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Paying attention to the mood and behavior of the overall market is as important as the ability to recognize a simple stock pattern, if not more so. Let’s forget the politics, unemployment and GDP for the time being. Rather let’s look at investor sentiment because this alone is a huge contrary indicator of a market. Point in fact is this weeks AAII Investors Sentiment Survey which revealed those responding were 42.1% Bullish [relatively unchanged], 28.4% Bearish [down 6.9%] and 29.5% Neutral [up 7.5%]. According to TradersNarrative ”the last time we saw a similar lack of bearishness was in April 2008 and September 2007. Both were tops before another leg down.” While I do not subscribe to AAII and therefore do not have access to these statistics, I do respect the work done on the tradersnarrative site and have to take it to heart. It is, afterall, when the most are Bullish, that markets correct. When they’re at their most Bearish, they pivot and turn higher [plowing over the Bears as fuel] so I remain cautious and Bearish at this point. Selling/fading market highs with close overhead stops and waiting. Somethings going to snap and it appears we’re going to make another run to the highs next week. If the Bulls can’t find enough buyers at years’ end with these extended valuations, I highly doubt SPX will rise above $1122. My stop tolerance @ $1130. Our Santa Claus rally may have been the rally we’ve had off the March lows; and that’s a helluva rally initself.
Some interesting patterns are developing here which may put an end to our little correction and send the market higher but it’s unconfirmed at this juncture. Today I began noticing many intraday [15min] wedges, or reversal patterns in the indexes as well as in the Dollar index itself. I noticed NQ broke out of its falling wedge but quickly failed. It then began to form a bullish triangle; the Bulls weren’t giving up the fight. Late in the trading session it broke out of its triangle. I covered my ES_F short and went long NQ_F with a target of $1797 and it hasn’t stopped climbing yet.
A view of the major indexes reveals that only the Nasdaq truly broke out where the others were stopped at resistance so a move higher is not unconfirmed. It could fail or it could be leading the pack so I checked further. Now the Dollar index [not shown] it also in a rising wedge; Bearish. While I’m not getting all giddy and going long equities at this point, these wedges[especially the DXY] are something to watch tomorrow with the job report being issued early morning.
I began writing a blip last night about how the market *could* rebound higher if USD/CAD worked its way through the shares at support and broke its triangle to the downside, thus giving crude a huge boost. Unfortunately however life intervened as my daughter called suffering from a kidney stone [Mom to the rescue!] so my post sat until I returned in the wee hours of the morning. Now as the sun rises all bets are off as McDonald’s [MCD] missed almost every estimate possible in their earnings release; then followed by a 3M [MMM] guidance miss and you had immediate shock by investors and causing a new round of risk aversion. Good thing Bernanke says they recession is over, huh? Chump. The USD jumped, and I mean jumped big time as investors sought a safer haven in lower-yielding currencies. I mean MCD has weathered this entire recession as the champion its known to be so a miss was bound to slap many investors into reality. Then to make matters worse, you turn on your TV and see Meredith “The Annihilator” Whitney as guest host on CNBC and you just know it’s going to be a red day.
ES futures broke down out of its rising wedge and the USD [via DXY] jumped up to $62.11 resistance. Once the normal trading session opens I expect ES_F to [at some point] rise up and backtest that breakdown resistance [yes, I'll be shorting it further there]. If it does not hold, watch out below, expect a correction over the next week……………and blame that damn MCD clown. We could still see a Santa Claud rally but clowns are creepy anyway and this is just gives one another reason to hate ‘em 
If you’ve ever looked at an oil painting and stood back to gain better perspective, sometimes taking a look at the market through a different chart layout allows you to gain perspective better than your typical candlestick or OHLC setting. Such is the case when viewing SPX using a mountain [also known as area] chart.
Single data chart types (bar, line, and mountain) use the closing price (or last price for intra-day) for its singular charting data point thereby removing many of severe highs and lows which can distract the eye. In the case of SPX, each area marked where the mountain *flattened* or experienced double and triple tops, a correction ensued. Now one should also note our recent market action reflects a much larger/longer flattening which I believe infers a larger correction ahead and here’s why:
- “Smart money” sells at the top and buys at the bottom and with that being said, I believe its larger/longer size means market participants are unloading more of their long positions at this *top*
- I believe we’re seeing some huge short covering in USD after its long selloff and if you remember the unwinding of the carry trade last year in JPY, it wasn’t something accomplished in one week. This pop in USD will put additional pressure on the market.
- Year end is only three weeks away; part of which Money Managers will be gone on vacation.
Last week I pointed out how SPY was forming a Bearish Megaphone and recommended extending out those trend lines on your chart as a type of “ceiling”. Friday that same extended trend line held and now the Bollinger Band continues to tighten. Volatility cometh. God only knows I could be dead wrong and we could skyrocket up to $1500 but based on the above, I firmly believe we should be following the Money Managers; selling into any pop, NOT initiating new longs and expecting a drop. It’s only a matter of time.
