A Few Problems With This Rally

… its getting kind of crowded.

I know there’s a lot of reasons for this rally to continue up, but never forget what this rally is made of.  As usual, it is nothing more than a technical bounce.  There’s no real substance to it.  So although you’re bullish, ask yourself what’s wrong with this rally?  I do that all the time, its the gift or curse of a contrarian.  Anyway here’s a start…

1)  Where’s my volume? Monday marked a “distribution day” on the market, even though it was down -7 on the Dow.  Regardless, today’s rally was on lower volume than yesterday’s reversal.  Not a good move for bulls- in the back of my mind, its almost like it was a “shake-out” for the weak bears heading into the Fed’s two-day meeting.  Which makes sense, since if I were a hardcore bear, I would mosdef not want to hold shorts into news events after selling off for over a month.

2)  This rally was long overdue. Its almost as if everyone was waiting for it.  Well, here it is!  We went from oversold to overbought in a matter of days (using IBD indicators here).

3)  A lot of “dumb money” being poured inside. I call this the “me-too” investors.  Remember all the “hesitation and delay” effects I was mentioning over the past two weeks?  That’s the dumb money.  Well now, what’s going on in their mind is that its time to put their money to work. Go ahead, give it a test… ask your neighbor, or co-worker, or other non-iBC trader what they think about the market?  They’ll probably tell you the bottom is in, or that they’ve been buying stuff like C, BAC, and GE… which is fine if you are an advanced trader, and not sheepish neighbor.  When more and more people get in, then its time to get out.  That’s why we use the VIX…

4)  VIX is about to hit “complacency levels.” I see VIX under 40 as a spot to take partial profits for longs, and in the low to mid 30s as a good area to short.

5)  Inverse ETFs are getting pounded. These are a bit of a contrarian indicator for me.  Looks like FAZ is testing lows, after being in the triple digits a week ago.  This is way too fast.  I have FAZ going lower on a few charts, but still, it makes me realize that people are getting too comfortable out there.  FAZ and FAS to zero!  hehe.

6)  And using another contrian indicator, the PUT/CALL ratio shows we are hitting “complacency levels”, not yet greed, but complacency on market + lack of volume (no big boys buying) usually gets wiped out

… under 0.72 on the put/call ratio then I will exit all longs.

7)  Are leaders leading this market? No, at least not the traditional ones.  If you’ve been keeping up with the top sectors in this market, then Healthcare, Education, and Precious Commodities like Gold should be moving higher too.

8)  What is leading this rally? Banks and financials.  Yuck.  Enjoy your first class seats on the Titanic!

Above the Comments:

So what does this all mean?  It means this rally is jello.  But at the same time, don’t let the dumb money outsmart you.  Understand the power of momentum, and apply your power of patience.  There’s still a tremendous gap above on the SPX/NDX/DJI to fill on this technical bounce, but the closer we get to resistance, you better be prepared to sell real fast or short with your bazooka.  Everyone was waiting for the market to rally, now everyone in it will wait for an excuse to sell.

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Pua’lena means “yellow flower.”

Still got some pulling back to do before I re-enter longs.  Its proper that we get profit-taking here, so over time, I’m aiming for market to get near 7046 before buying stocks.  Under the line and I think FAZ buy-imbalance on short term exists.

Meanwhile, the VIX was up while Dow up triple digits.  That’s some strange divergence.  As usual, at least the VIX must catch up to market, or vice-versa.  I think I’ll let this one come to me.  It took quite some time for that wedge pattern in the VIX to break down, so any attempted retest of the trendline forming the wedge, then I’ll short FAZ.  FAZ has some room to go UP before I decide to short it to new lows.  The inverse ETFs continue to trade at huge imbalances- they are prime targets for traders (ie, look at StockTwits top tickers).

Let it come to you.  If you don’t want to play the volatility of these 3x stocks (which is probably a good idea), then make a list of oversold stocks that are moving up on low volume.  When they pullback, get long on the “shake-out.”  A few examples include PDE, GMXR, IXYS, GG, LOPE, ESI, which are on my list.  Make your own, and let me know.

Oh yeah, we still have our original strategy to play SRS imbalance intraday.

