Follow Up

I'll try to make this as concise as possible. First, tomorrow the German Constitutional Court will drop their ruling on the constitutionality of the European Stability Mechanism (ESM) which is where all future bailout funds for Europe are to come from, however with the German Bundesbank being the largest contributor to the ECB which of the 27 member nation central banks, the German Bundesbank has the largest contribution share of nearly 19% (compared to say the Bank of Ireland at 1.11%), clearly the German Central bank is key to any plans regarding the ESM not only as the largest contributor, but as 1 of only 4 Aaa rated countries left in the Euro-zone.

Should the German Constitutional court surprise the world and strike down the ESM as conflicting with the German constitution, it would be a major blow. It is not expected that the court will strike down the entire ESM and a recent filing yesterday by a German government coalition member (arguing against the ESM) was thrown out immediately suggesting the court has probably already made a decision.

It's not a simple yes or no vote, the Constitutional court could uphold certain provisions while striking down others or attach conditions, the only consensus as of now is that they will uphold the ESM, but any details beyond that are anyone's guess and the details could be significant in the functioning and ratification of the ESM by Germany.

AAPL of course releases the I-phone 5 tomorrow, I have opinions on that and the competition as well as Consumer Credit, but none of that is really relevant. As I showed you today, it appears there's short term accumulation in front of the event which makes sense, but beyond that it looks like the floor has fallen out below AAPL.

 5 min AAPL chart with positive divergences at each low and a leading positive growing stronger in to the close at the lows of the day. Beyond the 5 min chart, there isn't much of anything so unless AAPL was going to spend more time accumulating, this looks like a 1 time deal and after that, there doesn't appear to be any support. As I have said numerous times, it looks like "Sell the event".

AAPL 4 hour -Compare the negative divergence of the last top in April and then where 3C is now at higher prices with a very sharp leading negative divergence (it's much clearer with a closer chart, but I wanted to show the relation between the indicator and price at two relative points).

While the NASDAQ, which underperformed today, was putting in a positive divergence most of the day, the other averages only put in relatively small divergences at the end of the day.

 DIA late afternoon 1 min positive divergence

 However nothing at 3 mins., 2 mins barely has anything.

 The IWM has had the best underlying chart action and it too only put in a late day 1 min positive divergence, normally if there weren't the ESM event I'd say this is evidence of an early gap in the morning which would likely be faded in the afternoon.

 IWM 2 min has a less impressive positive than the 1 min, the 3 min is not showing much and the 5 min shows nothing of any substance on the positive side, usually any decent move of a day or more would have at least a 5 min divergence.

 The QQQ 15 min on the other hand (and most timeframes below 15 min) is quite positive, again I believe this reflects the flow smart money saw today or put in today with AAPL considering AAPL's weight on the NASDAQ 100.

 While the 4 hour QQQ looks even worse than AAPL's 4 hour chart with a nearly vertical leading negative divergence, much, much larger than the April top.

 The SPY showed a late day 1 min positive...

And a 2 min relative positive divergence, but nothing beyond that with some very sharp negative leading divergences in the 15 min+ timeframes and even 5 and 10 min timeframes.

Thursday we have the F_O_M_C, it seems equities have fully priced in some easing action, yet Bernie at Jackson Hole seemed to kick the mess back to Congress as have several other current and former F_E_D members.

Gold is where we want to look for possible F_O_M_C expectations, not equity prices.

 GLD 15 min had some intraday momentum, but in context, it's still leading negative.

 The 30 min is much worse

As is the 60 min. I would think if the F_O_M_C were about to unleash a program as massive as equities semed to have priced in, we'd have some pretty stunning positive divergences all the way out to the 60 min chart.

As for futures...

 ES Futures

NQ Futures-niether are remarkable, in fact the NASDAQ futures are nearly perfectly in line.

What did bother me today was High Yield Corporate Credit's performance which was up +.67% at a breakout high, some feel this is merely related to index arbitrage and therefore not an important signal, but I've had good luck with HYG as a leading indicator and only have seen it break away like this once or twice before, but not this strong.

High Yield Credit which has negatively diverged for the last 6 days did see a move at the end of the day that is similar to the 1 min 3C charts on the averages at the end of the day, this gives me a little comfort that HY credit is acting more in accordance with other charts and makes some sense for a quick burst followed by a fade of the move.

