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Friday, August 29, 2014

Stock Market Leading Indicators From Wolf on Wall Street

A quick look at some of our Leading Indicators from Wolf on Wall Street

I captured these just before the last post to see if I could glean any additional insights. We'll start off with leading indicators (later we'll check internals and the Daily Wrap as they are really where all of this began being so deeply oversold (worse readings than bear market readings).

First, probably the most important of the Leading Indicators and the predictable instigator and support mechanism of the market from early August, HYG.

HYG vs SPX (leading indicators will always show SPX in green, unless otherwise noted like "SPX prices inverted").

Clearly HYG wasn't supportive of the market at all,  that is until the close. Look at HYG in to the close and the SPX, that's not an accident and it fits well with the The Week Ahead post which is the same thing I've thought all week. I'll show you more in a minute, just remember the SPY charts from the The Week Ahead post this afternoon.

I suspect the market is far too weak to stage a breakout, even a head fake -failed breakout without some help from the market levers. Take a look at HYG's intraday charts and remember the week ahead SPY charts...
 The 1 min above and 2 and 3 min below have an intraday positive divegrence just like the SPY, note the move up in HYG at the close, also like the SPX in to the close.

2 min HYG positive today

3 min HYG positive today.

I suspect if this were going to be a longer/stronger divegrence, it wouldn't have started upward toward the close, but rather stayed in the area and continue to accumulate.

As I said with the SPY in the Week Ahead, the roof on the move is at the 5 min chart which is not positive, but leading negative, that's the same situation for HYG so it looks like it's clearly being used as a lever to help push the market to our head fake move and looking at the close, I'm guessing it will be right off the bat Tuesday morning.


Earlier I showed you the trouble HYG is in, HYG As A Leading Indicator I suspect HYG will give out first and lead the market lower in to stage 4, I just don't think anyone will be wanting to hold HY credit so close to a decline.

This is the August rally and even with today's move, HYG is still very much in a reversal process, the 9th day of lateral trade, this is likely one of the main reasons the price gains in the overall market have slowed to almost nothing and the averages are headed sideways in their own reversal process.

Longer term on a 4 hour chart, HYG gave out back in May, it gave out again in June/July, the next leg down should be substantial and remember, credit leads equities.

Here I have inverted the SPX's prices so you can see what the normal correlation would be between the  VIX (spot) and the SPX, normally they'd move almost exactly together, but this week as we expected to be in the reversal process with deeper distribution, the VIX has outperformed the SPX which suggests protection is being bid.

In fact of all of the market correlated assets, the VIX has one of the clearest, cleanest reversal processes.

The red box is the market base from 8/1-8/8.

Here VIX Futures (VXX) are also outperforming the SPX (also prices inverted), especially toward the later part of the week. We often see this when the correlation is broken because there's real demand and a real bid for protection.

I like to use short term yields as a leading indicator because short term the market is drawn to them like a magnet. You can see yields have been supportive of the move (short term), but have broken away as the market has turned lateral, the topping/reversal process.

This is a longer term look at the same with the August rally at the last yellow box on the right, you see short term reversion to the mean, right now Yields are pretty severely dislocated and will be exerting pressure on the market to the downside.

Earlier in the week I posted TLT (20+ year treasuries) looked like they might pullback,  TLT / Treasuries. The divegrence is still there and we saw some late day selling in them, remember they are part of the SPY arbitrage and them moving down helps the market move up with two other assets, HYG moving up and VXX moving down, we already saw HYG at the close, now TLT. I doubt this is coincidence as weak as this market is they'll likely pull every lever.

I took a quick look at the averages and the Trend Channel, except at "A" when the Ukrainian government claimed to have destroyed an armed Russian Column that upset the market, there hasn't been a single stop and the channel has held the entire uptrend until the red arrow, that's about when prices started moving more to the side/laterally, which is exactly what the Trend Channel is designed to do, keep you in during the trend, pull you out when the trend has ended, but that doesn't mean an immediate reversal, in fact I've addressed this a couple of times this week, but it is telling us the easy gains on the upside are over.

The DIA also had the same stop at the Ukrainian news, but otherwise held the entire trend until the two red arrows, you'd stop out on the first and the trend has obviously turned lateral since.

Here's the QQQ Trend Channel and recent stop, note the change in trend from up to lateral.

In fact, the Trend Channel pulled the SPX and Dow out after 10-days of rally for a gain of +4.34% and +4.10% respectively. Over the 6 days since then until today's close, the SPX and DIA have gained exactly +0.55% and +0.35%... Not exactly worth your time or the risk is it.

For the Q's the Channel stopped out later, 14 days in to the trend with a gain of +5.63 and since then only +0.26%!

