Unusual Overnight Patterns

From October 2008 to March 2009, the financial system was  crashing.  A lot of funds got wiped out, a lot of dumb money was eliminated.  The remains are not so much the fish that were so abundant, but a lot of sharks.  This brings me to the topic of what I view as very peculiar overnight action the past week.  I am sure the stock traders could care less, but I'm mostly a futures trader and it matters to many of us.  A bread and butter play of many stock traders is to sell emotional large gap ups, and buy emotional large gap downs.  However, those plays are well known and many smart traders anticipate the RTH (regular trading hours 9:30 - 4:00) moves and buy or sell ahead in the premarket.

Big gap ups that reverse in regular hours are not that common anymore, because the smart traders who anticipate the RTH  reversal are already in pre market pounding on the futures while they are gapped up big.  By the time the market opens, the gap up has been shrunk in size to where there is little edge.  This is what happened after the State of the Union speech by Obama on Wednesday night.  We traded up to 1103 on the futures but we drifted lower all night in the overnight session until the gap up was whittled down from 9 to 3 points.

Same can be said for the big gap downs.  On Monday night AND Thursday night, we had mini panics in the Asian hours.  On Monday night, the market went down to 1081 during Asian hours, after closing at 1092.5 in the RTH session.  Usually, this means that we stay down big during afterhours and gap down big ahead of the RTH session.  But the smart traders smelled the gap down buying opportunity and jumped on it, buying up futures overnight in anticipation.  So a gap down of 11.5 points turned into a gap down of about 6 points.  Same thing happened on Thursday night, but was even more extreme.  The market closed the RTH session at 1079.25, and started weakening in Asia, down to 1071, an 8 point gap down, before staging a massive reversal and gapping up on the day by 6 points. 

The competition out there is as tough as I have ever seen.  There is an immense amount of statistical data that is available to the big trading institutions.  They are looking for whatever edge they can get, and it is mostly coming up with mean reversion strategies that buy weakness and sell strength.  That is the fundamental statistical strategy among seasoned stock market traders.  They seem to be crowding out their own edge and are partly responsible for these recent unusual overnight patterns.

Long For the Weekend

I have gotten long below 1070 for the weekend, I think odds are that we gap up on Monday.  If we gap down, it will present an opportunity to buy more at lower prices.  There is strong support in the mid 1060s.  My target is fairly modest, aiming for 1085.

Not Good For Bulls

Today's initial rally and failure to continue just made the intraday chart more bearish. There is more bearishness but traders are still thinking that a bounce is just right around the corner.  Perhaps that is why there is no give up and a flush lower, the buyers are just hanging on, hoping for a bounce.

I think a bounce will come, but from lower levels.   I am staying short here, and expect the next couple of hours to be weaker. 

GDP Excitement

The GDP number came in better than expected, which was widely anticipated, yet the market went up on it anyway.  The buying won't go away easily, traders have been well conditioned to buy dips.  Instead of a cascade selloff, I imagine a drip drip selloff with down days sprinkled with flat to slight up days.  I think the low for this correction is still many days away.  Today is the end of the month, historically bullish, but that hasn't really held up for the past several years.  The Chicago PMI number will be out at 9:45, but usually its leaked a couple minutes early to members.  I will maintain my short position. 

Short Ahead of GDP

I have added to shorts here ahead of the GDP number.  Overnight trade was quite volatile, but we're near the highs overnight.  Expectations are pretty high for the number.  I think there will be a sell reaction to the number, whether it be good or bad. 

Overnight Short

The closing 30 minutes of trade can tell a lot about a market.  The successful Bernanke cloture vote got the traders excited, but this market doesn't have the gas to go higher and finished weak in the closing minutes again.  That's the 4th weak close in the last 5 trading days.  MSFT and AMZN numbers were great, as expected, and there isn't much reaction to them.  Tech is overowned, we still need to work off the extreme bullishness that was built up over the past couple of months.  I am going to keep my short position overnight.

MSFT, AMZN, Bernanke, GDP

That is the lineup for this afternoon and tomorrow morning.  I think most traders are leaning long on all 4 of those items, i.e., they think the outcome for each of those events will lead the market higher. 

• MSFT and AMZN might move the market a bit but I don't think earnings matter at this point unless they are really bad.  Good earnings is most priced in.  
• Everyone knows Bernanke will get the nod, so the news will be anti-climactic, and possible sell on the news.  
• I am hearing that the GDP number will come out strong tomorrow.  Expectations seem to be high for this.  That's not good.
  

1081-1083 is Now Resistance

Are we going to pull off one of those tricks that this market has always done when there was a big dip, and ram a rally into the close?  I am not betting on it.  Serious technical damage has been done, and we will need to do some work at lower price areas and consolidate before springing higher.  Bernanke is keeping the bears at bay for the moment with his imminent confirmation but that is pretty much priced in.  I am staying short.  Target is the mid 1060s.

