't say it's a very healthy market if you can predict what kind of manipulation they'll use to try to drive the market higher!

I often say that "Wall St. doesn't do anything without a reason" and we noticed this on Tuesday, what could the reason have been, perhaps op-ex? I said ealry today since its a weekly and we noticed this Tuesday, I doubt very much it was that, what could it be? 

Earlier in the week I mentioned how Dow $16k, SPX 1800 and NASDAQ Composite 4k were just fractions of a percent away, these are major psychological levels and there is money to be made up there as bulls buy the new high, there's demand to leave retail holding the bag, if volume is up then there's the bid/ask spread and volume rebates. As far as I can tell judging by the size of the accumulation (less than a day and a half, that fits the bill considering the moves to those levels were fractions of a percent

The Dow made $16k on a closing basis so that's one, the other two aren't far at all.

In addition overnight we had bad news which is good news, China and the Eurozone both missed on Flash PMI and both dropped then the US Philly F_E_D missed. Another pop to the market today was the Senate's (Banking) confirmation or vote for Yellen as the next F_E_D chair nominee.

However as far as QE assets that were definitely QE off/Taper On yesterday, here's what they looked like today.

 USD up on QE Taper on, but failed to give it back today although you'd think it might on the knee jerk move, apparently there's still some QE Off sentiment.

30 year treasury futures fell hard yesterday, but did very little to rally today.

And gold found some support, but didn't bounce back, it seems the market was manipulated as expected, but underlying QE tone is still hawkish.

As far as the 5 min positives in the Index futures that made me believe the market would at least open up today (although I thought it needed some overnight help), well they've disappeared.

 ES 5 min positives mentioned yesterday...

"There are some 5 min positives in the Index futures, NQ (NASDAQ futures) look the best, and we saw late day improvement in the averages as I posted."

 NQ 5 min

And TF 5 min.

Typically they need a little time to reverse, there's almost always that process, but there are signs in some already of that happening like ES and it was obvious in the averages enough to the point that I felt that taking a put position in to IWM options made sense as I want to enter while there's still upside momentum to get the lowest premium.

The SPY calls were closed today as again I want to close them in to upside momentum to get the best premium, not as they start to fail, it's very different than stocks.

The P/L for the SPY calls worked out as follows...

At the cost of $2.36 and the fill of $2.50 the P/L came out to +5.93%. not at all what I hap hoped for, but a decent 1-day win.

AAPL calls are still open as I think they have more to go, but I expect they be closed tomorrow or Monday as both were meant as very short duration positions for a short duration market move.

PCLN was mentioned last night as a possible short/put position if it opened on a gap up, while it didn't close as I had hoped it would, it did dhow the sign of distribution as I hoped in to the gap up and on a relative basis was completely flat against the market today intraday.

This is what I said I'd check for on a gap up and it was there this morning (negative divegrence that did not confirm the gap suggesting distribution) and while the close I had hoped for (bearish engulfing pattern) didn't take hold, the relative performance intraday was poor and the 3C divergence kept leading lower. All in all I'm pretty happy with the position from this morning.

The market is still primed for a HIGHLY DIRECTIONAL MOVE, the VIX Bollinger Band Squeeze remains (I had said yesterday there are often fake moves or bouncing around before the actual directional move, but this is portraying a strong move, I have every reason to think up and the VIX moves opposite the market.

Spot VIX Bollinger Band Squeeze and if that happens, while there are a lot of logistical issues I have mentioned that make a downside move even worse like record margin, one of the more popular charts going around today that at least 6 of you have sent me makes perfect sense so since so many of you feel it's an important chart for me to see, I'll share it with those of you who haven't seen it.

I think what the chart is, is clear, it shows a record low level of shorts in the market, this poses a couple of risks, the one that came with the chart is the "Who are bulls going to sell to if everyone is a bull", but the more important one that I think a lot of people missed is that the market is a zero sum game for someone to make money someone has to lose money and when everyone is leaning to one side of the boat, it's usually not long before it capsizes.

Even worse, I have brought up the fact that HFTs have replaced market makers and specialists as the suppliers of liquidity and the fact that unlike the later two, HFTs are not bound by law to provide liquidity meaning to take your shares so long as you put them out at market and are willing to accept the spread. Shorts are an integral aspect of a healthy market, they represent future demand so if the market were to go 1929 tomorrow, there would be no one there to cover which is to say, "Buy" from those bulls who are seeing their portfolio fall like a rock. Shorts represent that built in demand as they take profits and cover they are actually buying when a market falls, without them, a market fall has no natural buyers and market makers and specialists have been marginalized by HFTs when it comes to liquidity so could we have a 1929 type sell off or worse? Of course and this is another chart making the rounds...it's of the SPX vs the pre-1929 Dow and while I'm not going to post it as it's pretty much just entertainment for me, not solid analysis, it is eerily similar.

