Welcome To Mordor

As you already know – I won’t be around for a good chunk of the trading session tomorrow. I may be able to chime in until about 1:00pm EDT, but after that I will be gone for the day. I’m not sure about Thursday yet – all depends on how productive I’ll be tomorrow. Of course I couldn’t let you guys hanging without a chart, and although I’m pretty busy preparing for my trip I was able to scrape a few goodies together.

Before I get started a little inspirational message for my stainless steel rats:

Welcome to hell boys and girls! I hope you are mentally prepared to sit out the gyrations of the coming week or two – because when it’s all over and done your puts will feel like they just spend a week with Bear Grylls, crawling through Mordor.

We are most definitely in a more long winded Minor 2 correction. The simple flat scenario with a quick and happy ending for the grizzlies died a quick (but brave) death today. The bulls have smelled blood after pushing this thing above the 200-day MA again. Only question now is when they’ll run out of steam, we have plenty of medium term momentum left on the bullish side – if you need a reminder of that please check my Sunday post. Twelve charts there that pretty much pointed toward some pain for the bears.

EUR/JPY bears are now running around with their fur on fire – it’s not a pretty picture. As you can see – short term we have given up quite a bit momentum and the result on price was… (drum roll)… sideways tape. Not good for the bars. I see this thing drop to the 20 mark on its stochastic before the open and then make a b-line  back up during the Wednesday NYSE session. OPX Wednesday is traditionally the strongest day of the week, so dress in shorts because it’ll get hot and steamy in those option pits.

I have modified the count a little bit in anticipation of two scenarios which could endure through the end of June. Orange has us paint a fifth wave starting tomorrow and Blue is a derivation that expects an extended third wave. Both scenarios anticipate a flat correction but things could get more complicated. For instance we could paint a double or a three – for examples refer to page 53 in the blue book.

A distinct key level which should serve as resistance is 1130 as this level serves as the 50% retracement of the way down as well as the 138.2% mark from the recent low up. But we could overcome that and push all the way to 1151 which marks the 68.2% retracement of Minor 1 down.

In times like this it’s always important to look at the longer term picture. And no chart speaks louder than my simple daily VolumeAvg chart. Quite clearly volume has dropped off sharply during this correction and I expect this to continue until the bulls finally run out of steam. Of course it’s wise to not be too impatient – these OPX week stop runs can get nasty and usually do more damage than anyone imagines.

But this is very clearly the type of signal we would expect during a bear market rally and not after a big correction leading into a continuation of a bull market.

I meant to post this chart over the weekend but my pleas for a BAA update fell on deaf ears – until today. So, I’m happy to finally post an updated version, which as suspected continues to paint a bearish divergence. I am very curious as to how the past two days have affected the spread and will post an update soon. Long term this chart is extremely important and should not be underestimated. We are lucky to get such an early warning as they don’t always play out – when they do they usually conclude as promised. Maybe this time it’s different but to me personally this is a long term bear alert I am unable to ignore.

Before I run off I do have a little goodie for you guys. Quite frankly I have used this chart as a standard trend indicator for quite a while now. But something caught my eye today and I literally had to kick myself for not seeing this much earlier.

In case you’re stumped – what I’m talking about are divergences – what else, after all I collect them like them like the rare gems that they are. I hadn’t looked at this chart for a week or two as I literally have dozens on various trading monitors. But that big divergence we painted recently stood out and as I started to look I discovered more and more. Well, I have highlighted some for you – and maybe you can find even more and post them as you come across them.

Also apparent on that chart is that we do have some upside momentum left – which correlates nicely with some of my other momo indicators. So, prepare for some pain in your long term puts – you might not want to look at them for a week or two 😉

Play nice now while I’m gone – no cat fights please. And most of all – stay frosty!

Cheers,

Mole