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Morituri Te Salutant
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Morituri Te Salutant

by The MoleMay 27, 2010

Alright, you are not going to like this, and I have to apologize in advance for scaring the living daylights out of you. Maybe it is nothing but I see increasing and alarming evidence that needs to be presented so that everyone can prepare properly. Quite frankly, the hair in my neck was standing up when I saw today’s reading on the NYSE A/D ratio.

Now I have serious doubts that we are going to close at 11.3 x but I think we can reasonably expect a 7 or 8. BTW, you may recall why 8 is afraid of 7… Alright, not funny, I’m just trying to make the news a bit more palatable. Please make sure you are sitting when I show you the only other matching fractal I found:

Yes, that’s right – the only prior occurrence of that pattern I found was the March 2009 low. Yikes!

Now, does that mean we’ll get a few more months of rally and then maybe a drop? Meaning will your long term puts be worth jack by the end of all this? Maybe…

What do you mean, maybe, Mole?

Well, it’s impossible to know – because you get those super exaggerated patterns at the onset of a new Primary wave. There will be violent snap backs and they will try to throw you off the horse – I mean just look at the gaps on the Spiders in the past month. These days when I wake up and see an open without a gap I wonder to myself – what happened?

So, if you know jack, Mole – what are we supposed to be doing here? Should we dump our long term puts?

Great question – glad you asked. See, this touches on what I have been saying for months now. In order to play Primary {3} down you need to be prepared for some violent whipsaw. I mean today is nothing in comparison with what’s coming. Are you prepared to watch your December or March puts go to almost nothing? Just a month ago mine were worth jack and just a few weeks later they had exploded to 8 x their premium.

I’m sorry to say that there are no guarantees in the market. In order to survive this battle you need to adopt the disciplines of bushido and be prepared to die in battle. Because if you think you can trade this one the safe way I have news for you: You can’t.

You have to think like Samurai Jack to make it through. Personally I prefer Toshiro Mifune, but most of you cats wouldn’t know what the heck I’m talking about. Suffice to say that I have weird taste in movies.

Here’s a snap shot of the daily Zero. What I see here supports the idea that we may be dealing with what eventually may be counted as Minor 2 of Intermediate wave (1) of Primary {3}. How far can a second wave correct? All the way, baby – technically. I personally get nervous at the 61.8% mark and cut the cord at the 78.6% fib mark.

Okay, so you are suddenly bullish?

No, not at all. I will hold my Dec 65 Spider strikes all the way – either they expire worthlessly or they’ll buy me a mansion or two. Why? Because those are my lottery tickets – I have made that clear. Based on what we know right now there is no guarantee that we won’t drop like a rock tomorrow or next week. As a matter of fact I am banking on that. But I want you guys to understand what you are possibly up against. This way you won’t ask me later why I didn’t tell you beforehand.

So, this is like a Zen riddle. Mole sees some bullish warnings but remains bearish. Exactly. Reason being that I expected to see monster fake out moves that will eat you alive. You cannot trade your way around them, well – most of us can’t. The only thing we can do is to understand our odds and place our bets accordingly. Today I am telling you to be prepared for the possibility of a nerve rattling rally.

Any good news?

Well, we should know pretty soon. If this is any consolation – fake out patterns usually resolve themselves within a matter of days. The move fast and resolve fast (case in point: Sept 19, 2008). Also, don’t forget that Monday is a trading holiday and I yet have to see a holiday in the past two years that wasn’t preceded by some damn ramp up.

Alright, you have been briefed. Deal with it on your end. If you decide to hang short don’t chicken out when it’s too late. And if we drop like a rock next week please don’t bitch at me that you’ve missed out on a big move because of me. This is obviously not a market prediction. This post is to warn you about what’s coming. Even if it doesn’t come today or next week it will come – you will see your premiums get cut in half at some point in this primary wave. Bank on that.

Meditate on this for a while and then come back and let me know if you want to be a stainless steel rat.

Ave imperator, morituri te salutant!

Mole


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
Enjoyed this post? Consider a small donation to keep those evil deeds coming!