In any case, the question posed with this chart is "Who will the bulls sell to?" when I think the more pertinent question is what happens when the market structure is so decayed (along with the market) that there are no natural "break-waters" left?

Moving on...

While the 5 min VIX Futures were one of the charts that made me think we'd see upside at least early today, there was an absolutely stunning bid for protection near the end of the day that not only unnaturally bent the price of short term VIX futures, but put in one of the strongest leading divergences I have seen in its own timeframe.

The bend in price shocked me (in the white box), it's unnatural), but more than that, this is one of the fastest, strongest divergences for the timeframe I think I've ever seen, it's literally very near vertical.

Obviously something big was happening at the end of the day and there was a huge reach for protection in a very short time, IT ALMOST LOOKS LIKE SOMETHING CAME OUT THAT PERHAPS ONLY SMART MONEY KNOWNS ABOUT RIGHT NOW, it also fits well with the Spot VIX BB squeeze.

You can be sure I'll be watching this tomorrow and likely looking to replace that VXX call that I closed yesterday for an 8% loss.

Finally as far as leading indicators go...

Again there was no Dominant Price/Volume Relationship.

NYSE TICK data was elevated and positive mostly above +500 today, but no extremes hitting anything much more than +1000 which I found a little strange considering some of the price moves today like the IWM.

HYG and JNK (HYG is used for arbitrage manipulation) both closed strong in to the close hinting at early upside tomorrow, however HYG's 3C chart is not at all commensurate with HYG movement. High Yield Credit did NOT buy the move AT ALL today. Sentiment indicators aren't saying much either way, fairly neutral, the VXX relationship was extreme at the end of the day as mentioned.

VXX (blue) vs the SPX should be a near mirror image, something big happened at the end of the day today, it will be interesting to see what happens here tomorrow.

Yields were down which is slightly bearish as they pull on the SPX and commodities as a group were in line with the SPX. 

If I had to make a guess, my guess is that the SPX will go for the closing $1800 tomorrow and the NASDAQ Composite $4k to join the Dow $16k which is something we were looking for earlier in the week before the minutes sent the market lower.

Overall though, there's still a ton of damage, one of the areas I see the most is Financials...

Bonus charts...

 The daily chart is nothing new, it's very ugly, but not new. We know from investor conferences, 10Q and 10F's that some major funds have been net sellers for 15+ months now so the 2013 distribution isn't surprising, although very ugly.

It's the $21 level that I said I wanted to wait for price to cross above and I think you know why, but if not, 3C will show you, the yellow trendline is the $21 level, watch what happens to 3C in numerous timeframes as XLF moves above $21...

The 15 min saw accumulation, then in line at the green arrow and above $21, pure distribution.

The 10 min chart shows the same, $21 was the trigger and this is the essence of a head fake move or a failed breakout.

The 5 min chart shows the same accumulation, the same in line and then the same distribution above $21.

 Even the trend of the 3 min chart shows the same, price right now looks like the left side of a parabolic move (upside down).

And the 2 min chart in line until XLF crosses $21, this is why I said I wanted to see XLF >$21 before adding anything, I suspected this would happen and among multiple timeframes, it happens at the exact same spot.

I'll check futures as usual before turning in and let you know if anything comes up.

Tomorrow is an op-ex Friday, usually the market moves to the max-pain pin which changes as contracts are closed out, but most are closed by 2 p.m., as usual that's about the time price starts doing what it wants, but it is the 3C positions that matter. Last week on Friday from the 3C charts late Friday we predicted the exact open and close of 3 of the 4 major averages for a bearish engulfing pattern, that's because unlike price, 3C tends to pick up right where it left off on the next trading day, even with a weekend in between them. I'd expect the SPX and NDX to try to hit their respective levels like the Dow did today, it's probably less than a 1/2% move for them to do so, however once again, it's what 3C looks like the last 2 hours that will make the most difference to any positions opened for Monday.

Why is the F_E_D Knee Jerk Reaction So Consistent and So Wrong?

I am only going to try to answer this in the broadest of terms because I don't believe anything in the market is so simple it can be put in to a 30-second sound-bite.

The F_E_D has immense power over the market, both US and global, it is the ultimate, "Waiting with baited breath" event for market participants.

