VERY Important Update

If you are looking at the SPX as the bellwhether for the market, you probably see somethings like a bearish Ascending Wedge throughout 2014, if you look at multi-day charts you'll see candlestick loss of momentum to Doji stars (depending on the timeframe), but you're probably not too panicked looking at it.

The fact is, the Russell 2000 is and has been a better barometer of the market for sometime as it is a broader measure of US economic activity through a more diverse component list of business. If you need proof (other than the fairly well known idea that the Russell 2000 leads the market and should always lead a rally/bounce), just look at Ben "Helicopter" Bernanke's Humphrey Hawkins bi-annual Congressional testimony. Whenever Bernanke mentioned the market (likely out of habit) he always referenced the Russell 2000 (typically regarding the "Wealth Effect"), I found this a bit strange as the Dow and S&P are household names, the Russell isn't so much, but it gives you insight in to what the F_E_D is looking at as their barometer. The R2K has a VERY different look than the rest of the averages and one that fits very well with the NYSE component Breadth Indicators, Credit markets, etc.

The bounce we forecasted last Friday for this week (on Friday July 18th), Market Update / NEXT WEEK was looking for an IWM led bounce with weaker relative performance in the S&P and NASDAQ 100, this is why I only switched my core short position in SRTY (3x short the IWM ) which was closed at about a 9% gain and opened a bounce/trade position in URTY (3x long IWM) which I closed the following day at a 3.5% gain after seeing the initial weakness. In last Friday's "Week Ahead" post I said,

"As I have thought all week, I think the IWM has to bounce before anything else on the downside happens. The IWM is down -6.28% for the month and almost a straight line decline, a bounce here would not be anything out of the norm."

And thus far, it has been nothing out of the norm at all, but like the forecasted SPX/NDX for last week, we saw the exact same weakness immediately which is a large change in character for the market as we'd normally see several days of bounce before distribution started showing up, both weeks saw distribution immediately on the first gap up in the a.m.

As for the move I expected as nothing "out of the norm" after a 6+% decline...

This "counter-trend" bounce from the decline off the July 1st (top of the right shoulder) highs, is very tame considering the previous decline, the retrace off the highs of July 1was only about 33%, not even half, in other words, exceptionally weak not only in 3C charts, but the norm for a counter-trend bounce.

I'D IMPLORE YOU TO TAKE THIS VERY SERIOUSLY...

The charts that I have been most interested in as far as forecasting the end of a bounce in the market and the area where we really want to have our ducks in a row and ready to go, have seen serious damage the last two days, the Index futures have seen damage all week getting worse each day from a 5 min leading positive R2K futures to in line the next day to a leading negative 5 min the following day to a leading negative 15 min yesterday. Just as I warned for nearly a week up through last Friday that the market would bounce, I've been warning all week that this has been an exceptionally weak bounce and I'm not even concerned with the percentage move which has been weak as well.

The SPX from Friday's close to its closing high this week + 0.49% and through today, -0.04%. The NDX from Friday's close to its closing highs of the week, +1.10% and through today, +0.35%. The Russell 2000 from Friday's close to its closing highs of the week +.56% and through today, -0.54% and the Dow at +0.08% to -.88% today.

Now the charts that have me "concerned" (which is really happy being I have my core positions set)...

 This intraday chart is not current, but I think it is likely the market bounces a bit today and maybe a bit more early next week, but that second part is a guess at this point, I don't have objective evidence for that as of yet. It would not surprise me to see the market close up after the 2 p.m. op-ex pin is lifted, however what price does the last 2 hours of an op-ex Friday is not important to me, what 3C does is as the market typically picks up right where 3C left off on the next day of trade, even over a 3-day weekend.


 As I have stated all week,  it is this IWM 10 min chart with a rather large positive divegrence that I've been focussed on; we haven't seen any significant movement until yesterday, today it is getting noticeably worse.

 For some context, this 60 min chart is the resolution of highest probability for the current market position; this is the right shoulder decline in the Russell 2000/IWM in a larger, volume confirmed, H&S top. The accumulation to the right is normal as this is like a large swing trade, but Wall St. knows what they are doing and what they expect, they sold very heavily in to IWM/R2K right shoulder highs and the current divergence is deeply leading negative (the strongest version of a 3C divergence).

 The daily chart is quite clear about the leading negative divegrence at the H&S-like top in the Russell 2000/IWM. The daily chart is by far the strongest timeframe of all the above charts, however often is less useful for our purposes other than to know what the big picture looks like and what the highest probabilities are. Again, we are at a deep leading negative divegrence.

With a divergence like this in place, any end of a current bounce means we should be looking for the next lower low and as a market gets closer to the edge of breaking, it becomes more volatile and less predictable (in a bearish way).

