Gutta Cavat Lapidem

Happy Sunday everyone. Before I get to the meat of it all a few house cleaning items:

Things are looking up in the evil lair. In the past month alone the number of subscribers has basically doubled. Maybe some of this can be partially attributed to the change in trend across equities but I also believe that much of it is a response to Evil Speculator 2.0. As some of you remember about six weeks ago I opened a new chapter for this blog by switching to a hybrid subscriber/free format. The essence of this model is that new posts are available to subscribers first but become freely accessible either after the session or a day later.

What I had hoped to accomplish appears to at least to be going in the right direction as we are all a lot more in sync these days and the main focus seems to be centered around banking coin. Our charts are working, the symbols/setups are banking coin, and in general we all seem to have a good handle on the market. The amount of noise has been reduced dramatically and I see many new faces these days – many of who appear to be avid traders, which is very validating. Subscribers and non-subscriber alike appear to enjoy the new format and I myself admit that it’s been a long time since I had this much fun running the place. And as the saying goes – if something’s working don’t fix it. So, expect more charts, more analysis, more trading ideas, more trading strategies and more of the evil flair you all have learned to enjoy – yes, yes, I know – it’s an acquired taste.

To all the noobs who relented and finally decided to sign up: First up, thank you for your business. Some of the things I present may be new to you, and some of it may appear a bit overwhelming. And some of it may appear a bit too technical. If things are over your head I suggest that you start by asking questions in the comment section. Being quiet and not understanding the info will not help you as my goal here is to engender self sufficiency and to help you beat the big cats at their own game. Unfortunately I cannot always be there to answer every question as I only have two hands and two eyes – plus there are only that many hours in the day. But there are several senior participants who will be happy to jump in when I’m not around. After all this is a trading blog and everything I do faces public scrutiny on a daily basis – my analysis is not being handed down like a market oracle. If you have evidence to the contrary – don’t be shy and present it. Finally, if you are really stuck or something doesn’t make sense to you please email me at admin@ and I’ll be happy to help.

To all the stainless steel rats who never ceased to support me in the darkest of times – a huge thank you. I couldn’t have revived this place without you. You know who you are 😉

Tools And Toys

A quick comment about Rammstein. A few weeks ago I was doing some back testing on Rammstein and arrived at new settings which seemed to be a lot more promising. I however did not want to fall prey to curve fitting and decided to run the strategy in quiet mode for a while to see if the new settings held up. So far so good and I intend to turn the signal back on in a week or two. Please be patient in the meantime – we are at a critical situation in the market right now and that is not a good time to be experimental.

Geronimo has been a bit quiet in the past two weeks but that’s actually a good thing. I also changed some settings a few weeks back and I’m extremely happy with it as it didn’t give us more than two false positives in the past month. As some of you know – Geronimo is a long only strategy and it’s important that it does not fall apart when the trend starts to the downside. And as long as it happily banks coin on upside corrections we frankly don’t care as it’s purely a scalping strategy.

The Zero Lite chart has been slightly modified last week as I added the VWAP indicator on the top panel. Some of you who are familiar with this indicator may understand how that correlation may prove to be valuable as it provides additional context when it comes to intra-day inflection points. I could be more elaborate here but I believe it will be easier to simply keep pointing such occurrences out in real time on the chart – when it matters. I suggest you keep watching the Zero Lite as usual and take notes when I point out certain VWAP/Zero correlations.

Alright – now let’s delve into some charts – I have many:

This week we’ll start with the Euro as I think it’s one of the most important charts right now. It is clear that the FX wolf pack has been calling Trichet/Merkele’s bluff as the €1 Trillion EU-TARP had no effect whatsoever – a mere week after the announcement I might add. Technically however we are now at levels where a bounce must manifest itself, otherwise things are going to get very ugly in a jiffy.

As you can imagine this may have an impact on how next week may play out on the Dollar and equities side.

I posted several times about long targets on the Dollar and that horizontal line is where many stainless steel rats went into cash after having enjoyed a long run up. If you are interested in some of the Dollar calls I made then check out my retracementlevels category where I correlate 2sweeties RLs with my own wave counts.

But this is not the time to chase the tape (is it ever?) and because of continued upside risk this is also not the time to take short positions. Why? Because instead of a extended fifth this could be a third – and if so you don’t want to step in front of a moving freight train. But I think the onus here will be on the Euro – if it falls through the 2008 low we may see the Dollar make fervent strides higher.