 This is VWAP today on SPX futures. As mentioned this morning, it seems a Citadel algo under the direction of the NY F_E_D pushed SPX futures to new highs >$2000 which were promptly lost as VWAP was broken at B and headed to the lows of the day at "C". At "D" we have the intraday highs (until the close) which faded right after the European close back to VWAP.

Looking at the VWAP/ES trend for this move, it's pretty easy to see the change in trend.

I looked at single Currency futures, this is AUD and it looks like it's going to come down with this 30 min negative divegrence

The 30 min Euro is still in line with its downtrend, this may change if Draghi acts next week.

The $USDX also has a deep leading negative on a 60 min chart, this isn't the first time I've seen it this week.

I didn't cherry pick these, they were the ones that stood out the most. These are not short term intraday divergences, but more along the lines of short term/Swing (or a bit longer ) reversals.

Interestingly the Yen's 60 min divegrence is leading positive. Taken with the above currencies, this would suggest there's no carry trade that will come to the market's rescue, rather it looks like the carry pairs are about to see a decline which would be in line with a market decline as well.



All in all, it looks like the same concept we see about 80% of the time is going to play out again as we have maintained all week.

Not that I subscribe to any of this as I have shot down these fractal correlations and Hindenburg Omens numerous times as I feel each market is different even though I may agree with the end result, but the 1929 high was the day after Labor Day which is coming up Monday, again, just an interesting aside.

I'll have much more for you this weekend.

Have a great weekend and safe holiday.

Tuesday, August 26, 2014

Gold, Gold Miners and our NUGT Long Pop

This is just yesterday's $USD, GLD (gold), GDX (gold miners) and NUGT analysis from our members' site,


 $USD / GLD / GDX Macro Trend Monday , August 25th 12:48 p.m.

"This morning CITI came out and let everyone know that they sold their $USD positions fearing a sharp decline after the $USD just had an incredible week (last week)...I thought this was interesting for a few reasons, 1) we saw some underlying weakness in the $USD last week and 2) we saw underlying strength in both GLD and GDX (gold miners which share a tight correlation to gold). In fact, last week we had Trade Idea (Swing) NUGT Long and the next day, Trade Management: Adding 25% to Yesterday's NUGT Long...I think what is going on here is a bit larger then the knee jerk moves on CITI's news this morning, and smart money doesn't disclose their positioning unless there's something to gain form it, whether long gold already or looking to pick up $USD at cheaper prices, whatever the case, CITI was out of the $USD before making that known to the world this morning...With gold and oil looking this way and CITI's announcement they have sold all $USD longs, it makes you wonder (as they never disclose anything that's not to their advantage unless forced to) whether they've already set up their $USD shorts and/or USO/GLD longs as commodities/precious metals typically move opposite the $USD."

With our NUGT long position on signals from late last week and a strong head fake move yesterday at the close...
We had a very strong case for our GDX/NUGT long.

This morning, Gold and miners gapped up, by the close our NUGT long was up 6.19% on the day. While we expect some bouncing around, the longer term 3C signals show us what appears to be at least a swing long trend in a 3x leveraged ETF.


Friday, August 22, 2014

Stock Market Forecasting, We Called the Bottom, Now...

Below you'll find a repost from Trade-Guild from Thursday, July 31st which originally from our members' site the same day, 


Some quick excerpts from the full post below, The Market Was Flashing Red Lights, Now It's Oversold ...

"The one thing I see for sure in breadth and the S&P/Morningstar performance is this market is now, very oversold on a breadth basis, so I think out position taken up today was the right thing to do and we did it based on the signals which just happen to fit the breadth oversold condition.

We'll piggy-back that trade and when we get to a little correction there are numerous shorts (some of which we have calls in now) that will be at beautiful set-ups if you need short exposure, I think most of us have been ready for this day." July 31st Wolf on Wall Street

Other Posts and excerpts from Wolf on Wall Street...

Opening Indications  August 1, 10:46 a.m. Wolf on Wall Street

"What I'm seeing so far makes sense with the degree to which the market is oversold and I never consider a market oversold based on price, but based on breadth which as you saw last night with only 24% on NYSE stocks above their 40-day moving average, down substantially from Wednesday, we are very oversold and I suspect we'll see a decent bounce.

The 3C intraday charts thus far have shown positive divergences in to weakness and there's a larger reversal process/short term base I suspect in the making so I still think we'll get a pretty decent bounce"

Multiple Asset View August 1, 11:41 Wolf on Wall Street

"While there are a lot of charts still in line with the downside and nearly all have intermediate and long term divergences that won't be turned around, there are quite a few that are working on what looks like accumulation of lows and a broader base, I'll show you a cross section of the market (mostly the ones working toward some sort of base). I'd be very tempted to take gains in assets such as SRTY +12.65% since re-entering it last week if indeed a bounce looks probable. I'd likely put most on the sidelines and play a few select longs with either 3x leveraged ETFs or calls and then re-enter the shorts like SRTY."

