Daily Wrap

I'm not big on starting the week with a day like today which really had nothing to do with any probabilities that really matter, but more like the probabilities of trying to predict which way a child will scribble next, it's not that important (although it does have its uses for short term traders and tactical planning). Before the bounce off the 1/29 to Feb 2nd base even got started, we already knew what the highest probability resolution to it would be, that it would be sold in to and make a move lower, nothing has changed in that sense since then and this was not based on the two previous bounce attempts of 2015 (1/6 and 1/12-1/14 bases) failed, it was based on the charts. I don't like to complain, it's not good karma, it's not anything anyone wants to hear, it's just frustrating to put so of my day in to what is a "possible" outlier event that can be useful, but has very strong probabilities of reverting back to the highest probability mean (in other words a possible small intraday or 1 day bounce that will almost certainly fail and turn back toward a downside resolution that does matter). At the same time I have to keep an eye on it, you saw Thursday and Friday's extremely strong and negative moves, if I had not been paying attention to intraday activity I would have missed them and they were and are significant.

From what I gather from my sources, retail went in to today long and was quite disappointed in the outcome, from at least one report the feeling was "Something isn't right if the market can't be ramped on such thin liquidity" and while I would not have been long in to this morning (playing against the strongest probabilities), there's a part of me that agrees that there's probably a lot more fear over Greece than we may realize, fear that became apparent today in the  spreads of Portuguese, Spanish and Italian bonds at 4 month highs, in other words, someone is quite concerned about not only Greece, but the fallout it will have on the periphery of the EU, many of which have debt obligations to the Troika as well. What the effect could be on the EU banking sector is a stress test I'm,m sure was never conducted, in fact the ECB didn't even include the most likely and now very real scenario of deflation so the results are garbage, but the question of the effect a Greek exit from the EU is a very real one with very real consequences for the EU banking sector and more so the unintended or unforeseen consequences of such.

Did you know that when we had the credit freeze in 2008 and all interbank lending stopped, it wasn't just banks who were effected? Much to Bernanke and Giethner's surprise, GE was about a week away from not being able to make payroll and they're not a financial institution, the same story for many others in unrelated industries.

As suggested for the Week Ahead /Monday, there was some early strength in the day, more relative to where the Index futures were just before the cash open and as suspected that morphed in to later day weakness around 12:45, however it did not look at all like what I was expecting to see as I've probably beat to death today.

Of all of the averages intraday today, Transports (salmon) and small caps/Russell 2000 (yellow) were the worst performers on the day. As mentioned in the A.M. Update this morning, the Baltic Dry Index hit what appears to be the lowest price ever for the Index or right at a tie with 1986 at 554 and this isn't a one off event, this is 47 of the last 51 days the cost of shipping Dry bulk has slipped. Transports haven't seemed to react much to the deep slide in BDI, although dry-good shipping is just one facet of transports, but the message of the market must be clear despite an oversupply in ships, the global economy as confirmed most recently this weekend by China's import/export data, is in a slump.

Additionally macro data has fallen way off with the worst start to a year in over a decade, forward 12 month EPS have fallen way off and the previously known tight correlation of the SPX to the F_E_D's balance sheet is starting to see a dip in the ROC as the F_E_D has ended QE3. There's not much to justify these valuations if there ever was.

Near term while my late day conclusion was that there's a higher probability of very near term bounce strength on an intraday basis or more or less what we expected today and a return to the mean (down), price action itself was very reminiscent of distribution , for example ES and its VWAP...

With ES breaking below VWAP and its standard deviation lower channel, the ramp back up to VWAP is where market makers and specialists would be trying to unload inventory for their clients as that's the measure of a decent fill.

While there were some odd indications, especially among leading indicators during the day, interestingly toward the close some of that strangeness that didn't make a whole lot of sense with a  declining market, worked itself out to a small degree, while not falling in to line with what normal expectations would be, there was improvement.

Looking at leading indicators, just remember I suspect both TLT and VXX want to accumulate at lower prices to be ready for the market roll over and the end to the 1/29 to 2/2 base/bounce cycle, so them pulling back , although not making a lot of sense in the normal order of leading indicators, it would make sense in the case of accumulation, smart money will very rarely chase an asset higher, instead they knock it down to accumulate or ramp it up to distribute, the opposite of what many technical traders think when they see prices down on volume (thinking it's smart money, they were already out of the trade before that every took place).

