Bears Do Bounce

Today we got some heavier volume and a bunch of dominant and co-dominant price relationships that suggest an oversold bounce may be brewing. We also saw a hammer candlestick which is a short term reversal signal. There are some 3C charts that are mildly or cautiously positive in the 5 min area, the 1-min area is largely confirming price action.

If I had to guess, I'd say we didn't see a lot of accumulation because 3C is mildly divergent, I think we saw a lot of short covering which gives the bulls a little breathing room to try to bounce this market a bit. This is not unusual as I pointed out tonight and is an excellent opportunity for our new members to phase into the core short positions on the June list (6/3/2010-inverse leveraged ETFs as well as a lot of regular short ideas.). This is why I advocated to the new members to phase into the shorts rather than buy them all at once. A little here and at higher prices a little more. Complete your positioning as the bounce fades and we see negative divergences.

The wild card is the jobs number that could take this market lower, however I feel that the information was already leaked several days ago, thus the breaks in all the averages.

As for phasing into positions, I NEVER advocate averaging down (or up in the case of a short), but the difference is, if you planned this before you entered the trade, you are using strength to further your strategic goals by adding tactically at higher levels, you ARE NOT doing it to try to lessen the effects of a bad position going against you. Agin, the difference is phasing in is good, you decided it was your tactical plan, reacting to a failing position by averaging is bad and it is reactive, not planned so you aren't doing anything that goes against our risk management in this case.

You will see a possible target should we get the advance that seems more likely then not. the target is not the typical technical analysis rule of resistance which you will find at the neckline that is broken, but more likely at the gap you will see around $107. This is the way Wall Street operates now, they know that everyone is looking at the neckline as resistance and the upside target, which is exactly why they will rally it to the gap if possible and shake out a lot of positions. Furthermore the change in character right before the breakdown suggests that some on Wall Street were caught by surprise, which means market makers will have inventory in the area of the gap that they would love to unload as they are currently at a net loss on that inventory. So for newer members, if we do get the bounce that is the higher probability as of now, then that gap should be your target to finish adding to your core and other short positions.

Don't be surprised to see early weakness as the limit orders of the retail crowd will most probably be filled on the sell side before the market goes higher. Again, the jobs #, if it wasn't already leaked and discounted, could be a wild card that sends the market lower. However we work with the information we have now and right now we have a bias toward a bounce which is great for you.

A quick word on inverse/short ETFs vs. real traditional shorts on a stock. The ETF's are leveraged 2-3x which works in our favor in a downtrend. ETFs are dangerous in a prolonged lateral market because of compounding, but they often outperform in a trending market. Buying an inverse/short ETF will allow you to avoid any stock specific news that creates unwanted volatility or moves in the wrong direction. However, a traditional short has the advantage of having a portion of the profits it makes available to use to finance other trades or to pyramid the current position. This is something that you can not do with a long position, the profits can not be used until you actually close the position, so buying a leveraged ETF, you do not have that advantage. For more information about this, read "Making More than 100% In a Short" at Trade Guild on the left side under "Resources and Concepts".

One last thing, if you are nimble and able to watch the trade and the updates, you may want to buy something like UPRO and play the bounce to make a little extra money. Last-UNG may be worth another shot. the difference between amateur traders and professional traders is this-amateurs try a position once, it fails and they forget about it. Pros will try multiple entries until they get the trade they want if they see there's something working in the stock. So long as you practice good risk management, there's no reason UNG can not be bought again with a tight stop.


Here are the charts

The hammer with the combo of this indicators readings are showing an oversold condition

3C v1 on the SPY 5 min suggest , although not strongly at this point, a rally sometime most likely mid to late morning.

QQQQ 5 min 4C chart shows the same thing

This 5 min 3C chart of the DIA shows the strongest divergence which is leading. I use the ETFs for my signals as they trade different volume than do the underlying index which gives better signals and shows traders intensions more clearly. I've noticed this to be true for years. The red arrows are negative divergences, the green are accumulation or positive divergences.

Finally, here's the hammer reversal candle, good volume indicating a mini capitulation and the red box indicates the gap resistance which is some of the strongest resistance and it also gives smart money the ability to shakeout those looking for resistance at the red trendline which is the neckline. Wall Street has been using technical analysis against its practitioners more and more as the net effect of everyone's understanding of technical analysis is like showing your cards at a poker match. In other words, Wall Street knows exactly what everyone in the retail side is looking at and they use it against them. This is still a H&S top with a lot of overhead supply creating resistance, but it's not a stretch to push prices into the gap.

Because we do not have strong confirmation, I'm not issuing any trades tonight unless you want to give UNG another crack. However, new members should read up as much as you can and consider filling in the core short positions and a rally is a perfect opportunity to get better pricing with less risk, just phase in to the trade.

