Headed Into Different Waters

Friday afternoon’s dramatic reversal lower may have accomplished nothing else than to serve as a reminder that the market is always capable of changing character just when it seems as though it never will again. At the same time, it is usually a good idea to not use hyperbole in these situations–After all, the major indices are still all operating above rising 50 and 200-day moving averages.

In fact, the Russell 2000 Index is still operating above all rising major moving averages, as you can see on the daily chart, below.

Nonetheless, the fact remains that dip-buyers were not treated this week with the same compassion they have been throughout 2013. Members of 12631 and the Weekly Strategy Session were prepared for the uptick in violent indecision this week, though. At the beginning of each Strategy Session, I provide a Thesis to drive home the main points.

Here was my Thesis from last weekend’s Strategy Session.

I. THESIS FOR THIS WEEK: AFTER (MAY 22nd) WEDNESDAY’S DRAMATIC REVERSAL, EVEN IF THE MARKET DOES NOT CORRECT DEEPLY SWING TRADERS SHOULD STILL BE PREPARED FOR FURTHER VIOLENT INDECISION IN THE FORM OF SIZABLE GAPS IN EITHER DIRECTION, AS WELL AS CHOPPY TRADING WHERE TIGHTENING TIMEFRAMES AND SMALLER POSITION SIZING ARE LIKELY CORRECT. BREAKOUT PLAYS SHOULD STILL BE KEPT ON WATCH, AS SHOULD LEADING STOCKS NOW PULLING BACK TO POTENTIAL SUPPORT ZONES, FULL WELL KNOWING THAT A CORRECTIVE MARKET MAY DAMPEN UPSIDE MOMENTUM FOR MANY INDIVIDUAL ISSUES. THE OVERALL MARKET UPTREND IN 2013 REMAINS INTACT, BUT TRADERS SHOULD BE EVEN MORE AGILE IN ENTERING AND EXITING TRADES.

This weekend’s Weekly Strategy Session is set to be published on Sunday.

Have a great weekend!

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…here comes a Friday afternoon hammer candlestick to your face. After a prior steep downtrend, the hammer candlestick puts us on watch for a potential bottom and requires confirmation. However, sentiment has turned quite negative and the sell-off in bonds has gotten a ton of press.

Treasuries are still under long-term pressure here, make no mistake. And I was pointing out a bearish topping pattern long-term pattern last summer.

But I would not be surprised to see them rally sharply into next week, more aggressively than the “bounce” in the utes and REITs so far.

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I took a 1/2 position starter going short Ebay, inside 12631 this afternoon. A move back above $57 probably stops me out.

I have been observing a head and shoulders topping pattern potentially developing in the stock since February.

Let’s see if that thesis stands up to the scrutiny of the market next week. I will only add on weakness. The stock has had a great run over the past eighteen months, and I am not about to call for its bull run to end. But an intermediate-term correction does seem likely now.

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Breakouts are fading and now the S&P is testing the lower end of our ongoing look at the 30-minute triangle. You can bet many eyes are on this pattern now, which increases the odds of shakeouts either way. Nonetheless, it is what it is. And dip-buyers are not having as much success as they have had up to this point.
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Looking at the EWJ ETF for Japan on the weekly timeframe, the 20-period weekly moving average, just below and rising at $10.79, appears to be the initial price magnet on the sell-off. That would be a level to really focus on whether support buyers present themselves.

However, there is also the possibility for Three Black Crows on the weekly chart, which means another big red candle next week. A consequence of the sharp rally since last fall leaves an air pocket below on further selling.

The pullback in Japan has not been orderly at all, which is a blow to the bull case. But it is not a fatal blow. In a world awash with Central Bankers and government officials giving price targets on the Nikkei, perhaps wild volatility even within an uptrend is to be expected.

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Degenerate gambler’s paradise…

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