Right now, this is one of the most important concepts that was posted October 15th in the Daily Wrap...
"I suspect we will see a sharp upside move taking out shorts and breaking above obvious resistance like 200-day moving averages and top trendlines as well as the August lows, remember these moves HAVE to be convincing, it doesn't mean there's a real change in character so if and when the time comes to start shorting in to that strength, it's a gift, although you can bookmark this post, I promise you , you will not feel it is safe to short in to strength as the market moves higher on a bounce like you do now, the moves are that convincing, which is all the better for entering new or adding to existing shorts."
This is from September 30th, the last day of Q3 Window Dressing, the Daily Wrap.
In the excerpt below I'm theorizing about a post Q3 rally and the reasons why, this is very early before we had any real evidence, I'd put this kind of analysis under the heading, "Mass Psychology".
"I'd say the amount of selling underperforming assets (Window Dressing in to quarter's end) with probably something near 50% of the NASDAQ Composite and 50% of the Russell 2000 stocks in a technical bear market, there certainly wouldn't be much accumulation during window dressing, this is the reason in the Week Ahead post I suspected if we saw anything it would be post window dressing, Wednesday. I think there's enough room to work with to put in that post Window dressing bounce as a lot of small and mid caps are oversold or viewed as such as they were the worst performers on the quarter and thus sold the heaviest this past week or so. I do think we'll have a clear signal and be able to make a choice of whether to participate or not..."
This is just to remind you of what sentiment was like just a mere 2 weeks ago...
Monday October 13th, 2 days before the lows were in and the rally was off...Daily Wrap
"From a conceptual point of view, the bearish sentiment among retail is exactly the kind of bear trap we expected with a head fake move not only below the previous week's lows, but below the larger support level of the August stage 1 market lows which were surpassed. In effect, the Head Fake move is there for several reasons, one includes creating supply from sellers and short sellers that can be accumulated cheaply and another is the upside reversal catching what is now a majority in a bear trap in which higher prices cause them to cover and eventually buy, instant demand and upside momentum without Wall St. having to spend a penny to drive prices higher as the initial short squeeze does the heavy lifting and the bearish sentiment change to bullish does the rest, assuming the move is powerful enough which is why I suspect this is going to be a very strong upside move, even though there's no real change in the underlying situation, it is a quick and rather effortless trade worth a lot of money to institutional traders."
Wednesday October 15th's Daily Wrap... This was the low before the market rallied...
"On the day today, lots of stats...
The Dow has lost nearly 1200 points in the last 3 weeks... remember I warned a while back that I wouldn't take the risk of being long as fear is stronger than greed and markets fall much faster than they rise.
The NASDAQ Composite is in official correction, down over 10% from recent highs. This Average also has one of the worst Advance /Decline lines I've seen.
The VIX's intraday high of 31.06 is the highest reading since December 2011.
The Dow Industrials are down -4% Year to Date, so much for long and strong. It's also down close to the official -10% correction levels.
The Russell 2000 is down -9.6% year to date and this is the average that should lead the market.. The SPX is now down -1.5% year to date."
And as to what we were seeing Wednesday October 15th...
"The Fear and Greed Index is at zero, the most bearish it can be, Wall Street often flips the script when there are too many people on the same side of the trade, you can't make money like that in a zero sum game."
Today SPX Futures volume was the highest in 3 years, this kind of smells like short term capitulation or a mini selling climax which makes room for a bounce.
"The VIX, after last night's "VIX futures were going negative on the 5 and 7 min charts very clearly and a bit further out" hit a new high at 331.06 intraday, the highest since December 2011, before closing lower at 24.92, creating a bearish Doji star with long legs or bearish "Shooting Star" (remember the VIX moves opposite the market). As for fear though which was obvious in the VIX intraday, not as much on the close, the Fear and Greed Index closed again at zero, the most fearful reading possible. Remember the VXX, short term VIX futures was also showing 3C distribution today as posted in a market update.
VIX bearish shooting star close after a bearish Harami Monday/Tuesday."
If we get the same kind of late day positives we saw today, we only need a couple of hours before I'd feel comfortable filling out existing longs and adding to them including Call option positions."
I think you probably get the point I'm trying to make, when you're at sentiment extremes, there's a reason, Wall Street designed the move to trigger those emotions and no matter how far in advance I warn, no matter how accurate the warning is, there's a reason that the majority of our concepts work in any time frame and with any asset, HUMAN EMOTION NEVER CHANGES AND THE MARKET IS MORE ABOUT EMOTION AND PERCEPTION THAN ANYTHING ELSE ON THE WHOLE.
