BATTLE OF WILLS

I have been taking quite a bit of time lately to just try and figure out how to play the stock market right now. As I have stated previously, we are in uncharted waters here in my lifetime. There is clearly a battle going on between the will of the people and the will of the governing in all aspects of our life right now. It is clear the will of the people wants to sell the stock market here. Just about every historically accurate way to time the stock market indicates a correction should be happening. However, we have a government that has decided that no matter what they have to do, stock prices are not going to be allowed to decline.

I really don't care if they go up or down to be honest, all I want is free market flow which we clearly do not have at all. The next chart should add to making this point.

This is a chart of Caterpillar, and old stalwart blue chip stock. Historically this has been a steady solid company whose stock although a good one to trade for holding purposes, has generally just plodded along. I have marked all the gap openings in this stock just in the last few months, many of which have held and not been filled. Trust me folks, this is highly abnormal. A stock like this should not look like a chart of OATS. This tells us a couple of things. First, it shows the tremendous overnight futures moves in the SP 500. Those moves are what cause these openings. Second, it also tells us that trading this stock in the traditional ways will not work anymore. Third, it is confirming the lessening relevance of the pit sessions here in the US.

I personally have had a hell of a time trading stocks the last month. The chart patterns are just weird and it is because of the overnight manipulation of the indexes by the Federal Reserve. The big problem I see with this when I study history, is that prior circumstances of government meddling in pricing of commodities has always resulted in price ultimately going where it wanted to, and often violently. This type of a move will happen out of the blue when it does, and I have no idea when. Study the price of lumber going back to the time when the government had a limit on the price on the upside, and what happened when it broke through that limit.

Listening to CNBC yesterday very early, there was shock that the Ireland bailout was not being perceived as good news. Are you kidding me? Countries that are basically insolvent loaning money to another who is should be viewed as good news? All they are doing is creating a bigger bubble. Bankruptcies need to happen. When an entity cannot pay for things, it needs to go out of business and then re-structure itself into a model that can operate profitably. As I have said recently, I am more worried about the big picture than at any time in my life now. I cannot recommend that the average investor be long stocks here. We have a wonderful trend that has been going on, but just the way this is being manipulated greatly concerns me. For my purposes as a short term trader, I have no problem being long because I can pull the plug and go flat when this wipe out starts, or get short to take advantage of it. The average person with 401k's is not going to be in a position to move that quickly either physically or emotionally.

The VIX index has been speaking loudly recently, that a sharp sell off was coming. It appeared to be here until the Fed got back into the futures business to stop it once again. There is going to be a time when they are not able to do it, and the exits are going to be incredibly crowded when this happens. I wish I knew when this would happen so that I could tell you. Today they are once again reversing a huge overnight down move in the futures, so the battle is on once again. Day trading might well be the answer to some of these issues even though it is a very difficult way to try and make money. It keeps you clear of the overnight games by the Fed.

For now I am just long Bonds and am in a couple of other things but overall not heavily trading today. I am looking for some other action. I have been looking for shorts in the energy markets. RB has a classic trap pattern right here, but since it is the strongest in that sector, I want to short Crude which has been far weaker. I got out of my Dollar long too soon, but I have not done much else right the last month so that is par for the course I suppose. I still think the traditional indicators say down in the stock market, but who knows if they mean anything anymore.



WILL HISTORY REPEAT ITSELF?

I would like to have someone tell me what the difference between these two graphs is? The one hint I will give is that the first one has more data so it shows what happened after the fact of the pattern development I have indicated. You can see they both have 4 higher lows in the blue line. In the first chart you can see that the price ultimately zoomed higher, whereas in the second one the price direction after the pattern formation is not displayed. I would challenge anyone to tell me there is any difference at all in these two "looks."

Now I will reveal what this is

You can see now that this is a chart of the VIX with the SP 500 overlayed in Green on it from 2004. This is the last time we had a 4 point divergence in my indicator and as you can see the VIX zoomed upward and stock prices came down hard. If we now go to the next chart, you will see why I named today's post what I did.

We don't know what will happen next but the similarity between these two charts is uncanny to me. In the 2004 example the decline was sharp, lasted about 3 weeks, then reversed back up again. This would allow us if it were to play out the same way, to buy stocks at lower prices for a continued bull run. Of course we have no way of knowing whether or not this will happen, but volatility has generally been a good way to track stock price direction. I do not as of this moment have a sell signal in the SP 500. I had one this week I took that I got stopped out on. I am leery of shorting this market, I have been burned doing so recently. However, I have to honor my signals, and my general tools tell me to look for short term sells in my indicators, so that is what I am doing.

Here is one trade I made this week that more than made up for alot of my dumb ass moves in the stock market, just so that readers don't think I am a complete imbecile.

I had 10 contracts on this long trade in the Dollar Index that made about 12k, so it made me whole and then some over the losing ES trade. I suppose I should still be long but sometimes when I have a couple of bad trades and get a good one that more than covers them, I like to ring the register and re-group. Also, these holiday trading days in the currencies get very strange sometimes. They have often had big one day moves that completely reverse the very next day.

Let's see what next week brings, but as per what I have shown here, I am looking for weakness in stocks. I am also looking for a long side entry in bonds which I will cover if I wind up finding my way into that trade.

NOT FOR THE FAINT OF HEART

Here is an intraday chart yesterday of the ES, and you can see the vintage PPT move once again. These guys are just the best there is, no question about it. Of course yours truly was short when they showed up. My entry was an overnight trade so I did not exit on the PPT move, but they did come reasonably close to stopping me out. This morning we have come back down so I suppose it is time for them to prop this back up again, and they probably will in the last hour if we are still down at that time. As I stated in the title, shorting this market is not for the faint of heart, it is groundhog day over and over. There is almost always an initial move that makes the market appear to break down, then the "mysterious" rallies that always happen.

It is very interesting to me, and I am surprised it does not get more press, that the Trim Tabs folks "cannot identify" where the moves are coming from. They track all sorts of categories as the premier tracker of various funds and their volume. They cannot explain in any of the categories, who is driving this. I think we all know who that is, and that is more anecdotal evidence about what I rail about in here constantly.

