Which Way Wednesday?

 |  Includes: DIA, FAS, IWM, SPY, TZA, UUP, XLF
by: Philip Davis



What a day yesterday. The Dow dropped over 100 points from the open but then, at 2 pm, a miracle occurred and we recovered almost all of our losses in just 30 minutes. We had similar action on the S&P and, as TA guru Dave Fry commented:

Our crack addicted trading desks believe in the Bernanke Put and the global central bank put. It's quite apparent reading the news from China this morning as pundits were universally calling for more PBOC stimulus - it's QE contagion. Moody's cut their European outlook to negative which must be viewed two ways: Moody's gets no respect and it means more QE.

Speaking of which the ECB is rumored to be launching "unlimited" bond buying (QE) with "conditions" (whatever those might be). The bond buying is said to be 0-3 year maturities with the implication being the problems of austerity and debt would beClouseau-like "solved" during that period. Given that sort of optimism you'd not be incorrect in assuming the ECB will need a bailout itself down the road.


As you can see from Dave's SPY chart, the real volume for the day came to the downside while more volume sold off into the close than took us up in the afternoon.

That's the beauty of the HFT algos - they punch the market up all afternoon and then dump it on the mutual funds that come in after the bell and buy (for you - you retail sucker) at the day's closing prices. Pump and dump - that's the game the big boys get to play every day and it's clear as a bell that yesterday was dump, pump and dump with 2-3 times more volume selling that buying.

That's why this chart of On Balance Volume has such a massive divergence, again, much like the one that led to a 20% drop in the market last year that "no one saw coming." OBV measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days - clearly SOMEONE is fleeing this market and has been since late July. Keep in mind it was Operation Twist that "saved" us last fall and we're up a solid 27% from 1,100 on the S&P but, when we get in on ridiculous moves like we had yesterday how can we trust that top line?

IWM WEEKLYOf course, at PSW, we don't care (from a trading standpoint) IF the game is rigged, as long as we know HOW the game is rigged so we can play along. At 11:39, we grabbed the DIA weekly $128 calls for $2.15 in member chat for our $25,000 portfolios and we were done with them at 2:41, nailing the top at $2.75 for a 27% gain in 3 hours and 3 minutes. We flipped to an aggressive bearish position, grabbing the TZA Sept $15 calls at $1.24 in the same comment. Why, because the move up was total BS and we knew it. We kept that one overnight so we'll see how it goes this morning.

Note how Dave's IWM chart has 82.50 on IWM (about 823 on the RUT) as the top of a long-standing channel so we have a pretty obvious line to stop out at as well as a nice target for profit-taking at 80 - especially with that 12-week moving average poking over that line and providing support. HOWEVER those of you paying attention already know that we believe that 81.50 on the dollar means those lines should be moved up 2.5%, so 82 on IWM is the fail line that the RUT must hold today.

Germany had a FAILED 10-year note auction this morning, receiving just $4.95Bn worth of bids at a $6.3Bn auction. This is being spun POSITIVE because - get this - "the lack of demand is a sign of retreat from the 'risk-off' trade in Europe." More realistic is Luca Jellineck of Credit Agricole, who says: "The result of the auction is a reflection of how tough the market is ahead of the big event tomorrow. We don't know what the ECB will say and no one wants to build a huge position ahead of that."

XLF WEEKLYThe futures are back to even at 8:10 am because the dollar has been jammed down .02 in the last 10 minutes and it's down from 81.70 at 4:15 to 81.20 now, which is down 0.6% so it's masking some major market weakness (as usual). Nonetheless - let's give Draghi the benefit of the doubt and say he comes up with a BRILLIANT plan tomorrow and Bernanke follows up next week with MORE FREE MONEY. Do you have $1,000 you can risk? Want to turn it into $6,000?

FAS is a 3x Ultra-ETF that tracks the XLF Financials. FAS is currently at $97.24 with XLF at $15.16. Last fall, XLF was at $11.50 and Operation Twist had them at $14.50 in January, up 26%. We can play for a 10% move up in XLF, to $16.50, which would translate into a 30% move in FAS to $126 by picking up the FAS October $108/120 bull call spread for $2. That spread by itself can make 500% if FAS hits the $120 target by mid-October option expiration day so 5 of those spreads for $1,000 can return up to $6,000 if we get some QE.

We can make that trade more interesting by selling XLF 2014 $14 puts for $1.55 against the spreads. That drops the net to .45 with a pay-off still at $12 for a potential 25,667% gain on cash and you risk owning 500 shares of XLF for $14 ($7,000) in 2014 if it's below that strike. While we are very bearish in our positions, something like this will make a good offset today - just in case. We can commit just $2,000 of our virtual $25,000 Portfolio to this one and there's a $10,000 upside if we are wrong and the markets rally - that's not a bad consolation prize...

UUP WEEKLYI don't think we're wrong but, as the Boy Scouts say - it's good to be prepared!

Aside from the fact that the gist of the volume trading is clearly down, which means all moves up in the indexes are nothing more than elegant pump-jobs designed to screw retail bag-holders as the IBanksters dump their positions at the top, we're also deeply concerned that the 6% move up in the market since mid-July is nothing more than a reflection of the 3.6% drop in the Dollar over the same period.

There's generally a 2:1 relationship between market and Dollar moves over the short run and I asked last week if you would really invest $125,000 of your Dollars to convert to Euros and put it in a safe and call that an investment strategy? Well, you'd already be up $1,000 this week as the Euro hits $1.26 for the first time since July, when Draghi first promised to fix everything. Now on the eve of "put up or shut up" - we're back to the extreme.

Why would massive EU Quantitative Easing make the Dollar weaker? Well, the bulls' theory is that the Euro is priced for a breakdown and is ready to rocket back to the $1.30s at least once things are "fixed." That brings us to our last but certainly not least concern (we'll worry about the fiscal cliff in later November), which is THE GLOBAL RECESSION THAT IS BEING IGNORED.

Fixing the currency, making banks solvent doesn't create jobs - just ask the 26M Americans who are unemployed or under-employed 4 years and $2.5Tn Fed Dollars after the crisis began. Goldman Sachs shares my concerns and is advising clients to cover their holdings with short-term S&P puts and equity strategists are collectively recommending their investors put just 44% of their assets into equities - the lowest allocation level for stocks since 1985. "Market judgements that are based more upon belief than fact are subject to change without notice," writes Gen Re (Berkshire subsidiary) CIO John Gilbert.

The New York Mets won the 1973 World Series with the slogan "You Gotta Believe" so anything CAN happen - what worries me is that so many people seem to have already bet on it.

Disclosure: I am short AMZN, XRT, QQQ, USO, V, PCLN, IWM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (see Friday's post for $25,000 Portfolio positions, Tuesday for bullish offsets as well as above).