This time around, after all these good quarterly announcements have been priced in, on top of, or in addition to, the QE2 driver, I have to ask myself where is the next market driver coming from? Absent something yet unknown, I believe the driver will continue to be the dollar and the potential for the bank/foreclosure situation to run out of control as ongoing driver(s). But with the Fed so blatantly propping up the criminal banks, we know that no matter how far down they go based on headlines, they will come back… they must for the market to advance. They must because capitalism isn’t much good without fresh capital being formed, financed, and handed out by the very banks we love to hate.

This QE2 expectation that the market will selloff on the news is possible, but hugely expected moves have a habit of disappointing. In other words, since everyone seems to expect the selloff, it’s becoming too obvious that it should play out that way. If it’s so obvious, shouldn’t the market be selling off harder as we approach Nov. 3? Nonetheless, I am on the short side of that trade at this point.

Just to underscore the many, many cross-currents playing out in this market next week: this Friday ends the fiscal year for mutual funds to determine capital gains. If funds sell big winners — like Apple — this week, and then there’s a big selloff in the next two months, investors get hit with a tax (this year) and then also losses. If winners are sold next week, the taxes are deferred for another year.

•Fed Asks Dealers to Estimate Scale, Impact of Central Bank Bond Purchases < Bernanke is now simply asking Wall Street how much stimulus it wants.
•Stocks, U.S. Futures Advance on Raised Earnings Forecasts; Dollar Weakens

Another week of substantial improvement in jobless claims would point to tangible payroll gains for the employment report.

Jobless Claims8:30 AM ET … claims for the week of October 23 are expected to come in at 455,000; actually came in at 434,000, a plus for the morning action anyway.

EIA Natural Gas Report10:30 AM ET
7-Yr Note Auction1:00 PM ET

The S&P 500 dropped roughly 25 points intraday Monday through Wednesday, but on a closing basis has lost three points in that time. This is merely a continuation of the choppy October consolidation, with no technical damage done, as it continues to hold above its August-October trendline and 10-day exponential moving average on a closing basis. For the very short term, if the S&P can maintainabove 1177/1176, it remains in position for follow-through gains. Resistance above is in the 1187/1189 zone, with a minor barrier at 1191 prior to this week's multi-month high (1196).

This article just makes me want to make as many deflated dollars as I can so as to buy real estate in the future: http://www.businessinsider.com/15-signs-that-the-us-housing-market-is-headed-for-complete-and-total-collapse-2010-8. One could say there's a problem in there somewhere! http://www.businessinsider.com/the-15-states-with-the-most-underwater-homes-2010-7#idaho-227-of-mortgages-underwater-1 Mind boggling!!

By the way, I'm one of those people who so far has managed to get through life without every owning any Apple product, no matter how much Steve Jobs says I need his trinkets. I don't need their ianything. Here is what can happen to the Apple cultists: http://www.foxnews.com/scitech/2010/10/27/time-traveler-spied-chaplin-film/?test=faces. Maybe if some of those folks in the foreclosed homes mentioned above had not listened to Steve Jobs, they could have stayed out of foreclosure… calling your bankruptcy lawyer on your iphone while watching your ipad, earbuds protruding from your head listening to your ipod just doesn't seem right.

There is nothing normal about this market.

The battle in the market is not just bulls vs. bears, it’s educated (about trading and the market) vs. non-educated money. Richard Pryor used to tell a story of a tourist coming upon a lion in the bush. The lion is laying down lazily watching the tourist. Camera in hand, the tourist diligently snaps pic after pic, encroaching on the lion’s space. The lion raises his head just a tad to get a better look and says, “That’s right, come on… yea, that’s it… and bring your camera too.”

It isn’t your system, or any system, that brings success. It’s the discipline and understanding of trader behavior within the trading environment. This is specifically why I continually point out the difference between investing, where price is the driver, and trading, where behavior is the driver.

If you’re unsure of which way you’re involved in the markets, you’ve got to stop, back up and review everything… your motivation, your goals, your approach, your “system,” and your attitude.

No one likes it when I say you have to “not care”– that you must be detached from your trade. Bringing human emotional baggage into a trade will make you sell/buy at precisely the wrong time.

The discussion above is why you see the following on my site, www.wallstwise.com, “everything you need to trade is on this site, but you will still need a coach to sort it all out.” Why? Because trading is about behavior, attitude, knowledge, timing, and other esoteric skills, it just is not enough to have a “feeling about that one.”

