No Balls to the wall here

We’re trading shy thanks to the amount of confusing information that we are seeing.  The most confusing of all is why the hell are we still above August 05 lows?   Commodities/China started this sell-off and normally we’d want them to bottom first yet US markets are holding firm while they keep grinding lower.   We’d prefer to see the opposite:  US markets make new lows, get panicky, while commodities firm up and show strength — that would get us interested in long trades.
There’s obviously two issues at hands, Europe and China, and they are making the lines somewhat hazy.    On one hand it looks like the S&P is pricing in Europe, while commodities are pricing in China.

We were waiting this week to short the 50SMA — we didn’t even make it there as the 20SMA on the $SPY  served as enough resistance.   The range is now tightening short term.

Copper ($HG_F)  still above the crazy Sunday commodity night but threatening it every day it seems

$CLF used to be one of our favorite trading stocks.  Now it trades like a dead internet stock from the bubble days.  Amazing.

$WLT was another super-star, one of our most loved trading stocks.  Again, trades dead.  Bid-less.    We want these to come back to the realm of living again before we start feeling the urge to go long.

We’ve noted our frustration this week on our stream.  Every night we send out our plan for the next day to our subscribers.  The plan has worked well (early in the week buy commodity to gap fills which all filled, later in week, short to support targets, which again worked) — basic range-bound reversion to mean strategy.  But our execution has been anything but stellar.  The gap between the plan and the execution is the hardest part of trading — when trading is bad the gap is wide. When you are in the Zone, then there is no gap.  Right now we’re in the gap area.  Why?  Because of all the mixed signals we can’t feel conviction about anything, thus we trade nervously.   We’re going for singles.  But maybe that’s not a bad thing.

Remember this chart we posted a few weeks ago under the title “How not to trade” — well update it at your own pleasure.  We’re still stuck to the range.    Peter L Brandt has an excellent post out today which covers this (lesson #3).   Don’t miss it.

Tough tape and people are getting impatient to see the range resolve.  It might happen next week or it might not happen for months.    If there ever was a time to be zen-like in your approach to the market and accept whatever the market brings, it’s now.

Dead cat bounce or the real thing?

he Euro-tarp rumor came out on Saturday and commodities were thrashed Sunday night before they bottomed.  We don’t think the rally has anything to do with a Euro Tarp rumor (since the real selling in for example copper came a day after)  but a simple squeeze continuation from yesterday’s commodity bottom.      Tech, which has held better than any other sector we follow, is not surprisingly underperforming today as it stands aside and let’s the commodity squeeze take place.     Take note that $AAPL is only up 1%, and for example $CMG $AMZN are both red.    This has all the makings of a vicious dead cat bounce, something we wrote about yesterday.
So how can one tell the difference from a dead cat bounce and the real thing?  Well we can’t.  They both start the same but the latter bases and then keeps making higher lows while the former gives it all back.   If you feel like the leaders should lead the bounce, well, it’s not that simple either since “leadership” is dynamic in the market.   It’s too soon to tell what this market wants to do (the reaction against the 50SMA should yield some information) but we do respect the fact that commodities, which started this whole sell-off, have now short-term  bottomed.
Charts are in a world of chaos and there’s not much to do today for new positions if you trade off patterns.  Don’t fall into the other side of the fear of loss which is the fear of missing:   if this rally is for real then there will be many excellent risk/reward set-ups in the near future.

A feeling of safety

The market has held the August lows admirably, while  commodities all broke down through August lows, and today hammered from incredible overnight sell-offs.    This to us is a very positive first step — but continuation will be key.   What will be necessary is a “feeling of safety” as traders who have had their limbs blown off by the sell-off start to come back into the market for “fear of missing the rally”.    Once that happens we could get a monster squeeze.

Right now tech is a lightweight — as noted this weekend we wanted $AAPL to be hit before we saw signs of a bottom.  We saw that today.   The real soldiers in the trenches right now are the four horsemen of commodities,  crude ($CL_F) , copper ($HG_F),  silver ($SI_F) and gold ($GC_F).     We’re keying off these for the immediate future.

The hammers in the four horsemen today are exceptional — but as we all know one day hammers don’t have much significance — it will be all about continuation.  We think this week will be the most important week since this sell-off started this summer.    The market held the range, the commodities bottomed — now if traders feel the fear of missing a rally and step up we could have a vicious bear market rally.    If today was a one day wonder and market pulls back tomorrow then fear of losses will outweigh fear of missing profits and we will go lower.   As said, this week is pivotal.     Bring your A game to the table.

Some positives

It's hard to get an edge on this market as computers trade to each other from one rumor to another but there are a few positives we'd like to point out today. The most obvious of course are the reversals on silver ($SI_F), gold ($GC_F) and copper ($HG_F) from their overnight lows. We also like the action on the refiners (which have been good tells lately) with $HFC $TSO $WNR holding gains.



