And An Algo Is What It Appears To Have Been

First take a look at this article from Zero Hedge explaining the compression trade, remember it's intraday.

Now take a look at this article with yesterday's Divergence between E-minis and the risk basket 

Note how it's only the ES in Orange (basically the S&P futures) that rises, while most other risk assets in what's called the risk basket in white, don't follow along. What's happening is the market is being bid up by an algo program, but there's not a broad market move as the risk basket including treasuries, gold, oil, etc are diverging.

Yesterday's divergence shown in the link above resolved with today's downside move. Here's the article showing the resolution and you know what happened in the market.

And today at the end of day, I noted some odd trading patterns. Then I found this posted at ZH.  This should clear that up, the implications you can probably piece together.


I wish I had a Bloomberg Terminal. 

The Miner Trading System Update

Today we had an entry in to DUST, closing out the NUGT position from last night's system 1 signal. As I suspected, system two followed suit today and is signaling a long trade in DUST Monday morning-don't forget to close NUGT.

HFT?

It looks like some kind of HFT algo has been deployed

 5 mn chart, higher highs/lows like short covering and big green volume

But break it down to the min and it looks quite a bit different.

XLF and the Long View

Remember, since early June, the idea of the market bouncing as it has the last few weeks was based on the long term 3C charts looking strong, even in a market that looked very frail.

That's why this chart of financials-XLF is so interesting....

The green arrows denote strength and confirmation of the uptrend, look what happened yesterday and furthermore today on the hourly chart!

SPY update

Trade has been pretty dull, but I have a feeling this triangle is going to decide the action in to the close. Keep an eye on whether it can sustain a move or fails.

SLV

I'm not going to go in to a broad discussion of SLV right now, but I did want to point out 1 chart.

This 15 min hart shows this morning's gap up in the red box, with a negative 15 min divergence. I've seen this pattern a lot and usually it's a good indication of a downside reversal.

PCLN, Bucking the Market or Setting Up a Short?

PCLN's trade today has been interesting, take a look...

 The daily chart looks strong with a new high for this leg!

 Here's the intraday trade on a 5 min chart, note volume when it crossed above yesterday's close and volume spiked again when it posted a new high for this leg.

 3C 60 min

 3C 30 min.

 After great confirmation, 3C 15 min goes negative.

 3C 5 min negative at new highs

And the 1 min chart negative at new highs.

This looks like it could set up a decent speculative short with a break (best if volume is big) of the trendlne at $547.34. A stop could be placed above the highs of the day which would represent minimal risk. If it breaks down hard on the trendline, this could easily snowball down into the close.

Answering the Gold Question

My overall feeling is gold is still a good trade, but there are pullbacks that are deep to the 150-day moving average that happen 1 or 2 times a year and this level has shown consistency as being a good place to be a buyer. The current question is what does gold do from here, move higher or pullback to the long term mean average?

There are so many undercurrents in the PM space, fundamentally gold is difficult to analyze.

One trend I do suspect that we will see develop is the bargain gold trade, which is in buying the miners, but this s over a long term perspective, not a swing trade-we'll leave those trades for the Miners trading system.

One of the fundamental questions is what effect the Dodd/Frank bill has on gold, silver, oil and various other asset classes that trade on large leverage on the OTC markets now that the bill is taking effect. In the consensus interpretation of the bill, which Bernanke himself says is confusing, it seems even hedge funds or at least a large portion of them may also be banned from trading on the OTC markets. In the short run, it would seem that those positions would need to be closed. The bill supposedly goes in to effect on July 15th of 2011, but many OTC market places are requiring customers to close positions prior to that date. From a common sense perspective, it would seem that this would put downward pressure on gold as massively leveraged funds close positions. There's also the question of what the market does over the next week or two and whether there's a safe haven flight to gold?

 Here's the weekly 3C hart of GLD, while there's been some slowing of momentum, it certainly does not look like there's an imminent crash building.

