Matt 1, Grasso 0

On June 15th, I took the other side of NYSE floor-trader Steve Grasso’s “quarter-end window dressing” call. Grasso said that the mutual funds were levitating the market and would keep it propped-up until the end of the month in order to dress-up Joe Sixpack’s quarterly statement.

Who won? I did. In fact, I crushed Grasso like a bug. Instead of levitating, the SPX plunged nearly 85 points! (click chart to enlarge. (that’s right, I made a chart.)):

How is it possible that some guy who never set foot upon a trading floor (me) could know so much more about the market than one of the “locals” who appears on TV as an expert? Well, I happen to track mutual-fund money flows on, and during June, the mutual funds themselves were reporting massive redemptions. They didn’t have any money to prop up the market.

Look at the “Domestic” line on the latest report from the mutual-fund industry organization, the ICI. Joe Sixpack pulled money out of his mutual fund during every week of May and June. That was the largest wave of redemptions since the TARP crash in September/October 2008.

SPY Gap – 06/29/2010

Yesterday, I wrote: “a triangle appearing at the end of a sharp trend always stands an excellent chance of turning out to be a bear flag.” And so it did. Here is an update of yesterday’s SPY chart (click to enlarge):

The flag (as I have it drawn) only made a 61.8% extension, and any extension short of 100% is often an indication of very strong support. However, there is no law saying that the pattern has to complete in one day. So, we have to be cognizant of the fact that a 100% extension down to $101.54 may still be in the cards. And that level coincides with the next major Fibonacci level (38.2%) on the weekly SPX chart. See the red line at 1014:

Now, look back up on the first chart and notice the big spike of volume that attended Tuesday’s open. When a gap is accompanied with that kind of volume, it is serious business. A throwback attempt to fill the gap would likely come up short. In such an event, be alert for the throwback to peak at the bottom of the gap – at $106.07.

Possible bullish factors:
QQQQ, IWM, XLF, DIA, XME, and SMH did not make new lows as SPY did. So that’s a bunch of non-confirmations.

SPY’s slow-stochastic is beaten down on every time-frame all the way up to the weekly chart, and that increases the odds of getting some price mean-reversion back upward.

Scarface had it Right
$378.4 billion in drug money from Mexican accounts sailed through Wachovia without any alarm bells going off. Now, if funds equivalent to one-third of an entire nation’s GDP were going through my bank, I’m pretty sure that I would notice.

SPY Triangle

In the last episode, I said that SPY’s “pattern should be considered a neutral symmetrical triangle.” And on Monday, SPY tightened its range and moved further into the apex of the triangle. Here is a 5-minute chart of the last three days (click to enlarge):

SPY fell below my lower line at the close, but bounced back up into the triangle after hours. The death of Democratic Senator Robert Bird appears to have cast doubt upon the FinReg bill’s fate in the Senate, and is the likely cause for the market curling up into the fetal position.

Of course, a triangle appearing at the end of a sharp trend always stands an excellent chance of turning out to be a bear flag. And if that is the case now, then a mere 50% extension of the flag will be enough to test the bottom of the range:

I start my Fib extension up at the top of last Monday’s exhaustion gap, and put the 0% level at the apex of the triangle (blue arrow).

Watch Fast Money
CNBC has a “half time report” version of their “Fast Money” show on at 12:30pm. At the end, at 1:00pm, the traders call the close. On Monday, they all said “sell”. Here is a one-minute SPY chart:

The market immediately plunged. So, if day-trading CNBC-watchers are now looking to Fast Money for direction, you may want to de-mute at 12:57pm each day.

Also on CNBC
Nouriel Roubini said that he was not in the double-dip camp on CNBC’s “The Kudlow Report” Monday night. And on “Fast Money”, (at 2:15 into this video) Dennis Gartman said that he thought gold might go parabolic. But you heard it hear first on November 17th.

SPY Ready to Rally?