I think if there's one thing we can agree on it would be the two fundamental drivers of the market historically as far back as trading goes (even Japanese Candlesticks which were used for rice trading hundreds of years ago depend and portray these two forces)...

If you come from economics you'll say "Supply and Demand" dictate the market's moves. What about the release of yesterday's F_O_M_C minutes changed supply and demand in any fashion? Nothing.

Instead, I'd say the two fundamental drivers that drive even supply and demand are FEAR and GREED, emotions. Why else would a market act so emotionally and so consistently (not just stocks, but bonds, precious metals, rates, and currency)?

Yesterday we saw an "Emotional Overreaction"  and perhaps that's the reason the knee-jerk effect faded and wrong so often that I have for years warned of it before any F_E_D event. Today I'd argue we saw an equal overreaction, but this is the nature of the markets, they are like a pendulum that swings far to the left and then far to the right and it's all driven by the only thing crazy enough to cause such crazy reactions, HUMAN EMOTION.

This was the Sentiment of the day among retail and this is why we don't chase, but we know retail does, that's what makes head fake moves so effective and so predictable.

Many are upset cause they didnt go long instead shorted the market on dip yesterday.. Totally understandable bad sit.

Going to hold AAPL Calls in to tomorrow

Leading Indicators

Taking a quick look at Leading Indicators where they matter the most, toward the close I see HYG is starting to come undone from the SPX in to the close, HYG's 3C chart never even took on the same level on intraday accumulation over about a day and a half, so not surprising.

Sentiment (PRO) is failing in to the close. The VIX futures are seeing a bid, protection is being sought, yesterday there was a clear 3C chart that VIX futures were pointing to this move in the market today, but now that's starting to chance.

High Yield Credit didn't buy this move at all.

For the averages there's already weakness from the day in 2, 3 5 min charts while 1 min tries to steer, but some averages like the QQQ/NDX that looked the best are seeing clear deterioration.

The IWM is probably the worst so I'm happy about the puts there.


The Index Futures are also deteriorating.

So the size of the move and the action today didn't make sense earlier, but now look near perfect for this kind of bounce or whatever we should call it.

As for tomorrow, typically Friday's open close to Thursday's close, I think Thursday's close is partly to bring the market close to the op-ex max pain area.

So far so good, I'm happy with what we saw in advance and  the way things proceeded.

IWM Update

I think if there were a concept of two to take away from this update they'd be, "The market is VERY randomly random... Wall St. doesn't do anything without a reason" and "Parabolic Moves tend to have parabolic failures" and maybe "Beware the F_E_D knee-jerk response".

 Other than the Channel Buster concept which we've covered before, but I look forward to covering it again as this looks like it will be a textbook example, the notable feature on this chart is the parabolic move, these tend to end badly with a parabola to the downside, often faster than the move up.

This is also a good example of the F_E_D knee jerk effect because as of last night, I HAD NO IDEA HOW THEY'D RAMP THE FUTURES AFTER THE BEARISH PERFORMANCE AFTER THE 2 PM MINUTES. 

I speculated they may slam the Yen and let the EUR/JPY ramp the market and do it in the middle of the night when volumes are low, that's exactly what happened.

Also recall my warnings since we first identified some accumulation on Tuesday that, "A short duration move doesn't mean it won't be impressive" & "Wall St. doesn't do anything without a reason " and a half baked move that serves no purpose isn't worth creating which is what they were doing Tuesday and late yesterday. A move like today's will sell retail, they'll buy the strength, it touches them emotionally so this move serves a purpose.



 The 2 min IWM chart shows the accumulation late yesterday as mentioned above, again, although it's not a lot and can't support a lot and wasn't meant to, it doesn't mean it won't be impressive. This is exactly why I bring these things up if I see them in the market, it gives you an idea of what to expect so you don't make emotional decisions.

More than that, it allows us to create new positions like AAPL and SPY calls or the PCLN and IWM puts, MOVEMENT CREATES OPPORTUNITY, especially if you have some idea of what that movement is about.

The 2 min chart that started the channel buster, this wasn't random, you can see right there it was planned in advance, but not huge accumulation either, enough to get the job done and make money on the trade, but this is not accumulating the IWM for a bull market run.

This intraday 3 min chart shows me the high probability that this is a parabolic move that will fail, price alone tells me that, but adding confirmation is always good.

There Goes AAPL

The only two positions I opened for this move, SPY calls which I just closed for a small gain and AAPL calls which I've held out (not hope, because this has been based on objective data), let's just say I've held out for patiently with the intraday underlying trade in the QQQ looking the best of the averages, it seemed like another hint that AAPL would make a move.