Moving right along:

Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. Markets also tend to return to the mean over time. The quality of Wednesday’s rally was not as strong as the quality of Tuesday’s decline. It came on lower volume and narrower participation. This suggests that no matter what path stock prices choose over the short-run, stocks are topping.

Based on the empty data calendar and a light earnings calendar, Friday looks to be a quiet session. Nonetheless, the dollar action certainly will be the focus.
•Geithner Push for Trade-Gap Targets Is Opposed Before G-20 Meeting Starts

We are all focused on the dollar because it has been the primary driver of this market. Knowing that, what will you do when the dollar stabilizes and the dollar is no longer the reliable driver? Knowing how to play in a stable market environment would be a good skill, wouldn’t you say? Or do you just like taking pictures with your camera?

I understand that you, like most market watchers, are faced with more readings, prognostications, outlooks, reviews, and predictions about stock market action than perhaps any other topic worth following. The sheer numbers of publications and their respective biases, online and off, regarding the markets are staggering. Generally, most folks settle for following a handful of mainstream media sources.

And then along come I with my daily Trader Thoughts and www.wallstwise.com whose job is not to convince you of anything except that in order to be a participant in the market, in order to trade, you need some knowledge of what’s going on and you’re potential roll in it.

It isn’t as if you don’t have enough to read. I know you’re busy with other things in your life besides a sometimes fickle, terrifying, exhilarating, or boring stock market. In short, I know you’re not necessarily treating the market as if it were your livelihood. I know you pay attention to things that will help you keep your job, and so you read about your industry and keep up with changes or risk being fired.

Well, that’s what I do since the market is my industry, my job, my boss, and since you’ve shown an interest in the market I try to bring you up to speed on things of importance to the market from a trader’s perspective.

As Wall Street expects more quantitative easing from the Fed, investors this week await reports from majors like JPM, GE, and INTC. Those companies do carry some substantial pull with the overall market and could at least be seen as a precursor to how the rest of the earnings season plays out.

Here’s the key: no matter the economic data, the market will give a knee-jerk reaction to it. If the news is bad the market knows Benny is there and therefore try to advance in light of the printing presses being turned on again.

Regular readers of Trader Thoughts are aware by now of the ‘good news is bad news-bad news is good news’ phenomena. We’ve been seeing it for two weeks now. However, as Michael Santoli of Barron’s says this weekend: “Those of us who scratch our heads over the enthusiasm for QE2—given that it amounts to hoping either for continued subpar economic numbers or reckless central-bank asset inflation—might conclude that whatever possible positive market reaction we might expect to such a program has been front-loaded.”

Front-loaded indeed. This will be my trading thesis going forward… I may trade long with the market but my size trades will be loaded and triggered for a selloff.

The expectation that Republicans capture the House portending a market friendly gridlock is probably already priced into the market as well as the Bernanke pending helicopter drop of crisp, freshly minted money further devaluing purchasing power. The real issue appears to be that none of this materially alters fiscal stimulus or deficit reduction.

This coming week is froth with reports: FOMC minutes on Tuesday and Retail Sales on Friday are the big ones. Earnings from JPM, INTC, and GE along the way will stir things up as well. In short, it’s a normal market during earnings season. There is a reason some traders sit out this volatile period.

The balance of the month leading to the November 2 elections as well as the November 3 FOMC drama will keep the froth bubbling to be sure. It is the quintessential Wall of Worry backdrop. We can see spikes to the upside given that the shorts are anxious to position themselves. We can see the occassional pullback that should continue to be bought as we head into November’s Bernanke drama.

In the background, the currency warriors and their respective governments await any output from the weekend love fest meeting of G-20 participants. No one knows how that will turn out, but it is certain to have an effect on currencies and thus the stock market.

•Finance Leaders Call for IMF Role in Averting Protectionist `Currency War’

•Sales at U.S. Retailers Probably Rose for Third Month on Vehicle Purchases < This is of paramount importance to the market.

All in all, whether you're a passive observer of the markets, a day trader, or something in between, there is something this week for all participants.
And make no mistake about this, the market can drop hard IN SPITE OF BERNANKE'S PROMISE based on who-knows-what… earnings, dollar rally, black swan event. In fact, a huge selloff, whatever the cause, would give the Fed and inflationist the opportunity to go ahead with another trillion dollar printing.

Best advice, invest in the company that provides Treasury with printing ink.

One thing I will be watching closely is the follow-through, if any, of Friday’s up move. Much of that move likely came from short covering which makes the following day suspect until proven otherwise.

