Special Weekend Edition

The Hoot 
Actionable ideas for the busy trader delivered daily right up front

• Thursday slightly lower, low confidence.
• ES pivot 1316.00.  Holding above is bullish..
• Rest of week bias lower technically.
• Monthly outlook: bias up.
• ES Fantasy Trader remains short.

Recap

Well for once it wasn't Europe that tanked our markets.  On Friday the enemy was us, in the form of some truly ugly jobs numbers that were bad enough to send the markets down big time.  The Dow's awful 2.22% loss was enough to drive it negative for the year so far and handed me my worst day of the year too - and that's despite being (partially) hedged.  Anyway, today's action caused some dramatic changes on the charts that are well worth aq look-see. In fact, these charts are so unusual, I just couldn't wait til Sunday night to trot them out, so here's an early preview of the Night Owl.  Be sure to check back again Sunday night for our usual late-nite market forecast.

And speaking of the weird, here's a very strange story from Friday about how the obsolete Greek drachma has somehow mysteriously reappeared on Bloomberg terminals, here.  According to Bloomberg, it's an "internal test".  I guess just in case it might happen to be needed again at some point.  In the future.  Hypothetically, of course.  Nudge nudge, wink wink, know what I mean?  Can you say "Grexit"?

The technicals

Dow daily

The Dow: All hail the Mighty Megaphone which spoke loud and clear on Friday!  I first mentioned this unusual pattern on Wednesday night when I said "this is quite a bearish pattern.".  And take a look at how it turned out.  Bearish indeed!  I find this pattern fascinating.  It reminds me of the infamous 1940 Tacoma Narrows Bridge collapse, where oscillations induced by external forces became self-reinforcing and amplified until eventually the entire system collapsed.  This is just what we witnessed happening in the Dow for the past six sessions until it fell down in a heap on Friday.

Unfortunately, the collapse of the megaphone isn't necessarily an all-clear, because it also blasted right through the dreaded 200 day MA, and that's never a good thing.  The only positive signs are that we never tested support at 12K, we hit the lower BB, and the indicators reached oversold levels.  But those are pretty weak reversal signs.

VIX daily

The VIX:  The VIX chart is interesting because it shows a divergence form the Dow.  While the Dow was nothing but a long red candle, the VIX on Friday gave us a classic hanging man.  And not just that but it also nudged above its upper BB.  And as I always say, the VIX rarely spends more than a day or two above its upper BB before retreating.  Notice also from this chart how well the RTC method works.  On Wednesday, the VIX popped out of its descending RTC - bullish setup.  On Thursday it traded entirely outside - bullish trigger.  And on Friday, pop goes the weasel - payoff.

Market index futures: The futures are of course closed over the weekend, so check back Sunday night for this critical section.

ES daily pivot: ES ended the week with a pivot at 1308.50.  Check back Sunday night for my usual pivot analysis.

$USDUPX daily

Dollar index: So many interesting charts today!  Check out this one of the dollar, in the form of the $USDUPX.  The dollar, as you can plainly see has been on an almost non-stop ride higher since the first of May.  But look what happened on Friday.  On a day where stocks got pounded, the dollar moved lower.  And in fact it gave us a good dark cloud cover, one of the strongest bearish patterns there is.  It also closed outside the long rising RTC - a bearish setup.  The dollar now appears poised to move lower (finally).  And despite the recent decoupling of the dollar/stock correlation I've noted a few times here already, I think this one is going to hold.  This chart looks to me like the dollar has more downside coming, and that should be good for stocks.

I note also a corresponding bullish pattern to the euro, which after dipping into the 1.22's on Friday, finally caught a bounce rallying hard to 1.2413.

Transportation: The major charts were ugly enough on Friday, but they looked positively like Miss America compared to the trans which dropped an impressive 3.21% on a long solid red candle.  And the indicators still aren't close to being oversold.  This chart is just ugh and uglier.  If you believe the trans are a market predictor, we're in for some more bad times this coming week.

TLT, daily

To the moon, Alice!

TLT: On the other hand, today we have a special guest appearance by the TLT, the iShares 20+ year bond ETF.  Bonds and stocks generally move in inverse directions.  When people want stocks, they don't want bonds.  And when they want bonds, they don't want stocks.  And boy do they want bonds right now.  Just look at the price of the TLT since the beginning of May.  Pow, zoom, to the moon, Alice!  This rocket ship has gone exponential.  And not just exponential - we're talking gap-up exponential on increasing moves and increasing volume.

And what always happens when a chart goes exponential?  That's right, class, it comes right back down.  If you're looking for a sign of an end to the current market downtrend, I can't find a better one than this.  Maybe not Monday, but Real Soon Now.


Hi-Lo: The $RHSPX, the SPX Hi-Lo Ratio index, hit 8.57 on Friday, a level not seen since last November.  Recall that last November was as ugly as the May we just ended.  And it was followed by a big move up in December.  When the Hi-Lo gets this overextended, it's usually a good reversal indicator.  (It's not quite as good when it hits high levels, as it can remain pegged at 100 for a while before an uptrend ends).

History: According to The Stock Traders Almanac, Monday is historically fairly bullish.

Accuracy (daily calls):

Month right  wrong  no call  conditional  batting average
April   7      9      2                       .438
May    10      7      3           2           .632
June    1      0      0           0          1.000

     And the winner is...

There's no call until Sunday night when I can see what the futures are doing.  From what I can see at this point on Saturday evening though, I'd say Emperor Nerobama and his PPT had better pull a whole bunch of rabbits out of their hats between now and Monday morning to put an end to this ongoing destruction of wealth.  And there do seem to be signals in the charts that this is exactly what the markets are expecting.  Failing that though, look out below.

Be sure to check back Sunday night for the exciting conclusion to Market Mania 2012!

ES Fantasy Trader

On Friday we took a nice 14.75 point profit on Thursday night's short.  I'll admit the exit was a bit premature, but I wasn't really expecting such a vicious downturn.  In any case, no one ever lost money by leaving money on the table.

Portfolio stats: the account now rises to $134,000 after 40 trades (31 wins, 9 losses) starting from $100,000 on 1/1.

Reminder - you can follow the entries and exits for these trades live on Twitter @NightOwlTrader.

BOT    10    ES    false    JUN12 Futures     1288.00    USD    GLOBEX    09:27:23
SLD    10    ES    false    JUN12 Futures     1302.75    USD    GLOBEX    00:54:34
 

CUA (Commonly Used Acronyms)

BB - Bollinger Bands
DCB - Dead Cat Bounce
MA - Moving Average
RTC - Regression Trend Channel
YTD - Year To Date