Closing UVXY Long August 1, 12:55 p.m. Wolf on Wall Street

Closing FAZ Long August 1, 12:55 p.m. Wolf on Wall Street

The Week Ahead August 1, 3:08 p.m. Wolf on Wall Street

"I think the current charts show a building divergence so I may decide to move some more positions around next week, but not right now...If you look at where we are now, any upside move would be off a "V" bottom and these are just not common, especially in a situation like this in which market breadth is so massively oversold...This is the SPY 5 min chart leading positive, but it needs to build out a larger footprint... From the charts I see, I think a bounce is probably likely."

Early Indications Monday August 4th, 10:55 a.m.  

"So far the early indications look very much like expectations for this week , at least the early or first stages as posted Friday in The Week AheadThe first step in an oversold bounce is widening out a base to bounce from which would have been an unstable "V" if the market just moved up this morning and kept going without coming down a bit and allowing for a larger footprint for the base, it looks like that's what is happening with the bounce probability still likely."

Market Update-Timing Friday August 8th 3:08 p.m. Wolf on Wall Street

"There are several calls I'd like to enter or add to like XLF and IWM, there are actually quite a few stocks that look good, but for a bounce I'd rather use something that's going to represent the broad market and with some leverage (URTY or IWM calls, GFAS or XLF calls).

As I said earlier, "Don't Chase", however this bounce is now looking very strong for lift-of, something we haven't seen all week so at the same time, I don't want to miss it."

*From there, we had our base and bounce starting the next trading day.
 3C accumulation/base formation from 8/1-8/8.


The base and what came next, called starting July 31st as you'll see below, allowing us plenty of time to re-oder our trading positions.

Currently we believe we have several more days of largely lateral consolidative movement before the next trend.

July 31st's repost,

 

Market Bounce Targets From 2 Weeks Ago & Changes in the Market

This post from our member's site,


shows the targets we had set two trading weeks ago on 8/11 for this market bounce as well as what we see moving forward...

This is a little bit of a tricky area, especially for short term traders or day traders as the dominant trend will be lateral/sideways which is usually pretty choppy and can create a meat grinder, just imagine a rectangle, fairly tight and price bouncing inside it.

For longer term trades which is what we have been most interested in with this bounce, entries are going to start popping up, the best will typically be on upside volatility. On an options expiration Friday (every Friday w/ weeklies), price generally un pins from the max-pain area around 2 p.m.

The main levers are failing, for this bounce HYG was the main lever set in motion August first and led the market the entire time the base was being constructed (q week) as well as almost through the entire bounce. If we look at it from a stock cycle/stages, we're in stage 3 (top/distribution) now.

This is the targets that were published on the first day of the bounce, August 11th, TWO TRADING WEEKS AGO IN Daily Wrap...

The first chart was a rough guess of what the IWM would look like and where there were two points of action, the first being a slight pullback where longs for a piggy back trade could be entered and the second was the upside pivot and more important short entry.

This is the actual chart from that post on 8/11 and commentary...
"Here's the base we expected to form just a little over a week ago, the 3C divergences during this base have been posted numerous times and there's one above (QQQ 10 min). We started a move up today which I expected to see early weakness as of Friday's "Week Ahead" and "Daily Wrap" which started today with a 50% retracement from intraday highs. at #1 we have the expected very near term pullback and reversal process, this is where I'd enter any call positions (speculative) or swing trades (which I prefer using a market average like the IWM with leverage like URTY - 3x long IWM). While there will undoubtedly be smaller/short term surprises along the way, the general idea is for the base to send the market higher along the lines of a swing trade. At #2 we have the most important part of the analysis which would be the start of the reversal process back to the downside, THIS IS WHERE I'D WANT TO CLEAN UP LONG POSITIONS AND START ENTERING ANY REMAINING SHORT POSITIONS"

This is what the IWM actually did...
 The above was posted at the white arrow, there's a small pullback which was to be used for any long trade entries. And the second pivot where shorts would be entered, was just above the white trendline if you look at the chart above from 8/11.

This is the SPX chart from the same post on 8/11 with several targets from minimum to the expected upside @ "B" above the psychological level of 1950. "C" was added as the next likely stop for the next leg down. 



Here's where we are.
 One of the SPX upper targets for the bounce were right in this area, as stops would likely be placed (short stops) right about where the SPX broke below the bearish Ascending Wedge, so a move to that level was reasonable, a move back inside the wedge would be difficult as the trendlines were extended.


