Dry as a Bone

Not a ton of time to get creative with the weekly check-in/check-up, amigos. Spring’s here and I have many projects grasping for my attention. So you’ll get just the unvarnished, straight dope this week.

And that’s OK as I see things lining up pretty clearly from both a macro and technical perspective. But I also have to say that the last 2 weeks straight I’ve been dead wrong in terms of my favored directional scenario. 2 weeks ago it appeared we were poised for a rout and instead we rallied. Last week the charts looked poised for a challenge of new highs (post FOMC) and instead it was three days of liquidation with a respite on Thursday and Friday.

So what’s it mean? What’s the point then if you can’t predict what will happen next ?

For my trading time frame and style, the process of idea generation is really the critical thing. When I have 2 logical directional plans, being right in the moral (ego) sense becomes irrelevant. Preparing (for me) means defining a hypothesis, establishing the criteria to test it. If it proves itself, fine. If not, well I have another one already in my pocket. Just switch mindsets and go with it.

When you have the freedom of both directions and a plan for each, being wrong is just as valuable as being right.  Creating a plan with a favored scenario gives me a theory to test. I plan 2 scenarios each week, chose the one I favor based on the technical factors I see and then identify what evidence I need in order for that plan to be trade-able. If the evidence doesn’t materialize, that’s critical information. You can lean on what a market doesn’t do as reliably as what it actually accomplishes.

Now that that’s out of the way, where’re we at? Where’re we headed?

S & P 500

Early this week the most pressing business in my view is for the ES to do some repair (or rejection) of the zone from about 2080 down to around 2065, marked on the chart below. This zone was created during Wednesday’s 40 point liquidation. We retreated to a large area of prior acceptance from 2060 down to around last week’s expected range low of 2038. We hung in there for 2 days, with Friday being a balanced inside/inside/inside day – that is inside prior day range, inside prior value and inside the ON range. Almost without fail when the market creates that kind of tight balance, it’s simply waiting for the right time to ease on down (or up) the dusty trail.

So for the week my bull/bear zone (a.k.a. a line in the sand) is from about 2075 down to 2070. The high side of the expected range goes to about 2108 and extends to 2127 and 2144. On the down side I’m looking at 2036 down to 2016 and 1999.
ES

 

We have a a ton of confluence in the bull/bear zone, including the March VWAP, last week’s VWAP, 50% of the weekly range and the midpoint of my intermediate term trend channel. Plus it’s the closest market structure repair zone:

ES2

I’m expecting, barring macro surprises, we will spend at least a little time trying to find acceptance in the region shown above. Even if the bulls manage to find a day or two of acceptance, I’m having a hard time seeing how it can hold. The bigger macro picture shows us that we’re in the midst of the Q1 buyback blackout, and the lack of corporate buybacks drain an important source of support from the large cap market. Of course, all stocks are affected by the blackout, I think large caps are fully valued somewhere in here. Recent economic data’s been decent but not blowout and has not given the market much appetite for multiple expansion (essentially valuation inflation, too much money with no better home causing prices to rise).

For these reasons I’m expecting the bears to take full advantage of any selling presented by overweight funds looking to book some profits and clip some risk. Prices seem especially vulnerable to downside pressure now that Q1 has all but closed and there’s no pressing need to dress up the windows again until the summer.

But as always, we get what we get and I’ll trade the opportunities presented.

The Rude Crude

3rd week in a row I am not covering WTI. There’s been more than enough volatility in the ES and NQ to keep me occupied. Friday was a massively wild ride on the WTI roller coaster, of course. No reason to expect this kind of volatility to suddenly disappear either given the situation in the Middle East (and elsewhere).

Trade ’em well this week, amigos…

 

Dr. Janet Feelgood, I Presume

Last week didn’t really play out like I expected at all. Not that it (the why or my opinion) matters, but ultimately lots of macro things worked out in the markets’ favor. Putin resurfaced, the FOMC effectively pushed federal funds rate changes out on the calendar, Greece didn’t get kicked out of the EU (yet) and middling economic/earnings news was bought fairly furiously. Blah, blah blah.