 On the daily chart, (speaking of false breakouts), GLD had a false breakout in the red box, the daily 3C chart confirmed this and in fact warned of it. Since there's been a mild positive divergence and gold has bounced back some, but 3C is NOT confirming this bounce by following price higher.

 The 15 min hart shows some more details of recent trade starting with the false breakout, the positive divergence at the lows around the 1st and a current negative divergence as GLD enters the area I defined several days ago as "gong to be sticky" as far as resistance goes.

 For intraday trade, we saw a late positive divergence yesterday afternoon and snce GLD has been more negative in to higher prices today. It's important to note that prices today are in the area of the triangle's apex, which is typically a resistance area.

 MoneyStream, once again as I explained earlier can have some excellent daly signals, is also signaling some trouble ahead if you look at the relative price points and divergence.

 Here's the 150-day moving average and the pullbacks that I mentioned that are seemingly great areas to buy. While our current top shares some characteristics with the white box, overall, I think it's more similar to the red box, which did pullback to the 150 sma.

Looking at the same moving average with pullbacks at the white arrows, we see some negative 3C activity on the daily harts in the red zones. It seems the current activity is the most severe of all of the former levels while would make sense considering gold's valuation now.

While this is a tricky subject and there are many markets not represented in our charts and many markets that will be shutting down, causing a scenario unlike any we have seen in the past, my gut feeling is still that GLD will see a pullback to the 150-day moving average. It may be at that time that hedge funds and other speculators forced out of the OTC markets (which in itself could move gold lower), may look to the 150 sma as an opportunity to get back in to their gold positions they were forced out of by the Dodd/Frank legislation.

Feel free to send me your thoughts on the subject. We may see a great opportunity with a great historical track record present itself.

CAT is another on the list

As I've been watching performance of industry groups, the Farm and Construction Machinery has been a group I've been interested in, thus the reason CAT and DE have been on my short candidate list.

 The weekly hart is certainly interesting to me. Even at the Q1 2010 top, which until recently saw the most draw down, RSI didn't' go negative. This time RSI did go negative as CAT made higher highs.

 On the daily chart, yesterday CAT put in a candle that looks very much like a shooting star reversal candle. Japanese rice traders who first used candlestick charting would refer to the shooting star as there being "trouble overhead". The fact that thus far CAT's highs today have stayed below yesterday's lows is also attractive.

Here you can see the cycle of accumulation starting the trend up, previously there was a negative divergence and if you look carefully, that uptrend ended not only on a negative divergence, but  false breakout as well. The divergence today is in a leading position. As usual, I'd like to short in to strength, but even at these levels with a stop above yesterday's highs, CAT still makes for an interesting short candidate.

As with any short, always be aware that if you are short when t goes ex-dividend, you are responsible for paying the dividend.

Another Trade for Your List-DKS (Short)

 Daily of DKS (click on the chart for a larger view). DKS broke a downtrend line and also just barely pierced a reaction high from May which was part of the downtrend of lower lows/lower highs.

 As you can see, 3C (15 min) had excellent confirmation of the uptrend, almost mirroring price exactly and making higher highs, UNTIL yesterday as it put in the first negative divergence.

Ideally I'd like to short DKS on some strength, the red rectangle is a breakout and gap zone of resistance, any price movement approaching that area would grab my attention. From the 3C chart above and the volume on the break, I'd say the uptrend's back has been broken.

Market Update

 The DIA above and the SPY and QQQ are showing some slight 1 min positive divergences. For the DIA and QQQ, not surprisingly, they are forming at support which is the important level to watch for today. The TICK chart is showing some modest improvement.

 QQQ

SPY

None of the 5 min 3C harts are in positive divergences. There's a possibility that the averages slide laterally along the support level and build a bigger positive divergence.

The IWM is currently not participating in these 1 min divergences.

Trade Idea- FDX (Short)

I'd like to see a few things happen before just jumping in the trade, of course the tone of the overall market at the close will be important and whether the market produces a failed breakout from yesterday as previously discussed. FDX has the same issue.

