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The Ultimate Bull Trap, Did You See It?

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July 16, 2009 – Comments (30) | RELATED TICKERS: SPY

Today's bullish action was the biggest load of flim-flammery that I've witnessed in a long time, but it also reminds me that even self-proclaimed veterans of the stock market can make rookie mistakes if not careful!

Here's what i'm talking about....

Please tell me you didn't skip right over that massive bullseye, which is that gap today from 905 to 916. When oh when was the last time that the S&P 500 was able to leave such a massive gap on the chart to the upside without a closure of that gap. I'd probably go so far as to say its been well over two decades.

This rally was spurred by flim-flammery and poppycock! To borrow from the Clinton administration, its the options stupid! I, like an idiot, failed to look at the underlying July contracts and "should"...key word there... have seen that there were a huge amount (250k or so) of SPY July 93 calls outstanding. Traders would have done anything short of SEC fraud to get the S&P 500 to the 930 level which is not surprisingly where we died today. Key point here, let the open contracts give you a hint where traders are making their bets. Not surprisingly, where is the open interest in August? You bet, the August SPY 80 puts!!!!! Over 360,000 contracts open...that's HUGE! Did I get monkey-raped for lack of a better word by today's rally? Yes! Am I worried that I'm going to recoup my losses? No! This is the biggest headfake since Ryan Leaf was proclaimed the next Dan Marino! Don't be trapped by the massive short squeeze we saw today. 840 is highly probably within 4 weeks, mark my words.

UltraLong

 

30 Comments – Post Your Own

#1) On July 16, 2009 at 3:06 AM, MrMoneyMarker (68.52) wrote:

Good point. I'm willing to bet your 840 prediction will come true soon enough.

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#2) On July 16, 2009 at 3:06 AM, mustbepatient (29.48) wrote:

UltraLong, interesting analysis.  I am less sure of the near-term action than you are.  Here are some comments I posted elsewhere on $WLSH, which represents the total US market:

$WLSH looking positive.  Early June aside, $WLSH has been having trouble with 9500 all year, but it closed above it today.  Based on how forcefully it's bounced off its 200-dma and its false H&S break, I'm not betting against at least a marginal new high.

 http://stockcharts.com/h-sc/ui?s=$WLSH&p=D&yr=0&mn=9&dy=0&id=p14542999763

Some consolidation time would certainly make sense, but I don't feel I have any ability to predict when the market will consolidate yet.

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#3) On July 16, 2009 at 3:12 AM, kaskoosek (35.82) wrote:

Ultralong

 

I think that it is very wrong to say where we expect the market to be. I think that the variables effecting the market are quite volatile and pretty much unkown. That includes inflation, interest rates and employment.

 

However let us go back a bit. I will give you a very good example why stocks now are still not expensive.

 

Philip morris gives a yeild of 5%, the payout ratio is 50%. Therefore real return is in the area of 8%.

 

Where do I put my money?

Treasury that gives me a nominal yeild of 3.5%, or PM that gives me a real return of 8%. You make the choice.

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#4) On July 16, 2009 at 3:13 AM, mustbepatient (29.48) wrote:

By the way, right now I peg SPY max pain for August at 92.  September is 82 though.  Maybe we get one last high followed by a traditional Sep/Oct low?

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#5) On July 16, 2009 at 3:15 AM, mustbepatient (29.48) wrote:

kaskoosek, as a trader I need a roadmap for context in my decision-making.  A roadmap is helpful to me as long as I don't get attached to it when the market proves me wrong.

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#6) On July 16, 2009 at 3:18 AM, TMFUltraLong (99.95) wrote:

kaskoosek,

I can be pretty certain that history will prove that a gap cannot hold on the S&P 500, and as soon as that gap is closed, the S&P 500 will have broken below the 50 day moving average again, and will have failed to cross the resistance line at 931-933, again. Intel's news was merely that it wasn't doing as poorly as expected, yet it was a quarterly loss. Just because companies are doing bad, not horrific, is no reason to sustain this rally. Put action has been all over the downside for August and thats where my play is. I'd be incredibly shocked to see us move higher from here.