 Our custom SPX:RUT Ratio showed early non-confirmation, shortly after that the SPX started losing ground intraday.

As for the longer term (cycle) view...

 Here's the most recent base area, not the indicator "should" be confirming at a higher high, it's at a lower high so once again, these two indicators are right on track with this bounce being near the end of its life span and the market heading back down toward the probabilities that were in place before the bounce even started.

 Pro Sentiment indicators threw me earlier, as you can see, when I looked at them they were at new highs on the day as the SPX was at lows of the day, that didn't make a lot of sense unless the lows in SPX were not being confirmed and a bounce was expected, I'd say that it is still expected, but we may be should moderate expectations and kind of split the difference as the indication gave up ground in to the close which is the most important area of the day.

 This is HYG (High Yield Corp. Credit) which is often used as a ramping lever, but when it negatively diverges with the SPX, it's a great signal for lower prices. Note that for this cycle (again 1/29-2/2 serving as the base), HYG has been used as normal, which is why I often say, "There's only 1 reason to accumulate HYG", to ramp the market! However although it may not be as obvious here, it is turning and today it gave up the leading premium it had above the SPX.

Here it is intraday...

HYG in blue/SPX in green, note the early strength in HYG, then it went negative and ended worse than the SPX which ramped up to VWAP at the close.

If HYG is rolling over and showing distribution which I'll show you, then it would only be natural for VXX and TLT to accumulate. The only thing about TLT is that I suspect at some point the dynamic is going to change as duration risk is shortened or put another way, a rotation out of bonds which outperformed equities in 2014 (the loss in yield was inconsequential to the bond's price gain), but with the F_E_D closer to a rate hike, duration risk is key and I'd think most would want to lower it to at least 5 years if not 2, but as I also made clear in the post on all of this, Treasury Futures/ TLT Update, this isn't an easy topic considering the unprecedented Central bank activity which soaked up most of the high quality collateral banks are looking for. While I'd think it's a possibility they'd like to get their hands on some high quality 30 year bonds, I also think that this is just an opinion or a possibility and it's probably more of a risk to hold such a long maturity with rising rates. One thing is for sure,  the very positive 3C activity of 2014 in bonds, especially TLT, has shifted dramatically toward the negative which is what the post linked above is all about.

As for HYG's 3C charts, I warned they were deteriorating last week and posted them, this is a 30 min in a leading negative divergence.

As you can see, there's a clear divergence and distribution moving out of HYG, suggesting it will no longer be available as a ramping lever, thus the move down today in HYG's price which is the actual mechanism, 3C charts are just the early warning of intention, would be appropriate and expected.

 The shorter charts would act as the timing charts as the longer term trend above is toward distribution. Here an intermediate 10 min chart is leading negative and sees one of the stronger distribution areas at a head fake move in yellow.

These clear negative divergences in HYG go right down to the 3 min charts, I expect we'll see it leading the market lower shortly and as a leading indicator we want to see a divergence between HYG's price and the SPX's price with HYG lower.

Again as explained above, if HYG is going risk off as a HY Credit asset or a risk asset that rallies with equities, we'd also expect to see the flight to protection (VIX futures) and the Flight to Safety (treasuries like TLT) accumulated.

This is the SPX in green intraday and I have inverted its price as HYG and VXX trade opposite each other so to see the relative performance I invert the SPX's price and if relative performance between the two is exact as the normal correlation would be, they'd move exactly together.

That's not the case above/today, VXX (Short term VIX futures) is showing relative weakness vs the SPX. At the red horizontal trendline VXX should have made a higher high in the afternoon as SPX was making an "actual" lower low (although because of the inversion, it looks like a higher high in the SPX). After looking at the charts as well as HYG and others, it's my opinion that the under performance is due to trying to get VXX as cheap as possible, thus a pullback would be very useful for those accumulating protection for a market downside move.

 Looking at VXX and its leveraged derivative , UVXY, you can see the SPX's base and start of the cycle at 1/29-2/2, that is also VXX's top and distribution, but the recent positive divergence to the far right suggests they are getting ready for the market to move lower and just like last time to the far left, they want to buy at lower prices, not chase them higher, especially in the size they trade.