What is very interesting to me is the insider trading investigation that is now ongoing. Apparently this guy leading this did not get the memo, and he is dancing on dangerous ground here. Let's watch this and see if it fizzles. The ultimate insider trading has to be the investment banks that house the PPT trading accounts who execute their trades. Might they be front running the futures buy orders in individual stocks knowing the push is coming? I would certainly think they are, I would be if I were sitting in their shoes. They know huge volume is about to come into the market at certain times in futures, which will move all the premiums to areas that will generate institutional stock buy programs. Wouldn't it be a reasonable risk to take as a trader to buy across the board with a close stop, when the futures programs are just about to kick off? It is hard for the rat not the eat the cheese, as much as he may innately fear it is a risk. Somehow I doubt the insider trading investigation will ever get to this part of all of this scheme, TOO BAD.

I have no proof of any of this, but I think people can see the way things are happening, that something very irregular is going on here. The story is going to break some day, and Clouseau may have stumbled his way onto this. The damage control will be bellisimo if this story breaks. It probably won't, but if a very detailed investigation were truly undertaken, I think what is under the hood on the feds books would be must see TV. It might be like the CIA and be such that it is better if we don't really know.

Meanwhile back at the ranch, shorting this market has been an incredible challenge. I have been doing it only because my techniques say to do so, not because I am some wise guy or doomsayer. I just take the signals as they come up with some discretion of course. However, I cannot just ignore valid signals because I think the PPT is controlling the stock market. That is an opinion, not an objective filter. However, it is very difficult to make any money on the short side which should tell us something about the strength of this trend overall. I hope buy signals show up because shorting this market is impossible. We do have some seasonal up biases that should be kicking in here shortly. They have been pretty consistent over time. The individual days however that usually have been bullish in the SP 500 this month have not been accurate, nor have they been in the Bond Market. I used to rely very heavy on seasonals and do not use them much anymore. It does appear to me though just by watching every single dip of any kind get quickly bought, that dips in general are buys in this market not reasons to get overly excited about a big drop.

The fly in the ointment is the US Dollar which has been showing some strength. If that were to continue upward, we could have some bigger trouble with stocks. I have been long in the DX but do not have any real expectations either way in that, it is just another trade. In general I think this dip whether it lasts just a few hours or a few days is likely a buying opportunity and not a huge rollover.

THEY MAY PULL OFF ANOTHER DRAMATIC SAVE

As we ended the week for another intraday rally to save a down close, this is how things look overall. First we have the big picture 3 point divergence labeled above. In general this picks much larger moves than what we have gotten so far, but there have been occurrences when this is all we have gotten. It certainly should not be a shock to anyone if we just rocket back up again here. There is a strong tendency for a rally going into Thanksgiving in both bonds and stocks. Unfortunately, both of those trades indicated being long at the beginning of the week, so if taken would both have been stopped out for losses, before the rebound here. This is the scenario #2 I discussed the other day, one big day blowing out of the low point.

We are now at a critical spot for this to turn back to the down side if it is going to. If by Tuesdays close we have not rolled back over, I think we will take off again upward. I have indicated on the far right part of the screen, where the momentum oscillator is still under it's trend line, but it is curling up sharply here and in a couple of day might be back above it. Ironically if it gets there and then makes a lower peak than point #3 and turns back down, we would have a very powerful sell signal. At this point we have no idea whether or not that will happen, it is just thinking out loud about possibilities.

We have by price action intraday the most powerful rally I have ever seen in my 20+ years of trading. You can find other spots on charts where the market has gone up more, late 90's certainly to name one. However, there has never been anything that I have seen with so very few even intraday corrections. The government has such a tight handle on this that they get futures buy programs going so quickly even on the slightest declines, it really makes even trading on the short side on a 5 minute chart almost impossible. In the late 90's this was not the case, there were plenty of pullbacks to play for day traders. We are in uncharted waters. I would not be surprised to see a push to outlaw shorting, Buffett has been running his mouth a little about that. What a jerk he is. The more he talks the more sick to my stomach I get. He is brilliant, but one of the great hypocrites of all time.

I still maintain that the longer this artificial manipulation of prices goes on, the more likely another terrible wipe out is to happen. Timing that wipe out is likely to be impossible because it is going to come out of the blue. Looking at a few other things to confirm or not confirm what the SP 500 above is telling us makes things a bit more clear to me.

Generally speaking Gold the chart above is the same trade as stocks, and as you can see it looks about the same. The oscillator is a little weaker here than in the SP 500 so I would argue that this is a tad weaker overall. This market does appear from a short term basis to be a sell the rally here. However, if the blue line rallies enough to get back above the trend line, long is the side to be on. Silver is much stronger, so longs should be done there not in Gold in the metals. This is the weakest of the metals markets at the moment.

The next chart is Crude Oil which again is similar to stocks in general they trade very closely in sync nowadays. Look at how comparatively weak this has become.

I would say between Gold and Crude we have a nod to the short side in general. The next chart is that of the Dollar Index, this muddies things up considerably.

You can see this is clearly a buy the dip, and the dollar stock relationship is an almost inverse tick by tick situation at this point. So if I look at that I have to feel that it forces me to lean to the short side also. However as with stocks, the momentum in the last couple of days is going toward the trend line. If it just keeps going that would negate a buy setup. This among many other reasons, is why I always want price to trade back in my direction to get into a trade. If I were just to blindly buy a dip here at the market, who is to say it won't just go straight down? I want at least a burst of short term movement in my desired direction to pull me into trades.

The last chart to look at is the VIX. We have broken back down in this index, and other than a possible 4 point divergence that could develop on new lows, there are no buy signals here ( sell for stocks ) that I can see. This would support the long side of stocks case. The next couple days are again going to be the key in this index also. I have drawn in a textbook megaphone pattern here. I have talked about this before in here, if you study charts you will often see this megaphone pattern at major high and low points in the past. It is not a very accurate pattern percentage wise, I would say less than half of them work. However, the ones that do are dynamite. I have inserted a chart of the NAZ in 2000 to show one example of one of these that worked pretty well. When they appear at market extremes they are better, and this is certainly that.

This has very good symmetry and it is at a multi-month low. The trades with this pattern are generally much better in a situation like this than just in the middle of other price action. The last chart is the Nazdaq at the all time high. Notice the nice 5 point megaphone pattern that formed, pretty much the inverse of what we have here.

Here you clearly had a trap pattern where new highs were made, then price quickly reversed. It is not always that easy unfortunately. However, I am just pointing these things out for your own decision making. It seems no two tops or two bottoms are ever exactly the same. For all I know I am forcing this here because I am leaning to the short side.

