Time To Shake Down Some Piggies

I love it when they suddenly drop the tape just before the weekend – on top of trading losses it also creates uncertainty and psychological damage. “Do I really want to step in and hold short/long positions over a weekend? What will they cook up in Europe in the next two days? Is it too late to take on short/long positions?” You know the drill – plus there’s no way of hedging via Forex until Sunday night once the currencies wind down late Friday afternoon.

Yesterday I told you guys that we had reached the ‘moment of truth‘ and that the odds of a large medium to long term reversal remained iffy, at least according to the situation on the FX side. At this point my stance remains as is and will only change after assessing the magnitude and velocity of the current ongoing correction. More on this below – let’s first take a look at our short term picture and possible near term targets should we continue lower today and into Monday.

As you can see since this morning we got ourselves a brand spanking new hourly NLSL at ES 1333.75 (today’s low). So the good news here is that trading just became a LOT easier on the short term side (long term is another story). I would be long right now until we close below that NLSL – simple.

If we continue below ES 1330 and breach through that cluster of daily NLSLs then my first target area would be near ES 1312. Depending on the pace of things we may however push just below ES 1300 – I think that old expired NLSL at 1296 would be a good line in the sand. A drop below that may really accelerate things and although there’s a T2 on the map T3 near 1240 would be my next best guess.

Volar made a good point about raging sentiment this morning and I have further observations to share – please step into my dusty lair:

I take it you remember this chart and I think in the context of today’s instant reversal it is crucial evidence. That rising support line on the NYSE A/D ratio has breached today and although we may push higher before the end of the day it seems that the easy pickings may just be over. It really depends on what happens in the next two hours and on Monday. A deeper close below this line would mean we get a more meaningful correction – meaning one extending beyond Monday.

I mentioned the VIX yesterday and said that the creep up was meaningless to our medium to long term picture. Quite simply, the tape was getting ready for a potential short term shake out which is evidenced by today’s rise on the VIX. Now, an important inflection point may be hit on Monday, assuming of course equities continue lower. If we close outside that 2.0 BB on the VIX then one of two things will happen:

1. We get a VIX buy signal and the tape continues higher a day or two later.
2. We get a VIX buy signal and the tape ignores it (i.e. equities continue lower) just like it ignored that recent VIX sell signal.

Bottom Line:

The outcome of a bonafide VIX buy signal will determine our medium term trend. Or in simple terms: Yesterday we approached an important line in the sand by the bears – conveniently today we turned on a dime, much to the satisfaction of anyone holding bearish positions – in particular the Prechter crowd. You can be assured many hobby bears are doubling down as we speak. Whether or not they are right (for a change) will depend on what happens by Monday and in particular if we get a VIX above ~21.52. The fact that this is happening before a weekend is not accidental and will add to a sense of insecurity and fear.

Regarding Volar’s sentiment measures – of course he’s spot on. But my point with this post is that quite often things do not happen the way people expect it. I always ask myself what would hurt the most traders. One scenario would be to drive the tape up to an important inflection point and then turn it around, just according to expectations of any remaining contrarians. After a quick washout of the weak hands the tape may then turn and run up to its bullish price object and THEN turn, of course long after any of the weak bears gave up their seat on the bus.

Perhaps this time we’ll get an exception and we continue straight down, clearing out months of extreme bullish sentiment. Whether or not that’ll happen will depend on how we close today and in particular where we wind up on Monday. If we push higher Monday then we may still continue downward – so I would rather see it continue downward pushing the VIX into reversal territory (i.e. the VIX buy signal).

So in a sense – in this upside down topsy turfy world we call the market a continuation lower today would actually give us more clarity and a better way to assess the tape. A push higher today or Monday may turn into an opportunity for a retest variation sell (RTV) setup and we’ll talk about when it happens. The best thing for the bulls here to happen is a quick shake out, which may buy them a bit more life in the ongoing trend. As Volar demonstrated – sentiment has become way to one-sided for the ongoing medium to long term trend to continue without lightening up the bus a little bit.

Hope all that makes sense – if not ask me in the comment section. Happy trading 😉
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Cheers,