 This is the SPY 60 min trend, the only disruption was the Ukraine fabrication of a Russian Armored column being destroyed last Friday (red arrow). However note the turn to the right and lateral reversal process expected this week after about two more days of upside from Friday's The Week Ahead...

"Today really skewed a lot of things (*Ukraine disinformation of Russian convoy destroyed*), but just going from the trend prior to today, it wouldn't surprise me if we were very near the end of this bounce, maybe a day or two more (This week*), but I suspect we'll be seeing a lot more lateral (sideways) trade next week, a reversal process."

We got about 3 days , but I believe the reversal process started Monday and as you can see the trend lines are now flat the last two days.

 Here's another way of looking at it on the QQQ, the 10-bar moving average has Rate of Change (orange) applied to it which has clearly turned down.

 From a daily ES point of view, this has been the lowest volume rally of the year with the last two days setting new record low volume for SPX futures exclusive of holidays.

 VWAP may look different to you for the simple fact it's no longer trending up, but sideways.


 HYG has been the lever for this bounce, it's certainly not demand judging by volume. HYG led since the base started on 8/1 through 8/8 and led through most of the rally /bounce until a few days ago when they reverted to each other, now HYG's relative performance is lagging badly.

 HYG intraday vs the SPX

 HYG's longer term 30 min chart positive at the lows/accumulation and negative now/distribution.

The 15 min chart with a relative and then leading negative divegrence.

And the 5 min chart.

The 2 min chart's trend is a great visual of when and where underlying trade moved from accumulation to in line to distribution.

As mentioned several days this week, VIX futures are seeing accumulation, I inverted the SPX price (green) so you can see the "normal" correlation, VXX is definitely outperforming the SPX...DEMAND.

 The Flight to Safety TLT/Treasuries (20+ year) are also outperforming, remember the accumulation on the F_O_M_C minutes knee jerk dip.

 Our pro sentiment leading indicator had been in line with the SPX through almost the entire bounce and started going negative a couple of days ago and continues.

This is TICK, note the strong move to -1500 earlier today and a flat trend now.

I would normally think we'd have about 3 more days or reversal process, but because this move was so straight-line with few pullbacks, it's probable that the reversal process will be faster/tighter than normal, the IWM may be the exception.

Wednesday, August 20, 2014

What the FED Minutes Really Said


Although for many it won't matter, here's what the F_E_D not only said, but has been saying for well over a year now and "D-Day" is not only coming, we may have actually just passed it.

In the F_O_M_C minutes released at 2 p.m. today one of the bullet points was voting members were uncomfortable with forward guidance, this is nothing new, they were uncomfortable with it nearly a year ago when they changed guidance from quantitative to qualitative, which is like going from the old guidance of "Rates will be kept at ZIRP until at least Q1 2016", whereas Quantitative Guidance (which seems reasonable) allows the F_E_D to make it up as they go along. No one can count on guidance from the F_E_D as it's now "data dependent" which again seems reasonable, but the F_E_D has always forecasted based on the data,  this neat little trick allowed them to up-end guidance completely on an arbitrary basis as we all should know by now that the unemployment target of 6.5% which was suppose to end accommodative policy is easily manipulated by cutting extended unemployment benefits as was done earlier this year in the Congressional budget, 99 weeks was no longer funded and in Florida anyway, it's back to a measly 16 weeks, half of what it was before extended benefits (use to be 32 weeks). As the unemployed falL off unemployment benefits, THEY ARE NO LONGER COUNTED AS PPART OF THE WORKFORCE, (some 3.1 million this year alone).

In other words, lower unemployment now is largely a function of the unemployed no longer being counted as they are considered to no longer be a part of the work force and thus, "NOT UNEMPLOYED"!

The same tricks can be used to just about any data series whether through revisions or seasonal adjustments that are totally arbitrary, the F_E_D and government can create virtually any set of numbers they want with a little finesse.

The old guidance of 6.5% unemployment rate also considered their dual mandate of price stability which is around 2% inflation, however the inflation trend has been hot which seems to be one of the reasons the minutes were more hawkish today as inflation is just about at the F_E_D's mandate.

"participants generally agreed that labor market conditions and inflation had moved closer to the Committee’s longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. "

The F_E_D speakers and meetings have continuously been warning the market to expect rate hikes a lot sooner than later, take Bullard's "The Market is Wrong" interview on Fox Business in which he said the market doesn't realize how close the F_E_D is to attaining their mandate,  which means, the market doesn't realize how much sooner than formerly expected rate hikes will begin.

Today was another reiteration of the same that's been heard at least a dozen times, even from Yellen herself, if you missed it, you haven't been listening to what the F_E_D has been saying.

"Indeed, some participants viewed the actual and expected progress  toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium term."