In summary, here is what my take on all of this is collectively.

First, and foremost, we have the government completely controlling the markets, which can trump almost any technical development unless heavy volume comes in. As a result, any shorting needs to be on smaller size risk wise until a new downtrend is clearly defined. They want prices to rise not fall, so the house is on the side of the longs. I am a bit surprised they allowed this recent decline to happen.

Second, we do still have a strong trend, and not much technical damage has been done yet. If we just move up out of here in the next two days everything is fine and look for new highs going into the end of the year.

Third, we do have a few things now from the dollar index, to weakening Gold and Crude Oil markets, that might be telling us to be a little careful here.

Fourth, the dollar index is potentially reversing it's downtrend, which would be very bearish for stocks if that were to happen.

The Vix is potentially giving us a major buy signal, but it has not yet setup correctly, and may not if we just keep falling there.

All in all I would say to watch the markets the next 2 days, if we stay stable then break out upward, we are off and running. If this is going to reverse down it will happen in the next couple of days. Many of these potential flies in the ointment would be negated with a few strong up days at the beginning of next week.

THE GAME'S A FOOT!

I am not sure if I even spelled that cliche correctly but don't care. Net net, here we go on the pullback, and pre-market today, it looks very powerful. This is what I was referring to yesterday about what might happen. For my own work, today will setup shorts in some places, but I probably need one more day of either sideways to up, to make it really what I am looking for. Here we have a juncture where you just have to pick a side, kinda like politics nowadays. You are either bullish or bearish here. If you are bullish you should have been buying yesterday. I did one long side trade which I will show in a second that I am exiting on today's opening gap up. If you are bearish, this is the beginning of what you should have been waiting for.

Unfortunately since the world is one trade, we have the dollar pullback long, es pullback short, currency pullback shorts etc. all setting up together. If you take them all, be mindful of your risk, they are all going to move together. You will win or lose on all of them, it is unlikely that some will move independent of each other. I am bearish, so I am going to be playing the short side here for all of the reasons I will not go back into today. I have detailed them over the last few days, you can read those posts if you are interested in the reasoning. If this day opens and becomes a 300 point up day, it is likely that some of the short setups will not be there, but I will just have to wait and see what happens.

The majority of the public and investment community is not even considering that there might be a deeper pullback than what we have had, so maybe they are right. I don't compete with them. I trade my own money and put it behind my own studies. If this just lifts off, I will be wrong, just that simple. I will then move on to the next opportunity. I quit trying to be right all the time a very long time ago, it is impossible. Trading is like a round of golf, you don't birdie every hole. You can still have a good score with a few bad holes, you just can't have all bad holes. Sometimes it is hard to accept, especially after having a good run in the markets, that you are going to have a bad streak. However, as you rebound time and time again from them to make new equity highs in your accounts, you will be more accepting of them.

I have chosen to play the short side on this bounce, so in the next couple of days I will place some short bets and hope I don't have too many bad holes and make a few birdies.

Below is the SMH long trade I did enter on the close of Tuesday's session. It was based on a combination of one of my trading patterns, and an ETF strategy out of Larry Connor's latest release. I just took 1000 shares just messing around with this. It is going to make about $500 so slush fund for today's golf game I suppose. These strategies by Larry are terrific and have been about 80% accurate in real time, so I suggest reading his book. I don't like one aspect of them, no stops. You can empirically prove over and over that mechanical methods work better without stops, that is true. However, in real time you can get wiped out without them. Further, it is tough to choose position size when you don't know what your stops are. I just randomly chose 1000 shares thinking I might have to give it $2 worth of room, a $2000 risk.

I guess it is tough to see this chart, I have better charts with genesis but their real time data feed is not real good, and I have it on my notebook computer with has better internet speed with my aircard than what my home satellite gets me. As a result, I don't have charts updated to today on this computer. I doubt I will do many of these types of trades due to the lack of risk control, but I wanted to do one live just for fun, since I "knew" we were going to get a bounce I wanted to have something on the long side.

AGAINST THE WIND

It is tough to go against the grain on things, you always run the risk of being the village idiot. The only person I can think of who has been bearish on stocks has been Bob Prechtor, and he has been dead wrong. Of course his approach is so long term, that 1000 Dow points don't really matter. You have to take positions if you trade with Elliot Waves and hold them through hell and high water constantly. I suppose it remains to be seen if he is right or wrong on his big picture calls for DOW sub 4000. If you remove him from the mix, and then possibly Glen Ring, another long time newsletter publisher, it is hard to find a bear out there.

It does you or nobody else any good to be bearish just to be a smart ass. That will make you the village idiot and poor, a bad combination. You need to base you views on the techniques you use to determine how you should position yourselves in the market. The unprecedented government takeover of the stock market has caused alot of problems. First, it has created these annoying correlations where everything trades one way and the dollar the other. Of course we have our crazy uncle Natural Gas that never got the memo, that goes it's own way regardless of all this other nonsense. For the most part everything trades in the same direction which make diversifying trading impossible.

Many techniques that have worked for a very long time have given several false directional calls due to the takeover of the stock market. Judgement is required more than ever, and that is a slippery slope. How and when to weigh what artificial interventions might occur and what they will do to prices, is such an arbitrary call that it is not recommended. So what to do?

First, I think we have to mostly focus on the Dollar/Stock relationship. It is impossible to know which wags which, and I don't really care. It certainly appears to me, that stocks move first, then the currencies follow just by watching tick charts. However, many argue the other causal relationship. It really does not matter, all you need to know is that they trade opposite. If you are bearish on the dollar you should be bullish on stocks, and vice versa. There will come a time when this ludicrous relationship will revert back to it's old ways, but it does not appear to be on the near time horizon. We have to accept what is currently happening, not what should be happening.

With all that in mind, the chart above is the daily chart of the Dollar Index. This is a clear break out to me of the downtrend, and all dips are buys. The momentum oscillator is climbing far ahead of price, which in general with a few exceptions is what we want to see. We have had 9 consecutive days of higher lows, a very strong occurrence that has not happened often here. This is my view is this is a .....you to Bernanke by the rest of the world saying not so fast brother. They are seemingly not going to allow him to devalue all the debt of ours they hold. If we accept that the dollar is a buy on dips now, then we also have to conclude stocks are a sell on rallies. Many of the things I watch to tell me if a dip like this in stocks is a buy are saying it is not, which is why I have changed my stance completely here. I have also detailed over the last few days, the other reasons why I think the market is setup for a decline.

