Daily Wrap

Again, another day in which the talking heads' narrative has nothing to do with market reality. When the market moves by chance with some news , economic or geopolitical event, they trumpet that as the reason the market did "XYZ", however few seem to see the simplicity of a base set up almost 2 weeks ago and the bounce we've been expecting since about that time which is playing out now. The message is quite clear, Wall St. controls a good portion of market movement in the short term, how else could we forecast last week's base widening, this week's early intraday weakness followed by a bounce off the base almost a week before it happened?

This is obviously a distribution event as most bounces have been, but this one is much more like the last 2 and nothing like previous bounces from the last several years that were extreme sentiment changers.

You don't have to dig deep to see that this is a selling event even though at this point it's really not any different than a normal run of the mill corrective move, although with a base like it has and 10-15 min positive divergences, it should be a lot more than it has been thus far.

IWM daily, the bounce is no different than an ordinary correction at this point.

There are clear signals that this is probably one of the last really good positioning short entry opportunities we get, but first we have to finish the process started with the base.

This Monday's Daily Wrap... I posted some probable price levels we could expect from this bounce, for the S&P, a couple of those were taken out today.

Those levels include the 50-day expo, 22 day simple and hammer support from July 10th. The SPX is testing right at the 50-day simple moving average today.

For the Dow...

That included the light blue 100-day expo, trendline resistance which is yet to be hit and of course the psychological magnet of 17k.

For the NDX...

Targets included the light blue 22-day simple m.a., the gap at the orange area and of course the psychological magnet of $4000.

The R2K included...

This cluster of moving averages (50 expo, 100 simple, 200 simple) which it has had a hard time with, the 50 simple is above, about halfway between here and trendline resistance, not a very strong showing from the R2K which only reinforces my decision to leave core short positions such as SRTY open.

The R2K is still quite a way away from even my example "forward expectations" which wasn't an estimate of where the R2K would move to, just the 2 important pivots with #2 being far more important than #1.

While pivot #1 was almost exact, we are still a ways away from pivot 2 around $116.20 (IWM) as we currently sit at $113.59... Another reason taking sub-optimal trades, despite probabilities, is not wise.

Transports which we have a short in and are looking to add to, were expected to bounce as posted last week, Transports To Bounce. IYT is now about 3.5% off the recent lows and should be near an area where we can add to the short or enter a new one soon.

The bottom line is that so far, for the most part we are pretty far from some of the higher end target areas and right around the minimum targets as this bounce has been pretty weak thus far with a lot of distribution in to anything resembling higher prices.

The most reliable way to tell when we should be looking toward entering shorts (as early entries while the bounce process is still in effect will likely result in draw down and sub-par entries as about 2/3rds of any given stock's movement is dependent on the broader market) is to simply watch the migration process of negative divergences and look for the base's positive which is mostly 10-15 min positive divergences, to fail and turn negative .

For those not familiar with this process, once the base's positive divegrence has been put in place (in this case on the intermediate 10-15 min charts), any new divegrence like distribution will start on the fastest charts like 1 min and if it's strong enough or as it gains strength, it will migrate to the longer timeframes like 2 min, 3 min, 5 min and so on until the original base positive divegrence itself starts to turn negative, at that point we'll come back to the intraday 1-5 min charts and look for the strongest divergences (again migrating through the timeframes) for a timing indication. We also look for a reversal process as 90% or reversals are an actual process like a rounding top or double top and are rarely a reversal event like a "V" or sharp shaped reversal,  this has a lot to do with the size of institutional positions which can't just move from long to short in a day like we can without driving price against what are often billion dollar positions or without attracting the predatory HFTs like "Iceberg Hunters" which ping for the iceberg orders above the surface knowing the rest of the large order is beneath the surface like an iceberg. Once they identify an iceberg they front-run them using their speed, costing the institutional entity a lot of money in the process.

One reason retail traders fail to understand the way the market truly works is because they look at the market through their own experience in which a trade can be opened and closed in many cases within a minute and suffer no damaging effects. They fail to understand how the large orders of professionals demand a different approach. I often say we are like jet skis that can turn on a dime while smart money is more akin to an oil tanker that takes a mile to come to a stop.

Updating where we are thus far in the process, I'll post the original base / positive divegrence and how far the migration process has come and in some cases, the actual base divergences is already starting to show signs of distribution and thus much closer to a reversal or "Pivot 2" as shown above, which is where the larger, important trade entries are for us.

 SPY's 10 min positive divegrence and base area which is still "in line" at this time.

So far the SPY has migrated to the 5 min chart with increasing negative divergences as higher prices are sold/shorted in to. The next step for the 5 min SPY is to move to a leading negative divegrence at which time the 10 min chart should be starting to go negative.

 QQQ 10 min positive/base which is also still in line.

However the 5 min QQQ chart has turned from a relative negative divegrence to a stronger leading negative divegrence so it's likely the Q's start to show some signs of the 10 min chart breaking down soon.

