Closing Wrap

So for the second time today, I suppose you could say an ETF of the major averages gave us an early warning signal without the others being in sync at the moment. The first was the DIA suggesting a move to the upside, which happened, the second was a negative divergence in the Q's suggesting selling into the close, which happened. This is not the usual pattern, typically they all move roughly in line together and give signals together. I'm not sure what to make of it other then correlations may be falling apart a bit as different sectors rotate. I'm guessing this is an effect of the market now starting to discount in a more historical manner being that QE2 is drawing to a close;  as opposed to the ramp of the market led by the NY Fed which we have seen since March of 2009.

In any case, here's our breakdown today :

The Dow had 18 gainers (Monday it had 1 of .22%)
The NASDAQ 100: 67 gainers
S&P-500: 324 gainers
Russell 2000: 1471 gainers (out of 1901 stocks)

We did have a dominant price volume relationship today for the first time this week, Price Up/Volume Down-this is actually the most bearish P/V relationship, despite the close up feature. However in this market, volume has been long gone so I'm not attaching a lot of weight to this reading, but it is not irrelevant either.

(For informational purposes: the 4 P/V relationships are: 1) Price Up/Volume Up which is the most bullish, but at extremes can lead to an overbought market 2) Price Up/Volume Down which is the most bearish as it shows traders are backing away from chasing higher prices. This relationship is more relevant in a trend in which the dominant P/V relationship shifts from price up/volume up to price up/ volume down or in a case in which the relationship grows steadily over several days-suggesting the bulls are backing away from higher prices. 3) Price Down/Volume Down-this is almost a meaningless relationship, but in a bear market it is the most common relationship seen. 4) Price Down/Volume Up-This can show a very bearish sentiment when it occurs as a market breaks down in a meaningful way. It can also be bullish after an extended move down as it can signal a short term bottom or "capitulation". For a P/V relationship to be meaningful, it must be dominant, not just the highest, but often 2x higher then the second highest relationship)

We had 81 stocks that closed up 5% or more on heavier volume, compared to 31 stocks that closed up more then 5% on lighter volume. Only 39 stocks in the NYSE closed down more then 5%.

As far as 3C, it's been difficult this week as I've expressed, I'm not seeing good confirmation such as the DIA/QQQ early warnings today.

Here are the charts beyond 1 min

 DIA 5 min

 DIA 10 min

 IWM 5 min

 IWM 10 min

 QQQ 5 min

QQQ 10 min

 SPY 5 min

 SPY 15 min

At this point I see two possibilities. My original thoughts based on experience; I expected the market to stage an upside head fake. This would require the SPY to gain at least 2% from today's close which would be a pretty big move, at least for a 1 day move. It would make some sense that an accumulation period would need to take place first and if this range holds up or we breakout from here, then that is probably what we can expect to see. What bothers me is the lack of strong confirmation in various timeframes and among the averages.

There are longer term charts that look like these which look more bullish.

 DIA 60 min

IWM 60 min.

 QQQ 60 min

SPY 30 min

All the charts above would suggest an accumulation period is underway for what would likely be a significant move up. As stated above though, my doubts are centered around the lack of confirmation filtering through multiple timeframes. These longer charts tend to me more important, but confirmation is what gives us high probabilities.

The second scenario is that the move down out of the triangle is correcting through time (the market corrects through price pullbacks or through time). If so, then we can look for another fairly ferocious drop.

One other relationship I looked into was the $AUD which is highly correlated with the S&P and at times leads the market. I hope these charts are understandable.

 This is a daily chart of the SPY in green with the FXA ($AUD) in red. In February 2011, the FXA fails to make a higher high, a few weeks later the S&P tops and declines 6+%

 Looking at the current 5 min chart, yesterday the FXA ($AUD) makes a second test high, while the SPY fails to do the same, the next day (today) the market rallies off the lows. Finally this afternoon, the FXA does not make a new afternoon high (at this point we already suspected a problem with the negative QQQ divergence) and the market gives up the closing gains. I show you these charts to reveal the sometimes leading nature of the FXA ($AUD). Below we'll look at the 3C chart for the FXA.

 3C 5 min applied to the FXA reveals the negative divergence on the 20th, leading to a plunge on Monday-the same as the market. Currently we have seen a few positive divergences in the FXA and a now leading positive divergence into today's close. The positive divergence in the FXA could be foretelling of further market strength.

 FXA 10 min 3C chart. Once again another positive divergence in the FXA which is leading as of today.

Finally the 30 min chart. This covers a longer period, but the point here is the FXA near or at its lows, while 3C is significantly off those lows on a relative basis.

As I have warned the last few nights, we are really looking at the trees at this point and not the forest, trying to determine the most likely short term outcome for the market, which could be a significant if we do get an upside head fake, this will give us excellent positioning on just about any inverse ETF or short position you have your eye on.