Very Bearish Action

What I am seeing extremely bearish on the screens.  I expected at least a bit of a pop after we got Obama out of the way but its not happening.  It seems like yesterday's rally gave everyone a sigh of relief, and this market is on shaky footing.  Bernanke's reappointment vote is coming up at 10:30 AM, I don't think it makes a difference.  Everyone knows he's getting reappointed.  In fact, it could be another sell on the news item.  I am short now.

No More Obama

Now that we have the Obama factor eliminated for the short term, the market will be focused more on technicals and China.  China looks very weak right now, and it doesn't look like it will spike back up anytime soon.  Looking ahead, the China factor could cause a few more gap downs in the coming days. 

We probably will have a sigh of relief rally for the first couple hours of trade, with Obama out of the way.  But I don't think it will be all that strong.  After that, I am not so sure, but I wouldn't want to overstay the long side.  It will probably be a sell opportunity.  I have changed tactics for the next few days.  I will be looking to short rallies, instead of looking to aggressively buy dips. 

Buy the Bad News?

Obama State of the Union is the last mine in the minefield before the longs get back to aggressive buying.  You could see that the longs were eager to let loose as they immediately bought after the FOMC announcement that Ben will keep rates at zero forever.  Now the nervous longs will wait to buy after the bad news passes.  Sell the rumor, Buy the news?  That's probably the case for tonight, I expect a gap up tomorrow as "relieved" longs buy after realizing that Obama won't take out the banks as his main agenda.

I expect us to test 1103 tomorrow and may get as high as 1105.

No Chasing

I think we keep going higher and finish near the highs but I don't want to chase because I don't have a ton of confidence chasing rallies in this market.  If it falls back down to 1080, I will welcome it as a buying opportunity.  Otherwise I will just watch.

Strange Action

Usually you don't see this kind of late selling right ahead of the FOMC meeting, so I don't know how to read the current action.  It feels like we need a flush lower before going higher.  I can't picture us going straight up after the FOMC announcement.  Another scenario, very unlikely unless we are super weak, is that we selloff all day after the annoucement.  I will play it as the first move lower second move higher type of day. 

Now Long

I am buying the premarket weakness that just hit the market.  My price target is 1092. 

Fed Day

We have sold off hard over the past week coming into the FOMC meeting.  It is now a more two sided market, and every bounce has been sold lately.  Today could be a fulcrum day.  A change of short term trend for at least a couple of days.  The market is very close to strong support levels around 1080-1085, and it will take a lot of initiative selling to get through that.  I don't think we'll do it this go around.  It will be quiet ahead of the FOMC meeting.  But I do think there will be an initial selloff on the FOMC announcement as Obama jitters overcome the market ahead of the State of the Union address.  That should be the time to buy.

Weak Market

Another weak finish.  Despite the oversold readings, the market is having a hard time mounting a sustainable rally.  Traders are nervous ahead of Obama on Wednesday night and I don't think the longs will chase the market at this juncture.  FOMC is tomorrow so that throws a wrench into things, I am closing out my position and will be flat overnight.

Holding My Short

I got in early on the short, but I'll hold on to my position.  I still expect a selloff in the final 30 minutes, its just a matter of from what prices.  If we go above 1100, I don't expect it to last long.  So I see no point in covering here.

Selling Em

I think we won't go much above 1096, so I have been selling above 1095 today.  I have a medium sized position, and will add more short if we revisit 1095.  I feel like we'll have a sloppy 2nd half of the day and will test 1083 at some point today.

Lower Range

We broke new ground in afterhours, trading down to 1081, and longs are getting nervous.  AAPL was a classic sell the news to blockbuster earnings, and this market looks like it wants to test that 1080-1085 support level.  I want to be buying when the market tests that support area because I think it will hold up this time.  We're slightly above those levels, so I'm going to wait patiently for lower prices to buy.  If we head to 1096, I will be shorting. I will be trading it as a range, just at lower prices than yesterday.  Consumer confidence and Home Price Index are coming out at 10:00 AM, so they could shake up the market a bit, more likely to the downside.

Altered Beast

We have a new market folks.  No more unstoppable dip and runs that close strong.  We are seeing dip and run and then dip again with mediocre close.  Instead of dips being hard to catch and being fleeting, the rallies are hard to catch and fleeting.  It is a reversed market.  A ton of technical damage was done last week, and it will take time to repair that.

Today's weak effort just emphasizes how changed the market is.  AAPL should be a sell the news phenomena, but with the close being weaker, it makes it tougher to game tomorrow.  I will stand by and watch, no position at the moment.