The 5 min VXX chart shows the tail end of the SPX's base in red to the left on the time axis and the negative divergence as there's rotation out of protection and i to risk, however once again we see the same positive divergence at the same place, the rotation out of risk and in to protection. I suspect the under performance seen above is purposeful as there's also a small intraday negative divergence which is probably why there was under performance in an effort to knock VXX prices down as cheap as possible to accumulate in larger size.

The VXX 2 min intraday chart shows the same, accumulation at cheaper prices and a small negative divergence intraday, not enough to be distribution, but more of a steering divergence.

At least I feel a bit better after seeing all of this closing activity than earlier today when not much was making sense and it was a lot of work to identify what amounts to a scribble in the big picture or even in this small cycle's picture.

As for the averages...

We didn't see the same really strong negative divergences that were seen in Tech and NDX Thursday and then in almost everything else and much stronger Friday, but that doesn't mean we didn't see strange activity, it's just next to last week's which I've rarely seen, it's not as extreme, but still there.

The positive intraday divergences are still there, some stronger than others (I mentioned several times the SPX has the best looking chart relatively speaking)...

 SPY intraday 1m negative Thursday and Friday in to the highs and a positive today as was expected early Monday, I guess we just have to stretch the timeline out from early Monday to a bit longer (Monday/early Tuesday perhaps) followed by a larger negative which HYG is already telegraphing. It probably goes without saying that since VXX and typically TLT move opposite the averages, a bounce in them would mean the pullback needed to accumulate VXX/TLT at lower prices.

 The 1m QQQ is there, it's a bit more sloppy, the red "pb" stands for pullback, which created that "W" base look intraday with the top / middle of the "W" being at the "pb" divergence.

And the IWM 1m chart which is almost perfectly in line with the move lower except at the very close where it diverges positive a bit.

You may recall that before we even had a bounce off the base lows, we already had a minimum target which is based on the mass psychology of technical traders, there was a descending triangle and we were looking for a Crazy Ivan shakeout below and then a move above (completing the Crazy Ivan shakeout with both moves being false moves), that's exactly what we got.

Here's the descending triangle with the Crazy Ivan with the first shakeout running all stops below the triangle for all of 2015 (lowest intraday move of 2015) and then the breakout above the triangle, at this point both sides of the triangle are cleared. However as I mentioned late last week, I'd be remiss to preach about head fake moves all the time and not show what could very well be a head fake move in the making, although I don't see the strength there and HYG is fading, it is the most obvious head fake target of the year...

With the apex of the triangle taken out, the trend lines can be redrawn and you have a choppy range and a well defined range through the entire year, a move above that would drag bulls back in the market. Technically Friday's price action could have been the head fake as volume was higher and it did fail, but usually a head fake move is there for a reason, it's convincing for a reason, to draw traders in to a trap (bull trap, which provides the same downside momentum as the small stop run to 2015 intraday lows below all support for the year provided upside momentum and the proof was in last week's Most Shorted Index Squeeze 4 out of 5 days.

Although my gut tells me that because of the weakness in the last 2 bounces and the divergences in key areas that it is likely not a probability, I know better, I know it's a level traders will watch as a breakout move from a long lateral range and thus serves a strong purpose in a downside reversal (momentum as new longs are caught at a loss when prices move back below or in to the range). Unless I see stronger evidence, I'm just going to say we'll deal with that bridge if and when we get there. There are quite a few things that we would normally expect to happen that are just as high probability that haven't: The Santa Claus rally failed, the month end/quarter end/year end window dressing failed to move the market, the January effect failed and the seasonal adjustments to macro data the first quarter that always make it come in way stronger than it actually is have failed as we have the worst macro data start to the market this year in more than a decade, so many commonly held assumptions have been shattered over the last 2+ months.

Now, for the rest of the charts of interest...

 This is the "strange" activity from last week, but includes the entire cycle from the 1/29 to 2/2 base and the current leading negative divergence below levels from the base area which is largely because of the action Friday alone in that heavy distribution.

I was going to stop at these charts since they have to do with the current cycle, but after spending so much time today on essentially a probable scribble move, I thought "we need to back up to the bigger picture once in a while.

 Remember this cycle's positive divegrence for most of the averages only went out to 3 min as you see on the chart above this one, note NO positive on the 5 min and all of them have been in leading negative position since the start of the bounce, distribution in to anything resembling higher prices, even locked in a range.

 This SPY 15 min chart is hard to scale to see the leading negative divegrence, but just pat attention to the direction of the price trend and the 3C trend and relative price/3C levels from left of the chart to right.