As we noted this morning we think the rally could take us to the first target of gap fill near 116.5 on the $SPY -- that first test will likely be faded. The reaction to the fade will give out short-term direction information.

We noted a gap fill trade on $OIH in our newsletter this weekend and we have the first positive step towards that target today. We expect the first test of the fill to be faded.

Visibility is low and traders are flying pretty blind -- taking it one day at a time and trusting only moves short-term is our motto right now.

Market Thoughts

The market rallying while silver and copper get raped makes no sense to us — we see it as Friday version of musical chairs. The bulls are trying to keep the range ($SPY August low 110.27 still hasn’t been breached) and traders are nervous that they will miss out on a potential rip due to weekend fiscal intervention headlines. That’s definitely a possibility but nothing we’d want to bet our money on (short or long)– especially if the recent past is any example.

We don’t think holding the lows now would be a good thing for the bulls — it would just extend the range-bound tape. We want a flush, new lows, and a cleansing. And most importantly we want the commodities to show strength first — they started the down-fall and we want them to start the rally, whenever that may be.

If you are an investor/swing-trader who got clipped this week — remember — the more you try to make it back the harder and more dangerous your trading will become. The market doesn’t care about your PnL. Get involved whenever there’s good risk/reward set-ups, whenever that may be, regardless of how much you have to “make up”.

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Russell Divergence

We’ve been writing about the divergence between the Russell and the Nasdaq for a while now but wanted to put out a few figures out there:

The $QQQ is 2.19% over its 50SMA

The $SPY is 1.96% under its 50SMA

The $IWM is 5.96% under its 50SMA



Here’s an update of the chart we posted yesterday showing divergence between the Nasdaq and the Russell:

We have no idea what’s going on — is this some new paradigm in which small-cap stocks, financials, coals, oil stocks, and copper all sit dead in the water while momentum “decouples”? We don’t think so. One will soon revert to the other — that is either the laggards start to stabilize or the momentum stocks will start to fade. We’ve been through markets where tech/momo take the lead and commodities/more conservative sectors grundgingly follow but we can’t remember a time where copper (fresh new year lows again today) was an inverse indicator for the market.

For short-term traders it’s business as usual (we had six successful momentum daytrade alerts from our newsletter trigger in last two days) but it has been keeping us even more short-term than usual, constantly worrying about sudden reversals and death traps.

It is not the critic who counts....

Too long to tweet – what a fantastic quote.

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly; who errs and comes short again and again; because there is not effort without error and shortcomings; but who does actually strive to do the deed; who knows the great enthusiasm, the great devotion, who spends himself in a worthy cause, who at the best knows in the end the triumph of high achievement and who at the worst, if he fails, at least he fails while daring greatly. So that his place shall never be with those cold and timid souls who know neither victory nor defeat.” – Theodore Roosevelt

Which one is telling the truth?

The divergence between tech/consumer discretionary and almost everything else has been a recent theme for a while. When tech started rallying last week we were looking for basic materials to catch up (and didn’t have much luck there as very few broke-out of our set-ups). Here’s a nice little chart $AAPL overlaid with copper (via $JJC) to show you how surprising this divergence is becoming:

AAPL at year high while copper at year lows.

We’d be happy with a market led by tech/momo names but the other sectors still usually go in more or less the same direction. A real up-trend is not going to happen with a dying basic material/financial sector. So which one is telling the truth? Will the momentum names pull up the whole market or will the laggards anchor down the healthy sectors?

Trading and washing toilets

The constant evolution of a trader comes from the attempt to minimize the distance between what one should do (strategy) and what one actually does (execution). The endeavor to close the gap between these two is a career-long challenge. After multiple years of trading your tool-box of strategies should be brimming, your risk-management skills solid, but what constantly differntiates the mediocre traders and the great traders is this distance between what they know they should do, and what they actually do. Ideas are a dime a dozen, but it’s the execution that will make or break you.

Treat trading as a job. Imagine washing toilets for 8 hours straight and then your boss coming to you and saying, well actually I’m going to take back the last 5 hours of your pay and will only pay you for 3 hours. Losing in trading is inevitable, but it has to hurt you — if you’re going to lose money it has to be on a trade that set up great but just didn’t work. Those are the losses that we like — they don’t put us in a bad mood. A loss from a trade that you would not hesitate in taking again. Most traders like trading, for them it’s a great job, much better than for example, washing toilets. And the money can come in fast — the normal correlation between time spent working and income occurs at a much different rate than in other jobs (at least from an hourly/daily point of view for daytraders). And maybe because of this they act fast and loose.



This is the reason we like having a pre-defined plan from the night before — it helps us execute well. A pre-defined plan gives us conviction and conviction and good execution (trading tight and disciplined) go hand in hand. Every single trade should count — and you should take the money earned from the job as seriously as the guy counting the hours washing the toilets at the city park.

