BIDU UPDATE

BIDU is another one of my favorite trades, not just because it's a core short position still being held in the equities model portfolio at a +20.5% gain (with no leverage-just a straight short), but because that gain in and of itself proves what patience and letting a trade come to you can do. I often say that the individual investor's greatest edge over Wall Street is patience, YOU DO NOT HAVE TO BE IN THE MARKET ALL OF THE TIME, you get to pick and choose your battles as our orders are small enough to make us maneuverable.

I'm a firm believer that no matter what asset you trade, whenever your money is in the market, it is at risk. Look at Mortgage Backed Securities; I can just hear the sales pitch when they were pushing these, "The safest investment, your investment is backed by real tangible property, etc." and look what happened... MBS nearly brought down our entire financial system and to this day the problems around the world/Europe started with MBS in the US.

So in my opinion, if you are going to put your money in the market, there better be a very good reason, if you are looking for adrenaline, I live in Florida, I can recommend some great roller coasters that won't rob you of your life's savings.

The primary BIDU trade and the sub-intermediate trade...

 The BIDU 5 day chart... What's wrong with this picture? 1) volatility went nuts in a nearly parabolic move during the QE era as BIDU was one of the favorite momentum stocks, but what about volume? What about that tangle starting in 2011? A 5 day chart will reveal things a daily chart will not, such as BIDU's personality and character which looks very much like a stock that went through mark up/ distribution/ a topping process and is near stage 4 decline.

 The daily 3C chart with accumulation at the 2008 lows, some moderate distribution in to higher prices (remember institutional orders are large and they need time and they need demand to sell in to strength. The leading negative divergence of 2011/12 looks a lot more like short selling or VERY aggressive distribution, this should tell you something about the longer term BIDU probabilities.

 This is where we stalked BIDU and were patient. A large triangle like this after an extended uptrend is almost always a top, but before we see major reversals, we almost always see a head fake move; we waited for that head fake move in yellow to short BIDU, we let the trade come to us and it's still at a decent profit because of that patience.

 BIDU 4 hour, distribution in to a breakout move. Traders see a breakout from a large triangle and they buy, perfect for institutional money to sell or short in to as there's buying demand to fill the sell/short sell orders in large quantity. We basically shorted BIDU at the same place smart money would have.

 The long term Trend Channel held the uptrend without a single stop out until we hit the top area, at this point the indicator is telling us that the trend is over.

 Since then, BIDU has moved down as expected and formed a bearish consolidation/continuation price pattern, it even broke below it and it appears to be another bear trap.

 Th 30 min chart was positive during the formation of the bearish price pattern, this gave us our first hint a bear trap was being set up, look at the positive 3C divergence in to the break below the pattern where traders would be shorting on price confirmation.

 But is an 8% gain all hat we should expect from a bear trap that took some time and expense to put together?

 The 3 min chart going very positive as BIDU breaks below the bearish price pattern, then the reversal...

 The 5 min chart shows BIDU acting like the rest of the market with a negative divergence suggesting downside this week, the positive divergence today created not much more than a consolidation. In my opinion BIDU will pullback more with the market, it may even make a new low, but that may give us another opportunity to trade BIDU from the long side on a quick trade or sub-intermediate trade, maybe even a short squeeze with an impressive move up.

 Why do I think that? Look at the 15 min chart, it is still leading positive. If BIDU were about to start a new primary leg down, I'd expect to see a lot of distribution, not a positive divergence.

Even more evidence, look at the 4 hour chart, leading positive through the bearish consolidation, the break below it and since.

Keep BIDU on your radar, we need to watch for short term positive divergences telling us the pullback is ending and the next move up is about to start.

FB Update

When I think about FB, even though in the last week we've probably made more money on a percentage basis in quick trades in GLD, FB is perhaps one of better pieces of analytical work.

I just want to take a moment to mention for newer members and remind older members that I DO NOT favor these quick trades, this is not a day trading site. I simply look at the market, look for opportunities and bring them to you when I see them. I would much prefer a trending trade over a 1 or 2 day options trade (I'm not a fan of leverage unless it is needed). However, the market dictates what the proper tool is for the trade, I'm not going to recommend a trending trade in a volatile choppy market (unless of course we have the charts to back that trade up). When I taught Technical Analysis for 3.5 years I use to try to correct people's methods in picking a trade which almost always focussed on analysis of a stock. The most important factor in how an individual stock will move (as a rule of thumb) is the market's direction itself which has given rise to phrases like, "A rising tide lifts all boats". This simply means whatever direction the market is headed in, chances are very high that your stock will head in that same direction near term, it has a bit less influence on longer term trends. The second most powerful gravitational pul on prices is Sector rotation. You may recall over the last week or so I've ben mentioning how "Highly correlated" the market is, this simply means that pretty much all of the sectors are moving together with the market, which means "Stock Pickers" will have a hard time in a market like this as a simple market ETF will likely perform just as well as a "Stock Pickers" pick.

