Even though we are no where near a bear market, at least no the kind as defined by Dow Theory, we have seen the signs and it wasn't so long ago that the cumulative effect of all of this distribution was taking it's toll, while the "Ginger Bread" house and the "The F_E_D has our backs" theme seemed to be logical. It was right in the middle of that and before that we not only showed the proof of what 3C charts have been showing with BofA's net positioning according to client types which showed a near perfect correlation to 3C distribution when compared to their Institutional clients, but as expected, their retail clients were clearly the fools being handed the bag of junk while retail swore "This time it's different" as history and out commentary proved, "It's NEVER different" in a bubble.
On July 31st when I posted a near emergency market Daily Wrap, calling for a base in early August and a bounce based on a deeply oversold condition, the next week we saw all of the evidence of that and saw the rally that retail cheered as all time new highs with the assumption or pipe dream that the "F_E_D has their back", which is about as childish an attitude as you can have, the F_E_D has the banks' back and their own, not yours.
This led to the analogy I have been making since then of the beautiful Pier over the ocean hiding the rot beneath the surface that is primed for a market collapse. After weeks of making the analogy, I put it in picture form on September 26th's Week Ahead charts. & Daily Wrap when the market looked like this....
And this was the net reality of what was holding up that long pier based on the charts we have been tracking, Rotten Pilings.
Even last week I gave you a number of downside targets expected to be taken out BEFORE any kind of bounce would take place, this was in Friday's Daily Wrap with the SPX just missing it's downside target posted earlier in the week, a break of the 200-day moving average, if there's something that will trigger sell orders/stops and get retail short sellers involved, all selling creating supply at low levels that Wall St. can accumulate...it's a break of the SPX's 200-day which it landed on Friday, today however....
Overnight it seemed to many that the Plunge Protection Team run by the F_E_D (actual law by executive order signed by Ronald Reagan, also known as the President's "Working Group on Financial Markets" signed by executive order on March 18th, 1988) was busy levitating the markets overnight after some nasty early opening downside. Whether true or not is no concern of mine, everything I've laid out is what I'm looking for which should be pretty clear by now so I don't want to be redundant.
In any case, this is the objective evidence we've been collecting that often contradicts the market as it's showing us what's really happening below the surface so while momentum chasing retail were celebrating new highs with ZERO follow through and no ability to hold them, we were pointing out the deteriorating conditions in the market that only occur for one reason, selling on a large scale masked by a thin veneer of shiny material in the form of financial media outlets trumpeting new highs, or WHAT ALREADY HAPPENED , I feel bad for the confirmation traders who bought the new breakout highs as they have taken about a 7% beating in the SPX over the last 3 weeks and a 13% beating in the Russell, but following what has already happened is not an edge in the market.
Now, back to where we currently stand. The bond market was closed today for Columbus Day, stocks being open and bonds being closed can make for some strange movements that can't always be trusted to be accurate as a major portion of the market is closed while the other runs on fumes. In fact, around 3:30 today a huge order in S&P E-Minis, (ES)
took out the entire liquidity stack... there's something wrong with this picture. Even I know that it's not wise to sell an order that is bigger than the available liquidity to fill the order, smart money is much more aware of it and their entire trading strategy revolves around their size issues. So this odd order around 3:30 that saw liquidity evaporate and cause a mini-flash crash in the SPX Futures smacks of some sort of intentional manipulation, whether that be to drive the SPX below the 200-day or to cause retail to be super bearish and short to catch them in a bear trap, something doesn't add up, especially given someone apparently knew this was coming as we posted today at 1:20 in Market Chart Update that an intraday pullback was coming.
To give you some idea of how low liquidity in futures was, at peak trading during regular hours it was lower than what we normally see in pre-market! Now who would put out such a large sell order under those circumstances without an ulterior motive?
Via NANEX...
Eric Scott Hunsader @nanexllc
For every seller there has to be a buyer, if an order that sucks up all liquidity is placed, the market response is going to be more downside momentum than the order itself creates as there's a snowball effect, but SOMEONE HAS TO BE ON THE OTHER SIDE OF THE TRADE.
Cramer, in one of his most honest interviews and probably the only thing he's done that's worth watching is his Street.com interview in which he describes how he would use $8 -$10 million as a hedge fund manager to buy puts in a stock and create a bearish feel, when traders saw the large put orders they'd sell and guess who'd be buying on the cheap and in size, not only booking profits on the puts as they created negative market sentiment in the asset and sent it lower, but by buying at the lows and riding the asset back up... Cramer and he's far from being the original with strategies like this, warning traders, "If you're not willing to play the game, perhaps you shouldn't be in the game".
The point simply being, few managers in their right mind would put in such a large order in such an illiquid market when the bond market is closed unless they were purposely trying to create a certain outcome which they'd benefit from because no manager benefits from selling a block order at a loss as the size of the order itself causes the loss when it can and usually is broken up in to smaller pieces to avoid that exact scenario.
