Intraday pullback

I suspect we will see an intraday pullback shortly.

ES is also showing a 1 min negative divergence.

I'm back and see our bounce is proceeding nicely

This is the Euro bounce that 3C has been signaling since last week, the catalyst today seems to be hope (and hope is a dangerous word in trading, even more so when it is used in a sentence that has "EU" in it) in the EU (as seen in today's Spanish Auction of debt) that tomorrow's ECB LTRO (Long Term Repo Operation) in which the ECB (European Central Bank) will provide up to 3 years of long term financing for banks and that those banks will take that money at 1% interest and gobble up sovereign debt at 5+% interest in a sort of carry trade, thus reducing yields that are growing ever more unsustainable, like Italy's 6.5+% 10 year BTP.

However, expanding balance sheets with more PIIGS debt when they have been trying to rid themselves of it the last 6 months, seems, well... "Hopeful", considering many of these banks are still way under capitalized, the cash may very well be used for more practical matters.

This has given the Euro the bounce we have seen coming, $1.30 just needed to be defended long enough, but I expect we will see distribution in to the bounce making it an excellent tactical window to get short the market. In the mean time, the short term long trades I put on last week in anticipation of the bounce are doing well and we have a nice selection of short candidates that will look even better on a little price strength-this has nothing to do with a Santa Claus rally, the timing is simply coincidental.

Now for the bad news for the ECB as Central bank actions always come with unintended consequences, such as QE2 sending commodities through the roof and killing manufacturers.

The ECB is taking collateral from these banks, as noted this is a REPO operation, that is as low as single A credit. So the banks will and have saved the higher quality collateral for private funding operations while giving the ECB the worst collateral they hold that the ECB will still accept.

Furthermore, while the ECB can give liquidity to banks, they can't make them use it to lend of buy PIIGS debt.

Also the LTRO operation greatly diminishes the chances, in the market's eye (Draghi has already been clear on the issue) that the ECB will print.

One other issue as the ECB loads up on tier 2 collateral (don't expect the banks to offer bunds for funds), the ECB has now expanded their balance sheet to the point in which it is now bigger then the F_E_D's ($3.2 tn vs 2.9 tn respectively). The problem? The ECB is now leveraged 30x over, which happens to be the precise leverage Lehman had when they collapsed and now they add more tier 2, junk collateral. If and this is nearly guaranteed, EU banks start failing, where will the ECB get its money back from? They'll be stuck holding collateral of diminishing value.

While Draghi is doing exactly what he said, following the ECB mandate and bailing out banks, not sovereigns, but providing liquidity hoping the banks will bail out the sovereigns, investors are becoming more and more concerned about the ECB's growing leverage and the lack of transparency about what exactly is on their balance sheet. This will become a bigger issue as investors question the wisdom of the ECB's ultra-high leverage and much of it holding sub-par collateral.

But for now, we have the bounce, lets see what can be done with it. Market updates are coming...
  

Your Euro bounce....

You might think housing starts coming in strong was behind today's gap up, you'd be wrong. The Euro has been responsible for this gap up as we have been expecting.

The Euro from yesterday's 4 pm NY close. As you saw last night we were already up in ES from an end of day positive divergence, from the European open, the market just kept moving higher. We have pretty good 3C confirmation so far this early.

Expect an early pullback, but I would think we should hold the bulk of gains today.

As mentioned I have a quick Dr.'s appointment and I'll be back around 11 a.m.

ES after hours indications.

Europe open in about an hour, so we may see some changes, but here is ES and FX tonight as well as the long term ES trend.

 The darker background is regular hours, you can see a positive 3C divergence forming in to the lose, then ES moves higher and forms 2 negative divergences.

 The hourly ES shows accumulation at the lows and distribution at the highs, recently the downtrend has been in line, but also leading negative making new lows on the hourly ES chart.

The red arrow is the close at 4 p.m. and the Euro was below $1.30, it has sine rebounded and is likely one of the drivers of ES after hour gains. We'll see what happens when Europe opens.

Tomorrow at 10:15 I have a quick doctors appointment with my back doctor, I slipped on some wet rocks fishing over the weekend and want to get it checked out before my insurance renews deductibles at the new year, it should be about an hour by the time I get home. I should have time for an a.m. update before I head out.

Speaking of the BLS

I have long maintained that information, government reports and earnings are routinely leaked, not because 'm paranoid, but because 3C has shown us this first hand a number of times. Now we have actual real confirmation that the BLS data has been leaked, perhaps days in advance.

This s why we follow the underlying action in the market and why prices mean very little as they are subject to change when the underlying trade diverges.

Here's the story about how the BLS was caught red handed leaking data

Gallup Finds underemployment at 18.4%

This is called the U6 number as reported by the BLS, although it's several percent lower then Gallup. The BLS number that is reported is the U3 number although there are 6 categories from U-1 to U-6. The way unemployment was measured during the Great Depression was similar to the U6 number which sees little in the way of headlines, the lower u# number is what is the headline number, but if you work 1 hour a week, you are counted in the U3 number making it seem like the unemployment situation is better then most realize as the headline number is usually taken to mean those who are jobless and few people make the distinction between employed and underemployed. I prefer the U6 number myself, the reason being is someone who works 10 hours a week, but wants to work full time, for all intents and purposes is not self supporting and is not contributing to the economy. There re tons of people who fall in to this category and at 18.4%, it's not far off the Great Depression peak which was 25%, but I'm sure during much of the Great Depression, the number was in the area of 18-19%.