The big bear gurus are still very bearish, but so are the bull gurus, which leaves the little guy … you, me, and millions of other good folk, caught in the middle. This is the normal position for traders, so I’m not suggesting anything new.

Gold futures (symbol: /yg) are sitting right at $1,300 at the moment.

Although the market was not able to add much in the way of follow through gains Friday after the morning run, there was no selling interest suggesting potential for additional upside progress early this week.

Resistance for the S&P 500 above the 1150 area is at 1157/1158, which is a Fibonacci retracement targets. First-level support is at 1144/1142.

I need to monitor the small-cap Russell 2000 (symbol: IWM) at its four-month range highs of 672/677 and the financial sector (XLF) for a stretch to its September high and multi-month range top at 14.97/15.09.

If there is no breakout today, or anytime this week, we could be in a new trading range for SPX 1125 to 1148 awaiting a reason, a catalyst. The catalyst that is known to be coming are the 3d Qtr. earnings results which start on Oct. 7. The wildcard is what may come out of Washington from your “you can’t live without us” representatives.

Gold futures (symbol: /yg) are sitting right at $1,300 at the moment.

Although the market was not able to tack on much in the way of follow through gains Friday after the morning run, there was no selling interest suggesting potential for additional upside progress early this week.

Resistance for the S&P 500 above the 1150 area is at 1157/1158, which marks congestion as well Fibonacci retracement/extension targets. First-level support is at 1144/1142.

Secondary factors to monitor will be how the small-cap Russell 2000 (symbol: IWM) reacts to its four-month range highs at 672/677 (session high 671) and if the financial sector (XLF) is able to reach back to its September high and multi-month range top at 14.97/15.09 (session high 14.61).

If there is no breakout today, or anytime this week, we could be in a new trading range for SPX 1125 to 1148 awaiting a reason, a catalyst. The catalyst that is known to be coming are the 3d Qtr. earnings results which start on Oct. 7. The wildcard is what may come out of Washington from your “you can’t live without us” representatives.

The original purpose of www.wallstwise.com in 2002 was to cut to the chase rendering knowledge and experiece about market dynamics and participant behavior. The site is linked to websites showing wanna-be traders sites that are most useful as opposed to those sites who’s function is the hype of making a quadrillion dollars in trading. Good luck with those sites.

Google “Stock market opinions” and 9,130,000 sites will have something to say, and none of them has a clue as to the future of the next minute in life let alone the markets. Some of the best minds in the investment world make their prognostications and some will charge a Lindsay Lohan bail amount for their service. And yet there are always two views that prevail, bullish or bearish.

No matter which opinion you ultimately agree with, for you to take action and plow money into the stock market you are speculating.

You probably don’t have to be reminded, but trading the stock market is a risk business. It is speculation and it contrasts with the term “investment.”

Speculation promises nothing… no safety of principal or guaranteed return of or on investment. The general term of a conservative investment, a Treasury Bill, or a CD, generally refers to safety of principal and guaranteed minimum return.

It was the ‘get rich quick’ or ‘make a bazillion dollars in the first 5 minutes of trading’ that prodded me into creating www.wallstwise.com. My belief then, as now, is that trading is about educated money vs. uneducated.

In other words, if you understand and appreciate participant behavior (as well as reading a stock chart) you’d be better armed to speculate. The landscape is littered with the empty trading account shells of those who bought the super-hype, but it also holds the carcasses of educated traders who upon learning the rules promptly ignored the very rules they paid for to learn.

There is no shortage of greed as an emotion in trading, as there is no shortage of fear. There is no speculative stock market without both.

The stock market has a built in upward bias as demonstrated time after time after time after a crash. (What does that say about our basic human nature? We want to see the good side!) The upward bias is what most anyone who trades will play … the classic buy low, sell high. Why is it then that some folks get caught in the buy low, sell lower syndrome? Timing? Bad luck? Ignorance?

Those traders may have done nothing wrong in their analysis, the market cratered on some outside negative influence (read governments).

My point is that trading is a speculative business. You have no more right to be angered at yourself, the markets, or anthing else you may point to then you do at being angered by having a double home run trade. In the first case, you speculated, it went against you and everything is to blame; in the second, you made good money, it was you the genius… funny how it works that way.

The trick is to stay balanced and follow the rules you learned… know everything (entry, exit, target, rationale, money management, etc.) about your trade before entering, cut your losses and keep losses small, try to keep your bull/bear opinion grounded in reality, i.e. the stronger your opinion, the harder it is to get out of a losing position.

