Market Update and Some Probabilities

Now that we are getting more data in since we saw the first positive divegrence yesterday after the move lower, we are starting to get a few possible scenarios , which I like to try to put out there as it may help you with closing or opening certain positions, whether they be short term option trades or core positions entries/exits.

I still want to see how the USD/JPY plays out in its divergences and correlation as well as checking Leading Indicators and getting an overall feel for the market by going through watchlists and seeing if there's a consistent theme within them which is very useful and the way I'd judge the market before I was created and learned how to use 3C, of course that meant looking at several hundred stocks a night (I thumb through them quickly, about 2 seconds per stock unless something is really standing out).

Here are the intraday charts and a couple of scenarios I see as probabilities.

 This is the bear flag / bear pennant (bearish consolidation / continuation pattern in Technical Analysis that consolidated against the preceding trend in a parallelogram or a slanting pennant as FXI turned in to yesterday). Technical traders see these and expect them to resolve to the downside as I have drawn in because that's what nearly a century of Technical Analysis has taught which worked great before everyone started using Technical Analysis once the internet could support the streaming data that allowed discount online brokers to make their appearance.

It's incredible how quickly Technical Analysis (which I was using at the time) went from being mocked and called, "Voodoo Analysis" with many people finding it inconceivable that trendlines and moving averages could tell you anything about future price action. Suddenly as people switched from classic brokers to discount online brokers, they needed a way to do their own homework and Technical Analysis went mainstream as it was much easier to learn and apply than fundamental analysis. It wasn't long after that I started to notice T.A, concepts were failing more often than working which was a huge change, but as more and more people lazily followed the rules of TA, Wall St. knew and still does, exactly how traders would/will react to any particular price pattern or other Technical Analysis concept.

I didn't expect the flag/pennant in FXI to break to the upside today as I usually would expect as a head fake move because I figured FXI is not as popular as the GOOG's, AAPL's and PCLN's of the market, but it does have considerable volume and it appears today is a head fake move, which would have been likely known in advance as it's not possible for Wall St. to manipulate the Chinese market to force a head fake move in a single asset tracking that market, but it is possible for them to know what the order flow looked like the day before and create a technical price pattern that would allow a head fake move to be created in advance.

 This is the EXACT same concept in SPY, except this is watched by every trader and head fake moves are much more common here.

TA expects a bear flag to resolve to the downside as I have drawn in, but at an ever increasing pace since about 2000, Technical patterns have been manipulated to create head fake moves,  the thing is, Technical Traders who largely chose Technical Analysis because of it's simplicity and ease to learn (you could say choose TA out of laziness) are still following precepts that haven't worked well for 15 years, not like they did before 2000. I suspect it continues to be laziness that has caused Technical traders to keep following these rules rather than adapting to what's actually happening in the market.

So, the point here would be, the appearance of a bear flag alone suggests a high probability of a head fake move which would be to breakout to the upside first, however while they can manipulate short term trading action, they can't hold the manipulation long, there's a reason there's a bear flag forming and that's because of the strong sell off of the preceding couple of days, that trend almost always re-emrgers despite a head fake move, thus they are excellent to use as entries, in this case we'd short in to the head fake breakout above the bear flag.

 SPY 1 min with the leading negative divergences that were forecasting a drop in price as well as the same in USD/JPY and the positive divegrence started yesterday.

"If" this were a real bear flag, I would not expect to see positive divergences in to its formation, I'd expect to see distribution in to the correction to the upside, thus the case for a head fake move above the bear flag just got stronger.

 SPY 3 min leading positive

SPY 5 min leading positive with some near term weakness intraday which introduces a more complex probability.

 SPY 10 min, just to keep things in perspective, the bear flag is to the far right at the red arrows, the leading negative 3C divegrence is the perspective I wanted to remind you of so if we do have an opportunity to short in to a head fake move, you have a strong basis of objective data to feel comfortable doing so.

QQQ

 1 min intraday leading positive with some recent weakness, as we pull in to the 2 p.m. hour and options expirations pins are removed, price tends to move a lot more, but it's the 3C signals the last 2 hours that give us the best data as they tend to pick up right where they left off the next trading day which would be Monday, however, this is also introducing a slightly more complicated head fake pattern that is more effective.

 QQQ 3 min is showing the same

QQQ 5 min is fairly strong overall and the intraday charts in the 1-3 min range aren't reflected here because the "slightly more complicated head fake move", still puts the emphasis on the upside breakout of the bearish price pattern, only the intraday 1-3 min charts that we typically use for intraday direction would need to be effected to steer price intraday.

The concept would be a Crazy Ivan Shakeout.

In this case the first move out of the bear flag would be as traders expect, to the downside. Most Technical traders won't short a bear flag itself without the confirmation of a break below the flag's support (bottom trendline), however on the break below the flag they will chase price and enter a short position. If the larger head fake move is actually to the upside, catching some shorts in a bear trap and forcing them to cover as price moves back above the flag and forces a small squeeze just adds more upside momentum to the head fake move.

A Crazy Ivan Shakeout will shakeout both sides of a price pattern (first catching the shorts and forcing them to cover, then catching the longs in a bull trap and forcing them to sell as price resolves back to the downside, but the increased momentum on the upside head fake adds more demand and allows more shorting in to higher prices (which is what we want anyway) as they need that volume with the size of their positions.

So the Crazy Ivan would look as I've drawn it above, a bear trap first on a downside break down which is what I suspect the 1-3 min charts recent weakness is depicting and then a breakout to the upside, which is why I think the larger 5 min positives haven't moved negative as this is the direction expected ultimately for the head fake move, allowing them to short price strength and more demand/volume before price naturally falls back down.

 The 1 min IWM is showing the same concept, however this introduces a third probability...

 IWM 5 min, there's a clear positive at lower prices and not much going on at higher prices as 3C is inline, this brings us to the 3rd probability...

As price makes the first minor head fake below the flag as traders expect and they short it, it opens up more supply, allowing accumulation at lower prices and with plenty of supply (from sellers and shiort sellers) to accumulate for an upside break, essentially forming a "W" base pattern, thus the IWM 5 min chart would not go positive again until prices are lower as they were yesterday around the lows of yesterday or even below them.

As of now, this is what I see as the highest near term probability, but there are a few other assets/indicators I want to check in to. Either way, we've been looking for a bounce higher to open short or fill out short positions in to, this may give it to us.