Matt Trivisonno’s Blog

If the market falls on light volume to the S&P’s lower uptrend line in the 1250 area ($125 for SPY) tomorrow, then that will be a good long-side entry point.

If the volume is heavy, then it will be best to wait for a reversal pattern to appear since the market will be unlikely to just snap right back. Even so, there will be buyers on a high-volume decline.

Jim Cramer has ordered his followers to ignore the jobs report if it is bad and buy the dip. Cramer’s followers are not just people watching TV, but there are actually quite a lot of hedge funds that take direction from his rantings. They will buy.

Also, Jason Goepfert at sentimentrader.com has done statistical studies showing that out-sized gains and losses from big events like the jobs report and FOMC meetings are usually reversed within a few days, and then the market gets back to what it was doing before the event.

The market burned off a good deal of its short-term overbought condition before the close Thursday. So, a large gap down Friday morning will get us to oversold country in a hurry.

If the market holds at the lower trendline and then bounces with increased volume, then that will indicate strong support. That’s what happened after the gap down Thursday morning. The market could not push to new highs because it was overbought, though it did hold up almost the entire day. A big gap down Friday morning will establish a more oversold condition, and any bounce is likely to stick better.

Other ways to play:

1) Wait for a high-volume breakout above Thursday’s high and jump on.

2) Let the breakout run, and then buy in when the market comes back down to test the breakout to see if the resistance has become support.

3) Same as above but in reverse if there is a heavy-volume breakdown below the lower uptrend line.

Watch the comments for updates during the day.

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SPY’s ascending-triangle pattern is still intact after today’s low-volume selling. A low volume trip down to the uptrend line (black) will be a very attractive long-side entry point. Click the chart to enlarge:

SPY also held above Wednesday’s low. So, while today was disappointing for too-eager bulls, the market didn’t do anything wrong technically.

If SPY falls on heavy volume, then the triangle will likely break down into a less bullish rectangle pattern, and require a scary test of the July 15th low.

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The unemployment number was another nasty surprise as I expected. So now we want to watch the volume as the market falls this morning. Light volume is bullish; heavy volume is bearish.

Watch the comments for updates.

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SPY’s chart, and many other charts, now has an “ascending triangle” pattern (click to enlarge):

If you don’t know what an ascending-triangle is, stop trading until you have read this.

This is a very bullish pattern. My textbook says it resolves upward 90% of the time. After the breakout, SPY could run to $138.

Look at the last five days on the chart. Notice that the volume was lighter and falling on the three down days, and heavier and rising on the up days. That is exactly how it’s supposed to be and is wildly bullish.

You might want to draw your lines slightly different than mine, but I drew the top line (blue) at a nice round number of $129. This is where the shorts have taken their stand. The up-sloping lower line (black) shows that the longs are gaining ground.

Scenarios:
1) Something, such as the unemployment-claims number or the jobs report, causes the market to fall. If the volume is light, and prices hold at or above the black line, then you have a screaming buy signal.

2) If prices push below the black line, then the pattern degrades into a less bullish rectangle.

3) If prices shoot above the blue line, a correction back down to the blue line on low volume is a good place to buy.

4) If your an insane swashbuckler, you might try shorting the next approach up to the blue line. The market is likely to fall back and coil the spring before bursting through, however you won’t catch me trying this short play.

Should the market be rallying while the global economy grinds to a halt? NO!

But will the market rally as the global economy grinds to a halt? It sure looks like it!

Does this make sense? NO!

This is the market we are talking about! It has its own logic!

What kind of crazy, insane logic is that?

Bear market rallies are where the market lures in the bulls and slaughters them.

This triangle will likely produce a fantastic bear-market rally that we can make a fortune shorting a few weeks from now.

Even if the jobs data continues to be bad as I expect, many traders will dismiss it as a trailing indicator. Unemployment is indeed a trailing indicator, however I don’t think we are anywhere near the end of the trail. As the job losses mount in coming weeks, that is very likely the trigger that puts an end to this bear-market rally as the bulls slowly emerge from their delusions.

Note: I’m guessing that the market corrects down to the black line this week. Jim Cramer wrote an article titled “Embrace the Bullish Sea Change” Wednesday after the close, so that will probably mark the crest of this wave.

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The 50% Dilution Rally
Even Republican perm-bull, Dennis Kneale was baffled by Tuesday’s rally. On Kudlow, he expressed confusion as to why stocks would rally on Merrill Lynch’s disastrous news. MER shareholders were diluted by an astounding 50% by the new stock MER dumped on the market. And this came just a few days after CEO John Thain said everything was cool. Perhaps this can be called “The Last Lie Rally” as the market celebrates the very last lie from the bankers.

