Daily Wrap

Last Friday there weren't any strong short term signals that we usually have on Friday's that not only give us an idea of what to expect the following week, but more often than not, probably a good 90% of the time, the closing intraday divergences tell us how the market will open the following week, even last week over a 3-day holiday, but none of that information this past Friday which is why I decided not to issue any new trade ideas other than what already had strong signals and just wait through the early part of this week to see if we can figure out what the most probable short term course of action would be so we can set up our trade entries.

I did put forth an idea of what I thought might happen on Friday, but this was entirely based on the probability of a concept we see often, not based on objective data, it was a best guess. Here's the link to the forecast report posted Friday, The Week Ahead and although this would be my 3rd time posting this today, I think it's as close and reasonable as any other possibility and we have some objective data that does not rule it out, but supports it, although still not what I'd call high probability/Low risk...

"Note how the price pattern looks much more like a rounding top when Tuesday's decline is taken as part of the pattern rather than the end of the pattern. Furthermore the head fake "Chimney", which is where I want to enter watch list shorts that look more ready now than they have in some time as the market has been in an exceptionally tight range, never took place."

It's the Igloo/Chimney Top price pattern which you'll never find in a Technical Analysis book that teaches the same price patterns they have for a century, it's based on observation and Wall Street's understanding of how Technical traders will react to different situations and stimulus (not monetary), this knowledge and predictability of technical traders is used against them so frequently that it makes Wall Street predictable if you know how they operate and what to look for.

I was able to fill in some of the blanks today with several posts, but the most recent was the afternoon Market Update which showed this flag-like price pattern...

This is not a true bull flag, but many traders who see it will take to for that. I also showed in the same post how, just like the large triangles in the market averages through most of 2015 were engineered in a market forecast from April 2nd, these flags were as well and today's price action perfectly maintained them not only at the lower end of the flag's range, but at the upper end. That's TOO coincidental to be random price movement and the divergences at the exact areas of contact with the trendiness just seals the case in my view.

Why would this "seeming" bull flag be useful? If the Igloo/Chimney price pattern/top is correct, then we need something to launch prices in to the chimney area and from what I see, they (Wall St. and co.) are not even willing to use the normal go-to, first choice levers of market manipulation.

Here's some evidence of such...

 HYG (High Yield Corporate credit ) is the go-to asset of short term market manipulation as it is an institutional risk asset much like a stock like NFLX might be considered the same among retail traders. The safe haven asset in the same class would be "IG Credit" or Investment Grade, kind of like moving out of NFLX and moving in to blue chips or even treasuries as a "Flight to Safety" trade.

Note how HYG in blue follows or rather leads the SPX in green and the areas in which HYG fails or leads lower, the market is not far behind giving rise to the moniker, "Credit leads, stocks follow". How could this be or why? Simple, there are High Frequency/Algorithmic arbitrage programs that are meant to buy and sell based on what institutional assets like HYG are doing. Thus if High Yield credit is moving up, the assumption programmed in to the also is that Institutional money is chasing risk and as such, the altos buy stocks. When HYG is falling, the opposite assumption is true. These are not thinking machines, they are simple programs for a specific purpose, whether that be to follow a currency carry trade like USD/JPY as we have seen for so many years, Scan headlines or chase credit.

Thus ramping HYG makes the machines think smart money is in a risk on mode and they do the same in stocks except they can easily execute hundreds of trades per second, in actuality much more.

Note how HYG in blue fell below the SPX and is leading it lower.

On a longer term scale, what is the message of the market here where smart money is concerned?

Daily chart of HYG (blue) vs the SPX (green) First HY credit saw some massive de-risking and then followed or lead the market up for a while through 2014, but since about last summer, HYG has turned from an uptrend to a Primary (bear market) downtrend with a series of lower highs at the red hash marks and lower lows at the orange hash marks. The next major move in HY Credit should be to a new lower low and the market can't oppose HY credit for very long; just look at the change in character of the SPX/Market through 2015 with barely any movement. In fact, since the SPX Feb 25th pivot highs, the SPX has put in a return of exactly -0.10% as of today's close, meaning no movement whatsoever.