One Day Bounce?

I am a bit disappointed in the showing that the bulls made today.  Bernanke news gave them the ball and they could run with it, and instead they didn't do much with it.  Despite the little rally we're putting on here in the final hours, this market is telling me that it wants to consolidate at these levels.  I see no quick bounces like the past several dips.  This consolidation will last for a couple of weeks at least.  I am contemplating going short overnight.  Odds are we gap down.

Buying This Weakness

We are weakening here and I am taking advantage by building a medium sized long position.  I will add more as we get lower.  I believe we will hold the fort and rally in the 2nd half of the day.

Bernanke the Sugar Daddy

This market wants its quick fixes, its sugar highs.  That is what Bernanke offers.  This market acts like a spoiled baby.  You take away the sugar daddy, and you get a market that plummets.  You give them the daddy again this morning with news of Bernanke being all but confirmed by the Senate, and the futures jump. 

It is ridiculous to think that Bernanke is a savior, but perception is reality.  I have closed out my long position in the overnight session because I don't see much upside above ES 1102 after the heavy volume selloff Friday.  Those kind of selloffs aren't erased in one day.  So I expect us to trade between 1090 and 1103 for most of the day.  I will be looking to reinitiate my long around 1090 and sell/short around 1103.  I expect the first half of the day to be weak, the second half of the day to be strong.

Rethinking the Next 2 Weeks

After sleeping on it, I have reconsidered the current scenario.  I ignored the signs of impending doom and thought the bull had a bit more legs.  It is not as bullish an opportunity as I first thought.  Since we easily penetrated the 1100 level on the SPX with heavy volume, I now think we're in a period of consolidation.

I still strongly believe Monday will be a trend up day.  This based on the pure panic I saw in Friday trade.  Usually a lot of that is reversed on Monday when bargain hunters become more brave.  But after Monday, I think we'll see some choppiness and a likely retest of Friday's closing levels.  A Bernanke reconfirmation next week could take us to 1110-1115 area.  Instead of a snap back rally as I first envisioned, we'll chop around these levels for at least 1 - 2 weeks.  During that time, we might make a new low down to 1075-1085 area.  After that, I expect a resumption of the uptrend, and a trip back to ES 1140.  On a swing trading basis, I see at most 15 points of downside and 50 points of upside.

Crazy As It Sounds

It looks like I'm crazy buying during this avalanche of selling, but this market has not offered many good buying opportunities.  The dips have been brief and fleeting.  The volume was incredible today at 3.54M contracts traded.  I think its the most ES volume I've seen since early 2009.  A lot of liquidation was being done and the bull side lost quite a few followers.   My target is 1125-1130 on the ES. As crazy as it sounds, and as silly as I look now, I still believe that we're going to be back to 1140 in a few weeks. 

Despite my losses on the long side, I welcome this volatility.  Its possible to daytrade again.    

Pure Panic

I will be buying at the close, I have a long position but I will be making additional purchases to get a substantial position.  This is pure panic and we'll likely gap up on Monday from these panic prices.

Swinging Long

I am staying long and believe today's trade is a puke out of long positions by weak holders.  The volume is through the roof, volatility is high, and we're down 4 points on the S&P.  I am going to keep my long position for a swing trade.  My target is 1130 on the ES.  A Bernanke confirmation next week should be a bullish catalyst.

P.S. - Despite the heightened volatility, the intraday range is still just 11 points.  We've traded a lot of volume going up and down but ending up back to prices near the open.  That tells me the short term downtrend is meeting support. 

Obama Panic

When there is an excuse to sell, its usually not a good time to sell.  We got that excuse yesterday as Obama suddenly acted tough on banks with new regulations.  Knowing Washington, nothing significant will pass with the banking lobby making noise.  The volume and volatility was through the roof yesterday.  From my back of the napkin view, that's usually a sign of panic and at least a short term bottom.  Add to that the several weeks last year where we traded in a range forming support between 1105 and 1110 on the ES.  Barring a total panic today, which I view as low probability, we'll likely bounce to 1118 and oscillate between ES 1111 and 1118.  I am positioned long.

ES 1118

There is resistance around 1118 in the ES.  This will be a likely stopping point for any rally in the overnight market.  On the other side, ES at 1111-1112 is strong support.  I expect the overnight trade to continue to be strong, leading to a healthy gap up.  I don't think we have enough strength, especially on a Friday to gap and run higher.  We'll likely range trade for most of the day between 1111 and 1119.  I plan on trading that range. 

Reversal of early weakness out of Hong Kong will eliminate some of the China worries in Friday's trade. That should allow us to close near the high end of the range.