The Game Plan

This morning the market reversed at 121 $SPY resistance (and $ES_F 1200). Day is still young and we could base intraday and take out 121 before the close –even though we’d prefer a close under 121, a few days basing, and then a breakout of 121 and into next resistance of 123.5 which would be top of channel/50SMA.

Of course in this market you have to be open to all options — and reversing back down is also one of them. However, this scenario is looking less likely in light of recent market action.

Tech, retail and trannies are acting well, but basic materials and financials have to start pulling their own weight soon if this rally is going to have any standing power. The daily chart is technically still in the bear camp until we break out of this range but short-term the price action is with the bulls. Our focus into the next few days will be the catch-up sectors (especially basic materials) as tech takes a rest.

Rip or Die

We’ve written before that this range-bound market seems to only know how to rip up or die down. There’s very little chilling in between. If we do want to finally leave this range then the market needs to digest the moves and start to build bases — something that has been missing since the correction started in August.

Note how we keep bouncing off the lower range and reversing off the higher range (and today no exception as market screeched to a halt and reversed down as we hit the higher range in the $ES_F, and the 50SMA in the $SMH).

Who do you believe?

Listening to the CEO of Societe Generale one can’t help but to feel re-assured that all will be well:



And just when you’re lulled into complacency this report by Jeffries’ market strategist  David Zervos smashes any sense of calm:
In most ways the excess borrowing by, and lending to, European sovereign nations was no different than it was to US sub prime households. In both cases loans were made to folks that never had the means to pay them back. And these loans were made in the first place because regulatory arbitrage allowed stealth leverage of the lending on the balance sheets of financial institutions for many years. This levered lending generated short term spikes in both bank profits and most importantly executive compensation – however, the days of excess spread collection and big commercial bank bonuses are now long gone. We are only left with the long term social costs associated with this malevolent behavior. While there are obvious similarities in the two debtors, there is one VERY important difference – that is concentration. What do I mean by that? Well specifically, there are only a handful of insolvent sovereign European borrowers, while there are millions of bankrupt subprime households. This has been THE key factor in understanding how the differing policy responses to the two debt crisis have evolved.
In the case of US mortgage borrowers, there was no easy way to construct a government bailout for millions of individual households – there was too much dispersion and heterogeneity. Instead the defaults ran quickly through the system in 2008 – forcing insolvency, deleveraging and eventually a systemic shutdown of the financial system. As the regulators FINALLY woke up to the gravity of the situation in October, they reacted with a wholesale socialization of the commercial banking system – TLGP wrapped bank debt and TARP injected equity capital. From then on it has been a long hard road to recovery, and the scars from this excessive lending are still firmly entrenched in both household and banking sector balance sheets. Even three years later, we are trying to construct some form of household debt service burden relief (ie refi.gov) in order to find a way to put the economy on a sustainable track to recovery. And of course Dodd-Frank and the FHFA are trying to make sure the money center commercial banks both pay for their past sins and are never allowed to sin this way again! More on that below, but first let’s contrast this with the European debt crisis evolution.
In Europe, the subprime borrowers were sovereign nations. As the markets came to grips with this reality, countries were continuously shut out from the private sector capital markets. The regulators and politicians of course never fully understood the gravity of the situation and continuously fought market repricing through liquidity adds and then piecemeal bailouts. In many ways the US regulators dragged their feet as well, but they were forced into “getting it” when the uncontrolled default ripped the banks apart. Thus far the Europeans have been able to stave off default because there were only 3 borrowers to prop up – Portugal, Ireland and Greece. The Europeans were able to do something the Americans were not – that is “buy time” for their banking system. And why could they do this – because of the concentrated nature of the lending. In Europe, there were only 3 large subprime borrowers (at least so far), so it was easy to front them their unsustainable payments – for a while. But time is running out. Of couse, the lenders (ie the banks) have always been dead men walking!
At the moment, the European policy makers – after much market prodding – have finally come to grips with the gravity of their situation. And having seen the US bailout movie, they know all too well what happens when a default of this caliber rips through the financial system. The reason the EFSF was created in the first place was so that there could be some form of a European TARP when the piper finally had to be paid and the defaults were let loose. Certainly many had hoped the EFSF could be set up as a US style TARPing mechanism (like our friend Chrissy Lagarde suggests). The problem of course is that there are 17 Nancy Pelosis and 17 Hank Paulsons in the negotiation process. And while the Germans are likely to approve an expanded TARP like structure on 29-Sep, it increasingly looks like it may be too little too late. The departure of Stark, the German court ruling on future bailouts/Eurobonds, the statements by the German economy minister and the latest German political polls all suggest that Germany is NOT interested a full scale TARPing and TLPGing process across Europe. They somehow think they will be better off with each country going at it alone.
The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly – wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs – one for each country. That is going to require a US style socialization of each banking system – with many WAMUs, Wachovias, AIGs and IndyMacs along the way. The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks – even though it is probably a more cost effective solution for both the German banks and taxpayers.
Where the losses WILL occur is at the ECB, where the Germans are on the hook for the largest percentage of the damage. And these will not just be SMP losses and portfolio losses. It will also be repo losses associated with failed NON-GERMAN banks. Of course in the PIG nations, the ability to create a TARP is a non-starter – they cannot raise any euro funding. The most likely scenario for these countries is full bank nationalization followed by exit and currency reintroduction. Bring on the Drachma TARP!! The losses to the remaining union members from repo and sovereign debt write downs at the ECB will be massive (this is likely the primary reason why Stark left). It will require significant increases in public sector debt and tax collection for remaining members. And for the Germans this will probably be a more costly path. Nonetheless, politics are the driver not economics. There is a reason why German CDS is 90bps and USA CDS is 50bps – Bunds are not a safe haven in this world – and there is no place in Europe that will be immune from this dislocation. Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. Picking winners and losers will be VERY HARD but let’s look at a few weak spots –SocGen 12b in market cap (-70% this year) with assets of 1.13 trillion BNP 31b in market cap (-55% this year) with assets of 2 trillion Unicredito 13b in market cap (-70% this year) with assets of 1 trillion Intesa 14b in market cap (-70% this year) with assets of 700b Compare this with the USA where we have – JPM 125b in market cap with assets of 2.1 trillion BAC 70b in market cap with assets of 2.2 trillion
Importantly, France GDP is only 2 trillion and in bank balance sheets are some 400% of that number. The banks are dead men walking with massive leverage to both home country income as well as assets. The governments are about to take charge and Europe as a whole is about to embark on a sloppy financial market socialization process that has been held back for nearly 2 years by 3 bailouts. The weak links will not be able to raise enough Euros/wipe out enough private sector equity to get this done, so there will be EMU members that need to exit and use a reintroduced currency for this process. We put a Greek drachma on the front cover of our Global Fixed Income Monthly 20 months ago for a reason.


