Market Update

The last week or two I've been saying "Expect volatility to get worse". I'll have to check where we are at with volatility now, but as mentioned earlier, pre-NFP last Friday it was 50% higher than Feb.

 The earlier SPY positive divergence looks like it was run over and that can happen, but it looks to me that there's been some short term accumulation in to lower prices as the relative positive divergence is holding well. For short term confirmation 3C should be lower than it is where the arrow starts at the left. "V" shaped reversals aren't seen often and I would think we are likely to see some chopping around laterally for a bit in the area, it seems to have already started.

 One of the reasons 3C is so difficult to understand compared to other indicators is because it is showing underlying smart money action. Although we have some short term positive divergences, the damage or the extent of distribution accrues from shorter term charts and a series of moves in those short term charts. For example, a positive divergence in the SPY may lift it like it did the last two weeks and the last bounce the SPX made a new high, but the accumulation period was small compared to the distribution once price started up, a series of moves like that adds a little accumulation to move price intraday or for a couple of day bounce, but the distribution is much heavier and accrues on the longer term charts. When we had the last real bounce (early last week), I said that bounce, even though it made a new high in the SPX, was starting from a much weaker place and distribution in to the bounce would be heavy. You saw the 15 min chart earlier and how deep the leading negative divergence was, look how much additional damage has been added today alone.

ES timeframes are a bit different on 3C then stocks, but here's the 1 min, a similar relative positive divergence suggesting the market is accumulating enough to simply get the market to bounce, which will see distribution in to the bounce.

The 4 hour chart of ES shows how bad the situation is. 3C is now lower then it was at the October lows when the market started to rally, yet price is much higher.

How can that be explained? Weighting of the averages, such as stocks like AAPL and market breadth.

Here's a simple example of market breadth showing the deterioration in to rising prices. You have to remember, Institutional positions are huge, they can't be flipped in a day or a week, it takes time to turn a ship that large and reverse course.

While the averages alone and any indicators applied to them may have looked bullish, this simple breadth chart shows what was really going on with all of the components that make up the average, this takes away the deception of weighting.

In green is the percentage of stocks trading 1 standard deviation above their 40 day moving average (red is the SPX). In February the percentage of stocks was almost 80%, by the time the SPX made it's highest high last week that percentage was cut in half and now stands at 12%. That means, despite what the weighted averages say, more components in the market are falling apart faster then most people realized, price of the average alone can't tell you this and thus, price is deceiving. I've been warning about this market for a long time, it IS NOT what it appears or appeared and we are just starting to see that now.

However, Wall Street will try to keep as many people guessing as long as possible and that is why volatility will continue to increase until there is a break that is simply unrecoverable. 3C has been showing it, the risk layout indicators, credit, etc have been showing it and breadth has been showing it.