Para el Escenario Número Dos , Marque Ocho

[Translation: for scenario number 2, press 8. Ah the irony.]

We had one hell of a week in equities, didn’t we? Going into it (for me) was a lot like calling the 800 number for the utility company, impatiently trying to wade through the phone tree options to get to the one I want.  As it turned out I had to back all the way out to the top level, stabbing and swearing at the 10-key menu, to get to the trading scenario that ultimately worked.

Last week I felt like the time was more ripe for a significant correction than it’d been some time. But no. It wasn’t to be. That really leaves only two explanations: my thinking was early; or my thinking was wrong. I feel confident enough that I didn’t somehow misread the technical tea leaves.  The charts were pretty clear. But guess what? Buyers wanted to buy despite all the lines and letters I drew on my charts. ;-} I mean, check out the circled region. Sure looked weak at the time, like a slinky about to walk down another step:

ES-Daily1

If you hang out in the Twitter #twitpit you may know that I was actually pretty short the indexes for the first part of the week based on my thesis. But by Wednesday mid day it became pretty clear that the morning’s dip buyers were serious and I unwound the remainder of that position while the unwinding was good.

I could go on and on and on about how as a trader it’s paramount to stay flexible, but I won’t do that. I’ve done it before. Instead I’ll just say that’s why I make 2 plans. I prepare for both success and failure, because when I do that I can easily flip failure back to success.

Anyway, let’s get on with the show…

West Texas Intermediate Crude Oil

That all-important weekly historical chart I posted a while back? Wow, you couldn’t have asked for a better performance. Here it is, exactly the same line and arrow as a few weeks back:

www.tradingview

On the weekly time frame it looks like we’ve had a pretty spectacular and predictable bounce. Zooming in a little close and we see that this week in particular was all about consolidation following an equally spectacular 5 straight weeks of vertical development:

CL
… with the POCs and overall balance remaining stable in the mid 57-58 region. The stable consolidation is even more evident on the daily chart:

CL-VP

… with a clean test of both the mid and top of the regression channel I have from early March. And from a classic TA perspective, this week looks a whole lot like a bull flag in the making, doesn’t it? So for the week ahead my scenario numero uno is for a test of the next balance area above the 58.60s up. The 60 handle is the first natural upside objective as it’s a round number and also because it’s smack in the center of the balance area formed when the bear flag/consolidation zone was created there in December (all prices are relative to the June contract, by the way):

CL-VP2

If this consolidation craps out and rips recent longs a new one below the 55.40s, my scenario numero dos expects to find pretty significant support at the 53-52 region. I mean check out the hot, steamy kurtosis action on the right side composite above. If that’s not profile porn, I don’t know what is. ;-} Anyway, at this stage in the oil saga I’m thinking only force majeure will take us below that 52 handle.

S & P 500 + Goooooooooold!

Oh yeah cowpokes, we’re going to be talking about the SPOOs and the shiny yellow stuff at the same time. Why? Well because gold is a pretty good sentiment indicator. In times of fear, the price goes up. In times of confidence (complacency?), the price tends to go down. Of course, we also know that the gold price “floats” on the price of the currency in which it’s denominated as well. But at this juncture in the equities market I’d rather look at what the price of gold is doing overall, globally, as opposed to how the value of specific currency is affecting it. So let’s start there. In my ideal world, the price of gold and the price of equities should move inversely. I’m not saying I expect them to move in lock step, I’m only saying that in times of market development (such as now) they should be inverse in their directional movement.

GC

Anyway, just like the SPOOs (below), gold has spent the last few weeks in a consolidation box pattern (above):

ES-Weekly

 

… and while the SPOOs have finally (!!!) broken to the upside at the same time gold looks to be starting some downward vertical development. This is exactly the kind of thing I’d like to see for a credible equities rally.

