Daily Wrap

I'm actually pretty impressed today that so many concepts held up so well from the F_O_M_C Knee Jerk Reaction most often being wrong and retraced as it was today to parabolic moves being inherently unstable and ending just as spectacularly as they began which we also saw today.

The two concepts here are "Parabolic moves don't usually hold and fail as spectacularly as they begin, whether up or down" and the second is a "A Base is a process, not an event",  as you can see with the last 2 bases, however a larger base looks to be creaping in to place.


We also saw the Dominant Price/Volume Relationship calling for a close lower today as well as the overbought S&P and Morningstar sectors, the SPX/RUT Ratio and today the VIX Inversion signals, all playing out perfectly thus far, leading indicators like Yields yesterday suggesting a move lower today, High Yield Credit ignoring the move yesterday and calling for a move lower, the 5 min 3C Index Futures charts divergence as well as last night's 1 min negative divegrence after the close, and even the increased volatility, just about every indicator and concept we use was spot on today.

Think about the increased volatility and the ATR chart posted in last night's Daily Wrap with my comments, 

"This 10-day Average True Range of the SPX shows the declining ATR as the market was celebrating new all time highs on gains of +0.10%, a tenth of a percent, which at the time I had said numerous times, "We'd ignore days like this as pure noise, a 1% move was an average day"

"You have to put the volatility in perspective when the market 's volatility increases and headlines about the best day in 3 years abound, there's a reason and it's the same reason that bear market rallies are some of the strongest rallies you'll see, as they finish and go on to make a lower low."

Thus because of volatility, you have headlines like yesterday's "Market biggest rise in 3 years" while the very next day you have the headline, "MArket's biggest plunge in 6 months"  THE DAY AFTER!

Every major average lost ALL of yesterday's post F_O_M_C minutes gains and then some...

All gains since the minutes release erased including transports.

This is exactly why I said yesterday, "There's a probability that the market rises today, but this is not the same as a high probability/low risk trade. I would not sleep well at night if I were long any market gain put in today as there's no support/base to make this a high probability/low risk trade"

Today could have gone a lot differently with the overnight session gapping down and losing all of those gains on the open, the point is simply, if you play Russian Roulette often enough, you'll be carried out in a bag, thus we have standards for what we look for in a trade, not just probabilities.

And the averages on the week thus far...

 Averages on the week including Transports and the averages...

Over the last month...

And as mentioned earlier today, the Russell 2000 has now broke below it's topping pattern...

Remember, there's a very specific reason I don't short an asset that just broke below the neckline of the topping pattern, there are 3 other places I consider excellent opportunities, one is coming up, but this is not one of them...


Here's another headline for you from the good folks at Nanex...

Hmm... on a simple retrace of a F_O_M_C Knee Jerk Reaction or maybe there's more to this market than meets the eye on a price chart alone...

I still have not changed my tune since last Friday's Week Ahead Forecast which was for weakness in the market the early part of the week and building a base by the mid part, around Wednesday when AA kicks off earnings, obviously the unexpected dovishness of the F_E_D minutes caused a delay of a day or so, but I believe we are still on track and I believe a head fake move is still probable to give us a good timing indication, I couldn't think of a better day to get this done than tomorrow on an op-ex pin.

As for the market, indications, charts, strategies and tactics, I'll try to cover this as briefly as possible while not leaving out key concepts you can use like the mention today of the NYSE TICK Index intraday as a heads up/ear;y warning indicator.

Here is one of several reasons I believe the bounce / base is still on...

 The ES/SPX Futures 60 min chart is showing a start to a base at last week's lows with a positive divegrence, this base alone is too "V" shaped and not stable, this is part of the reason the move up from it only lasted a COUPLE OF DAYS. SINCE, WE HAVE BEEN LOOKING FOR A WIDER DOUBLE BOTTOM OR "W" SHAPED BASE,  we pretty much have that, but one other thing forecasted Friday was the probability of such a base to put in a head fake move on the downside in the form of a stop run which allows accumulation of large supply on the cheap as well as being a momentum slingshot for the next move, the bounce to the upside.

 The 7 min chart of ES was leading negative as of this morning as were the 5 min charts, this was posted in the A.M. Update with the forecast that price risk was certainly , clearly to the downside, A.M. Update

"The short term risk is to the upside for the $USD as seen on this positive 15 min chart"

"All in all, it is as I suspected yesterday, it's shaping up to look like an unreliable knee jerk reaction."

Both early forecasts this morning at the open were correct.

The 5 min chart's negative divegrence in the morning has ended the day with reversion to the mean or 3C confirmation, this is more bullish than how we started the day, but I'm still not convinced until I see at least 5 min positive divergences, although I did take off some 3x short ETF positions to maintain the gains in them and get some dry powder ready for new positions on a swing trade basis.

The 1 min ES chart actually went positive in to the afternoon as we saw the downside momentum falling off.

