Bounce appears over due...

Funny how the market is heading in a direction that my positions favor and I can't help but see signals that indicate that it is about to turn against me any moment.

I must say that the price action has been ugly. Looking at the hourly, daily, weekly, and the monthly - I'd say we are having either a strong correction or the pre-amble to a major break. The pull back is simply not "orderly". I don't see a channel with parallel top and bottom trend lines. I just see a lot of weakness.

Open the hourly.




Once we broke 1130 it was pretty much a free fall to 1090. Support at 1090 failed at the third test bounced only once off of the famous 1080 level. The hourly sticks tell me that this might get even worse. Look at how the bottom bollinger band never had the chance to flatten - it is now opening further suggesting further down slide in price. The 20p and 50p MAs are sloping down with some fair aggression and there seems to be some strong selling along a single top trend line that has been tested several times since the start of this decline.

At the same time, I see a significant RSI divergence where with each reaction low the corresponding reaction low in the RSI is climbing. This explains why we see these recent mini-rallies. However, these mini rallies just don't have the legs needed to overcome the significant selling pressure. For this reason, I can't say that we'll get that bounce just yet - though it would not surprise me.

Another thing that bothers me is that I can't say for sure that I see a completed EWT. I thought that wave 3 was completed at 1090 with wave 4 being the pullback to 1100ish. I expected the final capitulation to take us in a fairly straight line down to 1080ish. We kind of got that, but it took two bounces at 1090ish before we broke and touched 1080. At that point we see another mini rally intraday that took us near 1100 (yet lower than the prior reaction high). From there we see this progression of lower lows and lower highs with another sharp drop to end the day on Friday.

This is a tough one to call. When I look at the Daily chart, I have every reason to expect a trip to 1030 in the coming week or so. Regardless, there will be a bounce at some point soon. The resistance levels seem to be 1090 and then 1130. You know it is a bounce when price action cracks above the top trend line. Until then, we are headed lower and this entire move may simply be wave 1 of a much larger EWT that could take us much lower indeed.

It is good to be back, though this week is again full of travel.

Love to hear peoples thoughts on the market - especially the Thursday and Friday sessions - as I had zero time to monitor the action. As a side note, my company won an award from Microsoft for the "Most Technically Innovative Solution" at the NYC BizSpark event. Got a trophy for the effort.

Looking forward to catching up!

Desk Issues Resolved...

Sorry the posts have not been coming. My desk issues are resolved. There was a conflict between my firewall and the trading platform that resulted in heavy traffic to my brokers network - causing them to block my IP address. Unfortunately, this impacted my ability to work the ES contracts.

We will probably get a bit of a bounce from here, and the tests will be first at 1100 then at 1115ish. I am actually hoping that we close in the 1110 range towards the end of the month, as I have a small butterfly spread around the 1080 - 11140 range. I think the best thing to happen for the bear camp is a battle in this range, with a downside victory.

My business calls for travel during the next two days, which means I will be inactive. I expect to resume analysis this weekend. I will be checking in on the markets from time to time and probably posting - certailing monitoring HMS blog and others.

Good luck out there!

Desk Issues...

There is nothing I hate more than technical issues with the trading desk. I really need some sleep tonight, but after installing my CA Internet Security Suite, my futures trading platform is DOWN. Last time this happened it took almost 48 non-stop hours working with technical support teams all across the globe to get it fixed. Great...

I really wanted to study the trend lines on the ES and YM tonight. So I am gonna have to work through this problem. Thankfully, I am flat overnight. But what if I weren't? Can you imagine having a 5, 10, or 20 contract position on the ES and not be in a position to monitor each tick? Frankly, I don't think I could handle 1 contract with zero visibility. I am a very visual trader - perhaps to my detriment - but I must watch each tick up, down, sideways, or gap. I need to be able to judge a head fake from a breakout. A high risk scenario from a low risk scenario - all from the live charts.

Anyway, price action moved as I thought and we did not get the significant pullback that the world expected. If you read my last post yesterday, you will see that the pullback zone was not reached and judging from the mixed trading on AAPL and TXN in the after hours, I think we'll get some weakness in the morning. Perhaps we'll get that final wave v in the EWT that I presented on the hourly chart.

There will eventually be a bounce and I suspect it may even reach that Major Short line near 1130. But I am as sure as I can be that the sellers are in control for now and the general conditions in the market are shifting.

Cheers!

Possible SPY Setups

Earlier, I posted an analysis of the SPY using the weekly chart. I wanted to add to the analysis by looking at the SPY Daily, Hourly and 1 minute charts. Again, SPY tracks SPX, and though I generally analyze the index directly, the big volume activity of Thursday and Friday warrants a look at this ETF. It is widely held and studying it directly helps me to better understand the general market sentiment of participants.

I want to start with the Daily chart, and most of my comments will be brief.




Note that we are still within an upward channel that started in mid August. This channel is approximately 80 points wide and tends to oscillate between top and bottom trend lines every 12-15 days. Note that we have been overextended since Thanksgiving, having skipped a trip to the bottom line. With this in mind, unless we break the bottom trend line near 108 (boxed region) - we remain in an up channel. Having said that, the volume and magnitude of the price drops in the last couple of sessions should have everyone on guard. Look at the low volume that accompanied the drop on Thanksgiving. In fact, buyers edged out the sellers on that day - on very low volume. Clearly, the selling on this trip suggests a very different sentiment.

