Just to be clear

The Equity model portfolio is where I've been making preparations for the big picture outlook, monster bounce or not, unless there's a serious fundamental shift, I'm not letting go or trying to trade around any of these positions that I have been building. As you can see I still have plenty of room +30% or so to add and hold some cash...

I haven't broken out this model in a long time...

This is going to be a new indicator for some of you, others will remember it, although we haven't used it in a while, I thought it wold be interesting to look at.

First let me explain it, this is not a MACD price based indicator, it is a 3C divergence based histogram-like indicator. The reason I wanted to look at it is because the longer a divergence generally lasts, the bigger the divergence is and the more impact it will have, I wanted to see what we are dealing with here because as you know when I first proposed the theory of "1 more bounce"-the last bounce, I had shown you several volatility measurements which showed market volatility from February when the uptrend was still intact through the March/April area when I showed you the change in volatility. What we saw was at least twice as much volatility in the market recently compared to February, thus the theory was the swings would be wild, much more volatile. We also looked at amplitude of the swings and what I came up with was that a final bounce would be one of the strongest we have seen, I even said it would likely be so strong it would make you question your conviction to our big picture market analysis (bearish). With short interest so high as well as the ratio between puts and calls, sentiment is so overwhelmingly bearish, it just makes sense we would see a really wild final bounce, but it would also take some time to accumulate enough of a position to support such a move and make it worthwhile. The idea from Wall Street's perspective isn't any different from ours, short term long positions for the bounce that are sold in to strength and then shorting in to strength before a reversal-more or less the same thing I and many of you are doing-building the long term short positions and running some speculative short term long trades for a bounce.

Lets use a 15 min 3C SPY chart as an example and then I'll make the price chart clean so you can view it easier.

 This is roughly March-present, the 3C negative divergences register on the red histogram-like indicator as deep crests, accumulation periods for bounces register as shallower troughs, the stronger the divergence in 3C, the shallower the trough, the stronger the negative divergence the deeper the crest. I have put yellow boxes representing distribution areas and a few arrows in red on price to show the negative divergences. The white arrows show 3C positive divergences and the white box defines where they are and how strong. The interesting thing about this chart is looking to the far right and seeing how shallow the current trough is, shallower than anything we've seen thus far which would make sense with my theory that the last bounce would be the most volatile.

 Here's the same 15 min SPY chart, yellow arrows representing 3C distribution areas that line up pretty well with reversals to the downside and white arrows for accumulation periods, again, the shallower the trough, the stronger the 3C signal. Again, look to the right and note not only the trend, but how shallow the trough is.

This would suggest  monster bounce and would explain why the 3C divergence has been so long in the making, the divergence can be seen as the red indicator moves to a more shallow trough.

 Here's an hourly SPY chart, note the increasing distribution in to 2012 and the shallowest trough at the October lows where we knew there was at least 2 months of accumulation, we expected a new low and a strong rally before the October low was made, the deeper the red, the more distribution as they sell in to strength.

 Here's the DIA 15 min, again note how shallow we are right now.

 Longer term DIA 15 min showing the October low to the far left and increasing distribution in to price strength.

 The DIA daily, the 2011/2012 depth doesn't look as bad as the 2007 area, I'll show you why in a minute. Note the 2009 accumulation at the bottom and remember, this is based on 3C, not price like MACD.

 The QQQ

 15 min, again note the trough at the right.

On a daily basis

Finally the SPY daily with no annotations so you can see it clearly.

 Like the DIA this chart would suggest that there's less distribution at the 2012 area than the 2000 and 2007 tops, this is pretty easy to explain...

This is the SPX weekly chart

Note volume increasing as it should in a bull market rally (green), now look at volume falling off since the 2009 rally. The readings in 3C are not as deep on the daily charts now simply because there's a lot less volume/less investors in the market now.

These charts would suggest we are still in for one monster bounce.

