Cognitive Dissonance – It’s What’s for Breakfast

I sense something; a presence I’ve not felt since…

–Darth Vader, Star Wars Episode IV

I don’t know who or what it is yet, but I think it’s there. I’m not even sure what or who it is matters so much as what it’s bringing with it. Or maybe what I’m feeling is the lack of something expected but missing.

Stay with me…

Let’s Talk Spoos

A couple weeks ago after the spectacular #santarally, the SPX looked poised to resume its sensible, inevitable upward march in the usual position, the upper channel. But guess what? It didn’t:

[one_half first]

 

SPX Daily

 

[/one_half]

[one_half]

ES RTH Mush

[/one_half]

 

Instead, it expressed enormous ambivalence, retreating to and retracing a large area of previously well-explored prices between 2090 and 2040 (left, above). The range between these zones was so well explored that the volume structure left behind is remarkably thick and indistinct. These are two attributes that the ES/SPX rarely ascribe to the same region.

So the 2100 dollar target question is why? Why did the market choose to calmly retreat to this region? We’ve been here several times before recently. This region, while lower, is only a couple points off the ATHs. And because we’ve been here so many times recently it’s pretty easy to rationalize this as “safe.” But to me there are now some subtle causes for concern if your primary thesis is “higher.”

Let’s start with the big doji candle left on Friday by the SPX, shown above. Next we have my momentum indicators either parked in the middle or edging down. This is an oddly and vaguely uncomfortable neutral position given the battle royale of buying (and selling) just a couple weeks past. If we look at that same chart but with the ES, things look a bit less ambivalent and weaker:

[one_half first]

ES Daily

[/one_half]

[one_half]

ES Island

[/one_half]

Then there’s that pesky gap on the RTH charts in the 2020 region (SPX and ES) that does not appear on the daily (Globex) charts. But as we know, the vast volume is cast in the equities RTH hours and anything which happens in the ES outside of that time can be easily disregarded, run over and crushed by RTH volume. In other words, there has been enough entrancement of this gap area above 2020 to seriously consider whether the area circled above is turning into an island top, which is a well-known reversal pattern.

Now before hitting the bid in a big way, I should bring up some mitigating (confounding, even) factors in the way this chart developed. First, very plausibly, the down move could have been sellers taking advantage of thin volume and the region of non-scary prices in order to shed some overweight positions and not grab too much attention. It was a very orderly, controlled slide lower over a couple days which indicates some long term players simply squaring the books around the new year. If this is indeed the case, it should already have the BTFD-ippers salivating and I’d expect:

  1. We see a measure of strength from MOOs right out of the gate
  2. A test lower and a more powerful afternoon bounce
  3. A trend down day taking us down to a point where we no longer have to wonder whether this is an island top

At this point, for early in the week, I am favoring scenario 2 followed by scenario 3. Why? Well I would be remiss not consider the seasonality precedent for the situation we see ourselves in now (via Quantifiable Edges), where there are biggish down days between Christmas and New Year-ish:

 

2015-01-02

 

At this point I think scenario 3 above is plausible given the charts, I just think it’s better set up just a little later in the week. As always with the SPX, you really have to think twice, maybe three times, before you get bearish. You have to have really good technical and fundamental reasons (and often a few 40 point red candles) for being bearish on US large caps for more than a day or two in this environment. Bears just get mercilessly pummeled with soap bars in sacks every time. The proof is right there in the charts.

That said, on the downside in the ES, the levels to watch for a test lower – below the 2050 area – would be 2043 Friday VAL, 2038, 2034 and the oh-so-critical 2028 Alamo area. This has been a biggie for weeks on end, and if it breaks there is almost no doubt in my mind we’ll close this candle gap and take out the open/naked gap at 2008. This 2000 region is the next prominent area of support and I imagine the market will pause and breathe a little should we run down that far.

If Team BTFD is ready for action, the 2050 area is an important psychological price as well as the lower bound of the December 31 range. This is the first key hurdle, and given where we are now we could easily jump over it overnight and test it early Monday (something like scenario 2 above). If it holds we have we have the 2055 area as a rotational target. But from a structural perspective the 2060 HVA area is more important. What happens there, should we get there, is critical to my decision making for next steps. There are a few minor levels in between I’ll no doubt tweet if they become relevant, but the 2076 area is next critical area for bulls to bust to get to 2100.