My wife has to work two jobs and gets up at 4 a.m. to get ready for work and comes home sometimes at 9 p.m. because she works two jobs, not because she wants 60+ hours a week, but because few employers want to pay 40 hour a week and almost none want to pay time and a half for overtime. One employer won't pay for more then 28 hours because if they do, then they have to pay for benefits like health insurance, so they have a cadre of part time workers. When we had our family cafe, we had a lot of workers who only got 212-20  hours a week, some because of school, but others because they would simply take anything they could get. My neighbor actually just moved to northern Florida yesterday because her fiance has been unable to find programming work for as long as I've lived here which is about a year.

While the unemployment rate is fairly high (higher then the national average) in south Florida, my wife is able to find a job within a few days, but the wages certainly aren't what they used to be. n any case, I've never trusted the BLS data, when is the last time they didn't revise the prior week and when is the last time they revised it for the better?

Crucial Market Pivots

Not only is the stock market at a crucial area, but the Euro, which is almost synonymous with the market.

So far on the first day of the week, the WOWS model portfolio starts out in the top 10!

While I'd love to see a bounce for many of our members, I have held all of my short positions because of what 3C has been telling us, despite the rumors of this and that, EU rescue summits and the current 'Santa Claus Rally", only adding to a few on market strength. As I explained during the move higher which ertainly wasn't fun holding leverged shorts during, I have been in this situation so many times I can't count, when everything seems to suggest I should cover, exept 3C and I can't remember the last time it failed me on an important decision like this, even when I don't understand what the dynamics are. I've often found if you wait for the explanation of why 3C looks the way it does, or you wait for confirmation of the bad news, YOU MISSED THE MOVE. This happened when oil crashed in 2008 and 3C called the end of the 5+ year bull market in oil down to the week. I went short, I had email after email telling me that oil is going higher, peak oil, and even the very same week that I went short and put out the short call, Cramer was on TV telling all his viewers to buy the next oil inventories report if it disappoints as a CONTRARIAN TRADE because according to Cramer, oil was going higher! This is surreal on a couple of levels, millions of Cramers viewers all doing the same thing is a contrarian trade? And no, I couldn't tell my readers why oil should head lower, why this was a top, all  could do was show them the 3C charts.

Here is what happened to oil the very same week I posted the oil bubble is about to pop and Cramer said it was going higher (I suspect to give his buddies at GS a herd full of sheep willing to buy a position they desperately needed demand to get out of).

 This was the week of the USO short, although 3C had been warning for over a month, the same week Cramer came out with his "Contrarian trade", which still gives me a chuckle (how millions of viewers all doing the same thing can be contrarian!).

 Here's what happened to oil after, an 80% decline, nearly parabolic!

 Here was USO at the time, you can see the daily negative divergence, but what was convincing was the intraday timeframes lining up.

AMR-American Airlines was another controversial all that stands out (based on how many reader emails I received ). I had said AMR was under accumulation and would pop soon, why? I had no idea beyond what 3C had been saying and as I recall, airlines weren't popular at the time as you can see by the preceding decline.

 The result, over the next few months a 200% advance.

 This was the daily positive divergence, although the intraday charts made the case more compelling, 3C even gave us the exit signal.

DXY-The Dollar Index was a tough call... There was no reason for the dollar to go up, it had been in decline for 9 months, 3C saw something that couldn't be explained.

 The result, a huge 20% rally for the Dollar Index (this may not seem like a lot compared to equities, but for the dollar a 20% move was huge).

Here was the 3C signal. A few months later, news broke that the US was going to pursue a strong dollar policy and a few other news items that explained the move came out. The point is, insiders on Wall Street know this stuff way before we do. If you have ever seen my year 2000 charts showing huge accumulation for homebuilders while tech was all the rage, you would understand that Wall Street is years ahead of the curve on occasion. Any way, the point being, 3C has brought me through some tough areas, even when I didn't understand what could possibly move the market, later it emerged, but later would have been too late, this is why I've held my shorts the last few months.

In any case, the point being, the FX and Equity market are at a critical pivot.

 Today toward the EOD, the Euro/USD broke the important $1.30 level, it tried to test it and failed, since this capture it had 1 more failed test then broke above $1.30 only to fail again.

 On a daily chart, the last level of support before $1.30 (which has a huge allotment of long contracts), bounced 1x and then failed, $1.30 failed soon after. Currently in blue we have something that looks like a bear flag, this could be used as a head fake to break to the upside, but that is assuming that the manipulators haven't lost control of the market, a situation in which the fundamentals overwhelm their ability to run short term manipulations as every time they try, sellers overwhelm the effort.

