As for late last week's action beyond some of the worst markets in 3 years, one of the things I didn't do a lot of last week was put out new trading short set ups and while that is based on signals at the time as we can only see the money flow, not know what it will mean in days or weeks, looking back on the week, just about any short entry would have left you chasing at worse prices, higher risk and potentially some near term draw down so the signals were correct in not calling for new shorts as the market continued the week to end at the worst performance in 2.5 to 3 years on the week for different averages. Sometimes saving money and not unnecessarily risking it is just as good as making money as losses are very difficult to make back ( a 50% loss requires a 100% gain just to get back to break-even).
However I did make clear Friday in Planning Ahead and then again Saturday that I think something is up, a short term head fake move, one that would look bullish near term , but have exceptionally bearish effects, I'm not talking about the pattern in price played out over the last several weeks being the same as the October 2007 high and the decline that led to, but something different that I haven't quite pegged yet.
I started to elaborate the subject Saturday in MACRO TRENDS AND CHANGES IN CHARACTER.
Much of what we do with forecasting starts based on concepts that we have seen over and over on the market and if there's overwhelming evidence that builds from initial indications, we have a good idea of what's coming and how we can use it to our advantage.
Right now I'd ask you to join me in doing what a lot of our concepts are based on which comes from real experience and that's THINKING LIKE A WALL STREET CRIMINAL.
What are two seasonal events that just about EVERY trader just assumes is a birth right? The first would be the Santa Claus rally which s usually speaking, broadly through December but especially the last week of December with year end Window Dressing (THE ARE OF LOOKING SMART) also in full effect and the second is the January Effect, a supposed deluge of new money coming in o the market whether from tax based events at the end of 2014 or new commitments to 401ks and other investment vehicles.
The last concept I've already touched on pretty thoroughly is the 6 trading week range in the IWM that hasn't moved at all and is SCREAMING for a head fake, false or failed breakout move.
Take these 3 Mass Psychology events together and you have a head fake breakout in IWM that gets a lot of attention as it moved to a level not seen in, well a lot longer the 6 trading weeks, but becomes a very obvious event.
This then leads to the assumption that the Santa Claus rally has began. Now should this be a true head fake move as all of the long term charts, leading indicators, breadth and just about everything else suggest it would be, then a failure might even possibly rip the Santa Claus rally out of the bulls arms which in turn , if ugly enough, may kill the entire January effect, no one wants to put money in to a market that looked like October's declines, not even the buy the dip crowd was willing to.
Each concept flows in to the next and amplifies the next. If it were me, I was the crook controlling the short term game with charts that show my activity looking like this...
both of which strongly suggest I (as the Wall St. criminal) have not only already sold my long holdings, but have gone largely short and am in place, then I stand to gain a lot from a move significantly lower and a head fake move, for all of the things it is and does, is a momentum igniter on a reversal (this case a broad downside reversal that many might argue has already begun).
As I look at the futures tonight as they open for the new week's trade tonight, I don't see anything of particular interest in Index futures, however remember the late Friday afternoon post, Planning Ahead. This post showed short term intraday 3C charts either negative or in line with the horrible price trend at the end of the day closing at the lows. ONE OF OUR CONCEPTS THAT WORKS LIKE A CHARM IS 3C DIVERGENCES PICK UP WHERE THEY LEFT OFF, meaning that even over a long weekend if the closing divergence was negative, the probability of price action Monday morning would be negative until a new divergence forms.
However I also showed you several charts in the same post of slightly longer timeframes that were positive suggesting early trade start negative and at some point in the day either start turning more positive in price or growing a larger divergence. In addition, HYG has seen short term accumulation which is also in the same post linked above and there's only 1 reason to accumulate HYG in to these prices and that's to act as a market ramping lever, PERHAPS TO CREATE A HEAD FAKE BREAKOUT ABOVE THE IWM'S VERY OBVIOUS AND WELL KNOW 6 TRADING WEEK RANGE.
You also know that treasuries , especially 30 year (or TLT) have short term negative divergences in them despite one of the most blistering hot auctions of 30 year treasuries this last week in a very long time. Why would they be showing short term distribution with such demand just days earlier? I can think of two reasons, to knock weak hands out and take their positions over at lower cost or to be used as a short term lever to help ramp the market to an IWM breakout/head fake move or BOTH!
So far I have evidence of these things, the rest such as the taken for granted and assumed Santa Claus rally and January effect initially looking like they are working and then suddenly failing , something most traders couldn't imagine, would be a set up for the perfect storm and as I said,
IF I WERE THINKING LIKE A WALL STREET CRIMINAL, THAT'S EXACTLY WHAT I'D DO.
We'll have to see about the rest and even the initial divergences that have formed, but I suspect this is EXACTLY what is going on, especially since last week's performance, BUT YOU'D BE SURPRISED HOW QUICKLY THE BULLS WILL GET BULLISH AGAIN WITH A BREAKOUT IN SOMETHING LIKE THE IWM, ALLOWING SMART MONEY TO SET A BULL TRAP THAT IS ON PAR WITH THE KIND OF UNBELIEVABLE EVENTS THAT HAVE FUELED THIS MARKET THE LAST NEARLY 6 YEARS.
Just think about it, you know traders expect the Santa Claus rally as if it were their birth right and the January effect, a head fake move above the IWM that hasn't moved at all in 6 trading weeks would start that and to turn traders birth right expectations on their heads, would be a most fitting end to this bull market with a mega dose of downside momentum. That's a working thesis for the time, but for know I'm sticking with hard evidence and staying short without hesitation or a second thought unless the market gives me objective reason not to.
Looking at Futures tonight, there are some interesting things. First the intraday futures in almost every asset (1 min) are dull, not showing anything which would suggest that trade continue to be weak early Monday, but you don't have to go far to see the same changes in short term Index futures that we saw in the Averages, again this post makes them clear, Planning Ahead.
Remember HYG is showing short term accumulation which almost always means they need it's support as a lever to help manipulate the market higher. Yields and bonds have also been showing divergences as they too can be used as a market supporting, ramping lever and interestingly tonight...
However as I showed Friday, their intermediate to long term uptrend is still very safe and very strong so this looks like a short term, quick manipulative move.
I still expect negative market action in the early morning and maybe through most of the day, but we will asses that as it happens tomorrow.
Some other interesting discoveries I made, I said I'm sticking with the gold short in effect for now because there's something on its charts I don't like...
Even more interesting, the speculative long call USO/oil trade posted on Friday, Trade Idea: USO (Speculative Options) Jan $22 Calls with these charts as evidence, USO Charts have picked up more short term bullish oil divergences.
While no one in the world wants to touch oil long except the knife catchers, we have objective evidence of what looks like a super sharp short squeeze in the making and are prepared for it.
Tonight I've talked to you not like a tinfoil hat conspiracy theorist, not like a member, but like I'd talk to a friend who asked me what I "think" is most like going to happen in the market, this is largely based on my second favorite for of analysis, Mass Psychology which is based on our concepts which are based on objective evidence and testing them through the years.
From here on out, the charts will have to provide the rest of the evidence, but as I said Saturday and as I said last week when it looked for a moment like we may get a bounce, USE IT TO YOUR ADVANTAGE. If we do, I suspect the IWM leads and shows the most relative strength besides maybe the Energy complex.
If you are wondering if I'd consider going long the broad market for such a bounce, my answer is a resounding NO. You saw 5 weeks of gains taken out in a week, I've seen the same done on one morning's gap down, so I would not trade against probabilities, but use them to let the trade come to you unless you are a VERY nimble day trader.
Have a great week, I'll see you in a few hours!