Market Update

There are several charts here other than the usual. As I touched on earlier, with some of the bigger divergences we have seen they build out to positives in the 15 and even 30 min range, then they come back around in what I believe is market makers/specialists that are stocking up in anticipation of a move which they would have some privy to as they are used by institutions to fill these larger orders. A number of the 15 min charts are already at the point I would normally say, "There's a big move about to occur". True that event risk has me a bit hesitant, but I can't discount the unknowable, I have to stick with the charts.

This is a bit of a random collection, but that's the point, I tried to mix it up with some ETFs, market averages, currency, stocks... There are plenty more, but I want to get this post out.

 AAPL 3 min leading positive.

 BIDU 3 min leading positive

 EDZ-Emerging Markets 3x BEAR ETF 5 min leading negative (this is confirmation compared to the long stocks/ETF's leading positive).

 FAS 3xBull Financials 5 min leading positive with a good trend as well.

 FAZ 3x BEAR  leveraged Financials  5 min leading negative-the opposite of FAS above.

 FXE 5 min Trend relative positive and today leading positive

 IWM 3 min trend and today both leading positive

 NFLX first leading positive divergence, much bigger than the last to the left.

 QQQ 3 min leading positive especially today

 SPY 5 min leading positive through today (note the yellow, blue and orange 3C indicators are all coded differently, thus the blue showing a lot of 3 min signals while the orange is showing more 5 min signals-it's a function of the coding and look back period).

 TNA 3x leveraged BULL Small Cap 5 min leading positive

 TZA 3x leveraged BEAR Small Cap 5 min leading negative-the exact opposite of TNA above.

 UUP ($USD) 5 min continues leading negative

 XLF-Financials 5 min leading positive-also note the flat area where we often see divergences form.

 XLF longer 5 min trend-also in a lateral area.

XLK Tech 3 min leading positive-like the tech stocks above, BIDU, AAPL, etc.

Like I said there are many more, I just wanted to give you a peak at the confirmation through different asset classes.

We haven't seen a volatile options expiration shakeout in some time, lately they have been pins that tend to stick close to where they had been trading most of the week, but I also don't recall seeing such a huge difference between the number of PUT vs Calls open interest.

Selling XOM July $85 Put

I already have an equity short in XOM, this was meant to give it a bit more kick, but until I see what's going on with Energy running against the FX correlation, I'm going to let this position go at a 27+% gain and perhaps look to re-establish it later.

A little bit of a fat finger Trade...

I normally go for in the money calls, I should have picked $530.

Adding AAPL June $540 Calls

This position is now bigger than speculative which I don't like, but I 'm going to go ahead and add to it here.

What I'm really looking forward to is adding to the equity short in AAPL at better levels.

AAPL Update

 AAPL has definitively broken an important support level, you know what the trend has been...

 Late yesterday we saw a quick positive divergence in AAPL and a little run in to the close, the 1 min chart has continued building from that and is leading positive here.

 The 2 min chart is leading very positive here.

 It's all bleeding to the 3 min chart.

And for the first time in a while the 5 min chart is responding.

If there's been AAPL accumulation for a bounce, it didn't just start yesterday, for a decent bounce it would have started last week, maybe even before as the goal is to accumulate in to lower or at least stable prices, this is a delicate dance between supply/demand as to not move price against an accumulated position, but often after a position has been accumulated in a situation like this, we coe back to the short term charts for timing as the middle men who filled larger institutional orders stock up in anticipation of an order they just finished filling. That's why we often see the short term charts go positive right before a reversal, it's not that the larger accumulation took place there, it's simply the market makers/specialist stocking up.

I'm going to peak around a bit more, but I'm considering adding to the speculative June Call position, the AAPL equity short which I won't be changing is up nearly 13%-That's the core position.

As always I'll let you know if I make any changes Before I do so.

Risk Asset Update

 The CONTEXT Model keeps building, ES is undervalued is the ES Model, so I wanted to take a look at the specifics and see what was causing this divergence in ES.