Buying for Tomorrow

I plan on doing some buying near the close to capture a gap up move in the ES.  I am willing to take the overnight risk tonight with traders fearful of further weakness.  With support at 1115 on the S&P right below, the risk reward is very compelling.  Also, the European and Chinese markets are very oversold.

Swing Long Opportunity

I see very little downside from current levels, so I am out of my remaining short.  I am now looking to go on the long side, looking for a swing long opportunity.  I will likely hold this long till early February.  I will play this through the ES or through FXI and other China related ETFs. I believe we are very close to a sturdy bottom. 

Feeling Some Panic

I have closed out some of my position and will be closing out the rest later today.  I will be looking for buys in the final hour of trade, I don't think we're going to bounce to the close like yesterday.  But a weak close could cause some panic which  I would like to buy into.  Traders will not want to be long overnight.

Reversed to Short

I am now short the ES and will ride it down to the close.  I believe 1110 is in the cards, there is a bit of fear in the air and I don't think it's going to go away by the close.  No one will want to be long overnight. 

Oblivious

The S&P is currently ignoring the world markets.  China is weakening, Europe is lagging, the dollar is strengthening, and commodities are lagging.  Yesterday was a V-shaped day, another strong second half of the day.  One of these days, the close will be nasty, but the market is not ready yet.  I think the first half of the day will be up, and may enter a small long position near the open.  The reaction to earnings so far has been negative.  They have failed to ignite a big rally and have mostly been sell the news.  Looks like they won't matter much going forward, it is all about the technicals.  And there is a brick wall around 1130 on the S&P. 

Play It Again Sam

We did again, a dip intraday, and steady buying from midday to the close, climaxing near the close of course.  We have seen it over and over again.  Due to the European and Chinese markets being somewhat oversold, I think they will bounce back leading to a gap up tomorrow.

Market Topped Out

Scott Brown was the top signal!  This market has traded vigorously back and forth from 1128 to 1147 for the past week.  The volatility is greater than normal and we haven't gone anywhere.  That tells me we've topped out, and likely the next move is lower. 

Choppy

The overnight action was choppy, and it remains choppy with earnings coming out from the big banks.  Notable is the strength in the dollar, especially against the euro.  There are crosswinds which are blowing, the market can continue to ignore the strengthening dollar and weakening commodities, but not for long.  It is risky to be long here, but the price action speaks to a strong market.  I will wait and see what happens, we could stay choppy for the first half of the day.

Out of My Short

I took a licking today as I was short from Monday and the market rocketed higher.  I don't think this market has much fuel left, looking at the moves in other asset classes. But  I feel uncomfortable being short overnight so I closed out my short in the final hour.  I will reassess tomorrow morning.  Today's move seems to be more than meets the eye.  Its not just because the Republicans will win the Senate seat.

Senate Election on Tuesday

There is a Senate election in Massachusetts which many traders are focused on.  The reason is that traders think that a Republican win will help to block health care and financial reform/taxes.  I expect any reaction from a win or loss to be an overreaction, and would be looking to sell any good news that comes from the Republican getting elected. 

The anticipation of the favored Republican getting elected seems to be driving this early morning buying.  Buy the rumor, sell the news could be in play.  Also, IBM reports earnings this afternoon, and BAC, WFC, and MS report tomorrow morning.

C and Overnight Weakness

Well C has come out with earnings and the initial knee jerk reaction is to sell 'em.  We are right at important support around 1127.50, if we go below 1125, there is a lot of air till 1120.5.  I am currently short from Monday in the overnight session, and I believe, we may have a little flush out today.  No Mutual Fund Monday today.  I will remain short and have my targets for my short at lower levels. 

Sentiment In a Bull Market

When the trading gets less emotional, I view sentiment as being less helpful.  And in general, trading is less emotional in a bull market than in a bear market.  I think we are in a bull market.  Some many disagree with me, and say we're just having a monster bear market rally.  But the lack of volatility and steady uptrend are bull market signs.

In a bull market, sentiment indicators lose some of their effectiveness.  Fear is a stronger emotion than greed.  And when markets are less emotional, the sentiment indicators should naturally be less effective.  I will bet that buying weakness during bearish sentiment environments is much more profitable than selling strength during bullish sentiment environments.  Bottoms tend to be sharp and fleeting, tops tend to be round and lasting. 

Right now, shorting the market because sentiment is too bullish is not that high a percentage play.  It is still better than 50-50, but not much better.  The reason is because tops are processes and last quite a while.  Thus, timing a top based on sentiment indicators is more difficult than timing a bottom on sentiment indicators. 

Timing becomes harder in a bull market.  My strategy is based on pinpoint timing.  I am a manic trader.  Not an investor.  I need to time markets correctly or I don't make money.  That is why I hate bull markets.  Not just because I'm naturally bearish. 