The only way I see HYG being enlisted to help is if it can be done at lower risk which means lower prices, which actually fits my initial working hypothesis which is based on a number of factors... It all starts with the flag though as Technical traders will assume it is a bullish , Bull-Flag. The truth is they (retail technical traders) are too lazy to even verify the volume confirmation of a H&S top, thus when price patterns formed what looked like a H&S top in 2010, they assumed it was a top, however one quick glance at the most important verification of such a price pattern, Volume, immediately showed it was either a false or random price pattern and prices moved higher snapping up shorts too lazy to use the only true confirmation available for H&S tops and bottoms are even more important to confirm with volume, but volume analysis is a dying art, lucky for us.

In my opinion, to make HYG less risky to act as a market manipulation asset, they have to pull price down and it doesn't hurt to get a little short squeeze going either, so my expectations right now are for a shakeout of the flag to the downside before an upside move in to the Chimney space with HYG's support, there's virtually no other support as the 3C charts made clear Friday.

The daily SPX...It's kind of hard to make these assumptions based on 1- day's underlying trade readings, but there are other things I've been patiently waiting for that are showing up as well. Here I have drawn the current Igloo/rounding top and where the proposed Chimney/head fake would be (roughly). Earlier today I explained the reason for such a price pattern, in short traders se a rounding top rollin over and go short, Wall Street runs a quick move above the former rounding top or the "Igloo" which creates a "chimney" false breakout squeezing shorts and pulling in new longs that become part of a bull trap for the reversal as these head fake moves are almost exactly preceding a reversal (down in this case). 

The flag which is now part of the rounding top would likely see a head fake/stop run below it's lower trendily, that's the only way I see the risk being lowered enough to engage HYG without taking on too much risk. The rest is drawn out with price in white, the price pattern/head fake in yellow and the resulting move at the end ... Down as easily seen on all of the important, highest probability 3C charts such as the 1-day SPPX E-mini futures...

I'm not even going to draw on the 1-day ES chart, the divergence and its strength should be that obvious.

I did draw a red box around the area in which ES's daily 3C chart goes in to one of the deepest leading negative divergences I've seen in futures. I often say, "This is the kind of 3C signal you are looking for, the kind that jumps off the chart, the kind you don't have to search for and when I find these, I never ignore them".

In any case there are other signals as well, you've heard me talk a lot about going through my watch list. I use to do this alone to get a feel for the market- several hundred charts a night at a glance and you see a pattern developing and it tells you what is happening with the market. Luckily I've been able to cut that down, but  what I've been watching for is the watch list candidates to show clear deterioration, as well as signals for a small bounce (with the market in to the chimney) which is EXACTLY where I want to short them at the best price, the least risk and the best timing.

I've seen this occurring with increasing frequency. Even though we already have 2 core short entries in transports, they remain one of my favorite short sale trend trades and I have said numerous times recently that I'd love to get one more crack at them for members who may be interested, but have not had the opportunity.

The very divergence between Dow Industrials and Dow Transports is the very essence of Dow Theory Non-Confirmation or "Trouble" in the market and that has been the case, so much so I created a custom indicator to make it easier to see.

Industrials vs Transports... they should confirm. In fact for a long time transports were considered the momentum trade and they led as you can see below with the red histogram above the zero line, but over the last several months, Transports have failed to confirm Industrials which by Dow Theory is a serious problem showing serious trouble in the market.

Still, if we could just get a bounce in Transports, we'd have a lower risk entry with much better pricing so I have been watching the charts along with all of the other watch list assets and I am now seeing a repeating theme...

 This is the 1-day, strongest 3C chart of Transports and it is leading negative, massive distribution, in fact transports are down almost -10% from the year's highs. Note the uptrend confirmation at the green arrow, the top and negative leading divergence (distribution) at the red arrow and a series of lower leading negative 3C signals and on a daily chart!

Thus these are the kinds of assets on my watch list, I just want to see a low risk/high probability entry...

