Volatility is useful and a bit different in the position we are in now which is having transitioned from a stage 3 top to stage 4 decline which has wiped out all 2015 gains in the SPX and Dow in a very short period as well as concluding the entire head fake move above the early 2015 range that was standing out like a soar thumb in late January, attracting the kind of attention that would result in a head fake move as traders are very predictable and that predictability is profitability for smart money.
I was a technical trader before it was popular and we were mocked as using "Voodoo Analysis" and asked how a line on a chart tells you anything about price action or a company's valuation. I've always maintained that the one thing that turned Technical Analysis in to mainstream analysis at a time when everyone was using CANSLIM was the advent of the Internet and the transition from stock brokers to low cost Internet brokers. Would you rather pay $80 for a roundtrip trade, paying a stock broker who didn't know the first thing about analysis other than what their manager told them they are to get their clients to buy or sell that day (a glorified telemarketer) or pay $14 for a round trip trade?
As I was getting to, I've always maintained that the attraction to Technical Analysis after the introduction of low cost internet brokers was quite simply, LAZINESS. A lot of books were sold, a lot of systems were put out and it really wasn't that hard and didn't take that much time to make a trading decision based on a simple moving average crossover, about as simple as you get compared to valuation/fundamental analysis which I tried as well a long time ago.
The point being, the reason we see so many head fakes and false set-ups or failed set ups is that the same tradition of laziness still permeates Technical Analysis, you can see it just in the search for the "Holy Grail" of Technical Analysis, that system that beats the market every time without having to do any real research. Or the whole "GURU" thing, that one guy who can lead you to riches and make you in to a millionaire, there's quite a few of them out there. This is why head fakes are so prominent, Wall St. adapted to Technical Analysis going mainstream, Main Street never adapted to Wall Street knowing and using all of these century old precepts against traders and again, it's based on simple laziness.
There I go on a rant and off track, but if you take anything away from that quick history lesson of the markets from the late 1990's until now, take away that the market always requires hard work and diligent research. Anything that seems too good to be true usually is.
The subject was volatility at the particular stage we are at now, it is intense and there are good reasons for it. Consider the record levels of margin debt and investor negative net-worth. This means that when things get a little ugly, they can get VERY ugly very fast as margin calls come in hot and heavy and in that way, an outside force other than the actual market is controlling the market's movement...forced selling, etc. just like the F_E_D was an outside force that moved the market and will again, just not in the direction the permabulls are hoping.
So at this stage, Fear is the strongest emotion and we are in a fear based stage, that means otherwise solid technical analysis can be over-run by surprise news, something that happens that the market had no way to discount, say an unintentional shot fired in Ukraine that kills a Russian General who was on the ground advising the Pro-Russian separatists that suddenly changes everything and the market had no way to discount this. In a different cycle the market may be able to weather such a fundamental event, but in a stage in which things can snowball a lot easier and Fear is the strongest emotion, things can change fast which is why I choose, even when I know the probabilities of a move like the October rally or the February cycle are high, to stay on the path of highest primary trend probabilities.
Just be aware, what we see and expect right now, can look a lot different in a matter of hours in the current cycle we are in and with the market structure and breadth so eviscerated.
This has a lot to do with why I'd much rather use a bounce to short in to than to try to trade it long and then short it, there's too much risk and not enough reward.
On to the market update...
So far this has not been anything like a normal accumulation cycle even for a very short term bounce of a day or even half a day, it's certainly nothing like the Jan. 29th-Feb. 2nd accumulation cycle, this is much more sloppy with a lot less timeframe confirmation. I suspect there are those who simply will not trade this short term from the long side.
I suspect we are pretty close to being finished with this base as I theorized earlier today "Finish the base today, bounce tomorrow, Friday a bit stale due to op-esd and maybe bounce in to the F_O_M_C", but the last part is a big maybe.
From smart money's perspective, the probability of a rate hike in June went way up much faster than they anticipated and the total rate hike for 2015 changed a lot faster than anticipated from .50 basis points at the end of the year to a F_E_D based average from F_E_D members of 113 basis points, that means everything just about doubled, faster rate hike and a larger rate hike as compared to market expectations before the last Job report. The point being, if "Patient" is removed from the MArch statement, it's almost certain that everyone will be front running the rate hike that became more probable in June with "patient" removed. Thus, if there's any last minute house cleaning /selling of long positions or "squaring", there's only a few days left before the F_O_M_C next Wednesday.
Or this may just be a normal, run of the mill bounce attempt, but I suspect the former.
This was evident yesterday just in the way price action was behaving, today we have the objective evidence that yesterday was more gut feel.
With the 30 min (and longer) SPY chart looking this bad, I don't want to trade against probabilities, but with them, thus the same plan as yesterday, short/sell in to any price strength because the underlying strength has left town.
The white trendlines are the 2015 range that was standing out. In January I said that the market is going to have to take out this range to the upside before we make any serious move lower, I think we'll look back and see that was true.
Look at the stage 3 range to the far right in red and look at the head fake in yellow, as usual, they are one of the best timing indications we have for a transition or trend change, hopefully you've read the linked posts on the member's site, "Understanding the Head Fake Move", then you'll understand why and what a gift these are.
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