Top of the Range

Today's trade defined the top of the range for this market.  We have a lot of willing sellers at 1150+ on the ES, and that should be a good spot to sell in the coming weeks.  I have my doubts now about us getting to 1200, we are expending a lot of energy around this 1135-1145 level.  I don't expect any extremes in this market so the new range should be 1120 to 1150 for the next week or two.

Taking Off Some Here

Paring back my short exposure on this dip.  I still have a small amount of short exposure.  Today looks like hedge fund liquidation at the end of the quarter for those that took on big positions in commodities and stocks to take them off the books.   This liquidation should weigh down the market today but I wouldn't be surprised to see the funds put their exposure right back on tomorrow, the first day of Q4. 

Momentum Market

Not that common to see such a big jump off a slightly better than expected jobless claims number and third revision of GDP.  No one usually cares about the 3rd revision. Dollar is weaker again, almost a daily phenomena.  Anectodotally, there are still dollar bulls who want to try to catch a bounce and are looking for a dollar bottom.  That's bad news for the contrarians looking to short the euro now. 

A tangent of that weak dollar trade is the strength in commodities, which the hedge funds are piling into at the moment.  Gold at $1316, it goes up slowly and steadily.  I would not short that monster yet. 

Currency Wars and QE

The latest talk in financial news is that of competitive devaluations.  This has been brought up because of QE2, and the BOJ intervention to weaken the yen.  The timing is of course late, because the dollar has gotten hammered over the past month.

I am more familiar with stocks than currencies, but from my experience, currencies are trendier than stocks in nature and sentiment is a less helpful indicator.  We are getting more bearish sentiment on the dollar after the Fed announcement last week and the big rallies in the EUR, CHF, AUD, etc.

Although I do think a small bounce in the dollar is right around the corner, I would not fade this weak dollar trend over the long term as the sentiment hasn't got extreme and euro bears are still around.  I would not be surprised to see euro at 1.42 by the end of the year, around the levels it was at on January 1.

Topping

Markets that reach a saturation point exhibit volatility near the end of the move.  It is volume spin.  Price flips vigorously at these times.  After this, you get the down move.  I am not sure if we are done with the chopping at the top, but I don't see the point in waiting when I get these sell signals.  The past several days have been more volatile than usual in the overnight market, and the market is surprising choppy while going nowhere.

Dollar bearishness is emerging again and the carry trade is back on, but this time, it is not the yen carry trade but the dollar carry trade.   If oil wasn't so tame, I would think this was 2008 again.

Shorted

The past 2 days consolidation of Friday's upmove is bearish to these eyes.  I am seeing a weaker dollar that is pumping up gold, yet we can't get the ES to make new highs.  I am short and looking for weakness in the next 2 days.  A gap fill of Friday's open gap awaits.

Bearish For Wednesday

Today's price action, which on the surface seems tame, due to the market being down just 3 points, is actually bearish.  The market is accepting value below 1140 after 2 days of trading above that level.  Complacency has gotten high enough to where we can see sharp swift downmoves, like we did this morning with more frequency.  The trade should continue to be choppy today.  But  I am expecting a gap down for Wednesday. 

Toppy Action

The market is feeling the pressure from Europe, with worries over Irish banks overshadowing bullishness about the US market and the weak dollar.  As I mentioned previously, there needs to be positive equity fund flows to propel us higher in a non-oversold market.  If you don't get the inflows into the equity funds, you are not going to have a rally that can carry to nosebleed territory of 1200+. 

If we do get back to 1200 this year, that would be an exquisite short opportunity.  I am not betting on it though.  I think we'll fall short of that level due to the lack of fuel.  I would sell any rally tomorrow looking for a gap down and selloff on Wednesday. 

Latent Bearishness

Much like the 10/08 to 03/09 market action scared away and shocked the masses, the flash crash and the Euroland mini crisis shaked the confidence and scared away the investors again (05/10 to 08/10).  After such shakeouts, you have a latent bearishness in investors that isn't easily shaken away, and takes time to convert them to believers again.  