I use to read a lot about the competing theories of "Random Walk" in which the market's moves are essentially random vs. "Efficient Market Theory" in which the market discounts ever bit of information that's out there. After years of watching these crooks set up rallies like this one which we called in concept, weeks in advance and which we called with actual positions right to the very day, I don't believe in either. For the most part, smart money is smart, they may not control everything in the market, but they exert enough control that you can beat the market by following what they are doing.
This rally wasn't an accident, it was predicted days and weeks before it even started and confirmed with objective data like the VIX distribution highs, the selling climax lows, the emotional warnings that "You aren't going to feel safe shorting anything" while we were in one of the most bearish periods in years.
I think it's probably pretty safe to say that we all get it, these market moves had to be extreme as the preceding bearish move was more extreme than anything we had seen in years in many cases and to shift sentiment, you have to d something bigger or faster.
As for technical levels, this may be what they were working so hard to hit yesterday with HYG accumulation and a VXX slam , both of which were ineffective....
The Dow 30 which over 2 weeks earlier was down 1200 points in 3 weeks!!!
The Dow also broke the psychological technical level of $17,000
Yet....
The NASDAQ Composite's Advance/Decline Line (green) is way below where it should be vs the NASDAQ Composite (red), there's a major problem here in breadth and this isn't an indicator, it's not something to be interpreted, these are hard numbers, these are fact.
And while all of the averages are above their 50, 100 and 200-day moving averages....
Less than half of ALL NYSE Stocks are above their 200-day moving average, in layman's technical terms, the market of stocks is in a bear market.
Barely above half of all NYSE stocks are above their 40-day moving average at a mere 55% (vs the SPX in red).
It's not that hard to see, something remains, VERY WRONG with this market.
Again, volume for the SPX was 40% below average, I found the chart I was looking for that shows SPX Futures volume vs price, I think it may be enlightening...
Anyone who's read the first chapter about volume knows that an advancing market that doesn't see rising volume is always suspect, in this case it's not just a couple of suspicious days, but a trend.
I showed how HYG fired off today and helped the market...
And it's still in a deep leading negative position, but note how it was perfectly in line and leading the market early in the move...
The Most Shorted Index also helped out today, there was a massive short squeeze, I doubt there's many if any significant shorts left, WHICH WAS THE POINT OF THIS ENTIRE MOVE AS TOO MANY PEOPLE WERE ON THE SAME SIDE OF THE TRADE.
The official MSI (GSCBNSAL) saw it's biggest move since December 2011 today, SHORT SQUEEZE. This move changed sentiment as it was meant to.
HYG wasn't the only thing to slip in to the close, pro sentiment did as well.
Pro sentiment...
Of the 9 S&P sectors, all 9 closed green with Energy leading at +2.28% and Consumer Staples lagging at +0.39%, an exact flip flop of yesterday's leader/laggard.
Of the 238 Morningstar groups, we had a massively 1-day overbought 115 of 238 green.
We had a strong Dominant Price/Volume Relationship in all 4 averages, Close Up/Volume Up, this is the count of actual stocks within the averages, not the average itself. The Dow had 19, the NDX 67, the R2K 1468 and the SPX 269 which is a strong relationship.
Ironically, although this is the most bullish of the 4 relationships, it's also the one most likely to produce a next day sell off.
I'd say we have a very sharp overbought condition and we have a very sharp breadth problem, all in all, the move has achieved its goals, which is why I had no problem using the move today which forms a chimney on the recent igloo top, for buying puts in to. As I said October 15th,
"bookmark this post, I promise you , you will not feel it is safe to short in to strength as the market moves higher on a bounce like you do now, the moves are that convincing, which is all the better for entering new or adding to existing shorts."
Remember, tomorrow is the F_O_M_C meeting, I'm not even going to guess what they say, do or anything else, but I will watch for signs of a leak as we have found about 3, not many, but they do happen. As always, BEWARE THE KNEE JERK REACTION. Here's the last F_O_M_C knee jerk reaction from the September17th meeting...
And here's what happened next...
From a "conceptual" point of view, I'd think they'd want to keep price above these averages for a few days to build a bigger bear trap, but today was pretty overbought at an extreme, just like the market was oversold at an extreme when it turned up, I don't have evidence suggesting we stay above the averages for a few more days, it just makes the most sense to me, of course the F_O_M_C is a total wild card.
And... FB soiled the bed in AH tonight with earnings and it seems to be having some effect on Index futures... Congratulations FB shorts!
Russell 2000 negative divergence in to the afternoon and after hours ...
Although it's not like there wasn't already trouble brewing...
R2K 7 min which has been doing a great job in calling out turns like the bottom that led to this rally.
Just keep your cool, use what you can to your advantage. This market is damaged and this rally didn't changes that as I showed you in the breadth charts, but we already knew it wouldn't change anything before it began.
Have a great night, see ya soon.
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