Market Report: Mother Market Spoke

By: Nouf | Sat, Nov 19, 2011
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Well she spoke and we listened to what she was saying, we went in last week with the ideas of either the bullish triangle breakout to the upside or the "tri trap" that I suspect that many fell victims to this week.

Last week I showed the potential setups, and whilst it looked good for the break out last week if key support held, there was some early clues that all was not well in triangle land.

I also suspect too many were looking at the same pattern, which although in its own right can't be a key to trading a pattern, it don't help when it's been talked about in virtually every blog and website known to the trading world.

Well those traders got a rude awaking this week, by having a bias they were blindsided by what mother market was saying, and believe me she was talking, those that understand the language were not fooled by the trap the market setup.

Earlier in the week I showed this chart to members, it was also in the free section on the site, it got me very cautious about expecting a breakout to the upside, in fact it alerted me to the fact that I suspect the "tri trap" was setting up.

ES
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You can see the arbitrage that was setting up, either the ES was a head of itself, or the FX markets needed to play catch up.

I am a firm believer that the FX markets lead and stocks follow, the very fact that the spread had widened to levels before a severe downside was a huge edge to help me determine that I thought the market had a trap setup for the bulls, and if you looked hard enough the market was telling you that FX markets were not rallying in sync with US stocks. That alone was a warning sign for those that were looking for an edge, and what an edge it was!

While others were looking for the breakout, we were looking for the breakdown, seeing the ES go it alone, further convinced me that the low risk trade was to sell the ES and not be looking for a breakout.

If FX markets had joined in, I could have got behind the move on a potential triangle breakout, but the very fact we had such a huge divergence was a caution sign, thus the "tri trap" was suspected as per last week's article. Shown on the NDX, but was valid on the SPX/ES and DOW.

Roll forward to today and we have all the markets back in sync, so the ES has now corrected that arbitrage.

ES
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With the triangle trap idea in progress it had us looking lower to take out the 01/11 lows, and whilst it whipped around somewhat, I was pretty such that was the overall target, as I write the SPX/ES and NDX have taken out those levels, but the DOW and RUT have yet to, but a suspected gap down should resolve that issue on Monday.


ES

So what now?

ES
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Well with the triangle players taken out and busted stops, I suspect many will be looking at the market with a bearish bias, only I suspect this could be a trap again only for the bears, this I what this market seems to enjoy, hurting the most at key pivotal areas.

Going into next week, we do have a bullish idea what will either find a low shortly within a few points or the market is going to be in a world of pain. We are currently working this idea as our primary wave idea based on a few other little edges I follow. I do like the bullish side of this market, if the market can hold the 1190-1200ES; this is the pit session ES Z1 contract, so it's essentially the same as the SPX. Just adjust for the spread between the markets. Ideally, a small move down on Monday/Tuesday and setup a reversal.

Whilst there can be a severe decline setting up, I see some vital important clues that the market might just have a trick up its sleeve once again for traders that are looking around for clues.

Well what do you mean by clues?

If you have been a follower of my work, you will note I take great importance in finding the small little edges the market gives you, I look at it as a challenge to put the pieces together every weekend, so members have a thesis and ideas of what we are looking for going into the week coming.

This week is no different, if you recall back to an article I wrote penned just before the Oct 4th low, I mentioned I suspected the FX markets were signally a reversal and the bears in stocks needed to pay close attention to that.

The same could be setting up once again, if you follow the FX markets, there is a few pairs that tend to give an edge to what US stock markets are doing, if a skilled technician can put the pieces together I am confident he/she can find themselves with great edges and ideas for trading setups, and whilst nothing is ever 100%, if you keep finding the clues, the rest becomes far easier than if you take a "stab" at an idea.


ZB Vs USD/CAD

ZB Vs USD/CAD
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Now those that are aware of the markets, are no doubt fully aware that in a "risk on" situation, safety gets sold, so the US$ and its counter parties get dumped, so the recent decline in stocks is currently a 3 wave move, yes it could end up being more severe, but currently that is not being suggested.

