Daily Wrap

Since Friday, we haven't had any divergences of significance in the averages, however the Rounding/Head Fake top price pattern or "Igloo with a chimney", seemed to be the most appropriate probability and since then as this small flag in the averages (especially SPY) has developed, it has become a catalyst for such a move. I still think it likely needs to be done before whatever happens on Friday in Greece actually happens.

However a head fake move (the chimney price pattern), doesn't require strong positive divergences. There are usually some to tell us it's coming, but we actually expect to see negative /distribution in to such a move so today's price charts of assets that should bounce such as Transports with very weak 3C charts actually make some sense.

There's almost always some proportionality to the market whether between a trend and its reversal or the size of a divergence and the move that comes as a result. I mentioned earlier,  that I went through all of the Futures in every timeframe for the Index futures, for the $USDX (which was slammed today as expected with the second largest 1-day loss since March of 2009), the Euro and Yen futures, Treasury futures, gold and crude futures.

$USD's strongest 7-day counter trend rally since 2008 (yellow) followed by a reversal process of 4 days and the second strongest single day down in the $USD since March 2009!

Just imagine our TLT Counter trend bounce trade if everything lines up there.

The standout other than $USDX futures which I showed clearly last night as being in a reversal process and near ready to resume its trend lower, was actually Crude with numerous near term negative divergences, thus the Trade Idea: Adding to USO July 17th $20 Put post.

I said that I thought it was likely that either the API inventory data posted after the close today or tomorrow's EIA data at 10:30 were leaked. The result since the idea and these charts, USO Charts...

Crude Futures (1 min) after the close on the API print with a second weekly gain of +1.8 mn bbl after last week's +1.3 mn bbl gain. Crude futures dropped immediately. We still have the DOE's EIA report at 10:30 a.m. tomorrow, but I fell pretty good about the USO put position and not because of the build, because of the charts.

However the point is, I didn't find the usual divergences I would expect in the averages, in fact only intraday ones that actually ended up being correct today...

Just like yesterday's bottom call and top call, today's negative intraday divergence was right, but beyond a day trade, I wouldn't mess with it.

I'm still expecting the same thing I was as of Friday's The Week Ahead post, which again was the following (from Friday's post)...

"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."

Nothing has changed since then, in fact a catalyst or technical trigger has just become more clear to fill in the Chimney portion of the top/price pattern...

This flag-like price pattern simply needs a breakout above SPY $212.50 and that should be the catalyst to fulfill the remaining top price pattern. I have little doubt that we'd see the necessary distribution to confirm a head fake move, it's already clear in Transports which unlike the market averages, have a clear base to "BOUNCE" from, no more than that, yet they are seeing distribution in to any price strength as seen earlier today, Transports Even Uglier Than I Thought.

However the point of all of this chart studying, with the majority of watch list assets showing the same theme which is major weakness or what I'd call an unrepairable crack just needing a foot over the cliff on a bounce or what would be the "Chimney " price pattern/head fake move.

Imagine the market and the watch lists being like a long , thin cliff with a crack in it and all it needs is a little "risk on", a foot over the edge to make that Crack in to a rock slide...

Not to be a simpleton or a joker, this is essentially exactly what I'm talking about and I'll show you on the charts...

The damage is done, the cliff is not going to magically repair itself. For that crack and what comes next, we need some simple risk-just like walking out too the edge of a cliff and that risk is represented by the Chimney" portion of the Igloo/Chimney price pattern.

The concept is no different than the set-up to the largest SPX plunge we've had since the September Igloo/Chimney top that led to the October lows.

 Note the rounding top and then the Chimney. the reason the "Chimney" is a head fake, but part of the actual topping process is because it surpasses the rounding top's highs and makes traders thing that the top has been invalidated by a higher high. As I always say, "This is one of the best price-based timing indications we have".  Note how the market fell like a rock as soon as the Chimney had played out.

Although I suspect it was probably the biggest 3-week plunge in many years, unfortunately I can only put together a weekly indicator real quick and the last week of 3 is the largest SPX weekly decline in over 2 years!

So what I found while going through futures... It wasn't any real obvious Index Futures' divergences with migration and multiple timeframes, except for that very serious damage, it was a small, almost hidden divergence that is about appropriate in size for the kind of move we need and proportional in size to the "What comes next" divergences...

 When I teach about how to use 3C, I always say to go through the charts until one jumps off the screen and is screaming so loud you can't ignore it. THIS IS NOT ONE OF THOSE DIVERGENCES. You have to be careful not to try to torture the truth out of a chart, if it's there it's there, if it's not, move along or be patient. In this case we need to know what the probabilities are and while I wouldn't normally put too much stock in a divergence like this (as you can see on the same chart similar past ones didn't lead very far), it seems to be the closest thing we have to our scenario and when compared to the "What comes next", it's very fitting.

For instance...

 The 30 min NASDAQ 100 futures with some boxes drawn to show the approximate strength of the divergence at each point without drawing all over the chart.

 The 60 min ES/SPX E-mini futures again with a strong timeframe and a strong leading negative divergence.

Or even stronger on the Russell 2000 4 hour 3C chart with the last and only positive divergence to show up on such a strong timeframe at the October lows. The leading negative divergences are obviously not only deeper, but much larger in scope.

Finally the strongest of charts and the cleanest underlying trend, the Es/SPX futures daily chart which has just fallen off a cliff in to 2015. Compared to the 15 min positive divergence, this is the "What comes next".

As for internals, I'm not even sure they matter right now, but they definitely aren't singing. There was no Dominant Price/Volume Relationship among the major averages today. The S&P sectors had a dull 5 of 9 green and the Morningstar groups were also dull at 141 of 238.

What wasn't dull was the $USD's trend change since the topping process mentioned last week and specifically in last night's Daily Wrap I think it's important to look at the symmetry and proportionality of charts which can only be gained by looking at enough of them You'll realize that reversals are very rarely an event that happens, but rather a process that unfolds. 

However once unfolded, things can get pretty volatile. As mentioned, within the span of 2+ weeks the $USDX puts in the strongest 7-day move in some 7 years and the second strongest 1-day decline in just over 7 years.

As the market starts changing trends, we'll be seeing a lot more of these "super" moves". The 2002/2003 bull market base to the 2007 top took about 5 years to build, it took about 16 months to tear it all down plus another -15% with most of the damage occurring in only 8 months so you might say bear markets decline about 4 to 8 times faster than they rise and bear market counter trend rallies as you just got a "TASTE" of in $USD, are spectacular trades.

Futures aren't terribly exciting tonight thus far, but we'll be on the lookout for a probable TLT counter trend rally that I have suspected since it broke its long term trend line. 

That will do it for tonight, I don't want to load you up with unnecessary information that has no useful purpose. I'd just say, be patient and let the trade come to you.  You don't have to make anything happen, if you are patient and demand the best set-ups, the market does the rest.