Going back to last week's discussion on a potential bullish set-up in the making, it lasted for less than a few hours. In fact, all I got off that idea was a 150 point gap up, that I didn't profit from, and a punch in the nuts as we faded that gap now down to the lows.
Typically, if we're close to a turning point, things start to diverge a little. None of the divergences we discussed last week set up, therefore, its hard to get bullish for much more than some sort of retest. Copper, Emerging Markets, Russell, all new lows.
Speaking of the Russell, it got absolutely blown out today. Further weakness is going to put this Index back at the 2010 lows. If you are asking yourself "Why is this important?" take a look at the chart below.
The indices all have massive volume pockets underneath their 2010 summer lows. Since the Russell is a good leading indicator to follow in these instances, it should point out a few things.
First, the lows in the Dow, S&P and Nasdaq are going to give way.
Second, if the Russell takes out the level I pointed to in the chart, there will be a swift, sharp decline through that volume pocket. Similar to the breakdown in early August. In S&P terms, a similar move should price the S&P at 900.
That's something to consider, if the Russell points the way.
I have this to say about equities...
I've been a bear, trading both sides of the market for over the last month. We've done quite well. About a week ago I was absolutely certain that this market would trade a lot lower before it traded higher, but in the last two sessions, my opinion has started to change.
First off, to illustrate how bullish I am here, I managed to pick up a position in some quarterly TZA 44 calls, filled at 1.56. That's only $.11 off the low today, and you saw the meltdown that took place shortly thereafter. I also liquidated my longs, in order to protect profits. I had a few lame longs heading into the day, but they were longs nonetheless.
Here's what I am thinking...and it's subject to change on a moments notice.
Coming into this week, we saw major bearish divergences across most inter-market relationships. Take a look at theEEM, which broke its "bear flag" or base last week. Hard.
If you've been watching Copper, it broke it's base over a week ago, and has been spiraling lower ever since.
With the late day scramble out of stocks, this should set up a great dip buying opportunity before we exit this range to the upside. The groups that have been absolutely mangled present some decent opportunities, so long as the right technical set-up occurs in the next couple days.
Here's what I want to be on the lookout for in the next 1-3 days, are continued bullish divergences. If this occurs, while the $SPX is around 1160, I plan to move a good chunk of my capital back into stocks. I've been managing a smaller book, playing both sides, and trading under shorter term time-frames. Most trades I've round tripped lately have been within 48 hours. If I get said move, I'll start putting more meaningful capital to work.
I'll be covering the remainder of my puts into weakness here, but I am building my dip buy lists like a mad man. I sense opportunity on the horizon. One that should, at the very least, fill that volume pocket in the $SPX, which is exactly 100 points up from here.
Again, I'm looking for a decent dip buy opportunity in the short term. I'd like to see a few things happen tomorrow, and I'll be concrete in my footing...
Lower high in the VIX.
Continued strength in Copper, and or EEM.
And into weakness, I want to see several sectors, like OIH, IYT, and others not take out that last low.
If this happens, look out above.
Trading Addicts is proud to present "Trading the Extremes" by TradePoint Software.
You're invited to join the "Trading the Extremes" webinar starting at 0830 PST on Tuesday 8/09/2011.
Registration will open at 0800 PST - there is a limit of 100 participants.
The discussion will demonstrate how 3 of the indicators from Indicator Pack 1.2 can be used to spot the formation of session and local extremes in real time. The talk should take about 15 -20 minutes with plenty of time for questions after.
Just click or copy and paste the link below after 0800 on Tuesday and you will be in.
Meeting Subject: Trading Local and Session Extremes
Meeting Date: 08/09/2011
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Today's volatility might have left you feeling a little sea-sick. Equities gapped significantly higher off the open, filled the opening gap in the first hour of trade, sold off post ISM, and rallied into the close to finish the day only slightly off of Friday's close.
Now the market awaits tonight's vote on the lingering debt crisis, and the impact will result in a gap tomorrow morning in stocks. Despite a tremendous amount of uncertainty, and volatility levels not seen since March, there were some interesting signals generated today, underneath the surface of a 33 point range in the S&P today. Let's start with the indices.
The most interesting chart across the indices was the Russell 2000. The $RUT has been lagging the $SPX into strength lately, but as of today, the Russell was the only index that didn't take out Friday's low. The Nasdaq, Dow, and S&P did.
Next, there was an interesting divergence in the VIX. While the S&P took out Friday's low, the VIX closed a considerable distance off Friday's high.
Next, there seems to be some strength in Emerging Markets. This same set-up occurred over the last few summers, where equities were consistently taking out lows, and Emerging Markets started to outperform. You can make the case that the EEM has been holding up extremely well, considering the weakness in stocks.
Finally, while stocks were at their weakest point today, the McClellan stayed positive. While it was only a slight divergence during the weakest point of the day, the McClellan actually posted a gain today, closing at -69.
If you go back and study these indicators at the March 2009 lows, the July 2009 lows and the August 2010 lows, you'll see similar set-ups taking place.
While these divergences don't necessarily signal the timing of a reversal, the similarities between them in relation to former major turning points is an excellent template to draw comparisons from. This could also set-up an interesting outcome from Jackson Hole later this month.
I'm watching the same stocks heading into tomorrow. No new additions at this point.
For the Bullish Watchlist, CLICK HERE.
For the Bearish Watchlist, CLICK HERE.