Near Term Analysis

Hopefully after you see all the charts you'll understand why this post took so long to get out, it doesn't need to be read all at once, so take your time and see what you think.

I already showed you the big picture so you know how much trouble I think this market is in, but nothing in the market goes straight up or down; the bearish sentiment is overwhelming and for good reason, but that still doesn't make Wall St. money by trading on the same side as retail. What you didn't see in the big picture post was some of the longer intraday timeframes which are bearish as well.

I've recently been thinking if we don't see a monster bounce before the F_O_M_C, I'll have to consider the possibility there is a QE3 leak, but in examining some of the longer term intraday charts, I don't think that's the case, but those positive divergences on intraday charts are large and long lived so that usually means the move they are pointing out will be commensurate with the size of the divergences which are pretty big.

Bank of America doesn't think QE3 is coming in June, but increased chance for August, I don't have an opinion on that as of now, who can say what the F_E_D will do or the ECB?

Some fundamental/macro-economic/Technical background...


Friday JPM lowered US Q3 GDP estimates from 3% to 2% with their reasoning being largely a slowdown in exports. Q4 estimates were unchanged at 2%. The Q2 growth projection remains unchanged at 2.5%. Full 2012 outlook was cut from 2.3% to 2.1%.

Manufacturing PMI's in Europe and China were horrible last week followed by the US Non-Farm Payrolls for May.

Bank of America believes Friday's NFP is not sufficient to see QE3 at the June F_O_M_C meeting, but August is increasingly likely.

Friday Spanish and Italian Soveriegn 10 year debt rallied, apparently the ECB stepped in to defend the bonds from their yields blowing out further, if so, this would be the first time in quite a while (several months). We'll see if it continues this week, but just seeing the ECB act is something, it has been about 4 months of radio silence from them.

Monday and Tuesday Europe will be slow with UK markets closed due to the Queen's Diamond Jubilee. Who knows, it seems the market does better when Europe is closed.

Wednesday brings the ECB's rate decision, widely expected to leave rates at 1%.While the ECB is being pressured to act, the consensus view is that they are waiting for some sort of coordinated European strategy to emerge, one that has been incresingly difficult since the French elections and the North/South Divde it has created as once former German EU ally France now shifts more toward the Southern/PIIGS nations in calling for things that Germany opposes such as a Euro-bond. The June Greek elections are likely another cause for a "Wait and see" attitude at the ECB. The ECB will also be putting out their view of growth and inflation for the Euro-zone 2012 on Wednesday.

Thursday the Bank of England will make their rate decision as well as decisions on their "Asset Purchase Facility", consensus is for no change, however recently several large investment banks have forecasted an expanded QE program due to the poor UK macro-economic data.

Friday the SPX dropped -2.5% and below the 200 day m.a., there's nothing magical about the 200-day average, but traders flock to it like flies to stink. I'd expect under normal circumstances (meaning nothing big happens overnight) there will be a flood of orders on the sell side as retail places orders and heads off to work, that could make for an interesting Monday morning and an interesting Monday day. When we talk about head fakes, the more traders that can be pulled in the more effective they are, a break of the 200 is about as effective as you get.

 We discussed several different ways head fakes could play out around this bear flag/pennant in the market last week, before this move got started the one thing I expected was extreme volatility, but saying it a month ago and seeing it are two different things.

SPX and the 200 day, a technical trader's strong Sell Signal.

S&P E-mini Futures (ES) saw the highest volume of the year  on Friday.

Gold posted the biggest 1-day gain since Jan. 2009-see our GLD accumulation post from earlier in the week.

Treasury yields saw all time record lows in the US as the flight to safety trade was strong Friday.

The S&P is almost unchanged for the year, the Dow is red, compare to the EuroTop 100 Index vs the SPX, as I have believed for as long as the argument has been going, the US is not decoupling from the world /European economy, it is lagging it.

Euro Top 100 is at a loss for the year, the SPX is just above a loss, the Euro-Top 100 has been leading, the US lagging.

Japan has a 200% debt to GDP ratio with a shrinking population, they may be in line for a sovereign debt crisis very soon. Before long I think Japan will be in the news as often as Greece and Spain, remember the big picture post.

Traders in the Euro go blind...

