Three Wrinkles in Focus
...it seems to be that trying to invent a price in an over leveraged landscape is like trying to turn a mirage in the desert into an oasis.
When I get to the bottom I go back to the top of the slide
Where I stop and I turn and then I go for a ride
'Til I get to the bottom and I see you again, yeh, yeh yeh
--Helter Skelter, The Beatles
Sitting down at my desk on Wednesday morning, a couple of things wrinkled and winked at me:
1. Over the last few days the S&P has traded down to sluggish early and gained strength. I noted with interest that the futures were up over four on Globex and prepared to have my face ripped off on a few core short positions. There was every reason to believe Wednesday would be a strong trend day.
- Tuesday left an outside up day
- Morgan Stanley (MS) had blow out earnings.
- Nuveen was being taken out
- Blackstone was in the wings
- Quarter-end loomed
- And not the least of which, it seemed the S&P had a date with destiny, a fling to all-time intra-day highs above its March 2000 1552 high. Has the S&P really marched up a stairway to heaven for four years before going vertical in March, notching up a new closing high only to leave the promise of a new intra-day high hanging fire? All signs seem to say that the odds favored a new intra-day high. Except for one thing. As I wrote on the Buzz yesterday, everyone, every trader I've been speaking to was looking for that run to a new high and looking for it to begin momentarily. It seemed like a crowded trade. It bothered me that virtually everyone was waiting for Gordon Geiko Godot and Black Horseshoe and the run for the American Beauty to launch.
2. Another wrinkle creased my cranium – why was the Blackstone deal being moved up? Why was it being moved up to coincide with Friday's rebalancing in the Russell 2000 which normally would generate buying and be supportive of the market? Did someone know something?
3. And finally a third thought – a smile wrinkled across my face as I heard the Big K "had changed his mind" a scant month after his proposed deal to take out the Bellagio plus has sent his over fifty percent stake in MGM Mirage (MGM) shares soaring. So let me see if I am clear on this – Mac the Knife, a ninety year old shark who may just as well have invented two card Monty, talks his book because he didn't like the twenty percent slippage in his stock and Wall Street comps him to the tune of a thirty percent rally in his stocks. In other words, the notion that he may buy out the shares he doesn't already own put the stock in "play" and sent the shares soaring from sixty-five to eighty-seven. Sweet! Looks like Kirk just had a change of heart and decided to take his chips up to his room.
By mid-day the S&P had remained water-logged and unpretty in pink and I penned on the Buzz: that an outside day down (below 1525.60 S&P) after an outside day up would trigger a reversal of a reversal or a Kaiser Soze' (from the movie The Usual Suspects) and would indicate a fast move. Remember the N/R7 Volatility Signal flashed by the S&P on Monday? The idea of a failure and a sharp move was coming into focus.
A) The Big W
B) The Little W
C) A Kaiser Soze Sell Signal was triggered when the S&P carved out an outside day down on Wednesday after Tuesday's outside day up.
I went on to say that an outside day down on a move below 1525 suggested a probe of hourly support at approximately 1521 which coincided with the 20 day moving average.
However at the same time I warned that the "snapper" in the bond market was over which may mean a failure of the 20 DMA and 1520. In the last hour, a two billion dollar sell program hit the Street and the S&P skidded below 1520 closing down 21 points at the low of the session at 1512.85.
Whether the Blackstone IPO was moved forward on the whisper of liquidation, forced or otherwise in the wind, I don't know. But, liquidation and a sense of panic was in the air the last hour on Wednesday as bids literally evaporated.
I don't know how much of Wednesday's sell-off was related to the blowup of a Bear Stearns (BSC) hedge fund, but when you can't sell what you want, you sell what you can. And the three point loss on ExxonMobil (XOM) is huge and seems to underscore the above notion.
When over leveraged hedge funds are dealing in derivative instruments where there is no tick-by-tick bid and the valuations are marked to a model and not a market, it exposes a psychological Achilles heel. Wednesday that heel was apparent. There is always the potential for a crisis of confidence when you have to invent a price. And it seems to be that trying to invent a price in an over leveraged landscape is like trying to turn a mirage in the desert into an oasis. On Thursday the momentum camels were long on straws and short on backs. Whether the back of the trend was broken remains to be seen, but as I mentioned yesterday Hoofy doesn't owe us anything from here. A break of the W, i.e. – a move below the June 8th low of 1487.40 would be a real red flag. A break of the 50 DMA at 1503 could set up an undercut of the W to say 1483 and a fractal of the recent March low. But, in that case I would only be a buyer on a recovery of the 50 DMA. And if the market fell below 1483 it could be Katie bar the door.
A) when 1525 broke a Potential Cup & Handle Pattern failed.
Conclusion: A big down open that tags near the 50 DMA and holds today and stabilizes may see a rally in the second half of the day followed by a lift on Blackstone Friday. However, lower lows on Thursday that persist after the first hour leave the market in a vulnerable position.
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