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  • bshah

    i don't see anything cuz i am not subscribed to anything …. so i don't like it.. but may be being a first post, i may get a prize.. 1 jul 110 SPY Put, 5 SEP10 67 SPY very small pos and TZA 100 at 6.87

  • bshah

    i don't see anything so i can't dislike it… but being first response to this post, i may get a prize.. hunh mole.. Small pos.. 1 JUL 110 SPY put, 100 TZA @ 6.87

  • https://evilspeculator.com molecool

    Today's price is a free water boarding by the CIA specialist of your choice.

  • captainboom

    heh… right after I picked up a Dec 100 SPY put for 5.70

  • https://evilspeculator.com molecool

    sorry! :-}

    Well, I'm proposing the potential – you need to decide if you are prepared to hold them through this.

  • anoopsan

    S & P 500 Triangle in hourly chart

    http://niftychartsandpatterns.blogspot.com/2010

    Thank you

  • Tooncez

    So I can't read ZL from a hole in the wall, but doesn't that look somewhat divergent?… maybe?…

  • http://www.mylifemytrade.com MyLifeMyTrade

    Mole: awesome post..

    I see your posts.. I have NEVER or rather RARELY seen your actual trades. But I know one thing – you must be an awesome trader. You got the mindset that it takes to be a good trader.

    The analysis you present is also some of the best stuff. Trading is all about having a bull and bear scenario and taking a side and managing risk properly..

    Keep up the good work..

  • captainboom

    s'okay. It's not going to surprise me if we ramp and dump, or not… I was delta positive, so don't mind the move to more neutral delta over the weekend.

  • katzo7

    Out, +3

  • http://www.mylifemytrade.com MyLifeMyTrade

    EOD HOD close looks quite likely.. which should be shortable for 10-15 pts IMO

  • ricebowl

    If we close on the highs, why would that be shortable?

  • Clint

    Huh ?

  • katzo7

    +2 not +3, fat finger

  • https://evilspeculator.com molecool

    I think he decided to go into cash.

  • Tyler_K

    last thread: “Short ES @ 1097”

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    I am saying right now that I am NOT prepared to die in battle.

    Getting a little wounded possibly. A broken nail perhaps as an honorable sacrifice to the god of war.

  • https://evilspeculator.com molecool

    I was really torn about making this post. Think about it – I am telling people that I am seeing signs but am not sure if they are real or not. It's a lose-lose situation.

    The best thing I can do here it prepare people for the worst – because if that happens they had a chance to get out. If it does NOT happen it may force people into the proper risk exposure.

  • elliott_surfs

    get that thing checked out, i hear they can cause some heavy damage

  • katzo7

    Good points mole.

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    I think we're looking at wave 2 here Mole. Target of 870 for wave 3.

    That will be a helluva ride.

  • katzo7

    I wish,a 1000 point plunge and I would be in heaven.

  • http://www.mylifemytrade.com MyLifeMyTrade

    I think Mole as a trader you can lay out the scenarios in front of people. What they are going to do with it is their business depending on their risk appetite.

    For you, your puts are lottery ticket.. and you will likely not take a huge financial hit if they expire worthless.. But I am sure there are people out there, who went all-in with these Long-term puts believing that they could make their entire trading account 25x.. for them a risky proposition on the horizon is a very different animal and they may like to cut their risk down..

    So you are doing all that you can do.. I think not posting this stuff would have been a bad decision.

  • DudePlunger

    Great post mole.

    Here's my plan for the next 2 weeks: I'm not getting short the /ES till at least Monday night. At this point, I'll be a seller on a break of today's intraday low of 1082.50. If we head higher, I may raise my breakdown level. I don't like fading markets on a swing trading basis, I prefer breakdown and keeping my stop loose initially. I'll scalp a small profit if its given me within 24hrs, and then add orders along the way selling resistance and selling breakdowns. If we go higher, I'll simply never get filled because we didn't breakdown.