If I had to sum up the week’s action in a song, this would have to be Dr. Feelgood from Mötley Crüe. Let’s face it – sex, drugs & rock n’ roll are what this market is all about now. Partying like it’s (Nasdaq in) 1999. Hookers and blow for everyone!

S & P 500

Seriously though, this market appears unstoppable. I thought last week there was a good technical case for downside to be made. I know I wasn’t alone in that thesis. But it became pretty clear on Wednesday morning, pre FOMC, that the downside case was just plain wrong. I saw it unfolding and traded accordingly. Since then most of the SPOO short positions were likely crushed. Some SPY and ES option premium sellers probably wish they had hung themselves. There’s a reason why this inspired max pain diagram was first created (source):

 

CAf3E4TVAAAvjLz

 

Anyway, as I looked across the board this weekend at the senior indices, it’s hard to argue it’s not looking constructive for higher:

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SPX

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R2K

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DOW

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SPMID

 

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NASD

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That said and shown, way back when I was a kid there was a game they played on Sesame Street called which one of these is not like the other? and the set of charts above is a good candidate for this game too. Cue up the song, give it a play while you look at the charts and I’ll wait.

Done already?

Yep, that’s right. It’s the Nasdaq 100 chart. It had a big gap up which met by some significant afternoon selling pushing it into red territory for the day. This is something to watch for next week. The start of something bigger? Or maybe just profit taking in a couple sectors which have gotten a little frothy (bio-tech names, et al)?

Basically, as I mentioned above in my view we’re in a location in the SPOOs where the weak shorts (and probably all but the strongest ones) have likely been squeezed out. Given this the ES won’t have a free stop ride higher and some initiative buying is needed to push the ES to new highs. The question, of course, is whether this will happen. In the event it does I’m looking at the following target area for the RTH session to complete an intermediate term auction:

 

ES

The 2135 area balances out a remarkably almost balanced composite profile from and 2132 is 127% (a mathematically magic number, 1.27 * 1.27 = the golden ratio) of the range from March 11th to the RTH all time high. When you’re off the map, measured moves of one kind or another all you have to go on. This has proven to be a good yardstick for me in the past so I keep using it.

On the weekly time frame, here’re the ranges I’m looking at:

ES2

My so-called bull/bear area, a.k.a. line in the sand, a.k.a. the zone above which buyers are in control and below which sellers are in control, on the weekly time frame is from around 2082-2075. ETH range targets above include 2118, 2126 and all the way up to 2043. Below I’m looking at 2038 down all the way to the 2-week profile balance target of 2003. 2003 is also a prominent low-volume area on the composite profile shown above. There are many great areas of opportunity in between too, of course.

WTI

For the 3rd consecutive week I’m not covering oil. There’s been more than enough volatility in the indexes to require my full attention. We’ll see if that continues, but with the VIX closing just above 13 on Friday the market’s expecting a lazy trade in the SPOOs.

 Trade ’em well this week amigos…

Going Down Like Disco?

I’ve decided I’m sticking with my cheesy music and movie line/title/pun title theme for a while. It’s entertaining for me. Maybe for you too. TA can be dry stuff. So why not?

This week’s post title is actually a song by the Dandy Warhols, a kooler than cool band from Portland, Oregon who’ve been influencing some of the best indie bands for decades. Have a listen to the song while you read for the full effect. Plus it’s got cowbell which automatically makes it awesome.

 

S & P 500

We had  an interesting week with a nice pickup in volatility, as I was expecting (hoping for) last week. But it was a tough read some days. Friday, many (most?) were expecting a kind of “royal flush” mentioned a few times during the week, but the bulls stepped in, shouted nada! and bid price right back up to the weekly VWAP around 2048. You can never know for sure, but my feeling is that price action this week was warped somewhat by the index futures March-June contract roll, and possibly some jockeying ahead of this coming week’s triple options expiration.

Anyway, I think this one chart sums up the week and also gives us some insight into where we may be headed. Believe it or not, you can read our Evolution charts (or other profile charts, really) a lot like a flow diagram. That’s why the Evolution charts are one of my favorites… they are really great at telling a story day-by-day, week-by-week, etc. Stories put any subject in context, context makes abstract ideas concrete. But I digress…

Start from the upper left, move to the right, follow the arrows:

ES

 

While we’re on the weekly time frame, let’s have a look-see at a couple weekly charts of the SPX.

