And if you wondered what purpose false breakouts serve...

Other then the mechanics of a false breakout in which I've described, "the snowball effect", one only needs to read a few brief words by Goldman Sachs traders with regard to the Carl Levin allegations of a Goldman Housing Short.

The full article from ZH is here

However, what is important for the purposes of this post and the purpose of helping you understand the friendly mentality of Wall Street, especially when Goldman comes out and offers you free advice, are a few sentences from traders involved in this investigation.

From their own traders involved in the investigation:

 "We began to encourage this squeeze, with plans of getting very short again."


Salem’s supervisor, sent e-mails in May 2007 urging traders to offer prices that will “cause maximum pain” and “have people totally demoralized.” 


Things are never as they seem on Wall Street and this is the mentality of the pack you are up against every day.

USO

 USO 1 min with a 10:55 positive divergence which is leading. So far that's about it, it hasn't moved to the 5 min chart as of now.

My concern with USO still is on this daily chart. Even if USO were able to pull off a move to $41, the failure of the breakout in the white box has me concerned about the next swing leg for USO. Perhaps if USO can move to $41 on good volume and a positive 3C profile things may be different, but with the way the $USD is looking right now, I don't see much more then some short term relief. I would only trade USO on a short term basis at this point.

SPY Update

In the last SPY post I showed you a positive divergence forming and said it was likely to test the low of the morning, if the positive divergence continued to build through that test, we'd have the basis for a pretty decent intraday move up, that's exactly what has happened.

The first divergence somewhere around 10:15 and the test of the lows in the red box. Note 3C moving higher into a leading positive divergence while we have a small intraday base formed.

VRML Showing Some Life Again

VRML is a trade we've had on and on May 31st, we had a 1-day 10% gain, I suggested taking some profits off the table and maybe introducing a trailing stop on the rest.

It's behaved well since then.

This morning it's up around 8%, the question is can it take out the previous high around $5.60? If so, this may turn into a double digit 1-day move.

If you are still in the trade, feel free to email for updates.

SPY Update

 1 min SPY positive divergence, this may test the lows once more and possibly create a second divergence which would be a stronger potential intraday move.

Asked about whether a bounce scenario is still on the table, this 15 min chart shows a relatively strong position for 3C considering the SPY is at the lows of the chart. It seems the ongoing event that Wall Street is having trouble discounting is the Greek Debacle as the main players within the Troika can't even seem to get a handle on it. Furthermore the reaction of the Greek people, Parliament and the Bond Holders that are currently the most important player in this plan, is a total unknown and Wall Street hates this uncertainty.

So when asked if the potential is still there, I'd say yes it is. However, don't lose sight of the bigger picture, which I posted again last night from another perspective.

The Troika is Stinking of the Same Desperation as the Hank Paulson Treasury

That is to say, things are very serious, they are concerned about an impending collapse in Greece with Ripple effects that would shake all of Europe.

In this scenario, substitute the Troika for Hank Paulson of the Treasury during the Lehman Crisis. Substitute Greece for Lehman and substitute Paulson's hectic rush to get something done with Lehman before it collapses with the Troika's efforts in Greece and what are the similarities? Mistakes and big ones that are potential deal killers.


The mistake is the unaccounted factor that 100% of Bond Holders will need to agree to the new terms and in that little oversight, the 2nd Greek bailout could be dead. Much like Paulson's deal with Barclay's to take over Leman, except for one thing... Paulson never got the approval of Barclay's governmental oversight, which promptly killed the last hope for Lehman.

There are a lot of smart people working on this, to let little details like this that could kill the deal slip between the cracks, shows how desperate they are, how big of a problem this is, and how these two realities are causing mistakes that parallel the collapse of Lehman, only this time it's Greece.

Financials Tell the Story

One could say the current financial and economic mess we are in started with the tech meltdown.

When I taught Technical Analysis, I use to show my students how far ahead of the curve Wall Street was by showing them charts of the home builders during the 2000 tech meltdown. Housing had hot spots across the country from time to time, periods of boom and bust, but generally speaking, the American's so called "greatest asset or investment", a home, accrued value in the single digits per year; until the housing boom. I can't speak for all, but I can say in our particular situation, our home more then doubled in value over a period of about 2.5 years (from the time we bought it and significantly more from the time the last owner had bought it). At one time, the land itself was worth almost 100% more then what we paid for the house. Builders were paying over a quarter of a million dollars just for the 1/4 acre lot and not even on the water. The house would be torn down and a McMansion would pop up in its place.

