Today we came to the end of an ugly month and ugly first half of 2008 so I wanted to take a step back and look at the picture of a long term monthly chart. As we sit now things do not look good.  We finally got a cross of the 8 and 21 EMA and a close below the 50EMA.  In the past when this situation occured it was rare to see the market rally from this point on without at least one more significant drop.  I would continue to be cautious in this market.  I will continue to day trade and keep the swing trade money in other markets or on the sidelines until I can get a better idea of what this market is going to do.

You start with a basketball from Walmart bought at the reasonable retail price of $10. At some point the owner signs the ball Michael Jordan and claims to be selling a MJ signed ball. The bidding goes up because what was worth nothing and was common, is now all the sudden deemed a rare piece of memorabilia triggering peoples emotions and greed. As the bid goes higher so does the interest in this item, it must be worth even more otherwise why would people be so interested right? The advertised price is now extreme and the original seller, knowing it was a fake, prances away with $990 in profit. Now the new owner only bought it based on his greed, so he turns around to try and sell it for $2000. Only now there is no COA (certificate of authenticity) and people are questioning the validity of the signature. Now his offers are now in the $500 range, because there’s still a slight chance it’s legit and greed tells bidders they could still resell for profit. Fast forward…it’s been exposed a phony signature. The bid collapses and now is back to being worth $10. The owner tucks it away for a few years till he has a garage sale. There someone buys it for $20 despite being told it’s a fake. The seller is just happy to get some money back, and the shady buyer knows the signature is passable. The new owner opens an auction with new naive customers who know nothing of the prior auction. What do ya know, he sells the ball for $1000 again, and the cycle repeats over and over.

Of course there’s allot more in the markets movement than a clear cut point A to point B. This is a simplistic look at things to say the least. One thing to take from this may be that what transpires in the middle is essentially noise and greed driven. The greed portion can linger on for quite some time, as long as the hope of selling for profit is around. Now on the other hand, the extremes of the range often have quick reactions thanks to fear being the stronger of the emotions.

Another reason I feel this is a fair depiction of the market is the fact that the ball holder creates the bag holder. This market is not a fair game, there is deception at work. The “smart money” in the market preys on “dumb monies” greed and fear. “Not fair” some would say, well no, but what in life is fair? LOL

Now that the FOMC is over it’s time to look at stock patterns…………

The market doesn’t sell goods nor services. It runs on hopes and dreams of profit

We’re trading/investing in a pretend slice of a company or contract with the hope that enough people will be joining us on our side of the see saw to profit.

The issue with this see saw theory though, is there really are 2 supply & demand chains at work in these non tangible markets. Since there are no hard goods, the scales can be tipped or manipulated by those with deep pockets. Maybe to a lesser extent on futures with no real limitations on open interest. But certainly heavily with stocks where there’s a set amount of shares to soak up before you’re in relative control.

So instead of this…

We have this…

I’m not saying it’s a must we over complicate things as a daytrader or even short term swing trader. But in general it’s very beneficial to learn to read the accumulation and distribution patterns of big smart money. I’m sure since this dual S&D chain is nothing I’ve seen talked about, many will think I’m a bit crazy. I won’t argue that, but I will argue that there is absolutely 2 chains at work in the speculative markets.

Chain 1 (Smart Money)…
1) Smart/big money accumulates low (Chain 2, step 2), in gradual increments in the downtrend (once they start to see a value imbalance and the dumb money begin to throw in the towel).
2) A large portion of the float is now in strong hands and an uptrend ensues with the occasional balancing period or correction.
3) Once they’re done with the uptrend, they then distribute (Chain 2, step 1) at the top. This causes a lack of significant, sizable interest which is needed to keep the ship afloat.

Chain 2 (Dumb Money)…
1) Retail/Dumb money accumulates high (Chain 1, step 2) often all at once due to the emotion of the newly advertised high prices which appears to be a big bullish push.
2) Some realize the gig is up quickly and promptly head for the exits causing a sharp move down, setting off a new downtrend.
3) The remainder become bag holders and will gradually exit until their individual pain threshold is hit and they finally begin selling to smart money (Chain 1, step 1).

Rinse N’ Repeat.

All JMHO, but this is how I look at the market at this stage of my learning.
To me thinking there is only one S&D chain is like thinking the markets operate in a vacuum and that they are tamper free and pure.
I feel the better I get at reading the volume based disparities the closer I am to riding the trends on the coattails of smart money.

Disclaimers:

There are many additional nuances, like deep corrections with no distribution or where a breakaway gap is used to turn weak hands into strong hands, to name a few.

