Daily Wrap - HEAD FAKE IS IN ?

For the most part I don't think I have to regurgitate what everyone already knows about the market today, we're interested in what the crowd missed.

Talk about volatility, how about that overnight ramp and gap up? In the "Pre-Market Update", I said, 

"My gut feeling is this does not hold, just because of what I see on the 1 and 5 min charts and general market behavior, if that be the case, we may end up here on a close any way, it would be one VERY volatile day."

The next two posts I added to my view that this gap up was noise, it was noise for a reason, I don't know why, but noise that wasn't going to hold as I showed over the next 2 posts and 6 minutes.

"ES Getting Worse" & "Compare ES Charts"

It's pretty incredible that a move that took all night to produce a significant gap up on no news, no market correlation whatsoever, failed so miserably and so quickly, as I said a few times today, "It almost seems like a test run".

This is the gap up is the SPY, it didn't even hang around, it failed immediately even though it took 12 hours to produce.

I don't know how many times in the last several days I have said, "We are expecting a short term move down, but that doesn't mean it won't be strong or impressive". Today I would say could clearly pass for at least the start of that move, perhaps the entire move. This is all still psychological, the stronger the move down, the more shorts that will chase the market, the more shorts we have, the better a bear trap / short squeeze to the upside works.

Today looked like this in the context of expectations...

I think everyone knows what the Technical Set up or trap has been since the triangle, if you are a newer member or not quite sure about what technical traders see here and how they react and how Wall St. is taking advantage of that, then shoot me an email.

Note the volatility in the triangle area as well as the increased volume. The Yellow arrows are the bait for retail traders, they are a test of resistance that has failed which means the SPY is a short in their view of Technical Analysis (I agree by the way, it's just more a matter of when and where or details as they can make the difference between a successful position and a losing position that was right).

The Technical concept of "Price Confirmation" means that probabilities are not good enough for most retail traders, they want an actual lower low or price confirmation which causes them to chase moves often leaving very little room for corrections and wide stops (higher risk). The red arrows are the price confirmation, as I said last Monday when describing what I thought would happen, I laid out the scenario which has happened and said, "Wall Street will give them the moves they need to enter the trades", for Wall St. these moves and set ups are useless if no one participates.

In last night's  daily wrap, "Insane Volatility" I showed you a a number of assets that projected how bad the big picture truly is and a number of short term assets that looked like, well as I put it in the case of several Leading Indicators, " I have to wonder whether this perhaps reflects the expectation of a quick move down like AAPL breaking below its triangle and a quick upside reversal, that may be the message HY credit is sending us."

Obviously we got the move we expected in AAPL yesterday , as I have said all along about this move, "I can't say how long or strong it will be, but it should be the shortest of the 3 trends (this being the first from where we were as of yesterday's close". I also said, In my opinion, the bear trap / Short Squeeze works best if the reversal process is more of an event than a process", (the opposite of what we normally expect and see).

There are already some interesting developments that suggest this "reversal event" may in fact be what we will see (This is why I wanted to get most positions for the next move either started or in place before the close today).

For example, take a look at the fairly extreme movements in Index futures, not only in today's regular hours, but in after hours...

 ES (SPX E-mini Futures) 1 min, the same chart that told me the highest probability of the gap up would be that it fails and that was posted in pre-market before the gap up even made it's highs on the open.

The white arrow (positive divergence is what occurred during regular hours today, the yellow arrow represents a rounding (perhaps) reversal "process", although tight and the white square on the time scale shows where regular hours ended and the leading positive divergence in ES that has continued to build tonight.

 Here we see the same in 1 min NQ (NASDAQ 100 futures) and to the ;eft we can see the premarket negative divergence that told me the gap up would most likely fail as it did, the after hours divergence tonight is impressive thus far.

Finally this is the 3C 1 min chart of TF (Russell 2000 futures) with a tight range like the others that seems to be toward the bottom of a rounding bottom and a leading positive divergence.

This is the ES 5 min 3C chart...

I don't show this to illustrate the 5 min leading positive divergence which is what I expected as I made clear since last Monday on a move down (a psychological game used against retail), but rather I show it to illustrate the scale and proportion of a tight, but still a "U" shaped reversal process. This could indeed be the kind of move in the morning that is most effective in producing a panicked short squeeze and it still has a "process" to it, the leading positive divergences above show the process is under way in 3C and this shows how it is underway in the "U" shaped bottom, although tight.

I can't guarantee or even show you anything right now that shows a high probability of the USD/JPY moving higher, it may come as the Japanese session unfolds tonight, but assuming the correlation is still holding, the pair would need to move higher in support of the market.

This today's intraday SPY/Yen correlation, it's pretty tight, near 1.0 most of the day except the close, note the Yen falls the last hour or so and the SPY fails to move higher, if I'm thinking like a Wall Street Crook and I have every intention of causing a short squeeze, I want all my bears in place and a close at the lows looks a lot more bearish than an afternoon ramp.

What I can show you is the same thing as yesterday, former Carry Trade pairs like the EUR/JPY and AUD/JPY that were there with the only one left, the USD/JPY, seem to be ready to offer help to lift the market in the short squeeze move we have been expecting to come out of this.

