The Averages...

 DIA 1 min, the DIA has been a 3C laggard, today it looked a bit better than other averages (relatively speaking). The 1 min trend has gone from positive to confirmation, today there's a leading negative, again suggesting more near term downside.

 A closer view, like everything else, the DIA was negative on the open, saw some intraday positive and negatives that weren't too impressive, but the end of day action is the most impressive divergence in a leading negative position. I'm speculating, but it seemed the averages weren't going to move low enough on their on and got a helping hand for reasons I've outlined.

 Again, even as a laggard, the 30 min chart is the largest divergence since the May 1 negative at the top, the yellow arrow is the false breakout of the bear pennant, a Crazy Ivan shakeout to the upside followed by a shakeout to the downside, the leading positive position just seems too big, too intentional for a 2 day upside move from the point in which the SPX made its low breaking the 200 day moving average (another closely watched indicator). Again like so many other asset classes the positive divergence starting on the 7th and running here until the 10th (other assets saw it run until the 15th and a few beyond) is curious.

 Keeping things in perspective, the primary daily (2-day here) chart of the DIA shows a leading negative divergence that is now at the same area as the 2009 lows. The negative divergence culminating in late July of 2011 that led the market down 20% is also clearly visible. If you look at 3C since the October lows/rally, you can see why I've been suspicious of the entire rally.

 QQQ 1 min like everything else from industry groups to currencies was negative on the opening gap up. The EOD saw the largest divergence of the day, leading negative, which is why I suspect the invisible hand was at work in the market as it seemed like it was going to close higher with an ambiguous star like close, I suspect there was a late day effort to push the market lower. Again, this is why I posted that article yesterday regarding what to expect at certain levels such as the area we reached this morning, what I called "games" in the market at those particular price levels.

 QQQ 15 min negative on the open and a leading negative divergence got the market moving lower EOD. The longer term trend of the 15 min QQQ chart has been in leading positive position since May 7th.

 Even the hourly chart has been moved to a positive divergence in the Q's, a divergence this size seems very out of place for a 2 day move up. The positive divergence on the 7th is visible on this chart and the strong relative divergence at the recent lows is larger than the May 1st top. As you can see the 60 min chart is leading positive. Just look at the overall 3C/price trend, a clear change in character is obvious.

 For perspective, the daily QQQ chart with a very fast and sharp negative divergence at the top with a deep leading negative divergence, this is the primary trend, the reason why I have kept the core short positions and the reason why I view longs as worthwhile, but speculative. This chart suggests the next primary leg down will be quite large as this is the strongest divergence in the QQQ , even worse than the 2000 tech bubble. Without going in to a new post, the reasons for this very strong divergence have their roots in F_E_D manipulation of the market via QE/POMO. There was no true organic strength in the market, this is clear when overlaying the QE1/QE2 periods on the price chart, when there was no QE the market started falling apart. Thus the only reason the market has moved higher since 2009 has been policy intervention consisting of flooding the economy and banks with liquidity that found its way in to the market. When you have money at .75% interest, of course you are going to put it to work in higher yielding assets. I believe QE 1 & 2 served 3 purposes, they allowed Congress to keep spending, they made it possible for the US to keep issuing debt in a debt market that was otherwise getting soft (as China slowed their purchases of US debt to a trickle), they made it possible for the US to pay debt obligations at a much cheaper price as the dollar was devalued (yes your bonds were payed, but with dollars so devalued that you actually lost money) and finally it allowed banks that were near the verge of collapse to post impressive profits rather than the F_E_D having to bail them out. From today's Bernie testimony though it seems clear that he is sending Congress the message that they can't keep doing this, that ultimately the problem must be resolved on Capital Hill by cutting spending.

 SPY 5 min -positive at the recent bottom with a negative divergence on the open and a leading negative moving throughout the afternoon.

 SPY 30 min going back to March. The March top, a bounce in to the Mat top and again that positive on May 7th the SPY stayed in a leading position through the bear pennant and went even more positive at the breakdown lows to form a current leading positive divergence above the May top.  No matter how ugly charts were today, it didn't move the 30 min and the size of the divergence is just too big to think 2 days of upside is what this was all about.

SPY daily chart for the primary trend perspective. No matter what lies ahead, even if we saw a rally to new price highs, there's just too much damage for this market to escape its fate short of massive intervention and even that may not have the same effect as before, too much has changed.

Currencies...

