Leading Indicators: A Tale of Two Tells

April Fools! And the market is the right place to find all the fools you need. Today the headline scanning algos BOUGHT (literally) an April Fool's joke, the release of the Tesla model "W" which stood for "Watch", TSLA's "smart watch" which looked like this..

TSLA Model "W" release!

Yep, BUY FIRST, ask questions later, the very point that was the basis of our NFLX short entered on 2/26/2015 with a near +15% profit on the position all because NFLX popped higher on terrible earnings that no one bothered to read.

 NFLX's earnings gap, most likely to let middle men sell their inventory at higher levels they took a loss on with the October gap. We made our trade plan the day of earnings, we were patient waiting for the right timing and signals and ended up entering NFLX short at the very high of the move, giving us low risk and a current +15% gain.

So much for "Thinking for yourself" as the momentum monkeys followed the headline scanning algos in TSLA. 

The story, or a weak version of it can be found here via CNBS- sorry, CNBC

Here's the chart that saw the "Buy first, read what actually happened second crowd" send TSLA up nearly +1% on heavy volume in seconds or less...

How could I not lead with such a story that shows why this market is so doomed and what kind of traders we are actually up against in what I view as the opportunity of not only a lifetime, but multiple generations! I like our chances!

While the market spent a LOT of time at VWAP today (I suspect selling everything they bought  for Window Dressing as the quarter closed out yesterday), they managed to push the SPX green for the year. See last night's Daily Wrap for charts showing the major averages' performance for the year leaving the SPX red as of yesterday's close and today, GREEN, but just barely. APRIL FOOLS? I suspect so. The market hangs around VWAP either when they are accumulating or distributing, this explains the lack of intraday movement today after the open (as previously posted today)...

SPY intraday, even without looking at VWAP, it was clear that was what was going on today.

Anyone notice the lack of correlation in the major averages with Small Caps outperforming everything else by a good .50% or thereabouts?

Yesterday I said that I suspect Biotechs would see some of the strongest fund selling for Q1 2015 when the S_E_C filings come out in about 45 days, I stand by that and I think that we'll have a decent chance to enter or add to Biotech shorts as I suspect IBB (NASDAQ Biotech Index and XBI (S&P Biotech Index), both saw a Blow-Off Top.

 The big picture distribution on a 30 min IBB chart.

The near term picture of Window Dressing distribution in to the quarter's end.

However as I said earlier and often, "We'll let the trade come to us, I'm not chasing assets like the momo monkeys in TSLA today with no edge".

And judging by the intraday 3C charts, I suspect we'll get a bounce here and an opportunity to enter a tactical short as the strategic charts above show what looks like plain as day distribution as the Biotech craze seems to have finally ended. However there will be those that have been biotechs fans and likely bought near the top who will and seems did "Buy the Dip" today as the chart above indicates. Once again, this is the same crowd who chases momentum for momentum's sake like TSLA with no idea why and no edge in the market. Once again,  I like our chance going up against this crowd in biotechs. XBI has the same divergences.

GPRO is another I had set price alerts on and was aware of the bounce, I'm also aware of what looks like institutional quarter end selling and the "Dip" today, but again, there's no reason to chase it when it should come to us...

 The positive 15 min divegrence that caused me to set price alerts looking for the GPRO bounce higher and what looks like a VERY obvious bout of institutional selling in to quarter's end. Again as I showed yesterday, there's a reason smart money creates these bounces that cost a lot less to start and give them excellent demand and higher prices to sell in to which it appears they did just as the quarter was ending.

Did we miss our chance? First our best chance is when the broader market and the specific asset are moving together, thus signals of a serious imminent break in the market (something we are now monitoring) and the same in the asset we want to trade, are our best probability which means we need GPRO to bounce near term bringing us to today's intraday charts...

GPRO 1 min positive in to a rounding bottom...

And migration (strengthening) of that new positive divergence.

This one's high on the list.


Leading Indicators as posted yesterday were already telling me something which is why I dared to dream that we need not rush in last night's, Daily Wrap and to continue to press for patience.

In talking about Leading Indicators last night in the Daily Wrap, I said this,

"...with leading indicators and everything else, I have not felt like it was necessary to rush any positions, but as usual, let the market tell us, being that we're already in line with the highest probability outcome with core shorts."

