We'll start with the short term charts-which effect short term movements and as all of these harts and timeframes can get confusing as to what they mean, we'll take a look at the big picture so you can get a feel for how things fit in to place. Just remember that 3C is showing the underlying "smart money" movements and as such will almost always contradict price as what you see in price is usually not reflective of what smart money is doing behind the scenes. To understand this, you have to understand the difference between the trades you make every day and how Wall Street is forced to trade.
Most of us can put in our orders, even large orders (our perspective) and we don't move markets with our trades, we are a drip in the ocean. However Wall Street cannot trade the same as we do, they are dealing with much larger positions. For smart money (Wall Street, institutional money-whatever you want to call them) to enter a trade, they have to phase in to the trade in bits and pieces over a longer time period. If they tried to place their full order in one pop, they would move the market against their position in a huge way-perhaps 10-15% in a day! So they need a few things to enter/exit trades and when you understand these things, you'll understand a bit more about how Wall Street works and how 3C signals work.
Assume I want to enter a 1000 share order in the SPY, I may move price against me a bit in getting a bad fill, but I'm not moving the SPY for more then a few brief seconds if that. When smart money is placing orders they are so big that they have to be done in pieces over time and they use market makers or specialists to fill those orders. For a purchase, they need a lot of supply being offered, this usually can be found in a falling market or a flat range bound market. A move below an important technical area that creates a lot of sell side volume is another way to get shares without moving price against them as they are taking the other side of the transaction and not visibly adding to demand.
To sell, they need demand and this comes in the form of rising prices, a short squeeze also creates demand as shorts cover (buy) they can take the other side of the trade and sell. An upside head fake that breaks an important price level will draw buyers in to the market and give smart money an opportunity to take advantage of that demand to sell in to. This is why head fakes are so common right before an upside or downside reversal. As mentioned, this also takes time, there's only so many shares traded a day and the last thing they want is to place an order that effects the supply/demand dynamic and moves prices against them. Think about these dynamics as you look at the charts, especially the long term charts at the bottom of the post.
First, the end of day indications. Don't let all of the annotations intimidate you, I'll explain them.
DIA 1 min This is the shortest timeframe I track and has the least amount of influence on price, usually it moves the market intraday, if the divergence is long enough or strong enough (leading divergences are stronger then relative divergences) it can have a longer effect. The longer the timeframe, the more important it is to the overall trend. First look at the white arrow to the far right, this is the end of day and it is a slight positive divergence. Why it may not be complete as the market closed, as it sits, it will do 1 of 2 things, either move the market intraday like a bounce, or it will send the market lateral in a time based consolidation rather then price. You can see since it started the downside momentum turned in to a consolidation through time. To the left is a red box, this is a leading negative divergence as price makes a relatively higher high, but 3C is moving down. This is short term distribution of today's lateral trade and led to the late day sell-off. The red arrow shows the price high yesterday at 3 p.m. and this negative divergence kept prices in place, the move up ended. I placed a yellow arrow over price too, which signifies the churning I have mentioned in previous posts. Churning can also be used by smart money to sell/distribute shares or even go short, especially if the churning volume is high. The white box with the white arrow to the far left shows intraday accumulation of the lows, which sent price higher. Sometimes it is essential for them to not allow price to fall as they have more shares to either distribute or sell short in anticipation of a downside reversal-both distribution and selling short are sell orders. However, I pointed out that area so you can make a relative comparison between price at the close today as well as 3C compared to that area and what you will notice is price is higher now then it was at the lows in the white box, however 3C is much lower. This shows you that the move up in pries was used to sell, whether distribution of shares or selling short. So the two things to take away from this hart are the distribution into strength and the end of day positive divergence suggesting a short term correction after such a steep afternoon fall.