UltraLong

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#7) On July 16, 2009 at 3:25 AM, TMFUltraLong (99.95) wrote:

mustbepatient,

I'm in for SPY Aug 92 puts =)

UltraLong

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#8) On July 16, 2009 at 3:31 AM, AdirondackFund (< 20) wrote:

#26) On July 11, 2009 at 5:04 PM, AdirondackFund (20.80) wrote:

Hey Driver,

 We're getting a nice rainstorm today, complete with thunder and lightning, so the fishing is off for today.  Maybe if it clears by sunset.  These things roll through with alacrity around here.

Speaking of which.  The link I posted here works for me.  I am simply pointing out the ride down from 600 to 588, literally from the top of the graph to the bottom.  It was the puncture through this downward sloping line that was the signal to close the FAZ position.  Wavecounts can vary, but I use trendline breaks because others do too and that is usually where the liquidity for trading resides.  It is very easy to hook up a Gann Fan like this one.  You simply connect the top, or what seems a top and the next lower high, then you extend the fan downwards.  Miraculously, price will bounce off of this trendline until it breaks through at which point it reverses trend.  I chased the flip and then dumped FAS at the first peak.  Then at the close they did an EKG move to wipe books clean. 

The longer term Gann Line is still above us and is the next downward sloping white line which has already served as resistence on the way down in the 1-2 pumping action which has led to this 3rd wave down.  It might be a 1-2 and then another 1-2 before the 3rd wave starts in earnest.  At least that is what the Gann Lines have to say about it.  It'll probably go that way too.  I am in all cash and watching to see what develops.  Eyes peeled looking for the white wolf that is stalking all of us. 

Interesting chuckle.  The last 4 ticks of the 5 minute chart on Friday show the outline and the silhouette of the Empire State Building.  Spire atop and steps on the left and right.  Even the architects like to get into the show.  The one that is most feared is The Chrysler Building Spire.  That one is all spire and smooth slopes on the way up and the way down.  In History, the Empire State Building was finished before the Chrysler Building.  The spire spike of the Chrysler Building represents the last gasp of a dying and soon to panic market.  We may be seeing that form in the next few days to get to the Gann Line which is above us and to the right.  Wouldn't that be the Siren Call for 'Ol NY.  A Chrysler Spire now that the firm has gone bankrupt.  Some sense of humor, I say. 

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#9) On July 16, 2009 at 3:41 AM, kaskoosek (35.82) wrote:

UltraLong

I respect your oppinion on the put to call ratio.

 

 

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#10) On July 16, 2009 at 3:51 AM, prose976 (< 20) wrote:

More trapping on tap for tomorrow.  This trap will last thru earnings.  After that it's a free-for-all.

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#11) On July 16, 2009 at 3:55 AM, TMFUltraLong (99.95) wrote:

I'd be surprised if we maintained this vertical trend tomorrow. The July SPY 93 call holders got their "jonesing" fully in today, time for this headfake to show its true form. Everyone will blame the drop on CIT but its really just more of the same.

UltraLong

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#12) On July 16, 2009 at 6:02 AM, camistocks (< 20) wrote:

Ultralong - let me guess, you are in fact ultrashort...? ;-)

Sure, the market may/will digest the recent gains, but what about a summer rallly...? Until August or so...? Noooo, it can't be... ;-)

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#13) On July 16, 2009 at 6:53 AM, toopersent (82.81) wrote:

I'd be surprised if we maintained this vertical trend tomorrow. The July SPY 93 call holders got their "jonesing" fully in today, time for this headfake to show its true form. Everyone will blame the drop on CIT but its really just more of the same.

I dunno, the JPM earnings this morning were pretty strong.  Strong enough to push pre market S&P into the green at least.  We shall see.

As far as INTC's earnings statement, I think a lot of the gain the followed was because of management's claim that they think they saw chip sales hit bottom last quarter.

Whatcha think?

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#14) On July 16, 2009 at 7:02 AM, catoismymotor (< 20) wrote:

flim-flammery and poppycock

 

That alone was worth opening this blog. Thanks, UL!