I’m not saying all retail is “dumb money”. There clearly are many smaller traders that know how to read the writing on the wall.

FED DAY

Well tomorrow is FED day.  I have said it before and I’ll say it again, the best way to play FED day is described in the image below

KEY PIVOT PLAYS

As for the key pivot play in the Euro I mentioned last night there was NOT a trigger for entry. Gold did not trigger either and the S&P set up I mentioned might occur didn’t take place, It would of required a positive close. The good news is, there are no open Key pivot plays going into FED day, you can rest easy.  I hope a set up comes soon, I am anxious to play one again

I called for a pullback test back on April 18th. I never thought it would have went this way and taken so long, but here is our test finally.
Macd and macd histogram divergence on last weeks close, which is lower than the prior closes. 200ma is double support backing this trendline as well.

The bigger picture, why can it be important to not solely focus on micro levels and step back sometimes?

In addition to my micro level chart we can now see a more defined channel. Plus much more is visible that is acting as support now. So, we have the downtrend broken and testing (from prior chart), 200ma and a now an added swing high as support. How about a trendline from all the way back to October 2004? CHECK!

This is a crucial but fairly low risk level to get long IMO. If it fails to hold though look out, we could hit 11k fairly quickly if this stuff gives way.
Could get interesting on any hint of a rally, FOMC as Cire pointed out could make things even more testy and jerky.

As always JMHO.

A couple of you have been asking me for the next key pivot play. I know there has not been one for a couple weeks but we must be patient and not force plays.  Gold was so close to a key pivot set up today but fell to fast in one day for a low risk Key pivot play. Good news is,  We may have a set up in the S&P soon depending on how the market trades tomorrow.   

 There is a Key pivot entry set up in the EUR/USD forex pair, for the entry see the chart on my last blog post below, it is a break of todays lows (1.5468)  this must happen Tuesday for the trigger to be valid.   I will not be playing it in typical Key pivot play fashion as I am already short based on some other set ups I have posted in the blog about.  1.5220 is a solid target on this play, 1.5120 for a more aggressive trader. I will not be tracking the Euro play in the Track record section.

Dollar Strength

   I have been posting multiple charts on shorting the Euro, I have been looking for a reverse ‘W’ formation to be confirmed and we almost has it today but the close just was not low enough. I am still bearish on the Euro and can’t wait to see what happens the rest of this week with the FOMC so soon.  Gold also took a big hit today as the dollar gained strength, if the dollar can stay strong I expect much downside in both the Euro and Gold.  Below you can see a couple charts on Euro and Gold.

I posted this chart on the TradersBASE forums back on the 15th of June, but seems I missed posting it here.
We are still in that box so nothing has changed YET.

I found then, and still find that volume on the high fishy. And there’s now lots of news about speculation and possible legislation surrounding the insanity we call OIL. I think that may have been a case of insiders getting tipped off and selling into the strength, that sure is what it looks like based on my TA knowledge anyhow. Swamping volume at highs is usually distribution, and now leading up to bad news for oil IMO we could get a collapse and reversal shortly. That was my call then, and it’s still my feeling now. If oil plays can breakout of those box like ranges with volume then my tune would have to change, but I’m feeling pretty good about the short side here. There has been posturing inside the chop up here, but I feel that 33 mil tells the story.

Good luck, don’t pick a top, let the top come to you.
MC

http://www.tradersbase.com/forum/general-discussion-misc/686-insert-rants-here.html

I created the above thread to get some stuff off my chest. I rant about stuff alot, now I have somewhere to keep all those thoughts and have others join in to try and formulate a solution perhaps. Or to tell me I’m a lunatic, but either way I want you’re participation.

Excerpt:

Don’t let the government or lenders pull the wool over your eyes. They are in the belly of this horse handing out credit cards and loans. They are inflating the money supply beyond that which is healthy. They are tricking you into thinking you NEED everything you see on tv. They have enabled you to live beyond your means. They are ruining this country, if not the worlds financial future and economy. If they can’t be stopped or held accountable it’s OUR job as consumers to remove our heads from our asses do the right thing. If you can’t afford to pay for it RIGHT now, you can’t afford it. If you don’t need it, don’t buy it. It sounds so simple, but the ads and brainwashing that goes on makes people really throw logic to the curb and go with artificial impulses.

Where are my independent thinkers? Join me in giving logic and common sense some legs, let’s return these traits to our people.

Cost of the 2008 economic stimulus package = insta-flation of < $196 BILLION
Cost of hosting this forum = $50 per month.
Being able to voice my opinion = Priceless
For everything else there’s common sense.