Market Update

I get the sense that today, from my perspective is going to be fairly dull. A counter trend bounce or a decent bounce such as the one since the 10th is worth trading in that particular environment, you may recall we had IWM calls and let go of them last week on Tuesday for a nice gain and despite what the rest of the market did, as of Friday, those calls weren't worth a penny more than Tuesday. I'm a big believer in not taking the , "Well lets see what happens" route. The IWM was showing good divergences and negative at that so in my view, taking the gains off the table Tuesday was the right thing to do if probabilities weren't pointing to further gains. Holding beyond Tuesday (IWM) would have been pure open risk with almost no god reason to hold so "Lets see what happens" was not a good idea.

As far as the bounce, which I think market-wise may have been best summed up by yesterday's futures post and more specifically, Market Update: IWM Can Still Bounce (excerpts):

"The charts since that dump look like this so the IWM can still bounce, although a few more of those and the bounce will be a lot lower....When I say the IWM can still bounce, personally this is not a trade I would try to be catching (bounce), it sets up the trade I would try to be catching, (SRTY dd to/IWM short in to some price strength)."
And so today, while we wait for a base to set up for a bounce, yes it can be traded, would I consider it a high probability/low risk trade (bounce)? NO. Does that mean probabilities are pretty high that most of today will be rather boring until/unless we get that bounce and then have an opportunity to short in to it? Yes.

Boredom is the killer of portfolios, patience is the builder of them so I'm just throwing that out there for your consideration. This does not mean that I might not run across something that looks interesting in the meantime, I'm just trying to anchor expectations a bit as I see it now.

I still don't see any action or lever pulling in HYG, which is a short term lever of market support/manipulation.

I think the pros are starting to fear the reduced liquidity more and more which is something I was going to mention any way.

Be careful with the assets you decide to trade, make sure there's enough liquidity. I've had some nice winning trades that I simply could not get out of without taking a wide bid/ask spread from specialists/market makers because there was no liquidity other than the last line of liquidity, but you're trapped taking the market price and the bid ask spread can be so wide in times of increased market volatility that a winning position can turn to a losing position just because of the wide spread as an effect of low liquidity, so be mindful of that.

As for the market, the bounce case was made yesterday in our Futures Update and specifically on the currency side of things, USD/JPY and EUR/USD.

 The "Dump" mentioned above is the USD/JPY as you see above from yesterday, today as we suspected on VERY minimal evidence yesterday in the Futures Update post, it looked like USD/JPY support would be nearby for the expected bounce which the IWM had been giving the best signals for.

This is a 3 min chart of the USD/JPY in candlesticks and Es/ SPX Futures in purple, not the sport and leading at that in USD/JPY, however I think this is because the market hasn't put in a reasonable base for even a quick gap fill bounce quite yet outside of the IWM which is today's leader in relative performance probably for the first time I can remember in a week or so.

As far as taking market related (market correlated) action, the only thing I really need to know right now is that the 5 min charts, unlike the NASDAQ futures' 5 min chart as of yesterday, are not leading negative.

 This is the NQ 5 min chart which was deeply leading negative yesterday, price moved in the direction of the divergence and right now it has a small positive which is less of a concern, really I'm looking for the negative divergence on the 5 min chart for new/additional positions unless you are interested in trying to trade a probable bounce, which as I said, I don not see as a high probability/low risk trade.

You might be wondering what all of the indicators on the bottom of the chart are. I decided to start using some additional indicators, one in which I developed a trading system around before realizing that you can't beat HFT systems at their own game and you need to be more of a detective, but it's still useful. The top is a Stochastics/RSI which can be useful for near term indications, the lower is Stochastics which is what I designed the automated trading system around and backtested it.

 I don't know if you see what I see, but this is a very long Stochastics period/setting and it takes some getting use to understanding how big the cycle you are in is likely to be and which timeframe is most appropriate, This is the 60 min chart of NQ/NDX futures.

However rather than use the indicator as normal as an overbought/oversold indicator, I use it the exact opposite of Technical Analysis and as I said, I use much longer periods that reduce the noise. The trading system (which this isn't, it's just an additional tool),only went long when Stochastics were pinned in overbought territory such as they are between the two white arrows and conversely only went short when Stoch. was pinned below 20 in the oversold territory, the exact opposite of how the indicator is generally used.

You can see this was a different time for me when I was more interested in trend following and knew a lot less about how the market works, how it's manipulated. However far beyond the indicator, if you take anything away from this, it's don't ever be shy about thinking for yourself and ignoring the textbooks, that's what gets a lot of traders in trouble, they rely on indicators and sop thinking, stop growing with the market and innovating.

As for the rest of the market update, Treasuries have been bid today, this sends yields lower and as a leading indicator, this is a bearish signal for the market. 

 30 year yields in red vs the SPX in green. This happened yesterday around 3:30, just before the market took a nose dive, you can't see it at the orange arrow because the bond market closes at 3 p.m., but Treasury futures still trade and they moved higher, sending yields lower and it appears to some that this was a warning of the move down to come although Yields are much more massively dislocated to the downside than what you see just here, I've posted numerous charts the last 4-5 trading days showing the transition. In any case, Yields are dropping again today on a bid in bonds and that would seem to indicate the same thing will happen today as it did yesterday.

The problem I see right now are bonds, at least very near term.

True, TLT (20+ year bond fund) is higher this morning, but look at the intraday negative divergence, thus the negative short term intraday signal in yields is likely to vanish, the short term one any way.

I see the same thing in Treasury futures...

30 year Treasury futures intraday 1 min negative divergence.

Thus the yields dislocation lower that some are looking at as they did yesterday, will probably be wiped out intraday as a signal. The much larger trend though is still in place. The bottom line is the market can and likely still is putting together a platform for the bounce we were talking about yesterday.

The TICK today has been fairly ugly...

Custom cumulative TICK Indicator today.

However when we take this in to consideration, a flattish base-like structure and then look at the intraday 3C charts...

 We still have intraday positive activity such as the 1 min SPY, it's not overwhelmingly strong which is why I wouldn't consider trading it right now, but it could set up a trade for sure as we covered yesterday-short in to any bounce.

 This is the 5 min IWM and it still looks the best as having had the worst relative performance through the bounce cycle starting 7/10.

Although as I said, it's not of concern as far as a move to the upside and I'd definitely want to short in to it if it can get off the ground. This higher probability 10 min chart of the entire bounce cycle shows a very strong leading negative divergence and no bounce is going to change this chart. So as I asked yesterday, given the information you have, what would you do?

I'd look for a bounce, I would not participate in it, then I'd look for the trade set up for shorts or puts depending on how far it can go and where the best opportunities are.

Until then, I suspect today will be a bit dull unless we find some other assets that are looking very interesting, likely outside of market related assets including most stocks for the moment.