NOTES FOR THE UPCOMING WEEK

Seeing the futures open flat tonight made me smirk a little bit. Let the market open at fair prices tomorrow with no pain scenario and let trader’s determine value the right way.

Last week we did a lot of heavy lifting. If you haven’t yet, read my recap of last week, I think you ought to at least skim though it. Two traps were set in the last two weeks that have participants in a precarious position here heading into the upcoming week.

Last week I talked about watching for divergences in the tape for the week, as they would indicate strength into weakness. Now days, when things are strong into weakness, it means that the weakness itself is suspect.

As for this upcoming week I have three things on my radar.

First, I won’t be as focused on the index action as I will the groups that will lead/lag this week. In other words, each day we will discuss themes under the surface. Which groups were the strongest and which were the weakest, and whether value or growth outperforms. This will determine the appetite for risk. So if the market doesn’t see any volatile price swings, I want to know what specifically is being bought, and what is being sold.

Second, another measure of risk has been the decline in credit vis a vis the $HYG. As a technician, I pay very close attention to volume, as prices have memory, and as this instrument has declined, I haven’t found myself worried yet. Here’s why.

Since bottoming in 2009, $HYG has traded in a range.

The dips in $HYG occurred under market duress. In fact I am using the low end of $HYG to determine acceptable market correction, versus “oh-shit.” The dips in $HYG translated into a 17% total correction in 2010, and a 20% correction in 2011. Right now, we’ve managed to correct roughly 13% from high to low. This instrument managed to reverse in an incredible location Friday. Any further weakness this week and I will be concerned about the lows/no lows argument.

Finally, the USD/JPY. This week we will need to see this range break. If higher, the lows are in. If lower…we watch carefully.

It’s interesting, but in the last week or so I have encountered a few bearish viewpoints and engaged said viewpoints for validation/clarification. I’m amazed at how many opinions out there are not genuine opinions, but most derive from the opinion, analysis, or charts of someone else.

I’m not spewing the opinion of anyone else here but my own. Why would I write with the conviction that I do? Simply because I trust my own analysis, work, and understanding of what I write enough to justify my own risk taking.

As many will tell you, there is a lot riding on this month. The monthly charts are in a vulnerable location. If we don’t have a strong monthly close here, the argument for downside will get louder. Because there is so much on the line, do your own damn homework. I have an opinion that comes from eighteen years of my own work and analysis. I don’t read the opinion of others. Never have. I don’t find that they’ve encountered any idea or question in this sport that hasn’t already come up in my mind, on my own. That said, don’t take my opinion or the opinion of anyone else and let it determine what you do with your own money. Do your own research, understand what’s really going on out there, and use your own conclusions to justify your own risk taking. With each post I write, despite being dead on accurate lately, I pose a compelling argument; one that hasn’t been completely ruled out yet. Try to understand it on your own, get to the bottom of it, go down the rabbit hole with me until you feel confident enough in the process as to when you should/shouldn’t take risk.

See you in the morning,

OA

I’ve been running this 1998 analogue since 2012 in every asset class, so please forgive me for talking it up beyond recent chart correlation.

I’ve talked at length about the environment now, from a breadth and negative divergence perspective is no different than it was in 1998.

I’ve shown you just how bad 1998 was from a performance perspective. ONLY 25% of stocks out performed the market. Roughly the same number of stocks are in bear markets already (down 20% or more on the year) as there were in 1998.

Again, breadth was just as bad then as it is now.

Let’s discuss two other items. The number of stocks below their 200-day moving average, and the Dow Theory sell signal.

The percentage of NYSE stocks trading above the 200-day moving average has historically ranged from a high of 80-90% (at the peak) to a low of 10-20% (at a market bottom). This percentage fell below 20% at market bottoms in 1998, 1990, 1987, 1981 and 1974.

We breached 20% (17%) on 8/25 this year. This is why the market is divergent.

Of the 5 years that breached 20%, 1981 was the only year where the market traded lower into year end. In all other years, the market moved higher into year end and beyond.

As for the Dow Theory Sell Signal:

The three major Dow Theorists had been under a BUY signal for many years up until the SELL signal on August 4th, 1998, after which interpretations diverged.

1998 newspaper clippings for Dow’s Theory in 1998.

2015 Dow Theory Press.

OA

I’ll be putting together another game plan and checklist for the upcoming week later this evening. As for now, the comments section is open.

Got a question? Hit me up.

I will start with a link to last weeks recap. Not to “tout calls” (extra fuck you) per se, but rather to show where balls were placed at turning points where few had answers or insight.