One of my favorite charts was HOV, the stock stayed pretty flat for well over a decade, occasionally reach $7 or $8.00, but usually trading around $5.00. Something changed in 2000 as the dot.com bubble burst and HOV went from $5.00 to $70+ in about 4 years.

 Around 2000, the market was falling off a cliff, but who would have suspected home builders were to be the next hot item? Look at the accumulation in 2000, prices were near their lows and 3C was making new highs.

It didn't stop there, the trend was confirmed for sometime at the green arrow, until home builders topped out, you can see distribution through 2003/2005, but the new highs of 2005 were the final nail. It's a known fact that economic and other policy and regulations were set up to be very accommodative for home buyers. Some, including myself, suspect this was a gift to the banks after the massive losses they sustained during the dot.com bust. What ever the reason was, it seems the reaction to one bubble bursting almost always creates another bubble.

Lets take a look at our current problem, the financial industry. This is the industry that took down the American economy and nearly destroyed it. In my opinion, not much has changed except we've made some dangerous banks even bigger and more dangerous, but nothing structural has changed for the better. You could say economic policy has been that of "kick the can down the road long enough and hopefully we'll experience a recovery", but when the road starts coming to an end... then what?

 In green we have XLF, the ETF for financials and in red, the S&P 500. Note how the financials topped out at the green arrow, months before the S&P did. Now look at the 2009-present period. Look at the growth in the market versus the stagnation in financials. In fact, financials haven't gone anywhere since early 2010 and they are n much worse condition for a much longer period of time then when we saw the start of the bear market in 2007.

 This weekly chart of financials shows the distribution and 200 final negative divergence at the top. Presently the distribution is just about as long, but the current divergence is much worse between the 2010 top in financials and the 2011 test of that top. Right now we are in a much stronger leading negative divergence then at the bear market in 2007.

Looking at the current period, you can see we had less then a year of momentum, since then financials have been largely lateral and 3C is in a leading negative divergence that is lower now then when financials hit the bottom in March of 2009.

These charts alone of financials should be a warning that something is very wrong with this market, arguably worse then before. And what has really changed? The specter of one of the big banks failing now is a lot worse then it was in 2008, the banks are simply much bigger now. If Lehman almost stopped our economy, what would happen if a Bank of America was in a similar situation?

Be patient, opportunities are close at hand. This could certainly be worse then the first verse. I made a 5 part video seres in 2007, before the market really fell apart and while I didn't spend to much time on timing, my opinion was that the Dow would be trading around $5500 before this was over.

Gold Miners Trading System 2

This is the second system I mentioned, I did a little work to the signal line and smoothed it a bit, the results were fewer trades (about 1 less winning trade and 4 less losing trades, reducing total trades over a 6 month period by 5 to 17). The equity line also performed better at 76% over the 6 month testing period (the period was so short because the ETFs are new).

So if you entered DUST today on the first system's signal, you may feel better about that being the second system (which I just ran) gave a signal today to buy DUST at the open on Monday. Whatever the opening price for DUST on Monday, deduct 3% for your stop loss and you are set.

The last trade in this system produced a loss of 2%, the trade before that, a gain of 16.6%.

I may do a little more work on the system and test it to make sure it's an improvement, but that last loss of 2% was just barely stopped out by a slight fluctuation in the signal line. If it weren't for that fluctuation, that trade would have produced a gain of 6.5%

Gold Miners Trading System-Signal/Stop

Last night I put up a signal from the first NUGT/DUST trading system, as I explained, it was the original system and I've made some improvements on top of it, but I left it up to you as to whether or not you wanted to take this signal.

The trade should have been executed on the open today and despite what you may have paid for DUST, the 3% stop rule which is pretty effective n dealing with false signals, is calculated off the actual opening price of $43.46 so the stop ON A CLOSING BASIS AND EXECUTED THE NEXT MORNING ON THE OPEN, is $42.16. This is not an intraday stop, it's not a stop to be executed the same day as the signal, it's always executed the next day at the open.

So system 1 (the original) is now long DUST and effectively short the gold miners. I'll alert you to any changes, whether it be a stop, a close of the trade at a profit or a new trade in NUGT.

Remember, the average losing position is about 2 days and the average profitable position is about 5 days.

Another market update

 DIA breaking the trendline, this was needed to produce a short squeeze

 It looks like the break was accumulated, DIA is not in too bad a shape at this point

IWM's divergence keeps getting stronger, it needs to show some price action along the lines of the divergence.

 SPY break of trendline, again this is what was needed to produce a short squeeze, again like the DIA, it appears to have been bought by W.S. The SPY needs to close above this trendline for me to feel ok with holding short term trades in leveraged ETFs.

The TICK chart has finally reversed to the more bullish side.