Bear Flag

The tape is acting a bit like Natalie Portman in Black Swan this week. It may be a fun ride if you like hot looking psychotic babes (tons of those here in L.A.) but it’s getting a bit much and I have to admit that I’m glad it’s Friday today. Well, the big pattern du jour is this:

This is a nice chart as it not only plots the unfolding bear flag on the price side but also shows us a nasty formation on the volume side. Basically we are currently in pinball territory (if you’re under 20 look it up) and although I’m not sure we get another touch up it remains a possibility.
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[/amprotect] [amprotect=1,13,9,12,5] On the medium term side the pattern unfolding on the spoos is looking pretty nasty, positive volatility pricing be damned (see my post from yesterday). There are distinct volume holes above and below each break out region (i.e. 1140 and 1240) and once we push outside this 100 handle nightmare I expect quite a bit of acceleration. Either it catches a bit above the upper hole or there won’t be any bids below about 1100 and we drop into hell. It’s important to differentiate upside momo from downside momo. It’s unusual to see a continued upside drive without much looming upside volume. But on the downside you can punch through huge stretches of non-volume without any problem – this is why downside corrections are usually a lot more violent (and potentially profitable) than what you see on the long side.

UPDATE: Some of you insisted on an EWT definition and here it goes but with a caveat in that I want it to be clear that I do not rely on EWT for bottom/top calling: If was still counting waves then this formation would most likely be labeled as some nested 1-2 wave pattern – meaning a first wave zigzag correction followed by a lower degree first wave down, a second wave down, and a third wave down now. This in context would produce a lower degree motive wave down concluding the lower degree pattern. Then we may get a push higher again via a higher degree second wave and then the motherload of all third waves down, which also could extend – your mileage may vary.

The problem with EWT is that this could also be a complex a-b-c-x-a-b-c double zigzag – which would further refine the current channel (or bear flag which some of you find contentious). It could also be a nested formation UP on the bullish side, which makes EWT so useless for directional trading.

BUT, what I did learn during my EWT years is one big lesson – either way this dog resolves – the ensuing move is going to be massive. And I think that is what we all should focus on.

Copper got cleanly rejected when trying to make a run for the 4.2 mark and it seems we are due for a date with the 3.8 support zone. Not a pretty picture and the implications here for equities aren’t peachy. But – as I said – the typical correlations are not really holding up today, so let’s not rely on them.

The AUD/JPY on its own here with net-lines – nice bounce off the sell net-line and we seem trapped inside a 100 pip range. Notable is the 25-day SMA which pretty much lines up with that NLSL, thus establishing nice support for the next few sessions. On the hourly panel we had a push outside both BBs which briefly breached the NLSL but was quickly bought, so 80.7 should be your line in the sand if you are holding long positions.

Seasonality Update:

You may remember these charts which Volar was so kind to share with us a few months ago. And we are now heading into the most bearish period of the year. October can be 50/50 but September is usually not a good one, so the setup is here to potentially lead us a lot lower.

This chart stands in conflict with the volatility update I posted yesterday. We should be pointing a bit lower, thus pricing in some medium term volatility (i.e. downside potential). I’m going to provide an update on that end again next week as #37 is by far the most skewed week of the year with a factor of 1.5x off the median.

And finally, the most important chart of them all:

Mr. Bucky is finally finding a bid and managed to crawl above that upper resistance line. Will it hold and thus paint an ending triangle of some sort? If it does the impact may not be felt right away in equities but believe me, it will be felt soon enough, perhaps by the end of August and once we head into 50/50 October.

Bottom Line:

Equities continue to look bearish (see my weekend treat) medium and long term, the price pattern is distinctly bearish right now on the short term side, we are heading into a bearish season, and the Dollar seems to be breaking out. BUT then we have that SKEW-VIX chart which is suggesting little medium term drama. What gives? It doesn’t just doesn’t make much sense. What do these bastards know that I don’t?

In the end we need to let price guide us. A breach of downside support levels will invariably lead us lower. A push higher toward 1240 (see my weekly/monthly SPX update a few days ago) may be a great chance to sell the rip to the max with easily defensible positions. I’m just not sure we’ll get it and thus our plan needs to be to trade the medium/short term with a perspective on the long term. Which again means to sell the rip at SPX 1240 and to trade the trend down at SPX 1140. The caveat of the latter is that the bears get treated to another short squeeze, which of course is part of the game – you drop just far enough ahead of a long weekend and then some ‘convenient’ news produce a gap & trap on Monday. Of course sometimes things are just what they are – but if you are ready to trade the short side here then I implore you to at least wait for today’s close as we may see a last hour surprise move. If the sell off continues into the close this may indeed be the end of the line for longs as week #37 beckons.

What a crazy week and way too much emotion for my taste – but may be one day a few years from now when all the drama has resolved itself we may be looking back at this period with nostalgia as the most exciting period in our trading careers. Yeah, probably not 😉

Cheers,

Mole