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.