The Last Write-Down?
But have the bankers really told their last lie? Jim Cramer says that the market rallied because we finally got a clearing price for all the junk mortgage paper on bank balance sheets: 15-20 cents on the dollar. Banking analyst Meredith Whitney also praised MER for marking to market. But is this true? If you read any of the stories on this deal, you probably noticed a lot of weird details such as MER loaning 75% of the cost of the paper to the buyer. Bizarre, right? Economist Nouriel Roubini says that we don’t have a clearing price after all because this deal wasn’t a real market-based sale, and I agree. Merrill paid somebody to take the paper off of their books. So it was more BS from the bankers.

Bankers are Allowed to Lie
On Fast Money, there was disgust over how the government is cracking down on short sellers, but bankers like John Thain are allowed to lie like rugs. While true, this misses the point. Short sellers must be silenced precisely because they are telling the truth. The only way to get Larry Kudlow’s “Summer Rally” going and save the Republican party in November is by having an army of John Thains out there dispensing a tidal wave of BS.

Will it Work?
You can see why the stock market has a history of not faltering during an election year. Every time you turn around, Paulson and crew are hatching a new crazy scheme. As Todd Harrison says, they have a mandate to get stock prices up. But will it work? I don’t think so. While they can reduce shorting activity, in the end, they can’t make you buy stock. And even though the BLS has been creating hundreds of thousands of phantom jobs with their birth/death “adjustments”, enough of the jobs truth is getting out to keep traders from clicking the buy button. And amazingly enough, during the banking panic on July 15th, Bernanke didn’t even deliver a token quarter-point rate cut. So, it doesn’t look as if the entire federal bureaucracy is successfully being marshaled to enforce this mandate.

Just Another Month-End Rally
So, if John Thain is not our savior, then why did the market rally? I think it can be easily explained as typical month-end window-dressing action. The market closed on Monday leaning short, and the light volume made it easy for the mark-up elves to get a short squeeze going. The elves should pull back and bid underneath Wednesday and Thursday, so while the market is overbought, it may be able to levitate until the end of the month just like at the end of June. Lucky for the elves, their work will be done before the jobs report hits on Friday, though they may have to burn through some extra capital if we get another bad unemployment claims number on Thursday.

What is Getting Marked-Up?
Have momentum funds piled into financials? Will they keep them up until the end of the month? I haven’t studied this closely, so if you have ideas, please post in the comments. What I did notice is that the XLE was the only sector to finish in the red on Tuesday. Of course, the big funds began dumping their energy stocks on July 1st, so nobody’s trying to mark them up now, and they should continue to be weak. And while KOL and POT finished in the green, they were down in the morning, and floated up on low volume in the afternoon. This reluctant participation in the big rally indicates to me that nobody is trying to mark up coal or ag stocks either.

What is the Pattern?
You can make a case that SPY and QQQQ are developing ascending-triangle patterns. You could draw the top line of SPY’s triangle at $129, and that of the Q’s at $46. Both will need to fight up to their top lines soon or face being downgraded to symmetrical triangles. I think the jobs data could easily trigger that downgrade. Also, it’s important to look at the patterns of leading stocks. As Paul pointed out yesterday, Google has a classic bear-pennant pattern on its daily chart. If this pattern continues to play out in textbook fashion, Google could drop another 70 points. Not good for the Q’s or SPY.

Jubilation in the Bull Camp
There was quite a lot of celebrating in the bull camp Tuesday, and that is rarely a sign of a lasting rally. Lasting rallies are met by skepticism, because skeptical traders have not yet bought in. Celebrating bulls have abandoned skepticism and bought in, indicating that everybody who is likely to buy at this level have already done so.

Global Crunch
Starbucks is closing most of its stores in Australia. Wasn’t Australia supposed to be a strong resource-based economy with huge exports to Asia? And now the Ausies can’t afford coffee any better than Americans? What is going on there? This can’t be good for S&P 500 earnings which have benefited from the global economy and weak dollar.

Tuesday’s Outlook
I actually had “MONTH-END MARK-UP” penciled onto my calender for Tuesday, so I feel stupid for putting my short positions on too early. However, I don’t think SPY, XLE, KOL, or POT are going to run away from me, so I will just have to put up with any mark-up action on Wednesday and Thursday. When June’s mark-up action ended, the market opened on huge gap down July 1st. It did rally back, but then rolled over and took out the March low. So, perhaps we will see another post-mark-up plunge, even if the jobs numbers don’t throw cold water on the rally.

Watch the comments as I will be posting updates during the day Wednesday.