AUD/JPY with a leading positive divergence, if it moves higher, it supports risk and the market moving higher just like the EUR/JPY and USD/JPY which is now the main driver of the markets.

Is this what they have in mind? You know I have believed so based solely on market behavior and the way Wall St. manipulates Technical traders, it was only after I told you exactly what I thought would happen last Monday and Tuesday that I started getting 3C confirmation, that's how predictable the market can be only because that's how predictable technical traders (retail) are.

This CONTEXT model for ES suggests that's exactly what they have in mind.

The ES model is 30 minutes delayed, but as of 8:10 p.m. it had a positive 24 ES point differential between the model and ES, that's huge.

What is CONTEXT? " The CONTEXT framework attempts to distill the world’s ‘risk’ asset-classes (interest-rates and curves, credit risk, FX carry, commodities, and precious metals) into a single-measure that can be judged against the US equity market in order to comprehend potential mis-pricings (or technical flows and liquidity impacts). Institutional and algorithmic clients tend to use CONTEXT as a confirmation tool for positioning against (or with) a trend. CONTEXT provides a 24-hour-a-day real-time indicator of the world’s risk appetite and whether US equities are over- or under-pricing that risk."

In other words, CONTEXT is looking at the pricing of other risk assets that move when a risk on move is expected and models where ES should be compared to those assets, meaning smart money's positioning in Credit, Treasuries, commodities, etc is all expecting a move higher right now, it's only the manipulated market that is out of sync and typically CONTEXT is a leading indicator, it's telling us other risk assets traded by smart money are positioned to expect a significant move higher and ES/the market should move higher as well.

This is exactly what I have expected, up until this point, everything from the triangle to the failed attempts to overcome resistance to the moves down after to suck in shorts are all part of a grand scheme to effect a strong short squeeze and send the market higher.

Although we are not there yet, my expectation is that after a short squeeze we will create the exact opposite, a bull trap and when that triggers, the market breaks and doesn't come back.

If I were to do a complete "Market Breadth " post right now, you would see some of, scratch that, you would see the most extreme failure in market breadth that I think has ever been recorded, it's nearly a miracle the market is still alive and kicking. Breadth indicators are not interpreted, they are solid, real numbers and there's not getting around them, there's no ambiguity. Perhaps I'll get a breadth post out before we go down, I think it's worth seeing as it is historic, it just takes me hours to put it together. In last night's post, I showed you the bigger picture with several charts showing how disconnected Leading Indicators are from the SPX, also historic, you should take a look at them again when we get a short squeeze as the idea is to change sentiment so the upside move would have to be so strong that you yourself would doubt whether being short is wise, if you feel like that, you should bookmark this post from last night and look at these indicators again.

Speaking of Leading Indicators... Other than the Equity Index charts above with huge leading positive divergences, the move in AAPL today predicted yesterday and the huge disconnect between CONTEXT and ES, there are some other indications worth noting today...

 Commodities are not doing well because of the global economy, but the last day and a half there's a difference and it's not the economy improving, they seem to be leading the SPX as they expect a risk on move along the lines of a short squeeze.

Here's commodities vs the $USD so you know it's not that causing the move.

I pointed this out last night and the day before, High Yield credit (and not a very liquid one) has found support, it's behaving much better than the SPX, in fact it almost closed unchanged today, this is one of those CONTEXT assets that is clearly set up by smart money and it looks as if it is expecting something big because the low liquidity in this version usually makes it the first mover in any kind of fearful market.

 Perhaps one of the more interesting of quite a few interesting charts tonight is out sentiment indicator, as you  can see vs. the SPX (green) it has called bottoms before the SPX and tops, today it acted noteworthy.

Here's an intraday look at risk sentiment, right around the time we were getting positive divergences today, risk sentiment went way up vs the SPX, again telling us something.

This is why I wanted to be in position today for the move. 

How about Yields, the equity magnet,  they are calling the SPX higher.

As noted, they have been out of action for a while, but suddenly the former favorite leading indicator among currencies, the $AUD is looking as if it is expecting and ready to help with a big upside move in the SPX.

As pointed out yesterday, the Euro as well.

Beyond that, much of the evidence you saw in real time today, such as the 5 min SPY divergence which I said yesterday will have to turn positive as the 5 min negative is the chart that has defined the market's move down, it just so happens....

The positive divergence I said we needed yesterday popped up today, only after first showing a clear negative on the gap up this morning on the open.

Or the AAPL post from yesterday predicting the head fake move we'd need to see and how it played out today, the positive divergence tells us it's almost certainly a head fake as that means the move down below support was accumulated by smart money.

Or the price action and divergences in HYG credit of late...

There's just so much there, no matter how bad the move looked today, I try to always base trades off unambiguous data, not emotion, it was hard to enter many of those today, but that's what the data is pointing to.

If the Index futures are indeed building a rounding bottom overnight, then they are no different than any other asset at any other time, they should see a head fake move below the range that is pretty much established.

I'll check in on them before I turn in and if there's anything interesting I'll be sure to update you.