The averages look like this...

 SPY intraday 1 min showing afternoon positives as price started to flatten out.

Those made it to the 2 min chart and like the ES 30 min chart, the bigger picture SPY 15 min...

Also shows a larger base divergence in the process of forming.

QQQ made it positive to 3 min chart...

IWM was mostly in line as you see above on the 2 min and...

 out to the 10 min so there is some work to be done here before a long position can be considered.

The DIA 2 min went positive in to the afternoon, but these are just starts.

The 5 min chart is just a tad better than in line.

In my opinion, the same opinion from Friday, we need to see something along the lines of...

A head fake move/stop run below well formed support which we predicted Friday for the week as you can see above, this is obvious support in  widely watched asset so a head fake move is high probability as stops will be lined up just below making it a very effective use of technical analysis against traders.

As for some of the Leading Indicators and our newer custom indicators...

 VIX fear has climbed and is now inverted to the highest level since the early August stage 1 base leading to the August rally and cycle, the red bars are actually a buy signal that run a bit early, but have been very accurate. 

As for the SPX/RUT Ratio in the middle, it is calling for a head fake move as it has moved below the trendline while the SPX sits right at support, well defined support which is an easy target for a stop run, thereby confirming the SPX/RUT Ratio indicator that has been right on every call since we introduced it.

 Our Pro sentiment indicator (1 of 2) is going neutral, I'd expect to see it leading the market before a move to the upside.

Here you can see it leading the SPX during stage 4 decline of the August cycle and mellowing out to accommodate a bounce.

 The second sentiment indicator is in line with the SPX, it too should lead positive as they usually do.

HYG Credit was perfectly in line again with the SPX today, however the first positive divergences were building there late today and...

The longer 10 min chart shows support building in the area for a market bounce, but keeping things in perspective as I sought to ANCHOR EXPECTATIONS TODAY...

THE LONG TERM HYG DIVEGRENCE IS HORRIBLE AND GOING TO PULL THE MARKET LOWER OVERALL.

YESTERDAY'S FLAT HY CREDIT WHICH TOLD US THERE WAS NO INTEREST AMONG SMART MONEY IN CHASING YESTERDAY'S MOVE WAS RIGHT ON AS THE MOVE FAILED TODAY.

However there are hints of a more positive tone now that we are back at the base forming price levels.

Yesterday Yields closed at the white arrow, I said that they tend to pull price toward them until they revert to the mean, that's exactly what happened today as price fell right to yields and reverted to the mean in green.

On a side note, UNG pulled back exactly as we expected, but better yet, speaking of another likely head fake move, it started working on a solid positive divergence today as expected when the breakout failed.

A for intraday breadth today... early selling was pretty intense near the -1700 levels , but as the afternoon went on the TICK Index ranged between -1500 and about +1200.

The Dominant Price/Volume Relationship was sticky today, the Dow had 18 in Close Down/Volume Down and 12 in Close Down Volume Up. The first relationship doesn't have much of a next day implication which is interesting in to an o[p-ex Friday, the second relationship which was less dominant is a 1-day oversold and usually sees the next day close higher.

The NDX had 63 in Close Down/Volume Down, what I usually refer to as, "carry on" as it has no distinct next day bias, which is interesting from a needed head fake perspective.

The R2K had 1119 in Close Down/Volume Down, also "Carry on" and the SPX was spilt with 251 in Close Down/Volume Up and 237 in Close Down/Volume Down.

All in all, this is not a Dominant P/V relationship among all of the averages, but all in all I'd say it leaves room for a downside head fake move which we must confirm.

Like yesterday, the S&P sectors are the mirror opposite of the day before, that meaning today 9 of 9 closed red rather than green, creating a 1-day oversold condition with the laggard being Energy at a -3.67% loss and Consumer Staples coming in the best at a -1% loss.

As for the 238 Morningstar groups, again 3 days of mirror opposite of the previous day with 231 of 238 closing red, another 1-day oversold signal, although without the Dominant P/V relationship, I feel it's a bit shaky and would suspect we spend a lot of time tomorrow in today's lower range, just as a gut feeling.

Finally, unlike yesterday, a majority of our breadth indicators did move today and at least half hit new lows for the year, meaning breadth fell apart even worse than it was, this happened before the August rally, although I don't anticipate anything that strong as that was a well formed base, I do expect an upside move that we can not only trade, but use again as an entry in some remaining positions that have been hard to get in to like PCLN.

We'll take it as it comes, verify and take action. I've been okay with trading this market a bit more aggressively as the ATR has opened up significantly making it worth the while and over the last month my own portfolio has seen a gain of +17.1% without trading any options. 

While I think we have the opportunity to trade around certain positions, other longer term core shorts such as SCTY , HLF, etc that we have significant gains in, I'm content to leave those in place with the probability of highest resolution as use the leveraged ETFs to trade around pivots.

I'll see you in a few hours...