Who do you believe?

Source/ h/t: Reformed Broker via BloomBerg, ZeroHedge

SPY US downgrade range

The blue rectangle represents the price range for $SPY  between Friday August 05 (downgrade didn’t come until that evening but rumors were already flying) and the Monday/Tuesday reaction.   Three days carved out the range for the next 6 weeks (+).

Cry Wolf Market

A fantastic squeeze into the close to end the day with a gorgeous green candle.      It’s hard not to get excited by such action, especially considering we gapped down below the trend-line.   But we’ve heard this story now multiple times in the last month.  Take a look at the following chart of the $SPY and the blue circles and note how many close at high candles there have been in this period:

Note that there was even follow through on some of these green candles, only to get it whacked down again and again.  We have no idea whether this is IT, and for day-traders it doesn’t really matter (we’re long $ES_F overnight ourselves), but if we were swing traders we’d put out a few tester longs, have a lot of dry ammunition (cash), and accept that we would pay up in price in exchange for more evidence/confirmation.

For you Fib lovers out there

We bounced in August on the important 61.8% retracement, next support is at the 50% retracement which also happens to be major daily support near $SPY 102.    We have no idea whether we’ll actually pull back to that area but we’re open to the idea and believe the possibility is definitely on the table.   However, it doesn’t really affect our type of trading as our time-frame is too short (i.e. even if we get there it won’t be a straight line and will give lots of opportunity short and long).   But for you longer time-frame position traders — keep an open mind.

Backing Off

In the conclusion of the newsletter this weekend we wrote, “We have been pretty active since this whole correction started but we are stepping back now for the first time and seeing how Monday shapes up”. We basically couldn’t think of any plan coming into today: we weren’t interested in buying the bottom trend-line test this time (too many tests in short period of time) and we felt like we were too oversold to initiate shorts. Basically, we had no conviction in either direction coming into today.

We broke the flag today — next support is 112 on the $SPY. Breaking that bottom trend-line removes a lot of our edge as we were trading against that for the last month. We mentioned in our post The Big Road Map the possibility of creating a new range and it’s quite possible we’re in the process of carving out new pivots for that scenario.

August was a good month for us as range-bound strategies ruled supreme. However we feel now (and hope that we’re wrong) that we are entering a more difficult stage of “slim pickings” and are backing off and going into more defense mode. Basically, we are protecting recent profits and refuse to give them back in what very well could be an edge-less trading time. To be continued….

All about the levels

We are bouncing from one gap fill to another. Yesterday we reversed off 120.8 resistance, and today we bounced (thus far anyway) on 117 support. If your time-frame is short, this isn’t chop, this is excellent opportunity. Here are the important, short-term levels on the $SPY:



#1: gap fill resistance we reversed on yesterday. #2 support gap fill that held today. #3 next support which is around 115.9 . #5 trend-line support near 115. Bulls don’t want to go to trend-line support so soon as one more test this early would probably break it this time. Soon one of these range-bound levels will stop holding (next trip to either side of the flag will probably do it) and then strategies will have to be shifted, but for now, enjoy the range.