As the market starts to trend, sector rotation will come back and stock picking will be advantageous, right now though it's a very directional market.

As to the FB update, this is a stock that trended well for us DESPITE what the market was doing; it's a stock we picked as a long and made good money on when EVERYONE hated it and I imagine they still hate it. FB also, to this point, has done everything we expected it to do when we it first appeared on our radar back in late May/early June. This is why we use 3C in multiple timeframes, it tells us generally what to expect near term, mid-term and longer term. Another factor is market behavior, you'll just get a feel for it as we go along, but a market or trading journal will help expedite the process and I recommend everyone keep one, you'll learn a lot and become your own teacher as well as identify what works best for you.

FB Update...

 This is when we first picked up on a change in character in 3C for FB. Think about FB at the time, it was the most hated IPO probably ever except maybe E-Toys. Think about the market psychology, everyone said FB was a short because of price action and what they read and heard in the financial media. From a Wall St. perspective, FB was a prime candidate for an upside shakeout which shorts continued piling in to even as it moved higher each day. There's no room in trading for loving or hating a stock, it's business.

When we first identified the long opportunity in FB, the red trendlines represented a stage 2 breakout area, it also represented an area I expected to see volatility, even a pullback from that level and although I closed my long position in FB, I waited for a pullback to materialize to re-enter the position.

 Here's the 60 min positive divergence (shorter timeframes were already much more positive) in the area in which we started buying FB long. I suspect MS/GS (the FB IPO underwriters and defenders of the $38 level on the first day, lost significant money and were looking to make it back). As FB reached the resistance level, look at the trajectory of 3C, not VERY negative, but it obviously looked like upside momentum was failing and we'd see that pullback; the question remained, "Is FB going to pullback and move higher as originally expected, or is this it for the move up in FB?"; we can only get  hint on the actual pullback and those hints are coming in now.

 I'm working from the longer timeframes to the shorter ones as each shorter timeframe provides a little more detail. The 30 min chart made it clear to me that FB was going to reverse near that resistance level. Keep in mind a reversal or correction can occur in 2 ways, 1) through price in which price pulls back and 2) through time in which price is relatively stable, but trades laterally or 3) a bit of both.

Since going negative at resistance, FB is starting to give clues as to the question above, "Is FB done or more to come?", the 30 min chart is showing the makings of a positive divergence in a flat area of lateral consolidation after a slight pullback in price, this appears to be the pullback I was hoping for to re-enter a new long position in FB and hopefully see a breakout to stage 2 mark-up, a definitive short squeeze area.

 The 15 min chart has more detail as a shorter timeframe than 30 min, but I'm focussed on the trend which has been leading positive . We do have a negative relative divergence in effect, but again this comes back to the gravitational pull of the market, I don't think it i FB specific.

 The 5 min chart with more detail shows the actual reversal and is showing a positive divergence in the flat trading range.

 A closer view of the 5 min chart...

 Now we'll work from the earliest timeframes to try to better understand near term activity, we see a negative divergence today at the FB highs and a small leading negative divergence, this is intraday trend and does not compare to the 15-60 min charts. Think of the longer timeframe charts as strategic and the shorter timeframes as tactical.

 While the 2 min chart has been leading positive recently, we see a negative divergence on today's activity.

 There's a slight hint of the same on the 3 min chart (remember divergences progress or migrate from short to longer timeframes).

During this lateral period which is often where we'd expect to see accumulation, note the market has not allowed a support level to form and there have been plenty of volatile shakeouts, the market doesn't want anyone getting wind of what's going on.

In my view FB is accumulating on the expected pullback, suggesting it will move higher. We may have to wait for the market to move in to better, more bullish territory before FB really looks strong enough to enter on the long side, I don't see that yet, but I do believe we will see it and as such, I would keep FB on your radar as a probable long set up, we just ned to see higher probabilities/timing to emerge.