AND...

 "Just like a 3C chart, we don't want to try to torture something out of the chart, it should scream and jump off the chart."

Which was a reference to the state of Leading Indicators; as of last night they weren't "Jumping off the chart" and telling me, "Right now is the time we need to make our moves"

I ended last night's Daily Wrap with the following statement at the end...

"My initial take is that it's time to really start looking at assets to enter positions, but we should have some time and need not be rushed.

We'll see how that opinion holds up tomorrow, but that's my call for now."

I think that if we had simply followed basic human emotion, than last night's extremely volatile overnight decline, would have had us jumping in to shorts on the open of today's US Cash market session, WHICH WOULD HAVE ACCOMPLISHED...

SPY intraday today from the early sell-off from the overnight futures session

...ABSOLUTELY NOTHING AND PERHAPS PUT POSITIONS AT RISK NEAR TERM UNNECESSARILY.

Believe me, I know the feeling of wanting to get the show on the road. I've been siting on some core shorts for quite some time and while I believe in them without a doubt and believe they will eventually, sooner than later, lead to one of the greatest opportunities seen in multiple generations, I also know that getting caught in a choppy market with increasing volatility (meaning increasing downside moves of disproportionate scale, likely taking out the entire years worth of longs in a single morning's gap down) without a VERY good reason, is just asking for unnecessary risk and possibly the least favorable positions at the least favorable entry.

I'm not going to post ALL of today's Leading Indicators because much of it would be redundant, but I'll post what I've seen , what I think may be important moving forward and what it likely means to us and actions or inaction at the moment.

Our Leading Indicators on the VIX Inversion Screen include the SPX:RUT Ratio which has shown a slight positive divegrence intraday vs. the SPX since the 10 a.m. lows. This is not a screaming signal for a buy, but it's also not a screaming signal to enter the shorts that I believe we should be on price strength AT THE APPROPRIATE TIME.

The second indicator on the screen is the VIX Term Structure which gives us buy signals when the structure is inverted with a reading above +1.0 which we haven't seen since December 16th, January 6th and January 15th...All bottoms that led to a bounce, but nothing more. The last time a truly meaningful signal was given on the indicator was October 15th, 2014. As such, it's a non-factor.

VXX (Short Term VIX Futures) has been lagging its normal correlation with the SPX, while this is not a signal of a bounce, it can tell us a lot about the market at certain times such as protection from downside risk is being bid. At present, we have seen this relationship for the better part of a month or more. My interpretation is that VIX based ETF's like VXX are being artificially held lower, below their natural correlation so they can be accumulated at the cheapest prices by smart money.

This is just but one of the reasons I believe this...

At #1 a former accumulation cycle and at #2 the distribution of that accumulation cycle. At #3, the current accumulation cycle on a longer term 30 min chart, meaning any signal here is strong to start off with, but this leading positive signal is EXTREMELY strong.

While this is pretty exciting for anyone who owns VXX or UVXY, I personally would wait a little longer before picking up shares for a new position. We had sold a UVXY position about 2 weeks ago or so for a +10% gain for a short hold time, but this is along the lines of the primary market downtrend expected since VIX-based assets move opposite the market.

These are the VERY short term intraday charts and why I think we have some time and patience before making the best moves, while broadly I can't argue with picking up VXX/UVXY long if I was to consider it a longer term position and I was okay with some near term drawdown which may last a day or a few days with what we know right now...

 Intraday 1 min VXX showing intraday accumulation Monday afternoon and in to yesterday's highs as well as the market's intraday lows, then another small distribution/selling area at this morning's market lows and throughout the rest of the day on a small scale as I suspect the market is moving laterally intraday to form a slightly stronger, but small (so far less than a day) base.

The 3 min chat is still an intraday "steering" timeframe or what I would normally consider market maker activity or very short term day trade-type activity. Again, there's distribution at yesterday's irregular highs which is likely caused by the NYSE blackout yesterday and again today we have a slight leading negative divegrence.

Some members sent me notes earlier about their take on VIX futures and the 3C divergences in the actual futures, I was interestingly looking at the same thing.

Carrying on with today's Leading Indicators...

HYG (High Yield Corp. Credit and one of the credit assets most often used for short term market manipulation) was posted in last night's Daily Wrap with the point being that it is HYG's actual price based divergence vs. SPX that acts as a leading indicator, but it's the 3C HYG divergences that give us the first head's up that something is about to happen.

