Leading Indicators and the Reversal Process.

I've talked a lot about the reversal process in terms of price formations, head fake moves, confirmation of head fake moves, etc., take the "Igloo with Chimney top and head fake, it is a reversal process differentiated from a reversal event which do occur, in fact every average except the IWM underwent a reversal event at the lows on this upside move while the Russell 2000 had a wider reversal process.

As it related to leading indicators, as volatility picks up and the surprise moves like last night's Nikkei 225 futures plunge, I sometimes suspect or anticipate that certain leading indicators may not give the reliable signals they have given in the past at broader reversal areas, however what I'm finding in looking at Leading Indicators today is that the signals they give and the time it takes them to give the signals are in fact,  part of the reversal process and in this case, it's comforting to see them as it relates to forward looking market forecasts and expectations which as you know I'm clearly in the camp of not only down, but down sharply, likely a new low for the year.

There's something very comforting about the predictability of these leading indicators flashing their signals (whether it be for a move up or down) and the reliability in which they do it and the fact they are doing it again right now exactly as expected and seen so many times before at reversal areas.

Leading Indicators...

 SPX/RUT Inversion...Note I haven't been displaying the VIX Term Structure/Inversion because it is no where near a long signal. The last long signal was around the first week of October and the one previous to that was the first week of August, both were correct, but they are not that common or I should say inversion of the VIX's term structure is not that common and that's why I don't display the indicator as it is offering no new information.

The SPX/RUT ratio however on a short intraday basis is showing an earlier positive signal as the indicator didn't confirm a new intraday low at the "+" sign and then on the bounce off what I suspected was the first part of a "W" intraday base, the indicator gives another signal, this time negative as it fails to confirm the move higher and price responds by failing at the area.

 On a slightly longer basis at the top area there's a lack of confirmation at the SPX highs and again at today's highs (to the right, seen above this chart in more detail).

The longer cycle is clearly negative on a primary basis.

 HYG has been breaking down since the negative divergences late last week were mentioned and price is following. Note the lack of confirmation by HYG at the SPX highs here and the move lower in SPX and again intraday today just as the SPX/RUT Ratio indicator shows.

 HYG was under accumulation before price ever started to rally, one of the leading signal that we'd see a rally, as I said, "There's only 1 reason to accumulate HYG". Now as you have seen before, despite even the 1-2 min positives of last week, HYG is dislocated and leading price lower, it's just a matter of time asHY Credit has been one of the most reliable leading indicators.

And on a longer term basis, at every high HYG has fgailed and the SPX has followed its lead lower, the current signal is the worst failure of the year.

Pro sentiment is again negative today.

 At the top area it is clearly negative in trend  and...

Like HYG, at the last 3 SPX pivot highs, Pro sentiment has been negative at all 3 sending the SPX lower with the most recent the worst of the year.

Our second Pro sentiment indicator (for confirmation) shows the same selling in to the SPX's range here.

Ad in the October trend, it moved from confirmation to outright dislocation and leading lower and lower. These are the signals I sometimes wonder if we may go without, but just as the reversal process is there, they are there every time, part of the reversal process and part of the confidence I have in our forward looking forecasts.

Last you have seen how the SPX resolves whenever it disagrees with 30 year yields which is happening right now again, the largest of such dislocations since the September decline.