MLK Weekend

It is going to be a long weekend, but Europe and Asia will still be quite active on Monday despite the US market being closed. Today's trade did surprise me a bit, despite the rally in the final hour of trade.  I expected this market to be more responsive to the initial weakness.  But selling on Tuesday and Wednesday has softened the underbelly of the bulls.  This market is becoming vulnerable.  I closed out my long position at the close.  I actually think there's a good chance that we'll gap down on Tuesday.  And the SPY weakness in afterhours, selling off about 0.15 after the futures close is signaling that there is a real possibility of a post-options expiration hangover. 

Buying It

I am starting to build a long position at these levels.  I will add on the way down.  I expect a strong final hour of trading.  We may selloff all day, that is the risk.  But I see that as being low probability.  More likely, we hold support and have a little rally into the close.

Out of My Long

I have taken a loss and will re enter around 1130.  I got in too early on the dip.  It is getting more dangerous to buy dips for sure.  But I see opportunity for a rebound later in the day.

Buying This Dip

Looks stronger than the other selloffs, but I am a buyer here.

S&P Outperformance

The S&P is powering ahead, while the world indices lag behind.  Does this mean that the US is out of the woods and going to take over the leadership?  I doubt it.  It just tells me that the rally is long in the tooth, and the initial laggards are starting to catch up to the leaders.  I view the emerging markets as the first movers, either up or down.  First it was China that lagged behind, and today with another gap down, the European indices have shown notable relative weakness.

INTC blew out earnings and is a sell the news phenomena, a much publicized one.  So a reverse of a reverse psychology would mean one has to buy the good news, because so many people are thinking that good news will be sold.  JPM earnings brought down the futures a bit but the stock itself didn't react much.  Odd.  I am leaning towards buying this gap down, because this market is not near term overbought.  It is too dangerous to short such a strong market that is not overbought, despite the bullish sentiment. 

 

Nothing Easy

A big gap up on strong INTC earnings would have been an easy sell.  Well, we're getting a very small blip higher on the blowout earnings, and INTC is only up about 1.5% on the news.  I don't think we'll be getting that easy sell opportunity. I am staying on the fence. 

Waiting For a Blowoff

The bears gave it their best shot on Tuesday and Wednesday morning, and it got them nowhere.  We are right back at yearly highs on the SPX.  The SPX is a beautiful looking chart if you are long.  But the investor sentiment is very complacent.  For me, the final arbiter is price action.  And it is awful on the short side.  I can't make myself go long here, with all the complacency.  I definitely will not short yet.  I will wait to see what the reaction is to INTC.  I have no strong opinion about how the market will react.

Extreme Call Activity

I usually don't put too much into put call ratios unless they are extreme and/or persistently high or low.  Well today is a day of extremely low put call ratios.  On the CBOE, its 0.47 and on the ISE, its at 0.38!  That is an extreme level of call activity that I rarely see.  There is a lot of optimism ahead of the INTC report.

P.S. - Dax and the European indices are lagging the SPX, joining China in the lagging category.  As SPX traded near YTD highs today, Dax was trading nearly 2% below its YTD high.  One by one, the indices are breaking down.  Nasdaq has lagged so far this year as well.  The last one remaining is the SPX.

Chinese Canary

The Hang Seng H-Shares Index is a good indicator for worldwide interest in Chinese shares.  I don't like to use the Shanghai Index because it is closed to foreign investors.  In the 2008-2009 bear market, the H-shares index bottomed before the SPX did, bottoming in October instead of March.  I like to look at it as a leading indicator for risk taking.  What you have is lower highs from middle of November, a negative divergence against the SPX. 

Despite the positive sentiment in emerging markets and China, the H-Shares have lagged the SPX.  What seems to be happening is that positive sentiment which caught on more quickly in China shares is finally catching up to the SPX, boosting it higher relative to China. This is more of a big picture theme, so it will play out over months, not days.  But it is a warning sign that the rally is very mature.

For today's trade, I am slightly positive but hold no position.

 

 

INTC: Short's Worst Nightmare

Today's market reacted in a classic dip and run pattern.  A slight whiff of fear around 10:30 AM this morning with crude getting crushed was enough to put in a sturdy bottom.  It is now time to position ahead of INTC and JPM for Friday.  Considering the market reaction to the past 2 INTC earnings blowouts, I suspect most traders don't want to be short going into Friday.  I have closed out my longs at the close.  I expect a bit more strength tomorrow, but the risk reward for a long isn't so great at current prices.

Dip and Run Rerun?