That's what we have as hard evidence and base our probabilities from there, so I'll be looking for some quick strength and any opportunities, especially in Financials to use that strength to short in to, however common sense and experience tells me to be prepared for volatility as the German Court ruling is in a way very much a Central bank issue for the EU and Thursday we have the F_O_M_C which almost always creates a knee-jerk effect whether lasting several hours or a couple of days.

I'm going to check around specific stocks, when you get a bunch leaning one way or another, it is usually just as good an indicator as anything, it's just a lot more time consuming. If I turn up anything that will add materially to what we have in front of us, I'll be sure to post it. I may even set my alarm for 3 a.m. just to see how Europe opens.

Probabilities

As per the last post, the probabilities of a scenario as described revolvig mainly around tech look even more realistic toward the close. I'll put the charts up after the close, but the SPY, DIA, IWM are all showing late day positive divergences , like yesterday, but on very limited timeframes. Essentially they are not broad, strong divergences, but they'd be enough to gap the market. I believe that is the most likely outcome with a probable fading of the gap. Almost the exact same parameters apply as yesterday, "if" the market gaps up, especially strongly, then there won't be any time/opportunity to add to the divergence and make for a stronger move and fading the move becomes more and more likely as the day wears on. "IF" the market opens neutral or even down, then there's time to add to the divergence, I'm not exactly sure what time the German Court ruling comes down, but I'd think before the NY open, so it will likely have a lot to do with how the market opens, which mean watching the Euro and futures overnight to get an idea.

From the longer term charts or even intermediate, there's a lot of damage and there's not much in the way of any underlying strength, that can only really come if the market doesn't open strong or on a gap.

It looks like tomorrow will provide us with some opportunities to enter those timely trades.

Charts coming.

Moving Forward

With Energy and Financials outperforming the broad market, the only laggard among the major 3 industry groups is Tech, yet it is also the only one that has shown strong underlying activity today.

As far as yesterday's closing divergences I thought and hoped we'd see early strength with an afternoon fade, that has pretty much happened, the analysis seems to be correct for today, but it isn't really creating much movement or openings except in existing positions from last week.

It's pretty difficult to say what happens with the German High Court although they are expected to let the ESM stand, it remains to be seen what portions they may strike down. AAPL is another event altogether. Despite intraday price action, I see nothing that suggests AAPL hasn't been building today.

 The 5 min AAPL chart wasn't showing much of anything earlier today, it now has a lading positive divergence in to multiple runs at stops.





















On the other side of the coin, looking at this 30 minute chart, I don't see any reason why the probabilities wouldn't be strongest shorting AAPL in to any strength. The two charts above, 1 shorter term, but still fairly powerful and the second longer term and very ugly, give AAPL the look of a "Sell the news" or in this case, release of the I phone 5.

The other average that has been building today and the worst performer (although the performance is negligible), directly linked to AAPL, the NASDAQ 100.

 QQQ 15 min chart leading positive

SPY 15 min leading negative.

Just putting the pieces together, it looks like a tech led bounce in to tomorrow, that's the movement we need to enter new positions as I have been saying I'd hold off on AAPL puts unless we get some price strength and underlying weakness.

Looking at this from the smart money side of things as we try to trade along side their actions, I'd want to accumulate AAPL/QQQ at the cheapest prices too, even if it is only to push them up to sell in to them. So I see nothing inconsistent with the charts above and the general theory laid out.

I do want to tae one last look around and see if anything stands in the way of that theory, but as of now, it seems like the most likely outcome.

UNG is solid

There are only 1 or 2 long term long positions that I really like, UNG we have been watching for a while and were way ahead of the crowd, this has made UNG a profitable position from early positioning while others hated the stock.

Last week we talked about a needed pullback to gather strength and the last 2 days we have seen UNG run 5% and thus far 6% today, despite the market yesterday!

UNG needs 1 thing to enter stage 2 mark up (the easy money/ trend) and that is a volume surge, not so smart money can buy, they did that long ago at much lower prices, but so technical traders think smart money is buying as their volume surge scans pop and they notice and chase UNG, then UNG enters stage 2. The first step though is breaking out of the base, that is happening now. It would be great to see today's gap up hold as an open, breakaway gap.

 The daily chart and the much needed pullback with a break through the base's resistance today, volume looks good thus far.

 The surge in volume since yesterday.

 3 min chart is seeing some profit taking, but after the last 2 days that's to be expected, it's not putting the larger move in any jeopardy.