Greece started a ban on political polling for the June 17th election starting this past Saturday, polls have been mixed and were clearly WRONG at the last election as Syriza (an anti-bailout party) did far better than polls precidcted, which created the need for a second round of elections as the ND and PASOK (pro-bailout parties) who were expected to easily win did not have enough support to form a coalition governement.

The last poll taken shows Syriza with a comfortable lead, but for the next two weeks leading to the elections, tradrs will be blind to what's going on politiically in Greece.

Most recent CFTC shows a record of non-commercial Euro shorts. The ES non-commercial short position is not nearly as bad as the Euro position putting the Euro in danger of a strong short squeeze (generally market positive), especially as the key technical indicator they were following (the Greek election polls) has now been blacked out. I have to ask the question, if you were leveraged to the gills on a trade with everyone else in the market and your key indicator went dark, what would you do?

If we thought the market bears were bad, look at the Euro shorts in red compared to the Es shorts in black!

Now for a lot of charts... Lets start with the averages themselves as they show what we've been looking at for some time, you'll notice several key dates in the equity averages and the FX pairs that repeat with signals over and over again.

 SPY 30 min, I'm going to try to use as few charts as possible, the point here is the SPY with a large leading positive divergence on an important 30 min timeframe, compare the size of the current positive leading to the past two relative (second is leading) negative divergences and look at what price has done with much smaller negative divergences. As I have mentioned before, around May 7 through the 14-18 there was a positive divergence, you'll see it in a lot of chart and a leading positive at the bear flag.

 Here's that positive divergence starting on the 14th, it is not unusual, we saw the same thing in CHK;s positive divergence which was confirmed with real numbers, dates, price levels, there was a positive, lower prices and a stronger positive on Icahn accumulation. Another key dat is My 29 with an upside head fake move that failed with a negative divergence, al of the averages show this.

 Last Thursday there were few good signals in the market, Friday though they were a lot clearer, like this intraday 1 min leading positive as price decisively broke below the bear flag, again what traders were expecting along with the head fake move on the 29th (a failed test of resistance-a textbook classic short set up, even more so with the 200 day broken).

 SPY 3 min stayed leading positive Friday, Thursday had a few intraday signals that were right on, but told us nothing beyond intraday movement.

 The DIA has been the least visible with underlying trade, but you can see a clear transition fro inline downtrend to a leading positive with the negative on the 29th's head fake breakout.

 There wasn't much in the Dow Thursday, Friday gave a more definitive and useful signal.

 Same thing, Thursday the 2 min called intraday movement, but nothing else, as far as a head fake break down, it didn't close below the pennant until Friday which we see a much clearer signal.

 IWM 15 min is one of the stronger leading positives, again compare to the negative at the May 1 top, the size of the current divergence is much bigger and if we got all of this downside from that May 1 negative, imagine the upside potential from the current positive, also the key days of May 7-the 15th or so with a positive just like al of the other averages and assets. Once again the 29th's head fake breakout move with a 3C negative divergence.

 The 1 min chart was useful intraday Thursday but nothing beyond that, Friday was a different story.

 IWM 2 min trend, the green around the dates marks the bear pennant formation, the 29th the had fake breakout and a current leading positive trend.

 QQQ 15 min leading positive, the May 7th accumulation period, same date as all of the other averages, I find it interesting, especially as it ended around the 15th which is a key date for some discoveries made in the EUR/USD on that date. Again note the difference in size between the May 1 negative divergence and how far it travelled vs the size of the current positive plus the May 7th-15th-ish period.

QQQ 1 min going deeply negative on the 29th false breakout and very positive, especially Friday.


While most technical traders depend on lagging indicators like the 200-day m.a. I prefer leading indicators like the Dow-30 vs Transports and FCT ( a member told me about this one) vs the SPX, both have a leading component to them.

 The Dow-30 in green vs the Transports in white, note the Dow -30 made a new low, the transports did not on Friday. Note transports called the Feb.-May top in not making a single higher high unlike the Dow.

 Here's the same, but on a 60 min chart-I studied and taught Dow Theory extensively, this is a good leading indicator.

 FCT leading negative or positive at several key points since 2007.

FCT on Friday didn't make a new low with the market.


Some of our Risk Asset Indicators...

 High Yield Credit longer term called the top as it refused to make higher highs, in white it was supportive in not making lower lows, even Friday it didn't fall as much as you'd expect as credit leads, I take this to be market supportive.

