I'll Try to be Succinct

For one reason, I'm very tired, but I do have a lot to cover. For newer members there's a lot of past reading you can do to give you an insight as to how things develop.

I try to be as objective as possible, that's hard when you see a bunch of signals that tell you one thing and price action that shows you another. One of the key faults with technical analysis is letting price determine your course of action. Four years ago I'd have a very different outlook on the market right now, but since seeing Wall Street's manipulation and corruption in action, I know that price movement can not be trusted. How many head fakes on intraday charts and even daily charts do we see per week? Enough to know that Wall Street uses Technical Analysis' affinity with tradition and price patterns against them.

So lets look at objective data once more to try and determine our most likely probability.

First we must deal with the growing bullishness in the market and sentiment. I don't know how anyone can buy based on the Initial and Continuing Claims reports in which the largest state in the Union guesstimated as well as Virginia and 7 others let the Federal government guess for them.

So this bullishness has led to a number of analysts to see this head and shoulders bottom. I will tell you a couple of known facts, one is that H&S bottoms are typically larger then H&S tops and as with tops, volume confirmation is important as many traders found out when they failed to look at volume and called an otherwise random price pattern a H&S top during the bear market rally around May-July of 2009. Even more important is the fact that volume in confirming a H&S bottom is even more crucial then a top, yet the bullishness persists.

Here's some charts.

Okay, it looks like a bottom, but these are typically bottoms of importance, just as the tops are. The decline from the April highs is hardly a bear market downtrend, soon you'll see it in a different perspective. The bottom also is not all that big, as they tend to be.

Here's the H&S top, to the right with the two trend lines is where the bottom all the bulls are watching is located. Just in terms of perspective, the advance (bear market rally) from 2009 is about right to produce a top of this size. You can see where the bottom is actually part of the right shoulder side of the H&S top, does the decline that preceded the H&S bottom look proportional? Not really. There is that July low sticking out below the top's neckline, but I've seen many H&S tops with the same including to a lesser extent the Housing Bubble top.

Now volume...

I created a cumulative volume indicator so you can see the trend of volume relative to prices. In a top it's fairly simple, you see declining volume on the rallies (red arrows) and advancing volume on the declines (green arrows)-it just makes sense, traders are scared, they're selling hard and barely buying and that is what we see here in the top. For a bottom the opposite would be true, but two opposing ideas can't be true at once, and the top shows the proper volume.

The further the H&S bottom or Inverted Head and Shoulders develops to the right, the more important volume becomes. The most crucial area is the advance toward and through the breakout, it shows that bulls are getting very active and excited, jumping in.

However, as you know, we saw the current September bounce being setup with accumulation by smart money in advance. The reason? The "Listing Boat". During the second half of August, the net short side activity increased by 4.5%. This is why in my opinion smart money was active at the end of August, they were setting up a short squeeze.

The 60 minute chart above is where it was noted and where we have followed smart money's moves. Note the negative divergence at the August top, then the decline, toward the second half even more shorts piled in and around the end of August we see smart money setting the trap for the short squeeze with accumulation at the white arrow. It was mentioned here on August 25 and 30th before the September rally even started. Since then, smart money has been selling that position into higher prices, not accumulating for a H&S bottom. In fact look at 3C's current leading divergence level. Prices are higher, 3C is almost where it was before the bounce began-a negative leading divergence.

And this is where your answer is as to why we have seen this rally on low volume, there hasn't been an abundance of buyers, it's mostly shorts covering, thus the low volume.

However, before the bounce got started, we already had an idea what to expect, a short squeeze and what I called a "scary move up" which will draw in longs as institutional money sells short to them.

Green Shoots
I think we all remember the "green Shoots" phrase that was largely behind the 2009 Bear market rally, but look at this chart....

Above, the "Green Shoots" rally as the public believed we were on our way to recovery. Contrast that with the July 2nd closing low that was the time of fear of the Double Dip Recession. Price levels between the hopeful , "economy is recovering rally with 5% GDP" and the price at July 2 2010 with GDP falling off a mountain, we have the same price levels. does this make sense?