One of this market's favorite patterns, the dip and run.  We dip in the first 30 to 60 minutes, and then we rally right back to the day's high and keep marching higher for the rest of the day.  Below is a chart of what happened last Thursday.  The dip last Thursday isn't as big because the market had already gapped down to start the day, while today started with a gap up. The hallmark of the dip and run is that the dip doesn't last long.  The market rebounds immediately with hardly any pullbacks during the rebound.  Like today.  It is very unlikely that we selloff in the 2nd half of the day.  I am sticking with my longs into the close. 

By the way, just noticed a gigantic 120,000 contracts traded in 2 minutes, taking the ES from 1136.5 to 1138.50.  Looks like some fund just capitulated on a giant short position. 

Going With The Flow

It is a bull market.  Those that tell you its still a bear market rally need to be sent as specimens for the Museum of History.  We are gapping up modestly today, about 4 points from the cash close, after a strong final 15 minutes of trade.  Despite China jitters with removing liquidity and being down 3%, the markets are gapping up.  This in addition to the few points tacked on in the 15 minutes after the stock market closed. 

The market should oscillate in the first hour, after which we should resume the ongoing trend.  ES 1142 to 1144 remain end of day targets.  I am staying long.

Dip Buyers

Well the market didn't disappoint the dip buyers.  I got in a bit too early and ended up averaging down, but the key today was to get long under 1135.  Because I believe we will be trading back over 1140 on the ES by tomorrow.  Today was about building a long position, not daytrading.  Targets for the ES is 1142-1144 area.  I believe dip buying will work till Friday.  After options expiration, it will get trickier. 

Buy Opportunity

We finally got the selloff that traders were waiting for.  I think its a buy opportunity this afternoon.  This market doesn't give many buying opportunities.  So when they arrive, it must be bought.  There is strong support around 1127-1128 on the ES and that should stem the damage.  I am a buyer this afternoon, adding to long positions.

Temporary Buyer

I have borrowed the bull horns for this morning and am buying this morning ahead of the opening bell.  The market is not overextended and I don't picture a selloff occurring before the major earnings start coming out later this week.  Alcoa disappointed, but they are irrelevant in the big picture.  The techs and banks are what matters. Everything else is pretty much meaningless during earnings season.  I expect the gap to be filled today.

Sunny Skies

Since the New Year, its been a string of strong closes and today was yet another one.  With INTC and JPM earnings coming up on Thursday/Friday, we'll probably stay up with only minimal selling.  I will welcome any small dip and be a voracious buyer.  I am going to join the bull camp, and look to get long on 3 point dips.  I will do that till Friday, at which point I will also consider the short side.  It is just insanity to short right now.  The market clearly wants to go higher.  If we gap down tomorrow, I will buy aggressively.

Next 4 points

Right now at 1140.50, I believe the next 4 points will be down, not up.  The reduced volatility has made me shrink my expectations.  This is definitely not a trader's market, it looks like a investor's dream, low volatility and steady uptrend.  All the Fast Money Halftime traders had a buy for the close.  I will fade those happy campers.  I remain short.

Mutual Fund Monday

It is a pattern that has been bashed into the heads of all short term traders.  The gap up Monday and further strength throughout the day.  So it is no surprise that we are gapping up again after the strong day on "bad" news on Friday.  The money on the sidelines is being put to work, the funds can't hold out any longer, they have to come in and buy or be left behind. 

Since we are at new highs, one of my favorite plays is to fade the first attempt at a breakout into a new high on the S&P. Usually it fails.  Especially likely to fail today because we are close to the 1150 target on the S&P.  Thus, I will be a seller this morning, initiating a short position anticipating intraday weakness.  I expect any strength in the first hour to be a sell opportunity.  Target price is 1138 on the ES. 

Changing Conditions

One of the keys to being a successful trader is to quickly identify changing conditions and adjust.  That is what makes trading interesting.  The markets are always changing.

I am guilty like many others of not adjusting quickly to the changing market environment.  In many ways, I am still in 2008 – 2009 bear market mode, expecting sharp selloffs coming frequently and unexpectedly.  Volatility was high so I had high volatility expectations. That got seered into my brain.  But the stock market has made a dramatic transformation.  It is now a dull, low vol market that just goes up slowly and steadily.

Part of the problem is that we’re all still transfixed on the bad economy.  That colors our thinking about the current stock market.  We are afraid to go long for fear of a sharp drop.  Yes, eventually the stock market has to reflect the economic value of the companies in it.  But in the short term, the economy can be horrible and the stock market can keep going up.  And odds are that the economy will get better, just because it got so bad.  There is  mean reversion for economies as well.  The economy is cyclical.  The economy bottomed in 2009, its unlikely that it will form a top in 2010. 

