Michael Filighera's  Instablog

The Bears are getting Hoarse - Are the Bulls getting Tired? When Will the House of Cards Crumble?

To say patience is a virtue would be a huge understatement when it comes to waiting for the U.S. markets to put in more than an hour-long correction. As the broader indexes churn higher day after day under the guise of anything but the actual basis is now much more difficult that watching paint dry or being akin to an animal chewing off its own leg that has become ensnared in a trap (in this case a bear trap) as the shorts are forced to cover. It may be safe to say that the only buyers are the shorts covering and that is evident in both directions at the moment.

What is behind the eternal bull (market that is) - it's the government pure and simple. As long as the Federal Reserve and the U. S. Treasury continue to flood the system with fresh new dollars via " QE stimulus" and ultra low interest rates (clearly stated by the FED to be held low through 2014) the bull should continue to run rampant. What is happening and will likely continue to happen is that the smaller investor is now getting sucked into the "mill" in search of higher returns over what banks are willing to pay out. It is a trade that has netted the TBTF boys billions over the last 4 years. The uphill climb seen in the big banks has been breath taking with all the TBTF banks participating. Against all odds some would say - but it is a trend that has continued in spite of the "ducks quacking".

Divergence is defined as "a deviation from a course or standard." - source Merriam-Webster.com

Divergences occur when things that normally run together (in the same direction) begin to go in opposite directions. Technically, as a trader it is important to recognize when they appear and to adhere to the "warning sign." This does not appear to be the case lately, as many seem to think there isn't much need of divergences since the markets only move in one direction - up - right? Wrong - divergences are clear signals that an impending change is on the way. Denying their existence does not mean what is being signaled won't happen. The markets will correct on both a small and large scale. It is not a matter of "if" but of "when".

Here are a few market divergences that can be added to the growing list of "why the markets will correct":

• The S&P 500 is up over 7% in two months with the past few weeks producing a more parabolic vertical rise with the a few sparse down days here an there. Copper on the other hand is down over 7% in the same two-month period. The divergence is notable because historically, copper and stocks almost always move in the same direction.
• The Volatility Index (VIX) is also signaling divergence. The VIX has normally moved lower as stock prices move higher. Over the past two months, as stocks have rallied - the VIX has gained nearly 10%. With stocks and indexes trading a new all time highs, the expectation would be for the VIX to be hitting new 52-week lows. It's not.
• Baltic Dry Index is produced by the Baltic Exchange in London and reflects the cost of shipping dry goods overseas. Here is a divergence for those that seek economic reasons for the markets to move. Over the same two-month period the BDI is down 5%. If the markets are rallying because the economy is improving then the BDI should be moving up with the markets suggesting an increasing demand for shipping goods. It's not.

Extensions occur with frequency within the first, third or fifth wave of a five-wave sequence. Most often it is within the third as this sequence is usually the longest and the strongest with the larger "wave".

Last week I discussed how the broader indexes were moving through the process of completing extended five wave sequences. This remains the case today, however, it appears that one additional "new" high is needed before the sequence is complete and a larger correction begins.

The S&P 500 (SPX daily chart) below shows the details (click to enlarge):

(click to enlarge)

The markets remain extremely overbought and with declining volumes continue to point to the end of the current rally and not the launching point for another surge higher. Longer term I continue to expect additional new highs as the current larger advance that began off of the March 2009 lows continues. I continue to see signs of exhaustion within the current move. A time when buyers and sellers are not willing to step in leaving the daily grind to day traders and the algorithmic computers.

Remember, an efficient market will always trade to volume. At the moment the search for volume remains to the upside, even though so many remain suspicious that the volume will be found at lower levels. So it becomes a game of patience. The shorts are not budging and the longs aren't either - not yet anyway.

The sector rotation out of biotech and into technology continues to carry the bulk of responsibility for the rally. Should a pull back on a larger scale take place I would be looking to add MSFT, AAPL, and INTC to name a few of the titans.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

• DJIA future (e-mini available)
• S&P-500 future (e-mini available
• US$/Euro futures (e-mini available) - very highly recommended
• GS (Goldman Sachs)
• AAPL (Apple Computer) - very highly recommended
• GOOG (Google) - very highly recommended
• LNKD (LinkedIn) - solid intraday range
• NFLX (Netflix) - solid intraday range
• TSLA (Tesla Motors) - highly recommended
• 30-yr Treasury Bond future - may get quiet
• 10-yr Treasury Note future
• TLT (Treasury Bond Long ETF)
• TBT (Treasury Bond Short ETF)

Day Trading vs. Position Trading

The necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading remains important. Day trading has increasingly become my first choice as the markets become more difficult to "read" and trade.

I advocate the use of overbought/oversold indicators and momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a "bull trap" or "bear trap" forms.

I believe that it only gets more confusing going forward as the market ignores "the writing on the wall" and continues higher with a false sense of security built on negative input. Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday. Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower.