Market Update-Intraday Jiggles

I often say (because the market often shows us), "The market is never going to make anything easy". No matter how right you may be on the market direction, the market is going to throw barrels like Donkey Kong for a couple of simple reasons, 1) It's a zero sum game, for someone to win, someone has to lose and even those who are right on the market's direction are going to have their faith tested as the market tries to knock as many of these people out of positions. 2) There's more profit for Wall Street in creating shakeouts as volume typically accompanies shakeouts as stops or limit orders are triggered and as if Wall Street doesn't already make enough money, they make additional money in the form of volume rebates for order flow-in fact there are several firms that specialize in order flow volume rebates, such as proprietary trading firms and many High Frequency Trading programs. 3) is kind of a wrap of what's already been said, but if the market simply does what you expect, such as trends down all day, it's the same concept as very high short interest except on an intraday basis; THERE ARE TOO MANY PEOPLE ON ONE SIDE OF THE BOAT and Wall Street needs people to trade against, not with.

This update doesn't change anything I've said about my opinion on the pullback, I just consider this intraday noise, but it can be useful to enter or exit positions and knowing what it is, that it is normal, hopefully will keep you from being a victim of volatility shakeouts.

As for the market update...

 DIA 5 min has an intraday leading positive divergence, it's hard to see or at least doesn't look meaningful in the context of things, but it's there so I'd expect an intraday move, maybe even a gap fill.

 SPY 3 min intraday leading positive divergence suggesting an intraday move up from here.

 QQQ 5 min intraday leading positive divergence, suggesting a pop to the upside, but look at the same chart with a little more context...

The 5 min QQQ's intraday positive divergence is just a small blip within the bigger picture's leading negative divergence. So look for some probable upside noise, if you can use it to your advantage that's great, otherwise this is just a warning of what to expect as the most probable path intraday.

VXX / UVXY Volatility ETFs

I'm usually not a big fan of the volatility ETFs, especially in the choppy market we have seen, however because I was expecting a pullback (these ETF's move opposite the market) and because there were some decent signals and these can really move, I decided to open a call position in UVXY yesterday in July 8 Calls

I had some trouble opening the model portfolio earlier, but the UVXY calls from yesterday are up +19% and the USO put position is up over 20% since opening them yesterday.

These volatility ETFs can be very volatile, I prefer not to use leverage unless the trade looks very good, but otherwise doesn't offer the kind of gains I feel are necessary to be at risk with a position open in the market. As such, I try to spend the least amount of time in leveraged positions as possible.

Thus far though, I don't see any compelling reason to exit the UVXY Calls.

Here's an update, I use the non-leveraged VXX most of the time for analysis as it seems to give better signals than the Ultra ETF (UVXY)...

 Here's UVXY on a 15 min chart vs the SPY (red), you can see the inverse relationship the two have, being this is the case, analysis on the volatility indices should be similar, although the mirror opposite to analysis of the market averages, this is just another form of confirmation and the more we look at, the more confirmation we receive, the higher our probabilities are of successful analysis. 3C is named such as a constant reminder, "Compare, compare, compare".

 Here's the 5 min chart of the same, note the volume in VXY looks as if it is in a consolidation in this area.

 VXX 1 min is in confirmation of the move up this a.m.

 The 3 min chart shows a relative positive divergence in VXX followed by a leading positive divergence, as mentioned yesterday, this is typical (to see a weaker relative divergence followed by a stronger leading divergence).

 The 5 min chart since going negative on the 28th has remained in near perfect confirmation of the price trend.

 The VXX 15 min chart shows several negative divergences sending VXX lower, but in the larger context we have a large relative positive divergence with a newly formed leading positive divergence, I like this chart for timing purposes.

 Many of you know that I like to look at the long term charts, there's less detail of smaller individual divergences, but the trend in underlying action becomes much more clear, here we have a VERY clear negative divergence at the top and a clear positive and then leading positive divergence near the bottom. One word of caution when using 3C on volatility ETFs, I generally require the signal to be much stronger than other risk assets, I have found in the past a good looking divergence is often not enough, I'm usually looking for GREAT looking divergences on these volatility ETFs.

 UVXY 1 min this morning fell a bit, this does not always mean a reversal on a 1 min chart, often it is a consolidation, recently UVXY has improved significantly intraday.

 UVXY 2 min is a bit better than confirmation of the move up with a recent leading positive divergence starting to form.

 Removing some noise, the 15 min chart is in leading positive position.

Finally the UVXY 30 min chart shows a clean relative negative divergence at the May top, confirmation of the downtrend and a positive divergence, now in leading positive position.

I may decide to trade around these positions a bit "if" the market gets choppy or momentum looks like it is fading, but for the time being, in the near term I'd prefer to trade these from the long side only until we are fairly confident that a market pullback is near its end.

