Strange Days/The End is Nigh.
Some crucial pieces of the puzzle came in on OpEx Friday, and its made things clearer in some respects, but not so in others. This was very strange price action indeed.
So lets look at what actually happened, and then we can apply some logic.
The first thing that happened was that we GAPPED UP, right up. Now I want to direct you to the price action I have highlighted in yellow. When we gapped up, that would have triggered quick thinking longs and short stops. Thats the first half of the yellow upside down V. Now there was NO FOLLOW THROUGH, no dip buying bulls jumping in to shoot it up to new highs. To me this is VERY SIGNIFICANT. This was a textbook long setup which FAILED TO WORK, for the first time in MONTHS. (Anecdotally I’m seeing mutterings on the blogosphere about textbook long setups in leading stocks also failing)
The interesting thing happens at the top of the upside down V. I’d be alert for some massive candle volume sign of manipulation or a big player getting set, but volume at the peak showed no signs of capitulation buying. The downside second half of the V is easily explainable by those longs who bought on open jumping out just as quick, and the shorts stopped out looking to get back in. Typically this drives price just enough to close the gap.
Which is what happened, gap fill. IMO we can completely RULE OUT this whole price action as providing anything meaningful, except for one thing.
THE LAST BUYER HAS BOUGHT. We may make one new high, but thats it. we arent going to shoot straight to the moon from here without further downside, unless something changes (which would be a week or more of sideways action at the 1300 mark and a popped stops short squeeze). We still have the massive non-confirmation between indexes, with $indu at new highs and the old leader, NQ, now the laggard. Very bearish indeed.
There is one piece of price action which CANNOT be traded, I call it BARBED WIRE. Here is a 5 min chart with a 20 EMA, price is involved in a tug-of-war around it. One of the characteristics is that bars will overlap in range a lot, which indicates that neither side is in control.
Got it? It happens most often around midday, and is particularly common in fx during the asian session. See this, save your cash, pit trading locals will bounce it back and forth in a 2 point range and take everyone out.
Now the next thing I want to point you to is very interesting. I’ve drawn lines at the daily 20 EMA, which acted at support, and the highs. See how we finished right at the 50% retracement, cruicially right where the 20 and 50 emas are sitting on the 60 min chart.
Remember what I said about not trading barbed wire? It applies here too. I saw rumblings on the comment section about the retest variation sell on the 60 and 120 min spx. Patterns are either reversal or continuation patterns, and they need something to reverse or continue off. While we are in TUG OF WAR mode, I would have VERY LOW CONFIDENCE in their accuracy. There is no edge at the flat EMA IMO.
Now look at the pattern on the daily chart. Its obviously a retest variation sell, but dont get too carried away. IMO the gap fill creates a distorted candle on the daily chart. It could still work, but I’d be inclined to place the order only at the NYSE session hours, and to watch for a zero lite divergence as it approaches the old spike lows.
Bottom line. All of these are still possibilities, we have POTENTIAL bearishness, but its not betting odds yet for me. I’ll be taking the short, with a greatly reduced position size, and monitoring market internals and zero closely as we approach the Thursday lows.
We would all like to believe this is in play..
But I can’t rule out this
Stay nimble. Smaller position sizing than normal. More aggressive with profit taking than normal. More vigilant with stops than normal.