Friday Morning Focus

After siding with the bulls the better part of the last 5 years, the recent weakness in August, the worsening economic data, and the terrible price action had me switch my bias back to being bearish.  Trading through some of the bigger market corrections, namely 2008 and 2009, you know the counter rallies can be impressive, and sometimes down right mind boggling.  This has been one of those rallies.

An absolutely great read this morning come from Frank Zorilla.   FOMO.  The fear of mission out.  No doubt the recent price action, the constant dip buying, the spikes to the upside, are telling you what the longer term charts weren't telling you a few weeks ago.

Now the question will be.... is this rally going to continue?  Or is it one of the relief variety?

The wonderful bear flag formation, the wedge breakdown..... what a difference almost two weeks of relentless price action will do.  The $SPY has rallied $16 from last week.  A stunning rally, with some names going absolutely ballistic.  $TWTR soaring like a Falcon.  Energy names, gold miners... the list goes on and on.  Even $IBM has joined the rally.

On the flip side, market leaders have stepped aside.  Look no further than $AAPL.  One of my few bearish trades that worked this week.  If you remain bearish on the market, I think $AAPL will remain weak throughout this short squeeze relief rally, or whatever you want to label it.

$AAPL is trying to crack the key $110 level this morning.  But I don't think it will hold.   This chart from yesterday is just as relevant today.

We know this market can and will rally without the help of $AAPL.  This $AAPL chart is not a proxy for the market, despite it being the largest company in the world by market cap.

We saw early weakness from many market leaders yesterday.  And in spite of this weakness the market remained strong.

We've also seen the VIX continue to melt lower.  The VIX just after the FED minutes came out saw a fat finger trade 20% lower to 16.  It reminded me of the fat finger $SPY trades to $212.86 late last year when $SPY was at $204.  I said at the time it was a paint that the rest of the market would eventually get up to.  And guess what?  it did.   The same with the VIX reading yesterday at 16.  It will get there.


The VIX and S&P500 correlation chart:

and energy.   What a rally for energy.  The heavy lifting for this rally off the recent lows has come from many of the beaten down names in the energy sector.

With the market ready to open in 30 minutes I've run out of time to post additional charts.

Perhaps the recent action is the makings of a double bottom.  All the awful economic data will be papered over by more Central Bank accommodation.   And maybe the market will continue on its merry way to record highs.

The rebound in energy and oil is key.  But I still view both as a relief rally.  As such we will still have a wave of energy debt defaults.  I also see any strength in the US Dollar as a negative going forward.  Much of these gains recently have coincided with the US Dollar pulling back.  The last two weeks have seen relentless dip buying.  Massive spikes to the upside.  Overnight ramps.  But I also see many of the beaten down names leading the cause.  The heavily shorted ones.  I don't think these gains will hold if the moves is based on short covering, buybacks, and central bank expectations.

However, as I pointed out in one of my recent market videos,  a correlation could be made between these lows and the lows in August 2011.  Which would imply that we are at the start of another multi-year bull market.

Today and Monday will dictate where I will trade for the rest of the year.  If we build on these gains... or hold right where we are, I think the market is setting up for something I didn't expect.  Which would be to avoid re-testing the lows of August on the $SPY.  However if we can't hold these gains and head back under $200, I think this market will pull the exact reverse of the last two weeks.  And we will see a nasty pull back.

I still think the trend for the market has ended.  The top is in.  And that we will not see SPY $212 for a long time.

See you in the chat room.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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