Daily Market Brief

Game Theory


NOTE: Below is the member market update from July 1. It frames up the strategic context of our trade strategy this past week. We’ve added some additional comments at the bottom of this article reflective of the latest Greece developments:

I’ve not written a book on game theory, but I can read between the lines and you know my views on what’s at stake: They need to make the math work. I’ve been pushing the long side after Monday’s drubbing not only based on technical signals but also on classic Game theory: They don’t want Greece to mess with the construct.

Tuesday’s monthly closes did technical damage. I posted some charts in technical charts and they are just plain ugly. They are a huge warning sign, but anyone shorting on that is getting killed overnight. Big time. So while I see bearish charts I’m also very mindful of the prevailing negativity everywhere.

As I said yesterday on the public feed:

Now we still don’t have a deal in place, but word has it the Greeks may be blinking. I don’t know if that’s enough to result in a deal, but what is clear is  that they are talking. Also all the global narrative is coming together for a deal.

Obama last night:

While a Greek default would not generate a “major shock” to the U.S. financial system, Obama told reporters at the White House, it would slow economic growth in Europe.

“And if Europe is not growing the way it needs to grow, that has an impact on us,” Obama said during a joint news conference that followed a meeting with Brazil President Dilma Rousseff. “It has an impact on Brazil. Those are major export markets. And that can have a dampening effect on the entire world economy.”

He added: “So it’s something that we are monitoring. It’s something that we spend a lot of time on.”

Translation: We can’t have little Greece mess our growth narrative up. Make a deal.

Why is is relevant? Well who has the largest voting rights and submits the most funding to the IMF:


Magic. Furthermore the stakes are raised globally. Here just on the Drudgereport last night:


The point of all this? FEAR. People got scared yesterday. And while we haven’t seen the big bad correction in price yet we see it in the signals. The CPC ratio is at a level consistent with major market bottoms:


Our $NYSI chart continues to point to the potential for a major bottom as well:


The message remains the same: Pushing short here is dangerous. Doesn’t mean the lows are in, but it informs my trade bias.

Potential black reversal candle on $SPY:


The strong overnight gap brings our MA reconnect in reach for the day time session. Which means we should see a proper 5EMA reconnect today:


Are the lows in? No idea. Am I a bull now? No. But I traded for a hard bounce and got it. There’s plenty downside risk still and bulls have to prove their case:


Much now depends on how Greece news flows the rest of the week and over the weekend. Any sign of true progress and we fly higher with seasonality and oversold conditions. My principle targets are the open gaps created Sunday night.

But this is not a straight line and if the Greek situation worsens after the referendum we are heading likely to new lows. Yes it is this binary.

The $VIX continues to be a guide and it has a long ways to fall on a positive resolution specifically the 200MA is a target:


For now I can just summarize our week so far:

We came in short on the big gap down, we covered for superb gains and we positioned long and now locked in some nice long profits. It’s been intense no doubt, but we got the strategy absolutely right.

TRADE PLAN: It’s been super intense since Sunday night. I intend to not do much trading here now this week unless I get stopped out of remaining longs.

My principle plan is to let longs now ride into MA connects and gap fill and casually scale out along the way until we are overbought and have a new sell signal.

Friday US markets are closed. Seasonality is now positive into next week. If they get the Greek can kicked then why not let it run.

And you know what’s coming to a market near you? That’s right. OPEX:


UPDATED: The Greek referendum is going ahead this weekend and emotions are running high. Not clear whether it will result in a large gap up or down for European markets. China also remains under significant pressure hence we already see talk of intervention. Central banks continue to feel it necessary to intervene in any price corrective activity either with rate cuts, QE, or jawboning. And this has of course created the infamous “buy the dip” and “bad news is good news” mentality. Investors count on this Pavlovian mechanism that has virtually eliminated risk from global equity markets.

In this context new lows may just be a gift to trade for an eventual Greek relief rally.  I say eventual because there will be a time when Greece will not be the primary news driver any longer. But it is now and the dramatic situation there sends a clear message to anyone inclined to go a similar path, be it in Italy, Spain, Portugal or elsewhere: If you think about defaulting on your debt we will make you miserable. Note the limitations on bank withdrawals didn’t come until AFTER the referendum was announced. How convenient. You want to let your people vote? Go ahead, but we will make them vote with their frozen pocketbook. We will make them fearful. That’s the message.

And so whatever the outcome this weekend, whether through a forced crisis, a new government, or an actual vote rooted in fear, one way or the other, there will be a deal and we will all forget about Greece in the weeks to come, perhaps with an extension in between. The math must work and before you know it central monetary and political planners will again appear as the saviors of markets, rescuing markets from another crisis they themselves did seed in the first place.

But the monthly charts are telling a story and they are signaling a change may be coming. Yet these charts also don’t preclude new highs being made down the road but, given a major broken trend line, new highs may not be necessarily bullish as counterintuitive as that sounds. But we shall trade that scenario if and when we get to it.



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