  • katzo7

    Short ES @ 1097.50

  • BobbyLow

    Well I've seen this crap happen before and it's “Rope a Dope” time.

    I've got a decent dose of Longer Term SPY Puts now but not enough to kill my account if I lose but enough to say to myself I'm going to hold them and if I loose then I walk away once and for all. Kind of like Texas hold'em.

    If they are able to keep this bullshit going for another 7 months then I'm in the wrong game and need to get the fuck out.

  • Clint

    Sounds like a good plan and well thought out.

  • https://evilspeculator.com molecool

    It's a possibility, yes.

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    There's no money in conviction trading.

    It shouldn't matter whether it goes up or down as long as you are on the right side of the trade.

  • https://evilspeculator.com molecool

    “who went all-in with these Long-term puts believing that they could make their entire trading account 25x”

    Exactly – that is my point. I don't want my rats to get burned. Even a small amount of your portfolio will be worth a shit load if this thing falls off the plate. No reason to get greedy.

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    Lovely patterns setup if that was the end of wave 1.

    Indicating to 870, which was the key support / resistance level for the six months to the March low.

    It would be pure poetry.

  • http://iberianviews.blogspot.com/ catracho

    One sign that this time the rally will be different ie not lasting..AUD has had a lot of tech damage..and in the past since March 09 has led equity rally (i think!)

    anyway the daily looks like big topping action with a break down out of the range last week..
    http://www.screencast.com/t/MjA5MTIzYmM

  • amokta

    what a day, i think we close above 1100 today on spx

  • Clint

    Going for 1100 just to say they did I guess. What a game this is !

  • Clint

    And there she be !

  • nugie

    In reply to your thoughts. I don't disagree that the market could rally but you have to be rational at some time and look at the fuggin economy and what is likely to happen in the second half of 2010. Deflation is now taking place here and in Europe. This will probably continue for 6 months to a year Salaries are being cut taxes are being raised, housing continues to fall, more mortgages continue to be foreclosed on. Global austerity will cut global GDP by 1%. Stocks are selling at 22x backward looking 10 year average. 29% of consumer confidence households think the stock market will go lower and 30% are bullish. Consumer spending is declining and will continue to do so for the second half of the year as earnings power continues to drop. You have 5 job seekers for every 1 job available that means little or no wage growth. Weve seen the first decline in 3 months in Capex orders. It is taking longer to sell new homes while median new home prices are at a 9 year low and government subsidies just ran out. This was an interesting comment by David Rosenberg about parabolic run ups. He says you can expect a 30 to 40% correction. Only two times has the market moved up as fast and far as the run from Mar. 09 to Apr. 2010 (80%) they were June 1932 to Sept 1932 (112% a 40% correction followed) and Mar. 1933 to July 1933 (116% a 34% correction followed) You can only pretend things are alright for a time and than people eventually wise up. Like when their out of work or loose their house or can put food on the table or can't get medical care for their kids. This shit always catches up with Mr. Market and than get the fug out of the way.

  • Clint

    And a little extra squeeze just for good measure…and any last minute scalpers.

  • http://www.flickr.com/photos/dabasia/sets/ Croozer

    Now……is this a 3rd wave up or just a throw over……

  • http://www.mylifemytrade.com MyLifeMyTrade

    Huge signal into close.. Close is not shortable (unlike I said before)

  • Clint

    Yea it looks like their gonna cut their heads off tmrw and make them have a really long 3 days weekend.-I've had my share.

  • http://iberianviews.blogspot.com/ catracho

    or we get a gap down…

  • http://iberianviews.blogspot.com/ catracho

    flat ahead of w/e looking for audusd to test 8570 / 8600 re short there

  • mothwhoflysbackwards

    now who was smart enough to sell huge amounts of FAZ at 1:16 and 1:17? whats weird is I looked back a few days (fidelity ony gos back a few days with min bars and it may not look so spikey on longer frames) you could not really see any big buys that matched… must have bought slow and got the hell out.

  • https://evilspeculator.com molecool

    Closing NYSE A/D ratio is 12.43.

    In-sane!!