In the NEW COMMERCIALS attempt to create artificial inflation, they just created short term blow offs in many markets, that are now reversing sharply. It is my feeling that we are very short term oversold now after yesterday, so a bounce should happen here. This bounce should setup short opportunities across the board. That is the next logical play to me, and one I am sitting on. The one scenario that could happen, and I would not put it past them at all, is the following. If we get a couple of small range days, they could go all in with futures buy programs to try and ignite a lift off. They would likely do this in the premarket to try and ignite all the stock buy algorithms on the opening that play off futures. This would be one of those 250 point plus up days that just opens strong and never looks back. If this were to happen, the scenario I just discussed could be negated. If you look back to July of 09, that is an example of what I just mentioned.

The plan for me going forward is to look to go all in on the short side after a bounce, things look very top heavy to me here. I know this is completely against what almost everyone else is thinking, so I guess I open myself up to be the village idiot. I always sell weakness and buy strength, so that protects me in these lift off situations. The orders don't get filled on those days because price does not trade down enough to trigger the entries.

THE DEVIL IS IN THE DETAILS

To those loyal readers of my blog, I owe all of you an apology. I have completely missed something critical in my recent analysis of the World Market ( Previously known as the US Stock Market ). Before I get to that, lets look at the above chart which shows valuations and more importantly Sentiment readings. I have marked off all the times where Sentiment reached excessively bullish levels. You can see that in every instance we got decent declines, and in a couple of them, big ones.

We have been maxed out in Sentiment now for a few weeks, and we are now starting to see what happens when everyone in the world is leaning one way. The markets go the other way. There is nary a bear to be found right now. It is certainly understandable as I think most people have realized now that the PPT is determining where stock prices are going, and they are certainly not going to choose down. The whole basis for their core function is to inflate things that are declining.

The one hail mary that the world always has against this manipulation is collective strength. As I have written about over and over, volume can overpower the government manipulations of prices. We have seen that a couple of times in recent years. They cannot buy enough futures to generate the price pushes they want if there happens to be mass selling by institutions at the same time. It seems the tact has been to get the futures programs going overnight when volume is a lot lighter. This way they can reverse overnight moves pretty easily. There will come a time when collectively large institutions will sell, and that will overpower the PPT. It is almost impossible to know when this will happen, I am must speaking conceptually here. Generally 20 and 40 or 50 day lows are good spots to look for this to happen. We are not there yet, so this decline is still containable.

The next chart is the one I just completely missed. I too got caught up watching the magnificent rally and stopped paying attention to what else was going on.

I have told readers often that I think the single best tool for timing the SP 500 is the VIX. Above is a chart of the Vix with my indicator below. Notice the incredible divergence we have between price and momentum. This is the biggest one of these I have ever seen. There are 4 distinct higher lows here with lower lows in price. The last time I even found 3 was in 2004 and we had a big rally in the VIX and decline in stocks. If you pair this with the dollar basing I have been talking about, we have the makings of big problems here. Of course the VIX is highly correlated to stock prices, but not 100%. An increase in the Vix does not always mean a decrease in the SP 500, but the odds heavily favor that cause and effect relationship.

I have to admit that I also have a hard time accepting this, but it is what it is. There was also prominent divergence in the NQ index the other day which I showed in here. What this all tells me is to forget buying this dip, and to lay in wait to short the bounce. I am just hoping we get one.

GOOD THINGS HAPPEN TO THOSE WHO WAIT

Things have cleared up a little bit in the last week or so, for those waiting patiently and experienced enough not to chase the markets. We always have to remember, and I constantly have to remind myself, there is always another trade, so don't get too jumpy. The above chart of the World Market otherwise known as the SP 500, shows just how incredibly powerful this move has been. Since every market in the world with just a couple of exceptions looks almost just like this, you really just have to follow this one to trade anything else. Gold, Soybeans, Sugar, Crude Oil, Aussie Dollar. The charts in all of those markets look almost just like this. As I have been saying for quite some time, the world is one trade. This correlation I think now is obvious to everyone, and I also think it is obvious to most now that it is not a coincidence. The NEW COMMERCIALS are orchestrating this via their various methods, the most recent being QE2.

Since we know this correlation is here, and not likely to go away anytime soon, just keep it in mind when determining position sizes. There are other markets, like the softs, meats, and Natural Gas, that seem to be able to defy this gravity, so those can be used to diversify.

I have outlined what I see to be the two scenarios that could unfold here. First, we are now short term oversold, so longs are probably the play here for the next few days. After that, I have drawn out another possible scenario, which roughly shows the trends rolling over which would dictate shorts. I am fairly sure of the first one, but not so sure on the second one. Since this is being so manipulated by the government, it is hard to imagine them allowing a rollover here. It has become clear that they believe that everyone feels a lot better about the economy when the stock market is over 11,000 than they would if it were at 7,000, even if everything else is basically the same. This false sense of security due to 401k balances increasing is dangerous in my mind, but so be it. I always tell people that the collective psyche of the American public is much better with stocks being higher than lower, and it gives the controllers some room to maneuver that they would not have if stocks were tumbling. What is surprising and unprecedented, is the degree to which they have been able to control this. In my lifetime I have never seen anything like this before.

For the long entry, Friday's highs have to get taken out today, which could happen, but it is a long ways up, still 10 more SP points from where we are trading as I compose this post. Interestingly enough, when I went through the whole SP 500 this weekend, stock by stock, I did not see a preponderance of buy signals. It was really mixed. This tells me that we are not likely to lift off again right from here. However, it also is not screaming top either. Maybe we will trade sideways?

In any event, we do have a pretty clear trading direction here, up in the next few days, then look to see if the shorts are setup.

SIDETRACKED

I have been distracted the last couple of days by outside business interests, my apologies to regular readers for missing a day. Obviously there is alot going on right here which I will get to in a moment. First, I thought it might be interesting to post the market everyone raves about in the liberal media, Shanghai. Of course China is the world's savior and is just going gangbusters, or is it?

If you look at their composite stock market you might have expected to see a different picture than what CNBC leads us to believe is happening there. We have seen some recent strength, remember the world is one trade now, so everything has gone up the last 2 months for the most part. However, look at how far off the highs we are in this market, does this really look like something so strong it will lead us out of this mess? Not to me.

