Risk Asset Layout Update

Generally the risk asset indicators, most of which have leading qualities to them, look pretty much in line with the expected pullback. There are a few that are off doing their own thing, one a bit worrying as far as the sub-intermediate trend.

First, CONTEXT for ES...

 As we saw earlier in the day, the CONTEXT model for ES remains quite a bit lower than ES itself, this divergence implies a pullback in ES as ES looks over-valued compared to the risk assets that should rally with ES.

 Commodities were moving out of sync and were becoming a concern for a while, they have moved back in sync with the SPX (SPX is always green as the comparison symbol unless otherwise noted). Even though the $USD took a pretty good whack last week, it was higher today and a such it was a bit strange to see commodities in sync and in the green.

 High Yield Credit stayed in sync with the SPX intraday so that's a pretty good signal as credit generally leads and equities follow.

 Longer term HY credit was becoming a concern as it diverged negatively from the SPX, but over the last few weeks it has really shaped up and is in line with the SPX, when we see a divergence between the two, usually there's a trend reversal coming shortly.

 High Yield Corp. Credit showed excellent relative momentum last Thursday and was in sync Friday, today it fell out with the SPX and seems to me to indicate the probability of a pullback, although it's hard to say just how much JPM's whale trade is effecting the various credit indices.

 As you can see longer term, HYC credit is a little divergent with the SPX today, but not so much to cause concern, I take this more as a pullback signal. Note the positive divergence in credit in the white box and the SPX's response after that.

 Yields are becoming a bit of a concern, typically yields are like a magnet for the stock market, this intraday divergence seems excessive.

 We have seen some decent size divergences in the past that have shaped up, but the current negative divergence in yields is the one aspect of this layout that causes me some concern. Again note the positive divergence at the June lows and the SPX's response.

 The $AUD is one of my favorite currencies as a leading indicator, Friday it was showing better momentum, today it was about in line, again, I take this as confirmation of a pullback in the SPX.

 Longer term they are pretty well synced.

 The Euro fell out of bed today with the SPX, it seems to me the legacy arbitrage correlation would suggest the SPX pulls back to sync up with the Euro.

 However longer term there's also some concern, it would be nice to see the two meet in the middle with the SPX pulling back and the Euro gaining some ground. Furthermore the market showed some resilience today in the face of a lower Euro and higher $USD, which makes me wonder if we were seeing an attempt today to set up a bit of a head fake move before a pullback.

 Sector rotation vs the SPX's momentum today saw financials gain a bit in the afternoon, Energy and Basic Materials did well too. Tech seemed to fall off a bit and some of the more defensive sectors fell off a little in to the close.

Since Friday, Financials seem to be rotating in (relative), there's more momentum in the defensive sectors like Healthcare, Staples and Utilities. Energy seemed to maintain, Basic Materials were off since Friday, Industrials showed a big change as they look to be rotating out and even though Tech didn't look as good at the end of day trade today, all in all it seems to be building some steam.

Other than the few concerns I have with the Euro and Yields, everything else looks fairly good for a move higher with regard to the sub-intermediate trend, short term there were some signs that appear to support the pullback signal we started seeing last Friday.

I'm really most interested in how credit reacts to a pullback, that will tell us a lot about the strength of the sub-intermediate trend and the probability of a short squeeze on a much larger scale.

Some Short Squeeze action

AAPL looked specifically like it got a little help to get a short squeeze underway. Think about it from a scalper's perspective or a middle man who's making money on volume rebates, if you see a bunch os orders all lined up at a level not too far away, that can be a pretty big pay day just by hitting that level.

A few of the market averages saw some short squeeze action, but it looks more like patterns that traders have been conditioned to react to were broken to the upside and sentiment which is overwhelmingly bearish, created a bit of a short squeeze. We talked a little in some of the market updates below about where some key intraday levels would be and what it would take to get traders to react.

Lets take a look at the averages...

 The first level of resistance for the DIA would have been yesterday's close and then the intraday highs from mid-June.

 That level was hit early this morning and quickly gave up the level within the next 30 mins. Note there's no look of a short squeeze in the DIA toward the close because there was no important technical pattern of level breached. The red arrow shows where th bid/ask is in after hours which as you can see is off the closing levels.

There was no interference in the DIA/3C as 3C traded almost perfectly in line with price through the afternoon.

 The IWM did see a short squeeze in to the close; Friday's high is seen at $79.73, but the level in which the IWM was squeezed was $.10 higher as it was reacting to an intraday pattern and resistance.

 The intraday triangle would have been more obvious to traders than the DIA which had no real technical price pattern, the resistance level of $79.83 intraday in the afternoon just happened to be the same level as the breakout from the triangle and after that you can see the tell-tale signs of a short squeeze.
 A close look at what a short squeeze looks like, typically there's almost no pullbacks, just a diagonal line up. Note volume picking up as price moves higher, this is a mini version of the snowball effect created by short squeezes and head fake moves.

