I have a kung fu student who needs a can of whip ass opened on him, so this is a quicky.
I differ from Mole a little this morning. Hes still bullish, and with good reason. BUT I have a short setup, its a valid (textbook actually) short setup. IMO the bullish case becomes stronger if this short setup fails (which would be a retest of the lows).
Basically today we have very positive $tick readings in the first hour, indicating that the market was going to try and go up, probably going to try and be a trend day. The fact that this didnt happen indicates that buying pressure is fundamentally weak. Thats what I was looking for as a sign to think about the shortside. POMO or no POMO, here we go.
So to clarify, the worst thing I can do is second guess my system (though Im caution because of the vix buy signal) I take the short, trusting that I will get a long signal if it doesnt work. Dont jump the gun on this, wait for weakness as it could still head up from here. I really want to be cautious and wait for price to confirm my view here.
The other setup I really like today is gold (silver too, but gold looks nicer to me) Its a retest variation sell.
And here we are again – Scott and evil Mole eagerly anticipated today’s tape and it pretty much turned out as expected. Maybe less fireworks than hoped but here we are closing at SPX 1328 again. Forget about cross index divergences – the bears seemingly lost another battle and it’s POMO business as usual.
The ZL was on fire today – it never believed that mid day drop an started to paint a small but textbook divergence. I did not recommend long positions as the signal was way too weak. I however pointed out that we may find ourselves at the top of the StdDev line should we make it above VWAP. And that’s exactly what happened – the top was touched a few minutes after NYSE closed up for the day.
Geronimo was very quiet today – not a single trade. Which makes me a bit uneasy about the long side if I’m honest. I would have preferred a stronger more confident long day. Of course this may all be strategic and thus intentional – after another opening gap tape like this gave the bears hopes for a late day reversal. Instead however we closed near the highs and if you been holding puts you were put through another vega squeeze.
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We are at an extremely interesting juncture, there are several ways things can develop. I’m going to present some unorthodox thinking here.
Lets start with what happened. We saw from the market internals divergence on the way down that the market was going to *attempt* to rally on Friday.
And rally it did. So the market is doing EXACTLY what its supposed to. Now, the big question to ask is “how does that rally fit with what was expected. Does it totally invalidate the bearish case? Does it make it stronger?
My current working thesis of what happened is in line with the 60 min chart setup I posted a few posts ago. For the Asian session on Friday price was sandwiched between the 20 and 50 EMAs. If those arent the EMAs you use it makes no difference. When price is like this there is a zone where all of the moving averages are clustered. Price is squeezed between numerous support and resistance points until it breaks clear one way or the other.
Now because there is many many moving average points, the break is rarely a totally clean one. However we see that coming into the European open we have a gradual short squeeze which takes us up to the daily high, which is where the bearish case starts to fall apart for Friday. Its all over for the bears at this point and we have a short squeeze which takes us to the 50% retracement.
Now this wasnt a shock and awe victory for the bulls. I’m willing to say at this point we had no fresh buying from the sidelines, and this was purely a squeeze. The way I see it the worst thing that can happen for the bearish case is for the bears to attempt to drive the price back down and fail to breach the 1294 spx lows, which would be a retest of the lows and complete the vix buy setup.
Paradoxially the best thing that can happen for the bearish case is for price to go up on Monday,
Because the bears have been repeatedly clown-raped, this market cannot go down until the last buyer has bought.
Prechter will be pointing at the exact 50% retracement and saying “its the top of the wave 2 of a wave 1 of p3 – this is the definition of the best time in the history of the world to get short. I’m here to tell you thats rubbish. I’ve done extensive backtesting of the way major tops form, and its a little different than ordinary tops. When a trend thats been in play for a little while changes, the first retest of the highs typically stops for a breath at 50% and 61% as the top pickers get short. There is an extremely high probability of the market running the stops of those weak hands before it falls, if its going to fall at all.
So lets look at Fridays price action for clues.
The first thing I noticed was that $tick was positive during the initial hour, without being a knockout blow. What that tells us is that its unlikely to be a trend day and we should be looking to bank profits on intraday trades rather than letting them ride. The next thing I notice is that $tick spent most of its time in the +600 to -600 range, which I always mark on the chart with lines. This sort of price action is “meh” action, and in this sort of LOW PARTICIPATION TAPE the greatest extreme the $tick can really hold is 1000, and you wouldnt want to be long much longer after a +800, or short much after a -800. In otherwords an extreme reading over 800 in either direction is sounding alarm bells. Now its not always like this, on days with higher participation tape the tick can handle much more (the intraday low on Thursday was an incredible -1300) but days like today I’m very suspicious of tick extremes.
Of course this is orders of magnitude easier with the zero. Low participation tape is obvious at a glance, and negative divergence tells us to exit longs at VWAP high of the day. Simple. Spend your $50 bux! Obey!
Bottom line, where are we at? The case for the top being in is still the highest probability, but its NOT TIME TO GET SHORT YET. You should get a better entry with less risk by waiting. Or a worse entry with a higher probability of success by waiting. Both of those are better than getting short right here and being a coin flipper.
We have 4 scenarios. In order of probability
1) The squeeze has a bit more upside to go, but it falls short of new highs. We go up on Monday without positive internals, and it runs out of steam. In a perfect bearish world it would paint a shooting star candle. In that case shorting comes back on the table.
2) The squeeze brings in fresh longs from the sidelines, we paint a trend day on Monday, open at the lows, close at the highs, expanded range. In this case a potential double top or worse can be on the table
3) We fall on Monday, but dont break the 1294 SPX lows. This is the game changing clown rape scenario for bears, as bulls will certainly rush in once it becomes clear that the bears have run out of ammo.
4) We fall hard on Monday, increasing negative breadth and breach the lows of Friday. This is the lowest probability outcome, but if it happens will probably cause the biggest move. At this point we can be clear that the last bull has bought and its time to get short with confidence.
I’m long, with no profit taken. I will be watching Mondays price action closely for clues as to if and when to take my longs off the table. My advice has always been to wait for the retest before getting short. You can see why now, we have many different options for price to take, and its pure guesswork at this stage.
Let the tape show you the way, there is every change we paint a high probability setup, either short or long in the next 2-3 days.
All technical analysis over the coming week should be geared towards answering the question “are fresh bulls coming in from the sidelines?”