Your Wall of Worry for the week: http://noir.bloomberg.com/markets/ecalendar/index.html -Consumer Confidence, Consumer Sentiment, and the ISM Manufacturing about the only biggies for the week. As a result there is less to worry about this week (barring a headline or black swan) aside from profit-taking on any given day, the momentum and trend is still up.

But perhaps an even bigger thing, not sure if it’s bigger than a sovereign default in Europe, is the Chinese stock market which has been in the news on and off… mostly off, if you’ve watched the talking heads. In any event China’s stock market is in a bear market now down over 25%. Why should we care? Because if it’s true that stock markets lead economies (it’s true) and if we accept the premise that global growth is in Asia than what, indeed, is their market telling the world?

China is trying to slow down growth to head off inflation. We’ve seen the European markets and the U.S. market react to each other, but the big, big picture beyond the currency mess is alive and well and threatening. If China’s largest trading partner is Europe and they’re putting in these austerity programs tightening their belts… how does China grow… the market sees this and gold sees this on top of the currency mess.

This is the market’s theme going forward… the incredibly delicate fragile dance between China, Europe, and the U.S.. Nonetheless, you will never hear CNBC or Bloomberg and the like scream out just “sell”. How can they? Their advertisers are folks who depend on folks like you to bring them your money to manage.

And so it goes, and so it has always been.

Friday’s action was particularly telling with higher volume in a decline… overall that little push back up by buyers on Friday now means that there will be more aggressive selling since incoming money is in weak hands. You only need to look at the weakness of the bears when the market and the bulls were in control to see that you can and will have the same reaction to the downside, i.e., buyers quickly become sellers, just as sellers during the rise became buyers as they covered and in turn aided and abetted the upside. It works both ways!!

Gold is still very much in play as it rises with a rising dollar. Oil is dropping as the dollar rises which makes sense since oil trades in USD. But gold should be going the way of oil and it isn’t, at least for now and since inflation is dead then gold is rising for another reason… see above.

The VIX index is volatile (as you would expect) having moved higher on Friday from Thursday’s low of 24.30 to a close of 31.24.

think it’s safe to say Europe will be front and center all week long and it’s news will have a tendency to overpower headlines from this week’s Wall of Worry. The good news is there’s no announcements on Friday.

What is the one thing the investors do not like? Uncertainty. Why? Because the ability to plan ahead using financial instruments is only useful if the future is somewhat predictable. It’s a given that there is always risk. It is not a given that fear of sovereign default was something that had to be pondered. Such are the travails of economies backed by “the full faith and credit of (fill in your country) ” – fiat money.

The market, as usual, has climbed its Wall of Worry (really, really big worries, and a really, really big climb) and now finds itself atop the wall literally at a place where it was before Lehman Bros. blew up on 9/15/08 (R.I.P., my old boss). The market is the only place for real return but that potential is stretched. Any kind of shock, real or perceived, can take back a chunk of that gain. As you know, markets go down a lot faster than they do upside.

Now I ask myself, if I owned stocks back on 9/15/08 and I never got out as the market went searching for Hades, and lo and behold I note that I’m back to even but staring even bigger issues in the face, what would I do? I might just take my money out as a long term investor being very, very grateful we came back the way we did. In chart reading we would call this phenomena the supply side of stocks while new money (demand side) comes in chasing higher and higher prices in the hope that things will get better.

Maybe it’s just my age, but having survived something like that, and being aware that there’s always a possibility of retesting the lows of 666 on the SPX… yes, its possible… maybe I just start trading rather than investing for the long term, as your broker has probably told you ad nauseum. That’s okay if you’re in your 30s. But, from the depths of 1932′s market it wasn’t until 1954… 21 years that the market came back to the 1929 high.

Maybe I should learn to follow sectors and industries short term and trade things short term. It’s all relative anyway.

Maybe Warren Buffett can wait 20 or 30 years, but my shallow pockets can’t withstand another trouncing that may or may not come back, and so I stay on top of things as much as I can… (I certainly demand that you guys read and read and read).

I trade what I see and yet I try to anticipate market reaction and position myself accordingly with well thought out money management plays and keeping any losses small. Small losses will keep you alive while betting the ranch will kill you every time.

I cannot believe that I listened to every word ALL day long into the evening as Blankfein and his boys played their roles in front of a congressional committee who showed signs of basic knowledge on the subject matter.