So for gold this week I’m leaning toward a test of the 1155-60 zone, though at this point I’m not really expecting anything lower regardless of what happens in equities. Should that downward development fail to materialize most likely something unexpected and potentially destabilizing has happened in the world macro balance. In that case we could even see a return to the previous zone of the failed auction in the 1215-25 zone. Which brings us back to the SPOOs…

The range breakout this week was a long time coming, of course, and it left a new but significant feature in the 2105 area on both the time (above) and volume (below) charts. This should be considered something of a very short term, intraday line in the sand. Taking a step back, though, it’s very common for the SPOOs to give as much as half of the recent range back before climbing higher.  So I’m pondering 2 scenarios for this week. The first is a slow grind higher, a la your typical week in late July. I think early in the week, Monday especially, chances are very good for some additional upside. Mondays are QE day in the EU which means hot money is spewing forth, and also in the states Mondays are a very common day for long-only mutual funds to average in their buys near the RTH VWAP line.

Beyond Monday I am going to be on the lookout for a punch down the the 2100 area, and I think we could easily see the 95-85 area and still be in rally mode. A quick failure about 05 and a push down to the 85-95 area would likely get enough traders bearish to be caught off guard and provide some buy stop grease for subsequent rally to even higher highs:

ES-Daily

So for this week I’ll be favoring upside scenarios until I see evidence otherwise. The best long trades will likely come at the pullback levels mentioned above. I’m not of the opinion that, at least on a swing timeframe, this move higher is not something I want to chase. But that said, I think the realistic upside targets are around 2125-2130ish, and for the mega bull scenario I can even plausibly see up to the 2145-50 area. Again, this breakout is still very wet behind the ears, naive and vulnerable, so it’s not wise to chase it. Let it prove itself first. Shorting breakdowns of the areas mentioned above and getting long the pullbacks (also highlighted) is the way to play this week in my view. And that’s what I’ll be doing.

Trade ’em well this week, amigos…

 

 

I’m Pretty Tired… I Think I’ll Go Home Now

It’s no secret that’s I’ve been feeling disturbances in the force for some time now. If you look back through my weekly posts (or watch my Twitter feed) you already know I’ve been very skeptical of them moves the markets have been making lately, particularly since the first of the year. Well, amigos, I could very well be wrong (of course) but I think the chickens are coming home to roost. Finally.

To put it simply, it looks and feels to me as if this market is just plain out of gas for the time being and needs a well-deserved correction to revive the will to run any further distance. Said another way, in the immortal words of Forrest Gump when he was at the sudden end of his cross-country run for no particular reason, “I’m pretty tired. I think I’ll go home now.”

S & P 500

Last week I likened the price action of the SPOOs to a Slinky walking its way down the stairs and I was looking to see whether we’d take another step down or spring up on to a new level. As it turned out the Slinky metaphor was right on the money. We rolled over and took a big ‘ol step down just as it looked like we were set to take a step, albeit a tentative one, higher. All 3 of the senior indexes utterly failed to hold the top of their recent trend lines:

spy qqq dia

What’s more, I think the divergence between the SPY and DIA versus the QQQ is the most telling (and damning?). If you look closely, you’ll see that the big caps were actually doing a better job at testing highs than the QQQ. Which is exactly the opposite of what I’d expect from a market with prices being driven higher by future growth and earnings prospects. Here’s a closer look:

ESvsNQ

Note the difference between the channel slopes between the ES and NQ. Again, this is exactly the opposite of what I’d expect to see. When the most significant appetite for risk assets this close to all time highs is in the US large caps – which of course have relatively stable prices and, most significantly, dividends – something is just not right. I’m not even going to go into the reasons why I think this might be. I have theories, but the evidence is right in front of us, and so in a pretty significant way none of that really matters now. With that said, let’s peel back the covers and see what there is to see:

 

spx50r

compq50r

indu50r

One of my favorite at-a-glance ways to gauge the health of any of the indexes is to look at the percentage of stocks above their 50-day MAs against the price of the index. In each of the indexes, in the large caps especially, we see large divergences appearing. This means one thing – weak breadth. The large cap indexes are looking mostly OK on the surface because they are being propped up by just a few names. Compare the recent prices to the percentages and you’ll see what I mean. The SPX at 2081 with the percentage at 44? The last few weeks the index price has been much lower with similar or higher percentage. To me this means we may no longer be at just an inflection point. We may finally see some significant selling take place. A market held up by just a few names is not exactly the picture of health.

