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.