 Everything else is confirmation- 10 min

 15 min

60 min

This is a longer term position, I rarely look at it, I think just give it time and let it do its thing.

GOOG

GOOG on the other hand is not building much of anything, it looks like it's just trying to tread water with Tech/AAPL

 GOOG  min early positive divergence which has faded already

 2 min

 3 min-again doing nothing today

 10 min-note the resistance breakout

 15 min again the resistance breakout change in 3C momentum to the downside.

Even a daily chart which has mostly been in line or trend confirmation with the only really serious divergence now.

GOOG is a core short in the equities model portfolio

AAPL Update

Not that AAPL is the only stock to trade, but with 20% weight on the NASDAQ 100, it alone can move the market and we do have the I-Phone 5 coming out tomorrow, it's more of a 5th average for the purpose of this post.

For newer members, to give you some idea of AAPL's weight which is a NASDAQ proprietary formula that you can receive with a $10,000 a year subscription, if you took approximately the bottom 50 NASDAQ weighted stocks and added AAPL to create the NASDAQ 51 and all 50 stocks other than AAPL were down 2% on the day and AAPL was up 3% on the day, despite 50 of 51 stocks being down 2%, the NASDAQ 51 would close up and in the green.

It's kind of silly that 1 stock has so much power to move the market, but that is the situation and one of the reasons AAPL has long been a favorite of the Wall Street Primary Dealers who made billions of dollars from the F_E_D with virtually no risk, so long as they took the profits from flipping bonds to the F_E_D in POMO operations and bought up the most heavily weighted stocks to mov the market up, even when a majority of stocks were moving down.

 AAPL 1 min is still building, it doesn't look like a failed move.

As is the 5 min chart.

If we go much beyond the 5 min timeframe, there isn't much that is inspiring about AAPL. Perhaps the I-phone 5 disappoints or is just a sell the news event. At this time, I wouldn't take any action on new AAPL positions.

Quick Market Update

There's some notable damage now in the futures, this is also the first place yesterday we saw the positive divergences that led to the overnight move and today's move.

ES

NQ

It's not horrible yet, but it is a change in character.

I'm going to check on some other indicators, Industry groups, etc.

AAPL Update

The head fake move is such a common occurrence before a reversal because technical traders are so predictable, you can pretty much use it on almost any timeframe without any other indicators, almost. You do have to have a general knowledge of what the underlying activity is and 3C is used to confirm that as well as the head fake move, here you'll see an update of AAPL, why the head fake move is so common and why.

 This is the kind of improvement on the AAPL chart that is noteworthy, a leading positive divergence, even though it's only on a 1 min timeframe, remember new divergences have to start somewhere. Look at the exact place the change in 3C character took the most dramatic turn to the positive... right at a move below yesterday's close which is usually first resistance/support other than a.m. ranges.

Why did 3C shape up there? That's where the stops were, that level only needed to be broken to trigger the stops making supply available and at better prices.

As AAPL moved below yesterday's close, it created movement with stops being hit and volume rising, it may not be a lot, but it's probably enough. As there was no more benefit with all of the stops that were going to be triggered, already triggered, volume fell off and there's no point in hanging around the area. Any shorts (I doubt there were many) are squeezed (as a general concept-think about all the timeframes this can happen on and the amount of volume) which creates upside momentum with their covering/buying.

 The 5 min chart that earlier was "Blah", has a leading positive divergence, again it saw that form as a small head fake move was triggered.

Even yesterday RIGHT BEFORE AAPL fell, the very last move was a short burst above resistance as it triggers limit orders, that extra bit of energy created by longs caught in a trap is part of the reason we see these moves so often as they provide extra momentum to the move. It doesn't matter that the move to hit stops was only 5 minutes or so, once that level is crossed, they are triggered.

This 10 min chart also shows there's nothing exciting in AAPL beyond the 5 min timeframe, while I'm pretty quick to take the profit that is available, I also wouldn't be too worried if I wasn't able to based on the fact the divergence didn't move out any further.

Closing AAPL October $675 Puts

I'll leave the others in place, I have a profit here and I think AAPL is shaping up enough that a move is likely.

I'll be looking to replace the position ASAP.

This was the smaller portion of the main position so it's not huge, but with leverage like this I try to trade around volatility as much as possible.

SPY Update

Today's move in the SPY is seeing slippage, I'm not convinced it's over, but I do believe there's additional deterioration in underlying trade or what you might call smart money's actions.