We have approximately 8-10 SPX handles to go to reach bottom. If we break this bottom channel, support will be tested at several key levels. I noted in my earlier blog that SPX 960 is a very reasonable target. If that plays out, we should drop a fib from 960 to the recent high and see what we get in terms of Fib levels. At to that what seems to be the volume driven support line and our target levels include:

• The 38% retrace at 104.60 (SPX 1040ish)


• The volume support line at 102.60 (SPX 1020ish)


• The 50% retrace at 101.22 (SPX 1010ish)


• The 62% retrace at 97.82 (SPX 980ish)

The most important level of the bunch is 101.22. This is the location of the 200p MA and if price action crosses below that line, we are back into bear market territory.

Focusing on the next 10 SPX handles, open the hourly chart.



This is a very, very ugly chart and one look suggests near free fall. I can not imagine buying this security. Look at it!

Anyway, I have tried something different with this chart by incorporating some shaded regions to help explain what I am thinking. First and foremost, there are three important levels of resistance on the chart. They are:

• Major Short at 113 (Representing the SPX 1130ish)


• Short at 111.60 (Representing the SPX at 1115ish)


• Short at 110.60 (Representing the SPX at 1110ish)

These lines are in place because I for one will look to add short positions at these levels - if they ever materialize.

I have also indicated the trend lines for recent price action. Note that the trend represents lower highs - as sellers are in control of the market right now and they decide how high the market will rise before dumping. There is no buyer evidence in the charts at all. So, the highers order trend line connects the high of the year with the first reaction high since the selling began. Note that this trend line has yet to be validated by a second reaction high (very scary!). The second trend line follows the price action from the first reaction high on Thursday through the hourly peaks on Friday. Note that the price action is falling further and further away from this line each hours (very scary again!). These trend lines are very important for the day trader as I will discuss them in this post.

Everyone is looking for a pullback Monday or Tuesday. I hope we get one, but frankly I am afraid we might not. For me, a pullback requires that price action breaks above that lower trend line and it must break above the 110.60 line. I created an orange shaded zone where I think a pullback might land. It occupies the space bounded by the trend lines and the two short lines. I would trade with caution in this zone as a break of the top line (labeled cover line) could signal a larger pullback. If we get into the pullback zone and fail to break 111.60 I would short again and double my shorts with a subsequent break below 110.60 after the failure.

Notice the green shaded areas. Any break into these areas might be a good reason to cover and wait for the next short opportunity. That opportunity is at the Major Short line near 113. I hope this all makes sense.

Now, the final detail is in the 1 minute chart:




This simple chart shows that we are in a strong down channel. I have confirmed that the top down trend line on the hourly (cover line) carries into the 1 minute chart. It serves as our cover trigger during the next couple of sessions. I have circled a natural spot to short, which is at the top of the yellow down channel. This circle also intersects with the 200p MA, and both the 50p and 20p MA are well below this moving average, which suggests we are heading lower. If we break out of this channel, I would consider covering any ES scalps.

Bottom line is that I have no reason to call for a significant pullback in the market util we at least touch down SPX 1080ish. I am watching the futures tonight to see if there is any indication of direction. We are up 5 handles on the S&P, but it is early.

Good luck out there!

This time is different...

Love that expression and how it has been used throughout the last year. However, for all the bears out there who have been disappointed by the tenacity of this rally - I think this time is different.

Normally, I use the chart of the SPX in my posts. Today I am using the SPY. The SPY tracks the SPX and it allows us to look at volume. Here is the weekly SPY candlestick chart.




Some important features include:

• The Main Fib Grid from the 2007 highs


• The Seconday Fib Grid spanning the reaction off of the March 09 lows


• 20p(red), 50p(baby blue), 100p(navy blue) and 200p(white) MAs


• The Fast Stochs with RSI (in red)


• Volume with 10p Average

Let me start with volume. We had an obvious spike up in volume over the last 2 weeks. In fact, it has been 12 weeks since we've seen volume above the average volume line. This is also the first time since Lehman that we have seen volume at almost twice the average line. The observation of this spike alone should cause alarm. Going further, we see that the volume in the prior 4 weeks (holidays) was pitiful. This means that any of the price action associated with that volume is very weak and hence - those gains were erased in 2 days of trading.

Now, let's look to see what else volume can tell us. Specifically, can volume help us predict support? The answer is yes. I have highlighted a range of weeks where we last saw a steady block of volume at the 10p average level of better. I found an area where buying out-weighed selling (more green than red bars). We then look at the price action in that period and see a run from roughly 88 to 108, which corresponds to 880 to 1080 on the SPX. I am happy to say that these two levels are very familiar to me, as they served as support and resistance in the past.

Looking at this highlighted volume block, we see that the only time volume exceeded the 10p Average is on a sell. That tells me that this price action is potentially soft - especially near it's top end, which is in the 1080 range. This sets up a major test this week. If we fail, the entire run from 880 to 1080 will be under attack.