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#15) On July 16, 2009 at 7:56 AM, ralphmachio (27.69) wrote:

I could see either possibility occuring, Cami, and Ultra.  Either way, can the market avoid crashing until inflaton kicks in?  Who knows...  

anyone who says the market is more respectable than Vegas is delusional. 

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#16) On July 16, 2009 at 8:01 AM, GorillaGorilla (< 20) wrote:

"yet it was a quarterly loss"

Oh, come on UltraLong INTC made a loss only because of an EU fine. 

 rich

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#17) On July 16, 2009 at 8:41 AM, rofgile (99.43) wrote:

Please tell me you didn't skip right over that massive bullseye, which is that gap today from 905 to 916. When oh when was the last time that the S&P 500 was able to leave such a massive gap on the chart to the upside without a closure of that gap. I'd probably go so far as to say its been well over two decades.

 

Between March23 - April 13, I see two examples of a space (gap) such as you have shown, and also big moves up.  These were both part of the longer-term (3 month) climb up.  I think either I never understand what technical traders are pointing at.. or maybe there is nothing here to see?

 -Rof 

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#18) On July 16, 2009 at 8:47 AM, binve (< 20) wrote:

UltraLong, .Great post man!. And I am super-bearish right now on the fundamentals and up until yesterday, on the technicals too. But this move smashed more than a few trendlines. In fact it smashed through somre really large long term resistance (from my last post):



Enlarge

Also regarding gaps: Gaps can stay open for a very long time. There is a gap above us on the Nasdaq that has been open for about 9 months now, and there are gaps below us that have have been open on a lot of indices (around S&P 680-700) since March. Gaps get filled .... eventually. They don't necessarily get filled quickly.

I think you would like my new post and I would love to get your thoughts on it, but in short, I think today is a cool off day and we will get some sort of pullback. But there are some strong odds that the rally since July 9 has more upside before the next downleg takes place. The amount of participation across all the sectors could simply be a massive short squeeze, but I think it is signalling something a bit more for the near term. My $0.02. And yes, from an uber-bear :) Thanks man!.

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#19) On July 16, 2009 at 9:39 AM, portefeuille (99.67) wrote:

uber-bear

Just a side note.

"über" is related to "over" (latin: super) ("ovar" in altsächsisch (as.) (old-saxon), see this pdf document, if you can't help it, hehe!).

überholen - overtake (actually holen is get, so überholen would be overget ...)

übermäßig - overly

überschießen - overshoot

(side note to this: why do you write shoot with a "t", not with an "s" ("ß" is actually like "ss", the (German speaking) Swiss (camistocks!) don't have it)? That is due to the High German consonant shift, in this case "t -> ss". Another example would be essen -> eat)

It can also mean beyond (latin: trans) as in

übertreten, überschreiten (latin: transgredi)

ein Gesetz übertreten - to violate a law

eine Brücke überschreiten - to cross a bridge

 

I am not sure the "uber-bears" have thes connotations in mind or do they think they are too (overly) bearish.

Whatever, hehe!

 

 

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#20) On July 16, 2009 at 10:10 AM, portefeuille (99.67) wrote:

thes

these

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#21) On July 16, 2009 at 12:00 PM, Mark910 (< 20) wrote:

repeating my comment from other blog...Your actions speak louder than your words.  Your green/red thumbs put you in the bull camp. 

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#22) On July 16, 2009 at 1:35 PM, edwjm (99.87) wrote:

portefeuille:

Thank you for the language links!

I found them very interesting, although they will have little impact on my investment strategy.

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#23) On July 16, 2009 at 2:44 PM, AnAmateur (< 20) wrote:

Okay - I sold all my stock. I value your opinion.

Just kidding - but I have sold my small-caps in the past few days after the 5%+ gain.

 

Reading CAPS makes me paranoid.