Many are still focused on where we’ve come from in 2009, not where we are in the big picture.  Sure, we’ve rallied over 70% off the March bottom, but if you look at 2009’s performance, it was 24%, not 70%.  On December 31 2008, S&P was at 903.  On December 31, 2009, it was at 1115.  And if you want to go back 2 years, we were at 1468 on December 31, 2007.  So you can say we’re still down 22% from the beginning of 2008.

How am I going to adjust to these changing conditions?  I should have followed my 2010 view more closely, but I am stubborn like many traders.  Starting from now, I will wait for extreme overbought conditions and other supporting factors to short.  Not just overly bullish sentiment.  And I will start to go long more often on dips.  I will temper my profit expectations due to the lower volatility.  Until the majority get much more positive on the economy (NOT the stock market), I think we’ll continue to grind higher with only brief dips.

Premature Raid

I am like many others out there, I have underestimated this bull market and the liquidity flowing through all assets.  It seems insane to be shorting such upmoves, but the sentiment has gotten so stretched to the bull side that I expect a sharp selloff next week.  I'll have to regroup the troops and make another raid next week.  I was too early this time.  I am going to be flat over the weekend.

All Bulls

Fast Money Halftime Report was all bulls, they all agree that the market is going higher in the short term.  Financials are also underperforming today.  This only gives me more confidence that we'll selloff soon.

P.S. The CBOE equity put call ratio has gone down even further, from 0.49 to 0.45 on the last reading!

Da Bear Suit

I just looked at the CBOE equity put call ratios, and its below 0.5.  Despite the flat indices.  Another low ratio!  This can't sustain forever.  Complacency is rampant.  The jobs report was poor, and while it looks like its being ignored, it will matter by the close.  I have initiated a short position and will add more as the day progresses.  I expect selling to come in the final hours of the trading day.  

Traders Caught Off Guard

The expectations had gotten too high, so a disappointment was going to send this market down.  Surprisingly, ADP numbers came in right on the dot to predict the NFP.  With traders leaning too long, I wouldn't be surprised to see a little forced selling at the open.  I don't think it will last long though.  The jobs number doesn't change my outlook on the market at all.  I will be looking to short sometime during the middle of the day today, but not at the open.  Just picking my spots. 

ES 1140

If the overnight market in the ES can break out through 1140, we're likely to see a little bit of panic buying before the nonfarm payrolls report.  I want to get bullish on the euro but the price action is not that great for going long.  Crude oil has a technical break out that looks legit, and will likely march higher over the next few months.  Also, oil sentiment is not overly bullish from what I am seeing. 

From the lack of energy so far in the overnight session and the bumped up consensus for NFP, I see it as likely that we'll sell off on the news.  We could get a very brief spike lasting 1 or 2 minutes, but that shouldn't last.  More likely, we'll just selloff right after the news.  By 8:45 AM, we should be lower than at 8:29 AM.  Just a hunch.

First Reaction to NFP

Recent articles, CNBC, and other financial media seem to be converging on the same theme.  A positive jobs report.  Consensus expectations have gone up as the market  averages have gone up.  Thus, consensus will be tougher to beat.  Now I still expect overnight strength leading up to the report.  But it seems more likely now that the first reaction to the report will be to sell it.

From 4:00 PM to 8:29 AM

I would not want to be short during that period, from close to right ahead of the non farm payrolls tomorrow.  In fact, I would be looking to get long to try and capture a few points forecasting a  slow upward drift leading up to the NFP in the overnight session.  The market is showing underlying strength, and refuses to stay down.  I know the put call ratios are ridiculously low and the bears are almost nowhere to be found.  That will come to matter eventually.  In a bull market, the market goes up steadily and grinds higher, with sharp, brief selloffs.  We are close to one of those sharp brief selloffs.  I expect it to happen next week.

Dip and Run Pattern

We got the dip in the first hour, and now we're running back higher.  I can feel the demand for stocks underneath.  Every dip is bought aggressively, even if its just a few points.  We may have a blowoff top scenario if the nonfarm payrolls report comes in positive.  A finish near the day's highs is very likely today.    Hard to fight the tape when we're not that overextended.

Overnight Weakness

There seem to be a bit of pre-nonfarm payrolls jitters in the overnight market.  Any weakness either in pre market or in the first hour of the regular session will be a buying opportunity.  For a daytrade, I believe the close will be higher than the open.  I think there is still money that's looking to be put to work on any slight dip.  So dips are probably buying opportunities.  But beyond Friday, I am bearish due to the lack of bears and overeagerness of funds buying risky assets.

Let Them Roam

I was anxious to get short today but after seeing the restrained trade in the first hour, I opted to wait.  It feels like the institutions' ammo is running out, but I think they have a little powder left.  They are probably just waiting for the nonfarm payrolls report to shoot their last bullet.  I got flat and am waiting to see what the institutions do tomorrow.