What do some of the other technical indicators tell us? Let's look to the Stochs and RSI. I usually watch the stochs, but I do not consider than very reliable during strong trending markets. As you can see, they have told us that the market is over-bought for the last 6 months. A lot of good that does! It is much better to watch for divergence in the lines and for key crosses that trigger sell or buy signals. In this case, we have our fast line (yellow) cutting sharply down through our slow line (blue). This happended in a highly over-sold state. Further, the slow line shows the first real divergence from price action. Note how the last slow line top is substantially lower than the prior top while price action continued to climb. Finally, we have a reliable stoch indication that it is time to sell - and we have plenty of room to run down. The slow line can easily travel all the way down below 30 before turning back. This is a really, really bearish condition and it can not be ignored going forward. My only concern is that I do not see a substantial divergence in the RSI and we did not reach on over-bought state. This suggests the possibility of another run at the top before collapse. Look at the entire year of 2007. Follow the RSI and stocks during that final double top.

Let's move to the fib grids. First, the main grid shows me that we have essentially met resistance at the 50% retrace level. Remember, these grids are simply approximations. We do not have to hit the price down to the decimal places. We are roughly 50% back up to the top. The 50% retrace level is famous for reversal.

Next, the moving averages. The first thing I will point out is that the 50p MA remains below the 100p and 200p MAs. This may not seem important, but keep in mind that in the last 5 years, the 50p MA has always been above both the 100p and 200p average. The 50p cross below the 100p was right around the third down impulse and the 50p cross below the 200p was right around Lehman. We remain in a bearish moving average position. I will also note that price action is sitting right on the 20p MA and looking like it is going to cross below. If it does, this will be the first time that has happend since the rally began. This is a super sell signal - SUPER SELL SIGNAL. If we cross, the 50p MA becomes the target. One concern I have is that we did not touch the 200p MA - especially since the 20p MA has crossed up through the 50p MA. It is odd for price to approach as it has and turn away without a close encounter. This too suggests the possibility of another run at the high.

Now we get to a target. I have placed a box around the target zone. The top of the box roughly corresponds to the top of the range associated with the last average volume block - which is around 1080. Will 1080 hold? I don't think so. Again, I think the top is soft based on the sell volume spikes we saw during the period. Anyone who bought into the christmas rally is exiting as fast as they can. There is a sense of panic developing and I doubt the buyers at 1080 are going to try and make a stand. Their resolve was tested many times in that period, I don't see how they could stand another round of it. Though I think 1080 will fail, it will likely give enough support for a small bounce as it also aligns with the bottom bollinger band which has only been touched one other time in this rally.

Why else do I think 1080 will fail? Because it is below the 20pMA, and if we cross it will be a first and the 50p MA is a likely next target at 960. That 50p MA happens to align perfectly with the 38% retracement level of the rally off the March 09 bottom. It is also the level at which we see the first major reaction high off the bottom. It should be the "big test". If it holds, we have a correction on our hands. If it fails, we have something more signficant.

So, I am going to concentrate on a 1080-960 targer for SPX. I do not have trade setups to offer today, but I can say that the following support levels are going to be tested:

1080
1020
960

Good luck out there!

Butterfly Spread for the Range...

I am as about as anxious as I have ever been in the market. Funny, we have a correction underway, I am short, and I am anxious. Very bizarre.

I say correction, and I mean it. We have seen the SPX correct 5% in three days. I would not be surprised to see another 5%-10% in the coming week. Assuming that the correction is eventually met with buying support, the SPX may very well trade in the 960-1040 range for a while post correction. If that is the case, how do we profit in this environment? I currently have short SPY puts at 104 which if assigned will wipe my short SPY equities position out this month. I will see a small loss from that assignment, but I will not complain. I was early and deserve to pay the tuition on that one. However, is there a way that I can make up those losses with limited risk going forward? I think so. Check out the risk graph that I put together for the SPY:



This graph is of course a traditional butterfly spread. I built it using put option spreads on the SPY with March expiration's. I could have also done it with call spreads, but since I am currently short a decent number of March 101 puts I decided to build on that position.

For those unfamiliar with this type of spread, it is formed by selling short two (2)puts at a middle strike price while simultaneously buying one (1) long put at some strike higher and one (1) long put a some price lower. The exact number of contracts is up to you but the ratio needs to be 2:1 (two middle shorts, 1 long above, 1 long below)

For my spread I chose SPY 101 as the middle short, 106 for my top long put, and 96 for my bottom long put. The total cost of this transaction for me is $3.07 and that is the maximum that I can lose. (My cost is about $0.40 higher than it would normally be because I am using pre-exising short puts sold at a lower premium than they are being traded at today). This max loss point occurs if SPY closes below $91or above $111 on March 20th. For this to happen, either the correction needs to run very deep without finding support - which means we have more than a correction - or the market rallies again - which is hard for me to believe.

My profit will range with this spread if spy is between $94 and $108 by March expiration. Any close of the SPX in the 140 point range of 940 to 1080 will produce profit for me in March. The maximum profit potential is $6.93 if March closes with the SPX at 1010. The fall off in profits from this middle max is linear in both directions (SPX above 1010 or below 1010). I would double my money if the SPX closes between 970 and 1050. I think it is a good risk reward profile.

I am contemplating the same for DIA. We have seen the DJI correct a similar 5% in three days with the real possibility of 5% to 10% more. That would put the DJI down in the 9000-9600 range while it finds support.

Here is that risk graph I am considering:



For my spread I chose DIA 96 as the middle short, 106 for my top long put, and 86 for my bottom long put. The total cost of this transaction for me is $3.67 and that is the maximum that I can lose. (My cost is about $0.40 higher than it would normally be because I am using pre-exising short puts sold at a lower premium than they are being traded at today). This max loss point occurs if DIA closes below $86or above $106 on March 20th.

