Chartalanche!

I’m very pressed for time tonight, so I won’t be able to offer much of an intro and a review of last week. So, you’ll be getting charts only with a few brief comments describing the gist of where I believe we stand. Let’s get started:

Every once in a while I let this chart out of its cage – it’s my intrepid weekly stochastics on the SPX. I’ve said it before and I’ll say it again – for such a simple and widely available indicator it’s been quite accurate in the past. Except for the past six months that is – we had several breaches of the 75 mark – all of which turned out to be fake outs. Will this time be different? Very hard to tell unless we finally punch through the 50% mark – it’s long overdue for sure.

Always remember – it ain’t over until the fat lady has sung. And she ain’t yodeling just yet.

She might be taking a deep breath however. Here again a very simple chart showing the entirety of the Nasdaq’s fall from grace (i.e. Primary 1), followed by the snapback from hell (i.e. Primary 2). A few nice tidbits need to be observed: First we have a time ratio of about 63% when counting the days in the drop (495) against the days in the rally back up (512). Secondly we have a retracement of about 65% – very close to a Fibonnaci 61.8%. Third we of course have a strongly defended diagonal trend line which kicked the bucket last week. Two and three both were taken out on the same day – I love it when things line up and my charting universe is all tuned and in sync.

For the record – I would be surprised to not see this trendline being revisited – if for nothing else but a last kiss goodbye. Again, I don’t think it’ll be that easy for the bears, but it’s really tough to make predictions right now. Even I was surprised by last week’s merciless drop – but if I listen to my own advice I really should not have been.

So, what exactly happened last week? We all were waiting for the obligatory dip buyers to swarm in and have their ways with us naive bears. Didn’t happen – we all gasped incrediously as we kept dropping – equities across the entire spectrum simply couldn’t catch a bid. Did GS and the quant boyz suddenly lose their appetite?

What happened was long overdue and a trademark of a very narrowly traded and one sided market. ZeroHedge posted an excellent article on the subject over the weekend and here’s a little quote I think you’ll appreciate:

A source of the extreme damage Wednesday and the following day was the absence of some high-frequency statistical arbitrage traders, firms that use high-powered computers to trade rapidly in and out of stocks and can act as liquidity providers for the market.

As investors tried to unload their positions, the high-frequency funds weren’t there to buy them—they were selling, too. The result was a black hole of no liquidity whatsoever. Prices collapsed. By the end of the day on Wednesday, PDT had lost nearly $300 million—just that day. PDT, it seemed, was going up in smoke. Other funds were seeing even bigger losses. Goldman’s Global Alpha was down nearly 16% for the month, a loss of about $1.5 billion. AQR had lost about $500 million that Wednesday alone, its biggest one-day loss ever. It was the fastest money meltdown Mr. Asness had ever seen. He was well aware that if it continued for much longer, AQR would be roadkill.

Personally, I think this was only the tip of the iceberg. Wait until the ‘real’ selling starts – when panic sets and everyone is running for the hills, desperately waiting for a tiny upswing to leg out of positions – which of course refuses to emerge. In a few months from now we will most likely see congressional hearings on the Fed’s SLP program as well as the HFT shops which seem to be happy to join the fray once the big selling starts. Naive congress members believe that the cats running this market have upside loyalty and will defend this market. But the naked truth is that the Fed’s IV drip will end this March, which means it’ll be a lot harder to offload your crappy worthless assets onto us tax payers and borrow at zero interest, thus driving equities higher. Nobody will want to be the last man standing once the music stops – which is why equities will deflate faster than my last souffle once important trend lines and moving averages are being breached.

The only (and important) difference this time around is that there are very few bears left with skin in the market. Oh, you think that’s a good thing for the bulltards? Think again – short sellers actually serve an important function a they provide a floor when buying back their positions in order to take profits and get repositioned again. This time around there are very few bears left and the one’s crazy enough to be short right now have a long term plan. Just go and check out the Dec 2010 SPY put option chain – interesting volume in there – especially far OTM.

There are also again calls to make it more difficult for short sellers – I think some variation of the uptick rule. I say – let them! The bulltards are about to learn a brutal lesson on the effects of ‘unintended consequences’ when meddling with the stock market’s basic underlying functions. Let it blow up in their faces – I’ll be watching the ensuing train wreck with an extra dose of Schadenfreude 😉

The title of my post – chartalanche! Get used to it – this is only the first leg down (if I have it right that is). Short term I am only counting seven waves down – we need to see nine in order to satisfy a motive wave according to EWT rules. If we turn after seven it could be counted as a corrective and that would indicate that there is a chance the bears are getting burned again. But then gain – wave counting is often subjective and this one was very rapid. So, I won’t jump to conclusions.

Otherwise everything you need to know short term is painted on the chart. Keep in mind the bounce zone which we are approaching. If you are short term delta negative, don’t get greedy and take profits at 1077 at the latest. The bulls will push back and I have highlighted a few possible scenarios.

This is the reason I added a truck load of short positions early last week – right at the very top I might add (heheheheee). First the CPCE (and the 10-day MA) kept dropping despite the fact we kept knocking on heaven’s doors three times. And then we were very close to the 0.53 mark I have had my eyes on.

Inversely it’s soon time to think about a long reversal – keep an eye out for the 0.63 mark which is now at the upper border of this 10-day MA channel.

I’m sure some of you old timers here remember this chart – and it’s worth showing again as we are now entering typical bounce territory. If we actually finish at 0.06 tomorrow then a snapback is very likely scheduled for a day or two later.

Similar picture on the NYMO – again, a few nice tidbits painted right on the chart. The 19/39-day MA crossover is actually considered a traditional long term bearish signal – which again adds validity to P3 being in the works. Of course there are never any guarantees – especially in a narrowly traded market like the one we have experienced in the last few months.

I’m not sure when we’ll get to 1,050 on the SPX, but when we do I’d look out for a bounce as well – even if it’s only for a few days. Many of the pros love their PnFs and you can bet that this level is near where a lot of stops would be triggered. 1,050 might be defended harder than 1000 actually – well, we shall see…

Last but not least – Mr. VIX in all it’s glory. I already posted this on Friday night but it needs to be shown again for posterity’s sake. Never seen a rip like it – it’s a beauty. Behold the power of the bears 😉 And yes – another reason to expect a counter push here – Rome wasn’t build in one day.

And that’s all I got for tonight –  sorry I couldn’t offer more this weekend but I’m leaving for S.F. on Monday night and I still have a lot of chores left on my plate before I skip town.

Gmak – if you see this – please don’t put up a post tomorrow morning until after 10:30am EST – it’s already 11:00pm as I’m typing this and most of my stainless steel rats won’t be seeing this until early in the morning.

Cheers!

Mole