K-den,

-gio-

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Say what?  I know, you’re thinking “what kind of crazy position is that”?  Well, if you understand market-imbalance, then you can play the short side while still being bullish, and playing the bull side.  “Bull side”… well, that’s a misnomer; I wish there were another word I could use, but I guess “bullish” will do.  For the rest of this month and perhaps until summer, I think it makes sense to play this tape as a large technical bounce.  I really miss those days where I could research up on a company with earnings going through the roof, and finding out the story behind the trend.  For now, buy-and-hold is destroyed, and fundamentals have taken a back seat to Government policy and economic reports.  Who cares if a company has 150% YOY growth when unemployment is moving up at an accelerated rate?  Everyone wants to destroy all the bullish sectors- people are searching for any reason to short Healthcare, or School stocks, and will make a calculated effort to do so.  “So what if enrollment rates in schools is hitting double digits, I want to short the whole sector just because its one of the last to pullback and EVERY sector will pullback.”  …what a loser way to trade, but since that’s the name of the game, we adapt and try to find a way to play it.  Even if it does pullback, I think the idea here that I’m trying to emphasize- that traders are now ignoring fundamentals is a growing trend.

And what’s up with these commercials by Schwabb and ETrade, telling people to open up their trading accounts and “take hold of their portfolio themselves”?!!  Gee.  I wouldn’t be surprised to see a new idiotic trend- people who shouldn’t be trading (ie, retired folks just learning how to use the internet) trying to trade.  This is the most difficult time in history for someone to attempt to become a trader… this will only create more volatile waves for me to surf.  Whatever.  I just wish these commercials by Schwab and Etrade were a little more responsible in their campaign message, because trust me, if they were after your best interest, they would have told you to go to cash a long time ago.  Or maybe be more like Fly, and just straight up tell you how inadequate a trader you are.  Lol.

… seems like I went a little off tangent there.  What was my post about again?  Oh yeah, getting bullish on the market and the inverse ETFs.  Well, this is obviously a short term play.  I will continue to build long positions on every pullback, because somehow I feel like if the bulls want to pull out an epic squeeze out of their pockets, then NOW would be the time.  And yes, those pullbacks along the way up will be VERY IMPORTANT.  Why?  Because that will keep the VIX stabalized.  Every pullback will make the VIX move up a bit, and that’s critical, because I do not want to be long a market with the VIX too low (ie, low to mid 30s at the moment).  Anyway, while holding those longs, its a good idea to “bet against yourself” on those pullbacks, meaning, at least for me, I’ll be getting long the inverse ETFs taking advantage of the selling imbalance on those stocks (remember, the inverse ETFs is a contrarian tool for me, and like puts/calls, they have an implied premium and discount depending on the speed of the market).  So, be quick, and if you’re long, play the inverse ETFs or bear ETFs intraday to hedge or “buy time” on your long position.

There are a lot of swing long setups there that are developing that can be played in a technical bounce scenario.  For those subscribing to The PPT, I suggest running a screen that searches for improving technical scores and hybrid scores as your first test for stocks.

Remember though, this perspective is totally from a traders view.  If we find an extension to this rally, then treat it nothing more than a technical bounce, and realize that that is VERY BEARISH on the longer term.  Playing this textbook folks.  New bull markets never magically begin at the bottom of bear markets.  They come after long periods of consolidation and kind of trickle up until everyone dumps the old bull market leaders, and starts putting money to work into new creative and innovative companies that are feeding a demand.  As long as the market is played strictly from a technical point of view, I can tell you it will be very dangerous for our stock market… if people just throw money in and out and in and out without actually investing in technology, creativity, and earnings, then the bottom is NOT in.

See you on the streets!

-gio-

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Woo hoo!  We had a 4-day rally on the Dow!!  Well, before you get out your pom-poms and start calling The Bottom, you may want to review the Dow Jones Rainbow Chart…

 

Quit chasing rainbows.  The market is a trench warfare.  When you find your advantage, attack.

Okay, now you can get your pom-poms.

Hat tip to @anton…

Have a good weekend!

-gio-

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Orange line held support and set the bear trap I was looking for.  Sold my FAZ puts into this rally, bought them FAZ>100.

The first chart is from Tuesday.  I sort of drew the direction of the market, and so far its following the trajectory, with the difference that it bounced off the orange support (aggressive) rather than the green (conservative).

Lately a lot of things have been so textbook.  After Tuesday’s rally I went searching for a bear trap (I think a lot of people understand they must fade rallies, but majority of the time their timing is wrong, mostly too fast.  Right idea + wrong time = wrong trade), which usually occurs after the initial relief rally on bear market squeezes.  So far, Thursday looks to be like a FTD, and if this market is textbook, then I expect profit-taking tomorrow in the final two hours.  I drew the next support line which would be an okay place to pullback to.  Under 7017 too fast and that will throw a wrench on this attempted follow-through.

Finally, just wanted to say the traders on The PPT Forum are on fire.

Aloha!
-gio-

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… no charts, no VIX, no moving averages here.  I can just feel it.

-gio-

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