You may recall that my belief was this would be a very volatile bounce precisely because of increased volatility, which is something typically seen at tops, in fact optically it's pretty easy to eyeball.
I have one member that reads all of the trading sites, as I don't typically have time for that he updates me periodically on what traders in general are thinking and most importantly, "Feeling". Here's his update for me today...
"Hi Brandt, It's working and the bulls looking to get back in and it's killed all
those who bought puts thinking plunge to 1350. "
Here's some excerpts from Tuesday's market update
On a 60 min chart the top formation is much easier to see than a 1 day chart, so is the break. This is an important break. It has been our experience market wide that any break of important support almost always sees a strong volatility shakeout move. Technical traders will be expecting a test of former support, now resistance at the trendline. However our experience has been that rarely happens and the test will look like it failed as the market moves above resistance, this would keep the "Buy the dip" longs in the game as most people are pre-dispositioned to being long the market. With volatility increasing it would not surprise me to see a move above the trendline, it may take more then a day, but it wouldn't surprise me.
Think about the psychology of this, bulls feel like the top broke and the break was a failure, they feel safe to buy. The shorts ask themselves, "Why won't this market hold its losses? This must be a correction and not a top". This is exactly what Wall Street wants, to keep everyone guessing, to keep everyone moving in to trades as most traders chase the market and then see those same trades stopped out. This is all to Wall Street's advantage. So while I can't point to a strong enough positive divergence as of yet that would suggest such a move, that has been my experience. I have little doubt whatsoever we are witnessing a top breaking apart, however for the market to do what I mentioned above, volatility must increase. Over a week ago I said, "Watch out for increasing volatility".
The excerpts above were posted as the first hints of short term accumulation were forming for a bounce, later in the day they were clear. It kind of cracks me up that the talking heads attribute the move to the trade deficit, even though Initial Claims made the pre-market action look like today was going to be a flop. The truth is Wall Street works pretty far out in advance of price action. The dovish blabber from Yellen and Dudley probably did help today, but that switch back and forth every week and curiously it seems to be dovish when Wall Street has set up a bounce move like this in advance and hawkish when the move is failing and heading lower as we saw on Tuesday with the SPX breaking both the small H&S top trendline and the 50-day average-both important breaks as noted above.
Looking back at what has happened since Tuesday, the above excerpts from Tuesday's market update are right on track. Judging from sentiment on the blogs and financial sites, the move is having its intended effect. As I mentioned, there's no purpose in even bouncing the market if it isn't going to sway emotions, knock out shorts and give the bulls something to get excited about.
As for today's action, we saw pretty decent signs of distribution showing up in the negative divergences in the market averages as well as ES. We didn't see the same thing yesterday because there simply wasn't enough of a move to sell in to.
Some members have asked about the possibility of a pullback before the market moves higher, which as I mentioned in the last market update today, I think it will. A case can certainly be made for a pullback, but the point of such a bounce is to sway emotions and the stronger the bounce looks, the more effective it is in swaying emotions.
I've mentioned it a few times and it makes sense to me, a rotation in to tech. The last bounce we saw before the SPX broke below the 50-day m.a., the SPX and Dow moved first while the NDX and Russell 2k were flat, the next day they switched. With the positive divergence in AAPL toward the end of the day, this theory makes even more sense. In light of that, we may see financial shorts set up before Tech and I'll be on the lookout for that tomorrow.
Interestingly the dominant Price/Volume relationship among the averages' component stocks was solidly in the Price Up/Volume down camp, which is also the most bearish of the 4 price/volume relationships believe it or not.
The $AUD is just starting to diverge a bit from the SPX, this has been an excellent leading indicator, but for me, looking at the market at the end of the day and trying to decide where we are in the process, the divergence simply was not as sharp as it should be, I expect it will become more divergent.
High Yield Corporate Credit looks supportive of the market's bounce, however upon closer inspection, HYG seems to simply be clearing out shorts as it has made a lower low (mentioned earlier in the week).
High Yield Credit, which is very cheap vs the SPX did rally today, it would seem silly not to use HY Credit's cheapness in a bounce, however it is diverging compared to yesterday.
Yields have started to diverge today as well, another excellent leading indication and they've done so at the right spot, again, it wouldn't have made sense yesterday as the market was fighting some headwinds.
For the moment, there's not much to do but watch the market for signs of a reversal, that's where I want to back up the truck. The emotional damage that will come out of a failed move this volatile will be pretty heavy and being we've already broken the SPX's 50 day moving average with volatility as high as it is, the reversal back down should be uglier then the move up is impressive, but that's not a new concept, Fear is always stronger then Greed/Hope and that's why markets fall faster and harder then they rise.
If anything interesting develops before I go to bed, I'll make sure to post it.
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