A few more items worth highlighting:

VIX

While it’s true the VIX isn’t expecting much volatility, in some ways I think the VIX is a broken indicator. At times when large money is planning to do the selling they won’t be buying protection for long positions. Why would they? It’s insurance they don’t need and it sends up a huge red flare that something is about to happen. Which, of course, is counterproductive for them.

inverseETF

Next, inverse ETF volume spiked in a huge way on Friday. This means one thing – traders of many sizes are looking to position themselves for a drop.

sp500COT

Once again, combined large money positions in both the SPOOs e-mini and big contract remains net short and has been some for some time. The short positions reached a peak a while  ago and my interpretation of this – given the other clues I see – is that the short positions are no longer hedges but now may be (at least in part) directional bets.

oexpc

Finally methinks it’s worth calling out a decades-long extreme in bearish bets on the largest of the US large caps going into this week. The P/C ratio against the S&P 100 is about 2:25 to 1. This is monstrous, relatively speaking, and hasn’t been this high in a decade and a half. If this isn’t a zero-confidence vote, not sure what is.

Anyway, as I’ve said many times before I make a plan for both directions, favor one direction, and determine what criteria I’ll use to execute that plan for one direction. Or the other if I’m wrong. This week it should be pretty clear I’m  looking for some downside. It may come early or late in the week if it comes at all. I’m not saying we’ll wake to a monster gap down on Monday, though that is a possibility.

On the downside the first important area to watch is the area between the Friday low and about 2045. This is an area of extremely weak structure and I expect that to be covered quickly of selling can manage to push through about 2060. Next, we have the extremely obvious area of support (#2 on the chart below) from 2040 to about 2030. If sellers manage to destroy long positions in this region  this region I fully expect a test of the lower value of this zone at around 1985.  If 1985 fails to produce buyers then I have to start looking to the 1950-70 area.

ES1

So there it is folks, a summation of what I’m thinking is possible and plausible in the week (or even weeks) ahead. There are lots of ways in which this could be wrong and maybe we’ll hold or move higher. But my sense is now stronger than it’s been in many moons that we’re about to see a significant intermediate term character change in the equities markets. As I do in times like this, I let it play out and take it one day at a time. But in my experience it pays to always know what the higher time frame is up to, and at this point I think they’re having having a harder time covering their tracks.

West Texas Intermediate

When things look this crazy in equities I may not be making any significant trades in the oil patch. So not covering it this week. But look left on your charts and what’s happening should be pretty obvious.

Trade ’em well this week, amigos…

I Want You to Want… Me

Cowpokes, I think no song better epitomizes the state the US equities market is in as we enter mid April 2015. Here they are, Cheap Trick, live from the Budokan in Tokyo… listen as you read. The opening is the best and pretty much what the SPOOs are saying to you, right now, today, in full-on 70s rock and roll fashion.

S & P 500

Once again, as we have several times in the last few months, we find ourselves at the intersection of Breakout Avenue and Heartbreak Street. We’ve been in the regression channel I’ve posted several times on Twitter recently since December. The SPOOs have tried to breakdown several times and failed. It tried to break out several times and failed also. Now we’ve consolidated our way almost to the bottom of the larger channel,  hit the bottom of the most recent down channel, poked above the top of it on Friday:

ES-Daily

See what I mean? So where do we go now, sweet child o mine? Sorry, couldn’t resist that one.