While HYG has an enormous primary trend divergence vs. the SPX (a primary downtrend with multiple lower highs and lower lows), it's the near term that I'm focussed on as we try to pin down a pivot point in the market. VERY near term HYG still has a little upside support, although this has been in place for the last two bounces and has given ground since. The intraday chart today was in line, not telling us anything vs. the SPX in leading indicators, but HYG currently sits at about the same position it was at when it lent short term support to the market at the SPX MArch 26/27 base area that bounced , which is the move we expected to see come down early this week in last Friday's "Week Ahead" forecast as the market has come down since.

In last night's post, the 3C charts for HYG are posted.

 The intraday HYG divergence that was already negative yesterday led to a lower price movement today, this is what we want to see for a LEading Indication divergence vs the SPX, Additionally there was an intraday negative divergence today.

I suspect, as suggested earlier in the week , that we may bounce in to the close of this shortened holiday week, but in doing so, Leading Indicators will continue to deteriorate, giving us the strong, objective information we need to pin point a reasonable area to take action in the market.

 The stronger institutional timeframe of 5 mins shows a positive /Users/brandthackney/Desktop/hyg 3.pngdivergence just before the F_O_M_C knee jerk reaction higher and then distribution in to HYG highs following that as well as again this week with a leading negative divergence in place now, right in line with LEading Indicators deteriorating while the market either bounces in to the close of the week or holds roughly in the same area as there was quite a bit of VWAP pinning of the SPX/Futures today.

On a primary trend basis or our "Core Short" perspective, this 2 hour chart is one of the strongest signals we could look for. Note the time axis and the months involved in this primary (price) downtrend.

The red boxes show 3C distribution at the HYG highs and at the lows we see a small positive divegrence that has since seen distribution , now we have a new leading negative divergence in 3C as well as a series of lower highs and lower lows in HYG's price, a primary downtrend. As I said last night, the saying goes, "Credit leads, stocks follow".

The Pro Sentiment Leading Indicators are either slightly positive or in a flat-ish range, they really should have a clear leading negative divegrence vs SPX, this is something I suspect will happen as the week concludes, at least based on what we can see right now.

The one asset class that seemed to just blowout today was Treasuries and as such, yields.

The 2 year Treasury yield seemed to lead the group to the downside in what appeared to be the bond market's vote of no confidence in a F_E_D rate hike, however, there are so many different aspects including negative yields throughout the world, that it's difficult to apply the standard definitions of Treasury movement to these moves. However, we do know what the track record has been with Yields as a leading indicator.

While the 2 year yield is very sensitive to interest rate expectations, the whole curve dumped today (5 year, 10 and 30 year above). This is the kind of leading indication we have been missing for a broader, deep market decline and it's showing up now as theorized earlier in the week. From my perspective, a slight bounce in the market here with leading indicators making lower lows and falling out of bed with the market to extreme levels is the ideal situation to call a major downside pivot beyond simple February cycle stage 4 decline.

YIELDS

 This 15 min chart of 5 year yields shows the February cycle with confirmation at #1, the Yield divergence at the stage 3 top of the cycle at #2, followed by SPX decline with the March 6th NFP data briefly skewing yields to the upside @ #3. then a negative divergence in yield s as they moved lower at #4 leading to the kind of leading indication I look for at #5 as the next bounce failed with the market attracted to yields as if they were a magnet.

Our most recent bounce from last week had all of the signals that allowed us to forecast market downside early this week in last Friday's "Week Ahead" post and today led to another move lower in yields.

This is why a bounce in the market with a continued move lower in yields would give us an excellent pivot point for a serious downside move and allow us to enter short positions (as well as a few longs) at the best risk:reward ratio and best timing, especially helpful for those wanting to trade options.

This 2 min chart of 5 year yields gives you a closer look at how they act as a leading indication and why a bounce here with continued weakness in yields would be advantageous. Even the market holding in place with lower moves in Leading indicators would work, but a bounce would be better.

 Finally a closer view shows the SPX (green) reverting to the mean of yields, like I said, equities tend to follow yields like a magnet so a nice divegrence sets up a beautiful trade.

 5 year yields dumping intraday and the SPX following.