Back then the Fed had all kinds of things they could do-or so we were led to believe, read this quote by someone with a track record...

“Nouriel Roubini, thrust into the forefront after predicting the chaos wrought by the subprime mortgage crisis and the collapse of the housing bubble.

"The US has run out of bullets," Roubini told an economic forum in Italy earlier this month. "Any shock at this point can tip you back into recession."

That's a pretty big shift is the outlook isn't it?

Today's big gap up was "apparently" due to economic data out of China-nothing against the Chinese people, but their government hasn't been known for transparency on these issues, for that matter neither has ours. So we got a gap today from almost nowhere. I think there's more to it, I think it was just a reason or a way to justify the move. You know I've been looking for a head fake, the bigger the better and with smart money going short I believe they think the same. So they squeezed the shorts, the second part was to pull in the longs and create a bull trap. With all of this sudden interest in the H&S bottom consider this chart and whether a move around or above the neckline might just do it...

Today's candle doesn't look good to me, but could this or a move slightly higher be enough to finally pull those longs in if they haven't already started filing in the market?

You know I was looking for a head-fake to end this rally that looked like this

The one in the bow with the arrow is what I'm looking for, we had a couple of close, but not quite there days last week. The other arrows all show declines that started with head-fakes. Each one posted a new intraday high, then the market came down trapping the bulls that bought the new high as evidence to them of a continuing trend.

I think I said last night that a good bounce play would be semiconductors, they were the #2 performing industry group today out of 239 industry groups, the reason for me... because they have been one of the worst performing groups and people gravitate toward a sale. It also has another more sinister meaning, they are the worst performing recently for a reason, so if you wanted to go short semis, wouldn't you want to do it at the most favorable pricing?

These next two charts are kind of enlightening...

History, learn from it. Above is the 30 year bond yield in green vs. the S&P-500 in red and below is the 10 year yield in green vs. the S&P in red. Note that when yields top out and the market tops out, we get a reversal, just look at price action after the white arrows. It's not so far fetched that  the April highs were our top (coincidentally that is the head of the H&S top). Just another coincidence or are these the objective pieces of the puzzle?

Next the VIX(CBOE Volatility Index or the "Fear Index". The VIX trades inversely or has an inverse correlation with the market and we just set a new intraday and closing low today.

The VIX in green, the SPY in red. Note extreme lows in the VIX produce sell-offs in the market. Extreme highs in the VIX produce rallies, we are at lows not seen since the April decline that ended with the flash crash. Plus you saw the charts I posted of accumulation in the VIX, the last time we saw that it produced the April decline.

All Rallies Are Not The Same...
The difference in the quality of a rally from one to another is market breadth or the internals. Here's a look...

First above in green is the advance/decline line for the Russell 3000. The line takes advancing stocks and subtracts from that declining stocks, so in a healthy trend it should rise, but you must compare it to similar points in price, the Russell 3000 index is in red. Note that the Russell 3k is at a level of resistance it has rallied to 3 times, but look at the slope of the advance decline line, fewer stocks are participating in the rally which is not surprising given the market data for August below...

The SPY alone accounted for 10% of the total trading volume 10%. Remember this weekend I wanted to work on an indicator that can see the weighting of each major market average and see where the money is flowing as it would be easy to keep a market up in a low volume environment so long as you invest , support or drive up the ask on the stocks with the greatest weight. So I find it interesting that 112 stocks account for half of the day's total trading volume in August and presumably September. 1029 stocks account for 90% of the total trading volume and the last 17,349 account for 10%.

Back to breadth...

Note recently where the Russell 2k (one of the broadest measures of the market and economy) advance decline line is (green) compared to the index (red), it's quite a bit lower, again showing fewer stocks participating in the rallies, this is what you call a thin market and it is bearish.

This is the entire NASDAQ Composite in red, it's not hard to see the trend in the advance decline line (green) vs. the index. The trendlines I've drawn make this clear.