In an earlier post I highlighted Broadening Tops, otherwise known as Megaphones where a trading range broadens until it ultimately snaps and the trend reverses. Such has been forming in SPY over the last few weeks and while this does not mean that the rug will be pulled out from underneath us tomorrow, it is prudent that you realize this *could* transpire in the days/weeks to come and protect yourself accordingly. For me this means gradually building short positions at the top of the range as the pattern broadens. I also must bear in mind that this pattern could take weeks or longer to actually break so I’m jumping in and out of small swing trades and day trading as well but longer swing trades [for me] are out of the question at this juncture. I recommend drawing extended trend lines on your charts and monitoring because while the pattern will widen and allow us to creep somewhat higher [I'm still watching SPX for a full 50% retracement], I highly doubt we’ll see any true trading above the trend line. Of course, anything is possible in this rally so it will be interesting to see how things play out. Just another item to keep on your radar going forward 
Japans currency has been the *in thing* in the carry trade for years but that’s changed now thanks to Uncle Ben’s massive printing leaving the USD in the weakest position on the face of the earth. I’m not saying it it was done unnecessarily; that’s an argument for another day but it is what it is so we must adjust our mindsets accordingly when it comes to investments. To that end, Ashraf Laidi has been pointing out the strength in the Japanese Yen over the USD and the fact that their market [Nikkkei] began a series of lower lows in September; ahead of the Dow or S&P. Today we examine just how much ground the Nikkei has lost; retracing almost 50% of this years rally and Ashraf’s opinion that we are on tract to follow in its footsteps. If you’ve been monitoring this meager blog at all, you know I’ve been prettymuch short for the last three weeks – and very profitably so.
Instead of looking at areas of support to *buy the dip*, I’ve adjusted my mindset to look for areas of upper resistance where I’m shorting stock. Once you view the Nikkei and checkout the S&P, you may want to adjust your mindset as well and short any pops here rather than buying the dips.
When the pundits came out two weeks ago stating that the easy money [trade] had been made; they weren’t candy coating it. The Feds program of purchasing its own debt had ended and while they continue to purchase MBS, the hard-core selling of the US Dollar had come to an end. That doesn’t mean that the greenback skyrockets. No way. It’s still enormously weak and the amount of debt now owed will take years to be repaid but by the same token, they can’t allow it to plummet being sold by other soverign nations either. For one, it must be somewhat propped up to appease China [our largest buyer]. It’s selloff has also inflated other countries currencies to the point where they need to somewhat deflate their own currency a tad. [There've been a few articles in WSJ and Bloomberg to this which I will hunt down and add here]
Aaaaannnnyway, while there are many more crosscurrents involved, it’s all adding up to some short term strength [chop] in the USD which is putting pressure on the market. I’ve adapted my trading style here to buy equities at the USD top of the channel and sell equities at USD bottom for as long as this pattern holds. Who knows how it will continue. Could be a day or two. Could be longer. In the meantime, I’m playing the pattern until it’s not anymore; then I’ll get long for one last leg up.
Keeping a weather eye on the EUR/USD trade over the next few days as its forming a triangle which [on a Daily view] is showing Bearish divergence in MACD and RSI. Shown here on the 60min. but you get the picture. As Ashraf Laidi has been quick to point out, crude has been unable to trade and stay above $80/brl as he believes demand [or lack of] is finally catching up with pricing. Cautious comments from retailers regarding their 4Q expectations is lending the USD some slight strength and the markets overall parabolic rise is [in my mind] unsustainable here. I shorted ES_F Sunday evening @ 1098 and again @ 1112 yesterday; covering all this morning ahead of the PPI release. I have now re-shorted @ 1104.50 and will sell further @ $1112, 1118 and 1123. Will cash it in @ 1135 or under a 4% loss if that were to come to pass.
Short and sweet, none of this weeks action has caused me to change my stance. I still feel we are in for a major correction; one of 10% or more.
Crude finally rolled over dropping from $80 to $75. XLF has already retraced 38.2% of its last leg up, bounced up 50% and is turning lower heading towads $12. It will be interesting to watch this and RUT as they were the first to show weakness. **If** the rally itself is over, they will be the first to show it.
In ES_F, MACD has been weakening with each move on the Daily and the MACD negative Histogram increasing in strength which in my mind, says we’re losing steam and the downside pressure is gaining momentum as we near the 50% retracement of the ’07 high. Additionally, if you caught the video [left] from slopeofhope, he made an excellend point. Previously, the lows of a new swing high used prior swing highs as support but in this last trend, each swing high had lows which penetrated he prior highs on an increasing basis. A good catch by Tim Knight. I continue to sell my longs as I can and short ES and other tickers at upper resistance levels. Doesn’t mean we can’t hit $1120 but in forming a top, I think we’ll continue to chop around until the Bulls give in, take their marbles and go home.
Market popped early in the US after overnight selling in London of the USD propelled commodities higher once again. Mid morning, we’re now going slowly into a snooze fest awaiting the FOMC minutes. This release will be scrutinized even more closely for a change from the “extended period of time” stance will skyrocket the USD and commodities [and overall market] downwards. If wording and sentiment reflect to keep the status quo, I plan to get long TTI and possibly another crude play for the next few days. Crude climbed above $80 resistance and is now perched there. With no change from the Fed, crude will be drawn to $82 then $83.70. Still scaling into my ES_F short as we go higher to re-test the ’09 market high.
