The 3 Pillars

For many of you the term, "The 3 Pillars" is familiar. If not, it's my reference to the 3 Industry Groups that are essential to sustaining any kind of move beyond a short bounce. Although all 10 major Industry groups are important, in my opinion the 3 most important are Tech, Financials and Energy.

Since QE3 was announced we have seen way more sector rotation than we have at any time since March of 2009, before the QE3 announcement, markets were highly correlated and whatever you chose in any of the 3 groups was pretty much certain to rise and fall together, recently we have seen that we need to have a little more diversified positions as sector rotation is taking place, even if only for a day or two.

 During the mid-October bounce we had positions in leveraged longs including Financials and Tech, one day Financials were in and the next day Tech was in and Financials were out, this is VERY different from the "Buy any asset" as the market formerly was two positions, "Risk on" or "Risk off", now we are seeing rotation and as such, it's important that Tech starts to look good for any shakeout move arising from last week's range-bound market.

Tech hasn't been an impressive leader lately, but Friday I mentioned a change in character in Tech toward the more bullish side, today I want to show you some of the developments, but first relative Sector Performance.

 Both are 1 min chart, the first is has a bit more history and the second more recent. For instance, today it's clear that Tech is showing better relative performance than Friday while Financials are showing weaker relative performance since Friday. The recent trend since the price range we were looking for matured, has shown Utilities and Staples over this timeframe both having declined and are moving out of rotation which is important because these are defensive sectors that typically do well when the rest of the market does poorly and vice-versa.

A closer look reveals Tech coming in to rotation while Financials are out today. Industrials, the momentum filled Basic Materials group and interestingly Energy are all showing better relative performance than Friday while the flight to safety sectors fall out except Health care which is relatively stable.

As for Tech charts...

This is more impressive and a larger signal than I believe we will see play out, a 2 hour chart with a positive divergence through the range and a leading positive divergence at today's levels after Friday's decline. This is an impressive chart that is almost purely trend with very little noise.

 The 30 min chart, also an impressive timeframe, shows the same thing with a little more detail, the main point being, the post-Friday divergence has been leading positive in an uncertain environment. Take away the macro events and just looking at the charts, I'd say there's pretty strong confidence that Wall Street has positioned for a move higher in the very near term.

A little closer to today's events, the same time period on a 5 min chart shows Friday's head fake gap-up opening and a leading positive divergence today as we once again saw a day that was largely lateral trade.

All in all the Tech sector is looking good and like someone has put together a decent size cycle for an upside move/short shakeout.

I want to use this move not only on the upside with our recent entries in to leveraged longs, but eventually as the market tells us, to get ready to close the longs and enter more substantial or add to existing short positions as the longer term probabilities are highly skewed toward a decline after 1 last shakeout of new shorts.

As for Financials...

 The 15 min chart is all we really need for a nice shakeout move higher,  here we have that. We can see a leading positive divergence form last week and Friday's head fake gap higher in to a negative divergence or selling sending the sector (along with the market) lower, for whatever reason and there have been plenty offered; I believe this has more to do with the tactical execution of Wall Street's cycle than anything else, simply put, this was either part of the plan or the plan deviated and they made a correction. In any case, today's action shows a 15 min leading positive divergence in to the pullback from Friday's open; the sector still looks like it has plenty of gas in the tank to bounce/rally.

 The more detailed 10 min chart shows the mid-October bounce that went negative, the range from the 23rd to the 31st with a positive and leading positive divergence and of course Friday's action and a positive 3C position currently.

Finally the more detailed 5 min chart shows Friday's gap up with a negative divergence as soon as the market opened, this gap was being sold immediately, but not aggressively (at least not in the underlying trade). Today we see the 5 min chart move to a new leading positive high, even though price is lower than Friday. All in all, Tech and Financials are still in basically the same good shape they were in as they emerged from the range.

Finally Energy which has been hit hard since QE3 was announced. I talked a LOT about the conventional wisdom of the market concerning QE3 back when it was announced and hoe emotionally I felt like I should close all shorts and go full long, but I said I wouldn't make a decision based on emotion or the conventional wisdom because things are very different now than QE1 or 2. Instead we waited for the information/proof to come in and we were 100% right for doing that, Energy is one of the greatest examples of why we were right not to take the knee-jerk, conventional wisdom, but rather look for evidence as Energy fell badly after QE3 was announced in direct contravention of the "conventional wisdom".

