ES Update

For those of you who may not be familiar with "ES", this is the ticker for the E-Mini S&P Futures. The reason we follow ES is #1 it tends to give great intraday signals unless the market is in a heavy distribution stage like at the top of a bounce that is near a downside reversal and #2 because ES is very influential regarding the S&P-500, for instance, ES trades overnight during the week session and opens early Sunday night. The movements in ES in large part determine or help us determine where the market will open.

In an earlier update today, "Quick Market Update"  at 3:43 p.m. I posted this chart of ES (which we track using 3C 1 min for intraday moves and developing trends) with the following comments...

" The ES chart is the only 1 min, as mentioned before I wanted to see a pullback and 3C build, the pullback came , 3C for ES held and didn't make a new low with price, it's moving up, I'd like to see it continue to move higher. The trend for the day looks good."


As you can see above this was the second time I mentioned my specific expectations for 3C/ES readings. While the lading positive divergence is good, it usually is only the first part of a divergence and to see if there's a stronger divergence building, we need a move to either the same relative Es price level as where the first divergence occurred or even better, a move lower in ES. If 3C stays positive, we are building a bigger positive divergence. 


The chart above shows 3C leading positive, making new highs for the day as price pulls back, this is the point of 3C, to contradict price and give us early warning that a price move is either confirmed or not what it seems, for instance a head fake move.


Here's the current ES chart, it will take a little explaining for those not use to spotting divergences. 

This chart starts at the 9:30 New York open to the far left. The first white arrow (white arrows always represent a positive divergence-green gets too lost in the price charts which are almost all green. Red denotes a negative divergence, a box denotes a more powerful leading divergence) is a relative positive divergence that was between two relative points, 1 pre-market and the second during market hours. As you can see, ES responded almost immediately to that positive divergence and moved higher, even though the EUR/USD correlation was not supportive of a move higher. ES topped on that move around noon time, it is important to note that it reversed (there is probably some other correlation that indicated the reversal, likely to be found on the Risk Asset Update), it is important to note there WAS NO 3C NEGATIVE DIVERGENCE turning ES down at this point or at any point during the day. 


The second positive divergence in't a "perfect divergence", but it is close enough. The next white arrow that spans approximately 11 a.m. to 1:45 p.m. as the second positive divergence, this at the point in which ES touched the red trendline for the second time. It's not a perfect divergence because that second point was not lower than the first time ES touched the red trendline, but the divergence is clear enough that it doesn't much matter. This is showing 3C's underlying trade (3C looks for accumulation and distribution via positive and negative divergences) is stronger at the second pullback to the red trend line than the first pullback. 


From that point ES turned up, but did NOT make a new high, however 3C did make a new high which is a leading positive divergence seen in the white box around 2:15 p.m. It is at this point I first mentioned what I would like to see happen in ES, either a pullback to the same relative price level or to a lower low so we can see how 3C responds. 


From the roughly 2:15 top of the run mentioned above, ES broke below the red trendline and headed to the lows of the day, this gives us a very good indication as to whether the 3C underlying trade is holding up or whether the divergence fails. 


At the low in ES roughly around 3:30 there are 2 white arrows stretching across the chart to the low, the shorter white arrow shows a positive divergence between the 1:45 pullback to the red trendline and the new ES low, 3C is higher at the new low than it is at the 1:45 pullback, this is a continued positive divergence. The longer arrow reaching to the ES low of the day compares the frist time ES pulled back to the red trendline and the low in ES and again, 3C is higher at the ES low of the day, another positive divergence or confirmation. When price is lower and 3C is higher, this is the positive divergent signals we look for to tell us there is likely underlying accumulation activity taking place. As volume increased on the move toward the low, there is more supply available in the market, whether from sellers or short sellers (both are selling) which allows smart money to accumulate a larger number of shares without arousing suspicions and driving price against their position. 


Finally from that low to after market 3C is again leading higher. Confirmation would be if 3C hung in the same area as price, a negative divergence would see 3C move below price to new lows. All day 3C put in a series of higher lows, even as ES moved to lows of the day.


Thus far the trend in 3C/Es for today looks very good. There were several positive signals as well in the Risk Asset Layout as well as the 2 day 15 min market averages.


Usually in a market that is not in this bad a shape, I would take profits in my short positions (Currently: BIDU +14.73%; CAT +13.92%; PCLN +13.06%; AAPL +9.52%; XOM +4.52%; and BEAV +2.07% -all straight equity shorts with no leverage/no options except an XOM July 85 Put at +32.31%) and try to reposition on a bounce higher. I am not trading around these short positions simply because I have spent over a month accumulating them and the market is in such bad shape I don't feel the benefit is worth the risk of not having the positions on a market break.


I'm positioned with several speculative trades that are much smaller (as they are speculative and run against my larger view market outlook) to try to take advantage of a bounce, those positions which are much smaller position sizes include equity longs in TYH and FAS and Calls in AAPL, BIDU and USO.


Next up is the signals in the Euro/FXE as the Euro is key to giving the market the breathing room it needs to move higher, trigger a short squeeze and a bounce. Keep in mind though, a move higher is only a tactical opportunity to add to short positions. Our larger view analysis is very bearish on the market.