This week we have had some "topping" action in quite a few markets, will this lead to declines? Of course we never know that. It is possible the "NEW COMMERCIALS" the Fed, has pushed things as far as they can with the little games they are playing. They cannot click every single persons mouse even though I think they would like to be able too. At some point some corrections or more than that are going to occur. I have said in previous commentaries that the minute they stop what they are doing we are going to have a huge air pocket burst. Since we can never know when this will happen due to the secrecy of what they are doing, we have to look to price action for our clues.

Here is the Dollar Index and as you can see we have had a bounce, but nothing earth shattering that changes even the short term trend yet. We did have a fair amount of POIV divergence at the low, but now POIV appears to be lagging on the upside. Of course if we were to blast off out of here, that divergence could be eliminated, and likely would be. Watching the overnight action, I would assume the Fed has conducted POMO again, since the ES has once again been brought back "mysteriously" for the brink of a crash. Those who study this everyday can check to see if that is the case or not.

I think the next trade is buy the indexes on this dip, then look to reverse to the short side up against the highs. I do not have signals either way at this point yet, but they are looking like next week should bring this action to a theatre near us. Today, I think we just sit back and marvel and what we are not likely to see again in our lifetime, the US government trading the stock market basically, and staging another late fourth quarter comeback. Once this economic cycle passes, I think changes will occur which will outlaw this type of thing in the future. Once the public gets completely in the know on this, I doubt they are going to be able to continue to do it. I read yesterday that Roubini is supportive of the PPT and what they are doing. He has been right about several things, but been consistently dead wrong about the stock market. I am not sure his opinion means anything at all.

The last chart is one trade I made this week in Natural Gas that worked out well. I was just in it for 3 days, but a good 3 days it was. You can see it made over $3000 per contract. This market seems to trade independent of most other markets, the crazy uncle so to speak.

Have a great weekend, and get ready for next week, it should provide us with a lot of action.

THE DAY THE WORLD FOUGHT BACK

As those of us who have traded for awhile watched the metals markets the last few days, we knew with pretty good certainty, this was coming. This bar may not look like much on this chart, but this range from high to low was almost $15000 per contract. Folks that is so insane, I have no idea who in the world is actually trading this market here? I suspect it is individual small investors just chasing the momentum, then fleeing in fear when that monster reversal happened. Is this a top, who knows? What it is typical of though is a big picture top. When you start getting this type of volatility, the market is speaking. What it is telling us is that the general equilibrium it has had during this run, has been disturbed.

We know just from reading the papers, that foreign nations are not pleased with the NEW COMMERCIALS and the market manipulation they are conducting. If we look at the Dollar Index and also the individual currencies, we are seeing the signs of a potential huge reversal setting up. As I stated the other day, we may be on the verge of a worldwide currency war here. Here is something I just noticed yesterday, just when things have been sailing along so gloriously.

In the NAZ we all of the sudden  have a 3 point divergence in the momentum indicator. I shorted a few stocks on Monday that had good individual sell patterns just because it is all I know to do. I have to take the trades when they are there, and let's face it, shorting into this 20 foot swell has not been a very good idea in recent weeks. I had no hopes for those trades, I just did them because I am a trader and the patterns were there. The market manipulation has made the market very unbalanced, but that does not mean I don't take sell patterns when they occur. My feeling had been to just look for a correction this week as I stated on Monday. Now that the above reversal pattern is here, it might be time to look for shorts when we bounce here, especially in the NAZ. I think this is especially meaningful because this index has been leading things for a couple of months now, clearly it has been the strongest. We now have a fly in the ointment.

In summary here is what we have currently going on. First, the world is trying to prop up the dollar, the NEW COMMERCIALS are trying to depress it. We have blow off conditions in the metals markets that could lead to a shocking decline there. The individual currencies are showing signs of weakness. Finally, we have a big divergent reversal pattern in the Nasdaq 100. This cumulatively, tells me we got some trouble here. If you are long, it might be time to ring the register and pat yourself on the back for a job well done. This is not a time to be greedy. If this were to get away from the NEW COMMERCIALS, the rate things could decline could be shocking to many people. This is the air pocket of all time they have inflated here. Maybe they can save it here, but alot of taxpayers dollars might need to be used if this gets going on the down side.

HOMEWORK ASSIGNMENT

I think now that even CNBC is talking about how Bernanke is controlling the stock market, it makes sense for someone to study the days over a larger time frame, where POMO was conducted. It is my theory that they are the new commercials for stock trading. The COT report has been completely worthless in the stock indexes for a couple of years now for a variety of reasons. I think that we have a much better indicator of stock prices with the POMO. The problem might be a small sample size. However, the correlation is so incredibly high, that even a smaller data set might provide reliable cues. My thinking would be that only buys be done on the days they are active, and on the non active days, take trades in both directions. If we know that virtually all the gains will come on the days when they are active, it stands to reason we would not want to be shorting on those days.

This is almost like insider trading, you really know which way the market will go before it ever goes there. The "NEW COMMERCIALS," the Fed, might very well be a key to riches. I sure want to be short once this PONZI scheme ends, but that may be next to impossible to determine in advance.

The above chart is of the Dollar Index, which does appear to be making a base here. We have had 3 probes at lower lows, yet the POIV indicator is diverging bullishly. This indicator does not diverge very often, which is also why it is more accurate when it does. It remains to be seen if the extreme market manipulation by the Fed to drive the dollar down will overcome this, it might. The momentum oscillator is in an interesting spot. It does appear to be diverging against price as well yet is also still under it's trend line, so it could go either way. I am leaning to the long side here due to the POIV divergence. It looked like the DX was breaking out last night, then of course it got reversed overnight once again.

The next chart which is of the EURO also makes me lean to the strong dollar weak currencies side as my next trades.

This is pretty much the inverse of the DX except that we did have a close above the prior highs that was quickly reversed the very next day and then was followed by a good down day yesterday. These trap patterns are amongst my favorites. It is my feeling that we need to hold right here in the EURO, or this could be a short term top of some type. The COT report shows monstrous short positions in commercials in currencies. As we have learned this is far from a panacea, but it does give us at least a reason to be a little careful about the long side until this chart conflict here gets resolved.