A Little Sell Into the Close?

It feels too pat for the market to finish strong today, so I have taken a little sell position into the close expecting a small selloff, maybe down to 1130 into the close.  Put calls are ridiculously low on the CBOE again, equity put call at 0.50.  Not a huge amount of confidence however.

Flood of Money

The only way to describe the action.  There is just a lot of money looking for a home, away from safe assets and into risky assets.  The commodity markets are not big enough to handle the inflows in an orderly fashion.  Thus you get the disorderly moves higher in oil, gold, silver, and copper.  Institutions are very bullish right now, and are reaching for anything to buy.  I am still not seeing the higher volume that I like to see before I sell aggressively.  I planned on selling today but the action is not to my liking.  I will wait.

Early Strength

The ADP employment number was around expectations, and we've gone higher.  ISM Nonmanufacturing data comes out at 10:00 AM, I expect it to beat expectations.  With institutional money flows still pouring in, I expect a strong 1st hour of trade and then a selloff.  I will be looking to sell if we can get to around 1136-1138 on the ES.  I don't expect any fireworks till nonfarm payrolls on Friday morning, so the downside will probably be muted. 

ES DOM Changes

I've noticed since the beginning of the year that the ES DOM bids and offers have gotten much thicker.  Where before there used to be between 500-1000 for the best bid and offers, now there are 1000-2500.  Now, it is common to see bids and offers of 3000 to 4000 a couple ticks away from the last price.  That was rare just a few months ago.  Part of this can be attributed to the lower volatility, which makes firms more willing to make large bids and offers around the market price.  The Depth of Market book has much more size now.

In 2008 and first half of 2009, the best bid and offer sizes were much smaller.  They were usually between 100 to 1000.  Market makers were fearful of getting hit by a big adverse move.  The book was much thinner despite the higher volumes.  Now, the volumes traded are much lower but the book is much thicker.  The market makers are no longer fearful.

Lid At 1140

The SPX at 1140 will be a very tough nut to crack.  We got close today, getting up to 1136.4, but it was rejected.  Any more attempts from now till Thursday between 1136 and 1140 should be a good short entry.  Any strength Wednesday morning will be a welcome opportunity to short.  The ADP employment report at 8:15 AM Wednesday should be closely watched.

Volume Rising

I am starting to see some more volume come in, more than yesterday, despite the weaker moves.  Equity put call ratio on the CBOE is very low for the 2nd straight day.  Currently below 0.5.  We are nearing a short term top.  I will be building a short soon.  Not much time left before we get a meaningful dip. 

Don't Underestimate the Liquidity

The Fed has pumped in historic levels of liquidity to pump up asset markets that it is hard for this market to go down.
Yes, it is too much money chasing too few assets. The value of the assets is meaningless right now, because money has to be put to work or you get 0% on your cash.
Banana Ben has singlehandedly rebubbled up the economy. This is bubble economics.  It is pure liquidity and it cannot be underestimated. $1.25 Trillion of MBS being bought along with $300 Billion Treasuries is a huge amount of money pumped in. This doesn't include the stimulus pork that is coming down the line and has already been put to work.

Why do you think oil is over $80 and gold is over $1100 with a crappy economy? We are reinflating asset bubbles and the Fed will not act until its way too late. That's been the pattern for several decades. It is not going to change with Bubble Ben.
This is why you are seeing the stock and commodity markets walk on water, float in the air with ease. Don't fight it yet. Let it rise without you or even go in there and ride it higher.
I am looking for a short entry but I'd like to see more volume.  Unless we get some big move today, I will probably wait till Wednesday.

Putting Money to Work

The first day of the year is when many institutions deploy cash due to mandates, policies, tax reasons, etc.  Anything but market reasons.  They don't want to wait, and have bull rushed this market.  This effect should wear off gradually as the week goes on.  It still feels too early to short, so I have no position.

S.O.S.

Weak dollar, strong commodities, strong stocks.  We gap up, run higher and don't retrace.  Seen this type of tape hundreds of times in 2009.  No need to be a hero.  I am mostly on the fence here with small probing sell orders.  Gold is a decent sell opportunity at these prices.  We may squeeze a bit higher for 1 more day, or this could be it.  I will be building short positions if we go higher from here.

First Day

The commodities are very strong in pre-market trading and the dollar is weakening, especially against the commodity currencies.  A lot of this strength is attributable to funds allocating money into commodities.  It seems like a lot of the selling in commodities in December must have been liquidation / tax related.  As history foretold, equity futures are higher.  I will likely be getting out of my overnight holdings by the open. I am reluctant to short the open due to institutional money flows and positive seasonality.  ISM Index number comes out at 10:00 AM.  I expect it to beat expectations.