The current prices, even with this latent bearishness, are high, which tells me when the market becomes long term bullish, the prices should be considerably higher than they are now.

What I want to emphasize is this.  The top will take time to happen, it doesn't feel toppy at all right now.   Trying to pick tops in this market for a big swing trade at this time is not recommended.

Short Entry is Awaiting

This market is ripe for a drop, but I want to wait for the perfect setup to go with a swing trade.  I will occasionally have daytrades on the short side, but for a trade that I can hold for weeks, I want a little bit better setup with more bullish sentiment and negative divergences.  We've got the negative divergences but the extreme bullish sentiment is not quite there yet.  It should get there within a couple of weeks.   

Stealing Monday's Move

Traders have been so conditioned for a bullish Monday that they have front run this phenomena and bought today.  I don't think you can expect a Mutual Fund Monday after such a huge move today.  Today just proves that we're still not done with the upside, but the past 3 down days does show that the upside will be met with resistance.  I am just sitting back and watching, amazed by the resilience of the bulls.

Surprise Gap Up

We have a "surprise" gap up after the weak close on Thursday.  It is a monkey see monkey do market.  When we are going higher, everyone chases.  When it looks like we're going down, everyone chases it lower.   Since we never sold off that much, I do expect a bit of selling on this big gap up but we'll probably recover from that and finish around the prices at the open.

I've Seen This Before

I think I've seen this picture a few times already over the past year.  We will have the selloff coming from a gap down on Thursday, with continued weakness into Friday morning, and then strength into Friday's close and then a gap up Mutual Fund Monday.  Are the fund managers doing the same thing they did before?  Monkey see monkey do.

No Humans

It is amazing how much the volume drops off after the European close at 11:30 AM ET.  The bots turn it down a notch and there seems to be almost no human trading.  It does make it tougher to daytrade, but it doesn't make much of a difference in bigger time frames as these bots are most daytrading. 

Today's action has both positive and negative implications.  In the very short term, the market will likely edge higher, but in the bigger picture, we are topping out and European weakness is starting to show, forecasting future turbulance. 

Europe Effect

The futures are getting shelled by the weakness in Europe and we have another gap down.  We have reached a price point where demand is being met with supply.  I don't think we've hit the ultimate top of this move, but the market will have a hard time getting above 1150 SPX, but it will also have a hard time getting below 1115 SPX.  Today the first half of the day should remain weak, the 2nd half of the day is really up for grabs, I don't think we'll totally fall apart today since the uptrend has been so strong for 3 weeks.

Small Gap Up

My signals are telling me that we're likely to have a small gap up tomorrow.  I do think the existing home sales number will be bad so we'll probably drop on that number. 

Gassed

We have run up for 100 straight points in 3 weeks, the market has finally hit a barrier that is more than a speed bump.  Sometimes pullbacks come out of nowhere, but usually there are some signs.  The weakness overnight from European equities was a warning signal.

Here is the problem though with looking for a big pullback.  The market spent a week trading from 1111 to 1126 before finally breaking out above 1126, or SPX 1130.  That provides a base of support.  Now SPX 1130 has supported this market on its first down draft.  I don't see how this market will go down to 1111 or lower without first trading between ES 1126 and 1143 for a few days. 

During this trading between 1126 and 1143, those that missed the upmove and don't want to wait will get in.  Also, you will have some nervous profit taking for those waiting for higher prices as the market stalls out.  Only after these trades have gone through and time has passed will you get sharper breaks.  At that time, time sentive traders will take a back seat to price sensitive traders.

Ripples Out of Europe

I view the European markets as an early warning signal for the US.  Usually, the first signs of weakness show up in the weakest equity market, which is Europe.  Considering the weakness out of Europe, it is a bit surprising that we are only down 2 points on the ES.  This topping process will take a while.  I won't force anything here, I am sitting back and waiting for more obvious setups.