Here's a longer look at the  Euro, this is important support, if broken it will start or already has started a wave of liquidations of the $1.30 long contracts.

 Longer term we have lower lows and lower highs in the EUR/$USD which is better known as a downtrend, this is why a failure of $1.30 is so important as it will likely make a new leg lower and continue the downtrend.

Here's 3C for the Euro

 Compare this daily 3C chart to the one above, it is the same price pattern with 3C negative divergences at the tops and a positive divergence at one of the lows.

On an hourly basis, 3C has shown distribution in the Euro and is now leading negative making a new low.

Here's the critical SPY/S&P-500 hart, ready to break a trendline that happens to fall at the same area as the 100-day moving average and more importantly the psychologically important $1200/$120 level.

Later I'll try to put up the chart of 2008 in which this entire last few months has looks almost exactly the same, it was the model and the basis for many of our ideas about what the market would do and thus far has been incredibly accurate. History may not repeat, but it does rhythm , especially in the market where human emotions which never change are responsible for the bigger price action trend.

Good for a laugh while exemplifying the joke that is the EU

Earlier in the day I mentioned how the UK is likely (now definitely) not going to provide the $30.9 bn in aid to the IMF so the IMF can turn around and bailout the very same countries providing the aid, but if that were not surreal enough, get this...

Italy is probably the one PIIGS that can bring the entire system down, they have huge debt they need to rollover and can't seem to do that without paying an unsustainable 6-7% on 10-year BTPs, translation, Italy needs a bailout.

We already knew that Germany was providing the most to the IMF, $41.5 bn and France, which should be downgraded any minute now is providing $31.4 bn, the UK for the second time since December 9th has given the EU the shaft and won't commit to the $30.9 bn in IMF aid which is desperately needed to bail out Italy, but what we didn't know until now is that Italy will be contributing $23.5 bn in IMF aid to bail out Italy!!!

Since the day the EU had the first Sunday summit after the G-20 gave them an ultimatum, it has been an absolute circus and thus anyone and everyone who was committed to helping (mainly China and the other BRICS) is now running for their lives away from any bail out as each summit, each press conference does nothing more then to revel how absolutely inept the EU policy makers are.

I have long thought, "They know something we don't and that is why this looks ridiculous, but they have something up their sleeve", each time I have been proven wrong for giving these policy makers the benefit of the doubt; but how in the world can one give them the benefit of the doubt when Italy is now contributing $23.5 bn to its own bail out?

Seriously, I feel like I'm missing something here, can they be that inept? Credit and now the formerly sugar rush addicted market seem to agree, "Yes, they really are that inept".

Don't be surprised to hear that Germany has been put on negative credit watch just for advocating and participating in something this.... (you fill in the adjective).

BAC Keeping the whole market under pressure

Every day there's a fulcrum stock, today we are seeing a huge fulcrum in BAC, which has the entire market under pressure. Earlier today I said the line in the sand for BAC is $5.00 and that it is a major hedge fund holding. Well, see what 1 stock can do to not only an Industry group, but the entire market.

 BAC breaks $5.00 and instantly volume spikes on stop-loss orders. NEVER put your stop-loss at a whole number, it's just way too obvious and way to easy for the middlemen to run you out.


 Look what it did to financials at the very same time...

And the 22% financial weighted S&P-500....

I would dare to guess that BAC is being moved off hedge funds positions so they don't look like morons with the next quarter's prospectus. Warren must be VERY happy he capitulated to Obama's request.

In any case, it probably doesn't need to be said, but funds will be looking for ANY strength in BAC to unload before the 27th of this month.

VALE Short Trade Idea Follow Up

VALE is a trade I like for 2 reasons, it's a play on weak commodities and from what I understand, 60% of their revenue comes from China, it's also a bit of an Emerging Markets play.

 Here's a weekly chart of VALE, see the top and the break, this has already done the volatility move after the break, so it's in a much better position for a trending trade.

 It's been heading down since it was featured here, but also kind of in a bullish descending wedge, there may be a false break below the wedge if enough people see it, but in any case, the rule of thumb is "wedges retrace their base", so that unfilled gap in yellow does not look likely to be filled, meaning it would be a break away gap and add an extra element of bearishness to this trade. So if we get a bounce here, which would set up a nice short for those who are interested or an add to for those who are in, the target area would be around $22.50-$23 or so, I can update you if we reach that level as far as 3C charts and entries.

 The 5 min chart has shown a positive divergence right at the wedge, so that makes some sense.

Here's the bigger picture for anyone considering or preferring trending trades (that would be me). 3C went negative at the 2007/2008 top and VALE fell apart, it also went negative at the 2010 top and has fallen apart, but the easy money is in the snowball decline like in 2008 which VALE has not entered yet, so in my opinion, an entry on a little strength sets VALE up as a great trending short sale candidate.

If you haven't already, I have a link from an old article I wrote at my free site, Trade-Guild about how you can make more then 100% on a short as people are not generally aware that you can make more then 100% on a short. Here's the link, it's a bit old, but still relevant.

Making More Then 100% on a Short