This DIA 15 min chart is showing very bad distribution during the rally by smart money. A 15 min chart negative divergence alone is often enough to turn the market, when longer term harts like 30-60 min also are negative, it is showing the market to be in worse condition as the distribution is even heavier as well as their short selling, which of course implies a nasty downside reversal. The red box is there to highlight the leading negative divergence has hit new lows and is far below where the rally first started on the 4th. Considering prices are nearly 11 % higher then the lows of the 4th of October and 3C is lower now then it was then, this implies to me that not only has Wall Street distributed all of their long position that was accumulated before the rally started, but most likely they have a huge short position already in place as well. First they accumulate/buy shares before the rally starts, then they sell them (distribute) in to the rally's strength, then they short the market for a reversal down. So in terms of distribution, they can't sell their position like we can at say $114, rather they start selling shortly after the rally starts (once they prices have moved above their average accumulated position), so their final exit will be an average determined by how much they were able to sell at each price level as the market moves higher. It's not selling at the highs, but when you consider how many shares they had, they make a nice profit.
IWM 1 min shows distribution between yesterday's close and today's early morning trade and notice it is at the price highs. Again, this is most likely short selling at this point. The red box shows a leading negative divergence as the market traded sideways (lateral trade is also an area where they are very active as it provides stable average prices). At the end of the day, after the late day decline, there's a relative positive divergence at the white arrow and notice how prices lost the downside momentum.
IWM 5 min chart (this is more important then the 1 min chart above). Here there's no sign of any end of day positive divergence which tells us that as of the close, it wasn't that big. The area in white is offered as a relative comparison between that area and today's close. Once again, prices right now are a bit higher then the white box lows, but 3C is making new lows. This tells us again that price strength was used by smart money to sell in to.
QQQ 1 min-At this point you should notice that different versions of 3C and different market ETFs are all giving similar signals, that is the type of confirmation I look for. The late afternoon sell-off once again saw a positive divergence that killed the downside momentum. Partly because we are near a support level where buyers will enter the market, possibly sending the market higher in an intraday bounce, which they can play long and then sell short into again to add to their short position.
The QQQ 2 min chart, which is slightly more important also shows this end of day positive divergence. The red arrow shows price being distributed in to the highs, which were also a head fake move highlighted in the yellow box. The white box is for comparative purposes. Price is about equal now to the lows in the white box, but 3C is making a new low, showing there is more of a negative money flow now (probably because of short positions added). If all things were equal, 3C would be at the same level depicted in the white box.
SPY 1 min-is the same explanation as above.
The 5 min chart which is more important to the longer term trend is making new leading negative lows, which also tells us the end of day positive divergence wasn't that strong, otherwise it would be reflected on this chart. Compare where price is now to the lateral red arrow-much higher now, but look at where 3C is compared to Oct. 4th. This tells me that the position accumulated at the white arrow has been completely sold and likely they are heavily short. Looking at price alone, you would never know this, that is why I say 3C has the power to contradict price and show us what smart money is really doing.
This is ES (E-Mini futures, about $60,000 per contract) which trade 24 hours a day during the trading week. We see distribution in red during the trading day, price falls significantly and an end of day positive divergence.
The longer term 5 min ES chart also shows longer term distribution and an end of day 3C reading that is not positive, but inline with price, meaning following price.
ES 15 min-shows longer term distribution at this top, the green box shows 3C confirming today's price decline.
ES 30 min, we see accumulation sending price to it's high and at that high, there is distribution. Just as said, they sell in to demand and in to price strength to get the best average position. Today we also see a negative divergence and price react badly, falling in the afternoon. 3C is leading price lower at the close.
Here are the long term charts. Remember, an hourly divergence is very strong and we don't see them very often unless a big move is coming.
Compare price and the corresponding 3C level at point A and B, price is higher, 3C is much lower. The long term trend is showing a lot of distribution in to this last rally-which is a mix of selling their long positions and going short.
IWM hourly in green shows confirmation of the downtrend as 3C makes lower lows with price. Compare points A and B and where 3C is in relation to each-currently leading negative.
QQQ hourly. This is an excellent example of how this latest rally has been distributed, look at points A and B and notice how much lower 3C is and in a leading negative divergence. Even though price has made a new 10 week high (likely a head fake as it moved above point A, 3C is moving toward new lows. I believe the last 10 weeks have been used in part to accumulate for the current rally and it has been distributed hard.
We see the same in the SPY 60 min as price is higher then point !, 3C is lower and in a leading negative divergence.
It's my position that if we were seeing price pullback over the last few days for a new leg higher, we would see accumulation of the consolidation/pullback, instead we just see more distribution. I do not believe this is a consolidation for a new leg higher.
Study the charts, they will tell you a lot about how the market works.
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