Put another way, the F_E_D is not concerned about overshooting on unemployment, but rather on inflation. You can go back about 5 months and you'll see I've been consistently posting that the one thing that ties the F_E_D's hands and leaves them no choice but to hike rates is the inflationary trend getting out of control,  this is nothing new, it's just being yelled now instead of spoken.

"These participants were increasingly uncomfortable with the Committee’s forward guidance. In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate"

This speaks for itself... Participants are essentially saying in an official forum rather than FOX news that rate hikes are coming sooner than later and will be larger than expected. You may recall from Yellen's own words, the committee expected rates to be at 1% by the end of 2015 which essentially means rate hikes are right around the corner and they'll be successive assuming they are done in 25 bps increments,  this is a market slayer.

While we're on the subject of guidance ... there was this gem (although not the first time it has been mentioned)...

"The (FED's) Balance sheet should be cut gradually, predictably"

With over $3.5 billion in balance sheet expansion from accommodative policy, the Bank for International Settlements" in its annual report questioned whether "Leading Central banks" would have the ability to respond to even a run of the mill recession, in other words the F_E_D's balance sheet is tapped out which is likely one reason QE is ending other than the market bubble and inflationary concerns.  However, initial guidance from Helicopter Ben" was that assets on the F_E_D's balance sheet would be allowed to roll off at maturity, that's not the same as reducing the balance sheet. 

I'm not sure what the angle is here other than the fact the F_E_D has absorbed most quality collateral which has forced banks to use the 1-day reverse repo facility at the end of the month and quarter for window dressing to make it look like they had collateral when in fact they only "borrowed " it from the F_E_D for a single day, the last day of April and the last day of Q2 setting the second highest usage for the facility in April and a new record high at the end of June as they dressed their windows to make their financial condition look better than the mess it truly is. It seems among the 94 banks that participated in the "Art of looking smart" for the end of Q2 (the very last day mind you), there's about a 1/3rd of a trillion dollar shortfall in collateral at the banks. Perhaps this is one reason the F_E_D wants to cut its balance sheet so banks can pick up some much needed quality collateral, of course the inability to respond to a garden variety recession may be another as the balance sheet is bloated. A third reason may be the fact that the F_E_D (yes the F_E_D) has shareholders and is a "For profit" quasi-public/governmental corporation, not much different than Bank of America being given exclusive rights to print money and set monetary policy.

The F_E_D's unofficial mouthpiece, Jon Hilsenrath of the WSJ summed it up with this, 

"The minutes of the meeting, released Wednesday, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices. Emphasis added, although probably more appropriately to "Rising consumer prices" otherwise known as inflation, just what we've been warning about as the one thing that ties the F_E_D's hands, although that was when they were still playing the "Accommodative policy in place for a considerable time after the end of QE" card, which is now clearly moving off the table.

The bottom lime is the F_E_D has been planning their exit the very same day they announced QE3 when they hinted at using a different yard stick, the initial stage was being set to move from quantitative guidance such as a specific date to qualitative guidance which as I said, seems reasonable, but qualitative guidance s used in putting forward quantitative guidance, it was really nothing more than a way to move to arbitrary decisions and remove the one thing the market craves, certainty.

Since that day when the debate about the yardstick started, the F_E_D has been on a steady path of extracting itself from accommodative policy even as they introduced the newest and last QE program.

If you wonder why market breadth looks the way it does or why High Yield Credit fell off a cliff, it's simply because they understand what the F_E_D had been subtly hinting at, now they are saying it up front and with a louder voice, it doesn't get much louder than, "The market's are wrong" from a regional F_E_D president, but for now, retail is more than content to keep whistling past the graveyard and buying the dip even though they apparently have no idea what supported buying the dip in the first place and the fact that it's rapidly disappearing at the rate of $10 billion a month and will end completely in October. That doesn't mean buying the dip is a good idea until October, the market ALWAYS front runs the F_E_D and this is a mess the likes of which the world has never seen, at least no one alive today.

Wednesday, August 13, 2014

Stock Market Update

From our member's site,


Daily Wrap for August 13, 2014


The F_E_D's accommodative policy skewed and screwed up just about every indicator out there since late 2008/early 2009 as there was really only one thing that mattered... the size of the F_E_D's balance sheet and expansion...
The F_E_D's balance sheet, up about $3.4 trillion dollars since late 2008 has a very clear correlation with the S&P-500. There are multiple reasons why this was the case, but one of the simplest was what I consider to be a "Stealth Bank Bailout" because as you may recall, the AIG/GM bailouts were not very popular and the banks needed it so to avoid political suicide, the F_E_D went to Quantitative easing which had a very bad ending in Germany/Weimar Republic as well as just about everywhere else it has been tried (i.e.- Zimbabwe). 