ES 1145

1150 on the S&P is a psychologically important area, because its a round number and because it was the top of the move in January, when we had the 100 point pullback on Greek jitters.  The market is going to have a hard time with that level so I expect some consolidating soon.  There is the jobless claims and existing home sales and leading indicators all coming out on Thursday.  The latter two data points should be a sell catalyst for this overbought market.

Safe to Short

With all the good news out, I believe it is now safe to short for a pullback.  I emphasize, it will only be a pullback and the market will likely retest the highs made during this rally.  I don't know when the market will go back down, but probably either Wednesday or Thursday should be a turning point for a 20-30 point pullback.

Want to Short But...

The set up has to be very good to get me to short.  I just don't see it today and even though I initially thought we would selloff on the announcement, I'm not so sure now because we're already fading.  I will just sit on my hands and see what happens.  In any case, I don't think an important top will happen today so I'm in no rush to short.

FOMC Anticipation

Historically it doesn't pay to fight the Fed on the FOMC days, as the market usually goes up.  Plus, with the breakout of 1130, any weakness will be quickly snapped up.  I want to short, but it still feels like players are transitioning from caution to risk taking, and that usually means a continued upward trend.  I didn't see the enthusiasm with this 1130 breakout that I usually see with the Fast Money crowd after a strong rally.  Traders are still in range trade mode, and that means we're likely not going to pullback much at all. 

I expect a grind higher today, but since we're so "high" up, I will not be playing the long side.  I will look to short before the announcement anticipating a reflex sell on the news reaction on the FOMC announcement.  This will likely be bought and we'll probably have another strong close. 

No Way Out

For dip buyers and shorts alike, there has been very few opportunities to buy.  You either pay up or miss out.  But this rally is maturing, and that means more two-way trading in the next few weeks.  As I mentioned in my Saturday post, there needs to be fund money coming in to sustain the rally, otherwise we'll just go sideways.

Breakout

The breakout players and the momentum funds are loading up here and there are no sellers.  I think we'll stall out around 1133, which is the overnight high from Friday but this breakout should stick till at least the FOMC announcement.  I have gotten out of my short for a loss.

Mutual Fund Flows

We've been seeing steady outflows from equity funds and a steady inflow into bond funds since May.  We are also overbought.   It is similar to the fall 2009 period where the market grinded higher despite the equity fund outflows. A top was made only after a few straight months of inflows (January-April 2010).

The best way to interpret this is that you don't get a strong rally off non-oversold conditions unless you get equity fund inflows. The strongest upmoves off non-oversold conditions occurred when the equity inflows were strongest (April-August 2009, February-April 2010). If we don't get equity fund inflows, we won't have the fuel to go much higher.


Investment Company Institute data


Monthly Net New Cash Flow (billions)

3/31/2009 -25,571

4/30/2009 11,910

5/31/2009 18,286

6/30/2009 12,169

7/31/2009 9,422

8/31/2009 4,045

9/30/2009 -10,156

10/31/2009 -6,932

11/30/2009 -2,634

12/31/2009 -3,549

1/31/2010 14,432

2/28/2010 256

3/31/2010 11,236

4/30/2010 13,163

5/31/2010 -24,701

6/30/2010 -5,637

7/31/2010 -10,430

Estimated Weekly Net New Cash Flow (billions)

8/4/2010 -2,201

8/11/2010 -1,431

8/18/2010 -2,822

8/25/2010 -4,603

9/1/2010 -9,541

9/8/2010 -1,061

Running Out of Shorts

Did the stop run in the overnight market to ES 1132 make the shorts run for cover? This market is trading heavy, and the complacency is getting thick. The chasers who can't stand to underperform and have cash burning in their pockets likely have already put money to work.

I give it about a 75% chance for a gap down on Monday, with the other 25% chance being for only a small gap up. Post options expiration hangover will be looming large on Monday.

