The 3 Pillars- Financials, Energy, Technology

If you recall this Market Update from this afternoon, the confirmation that wasn't there Tuesday/Wednesday as the market put in some strange and fractured positive divergences that weren't confirmed in the traditional assets I look to for confirmation like volatility or the flight to safety trade, Treasuries, started to show up yesterday and confirm.

This led to a look at one of the best kept secrets in understanding Wall Street, market makers and specialists and how orders get filled, the VWAP. I looked at these this morning and came up with  theory based on what I saw, what I've seen the last few days and what I've learned about how the mechanics of the market work and what we might expect;  you can find those posts right here and here.

So there were certain things to look for as this move not only started, but was underway. In reality there's no way to tell ahead of time how much a move may be marked up before they start selling/shorting in to it. We saw the signs that not only confirmed the theory put forth in the second post of the day, but also would seem to indicate that any strength is being used, there doesn't appear to be time or patience to wait for mark up, of course you have hundreds if not thousands of hedge funds all underperforming the benchmark SPX and they aren't concerned with following the herd right now, they are concerned with redemptions hitting their funds as soon as next month. As I mentioned before, why pay 1.5 - 3% a year in management fees on top of the average 20% incentive fee that can run as high as 50% for a fund that can't outperform the SPX when you can buy  simple Vanguard SPX fund and skip all of the fees and still have better performance than 89% of all hedge funds?

So today the theme seemed to be, "He who sells first, sells best".

What I found from looking at the DIA, VXX and TLT in the first post linked at the top was that there seems to be solid distribution that is working its way through the timeframes as it should in a normal scenario with VXX and TLT confirming the same. In fact, the other major averages are confirming the same, that's a big difference from 2 days ago when the first signs of accumulation were there, but they were very sloppy and there was little confirmation.

Now the Tech, Financial and Energy sectors are confirming as well as the major averages and Treasuries/volatility. Confirmation is key.

In general what I've found is that the distribution that should start on the fastest timeframe (1 min) and if it is strong enough, should migrate to the next timeframe and the next, did exactly that and at about 5 mins where the positive divergences reached or maxed out at for the most part, were starting to lose their momentum and show early signs of the migration from the 3 min chart to the 5 min chart, in fact, by the close the SPY/QQQ 5 min charts were also starting to go negative, not just lose momentum.

 QQQ 5 min leading negative

SPY 5 min leading negative.

As the 5 min charts turn and start to get ugly, we should see the end of this move.

Here are the 3 most important sectors in my opinion.

*Continued below charts*

 Energy/XLE 1 min negative in to the afternoon and the close.

 XLE 2 min from the positive divergence to a closing negative

 XLE the same on the 3 min chart

 And even the 5 min chart

 The bove charts are basically what I would call noise, they are there to cause movement, they are there to cause doubt, hope and confusion, these longer term charts are the real trends and at the 30 min mark, Energy has obviously been distributed (selling/selling short) heavily in to a rounding top and probably a clear head fake area if I were to look for it.

 Financials 2 min XLF leading negative

 3 min XLF leading negative

 5 min perfectly in line, but no where near the positive seen 2 days earlier.

 Financials at 30 min in a deep leading negative divergence after confirmation, now well below the June lows.

 Technology/XLK 1 min positive quickly went leading negative, while I think stocks like BIDU do have some decent upside left that will likely take this sector as well as others higher, the damage is clearly being done and I'm not so sure that ALL tech stocks will follow the industry group.

 XLK 2 min leading negative

 XLK 3 min from relative negative to starting a leading negative

 XLK 5 min in line, the nature of this move and the importance of it in the big picture can clearly be seen when comparing the negative divergence at the head fake top on the 21st and the relative positive divergence after that. While I do expect more volatility and more upside (however at the rate things are moving it could end abruptly mid-day), I also think it is VERY likely that the top has already been put in and as I tried to show you with a section of the SPY chart vs the full chart, it is often not clear until after when you are looking back.

Finally XLK 15 min is horrendous. When the short timeframes and the longer timeframes all meet in negative divergences it will be hard for the market to do anything but panic.