Middle of Nowhere

We rallied almost 7 points in the $SPY in 3 days from support, hit resistance today, and reversed.   Nothing too surprising here — and also nothing to draw conclusions from except that range-bound strategies are still ruling supreme.

120.8 gap fill — our short alert from yesterday’s newsletter:

We’re in the middle of the flag/channel,  basically in no-man’s land for anyone who is not a day-trader (for new positions anyway).    Next support in the SPY near 117-117.2.

How NOT to trade

Some things never change in this business and panic/euphoria will always be one of them.    Click to enlarge $SPY

Bulls won a mini-battle today but the war is still raging

We wrote this weekend to our subscribers that the first test of the bottom of the bear-flag, $SPY 115 zone, would likely be bought.    The first test of support/resistance coming from extended daily is usually good for a trade.   The second test, not so much.

We gapped slightly below the bear flag and then went up all day almost closing the gap.  Well done bulls.  Small victory, but important one.      Today’s action takes us one step closer to a scenario we laid out this weekend, that instead of a bear flag break down to next support (102-104 on the SPY) we would carve out a new range.   If we base around these levels then the bottom of the flag will lose some relevance.

To put it bluntly, we’re still deep in bear territory, but it could have been worse.     The bottom and top of the flag are the big areas to trade against, everything in the middle is no man’s land belonging mostly to day-traders.   Bulls need to get away from bottom of range as soon as possible and bears need to break us down through $ES_F 1136 weekend low.  For our type of trading, it’s one day at a time with no anticipatory trades.

The Big Road Map

Here’s our road-map for what we imagine will be the next quarter:
Let’s start out with the most basic line, A, which was as we called it this summer, the Big Kahuna, the March 2009 trend-line (we posted around a dozen posts on this) .   Once we broke that line sentiment changed and traders like us who had confidently bought the dip for 2 years now ceased to do the same.
B represents the  current $ES_F low of 1077 and the bear flag we find ourselves in — too early to see how this resolves.  A break-down to the next big level of $SPY 102-104 is of course one possibility (lower blue box at C) but so is the idea that we will create a new trading range (upper blue box at B).    Note that on the $QQQ the recent rally went all the way to test the underside of the 2009 trend-line — one that was immediately sold by traders fading resistance.
D represents the hope of the bulls which is the possibility of the creation of a new range and eventually a break of the recent trend-line down.  


Click to enlarge.

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Now What?

In the last two weeks we rallied over 10% off the lows straight into resistance ( see our posts earlier this week Don’t Get Complacent,  Resistance is Futile) where we urged our readers to go short at resistance (the first test of resistance short on extended move is a bread and butter HCPG type short strategy).    Not surprisingly we reversed at resistance but today hit support.  Now what?
Look at where we gapped down to this morning — exactly at support:
$QQQ reversed at 50SMA and gapped down this morning right at gap fill.  We came in with the plan of buying an intraday reversal off of 53.3 but backed away once we got the gap down on the horrendous job report.   We like buying sharp intraday reversals with stops on low — gap downs to our levels usually get us on the sidelines.

$SPY filled gap — and 20SMA right below.  Do or die territory.

$IWM filled gap and opened on 20SMA, again do or die territory.

The leader of the bounce has been the Nasdaq — let’s review

1. Rallied off the bottom all the way back to 50SMA.   Check.

2.  Reversed exactly off 50SMA.  Check.

3.  Held gap fill area at 53.3.  Check.

Now what?   There’s some further support near 53 (20SMA and short-term trend-line from bottom) but that’s about it — through there and we probably revisit the lows.   And if we rally, we have the 50, 100, and 200SMA walls right above.      The lines in the sand could not be more clear.

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Resistance is Futile

Resistance against the first touch of resistance in an extended move up is usually futile, especially if you have a short time-frame.   A bit of a pushed title but always wanted to fit something in from the Borg.   Anyway, we hit and faded from major resistance today on multiple sectors.   This isn’t necessarily bearish but typical price-action in which an extended move hits supply.   Bears would gain upper hand if we reversed hard and fast away from these zones while bulls would win the hand if we can base near resistance and digest the move.    Longer trend we’re still in bear territory but shorter time-frame bulls have been printing better price-action.

We came in with several short spots on the $QQQ (50,100 and 200SMA) and the first one, 55.7,  hit and is currently working   (today’s high 55.74)

$IWM hit resistance and faded:

$XME hit resistance and faded.   Again though this could become a bullish set-up IF we can base under and digest the move.

Disclosure: short QQQ

Update: covered 3/4 on move back below weekly 50SMA, and last partial stop now under break-even at 55.5

Don't get complacent

The leader of the bounce, the $QQQ is now in difficult, uphill waters.  No chart illustrates this better than the weekly:

We bounced on the 100SMA and today stalled into the 50SMA.  Very nice move but we imagine things will slow down now and more range-bound strategies will again come to the fore.