If you wonder why technical indicators gave so many bad signals above and beyond the fact that Wall St. uses the dogma of Technical Analysis against traders as they refuse to adapt, just look at the S&P's performance during QE or similar operations or more specifically look at the market's performance between operations, there's an eye opener!

From left (March 2009) to right (Jan. 2013) we have QE1's expansion as it was originally only MBS, the expansion added treasuries and the market took off. The grey periods are when no accommodative policy was in place and they all decline, some as much as -20% in a very short period. In green is QE2, but the market started up before that as it was announced at the Jackson Hole Symposium well before it was enacted or officially put in place. Purple is Operation Twist, then Twist 2 or what some call QE3 and to the right, QE4. there's a very direct correlation between F_E_D printing/balance sheet expansion and the market rising, which is why it's mind-numbing to consider the perma bulls who think the market will continue up for the foreseeable future when we can very clearly see, "when the F_E_D is not expanding its balance sheet, the market is falling". Who doesn't know that the F_E_D is not only exiting accommodative policy/balance sheet expansion via the taper, but something far worse for the market, THE END OF ZIRP AND INTEREST RATE HIKES? 

I mentioned that to mention this; before QE, 3C timeframes were VERY predictable (this was also before HFTs dominated the market, but that seems to have less effect as the very nature of their speed is built more for scalping, arbitrage plays and front-running rather than position trades (you don't need to be able to trade in micro-seconds for a position you plan on holding for 6 months). 

One minute charts were market makers/specialists moving the market intraday, 2 and 3 minute charts are essentially the same. At 5 mins we have the first or fastest time-frame that picks up institutional actibvity intraday (although that can be seen on longer term trends of faster time-frames like 1-3 minute). A divergence on a 10-15 minute chart was almost always a clean swing trade, in fact in an experiment after the July/August 2011 plunge, there was a range bound market from early August until early October. We used 5-15 min charts and traded EVERY swing up and down with 2x leveraged ETFs and hit everyone for a portfolio gain of +85% for the period which is normally a very difficult market to trade or what most traders find to be a meat grinder as few trades lasted more than 3-5 days. In addition to calling the August bottom 2-days ahead of time, we caught 9 swings with 100% accuracy as well as calling for a new head fake low to be followed by  strong rally (which came October 4th).

The 2011/-20% decline in which we called the end of the decline a couple of delays before the market bottomed in early August, we traded every swing long and short with 2x leveraged ETFs like QLD/QID and called for a new head fake low before a strong rally. That's how easy these swings were to call with a 5, 10 or 15 minute 3C chart. 

*Note this was also a period in which there was no F_E_D accommodative policy in effect.

The 30 and 60 minute charts typically were very good at calling intermediate move such as the 2008 USO decline of -80% after we had gone through the G.W. Bush-era oil boom.
Over nearly 8 years oil had seen a move up of approx. 700%, we called the USO top within 2 weeks, ironically the same week Cramer was telling his audience to go out and buy the next bad EIA Energy report in what he termed a, "Contrarian Trade". I don't know how millions of viewers all buying oil on the same day after a +700% run can possibly be called "Contrarian" . If you followed Cramer's call, you were left holding Goldman's bag as oil plunged -80% from there.

As the F_E_D unwinds QE via the taper, these charts are once again becoming more and more accurate or perhaps timely is a better word as they have shown underlying trade with uncanny accuracy as we recently learned when Bank of America/ML released this infographic of the net positioning of Hedge Funds, Institutional Money and Retail.


The 3C divergences and the velocity of them matches up nearly perfectly with Institutional "Net Sellers". Look who the net "Buyers" have been... Once again, retail will be/is holding Goldman's bag.

In any case, I won't enter or exit a trade without strong, objective evidence which has led to periods of inactivity, most recently an approximate 2.5 month period just after the February Rally in which we had no good signals for several months and our trade ideas fell off by 90% by the end of the period...
As we live on the right side of the chart and don't have the benefit of hindsight, all I knew at the time was it was very frustrating not to have any strong signals for trades, it was only after when looking back that it was apparent there was a 3% range in the SPX which was eating longs and short alike alive, a MEAT GRINDER.

I just wrote about "Patience" Monday night, which dovetails nicely. I'm always learning something new from 3C as the market changes, but one of the most important lessons I've learned this year is to wait for the signals, if they are not there, there's probably a good reason and missing a trade is a lot better than taking on a low probability trade. It took a while for me to learn to take losses and be happy about it (before they turned in to catastrophic losses), it also took a while to learn (and I'm still fine-tuning the lesson) to understand that missing a trade is not the worst thing in the world, in fact it's no bigger a loss than opportunity. However, as I said earlier, "It's a lot easier to keep it than to make it back" with the example of a 50% loss requires a 1005 gain just to get back to break-even.