The same is true of 10 year yields, you can even see a little positive indication at the last base/bounce low (white) in the SPX at #3 and the negative signal at #4; no different than the negative signal at the F_O_M_C knee jerk at #1 and the bounce's top at #2.

30 year yields intraday.

As for our bounce, since the end of Quantitative easing, commodities that are reflecting a global slowdown on a larger scale, are once again working as a Leading Indicator, one which we have used for a long time until QE caused distortions in it, but it seems to be working well again and commodities are one of the L.I's that are showing the probability of a little bounce we can use to enter position like Biotechs short or GPRO as examples posted above.

 Commodities (brown) as an example of a Leading Indicator since the market's February cycle. If you look closely at the market's base from 1/29 to 2/2, you'll see commodities make a higher low, in fact a higher high as the SPX in its base makes a lower (head fake) low at #1, commodities were leading the market to the upside and doing what they should as a leading indicator. At #2commodities confirmed stage 2 mark up of the Feb. cycle and at #3 and 4 they started leading to the downside and dislocating from the SPX (green), which was one of numerous signals we look for in calling a top, this led the SPX lower as stage 3 top gave way to stage 4 decline. Since, commodities haven't recovered and have stayed in a leading negative position which is even worse on a primary trend. However at #4 and 5 they are leading the market again to the upside which is likely the bounce that would come in very handy right about now so long as the market , leading indicators and single stock assets all deteriorate at the same time, giving us the timing and entries we need for the best risk:reward positions with the best timing rather than being caught in what has been a volatile range throughout the entire year.

Here's a closer look at commodities leading lower at SPX bounce highs and calling a top in the bounce with today, leading higher.

Again just so there's no confusion, I WOULD NOT PLAY THE MARKET ON THE LONG SIDE HERE UNLESS THE SIGNALS FOR A BOUNCE ARE INCREDIBLY STRONG, THERE'S TOO MUCH DOWNSIDE RISK. Rather as has been the plan, use the bounce to sell in to or to sell short in to.

Commodities intraday vs the SPX giving a near term /small trend leading signal.

I'll update USO/Crude tomorrow, but for now today's EIA report missed as inventories saw a 4.77 mn barrel build, greater than expected so technically a miss, but lower than the previous week. Still this is the 12th consecutive week of larger than expected builds which is a stretch of consecutive builds that sets a new record that hasn't been seen since 1982 when records were first kept.

Crude rallied on the "No Deal" out of Switzerland with Iran. While I expect the primary trend to reverse and move much higher, in the near term I have expected a pullback and a bit more work on the base which looks fantastic. 

Even though Crude is a bit higher than expected as we were looking for a slight pullback,  it's still well within the larger base with the type of 3C divegrence that I'm talking about when I say, "Jumps off the chart!"Thus our 1/2 size long position looks good here and if we can get a little pullback, I'd likely add the rest of the full size long position when we saw accumulation of the pullback.

Right now I don't have any strong intraday signals of a pullback since the Iranian news is driving price which only pulled back a bit today after the NYMEX close, gut either way, USO, wherever we finally end up entering a full position should be a fantastic trend performer with such a beautiful base and 3C divegrence.

We'll see tomorrow what the charts look like as I'm sure the Iranian deal is not done just yet and may be the catalyst to a pullback allowing us to enter the rest of the USO long position on a primary trend basis. Of course all other trades from options to swing will be posted depending on what the charts look like (which may call for closing out the 1/2 size position to take some gains and re-open at better levels).

GOLD

Our last GLD update was on Monday in the Daily Wrap which dealt with the last position/trade idea TRADE Idea (SWING) Gold Short or GDX Short/ DUST Long. I'll update GLD and more specifically GDX/DUST tomorrow, but since Monday in which I posted numerous charts showing a probable decline in GLD along the lines of the original trade idea, things look worse for GLD any way, GDX/DUSt I imagine will follow suit, but don't have as strong of signals.

 GLD's large positive and uptrend is likely, but first it looks like a decent pullback which is what the GLD trade was based on. The 30 min negative divegrence in place right now is the broader pullback signal, since we have better near term signals for a pullback that I suspect will see downside as early as tomorrow.

 GLD 10 min positive and gains and the current negative.

The 5 min chart of GLD today went strongly leading negative as did the intraday charts...

