Don’t Take It Personally

If I have learned anything over the past two decades of trading for a living, it is that the market is an equal opportunity serial offender. Meaning it enjoys screwing with everyone all the time, especially near important inflection points, and the more the merrier.

Last Friday’s shake out of the bulls became a high probability scenario as soon as an attempt to breach above VWAP on the E-Mini was instantly thwarted at around 1:00pm Eastern. The spike high retest that followed was a great short scalping opportunity.

Knowing that, a case could be made for pulling any remaining long exposure but once you breach that line of no return life as a trader becomes a tangled mess of subjective decision making followed by a feedback loop of avoidable losses.

You just don’t go there. Period. Once a campaign has been entered it is followed through no matter what, otherwise it never had a leg to stand on in the first place.

Now if you think I’m pissed about being slapped behind the ear by Ms. Market: well, nothing could be further from the truth. Given the formation and technical evidence present on Friday morning it’s the type of entry I would take every single time without thinking twice.

What I lost was a small lottery ticket within a churn range – this was to be expected and thus proper position sizing had been employed. We are not running a sideshow here at Evil Speculator.

What we all gained on the other hand was a ton of new information that will prove to be beneficial moving forward. So let’s talk about that:

While equities were selling off last Friday bonds bounced right where I actually had anticipated it – near its 25-day SMA which is currently leading it higher.

The USD has been working quietly but diligently on producing a possible medium to long term floor pattern. While a sudden rip higher is possible we haven’t seen a retest yet thus more monkey business and frustration may be laying head for any Dollar bulls.

Now the possibility of a bouncing Dollar as well as strengthening bonds is bound to produce some headwind for equities, right? Yes, and if anything bearish should happen then it better happen this week as it happens to be the third bearish week of the year, statistically speaking.

Which happens to be followed by the most bullish week for equities, again in historical terms.

Here’s a similar view of the same information but in percentage points based on the number of positive weeks vs. the number of negative weeks. Week #15 is only positive 32% of the time.

Here’s weekly SKEW which is slightly negative and that means the mean sits to the left of the median, producing a long tail to the left. And that in turn means that the few times week #15 is positive, it is REALLY positive.

Gold has been through hell and back over the past five years but has managed to slowly produce an extensive floor pattern. Moving averages across all my intervals (daily, weekly, monthly) are now all pointing upward.

Should the proverbial excrement hit the fan then liquidity may elect precious metals as a temporary sector of shelter. This is not crucial to our current considerations but worth remembering as it could serve as a nice hedging tool.

All that taken together translated into the following package of pain™:

• The market is clearly coiling up and will relieve itself all over our faces in the near future.
• Bullish and bearish sentiment are taking rapid almost daily turns now.
• Momo indicators are starting to support the bullish case (we covered that on Friday).
• Medium term the bearish door leading to nirvana remains open, thus threatening a sudden wipeout scenario.
• The ES 2550 to 2600 range is the bullish line in the sand. Below it the bears are out of hibernation and in control of the tape.
• The Dollar is attempting a medium term bounce, per the USD/JPY, the AUD/USD, and the DX futures – not so much via the EUR/USD. Which is why I am still very skeptical as all four musketeers need to be present to ensure a short squeeze higher.
• Historically speaking week #15 is net negative but with large positive outliers. Week #16 (next week) is normally distributed plus it’s one the most bullish week of the year.
• As a side note – Fridays are usually shake out days, followed by reversals before NYSE opens on Monday morning. I shouldn’t get positioned mid range right now and most definitely not on Fridays.

Bottom Line:

The bears have a small but real chance to take down the market this week. If they waste this opportunity then they better stock up on lube as they are bound to receive a complimentary prostate exam of biblical proportions the following week.

If equity longs survive this week intact then odds support a massive long squeeze starting next week. Either scenario should entail profitable opportunities if we are nimble and don’t fall prey to directional bias.

Whatever we do – getting positioned in the center of the churn range has low odds of succeeding. Use the ranges for swing trading as well as break out entries after a retest.