 The IWM had a leading positive divergence around 12:45, but there was no obvious positive divergence before the squeeze, this seems to be all about technical traders reacting to a price pattern.

 The QQQ's first resistance was at Friday;s closing highs.

 Although not as strong as the IWM's, the QQQ also saw a short squeeze as it broke out of the intraday triangle.

 As for 3C action, again there's no obvious push to effect a short squeeze like there was in AAPL, it just looks to be more price pattern based and that's the predictability of technical traders. This could indeed set up a nice head fake move for a reversal in to a pullback, with the same caveat I mentioned on Friday- once we hit a short squeeze, small pullback divergences can be run right over by the snow-ball effect momentum of a short squeeze and ultimately the short squeeze is the last part of our expectations going all the way back to mid-May, especially at the June 4th lows.

 The SPY had resistance from Friday and the next level at the red arrow.

 At the white arrow is an area I believe I mentioned as an area of interest that would have to be broken to see traders jump back in the market, on this 1 min chart volume surged at the white arrow just as that high was crossed. The green arrow is the daily resistance on the chart above (at the red arrow). The SPY is trading down in AH.

And again while 3C 1 min stayed constructive and in line, there was no obvious interference from smart money to push prices through particular levels, if there was interference, it came by way of working the bid/ask higher and not any actual accumulation to soak up supply and send prices higher.

Keep an eye on these obvious levels, traders reaction to them is unbelievably predictable.

As for the chart of the XLF I posted with several major head fake moves, here they are...

 First a bearish ascending triangle. Traders expect the ascending triangle to break down and retrace its base around $12 as it reaches the apex, instead as we saw dozens of times during this time period, XLF broke out to the upside. Shorts would have had to cover, but to make things worse, technical analysis teaches. "If a price pattern fails, reverse your position", which means technical traders would have gone long XLF after having to cover shorts, of course that didn't work out either as XLF finally broke down. This is the kind of head fake move I love to take advantage of.

 Next a bear flag/pennant former, this is a consolidation/continuation pattern that traders expect to break to the downside and create a second leg down roughly equal to the first. We saw a Crazy Ivan shakeout, first an upside breakout that failed, this may have stopped out some early eager shorts, but as it failed it would have given shorts confidence in that the breakout couldn't hold. Next there was the break to the downside that technical traders expected, often they'll wait for price confirmation like this and short the break, several days later they were caught in a bear trap and would have been at a loss; this is exactly why I don't like chasing price, but more importantly, our tools told us this was a bear trap way before it even broke to the downside so it became an excellent buy point as this pattern was pretty much market wide (see the SPX).

Lastly, traders could and probably would have interpreted this as a bear flag, expecting it to break down and would have shorted the break at point "B", again, another bear trap as prices went up and above the resistance level of the flag.

Take a look at 3C during these moves and keep in mind I'm only using 1 timeframe to illustrate the head fakes, we typically use 6.

 The ascending wedge was a bearish pattern, 3C shows that clearly, but it's an obvious pattern that is likely to be manipulated. At the white arrow the breakout is coming, we know it's not going to immediately break down, at the second red arrow we know that's the area to short XLF.

 As for the bear flag/pennant, the pennant formed in to a leading positive divergence, the break below it in yellow shows while retail was shorting it, smart money was accumulating, using the supply from retail's shorts to accumulate on a strong leading positive divergence.

The final chart of the bear flag could have been traded, the 15 min chart showed us it was going to break down, but as it broke, again it was accumulated at the white arrow and leading positive divergence, time to cover and take the profits.

AAPL Update

First off, there was a nice little short squeeze during the last 45 mins. or so, we'll get to that. 

As many of you remember, I have long expected 1 final rally before the market moves to the next primary leg down. We have seen a lot of bearish set ups since that expectation was announced and they all were bear traps. You may also recall that I expected Tech and specifically AAPL to lead the move, although I'm not a fan of AAPL for the primary trend and it is one of the core short holdings at a decent profit. In any case, AAPL is getting a bit interesting and saw its own little short squeeze today.

 First we have a little top here, but in this little top we saw some very aggressive distribution activity. Note the bearish pattern formed when AAPL trended down at the red arrow and then formed an ascending triangle which is a bullish consolidation pattern, but has the wrong preceding trend to make it legitimate. Still there was a quick breakout in the yellow box that failed-these are the kinds of failures that technical traders look to short as they offer good positioning and low risk and I believe these are thrown out for technical traders as bait. We saw another move higher in AAPL and as AAPL crossed above that former high in mid June today (as well as above an intraday triangle), we saw a short squeeze.

 The weekly AAPL 3C trend shows where there was heavy accumulation in AAPL and where there has been heavy distribution in to price strength, this is one of the biggest misconceptions traders have, that big volume on falling prices is smart money selling, no they sell in to demand, in to strength as you can see they were selling in to a nearly parabolic move in AAPL.

