Daily Market Brief

Sobriety Checkpoint

Checkpoint“One should always be drunk. That’s all that matters. But what with? With wine, with poetry or with virtue as you choose. But get drunk.” – Charles Baudelaire.

Well there’s no arguing that stock investors are taking Baudelaire to heart and drunk they are. So drunk it seems they hardly even show up to buy stocks anymore. Wednesday was the lowest print for $SPX options of the year and US cash exchanges printed the 3rd lowest volume of the year with only Monday and January 3rd being lower. Some keep claiming that volume doesn’t matter, but claiming it does not make it so. It is reflective of something and it’s certainly not conviction. Of any sort really. Markets remained disconnected from its MAs and the positive earnings news from $AAPL and $FB lifted futures back to previous day’s highs in seconds. Fortunately I had locked my $NQ short profit in and was able to re-short it in after-hours and again this morning.

Am I fighting the market here? I don’t think so. In my mind the market is an erratic driver who’s had too much QE and is in desperate need of a checkpoint and a rest. Can the market touch its nose? Let’s see:

1. Below is a monthly chart of the Wilshire 5000 index. That’s the entire market. The message: It’s further disconnected from its middle Bollinger band than ever with its RSI exhibiting behavior similar to the previous major market tops which resulted in quick reconnects within a 2 month period. In short: The market is due for a 15% pullback and fast. Those that claim that the market is fairly valued or that we are not in a bubble are simply ignoring the reality of this chart:


2. It is a mid-term election year. Those have a powerful seasonality to them. And guess what? The jig is about to be up. Here are 2 charts from different sources sending in essence the same message: May and June will be rough and you better be buying something sometime in September:

mid terms 1 SPX midterms

3. $AAPL is doing another stock split and is increasing its buyback while increasing its dividend. Yay! Yay? Well aside from the stock split it did the same in March 2012 with the stock at $575. Right. Well, shares may reach the same price today on a big gap up. But good data is out there suggesting that $AAPL’s stock splits are a larger sell signal. From sentiment trader:

AAPL split

What does this mean for the $SPX? Not much good news in the past:


So consider me highly unimpressed and I continue to see this market at a major sell junction. Yet tops are processes and require patience and getting scaled in through the gyrations is fraught with false starts and requires tactical trading.

This morning’s overnight gap comes on the heels of this move in the transports:


Moves like this are rare and are not sustainable hence further upside seems quite limited. On the $SPX I had outlined several scenarios. Yesterday’s breather on low volume could at best be viewed as a small consolidation day. Yet it lends energy for another push higher that will now be met by previous highs resistance. The upper trend line is looming as well so a push into the 1900-1920 area is a definitive possibility:


None of this changes the macro points above, but it may make it psychologically very difficult for traders to maintain their outlook. Hence I again stress the importance of sizing and scaling. One needs flexibility to position for the big moves. Yet what are we talking about here? The trend line is a mere 2% from here whereas the larger corrective target is 15% lower and the initial target about 7-8% lower. So this is how I view the risk/reward equation at the moment.

Overnight I scaled back into heavier short positions again taking exposure from 25% to 35% leaving of course flexibility for the market’s excitability. $AAPL may help push the $NDX into classic H&S territory as the descending trend line is looming just above, and I aim to add scales in this area:


And the $SPY will be enjoying yet another morning disconnected from its 5EMA and you know what that means for me: I get more aggressive:


In addition to futures scale-ins I will re-add $SPY put positions across multiple strikes and time frames. This week’s puts are obviously at risk. I will scale-in in the following order: Monthly May, May week 1, and, on the most extreme spikes weekly $189/188s along with weekly $VXX calls and additional $VIX calls and $VXK futures longs. In fact, watching the $VIX today will be of primary focus as I sense the $VIX will end up turning before the markets.

As it stands the $ES has managed to eek out a 2-3 handle move above Tuesday’s highs. Oooh scary 😉

Screen Shot 2014-04-24 at 11.49.13 AM

So there you have it. Time to focus on the set-up, keeping your wits and discipline while maintaining patience. As always. Good luck! Today will be busy!



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