Another measure of breadth, the percentage of stocks 2 standard deviation above their 40 day moving averages in green vs. the S&P-500 in red. Note the S&P is virtually at the same level as it was in August (white arrow), at that point 38% of stocks were above the moving average, now at nearly the same price level only 23% of stocks. Again, this does not show a bullish market, it shows a market rapidly falling apart.

This is similar except instead of 2 SD above the 40 day moving average, it's only 1 SD above the average. Again, a huge drop at relatively the same price level (the S&P-500 is in red, the indicator in green).

I show you this chart almost every day, it's the advance/decline ratio for the NASDAQ 100 component stocks. Almost everyday we see the same, fewer stocks participating into higher prices, again, a bearish, thin market.

Now a closer look at today's action...

Here we see a possible reversal in UUP (the dollar which is bad for the market). You see the positive 3C accumulation before UUP heads higher (white arrow), the red arrow shows where prices retreated into a bullish bull-flag consolidation. The last several days we see accumulation again in UUP as it may have shown us a false breakdown below the support line of the flag, which would be expected before a reversal for reasons I have outlined many times.

Above is today's price action in the SPY, we see a bear flag form from the opening gap up, then a possible false breakout-we can't say until we see tomorrow's open, but the volume into the close looks pretty bad.

Here's the 15 minute 3C for the SPY the last week or so, note the trend in 3C indicates distribution by institutional money. More importantly look at 3C's behavior today (red arrow to the right) and that into higher prices.

One more time, the DIA hourly chart... Again, note the most recent behavior in 3C compared to the DIA, it's distribution into higher prices. This is everything we expected to see BEFORE the bounce even started.

It is for these reasons, I can not be objectively bullish over the market. The puzzle is all coming together and strongly suggesting lower prices. Until then, please be sure to use appropriate risk management. If this market breaks that H&S top there will be plenty of profits to make.

It's been a long day and night, I've been non-stop since 8 a.m. and my wife has had dinner ready for hours now. So I'm going to glance at the emails in about 30 minutes, if it is urgent, please send "Urgent in the subject line"

BBY

I believe reports earnings tomorrow, before the bell, it doesn't look especially strong, it looks a bit weak, but so does tha market, still we may be seeing a leak. I would treat this as a very speculative earnings play on the short side if you took it, if they come out strong, because it's before the bell, you'll have a gap up that you can't protect against. It may be worth a shot, although I'm not a fan of earnings plays, but it must be kept is SPECULATIVE perspective.

Breakout of the Bear Flag

As I suggested in the last post, we have the bear flag breakout on a modest rise on volume. The SPY already has a negative divergence, the DIA does not yet, it's still inline with price, the QQQQ has 1/3 in a negative 1 min divergence. On the 5 min they are all solidly negative in leading downside divergences.

I don't know what it will mean yet, but I just saw a nasty downside candle-1 min. It may be the start of the move back into the bear flag trapping longs.

The View of the Forest

Backing away from all the micro analysis, lets see the big picture.

The 5 min 3C SPY-shows what has developed into a bear flag (downside continuation pattern) There's a negative divergence in the bear flag

The 15 minute SPY 3C chart, the divergence is even worse.

Here's 10 minute chart of today's bear flag-volume tends to confirm the pattern as not being random

Here's the actual Dow-30, the only index I can get intraday 3C data from directly-look at the trend of price and that of the 15 min 3C chart

Again, the Dow 30-this is the 1 hour chart that showed us the bounce starting in late August-see the white arrow. Note 3C's past effectiveness at the top. The current 1 hour chart is a negative leading divergence.

Finally the same breadth chart we've been watching of the NASDAQ 100- Advance / Decline Ratio, again shows a roughly lateral price trend with fewer and fewer stocks participating in upside gains. We actually are seeing the downside increase.