 

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SPX

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SPX2

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On the left we have a 2 standard deviation regression channel of the recent solid up-trend from mid-November 2012 to now. On the right there’s a closeup of the past few weeks with an ascending triangle drawn. The two things to notice about this very traditional, basic TA chart is that the middle of the channel was rejected 3 weeks ago and we’ve never really looked back since. This is not a pattern the SPX sees very often. In fact, the last couple times it’s made an appearance was in the breakdown of the trend from March of 2009 to 2011 (left) and July of 2002 to January of 2008 (right):

 

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SPX3

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SPX4

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Twice this regression line rejection proved to be a precursor to a significant pullback or correction. Before I get all giddy imagining the smell of red candles burning bright tomorrow, notice that on the left chart above, during a similar rejection of the regression line (July of 2010) the index bounced right back into the channel. Which is to say anything can happen and the market is always right. Said another way, we have to prepare for multiple scenarios as traders. Which is a brilliant segue into the week ahead, if I do say so myself. ;-}

First, let’s start with some March seasonality statistics for the S & P 500 and the Nasdaq indexes (via SentimenTrader):

 

seasonal_march_spx

 

seasonal_march_ndx

 

Notice that less than half of the time March 16 is a positive day for both indexes and it’s a crap shoot for St Patrick’s Day. Then following the down days there is a stronger tendency, especially in the Nasdaq, for a bounce. I’ll definitely be watching to see if this is holds true this time. The farther we fall, the more inviting price becomes for buyers, save any macro force majeure. And amigos, I don’t have to tell you there’s plenty of news risk and big economic events on this week’s calendar, any of which (read: FOMC) could create a stir.

I’m actually expecting that we’ll be exploring both sides of the current balance area this week to one degree or another. At this point the HUGE consolidation zone between about 2050 and 1975 has a ton of structure, and save some crazy new events such as the death of Putin and a takeover of the Russian government by extremists or Greece (Spain? Italy?) getting kicked out of the EU, it’s most logical to expect that to be a tough zone to break through. Things just aren’t that bad, honestly, and dip buyers have shown they’re ready, willing and able to buy. So for the week ahead I think the 2040ish composite VPOC is set up as the most logical bull/bear line:

 

ES2

 

Given what I see I think the most likely zones of exploration are from 2040 down to the balance area around 1985 and from 2040 up to the balance area around 2085. Yep, a full 100 point range. Not that we’ll cover it all, but look left on your weekly charts and you’ll see it’s not out of the question. Again, I won’t be shocked at all to see some exploration of both zones, though I’m favoring scenarios in which explore lower first. We’ll see what we get…

The Rude Crude (Oil)

Not covering WTI again this week for the same reasons as last week. Though with a close on the 45 handle, which concluded the week with a huge and solid trend down, there may be a fat pitch to swing at very soon. Charts say lower still from here, with a strong trend in place, but the move is extended enough that it might invite buyers in to trap late sellers for a (short) squeeze play.

Trade ’em well, amigos…

Death or Glory?

Well, we had an interesting end to the week, yes?

Seemed, to me at least, that a sell-off has been a long time coming (as I’ve been saying on ye olde Twitter machine). And by long time, I mean a couple months and particularly this last week. My trading time frames are short, and as a futures trader I really couldn’t care less whether the market goes up or down on an intraday basis. But because of my favored time frame, I always have to be aware of what the higher time frame is up to, particularly at the margins. The higher time frame players, also referred to in profiling parlance as other time frame (OTF) players, are the ones whose decisions ultimately move the equities markets.

So what’s their agenda for the US equities this week? Death or glory? Listen to the brilliant song of the same name by the blindingly brilliant band The Clash while you read to get the full effect.

