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