Because we have a very obvious bear flag on the chart, we have to expect an upside head fake as usual. This is what I tell you almost every day, the market uses conventional technical analysis against those who use TA to make their trading decisions. Anyone going short the bear flag would be confronted with losses on an upside breakout, this is to the market makers advantage and ultimately when we get downside movement, it provides fuel to the downside in the form of longs who would buy the breakout, now at losses (speaking in the future).

Study these charts, see what happens, understand the game and if you use technical analysis, see how they manipulate it for their own purposes.

As suspected..

You see, after a little while of watching these guys they get predictable, but first you have to get over the learning and unlearning curve to understand the game.

I any case, 3C 1 min is headed back into leading negative divergences. If anyone is an avid blog reader, I'd like to know what the early sentiment was today-in other words, were the bulls out buying on the gap in blogland?

On another note. UUP -the dollar has quite a few leading positive divergences, as I said last night I think (I write a lot-here and emails) it appears the dollar's pullback is ending, this alone will drive oil prices lower.

USO is showing a multitude of negative divergences so whether the Inventories report on Wednesday is bullish or bearish, I think a downtrend is about to be re-established, today's head fake in USO as well is another sign of the probability of that outcome and while we are up here on this gap, it may be a decent place to add oil related ETFs-on your short list. Or to buy the inverse ETFS.

Head Fake?

The SPY did what I suggested, it broke lower resistance of the ascending triangle, then broke out to the upside, unless I have a bad print, at 1:27 there was huge volume of 10,273,400 shares on a hammer candle. Right now we still have some muted upside momentum but 2/3 1 min 3C charts that were showing this reversal earlier with leading positive divergences have already gone negative. I'm wondering if this move maybe is a long head fake. It's definitely a "Crazy Ivan", clearing the orders piled up on both sides of the pattern and we see that often now as market makers are able to make extra money by increasing volume through hitting stop/limit orders. This is why obvious technical patterns are almost always used against TA practitioners. The TA guys just haven't caught on to the game as they keep doing the same thing.

And.. There it is

The minute I hit post I saw a big up candle, the breakout should follow.

Afternoon Update

Here's the chart-1 minute 3C of the SPY

You can see an ascending triangle, which is bullish, but it's in the wrong place, it's a consolidation pattern found in an uptrend not a downtrend as we have here. Also even in an uptrend during a primary bear market they often fail. However 3C is now in a leading 1 min positive divergence suggesting a leg higher intraday, the 5 min and longer are still solidly negative. My guess is that this pattern is taken by traders as a downside continuation pattern which would draw in short term/day traders on the short side as it breaks the lower resistance line, that provides some future buyers to help move price up as they will likely be forced to cover if prices breakout above the top resistance trendline. This is a miniature version of the Judo Concept.

Market Update

We should see a leg up in the market any minute now.

PUT TZA ON YOUR BUY WATCHLIST

It's created a bear trap-remember it's inverse so it's really a bull trap and it's showing accumulation. This is another good indication for us and you could pick it up on the cheap today maybe with a stop below today's lows.

Thanks J.

DBRN

This is creating a short sell opportunity as there is a H&S top in place, price has broken through that resistance and made a recovery intraday high, this should lead longs in on the assumption of a failed H&S top. Again, I would enter in phases, maybe some here and the rest on a break below the neckline (confirmation) around $22.75

Trades from Last night

MSPD is up pretty good, there's leading negative 3C divergences in place on the 1 min, the 5 min needs time to respond, but I suspect we'll see them. If I was new to this position I would consider entering 1/3 or 1/2 of my intended position, add on anymore strength or a break down.

GLD seems like there may be a move up yet to come, 3C is just starting to show some leading upside divergences, this is a trade I would probably enter more incrementally until we have a confirmed downside reversal.

Encouragingly, AAPL is in some very negative 1 min negative divergences. Again, I would prefer to phase into these positions, but here I may take on 1/2 of my intended position size.

GOOG  I doubt with the gap too many people got in on the quick long, who knows, there may be a pullback and afternoon ramp up job, but right now 3C is leading it lower. As for shorting it, incrementally would be my approach and in smaller size on this one initially.