S & P 500

This week’s musical post title is actually a double entendre. Why? Well because not only are we at a clear price/valuation inflection point, we have a rarely seen extreme clash between the so-called smart and dumb money players:

deathorglory

The above chart, from SentimenTrader (yep, I’m a paying subscriber) smart/dumb money model,  shows us that the spread between the optimistic trend-following bulls and the pessimistic “smart guys” is at an multi-year low. This interpretation of this chart can be confusing, despite its apparent simplicity, so it makes sense to let the maker explain it (emphasis mine):

The Confidence Spread subtracts the Dumb Money from the Smart Money.  So when the Spread is very high (above 0.25), that means the Smart Money is looking for a rally, and the Dumb Money is looking for a decline; we should expect stocks to rise after those conditions.

When the Spread is very low (below -0.25) then the Smart Money is anticipating a decline and the Dumb Money a rally; we should expect stocks to decline after that.

Note that the “dumb money” is not dumb at all during trends.  Most of them are trend-followers, and will get more and more bullish as stocks rise.  The “smart money” is mostly comprised of hedgers, and they will sell short as stocks rise.  So for much of the time, it looks like we have the terms confused.

But it is when both sets of traders are at extreme positions that they earn their moniker.  Dumb Money is most often at their most exposed before stocks decline, and at their least exposed before stocks rally; Smart Money is the opposite.

Note that the “dumb money” is not dumb at all during trends.  Most of them are trend-followers, and will get more and more bullish as stocks rise.  The “smart money” is mostly comprised of hedgers, and they will sell short as stocks rise.  So for much of the time, it looks like we have the terms confused.

Since since both groups can’t be right, the most likely outcome in the near term in my view is an increase in volatility. Which would be a most welcome improvement over the lazy trading days of the last few weeks.

As far as what I think is next, I see and am planning for a couple scenarios. It was clear that the dip buyers were active and buying each new low (see candle tails below), which made for a steady, controlled slide rather than a bloody knife drop. Especially so below about 2080, and then a little covering rally at the end of the session:

ESTails

We also just touched the 50DMA on the SPX, and that is a well-watched landmark:

SPX

Since this is the first test we’ve had in weeks, my favored scenario is that we have something of a bounce early in the week. In addition, the ECB QE program starts Monday as well and that could release some loose money in need of a home. My macro view is that the only thing which will raise the prices of the index to new highs at this stage is fresh funds. I’m sticking to my thesis that the lion’s share of the big money is already invested, expecting higher prices and trying to achieve that via the financial media, engaging individual investors’ desire to not miss the boat. That said, we have two distinct areas previous acceptance from the highs down to the top of the low volume area (LVA) at 2085 (see below chart). The lower balance area in particular is within pretty easy reach in one or two lusty buying days.

If instead we see the selling continue the range of prices which is the most plausible the first part of the week, and in most need of short-term repair, is the range from about 2085 to 2040:

ESRange

However, if this is only the beginning of a significant repricing event the next area is the range from 2040 into the series of open gaps down to around 2015 created during the epic “battle in the box” from January and early February:

ESGaps

Be sure to notice too that the VPOC for this range is right at about 2050, so any drop through there may be slower and more contentious that you might hope for unless we have something akin to a flash crash. Anything can happen, of course, but it’s probably best to just expect the most probable things. If you take my meaning. I’m sure you do, gentle readers.

Any lower than this and I’ll re-calibrate my expectations. Fact is long term trend is still secular, long-term bullish. Friday’s ES 2065 low is a measly 2.5% off the highs. At some point the market will do its job, buyers seeing bargains will step in with force. It’s always pretty obvious when it happens, if you’re open to seeing it.  Whether it’s Monday or in a month, just know it will happen and prepare to capitalize on it.

Oh, and uh, one last thing. Not covering the rude crude (WTI) this week, though I will be watching. We’re in a place where I’m expecting more than enough action in the SPOOs and QQQs to hold my interest and require my full focus. But, as always, I will be watching to see if it throws any fat pitches my way.

Trade ’em well this week, amigos…

Keep Your Head on a Swivel

There’s an expression among aviators/pilots which goes keep your head on a swivel. It’s the kind of thing they say to each other as a reminder to stay alert in calmer flight times, just when the first hints that something “interesting” might be about to happen. Here I see my focus markets at important short-term technical spots and set up for some stronger directional force than we’ve had of late.