This is a great example of Paper, Rock Scissors, I think we all know the hand game, Paper beats Rock, Rock beats scissors, scissors beat paper. The point here though is divergence size and multiple timeframes as it was the same divergence that both kept me in the AAPL calls and that have me convinced AAPL is going to see some decent downside and if I can get a decent price concession that lowers risk (an AAPL bounce), I'll be glad to take a short position or Put in AAPL.

For now...

 Intraday this is what has been going on with AAPL, it took a hit and saw intraday distribution on the gap up sending it down and in to the red where it did take out some $515 stops. Since then the move on the upside in to the green has been in line with 3C moving like price.

The 5 min chart alerted us last week something was going on with AAPL

The 10 min chart as well, I'm not convinced this is a core short, but something seems to be going on that is worthy of a position trade, but as usual, I'd only enter on a price concession that will give me a better entry and lower my risk profile.

Ironically it's the same 10 min chart that has kept me in AAPL. This is where analysis gets interesting. Keep comparing the 10 min chart above and the 10 min chart below, they are exactly the same.

This is that same 10 min chart zoomed in to intraday perspective showing a positive divegrence. If you look at the chart above which is leading negative you will see this same area.

The correct interpretation of this chart is that the 10 min positive intraday above is more than enough to move AAPL to the upside, but not only because of it's limited or short duration "foot-print" or base, but also because of the position of the chart above, this is almost certainly guaranteed to fail at some point soon.

The chart above this one has a larger foot print and a much larger leading negative divergence which is always stronger than a relative divegrence like the one above.

How do I use this information? The main trade or highest probability is to play AAPL short, however nothing moves straight up or down, this is where Cramer's, "I'm bullish or bearish" leaves you on your own to cross the swamp

The shorter term trade is much more speculative and has much less profit potential, this is why I have to leverage it up using call options, but once the move on the upside gets in range and I start to see the intraday charts go negative, I want to close the call and start looking for the longer term short position which has more profit potential and doesn't need options leverage.

THAT'S MULTIPLE TIMEFRAME ANALYSIS AND HOW IT CAN BE USED.

Opening IWM Jan. $112 Put

This is in addition to the SRTY (long) so it will be normal size which is somewhat speculative

Now I'll Close the SPY December $179 Call

I feel better about it now, the signals are looking more like I'd like to see.

The IWM also looks similar, if I had a call there, I'd probable close it too.

USO Update: A Study in Patience

If you need the longer term charts and the USO set up we have patiently been waiting for as well as our expectations for USO, just let me know and I can direct you to several posts.

There are a lot of lessons in USO: Patience, Let the trade come to you, The right tool for the job, A Bigger base can support a larger move, and more.

USO seems to be coming out of that base we have patiently watched develop and the upside for USO is pretty significant, it's still worth a long position in my view, although I'd prefer some leverage and you have to be careful with volume with leveraged ETFs.

"To make money you have to see what the crowd missed"

A 5-day chart isn't against the rules, often you'll get different perspectives than you're use to making you think more about the position and either building a case or not.

Here we have two bullish reversal hammers and they form a Tweezer Bottom reversal together.

I expect oil is either in a down trend or is range bound in a large/wide chop. Either way, I consider a move up here to be a "Counter-trend rally" and they are often some of the fastest, strongest rallies you'll see.

 Intraday we have a consolidation as the 1 min is negative

The 5 min chart though is in line so all in all, this is a nice start for USO to finally start coming out of the reversal process.

 The 15 min chart and the reversal process.

The larger the foot-print of a base, the more upside it can support.

During the 2000 Tech or Dot Com crash, homebuilders saw at least a year of accumulation, some a year and a half. Who would have ever thought that after the tech revolution changed the entire world (I dare you to leave home without your cellphone) something as historically mundane as "Housing" would lead the next bull market through heavy consumer spending? Someone knew years in advance and the base they created allowed home builders to move +2500% and even +5000%

 If you follow the 60 min divergences you can see EXACTLY what happened here.

60 min Brent Crude futures look similar, same positive and rounding bottom

The 15 min futures are in line like USO's 5 min

This is the actual "Short" stop out on a close just above at $34.27, when that is hit, the character of USO has changed by 2 standard deviations of its normal character and the trend is effectively over and a new one starts, bullish so if you like USO or some derivative asset, I may watch for a pullback of just hold your nose and jump in here with  wider stop and fewer shares, you can always add to a position that is working, in fact as far as I'm concerned you should. Too many people don't because it lowers their trade's average gain which is all ego because it increases your portfolio gain.