With all of that in mind...I've shown some bases forming and it appears we were right on these lateral trade areas being bases. Last Friday's (8/8/2014)  Week Ahead Market Update said the following,

"Last week as the market was moving down and things were getting oversold (breadth), the "Week Ahead" post (8/1/2014) expected a wider base to form early this week and a bounce off that base. It seems we have a wider than anticipated base and I say that because there's improvement on the intermediate charts that represent a bounce of the scale that can move the market from deeply oversold (breadth) levels which it has been sitting at all week, to a sentiment changing move. This would be the first major pivot/trade set up since the short from late July. I typically want to enter my trades at these major pivots and then let them work until the next one sets up.... 

The 2 min charts look like we'll see some weakness moving forward today, maybe in to early next week,  it is this weakness that I want to use to re-enter a call position, likely in the IWM, but it will depend on what looks like the best set-up at the time.

ideally from here we get an ugly intraday pullback that can be used to enter a leveraged long ETF or call options. I still consider this speculative as the larger trade and best use of any bounce is to short in to price strength for long term core positions.

That's what I see as of right now so I suspect that we will be seeing a stronger bounce next week so I want to look for the right entry for something like the IWM calls closed earlier."     8/8/2014 1:30 p.m.

So our forecast from 8/1 was for a wider base to be built which was actually wider than originally anticipated. Friday's (8/8) Week Ahead Market Update forecast was for early week intraday weakness that could be used to enter some bounce longs and a move up in to this week off this base...
 The lateral base for the QQQ (60 min chart) and this week's initial pullback intraday Monday and most of Tuesday followed by higher prices today which was in line with last night's Dominant Price/Volume Relationship, the non-influential "Close Down/Volume Down".


We even have a strong 10 min 3C positive divegrence at the base area, but we haven't had any strong trade set-ups. I don't know how this story ends as we live at the right side of the chart, but  as I said earlier today, "We don't trade probabilities, we trade high probability/low risk set-ups".


Here's what I've noticed about the market thus far today...

Yesterday's late day positive divergences in the 1-3 min timeframes which developed very quickly, never made it to the 5 min timeframe which is essentially the line in the sane, unless there are very good reasons, I rarely take a trade without the 5 min charts confirming as the concept of 3C migration would mean a 5 min divegrence shows institutional money is active and probabilities are on our side for a short term trade.

Last night the late afternoon divergences were described as a late day ramp attempt to unchanged and/or VWAP.

Today...
Today ES hit the upper S.D. of VWAP, the ideal area for a market maker or specialist to fill a sell or short order for an institutional client. Intraday 3C charts, especially in the 1 min range (intraday movement forecasts) seem to take a hit right around the European close and then spend the day drifting as if market makers/specialists are working the bid/ask (tweaking supply/demand) to maintain the market's range near VWAP and or holding back an all out plunge.

 Today on the SPY intraday chart, right at the European close 3C goes leading negative and remains there, losing no more ground, but not allowing price to gain any ground either.

Monday and today both saw similar price action right as Europe closed.

 The major averages on Monday all top out at the European close, although we had forecasted intraday weakness for the early part of this week on Friday.

Then again today, except for the QQQ, none of the averages managed to gain after the European close which as you saw above, came with a sharp leading negative 3C divegrence.

In fact, none of the carry crosses moved after the European close (USD/JPY, AUD/JPY, EUR/JPY)...
USD/JPY goes dead in the water with the other carry pairs after the European close making me wonder if DE Shaw's algos' are still tied to the USD/JPY-ES correlation or perhaps something else was going on and the markets were having more trouble treading water at the upper channel of VWAP than we realize...

The "Short Squeeze" has been virtually a thing of the past. Earlier this year we had short squeezes that lasted weeks, since July 1 I can't recall one that has made it through an entire day, although the opening squeeze has been quite common. 
 Our MSI (Most Shorted Index) popped on the open and then once more in to the European close and then underperformed the rest of the day.

In fact, take a look at the MSI on the day...
I saw a bit of this at the close yesterday, but today there's clear underperformance of the squeezable shorts as they underperform even the broad market averages, which has me wondering about breadth.

You may recall what happened the last time the MSI underperformed the market...
5 min MSI vs SPY. The last time is the move that took several of the averages, notably the Russell 2000 to red on the year and brought market / NYSE breadth down to such low readings that they were in many cases, lower than what we saw during the last bear market in 2008 with only 20% of NYSE stocks trading above their 40-day simple moving average, the reason I expected a bounce in the first place...based on not an oversold indicator, but an oversold market of stocks.

What is interesting as most of the averages sat near an ideal selling area of VWAP...