It also appears to me that the Bond market is potentially setting up another long entry, which all else being equal, might tell us the DX would rally with it. Of course as I have written ad nauseum recently, the world is basically one trade right now, long everything and short the dollar. With the "NEW COMMERCIALS" at the helm, it remains to be seen if they will allow any of this to happen right now.

I DECIDED TO THROW OUT MY CHALLENGE FLAG ON THIS PLAY

After watching the market action for the last 2 months I decided to throw out my one challenge flag and risk losing the time out. This play had to be reviewed by the people in the booth for a ruling. Here is what they looked at. I found this at Trading Markets.com, a great trading website, and home of one of my original mentors Kevin Haggerty. He posted this chart in his most recent commentary. I first learned of the PPT from Kevin, he knows exactly what they do and how they conduct their little "activities." The Feds Permanent Open Market Operations ( POMO ) is shown above and low and behold you can see on the days where nothing was done the market has been completely flat. The whole recent rally has happened on days of POMO.

You can draw your own conclusions about this, but of course the answer to the quiz question is obvious. I was not charged a timeout and it was agreed something was wrong. There are a number of ways of how this money that gets injected drives stock prices, and I will leave that up to you to decide which one of them best explains this. I have an idea of how this is happening but am not going to get into it further. The chart above says more than I could possibly say if I talked for an hour.

This does not change anything I said in the last post at all. I just found it compelling enough when I stumbled upon this to post this here. For those wanting what I consider to be one of the best prognosticators of stock price direction, check in for Kevin Haggerty and his comments at Trading Markets. He is one of the best.

The interesting thing that has developed over the weekend is the bashing of the Fed by foreign governments. I believe that is the beginning of what will wind up being a currency devaluation battle that will ultimately drive the dollar way up and everything else down. These other countries are losing a bundle on the debt of ours they own with the deliberate devaluation of the dollar the Fed is conducting. I think at some point they will start buying dollars to prop it back up. What we could have then is other countries intentionally trying to drive our dollar up and the Fed trying to drive it down. This could get very interesting, it is must see TV coming soon. However, it might be best to tune out before watching the ending, it is not going to be pretty.

As I looked through the commodity markets I found one market that is in an interesting position right here, Soybean Oil. The weekly chart for this is below.

I have marked off the instances where the Small Speculators have gotten excessively bullish in the past, at the same level they are now. You can see that what happened in almost every instance was a pretty good decline. The one exception was a time when we were not overvalued by the Will Val indicator. We are overvalued there at this time along with the huge Small Speculator long position. This is a market to look for sell signals in. It is much weaker on a weekly basis than most of the other grains, and has this fundamental condition to go along with that. The daily chart does not have a sell pattern yet, but I am watching for one closely.

I do expect a pullback this week in stocks, but again if the Fed does not want one we won't get one. It is all up to them unfortunately. In scrolling through the SP 500 stock charts one at a time this weekend I found a bigger dichotomy than I expected. This rally is more narrow than I thought. Normally this would be a red flag, but things aren't normal.

PATIENCE GRASSHOPPER

The above chart is Cardinal Health, it means nothing. I just chose this chart at random, it looks just like any other stock or commodity chart right now, VERTICAL. I know this is very exciting and tempting to chase this stuff. I urge caution to people in doing this. I have to admit yesterday after reading of QE 3 and 4 already in the plans, and seeing the across  the board moonshot this stuff is artificially creating, I came up with the following conclusion.

I HAVE NEVER BEEN MORE WORRIED IN MY ENTIRE LIFE THAN I AM RIGHT NOW

What is the Fed looking at that makes them take such dramatic action, I thought there was a recovery underway? For them to embark on a program to artificially force inflation in the hopes that will in turn get the economy going again is ludicrous.. If you look at commodity prices with Cotton for example, you see the price just skyrocketing. How many of you are prepared to pay 20% more for a pair of jeans? In the end I think this is going to create a monster devaluation wave that will be devastating. 

It is my opinion now that what the doomsayers have been saying for a long time is going to be correct in general. Here is what I think they have wrong. As the dollar continues to decline, it is putting other countries in a spot where they are going to have to try and devalue their currencies so their trade positions do not get too far out of whack. We might be embarking on a world wide contest of currency devaluation. When this does happen the US Dollar will skyrocket unless for some reason our country has become very weak militarily. When that happens all hard assets will plummet.

Our model for our economy has become based on consumers spending more than they can afford, going into debt that they cannot possibly handle, to aritificially move prices higher across the board. This business model obviously makes no sense at all. I have no idea the time frame upon which a scenario above will play out. It will not start tomorrow. For the immediate future as traders, we need to max out what we can with these extraordinary price moves. Here is the challenge as evidenced by the chart above. Most if not all markets are significantly extended price wise, many in historic fashion. The following weekly chart of Silver is typical of how many of these markets look here.

I have marked off the areas on the chart where the valuation versus Gold was at an extreme. Of the 3 prior level similar to where we are now, 2 produced nasty declines, with the third also happening but about a 5 week lag. We are actually more overvalued now than all of those. This just tells us fundamentally what anyone can clearly see on a chart. We have a blow off happening here sponsored by the PPT. I have no idea if a major top or just a retracement is going to happen. Here is what I do know from experience. If you chase these markets in phases like this you will get burned. The stops are massive, and you just have to set the greed aside and realize this is dangerous ground we are in right here. I would have loved to have been long Gold and Silver yesterday, but the Silver stop was over $5000 per contract, just an insane level of risk. It would have worked out, but had it not the loss when added across multiple contracts, is just beyond what I am willing to risk on an individual trade.

Here is another chart which shows the valuation of the Stock Market vs the US Dollar Index. A couple of things stand out to me.

First of all notice how well this valuation model worked for so long picking highs and lows in the stock market. Every time we got undervalued vs the dollar we got a rally, and every time we got overvalued vs the dollar we got a decline. Once 2010 started, the great engineering feat of the PPT began. It is obvious how overvalued we have been for the whole year against the US dollar yet the rally goes on. This to me is just more conclusive evidence of the market manipulation that has occurred. It has rendered so many traditional tools like this basically worthless. However, this is also why I am urging extreme caution. Since this whole thing is engineered not by natural forces, but artificial market moves by the FED, the minute they run out of money or slow down, this whole thing will collapse. It also could be reversed by other countries devaluing their currencies.