The DIA 15 min positive/base is now showing the first relative negative divegrence, from here it should only deteriorate more.

 DIA 10 min chart negative has bled through to the 15 min above.

IWM 15 min positive divegrence is also starting to show the first sign of a negative divegrence with a relative negative in place.

However, unlike most of the other averages, short term IWM charts are positive which is likely a function of the lagging IWM trying to catch up.

As for signs that all is not well, today and really since 8/13 when Retail sales came out (but also the same time we had the first real move up in the broad market), Treasury Yields which move opposite treasuries and generally with the market have seen some nasty divergences, for example today the 30 year yield hit a 15 month low of 3.18% which means that while the market "appears" to be in a risk on mode, the bond market is clearly risk off or a "Flight to Safety".

About a month ago I posted about the 10 year benchmark yields diverging from the SPX and how it looked a lot like the 2007 top, not long after as you can see (these are 30 year yields in red) the market broke down from a bearish ascending wedge. While many economists believe an inverted yield curve must come before a bear market or recession (because it has happened 6 of 6 times in the US since the 1950's), there's a lot of evidence to show that's not true. Over the last 20 years Japan has had 7 recessions, only one have an inverted yield curve prior to the recession.

What this does tell us though is that while stocks rise, the safety of bonds are being bid up, today in specific, the 30 year hit 15 year yield lows. The 10 year closed at 2.4%. You may recall how we use yields as a leading indicator as stocks tend to be drawn to yields, so a lower yield vs the market tends to pull the market down to reversion to the yield.

Dr. Copper is also not buying in to this move...

SPY vs. JJC (red)

As for the enablers of the market, I already posted on the deterioration in HY Credit, HY Credit is Starting to Give Out , the USD/JPY was also in control today until about 2:30 at which time the market moved up without the carry cross.

Our Most Shorted Index is underperforming the broader Russell 3000, so much for the days of a bounce/short squeeze...

MSI (yellow) underperforming the R3K.

The closest we had today to a Dominant Price/Volume Relationship was primarily in the NDX and SPX, both Close Uo and Volume Down which is the most bearish of the 4 readings, it doesn't create the same 1-day overbought as Close Up/Volume Up, but it's telling us a lot about the quality of the move. In fact, we had 2 days this week with SPX Futures volume 40% below average volume, yesterday it was 50% below average and today was the worst day of the week with S&P Futures 55% below average daily volume.

Interestingly 7 of 9 S&P Sectors closed green, but the two top leaders were both defensive, Healthcare +1.18% & Utilities +.92% and 194 of 239 Morningstar Industry/Sub-Industry groups were in the green today. Again, Utilities and healthcare related sectors were in the top 10.

The Percentage of NYSE Stocks Trading Above their 40-day Moving Average moved up to 41.29% from 36.59% today, I'd say we need to be somewhere at least around 50% before we can start considering the market out of the deeply oversold breadth condition which initially led me to believe we'd see a bounce,  we saw readings as low as 20% which are worse than most bear market readings.

One of the most surprising breadth readings during this bounce has been the NASDAQ Composite's Advance/Decline line's inability to recover.

COMPQX red vs A/D line green.  This should give you some idea of how horrible the breadth situation truly is out there and what a ginger bread house this market is.

Other than that, breadth looked pretty much in line with price action.

Tomorrow is a monthly options expiration Friday so we should expect to see a max-pain market pin which usually is somewhat close to Thursday's close. The pin is usually in place until about 2 p.m. as contracts are cleaned up and after that the market tends to move as it wants,  however this is the best 2 hours of the week for 3C information and usually gives us a good idea of what to expect for the week ahead, the last 3 Friday's forecasts for the week ahead have been almost dead on so I'll be looking for that.

Again, while I don't pay too much attention to intraday/1 min Futures charts overnight, we do have some leading negative readings in Index futures.

NQ/Nasdaq 100 futures are leading negative as are TF and ES. I'll check in on these later tonight and see if it's something that is turning in to something that needs to be watched.

Otherwise, I think the Tuesday Daily Wrap that started out with "Patience" is right on track for the week. I'd much have preferred to be in some positions making some money on piggy back trades, but I'm not taking unnecessary risks for small gains when we are so close to an important position entry point (The R2K has only moved 0.11% since Monday and 1.05% since Friday's close, not exactly the kind of bounce gains I was expecting).

Lastly, as we moved toward a base/bounce I noticed some inflow (small) in to HY credit which I figured was for a bounce and I noticed SKEW dropped below the elevated zone which I thought the same of, however the one thing that has been most important when looking at and forecasting SKEW is not just the number/reading, but the Rate of Change in the readings which have suddenly started moving fast again... Take it for what it's worth, but an elevated SKREW means someone is paying up for deep out of the money puts.

SKEW drops from highly elevated levels just as our base forms and now is moving to the upside very quickly, once again at red flag levels tonight.