To further the argument note the triple resistance just above us on the daily chart — we think the 55.7-56.4 zone will offer excellent resistance shorts for our type of active trading.

Any basing at this upper range would further strengthen the bull argument.  However, a further move up in a quick manner into major resistance would likely fail.

Usain Bolt DQ at 2011 Finals

Brutal to watch as Usain Bolt gets disqualified from 100 M 2011 World Finals.  Contrary to what the sport announcers are saying though we had to respect how he didn't protest it and took it like a professional.  Mistakes happen.

The end is near

As crazy as this market seems it’s actually acting technically perfect IF you are trading it range-bound.   We came into yesterday telling our readers in the previous night newsletter that our game plan was to short $SPY 119 resistance.  We gapped a bit over and then ran straight down for many good shorting opportunities.  We came into today with 114 $SPY support — the last chart we included in last night’s newsletter.

114 was trend-line support and it held like a champ as we are now 3.5 points higher on the intraday bounce.

Now the plot thickens — with two clear trend-lines above and below the current print.   One more time through the 20SMA on the daily could do the trick and nullify this bearish pattern.    On the other hand one more trip to 114 and 112 is next stop.

Either way we believe we’ll be leaving this range soon which will likely coincide with the end of summer trading.  Gun to head we like the long break more than the short break, but at same time we’re not willing to ancitipate an edgeless pattern with hard-earned money.  Once the range breaks we’ll go into the closet and grab back the swing-trader’s hat but for now all cash by EOD is our modus operandi.

Resistance Shorts are all the Fad

The theme of the day was the reversal of the 20SMA on daily .    Let’s take a look:

Crude ($CL_F) reversed on the 20SMA

$ES_F and $SPY reversed on the 20SMA  ($SPY 119 short was our game plan spot)

$IYR reversed on the 20SMA  (another HCPG pick resistance short from our newsletter last night)

And the freebie we put out yesterday on the stream  $LNKD 73.2 short which set up great at 74 today for a nice smooth ride to 70.

Range bound strategies rule right now — we’ll see if that changes post Jackson hole.

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Market Road Map

A good start for the bulls today as the rally is still holding (3rd time indeed was the charm) but we have tons of resistance coming right up — ideally we base near the top of the range and then break-out.      Red line is resistance and the hard zone is  1146-1153 on the $ES_F.

 Note how this re-test is much smoother than the first — less wide as bulls trying to hold the fort.    If we can close over the red-line then we could get some continuation to the up-side.   Expect backing and filling around these levels.    And for the bears — if we go through dotted red trend-line and most likely we’ll go back to test 1077 $ES_F

Bulls doing good job keeping bonds and gold down today but a pop in the trannies ($IYT), which are lagging today, would also give the bulls some more confidence.    The animal spirits are there — the missing piece is bank stabilization.  If financials can get their act together we could be in for a decent counter-trend rally up.

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Random Thoughts

We’re looking for a few possible “tells” to give us indication of when to enter for a tradable rally.  Here are some thoughts and possible action scenarios:

• Gold ($GC_F) keeps ripping, going  through $2000 while equities hold stable.   Gold then starts to reverse, market rallies.    We want the gold/equities correlation to break-down.  Today was a good start as market closed flat while gold again rallied hard.

•  Is Gold $2000 like Silver $50?   We were all over the silver short but don’t have strong feelings about a potential gold short.  Not yet anyway.

• We sell off and take out the $SPY low of 110.27 but make a higher low over the overnight $ES_F low of 1077.

• There was whiffs of panic into the close as $GS got machine-gunned but we liked how tech held green and stable.   That’s a good start.  Small step, but in right direction.

• We would prefer an intraday reversal 10x over these gap ups that are so often faded in bear trends.

• We have a number of breakdown shorts on our list — we want them to all be taken out and THEN reverse.   If they don’t trigger we think the pain will only be postponed.

• This action reminds us not of 2008 but of 2002 where we grinded down every day in a market that didn’t scare out the bulls, but wore them out.

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Without conviction, we're nothing

We felt edge-less today.  We didn’t like longs as there are no good set-ups within our strategy parameters (need more base, moves are too Vish from 1077 $ES_F) and yet we were hesitant to short into a good-breadth trend-day (we did try a few scalps but only managed to churn).    The close we thought was silly and spontaneously decided to put on a decent sized short right into the highs for a  swing into tomorrow.  Then we started second guessing and thinking well, next resistance is at 1219 and maybe we’ll get there.    We hesitated, second-guessed ourselves, and ended up just taking 1 point profit on a very good entry on decent size (  currently ES_F is 5 6 points more in the money).
For our type of trading we need full conviction.    Our whole strategy is built around very clear patterns.  Basically, if it’s not a lay-up, we don’t trade it.  And when we do get into a trade that we’re not sure about, like today, we don’t execute well.