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I’m thinking that today should be like Friday: a narrow-range day that consolidates yesterday’s decline.

Watch the comments section for updates.

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With the market down so much over the last three trading days, you might think that there is nothing left to short. Not so.

KOL - today I bought some KOL puts. KOL has floated back up to the top of its downtrend channel on light volume. I made money shorting it the last two times it did that. (Here is my first post on KOL.)

GLD - tomorrow I will be looking to buy some GLD puts. GLD has a classic bear-flag pattern on its chart: A high-volume plunge on Tuesday and Wednesday of last week, and a low-volume float-up Thursday, Friday, and Monday. It may not be able to get through the resistance at $92. Or if it does, it may be able to float up to its new downtrend line, which you can see by drawing a line from the peaks on July 15th and July 22nd. As long as the volume stays light, I will be looking to short it.

POT - Potash is a great company, but that isn’t preventing Apple from getting a beating, right? So, POT is a short too. It spiked down on heavy volume on Thursday, and floated up on light volume Friday and Monday. Another classic bear-flag.

Note: I didn’t have time to make charts, but the patterns are very easy to spot as long as you are studied-up on your technical chart analysis.

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The market is overbought on the daily chart, and oversold on the hourly chart, so perhaps some low-volume sideways-to-upward consolidation action is in order before the next leg down. I think any move upward is a shorting opportunity.

Does somebody know if the BLS’s birth/death calculation is used for the unemployment rate? Gerard? Crash? I’m thinking that maybe the unemployment rate may carry more weight with the market than the actual number of jobs which is now a widely ridiculed statistic.

Watch the comments as I will be posting updates throughout the day.

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Some traders dismiss Thursday’s big move down because the volume was low. Normally, that would be a good argument because the low volume would indicate that large funds were not dumping shares. But this time, I think the low-volume must be viewed as a negative.

The big funds didn’t have to dump stock on Thursday after the nasty unemployment-claims report because they had not bought into the rally off of the July 15th low. That rally was all short-covering. So on Thursday, bids were simply pulled and stocks went into free-fall - the air-pocket.

Air-pockets often appear as rallies lose steam, and are a warning sign that the big dogs are not interested in taking stock at the current level; that there is no bid under the market.

Some traders also dismiss last week’s action as mere sideways movement as the S&P 500 was barely changed. That is simply crazy.

After a three-day struggle, the March low was recaptured on Tuesday. On Wednesday morning, SPY registered an “exhaustion gap”. On Thursday, the market hit the air pocket and plunged right back through the March low. On Friday, the market could not re-capture the March low, even with an assist from falling oil.

That was not uneventful, inconsequential trading. Hopes were raised high, bulls were sucked into the trap, and then slaughtered.

SPY has now closed below the March intra-day low at $126 for two days in a row. One more day of that and the market will likely roll over again just as it did on July 14th, the last attempt to recapture the March low.

War is being waged over the March low because that is the line-in-the-sand between a banking crisis, and a banking crisis plus a main-street recession.

The rally that was birthed on March 17th was received as proof that the Fed had saved the financial system, and the all-clear had been sounded.

The loss of the March low in July, and the quick recapture, seemed to prove that it was the same old financial crises that our government had once again fixed. Many traders still don’t believe the economy is in trouble because of all the cooked economic data like the GDP numbers (which are not properly deflated.)

Thursday’s unemployment-claims number had nothing to do with the financial crisis. It came straight from Main Street. And it sent the market back under the psychologically crucial March low.

So, far from being inconsequential, last week’s trading may have seen the market’s final acceptance that there really is a serious recession going on underneath the tidal wave of election-year propaganda trying to mask the facts.

The market’s frantic reaction to Thursday morning’s unemployment claims number shows that the market may only be beginning to price in the Main Street recession.

I am 98% in cash now, and 2% short the SPX, but I will be looking to increase my short positions soon.

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You probably heard about Chrysler no longer offering auto leases. However, the story goes much deeper. Chrysler had no choice to stop the leasing because the banks that loan them the money pulled the plug.

(This is the Wall Street Journal’s story, so that’s were you want to read up about it.)

As the value of gas-guzzlers plunge, the banks are worried about how well the leases will hold their value. So, they are reluctant to make auto leases for the same reason they are reluctant to make mortgages: deflation.

July 2008 may be the beginning of the shift from inflation to deflation as the intensifying credit contraction tightens its death grip upon the economy. The prices of just about everything are falling now: real estate, SUV’s, natural gas (UNG), oil (USO), commodities (DBC), and of course, stocks.

When credit tightens, the prices of just about everything must fall.

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