Mole’s Cunning Plan

Equities have been holding their ground overnight and it’s completely plausible that we may see an attempt to squeeze momentum higher early in today’s session. However, thus far the reversal has been anemic and the recent lack of buying mojo calls into question whether or not the bulls will be able to overcome the first major hurdles waiting ahead.

For one there’s the 25-day SMA (weak) near 1950 followed by a volume hole a few handles further near 1960. If you remember my ‘zoning low’ chart then you recall that this is where the bearish scenario rapidly loses its luster.

Since yesterday’s drive higher our SPX P&F chart has switched into bullish mode, as would be expected due to the double top break out I pointed at last week. Now this is the price potential given we hold here and perhaps even drive higher. But if we run into a wall then this would trap a hell of a lot of longs, wouldn’t it?

And that potential scenario has been in the minds of market makers as the VIX:VXO isn’t yet buying this rally. So short term near term option premiums seem to going at a slight premium.

On a quarterly basis however the market believes that it’s clear sailing ahead – kind of. A bit tepid that signal but let’s not try to read too much into it. One step at a time.

So what happens right here and now is rather important, wouldn’t you say? The GBP/JPY correlation meanwhile is pointing down and I intend to keep a close eye on that one during the open. Yesterday it’s been useless to us as Forex markets were digesting the BOE’s quarterly inflation report.

Now if you’re a sub then you may have taken our NQ long and thus far it’s banked 1R as of this writing. So we have to make a decision now – do we hold it in expectation of a run higher or do we take our R here and run for cover? I have decided on a hybrid approach – which means I will advance my stop to break/even and keep the NQ long. Meanwhile, as I’m expecting downside, I will balance myself delta neutral where I expect the most weakness. This way I can wait until I get a proper entry on the short side which will only happen if we see spoos run into a wall. So effectively I just bought myself a cheap pass to sit out some of the whipsaw we can expect up here – I agree with Scott that we are approaching an important inflection point.

And here’s what I suggest on the short side – please step into my lair:


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So that is it – Mole’s cunning plan – and no invasive surgery is required.  Now let’s see if we get away with it ;-)

Cheers,

Alien Versus Predator

My money is on the aliens every time. And when it comes to finding analogs in the financial markets the Alien is the bond market and Predator is played by equities. Simply speaking – bonds (and forex) are the dog that wags the equities tail. So it makes sense to correlate the two and find out who’s lying. We play this game every once in a while and it’s particular useful when price data on the equities side keeps us guessing.

Let’s look at some ETF correlations first. Why? Because they’re easier to get in/out of for the average retail trader. So they have meaning given the overall message the bonds are telling us, however they may show us short term trends as well. Here’s JNK (guess what it represents) vs. the TLT which has 20-year treasury bonds as its underlying. That was a beautiful divergence near the top – took a while to break equities. As I said above – it’s a dog/tail relationship and bond traders are usually smarter than their equities slinging cousins.

I see a tiny bounce there at the bottom but we’ll have to give it another day or so.

Let’s zoom in a little but this time compare it with corporate bonds, which have been very very popular in the past few years. Better timing on this one on a short term basis – not if you are a fund manager who needs to flip a few Million shares. But to us this one offers better clues regarding direction on the equities side. What’s it doing right now? Bouncing a bit – which confirms our general view that we should see a re-test of the highs. Well, at least an attempt to do so. IF this really is at least a medium term correction then it has to happen anyway. Trends to just fall off the plate – they form a top first.

Now let’s mix it up with a few managed mutual funds – with more long term implications:


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Cheers,

Post FOMC Musings

As widely expected the Fed decided to taper by another $10 Billion per month. Worthwhile noting however is that it also delivered on some earlier rumors that it would hint at a more hawkish stance going forward (i.e. interest rate hikes). The response on the equities side thus far has been pretty muted but predictable.  As in draw in all the hobby bears ahead of the announcement just to smack them with a two-by-four post announcement.

Where we wind up closing today is anyone’s guess and to some extent it’s academic and really doesn’t matter. As both Scott and I have been telling you over the past two weeks – entering anywhere inside our current trading range borders on ritual suicide. The chart above shows nothing but the price action of the current month – we’ve got one more session to go. What does this tape tell you? Does anything jump out at you?

Frankly speaking I’m seeing a cigar smoking dragon in a clown suit riding a Harley. Yes, it’s  a complete and utter mess – the only take a way message is that the current trend is either inside a sideways correction or that we are painting a medium or long term top. Given Scott’s posts earlier today and yesterday I would not rule out the latter. Which is why I suggested some cheap insurance – it’s still available but volatility continues to climb. You have been warned.

On the SPX however today’s session was extremely productive as it bestowed us with additional context. See -experienced traders focus on controlling risk while retail chases gains [quote I saw on the ThinkingAlpha feed today]. I really don’t care about the gyrations we’ve been suffering through in the past month. But I care a LOT about price context in combination with various technical evidence.

I’m seeing various momo indicators suggesting a correction is overdue – see above my updated NYA50:NYA200 chart which expresses breadth across the NYSE. It shows as at a possible inflection point but it also does a pretty good job of visualizing the buying exhaustion that may have permeated equity traders. As you can see bullish momentum is oscillating in smaller and smaller signals and over the long term this is unsustainable.

but in the end price will have to follow suit. And for that we need context on the price front. Well, the SPX just produced a technically valid support zone which is rising – and that means the onus now is on the bulls to keep price above 1965 and pushing higher. This may appear of limited meaning to you but for me it carries significant implications.

Quick update on the Dollar campaign I posted about last week. Well, it’s been going pretty well and today’s little pull back was expected. I currently do not see any cause for concern – I’ve been long since 81 and after a three week advance a correction will shake out some of the weak hands. We may even see a retest of the 100-week SMA and I’m leaving my stop in place (< 80.5).

Not surprisingly this has produced a more favorable exchange rate for this lowly expat. I like what I see thus far but the EUR has now approached its 100-week SMA and I expect longs to stage a significant defense down here. Today’s FOMC response has produced a very convenient push higher and some of the strong players who traded this one down may now try their luck flipping for longs here.

Bonds also have responded as well post FOMC – here’s the ZB futures contract which was near its own 100-week SMA just ahead of the announcement. I always get suspicious when I see major symbols approach long term resistance/support ahead of the Fed or ECB. Again shorts now have a good excuse to launch a bit of a squeeze lower but they are facing a weekly NLSL near 136 below. Let’s see how that plays out.

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Cheers,





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