I do not believe we are at this point since they have just now initiated another round of QE. However the farther they push this, the bigger the air pocket is going to be. It is my contention that the next move down whenever it does take place will dwarf the last one. This type of thing can only end one way as we have seen. The biggest problem I see with this which makes it different from a couple of years ago, is that they have inflated virtually every market, there is nowhere to go for safety when this breaks. I told my best friend the other day who is a general manager of an NBA team, and completely divorced from the financial markets, the following when he asked me how to diversify. I told him there was no such thing anymore, everything is the same trade. You will have the same exposure whether you are in a US equity fund or an emerging market fund. Everything rises and falls together. This should tell anyone who doesn't even know anything that something is amiss.

What to do now? It is my suggestion to continue to play the long side, but wait for some type of pullbacks for entries. If you go back in time and look at huge price spikes like this you see a lot more tops than you do continuations. Do not pattern your trading approach to what is happening here, only about 13% of total market action is like this. This is time to be patient and manage your risk correctly. This is not a time to swing for the fences. If you are a long time investor life is good and should continue to be for awhile. Asset prices are going to rise except real estate, and that might even tick up slightly. However, develop an exit strategy on your long positions and stick with it. Whenever this moves down it could so so on virtually no notice at all.

DON'T BECOME A STATISTIC HERE

BE CAREFUL WHAT YOU ASK FOR

I think it is as clear as can be this new age we live in, just look to the federal government to give us direction for our markets. This is a bad movie we are living in real life. The above two charts show something I have never seen before in all my years of trading and studying charts. Look at the incredible discrepancy between what happened yesterday between the 10 year and 30 year rates. When the Fed minutes were released we had a huge rally in the 10 Year and huge sell off in the 30 Year. Ladies and Gentleman the free markets are gone.

This is what artificially manipulated prices look like on paper in real life. The intervention by the Fed is creating things we have never seen before. I really have no idea how this will all end, but for now it is obvious, just look to buy everything, shorting is just suicide right now. There may come a time for some counter trend shorts for short term trading, but keep them on a short leash. They have started the monster inflation wave so many doomsayers have feared. This leads me to the second point while I am talking about unprecedented events. The doomsayers are right for the first time probably ever that I can think of. We have to give them their due, they have been right all along. Those of us who follow history and look there for a general idea of what is likely to happen next, have been left in the dust.

If you had told me 5 years ago if I would be my life that 5 years in the future we would be looking to the Federal Government for direction on which way to trade the markets, and we would have to ignore everything else, I would have bet my life and would have been gone by now having lost that bet.

Here is what is very good news about this, and I have mentioned this before. We have a pre-determined direction from which to trade, and it is fixed, so not very likely to change. It should be time for us to just clean up now, just buy, buy, buy. It does not matter if it is soybeans, silver, the Canadian dollar, or the SP 500. It is all the same trade and all a long side only affair.

I do think there will come a day when the markets will violently and possibly in a devastating fashion, react back against this. However, the power of the PPT should never be underestimated again. Look what they have been able to accomplish. It took them two years to pull this off, but they have done it. Now, will they be able to reign this in when the inflation wave goes supersonic? That is the million dollar question.

As traders lets just make a bundle of money on the way and deal with that nightmare when it gets here, it could be awhile.

THANKFULLY THAT IS OVER

Now that the elections are over, I just have one thing to state. If there is one single person who reads this blog who voted for Boxer you are hereby prohibited from ever reading this material again. How in the world anyone could vote for that pretentious B... is incomprehensible. I wish I had been that general when she pulled that mam vs senator crap. California is in very serious trouble I fear now that shill for the unions just got put back in the governors office. Now we will have continued support for all of the entitlements that got us to where we are now. There really is not a single ray of hope for this state that I can see, and I fear it is going to be time for me to have to move from here. I will hope for the best, but it is hard to believe this guy is not going to push unions and tax the wealthy. I hope every single business moves out of this state and it burns to be honest. This dumb ass liberals will never learn short of something that dramatic happening.

We should get a stock market a little more free of manipulation, so let's see what happens. It does appear to be smooth sailing ahead. The Vix above is nearing it's seasonal peak time, so if it were to begin to decline, it would reinforce the rally we have going already. You can see we are already in a downtrend in it which has supported the price of the SP 500 recently. I do still have sell signals in some of my other indicators, but so far they have all been wrong. I am hoping we move up enough to negate them, then get a pullback to buy into. We could very well just keep flying upward. I will admit that the indicators I use have not been very good in the stock market the last year or so, with the exception of the VIX. It has continued to be the best stock market timer their is. The oscillators have picked some nice trades, but for the most part have been diverging against the trend quite a bit, which does me no good at all.

I think the plan here is to look for buys in individual stocks, this freight train is not coming off the tracks anytime soon. The prognosticators of doom are going to be disappointed. This probably means that most every other market will continue to rise and the dollar will continue to decline. Since the correlations are so tight, it is hard to imagine making good money shorting anything with a stock rally this strong going on. Maybe in the softs, and meats which can trade independently something could happen. However, the inflation wave trend seems to be intact. This does make some sense if you think about it. The COT data shows almost all markets setup for sells, so it will be interesting to see if we get another extended period where that data is misleading.

There are many who believe that this rally is not legitimate, I have been amongst them. We have been wrong. However, one of the things that some of the naysayers state as a big problem, is an inflation wave. It could be that this manipulation of asset prices by the Fed will create that wave that could at some point down the road become a problem. For now I see no need to worry about that and just focus on the long side in most markets.

CHANGES COMING

I have decided to make a change to what I am doing and I do not know how it will effect the content of this blog going forward.

Here is an intraday chart of the SP 500 yesterday, and of course another save by the PPT at the very end of the day. This is getting so old that it is basically just the market now. It is not even worth commenting on other than to say that if you are a short term trader and are short the indexes or individual stocks going into the last hour of any down day, you should exit by noon. There is no point in continually letting all those profits go because of what is going on. It is hard to say when and if this will change, but it has been going on for so long now, get the hint and save the money. Shorting and holding overnight is not a viable strategy at this point almost no matter what your time frame.

As readers know a couple of months ago I mentioned that I was undertaking a change in my trading, and that I thought it would be painful, but was going to try and stay the course. It has been painful, in fact it has been the worst 2 months of trading I have had in several years in all honesty. If I had known it would have been this difficult, I would not have undertaken this task. At this point my goals for the year are now out of the question, they will not be reached. Trying to do so would be putting levels of risk too high, and I never do that. I thought I would highlight something I have done completely wrong trying to make the changes, so that maybe others might benefit from my mistakes.