If I had to guess, based on looking at just this chart, I’d say a test upward is due. I mentioned several times on my daily Twitter homework charts that if buyers could achieve acceptance in the 90s that we’d likely test the ATHs. And I’m sticking to that story.  The chart above shows lots of assertive buying interest in the 30s to 60s the last few weeks. To me, this is clearly OTF activity, and above where we are is where their payday awaits. What’s more, when you zoom out to the weekly, there’s just no denying the massive force of the bull market we’re still clearly in. I mean, look at this thing. It’s a monster:

ES-Weekly

There’s a couple ways that bull trends generally take a larger pause (or end). The first is a “blow off top,” marked by frenzied buying and parabolic candles. In auction theory terms, this is known as excess. Look at the chart above, nothing like that yet. The other way is when, to but it plainly, there’s just no one left to buy. Everyone likes the market (or specific stock), but everyone who wants to own it at a given point in time already does. This kind of thing has happened several times with AAPL over the last few years, for example. A part of me thinks this is kind of the place were in now with US large caps. We’ve had about a dozen attempts in the ES at holding the 2100 zone and each time it failed. Not with a big bloody sell off, but with a push back down to recent value. Each time we bounce up we bounce a little less high, kind of lke a slinky walking down stairs. Look at the daily chart above again and tell me you don’t see what I mean.

So as of Friday we’re in just the right place to test the “Slinky” metaphor, aren’t we? If there’s no one left to buy (for a couple of very practical reasons I won’t bore you with here), then we should see some longs ready to take some profits and the Slinky will start rolling over toward the next step down.

So which is it? Breakup or breakdown? Well, this time it’s complicated. Let me show you a couple things, and you’ll (hopefully) see what I mean. First, not that it’s the be-all-end-all, but SentimenTrader has some pretty good charts which can help with sentiment (duh) and seasonality in particular. So according this this measure, we’re now in extreme territory just like we were a few weeks ago with the so-called “smart money” and “dumb money” viciously at odds over the market direction:

chart (1)

This chart says big players have little interest and are expecting and/or positioning for the market to take a dive while at the same time small players are excessively bullish in outlook. Honestly, I really never pay too much attention to sentiment indicators and measures except when we’re at intermediate term inflection points, like we are now.

The next thing I want to call to your attention, gentle readers, is this week of April 7 Commitment of Trader’s report. Bottom line is that in this report every category of trader which is required to report is net short in the ES now, some by a huge margin, and only one category required to report is net long in the big SPOOs contract. The report is linked there, have a look-see for yourself.

Now if you don’t know already, it’s important to point out that there’s just no way to know why any class of trader is net short or long from the COT. All we know is they are positioned one way or the other on a  net basis. Keep in mind that all futures contracts are both positioning and hedging instruments. So for example, if I run a hedge (or whatever) fund and I have big long equity exposure and I’m not feeling confident about the market’s direction I can hedge off some my market risk by shorting the ES. That way if the market goes down my losses are at least somewhat muted by the gains from my short contracts. The other possible reason to be net short is that you are confident that the market is going down and you want to make a levered directional bet. We don’t know why there’s all this net short exposure now, and that’s the reality. But it’s there for sure.

OK, so let’s get back to the upcoming week. Here’s the thing I am watching like a hawk now. I call it the come-to-Jesus line, and I think it will help us know whether this up-move is for real or just a… wait for it… Cheap Trick:

ES-Range

Basically, I want to see how the ES reacts to this trend top – or whether it fails to get there at all – before I make any big directional bets. Let’s be honest, it’s not like the journey even to the 2090s was smooth and stable, leaving solid structure underneath as a base:

ES-RTH

There are some significant flaws in this move up in my view, and Friday left a pitifully weak and ugly P-shaped (imbalanced selling) profile. So lets see what Monday brings. Speaking of Monday, know that I’m taking this one day at a time now. Given the current location, I think it’s silly to look out any further, so I’m calling the bull/bear zone for Monday around 2091, and watching the 96, 2100, 03 and 05 levels like a hawk to see how we react.

ES2

If sellers are found, we have all kinds of targets from the 90s down to about 2047. Let’s shake this tree and see who falls out, I say. ;-}

West Texas Intermediate Crude

If you’ve been trading this contract the last several weeks then you know this monthly chart is the only one you need to pay attention to for anything other than intraday prices:

www.tradingview

 

Contact with this trend line will either act at a floor for a rally (looking that way at the moment) or if it’s broken it sure seems we’ll head for the depth below with force. Round and round she goes, and where she stops nobody knows…

Trade ’em well this week, amigos…