Overnight Thus Far

 The negative divergence in the $USD which grew worse today got me looking at the Euro after hours and I noticed a small bullish consolidation. The point I was making when I said it was small and hardly noticeable is not that it was hard for me to find, but that obvious technical patterns like an ascending triangle often get manipulated in the short term, this one was small enough that I didn't think it would be manipulated and it looked promising (it's in the green box). Since noticing the pattern that only showed up AFTER the market closed, it has moved higher, crossing above where the ER/USD opened this morning at the NY open at 9:30 and it's not too far off the intraday highs at the red arrow.

 Over the last 2 trading weeks, as pointed out earlier today, there have only been two breaks in the down trend that could produce a small base from which to rally from, the first was right after the break of $1.30, the second has been over the last 2 + days.

 ES isn't flying after hours, but the stronger Euro/weaker dollar is helping ES move up, the red arrow is the 4 p.m. close.

 On a longer chart there's the possible formation of a "W" bottom, as most of you know, "V" reversals aren't very common, it takes time to set up a bottom which requires shaking out positions. This is a decent start to a short term "W" base that the market could work higher from in the near term.

 The 15 min 3C ES chart shows the 5/1 negative divergence or last top and a 15 min leading positive divergence, there are similar patterns in the market averages such as the 15 min QQQ and 15 min SPY

 QQQ 15 min, similar divergence to ES 15 min with a negative through the 5/1 top.

The same in the 15 min SPY

 As for longer time frames in ES, the top area is clear on this daily chart with a leading negative divergence-this is the ugly longer term trend and bear market I expect to continue to develop although a bounce is still in the cards.

The longer term 3C ES weekly shows the 2011 top and the leading negative divergence that is worse at the current top, this also parallels many of the market averages, Industry groups and key bellwether stocks.

If the concept that we have seen so often that it influences when and how we enter shorts, is still alive, then we have the key breaks of support needed to get one final shakeout move underway.

Breaks of key support levels in the majors...

 SPY

 DIA

 QQQ

IWM

12 years ago it was a no brainer to short a break of support lie this, once in a while we'd see a failed test of resistance that offered a second chance shorting opportunity that was often considered to be lower risk as you could still short some strength, but use the resistance as a stop. Wall Street caught on to the game pretty quick as technical analysis went from a voodoo art to main stream as the internet offered automated charting, cheap online brokers and DIY investors looking for an easier, less time intensive way to analyze stocks, thus the flood in to technical analysis, but with that came the predictability of what traders would do which Wall Street adjusted to, technical traders just keep doing the same thing. This is one reason we see strong short squeeze rallies when key support is broken.

Other reasons for the head fake moves and I believe (we'll have to see if I'm correct) the Euro didn't shape up until after the market closed as to not ruin the head fake move. Back to the point, there's a lot less retail money in the market now, there's less institutional money as whole continent's like Europe have sold assets to try to recapitalize their banks. Th flow of funds data has shown retail investors moving out of domestic equity funds by the billions every month. Thus one of the reasons for head fake moves is that they are self priming without the need to invest too much in to a counter trend move to make it work. When the market breaks key support the longs are stopped out, the shorts enter en masse (we are already at 2012 highs in NYSE short interest as of last week and you saw how many puts there were in the SPY options chain vs. calls), a move back above resistance is usually where retail traders place stops, in this case "Buy to cover" so the first move above resistance will cause the start of a short squeeze which feeds on itself as demand via short covering causes more shorts to cover, thus we get a strong momentum move up with minimal need for Wall Street support. If the move is strong enough, what' left of the "Buy the dip crowd might even come in the market. Just the same as we see downside head fakes, in nearly every bounce we have played over the last several months, almost every one has ended with an upside head fake move, breaking above a resistance level or setting a new intraday or closing high. Longs that come in to the market are caught in a bull trap as it reverses back down and momentum once again snow balls.

If we do get this one last bounce, don't be surprised to see a move  lot stronger than you'd anticipate. There are reasons for these head fake move and reasons for these bounces, if thy can't accomplish a certain level of emotional capitulation, they aren't worth running as each one, as we move closer to the edge of the cliff, becomes more dangerous as a counter trend move.

I may be getting a little ahead of myself, we have some interesting charts, the start of a decent move in the Euro, a change in character in the trend from down to lateral as seen in ES and the Euro above and a small, but decent move in ES tonight in what is potentially a short term bottom. Like I said, I don't want to get too far ahead of myself or the market, but there are certain trends we have observed time and time again in which retail traders get knocked out of positions, we've recognized the game and have been able to use it to our advantage as evidenced by every short in the equities portfolio already at a respectable gain and we haven't even really broken free of the Stage 3 top, much less entered stage 4 decline where the real money is to be made.