Then recently this 30 min Transports positive divergence indicating a bounce we can use to sell Transports short a 3rd time shows up. The daily chart is much stronger and that's the direction of highest probabilities...DOWN, thus any short term price strength in Transports should be used to sell them/sell short. This is one of 3 things I have been looking for, the first is overwhelming damage such as you see on the daily chart above. The second is signs of a bounce to short in to as MOST  stocks will move with the market. I know the Igloo/Chimney thing must be tiring, but transports look like they are going to make such a move that if they follow the market as they do 2/3rds of the time, then we have good evidence for that as well.

Finally, it doesn't matter how much damage is done, if there's not good timing on the trade...

This intraday 1 min chart of transports is negative JUST LIKE THE MARKET IN TO THE AFTERNOON TODAY. As I said, 2/3rds of the market's stocks will trade with the market directionally.

Thus if this is representing a short term break under the flag, we have the set-up/stop run to get HYG involved and get the Chimney portion underway where you'll see numerous trades put out faster than I can type. I think this has to be done BEFORE Greece defaults this Friday unless they pull a miracle out of their hats, then that serves the same purpose as everyone knows Greece will never extract themselves from being a debtors' colony to the EU, in other words, any Greek deal would be a knee jerk reaction, but never a fix. This would be the 3rd deal and everything is worse.

NFLX is one I've been watching very carefully. I haven't put out recent updates because if price is just lateral, there's nothing actionable, but much like Transports and the rest of the watch list....

The daily NFLX chart is leading negative and NEVER confirmed, it's in a horrible position for a longer term trend trade.

However recently it has seen strong weakening on the 60 min chart suggesting it is finally getting ready to break. However , again like the market and the top of the Igloo's range, there's a range in NFLX and that's where we need it to be.

The very short term 2 min chart is all the strength it can muster which is good because it's almost no strength at all, however if we can get it in to higher prices on this kind of underlying weakness, we have a better entry, less risk and the best timing we can get.

These are just 2 examples and I suspect they are showing up with increasing frequency now because D-Day is coming for Greece and that will have untold effects on the Global financial system...Another reason I like Financials short.

As for the carry trade and the $USD unwind... we have seen what I have talked about for a long time, the strength of a counter trend rally. The $USD made the strongest 7-day move in 8 years, this as it is in a downtrend, this is why counter trend bounces must be so strong, to be convincing since the trend is bearish.

However as the $USD fails and rolls over, as we have always expected, it will make a new primary trend lower low and the carry trade at 100:1 or 300:1 leverage will see 1 pip= a 100 to 300 pip loss and things snowball out of control fast like AAPL in 2011 when it lost 45% in 8 months on reports Dan Loeb of Third Point no longer held AAPL as a top-5 holding. Few people have seen a panic in a 300:1 leveraged asset, but it's a snowball effect and killer.

As for the $USD, we forecasted the downtrend as well as the counter trend bounce, last week we forecast the counter trend bounce is ending which should send the $USD to a new lower low and the carry trade at deeper and deeper losses meaning the assets bought with carry proceeds like bonds and stocks will have to be sold, the only difference, they got a head start on selling bonds a while ago...

Treasuries as you may know are already in a downtrend while the SPX is flat.

As for TLT...

 The $USDX (purple) vs 30 year Treasury futures (candlesticks). Note the correlation. When the $USD drops, I suspect either both stocks and treasuries will drop, or stocks will drop and treasuries will follow after a counter trend rally which we'll know about soon...TLT Follow Up

You can see how the closing of the $USD carry has necessitated the selling of assets financed with carry proceeds, just look at the correlation before the $USD's counter trend bounce.

 30 Year Treasury futures 10 min 3C chart with a negative divergence as we expect TLT to come down (as per the TLT 6/19 put position).

The 15 min chart is also leading negative.

However as mentioned today in the TLT update, the move today was a little too hot/parabolic and we don't want an oversold condition causing a bounce before our short has reached its potential, thus some relief from the oversold condition makes sense.

The 1 min TLT chart shows that, although we already saw that earlier today. TLT should get a little rest before heading lower, then we'll figure out whether we can get a counter trend rally in TLT after the put position is closed. I suspect the answer is yes and a rotation between equities and treasuries will take place for a time just as Treasuries fell first as seen above although they outperformed equities last year.