 When I warned of an IWM bounce, I didn't expect the bounces we have seen so many times in the past that move 4-7% and change sentiment from raging bearish to full on bullish,  I expected a move that would create a series of lower highs/lower lows, but even in creating that down trend you need a bounce. I used the right side of the head's decline as an example of what I expected this bounce to look like and thus far it's right on track, although weaker than I anticipated (which is why I had opened the IWM calls as a hedge against my core short positions-a position which I closed yesterday...Closing IWM Hedge Calls).

 The Q's intraday are not looking as good, but I'm much less concerned with intraday right now, in fact any bounce would be useful.

 The 5 min QQQ chart since the divegrence in which we called for a bounce off of and which we observed extreme underlying weakness. The move since has seen an even deeper leading negative divegrence.

 The 15 min chart is much more important, but shows the exact same trend, worsening distribution and a leading negative divegrence on a respectably long timeframe.

 The QQQ daily chart is part of why I have been so adamant about my position on the market, but this is just 1 piece of the puzzle, I;'d never form a position/opinion based on one chart,

 The SPY 15 min is similar to what is happening in the IWM on its 10 min chart, deterioration locally to a new leading negative low.

Worse than that, the last 3-days have seen increased distribution as  the 15 min leading negative has migrated to the 30 min chart and a move this steep in 3 days on a 30 min chart is not a common occurrence.

 For a look at the broader picture/context, this is the same 30 min chart zoomed out. I have believed ever since the range that formed from March through May that we'd see a head fake move above the range before any significant move lower. We already had strong distribution in the range, but it is dwarfed by the distribution since the breakout above the range which is where retail traders would buy as the range was a chop-fest destroying longs and shorts alike.

 This is the 4 hour SPY chart. Many retail traders mistakenly believe that a declining market is evidence of smart money selling, in reality they have VERY large positions, it's not uncommon for some of the larger funds to hold a billion dollar single stock position. These size positions can't be entered or exited in a trade or a day or even a week, there are predatory HFTs that look to "Ping for Icebergs", large institutional orders and front run them which costs the fund money. These funds are very quiet about what they do and it typically takes a while to move positions that large, AAPL's decline on the Third Point AAPL top 5 positioning (no longer there) was an exception that sent AAPL down 45% in 8 months.

Normally, by the time a market rises, smart money has long been in and they are exiting on demand and higher prices.

 This is the daily SPY chart with a strong 2014 leading negative divegrence.

The point Im trying to make is the damage is already extreme, just like any trade we enter, we are already looking at the longer charts for our strategic position and the shorter charts for our tactical entry/exit. The longer charts are in tatters and the short term charts are falling apart quickly, both the strategic and tactical are looking VERY bearish.

Don't forget to consider other things like the failure of the carry trades (clear uptrends have gone sideways or down), market breadth which has been falling apart for well over a year, but intensely now such as I have only seen twice in 15 years of looking at breadth charts, also the divergences in High Yield Credit, Treasuries, the Flight to Safety trades in to Utilities, and of course, the record setting elevated SKEW for the longest period since SKEW has been published.

To give you some idea of why I say this is an opportunity that no one alive has seen, if you understand the new market dynamics as they will not be the same as the previous  5 years and are on the right side of the trade...Look at the Dow now vs. the Dow from the 1929 highs just before the crash...

This is the 1-day 3C chart for the Dow-30, while this did creep up rather fast and there was a VERY strong 3C reading through most of the 1920's, this was NOT a total surprise, big money was moving out almost a year in advance as you can see above (note the year at the horizontal axis)

This is the daily Dow chart right now, all settings are exactly the same.

Some of the biggest funds have been net sellers for over 2 years. Last May Apollo said at a financial conference they had been selling "Everything not nailed down for the last 15 months" as they described the market as being, "Priced to perfection" and the market trend was useful in allowing them to exit their very large positions.

If you need more evidence beyond 3C and what funds have shown, let me remind you of the Bank of America Custodial Accounts for Institutional, Hedge Fund and Retail investors...

This was released a couple of months ago, Institutional clients have been insanely strong net sellers especially going in to 2012, while they have been handing the bag off to none other than RETAIL as they have been buyers during the EXACT same period. Shortly after this was released,  JPM released a similar chart.

On a stronger trend basis, the 5-day 3C chart for the Dow 1929 looked like this...

 There was very strong accumulation in 1921 and 3C confirms the Dow's explosive growth at the green arrow. This still shows strong distribution starting about a little overa year prior around 1928.

Now compare the exact same settings to now, 5 day DOW 3C chart. The 2002/2003 accumulation for the next bull market is obvious and the trend is confirmed until distribution in 2007 near the top, accumulation at the 2009 lows is seen.

You may be wondering why 3C is so low during the last 5 years, remember this market was not sent up by strong buying ,volume demonstrates that...

A market rally  should always be accompanied by rising volume and that was the case until 2009 and beyond.

What sent this market higher was a 3.5 Trillion dollar F_E_D expansion during the same period, much of that money flowing to the market, but now the same strong underlying purchasing of the 2002/2003-2007 bull market.

I have a lot of work to do in looking at several stocks, but I'd urge you to take this very seriously.