Quick Market Update

The reason market updates are important right now is because the market is responsible for about 2/3rds of any given stock's direction, I've known it was very powerful, but this is actually directly from a S_E_C study. So before making moves in individual names or Industry groups, understanding the market is really the first step.

I think it was clear that earlier I was uneasy about the market and thus DID NOT close SPY calls that I'm anxious to do in to momentum, if I lose momentum on them, then I lose gains.

In any case, I'm sure we have all seen this.

SPY.

So I'll let things be a bit longer.

To try to get charts of all the averages up is useless as they'll change before I can post them.

The 1 min charts are either in line like the Q's or close, the damage from earlier in several 2-3 min charts is still there for the most part so I'm really looking for the 1 min charts to get ugly and migrate through the 2, 3 and 5 min charts and continue the negatives there, it's pretty much all intraday stuff as expected (short duration, impressive  and that's about it), I just knew there was something I didn't trust thinking the market was done that early and in front of op ex.

The Q's tend to have some of the best signals, especially 1-2 min charts so AAPL may very well make that move (the AAPL short term call trade entered this week) and I'm happy to see PCLN trading the way it is so far today.

Quick Market Update

The intraday 3C signals are progressing as you'd expect (negative) with the way price in most of the averages is acting right now, perhaps I was right on when I mentioned that this may only be a half day correction, if that were the case, then I'd need to close out the SPY call at a small loss rather than a larger one, but I'm not ready to close it out yet, this sems REALLY early in the day for a trend to reverse to the downside.

We do have op-ex tomorrow, perhaps we are getting near max pain, however it's a weekly and although you can enter weeklies far in advance of that week, I do have to remember that the first signs of this move came Tuesday, pretty early in the week to know which way an op-ex pin would likely be unless there was just a tidal wave of contracts in the same direction?

For now I'll just say that the negative divegrence is progressing very normally and price looks very normal for this kind of divergence, if it weren't so early in the day, perhaps it wouldn't bother me so much (but again I have to remember it was me who said this corrective move may only last half a day).

I'm going to scout more markets and look for more information before making any significant moves which would either be closing short term call options or entering new short positions.

All trading shorts already in place will stay in place as well as core position, THIS DOESN'T EFFECT THE MANAGEMENT OF THOSE POSITIONS AT ALL.

IWM Update

So if there's at least 1 lesson we can take-away from this week that gets repeated here OVER AND OVER AND OVER, that would be...

"BEWARE THE F_E_D / F_O_M_C KNEE KJERK REACTION, it is almost always wrong and almost always reversed"

That doesn't mean anything beyond what we saw yesterday and what we see today, so don't read any further in to it as far as trends and expectations go, it's just an effect that happens with F_E_D related events or really any Central Bank.

Now the IWM... I said yesterday when talking about the "Ideal" set up for a PCLN short that we'd need to see a pop to the upside, there was some late day 3C positives, but they wouldn't have been enough so I said they might smack the Yen down in the middle of the night to push ES up on the back of a rising EUR/JPY as a result of a Yen smack down and don't you just know it, 1 a.m. EDT when the volume is exceptionally light, that's exactly what they did.

The point with PCLN which I said was a decent proxy for the market because the market would HAVE to lift for this open to happen in PCLN, is that I also said I expected a bearish engulfing type candle which means PCLN and likely the market would have to lose ground and I said the move may be a day, but it also may be as short as a partial day. Options expiration Friday always tends to distort things though and I wish this were a Tuesday rather than a Thursday, it would be much easier to analyze.

IWM Cycle. A cycle is a series of 4 events, accumulation, mark up, distribution or top and decline, these 4 events or a cycle play out over and over in stocks and averages, it's like the business cycle in a way. Below is the cycle that started from the 10/9 lows.

 1) Accumulation  in to the lows which even showed a head fake move to shakeout longs. 2) Mark-up  and 3C generally confirms this stage, the IWM is a bit different because it had a stage 3, went in to stage 4 decline and then performed a larger stage 3 "Head Fake" move that is seen above as a Channel Buster", these almost always reverse hard in the opposite direction of the break out of the channel so even without 3C distribution and IWM being where it is in the cycle, I'd put the probabilities of an IWM sharp decline as being high just based on the Channel Buster.

However IWM is in a pre-stage 4 area with a head fake move and 3C distribution.