I have been "babysitting" intraday price action way too much. I used to be able to watch the swings during the day and have no problem with it. For some reason now that I am trading larger, it is way to stressful to watch 25 to 50k come and go during the day. I have made some very bad decisions due to watching these swings. I have the chart above to illustrate how much things can move during a day.

Lets just say someone was long and trying to ride through this daily chop of the last 2 weeks or so. There have been some sell signals, all have failed, but they have been there. If you are watching intraday, and yesterday was a good example especially in the Russell 2000. That index formed an outside day when it took out the prior days lows. It you were long and were watching that, it had to be in the back of your mind that this market is extremely extended upward and maybe this is finally "the break" that is going to turn things down. It might not be a major turn, but big enough just to pick off your stops on your long position. You might have been tempted to exit your longs when those lows went. I was watching this at that time, and although I did think the PPT would show up which they did, it certainly occurred to me that this one could roll over. It is these types of thoughts that are dangerous. Of course we got the false break and reversal and we went up considerably in the last 30 minutes.

I have been looking for sell signals, so I was even thinking along the lines of whether or not it might be an entry when that outside bar formed. What a stupid thought. If you look at a daily chart, it was obviously just another decline into the clear support level, and nothing to even consider shorting. I arrived at that final decision by focusing on the daily chart and forcing myself to assess that versus the chart above. The point is this, match up what you watch with the time frame you trade. If you make decisions based on daily price bars, watch daily price bars, do not watch intraday price bars, and vice versa. If you trade off weekly charts, do not get hung up on daily bars. I have often thought to myself, well I am an experienced trader, so maybe I can get in a little better watching intraday swings, than what my daily plans are. This is a terrible mistake to make and it has cost me dearly this year. This one thing alone has taken over 100k of profits back from me.

I made this mistake for the last time of my life yesterday, and it is what has led to this post topic. I came in yesterday with sell orders in Soybeans. I had looked at the grains and determined for a variety of reasons, that I wanted to be a seller on a break, and that is the market that I determined looking at the markets "Daily" bars, that I wanted to play in. During the day I noticed that Soybean Meal was trading weaker, and also had a legitimate sell pattern on it's daily chart. When it broke down ahead of Beans, I switched my strategy and shorted the Meal. Well the rest is history, the Meal was a fakeout, and I was stopped out last night for a 5k loss. The Soybean orders never filled. Had I not been watching prices intraday, this would have never happened because I would not have known about this intraday BS. As much as I look at the Meal chart after the fact and still see a valid sell signal that failed, it was clear that my overnight study of the two markets yielded the correct strategy, and I overrode that plan on an impulse.

DON'T DO THIS EVER

Probably my biggest blunder of the whole year involving this was during the flash crash week. I was short the farm going into that week, and had I not watched intraday would have made at least another 50k if not 100k. I have not bothered to calculate it because it would just infuriate me. I exited all the shorts too soon based on emotion watching intraday. I will grant you that was extraordinary action, but just watching it after the fact I would have thought, wow that was a big day, glad I did well and moved on.

I will be turning off my live data feeds during the day now going forward. I will not be watching intraday trading anymore. I cannot say forever, because who knows what the future will bring. I can say for sure that for the rest of the year at the very least, I will not take a single peak at prices intraday, not ONE! I suggest you do the same unless you are a day trader. If you email me during trading hours I will not respond until after the markets are closed, because I will not know what is taking place. I will have my stops in and that is that.

STUBBORN

I guess I am just stubborn ( A thought that keeps popping into my head ). In reality it is not that at all, I am just going by what my studies tell me. First there is a very powerful mid term election up bias in stocks, and we have certainly seen that. That bias basically expires tomorrow. We know the PPT will not allow this market to go down before that time, that is a given. If for some reason every mutual fund in the world decided to sell everything they owned in the next 3 hours, the government would likely take a trillion dollar position long the SP 500, to reverse the slide. Of course that would violate the laws on position limits, but as we have seen they pay very little attention to the rules of our land when it pertains to them. As a result, there is no reason to short this market before Wednesday no matter what your signals might tell you.

However, in the bottom of the two indicators, there is a special pattern that is hard to spot, and is proprietary to Larry Williams, so I will not point it out specifically or what the rules are. It is a sell pattern that does not show up often, but is usually pretty good when it does. It does not pinpoint a day for entry, just a direction to look. We do today if we were to close above 1193 have a possible trap pattern for a sell. I doubt that is going to happen. I think it is more likely that if we were to get a trap and reverse pattern, it will setup tomorrow indicating a short on Wednesday. It would be a buy the rumor sell the news type of situation. This would just require a close above this recent flat congestion that reverses the very next day. I have no idea if this will happen or not, NONE. I also have no expectation, NONE. It is simply a possible setup that could develop that I will act on if it does.

One of my weaknesses as a trader is these running moves like we have had here. They just creep along with very small pullbacks, and make retracement entries tough to find. The indicators I use often diverge during runs like this, so I have to use a ton of judgement, and be right about all of those calls, to not get clobbered during runs like this. It does appear to me that almost all indicators diverge against trend runs like this that just creep along, so we have to be aware of that. Life is a judgement call and so is this. In general I think there has to be alot of very prominent divergence, and not just wiggles, to go against a trend like this looking for a reversal. The other exception I have found is you can go against them when the pattern in the bottom indicator is there.

Larry Williams just recently let some of us know of a cycle due in the metals that could call for a major top right here, specifically in Silver. This would setup a very interesting scenario if it were to pan out. That would likely mean a bottom in the dollar and probably a top in stocks. However, that is not necessarily the case. At some point the correlations that are making the world one market, are going to de-couple. The DX does appear to be making a bottom here as I have stated recently, and I am looking for buy signals there every day. I have orders to go long there today, but they are above the current price by enough that I doubt they are going to be filled.

I am content to wait a day or two for the election to pass, so that some of the "market forces" back off a little and let things go where they may. For any readers of this blog who have any common sense at all, set your politics aside and vote for the R's. Even if you are a staunch liberal, this whole thing is coming down around us and it has to be slowed down. This insanity needs to be stopped now. Punish the suppressor while you still can. The guy is an idiot, admit your mistake and move on. This is what I do every day after a bad trade. I kick myself for being an idiot, admit I was wrong, and correct my errors the next day.