Knowing that the worker bees of Blankfein did what their lawyers told them to do, that is, avoid at all costs incriminating the firm, it was entertaining. It’s about the firm, not about the boys as witnessed by the release of those incriminating emails thereby throwing Mr. Tourre under the number 12 bus. Senator Levine even asked that question to Blankfein, “Why did you release Mr. Tourre’s emails in this matter and no one else?” Blankfein didn’t know. Actually Blankfein seemed to be out of the loop on everything.

Selling crap by Wall Street is hardly a revelation and hardly new.

Prudential Securities, when I was a broker with them selling their real estate and oil partnerships, was eventually charged with the same fraud relative to those partnerships.

What struck me regarding the Prudential case was the discovery that the crime did not come from marketing. It did not come from unscrupulous sales people… it came from Prudential’s own legal department who blessed the partnerships WITH THE ADVANCE KNOWLEDGE that there was never enough cash flow in those partnerships to make the product viable and they still let it out the door. When those deals blew up and the case went to litigation the fine was four billion dollars.

Merrill Lynch was charged with hanky panky in the late 80′s or early 90′s and fined about five billion.

So the fact is that brokers have lied. Your personal broker is simply telling you what his boss has said about that particular deal who then told your broker to sell it or else. Everyone takes the word of the guy above him. It’s a given that they must know what they’re talking about, and few, if any, individual brokers will do due diligence as a result of the presumption that due diligence has already been done. All they need to know are the bullet points of the product to make a sale.

What I enjoyed most about the testimony and questioning was the constant reference and descriptions from both sides as to risk and risk management. What became apparent was that GS knows how to manage their risk… sell it to the public.

Thus far the words of today’s gospel.

The Dow may be 31 points away from 11,000, but it is also 3,225 points away from its all-time high. No one can deny that the Dow, indeed all the indices, have made a hell of a run off the lows of March 2009, but be real, there is also no denying that there is still a long, long way to go before one we can feel good about crossing these round number thresholds.

Day trading the long side is one thing, positioning for extended long swings is something else… for that I need a correction. At these heights going long means smaller size no matter what I see in the charts. Look at volume on the SPY today, half what it’s been the last 3 months. Where’s the conviction of bullishness? It’s there, but only for a few… so far.

Every major index has developed a rising wedge pattern and nearing a channel line which are the next patterns it has to destroy… spx, dji, iwm, spy, below is the SPX example:

Rising wedge nearing a top channel line

Tomorrow before the open FDO, GBX, MON, and MSM are scheduled to report. Watch closely how these stocks react to the announcements, especially MON, for clues as to how the market will handle earnings starting next week with AA. If they sell off on reasonably good reports then they were overpriced to begin with.

Buying into those drops on the way to Mar. 6, 2009, specifically during the period between Sep 29 and Mar 6, was as deadly as shorting into the rallies since. The relentless rally started on March 6th and has rallied ~67% with only one ~8% correction. 

I mentioned at the beginning of last week that I sensed a paradigm shift in sentiment mainly due to ever improving price action and improving, but spotty, economic reports. These favorable reports were topped off by Friday’s jobs report and rally.   

All of a sudden, as shown by the drop in the VIX in recent weeks, the bullish reading in the $TRIN, the bulls have made their move. Things are so bullish… that they’re now bearish technically speaking. We’ll have to wait and see if the fundamentals really have improved and only time will tell us that story. 

The market always overreacts up or down, always overplays its hand, and always reverses when least expected. The bullish readings are so high that the trade has to be a short play but (there’s always an infuriating ’but’) we can squeeze higher still… 1150 SPX looks like a target but it’s too obvious. 

My best bearish scenario would be a small push higher on Monday that fades quickly and, more importantly, a pullback across all sectors with a sharp pullback. Developments in Europe and Asia over the weekend will influence Monday’s trade as usual. If the market really wants to show bullishness it will have to correct (headline unknown at this point) and bounce back sharply. Any correction in this environment will be short lived and that’s okay with me as long as it’s sharp… say down to SPX 1109 which would make price sit right on the Feb low uptrend line. Probably more realistically for any pullback next week would be to target closing the gaps down to 1116… roughly a ~2% pullback and certainly not a correction.

 A correction is meant to shakeout the excess usually by violating a trend line… a pullback still maintains it’s uptrend. My last comment of the day on Friday in Trader 2010 on Finviz was, “Lack of volume throughout the last 5 days will take it’s toll on today’s rally.”