This type of action is the primary motivation behind my advocating switching strategies if necessary and focusing on day trading and less on position trading. I do believe there are discernible longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk.

I continue to recommend the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the "chaos" and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

Disclosure: I am long FAZ, TLT, MSFT, EWI.

Additional disclosure: I am short IWM, FAS, QQQ, SPY

The DJIA, S&P 500 and Russell 2000 Continue to Push to Daily New All Time Highs. Treasuries Maybe Ready to Turn Along with the Dollar and Precious Metals

Even day trading was a snooze fest on Wednesday as the broader indexes continued to churn higher into record territory. The complacency as to understanding the reasons remains overwhelming to many. The Status Quo is changing and it appears that massive levels of denial are in full force. The belief that the government will continue to keep the bubbles inflated is what continues to bring additional monies into the markets. Let's face it Mom and Pop are no longer willing to sit with a 0% interest rate on their money while the "fat cats" at JP Morgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Citigroup and Morgan Stanley rape pillage and stuff their corporate pockets with the spoils of the Bernanke Asset Bubble.

The Bernanke Asset Bubble, has the Fed chairman getting even more aggressive with his money printing... Bernanke will add $1 trillion to the Fed's balance sheet this year - bringing the total debt to $4 trillion. And the Fed won't raise interest rates "as long as inflation isn't forecast to rise more than 2.5% in the future and as long as unemployment remains above 6.5%," according to the Fed's statement last December. Take a look at the chart of the S&P 500 below to see how this type of monetary policy has pushed unwilling participants back into equities as the hunt for "alpha" continues.

(click to enlarge)

But even the Bernanke Asset Bubble corrects before pushing relentlessly higher. And please do not be fooled. The correction I am expecting is not the "end of the world" correction being called for by many. No, that is not what I am looking for - at least not in the next year or so.

Consider what Seth Klarman, founder of hedge fund Baupost Group wrote in his most recent letter to investors regarding today's complacent market environment.

Source: Zero Hedge Blog

The markets remain extremely overbought and trading ranges are shrinking along with volumes. This again is showing exhaustion of the current move. A time when buyers and sellers are not willing to step in leaving the daily grind to day traders, professional money managers, hedge funds, and the algorithmic computers. And I've been hearing from many other day traders who are not trading that much these days.

Remember, an efficient market will always trade to volume. At the moment the search for volume remains to the upside, even though so many remain suspicious that the volume will be found at lower levels. So it becomes a game of patience. The shorts are not budging and the longs aren't either - not yet anyway.

Observations from Wednesday

The Russell 2000 has had its moments lately with one day being the percentage looser and the next being the percentage gainer. For a short period it did look like the Russell was not going to joint the other broader indexes in moving to new highs, but that is no longer an issue. It has though, created a situation where a stronger more pronounced correction is likely. If we consider the current highs at the completion point for the advance that began off of the June 2012 lows. First support for a correction would come in at 913 with the more likely zone being at 878. The momentum oscillators (near-term) are back to extreme overbought levels with the mid to longer-term oscillators remaining overbought.

Comparable levels for the DJIA begin at 14580 with the more likely zone being at 14090 to 13777. For the S&P 500 first support is at 1567 and the likely zone comes in at 1524 to 1489. Here as well, the momentum oscillators are sitting at extreme overbought levels and volume levels have dropped off substantially over the past couple of weeks.

I am still keeping track of the discernable rotation that appears to have caught some momentum as money is pulled from the biotech sector and back into the technology sector. I continue to favor MSFT, AAPL, and INTC to name a few of the titans and still believe they will become very attractive if and when the broader markets pull back.

Adjusted Support levels for a Larger Correction.

DJIA - initial support is at 14750, and then the 14480 to 14450 area, but eventually downside momentum may prevail with stronger support coming in at 14090 to 13777.

S&P 500 - Resistance is at 1645 to 1650. Support is at 1590, 1578, 1535 - 1524, and then 1489.

Russell 2000 - First support should be found at 912, and 906. Ultimately, it remains highly likely that it could get very ugly for the Russell 2000 with stronger support seemingly far below at the 877 to 850 area.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD and GS.

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

· DJIA future (e-mini available)

· S&P-500 future (e-mini available

· US$/Euro futures (e-mini available) - very highly recommended

· GS (Goldman Sachs)

· AAPL (Apple Computer)

· GOOG (Google)

· LNKD (LinkedIn)

· NFLX (Netflix)

· 30-yr Treasury Bond future

· 10-yr Treasury Note future

· TLT (Treasury Bond Long ETF)

· TBT (Treasury Bond Short ETF)

Day Trading vs. Position Trading

Recent discussions have revolved around the necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading.

I advocate the use of overbought/oversold indicators and momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a "bull trap" or "bear trap" forms.

I believe that it only gets more confusing going forward as the market ignores "the writing on the wall" and continues higher with a false sense of security built on negative input. Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday. Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower.

