Wagging the Dog

It’s so odd to wake up and not see the eminis up 5-10 points overnight.  Most markets continue to be rather subdued as we all wait to hear what Bernanke has planned.

SPX hasn’t yet broken its 1687.18 high.  Although I suspect it will eventually, it will have to show us its intentions.  For now, it’s showing us that it’s content to wait for whatever incredibly bullish comments the Bearded One will deliver tomorrow.  Look for a back test of the .886 Fib at 1672.72 or the channel bottom at 1663 if things get really out of hand.

Last week, markets spiked on Bernanke’s incredibly bullish remark that the Fed was unlikely to tighten interest rates anytime soon.  As we discussed, this was not only not news, it was cover for an after-hours ramp job that shoe-horned the SPX past combined .786/.886 Fib resistance.

Instead of an occasional boost based on important events occurring outside the US, ramp jobs have become the tail that wags the market’s dog.  Like QE itself, they have become necessary to the market’s continued “health.”   As the table above shows, without the points delivered in the first hour of trading following after-hour ramp jobs during Mar-Jun, SPX itself would be sitting at around 1430.

The 120-pt rally from 1560 over the past 15 sessions has featured 9 ramp jobs totaling 126 points.  They are rarely inspired by actual news, earnings reports or economic developments. And, they rarely last longer than is necessary to clear whatever technical hurdle lies in the way.

In the chart below, Fibonacci levels are cleared by ramp jobs 2, 3, 4, 7 and 9.  Channel lines are cleared/saved by numbers 1 and 7.  Downward momentum was arrested by numbers 1, 4, 5 and 6.

Once the cash markets open, they play catch-up (allowing the sale of the previous night’s emini accumulation), and then generally drift about — waiting for the next one.  It has become remarkably cheap and easy to push the market higher… and no one is pushing back.

Not so many months ago, ramp jobs were the exception rather than the rule.  A trader could leave a position open overnight and have have a reasonable expectation that whatever pattern had completed would play out the following day (e.g. H&S patterns, harmonics, broken channels, etc.)

Now, these normally reliable patterns (especially the bearish ones) are routinely busted by the overnight action — driving more traders either into futures or away from the market all together.  It’s yet one more way in which individual investors face increasing risks at a time when many of them — enticed by scintillating reports of the market’s new highs — are considering jumping back in.

I had lunch yesterday with a friend who, as a very successful broker, has recently turned away 15 new accounts from retail investors who have bought into the bullish story line and were ready to roll the dice.

Of course, there’s nothing wrong with making money in equity markets.  Some exposure to equities is a good idea for most investors — particularly those with a long enough time horizon and adequate risk tolerance.  It’s entirely possible the market will continue rising over the coming year.

But, when new highs are built on artifice rather than an improving economy and quality earnings growth, investors should know that the risks of a sudden and severe downdraft are also rising.  Wall Street doesn’t want you worrying about this, of course. Neither do banks, brokerage firms, mutual funds, the Fed, ECB, politicians or the MSM — whose bonuses or continued employment will be determined by their ability to keep advancing the story line.

As a technical analyst, this sort of market makes my job easier.  Patterns that look bullish will probably play out.  Those that suggest a drop beyond the occasional back test or channel expansion probably won’t.

As a trader, this sort of market boosts my returns (preliminary June performance appears to be about double our 10% monthly average.)   My strategy is essentially to take positions suggested by the charts and let the market tell me whether I’m right or wrong.  Any time TPTB’s game plan becomes more easily discernible, it becomes easier (unfortunately, not easy) to make the right calls.

Nothing lasts forever, of course.  Whether by tapering, higher interest rates or HFT, the rally will falter.  If Wall Street thinks it’s tough to get mom and pop investors into the market now, wait until it sells off by 20%.  I was trading options in risk arbitrage names back in October 1987 and can well remember how individual investors fled the markets after the meltdown.

Those who were decimated by the crashes in 2000-2003, 2007-2009 or even the summer of 2011 are understandably nervous about a repeat.  Until the market can stand on its own two feet and string together even a few months of positive returns without games or outright manipulation, they should be.

*  *  *  *  *

UPDATE:  1:30 PM

Who knows whether it’ll be permitted to play out, but there’s a completed H&S Pattern visible on the 15 minute chart below.

It targets 1661.76, which is also a .618 retracement of the last leg up from 1647.66 on Jun 10 and a stone’s throw from the .786 Fib of the 1687–1560 decline.

I’ll take a long position on any bounce back up through the neckline.

UPDATE:  1:39 PM

SPX just moved back through the neckline at 1673.30.  I’ll take a long position here, but keep a tight rein on it in the event that it’s just a back test.

Ordinarily, I’d put the odds of the H&S playing out at 60-70%.  But, the market completely yawned when the pattern completed. And, SPX did just bounce on a channel fib line (the red .146.)  There’s a better looking neckline available based on the 1671.84 low that suggests a shoulder of 1676.68 later today.

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