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The Market's Fake-Out


The push and breakout above the morning range proved to be a fake-out break-out late Tuesday: a fast decline ensued on the heels of the false move into the green, and accelerated into the close...

My obsession, your possessions, every piece that I can get
My obsessions are your possessions, my mouth is soaking wet
I think I blew it now, confession


There are a few trading axioms that I have learned to live by. One of them is that false moves lead to fast moves.

On Tuesday, the S&P tested the key 1500 level once again, (key because of an abundance of 150 Spyder puts outstanding), and traced out an inverted, bullish Head and Shoulders Pattern on the intra-day chart. The pattern triggered as the S&P exploded ten points higher to 1511.35, going green by a couple of points on the session.

However, another trading axiom is that the market has a memory. In this case it was the memory of the Weekly Swing Pivot at 1510 S&P. This is where the Weekly Swing Chart turned down for the first time in eleven weeks (last Thursday). This level proved too much to overcome. Not only did the S&P not forget, but this 1510 level also proved to be very unforgiving.

The push and breakout above the morning range proved to be a fake-out break-out late Tuesday: a fast decline ensued on the heels of the false move into the green, and accelerated into the close when the Inverted Head and Shoulders Pattern was snapped. Again, failed moves and failed patterns lead to fast moves. It has always been so; it will always be so. Although it may sound like a cliché, it is a time-tested concept for a trader to live by. It is important to remember that clichés are so called because they are often true.

Another market axiom that I have found illuminating is that time is more important than price. For example, ten-year yields began to explode in mid-May but it took time for equities to notice. Ten-year yields exploded to a new high for the year to 4.95% on June 1st, but it took until June 5th for stocks to react.

Apparently, foreign central banks' and foreign institutions' participation in U.S. Treasury auctions has been lackluster. Why the sudden subdued interest? After all, yields have been going up around the world faster than here for a while. Why the Catsup on the bond weenie roast now? Foreigners of the U.S. have been getting burned by the currency translation on their bond purchases for a long time. Why the poor participation in government auctions lately?

Moreover, Professor Sedacca tells me that it is not just a reduced appetite for U.S. Govies, but there is also aggressive selling by foreigners of U.S. inventory. And remember the U.S. depends on the kindness of strangers to service its debt.

Why now? What is/was the catalyst for the Bond Bust? Why the obsession on rates now? What was the tipping point? The answer? I have no idea. It is what it is. But, as mentioned above, I subscribe to the notion that time is more important than price: the markets seem to have their own internal clock - things matter when they matter. And they seem to matter all at once in this Golden Age of Linkage.

For very good reasons: there are more hedge funds than ever before; more money managers around than ever before, with more possibilities and styles of paper to bet their hunches with that money than ever before. In this Golden Age of Globalization it may be worth considering that the other side to the benefit of globalization of capital flows is that globalization and computerization may cause things to happen faster than many market participants are accustomed to handling. In other words, the linkage may be magnified.

V is not just for volatility. V is for vendetta – The Revenge of the Volatility Nerd which has 'morphed' into some kind of nutty professor on a toxic brew of some kind of artificial sweetener – cheap money and artificially low yields on the long end of the curve; promulgated by the surplus capital thrown off by such factors as the Yen Carry Trade, and new-Fangled Dragon Chinese capitalism. A toxic brew promulgated on the short end of the curve by a strange mix of free money in Japan on the heels of their "don't let 1989 turn into 1929 Kabuki deflation dance;" and free money in the U.S. on the heels of the technology crash, corporate scandals, and 9/11. A powerful Yin-Yang/East-West cocktail enabling a and a

In my experience, coincidence gets short shrift. I'm not big on happenstance. I tend not to believe in coincidences - things happen for a reason - although it may only be apparent in the clarity of hindsight how the cause and effect martini shakes out.

In other words, money supply growth through easy money policy is one thing. The velocity of money supply through easy lending is another. A Fed that feels that it has lost control of the reins of money supply is yet another. A Chinese government that warns of excess speculation to little avail is a dragon in the ointment. Put it all in the correlation Cuisinart, and central bank tightening may be more concerted and less happenstance than perceived. Rates - their possession, the markets' obsession.
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