 Early trade on the 2 min chart on an intraday basis is pretty much confirmation in the morning, in to the afternoon there's deterioration, this is basically what I was expecting and hoping to see yesterday o the late day positive divergences.

 The 15 min chart doesn't look like it has added much to yesterday's lows in 3C, but consider where price is now compared to yesterday's close, basic confirmation would have 3C higher, the fact it is right about where it left off yesterday with the SPX up today is in itself deterioration.

As is always the case, new divergences will start on the 1 min timeframe so this is where I want to watch for any changes either positive or negative for the SPY, given the longer timeframes have deteriorated, I'd say the probabilities are for a negative change in character when they are ready.

Financials not looking good here

This is probably an opportunity to look at some financial names as short positions. The SPY generally is not looking very good as the day progresses, as such with about 22% exposure to financials (more than any other average), I thought to look at Financials and found there's weakness there, not only in the Sector, but in individual names, BAC and GS are two I'm looking at right now. Also FAZ is looking good in this area, I'd say it's probably a little too early to make a full commitment to a position there, but it's worth keeping an eye on and maybe dipping your toes in to the idea.

I'll get some charts up, I want to look a little closer and see if there are any specific target areas that would be high probability. I may add to FAZ in the equity model portfolio.

QQQ/DIA example

As I just posted the difference between the DIA and AAPL, I'll show you the same between the DIA and QQQ which is acting a lot like AAPL this morning. It's also worth noting the market averages have come unglued from the high level of correlation that has been a hallmark of the last several months, maybe longer as the Dow-30 is up 2x the QQQ this morning.

 The longer term DIA 1 min chart shows clearly the divergence getting worse in the average until it just breaks (yesterday).

 Looking closer at the very same chart, just zoomed in for an intraday perspective, the DIA is apparently burning through energy or seeing price strength distributed, rather than building it, after yesterday's break and the late post on the divergences present, this is what I had hoped to see, rather than the average gathering strength.

 The DIA 3 min chart looks similar to the 1 min because there were similar underlying trades taking place.

 Zoom in on the same 3 min chart as above and again the DIA is not gathering energy, but burning through it. If I were looking for an average to short, I'd be considering the DIA as it has a decent price entry, less risk, lower premiums and higher probabilities as this move should fail shortly and doesn't materially change the weakness from yesterday (although it could draft off the NASDAQ 100, but that is why I mentioned the break in correlation which makes that less likely).

 The QQQ does not look strong generally speaking, you can see very clearly at the break above resistance how much worse 3C became as selling in to strength was the theme.

 A closer look though intraday of the QQQ 1 min shows it gathering some strength at the lows.

 QQQ 3 min also is gathering some strength, the market makers and really every other pro on Wall Street can see what's happening in order flow with AAPL and I don't mean retail order flow, I suspect that is why the Q's are gathering strength, if for no other reason, the managers of the ETF have to move the Q's to reflect AAPL's weight on an AAPL move.

 QQQ 5 min also gathering some strength.

Even on the 10 min we see the same.

I also want to point out that we use multiple timeframe analysis to look at different trends, the structure of underlying trade, etc. I am pointing out gathering strength in the QQQ's, but most of what we are discussing is intraday and shorter term in nature, this doesn't imply a massive new round of accumulation in the QQQ, so to be fair I'll show you the trend and try to distinguish from short term divergences and the situation with regard to the trend off the June 4th lows.

We saw numerous positive divergences probably about two weeks in advance of the June 4th low which was also a head fake move on a bearish descending triangle that traders expected to break below the triangle and make a new leg lower. We already had information before price broke below the triangle that it was almost certainly a head fake move at the June 4 th lows and that's where hedging long positions were entered in leveraged ETFs to protect core short positions. As this 4 hour chart shows, there's a positive divergence in to the June 4th low with about 2 weeks of notice before hand, the leading negative divergence now is very deep, it's much larger than the June positive divergence, so I don't want to give anyone the wrong impression about the QQQ analysis above, it is shorter term in nature, less important. The dominant trend here is very bearish, but nothing goes straight up or down and especially as volume has dried up the lat couple of years, the intraday and day to day volatility has grown exponentially, this doesn't change the fact that the market is still heading to where it is heading, it just does so in a more volatile manner, which requires multiple timeframe analysis, wider stops, better entries and exits and an understanding of what tools/trades to use at what times, otherwise it's a meat grinder for most traders.