For further reading on the subject see    http://highchartpatterns.net/daytraders-hang-with-your-own-kind/

Now the hard work begins

The panic last week took us straight to the 200SMA on the monthly chart of $SPX.   The resulting bounce took us back up to close the week off back to the 50SMA:

Today we stopped dead on at 1200 resistance:

And to end the symphony even the intraday set up today at resistance at R2:

We’re now up 10% from the $ES_F 1077 bottom in a very short time.    Our best case for the bulls is to start basing near the upper side of the range (without giving up too much) and  thus a) negate the bear flag pattern  and b) set up longs that are much too V-ish to work right now.    
The more we rally from here in an extended form the higher the chance of failure.       The bounce from extremely oversold levels is always the easiest bounce.  What comes after in a completely broken market, the slow healing,  is the difficult part.
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Post 2008 international bank performance

Here’s the legend of a small sampling of international banks but interesting nevertheless:
Black: Bank of Montreal ($BMO), Green: TD Bank ($TD), Blue: JP Morgan ($JPM),  Purple: Banco Santander ($STD),  Red: HSBC ($HBC), Orange: Bank of America ($BAC), Yellow: Citibank ($C), ,
Note how they look like they converge near the bottom of the 2008 crisis and how differently they rebound (especially the top two Canadian banks).

The more volatile the market, the better the weekend reading

Some of the best articles we’re read in a long time came up this weekend.  Grab a coffee and go through these:

We’re big fans of Jeremy Grantham (even though not actionable in any sense for traders of our time-frame we find his writing brilliant) and this interview did not disappoint:
Can Jeremy Grantham Profit from Ecological Mayhem?   A few of our favorite excerpts:
“Phosphorus makes up 1 percent of your body weight,” he said, looking up from the page to catch my eye. “It’s a basic element, the residue of exploded stars. You can’t just make more.” He also pointed out that most economists see global trade as a win-win proposition, but resource limitation turns it into a win-lose, zero-sum contest. “The faster China grows, the higher grain prices go, the more people in China or India who upgrade to meat, the higher the tendency for Africa to starve,” he said.
“Grantham believes that the best approach may be to recast global warming, which depresses crop yields and worsens soil erosion, as a factor contributing to resource depletion. “People are naturally much more responsive to finite resources than they are to climate change,” he said. “Global warming is bad news. Finite resources is investment advice.” He believes this shift in emphasis plays to Americans’ strength. “Americans are just about the worst at dealing with long-term problems, down there with Uzbekistan,” he said, “but they respond to a market signal better than almost anyone. They roll the dice bigger and quicker than most.”
“Grantham, who says that “this time it’s different are the four most dangerous words in the English language,” has become a connoisseur of bubbles. His historical study of more than 300 of them shows the same pattern occurring again and again. A bump in sales or some other impressive development causes people to get excited. When they do, the price of that asset class — South Sea company shares, dot-coms — goes up, and human nature and the financial industry conspire to push it higher. People want to hear good news; they tend to be bad with numbers and uncertainty, and to assume that present conditions will persist. In the financial industry, the imperative to minimize career risk produces herd behavior. As John Maynard Keynes, one of Grantham’s heroes, put it, “A sound banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” All these factors contribute to a surge of what Keynes called “animal spirits,” which encourages people to convince themselves that this time prices will just rise and rise.”
“When prices go up and stay up, it’s not a bubble. Prices may always revert to the mean, but the mean can change; that’s a paradigm shift. As Grantham tells it, oil went first. For a century it steadily returned to about $16 a barrel in today’s currency, then in 1974 the mean shifted to about $35, and Grantham believes it has recently doubled again. Metals and nearly everything else — coal, corn, palm oil, soybeans, sugar, cotton — appear to be following suit. “From now on, price pressure and shortages of resources will be a permanent feature of our lives,” he argues. “The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.”
Here is the full text of the GMO letter.  Not exactly “merry” reading but definitely worth your time:  (thanks @radenmasbowo for the links)
Part I
Part 2

Two articles focused on the stink bombs coming our way from Europe:

Can Germany defend the Euro?
Global Jitters Gather Over State of Société Générale

Post from Barry Ritholtz at the Big Picture who is our Go-To guy for times of marco crisis:

How the Fed Got Itself Boxed In — fantastic article that gives light to our current situation.   Even this week you could hear traders/investors complaining about the lack of Fed intervention into the crash.   We expect the Fed now to get us out of trouble everytime the market crashes, and that mentality is problematic.  Read the excellent post.

John Maudlin’s “The Beginning of the Endgame” (via The Big Picture)– very stark letter by John Maudlin, great read.
And of course as traders we need to end off with a trading link.  As usual, good stuff from Trader Ken:
Bear Flags Everywhere by IndependentTrdr:  great quick review of major sectors and the bear patterns.  Woof.   As he writes, we either break down the bear flags or negate the patterns.  Stay tuned.

