Daily Market Brief

Dealing With Rejection

dealing-with-rejection_tThere’s probably no polite way to put it so I’ll just say it: Those that positioned long into new highs on Tuesday were wrong and those that sold and stuck to their guns were right. Obviously selling the strong bounce Friday into Tuesday was the hardest trade as markets had just simply levitated to new highs so many times before. So it was tough, I get it and I could feel the tension as no real selling materialized until yesterday. As you know I view trading psychology to be the central, overarching theme of my process. It doesn’t matter how good your analysis, your entries, TA, or otherwise may be, market action may literally screw you out of your otherwise winning positions. And the push to new highs caused many to either cover, or wait for even higher prices to sell into. Instead markets got rejected. Hard. And a market that is not used to dealing with rejection finds itself now distraught and confused:


In context of this action I want to highlight again the issue of drawdowns and scaling. You cannot pick the top or the bottom. So unless you want algos to stop you out to death you have to trade in a way that permits for some drawdowns on paper until a trade is concluded. I say it again: I scale because I can’t know the precise top or bottom. In fact, algos make it ever more difficult in picking levels. I can point out technical levels until I’m blue in the face, but I see algo programs come in and create fake highs or lows all day long. In fact, I see them come in and buy before a level is reached. The latest example was the $TBT gap level I kept pointing out. I entered my first position just above the gap level precisely because I know the fakery games that are going on all day long. Sure enough they came in and bought the levels ahead of the gap. It’s a tricky environment for sure:


But I pick levels based on my analysis, my experience and process. And this is what protects me. I leave room to adjust, I’m not afraid to go aggressive when markets go dumb, and I see my trades through with patience and persistence and that’s one of my key strengths as a trader. I have no fear. I have a process. And it produces results even in difficult market environments. And right now is probably one of the most confusing, uncertain and choppy environments I’ve seen in a long time.

There is real pain in the hedge fund and retail world right now. Ugly indeed. While it was easy to blame Tepper’s comments for the sell-off I think he was the excuse, but not the reason. The reason in my view was the good news on the job claim front. The message: Taper will continue. Bad news for small caps. And hammered they got and we finally saw signs of the larger market rolling over. Bad signs abound, BUT the dip buyers are still there and they live near the 50MA for the $SPY:

SPY black

What we saw this week is a confirmation of the black candle reversals we’ve seen numerous times in the past few months. Until we got the bounce into close it started to look like a precise repeat of the December pattern. Now one can frankly wonder if it’s not back to the January action. We shall find out today and/or Monday. Both patterns call for a new low today, but then either stabilization and higher or much lower from here. It is OPEX, it’s a Friday and we are far from a high volume high fear environment, in fact still the opposite. So my trading ‘gut’ tells me we are far from a low. But bounces will and must happen. Remember the more buyers get trapped above the fiercer the selling later. We have high margin debt in the system and funds at risk of redemptions. Anything could happen.

For now the $RUT got saved from falling below February’s low yesterday:


Yet the technical implication of the 50/100 MA cross-over looms heavily. Can we bounce back to the 200MA? Sure. But the $RUT is guilty as sin as far as I’m concerned and guilty until proven innocent. Dip buyers are trapped and are hurting in there. The yellow support line is holding up the market right now as far as I’m concerned. Fall below it and we see major market selling.

As you know I like to keep an eye on the macro picture when things get dicey. Here are some views:

$SPY weekly: Trend intact still, but double top rejection with a downward sloping MACD highlight large negative divergence:

SPX weekly

$SPX monthly: Still above 5 EMA, but a break below 1850 on a closing basis this month would indicate a massive change in trend. We see a negative divergence on the RSI supporting such a move coming sooner rather than later:

SPX monthly

The monthly $WSHR index showing weakness similar to 2007 (and 2000 for that matter) and pointing toward roll-over of MAs and MACD:


Fact is nothing in this market’s action is indicating bullish behavior, not the low volumes, the weak internals, the macro backdrop, anything. Does this imply we are guaranteed to fall? No. We are still dealing with central banks trying to levitate markets as they view market prices as an instrument of policy to achieve economic growth. It is obvious that they are failing and last night’s frankly pathetic admission by Janet Yellen that the economy is not healthy is an insult to the public who have seen their savings rates drop to 0 over the past several years. Over $4 trillion in balance sheet expansions, $8 trillion in additional government debt and a policy to push retail into risky investment assets have failed to push the economy into a healthy state. What’s it going to take Janet Yellen? How much money? For how long? And why would it work if it still hasn’t worked in 6 years? Of course she doesn’t get asked these questions. As traders we can’t solve these issues, but need to be aware of them as central banks infect everything. For right now Yellen looks to be the wrong person for the job. My thoughts about her are well known and nothing spells more trouble than a person in a key leadership role that appears not up for the job.

It is a game of confidence after all, and if Yellen loses the market’s confidence things can get ugly real fast. And as the decimation in tech and small caps is already showing us:  Much of the gains since November 2012 were simply a mirage driven by Fed liquidity. And now retail is getting hurt again. Well done Federal Reserve. But Ben Bernanke and Tim Geithner don’t care. They have books to sell and speeches to give and are collecting millions for them. Shameful.

Trade Plan: I plan to do little today. After taking nice profits yesterday I have $SPY calls as a hedge against remaining short positions and the levels I outlined remain key targets. A gap fill in the 1840 $SPX area will see me scale out more. Markets remain very vulnerable to a sudden break and action in $RUT and $VIX remain key areas to watch.



Categories: Daily Market Brief, Market Analysis

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3 replies »

  1. Excellent take, I’m making good long entries and then using stops at or slightly above entries to avoid drawdowns, but it’s like they know where my stops are before resuming the direction, only thing consistently working has been shorting miners on every rally on very low volume with USD not rolling over, then covering. I still think metals could fall much more from here but not willing to hold DUST more than a few days. Amazing to watch Friday as they came in last hour to save market once again. Fortunately thought that was coming and bought & sold TNA for nice daytrade before bell. Interesting to watch Twitter as some of the option traders saying they are making a killing in this environment, kudos as they are better traders than me as I’ve never focused on options compared to trading indexes, volatility and small caps under $10.

    • good comments Ron. In general I’d say to be somewhat cautious in regards to claims of oversized option win trades, especially if they don’t come with a record of losing trades as well.


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