The 1 min intraday, it seems a bit early for distribution, but this has been a strong move. This is why I try to anchor expectations ahead of time and have said numerous times the last few days that "Wall St. doesn't do anything without a reason" and "Even though it may be a short duration move, that doesn't mean it won't be impressive, it's job is to be impressive", this is how Wall St. makes as many traders strong as possible at any one time.

I hope you haven't forgotten the quote just posted, "To be right and sit tight is a rare trader indeed".

You can also see the accumulation at Tuesday lows and Wednesday, enough for a short duration move, no where near enough to be much more than trend noise, but most traders react emotionally and even noise will do it's job, consider the "Rebel Yell".

 IWM 1 min close up, it's causing a consolidation. The rule of thumb with 3C is a 1 min negative has a 50/50 chance of a consolidation through time (lateral like this one) or through price, a pullback. If the 2 min chart also goes negative, then the probabilities increase toward a pullback. For our purposes we are looking for the end of a move and the IWM to make a significant fall, so I would like to see very strong signals and I wouldn't expect them this early or in front of options expiration, but if we get stronger, growing signals, that's what I'll follow.

As far as an IWM short or an SRTY long, I'd have no problem with either in this area. As far as an IWM put, timing becomes more critical and I'd wait for a better signal, but I'd also be willing to miss the trade if I had to, I don't want to enter a subpar signal because I'm afraid I'll miss the trade, that's emotional trading, both fear and greed.

 The 2 min chart's trend looks good, this is where the higher probabilities are, leading negative on the Channel Buster, you can see where there was accumulation right at the area I called out as forming a mini cycle on the 7th/8th, but that fueled the Channel buster, although it looks like a strong move and a bullish move, those that started it almost definitely didn't have "Bullish" intentions, they had "Sell or sell short to bag holder" intentions. That's what a Channel Buster is about psychologically.

 2 min chart up close, it's going negative, but this isn't even as strong as the VXX signal I ignored yesterday and for good reason, it was too tight, too small.

We have a little rounding, this certainly "could" put in a proportional rounding reversal today, however with op-ex tomorrow, it could put in a larger one with today/tomorrow, not sure which we'll get, but it has a lot to do with the rest of the market so lets check in to that as well.

IWM Update

I know a lot of you have asked about the IWM, today is a perfect example of why I warn you of accumulation on a day like Tuesday, it's 1-day so that makes it useful for an IWM short, but it doesn't change trend expectations.

In any case, IWM is starting to show some cracks.

I'm very happy to see PCLN is pinned and not following along.

I'll have IWM and market charts out ASAP, I would probably consider IWM in this area although I'd like to have a little more of a mature signal.

Market Trend Update

*For the gist of market trends, expectations zip down to the bottom of the post in red, but I think if you miss the entire post, you miss ALOT.

Later tonight I'm going to try to give you a view of the market, to show you why, overall I'm bearish on the market. I don't know if I can get it all in to one post in one night, but this is based on overwhe;lming objective data, I don't make decisions based on gut or "Feelings", I do have feelings as I admitted yesterday in this post, "Market OPINION"  (note I was very careful to say opinion).

Thie above post is based on what was first predicted last Friday, that we get a bearish engulfing pattern on Monday which we did in 3 of the 4 major averages, then my opinion Monday that Tuesday would see trade hang around the area, then my on Tuesday that this VERY SHORT DU?RATION period on Tuesday was short term accumulation and as such I entered short term positions like AAPL calls and SPY calls for a corrective bounce, but this is all day to day stuff and doesn't change my view point on the market whatsoever.

From yesterday's post...

"However, I have to stick with the charts and an hour or so of 1 min negative intraday charts isn't on the same level as the 5 min positives built yesterday, even though they are weak as well which I interpret as a short duration bounce, thus the reason for options for leverage.

If I have something that's more than emotion, I'll let you know, but I'm human too. However I have to stick with the highest short term probabilities and they are still with yesterday's 3-5 min charts."

This post is dealing specifically with the 5 min positives of 1-day, Tuesday and the call options meant for very short duration trades in SPY and AAPL. I was saying that even though intraday charts looked like the market was going to see downside as it did, overall as far as the short term options in SPY and AAPL calls, the 5 min chart still suggests they'll do ok and I'll hold them.

However even this 1 min chart information was useful as I exited a VXX call position at a small 8% loss that would have been 35% or more today.

We have a lot of different traders in all kinds of timeframes and the market often gives us a lot of information, FOR INSTANCE A 5 MIN POSITIVE ON TUESDAY ALONE tells me there's likely to be a nearby short duration bounce, THAT'S TODAY. 

