As I have alluded to, there are so many different timeframe trends, with 3C each timeframe represents a different trend, a different amount of accumulation or distribution and different start dates for each trade or depending on your trading style, there may be several different trends all at once; for example Long Term Bearish, Intermediate term bullish, Sub-Intermediate term bearish, Short term bullish. I know that sounds confusing, but if you were to look at the underlying trends and even price trends, you could make a case for each of those elements and aligning your trade to the right trend and using the right vehicle for the trade is often the difference between success and being right on the market and just using the wrong assets at the wrong time.
Also as I alluded to earlier, this is one of the most complicated set ups (the different trends and all starting to converge) I've seen all year, perhaps in several years; it reminds me of the perfect storm but instead of all one way destruction, this will be moving in different directions which should cause pandemonium among traders who don't have an edge and are stuck in one way of viewing the market and one way of trading.
I'm going to do my very best not to confuse you and try to stick with what's in front of us right now, but I will give you a couple of examples of what I mean when I talk about different timeframe trends of different importance all coming together at the same time, you don't have to worry too much about it as I'll try to keep things relevant for you. To add even more craziness, we have the Fiscal Cliff and several other economic and geo-political uncertainties in the market.
Lets start with what's going on today, why we have the options positions we have which are geared up for a short term move (How long is short term? I can't say, a day, several days maybe, but we'll know it when we see it) and what today's volatility was all about.
Shakeout...
One of the first things we see before a new move, trend or reversal occurs is a shakeout or what we often call a head fake move because it makes traders think the market has a particular sentiment based on price action, but price action is rarely representative of what is really going on and that's why we get in place earlier than most because many times we can see the underlying trends that will influence price action, giving us the best entries and lowest risk-at least that' out goal.
We have a defined range since Friday's Op-Ex, we saw some things that suggested a short term move up, since the move is shorter in duration, I prefer a more leveraged vehicle, in this case options which fits well with my view of using options-I want to take the gain as fast as possible and get out of leveraged trades as soon as possible so they seem to be a good choice here to give us the leverage and get out before options related risk starts to appear.
Today's move under support looks to be a shakeout move, not just because we see these moves all of the time with a defined support/resistance level, but also because the short term 3C charts are confirming.
If we look at today's NYSE TICK Index (Number of NYSE advancing issues less declining issues) we see an extreme of -1200 at the break below support today (shakeout) and as the market is flat and lateral we see the TICK rising showing good intraday breadth for an average that really isn't moving much as of this capture.
The 3C SPY 3 min chart with a leading positive divergence only after the shakeout move, this creates supply as longs stop out and shorts sell short, it makes it easy for smart money to accumulate without driving price against them.
The other averages... So far the positive divergences on the averages today have been limited to the shorter term intraday timeframes, although a bit of a pullback may move them out a little further, but all in all, this is why I'm more concentrated immediately on a short term move, perhaps a gap fill from Friday's open, maybe more as the market is often more extreme than rational thinking would seem to indicate.
DIA
3 min with a relative positive followed by a leading positive divergence, how many times do we see this combination in this order? The relative divergence (arrow) is not as strong as the leading divergence (box) so as we move forward in to a divergence it gains more accumulation or distribution and shows more strength.
The IWM, which earlier had no divergence at all, now has a leading 2 min positive, quite strong for the timeframe.
QQQ 3 min leading positive, but we are still within the intraday timeframes.
Volatility Futures/ETFs as confirming indicators.
UVXY is the leveraged version of VXX (Short Term VIX Futures) both move opposite the market, when the market was moving down today the VXX and UVXY were moving up with 3C confirmation, as the averages bottomed out and started building positive divergences, these two topped out and started building negative divergences, this is one form of confirmation of the market signals we are seeing.
The more confirmation, the higher the probabilities are.
UVXY 5 min is starting to lead negative.
VXX (same as above, just not leveraged) with a 3 min leading negative divergence, this is the mirror opposite of the market averages, confirmation!
XIV is the daily Inverse VIX Futures ETN and moves WITH the market, so a positive divergence here is confirmation of a positive divergence in the market averages and confirmation of negative divergences in VXX / UVXY.
XIV 5 min leading positive-more confirmation.
Leading Indicators...
I will largely stick to near term trade and analysis related to the options position from Monday and today.
Credit
High Yield Credit is a risk asset, it should move with the market if the market is moving up, this is a short term chart and HY credit is performing better (relatively) than the SPX (green), this means Credit in the near term is supportive of higher prices, a positive divergence.
High Yield Corporate Credit fell hard initially with the market this morning, now it's moving along with the market, an improvement.
Junk Credit is acting a lot better than the SPX as well as the day wears on, these are all near term positive indications.
The $AUD is a great leading currency, this is also an example of a few different timeframes and trends. Short term the $AUD is trading with the SPX, recently it has been moving lower in a negative divergence so the short term picture here is improving, but it is the short term picture.
The sub-intermediate trend in the $AUD is in a solid negative divergence with the SPX, this is a more bearish view, this would be interpreted as a short term bounce and that is followed by a longer term and more serious decline (bounce may equate to a gap fill from Friday's market open, etc.). This is only 2 trends of at least 5-6 (depending on how you classify them).
The Euro is a good confirmation currency for the market, it headed lower today, the SPX followed it nearly tick for tick, this isn't just because of the Euro, more importantly because of the $USD, but the Euro is a good proxy for the $USD that moves with the market instead of against it, making divergences easier to see.
Looking at the same 1 min chart, but zoomed out, the Euro is more positive than the SPX hinting the SPX has some upside in the near term or short term to move back in line with the Euro.
I only showed you 2 timeframes/trends, there are at least 4 major timeframes/trends in play right now.
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