This type of action is the primary motivation behind my advocating switching strategies if necessary and focusing on day trading and less on position trading. I do believe there are discernable longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk.

I continue to recommend the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the "chaos" and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

Disclosure: I am long GLD, NEM, TLT, FAZ.

Additional disclosure: I am short QQQ, IWM, FAS, SPY,

Mirror, Mirror… - Russell 2000 Gains 1.7%, DJIA and S&P 500 Gain 0.9%, Treasuries Still Embrace Zero % as Gold & U.S. Dollar Rally

Thursday was the mirror image of Wednesday almost to a "T." No surprises, other than how far the pushing went. The S&P 500 hit another new high; with the DJIA still lagging and the Russell 2000 appearing to be the little index that wishes it could. Volumes remain light, which keeps alive the "choppy" action until either the bulls or the bears make some type of commitment.

Thursday's rally doesn't remove the necessity or the probability that the market will correct. The pattern in progress is still adhering to a clean Elliott wave structure. I was surprised yesterday, that the volumes did not increase, that the selling was done on very thin volume so I suspected that Thursday's move would happen on low volume, which speaks loudly in terms of buyers not moving back in a full out across the board style. Leaving one to ponder that much of the move is happening because of "traders" be it HFT, algorithmic or manipulation. It still is a rally and being held higher for negative reasons.

"I'll Marry You Tomorrow, But Let's Honeymoon Tonight." -© 2007 by Marvin H. Lane - Observations from Thursday

The ECB cut interest rates before the U.S. open on Thursday, which initially set things into motion. Once Thursday's U.S. economic data was released it was more evident that the dollar and precious metals rallies were not going to suppress the urge for higher levels in equities.

The Russell 2000 albeit the percentage gained leader remains the weakest link amongst the broader indexes. To answer one of yesterday's questions: it sure felt like another set up as markets surged higher in search of volume. It is still prudent to remain open to the DJIA reaching a new high before any sustained pull back begins. The one-day drop did not relieve the mounting pressure for a correction. The momentum oscillators (near-term) shot back to extreme overbought levels with the mid to longer-term oscillators remaining overbought.

LinkedIn (LNKD) reported after the close on Thursday after hitting a new 52-week high at $202.91. The company while reporting stellar earnings disappointed the Street with lowered 2nd quarter revenue estimates and guidance. In after hours trade the stock dropped to a low of 177 before settling into a range between 179 and 183.

I am beginning to notice a discernable rotation one that may catch fire as money is pulled from the biotech sector and back into the technology sector. It would seem that all is forgiven with technology stocks again gaining strong favor from the investing public and money managers. MSFT, AAPL, and INTC to name a few of the titans will become very attractive if and when the broader markets pull back.

Friday's trade action may be a coin toss at this point, but expect a reaction to the release of April's Employment report to decide direction. Resistance levels remain in place for the broader indexes and as discussed previously new highs may not produce the desired momentum many appear to be "banking" on.

Restated Support levels for a Larger Correction are still valid.

DJIA - support at 14550 while tested recently remains in place for now. The next zone is at the 14500 to 14450 area, but eventually downside momentum will prevail with stronger support coming in at 14400 to 13750.

DJIA (Daily) with Channel Lines

(click to enlarge)

S&P 500 - Resistance remains at 1598 to 1600. Support is at 1573, 1566, 1559, and 1550, with stronger support below between 1525 and 1475.

S&P 500 (Daily) w/Channel Lines

(click to enlarge)

Charts courtesy of ThinkorSwim

Russell 2000 - Support should be found at 920, 916, 912, and 906. Ultimately, it remains highly likely that it could get very ugly for the Russell 2000 with stronger support seemingly far below at the 850 to 820 area.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (MINI), S&P 500, ES , RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD and GS.

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

1. DJIA future (e-mini available)
2. S&P-500 future (e-mini available
3. US$/Euro futures (e-mini available)
4. GS (Goldman Sachs)
5. AAPL (Apple Computer)
6. GOOG (Google)
7. LNKD (LinkedIn)
8. NFLX (Netflix)
9. 30-yr Treasury Bond future
10. 10-yr Treasury Note future
11. TLT (Treasury Bond Long ETF)
12. TBT (Treasury Bond Short ETF)

From previous articles -

Day Trading vs. Position Trading

Recent discussions have revolved around the necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading.

I advocate the use of overbought/oversold indicators and momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a "bull trap" or "bear trap" forms.

I believe that it only gets more confusing going forward as the market ignores "the writing on the wall" and continues higher with a false sense of security built on negative input. Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday. Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower.

This type of action is the primary motivation behind my advocating switching strategies if necessary and focusing on day trading and less on position trading. I do believe there are discernable longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk.

I continue to recommend the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the "chaos" and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

Disclosure: I am short IWM, QQQ, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long NEM, GLD, VIX