 Intraday on Friday was was high yield (which is a real risk on trade in credit) rallying off the lows as the market drifted lower? HY Credit actually closed positive! I found this to be very interesting on Friday.

 Yields are also another great leading indicator, look how they failed at market bounces, now they seem to be reverted to the mean with the SPX.

 Note the 15th (a key date when we discovered some interesting things in FX) yields are quite a bit more positive as the market moves toward forming the bear pennant.

 While the PX dropped Friday Yields rallied, another leading indicator that was showing a bullish divergence in to a VERY bearish day.

 High Yield Corp Credit appears to be in sync with the SPX

 However look at the afternoon trade closer.

Several weeks of sector rotation momentum vs the SPX, the defensive sectors are obvious, but what is not so obvious is Discretionary, Tech, Industrials, Basic MAterials and Energy to a degree, all performing much better than would be expected.

As for sectors...

 Energy seen with the SPX bear pennant, note the out performance on the16th, the lack of a new high at the 29th false breakout and the recent relative outperformance Thursday/Friday. The yellow arrows are the 29th false breakout/head fake move.

 3C-Energy, negative at the 29th (1 min(, but pretty positive since, and leading positive Friday.

 The longer term trend on a 30 min, negative in Feb. in line at the green arrows, negative at May 1 and that same positive on May 7-15 and still in leading positive position after Friday.

 Financials have underperformed the SPX, the yellow is the 29th.

 Financials 1 min negative in to Thursday's close, very positive Friday in the afternoon

 Financials 15 min since May 1, again that positive divergence May 7th on, then in lone and then leading positive at the bear pennant, also a slight negative on the 29th, the same dates keep coming up with the same divergences in different assets.

Tech's relative performance vs the SPX in the pennant. Note the outperformance as the SPX broke below the bear pennant al traders were watching, also the outperformance as the SP hit the first low starting the pennant.

 Recent outperformance of Tech vs the SPX.

 Tech 1 min 3C, fits well with the chart above.

 1 min trend, several smaller divergences, negative on the false breakout at May 29 and leading positive the last several days. This fits well with my expectations for AAPL as I closed the June calls looking for a pullback to buy July calls in to price weakness/3C strength.

 Tech 3 min negative at the 29th with a nice positive Friday.

 5 min with an overall positive trend, but especially Friday, also note the 29th negative, which seems to be a clear set up, it repeats too often with strength following it on the downside break, an extreme Crazy Ivan.

Tech 15 min trend, note the May 1 top and negative, the May 7th positive like the averages and still in leading positive position on Friday's sell-off. There are too many charts showing the same thing on the same dates and remaining very positive relative to price.


Currencies...

 $AUD as you can see is an excellent leading indicator among the currencies, red is $AUD negative divergences, white=positive and green is inline, it would seem the $AUD is in line right now.

 However later Friday it started outperforming the SPX.

 On a 5 min chart I applied ROC to SPX price and the $AUD, you are seeing the ROC of those two, $AUD is showing more positive rate of change.

 Euro 30 min vs SPX, this is also a decent leading indicator, it called the March market top and has been in line since.

 The 15th I noticed something bullish in the Euro/bearish in the dollar, look at the Euro on the 16th / 17th-21st as the SPX ignored the correlation to form the bear pennant, the Euro was very negative at the 29th false breakout in the market and recently on Friday is outperforming. I have seen the positives in the Euro and negatives in the dollar, but had no idea what would turn them, it seems the NFP did that on Friday.

 Euro vs SPX Friday, obviously the Euro was much stronger, so again the market broke the traditional FX legacy arbitrage, did it do so simply to break the 200 m.a. or something else NFP related? Or could the NFP action be a cover?

 Euro 2 min positive the last several days near term, the longer term is already in place.

 Look at the Euro's leading positive 1 min Friday!

 The same positive trend on the 3 min, especially Friday and this with Euro strength!

 Remember the 15th I noticed something in EUR/USD, here's the positive on 15 min chart right after the 15th and other recent positives, this is similar to the market's positives on the 7th on, the 15th keeps popping up and I asked the questions on the 15th, "Does someone know something we don't?" regarding the FX pair.

Euro 30 min top in March and May 1, in line since then until the 14/15th of May where the 30 min chart goes leading positive, the 30 min chart is no joke, that could create a strong move, just compare the negatives and price action after to the size of the positive.

If the Euro is positive, for confirmation the $USD has to be negative.