 EUR/USD from Sunday night's open of the FX market, the Euro with all time highs in short interest  just tested major resistance. One of two things were going to happen, a blast through resistance and a strong short squeeze or a failed test, which as I posted regarding the market yesterday, I leaned toward an initial "seeming" failure of the test which would embolden shorts- this is one of the classic short set ups, a break of support, a test of what becomes resistance and a failure of the test. This creates a low risk entry for shorts as their stop would be above resistance so you can see how it would draw more shorts in to the market. If the Euro breaks above resistance, all of the new shorts will have stops just above which will trigger a wave of buy to cover orders-increasing demand, which drives prices up and causes the more hardcore shorts to start encountering losses or covering to try to preserve profits, which leads to more upside. As I have explained many times, the entire concept of head fake moves like this are to create a snowball effect in momentum and it's the reason so many reversals start with a head fake move. The head fake move has allowed us to enter most of our positions at the best prices with the least risk, even though entering the position during the head fake move at the time seems counter-intuitive or risky, it is actually the least risky entry with the highest probabilities. Very often the correct move in the market is the move that our emotions are fighting against.

 The EUR/USD from regular hours open to close, that's 3 attempted tests with each weaker than the previous, from a short's perspective this is encouraging.


 The current market in the pair as of about 9:40 p.m.

However, since Friday, the up trend line remains intact, higher highs, higher lows. I'm sure I'm not the only one looking at this trendline, therefore I'd expect it to be broken to the downside, Wall Street knows what traders are watching and they have the proof in limit orders on the books. Even as a small trader I believe you should never put your orders on the books for professionals to see. The one time I used a stop on the books (on vacation), my stop in a long position was hit, it was also the low of the day and the stock took off from there. Pro traders have enough advantages, why freely give them more? Wouldn't you like to know exactly where smart money's entries and stops are?

 Euro 15 min chart has been mostly in line since trending higher, there was one negative divergence and a pullback the next day, today formed another negative divergence and even the gap up opening was a form of a head fake move, they clearly had the intention of selling in to the gap up, it's highly probable that orders on the books told them where the orders were and they used that information to their advantage. There was a mid-day positive sending the Euro higher, it ended approximately in line with price.

 As the short term charts are cloudy I often will return to the bigger picture to keep my bearings, The May 1 30 min negative divergence was quite strong and the following downtrend impressive, however we are now in a leading positive position with much of that momentum coming at the recent lows. As mentioned earlier, I find it hard to believe such a large divergence on a 30 min chart would be needed to create 5 days of upside in the Euro, the same could have been done in a few days on a 15 min. chart.

 The 5 min Euro negative on the open and negative at the 1:30 test of resistance, yet comparing relative points (green) shows the Euro is in line intraday (confirmation) rather than a worse negative position. Comparing the white relative points, the Euro was actually stronger at the 3 p.m. bounce than the 1:30 test, even though prices were lower. It just doesn't look like the type of distribution seen at a true selling event, it looks more contrived.


 $USD 1 min was leading positive at the gap down open, it went to a negative divergence at the intraday highs, the second positive divergence at 1:30 was much weaker than the opening divergence (compare at the two relative points marked in yellow). Also the intraday negative divergence around the 11:30 area saw a much higher 3C position than the ending position of 3C which saw prices nearly the same.

The $UD 15 min chart shows activity at May 15th, this is when I first noticed something was going on with the currencies, the 7th is an interesting date in equities, the 15th in currencies. The 15th saw a leading negative divergence in the USD and a leading positive in the Euro. Since the $USD topped around the 31st of May with a negative divergence and remain pretty much in line or trend confirmation. The bottom line is on the more important charts, there doesn't seem to be anything indicating the Euro won't move higher and the dollar lower which is market positive. On daily charts, the Euro is very negative and dollar still very positive, in line with the primary trend in stocks.

Risk Asset Update

 First commodities (brown) vs the SPX (green) and the Dow (blue), as I mentioned before, commodities were weak today on the lack of QE hints from Bernie. Some QE sensitive asset fell hard today: USO    -1.31, GLD -1.72%, SLV -2.6%.

 Here are commodities during QE periods, note they appreciated during QE1 and started to sell off or deleverage as there was no QE2 plan in the line up, they started up again after Bernie strongly hinted  of QE2 during his 2010 Jackson Hole speech and then rallied on QE2, again deleveraging before QE ended, since QE2 ended commodities have been in a downtrend.

 High Yield Credit was a little scary yesterday as it trended down in an up market..

 Today High Yield Credit jumped up and stayed in a flat range all day even as the SPX sold off EOD, while the next day or so may see downside in the market, the fact HY Credit remained resilient was encouraging.

 The $AUD vs the SPX, yesterday the $AUD saw some extra momentum as the Australian Central bank cut rates 25 basis points as the market expected a 50 basis point cut, lifting $AUD a bit more , today it fell back to correlation with the SPX.

