Relief rallies on soon-to-be Ireland bailout or a bull trap? Watch HFT bid/offers for 'grind' patten.

Particularly the Dow, as a massive bull trap has formed. Low volume towards the close of trading, marked up distribution on buys and the unmistakable 'grinding' patten (top end) of High Frequency Trades throughout out the trading period. No attempts at further breakouts with a rally that mirrored the sell a day earlier (17/11/2010) with the HFT's grinding along the bottom end.

The rally or 'relief rally' started on the IMF/EU and Ireland bailout plans that are now filtering through to the broader market. It was a rally on the premise of a bailout of Ireland's banking system minus a bailout of government. Of course Ireland is trying to play a bluff and get the banking sector bailed out, therefor avoid a total government bailout (like Greece). This won't happen and Ireland fiscally will be bailed out. A smoke and mirrors trick to instill confidence into the market which shrank the yields of Irish bonds and narrowed the credit default swap (CDS) spreads.

But, I think a rally on Ireland's overall bailout may not happen, only because yields on Irish bonds may still increase as the likely hood that the rest of the PIIGS will be giving bailouts such as Greece and now Ireland. Germany may decided to rethink the EU's haphazard country bailout fund; as the costs to Germany may be extreme - with Portugal eyed next and Spain then Italy. Debt markets will be choked and oversupplied with all the new debt waiting in the pipelines. The problem? Will the European Central Bank (ECB) still gobble up European debt? For this they have to narrow yields (to keep interest rates down) thus pumping liquidity into Europe, again Germany (who has nightmare inflation memories) may put a swift end to the PIIGS/EU bailouts; and do what should be done; restructure indebted nations. Portugal maybe the upcoming experiment. Which may mean shrinking the European Union i.e kicking out nations, letting them back in only when they have got their shit together.

Whatever ones opinion is of HFT trading, it's here to stay. However it is how one adapts to the illusion of stock price stabilization (as far as 'grinding' bid/offer spreads) via HFT trading. As long as governments and central banks 'band aid' fractured economics and insolvent banking system and countries, we will see these wild swings from sell to buy and buy to sell and with expectations that HFT will smooth out bid/offer ranges thus ensuring a possible meltup or meltdown.

Which would be a bet or gamble as the market grinds a trading range for the day.

The bull trap that has formed on this market is quite an interesting one in the sense that the relief rally drove (using the Dow as an example) a major overbid (5 shares bought for every 1 sold): on the opening 18th Nov 2010, the Dow's low @11010 which then went to the high @ 11151, a 141 point change, as the market rallied on the opening session. At 2.00GMT it consolidated @11125 then hit the daily high @11199 a further 74points. Some further consolidation as the bid/offer spreads tightened and the Dow grinds out for the rest of the trading day closing @ 1181

Note: the 14day Kairi Relative Index and the Relative Strength Index indicators both show price divergence from the closing price 19th Nov 2010, which indicates the Dow is overbought. More particularly is the KRI (black-line overlay with the Dow) showing a price swing down (high%) = sell signal.



Chart below (Dow) shows the grinding from the bottom (17/11/2010) and top (relief rally 18/11/2010)