 The point of a false breakout is to trap longs, longs need a reason to buy and the technical reasons are pretty easy to identify, such as a break of an important resistance level, FDX did so yesterday. Another would be posting a new breakout high, yesterday FDX also did that, not only at the Feb. high, but since the March 2009 rally started. What needs to happen to make FDX an interesting short at this point is to break support at the red trendline, the more convincing the break, the better.

 While I don't use MoneyStream a lot, I think it's a solid indicator when it does give a signal and here we see a substantially lower MS reading at the breakout, then at the Feb. high.

 The hourly trend channel has done a good job of holding the trend, the channel being broken to the downside and the channel turning down would be a strong indication as well.

 The 30-min 50 bar sma has also held the trend well and a break of this average would be in line with a break of the trend channel as well as support.

You can see volume has been decent lately, especially above the former resistance level. This is part of last night's Price/Volume relationship, which clearly showed the longs came out. The resistance levels identified as needing to be broken to the upside to entice longs back in the market were right on, thus the dominant price volume relationship last night. One trade that I would consider would be a break of support at the red trendline, especially if the market does the same today , I'd probably keep a fairly tight stop just above today's highs. You could opt for a wider stop above yesterday's breakout highs as well, you'll have to decide on that when looking at your position sizing and whether there's a convincing break.

Trade Idea LEN (Short)

 LEN has been in a downtrend channel for nearly 5 month, characterized by false breaks above and below the channel before reversals. Yesterday LEN broke above local resistance possibly setting up a false break out.

 Here's what 3C (15 min) looked like on the move yesterday, it was negatively divergent. Today the break back below that local resistance is another signal that yesterday may very well have been the often seen false breakout before a reversal (to the downside) begins.

 The hourly 50 ema has provided decent support to LEN, it's now broken, although there's commonly volatility around these support resistance areas after an initial break.

Several entries could be set up depending on your trading style and risk appetite. A break below the consolidation triangle around $18.30 could be an entry, for those wanting a higher probability trade and willing to take on a wider stop, the break back into the channel would be very high probability around $17.50. I would prefer a stop above yesterday's high if I were to enter in this area, if I were to enter on a break back into the downtrend channel, I'd have a stop just above the downtrend line, maybe around $17.80. Should LEN enter the downtrend channel, it's likely that it will quickly shoot to the bottom of that channel around $15.75.

And the Reason Why A False Breakout was Suspected

Frst, t's because that is the market M.O. for reversals, secondly, the 30-60 min 3C charts have been the backbone of the belief we'd see a rally since early June, when that strength started to dissipate, it became clear what was going on. Last night's P.V relationships were astoundingly on point, as I said, "I couldn't make this up".

Here's the formerly very strong 3C 30 min SPY chart.

Note confirmation of higher highs in 3C during the short squeeze, until 7/5 on, 3C since then has weakened significantly.

SPY Update

It looks as if the SPY may try to fill a bit of the gap, t's still very early, but those are the initial indications.

What it takes from here

 The DIA will post a change in trend should today's high remain below the orange trendline. We can presume with a fairly high degree of confidence that a break below the red trendline will give us a false breakout (which as always is one of the best reversal signals we have).

 QQQ -The Q's can't change the swing trend today because of the highs already put in, but more important would be the false breakout confirmation which would occur with a close below the red trendline.

As the SPY sits now, it is a confirmed change in trend, so long as it doesn't make a high on the close that is higher then yesterday's low. The SPY as it sits right now is also a confirmed false breakout yesterday as we are below the red trendline. These will be important levels to watch today and we can probably start easing in to some short positions with a little more confidence.

I wrote to one member yesterday that I had a feeling today would be the day.

Thus far, the concept of what we've been looking for in the markets since Late May/early June was played out almost exactly as expected. This isn't because of a crystal ball, it's not a guru thing ether, it's simple, objective observation of market behavior, especially as it relates to retail traders. Remember what I posted last night about the dominant Price/Volume relationship and remember all the small clues along the way.

Lets see how this plays out and where the opportunities are.

Non Farm Payrolls

Well, we were in the zone and looking for a breakdown, it looks like the huge mss in NFP may be the catalyst.