Tempting Tuesday – Fools Rush Us Towards the Strong Bounce Lines

We're getting there.

The S&P 500 Futures (/ES) are only at 2,431.50 at 7:49 and yesterday, in our PSW Morning Report, we predicted a weak bounce to 2,430 while the strong bounce line is still 0.5% away at 2,442.50 and, if we don't get over the strong bounce line today, odds are this has just been the pause that refreshes for the bears, who are consolidating above -2.5% line (2,418) for a proper break-down – but we still have faith as those dip-buyers are well-trained, aren't they?

We haven't made any bearish bets yet but we'd love to see 5,850 tested on the Nasdaq, but it's not likely we get that high today.  Nor is 1,377.50 likely on the Russell but the Dow (/YM) is over its strong bounce line at 21,670 and failing that line will be the signal we're looking for to add some shorts to the indexes.  These are the handy charts I made for our Members in yesterday's Live Chat Room:

The S&P Chart was already posted in the Morning Report and let's not give the Dow too much credit as we were looking to confirm a more bearish channel, from 22,000 to 21,450 (-2.5%) but, in reality, the drop was only from 22,100 to 21,600, which is 500 points so our 5% Rule™ says to expect 100-point bounces to 21,700 and 21,800.  The 22,670 line confirms that the Dow is failing within a longer-term, weaker trend we believe is in progress.  The short story is, the Dow has to hit 21,800 before we consider it in proper recovery.  

If you want an upside hedge right away, try the Nikkei (/NKD) which tested a major bottom at 19,300.  Once they cross over 19,400, that line can be used for a bullish bet with tight stops below 19,400 and, of course, the Nikkei loves a strong Dollar (good for exports), and the Dollar is nice and low in its channel at 93.35 so a higher Dollar gives us a greenlight on that bounce play.  

With the Nikkei falling from 20,300, a 5% pullback takes them to 19,285 and the low was actually 19,265, so a bit of an overshoot to what our Rule predicted but we'll still use 19,285 as the baseline to calculate the expected bounces and the fall was 1,015 and we'll round it off and call it 1,000 and round of to 19,300 and that means we expect 200-point bounces to 19,500 (weak) and 19,700 (strong) and, as you can see, /NKD already failed their strong bounce last week so now we don't expect much more than a weak bounce but, even so, 200 /NKD points are good for $1,000 per contract profits – so we'll still take it!

200 Nikkei points is 1% and the Nikkei ETF (EWJ) is at $54.33 and a 1% move is just 0.50, so it's really not worth playing as a stock or options play.  That's what's great about the Futures – they are perfect for making quick in and out moves like this.  We'll do a little futures trading in our Live Trading Webinar tomorrow, at 1pm (EST).  Last week our live Futures trades made just under $1,000 during the Webinar – that was certainly worth attending!  

We're also looking for a long on Oil (/CLV7 – Oct) Futures when they get back above the $47.50 line but tight stops today as they still have 26,941 open September contracts at the NYMEX and at least half of them are FAKE orders that need to be cancelled or rolled by 2pm.  We're expecting a move higher into next week's holiday weekend, which will be the last gasp for demand this year so, if they are ever going to see $50 again – this is probably their last chance to put a run together.  

However, as you can see, the NYMEX strip is STUFFED with over 1.2Bn Barrels worth of contracts (1,000 barrels per contract) in the front 4 months and keep in mind these are all fake, Fake, FAKE orders for the terminal at Cushing, OK, a facility that has an 85Mb capacity, so it's physically impossible for all that oil to ever be delivered – even if Cushing were not already pretty much full.  NYMEX trading is essentially a scam, a shell game to drive up the prices you pay at the pump for gasoline as well as for the petroleum products that heat your home or become consumer goods.  

That's why we're so good at predicting it – we know it's a scam and we know how the scam works.  It's kind of like betting you will not be able to find the Red Queen when you are playing 3-Card Monte – it's pretty much a given that you won't – and we simply bet you won't.  It's interesting that you can read 100 articles on oil today that try to explain yesterday's drop and not one of them will mention it was the 2nd to last trading day for the Sept contracts and the trader had to dump 40,000 FAKE orders.  No one mentions contracts at all though we point it out all the time as the PRIMARY driver of oil prices into rollover weeks.

There may be some pressure on the few remaining contracts early today and maybe we'll see $47 (also a good place to go long if we get there) so tight stops at $47.50 but cerainly we'd like to be positioned long for the bounce on oil, which is down $2.50 from $50 (5%) but Brent (/BZ) is only down $1.50 from $53 (2.5%) and a $4 gap is virtually unheard of between the two so it's very likely to close and more likely to close up than down, once they are done rolling out of the September contracts they never really wanted (into October contracts they also don't really want).  

Since 2.5% is a decent correction, this one can be played using USO options.  USO is at $9.69 and a 2.5% move up would give us $9.93 and our target is next Friday for the long weekend so we could play the Sept $9 calls, now 0.72 with very little premium and we'd look for an 0.20 gain (27%) for the week.  You can see why we like Futures better, /CL pays us $200 per contract for an 0.20 gain while each $73 option contract pays just $20 profit – though they do use less margin.

Hope springs eternal ahead of the Jackson Hole meeting this week and, as I said during my Benzinga Radio interview yesterday morning, we haven't burned the dip buyers enough yet to teach them a good lesson so we need to step back and let them have their fun (or join them with /NKD) while we wait for good set-ups to jump back in on our shorts.  As I said yesterday, there's not much data this week and Durable Goods on Friday are likely to be a bummer, so what is there to get bullish about?

Be careful out there.