 Today's triangle on a 1 min chart, check out volume as price passes the former June high and breaks out of the triangle, it may not look like much of a short squeeze, but check out the next chart...

 The nearly uninterrupted diaganol line is exactly what a short squeeze looks like and it happened just as AAPL broke out of that triangle-tomorrow's action should be interesting to see if this was a head fake move. I'd prefer to trade AAPL on a short term basis from the long side and buy in to weakness/pullback. Longer term I'm still holding a profitable AAPL core short position.

 3C 1 min was pretty negative early on, toward mid-day and the afternoon it was more in line. At 3 p.m. there was a positive divergence, this is the timeframe in which we see a lot of middleman activity such as market makers/HFTs, etc. It "looks" a whole lot like the pro's knew exactly where the stops were and gave AAPL a little boost at that white arrow (positive divergence) to push it through the triangle and create a short squeeze. Some longs would have jumped in there as well, so it really would be an ideal set up for a head fake reversal/pullback.

 The 2 min chart was negative in the a.m. and in leading negative position (even though it moved with AAPL most of the day-just lower than it should be for confirmation) , again that positive divergence that led to the breakout of the triangle and the short squeeze is evident.

 As we move to longer charts we get less detail, but also less noise and more trend. While the 3 min is still an intraday timeframe, we can see an excellent example of a relative negative divergence at the red arrow  (comparison between 3C's position and price's at two relative points) and then a leading negative divergence in the red box. At the white arrow we see 3C move up during the short squeeze, but it doesn't give any real signal being it remained in a leading negative position.

 The 5 min chart shows the improving AAPL underlying trade as we saw a VERY weak positive divergence to the far left and heavy distribution in to the run up. In essence it looks like the pros accumulated just enough to get AAPL moving and then sold in to strength in a much bigger way, however shortly after that we see two very strong positive divergences, the one at the lows of the 28th was quite spectacular. Since we have a leading negative divergence; in line with a pullback move, but not so bad as to ruin the positive divergences of late June.

The 4 hour chart shows accumulation in November/December 2011, then confirmation of the uptrend and then very strong distribution in to the March/April highs.

Ultimately I think AAPL will put in an impressive move to the upside, however once that is done, I'd expect to see the same distribution or worse that we saw during March-April. I'll keep the AAPL short open, but in the near term (sub-intermediate trend), AAPL is finally starting to shape up and looks like it is now worthwhile as a long on some price weakness.

Closing Market Update

The short term intraday charts (1-3 min) have been mostly in line today, the longer term trending charts have mostly been negative. Again to me this suggests there may be a little head fake move going on and a pullback still looks like the most obvious course, however there's no real indication that the pullback would be very strong, that would mean it would most likely be a constructive pullback, good for tactical entries, etc.

There are some oddities in the Euro and $USD I want to look at closer, obviously after market and we'll look at the risk asset layout as well.

Financials Pullback-FAZ Trade

If I did trade FAZ here, it would be with the understanding that this is a quick trade, you have to be nimble especially with a 3x leveraged ETF. If Financials pullback which they look set to do (the market is VERY correlated), then FAZ (3X short financials) should see some decent upside pretty quick, but again, expecting a pullback in financials means that FAZ long trade would be pretty short and you'd need to be able to watch it closely.

The charts...

 First on the daily Financials/XLF chart, there are at least 4 major head fake moves here. Take a look, see if you see them and why they are head fake moves and how they influenced trade in financials.

 On a 15 min chart we have a decent gap from Friday and that looks to me to be where the market likely needs to do some backing and filling (pullback).

 The 5 min chart, notice how flat trade is over the last 2 days, flat trade is where we often see divergences, it catches people off guard as the flat trade is not exciting and people aren't paying attention, but that' not the reason for the divergences, the reason tends to be stable prices; just think about why VWAPs are used to gauge the quality of a fill of an institutional order.

 Financials 1 min 3C shows several divergences, both negative and positive, the most recent is a leading negative divergence as Financials popped Friday, it appears that pop as being sold in to near term.

 The 2 min chart is seeing the weakness of the 1 min chart migrate to the longer timeframe.

 The 3 min chart is a good example of a relative negative divergence (relative between 2 points) and then a stronger leading negative divergence.

 If XLF is negative on the 3 min chart (again this is not a hugely important timeframe, it is along the lines of a pullback), then we'd expect to see a positive leading divergence in the mirror opposite ETF, FAZ (3x leveraged short financials) and there it is, this is part of confirmation.

FAZ is even seeing a 5 min leading positive divergence develop. It looks like Financials will pullback and fill their gap and FAZ will likely mov up to fill its gap, although moves in the market have ben getting more volatile recently so we might see more than just a gap fill.