In the previous SPY chart, I pointed out a potential falling-wedge reversal pattern. And while it wasn’t terribly impressive, the wedge did indeed pop SPY out of its downtrend channel. Here is a 15-minute chart of last week’s trading (click to enlarge):

The IWM popped out of its channel also, and its chart looks more impressive than SPY’s. However, the QQQQ is still trapped within its channel, so that is an important non-confirmation. Blame Steve Jobs and that new “phoneless phone” of his which dragged Apple down, and the Q’s along with it (though the Q’s did manage to close above their 200-day moving average).

The XLF celebrated the watered-down FinReg bill by running up an impressive bull-flag pattern on its intra-day chart. Can the XLF lead the market higher? Perhaps, though on Friday it looked like we had rotation out of tech and into financials, which doesn’t strike me as terribly bullish. Also, NYSE breadth ran up to near the top of its range at +1,430, and all the bulls had to show for it was a lousy 3 points. That’s not encouraging.

However, it is possible that traders will be taken by surprise by Bloomberg’s survey of economists which showed that the consensus estimate is for +113,000 private-sector jobs in Friday’s big jobs report. Everybody “just knows” that the economy has gone off of a cliff, right? But in reality, companies are hiring at a brisk rate. For example, this Wall Street Journal story reports that Red Hat (Linux) of Raleigh, N.C., is expanding its workforce by 25% from 3,200 to 4,000 geeks. One day, IBM will buy Red Hat and send all of those jobs to India, but until then small tech companies like Red Hat appear to be doing land-office business and are staffing up.

As I write this Sunday night, the futures are green and trading sedately, so their body language is bullish. Of course, things can go haywire when Europe opens in a few hours, but let’s think about what a bullish Monday might look like for SPY. This 5-minute chart of the last two days shows that SPY tried to print in inverse head-and-shoulders reversal pattern:

However, Friday afternoon’s rally wasn’t strong enough (red arrow) to reach up to the level of Tuesday’s high (red “X”). So, SPY was not able to print a horizontal neckline, and the pattern should be considered a neutral symmetrical triangle.

With a bullish resolution, SPY might be able to rally $1.50 based upon a 100% Fibonacci extension:

From the 100% Fibonacci level, I have drawn a blue line to the left, and it lands right on the top of SPY’s down-gap from Thursday. So, that seems like a reasonable target. The IWM completely filled its Thursday gap already, and that’s an indication that SPY may be able to follow suit.

Let’s take a look at the Fractal Dimension Index on the daily chart:

The green arrow at the right of the chart points to and “End of Range” signal. The last such signal (purple arrows) appeared on May 5th, the day before the Flash Crash, and SPY broke out of its range rather emphatically. Not a bad signal, huh? So, SPY is poised to make a big move, though the FDI can go higher before SPY breaks out. Perhaps we won’t get the breakout until Friday’s jobs report. And don’t forget that the FDI does not predict the direction of the breakout, only that it is likely coming soon.

Other bullish factors are that all of the top ETF’s made, and held, 9/36/15 cross-ups on Friday, and the TRIN is in a bullish condition. This chart shows the QQQQ in the bottom panel, and a three-day moving average of the NASDAQ TRIN (TRINQ) in the upper panel:

If the moving average has indeed peaked (blue arrows) and turned down, then it may be signaling that a swing-low has been printed like it did last time on June 8th (purple arrows).

But as long as the Q’s are trapped in last week’s downtrend channel, nothing good can happen. If the Q’s turn out to be leading the way down, then the bottom of SPY’s June 10th gap at 106.02 is a likely target.

So, the Q’s need to break their trend channel before the bulls can run:

Fabricio Flattens Fedor

Fedor Emelianenko‘s strategy of appearing invincible by only fighting washed-up UFC fighters came to a screeching halt last night when washed-up UFC fighter Fabricio Werdum needed only 1:09 to choke out Fedor.

Now we see why Emelianenko has avoided the UFC for his entire career. He prefers to be a big fish in a small pond rather than take his chances in the big show.