UNG and the Weekly EIA Natural Gas Report

This report is usually due out at 10:30 on Thursday but because of the 4th of July it was moved back to today.

Released On 7/6/2012 10:30:00 AM For wk6/29, 2012

Prior Actual Weekly Change 57 bcf 39 bcf

Expectations were for a 40 bcf injection, so the actual fell a little short; this is bullish for Nat. Gas, but considering UNG is at a major resistance level that once broken, should send UNG in to stage 2 mark up (a nice trending trade), I doubt it's enough to get the job done.

 UNG moving from stage 4 (decline) to stage 1 (base) and very close to stage 2 (Mark up).

 This morning's action on the release of the EIA nat gas report, an initial spike with heavy volume and a long candlestick upper wick suggests there was a churning or distribution event at the intraday highs, since UNG has broken back below the major resistance level that separates the base from stage 2 mark up. This has been a question over the last week, whether UNG would just pullback a little and gather steam to breakout or whether there would be a deeper pullback and gather more steam for an eventual break out to stage 2; as of this a.m. it seems the question has been answered and I'd expect a deeper pullback which will open up some opportunities for those interested in the trade to let the trade come to you and buy on price weakness. UNG remains one of my favorite long term long plays.

For those with a profitable position already, you may want to consider whether you want to take profits and re-enter at better prices, I believe I have about a 14% profit in UNG, I intend to hold UNG and look at maybe adding some if it pulls back enough with solid positive divergences in to the pullback.

 The 2 min chart shows the distribution this morning at the churning event mentioned above.

 The charts between 3 and 15 min are all pretty much in line with a pullback, despite some better readings earlier in the week. This 15 minute chart suggests we will likely see the pullback I initially thought we'd see.

The 60 min trend channel may be useful for those looking to take a profit and re-enter at lower prices, the current stop is at $18.40, although I'd probably consider just taking profits here if I were inclined to trade around the position. I'd expect the pullback to end up near the support level of the base that UNG has been building, around $16+.

USO Update

Yesterday I opened a put position in USO the charts and reasons why can be found in the previous post...

Basically we have the market fallen out with its normal FX arbitrage correlation, cue in part to a few short squeezes which can take on a life of their ...

The SPY vs the Euro (Euro is just a proxy for the $USD which has an inverse relationship, thus the Euro is easier to use to show divergences) falling out of correlation, in part due to as I mentioned, a few intraday short squeezes.

Also the same week we have another event, more fundamental in nature, causing oil to fall out with its normal FX correlation, that is the event risk that the Syrian/Turkish tensions have created.

 USO breaking with its normal FX correlation with the Euro. Both events can take on a life of their own and it's a little ironic to see two events like this that can break correlations without market manipulation, occurring in the same week and sending both oil and the market higher than the correlation would normally suggest or even allow.

As a result, it appears the arbitrage players have been selling in to this strength in each, thus the negative divergences we have seen. As mentioned yesterday specifically in reference to oil, the arbitrage divergence has become so big in oil that it is probably an equal downside risk to the Middle East's situational events that represent upside risk. The tie breaker was stronger negative divergences in oil yesterday, thus the put position.

 USO 1 min is pretty much in line, it looks like it wants to back and fill in to the gap a bit, but again this may just represent a consolidation.

 The 3 min USO negative leading divergence was getting extreme, this also suggests more downside, especially if the Syrian/Turkish situation calms down over the weekend.

 The 5 min chart is in negative territory, but not seeing the same degree of divergence as the 3 min chart, we'll see if that weakness continues to migrate to the 5 min chart, for now I see no reason to close the USO put.

 USO 15 min seems to show the arbitrage players selling in to strength on the probability of a return to the FX median.

 USO's 30 min chart also shows a divergence process, however the recent move up of the last 2 days looks like it's just gone too far considering there's no FX support and this is all based on event risk.

The 60 min chart is still in line from the positive divergence in late June.

Market Update

We're off to a start on the market pullback, I still expect to see a constructive pullback meaning some accumulation near the end of it to send the market up once again, but from the risk asset layout, the dislocation with the Euro/Dollar and the depth of some of these divergences, this isn't striking me as what people generally think of as a pullback (a couple of days of reasonable correction). This market has been extreme in its movements and growing more and more extreme, there's a reason for it as the chop combined with the extreme movement are knocking traders out of positions left and right. The point is, the meaning of pullback, I believe this will be more extreme than what we generally associate with pullback.

Here's a look at the SPY charts...