If you look at 2 of the safety markets the ZB (30YR bond) and the USD/CAD pair, both lift higher as risk is being sold, nothing new there.

However the clues come from what those pairs could be telling us? If you look carefully there appears currently a 3 wave move in progress, and whilst if made be something far more aggressive to the upside, atm, it's suggesting something far weaker than I think the bears in risk are considering.

If you only have a 3 wave move down in the ES/SPX aka US stocks and a 3 wave move to the upside on safety markets, that in itself is suggesting a potential reversal, and agrees with our ideas that we could be setting up for a reversal in risk markets.

The time to sell the markets was earlier in the week against the divergences around 1260-63ES and 1255ES and 1242ES, which we promptly did on all occasions , but selling this area towards 1190-1200ES aint exactly the ideal selling opportunity, especially with the weakness that is being suggested in some of the safety markets.

Sure they could morph into something far more bullish, but atm that's not being suggested, the price action recently suggests a topping setup in ZB and USD/CAD, that is also agreeing with some other markets we are watching to suggest that a risk reversal move is potentially setting up and imo the bears have had a great few days but now is the time to let the market do the talking. There are a few other markets we are watching, although not shown in this article.

As the bulls ignored the message of other markets, the bears need to also take note that other markets are potentially talking and respect that at this current juncture.

If the market are on the cusp of a large move lower in stocks then the charts shown here won't matter, then we go to our secondary wave count, but if they are suggesting what I think they are suggesting, then the bears that over stay their welcome, might just be getting a rude awaking similar to that of the Oct 4th lows.

I would rather let the market do the talking, than speculate on a 50-50 setup, especially when I see safety markets suggesting a reversal, and a potential move back into risk, the edge is just not there imo to warrant putting $$$$ on the line for a 50-50 trade.

Those sorts of odds don't cut it with me; I want a solid set of ideas.


6C Vs ES

If you don't know the 6C is the futures contract for the Canadian $, so it's basically the inverse to the spot market USD/CAD, so 6C is CAD/USD.

6C Vs ES

Now again if you have followed my work, you will note the obvious correlations' to the USD/CAD and SPX/ES, I spotted this clue a few years ago, and it's a vital clue in my work.

If you look at the current tape, you will note the potential for what we Elliotticians refer to as a Ending Diagonal (ED), so if an ED is setting up, and reverses, it seems logical to think that the ES/SPX is also setting up for a reversal, hence you see the potential ABC correction in the ES over the past few weeks.

The market in order to get very bearish here in selling risk, would have to shake off the negative signs I am seeing in safety markets, so you would need to have something in the order of a crisis or something like that to get traders back into safety and turn to markets such as the ZB and ZN contracts, as well as the USD$ thus seeing a bid in the USD/CAD.


Conclusion

There are some key safety markets as well as risk markets that could be signally a reversal in risk from the current downside trends we have seen the past few days.

I am sensing a slight shift in bias as well amongst other technicians and traders, as the bullish triangle that many I suspect had been looking to trade the breakout on, failed and many were caught napping, however this is where the market could also be setting up equally nasty trap for those that think the market is about to puke hard.

Now whilst nothing is certain in the market, and we do have a bearish setup here (not shown), if the current ideas hold, it could get nasty for the bears if the tape fails to see aggressive upside in safety markets such as the DX aka US$, ZB, ZN and USD/CAD.

In order for a steep decline in risk markets such as US and European stocks and risk pairs such as AUD/USD etc, you will need continued upside from the current trend in those safety markets.

Presently they appear that they could be suggesting a reversal as there is some setups, that if they rollover could be nasty and those that are on the wrong side will be hurting quick.

I am about 60-40 swayed in favor of a risk reversal trade, but want to see the patterns I am following work out as I expect, but any clues to suggest that is not the case and risk is getting dumped, will have us move back into bear mode and continue to sell risk markets again as we have done this week.

Be it bull/bear we don't care as long as it moves we can count it; if we can count it we can trade it.

Until next time.

Have a profitable week ahead.

 


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Nouf

Author: Nouf

Nouf
www.Wavepatterntraders.com

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