It’s Crowded At The Top

You’ve heard the old saying – ‘it’s lonely at the top’. Well, that is one of life’s lessons which most definitely does not apply to trading the markets. Quite to the contrary, mon frère – for the bulls it’s always very lonely at the bottom and usually quite crowded at the top. People are lemmings – they do what everyone else is doing expecting extraordinary results. With that mindset we’ll revisit some of our time tested momentum charts.

Let’s first look at market breadth – some of you may not be familiar with the term so I lifted the definition off investopedia: A technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining. Positive market breadth occurs when more companies are moving higher than are moving lower, and it is used to suggest that the bulls are in control of the momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum.  

And there you have it – the chart above shows you a ratio of two breadth indicators, the SPXA200R vs. the SPX50R (i.e. the percentage of all SPX symbols above their 200-day SMA vs. the percentage of symbols above their 50-day SMA). Rather apparent from just looking at the chart is that divergences usually result in market corrections. However, in the past few years (since QE became the ugly mistress of modern finance) those divergences can play out for quite a while. Usually the 0.8 mark on the ratio above was when things had a chance to slip. Doesn’t mean they have to – often we see that last minute bounce that puts the bulls back into the driver’s seat.

Now let’s look at advancing vs. declining issues across the NYSE. In yellow I have highlighted the periods when things finally rolled over after painting rather pronounced divergences for months. The orange horizontal cluster is where momentum usually produces a quick correction before buying interest streams back in to save the day. Yes, we are close right now but if you look carefully there’s always that last bump higher (what wave wankers refer to as that second wave) before gravity finally takes over. Hence you can’t use this chart to time a turn – you can only determine that conditions may be conducive to a correction (let that one melt in your mind for a while). I think we are getting close here but we must let price point the way – which is an exercise I pursue throughout the trading week.

My CPCE Deluxe chart – put/call ratio on the CBOE. Now this is extremely interesting – some of you long term readers may recall that I called that green lower line the ‘beginning of the end’ – at least in the past a touch and a churn higher was necessary for a roll-over to occur. What we’ve been seeing in the past few months however is a new pattern that simply weaves its way sideways. There is frankly no telling how far this rally may run. But perhaps our trusted P&F chart may shed some more light on this question?

For that and more please step into my lair:


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This entry was posted on Sunday, April 7th, 2013 at 10:54 am. Both comments and pings are currently closed.



  • http://dartht.blogspot.com/ Darth_Gerb

    new pattern.. just when you’ve got it figured out, the Market pulls a chameleon.

    some divergence on the gold front.
    http://s24.postimg.org/4u8bxm5it/gold_Q1_2013.png

  • http://evilspeculator.com molecool

    Just when you think you figured it out the market usually pulls a fast one on ya.

  • Skynard

    Great post! Will be buying physical silver again when it gets there. May time frame will be my target.

  • Sean

    Love the long-term posts! … but I think the Fed (and other CB’s) is distorting the longer-term price signals and that is impacting other indicators… on the CPCE chart for example, it would typically want to break more convincingly upward, but the Fed’s actions are applying downward pressure, causing it to resolve sideways… also, what if the Dec, Feb and March events were supposed to be “tops” except the Fed has tilted the market into an upward bias so triple tops now look like upward trends? (also, typical longer term correlations for the S&P with almost any other asset/signal I could think of have completely broken down since the summer of 2011)… I think daily and intra-day price signals still work (for now), but these longer-term charts may be getting distorted… It feels like we are navigating a mine field like none we have seen before, and the central banks around the world have the power to move the mines, so good luck to anyone not privy to which mines are getting moved and to where… as Nassim Taleb would point out, the longer they struggle to maintain stability the more fragile they are making the system and instead of a nice healthy bell curve of corrections between 2% to 20% we are increasingly moving into a barbell shaped market where the options are going to become 50% and nothing in between… But I guess only we will only really know with time and hindsight… till then, it’s a good thing I’m smarter than everyone else and can get out right at the top…

  • Ronebadger

    Great stuff Mole, thanks! Lots of charts and analysis to get me going….eventually…

  • Th3_Acist

    Love the long term posts, any chance we could see more P & F charts for Forex in the future? I trade longer term due to my day job and the daily setups are much to fast for me.

  • convictscott

    Take a look at the monthly chart. Very tasty

  • http://evilspeculator.com molecool

    That’s one of the reasons I have been posting less long term (Sunday) posts recently. The signals are very hard to read thus unless we just went through a correction or a P&F target is hit it’s difficult to get positioned. As you may have noticed I also have increased the intra-day setups which is really what’s been banking the coin lately. Hey, you got to go where the money is and right now the best edge is by being nimble. Besides, who really wants to hold through a weekend these days? ;-)

  • http://evilspeculator.com molecool

    I do post LT Forex charts regularly – as soon as there are inflection points to be had I present them. But I won’t post charts just to post ‘em – as of right now the FX side is looking iffy on a LT basis. The Dollar hasn’t been able to make it above multi-year resistance and if that ever happens I want to be there – until then we have to play the swings on the USD and EUR side.

    On the daily side the Yen is going to be really exciting over the next few weeks – EUR/USD just painted a gap higher. There was a great LT setup last week but that spike higher was impossible to catch.