This is the 1 min leading negative which is an excellent timing signal.

For now, I'd probably stick with the GLD/GDX short Swing trade, but at some point Gold looks like it will be a buy again after it comes down and we get additional positive signals.

Look for an update tomorrow that covers GDX as well (DUST too).

As for the broader market, we have some interesting internals tonight that may suggest a stronger upward bias than we are currently getting in signals otherwise which seem to be more focussed on selling at VWAP.

The Q's have a minor 5 min positive divegrence from the latter half of today. The IWM also put in some very short term, weak positive signals on a 3 min chart and the SPY put in some similar signals.

I would not take this as anything more than it is right now which are very weak signals in an overall very negative strong signal environment, perhaps that bounce I have been talking about and seeing some signs of.

The Index futures aren't looking great, but as posted earlier today there are 7-15 min charts that are just ambiguous enough that they could allow some higher prices to develop, it may take a little basing first, but again, don't miss the forest for the trees and remember that the broader signals as they have been all year through head fake bounces and all, are definitively negative.

Index futures overnight don't look great, but I wouldn't come to any near term conclusions based on that alone yet, we are still waiting for decent upside signals and some of the best as mentioned above ,maybe in internals tonight.

Here are examples of the near term "possibly" positive vs the significant , strong leading negative divergences, but remember this is in the context of multiple timeframe analysis.

 QQQ 5 min positive today. This is FAR from a base or significant divegrence, maybe enough to get a bounce going very short term.

On the other side of things, this 30 min QQQ leading negative divegrence is extremely high probability and reason enough to maintain the core short positions through any near term volatility, which was the most important thing to see this week as it increased as we had hoped and expected.

As for futures on a very short term basis overnight...

NQ 1 min through the cash market and a negative right now toward the overnight session. The other Index futures are mixed a bit more and ES for example is closer to in line.

As for the intermediate 7, 10 and 15 min charts, these are probably the best argument on the charts of the averages or Index futures right now for a near term bounce...

 Es negative in to Monday as expected on a 7 min chart and a slight, but noticeable positive right now to the far right.

 The 10 min chart negative in to Monday again, and a slight positive.

And of course the 15 min Es chart's positive is clear.

That's the best case at present on the charts of the averages themselves, not counting all of the other indications that we use to build a case.

As far as how this all ends, the 1 day chart has the strongest signals and the Es 1 day below doesn't need any pointing out of the divergence...

Although I did any way. Note this leading negative through all of 2015, this is in line with a massive top/distribution event that's much larger than past divergences at historical tops.

However, as noted, internals may be one of the better or additional cases for a near term bounce, very near term.

The Dominant Price/Volume Relationship came in on 3 of the 4 averages, again like we have seen so many times recently the Russell 2000 has no dominant relationship, but half of the Dow-30, 56 of the NASDAQ 100 and 189 of the SPX all came in at Price Down/Volume Up which is one of the strongest near term oversold relationships that usually sees a green close the following day.

*I should mention as to the longer term perspective tat we have been covering as well, only 11 of the Dow 30 stocks are above their 50 day moving average and less than half of the SPX-500 are above their 50-day.

This Dominant Price/Volume Relationship tonight fits well with the Daily SPX close and support at the 100-day moving average...

Although this average is only going to be tested so many times before it breaks, especially with the long term 3C charts and dwindling Leading Indicators, for now, the Hammer-like daily candlestick close is a bullish indication of a reversal, although it carries no target or timeframe beyond a reversal from yesterday's move to the downside.

In addition, of the 9 S&P sectors 6 closed red with Materials outperforming at a meager +0.29%  (barely a positive close for a leading sector) and lagging was Healthcare at -1.01, more in line with the Dominant P/V relationship.

Of the 238 Morningstar groups, only 92 closed green. This is also in line with a slightly oversold bounce, but not so much so that I would expect anything very impressive, perhaps just enough to allow leading indicators to deteriorate and a few select stocks to bounce enough to make decent short entries like GPRO and the Biotech examples above.

I think that will do it for tonight. The market is much easier and less time consuming when I don't have to dig so hard for the message of the market, but perhaps in having to dig so hard the message of the market is to not expect much on the upside and be vary cautious of the expected downside, the resolution of highest probabilities.

Have a great night everyone!