Especially the most current leading negative at this particular cycle's area right now.

The 15 min chart with a broader perspective back to the October lows, the last strong accumulation area and the current major cycle in effect other than the 2009 to present cycle, the leading negative divergence should be very obvious, what is important is where it gets really bad.

SPY 6 hour needs to commentary, however please note the divergence at the last red box to the right.

QQQ 2 min and that strange, strong distribution last week, this created a leading negative way below anything on the chart.

QQQ 5 min, again no positive a the base area for this cycle, the last one was at the 1/14-1/16 area, but note the distribution on this cycle.

Again the 10 min chart is hard to scale, just pay attention to price vs 3C and their trends

QQQ 30 min since just before the October lows (he divergence and Bullard comments leading to those lows), the accumulation at the October lows and of course, what happens next.

 QQQ 60 min speaks for itself, you are probably noticing a lot of charts with intense increases in 3C's downside ROC on a lot of these stronger/longer charts. Wonder why? That's a rhetorical question, just think about F_E_D actions and programs.

IWM 3 min and the unusual activity from last week, also the base, every chart has the base at the exact same place, 1/29 through 2/2 . Also the current leading position since last week's activity is almost solely responsible.

 IWM 5 min, again focus on the trend.

IWM 10 min

IWM 30 min from the October lows.

IWM 6 hour.

As for internals tonight, the Dominant Price/Volume Relationship was dull, Price Down/Volume Down, but as some retail sentiment indicated, "not being able to ramp the market on such a thin market and liquidity is a little out of the ordinary". There were 19 Dow stocks, 61 NDX 100, 973 Russell 2000 and 164 SPX-500 in the category that is the least influential on a next day basis. I describe this relationship as , "Carry on" as in keep doing what you were doing, it doesn't have any overbought/oversold bias and as such tends to be one of the most "blah" relationships,  it is however the thematic relationship during a bear market.

As for the S&P and Morningstar sectors and groups, the S&P sectors came in at only 1 of 9 sectors closing green which was barely green, it was Energy at +.10% and the laggard was Healthcare at -1.18%.

Equally as dull, only 51 of the 238 Morningstar Industry/Sub-Industry groups closed green, this may suggest a bit of an oversold condition although not showing up in volume. If I only had these 3 indications to look at, my opinion would be that we are in a leg down and there's more to go, at least until volume rises to the level of short term/mini-capiitulation. Who knows, that may indeed be what's going on.

I took a quick look at some of the breadth indicators and here's what you may not have known that you should know. Of all NYSE stocks, only 48% are trading above their 200-day moving average, if you look at the market as a market of stocks rather than the weighted stock market, we'd be in a full blown bear market, that's the weakness in the market that just needs one good knock like Lehman or Greece.

The momentum stocks represented by Stocks trading 2 Standard deviations ABOVE their 40-day moving average that use to tun at about 40% are at a mere 13%, so much for the momo crowd and game.

The Cumulative 4 week New High/New Low Index that has only diverged 2x in years, the last at the September highs which led to the October lows, are divergent again, now for the entire year of 2015 and well below the previous divergence (making it worse).

And the NASDAQ Composite's Advance/Decline line will make the Percentage of stocks Above their 200-day m.a. make sense, this is all NASDAQ traded stocks and assets, over 3000 components...

Note the A/D line in green vs the Composite in red, was in line and moving with the Composite through 2013 before trouble started in 2014, now the A/D line is well below the Composite.

Finally, as for Index futures tonight, there's some negative activity, although it's on short term charts, but we saw Sunday's open start with short term negative activity and look how that ended up, negative...

Here's an example using NASDAQ 100 futures 1 min.

All Index futures are seeing similar activity which started with the move up to VWAP this afternoon/close. It looks like price is starting to respond to the divegrence. At the 5 min area the charts are mixed from slight positive to in line to negative, so that may be what was a bit confusing about today and representative of tomorrow, but as far as the rolling over of this cycle, the 7 min charts are all negative and this gives you a good feel for the action there...

TF 7 min, note the rounding top and divergence, there may even be a "Chimney" / head fake.


I'll check in on futures again later, if there's anything interesting I'll bring it to you.

Keep your eyes and ears on Greece, that's what the market is upset about right now and taking it out on the other PIIGS nations as well as the European averages.