DEFCON 2

An intrepid sub who wants to remain anonymous sent me a pointer right after the close. One that gave me shivers and which after reviewing my own charting universe prompted me to officially switch my evil trading lair into DEFCON 2.

In today’s comment thread I already eluded to the fact that I did not like today’s tape at all – the Zero was pretty much flat all session while the shorts got squeezed into the close. But I have been around long enough to have developed a bit of a Spidey sense when it comes to the behavior of the tape. And right now I’m smelling a rat. Maybe I’ll be proven wrong but the charts are the charts and in over time they have proven to be reliable.

Now let me precede the following with a caveat – any evidence presented is purely medium term, so I do not rule out a push higher in the coming days. But if your trading window is medium to long term then you most definitely want to see this:
[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 or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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And here it is – you may recall the VIX:VXO chart I introduced two weeks back. While I was busy with admin chores this thing managed to climb all across that upper Bollinger, thus triggering a medium term alert, at least based on prior evidence. Clearly this is a medium term signal as there are often days or weeks until prices respond. But based on that chart I looked at several of my usual suspects and was quite shocked by the unfolding picture:

Copper – divergent. This is yesterday’s chart but it has not moved much in today’s session.

Junk ratio as expressed by FAGIX:VUSTX – also divergent. Again, yesterday’s chart but clearly not supportive.

Same concept – JNK vs. TLT – also divergent and there has been a tiny push higher today. But in general it’s lagging equities thus supporting the unfolding picture.

NYSE Advancing vs. Declining Volume – divergent, quite clearly so I may add.

My NYMO Deluxe chart – also clearly divergent. Again, this is yesterdays’ but if there’s a strong push up after the update I will post a correction here.

UPDATE 2:10am EDT: There was only a tiny push up – major divergence remains.

Finally, and since this is an important occasion I’ll give this away to all Gold subs, the daily Zero – also divergent thus far, in particular on the smoothed panel.

Bottom Line:

I could probably keep digging and find more chart supporting the same outlook but I think you’re getting the picture. Whether or not we push a bit higher from here is beside the point. Technically speaking I now believe that the odds do not support the long side, seasonality be damned. The odds may not support the short side either yet but if you are strongly delta positive you may at least take notice and tighten up your stops a little. It’s quite possible we may see another shake out developing in the near future.

By the way – what really bugs me the most about this outlook is that it allegedly coincides with another one of Prechter’s bearish calls. Usually he’s good for at least a 20-30 handle fade and we may just get that. But in any case – let me make it clear that my analysis has nothing to do with Prechter’s work (I don’t even read his anymore) and that the charts above obviously speak for themselves. The rest of course if up to the tape and it remains the ultimate judge.

You have been briefed – wishing you the best of unbiased trading.