Leading Indicators

Again, like the last update, I don't think this changes anything, at least not as of what we know right now.

What we know right now as the highest probability in both near term market action, what comes next and highest probability market action would be as follows...

Despite the damage intraday described in an earlier market update as seen on the SPY 2 min chart, right now it's a non-trending event or noise, what I'd basically call a waste of time in understanding and getting to larger, more lucrative objectives, but does show there's something that's not right with the market, something the market is not happy with. This "could" continue to develop from here, but as of now it's more or less noise from my perspective, although it may be an sign of things to come.

What we know from last week's analysis is the positive divergence at area "A" was based on a truly oversold condition in the market. The divergence did not reach its full potential as something changed on January 8th in intraday charts and not long after in price itself. It would appear to me from last week's analysis that the divergence at area "B" is essentially a "do-over", it doesn't appear to be connected with area "A" and it is still intact, strong enough to bounce and we've already covered some basic minimum target areas for a base/bounce of this size.

In multiple timeframe analysis, the longer charts are showing the stronger trend and as you are probably well aware, there can be and always are multiple trends all at the same time depending on your perspective and which timeframe you are trading in, this is essentially what Dow Theory is all about, classifying short term, Intermediate and Primary trends as all 3 (or 4 if you count sub-intermediate trends) can and often are different, such as a primary trend with a short term counter trend move (bounce or decline.

Those longer term trends at 10-15 minutes and longer have deteriorated badly which is why in my view, the safest, most effective trade is letting a bounce come to you and shorting in to the price strength as the larger underlying strength to support such a move is simply not there. This is essentially where we are now in looking for an upside bounce to use as a tactical entry/exit to set up the larger strategic view which you can see above on 10-15 min charts, but really...

It's  charts like this SPY 6 hour showing the very intense deterioration of the market and especially in to the Broadening Top price area.

I'd say that's what we know right now as far as probabilities.

Looking at Leading Indicators, there aren't to many surprises, but even if it's not a surprise, I think it helps to better understand and give more evidence to the charts above.

 These are fairly new indicators in our Leading Indicator layout. Above is the SPY (or SPX- it doesn't matter much) and below is the VIX Term structure. When the VIX Term Structure has inverted enough that it has usually resulted in a move higher or a buy signal, I've painted those bars white on the indicator and on price above. There's a correlation between how long the signal is and how far the move can travel as you can see , not one has been a misfire yet, although sometimes they run a little early.

I combine that with the SPX:RUT ratio which is essentially a confirmation/non-confirmation signal of price movement, often lining up with the VIX Term structure signals above.

 On a 4 hour chart going back to November you can see the obvious VIX buy signals in white, but what gives them more credibility is the SPX:RUT Ratio putting in a divergence in to the buy signals, rather than confirming the downside price move in to those Term Structure buy signals, note the red indicator contradicts price in to those areas, giving a stronger, more reliable signal. The last VIX Term Structure buy signal to the far right is missing that additional confirmation.

A closer look at the area shows the SPX:RUT Ratio initially giving a positive signal in to the start of the white "buy" signal, but quickly fails to a small negative reading.

Again I don't think this is enough evidence to change any trend expectations, even very short term, but it does seem there's some change in character to the weaker side as seen this morning in some of the 3C charts and intraday breadth (TICK).

 While short term VIX futures are in line with the SPX (green and price is inverted to show the normal correlation), the Spot VIX above (light blue) is underperforming on an intraday basis, which is in line with the latest findings that the market is or has put in intraday lows, at least as far as we have gone today, meaning the morning decline looks to have put on the brakes and got itself back together. Looking at intraday price since around noon time looks o confirm that observation from earlier.

 Many other indicators like HYG are nearly perfectly in line with the SPX (prices not inverted here). The degree of algo correlation between assets like HYG and the SPX is actually quite impressive, if not nearly totally computer driven, that's what makes divergences between the two such excellent leading indicators.

 Some HY Credit is not looking great, but it's not screaming, "SELL , SHORT", I wouldn't expect it to until a bounce/higher prices are achieved.

We also can't ignore the fact that higher prices thus far this year have been met with aggressive selling so only time and movement will tell.

 The intraday 5 year Treasury yield has not only seen the SPX (green) revert down to yield's lower levels, but is now showing some intraday upside support, as small as this is.

The 30 year yield however is a bit different as SPX prices did catch down to Yield's gravitational [pull on stock prices, but rather than stay in line or leading like the 5 year, I'd say this is a negative dislocation. As I said last week, I would not be surprised to see a bounce and yields continue to diverge negatively from SPX price, this would be what Leading Indicators do.

So while you may or may have not learned something new, at least you can hopefully see why there's confirmation of more than 1 trend, whether very short term, sub-intermediate and although I didn't get in to primary trends, the evidence is easily there supporting the 3C charts above that represent the long term primary trend.

There's also the same evidence of something the market  is not happy about, although at this time it doesn't appear to be enough to change any of the trend projections, it does seem to be a warning signal and confirmation of the plan to use higher prices to our advantage-selling/shorting in to them.