So here we go…

WTI Crude Oil

Well, looking at last week’s post, I said I felt that buyers really needed to defend the 49,50s, and as it turns out they did a pretty nice job . We closed right on that number and basically the mid/VPOC of the January 12 to Friday profile. This is an interesting time frame as it represents the most recent and significant attempt to find an intermediate term bottom:

 

Intermediate Volume Profile

 

We closed right on 49.52 and in very good balance. As a reminder, profile balances mean that, over a given range of prices and time, the market has found motivated buyers and sellers at low and high prices, respectively, as well as a region “fair” prices in the middle. In a word, the the WTI market has reached an equilibrium,  seen from the point of view above.

Now that we’ve reached an equilibrium and defined a range of fair prices (aka a value area), what’s next? Well, without a doubt this is really an even more critical technical juncture than we were at last week. Previous weeks had buyers were snapping up the contracts left and right. This week, while it’s clear buyers were active and motivated, their thirst seemed to be pretty well slaked at all but the lowest prices available. Just check out the tails hanging off the bottom of the candles on the above daily chart.

That said, the inventory reports show we’re still building stores, generally, and of course producers continue selling into this market every day because they have to. Shale producers can’t really just shut off their currently producing wells by turning a valve, nor would it make economic sense to do so for many of them, so says the EIA analysis. Anyway, this week was a great example of this steady selling pressure. In the chart below both sides asserted themselves at times, but there was a clear down-sloping axis around which the action rotated:

Weekly Trend Axis

So where does that leave us? Well, if we look at some of the other parts of the domestic energy complex such as natural gas and RBOB prices we can see that they are also contemplating bottoms with the RBOB contract starting to go parabolic. Keep in mind that we’re also coming into the North American driving season so, you know, seasonality is a factor there.

Today, Sunday, we’re at a key technical juncture. We closed on at the most accepted price of WTI since mid January. The last swing has been lower. There’s really little room for doubt in my mind that bulls have to keep the buying lust going for higher prices. While it’s true they are seeing value here, it’s also very true that we have way more then enough waxy shale grease to go ’round. Short of some supply disruptions or calculated short-lived short squeezes, I see the most plausible tenor for the week as a gradual drift to test the upper 40s range:

CL2

Significant nearly support areas I am watching include the 48.50s, 47.80s, 46, and the 45.20s. Above we have 50, 51.20s, 52.40s and 54.20s. As with this last week anywhere above 53 is a potential squeeze zone.

 

S & P 500

Meanwhile this week was, at times, excruciatingly slow in the SPOOs. While sellers really didn’t show up in force buyers showed no real motivation to push the index higher. In fact, for a couple of days while the overall index drifted higher there was selling under the covers, as evidenced by the percentage of SPX names above their respective 50DMAs:

sc

Essentially this some selling under the covers index was taking place or some names were correcting with time and may find support. Not exactly uber-bullish picture. We closed essentially right on last week’s SPY option maximum pain number of 210, which also corresponds to a big LVA/bottom of balance area in the ES:

ES

At this point I don’t think there’s a reason to be bearish, from a technical perspective. Be ready for weakness? Sure. But that’s not the same as bearishness in my view. It’s the beginning of a new month which has the potential to bring more selling but also a the potential for an influx of new money to enter the market and push to new highs. Don’t forget the ECB begins their QE program next week.

If buyers fail to buy this dip, they may provide support in the next area of balance below at 2100 down to about 2082. If sellers manage push through there’s a big ‘ol pocket of air between 2082 and about 2068 as well as an open gap at 2066. Large caps would probably be seen as a much better value down there.

Anyway, my view is that it’s all on the buyers now. Failing to support assertively around 2095-2100 means I’ll be watching 2089 for signs continued weakness or merely tepid buying. The air pocket then begs for added attention. Above the 2100 area we have 2107, 2111 and 2117 areas as known resistance.

Even though the market is not expecting much volatility with the VIX closing a little above 13, for some reason I’m optimistic that we’ll see a more exciting week. Assertive bears and bulls, if they show up, aren’t going to telegraph a plan at this stage.

But we’ll get what we get, as always. Trade ’em well this week, amigos…