My profit range with this spread is $89.50 to $102.50. Any close of the DJI in the 1300 point range of 8950 to 10250 will produce profit for me in March. The maximum profit potential is $6.33 per share if March closes with the DJI at 9600. The fall off in profits from this middle max is linear in both directions (DJI above 9600 or below 9600). I would more than double my money if the DJI closes between 9350 and 9850.

Let me know what you think of the ranges - I think they are correct.

Cheers.

This wave may be exhausted...

Sorry no charts tonight, perhaps later this weekend - but It seems to me that this first sell wave is near exhaustion. We may see just a nudge move down on Monday (5 points max) before we see some support pile in and bounce before reaching the 082-085 area.

I sold my March put options today for a very hefty profit. That was not the plan, but I could not resist. Of course, this may turn out to be a mistake. If we don't get that bounce, I will have cut my profits way short and left myself exposed with the matching naked puts. I felt booking the profits was the prudent thing to do.

Look back later this weekend for some Technical Analysis.

Cheers.

Picture Perfect - but relax!

Needless to say, I am pleased that price action followed my illustration perfectly. Again, that is unusual but sometimes I get it right. Here is the hourly chart for comparison to yesterday's drawing:



Enough bragging. The more important issue at hand is where are we headed. All too often we bears get excited about a break in our favor, and this was significant for a number of reasons, however it is way too early to celebrate. Rather, we have to be very smart, nimble and prepared to take profits whenever opportunity presents itself. Two days ago, a number of bears that I know wanted to through in the towel. The rally was never going to end and they could no longer endure. DO NOT FORGET THAT FEELING - as it may be right around the corner. Nothing feels worse than hesitating only to see the market swallow your paper gains in a heart beat.

The good news is that I think we have more downside ahead of us. On the hourly, I highlighted what I believe to be a 5 wave EWT that is either near completion or mid-way through its cycle. Wave i was formed with yesterdays firm push down to support at 1130ish. As expected, support was found because there are so many folks out there convinced that all you need to do is buy the dips to win. Big money relies on that psychology to distribute - which they did heavily once wave ii completed in around 1143ish. Note that this was the resistance box that I illustrated yesterday. It marked the 50% retracement and location of the 50p MA. As soon as that happened, note how the price action forcefully moved right through support at 1131 and paused somewhat at the 1120 area. Now, this could very well be the mid point of wave iii. If so, wave iii completed at 1115, as prescribed. I am encouraged by how long we flagged along the 1115 support level - reaching back up to the mid point of potential wave iii, before breaking down again to close near the lows. This "flag" is either wave iv or the middle of wave iii.

Why is this important? Simple. We are at 1115 - which is the top of a prior trading range. If we break support here, we re-enter the 1080-1115 range. That is a 35point range and could be very profitable for all of us. Let's do the math. If we dropped from 1150 to 1115 to get here - that is 35 points. If we are at the mid-point of this EWT that means we have another 35 to go - which puts us remarkably at 1080.

You can see this more clearly on the daily chart.



Other features worth noting on the daily chart are the intersection between the bottom of the old range and the trend line for this 10 month rally. This seems to confirm that within the coming sessions we should see 1080. Also note that the 20d MA sits below that trend line, which means a major break could occur down to the 200p MA which should be around 1020 by then. Things happen fast, so let's see how it goes.

Today I sold some front month OTM puts on my SPY, DIA, and QQQQ. I chose strikes of 104 for SPY, 101 for DIA, and 42 for QQQQ. This timing was perfect for these sales as the options have a significant amount of time premium which will rapidly fade over the next 20 sessions. If by February we reach these strikes or lower - fine, take my shorts. As you may recall, I have an equal number long March puts to replace those positions at much higher strikes - including average strikes of 108 for SPY, 105 for DIA, and 45 for QQQQ.

The options are all about timing though and I have to carefully monitor the swings to time my exits.

Pretty Good Day...

Ocassionally, I get it right. Today was one of those days. All of the major indexes were down, substantially. The TRIN shows that the selling was strong and the buying at support was weak. The VIX shows volatility is again on the rise - which is obvious from the hourly and daily candlesticks.

Take a look at the SPX hourly.



We have tested the 1130ish area 5 times in two weeks. We are in a range of 1130 to 1150. Big money seems to be selling every chance it can get on volume. The proper play is to trade the range until it is broken. That suggests a bounce back to test that 1150 area once again. Chances favor price action being turned away before reaching the top of the channel. I am watching for tests of 1140 and 1143 as resistance levels that may send this puppy back down. Reversal at these levels could cause that final break of the 1030 support level and a rapid trip to 1115ish. Alternatively, we could see a more symetrical path for the price action as I have sketched on the chart. Finally, we could always break straight up through to all new highs!

Cheers.

Gary Kaminski says Melt-up Peaking

I never listen to the CNBC crew - but I did find this interview with Gary Kaminski interesting and spot on. Gary correctly observes that JPM and IBM, despite good earnings, sold off because they are "over-owned". He thinks the same will happen with Apple and Amazon after they beat the street. I don't disagree.

I fully expect tomorrow to be a down day. There are several big names in the banking sector, including:

Bank of America
Bank of New York
Morgan Stanley
Wells Fargo
US Bancorp

One of them is going to disappoint with numbers or outlook - guarenteed. The FHA announcement tonight (including a new mandatory 2.5% fee on all mortgages) can't help BAC going forward.

