Daily Archives: September 24, 2010

Anatomy Of A Bear Trap (by Molecool)

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Yesterday was an extremely fascinating session and I would like to walk you Slopers through it as a textbook example of why the Zero has become indispensable for many of my subs and yours truly:

2010-09-24_zero

Shown here is the current screen grab of the live Zero taken at 12:45pm EDT. You can see the last eleven sessions on the hourly Zero (on the left) and the recent three on the Zero Lite (on the right). This is exactly what you would see as a subscriber – a continuous twenty second interval feed of these two indicators.

Let's start with yesterday's opening gap – both Zeros painted a down signal but it was a pretty weak one. I'm saying that knowing that a 'strong' down signal would register at least a -2.0 or more on the scale. So seeing a gap down like that accompanied with a -1.0 only reading (or less) usually makes me suspicious. As with so many indicators it's not just important what you see but what you don't see.

And sure enough – the dip buyers swarmed in immediately and drove the SPX to 1137, after which the tape degraded into a sideways pattern. Many of you and myself included expected another ramp into the close and I think we were all a bit surprised to see VWAP being breached. I put a little sticky note comment on the chart (which I do often) indicating that this was unexpected as that breach was not supported by a reasonably negative down signal on the Zero Lite (ZL).

Of course it didn't stop there – we started to see one red candle after the other and I was getting very suspicous. Especially since Friday (today) was supposed to be another POMO day. Not that I trade the news or will have any of that on the blog but a sudden drop on no participation ahead of a POMO day was an encounter of the rare kind. And didn't hesitate making that point via various sticky note comments on the Zero chart.

Twenty minutes into the last hour Tyler over at ZH tweeted the following:

2010-09-24_ZH_pomo

At least someone else was paying attention – and at least I wasn't the only one being paranoid!

As we continued to drop lower I again commented on the chart saying that if 1120 didn't hold all hell would break loose. Eventually the dip buyers put up a symbolic floor right at the VWAP's lower 2.0 standard deviation line (which was exactly at that 1120 level I had pointed out), which produced that small hook up into the close.

The bell rings and a few minutes later Tyler must have parsed his Level II feed as he tweeted this:

2010-09-24_1120

At that point I had a big smile on my face. No, I haven't morphed into a bull but I had dozens of Zero Pimp-A-Thon subs watching the Zero for the very first time and a gap lower the next day would have been egg on its/my face. But obviously the Zero seemed to be on the right track here and there was a chance that the 1120 mark would hold into Friday. Especially since someone seemed to know something out there.

Of course the story doesn't end there. I was typing a few emails late in the evening (yes, I descend from vampires, thus I never sleep) when I saw my AUD/JPY chart explode to the upside. It looked like a damn Shuttle launch and the second stage rocket boosters were kicking in.

2010-09-24_audjpy

The writing was of course on the wall at that point – even though the Chinese started to buy Japanese bonds like wild the AUD/JPY managed to bust higher early in the morning. I don't think too many currency traders are eager to duke it out with the BOJ. For the record – I'm not an avid currency trade so more info on what happened there last night would be appreciated.

When I fell out of my coffin this morning I immediately pulled up the Zero on my iTampon. And sure enough – we had gapped up at the open and then ramped it up the bears asses from there – this time accompanied by a solid positive ZL signal. This stainless steel rat for one was not surprised and had escaped yet another trap with its ass(ets) intact.

Moral Of The Story

Now, did I know we'd see a currency intervention yesterday night? Nope! Did the Zero? Of course not – but what was blatantly apparent was the lack of participation accompanying the EOD drop, which IMNSHO was nothing but yet another bear trap.

Of course maybe all this was sheer coincidence – but feel free to pop that question over on EvilSpeculator as the subs will tell you: We have had many of those 'coincidences' in the past year. Maybe it's true what they say: It's better to be lucky than good 😉

BTW, if you're interested in giving the Zero a test spin – today is your last chance to join the Fall 2010 Zero Pimp-A-Thon – details in the lower part of that post.

Cheers,

Mole

Mixed Picture (by Springheel Jack)

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I've been having a careful look at the overnight action this morning and, at best, we are looking at a very mixed picture.

On the bear side on the bigger picture the Gann guys have been talking about this week as a likely key reversal week, and while I know some don't take them seriously, I've seen them be right so often in the past that I always watch them carefully. Any key reversal here would seem likely to be downwards so far, though if we saw a big decline today then it could possibly be up.

On the chart side SPX has faltered before reaching 70 on the daily RSI, which is so far failing to confirm a change in trend to bullish in my view, and the daily RSI has broken the recent rising support trendline, which is bearish. The obvious target is the support trendline on MACD which I'll be showing in my SPX daily chart below, and that would suggest a reversal towards rising support from the July low in the 1060 area.

Financials across the world also look relatively weak, and longer term the US economy is being forced down the rabbit hole by well meaning but short-termist policymakers, which doesn't give much confidence on the bull side for equities longer term. My personal assessment of the odds that we started a new secular bull market in 2009 puts those odds close to zero, though we have definitely been seeing a cyclical bull market since within the overall secular bear market, and that cyclical bull market may not have peaked yet.

On the bull side USD has faltered badly under the repeated recent assaults from the Fed, and may well soon confirm and strengthen the current downtrend by breaking a key support level at 79.63. That is traditionally bullish for equities. Copper is also in a strong uptrend and if the current rising wedge breaks up, will soon make a new high for 2010, which would also look bullish for equities. SPX broke back below the SPX IHS neckline yesterday though, which while it doesn't invalidate the pattern, makes it less likely in my experience that we will see it play out. A close much below yesterday's would weaken it further.

Here's the SPX daily chart and I would draw your attention to the RSI and MACD as there is a  distinctly bearish short term message there.

100924 SPX Daily Patterns

USD has been very weak overnight and as I said, we are very close to key support now, as well as significantly below the neckline of the scary looking but uneven H&S pattern:

100924_USD_Daily_HS_Pattern_and_Support

On copper we have a very nice rising wedge on the daily chart that is showing some signs of breaking upwards. I've put this wedge in the context of the larger picture. as and when we get a break from the wedge on a daily close basis I will be regarding that as a very significant indicator of where SPX is headed next.

100924_Copper_Daily_Rising_Wedge

Back in the short term though, ES fell sharply yesterday in the pre-market and then rallied to touch declining resistance before falling back to support again. That was good short-term bearish action and unless we see a break of that resistance trendline I'm on the short side today. We should know soon as I am watching that trendline being tested while I write.

If that trendline breaks on an hourly basis, I'll be a lot more cautious about shorts today and will be watching the thinner declining trendline a little above it. If that breaks even for a couple of ticks then I'll be out of shorts today altogether. The main decline trendline is slightly under 1128 ES at the moment and the higher trendline is slightly under 1130 ES. Add 5 points for SPX of course. Here's the ES 15min chart:

100924_ES_15min_Declining_Channel

I'm expecting a significant move today, probably downwards. If this resolves down I'm expecting at least a test of gap support at 1110 ES, but my preferred target is 1099 ES. If declining resistance breaks then I'm expecting a move that may well be capped at 1140 ES, but could make it as far as 1155. If the higher target is hit then I'm expecting a reversal on Monday that would reverse most of the gains today.

While I've been watching ES has broken up through both of my short term declining resistance trendlines and I'm therefore very doubtful about the short side today. There is still some possible resistance at the lower trendline of the broken wedge at 1132.75, but that's already been tested once from below. A second test suggests that it is breaking up.

I'm out for most of the trading day today at my younger son's birthday party so everyone have a great weekend.