Daily Wrap

It seems the F_E_D's Red Haring didn't work. For weeks the market has been worried about the F_E_D taking out the "Considerable time", defined by Yellen once as 6 months, the time between the end of QE and the start of interest rate hikes. The market has been discounting the removal of the lkanguage expected because dovish and hawkish F_E_D speakers alike have all said it's time to do away with it, yet it remainned making the F_O_M_C statement seem that much more dovish, however in the press conference, Yellen absolutely stripped the phrase of any meanaing at all and actually tried to define it as "incoming data" which is a pretty neat trick if you can pull it off. However it is clear that this language was left in to distract from the fact that the "Dots" or median forecast for interest rates at the end of 215 and 2016 keep rising, which not only means higher rates, but likely a sooner start to get to such rates by the end of 2015. Thus the red herring was left in, but did it work? Not looking at small caps and transports or the IWM...

After going through some more indications that I have to update after the close, I feel pretty comfortable with today's, The Week Ahead which I'd encourage you to check out, even if you've already read it, just from a charting perspective, there are a lot of charts that fit together amazingly well. I'm not looking to make a match when gathering objective data, I'm just looking for a pattern. The market will give you pretty much any data you want if you look at it just right, to draw any conclusions you want, that's why I ALWAYS refer to data as "Objective", I don't care whether we make money long (like MCP today) or short, just that we are on the side of the highest probabilities and in this case, I think a historic trend to emerge and with that, historic opportunities that will make the Bernanke put look like child's play just as the 2008 bear market made the previous 5 year bull look dull.

Call it coincidence, call it whatever you like, but we've had an incredible run with the Dominant Price/Volume Relationships. Last night's Daily Wrap contained the following (keeping in mind, after the Dow and SPX closed at all time new highs which usually see next day upside follow through)...

"There was a Dominant Price/Volume Relationship, 20 of the Dow 30, 63 of the NASDAQ 100, a smaller ratio of 643 of the Russell 2000 but still dominant and 234 of the Russell 2000. Of the 4 possible combinations, today's Dominant P/V Relationship across the board was Price Up/Volume Down which is the most bearish of the 4 relationships and often sees a next day move lower or over the next couple of days."

Considering the new highs and usual follow through, with the Alibaba IPO today, one of the most historically over-hyped IPO's ever (in which it surpassed Walmart's market cap in intraday trade), was it coincidence the averages ended almost all in the red?

 The SPX and NDX closed marginally lower, the Dow closed up by +0.08% and the Russell 2000 lost -1.09% today.

It almost looks like on a longer term August cycle basis, the Russell is moving to catch down to HYG's stage 4 decline and the SPX really doesn't look that far from doing the same.

Since Aug 1, the R2K in white is catching down to HY Credit, the SPX put in the Igloo-with Chimney topping head fake pattern.

Especially hit hard were small caps and Transports which erased ALL FOMC gains.

 Small caps...

Transports...

And how about the Russell 2000?

The Russell 2000 reversed all F_O_M_C gains today alone, in fact, nearly erased all gains on the week and is now down -1% Year to date and near 6 week lows, I'd say we can probably call that stage  4 of the August cycle.

However the Knee-Jerk response is not just stocks,

 5, 10 and 30 year yields lost all gains from the F_O_M_C as well, recall our recent posts that TLT was about ready to end its pullback and move higher, well it did so today with a +1.27% move and that's with giving quite a bit back this afternoon as we forecasted earlier today for a short term correction allowing a long entry.

Yields on the day didn't look very good either with a wide range that closed lower in the 5, 10 and 30 year.

And there's the F_O_M_C / F_E_D knee jerk reaction in live action, as almost always, the initial knee jerk move (although muted), is almost always wrong whether it's up or down.

Perhaps, this in "part" may explain the destruction of the Most Shorted Stocks / Index(MSI). Normally we'd be looking for support from these as they are easy to squeeze, but since July 1, the squeezes have gone from weeks to hours to minutes and today, absolute destruction as the Index headed lower meaning these heavily shorted stocks were in significant decline today.

The MSI (yellow) vs the SPX. I'd say this chart alone is the market speaking pretty loudly about its condition and things to come. This is why I suggest looking at the Week Ahead post as there are more charts that are important.