I am betting that today was a head fake. I rarely see a rally such as the one we had today fail as it approached the top. If this was the real deal, the prior reaction high would have broke and IBM would have pushed the market much higher after hours.

I expect a swing down tomorrow and I hope to profit from the move!

IBM Earnings to Reveal Market Intention...

Everyone knows that IBM is going to beat the street and offer good guidance. The question is how will the market participants behave after the fact. Looking at all the indicies, we have either rallied up to Thursday's HOD or, in the case of DJT and the RIFIN, fallen short. There hasn't been selling pressure as I would expect, but the buying isn't strong either. Since the technicals really don't support a breakout rally I think we are going to get a major distribution wave into the IBM news.

Take a look at the 5min chart for the SPX today:



I am short on the ES and YM in anticipation of a selling wave.

Cheers.

Watch for the reaction...

I spent some time looking at the daily and hourly charts of the SPX. It is the one index that I am short without any form of insurance. In my recent posts I talk alot about fundamental market conditions needing to change to get our correction. Of course the issue of zero cost liquidity will not change over night, but there are other things afoot. One of the most telling events is the baby Berkshire 50 for 1 split. The release speaks of making the stock more accessible to the common investor - as if the wonderful principles at Berkshire care so much for the common man that they just have to share this incredible investment opportunities out of sheer kindness/benevolence - RIGHT! This is about absorbing cash from the suckers before it all disappears. Anyway, it is a clear signal, along with the failure of financials to surpass their October highs. The tide is turning here and market fundamentals are shifting.

So, looking at the SPX what can we expect. I begin with the Daily chart - 50 day period.



I have labeled some important features, including the rising price channel bounded by RED upper and lower lines. As I look at this channel, I note that the last reaction high of Thursday failed to reach the top trend line and may very well have put in a double top. The RSI divergence seems to confirm that observation. Also, I see that we ran the width of the channel down and touch off the bottom trend line on Friday. Though we have seen worse down moves, this was a fairly significant drop and the buying really wasn't there until the covering in the end of the day as we bounced up off the bottom trend line.

This bottom trend line happens to align with several other supports:

• 20d MA


• Bottom of the Bolligner Band


• Support Line at 1130 (tested 5 of the last 9 days)

Judging from the RSI. the recent increase in volatility (look at the expanding sticks) and continual tests of 1030ish, we may very well see a break and retest of the top of the prior range near 1115-1118. This range is highlighted in yellow on the graph. I am sure may of your remember this trading zone. The chances of retesting this range are good - as you will see that the 50p MA is sitting insider near the top of the range. Though it is not an immediate target, look how far the 200p MA is from price action. Some day, we will come all the way back and kiss it.

The Daily is good to help us get a sense of where we are within the swing and what might happen. Seems to me that we are bouncing off the bottom trend line of the channel - but support is waning, meaning we are not likely to challenge Thursday high successfully - rather, we may get a break down to 1115ish.

Let's open the hourly to see what may happen:



Oh yeah, that's much clearer for me. Note that this chart really shows the weakness setting in. This chart is for the last 20 sessions - which means it includes the holiday nonsense. When I look at this chart, I see significant distribution at the 1150 level - causing the retests of support at 1130ish. This support level also aligns perfectly with the 50% retracement of the New Year rally - which was on very little volume. Generally, when we see more than one retrace to the 50% level, you can expect a full retrace - so this means that 1115 is realistic.

Note how the price rise followed a channel before breaking out on Friday afternoon. For those of you watching action on Friday, this channel was in force. Price action did drop to the bottom of the line and paused for some time before selling pushed the break through. As is customary with breaks of channels, I would expect to see price rise to retest the bottom of the channel line before continuing lower.

I have placed a box around the 1141 zone - which is a very possible target for any pullback on Tuesday. It is a gravity zone for several reasons:

• Bottom trend line of the broken channel


• Location of the 20p MA


• Location of the 50p MA


• Center of the BB (price tends back to center

Rejection within this zone will be the signal to short for a ride to 1115. If we break above this area (say above 1144) I would expect another go at 1150 - and I would short there as well at the first sign of weakness. Using tight stops on both of these trades is advisable - as this market tends to surprise with its mysterious rallies.

I have yet to study the futures - purposely. I wanted to first get an understanding of the cash market. If I see major divergences in the futures market, I'll have to try to understand why.

Good look this week!

Insurance Please...

I am very please with today. The move down was strong and deep. The double top on the ES futures played well and I think there is much more of it to come. I profited from the my ES short contracts, the put options that I sold short which have now expired, and I took some profits on a small long position I held in SWKS at yesterdays highs. I had more than a hunch that today would go they way it did.

Better news is that I bought some insurance on the cheap. My QQQQ short position is now insured with March $46 calls. I already own $45 puts that are currently in the green (which I purchased at the last QQQQ reaction high). I simultaneously sold some $44 March puts to offset the cost of my insurance. At this point, my loss potential is fixed to a very small amount through March, but my reward for a break below $45 is officially unlimited in the same time period. This was a very fine peice of financial engineering and timing. A big relief!

