The collision of global markets and social mood

Thursday, May 13, 2010

What If It's A "B" Wave?

I’d be quite pleased if this really is the start of Primary wave 3 down. I am more than ready for the fireworks to begin. But as I said in a previous post (here): I’m becoming an uneasy bear. Here are a few reasons why:

Friday, I wrote a quick post about Giddy Bears. My feeling is that when traders' banter changes from what levels to take profits at to which yacht or what island to buy, sentiment has clearly changed much too fast. Whenever I hear traders, flush with quick profits, going hog wild and asking questions which amount to “Bertram or Hatteras,” I go on high alert to consider the other side of trade. Suffice to say it’s never good when the party gets started before it takes place.

Turning to the market, I am not happy with Friday’s volume vs. Monday. We went up on Monday with more volume than what we came down with on Friday. I'd prefer it to be the other way around to confirm the downtrend.

Nor am I comforted by the volume in puts vs. calls on the SPY, which I like to use as a proxy for the public. The public is rarely ever right for long.

“The public must always believe, with the strongest conviction, the idea that will make them contribute the most to the market, and one of the things the public has to do is sell low and buy high.” Victor Neiderhoffer

I do not like this chart either. Why? Because I'm a divergence trader, and there isn't any. New highs confirmed the index highs on April 26th. While it’s true there have been major bear markets that have resumed without warning after large bounces such as we’ve had (1937 being an example), maybe this is one such time. Maybe not. This chart is making me cautious not to overly commit.

Nice chart of the crash, huh. It’s the Yen. And what you’re seeing is that there’s still a large carry trade on that is very risk adverse when it has to be.

However, when you look at this monthly chart of the Yen, notice how it’s trying to break out of its downtrend channel. The market crash was a perfect opportunity for the Yen to backtest the downtrend channel. I’m currently interpreting this to mean that the carry trade is still not yet in an overt risk-adverse mode. What would it mean if the Yen weakened (went higher) for another couple months or so?

Same thing with the Euro. This could easily melt all the way to parity for all I care, and you could add me to the list of the Giddy Bears. But what if it bounced here for no good reason other than because that’s what markets do? I could see it heading as high as 1.34 without breaking a sweat.

Likewise, the dollar, as I warned way back on March 9th, finally went higher than anyone expected. What if it decided to cool it for a bit? Put your intermarket analysis hat on and anticipate what these things might mean for the ES.

The market’s job is to screw the most people it can in the shortest amount of time. Always know your risk. Always know where you’d be wrong.

I’m wondering if we need to start considering that the market is getting ready for a epic screw job.

Here's my point. What if this entire move from the April 26th highs is a B wave?

What if the highs of April are wave A of Z? What if we’re tracing a huge triangle here? What if we’re not in primary wave 3 down here, but setting up for a wave C head fake to one more high?

Remember: B waves are phonies.

The good thing is that if we truly are in a primary wave 3 down, we'll know soon enough. This post will be rendered meaningless, I'll be the phonie, and I'll be more than happy to have been proven wrong. It's a small price to pay.

Perhaps the latest cover of Barron's is a small clue.