Just remember my central thesis, the game is about putting as many pieces of the puzzle together as you can and then making a decision based on the information you have. These comparative indicators (I tried several ways of creating actual indicators, but in all but 1 case, comparative indicator were easier to read). That being said, no 1 indicator by itself is the answer, it's taking the sum of them, 3C and other analysis and finding the sweet spots where agreement is high probability.
Here's a first look.
First commodities, they are a risk asset and should follow the market pretty closely, divergences can show that a risk on trade has limited breadth and I suspect this will also be a good indication of the Chinese economy moving forward.
This daily chart points out commodities giving early warning at the QE 1 top and made for a good short trade from the SPY's (always green) top. Commodities also gave at least 1 month of early notice of a new uptrend before equities or while equities where bottoming. In 2011, they pointed to the top right before the July crash, right now they are significantly underperforming equities, suggesting this is indeed a top.
On an intraday scale, they pointed to a decline as the market went higher, a good short entry and now on a short term scale equities have caught up to the risk off in commodities, but the daily divergence still remains wide, suggesting more downside and that this is a top, there's also obvious implications for the world's largest commodity importer, China and as such, the global economy as well as acute issues such as the EU.
The Euro. Over the last few years the Euro which is more indicative of the dollar relationship, has been somewhat meaningless because of QE1/QE2 where Fed monetization via the primary dealers drove all risk assets up as the PDs took billions in middle man profits and put them to work n the market, but not that QE/POMO is over, the FX correlation is taking on renewed meaning.
Here we see several small divergences that would have worked for quick short sales to the left, the bigger issue is now with the dollar moving higher, the Euro lower and risk assets haven't moved much at all, there's an expectation for reversion to the mean and risk assets to eventually catch up to the fall in the Euro, again suggesting we are in a topping process.
Very short term, there's an uptrend in the euro in white that led the market higher and several dislocation is equities that have led to sharp sell-offs, these dislocations, when taken with 3C and other indicators make for good short sale entries. Short term risk assets have fallen to catch up with the already low euro, but the chart above this shows there's more downside to cover in equities.
This is one indicator, not comparison, that may serve as a model indicator for others, it is the difference of performance between financials and the market, not financials vs the market. In other words, it is the spread between the market and financials, almost like replacing MACD's short and long term moving averages with the SPY and XLF instead. In 2007 it was very early in warning of the top
At the 2011 top, it was also an early warning of the top and currently is warning again that we are at another top.
Here it shows on an intraday basis, several good short sale entry points and the market saw sharp 1-4 day drops from each point, it continues to suggest more downside is coming.
Here is the SPY vs high yield pointing out the 2000 tech bubble top and also giving at least 3 months early notice of the new bull market bottom before the market moved.
It gave the same early warning in 2007 while CNBC pundits were still calling for Dow 20,000 and also gave early warning at the 2009 market bottom 3 months before the market bottomed.
In 2010 after QE1 the market made a top before QE2 was announced, this gave nearly a full quarter or 3 months early notice of that top and again was trending up nearly 3 months before the market started on it's next QE2 leg up, a great time for investors to have accumulated at the market lows and with intraday information, the timing probably was superb.
Here's warning of the 2011 top just before it crashed in July if anyone remembers that horrible rash, also early warning on the October rally, the same as 3C. Currently it is short of equities and seems to be warning of another top right now.
For intraday use, it nailed the exact top of the October rally.
On even shorter timeframes, entries can be optimized as several warnings have led to sharp and quick equity sell offs.
This is high yield corporate credit vs the SPY and on a daily basis also warned of the QE1 end/top as well as early warning of the new QE2 uptrend, again about 3 months early, It also shows the 2011 top.
On an hourly chart, HYC started topping and broke down before the market's sharp break of the last few days, this would have warned as far back as the 8th of a coming fall in equities.
On a shorter term chart, it gave a buy signal for a sharp equity move up as well as 3 sell signals for sharp moves down, and all of this in a lateral market that most people would otherwise have a very hard time making any money.
On an even shorter chart, the same signals are there, the signals are in the boxes, the move in equities are represented by the arrows.
This is interest rates and warning of the 2000 tech bubble top as well as confirmation of the ongoing downtrend-you'd known to stay short.
Here's warning of the 2007 top and it shows how serious the market fall would be long before the fall got serious.
Here's the 2009 bottom and a good 2 months of early warning, while most expected the market to break to new lows.
Here's very clear warning of the 2011 top as well as how serious the coming July fall would be. Once again, it refuses to move higher, indicating that we are currently at another top in the market.
On an intraday basis, it gave several buy signals that would have been confirmed by 3C and a sell signal right at the very top of the October rally, recently it has suggested more downside and recently we have seen that since Friday's pop in the market, which was an excellent entry.
On a 5 min chart, there's a buy signal for a quick move up and at least 2 short term sell signals that the market reacted to very quickly and a larger sell signal that we have seen play out over the last few days. These signals are excellent and would have made money, and that's not easy to do with the market having been in a lateral consolidation recently.
Right now in the short term equities have moved lower as credit and the other measures have indicated, longer term, there's still apparent, significant downside. Taking with 3C and using multiple timeframes of each of these, we can lock in to excellent entry points and even get an idea of how serious the coming move will be.
3C for ES tonight
Above was Thursday early am action that went negative and you can see the rapid fall in price today, toward the EOD it went slightly positive and ES moved up, in after hours it went negative and ES moved down.
This was the last capture of ES with Es responding to each of the divergences.
3 a.m. will be the start of a new day, I can see the probability of lateral action or even a bounce, but the longer term implications continue to suggest we are in a top.
As for tomorrow...
Long term trend, 3c is showing not only the top, but significant downside ahead.
Short term 5 min, it looks like a bounce to start the day, how it ends remains to be seen and the credit indicators will likely give us a good indication as well as 3C. This divergence could also represent a consilidation as we saw through the afternoon and the early lift in ES after hours.
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