Ireland News

It is convenient how the bad news comes out when the market is overbought and ripe for a fall. It is almost as if Ireland was fine on Thursday but today, all of a sudden its a total mess. The market is due for a pullback and Europe provided a good excuse. I am a bit surprised that we aren't down more, but the first pullbacks are usually bought, so it will not be clear sailing on the downside. I do think next week will provide more explosive selloffs that stick. Today we'll probably not fall apart, but that would probably set up a gap down on Monday, which would surprise a lot of traders used to Mutual Fund Monday.

Now Short

Looking for a selloff in the first half of the day. I have initiated a short position.

Fading Away

The big gap up that was underway is getting whittled down quickly. There are not many times when you have a gap up to over 10 points and have that reversed down so severely before the market even opens. Europe looks like the weak link again in the global picture. The market is vulnerable here to a quick pullback, and I will be playing the short side this morning. I am expecting weakness in the first half of the day.

Gap Up

The market is set up for a gap up to a new high for this move. Under the surface, there are subtle signs of deterioration, such as small cap underperformance. If we can gap up to 1125+, I will take another shot on the short side.

Looking for Weakness

We are teetering on the edge of a cliff.  It isn't a big cliff, but most of the signals are telling me we are going to be weak for the next few hours.  But we probably won't finish near the day's lows because so many are looking to get in on pullbacks.  So weaker intraday till 2-3 PM and then higher in the final hour. 

Nothing Easy

It would have been nice to get that gap up to sell into but this market has been giving up nothing easy on the short side.  All the setups seem to be long ones unless one likes to catch down moves in the overnight market.  I am receiving mixed signals so I will just wait.  The market has already given up the reflex up move off better than expected jobless claims.  Market looks exhausted on the upside.

Small Gap Up

If we close around current levels, I am expecting a gap up that will take us to around 1125, or SPX 1130, the much talked about top of June and August.  That will probably be a good spot to get in for a short, with a price target of 1105, or a gap fill of Monday's gapper.  After going down to 1100-1105, I expect another push higher to around 1140.

Commodity Bubbles

The commodities are back in style.  I can't say that I know the fundamentals of each commodity, but I don't think we will be running out of coffee or sugar anytime soon.  They are trading as if there is a supply shortage.  The grains are going parabolic.  The fundamentals can't all be so similar.  I suspect this is the work of trend following funds going long. 

Trend Day

We are not done with the upside.  I was expecting a pullback this week but it seems less likely with this price action.  I think we'll trend higher all day and finish near the day's highs.  My planned short at 1120 is canceled for now.

Next Trip to 1120

I am looking for this market to have one last trip up to ESZ 1120 today and set up for a gap down and run lower to fill the gap and touch support of 1098-1100, probably on Thursday.  For those looking to put on shorts, today is probably the day to do it.  Expecting morning strength and then weakness for the rest of the day. 

The Last Push

Where traders often make mistakes is when they try to short an uptrend too early and get grinded down.  I have done that many times and this feels like one of those steady upmoves that last longer than most expect.  The dollar getting pounded today tells me hedgies likely went out on the risk curve today.  I will wait a bit longer before putting on another swing short. 

Underinvested

The funds are scrambling in front of your eyes.  The hedgies are underinvested and panic buying now and are trying to make up for their lackluster annual performance.  The traders are all back from vacation and this is the main crew putting down these bets.  This could go on for a few more days but I don't think the story will end well for the panic buyers. 

Covering

I am getting out of my short on this little dip, I think we are range bound today.  

No Enthusiasm

You would expect the Fast Money crew and various pundits to get more bullish on a 1% gap up and closing the day up 1%.  But Fast Money was talking about taking profits and being range bound.  That is usually not the sentiment I expect after a 1% up day after 2 weeks of a strong uptrend.  I am cautious here on the short side, It will not be easy to make money being short.  Any small pullback and I am out. 

Catching Tops

Picking tops can be frustrating, especially when the sentiment is not extreme.  There is no extreme bullish sentiment so the next pullback off this up trend should be brief.  I will stay short for now, but I acknowledge that this is unlikely to be the final top of this up move.

