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Below is an excerpt of the Daily Market Brief From October 27, 2017 titled: Standard Operating Procedure
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During the first 2 briefs this week I had outlined the following thoughts:
“Yet we have major tech earnings this week. On Thursday after close we have both $AMZN and $GOOGL or 15% of $NDX market cap reporting and Friday morning we have GDP reporting and our regular $VIX crush program? Oh, and for extra fun, we have another ECB meeting and press conference on Thursday as well….
…So yes I admit I’m cautious about the end of this week again. It almost smells like another gap up and run set-up.
…this market is defended with precision and uncanny timing to ensure no technical damage occurs prior to the weekend.
We’re taking it one day at a time here still trying to position. 5 EMA tags remain hedge call opportunities, as do gap fills and we’re selling strength on spikes. The daily BB has now room to 2585/90 this week, and that’s now the expanded risk range and I continue to be on the lookout for changes in the program. If paranoid about fading any of this the standard answer would simply be to have calls on every week to pay for any stop-outs and/or take scales of profit on sudden weakness like we had last week.
…So it’s tricky, especially with the Draghi meeting on Thursday as well. The obvious answer is to have hedge calls on for those 2 days (Thursday/Friday) as I mentioned yesterday.”
Well here we are.
As I’m writing this I see this overnight price action:
Standard Operating Procedure. So what has changed? On the surface the answer is: Nothing.
Draghi was easy, dovish, QE forever, no rate hikes ever, etc. Btw Draghi’s term ends in 2019. He will not have raised rates once in his entire tenure. He’s done nothing but blow money on QE. Just think about that. Unfathomable. He came, he saw, and he eased and eased and eased. The end.
And Kuroda is no different. He’s buying the entire stock market and the BOJ is and will be the largest corporate shareholder of most publicly listed companies in Japan. I’m not kidding.
This is not capitalism. These are not free markets. These are planned markets.
And while I’m at it: What kind of society are we creating here? As you saw this week Ray Dalio was bemoaning wealth inequality. Many others have done the same thing, including Janet Yellen. Everybody with a brain recognizes that this is a huge issue. And so what’s happening on that front? Well, in 2016 total wealth of the world’s billionaires grew by 17% to $6 trillion. You can be sure the melt-up in asset classes in 2017 will have accelerated this appreciation.
Heck just last night Jeff Bezos added $6.6B to his wealth. In mere seconds he added more wealth to his portfolio than the other 7.5 billion humans on this planet will ever see in their lifetimes. Heck they won’t ever even a see a fraction of that amount. And this happened on the same day that the US House voted to approve the new budget, the same budget that cuts Medicare and health care benefits for the many by over $1.8 trillion.
And every day of record highs in stock markets actually exacerbates wealth inequality. We see it in the numbers, we see it in the results.
So the philosopher in me is asking: What kind of society is being created here? $AMZN disrupts everything else which is a euphemism for destroying entire lines of businesses and industries, leaving low paying jobs in its wake. Bezos gets richer, while former retail employees are forced into part-time jobs or shuffling boxes through endless warehouses and distribution centers. Until Bezos will replace them with robots.
What a wonderful world.
But philosophy is dead and central banks remain unrelenting in their mission as the deflationary forces of technology and demographics continue wreak havoc upon their inflationary dreams.
Still, despite the dovish interpretation, the total amount of stimulus is being reduced, but negative rates are here to stay and that is what the market cues off at the moment.
We had another quick dip this week, we scaled out, we hedged up and now they’re jamming it all back up again.
Dips are getting shorter and shorter.
Since the election last year we noted previously that daily oversold readings were no longer happening. We were then reduced to trading the 2 hour chart:
Oversold RSI readings on the 2 hour chart were a buy/cover signal and we booked on these a few times this year.
Since August: Nothing. Nada. Indeed the big joke here on everyone is that now the most historically volatile months of the year, September and October, have not even produced an oversold reading on the 2 hour chart. The 2 hour chart!!!!!
All the while the $VIX was getting ever more compressed with ever lower highs:
So yes Mella and I were arguing this week. By the way we don’t have fights in like a serious manner, but we passionately argue the situation.
And this is what markets have reduced us to: Covering on the first 1% dip. Face palm.
I’m telling you all this because the struggle is real. I fear that when this thing finally cracks everybody will have covered during the first 1% dip down. Such is the psychology now.
This is not price discovery.
But it works as it is the program in place and hence it is intellectually so tempting to just throw up and buy. The classic capitulation.
Look, we can’t complain. We booked gains this week and we saw this script being in the playbook and hedge calls were the tactical call. So in context I do think we’re doing the right thing here.
We are mindful of the charts and signals we react to them and book gains.
Yet fading remains very difficult. I keep saying that people that fade on dips and breakdowns get massacred.
Dips are spots to scale out and gap fills and MA tags are places to get hedge calls. And so again this week:
For us to see a roll-over in markets we need to see a change in this program.
This week did produce bearish engulfing candle action:
So far it has meant nothing and the weekly 5 EMA has held. So far.
But note this development here:
Every morning the open is jammed up with positive advance/decline. Every morning. And then they are being sold and internals turn into crap.
Why is $NYAD positive every morning? Part of the answer is the incessant overnight gap up action, but I suspect a larger answer is related to the stupefied automative deployment of cash via ETFs:
This trend is expected to continue at least until we see markets turn.
But the turn from positive open to a move toward negative internals signals clearly: Someone is selling. And we can see it on the daily candles as well:
Just in the past few days all $SPY candles were red, even yesterday on an up day.
Same with tech:
Now tech looks to be green now based on 4 stocks reporting solid earnings.
But let’s look at the $NYAD program on a cumulative basis:
Hello there. It’s amazing actually. In just the past 10 days cumulative $NYAD prints negative 70K and still price is flat to higher. Oh yes it’s tough to be a bear, but the larger message: There is selling in this market.
Now so far this has not produced a crack, but it informs me that perhaps things are not as bullish as they appear.
So where are we now: Well, we’re in a tricky spot here. I can’t add to shorts here with $NYMO with this oversold still:
$VIX 11 with $NYMO at -41. Really?
Yet I can’t buy long here because we haven’t dipped and the signal charts continue to suggest that a larger corrective move has just begun:
Conflicting signals that make for no conviction to add to exposure here. Indeed the $BPSPX looks to break its bear flag finally, unless they reverse it today again.
So what needs to happen here?
Simple, we need to reverse and dip buyers need to find themselves under pressure.
On the surface bulls should have everything going for them today: Draghi was dovish, tech earnings beat, GDP could beat as well beat, and it’s the regular Friday $VIX crush program. What’s there to fear?
Indeed, this looks to be the standard operating procedure for today. If it is then there’s little point of fighting it.
But, I do note this:
The $ES keeps respecting this trend line for now:
Which means that sellers still have a shot here.
Both $SPX and $RUT closed below their daily 5 EMAs yesterday:
And the game is to gap above them again. Fixing all technical damage before the weekend. Magic.
The $DJIA remains super strong and above the 5EMA and may well make another all time high today:
It would come on a negative divergence of course.
If sellers, who as we saw from the $NYAD chart are active every day now, can assert themselves today we could feasibly see a change to the program.
Were we to see price move below this week’s lows I suspect we may see floodgates open up.
Strategy: <Outlined daily in Daily Market Brief>.
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