On July 3rd, we will see a true clash of titans at UFC 116 when champion Brock Lesnar fights Shane Carwin. Carwin is 12-0 with all of his victories coming in the first round.

How would Fedor fare against fighters of this caliber? We may never know, however perhaps this humiliating loss to Werdum will motivate Fedor to prove himself. Maybe he will now feel the need to fight in the UFC.

Friday’s Trading – 6/25/2010

Here is a 15-minute SPY chart showing the week’s downtrend channel (red lines), and what may be a falling wedge reversal pattern forming (blue lines). Click to enlarge:

Another way for a channel to end is for prices to plunge through the lower boundary-line, and then print a hammer candle. The market is pretty beaten down, so I will be alert for a reversal day.

That’s the good news. The bad news is that SPY’s daily chart has a pattern that is very similar to the Three Black Crows. That’s the pattern that preceded the 1987 crash.

So, if the market plunges, how can you tell if it will print a hammer or just keep right on crashing? One of the ways is to watch the TICK, as JungleGirl mentioned on May 6th. If it drops to absurdly low levels and just stays down there, then you have pretty good evidence that there is a panic going on and bids are being pulled.

Everybody has been predicting a bad earnings season, but will Oracle’s blow-out quarter change their minds? If so, then the market could make a sharp bounce. The McClellan Oscillator has come down from the nose-bleed level that I mentioned on June 16th, and is now in oversold territory. It could continue lower, but it usually makes a zigzag or two as it goes. And since its recent peak, it has just been straight down, so it is due for a bounce, no matter how fleeting it may prove to be.

In summary, the market will either plunge down or shoot up. Or maybe it will coil up into the apex of the falling wedge and break out of it with a gap on Monday. Up, down, or sideways – that about covers the possibilities, right? But seriously, the first hour of trading may set the tone for the day: panic, euphoria, or nail-biting.

Miami Real Estate “Boom”
I got a letter from a real-estate agent saying that a condo here recently sold for a higher price. A couple of years ago it sold for $415,000 and it recently sold for $417,000. I guess that’s a major milestone. Of course, it could be because the Gulf Coast of Florida will soon be covered in “Peak” oil, and the Atlantic side of the state will consequently enjoy a boost in real-estate values.

Another SPY Bear Pennant?

SPY developed an uptrend line on its intra-day chart Wednesday, however it may turn out to be the lower boundary of another bearish pennant pattern. Here is a 15-minute chart of this week’s trading (click to enlarge):

The red line is this week’s down-trend line. The blue lines show the bear pennant (or flag) that appeared on Tuesday morning. The purple lines show the symmetrical triangle that appeared on Wednesday. The triangle itself is a neutral pattern, but when it appears in the context of a strong trend, it implies that the trend will continue. It may end up looking just like the blue triangle.

So, if SPY does in fact break down on Thursday, let’s look at some targets on this 60-minute chart:

I start my Fibonacci extension (red lines) from 111.39, which is the point where the whoosh down began on Tuesday afternoon. A 100% extension takes SPY into its June 10th gap, which is a likely place to look for support. A 78.6% extension and a bounce off of the top of the gap might turn out to be a bullish development, while a 127%+ extension and a complete fill of the gap a bearish development.

There is no guarantee that the market will break lower. SPY could make a false breakdown out of the purple triangle on the first chart, make a double-bottom, and then rally. One of the ways to determine a false breakdown is if the breach of the trend-line occurs with lackluster volume.

QQQQ and IWM have the same lines and patterns. Often, they will lead SPY, so watching them can give you a clue as to what SPY will do.

Now, if you want to be extra-hopeful, you can look at Wednesday’s action like this:

The FOMC announcement at 2:15pm didn’t end up moving the market hardly at all. So, if we just ignore the gratuitous gyrations, the purple triangle goes away and we have a more promising uptrend channel. Of course, as you may have noticed, optimism hasn’t been paying-off lately.

