SPY August 1, 2013

SPY August 1 2013

Bulls finally caught the break for which they had been looking over the past couple of weeks. The futures surged overnight and continued through the morning, barely pausing at the open. They ended the day near the highs - the all-time highs - with the usual slow grind higher throughout the afternoon.

Being at all-time highs, there aren't a lot of reference points. What we do have is a very solid base of support in the 1670s-1680s. That should cushion any downside. Well, that and the fact that there are many traders who simply refuse to believe that the market has any right being this high and are short from all points north of 1600 (and maybe lower). Yes, there are shorts who went short months ago and refuse to, um, cave. Many went short today at 1700. They will probably be right one of these days.

We would see any move back to the 1680s as a potential buying opportunity, given the usual factors supporting a buying decision (at support lines, a review of market internals and so forth).

We do have the old uptrend channel to guide us. We will be keeping an eye on extreme moves within it, though the past couple of months showed that it is hardly inviolable.

If the "pros" are still selling to "retail," well, they just missed another all-time high. If I were their client, I would want to know why. Then withdraw my funds.

Saw an interesting chart posted on Stocktwits the other day:

Federal Reserve Assets vs. S&P 500

For those wondering why on earth we would worry so much about the sacred uptrend channel we've been following all year, the above chart is a clue. There is money being pumped into the system. It is filling up the averages at a steady rate, like water into a bathtub. As long as the tap stays open, the averages rise.

At least, that's the theory. It's never wise to get too cute with charts and unrelated phenomena moving in concert for periods of time - the relationship can break or even reverse at any time, especially if someone suddenly pulls the plug (war/assassination/flash crash/etc.). But it's an interesting chart which might explain a few things.

SPY July 31, 2013

SPY Daily chart July 31 2013

Wednesday, July 31 2013 was a Fed day, so it was market by a quiet morning and a wild afternoon. The Fed of course did not say anything earth-shattering - nobody really thought that anyway - but, especially in the era of QE, these Fed days catch traders' attention, so it is a chance for some traders to profit from volatility. Surprisingly, the averages, after all the fluctuations, wound up pretty much unchanged all around, with a slight bias to the upside.

It's never wise to go into Fed days with some illusion that you know how they will turn out. Yesterday, we did not try to do that, though we held out positions. This simply does not look like a market turning point unless the Fed wants it to be, and nothing fundamentally has changed to suggest that it is. To be clear, we remain Bullish.

Why remain Bullish? Several reasons, which we've discussed all along. It was difficult to be disappointed with today's action if you were Bullish, with the trading range we have been stuck in shifting ever so slightly higher. For the first time in a while, we did not touch the 1670s. The futures high at 1694 was very encouraging after we had not seen that level in a while. The market often acts like this at bright lines like 1700, hesitant to go through them. Shorts get to trade on Longs' fears that "it's just too high," as if the we don't deserve to see levels that high or something. That's all nonsense, but it's a psychological battle. When the market builds up enough energy, it then usually blows right through those previously unassailable levels without any trouble. When we finally do clear 1700, we easily could see 1720 the same or the following day.

Another factor is the rising wedge we now see in the below 4-hour chart. We talked about the Bull Flag that was forming a triangle yesterday. Today's action clarified that, on the four-hour chart, we in fact are in a rising wedge. That is Bullish.

Futures 4-hour chart July 31 2013

Somebody asked me yesterday, reading what I wrote, "Does this mean you don't really know where the market is going?" Son, no I don't. If you ever find anyone who knows where the market will close each and every day, go buy him lunch. I would bet you good money that no such person exists or has ever lived. If, in response, I had said, "the market will be higher tomorrow," I would have been wrong. If I had said, "The market will be lower tomorrow," I would have been wrong. The market was unchanged. Did anyone you know think that would happen? I sure didn't. But I don't care, because I don't try to predict.

What I do deal in is probabilities. Sometimes they wind up profitable, sometimes they bite me in the butt. Overall, the key is to play the probabilities properly once you recognize them. The probabilities right now suggest the market is going higher. We remain Bullish.

SPY July 30, 2013

SPY July 30 2013

It was another listless day for SPY on Tuesday, July 30, 2013. In past summers, we had booms and crashes and flashes of financial lightning. This summer, it has been a slow sleepwalk, as everybody is afraid to make a move without Uncle Ben's blessing. Imagine a patient having a seizure (2010), and then being sedated (2013). The market currently is sedated. Whether that means it also is on life support remains to be seen.

Everybody is getting tired of this, Bulls and Bears alike. The market doesn't want to sell off despite numerous golden opportunities to do so. Buyers, on the other hand, remain hesitant to send the futures above 1690 again. Instead, the market is almost blatantly baiting traders to fold their cards on these half-serious dips, then enticing a few chasers on the futile runs higher. The wise, of course, are biding their time while selling the rips to the upper 1680s and buying the dips to the 1670s, but that game won't last much longer. As the chart below shows, we've been doing the Up-Down-Up-Down dance for about a week, and the range is narrowing as more and more traders catch on to the game. The futures have formed a wedge, which probably won't be broken until tomorrow afternoon.

S&P futures 4-hour chart

After all this consolidation, if Bernanke so much as gives the wrong person a dirty look tomorrow, or unexpectedly mentions the wrong name ("I have recommended that Alan Greenspan come back and take over the Fed again"), it could ignite either a solid melt-down or a classic run through 1700. When the firestorm gets lit, the traders on the wrong side of the trade will have to act fast. Given that there's been five days of this consolidation, the blaze that burns could be especially bright. If the market starts higher, shorts could cover and give the move added punch. On the other hand, it is the summer, so we also might just see the usual hour bump in one direction, with feints in the other direction, then a torpid close. That's what happened last time.