  • beentohardknocksU

    Early going on Sunday night markets but Yen continuing to show (downward) momentum. AUDJPY and EURJPY both continuing. I have to say the logic of the Euro popping based on Japan debasing its currency had been lost on me – reading posts here has at least partially lifted the cloud of my confusion. In a sense it doesn’t matter why, I know, as long as I know what. And the trend in the Yen pairs is not showing any sign of breaking just yet.

  • newbfxtrader

    A little hammer action?

  • Jake_38

    /QM-/CL coiled tight on the monthly…..

  • convictscott

    Incomplete month so early days but yes, hammer at lower monthly bollinger in a flat market. Nice

  • convictscott

    It is an incomplete month, so possibly take the weekly setup if it triggers and look to trade it on the monthly charts. At first glance the monthly looks like an uptrend, but my rule of thumb is that after 20 bars the prevailing trend loses its influence so that now looks like a trading range. In a trading range the optimal strategy is to buy low at support and sell into resistance and scalp (rather than hold to catch a trend)

  • convictscott

    Gold is stronger than silver, IMO better trade

  • convictscott

    looks good

  • newbfxtrader

    Thx Scott.

  • http://dartht.blogspot.com/ Darth_Gerb
  • convictscott

    Very nice 60 min Euro setup setting up for 20 mins time. Gap down, retest of the gap down low, with trend, at moving average support. Ticks a lot of boxes

  • http://twitter.com/crashof2008 crashof2008

    the guy from http://sentiment-trader.blogspot.com.au is awesome with his market calls. He is saying the market is about to drop big time.

    I think I agree with the earlier comment on here about Q2 normally being statistically weak for the market and earning might now be very good….we shall see.

  • http://twitter.com/crashof2008 crashof2008

    nice chart

  • newbfxtrader

    The monthly BB are inside the Keltner channels. Squeeze play plan like you posted earlier could work I guess.

  • convictscott

    More likely that the squeeze goes on longer, a super upside break from here is way too obvious IMO. No evidence of a breakout from squeeze, so its a range traded market. Range trades are very easy to trade and clear direction. Buy at support – sell at resistance, don’t hold to try and catch a trend as there isn’t one. It could bounce up and down several more times before eventually breaking out. In this instance I just measure risk (the distance between entry point and the stop) and the target. If I think its a 50/50 chance, and the payoff is 2:1 …. thems bettin odds

  • convictscott

    The “divergence” you have marked is actually one of the setups I trade called a fakeout buy, which provides an objective way to trade it. IMO it becomes higher probability at the bottom of a trading range.

    This is a definite edge

  • convictscott

    The gap up at the start of the week has the potential to become an exhaustion gap. I see people becoming very carried away with this trade, as though the BOJ is just going to hand out free money to traders. This is NOT the case. The markets have a habit of doing what would fuck the most people, and I see pretty much everyone clamoring to get long and hold for the guaranteed trade of the year.

    Soros says it is axiomatic to fade central bank intervention as it fails most times (look at a history of BOJ intervention, it tends to fizzle after a few days)

    An objective look at the price action here reveals some things. 1) We are in a very very strong uptrend. 2) That uptrend is now weakening and volatility appears to have peaked. Maximum volatility is associated with tops.

    IMO there is no reason to get short yet, but caution is definitely required here. All trends by definition have an end, and this one is late in the game.

  • http://twitter.com/D2point0 Daron

    you’ve got to be careful about who you listen to. Try not to get a bias on the market. I would agree that at some point we are going to drop bigger than most of us have seen in a long time, but no one knows when. The thing about divergences are, they can build and build and mean reversion usually takes place when no one is on board. I know that nothing is for certain, but I don’t think the highs of the year are in. It seems like that with every 1% drop, all the bears come out with “the top is in”, and “I told you so”. This is dangerous behavior and every so called “expert” has their opinions. Stay as ambivalent as possible and trade your setups both long and short, keep unbiased and you will bank coin. Let the guys on the other side of your trades pick the top. It seems like we as humans gravitate towards people with the same beliefs. Trade safe and stay frosty my friend :-)

  • convictscott

    Sorry I’m watching USDJPY not JPYUSD so I’m up to your down, so to speak :)

  • convictscott

    Alas it did not work ;-(

  • convictscott

    Second bite of the cherry on Euro. Nicer looking setup

  • convictscott

    And so far so good

  • http://iberianviews.blogspot.com/ catracho

    Are we seeing a change in past correlation? strong dollar -strong equity? Is it commodities turn to take the spotlight? Global liquidity providers still going strong = inflationary? JPY crowded trade?

  • http://evilspeculator.com molecool

    Interesting question – there has been a reversal to the old normal recently and we should keep an eye on that. For the noobs – back in the day equities were moving with the Dollar but that changed during three rounds of massive QE – risk on suddenly meant a weak Dollar and strong equities – risk off the inverse. If we are now continue to see the Dollar move along with equities then it may change market dynamics as well.

  • newbfxtrader

    Yes its mainly a US is doing better trade. This has happened before (early 2010 if I remember). If numbers disappoint then USD and equities will sell off together. JPY trade is crowded but darned if I know how to pick a top.

  • http://evilspeculator.com molecool

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