SPY Bear Flag

Here is a 5-minute SPY chart of the last two days showing a bear flag (click to enlarge):

On this 60-minute chart, we see the flag making a 100% completion right at the June 15th gap:

With the flag making a 100% extension right on the gap, this leg down looks complete. It was a very sharp move, and the TICK is in a severely beaten-down condition, so the market is ripe for a retracement. The SPX could certainly continue to drop, but perhaps shorts will want to take profits ahead of Wednesday’s FOMC announcement at 2:15pm.

Michael Pento thinks that the Fed will ease soon by reducing or eliminating the interest that they pay to banks on their reserve balances held at the Fed. Pento doesn’t think that the Fed will announce this on Wednesday, but if they did, it might surprise the market.

The Fed pumped a bunch of money into the banks so that they could pretend to be solvent. But it didn’t want that money to get into the economy and cause inflation, so it gave an incentive to the banks to keep the cash in their reserve accounts by paying interest. Eliminating that interest would be “stimulative” and a large quantity of money might gush into the system. If it isn’t announced on Wednesday, it is definitely something to keep an eye out for.

The “reserve interest” issue is a pet of the gold bugs, who are always, of course, predicting hyper inflation.

Tuesday’s Trading – 6/22/2010

The SPX futures gapped-up and rallied Sunday night. But then at 9:08pm, they went into a nose-dive, plunging from 1127 down to 1116 in only 19 minutes. That was a precursor for what the SPX did Monday morning. The SPX will often repeat the behavior, more-or-less, of the overnight futures action. It will test the same highs and lows, trend with the same momentum, etc. As I write this, the futures are still acting crazy. They just popped 7 points and then flopped 7 points in less than 45 minutes, so I’ll be alert for some more wild moves from the SPX today.

On CNBC Monday, Steve Grasso said that he was still shorting the market. He has also been saying that the mutual funds will prop-up the market until the end of the month. So, why is shorting it?

On “Fast Money” Monday night, they had a guest on who talked about the massive outflows from mutual funds. Maybe they got wind of my “Mutual Fund Monday” criticism and decided that it was time to restore credibility and not shill quite so hard for Fidelity.

Goofy Grasso

Last week I criticized floor-trader Steve Grasso for his theory that mutual funds are taking the market up to paint a smiley face onto Joe Sixpack’s quarterly statement. And Grasso is sticking to his dubious story. On Friday, he said:

“Everyone hates to say the word ‘window dressing’, but it just seems really obvious”.

…at the six-minute mark of this video with the Fidelity logo:

The reason why I’m skeptical of this theory is because the mutual funds have been bleeding from the eyeballs. Look at the latest data from the ICI (click picture to enlarge):

That’s five straight weeks of net redemptions totaling almost $26 billion. Wouldn’t the mutual funds have to do quite a lot of selling to meet these redemptions? Where would they get the huge amounts of cash required to prop up the market?

Not only that, even if they did have the money, why would they start the window-dressing three weeks before the end of the quarter? What happens if a sovereign or bank in Europe defaults and the market plunges? Wouldn’t it be smarter to hold your fire until the end of the month?

The truth is that every hedge fund on the planet probably piled in short during May, and we are now seeing a perfectly normal short-squeeze fueled retracement. Either that or the market has realized that the economy is not collapsing, but only in a soft patch.

The fact that Grasso is sticking to his story likely means that he, and lots of other shorts, are grimly holding onto their positions. And that is bullish because it means that there are more shorts to squeeze. So, perhaps the June rally has another leg up.

It is also important to note that the “window dressing” and “Mutual Fund Monday” memes are only broadcast during the “Fast Money” show, which is sponsored by Fidelity Investments. So, my questions to Melissa Lee are: Are there any Fidelity employees on your writing staff? Are you contractually obligated to say the phrase “Mutual Fund Monday” a certain number of times each week?

Trump vs. Jobs

Recently in Donaldus Magnus I lauded Donald Trump for being one of the few members of the elite to criticize US trade policy with China. Then billionaire Steve Wynn lashed out against Washington in a CNBC interview. Wynn’s comments were more partisan than Trump’s, however now that Nevada’s unemployment rate has exceeded that of Michigan, we can begin to discern a pattern.