 The Euro vs the SPX, overall the Euro is in a much better place than it was 8 days ago.

 Intraday the market looked a little overdone vs the Euro, note the market did break the intraday lows, but the Euro (orange) did not break to new intraday lows. I get the impression the market received a little extra push down today, more than it would have without a little help from smart money, you'll see what I mean later. This is a gut feeling and the reasoning would be to make the test of the resistance area look like a failure, it seems that when retail alone couldn't push the market low enough to create a bearish daily candle, the magic hand stepped in late in the day to get the job done. This may seem paranoid, but you can never be too paranoid when dealing with the likes of GS. Just look at price today, it really seems to me that they stepped in to create the failed test of resistance that I mentioned early yesterday before we even reached the level.

 The $USD and the market have an inverse relationship, but once again (much like the Euro), the EOD sell-off seems overdone compared to the leading indicator correlations. Here the SPX did break below the intraday lows at the EOD, note the Dollar did not break above the intraday highs, yet another indicator that seems to indicate the market was pushed a bit in the late afternoon.

 High Yield Corp. Credit looks pretty much in line with the SPX, this alone is pretty good news for a bounce as it is not negatively divergence as it usually (90% of the time) at a real final top.

 Looking closer at the intraday action the uptrend in HYC credit was broken late in the afternoon, but it rallied back up to the uptrend channel.

 Energy momentum also did not break intraday lows like the SPX and it had every reason to do so, instead it followed the FX legacy arbitrage correlation.

 5 min Energy chart, note the negative divergence on the open and a late day positive.

 The 30 min Energy chart going negative at the May 1 highs, again that strange positive divergence starting on May 7th seen in so many different assets and an overall leading positive divergence. This 30 min chart would suggest there's more upside in Energy, despite high inventories in oil, this would suggest that any move in Energy to the upside would be based on a Euro short squeeze and a falling $USD as Energy moves opposite the $USD.

 Just to keep everything in perspective, the daily energy chart depicts the primary trend, the 2011 top is very clear as is the deleveraging of large positions in Energy as the QE2 program was about to wind down; they understood that without excess liquidity sloshing around in the market prices would fall and started selling in to the highs before QE2 ended. This leading negative daily chart is why I consider all longs (with the exception of UNG) as speculative and  I keep them at smaller sizes with less risk as intermediate long positions are still counter trend vs the primary trend.

 Financials rotated in yesterday, today they underperformed, but again Financial momentum was not as bad EOD as the SPX downside momentum.

 Financials 5 min show a negative divergence off the open, another negative at the afternoon highs and a slight leading negative into the close, this is 1 reason why I suspect we'll see some more downside in the near term.

 Financials 30 min from the May 1 top, again that May 7th positive divergence seen everywhere and a current leading positive position.

 For perspective, the primary trend on the daily chart shows a deep leading negative divergence.

 Tech , as I suspected, has shown excellent relative momentum vs the market overall, it was crushed pretty bad today.


 Tech intraday momentum vs the SPX, note the end of day bit of strength while the market was headed lower.

 This 2 min chart of Tech may explain that end of day bit of strength .

 The 5 min chart went negative right off the open as well, yet we still see a relative positive divergence in to the EOD. To me it almost seems like smart money was trying to create a more bearish market and a price candle that didn't leave a gap up. The SPY closed at +.03%, if it weren't for the EOD push down, that price candle and close would have been ambiguous for shorts as it would have left something more akin to a star that had a gap above yesterday's close, that would seem to me to appear more tentative to bears.

 Tech's 5 min Trend, negative at the May 1 top which was a beautiful signal and an easy short in to strength, This chart is currently leading positive well above the May highs.

 Tech 15 min has been in a leading positive position since about May 7th, that date that keeps popping up everywhere. In my experience with 3C, price often reaches the point in which a divergence first started, CHK for example is in the region where a positive divergence first started even though it saw a stronger positive at lower prices, meaning the average position cost is lower than where the divergence first started. It makes sense as there's no reason to accumulate if you aren't going to draw a profit from the position.

 Again for perspective, the primary trend on the daily chart shows a very fast area of distribution at the highs, this is rare to see develop so quickly on a daily chart, then a leading negative divergence. Bounce, counter trend rally or not, it is pretty clear what smart money's opinion of the market is. This divergence is now below the 2009 lows, the implication is there's far less money in the Tech sector at these highs than there was at the 2009 market lows, which would indicate a very strong leg down as the primary trend to the downside re-emerges. Markets almost always fall faster than they rise as Fear is a stronger emotion than greed. The 2003-2007 bull market was nearly 5 years, all of the gains and then some were erased in 18 months and the majority of the damage took place in 8 short months; had the government and F_E_D not intervened, it would have been even worse.

