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.