 As I said last week, the $USD looks to have made its high intraday and is in a reversal process. IT will likely be choppy in the area and this 10 min chart suggests a choppy bounce in the reversal process.

However, the Euro moves opposite the $USD and near term the Euro looks like this...

Carving out a bottom with a leading positive divergence, further suggesting the $USD is topping from its counter trend rally and is going to dump to the downside soon.

This stronger 15 min chart shows not only the negative divergence in $USDX, but the flat/lateral trade of a top-FAR from the 8 year record pace it was moving at last week.

The 60 min chart is also calling for downside as it never confirmed the rally/bounce, after all, it was a counter trend rally, NOT a reversal.

 And the $USD's daily 3C chart with accumulation as the carry trade was being started in white at stage 1, mark-up/confirmation at green/stage 2 and distribution/top at the red arrow/stage 3. Now the $USD is leading negative.

A closer look of the same daily chart...

You can see a series of daily highs, Lows, Lower high, lower low and another lower high at the end of the counter trend bounce. Also note the last 4 days' candlesticks, no higher highs, just bearish long upper wicks. It won't be long before the $USD is making new lower daily lows.

As for some of the other Leading Indications and signals...

 Our custom SPX:RUT ratio which failed to confirm at afternoon highs, there were quite a few good signals for an afternoon pullback and I know several of you traded it with double digit gains so thanks for writing in, glad to hear you could use the information.

Our Pro sentiment indicators have been failing. This one shows the last mini-accumulation cycle on May 6th/7th and the indicators leading dislocation vs the SPX in green.

This is our second Pro Sentiment indicator, also showing them unwilling to take on risk (see HYG discussion above).

And even though it's time has passed due to the carry trade unwind, the last week+, Yields have been acting like the fantastic leading indicator they were and will be again after the unwind.

 For now, 30 year yields (red) are leading the market just like they did as a leading indicator for a couple of years-one of my favorites. Yields as a leading indicator tend to act like a magnet pulling equities (SPX in green) toward them.

Here's TLT inverted to see the 30 year yield in to the close as Treasuries close for trade at 3 p.m. Note the leading yield to the upside. Remember yields move opposite Treasuries meaning a move down in TLT as we expect sends yields higher and if they continue to act like the leading indicator they have been the last couple of weeks, that's further evidence of the near term market expectations I SUSPECT at this point, but I'm keeping an open mind to wherever the data leads me.

INTERNALS...
Today was pretty dull for internals outside the TICK Index intraday which really showed why it's a useful tool. As for the Dominant Price/Volume Relationship (which is a screen I created that looks at the dominant price/volume relationship among all of the component stocks that make up an average among 4 possibilities for each of the averages, I'm looking for the dominant one across all of the averages), there was none today.

Among sectors, we are selling a little overbought intraday with 8 of 9 S&P sectors closing green, which may fit well with the stop run theory below the SPY's flag.

Morningstar Industry groups throw a bit of a wet towel on that probability though with only a meager 155 of 238 groups closing green, not quite at an overbought area.

Among Futures thus far, the $USD made a new intraday high for the new week, but is looking a bit weak right now. Remember it should be choppy, but it is at the end of the counter trend move and should be seeing a renewed downtrend.

Oil has a near term negative divergence so I fully expect it will continue coming down as the recent trend has made clear. Hopefully we'll get a shot at a put/options position to add to the equity short.

I already addressed gold and what I suspect is going on there, but I'll be watching gold miners closely as I think we'll have a decent GDX or NUGT long position open up in the next day or so.

Finally as for Index Futures, besides their big picture charts which are horrendous (see above), the very near term/overnight looks just slightly weak, nothing I'd get too excited about, but again, it may be enough to break below the SPY's flag/support area and get the party started. I'll check on them before I turn in, but I really don't expect much movement until the cash market opens, unless there's another unsourced Greek rumor like the one that moved futures on TWITTER of all places!

Have a great night and be ready for a lot of trade ideas coming fast. As I said, I suspect they'll want to wrap up risk BEFORE the Greek IMF payment deadline, 11:59:59 p.m. June  5th (Friday).