I did something very similar with the DIA yesterday and today. Yesterday, I purchased a substantial number of March $105 puts. Double the number when compared to my short equities position. Today I sold half that position for a nice profit - leaving the other half to take the place of my short equities when the time is right. I also did a complex spread which includes insurance on 40% of my short positions at $106 offset by the sale of an equal number of March $97 puts and the sale of my prior DIA March $102 puts. In the end, I have 40% of my insurance in place and twice the short potential with half the risk. I will look to insure at lower and lower targets as this develops.

I made no moves on my SPY holdings as it seems clearer to me that SPX has more downside to come. I will make my moves once we make our way down towards the 1120 range. The insurance will be cheaper and the premiums on any put sales will be higher.

This weekend will involve more serious technical studies - I hope the this time we'll get our correction.

Cheers!

Selling the news...

Well, as expected, Intel and JPM beat. The initial indications are selling into the news. Of course we need to see how the markets fair at the open and through the session today.

Question is, why the selling into the good news? I think the answer is simple. This is a thin market and the big boys swinging the long lines can't easily sell their positions on just any old day. Doing so would adversely affect their market price. The big money waits for conditions where there is sufficient interest in buying their shares - allowing them to dump as close as possible to the current market value of the issue. So watch the volumes today to see if the selling is more significant than usual - that will tell us if the big money is distributing and that would further support the prospect of a near term correction.

Another thing to watch is if many issues which recently 52 week highs get turned away from their last reaction highs before breaking them. I am particularly interested in the performance of the financials and the techs. These issues led this rally and are the early indicators of the markets direction for 2010.

Finally, the FEDs now have the ammunition they need to start cooling off there intervention. They have to start mopping up the liquidity - and the earnings from Intel and JPM help make their case. I expect to see increasing use of the media, such as this bloomberg article, to gradually sensatize the market to the inevitable increase in rates and other steps for the FED to backout. This is very important, as we all know the employment picture has not improved and real estate is still in the crapper, yet the FEDs are staging a move. This means that they have no choice - they can not continue to support liquidity at this level. They would if they could, but there are limits before inflation becomes a reality.

So, we still have macro economic deterioration, big money selling whenever there is an opportunity, and the FEDs being forced to throw in the towel. China is being setup to take the blame this time - as it will be their bubble that bursts and we will simply be the victims of their bad policy, lies and failure. It is the smoke screen that the administration needs.

30 minutes after Intel...

So today brought bad job numbers, worse retail sales numbers, and an apparent big beat by Intel. I am watching both INTC and the futures markets as I right this to see how the market digests. So far, I think we have a sell the news scenario developing for tomorrow. The market may be saturated here and ready to break to the downside under the right conditions. INTC rose above 22 for a few moments and has since given most back trading at 21.77 (fluctuating for now) - a mere .30 above the close - and guidance looks less than good for the coming quarter (down 8%).

After scalping some nice overnight profit on the ES and YM, I went flat into the day waiting for the reports. Take a look at the ES chart - captured about 30 minutes or so after the INTC results.



I think we may have a real double top forming here and this might be the confirmation. This chart - a 60 minute view - shows a double top forming across the last 6 sessions. If this plays nicely, it will see rejection tonight below the 114875 level and drive lower through the begging of next week. A double top typically forms over an 8-12 day session - so it is a candidate.

Note the low volume today relative to yesterday and the day before. Also, we may have a divergence in the RSI when comparing to two reaction highs. Support at 114000ish is going to be key - if it breaks, then we test then we see the 113000ish level again - which would be very nice.

If we see a break higher, then lookout. The market will be sending a very clear message - it wants to go up!

I'll be watching tonight.

Is this a bull market or what?

Another great quote:

"The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated..."


So Alcoa misses, jobs data misses and the market does exactly what is predicted. It goes up - because bearish items are ignored. Now we have the headlines telling us Alcoa doesn't matter - Intel and JPM are better indicators of the economy. Wow.

Anyway, I bought more put options today at higher strikes and lower cost than the original batch purchased last week. There is a a good deal of cream in the market now and I am starting to become confident in a sudden correction.




Looking at the 60 minute 10 day chart of the SPX, we see the gap closure at the end of the day, followed by a mild sell-off. The closing candle is bearish and we see a divergence in the RSI. We also see rising volatility levels (higher lower reactions). I think the game may be on. I have shorted the ES in anticipation of a rejection at 1150ish tomorrow. Hoping to see price move incrementally - but steady - down to the 1130ish area again. A break of this support would bring on a nice down leg. Of course, I will watch the futures overnight.

Cheers.

Pressure mounting for disclosure...

I know this is an old topic and I mentioned this in an earlier post, but I think there is growing pressure for full disclosure regarding the US governments possible manipulation of the equities market. Watch this Charlse Bidderman interview.

I share this as an example of two things. First, it gives good insight to the "general market conditions". In additional to unlimited liquidity, the markets may simply be rigged to the upside. It is hard to be short. Having said that, this very well be the undoing of the markets. If it is determined that the FEDs intervened by manipulating the futures market, all confidence in the market will evaporate and a major selloff will occur.

For now, it is merely speculation.

If after AA...