Now for a couple macro things I find kind of unsettling at the moment (force tremors). First, NYSE margin debt seems to have peaked and backed off. This means that bulls have buying power if they want it. But margin debt also tends to peak and roll off prior to market tops. Also, the jokers on CNBC have been saying for a couple weeks now they expect multiple expansion and another 8-10% positive year in the S&P. This sends off alarm bells in my head for a bunch of reasons. It can mean they are already overweight large caps and getting low on dry powder. They need the little guys to keep it marching up with fund inflows and raw speculation.

Of course I understand the exceptionally bullish monetary situation, but this week I am having an increasingly hard time squaring that view what could happen as the cheap oil chickens come home to roost, the message the massive moves of the USD are trying to send, and some others I won’t mention. I just think the talking heads are purposefully (some idiotically?) overly sanguine for show and tell time on camera, trying to keep the fear of missing out sharp in the minds of the retail cohort. Cognitive dissonance. It’s what’s for breakfast all week, methinks.

Personally, I’d love to see the return of volatility to the ES. Not Armageddon volatility. But I tend to do my best trading when volume’s high and the rotations abusively powerful. It just fits my style of intraday trading.

Oh, and speaking of cheap oil…

A Tale of Grease and Two Gasses

The energy complex is  still just weak, weak, weak on the weeklies:

Natural Gas

Natural Gas

RBOB-Gasoline

RBOB Gasoline

WTI Crude Oil

WTI Crude Oil

For the last 3 weeks, every one of them opened higher and closed lower. Friday trade, shown in blue on all the above charts, is at the bottom. I don’t trade Natty Gas or RBOB, but there was a bounce in NG in Friday that shouldn’t go unnoticed. Which could be an interesting implication, or only a dead cat bounce. It’s just been ugly, ugly, ugly. As we all know, NG is a big companion product of domestic oil producers and it’s been in an oversupply situation for some time. In fact, I remember reading not long ago that about 50% of all the gas produced is just burned at the top of stacks because they have to remove it to get the oil and there’s just no demand for the excess supply. RBOB is of course a cracked derivative of the raw crude, but I digress.

What I really do care about is WTI. What I think is the key pattern to watch in Sunday’s overnight/London session and Monday is this big ol’ descending wedge CL has jammed itself into over the last week. This is a bullish pattern. That’s not to say it will turn out this way, but the holiday week volume was actually pretty close to normal. And in fact, even as the week progressed and volume increased, the range decreased and the rotations sharpened. Many an oil trader were griping about algos and bots on Friday, but what it really means is that there is a buying presence here which is catching up (or trying to) and match up to the relentless selling of months past:

CL Desc Wedges

CL Desc Wedges and Tails

 

Note the buying tails on the candles at the bottom of the range in the last two sessions. This range compression is what’s starting to piss both sides of this trade off, IMO. Everything is tightening, and over a longer time frame that we’ve seen recently, and this may be a character change signal. At least in the short term. I think $50 is an important psychological price for a whole bunch of reasons, and I think it’s very reasonable for someone to try to floor it at or near there. Will it work? Given the supply/demand picture that has emerged over the weeks I have to say I doubt it.

But we’re really only a couple explosions or voluntary twists of a big pipe valve away from the mother of all supply-disrupting short squeezes. Not saying I am expecting anything this dramatic, just saying these kinds of threats always loom over the energy market. But what is even rarer than credible supply disruption threats is to have to oil market so lopsided. At some point low price will start to tip over the supply dominoes… but that will take time. Unless any supply disruption is caused by force majeure, we’ll know it as it manifests and can plan accordingly. No need to get ahead of ourselves on this one. So for now, I’m taking this trade one day at a time.

Speaking of, I mentioned my specific expectations for Sunday/Monday on Twitter.

It’s setting up to be a fun and (hopefully) profitable week if you can swallow the dissonance. Trade ’em well…

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *