Endgame

Sometimes markets come to an inflection point. We are here. Take a look at the monthly chart of USD

Basically, if the dollar is going to rally, it has to do it RIGHT NOW. A breach of that lower yellow trendline should trigger a sustained move to the downside. Think about it. 6 years of dollar devaluation from 02-08, followed by 3 years of corrective action from 08-11. If the USD breaks down here its reasonable to expect a massive move measured in years not months.

So you trade equities, and you don’t care. WRONG ANSWER. If the dollar starts unwinding, POMO will continue to inflate our way to fantasy, and this market will literally go into orbit. Hitthebid hitthebid hitthebid, think dot com bubble.

Why you ask? Take a look at the 30 year bond price. It just broke to the downside, price is embedded in the lower bollinger band after a bollinger/keltner squeeze play. As an aside this chart should go on everyones watch lists for the next week, and TLT as well if you trade the bond etfs. Price action like this any bounce is a short. Be on high alert for shooting star candles and inside bars. Sell sell sell when you see them.

Let me introduce you to the concept of SQUEEZE PLAY. This is stolen from John Carter, only he does it with an indicator called ttm squeeze, which I dont like, since its so easy to see it play out visually. The concept is simple, the longer the bollinger bands remain squeezed inside keltner channels, the greater the likeihood of an explosive move in one direction. I have personally backtested this, it comes out INCREDIBLY well.

But I digress. This is the Ben Bernank’s doing. They might blame it on bond vigilantes, but you cant take credit for having a dog that barks at burglars, and not care when the dog craps on the floor. Its the same dog. Funds are leaving bonds as fast as the market will let them out. Newsflash, thats how the USA pays for its POMO, with bond sales. Another way of saying that is that the cost of servicing your (I’m Australian) national debt is rising because the market value of the debt instrument is falling. You have to pay more vig.

This is actually a big issue which has the potential to put the brakes on POMO. But I digress.

Thats the bad news. This is the good news. That nightmare scenario is the LOWEST PROBABILITY OUTCOME RIGHT NOW.

Here is the story price is telling us right now. Lets start with the euro, which is critical to any unwinding. What we have is a totally overdone short squeeze, which has unwound 300 pips in 2 trading days.

Now we are well overdue for a bounce, and look at that nice textbook perfect 5 wave elliott fractal painted to the downside. What I am doing is waiting for a retest of that old high which fails. At that point I can go short with confidence, until then I am just coin flipping. If it plays out the way I suspect, its going to be an OUTSTANDING TRADE, and I will post in detail about it.

Lets move on to equities. Basically the market looked certain to fall over last week, after a retest of the fall . But that big trend day shooting to new highs was a game changer. It stopped out the shorts, gave top pickers a chance to get short again, then burned them again.

I posted last week about a buy signal (hammer candle in an uptrend, statistically a high probability play) on break of the high which triggered. Disclosure I’m currently long as a result, but I found it emotionally a very hard trade to take. Yet intellectually buying spx 1309 is a better play than buying spx 1299.  The 5 min chart shows very clearly that the bears could NOT drive price down, it closed at new highs. Internals strengthened to the close, but not convincingly.

Any bears who are yet to cover will be covering on Monday. That gives us another piece of the puzzle, there WILL BE SHORT COVERING on Monday, the strength of that covering, and whether or not it can attract fresh bulls to the table, tells us information we just do not know now.

At this point the price action is very clear. There are only two realistic probabilities at the moment.

1) Monday is a savage bull trap and we plummet from the open. This is HIGHLY UNLIKELY
2) The shorts who got top-picking got squeezed out and breakout buyers happy at the confirmation above 1300 spx will fuel a rally of some sort on Monday, form unknown, but possibly a trend day.

So Monday is on the radar as a potential TREND DAY, otherwise known as a FREE MONEY day. Read my earlier posts on trend days, they are very easy to trade, and I will be watching the $tick readings intently from open. If $tick is solidly above zero I will be getting aggressive with long trades on 5 min charts.

So bottom line, where are we at? Assuming that bucky holds the line here, and I think it probably will (and getting long USD on a retest of the current low is a very good trade risk/reward) I’d like you to remember that the market is overstretched as fuck, and ready to fall over if someone sneezes, even with POMO. At this point I am long, and you SHOULD NOT BE SHORT YET, but I am going to be VERY VERY agressive with profit taking on this long. Towards the middle to end of this week I expect an OUTSTANDING short trade to eventuate, and of course you will here about it first. Even with POMO NQ cannot break to new highs as yet (although should soon) it is behaving like a market at the END of its run, not the beginning.

Gut call, one more spurt up, then done, assuming bucky holds the line. Its setting up to paint a tasty gothic church fractal at the same time, increased price on decreased breadth. What would be perfectly scripted is if that one more spurt up coincides with a decent retest of the current euro high/ USD low, and then kicks off at the same time as an equities pullback.

Oh one more thing. At this point short trades should be taken in the weakest index, NQ or the small caps. I wouldnt be taking short trades in ES or SPY and definitely not DIA or YM futures.