Market Update-SPY

I said a few things in last night's market wrap that I want to revisit.

"What seemed to be a positive divergence intraday, didn't look so hot at the end of the day. I just heard someone dumped $3.3 Billion in E-mins at the end of day. The market also closed below the 50 m.a. on volume, it is hard to imagine a bounce from here, however we'll have to let the market tell us."


"As for today's dominant Price/Volume relationship, it is easily Close Down/Volume up for all of the averages. There's a dual edge to this relationship, it can be a sign of a serious break in the market and it can be a sign of a serious oversold condition.  Since we are so close to the 50-day moving average, we cannot rule out either possibility. The divergences that formed earlier today weren't strong, only on the 1 and 5 min charts with one exception, these are usually little more then a 1-day bounce. However, such an overwhelming P/V relationship in such proximity to the 50-day moving average can set up a nasty bounce up although it doesn't look or feel that way now, we must reman open to the possibility of this happening even if it is remote."


"The key thing to remember is how bad the longer term charts look and even if we were to see such a bounce (it would likely be a scary upside bounce with so much selling today), we can't take our eye off the ball and that has been, as mentioned above-since June, the next shoe to drop is going to be very ugly on the downside; just consider the breadth posts I put up a little over a week ago."


The point of the above comments was not to sit on the fence and try to be right either way, the point was, there was a unresolved positive divergence, even though it was on the short timeframes it lasted most of the day. Secondly, with a break of the 50-day moving average, a lot of traders are going to run to the short side of the ship, this is a perfect opportunity for the market to use Technical Analysis against it's practitioners. There are very few times I have seen Wall Street lose control of the market, typically, they are planning very far out n advance. I use to get the internal trading memos from a large Wall Street firm, I couldn't make sense of them simply because they were thinking so many steps ahead, nothing they talked about seemed remotely possible looking at the charts. Some of you may also recall that while I was teaching, I use to show charts of the homebuilders which were under accumulation in a quiet lateral base for well over a year while the tech bubble had exploded and we were in a bear market. The point of showing these charts was, "Who would have thought after the tech revolution had started, that the next major trend was going to be in housing?" Well Wall Street knew and was accumulating positions almost 3 years before housing really took off. The point being, once in awhile they do lose control of the market, but more often then not, what we are seeing today has been planned out far in advance. Just look at my July 15th post, "What Can We Expect After Op-Ex Today?"  I could not have posted an outcome that was so accurate over the next week if I hadn't been able to see the underlying 3C action which was pointing to exactly that outcome. Over the next week, everything played out exactly as posted on July 15th, from the dip on Monday to the bounce through the rest of the week.


Now we have to prepapre for what may be comng next, the 3C charts wll develop and give us a better feel, but this s my initial idea and this goes back to what I had been expecting last week.

 As mentioned last night, when the Price/Volume relationship is dominant (among the 4 possibilities) as it was last night, we have to pay attention. Last night's P/V relationship was close down/volume up and it was easily the dominant relationship. Rarely when the market really breaks away to the downside this relationship will appear, but more often then not, it's a short term signal for a reversal. Just look at the chart above and the 2- heavy volume days and what happened next.

 Here's the intraday price acton, already above the average accumulation level.

 Here's the 3C 5 min chart which showed a spike in the divergence as the market broke intraday support as well as the 50-day moving average. Wall Street knows full well that traders are watching and acting on the 50-day moving average. The white box indicates improvement in the 5 min 3C chart as it leads.

 Look at the positive divergence at the break of intraday support on this 15 min chart and note all the volume, this makes it very easy for Wall Street to accumulate a large position openly as they are simply taking the other side of the trade. The 15 min has improved today as well, in a leading divergence.

 I also warned last night that it could be a "Scary" move up and as 3C develops we'll have a better idea, but the 15 min chart being so positive right now is a strong signal in itself. Last week I was expecting a breakout above resistance, and that's where I think Wall Street will go massively short when the bulls step in as buyers, the reverse of yesterday. I've had this opinion for some time, so to see the early manifestations of the possibility, I lean toward this opinion. Of course if 3C changes, I'll let you know. I'm not in the business of guessing where the market will go, I bring you the indications I see.

This would be the breakout level on the DIA. 


As of today, I'm going to lighten up a bit on my shorts and perhaps hedge a bit until this becomes more clear.