 As the SPX (Green) takes out the a.m. lows from 10 a.m., commodities are running in the other direction, this is the 3rd day this commodity index is in the green, closing around +.50 Tuesday, +.70% yesterday and thus far today at nearly +.40%. I find it interesting that commodities (not a single commodity, but an entire index) is moving against the risk-off correlation as well as the FX correlation.

 Commodities vs the SPX over the last several days, this is the first time I can remember commodities significantly outperforming equities as they have lagged badly for well over 6 months, commodities have a tight correlation to the $USD, which again makes me ask the same question I've been asking for a couple of days related to currencies, the Euro and $USD, "IS there something brewing that we don't yet know about?". You saw the Dollar chart last night, it was showing a strong distribution signal in to price strength.

 The Euro correlation is not messed up, commodities are running against their normal correlation as seen here, they should move with the Euro/$USD.

 Just to make sure there's no anomalies between the EUR/USD and the actual dollar, Here are commodities rallying WITH the dollar 100% against their normal correlation.

 Yields are down intraday, I mentioned last night overall they are supportive of a market bounce, looking at a little larger view than just intraday, they still are.

 Here's the 3+ day trend, Yields should (in a risk off move) be moving down with the SPX or even leading it, instead they are moving in the opposite direction in a bullish divergence. Thus far we can see at least a couple of reasons the CONTEXT model is so much more positive than ES.

 Since the May 1 top where Yields diverged negatively which was one of the signals in our analysis that the market would reverse from the May 1 bounce highs, yields have been largely in line as they should be with a market risk off move, except the last 3+ days.

 I don't just want to concentrate on the short term as our shorts that are set up for the changing market trend are performing very well (CAT and BIDU shorts are both up over 18% right now), the long term in Yields has been negative, this is why I was referring to the rally when it was under way as a "House of cards". The longer term view is very ugly, think regression to the mean here which would take us below the October lows.

 Back to the near term in High Yield Credit, looking at the 15 min trend, it looks a lot like the 15 min 3C charts in many of the averages, tech stocks, and even ES as shown last night. However there's been some deterioration intraday today, yet the larger trend here is in line with many other indications that are totally unrelated to Credit. As you know from earlier, I expect if we do get the bounce and I'm still leaning toward it, it will likely be much stronger than anyone anticipates and these 15 min charts would suggest the same.

 High Yield Corp. Credit intraday at this area is in a bullish divergence.

 As far as the longer term, Credit is showing the market in major trouble. I first suspected the breakout in HYG above the downtrend was a short shakeout, that was before we knew about JPM as all kinds of credit are being effected by their position or what's left of it. In any case, longer term view of the market shows why our shorts are working so well and why Credit told us very early on to start building those short positions while the market was still near the top of its rally range. These charts may be a bit boring, but this is one of the reasons we started shorting in to strength when we did and the results thus far are excellent with near 20% gains and the market hasn't even entered stage 4 decline yet.

 Currencies-The $AUD shows a slight bullish divergence, when $AUD is giving signals, they shouldn't be ignored, this is one of the best leading indicators among the currencies.

 Sticking with that idea, take a look at the big picture and this is another reason we started shorting the top when we did, the $AUD is a carry currency and the shift between risk on rally and the carry unwind is quite clear.

 The Euro intraday as of this capture is at a bullish divergence for the market.

 As you know, I consider the 3 most important industry groups to be Tech, Financials and Energy; here Energy is bullishly diverging in momentum, again against the $USD correlation.

 A little longer view shows this trend started yesterday and has gained momentum today.

 Financials are showing a large bullish divergence from SPX momentum.

 And Tech is bullishly diverging from the SPX today.

Ironically, remember that late day AAPL positive divergence, I didn't see a similar one in Tech, but Tech started to bullishly diverge late yesterday and has increased today.

I suppose I am wondering a bit whether we are going to get a much more volatile options expiration move rather than what we have seen recently where the market stays roughly in the same area op-ex week near the pin. In other words, perhaps more Put contracts are being suckered in to the market only to get a nasty surprise through op ex? Just something to consider.