  • http://www.portfoliotilt.com PortfolioTilt

    S&P 500 closes above 1100, and the 200 day Moving Average line after today's strong session.

  • Clint

    Hey…in this market…anything's possible. 🙂

  • ricebowl

    If there is anyone here who put 100% in long-term puts, you need to beat them with a large stick right now. That is just stupid. Anyone trading options needs to understand that they're priced to rape you with theta burn.

    There are way too many signs pointing to a retrace up to 1120 or 1150 that will at least take us through June opex. There is even a possibility that we set fresh new highs in July. I count 3 or 4 different reliable indicators plus some fractals from the 2007 top. This led me to reallocate half of my 401K yesterday into high-beta funds which, so far, is working out nicely I would say.

  • Gold_Gerb

    short covering – how was the volume on that?

  • psycho_puppies

    I think the extremes are going to be / get more intense. We are looking at going into a 3 of 3. If this were the other way some may be calling today capitulation.

  • BobbyLow

    Maybe so Jack. But I've got to tell you there are too many conflicting cliches in this game.

    How many times have we heard “Take profits early and often” or how about “Get it right and sit tight”.

    I could go on and on.

    I also need to say that as of right now I've only locked in 20% of my trading account in Long Term SPY Puts. The rest of my trading account is in cash. I might be crazy but I'm not stupid. LOL

    I also have some Long July Spy Calls but never the less, today was the worst day I've had in weeks.

    Shit happens.

  • Gold_Gerb

    I've had convictions, been messed over during expiry week.
    and turned out to be “correct” the following week.
    Did I get money in pocket? no!
    Ditto to SpringyJ.

  • amokta

    relax, we could easily have a 30pt down day tomorrow (but look like we'll be here for a while)

  • gsavli

    short squeeze. this tape is textbook – no entries, no exits, just relentless grind up.

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    I think this is wave 2 now. Target 1130 – 1150 then drop well below 1000. Looks good for your puts

    That's the probabilities and patterns talking though, not conviction.

    Faith is for church.

  • Bob the Horse

    This is not a short squeeze, it's a classic bond-equity switch day. Often happens into month-end after a big divergence in performance, you get a rebalance. Its just a relentless flood of money into equities, any retracement is miniscule. Might get another one tomorrow. . . .

  • http://www.marketfeel.com/ MarketFeel

    have decent season bias tomorrow too and even better after tues of next week

  • Bob the Horse

    FWIW, I think today is a pretty clear signal that the low is in for now. We've tested it multiple times, it's held, and we've had a big, broad up day to confirm. Market now needs to be treated as bu8y on dips until proven otherwise. We'll see how it behaves as we approach resistances but the way I see it, Estoxx can rally as far as 2800 and still not be back in a bull phase (ESM0 around 1180/90).

    My plan is play long side above recent lows until we get to these upper levels. Then take a view. Breach of 2800 means we are going to 3300/1300 before huge collapse to 1000 then 920 S&P. Failure there means going to 920 before beginning mother of all bull markets.

  • ricebowl

    That's interesting and makes a lot of sense; it means everyone is doing exactly what I did yesterday ;-).

    Thank you.

    How is your portfolio doing, by the way? You said a few days ago that you were hoping we'd go back up to 1100.

  • ricebowl

    I've been saying that 1120 is the minimum retracement, but the 50% Fib at 1130 is too low, IMO. I'd be looking for 61.2% – 76.8% (1150 – 1180). The thing is that in just 2 days we've moved up 60 points off of the lows, and 1130 is a mere 30 points away. Wave 2 should last at least as long as wave 1 if not longer, and wave 1 lasted a couple of weeks.

  • gsavli

    thanks, that's a new one for me. sure looks exactly as a short squeeze though.
    can you recommend a site for further reading on this subject?

  • Bob the Horse

    It has been volatile. I made a shit load of money on the EU bailout package earlier in the month. Gave that back and a lot more on Monday and Tuesday. Made the bulk of it back on Wed. Overall, small down on the month. That's a result as far as I'm concerned, this month has been a bloodbath.