However, this does fit perfectly with our head fake scenario in which prices are sent below an obvious support level like SPX -200-day moving average which creates snowball selling/short selling by retail, which can be accumulated in size and on the cheap and no one ever asks, "who's on the other side of that trade ?" as if the shares just magically are sold and are taken out of the market with no counter-party buying them. This also fits with the lower prices today as the move which I suspect is a false head fake stop run below the August cycle lows was too thin, a reversal event rather than a reversal process. Accumulation is almost always in to falling prices or at least flat prices , while distribution is almost always in to rising prices or flat prices, Apollo Group is a perfect example, they had been selling at least for 15 months prior to May 2013 because their positions are so large, it would take them quite a bit of time to sell them in to higher prices rather than do what happened today in SPX futures and crash prices on an order that's too big for liquidity.
Such a head fake move has the additional benefit for the buyers of stocks on the cheap in size, of creating a retail bear trap in which retail, as usual chases price rather than having any forward looking indicators or analysis, this puts them short and when prices rise, they are caught in a bear trap forcing them to cover and giving the upside move additional upside momentum by virtue of their short covering at a loss alone. This is all explained in my two articles linked on the top right side of the members' site, "Understanding the Head Fake Move" PART 1 and PART 2.
In last Friday's Daily Wrap I also posted the "Fear and Greed" Index reading of 4 of 100 with 0 being the most fearful or bearish, today that hit ZERO, the most bearish which is why our custom VIX Inversion indicator is bright red, giving a buy signal as emotions are often one of the best contrarian indicators available. You may also recall our September post illustrating the "Igloo with a Chimney top and how the "Chimney" was the head fake move that often is one of the best timing signals for a reversal move as it was present in the VIX, although in this case you'd have to flip the Igloo upside down...
The same is seen in the SPX on a daily chart in the August cycle's 4 stages...
Although the move below the base's lows from the previous week and the move below the August stage 1 base are not easily identifiable as any kind of base, when looking on an intraday basis...
The concept becomes a bit more clear... the base area and the move below that base creating the upside down Igloo/Chimney, *keep in mind a top or base doesn't have to be rounding, however the head fake move is there about 80+% of the time.
From two other Concept points of view, you know there are 3 places I'll short a H&S top and 1 I won't, the Russell 2000m is as close as we get in the major averages to a H&S top.
For example take out HLF short at a 32% gain...
And the SPX/SPY with it's bearish Ascending Wedge... Technical traders are taught to short the break below the wedge's apex or point of convergence of the trendlines at the first arrow, but again, Wall St. knows this and they run a shakeout at the second yellow arrow. Technical traders are taught that if the first position fails as it did, to switch positions and in this case go long so as soon as they are long, they are once again stopped out as the Ascending Wedge's bearishness is real, it's just the shakeout of technical traders in between that you have to watch out for, once you know how retail traders will respond, you can virtually predict what Wall Street will do.
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.
As for market internals today, all 9 S&P sectors closed green with Energy the worst at -3.09% and Utilities the best (Flight to safety trade) at -0.09%.
Of the 238 Morningstar groups I track, 200 closed red, these two indications both indicate a short term oversold condition, normally the next day would close green, however recently we've seen these in clusters of 2 and even 3 days.
The Dominant Price/Volume Relationship was skewed today because of the low volatility on the Columbus Day holiday/Bond Market closure. The Dominant Relationship in the averages except the Russell 2000 which had no dominant relationship was Close Down/ Volume Down, which has no strong next day bias, I call it, "Carry on" as in do what you were doing. There were 21 Dow stocks, 58 NDX and 258 of the SPX, but again, volume had little choice but to come in on the light side.
I can't draw any next day bias conclusions from this other than the slight bias of the S&P and Morningstar groups dominantly red today, typically a 1-day oversold condition leading to a bounce.
All of the major averages saw intraday 3C end the day in line suggesting more weakness on the open tomorrow, however there has been a lot of 3C positive activity in the overnight session. Still we don't have the head fake confirmation just yet so I'm going to stay patient and wait this out as it can develop in a matter of hours considering some of the longer charts have already gone positive from accrual of smaller divergences over the last several days such as ES's 60 min chart. I'll also note that the end of day trade action was very parabolic to the downside and just as we saw last week on the minutes to the upside, I don't trust parabolic moves as they tend to fail badly as the minutes upside move failed the next day so we need to be on our toes.
As for leading indicators, the SPX/RUT Ratio Indicator that has been so reliable, it has been near flawless since we introduced it, is calling out not only a VIX Inversion buy signal, but the SPX/RUT ratio is not confirming the market's downside and is starting to positively divergence with the market as you've seen several times today. Other leading indicators were less constructive, but I think the bond market being closed today had a lot more effect on the market than you might think, liquidity was very low making accumulation very difficult which may be why we saw that mini-flash-crash in SPX futures this afternoon, it created liquidity in a almost non-exisztient environment and on the cheap big time.
For now, all core shorts are staying in place, Thursday I went to cash in my trading account with SRTY and SQQQ, perhaps a bit early, but I didn't feel the extra gains were worth the risk and wanted to have my dry powder ready to be deployed, but positions like HLF, NFLX, SCTY and others with significant gains are going to stay in place for now and the leveraged ETFs will be used to trade signals, once we have SOLID signals.
The Index futures are still some of the best indications we have as the 5, 7, 15 and all the way out to 60 min charts are positive. there's definitely something going on and the market price wise has done exactly as forecast, even if a day or two late from the week ahead forecasts.
PATIENCE.