 The stronger intraday 5 min chart which is the first or fastest timeframe in which we can observe institutional activity intraday shows the SPY seeing strong distribution , this happened Monday and again today with an even stronger leading negative divegrence today (relative to price). Again, both of these divergences are picked up around the European close.

Although the Q's had the best relative performance, they too see a strong leading negative divegrence right around the European close today. These 5 min charts looking the way they do is why I won't enter any short term long piggy back trades as initially intended. *This is also the same kind of strong, immediate distribution we saw during the last two bounce attempts, essentially distribution on ANY price strength.

The IWM did end the day with several decent looking positive divegrence, but the overall look of multiple timeframes as well as the other averages would have me enter nothing longer than a 1-day (enter today, likely close tomorrow) position, but even at that, the risk just looks to be too high to even consider it.

Also, as pointed out earlier today and this morning in the first post of the day while the market was in an "apparent" risk on mode off our base, bonds were bid essentially creating a risk on and flight to safety trade at the same time.
The SPY (green) vs 10-year yields closing the day at 2.41%.

However this flight to safety action in bonds started well before the horrible Retail Sales print at 8:30, you may recall as was the case with so many assets at the European pen until 5:30 a.m., 5, 10 and 30 year treasury futures were under accumulation and made their first move up not at 8:30 on retail sales, but 5:30 a.m. after 2.5 hours of accumulation.
5, 10 and 30 year Treasury futures all accumulated overnight and moving at 5:30. The point this morning was to show that none of this fit the "Talking head's" narrative in which they explain why the market does what it did in 30 seconds.  We may have bought the Treasury buying on the Retail Sales print if we had not seen the 3C chart showing Treasuries were being accumulated long before retail sales, in fact well before the European open.

High Yield Credit has been leading the market and supportive of a bounce as pointed out for over a week , yet underlying action in HYG is getting quite ugly, not at the point in which I'd call it a short, but at the point in which the near term resolution of price is becoming plainly obvious.
HYG's 15 min 3C chart.

In fact, considering HY Credit's underlying performance or lack thereof, Treasuries bid, the only asset seemingly not in sync would be VIX futures, but notice I dais, "Seemingly",,,
 VIX futures (5 min) have seen a positive divegrence since this week started and...

VIX short term Futures have also seen a similar positive divegrence. Just like HYG not being quite there, I wouldn't enter VXX long yet based on the lack of a reversal process on its own, however it is interesting to note that protection is being bid here.

Internals...
We've already seen S&P Futures at 40% below average volume 2 consecutive days this week, today marks the third, but at half of average volume (50%). As a reminder because the lost art of volume analysis is going to once again be front and center as the Bernanke put is completely removed from the market, "Any move higher in price on fading volume is highly suspect" and without the F_E_D to backstop the market, these concepts are going to be very important again, but I fear few traders of the "new normal" have any idea what volume analysis is. If I had only two  indicators on my chart, they'd be candlesticks and volume.

The Dominant Price / Volume theme today was co-dominance between Price Up/Volume Up and Price Up/Volume Down. The first is the most bullish, but often leads to a 1-day overbought event with the next day closing lower. The second is ironically the most bearish of the 4 relationships ad tends to have a 1-day overbought condition attached as well, but not as strong as Close Up / Volume Up. Being it was a co-dominance, I don't give it much weight in forecasting.

Of the 9 S&P sectors, all 9 closed green with the recently defensive acting Healthcare sector leading the way at a gain of +1.21%.

Of the 239 Morningstar Industry/Sub-Industry groups I track, 191 of 239 closed green, this is a FAR cry from last week's readings which were polar opposite and the main reason (other than the 10-15 min positive divergences) I expected a true, "Oversold" market bounce.

As far as the oversold breadth condition which was worse than a full fledged bear market, new high/new low ratios have returned to a more normal state. As far as momentum stocks trading 1 or 2 standard deviations above their 40-day m.a. there was very little improvement which fits with today's MSI readings vs the SPX. The Percentage of NYSE stocks trading above their 40-day moving average barely budged today from nearly 33% yesterday to 36.5% today, still a small move considering 55% points were lost over the last month. Advance /Decline lines are moving as you'd expect on the day, but are no where near repairing the damage of recent. The Russell Indices being the most recent victim with the NASDAQ Composite being the most dislocated and longest running divergence.

I'd remind you that even with the slight improvements the last several days, the breadth indicators that I've been watching for 15 years and only seen them in this condition twice are looking as bad 2007's top.

For now, unless something is obviously standing out, I think Monday's message of patience is still the way to go, we have plenty of opportunities and plenty of positions already in place, now is not the time for a mistake.

*As of this moment, the intraday 3C charts for ES/NQ and to a lesser degree, TF are all leading negative, however this is not a time frame I generally trust overnight unless the trend continues. I'll check on it later tonight.



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