Feeding the Ducks

I am now short.  This one is NOT a daytrade.  I think we've hit a short-term top and will ride this one out for a few days.  I don't expect much selling today, but I want to grab a position as at these levels, we're very close to heavy resistance, the August highs, and short-term overbought. 

Power Uptrend

This is a classic powerful uptrend which leaves behind numerous unfilled gaps and doesn't provide many pullbacks.  We are overbought, so I can't recommend buying here, but I do think shorting should be done carefully at extended rally exhaustion points.  ESZ (December contract) at 1120 is an obvious point of heavy resistance, since that is where we had the breakaway gap down which went all the way to 1040.  1115 is also another spot where a lot of trading took place in August before the move down. 

I am looking to get short but will wait to see what the manic Monday buyers will do. 

Bullish Mondays

There was only one pullback this week, and it lasted 1 day on Tuesday.  I expect a continued trend higher until I see early signs of a trend change.  I still don't see it.  Mondays have been bullish over the past year, and I expect that to continue.  Expecting another gap up on Monday.

Bullish Action

This week was a win for the bulls.  Even though the market is up on 4 points from Friday's close, after such a strong upthrust last week, to selloff for just one day and then to keep going higher is bullish.  The strength is likely to continue into Monday, as all the traders come back after holidays. 

Consolidation Day

I am thinking we'll selloff in the first hour, and then trade sideways to slightly higher for the rest of the day.  Nothing exciting and probably a good day to start the weekend early.

Thinking Gap Down

 It is a dull market, and most  indicators are slightly overbought, but the trend is up so the picture is mixed.  Not too confident about tomorrow's action, but the trading today with the solid rejection of 1110 and typical Friday jitters should give us a gap down.

Dead Market

Aside from the wiggles in the first hour, the action has been dead.  Only the long term investor can like this market.  I am out of my day trade short due to the dullness.

Have To Fade This

We are right around resistance on the ES, and this jobless claims number is setting up a gap and crap scenario.  We've got too many gaps that are left unfilled and I can't imagine this one gapping up and running away.  If it doesn't run away, it has to go down.  I am not very bearish on the market, but I am nibbling on shorts here for a daytrade. 

Expecting a Gap Up

The trading today bodes well for Thursday's trading.  There was never really much of an opportunity to get long, the market lifted off right from the open, and even with the bad Beige book report, the dip was quickly bought.  Only bad part is the low put call ratio, but that is probably why we are closing weak on the day.  The market is set up for a surprise gap up tomorrow and it should catch the traders off guard. 

Time for Crude

This is a seasonally favorable time for the crude oil market.  The heating oil season is coming up and that means crude oil accumulation for the next month or so.  August to October are seasonally favorable for crude oil.  But once we get to October, that is usually the annual peak for crude oil prices.

Trend Days

It might just be my imagination, but there seems to have been an awful lot of trend days this year, despite the market going nowhere.  I haven't done a study on how many days ended up in the top 10% or bottom 10% of the daily range, but I think its a big number.  Just as yesterday was a trend down day, things are shaping up for another trend day, to the upside this time.  I don't know if its HFT, quant funds, or just hedge funds running with the herd.  Something has changed from the past.

Semiconductors

The bullet that has been the enemy of the bears for 2009 and the first half 2010 will be their friend.  The earnings that have surpassed analyst estimates and caused a rush into equities are a thing of the past.  Earnings are a reflection of what has happened, not what will.

We've had the inventory up cycle and now its over.  The weakness in the semiconductors are the canary in the coal mine.  Semiconductors are one of the most sensitive sectors to economic cycles.  They made new 52 week lows on the last trip to 1040, which is a negative divergence.  In March 2009, they failed to break the November 2008 lows, a positive divergence supporting the bottom case. 

The upcoming earnings season in October should be a sell catalyst, not a buy catalyst.