Can Trump and Wynn export their condos and casinos to China? No, they cannot. They are trapped, like rats, here in the USA. For their projects to pay off, they require that Americans have jobs.

But you never hear Steve Jobs criticizing trade policy, right? That’s because manufacturing companies like Apple can move plants to foreign lands more easily and are making a fortune off of “labor arbitrage”.

And so a schism amongst the rich and powerful is now visible. Who will prevail? Men like Trump and Wynn who want to develop the USA, or men like Jobs who want to develop China?

Since Americans seem to be docilely accepting European-style double-digit unemployment, and a Democratic regime in Washington has failed to make even small changes to trade policy, it looks like Trump and Wynn will eventually be forced to move more and more of their new developments to China.

Steve Jobs is a Pompous Ass

Gadget fashion designer Steve Jobs has once again lashed out at bloggers:

“I don’t want to see us descend into a nation of bloggers, myself. I think we need editorial more than ever right now.”

Jobs’ attitude is that if Corporate America is not paying you to express your opinion, then you should just shut the hell up.

Note to Jobs: piss off.

Jobs’ anti-internet attitude explains why Apple has been amazingly clueless during the rapid growth of the web. Where was Apple when browsers were invented? What about Linux? What about search engines? What about social networking?

Nowhere; that’s where.

Jobs just watched as huge companies came into being: Netscape, Yahoo, Google, Facebook, YouTube, eBay, PayPal, etc. Mr. Jobs wanted nothing to do with anything that might empower the little people.

It would be a cold day in hell before Jobs assigned his programmers to develop free blogging software like WordPress. But as successful as Apple is, has a higher Alexa rating, ranking 16th to’s 47th at the time of this writing. Any Apple programmer caught working on such a project would be re-assigned to a Foxconn sweatshop in China making iPads at suicidal speed for Chinese minimum wage, which is less than what convicts in the USA get paid to make license plates.

(Note: the preceding may not be a true fact. I do not have a fact-checker on staff, so I am forced to just make things up. Note to Steve Jobs: the preceding commentary was a joke.)

Jobs also stated:

“Any democracy depends upon a free, healthy press.”

Is that so Mr. Jobs? Then why was the Zapruder film locked up in a vault at Life Magazine for 12 years? President Kennedy was assassinated in 1963, and the American people were not permitted to see the film until 1975. How did that help our democracy? When the powers-that-be want to cover something up, Big Media is only too cheerful to help.

Not only is Steve Jobs pompous, but he has it exactly wrong. It’s critical that we have a counterweight to Big Media.

And so, the great man will now “save” The New York Times and The Wall Street Journal by figuring out a way for them to “get paid” for their content. Sort of ironic coming from a man whose iPod became wildly popular because it could play bootleg MP3 music files, is it not? And last I checked, newspapers have been getting paid for centuries.

Note to Steve Jobs: I dare you to disable MP3 capability in your music-playing devices so that artists can get paid more through iTunes. I double-dog dare you!

It’s Time to Conquer Arizona

A month ago, I said that It’s Time to Conquer Mexico, but nobody listened. Now, the Mexicans have seized control of large chunks of Arizona. As a consequence, our next war will be fought on our home turf – the first time since the Civil War (if you don’t count Pearl Harbor).

See what happens when you don’t listen to me?

Pinal County Sheriff Paul Babeu said that squad-sized paramilitary units of Mexicans now control a section of the Buenos Aires National Wildlife Refuge which is now closed to Americans. The closed area is about 50 miles southwest of Tucson.

When was the last time that foreign armed-forces controlled a stretch of US territory? I don’t know off the top of my head, but the British sacking of Washington D.C. in 1814 comes to mind. Among other things, the British burned the “President’s Palace”, as they called it. Later on, the building was painted white to cover up the damage, and that’s how it got the nickname “White House”.