Last week I had talked about two traps that needed to be set. Last week we had the bull trap set and played to perfection, and also in that post I said that I hoped we would start off with weakness at the start of the week to engage bears at the lows. Monday and Tuesday proved to be the lows for the week, and all option activity and market action showed bears fully engaged at the worst levels possible.

Here’s a snippet from the Monday morning post…

As mentioned last week, your resolve will be tested here over these next few days. In terms of signals on the week, I want to focus on divergences. Any divergences this week should communicate to me that I am in the right place and the right time in terms of taking risk here, in the thick of this ugly price action.

Towards the end of the day, I started buying ($LABU, $NFLX, $YOKU, $CYBR) that day stating that…

This action on my behalf doesn’t indicate that I think the market has bottomed today, FYI. Our theme this week is divergences and I will hop on to explain this concept in better detail later tonight.

Also, a post about the divergent Yen, and how it pertains to higher stock prices.

Here was a detailed post about which divergences we’d want to see this week and why they would matter…(great read) all of which worked this week.

This was all out Monday, making sure everyone was prepped for the week ahead.

I closed out my $BIS position Tuesday not long after it bottomed and said Tuesday morning that…

I don’t think this was the bottom, but that we will see one more move this week that will seal the deal. The yen says this isn’t it, and breadth isn’t what it will be when we actually bottom. One more move this week and we’re done.

Mind you, that was after a pretty bad-ass reversal. In the afternoon…

As mentioned in my last post, this isn’t the bottom yet. It is for a few select stocks, groups, and other instruments, but the bottom isn’t here yet for the market. Most importantly, the Put/Call ratio at 158%!

They’re buying puts into this rally. This is the final trap that needs to be set, and that is to engage all bears at the bottom of this range.

In other words, participants were calling “BS” on that reversal and we’re engaging on the short side at the lows. Trap set.

We added another indicator to the bag, which was Goldman…assuming it would act as a market proxy this week.

The best call out of the entire week, was Tuesday into the close. The $SPX went to its low on the week and NOTHING ELSE FOLLOWED IT DOWN. This was the divergent action I warned of the week prior to provide comfort in the risk taking process.

Wednesday we opened up, and I said at the open…

The bulls need to nod here, and let this one go. I knew with an hour to go prior to the close and the twitter heckling at the lows, that the pain trade would be up today. This isn’t it yet, but shit, I would be nervous being short down here.

On the day, RUT non confirmation, Yen non-confirmation, breadth non-confirmation. I’d like to see a repeat of yesterday to be honest and this shit is a wrap tomorrow.

In short, hoping this is the start of the last “uh-oh” move.

Stocks rolled over, and bottomed about noon. At that point I had taken notice that all week, everyone was talking about stocks in relation to their August lows. Most analogues followed called for a breach, and I was leaning back and forth on that one detail.

Thursday we opened up and sold off again, and into that weakness, again, everything came up divergent.

By noon Thursday I went through my second round of buying at lunch time…$SOHU, $GS, $LULU, $FEYE, $FB, $LNKD and $NFLX. Very well timed too.

By Thursday’s close I was convinced…

The more I think about this whole thing, the more I’m convinced that the only thing both sides of the trade are watching for here is the lows. All analogues call for a break of the lows, right? Except for the 2015 analogue?

The ultimate pain trade here is that while everyone watches the lows with bated breath, the market has already bottomed.

NFP hit this morning, and all analysis had met the ultimate test. My last two remaining confirmation signals had yet to hit, and here we were, selling off pre-market. Blog title “The Knights Have Been Summoned.”

Everything came up divergent again immediately off the open. About 20 minutes in, I started the next round of buys in $TSLA, $PYPL, $AAPL, $WING. The USD/JPY screamed back up into its range, and the market found its initiative buyer. The last two qualifications that needed to be met for the week.

I am doing these weekly recaps to help answer the questions I get in the chat, and to illustrate the process. You learn more about markets by watching these things unfold, than you do at any other point in time.

In the next ten years, all the old books from the 80’s relating to techincal analysis will be burned. All books pertaining to market analysis will emphasize the mental aspect, how to understand pain, how to forward think how the market will fuck you, and how to avoid those moments.

Have a good weekend.

OA

I have pushed more buttons and made more clicks this week than I have in a month. I have taken a good chunk of exposure to the market this week, and still have a lot left on my list. Those names I took positions in this morning include $AAPL, $TSLA, $WING, $PYPL. I have a pretty good cushion in names taken this week, and haven’t taken off the hedge yet…which will be the last move for me, once I have 100% signals in play. Thus far I am missing only one confirmation.

I’ll do another recap of the week later today for the weekend. Hope you enjoyed the ride.

OA

More later,

OA