  • http://www.marketfeel.com/ MarketFeel

    interesting I traded the exact same way. I think my big win on the bailout deal got me a little cocky and I had to learn a newbie lesson again to refocus.

  • DudePlunger

    Bob, would you continue to stay bullish if we broke below 1080? I'd be interested to hear which support levels you want to see hold before you chance your stance. I'm bearish, and I'll continue to stay so until we fill that gap above 1147. I'm not holding any positions as I establish my swing trades on breakdowns of daily lows.

  • Clint

    Interesting. If the bears don't get control of this again next week…then I think we're staying above 10,000 for the summer anyway.After today…there is a ton of bad news now priced in our market for the moment (European debt crisis,oil debacle-etc,etc)…I think.My bet is tmrw is either flat or up. They stole a lot of money back today and their gonna wanna keep it. I”m still betting we close the year under 10,000 though.Next week will be interesting.

  • ricebowl

    Pera ambulat et se sentit bene. ('Pera' is likely the word that Latin would have used for 'stock market' had it existed.)

  • http://www.flickr.com/photos/dabasia/sets/ Croozer

    Priced in or 'significance downplayed' ? The shit in the US balance sheet hasn't been talked about in any great length……

  • Bob the Horse

    The logic is if you are a pension fund looking for 60% equity, 40% bond weights and equities rally 10% and bonds fall 10%, you will end up with 55%/45%. So you need to buy equities/sell bonds to rebalance. Often happens month end (even more so quarter end) if there has been big divergence in performance.

  • Clint

    Probably both…and agree the U.S. balance sheet is for shit.-That said..I've had most of my losses trying to be logical and timely at the same time.We'll see. If I had it my way…we'd be at 8000 on the DJIA RIGHT NOW….but nobody seems to care. 🙂

  • Bob the Horse

    I need to see Estoxx hold above 2500. Europe is more important in many ways as that is where the problems are. We might retest it but I wouldn't bet on that now. Other key level for me would be the S&P having a monthly close above the 12 month SMA – can't exactly remember where that is but think it is 1080 something.

    It's still a bearish overall structure but the levels of volatility got so elevated that even the counter-trend bounce is worth playing for in my view. I know for a fact that a lot of hedge funds have capitulated and we might need to go a fair bit higher to suck capital back in again.

  • Tyler_K

    consider 60/40 weight on a $100 portfolio
    equities $60, rallying 10%, to $66
    bonds $40, droping 10%, to $36
    equities weight now $66/$102 = 64.7%
    bonds weight now 35.3%
    reweighting decision: sell equities, buy bonds.

  • Bob the Horse

    sorry, meant equities fall 10%, bonds rally 10%. It's late here in the UK.

  • http://www.blenderking.com Dan Robbins

    We also closed over the 10 day moving average on many of the indexes too. That's heavily watched. In addition, the hourly /ES poked back over the 150ema – 1st time since May 13th, but the upper green line (2% channel) typically provides resistance after a long stretch down like we had. Attached are the /ES charts.

    Daily: http://screencast.com/t/ZDQ5NzMzYj
    Hourly: http://screencast.com/t/MmQ3MmVlN

  • BobbyLow

    But don't probabilities and patterns lead to conviction. I don't want to get hung up on semantics but without conviction why buy or sell anything?

    BTW, I think you do a great job on your charts. I wish I had that kind of talent.

    What I'm able to bring to the table is 12 years of experience in surviving the day to day BS of this game after making and losing a shitload of money.

    If a person wants to know what not to do then just ask me and I've probably made that mistake.

    However, if there is one thing that I am totally convinced of is that the market is an illusion of perception. (If that makes any sense)

    Another thing that I am convinced of is that Noise Kills. I don't now how many times that I was “Convinced” that the market would rise of fall over the years only to allow myself to be talked out of my convictions.

    Every single one of my convictions proved out to be correct. Of course I didn't make a dime from any of them.