PIIGS Simmering

Subtle rumblings in Europe have pressured the futures here.  The European sovereign problems never went away, they were just forgotten for a while.  Another hurdle for this market to overcome in the remaining few months.  I still believe we'll have a fakeout rally to 1140 so I'm not overly excited to short except for quick trades.  Expecting weakness till at least midday today, with some late day squeezing.

Time for Rest

The strong upward thrust off of 1040 changes the technical structure.  We're likely to make marginal breaks of the highs in June and August, perhaps to 1140.  It should take at least 3 more weeks, around late September. There should be a pullback next week down to 1090, to fill the gap left by the nonfarm payrolls report.  From there it should be a grind higher to 1140.

We have a long weekend here and it's time for some rest and relaxation.  Enjoy the Labor Day holiday.

Know When to Fold Em

In front of a holiday weekend, the shorts are in a bad spot here and I don't want to be the last one out of the door.  I have gotten out of the short and will wait for a better spot to get short, probably at the open on Tuesday. 

The animal spirits are back, and based on the strength of the rally over the past 3 days, and it should last till late September. 

Crude Divergence

Crude oil is massively underperforming the equities this week.  I haven't studied up on the times when we've had these kind of divergences, but it does send a warning. 

The market is hanging in there better than I expected, but from a daytrading perspective, the buyers seem to be more urgent to get long early in the day than usual.  From a longer term perspective, there needs to be more than bearish sentiment to keep driving this rally.  It takes a few months for the macro weakness to filter down to corporate earnings.  I wonder if INTC's warning is just the first sign of the wave. 

Get Shorty

The squeeze is on.  All the shorts are getting buried here and it looks like there are no sellers.  I am coming in here to fade the froth.  We have gone up 60 points in 3 days.  This is all based on better than expected economic news.  I expect a strong selloff from this gap up and expect a gap fill today. It is hard to imagine with the strength pre-market, but this looks like short capitulation and panic buying.  I am shorting here. 

Squeeze Play

The market is set up to squeeze on the nonfarm payrolls report.  There will be no graceful exits for the bears here, it will be straight up and likely the top of this rally will be right after the nonfarm payrolls number comes out.  I have no idea how the number will come out, but with low expectations and a blowoff top setup, the odds are we go higher after the report.  Gap and crap seems to be the most likely scenario.

Not Feeling the Excitement

One of the negatives about yesterday's rally is that it was started with good news on Chinese PMI and the U.S. ISM index.  In general, strong rallies on no news are much better than rallies on good news. 

The sentiment surveys all point towards lots of pessimism but the real money gauges like the put/call ratio, Rydex fund flows, and the VIX don't back up this high level of pessimism.  I'll follow the real money gauges any day over the sentiment surveys.  The VIX got up to 48 at the May bottom, 37 at the July bottom.  It was only able to get up to 29 at this most recent bottom.  I have rarely seen a sustainable bottom with the VIX only going to 29.

This rally looks like a sucker's rally to me and I believe odds are much higher that we go down the next 2 days than we go up.  I expect us to sell off all day today and finish near the lows.

Big Up Days

It is hard for the market to go up more than 3% in a day.  We are up almost 3% right now.  Strong up days tend to close strong.  After one of these big up days, the upside is usually limited for the next few days, unless it is an intermediate term bottom.  I don't think we've made an intermediate term bottom. 

The time to short will be coming soon.  I am targeting Tuesday or Wednesday of next week. 

Seasonals

The next 3 days are seasonally positive as we head into the Labor Day weekend.  It makes sense since the first day of the month has "real money" allocating to the stock market via automatic purchases.  And ahead of a holiday weekend, usually everyone who wanted to sell already did so earlier in the week. 

The only factor would be how the nonfarm payrolls number comes out, but I can't picture a big selloff on the number because of the low expectations.  Looking at my crystal ball, today should be up due to first of month inflows, Thursday is a crapshoot, and Friday should also be up.