HOWEVER, 1 DAY OF 5 MIN ACCUMULATION THAT "IS WEAK" IS NOT A TREND CHANGE, IT'S AN DAY TO DAY JIGGLE IN THE MARKET, for many of us it's useful such as using it to enter PCLN shorts/Puts this morning or closing a VXX call and not taking a bigger loss, but it doesn't change the trends expected.

People like Cramer will give you a "I'm bearish or bullish XYZ stock", a blunt statement. It reminds me of something I heard in watching Abraham Lincoln last night, 

"A compass, I learned when I was surveying, it'll... it'll point you True North from where you're standing, but it's got no advice about the swamps and deserts and chasms that you'll encounter along the way. If in pursuit of your destination, you plunge ahead, heedless of obstacles, and achieve nothing more than to sink in a swamp... What's the use of knowing True North?"

In my view, the same is true of saying, "I'm bullish or bearish XYZ stock", if you don't understand what is likely to happen in the near term, you can easily be kicked out of XYZ stock even if you were correct.

This is what Jesse Livermore, "World's Greatest Trader" was saying in this quote....

"“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!

“It is no trick at all to be right on the market,” he adds. “I’ve known many [traders] who were right at exactly the right time, and began buying or selling stocks when prices were at the very level that should show the greatest profit. And their experience invariably matched mine; that is, they made no real money out of it. [Traders] who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make the big money.”

This is exactly why I posted these two charts and the following in a recent MCP post (commentary will pick up again after the "-----" dashed line...

"even if you have no interest in MCP, there are some great concepts and examples of market behavior.

Just looking at the MCP chart it looks like a simple long, short trade and the short side looks really easy , like a no brainer.

These are the stages and trends of MCP, PUTTING YOURSELF IN THE EMOTIONS OF THE MOMENT (WHETHER LONG OR SHORT) IS ONE OF THE HARDEST THINGS TO DO, BUT GIVES YOU A REAL NOISE FOR THE MARKET.

MCP started at stage 2 Mark-up (2) however as I have mentioned many times, changes in character are important as they precede changes in trend, I just mentioned this Friday re: MSFT (when it was a momo stock) and AAPL recently before the top. At "A"  there's an uncharacteristic, nearly vertical price move, these are most often seen JUST BEFORE a stop tops so in actuality they are warnings or red flags, at least time to have a tight trailing stop. At "3"  we have a large triangle stage 3 Top.

At "C"  we have the break down from the top and then a 5 week bounce which was a +40% MOVE, try to put yourself in the emotional position of being short then.

At "D" we had a 5 month rally/consolidation, again just from a time perspective and after a 40% bounce, as a short this would be emotionally exhausting, but this is why it's important to know what is normal so you can anchor expectations and make fact based decisions rather than emotional ones.

At "4" we have a stage 4 Decline and at E  and F we have "Dual Capitulation". People always think after the first capitulation it's time to go long when in fact there are usually at least 2 capitulation events and then months or years to form the next stage 1 base so those going long on the "Blood in the streets" capitulation event are often at a loss for a long time or at least at Opportunity Cost."

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MCP's "True north back then was clearly a short, but there were chasms, swamps and deserts along the way in the form of a 5-week bounce, a +40% counter trend move, MCP was still a short for trend traders, but for others, they need to know what's coming, they need to know so they can decide if they want to try to trade around 5 weeks of opportunity cost that may drive them out of the position because at the time as you sit through those 5-weeks, you have no idea or guarantees that the downtrend will continue. This is why I try to show you the long term and what is right in front of us in the short term. 

Being bearish MCP would have been the right call, but how many traders could have "Sat tight" through those kinds of obstacles without having some clue of what underlying trade and probabilities had to say?

So I think we are in a small corrective stage after a recently , nearly unprecedented 3-days down in a row. Is it a big deal? No. Does it change where I expect the market to go or my expectations the 10/9 cycle in now moving toward stage 4 decline? No. 

However I can see how it can be hard to keep up on all of this if you are not up on most of the posts.

I was thinking about a short term trading model portfolio and keep the core portfolio, but I'm open to other ideas as well as I can put them on the new site. Just keep in mind, I don't make price forecasts or at least that's not what I try to do, I try to let the market tell me when it's time to make a change and that is often long before it happens in price.

I expect this corrective bounce to be short term in duration, 1 day of accumulation is like 5 gallons of gas, it won't get you very far.