Interestingly, although there wasn't a lot of movement in the average beyond the Russell 2000, they did manage to put in some ugly bearish reversal candlestick patterns.

 All of the averages have negative divergences (well in a lot of indicators) in the RSI like U.O.

The SPX put in a bearish long wicked Star candle on the close in to the divergence.

The NDX is shown with the same indicator on a 60 min chart with a positive divegrence just like my SPX/R2K Ratio in the "Week Ahead" post, at the base of the August cycle to the left and a negative divergence now. The daily closing candle for the NDX was a bearish Hanging Man.

The RUT also shows a similar divergence at its top and a very  bearish Engulfing Candle that swallowed the last two days entirely.

The Dow 30 has the same divergence with a bearish "Shooting Star", the Japanese call this candle, "Trouble ahead".

Transports put in a confirmed Star/Bearish Engulfing candle today.

The $USD is doing amazingly well. Remember what the $USD did during QE or Dollar destruction via printing? Well it's signing a different song, a telling one at that as well.

For all those who believe the F_E_D has got their back? What's the opposite of QE's Dollar destruction? How about the $USD closing up for a 10th consecutive week at multi-YEAR highs? What's that telling us about the F_E_D balance sheet moving forward?

Have you ever seen the correlation between the expanding F_E_D balance sheet and the SPX? Remember, the F_E_D is no longer going to hold assets until maturity, they'll be reducing the size of the balance sheet, although they are keeping this aspect very grey and fuzzy right now.

As you might expect, dollar denominated assets have been pounded during this $USD strength, again see the "Week Ahead " post, but...

On the week, USO is the only asset here closing green, gold is down, although you know we are watching gold, GDX/NUGT for a possible reversal, however, look  at silver in white! Silver has long been manipulated and this week as it puts in a 4 year low, I suspect it is still being massively manipulated, not my favorite asset to trade by far.

Today we had an especially Dominant Price/Volume Relationship, 17 of the Dow 30, 82 of the NASDAQ 100, 1323 of the Russell 2000 and 257 of the S&P-500, all were Close Down/Volume Up.

Usually I'd say this is a strong 1-day oversold event, however today was quad witching and the much higher volume is to be expected, so whether we get a 1-day oversold bounce Monday is up in the air, I tend to dismiss this one just because of Quad-Witching today.

As for the S&P sectors, 8 of 9 closed red, only Utilities closed at flat 0%, the worst performing sector was Financials, the short we were looking at on a slight correction. This does look more like an oversold event and is in line with the near term forecast of the Week Ahead, as in Monday.

Of the 239 Morningstar groups, a very paltry 47 of 239 closed green, again, both indicative of a 1-day oversold event, but also indicative of massive destruction in market breadth, far beyond what most of the averages showed in price action (except the R2K).

Breadth was all in all HORRIBLE. Stocks 1 and 2 standard deviations BELOW their 200-day moving average are just as high now at a near new SPX high as they were during a deep pullback that ended early August, major trouble.

The A/D lines for the NYSE, Russell 3000, Russell 2000, Russell 1000, NASDAQ 100 and the NASDAQ Composite all closed disproportionately lower today except maybe the R2K which was in line with the massive decline there.

Let me explain it this way, the extraordinarily deep breadth decay of the last decline in late July is now seeing as bad breadth readings, except the market averages aren't in decline, the SPX and Dow just made new all time highs, the point being, it was  bad when the market was seeing a 4-8% decline with breadth that destroyed, but now it's nearly as bad during a rally, in other words, that pier's pilings I've been talking about went from bad earlier in the year to really bad in early August to unbelievably bad currently. I'll look back at 2007 and 2000 again, but I don't think there's anything that compares with this.

Finally, as I said in the week ahead forecast, I think early Monday we'll see some weakness, perhaps in to a bounce later in the day and maybe in to Tuesday, I expect HYG to decline from there as it has already started falling apart. If the 3C charts don't put together an intraday positive after Monday morning, the market will be in nig trouble fast, however based on breadth like the S&P and Morningstar sectors, I'd expect at least 1 day of correction to allow them to try to work off some of that oversold tension, but oversold can quickly turn in to bear material, that's how this market will end.

Have a great weekend.