Melt-Up Mania

We didn’t get the pull back I expected before touching 1100. Quite frankly, this surprises me – earnings season or not. Maybe the straw that broke the camel’s back was the pic of the slayed bear I put up in the afternoon. However, what did somewhat prepare me for the possibility was the AUD/JPY chart:

Quite frankly, this is looking even uglier than last evening. We basically blew away a big chunk of bearish momentum without as much as breaking a sweat on the price end of the stick. As usual my worst suspicions have turned into reality:

• The extreme medium term oversold conditions in the AUD/JPY has led to a massive short squeeze. Equities are being led along – forget about earnings season. This has nothing to do with this ramp up. I used to be a software engineer back when and over time had to learn a very tough lesson over and over agin until it stuck: Correlation does not equal causation. Many traders fall prey to that same mistake, and it is my fervent belief that we could have seen equities drop to hell in the context of the very same earnings reports had the AUD/JPY taken a nose dive.
• We are officially in the summer of pain for the bears. I mentioned yesterday that it’ll get a lot worse before it gets better and even I had no idea that we would  bust higher to 1100 after three up days accompanied by bearish NYSE A/D readings. Equities were coiled like a spring and took the path of least resistance. Right now the most resistance seems to the downside.

The wave count still dictates that we should see some kind of retracement before we bust into the final leg of Soylent Blue. The latter I am almost convinced of – there is simply too much fear out there right now to not exploit it. Anyone ‘hoping’ that we turn right here and now will be extremely frustrated to see the tape push even higher. If they can do it they will. Of course nothing moves in a linear fashion and there are also other forces to reckon with:

The SPX touched the upper boundary of my Keltner channel, which thus far has held up pretty well. The one thing the bears have been going for them right now. Question is – will we reverse here or will we only pull back slightly and keep climbing the ladder slowly and mercilessly – destroying any short positions left in the inventory?

At this point we are looking at 2 1/2 scenarios here:

Clockwork Orange: Frankly, this is the 1/2 scenario at this point. I do think that a pullback is in the works (yes, I said that three days ago – eventually I’ll be right – LOL) but as this wave has stretched out far longer than I thought we would have to drop immediately and reach terminal velocity by the end of this week. Doubtful – the bears simply don’t have the momentum right now.

Soylent Blue: That one has been extended a big higher but remains in place as the highest probability. Some variation of a double zig-zag.

Soylent Green: A.k.a. the Big Flat Whopper Now, this is something that would confuse most of the bears and very likely serve to force most of them to the sidelines. The idea here is that we completed Minor 1 in May, then painted an Minute {a} mid July, a Minute {b} late July (the low of the year), and are now ascending into a motive wave (not properly painted on the count plus it may conclude earlier). In EWT this is called a flat and it unfolds as a 3-3-5 formation. More specifically this would be counted as an ‘expanded flat’ (see page 46 Fig. 1-32 in EWP).

I can imagine that Soylent Green will scare the pants off of anyone reading this – except Bob The Horse of course. My money is still on Soylent Blue but I want you guys to be prepared for the worst. And based on what I am seeing in the FX department and specifically in the AUD/JPY it could be one ugly summer for the bears.

UPDATE 3:02pm EDT: I have to make a point here as I see a lot of warning signs in the comment thread as well as on a few other financial blogs I follow. A lot of you guys are complaining about the tape and much time and energy is attributed to arguing/debating why and how the tape suddenly melted up and who is responsible.

You need to stop this right now!

See, arguing with the tape is completely irrational and a total waste of time. Obviously you lost money – don’t bitch about it and instead spend your time thinking about what lesson can be taken from it. My opinion has always been that losing money in the markets can be the best education money can buy. Once you force yourself to see it that way a financial loss can actually be turned into a productive learning experience.

ZeroHedge just posted another derisive article on what caused this sudden melt up – short covering and prop desk trading (big f..ing surprise). I do read those and other posts as I am generally interested in what makes the tape tick. But I am aghast at the amount of energy that is being expended to argue the tape’s validity here and on other trading blogs.

I know a bit about human psychology – in my days I have picked up a thing or two on how people respond to adversity in general and to financial losses in particular. Listen guys: Personally I expected the worst at the bottom and you know it. Thus I was mentally prepared for a ramp up of biblical proportions. If I remember it correctly I even used those very words. So, you were briefed and if you decided to not hedge yourself, expecting only a short run up, then you were wrong and need to live with the consequences.

In retrospect we saw quite a lot of warnings on the horizon – and I myself pointed out that none of them mattered if we breached that lower diagonal. But we didn’t – and that is why those indicators and momentum measured started to matter quite a bit as we were heavily oversold. That is the inherent duplicity of the markets – when investors/traders pick a new trend then any news/indicators/momentum will support that new direction. News or measures that would have not made any impact on the way down all of a sudden make a big impact on the way up. Many of you continuously struggle with that very idiosyncrasy and I concede that it is one of the toughest lessons to learn as a trader.

Which is why I keep telling everyone to forget about the news. Read ZeroHedge after trading – I truly believe that any news during the session is counter productive and will harm your trading performance. Especially if you get sucked into highly emotional and cynical pieces which blame manipulation or heavy weight market participants for a particular move. I have news for you – that’s always been the game – and it will never change.

I choose to see this as yet another ramp up as part of a market that’s in the process of rolling over. I am positioned accordingly – and yes, my puts are not looking so peachy – but I still have a lot of time on my side. A lot more time than this market has IMNSHO.

Detach yourself from what’s going on right now this second and spend more time thinking about whether or not we are in a bull or bear market. If you think we are in a bull market – then great! You just got handed a bucket of profits! If you think we are in a bear market then great! You just have been given another opportunity to load up on puts.

In short: Focus your energies on how to leverage the current situation as opposed to bitching about it. We are stainless steel rats and we trade the market that we are given.

Cheers,

Mole