I expect the cycle that started on 10/9 and has gone through stage 1 accumulation, stage 2 mark up, stage 3 distribution and top and even a head fake move, is very close if not already entering stage 4 decline (despite a counter trend move today that we expected)

I also expect the longer term market to see massive downside in proportions that can't be described because we have never had a similar market in the history of markets.

I also expect that a chart like the MCP example above will be a perfect model for what you can expect, look at most bear markets and even bull market that didn't have a "Bernanke put" under them and you'll see they do the best they can to make as many traders wrong at any one time.

PCLN Update - Market Example

I'm going to update the general market conditions as well as short term and PCLN is a pretty good proxy for that, although it's not the best model.

PCLN has done EVERYTHING we expected it to do and hoped it would do since I first said, 

"I'd be interested in adding to a PCLN core short or perhaps a Put trading position above $1100"

I didn't picked >$1100 out of the blue as we were trading below $1100 at the time, there was an obvious resistance zone there which makes not only the zone, but the psychological centennial mark of $1100 a magnet for a head fake move. 

If you understand what a head fake move is used for, then you'll understand why $1100 is such an important level, if you don't understand why $1100 is an important level for a head fake move, I'd urge you and anyone who hasn't read the two articles that are always linked at the top right of the members' site, "Understanding the Head-Fake Move" part 1 and 2.

 Lets take a quick look and understand that I am bearish on PCLN here.

1) This is the resistance range easily visible at an already known psychological level where limit orders to buy and traders who see the move will step in, as I often say, "Wall St. doesn't do anything without a reason" there's no random walk here.
2) After the breakout of $1100 I'm interested in PCLN short, but I want to get as close as I can to the lowest risk and shorting the first break of $1100 when there's no reversal process at all in place is crazy, expecting an instant , next day drop is not realistic, there's almost always a process so what I hoped to see and based on charts thought we'd see was a Doji or a star after that candle in the same area that would create a rounding or reversal process. 
3) The next day we got exactly that, but these are almost always proportional to the trend that preceded them so if you look on a 15 or 60 min chart you can see 1 day is not enough, so that day I said "I'd like to see another Star/Doji" in the same area to widen the "U" top reversal and the next day we got that star candlestick.
4) At this point, looking on a 60 min or any intraday chart long enough to show the 3 days, there was a clear line of resistance again and as I often remind, the market is fractal, the same concepts that apply to daily charts apply to intraday charts or weekly charts. That clear resistance line (go back and look at the series of PCLN posts in the archives on the members' page) was a clear magnet for a head fake move. We have a larger one (Above $1145) already in place, the smaller one above that range would almost act as a primer to a larger move just like you need a spark to ignite a much larger ammunition piece. We got that yesterday at "4"
5)Yesterday I saw this as we had been looking for and said the "ideal" scenario would be a gap up open in PCLN and I don't know how we will get it after the negative minutes unless there's manipulation like an overnight Yen slam down, wouldn't you know it, there was an overnight Yen slam down and we got the exact gap up open I had hoped to see yesterday and said I would likely enter a short or put position right off the open if such a thing occurred as WE NEED A GAP HIGHER TO CREATE A DAILY CANDLE CALLED A BEARISH ENGULFING CANDLE WHICH IS THE CONFIRMATION OF PCLN'S DOWNSIDE REVERSAL.


THIS IS WHAT TODAY'S GAP UP OPEN WOULD LOOK LIKE WITH A CLOSE LOWER TODAY CREATING A BEARISH ENGULFING PATTERN, JUST LIKE WHAT WE PREDICTED FRIDAY FOR THE MARKET THIS MONDAY AND GOT IN 3 OF 4 MAJOR AVERAGES.

 I drew in the rest of the day, but the open-the very top of the last daily candle is the real open from today, the close is what I drew in and that's a bearish engulfing candle or a reversal confirmation candle to the downside.

So you see, not every move up is bullish, this actually is very helpful because even if it doesn't close the way I want, if I feel the position may be in trouble, I'm so close to any stop I want the risk is mitigated and the entry is as good as it gets, 

LIKE I POSTED YESTERDAY, "SOMETIMES YOU JUST HAVE TO HOLD YOUR NOSE AND JUMP IN" even though they seem like the most difficult emotional trades, they are often the best entries with the least risk.

I said I wanted to check the open if we got a gap up and PCLN shows 3C did not confirm the gap up, again, exactly what I wanted to see.

So, while yesterday we (PCLN short traders) were hoping for this gap up, it doesn't change the bearish sentiment or where we think it's going, it's just a short term move that is helpful in risk management and getting the best entry possible (with puts, the lowest premium).