 2 min $USD in line until the 11th, by the 15th it is in a clear leading negative divergence and has stayed there, it seems the $USD is even more negative than the Euro is positive.

 $USD 5 min in line down and then up, on the 15th it goes leading negative and never recovers

 $USD 30 min, negative at March12 area, positive around April 2nd, negative in to April 9 with a larger positive in to April 30th, then in line and by May 15th leading negative on a 30 min chart-the 15th when we first noticed something was up.

 3 min $USD leading negative as it rolls over Friday

 5 min $USD, starts to act strange on the 7th, leading negative by the 15th and never recovers.

 Commodities (green) vs the $USD, the correlation is as it should be at the green arrows, at the yellow and white box commods seems to respond to the 3C divergence and break the FX correlation, it seems likely commodity traders knew something about FX order flow.

 1 min $USD leading negative on Friday in a flat price environment

1 min $USD, something isn't right around the 7th (remember the 7th in stocks/averages), by the 15th, the $USD is leading negative and never recovers.

GLD-remember the positive divergence, very strong in GLD in this post, May 15th and Gold-Something Up

 At the white arrow I posted something big was happening in GLD with a very strong positive divergence. That's a bearish consolidation/continuation pattern, traders expect it to break to the downside, Gold saw the biggest 1 day move since Jan. of 2009! Out divergence was screaming something was up and I have no doubt shorts were forced to cover.

 This is the leading positive 60 min divergence on that day at the lows of the day I posted, many of you took the trade, I know at least 1 member who made 200%.

 The 5 min in GLD leading positive at the same price lows, as usual, Wall St. accumulating on the cheap and in to a bear trap.

 GLD's 1 min Friday is in line with a slight leading positive at EOD.

TLT-Treasury Safe Haven trade...

 5 min 3C shows a negative divergence on Friday, Thursday I couldn't get a useful signal as you may recall.

 TLT 3 min trend with accumulation at the May 1 market top, remember the accumulation in the market starting May 7th, note the distribution in the safe haven trade at the same period and a leading negative divergence as TLT never recovered.

 TLT 5 min in line in green, negative badly at the 7th's market accumulation, TLT/Treasuries still negative a 3C failed to make a higher high.

Oil/USO

 60 min chart, ver negative in Feb/March, since has gone very positive in a leading positive divergence like many of the market averages. USO is at new lows, 3C is close to new highs.

 USO 15 min leading negative May 1, the same accumulation as stocks starting the 7th and staying leading positive since.

 Thursday there were no useful signals, Friday a leading positive at the lows of the day.

AAPL-It seems I made the right call when closing the June Calls for a 131% gain on May 30th (red box) as I was looking to open a new July Call position on an AAPL pullback, the divergences were right thus far and I saved a bundle as that June Call would be worth a lot less right now.

 60 min 3C on AAPL shows massive distribution at the top and a leading negative, but there's a 60 min relative positive divergence still suggesting AAPL goes higher.

 The MAy 30th 5 min negative divergence and Friday showing the start of a positive, it may be time to start looking to add that July Call position back.

AAPL 1 min Friday from confirmation of the pullback to the start of a positive divergence, EXACTLY WHAT I WAS LOOKING FOR!

Here's FX's EUR/USD open tonight.

 Open of FX trade at green arrow, Friday saw Euro strength, thus far holding up.

The bottom trendline is the long term EUR trendline of about a month, the top is the shorter trendline of about 2 weeks.

There are some interesting recent development, but the dates that are seen over and over again are very interesting, as I asked, Does someone know something big we don't? With the size of the 3C positive divergence I can't see this market not rallying, the 200-day break should bring in a lot of early sell orders, which really would be the strongest head fake move we've seen all year at the 200 ma. what interests me is what happens in 3C on a flood of potential sell orders, head fakes are always at areas that technical traders will flock to, usually support/resistance, but the 200-day ma. is the grand-daddy of them all as every technical trader follows it. With the size of the positive divergence in the market, in the Industry groups and in FX, the head fake would be commensurate with the size of the positive divergences. Just remember above all else, Price is deceiving.

For now I'm not reading this as a QE event, at least not the scheduled F_O_M_C June meeting event and I have no plans on changing tactics or positioning, I'll just be sitting like Jesse Livermore and looking for opportunities like AAPL, I wish I had taken the gold trade.

See you in a few hours.