I am hoping that the market rally will come to an abrupt end after the Alcoa results. As I posted on the HMS board, their report was less than impressive. In summary, they continue to see weakness in key markets:

DECLINES in Aerospace
DECLINES in Commercial Building
DECLINES in Industrials (negative 25%-30%)
FLAT in Cans and Packaging
Increases only in Automotive (2%-7%) and Trucking (5%-10%)

They did benefit from a 9% increase in the price of AL - but their production numbers are basically flat. They emphasize their liquidity - meaning "we have cash to survive" - and the fact that they continue to terminate positions - 70% of which they claim are permanent redeuctions. They have trouble in Italy to the tune of $320 million and have yet to settle their energy source and cost issues. This, along with a weak dollar remain negative factors for them going forward.

Bottom line, sales are not going to get back to historic levels anytime soon. Further, they are very dependent on China for growth - and that bubble is likely to pop...

Let us see what happens.

In the mean time, I did lighten up a portion of my QQQQ short position - equal to the number of $45 March put contracts that I purchased last week. Essentially, I swapped the short equities (at a loss) for the options. I see the Qs correcting along with the general markets, however I am more bullish on this (technology) segment than any other. If the markets do continue to rally, the QQQQs will lead the way. I am now waiting for opportunities to swap out similiar portions of my SPY and DIA shorts.

For those who are concerned that I am exiting prematurely, do not fret. I remain bearish - and my put strategy will keep me in the game. I am simply protecting myself from an extended rally in the SPX and DJI. I am doing this in light of the recent technical developments (as discussed in prior posts) and the "general market conditions" - extreme liquidity and a sagging dollar. Once the technicals diverge again and the general conditions show signs of change, I'll be the first to sell equities again. In fact, I am identifying a portfolio of shorts that I am now tracking, they include:

ANF
JCG
MCO

Let me know if you have any shorts in mind!

Cheers.

Where is the throw back?

1120 has come and gone. We are now in the 1140s flirting with 1150. The technicals have shifted to the bullish side. This baby is just not pulling back. Let's look at the 3 year weekly chart.



Note several very important events this past week.

1. We broke out above the 50% retracement level
2. After a retest of the top down channel line, we have drifted up and away
3. The RSI is no longer diverging from price
4. There is no longer a topping pattern to speak of

Unfortunately, I have to say that there is more room for this to run. From the looks of it, we could see 1230 and then a test of 1300.

The 1230 level represents the 62% retrace of the full decline, and 1300 represents the last reaction high before the Lehman bankruptcy. This pattern is a very familiar one - at all levels. In fact, looking at this graph and pretending it was a 5 minute graph, you would expect a couple of long bar pushes to rush resistance at 1200-1230 followed by some weakening bars into the top at 1300 validating exhaustion. This is also the location of the 200p MA - reasonable spot to turn back. That is the short play - and I think it is as close as five to six weeks out.

I can not sit on this heavy short index position until then. Though I am confident that we will see a correction - and perhaps another major leg down - we are talking about 100-150 S&P points. That is just too much and I will be seeking a throwback to lighten up. I have the March options and I have the ES trades to scalp and catch throw backs from reaction highs.

Here are some interesting quotes from every traders favorite book:

"suckers differ amongst themselves according to the degree of experience"

This stuck with me and I often think, how much of a sucker am I. We all are - even the best of us - but how do I rate. All I can say is that when I take a position that moves against me, against my technical expectations, the longer I take to fix the problem the more of a novice I feel. A smart man exits with minimized losses and works to earn it back.

"Men who can both be right and sit tight are uncommon"

At first you might say that his quote is an argument for me to sit tight on my short positions. It is not. This quote refers to traders (like myself) who act too quickly when they are IN THE MONEY to take profits. The best traders are able to stick to their analysis and play the setup to the end. In many cases, there is no end per se. Once you take a position, you should keep it until the larger trend has ended. Currently, the trend is up and I am holding a short line for the ride - hmmm, not good.

"I do not allow my possessions - or my prepossessions either - to do any thinking for me."

In other words, I am short a substantial line on the SPY, DIA, QQQQ. This line in and of itself is not a good reason to be bearish.

One of my favorites:

"It is naturally the semi-sucker who is always quoting the famous trading aphorisms and the various rules of the game."

Over the years, I have learned that either you got it - or you don't. You ain't gonna find it in somebody else's wisdom and though experience is super important, very few of us have the bankroll for a thorough education. These last 6 months make me wonder if I got it or not. But then I recall this final quote:

"Without faith in his own judgement no man can go very far in this game."

The market can not beat you - you can only beat yourself.

Put Options in Place...

At this point I have secured March put options representing about 40% of my short equities positions in SPY (106), DIA (102), and QQQQ (45). I remain fully short in my equities and have a small short line on the March ES that at approximately 1033.00 (constant work to keep this position without losses).

I am amazed at how much hype is going into this one jobs report tomorrow. It is as if this one report controls the destiny of the markets for the balance of time. Quite amazing actually. It is just a jobs report, but it is being used to drive emotions to irrational levels. This is the most dangerous time in the market - for both bears and bulls. Bears run the risk of capitulating in a wave of panic while new Bulls run the risk of getting sucked into the wicked final push of a very tired 9 month rally.

I'll leave you with something I learned today. An investment committees responsible for a substantial portfolio has recently pulled out of the equities markets. The consensus of this veteran team is that the markets are way ahead of themselves, the economy is worse than being presented, and the time is now to lock in gains and avoid further risk. I suspect this is becoming familiar advice for organizations that rely on equity portfolios for operating income.

We will see.

The ES Hourly Chart...

Here is a quick check of the March ES hourly chart.


