Turbulence

Big fish love turbulence. They lay in wait in the still water below while the little fish above are buffeted by the turbulent cross-currents and make for easy prey.

Despite two days of intraday reversals, Thursday and Friday offered back to back days of up-down markets with little net progress. Most telling, there was no price spread to the downside. So the market seems to be churning here, perhaps distributing longs from big fish to little fish, while the big fish build short positions. Unless we make haste to the downside next week, this feels like a high level consolidation and distribution just before a last gasp blow-off top that sucks in the public. A nice, old-fashioned fish fry.

Remember the four market phases: accumulation, markup, distribution, and markdown. Sometimes the market, in its infinite wisdom, disguises the transitions between the phases most beguilingly. With the exception of down days having more volume than up days, there are few overt clues. So let's widen our gaze.

In the Life Imitates Art category, Ridley Scott's newest film is "Robin Hood" -- just in time for the passage of ObamaCare and its repercussions. Irony at its best. It seems the mood is spreading too. The Grand Casino in Basel, Switzerland, was just knocked off by 10 heavily-armed robbers. Spreading the wealth around by force looks like a new trend.

Moving on to Forex, forget the Euro and the Pound for a moment and ask why the commodity currencies (CAD, AUD, NZD) got whacked on a dollar decline Friday while gold spiked higher? I ordinarily take gold action on Fridays with a grain of salt (thin market). Yet evidently, cross-currents are everywhere. Such turbulence will likely obscure and redefine intermarket relationships in the near term while much larger trends reassert themselves. What are these larger trends? 1) More US dollar strength -- a near-term correction to the 79 area notwithstanding. 2) A return of the bear market in everything else. Study what happened in 2008 when the dollar strengthened. I assure you it was not on fundamentals. (Will post about this soon)

From a macro perspective, Greece is the subprime of 2010. It will spread to prime, i.e., Germany. And I agree with Jim Chanos on China. It is a trainwreck waiting to happen. Interesting times indeed.

As far as targets go, note this weekly chart of the S&P cash index:



That's a 200 period MA plotted on there. It's sitting at about 1225. It's so close that I'm assuming the big fish would love to see us get there. Then the media and every bull in the world would trumpet that we've gotten back (and possibly above) the 200 MA. It would certainly be a new bull market then, right?

For now, let's use simple box theory. 1150 needs to be broken to the downside if we're going to cave in. If 1150 holds, then we could retry 1175. If that holds, we're likely going to 1200. And then, since we'd be so close, why not 1225. Above that, there's a nice volume cluster at about 1250.

Until the market sorts this out, all I'm doing is betting on turbulence. That means long calls on dips and long volatility on rips.