You can’t really blame the Mexicans for invading Arizona. I mean, the land is just there for the taking, right? It’s not like it’s defended in any serious way. But eventually we will have to drive them out, and the longer we wait, the greater the risk of collateral damage to civilians.

Here’s a Fox News story on Arizona:

R2K Non-Confirmation

Yesterday, I posted a chart of the SPX breaking out of its rectangular trading range. However, the small caps have not confirmed the breakout yet (click chart to enlarge):

The May 20th down-gap serves as the upper resistance (red arrow and red box). Today, the IWM was able to fill the lower half of the gap (blue arrow) and exceed the peak from May 28th (purple arrow), but was unable to close the deal.

This is a key test to watch because the rest of the market cannot rally further without the participation of the small caps.

Wednesday’s Trading – 6/16/2010

Grasso Gets Squeezed
On CNBC Monday and Tuesday, floor trader Steve Grasso said that the market is rallying due to quarter-end markup. Since when, may I ask, does the markup begin three weeks before the end of the quarter? And with the money gushing out of mutual funds, where exactly are they getting this alleged cash to take the market up? Answer: it’s all BS; there is no markup going on. The buying is all being done by shorts covering-up, and Grasso sounds like a trapped short.

Note to Grasso: it could be worse. You could be a pelican trying to dive for fish in the Gulf of “Peak” Oil.

Another note to Grasso: one thing you can be certain about in the market is that there is always a retracement.

Super Semis
The economic “canary in the coal mine” semiconductors are chirping a bullish song. The SMH is now above all of its major moving averages on the daily chart: the 20, 50, 100, and 200. It’s next challenge is the 61.8% retracement of the sell-off just above at 28.67.

Nosebleed Breadth
The McClellan Oscillator is now way up in the clouds at +249.74. This is the level where bear-market rallies go to die. But are we in a bear market? Time will tell. If we are still in bull mode, the market will give back a little ground over the next few days, and then blast higher. If you are short, you want to see your positions begin to produce very soon. My TICK indicators are also bleeding from the nose, so I would expect flat-to-down this morning – at least until the TICKs unwind a bit.

How’s that for Accuracy?
Here’s me at 12:57pm on Tuesday:

If the SPX takes out 1105, the next target up on my list is 1115.05.

And where did the SPX close? At 1115.23, only 0.18 points above my target. That that Nostradamus!

SPX Rectangle Pattern

The SPX broke out of a rectangle pattern today. A 100% completion of the pattern would target the May 13th peak at 1173.56 (click chart to enlarge):

The red box is the rectangle, the blue line is the pattern projection, and the blue X shows the target level.

SPY’s volume increased today, but not enough to rule out a false breakout in my opinion.

Tuesday’s Trading – 6/15/2010

Bearish Factors:
1) The market is at an overbought breadth extreme.
2) The IYT printed a gravestone doji candlestick on its daily chart.

Bullish factors:
1) Moody’s downgrade of Greek debt only resulted in the loss of 2 SPX points on the day. That’s a bullish response to bad news for the second day in a row.
2) The IWM refused to fill its morning gap, and refused to make a 9/36/15 cross-down.

If we are still in bear mode, the breadth extreme should produce a wave down soon. If we are in bull mode, the market would tread water while the extreme mean-reverts. The IWM might give us the best clue today. Filling its Monday-morning gap, and making the 9/36ma cross-down on the 15-minute chart would likely be a bad omen for the day. A flat day would be a win for the bulls.

The Market’s Reaction To News…

…is more important than the news itself. Right?

I was very surprised to see the market rally after the pre-market plunge caused by the weak retail-sales report Friday morning. It reminds me of how the market rallied in 2009 every time a terrible Non-Farm Payrolls report was released. Shrugging off bad news is a hallmark of bull markets. And so is recovering from a morning down-gap.

I imagine that if the shorts are taking profits, the market could continue rallying for quite a while. If everybody is short, and everybody starts to take profits, then everybody is buying, right?

The question though is, will the short-covering continue, and if so, how high will the retracement be? Will the bears want to ring the register before earnings season begins?