PRWT is doing what we wanted, if you have been in this trade, you are in the double digits, 3C is not going to give great signals here because of the spotty trading, but I may take some off the table or set a tighter trailing stop for at least a portion of the trade.

JNPR is showing some 3C distribution, not as heavy as the others, probably because it has not convincingly cleared the resistance zone to suck in longs-watch for that and then I'd expect heavier distribution.

SNDK is pretty much the same as JNPR, although it's made a better head fake, I'd expect bulls to get excited if it moves into that gap.

HPQ is the first now to show a positive divergence, probably because it did nothing this a.m., but I think last night I said this one is weaker then the rest. In any case, it appears to be getting ready to move up

CSCO is in 3 1 min leading negative divergences and 1 5 minute. This may be as high as it goes today.

OVTI looks bad, I think it's setting up a situation now in which it will begin falling.

3C shows no reason for CAVM not to move higher. Technically even with the nearly 6% move, it hasn't broke any resistance/patterns that could be game changers from a bull's perspective. I'd expect higher prices to come short term.

Same thing as above for ISRG although it's done virtually nothing. 3C is not looking horrible, but not good either, it leaves room for it to move up if it wanted to which I'm not sure if it does with no real accumulation.

GBG has one small positive 1 min divergence suggesting maybe 1 more run intraday leg up, the longer charts are in leading negative divergences and look bad.

VGZ is inconclusive in the short term, but the GLD chart looked similar, long run they don't look good. If you are in any of the gold bounce longs, I would use some trailing stop and on an INTRADAY basis in this situation.

The divergences in the SPY are starting to look a lot worse relative to price.

USO update

3C is tracking noticeably lower in USO on the 1 min, all 3 are in some form of a leading negative divergence. Even a 5 min is moving into a leading negative divergence. UUP (the dollar) is near it's support in that flag I showed you last week (bullish flag) and the 3C charts, especially 1 min are quite positive. Remember oil and the Dollar as well as the market and the dollar typically have an inverse relationship.

SPY Update

The SPY is approaching a 1-min leading negative divergence, the 5 min is pretty much in a light leading negative divergence. The DIA's 5 min 3C is in an unbelievably low position. The Q's are in a bad relative divergence.

Still, the derivative ETFs look worse.

The fact the SPY hit $112.95 is good for our bearish scenario as that is the region in which the Inverse H&S bottom's neckline is, depending on who draws the trend line. There was no appreciable pickup in volume, so it doesn't appear (if we didn't have 3C) that volume analysis would suggest anyone other then retail and light at that, is chasing this.

Remember that the example chart I showed you of what the reversal could/should look like started with a big gap up and ended the day significantly lower.

Update

OK, expiration date is moved up, so we need to be watching the market carefully. Which also means longs and profits should be considered early rather then later. The SPY is showing some 5 min distribution which is good (for our bearish scenario.)

But some of the leveraged ETFs are looking a lot worse...

I'm hearing reports of certain traders going in 100% long, which is what we want. This is the kind of gap up I have been wanting to see, it's also near that inverse H&S top neckline which the bulls have been talking about all week.

Understand volume is crucial to confirming either type of H&S, but more so with a bottom. The volume confirmation for a bottom is not there. By this time it should be huge, not some of the lowest of the year. So our scenario seems to be setting up well, just moved forward quite a bit.

I'm going to be exceptionally busy today watching charts, it takes 3x longer for me to update with charts and I need to watch the market so I'll try to get them up when I can. Emails I'll answer as soon as I can, but if it's urgent, please put that in the subject line.