Look for updates in the a.m.

Final Update

It looks like we'll close around this level. There is a small divergence (negative) between the 2 and 3:45 p.m. tops. We'll probably see some weakness in the a.m. from that.

Update

We now have 1 and 5 min negative divergences in the SPY. Lets see if this can take us to a new intraday low.

Several 1-min 3C charts have started putting in positive divergences

We may see a bump up in price shortly, an excellent place for those of you who need core shorts to add a little.

H&S tops

"Failed July 2009 H&S?" Random price pattern as volume did not confirm the pattern, this was not a H&S top.

Current H&S top. Note how this cumulative volume indicator I wrote to help you more easily see what volume is doing, rises on the declines and falls on the major rallies. This is the confirmation needed for a H&S top. Volume analysis is the second most important part of technical analysis only behind price, but nearly every technical pattern has a corresponding volume pattern that must be in place to confirm the pattern. A month or so ago, I thought this might be a Broadening top, I said "The price action looks like a Broadening top, but the volume action appears it will become a H&S top". Be careful, don't forget the importance of volume as many in Technical Analysis have. T.A. has long been described by some as an approach that attracts lazy people, the volume analysis which was missing from the July price pattern of 2009 seems to confirm that statement in some people's case.

Below are 6 3C charts (2 different versions on 2 different averages-1,5 and 10 minute) and as of now, all are either in leading negative divergences or are in lock step with the decline (confirmation). There's also a chart of the SPY with the first red trendline being the H&S neckline broken, the second trendline is new lows for the year. The other two charts are the NASDAQ and the DOW breaking the neckline and some significant lows. 

We have to on guard for a bounce attempt, but the S&P has carried far enough now that any successful retest of resistance grows less likely every day.

One word of caution and a note for new subscribers, I would consider phasing into the positions, adding some core/or other key shorts. However, a major feature of a H&S top in about half of the cases is the second chance "Kiss Goodbye" in which price rallies to the necklines that have been violated, sometimes (especially recently) a little above as the market tries to shakeout those that are stern believers of support and resistance levels as "exact numbers" rather than the correct interpretation of the levels as "areas" of support and resistance. If you think about the emotional factor that causes resistance, you will understand why they are areas and not exact numbers.

Back to the kiss, this kiss is an excellent, low risk opportunity to add to your short position. You want some now in case the kiss doesn't happen, but it's also wise to save a little room in case it does. 

So do not become overly concerned about a rally attempt, there's a lot of overhead resistance above that will provide plenty of supply.

I did get an email about an article written by someone who believes we should be on guard for a false H&S top like we saw in July 2009. We must always be on guard and that is why we have at least 25% in cash, however, the H&S top of 2009 WAS NOT a H&S top, later I'll show you why, it was a random price pattern that looked like a H&S top, but it's good to be on the watch and thank you for the article.

Our plan is working out very well, I can't imagine there are any members who got in on the core shorts that are not solidly in the green right now. Again though, do not let your guard down, do not get reckless and maintain your risk management above all else.

Still have a positive divergence

The divergence is there, that is not really the concern, the market can go up, but it would be best for us if this inverse H&S is not broken to the upside. It's not the end of the world if it does, just more time and possibly some extra action we may have to take.

Update 2

We have a minor 1-min positive divergence, but in the long run, it's looking pretty negative.

Small H&S bottom

There's a small (1 min) H&S base, but the volume is wrong for the pattern, in any case, a break above the neckline at $104.90 would signal a run higher to the gap area.

this is one of 4 3c type indicators that is positive, we also have one now in a leading negative divergence, explanation=watch price for that break above, if it totally fails, we should see a quick move down.

The indy above is inline on the 5 min SPY, negative on the 1 min QQQQ and positive on the 1-min DOW, all other 3C's are mostly in line to slightly negative on the 5 min charts of all 3 averages and slightly to very negative on the 1 min chart. This is what I hate, a lack on confirmation, but that is what is there and like I said, it's a lot of retail trading now so the readings aren't terribly important yet.

UPDATE

The 1-min positive divergence we saw yesterday is already fulfilled in filing the gap this am and it's slightly negative now, but hasn't gone into a leading divergence, if that happens then I'll post that chart as it would be meaningful.

There are a few 1 min charts that are starting to deteriorate, the 5-min did not gain any ground on the fill of the gap and instead is relatively negative. Thus far, although it's way too early, I don't see anything very bullish so watch for more downside. (1) 1-min 3C is close to a leading downside divergence, but until it is leading, it can turn up any time, but still it's fairly negative, more so then I expected last night.