Daily Wrap

Today we didn't have a dominant Price/Volume Relationship, but we had a few averages with a bias of Close Up/Volume Up which is actually the most bullish, but at the same time the 239 Morningstar Industry and Sub-industry groups declined from yesterday to 167 of 239 closing in the green. The feel I get is of an overbought market although by most conventional standards, we aren't close to that reality. However, the effect may be the same.

Today as early as 2:30 I started posting about distribution in the market that was nearing the level consistent with a market turn downward, we were only looking for one thing that almost always pops up before such an event and that was the head fake that we saw so very clearly in closing trade.

When stepping back to look at a picture somewhat bigger then just today's, I've been talking about the need for a head fake, one that will be strong enough to drive bears back in to the market at near record short level interest and near record margin levels. Should this event occur, then we can see a real squeeze of the shorts as I had talked about before options expiration.

Here's our current pattern in most of the major averages...

According to the dogma of technical analysis, this wasn't supposed to happen, the 2 day breakout of a bear pennant. What was supposed to happen was a break down from the triangle/pennant. So should the market head lower, the bears will be at ease, after all, a failed pattern mans that you take the trade in the opposite direction which the bears have been dying to do, A move inside the triangle might be enough to inspire their confidence, a move below the apex of the triangle would go a lot further.

Should this occur as it seems more and more likely that it will, then we have the makings of another short squeeze and the possibility for the market to rally, especially with the major investment banks now saying that Bernanke's Jackson Hole Speech was a stealth QE3 warning. This "Could" take the markets to the $130's, maybe even new highs which would set up the second shoe to drop scenario in grand fashion, after all, we'd just be stacking the house of cards that much higher.

As for the charts that seem to matter right now the most, they are the same charts that I've been showing almost every night. Except now, we have something we haven't had recently and that s multiple timeframe confirmation.

 All negative-SPY 1 min

 SPY 5 min

 SPY 10 min

And the crucial SPY 15 min.

We also have plenty of news and reports this week to serve as a cover, or rather as CNBC would put it, a catalyst.

And finally we have that last element...

The head fake on increasing volume. Those are longs that bought up there and are trapped at a loss and when the market heads lower, they'll add to the snowball effect when they provide additional supply by stopping out.

 FXE went into the gutter today

And UUP put in a spectacular performance, from an inversely correlated Dollar point of view, all of the elements to market downside are in place.

 Even the safe haven trade s accumulated and ready as you can see TBT the Ultrashort Treasuries made a new negative leading divergence

And TLT, the safe haven trade made a new leading positive divergence, the chess pieces are all set up, just while no one was looking-except maybe us.

However, if we step back even further, it looks like after this episode of setting up shorts for a squeeze is over, we still have some very bullish timeframes that want to take this market higher.

 DIA 60 min

 DIA daily

 QQQ 30 min

 QQQ daily

 SPY 60 min

SPY daily...

And as for that second shoe to drop after this stage is through...

 DIA 3 days

 QQQ 3 days

SPY 3 days

In case you are wondering how bad this house of cards really is, look at the negative divergence in the QQQ and SPY in 2007 at the market top compared to what we are facing now. These charts are actually worse then 1929!

So now you have an idea of my perspective, I'm sure we'll get some twists and turns along the way and unexpected strength and weakness as the market s like a pendulum, swing way too far one way and then way too far the other, in such manner that even some of our most outrageous projections can look conservative and this my friends is where enormous opportunity awaits for those who are aware of what's going on in advance and figure out the game the fastest.

It's pretty much all right there.

See you tomorrow.