Putting that in context, without getting too much in to the details as I've talked about in numerous times, there's herding among hedge funds, the reason so many underperformed the market so badly the last several years is because they're all basically doing the same thing, they follow a few leaders like Third Point and when the leaders make a change, everyone else does the same (Third Point and AAPL are a perfect example), there's only one thing worse than underperforming the SPX for a hedge fund manager and that's underperforming the pack.
Today's action really had this feel of, "Whoever sells first, sells best", but in reality this is a move we first saw developing Thursday 6/27 and considering last week it's not surprising we didn't get the move, considering the 27th is when the signs first started popping up (as it takes some time after the initial divergences) and considering the range that was in place, the timing and where the SPX is right now aren't surprising at all, take a look.
However, the SPY/SPX's close above the range and 50-day m.a. (in fact all of the major averages closed above their 50-day for at least the second day in a row which is another obvious head fake area) isn't the best of the head fake moves, the one average that saw some of the nastiest intraday 3C signals was the one with the biggest attention getting, retail chasing, sentiment shifting moves and that was the Russell 2000 closing just above the May 22nd intraday highs. Does May 22nd sound familiar? Not only did the R2K make the close above the intraday high, the all-time closing high, but above the 1-day key reversal on May 22nd that no average has been able to hold a move above (except the R2K) so closing above the intraday highs there was almost a little show-boat-y, in any case it did the trick early on as far as retail was concerned.
Our sentiment update today shows how fickle retail is,
" Sentiment has now swung to bullishness all of a sudden with many making a point about IWM making new highs. The big bears that were buying loads of puts from 2 weeks ago are nowhere to be found."
This is what I'm always stressing, "There's no point in moving the market unless it achieves a goal", it's not about oversold or overbought, it's about changing sentiment and creating opportunities. Remember this is a zero sum game, for you to make money, someone has to lose it. For institutional money it's a different game entirely and that's where most people go wrong and fail to understand the market's behavior and motivation.
Here's an example of the R2K and how Technical Analysis has changed.
After the break below support at the red arrow with two nasty days in a row (follow through) the break of support alone was usually a decent entry, a better entry was to wait for the test of former support (now resistance) at the white arrow and on a day like that with a long upper candle wick, it meant higher prices at resistance were re-jected and this was literally a textbook short entry. Then Technical Analysis started catching on with the internet and discount online brokers, then Wall St. started adjusting and up until 4 or 5 years ago, gap resistance as seen as the last day to the right (July 2nd) was some of the best resistance you could ask for and that became a sure fire short.
NOW....
Everything is about changing sentiment, I think it's partly because Wall Street knows exactly what Technical traders will do in every situation and part of it is necessity due to lower volume in the market. This is where traders lose Wall Street's motivation, with positions the size of theirs and lower volume it takes a change in sentiment to create the movement that allows them to fill positions, THEY NEED THE VOLUME AND TO SELL/SHORT IN TO HIGHER PRICES.
As the sentiment update says, "The big bears that were buying loads of puts from 2 weeks ago are nowhere to be found.". Those big bears, weeks ago would have been chasing the market as it broke below support (it has to be obvious to technical traders) literally at the red arrow, that changed sentiment to bearish, it created the opportunities Wall Street needs to position themselves and to get in at a decent average fill. Today's move ABOVE all resistance at a new high did what it was designed to do, "Sentiment has now swung to bullishness all of a sudden with many making a point about IWM making new highs." In other words, retail chasing the IWM at new highs created that opportunity and it's no coincidence that the IWM intraday charts looked like this today.
By the way the symmetrical triangle in the IWM today was not coincidental, a symmetrical triangle in Technical Analysis is a Consolidation/Continuation pattern that is "suppose" to breakout in the direction of the trend preceding the consolidation, that would be up and don't think Technical traders didn't notice that today.
The half position in SRTY long today was not coincidental, either, it was specifically chosen as an equity position rather than a larger leveraged options/put because of timing issues with options and its ability to withstand drawdown (especially at half normal size) that options/puts wouldn't be well suited to.