On the equities side I continue to follow the fractal situation on the NYSE A/D ratio. Over the weekend I recoded my brand spanking new SuperADRatio over on Multicharts as the TOS data feed appears to have holes and I prefer IQFeed in particular for all market meta-data. The more normalized SuperADRatio reveals several important clues – mainly that the strength of Friday’s sell off rivaled that of May 6th. So it’s indeed possible we will see a continuation of the downtrend, most likely after a little Monday bounce – should it materialize. Although I don’t trade correlations I believe that a Euro bounce may lead to a small counter wave up in equities:

The count has not changed – I still expect the May 6 lows to be breached – possibly next week. A bounce should reverse around the 1150 mark – after 1155 I would get a bit nervous although technically it’s absolutely permissible. We don’t want to see a breach of 1174 – things could get very dicey for the bears if the bulls can get above that. For now there is however no indication that will happen – yet – I will of course keep guys in the know if I see odds change to the bullish side.

Momentum Indicator Roll Call

I introduced this monstrosity a few weeks ago and I’m really starting to like it. The yellow regions mark occurrences where conditions seemed ripe for a bounce. Similar to the NYSE Adv/Decl Volume ratio chart it appears that final lows within corrections are often accompanied by lower prices in the context of higher readings. Thus far we are not seeing that yet, so this indicator is not telling me that the current down move is in danger – again thus far.

Speaking of the devil – I switched the NYSE Adv/Decl Volume ratio chart to a 3-day SMA as we need to be a bit quicker on our toes moving forward. As mentioned above for the NYMO:BPNYA ratio, we are looking for divergences at new lows – and thus far all I saw was a lightning fast snapback after the May 6 low. Although nothing is guaranteed this chart also appears to permit the formation of new lows in equities.

Every week I look at this chart I see something new. I have again highlighted bearish/bullish reversal signals but what’s also interesting are the two fractals I have highlighted. The readings near the March 2009 low and the current signal seem to mirror each other. Let’s see how this will play out – I can’t put too much stock into this just yet. However, the more traditional interpretation was spot on – we got a snap back right at the top of the channel at the May 6 low. There was a lot more room on the bottom and we are not in overbought conditions, even on this quicker 3-day SMA chart. However thus far equities are pushing lower, not higher. This may indicate that we are seeing a trend change here. Or it may simply have been a bear trap and put/short holders will get punished next week. I believe the next three days will be key in determining the tape for this summer.

Supporting Evidence

The JNK to 20-year treasury bonds ratio appears to paint divergences ahead of large corrections to the downside. I failed to highlight the one preceding the March 2009 low, so remember that this applies both ways. What the current reading is telling me is that we are not done yet.

Copper has a very similar read when put into context with equities. Again, it appears that big divergences point towards a trend change or at least that a deep correction is looming ahead. Nothing on this charts looks bullish to me and we’d have to see a big spike up starting next week to change that.

Bottom Line:

The Euro chart is at an inflection point and if it breaches its 2008 low I believe that all hell will break loose in equities. If not then we may see a more complex sideways pattern which I have not accounted for yet in my wave count. Maybe some triangle or double zig-zag – which would be key to discouraging the bears ahead of a final and strong move to the downside. So, either next week will be fun or mind numbing for the bears – it all depends on how things play out on the currency side. Technically I do see the potential for a bullish snap back but my momentum indicators suggest that there is potential for a breach of the May 6 low in equities. My correlations also point towards that scenario, thus supporting the bearish wave count I have presented above. Again, nothing is guaranteed in life and especially not in the markets. It sure feels like a trend change is in the works – but in the end the market has to prove it to us – until then all of this is nothing but lines on charts.

Personally I will continue to hold my long term puts until the market tells me otherwise. As I keep saying over and over again: Don’t worry about the head fakes and intra-day swings. Focus on the big picture – and fade all the noise. I’ll be here with you every step on the way (down).

8:16pm EDT: I forgot to mention this in the afternoon and it’s completely off topic – but I grant myself a little tidbit tonight. Today marks the 50th anniversary of the laser. The date was May 16, 1960 when Theodore Maiman successfully built and fired the first laser over at HRL in Malibu. Which btw is still there today – the facility is located in a fantastic spot on Malibu Canyon Road overlooking the ocean. I pass by there all the time when I head out for a day at the beach. And each time I drive by I remind myself that this is the birth place of the laser – an innovation in physics which changed our century. Nothing in terms of technology you take for granted today would be here without it. Anyway, happy anniversary laser! 🙂

Mole