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Daytrader Toolbox, EMA talk

We wanted to go a bit further into how we trade futures and use the EMA.  A couple of points:

 

• The reason we watch 3 min, 5 min, 15 min, and 60 min simultaneously is because we always want to know which time-frame the market is keying off.   Our golden standard for 10AM to 1PM is usually the 5 min chart with 9/20EMA.  But we also often have an eye on the 15 min chart.

• Most times the market responds to the EMAs/ pivot points on the $SPY, but not always.   Lately we’ve found the $ES_F has been leading.   Note that Pivot points on SPY/ES_F do not correspond with each other.
  

• We’ve also often found that the ES trades better when we have no daily spots (stock alerts), which of course works well as a complement.  Volatility in stocks makes things very messy, but often gives excellent ES opportunities.

• We try to only trade futures when the EMA is smooth ascending/descending.   For our way of trading if we only trade the ES_F when the EMA is non-wavy our consistency rate is excellent, and the exact inverse is true when it’s wavy/flat. 

 

 

 

We were keying off the 15 min on the ES_F today — note the perfect Indy set-up.  We run up fast to 1150 zone, base until 9 EMA catches up, and then rip up.  Excellent long risk/reward trade. 

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SPY 5 min was also decent pattern, but not as clear.   Note how SPY constantly hammered on the EMA refusing to close under it, finding support on R1 – very bullish sign.

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Second clear trade came at shorting R2 with a very tight stop on the ES_F for a decent scalp.   The only way though to take a short like this is when stock rips up from base extended from base, and into resistance.  If EMA had caught up we would never go short this pattern.  

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More Random Thoughts

• We’re deeply oversold and we feel it in our bones that the US market wants to rally (be it even a few day dead-cat bounce) but it can’t until there’s some semblance of order in Europe.  You can hear the collective sigh of relief at 11:30 EST every day as Europe markets close.   We rallied on what was perceived to be negative news yesterday and even bad news that is not catastrophic could get this market going.

• That coffee stocks are rallying today shows us there is some appetite for momentum, which is bullish  ($JVA $GMCR $DNKN).  Again though we need the European stabilization before this can mean anything substantial.

• Rumors need to dissipate (no France downgrade would be nice start) and French banks need to stabilize.    (If you have Interactive Brokers you can watch Societe General via GLE once you subscribe to Europe data feed)

• We’re itching to pick up some names but just can’t do it with the current overnight risk.    Our swing-trader hat is in the closet and we’re only daytrading and barely that right now.   Today thus far it’s been edge-less chop.

• We  live by charts and make our living via charts but charts aren’t going to help us if Europe implodes.   Our rational side tells us that Europe won’t let France go down as the stakes are too high, similar to”knowing” in the back of our heads that the idiot politicians wouldn’t actually let US default.  But at same time we don’t want to risk our hard-earned money on that either.

• This leaves us to hitting singles and forgetting about home runs for now.    When things stabilize we’ll pay up for it — in no rush to get into anything right now as it’s beyond our risk tolerance.    Everything we do is vis-a-vis risk and the risk right now is too high for us to try to find the bottom of a news-driven market.

Random Thoughts

• Historic range today as we are now 9% higher than the overnight low ($ES_F).   The only way to interpret the close was that it was very bullish — FOMC was perceived as a negative for the market in that there was no QE3– market sold off, paused, and then ripped higher finishing on the highs.

•  As the trading maxim goes:  going up on bad news is always very bullish.  Of course we also to have to keep in mind that the best rallies come in bear markets.  However, as active traders, let’s not worry about that one yet and enjoy some possible short-term moves up for the immediate future.
  

• The big test for us as to whether this is a bottom, or nothing more than a dead cat bounce, is what happens on the test of the underside of the 2009 trend-line:

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Trend-line on the $SPY currently near 128 –  still a long way off but definitely something that is on our radar.     Unless there’s some new events coming out of Europe our thinking is that the short-term bias is long for the next few days at least.  1077 short term bottom.

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Orderly Panic

As we wrote last night $SPY had significant support at 115.2 and 113.2.   Today’s bounce came at 115.28.    Nice to be right (daytrade 115.2 to EMA at 117 was the typical HCPG strategy day-trade which is now finished), but on days like this we don’t expect perfect, text-book bounces, we expect messy overshoots.

Bounce on 115.2, rally to EMA, and base.    This is the kind of chart we expect on a normal support trade on a typical day.   Not after the day the US loses triple AAA status.     If indeed we bounce from these levels we think it would just be a pause for further selling in the coming days.  This is orderly selling, no fear.   No overshoot, no mess, no blood.    This is what we meant earlier when we wrote that we were “non-believers” on this 115.2 bounce.    It’s too clinically perfect.     We go through today’s lows though be it today or later this week and things will get hairier.  And if we’re wrong, well then we just missed a bottom by being in cash.  Worse things have happened.

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