Burn Baby Burn!

What can I say – this is my kind of tape, sheer heaven. Fear is rampant and everyone is running around screaming with their hair on fire. Suddenly everyone found religion and the lips of the pundits are flapping faster than the wings of those hummingbirds buzzing around in my garden – similarly aimless I may add. In particular I enjoy the finger pointing over the weekend – what’s the old saying: Success has many fathers and failure is an orphan. Unlike the financial markets human nature fortunately is extremely predictable. Which gives us a clear edge.

But before we get to that – while the spoos descend to new lows and Obama is figuring out what can of simple minded horsewash to serve up to a gullible nation eager to embrace another helping of sweet lies I guess it’s time for one of our all time favorites:

No, I’m not kidding, my dear steel rats. You are not supposed to be scared – you are supposed to be enjoying this. After all, you have been in mostly in cash since you started seeing those mighty divergences on the daily Zero and plenty of other momo charts I have been posting.

Right?

And you have been keeping your powder dry for the right moment – once that POMO swamp had been drained all the way.

Right?

Well, if you didn’t then you probably weren’t a sub and after a 17% drop in four weeks you probably can’t afford that $29.- subscription anymore. Which brings me back to relativism and ergo – human nature.
[amprotect=nonmember] Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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It’s a funny thing – although people in the Western hemisphere like to think of themselves as rational and unique little snowflakes there is one constant that can be found throughout history and it’s crowd behavior. Perhaps single individuals can be rational – angry and scared crowds surely are not and they have a tendency to get out of control rather quickly.

Although I would love to tell you that now is a good time to go long – the game just isn’t that easy. Remember when I said that there are situations where downside risk outweighs even the best odds? Well, on a weekly basis we are only in our fourth consecutive week down, and that happened 47 times in the past half century. The odds for a fifth wave down are only around 2%, yes – but look at that candle and look where it is, right below both Bollingers. So, what has to happen right now and here is for a bounce up. If we continue downward today and tomorrow say hello to SPX 1000 and that in a jiffy.

On a monthly basis we are also at four – and that has happened 5 times in the past half century. The odds for a fifth month down is a bit over half a percent. The trouble is that if we see a fifth one it’ll be quite nasty and long as we are also below both Bollingers – not a spot where you want to get comfortable.

The VIX is scraping the stratosphere today – boy they never take it easy on those retail schmucks, do they? Oh, you really didn’t think the big boys didn’t see this one coming? Don’t kid yourself, please – there was a lot of distribution near the top and I pointed it out on many occasions. Anyway, who cares what I said back when – what are you saying now Mole?

Well, here’s the skinny: Crashes happen in oversold markets – so if you want to play this big then be patient and wait for signs of a bounce. We don’t have that just yet. Just because the tape is oversold right now doesn’t mean we can’t continue downward in big strides for a bit longer. Besides, if I was counting waves I’d say that we at best are concluding a third wave right now and that we’ll get a bounce followed by another drop. If I was still counting waves that is… 😉

For one I would also like to see a bit of a divergence on my RSI_EMA chart. It’s very notable that it actually dropped through that support line – we didn’t even see a signal like that during the 2008 crash. Extremely interesting and I am sacrificing several chicken to the Dark Lord of Bullish Divergences tonight.

Copper also needs to find a floor and it seems it’s currently heading to T2 at 3.9. Again, a divergence here (i.e. a push higher while equities drop) would be a harbinger of a possible snapback.

My CPCE Deluxe chart suggests that there is still room for a continuation here – so unless I see 0.86 on my moving average I’m not going long in a big way.

As you know I posted this chart for weeks now and that comment wasn’t added recently. Appears to me that we may be playing out a similar script here – with slightly shifted dynamics. What everyone calls a crash today is nothing compared with 2008 and I’m really not too worried about this happening today. But wait what’ll happen when we push higher and the Dollar (hopefully) finds a bid and pushes above 77. With short term interest rates at zero – and after two rounds of quantitative easing. That trade, my dear fellow rodents, would be a wonder to behold. The snap back correlated with a rising Dollar is where the real money is going to be.

Partially related to ole’ bucky – the Euro is in a nice Net-Lines range. Unfortunately whatever way it’ll swing there is not much target area, so I’d stay away right now. I’d love to see a drop here – which would fit the script with the most profit potential.

Now, two possible setups I see today:

AUD/JPY – I have rarely seen a candle this far out of both Bollingers – wow – thus it’s my sworn duty as a market megalomaniac to consider a trade here. But since everyone is in panic mode we have to treat carefully. Thus I would suggest lottery tickets – go at least four five strikes OTM and buy small. Then forget about that trade and expect to get stopped out.

Same situation on gold – we finally got what I have been waiting for, which was a push outside both (steeply rising) Bollingers. Can this thing push higher if the tape crashes in the next hour or tomorrow? Absolutely – which is why I would also recommend lottery tickets here. At least five six strikes OTM and be small about it – consider those positions lost and forget about them.

BTW, if you are playing GC or GLD options make sure you are properly hedged in terms of volatility – this may be a good time to read up on vertical spreads.

Bottom Line: You cannot predict a crash or a reversal in a deeply emotional down trending market. As I’m typing this we are dipping deep on the spoos and who knows where we’ll be by the time I’m posting this. But everything I’ve posted above holds true, no matter what happens. If we happen to crash then don’t panic and stay frosty. I’ll present signs of a floor as soon as they emerge. In the meantime either stay out of the tape or at most grab a few lottery tickets – that’s really the best you can do.

Even this shall pass and at some point there will be a snapback. And that’s what you should be focusing on – the push down right now is ancient history – that trade is done. Do not focus on the past – focus on the future and opportunities that arise after the market throws up a furball.

Long patience – short emotion.

Cheers,

Mole