Dynamics of Intraday Trade

Earlier today I put out a Quick Market Update followed shortly after by an  Intraday Update. The fact that these were the two main events intraday tells us something in and of itself, while market prices are roughly in the same area (down about 1/3 to 1/2 a percent today), underlying indications like 3C, Leading Indicators, overnight market sentiment in Japan which it seems (not from our members), a lot of people are still having trouble understanding how futures in the Nikkei could take such a hit while the cash market closed up 3+% and how this was not a positive event for the Nikkei, although it did level out a bit.

Imagine a 1000 pound load held up by 1000 lb capacity jacks, you don't really have any problem to worry about other than a mishap. However when you maintain that same 1000 pound load (in this case price) and the support mechanism (like the pier/pilings example) starts dropping to say 500 pounds, well you may be lucky for the load to hold in place, but it's an unsafe environment.

I don't want to get too hung up on intraday trade as today's dominant theme because not much else seemed to be going on, there were significant events. The load bearish structures like 3C confirmation deteriorated significantly the last 3 days now. Leading Indicators which I sometimes expect may skip a beat in a faster moving market are solid and steady as she goes with even more deterioration. Our 1000 pound load lost a lot of support and it was visible in numerous ways from 3C charts to Leading indicators that have even surprised me with their consistiency.

However, since I did post the intraday chart movements and the possibility of a wider "W"base and the potential of higher prices intraday that I would short in to at this point, no more information gathering needed, well I might as well go ahead and show you the end of the day and explain a few things about these intraday dynamics.

I've been flying more often with Andrea, my significant other who is a helicopter pilot, and while at first I was just in awe at her skills and the excitement of being in a helicopter, I didn't pat much attention to the 4 different controls (talk about multi-tasking) which would be the anti-torque pedals which are at the feet similar to an airplane, these control the tail rotor, without the tail rotor the body of helicopter would just spin in circles from the main rotor so these are fine adjustments made to keep directional flight. There's a joystick like lever in the middle which is called the "cyclic" which essentially changes the pitch of the main rotor hub, tilting forward for forward flight, to the left to turn left, etc. and there's a large lever to the left like a big emergency break which is the "collective"; it's function is to collectively change the pitch in all rotor blades on the main rotor producing the effect of lift.

Andrea and the helicopter she now flies.

When watching her fly (because I'm sure I can do it too!), I notice the minor adjustments in the anti-torque pedals she controls with her feet, say if a strong wind gust blows or she is making slight movements and not full turns. This reminds me of intraday timeframes in the 1-2 minute range, it's probably an appropriate analogy as well as these timeframes were first defined during the days of market makers and specialists (not that they're not still around, it's just HFTs has invaded a lot of their space). Market makers and specialists are often paid for their services to execute large orders  for institutional customers in the stocks they make a market in. Intraday timeframes use to show what they were doing with a pretty high degree of accuracy as they move price slightly this way or that way to stay within the execution band/price , often VWAP. So more often than not, we see smaller movements in these intraday timeframes, almost corrective movements like the anti-torque pedals on the helicopter.

Today's charts...

 This is the SPY 1 min chart, a short timeframe, more akin to slight changes in intraday movement, than large directional changes that might be made by something like the collective (producing lift) or the cyclic producing directional flight.

We had a 1 min positive at the 11 a.m. lows which was enough to send prices higher and toward yesterday's close,  however before the close someone applied a little "left pedal" so to speak and caused a small negative divegrence. I can guess that they may be taking price back down to the accumulation band seen earlier forming a "W" or double bottom base intraday which would have the effect of producing lift, higher prices, however I can't confirm that as a probability until I see price actually decline and see if there's accumulation ( a positive divegrence) as we near today's intraday low. If I see that, then I know here's a pretty good chance there's a larger divergence in place, essentially like a pilot pulling up on the collective which controls lift, in this case lift of prices.

With a 1 min 3C divergence there's about a 50/50 chance that it's either a simple consolidation to keep prices in a general area like today or that it's going to turn in to something larger and produce a price move, which i said I'd short in to because of all of the incoming data and how extreme it is getting.

If we have a positive divegrence on the 2 min chart as well, then the chances are very high that we will see a directional move, not just time killing/consolidation, but we did not see any 2 min positive divergences today and the market had almost the entire day to migrate to a longer/larger divegrence which would migrate to the 2 min chart and display a positive divegrence there as well, perhaps even to stronger charts like the 3 and 5 min and then we have a pretty good idea that someone will be applying lift to prices, of course the amount of lift depends on the size and intensity of the divegrence.

In any case, as you can see by the 2 min chart above, that didn't happen so we are still stuck between a 50/50 chance of consolidation or perhaps something bigger.

I should note that consolidation at this time is not unreasonable right in front of the ECB decision Thursday, traders may not want to make many moves before then and smart money may want to use it as a catalyst to help move prices in a predetermined direction which is looking more and more like down as always expected.

 If the 1 and 2 min charts are like the anti-torque pedals, for slight alterations to flight, the larger 30 min divergence is like the collective, producing lift or decent. In this case with 3 top pivots and each one seeing a worsening divegrence, the current being by far the worst, we can be with a pretty high degree of confidence that we'll be seeing lower prices in the very near term, after all, the move up did exactly what it was meant to do.

 The IWM 1 min positive and leading positive also went negative by the day's end, perhaps to make another low near the 11 a.m. lows or perhaps just to take price altogether lower as today may have been a simple consolidation day in which they weren't ready to move price anywhere yet in a significant way which could be part of the reversal process or waiting the ECB out.

Again, the 2 min chart, which could easily see positive migration in a matter of an hour saw none and it was no better intraday than in line while in a larger sense it was in a leading negative divegrence.

This still leaves us a t a 50/50 chance of consolidation through time or perhaps consolidation through a price move. We'll know if prices move lower and 3C either responds positively or fails to respond, but the chart below is giving us our highest probability for the resolution of these short term charts...

 IWM 10 min, again is more like the collective control producing lift or decent, not the subtle intraday movements akin to the anti-torque pedals which make small adjustments.

The Q's are in the same boat with the 1 min intraday, not much better than in line

And the 2 min no better than in line and on a larger scale, the dominant feature of this chart is the larger leading negative divergence.

 The 15 minQQQ chart's deep leading negative divegrence is altering near term probabilities and timeframes as it has really deteriorated quickly, these are not divergences that produce small movements, but divergences that produce large directional moves.

 Given the Leading Indicators, the 3C charts and the break down in breadth, today almost seemed like a hover which would be controlled via a series of small movements or corrections with the foot pedals, but the case is quickly building for a directional move and one to the downside as we suspected from the start after this run.

If we get the chance to take advantage of intraday prices and shot in to some, I almost certainly would, the ECB is just as prone to knee jerk reactions as the F_E_D, just like the BOJ as we saw Friday so we may have some interesting opportunities, but all in all I'm very comfortable with short positions in place here and more than likely adding where we can on good opportunities.