Traps Are Set Before Major Moves.

We trade what we think is the truth based on the time frame under scrutiny. Time bends the truth. Are we trading "the truth" or trading to make money? Opinion tweaks truth -- often monstrously. If we don't trade "the truth" and we make money, should it be considered dirty money? By that I mean, will winning with the wrong approach or strategy come back to haunt you, causing bad habits?

Not if you use discipline. Translation: You can do anything as long as you're disciplined enough to know where you're wrong. Discipline doesn't just equal a stop; it means exiting if the reason that got you in appears to be a shadow and not substance. You don't have to wait around for a price stop to get hit; you can employ a time stop.

Every good move in the market (either up or down) seems to start with a trap or a hook -- on all time frames. Such was the case in the secular bear (US) market from 1929 to 1949. Why do I say legitimate? Because that was the low prior to the advance that led to a new record high over the 1929 high. That was soon after the US government stopped crowding out the private sector, by the way.

Major moves on whatever time frame seem to erupt from traps that catch players wrong-footed -- a breakout puts many traders in the mode of buying all pullbacks, thinking the former thrust will be revisited; a breakdown puts many market participants in the mode of selling all rallies, thinking the former weakness will be revisited.

Markets KNOW this. This is their way of accumulating and distributing and clearing the decks before the ship sails, giving it an easier berth (birth?) as it were. In my speculative skepticism as to the markets, my thinking is that these bull and bear traps don't just happen -- they aren't just coincidences. Put another way, as my dear old dad used to drum into me, “Stocks don't move, they are moved.”

It may not be so much that the Street doesn't believe the Fed last week as much as it is that they realize they're winging it. They may be on this "extended" interest-rate holiday because it was a one-way ticket, and they're trying to get enough bonus miles together for a trip back to reality, out of the cave and into the light. Or, it could be that the market is sniffing out that they are clueless as to the next song in the rain -- after all, who was in the watchtower when Risk threw a riot in the prison yard?

Last Thursday morning, the Street was rife with the sentiment that Fed days that are strong pre-FOMC end strong. I don't know the stats on that but it seems that if the above is correct, then it's fair to say "Houston, we have a problem"; it's fair to say that the notion may be true but doesn't hold up when the trend has turned. This is the second time the market has slipped doing the FOMC Cha Cha. Remember that the September 23 Key Reversal Day was a Fed Day.

The market. 985 S&P or bust?

From the 1101 swing high to the recent low of 1029 is a range of 72 points (72 x 5 points/waves = 360-degree circle cycle). Yesterday's rally high came in pretty much as expected, as shown by the hourly S&P chart in yesterday morning's report, shown here again. And, as you know, 1060 is 50% of the range for the month of October's Doji month. A measured move of 72 points down from 1060/1061 projects to 989. At the same time, 50% of the July/October range is 985.

Connecting the dots from the daily dollar to the weekly shows that while the Street is crowded with dollar bears and chatter of a crashing greenback, when you hold a candle to the cave wall of the weeklies, in reality, the dollar is above a nice base from last year. Is the dollar carving out the mother of all backtests? When you step to the next drawing on the cave wall to peer at the VIX, it looks like a decisive breakout with a backtest over the last few days, which suggests a possible acceleration higher (chart above).