    So I'm holding on this time. And if after 7 Months this market is still rallying with no substantive gains in our economy and or wage inflation, then I would have to definitely take a long hard look at taking what funds I have left and just walking away.

    I understand that this game is gambling nothing more – nothing less. But there was a time that the market might have had at least some resemblance to reality of what was going on in the economy. This has not happened for quite some time.

  • gsavli

    one observation though:

    today's blast off was achieved on a very low volume.

  • grednfer

    good estimate jack……did you trade that yesterday when we dropped to 1060?

    You are right about conviction too…..its about “spot momentum”

  • Clint

    The whole rally form March '09…from 6500, was on low volume.

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    I'm going for 1150 as my primary target. I'll explain why in my morning post tomorrow, but I've got good reasons.

    I'll start getting uneasy if we go to 76.8%.

    I'm thinking two more weeks with a working target of 10th June.

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    Yes, I had a support trendline there. Pretty good week all told. 🙂

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    My bad. We hadn't chatted before & I didn't realize you were that experienced.

    Some of the newbies here don't understand that we're just gamblers playing a game that combines luck and skill, but obviously you do.

    Too much knowledge isn't necessarily an advantage you're right, and being able to see all sides can make it hard to pick one, but having a good big picture view can help filter information.

    For instance, my reading on secular bear market cycles and economic history suggest to me that this secular bear market cycle will most likely last another four to eight years, and that the last cyclical bear market in that cycle should take place in a backdrop where the imbalances of the last secular bull, in this case excessive borrowing, are being unwound. I'm not sure we're close to that yet.

    Then I see this long term chart of SPX adjusted for CPI:

    http://www.screencast.com/users/springheel_jack

    You see the perfect secular bear market declining channel? Look how far we still are from the upper trendline.

    I'm not convinced that we'll see the real equities peak before 2013. That's ok, I can wait. 🙂

    http://www.screencast.com/users/springheel_jack

  • BobbyLow

    Thanks for your reply Jack.

    The CPI/SPX relationship is an eyeopener and the Patient Bear tells the other part of the story. LOL

    In one of my replies, I mentioned one of my disclaimers to a possible continuous upward run in equities was wage inflation. I singled out wage inflation because it appears the Fed is trying to inflate their way out of the debt mess but so far it's not working. Zero interest rates may have allowed corporations to shore up their balance sheets and cost cutting has helped their bottom line.

    But where is the real growth coming from? Unless there is substancial growth that spurs on new hiring in the Private Sector and subsequent competition for employees that drives wages, there is no inflation at least by a standard definition.

    That does not mean there won't be cost inflation in raw materials etc. So we end up with the worst of all worlds. Zero interest rates that penalize savers, no rise in wages, reduced consumption, increased costs of living and no inflation at least until the Bond Market Blows up. These factors IMO do not warrant high equity prices.

    This was more of a technical rally than anything else. So when I read that the market rallied because China likes the Euro, I could only once again shake my head in disbelief.

    Anyhow, I'm rambling on and on. It's been a tough day but it is what it is.

    Have a good night.

  • rg64

    This is top notch thank you for putting this together

  • tradingmom

    I remember this rationale applied to a massive 2-3 day rally we had in the last week of October '08. We had just had a massive slide down and then wham! out of nowhere all this money came flowing out of bonds and into equities — allegedly to maintain the 60-40 ratio. Have no idea if it is true, or if so, why it would be happening towards the end of October in 08 and then in May of 10 – doesn't seem to be a standard quarterly allocation assessment.

  • jpstanley

    daaa bearss

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    Nothing here warrants high equity prices.

    My view is that we've been in a three stage bubble:

    1195 – 2000 – Corporate Debt Bubble
    2003 – 2007 – Personal Debt Bubble
    2009 – 201? – Government Debt Bubble

    We're still in the last bubble of course, and in my view the final bear market of this secular bear cycle, and the reversion to the long term equity valuation mean, can't take place until the last bubble peaks.

    The bond market will end this mad final bubble within a couple of years. After that we'll drop to long term support in the 450 – 500 area. We could drop below it if it gets really ugly.