My first reaction to the pattern is that we had a bull flag on Monday that failed to break out in a meaningful way today. As a result, price is stalling at the top trend line of the rising wedge. This combined with hesitation to jump in before the jobs data later this week may be enough to send price action back to the lower trend line.

Do the technicals support this? I think so. Again, we see a negative divergence in the RSI over the last two sessions. RSI is decreasing (from an overbought state) as price continues to rise. This means that the market internals are weakening and the last buyers of the reaction high will have to cope with a drop. This RSI phenom can be seen last week as well where price bounced off of the top trend line twice (with RSI divergence) only to fall to through the 50p MA (thicker baby blue) down to the 200p MA (thicker white). We may very well see the same thing tomorrow and Thursday.

Notice that I have added the CCI oscillator to the study as a double confirmation. I look for the RSI divergence when we have a clear overbought condition in the CCI. I think we are there now. Also, the Turning Line (thin rose) of the Ichimoku is poised to cross down through the Standard Line (thin blue). When this occurs above the cloud , it is a strong sell signal. The top of the cloud is aligned with the 50p MA at the 1025 area. This is a likely first support point if we start to move down. This also matches with the low of the day today after that terrible housing report.

So, I am of course short a number of ES contracts looking for the play to 1025 - perhaps lower. Unfortunately, the action has been happening in the late hours - so it will be another sleepless night it seems.

Good luck trading!

Step 1 Initiated...

I started steps in Phase 1 to exit my short positions. Though I have not covered any positions yet, I made some initial put option purchases (you didn't think I was going to abandone my chances at profiting from the correction did you?). Specifically, I purchased the March SPY 106 put contracts in a quantity representing about 40% of my short position on the S&P. I will look to do the same as I see the DIA and QQQQ reach reaction highs. I am targeting put contracts that are about 6% out of the money. I choose this level because I expect the correction to be in the 12-15% range. My target for the S&P remains at 960 - with a possible 830 if things get real ugly. If it occurs between now and March, I will profit nicely.


Phase 2 will be to cover the short equity positions - incrementally - as reaction lows occur. I will do this by selling in-the-money put options at the lows in the front month. This will allow me to get a premium over the strike price. There will be at least 2 reaction lows between now and March - giving me two periods of strategy assessment. If the market is pushing lower - great, my put options will be increasing in value and I can cover at lower prices with higher premiums. If the market is pushing higher, fine - all the more reason to exit the positions.

I like this strategy because it preserves my ability to profit from a correction (in a time limited manner), allows me to extract the maximum return (least negative) when covering, leaves open the possibility of keeping my short positions (and benefiting from the puts simultaneously) should the market take a hard turn lower.

It gives me great relief to have this plan and work on this project in the coming weeks. I feel much more productive at the desk and far smarter than I did just a day ago. One of the worst things that can happen to a trader is paralysis when the market fails to meet expectations. But the key thing to understand is that paralysis is the result of not having clear alternatives.The only cure is to think through all the scenarios in advance and prepare, prepare, prepare. This applies in every setup, whether it is a day trade or a cyclic swing. We trade best when we are in control.

Anyway, the plan is in motion. My technical analysis from here on out will focus on reaction highs and lows that support my strategy.

Good luck out there!

PS-> How about that housing data? And the GS downgrade by MW?

Is it time to throw in the towel?

Usually, by the time I ask that question - it is too late.

During the holidays, I read several books. "Too Big to Fail", "Meltdown: A Free-Market Look at...", and "America's Great Depression". All three interesting, but more importantly, all three have helped me to realize just how corrupt and broken our markets have become.

It is more and more difficult for me to trade comfortably with the knowledge that our government will do everything in its powers to intervene and prolong a false rally in hopes to avert (or pull out of) the current economic crisis. This includes open market purchasing of assets, including equities and rewarding our failing banks with free money to participate in the run.

For me, it is irrelevant that the Fed approach will only lead us deeper into crisis. It is irrelevant that the US runs the risk of defaulting on the world. It is irrelevant that we will ultimately go down the same path as Japan. All of it is irrelevant to me. What is relevant is that there is no way to trade this market. To go long knowing the facts is simply foolish. It is a house of cards. However, to go short seems suicidal.

From a technical standpoint, I no longer see a topping pattern. Rather, I see the SPX breaking out from the well established range and setting a new high. The same goes for the DOW and COMPX. It is time to lick the wounds and scale out of the position.

I have included the SPX 60 minute chart.



Note that we are at the top of an upward channel with a divergence in the RSI. I am looking for price action to reverse and make it's way to the lower trend line. Depending on how this move is made, I will begin to cover. I expect a retest of the prior range top in around 1120. I can only hope that we break below that level firmly and head to the 1096-1110 area. I will weigh my options at that point - but I will likely look to cover all of my futures contracts on the trip down and some of my equities at the bottom trend line - perhaps as much as 50%. I may at that time purchase some options and sell some puts - I don''t know yet, we'll see.

The reality is that this market rally has defied the fundamentals and to a large extent, made the technicals very difficult to interpret. To be frank, I no longer feel my skills are sufficient to place bets of the size and frequency that my style dictates. So I guess I am resigning in a sense, scaling out to reflect and determine a better approach - if there is one - for the markets.

I'd love to hear other perspectives.

Cheers.

PS-> My public resignation is supposed to give the all clear signal for the market to sell off!