I like the IWM short here, but with that triangle I know there's a pretty darn good chance of a head fake move there, the only reason I didn't wait to start the position until a head fake move (upside false breakout) occurs is because of the general tone of trade today which was as I said above, very reminiscent of AAPL just before it broke, "Sell in to ANY strength".
The IWM or the Q's trying to make a move that might have taken the entire market higher today, but couldn't find any legs was far from the reasoning behind entering SRTY today.
Really this all was becoming very clear last night and pre-market, take last night's post:
- -Index Futures seeing sharply lower leading negative divergences
- -30 min Index futures going negative from their former demarkation between the 1-15 min negatives and the 60-120 min positives (I'll have more on that just below)
- -Treasuries showing sharp and very sudden positive divergences (Treasuries had their BEST DAY in 16 moths!)
- -Nikkei charts falling apart
- -Credit Dislocations drom the SPX
- - Sentiment Indicators turning sharply negative.
Then Take this morning's Futures update
- -Treasury Futures with even larger divergences - the size and speed in which these developed were not coincidental in my view with them seeing the best performance in 13 months, it also speaks to something that changed pretty quickly on the bearish side in the market.
- -Certain Risk supportive currencies seeing strong positive divergences like the $AUD which made a strong move today
- -The $USD going sharply negative very quickly
- -Crude showing much sharper negatives (USO ended the day down -.41% despite the Egyptian chaos getting even more out of control and Brent was down about 1% since futures opened yesterday).
- -Precious metals seeing sharp positives as well with gold up 1.19% and SLV up 1.10%. Our SLV calls opened Friday ended the day up over 14% and NUGT calls ended at break even despite the red close.
I'd rather look at futures later in the evening, but there were some developments mentioned above that won't change with the passing of several more hours.
Not only did Russell 2000 5 min futures get quite a bit worse as you might imagine after seeing the intraday charts...
But that wasn't even really something I would have mentioned if not for this...
It didn't stop there though, the previously positive 60 min charts...
As you know, I like Treasuries, they had a spectacular day today, what's interesting is how fast the strong positive 3C divergence developed last night and this morning (see the linked posts above for the charts), it's almost as if someone found something out, these weren't the typical gradual divergence that shifts from relative to leading...
As I mentioned earlier today, I still like Silver, gold and miners, so much so I left the SLV call open even though I suspect it has a good chance of pulling back. This is just one of those positions I don't want to over-trade or get too fancy on and miss a nice move (I learned a valuable lesson from trying to get too fancy by trading around an AAPL short).
Most of these charts you've already seen throughout the day or specifically in the Leading Indicators update.
High Yield Corp Credit/HYG is negatively dislocated from the SPX since Friday, it traded in line with the SPX intraday today and I suspect that was 100% all about the arbitrage value. The close of HYG looks to me like the IWM triangle (intraday) sees a false breakout.
High Yield Credit as I have talked about a lot recently, but today we actually saw it, having no arbitrage value or very little and lower liquidity than HYG is and was the first to panic, take a look at the Leading Indicators post, around HY Credit dropped pretty much straight down, the daily move is one of the largest moves on LARGE volume (in fact the second heaviest of the year - about 5x average volume) since the 5/29 -3.63% day that made a new low for the year. Point being, this is the first form of credit to hit the panic button and it did so hard today.
Sentiment Indicators- both were lower today as they were Friday as well. There was a bit of an intraday move that seems to me to fit with an upside breakout from the IWM triangle (it's just too obvious and in the right spot at the right time), one I'm sure will be revealed as a false breakout and likely the best positioning for either SRTY long or IWM puts.
Based on what I see right now and know, the SPY provides a good model (the other averages are very similar) to how I think this goes down, which is really just a part of the reversal process of the next leg in the market which we have been expecting to the downside, it's nothing new as far as I can tell (that seems obvious just looking at the first, second and third charts of this post).
*Note the head fake move in yellow, people usually don't notice them unless they are pointed out, but the entire point of them is to set up a reversal and that's why they tend to be the last thing we see before a reversal just like the example above.
If futures provide anything of interest later tonight, I'll post those.
As far as Alcoa's earnings, they don't look very impressive. Remember we first developed 3C on TOS for after hours use, take a look at AA AH.
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