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#24) On July 16, 2009 at 3:20 PM, TMFUltraLong (99.95) wrote:

This is some of the goofiest trading I've seen... the Nasdaq up 7 days in a row on what???? The S&P trading 8.3% off its lows four days ago on what???? A gap on the chart, non-convincing volume, a few analysts huffing and puffing their wisdom on CNBC, the 4th largest bankruptcy in history looming, another crappy Nokia report, foreclosures up another 15%, the credit market still screwed according to JP Morgan...i mean what the hell else do we need here to give traders and swift kick of reality in the side of their head.

I am practically fully invested now in SPY puts, this is ludicrous.

As for a few comments above...

GorillaGorilla.. yes, it was an EU fine, but Intel hasnt had a loss in two decades, I think this is statistically important.

Rofgile.... there really havent been any gaps on the S&P 500 chart in a long time. What few there have been do not hold, and neither will this one.

Camistocks.... Not ultrashort, just SPY puts. Ultrashort puts are the sickest, most sadistic torture i can think of.

UltraLong

 

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#25) On July 16, 2009 at 4:50 PM, camistocks (< 20) wrote:

July 16 (Bloomberg) -- U.S. stocks rose for a fourth day, the longest streak in six weeks, as economist Nouriel Roubini said the worst of the financial crisis is over and the recession will end this year, while takeover speculation lifted commodity shares.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aOuH67Yu.5VI

Volume is just back to normal I would say from the shock high volume during the crash. Especially considering that we are in the low volume summer trading time. Look at the bull market that started in March 2003. It never turned back until the new year. Will the new bull market that started in March 2009 do the same...? ;-)

 

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#26) On July 16, 2009 at 4:51 PM, camistocks (< 20) wrote:

@ portefeuille - Scheisssache mit der Rechtschreibung...

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#27) On July 16, 2009 at 5:06 PM, topsecret09 (39.96) wrote:

This Is a very suspect rally on low volume......... I am selling my profitable positions,and raising cash. Until the consumer can access credit,and actually goes out and SPENDS MONEY,this economy will be stuck In the mud. My charts Indicate that the shrp move that we just experienced Is probably no more than a head fake on suspect volume.... The Merideth/ Intel rally ?  I do not buy It. Just waiting for the next shoe to drop.   Jim

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#28) On July 16, 2009 at 8:10 PM, TMFUltraLong (99.95) wrote:

Put to call volume is still increasingly signifying bearish tendencies. I can't even figure out how we had enough energy left to go up today, but then again there are still a ton of outstanding July 93 calls on the SPY. We have SO many outstanding puts in August that I wouldn't want to be anywhere near the long side of the market after today.

UltraLong

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#29) On July 17, 2009 at 1:35 AM, Synesthetic (< 20) wrote:

UltraLong, I agree about the gap being a drag on the index, but if you go back a few days to July 1st/2nd there's another gap! 

Normally, those gaps get filled in, but here we almost hopped over it completely!  My technical analysis knowledge is limited but isn't this called an island reversal and isn't this the bullish type? 

I don't know, I think the market could easily collapse over the next few months but I like to be optimistic.  I still can't believe the Dow is STILL below 9,000.  And woah, the Nasdaq is down more than 60% from 9 years ago?  Where's all this money they are printing, or is it funny money?

Synesthetic

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#30) On July 18, 2009 at 12:11 AM, LovinMe (71.28) wrote:

We're pretty much on the same page, ultralong; except that I'm not fully invested in puts :P

Never underestimate how long markets can be manipulated. We rallied off of the march lows without so much as an attempted retest and I'm sure no one is still holding short on that position.

Point being: there isn't a selling signal yet. In fact, friday was the first day where we even had any indication of the bull trend slowing down. But I find your scenario likely at this point. On spy/spx the oscillators when from oversold to overbought (daily) in 4 days flat. Compared to even the dramatic movements in the past that is rare to see; and when there is little to no fundamental or technacle reason for this... we'll. That's a recipe for headfake.

I'll be watching this SP500 retest of last months highs and at the first sign of breakdown I'll be short with you ;)

Btw, whoever commented on CAPS. If you really believe caps calls reflect someones real investments you're delusional.

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