 SPY 1 min is pretty much in line, there's a bit of an intraday positive although nothing too impressive. We may see some backing in to the gap, but I seriously doubt it will be closed; I think more likely we are seeing a consolidation here before we see another leg down.


 The 2 min leading negative position suggests there's plenty more room on the downside, maybe this will help the risk assets like yields and the Euro re-couple.

 The 3 min chart leading negative as well, so we have good migration through the timeframes and thus good confirmation so far.

 The 5 min leading negative divergence, this is also migration from the shorter charts and also suggests we have plenty of downside before we hit a reversal, likely more downside before we'd even see positive divergences or accumulation in to price weakness.

 The fact we hit a 15 min chart with a leading negative divergence I think underscores a few things that created a true overbought condition in the market; the short squeezes didn't help as they sent the market above where it would have been otherwise and part two is actually seen in part 1, the breakdown of correlations like yields and the Euro. Had we not been in short squeeze territory I think the pullback would have already been underway days ago and it would be less extreme. At this point the market has some catching up to do on the downside to those correlations.

Finally a 30 min relative negative divergence, again, suggesting this will be more extreme than what most of us would call a "pullback".

Overnight and In to the open

There are two events moving the market toward the pullback we have been expecting, despite the danger of being in the short squeeze zone (at least in equities as we saw a few brief squeezes this week); those 2 events would be 1) The fade of last week's EU summit (as predicted and always predictable and more recently this morning's NFP miss.

As to the EU summit fade, promising a unconditional bailout of Spain and Italy is one thing, delivering it is quite another as we have seen with all EU grand schemes, just think back to the ultra-leveraging of the EFSF, the EU decided to leverage the temporary bailout mechanism to over a trillion dollars, the only problem was there was no money and no one willing to put the money in to the fund.

As to last weekend's promise, Holland and Finland (2 of only 4 EU-zone member states that still have a AAA credit rating) apparently wish to keep their triple A credit rating and as such have pretty much scuttled the promises of last week's EU summit, Germany has participated as well, virtually stripping away the language from the summit that would strip the ESM of its seniority status as it pertains to debt and as a result, Merkel has seen the highest German approval ratings since 2009.

The Spanish 10 year which dropped to 6.2% after the summit is now back in the 7% area as all of the post EU summit rally fades away.

Overnight, after seeing the temperament of the paymasters, Greece has revoked its demands to ease bailout terms, it has been made clear to them that it is not happening. This may cause a lack of confidence in the new government that campaigned on promises to renegotiate the terms of their bailout.

The IMF said they will be lowering world growth estimates overnight.

The German Finance Minister said no action can be taken on the Spanish banking bailout front as there is not a complete Troika report yet (more conditions added since the bailout was announced about 3 weeks ago). He also said the bailout mechanism that was supposed to come online July 9th will likely be delayed until July 20th, which means it will probably be delayed well in to August.

The market tone in Europe is one of overall disappointment as the Central Bank decisions yesterday came in as expected, there's disappointment that more was not done on the easing front.

Finally one piece of good news, German Industrial production for May did beat, however that is like an island in a sea of misses this week.

As to the US, as usual, yesterday's ADP report signaling an improving labor environment ahead of the Non-Farm Payrolls this morning, was shown to be what it truly is (AGAIN), a noisy data point that has little relevance to real world data.

As the world awaited the US NFP this morning, the tension was palpable as ES volumes dropped to about half the normal volume.

Non-Farm Payrolls came in at a miss

Released On 7/6/2012 8:30:00 AM For Jun, 2012

	Prior	Consensus	Consensus Range	Actual
Nonfarm Payrolls - M/M change	69,000	90,000	35,000  to 167,000	80,000
Unemployment Rate - Level	8.2 %	8.2 %	8.1 % to 8.3 %	8.2 %
Average Hourly Earnings - M/M change	0.1 %	0.2 %	0.1 % to 0.2 %	0.3 %
Av Workweek - All Employees	34.4 hrs	34.4 hrs	34.4 hrs to 34.5 hrs	34.5 hrs
Private Payrolls - M/M change	82,000	100,000	45,000  to 176,000	84,000

The print of 80k was below street consensus of 100k; private payrolls came in at 84k below street consensus of 106k. While the U3 unemployment rate remained at 8.2%, the broader measure, U6 (the same way unemployment was measured during the Great Depression) rose from 14.8% to 14.9%.

ES is off about 13 points since yesterday's NY close, the Euro is on the back-foot.

Since NFP...

Multiple Market Updates on the way