Sucker Rally = Consolidation

Yes, today sucked – especially after the wild ride we bears enjoyed yesterday. Did I take a hit to my portfolio? Absolutely! Did it wipe out yesterday’s massive gains? Not by a long shot! Did I back up the truck and loaded up on more puts in tech and financials? You better believe it.

Nevertheless, it was a bit mind numbing seeing things go against us yet another time. After all, the bears have truly paid their dues in the last 6 weeks and the very least this market could do is to present us with a measly week or two of down days. Well, as we all learned today, the market can be a cruel mistress as she made us sweat through yet another sucker rally. Reminds me back in the days when I was still dating – all those hoops you had to jump through before she finally put out.

Anyway, as I am not just evil but also inquisitive by nature I of course wanted to know why the heck we were pushing up in the first place. Was it something in the news? Not really – no banks were wiped out today, the PPT didn’t come to anyone’s rescue, no cooked reports either, the tooth fairy had the day off, nada. The treasury yield was mixed – up throughout the day but nothing major; it comfortably hung around below 3.7% and was actually dropping a bit while the market was rallying. So what already? Well, leave it up to good ole’ Mole to figure it out – for instant enlightenment take a look at the chart below:

Japanese Yen clearly driving the Dow today.

May I present today’s culprit – the Japanese Yen. What you are looking at are not the insane scribblings of a demented mind (I do have folders of those if anyone’s interested), but a comparison chart between the Yen and the Dow. One can clearly see that there is almost a perfectly inverse relationship. The Yen got pounded today right from the get-go; tried to rally but couldn’t manage to gain ground. And when the market suddenly pushed higher you could watch the Yen drop like a rock.

I usually am very careful to draw correlations between diverse markets as those are mostly valid for only limited amounts of time. For instance a few months back when volatility was pretty high (i.e. market was getting pounded) there was a inverse correlation between the VIX and Gold futures (ZG, GC). Whenever the VIX dropped hard, a day or two later Gold took a tumble. Man, was it fun trading those moves – until of course the VIX dropped towards 20 and the party was over. The same can be assumed for the market/Yen relationship right now. For certain reasons involving something exotic called the ‘carry trade’ (which I don’t have the time/space to explain here) a stronger Yen (irrespective of the Dollar btw) is currently dragging down the equity markets. Does that mean that we’ll see the markets push up every time now as the Yen drops and the inverse? Well, I think the answer is that it is a measure of leverage. On a no-news-day like today it seems that the Yen has a clear impact and I would wager that if we would see a very negative headline like let’s say… one of the large investment banks like LEH or LM declaring bancruptcy or being bailed out (perish the thought), a dropping Yen might not be able to lift the market as much. Not that I’m saying LEH or LM will go down the tubes, this is obviously a purely hypothetical example. I would feel truly terrible if such a thing would happen – and I’m sure a day of mourning might be my first course of action in that event. May I suggest Las Vegas as a proper venue? I’m buying….

So, why exactly am I calling today’s tape a ‘sucker rally’? For starters volume on all averages was pretty measely compared with what we witnessed during yesterday’s monster drop. Also, market breadth was anemic at best, in particular looking at the DJI which barely managed to clock a 1.3:1 ratio and the SPX which closed at ratio of 1.4:1. The NDX was leading today with a 2:1 ratio. Finally, another tell-tale sign was that, just like Monday, we saw an end of day sell off instead of a buy-in. But for you EWT aficionados I do have a goody that should leave very little doubt as to why today was a typical consolidation rally as well as where we are heading starting tomorrow:

DJI painting a super clean Elliot Wave.

Frankly, it doesn’t get much cleaner than this. Monday we painted a typical ‘five’ down which was follwed today by a clear ‘three’ (a.k.a. an ‘abc’). To round things up the market even took the liberty to start its first leg down as a little hint of what to expect tomorrow: more downside potential. Could the market throw us a curve ball here? Possible, but again – the name of the game here at ES is to offer probabilities of market trends. And this seems to be the most plausible scenario for tomorrow’s action.

The astute and more devious ES disciple might wonder if, in accordance to the inverse Yen/market relationship, we may see the Yen push up tomorrow. Frankly, I am not sure I can answer that – I am pretty sure that it is the Yen which drives the market, not the other way around. But I things are fairly complex these days and it seems that the market hops from one correlation to the next on a weekly and sometimes even daily basis. Perhaps tomorrow rising crude oil prices will make an impact – who knows. For that reason I tend to stick with what I know and trust, which is traditional technical analysis with a healthy dose of EWT (which is actually quite traditional, but some people would disagree).

Now, there is a slightly related piece of the puzzle: The U.S. Dollar. Unless you’ve been trading out of a cave for the last month (in which case I’d be curious as to how you got your broadband working) you know that the Dollar has been making a shuttle run into the outer stratosphere. The Yen has been holding its ground, unlike most of the other currencies out there, just look at the British Pound or the Euro. But I actually think that the Dollar is due for a consolidation as we’re now bouncing against 80 on the DXY. So, it’s possible that even Yen/market correlation could be soon replaced by a Dollar/market correlation going forward. Moving on…

VIX painting 2nd buy signal.

Now, here’s the chart that’s making me a bit nervous. Most of you leeches are now familiar with the VIX buy/sell signals. I’m not going to explain that again – Berk has done that yesterday and on many previous occasions. If you still don’t know what they are, please sign up for an instant flogging at your local torture spa. Nevertheless, knowing the average IQ of our visitors, I have been trying to make the chart ‘fool proof’ by labeling the recent buy signals. The first one was even confirmed but then discredited a day after (Tuesday’s rally). Today we see yet another close inside the 2.0 BB which is yet another buy signal according to the rules. It’s NOT confirmed yet – for that we would need one more close lower in the VIX. It’s making me a bit nervous, but I also know that it is typical for multiple false buy signals to occur during bear markets.

Gold continuing its course to its 720 (interim) target.

Frankly, I don’t know why I keep bothering to post this as I continuously keep seeing folks here and on the slope calling for a bottom in Gold, or attempting to convince me of the errors of my ways. Well – you should know better by now as I have been continously right on predicting Gold’s traversal to the downside for the last 3 months. Nonetheless foolish traders have been betting against me and I’m spending their money on cheap booze and expensive floozies as we speak. I know nobody really is going to believe me this time either, but here’s what I expect going forward. Either we get completely wiped out right here or we push up to suck in a few more suicidal gold bulls. I’d give the former a 65% probability and the former a 35% chance. I actually hope for the latter as I would love to re-load and add a few more puts. For the record: option players should trade GLD or GDX – if you want you can also grab some ABX as that one is enjoying the double whammy of being an equity plus being related to Gold right now.

I also see a 100% probability that I will now re-focus my attention to said floozies who are taunting me with the prospect of devious pleasures. Got to spend my ill-gotten gains somehow after all – plus, I have a bad reputation to live up to.

Cheers!