Market Update

You may recall toward the end of trade on Friday, I pointed out some profit taking and ended the post with the question of whether or not institutional money was also engaged at this point.

It's important to remember that distribution takes place in to higher prices, conversely accumulation takes place in to lower prices or a trading range. The idea is to pick up a large position on the cheap and then after the mark up process has started and Wall Street is above the average price paid on the position, they start to feed shares out through distribution. If they were to try to dump such a large position at once or in bulk, they'd drive prices down by overwhelming the market with supply, so they average out of the position making sure not to let out too much supply at any one time to adversely effect the supply / demand balance which in a rising market under distribution, they'd prefer supply be on the scarce side and demand higher, especially when the market is under a short squeeze, something I said I thought would happen one the market broke out of its range (around $129.95 for the SPY). Indeed, I pointed out that price action looked very much like short covering ( a lack of normal pullbacks), a day or two later we got confirmation that a huge number of shorts were being squeezed.

Basically the theory that started a month or so ago, has played out just about as imagined.

Here's the NYSE components $TICK chart which shows the uptrend line (advancing issues minus declining issues), per tick broke down late Friday under the trendline. This morning the behavior has continued and we have seen some of the worst readings since the squeeze began. Note the TICK chart is making several -1000 spikes today, pretty extreme.

 In fact the TICK this morning hasn't looked this bad since June 24th above.

 Usually the SPY holds a 5 min 50-bar average, the momentum last week was so strong though, it was holding a 1 min version of the 50-bar average, it may not sound like a big difference, but it is. Typically the market may have a few run ups during a rally that hold the 1 min 50 bar average, but it typically can't sustain that for a day-more evidence of short covering. RSI has also gone a bit negative on this chart.

 Here's the longer term trend showing the entire run up on a 10 min chart, notice there's only been 1 pullback to the 50-bar average until this morning and thus far the SPY has found a little support in the area as can be expected. A break below and the average turning down would hint at a substantial change in character from last week's short covering rally.

 The 15 min 3C chart is putting in the first credible negative divergence since we saw the pullback from resistance on 6/22. The green arrow shows the lack of substantial or normal pullbacks usually seen in a trend, another hint of short covering.

 The 10 min hart has been showing distribution for the last couple of days and is now pretty substantial. When the 15 min chart starts to look more like this, we are probably pretty lose to a reversal or at least the end of the short covering rally. Remember, prices can do 3 things, go up, go down or go sideways.

A sideways environment would most likely show us short selling by institutional investors. At this point, most retail investors are not going to be to brave about shorting the recent market strength.

 This is a 3C divergence scan indator on StockFinder that I've spent a good portion of the 3-day weekend working on. A divergence is one of the hardest things to define in software because they can occur over different timeframes or different lengths of time, yet the indicators we have available to help define the divergence are set at one particular timeframe, making this task very hard. So far I'm getting pretty close and the pink you see on the charts is a sign of a negative divergence, interestingly starting late Friday and early today.

Past Bollinger Band volatility squeezes have led to upside breakouts, when the bands tighten a directional move is close at hand, we want to keep an eye on this, there could always be an initial shot up followed by a reversal, either way we are in an area in which the trend is becoming over extended and should be vigilant about our positions.

This is the longest Heiken-Ashi Candle formation of 3 dojis (indecision) we've seen since the uptrend started. Also note Volume at price in the area (to the left, at the top).