IMPORTANT UPDATE

Well, I've told you a lot of times I'm not an options trader. We do have quadruple witching this Friday which includes options contracts. However, while this month there will be weekly Friday options expiration in the VIX introduced, the contract I mentioned last night expires either Tuesday or Wednesday, I'm trying to get clarification as Yahoo's options Chain has the expiration as of the end of trading Tomorrow, but the CBOE site says this:

"One day each month, on the Wednesday that is thirty days prior to the third Friday of the following calendar month, the SPX options expiring in exactly 30 days account for all of the weight in the VIX calculation. VIX options settle on these Wednesdays in order to facilitate the special opening procedures that establish opening prices for those SPX options used to calculate the exercise settlement value for VIX options."

Being they are talking about the settlement date, I'm assuming the Yahoo site is correct, meaning the last day to trade them is tomorrow. Friday we still have options expiration including: Stock Index Futures, Stock Index Options, Stock Options and single Stock Futures.

So today and tomorrow are the days we need to watch closely for our reversal-not Thursday or Friday.

In any case, that makes me more comfortable with the price action today as it is nearing or at the level in which it could trigger a head fake for bulls.

NEW SEPTEMBER LIST IS UP

I've been looking, running scans and that VIX chart is the thing that I'm really focused on. Last time we saw 3C accumulation it doubled, that means the market falls-a lot. I think that was the sell-off that ended with the flash crash.

So open interest on the VIX is $45-that's the heaviest for the calls, I don't know if it goes that high as they tend to pin the big open interest, but that all depends on who owns those calls and if we're seeing accumulation in the VIX, then we may assume Institutional money owns them. In any case options expiration is this Friday, which is starting to fit together.

I laid out several shorts, but looking at a lot of charts, I'm seeing a mini version of what we saw just prior to Sept. 1. Which means we have some time early in the week to get that head fake I mentioned. We got a couple and Thursday's was pretty close to what I wanted to see, but not exactly. It needs to be convincing. If you are in serious doubt and ready to cover shorts, then that's probably the one.

There's a lot of bullish sentiment building about this inverse head and shoulders that is part of the bigger head and shoulders top. So a nice big move up, one day or 3, whatever, may do it for the bulls. The market is under heavy distribution, GOLD is too, and they look like they want this bounce or head fake. The VIX lines up perfectly with a big sell-off, but like I've said about this Judo concept, they need fuel for it and the more longs they can slam in the door the better for the decline.

I know it's been since September 1st and it seems like forever, but it's only 8 market days for what needs to be a serious catalyst. There is the off chance that something drops early in the week and we are down, but I'm guessing and it's just a guess that this is going to go down on Thursday or Friday, I'm leaning toward Thursday. There's a lot of reports that will be out those two days and I have a feeling the revisions on Initial and Continuing claims are not going to be very good. It just makes sense, the government guesses for seven states and the biggest economy in the IS, the 8th biggest in the world, estimates? Those revisions have got to be the key and I think Wall Street knows it because it's likely the data is already out.

So if you do like I do and keep at least 25% cash on hand, I'd play the bounce with any of the leveraged longs-UPRO or SOXL, FAS, URTY would probably be a big mover, UWM, UDOW, TQQQ, etc.

Look, this isn't going to be a ride in the park, it'll be scary, but everything seems to be lining up. Back in late August we could see the bounce, we had an idea of what is was (not an oversold bounce), but we just didn't know how it would end. Seeing that VIX chart looking the way it did, kind of connects all the dots. So as I say often, the market is like a pendulum that swings way too far one way and way too far the other, rarely is it mediocre.

It's been months since we've seen accumulation in the VIX, a move higher will put it at new lows, probably for the year and we know that it trades inversely against the market, add the accumulation, and this all smells of a scary bounce and major crash this week. That's me going out on the limb which I hate to do, but there's too many things lining up. All these shorts I put on the list, but said wait for a bounce, the charts look horrible.

So that's my opinion. There's a few "cats and Dogs" longs on the list because they tend to be there at the end of a bull move and they move fast and far, but remember they are speculative so take the gifts f they come, don't assume they'll last all week.

Nuff said for now.

Have a great week and look at those charts. I'll be adding more and more to the list.

Accumulation in the VIX in the green boxes and white arrows, blue arrow is the move, the market goes the opposite direction.