Covered Half

I will look to cover the other half in the final hour of trade.  It looks like a trend down day with a Friday risk off theme. 

Likely Adding

The bounce was pathetic.  Yes, I am using past tense because it lasted less than one day from beginning to end.  It is hard to be bearish after we've gone down so much with so few bulls but the price action says we need to go down some more.  I don't know if we will get to 1250 as many expect, but I don't think we stop at 1275.  I'll probably add to my short if we can open around 1280 +/- 2 points (Sep futures)

Small Short

I believe the first bounce in 6 days gets sold hard.  I am short and looking to cover on the gap fill down to 1277. 

Intraday Bottom

We should fill the gap early in the trading session, make a whoosh lower to the 1275 support zone midday, and then close strong to finish either unchanged or slightly higher.  That is the highest probability scenario.  The next most likely scenario is a drip lower to finish near the lows, around 1270-1275.  Either way, I see good risk reward in buying the dip intraday today and selling out around 1290-1295.

Psychology of the Stock Market

I have added a Favorite Books section on the right which include some free books available over the internet.  One that I have enjoyed reading is Psychology of the Stock Market, a little known gem written in 1912.  It is interesting that some of the best books on trading were written in the early 1900s.  Speculation is as old as the hills.  Human nature never changes. 

I missed today's earlier bounce, but as I am writing, it is already fading badly.  I admit that many are bearish, but there is very little short interest out there and longs seem to be waiting for a bounce to get out.  They still haven't gotten one yet in June.

Doing Nothing

I am waiting to see the white of their eyes.  Sure I could miss a 15 point bounce, but I don't think I'll miss a 25 point bounce by waiting.  This market has favored dip buyers who acted quickly and bought the first dip and held on for the V bottom ride back higher.  I am putting my bet down for a U bottom. 

No Vs This Time

I am not expecting a V bottom this time.  I do think the bottom is coming soon but we'll probably trade at that bottom range for at least a week or two.   I am basing this on the lack of volume and fear, along with the uncertaintly about the effects of the end of QE2.  So there is no rush to get long, because I don't see this market making a V bottom and running away higher like last time.

P.S.  Next layer of support is between 1275-1278 on the ES, which is the Egypt bottom.  I do expect the bulls to make a stand there.  It might be good for 15 to 20 points.

No One's Selling

The volume is pathetic.  We are making new lows on this down move and I don't see fear.  I see apathy.  There is buying of put protection, but I see very little liquidation.  Without liquidation, you don't have much fuel for a bounce back higher.  The selloff feels like one of those from the summer of 08 where no one cared that we were dripping lower everyday.

This is very much out of character from previous selloffs over the past 2 years.  Those selloffs were always quick and on high volume with fear and liquidation. 

Bad Signs

First, we've got a gap down after the vicious selloff in the final 2 hours on Friday down to the day's lows.  That is definitely a change of character from the Friday selloff, Monday gap up that we've gotten used to.

Second, the market is still going down even with the dollar going down.  A weak dollar doesn't hold up the market anymore. 

Third, China is killing the US.  Not by keeping their currency lower.  It is because they are jacking up the price of commodities with their insane 5 year projects replete with bridges to nowhere, roads to nowhere, ghost towns, and high speed rail that no one can afford.  They are rationing coal to keep the price down, they don't want to bid against themselves!   We have Brent oil at $115/barrel with no employment growth.  Imagine if there is a halfway decent economy in the US.  Oil goes to $150/barrel in a straight shot even with Libya back online. That kills any recovery. 

On the positive side, we have sentiment getting bearish but with fundamentals like this, you need to see big oversold readings to get good entries.

Echos of 2007-2008

The weak dollar isn't helping stocks anymore.  The same thing happened from the fall of 2007 to the summer of 2008.  Commodities would go higher but stocks would not.  But this time, commodities have front run the weak dollar theme of QE2.  That game has been played out. 

We are starting to decouple from the weak dollar higher stocks relationship.  The market is giving up its intraday gains.  We need to see a lot of volume to confirm the panic.  Still not there yet.

Bad Jobs #

Looks like the ADP was right this time, but we're still gapping down big.  I am a bit surprised that we are gapping down so hard even with an expectation of a bad number by most.  It emphasizes the weakness of the current market.  We are now at that 1295 area where I believe there is a fair amount of support as it is the lows of April from where we bounced 70 points.  So the first half of the day should make back some of these losses at the lower open.  But I would sell that rally off the open quickly.  By the end of the day, we'll probably give most of it back. 

Bad News: Low Volume

Contrary to what many are taught, low volume on a big selloff is bad news.  As is high volume on a small rally, like we had on May 31.  Many don't interpret volume correctly.  You want to have a lot of volume on a big down day because it means there is panic and weak hands getting flushed out.  When you don't have high volume on a big down day, it just means the weak hands are just hanging on waiting to sell later.  

Yesterday, we had low volume for such a big down day.  We went down over 2% on lighter volume than the previous day when we went up 1%.   It is almost unprecedented in this rally from 2 years ago when all the big down days were on big volume and big rallies were on light volume.

It is a bad sign for the bulls for the short term.  It means the weak hands didn't capitulate despite the big down day.  I am looking for more weakness ahead and despite all the bad news bears out there, are they acting on it?  The volume yesterday says most of them weren't.
Nasdaq Volume data 2011

Looks Like a Downtrend

Don't want to put too much weight on one day but it was a whopper of a day.  We haven't had this kind of all out selling in a very long time.  It looks as if this is day one of the continuation of the selloff.  The final part of the down move is always the sharpest.  So this downtrend looks quite mature.  I'm expecting a few more days of weakness and a likely break of 1300, down to 1295, the low in April.  That area should stem the bleeding and should be a good buying zone. 

First Day of Month Effect

This seasonality is too well known.  It vastly outperformed its historical strength over the last 2 years and that got many jumping on the bandwagon and front running the strength.  I think that explained a lot of the buying in the last hour in the ES.  The volume was quite high.  The market is never this easy.  When traders on Fast Money know about this seasonality and game it, you have to watch out for the opposite to happen. 

Something that is sticking out is dollar weakness on a strong down day.  Usually the market doesn't go down this much when the dollar is weak on the day.  Not a good sign for any kind of reversal today.

Get Short Soon

We're getting a gap down on the bad ADP jobs numbers but this market has ignored bad economic data and kept going higher.  The Greece backstop is what this market wanted and it got it.  Everyone knows the US economy is weak, so the data doesn't have any surprise factor. 

That being said, we've got a strong bounce in this pathetic little downtrend, or you can just call it chop.  It is hard to distinguish for most.  Today's fund flows should be used to establish short positions.  At around 1340, it looks like a good risk reward on the short side.  The coming weeks in June will have many worried about the end of QE2 with all this bad economic data.