Afternoon sector rotation confirms the relative strength that built in to tech in the late afternoon.

More charts coming...

Absolutely Whacky Day

Today's underlying action is way more whacky than price itself, so much so this update is going to have to be done in multiple parts.

First lets go back to yesterday morning's "Head Fake" Post

Even though yesterday was a pretty bullish day with many of the averages up over 2%, I had a pretty good idea that there would be some craziness or as I put it, "game playing". My intention in posting this was simple, "My hope is that this post will show you how Wall Street operates, what we can expect moving forward and kind of anchor expectations so you can make plans" . In other words, give you some idea of what was likely to occur so you weren't thrown for a loop or surprised. This is all pretty much based on observations of the market, how traders think, how Smart money uses their assumptions against them.

I gave several examples of this behavior in GLD and BIDU and then posted this chart with the following commentary below it.

"Here are the areas where we may see some action, the apex of the bear pennant is thought to be resistance, bears will look for a failure at that point, any backing off from that area and shorts will see it as a shorting opportunity, the next area they'll be watching is the major trendline resistance, this is the last stand for bears, we may see some game playing in that area, but as soon as that area is broken, the short squeeze should be in full effect."


Today's market...

This chart shows a short squeeze move yesterday as the bear pennant's validity was questioned. The bear pennant broke down as traders expected, what they didn't expect was a move higher, they expected the next leg lower. The second area I highlighted yesterday is exactly where price ended up today. The thinking goes like this: 1) Almost EVERY TIME important support is broken (as it was above when prices broke below the trendline), there's almost ALWAYS a volatility shakeout. The more bearish the crowd is and the more obvious the set up is, the more likely this shakeout which typically moves pretty far above major resistance before continuing lower.


We've had a pretty good move up off the 6/4 lows, over 3% in 2 days, but it doesn't seem to be on par with the size of the divergence in the market.

This is the SPY 30 min, for newer members this is a significant timeframe and the size of the divergence is significant. Just looking at the size of the negative divergence on May 1 and how much downside damage that did and comparing with the size of this divergence, a 2 day move doesn't seem like that's the end of the move. There's a question still about the positive divergence from the 7th to the 15th in some cases, the entire pennant area is in a leading positive, the recent lows have a large positive and the current divergence is at a new leading high. If Wall Street simply wanted to shakeout the pennant, they could have done that without the positive divergences before June started. They could have done that with accumulation from May 31-6/4 (3 days) and all they'd need to do is go out to a 15 min chart positive divergence. So the size is important here.


The fact we saw "game playing" right where it was expected is something that makes me feel a bit more comfortable that we are on the right track. However there were signals all over the place today so I'm still putting a lot together and I'll post it in digestible pieces. 


The point of a failure near resistance like we saw today is to feed the expectations traders already have, to get them to commit to shorting the market as that is eventually used against them as a primer in a short squeeze, that's what I was trying to pass on to you yesterday in the post above.


From what I see from today, my guess is that we will see downside tomorrow, which would further lock in shorts, but we need to keep an eye on as much as possible to make sure we are in line with the path of highest probabilities.


More coming...

Quick Risk Asset Update

The closing information will be more meaningful, but I've been meaning to look at this all day after High Yield's ugly day yesterday.

 Commodities are underperforming today, I think it's pretty clear this is QE disappointment as commodities gain a lot from QE-this the intense inflationary pressures that were squeezing manufacturers' margins during QE and why the F_E_D needs inflation under control before launching another program, this doesn't tell us much except the QE crowd was disappointed.


 I'm happy to see High Yield Credit acting better today, we'll see at the close, but thus far it moved up today and stayed in a range despite the SPX selling off EOD.

 Yields don't look horrible, but they're also not giving us much to go on.

 Their market closed before the SPX sell-off EOD, it would have been valuable to see how yields reacted EOD.

 The Euro vs. SPX looks about in line... but look closer.

 Thus far the Euro is holding up better than the SPX relatively when comparing the intraday lows.


 Even at the SPX EOD sell off the Euro is acting better, we'll see what it looks like at the close.

 High Yield Corp. Credit looks to be in line, no negative divergences.

 Again, a closer look reveals what is thus far an intraday afternoon uptrend that is holding in to the SPX move lower, that would be bullish if it held.

Sectors saw rotation , Defensive sectors came back in a little, not a huge amount, Tech rotated out, Financials held pretty well, Basic Materials and Industrials rotated in.

Not horrible, we'll see on a closing basis.