We'll have to wait and see, this is a truly weird market when the words of one man determine the fate of investors, speculators, retirees, pension funds, and everyone else who holds financial instruments. Having learned his lesson with his callous carelessness in May, it's unlikely Bernanke will come right out and make an ass of himself again, so the hunt for nuance will be frantic.

It happens to be the end of the month, so window-dressing decreases the likelihood of a major sell-off (though it doesn't eliminate it by any means). The pros can't go their clients showing they are only holding cash. That will mitigate any quick downward move. A spurt higher seems to have the better likelihood. Most likely, the big players already know what they want to do and are just waiting for the right moment to drop the hammer.

SPY July 29, 2013

SPY July 29 2013

The market continued its dithering on Monday, July 29, 2013. Either you view this as "consolidation" or "creeping toward the cliff." What seems most likely is that the major averages will continue with a slight negative bias until the Fed completes its meeting on Wednesday and Fed Chairman Bernanke says whatever he has in mind.

That said, there isn't really much that technical analysis can tell us about going forward. How the market reacts to Bernanke and his crew will determine the next major move. However, if this is a Bull Flag, and it reacts normally, eventually it will resolve higher.

Trading Psychology

It's been interesting the past week watching the changing psychology of traders. It has become cool again to be a Bear, given the market's gains and the recent all-time high. I can see some fear in some traders' posts. That's fine, maybe the fear is justified, the Bears ultimately may be proven right. Beware, however, of mistaking emotion for analysis.

Let me get a bit more specific. When people become worried, some parties who shall remain nameless and faceless are all too happy to feed into that fear. Thus, we see the spectre of "rumors" and "misleading charts and data."

The height of rumor-mongering is when the market is straining, but not quite ready to change direction or continue whatever momentum it has. This is at potential turning points. If you've been around the market long enough, you know that talk of Yahoo! getting taken over has been pulled out by the rumor-mongerers with regularity for years and years. Same thing with rumors of various sorts about Microsoft. Denials follow quickly - right after the Bell. This is usually a way to send the market a bit higher when the rumor-mongers sense hesitation. On the downside, the rumors can involve some kind of shooting at the White House or talk of sovereign downgrades (though nobody seems to care much about those anymore) or, well, pretty much Any Damn Thing.

Which brings up one of my favorite topics: phony charts. If you put something in a fancy graph, it looks so much more official and convincing. However the logic behind some of these charts is often quite shaky.

Yes, here it is again

I mentioned last week my opinion on the use of the "Pro Selling vs. Retail Buying" chart to guide your trading. That chart showed that the pros have been net sellers since December 2012, while retail traders have been buying. Naturally, the chart shows that these pros actually has been selling throughout an epic Bull run. A Twitter follower mentioned, in the pros' defense, that it takes a long time for the pros to liquidate their large positions, so the fact that they have been net sellers ALL YEAR is justifiable.

Perhaps. But my response to him and you is that, if the pros require that much lead time, relying on them for any kind of short-term guidance is pointless and counter-productive. Today, I heard a variation of that statistic: that "the pros have sold more stock to retail in the last four weeks than at any time in history" (I think that was the headline). Well, if that's true, they missed an all-time high and will have to do something before the end of the month to show their clients that they actually have some positions and aren't just twiddling their thumbs with their clients' money. Let's see how that works out for them.

Another old chestnut of a chart keeps popping up, and we might as well address it: the old Margin Debt chart.

Margin Debt vs. S&P 500, 1999-2013

You will hear the cry, "Margin debt is at an all-time high! That means the market must crack soon!"

Perhaps. That's always possible. The market could crack at any time, as we keep saying over and over. And it's undeniable - margin debt is up there, and when the market has trouble, those margin buyers must liquidate, or be liquidated. So, yes, this could mean... something.

But what, exactly? If you look at the chart, not just at the current high levels but the whole chart, you'll notice something that the Bear hypesters aren't mentioning: the margin debt levels simply track the market. Yes, folks, when the market goes up, so do margin debt levels. When the market goes down, the margin debt levels go down. The only truly interesting thing about this chart is that it shows that margin debt seems to fall more during down periods than you might think, then accelerates during up-turns. Margin debt serves as a sort of accelerator. But using it as a predictor? The margin debt tends to top with the market, and bottom with the market. So there's really not much predictive power there.

If the Margin Debt starts to tank, then you might get a little more Bearish, but as far as I'm aware, that hasn't happened. Margin Debt is simply tracking the market higher, and yes, it is high, but that is simply because the market is high. It's kind of funny hearing the suggestion that you should sell because margin debt is high and rising - when it's exactly the reverse: you should sell when margin debt is low and falling. Just look at the chart!

If you are basing a decision to sell on that chart, you might as well just say, "Well, the market is up, so I might as well sell." There's nothing more to this "analysis" than that. And that might be a valid reason to sell, but it isn't based on anything Margin Debt is doing or saying.

I realize that some of you might think this is simply me trying to talk you into something. I'm not. I present these charts in part to make the Bears' case for them. You have the charts in front of you - it is up to you what you make of them.

What I am pointing out, however, is that these same old chestnut charts and ideas get pulled out at the same old times, but they don't really say anything meaningful. They simply feed into your existing Bullishness or Bearishness. Make up your own mind.