 Energy/XLE on a daily chart shows a clear and very strong negative divergence RIGHT AT THE QE3 ANNOUNCEMENT! We saw this back then, we wondered if the charts would change and gathered evidence, but the long term charts were correct. For this reason, unless the market delivers a different message in the coming weeks, I want to use any price strength to sell long positions in Energy such as ERX and then move to short positions and/or add to existing core shorts like IOC which is still at a +15% profit and XOM (so long as they are still high probability/low risk trades).

 The 4 hour Energy chart also shows the area where QE3 was announced and the negative divergence in to the announcement followed by Energy's decline of over 7% since then, had I made a knee jerk reaction toward conventional wisdom, IOC would have been covered at the worst possible time only to find itself profitable in the days ahead.

We can also see a positive divergence recently between the white box now and the white trendline area earlier in the month, Energy looks like it is FINALLY coming together for a move higher, one I think will be used to shakeout shorts so Smart Money can essentially take over those positions at better prices with less risk.


 The 2 hour chart shows a negative divergence right at the QE3 top, confirmation for much of the move down and a recent positive divergence that includes our expected "range" area.

 On the 15 min chart we have a positive divergence that sends energy more lateral with a head fake breakout move that is sold just like the market last Friday. As is usually the case with failed moves (head fakes), they reverse quickly in the other direction and Energy takes out support, this hit a lot of stops and allows Wall St. to make money on increased volume rebates, allows them to pick up shares for a bounce at better prices with as much supply as they need to enter these larger position without arousing suspicions. Note 3C is in leading positive position as that support level was broken, implying the stops that were hit were accumulated for a run higher.

Finally on the 1 min chart we see the recent small head fake below range support and just like the larger break below support above, this one too shows a leading positive divergence once again suggesting this head fake move was accumulated as stops were triggered. These head fake moves usually are the last event we see before a reversal so we may indeed be very close.

The main point is I'm glad we didn't make an emotional decision Friday to exit longs, the evidence since late Friday has supported our view that we will see a strong upside move that will eventually fail leading to the next truly serious leg lower in the market.

Market Update

With all of the uncertainty this week, last week's range which is a powerful reversal area (as you know we are looking for 1 more upside reversal to sell short in to) seems to have come at a very bad time.

We predicted a range, noting that a reversal, even if only for a shakeout move, is a process and not an event. However this process could have unwound many different ways such as a "U" or "W" consolidation, instead we were right on with the range and the reason I thought a range BEFORE the market had even given us a sign that it would form a range and wouldn't just keep falling like a rock, was purely based on market behavior. A range has clear support and resistance and all of the things a reversal needs are best found in a range.

So I'm happy it developed as we expected, although it's difficult to have all of this uncertainty just as we come to the area in which the range should be giving way to a reversal. One thing a member reminded me of, something I always remind you of, is the market hates uncertainty so in a way, no matter who wins the US elections,the certainty of them being over may in fact give us the window we've been expecting right about now.

The earlier notations I made about how the market was showing bullish and positive underlying behavior today have not changed and I would say if anything they have grown, so I do like what the market is looking like on today's trade this far.

 DIA 1 min looks good today, but this is the least of the positive activity.

 Overall DIA 5 min, big picture shows what had me concerned on Friday all pretty much repaired today, it looks more and more like a 1 day head fake, maybe because of weekly options, maybe it has to do with cycle timing, who knows, but it did its job and it looks like whatever damage was done is now repaired.

 DIA 15 min today look excellent.

 And surprisingly, even the 60 min is in a much stronger position than I would anticipate.

 IWM 10 min, as mentioned, "The longer term charts are where we are seeing the action today) and that may be appropriate because these show us larger, more important activity and if you needed to make quick changes or repairs in a day or so, you'd need to move these longer term charts.

 IWM 3 mi shows the head fake on Friday, but not a lot of distribution before that, today we are hitting new local leading positive high while at lower prices (compared to Friday's open).

 QQQ 5 min showing the same head fake and leading positive divergence today, this doesn't look like a market ready to follow through on the downside right now.

 Look at the leading positive in the QQQ 15 min all TODAY!

That's a huge move.

 SPY 3 min looks good and as you might expect for a positive day, but...

Tae a look at the leading positive today on the 5 min, compare to the head fake negative divergence on last Friday's open at the red arrow, there's quite a bit of activity in underlying trade that few see today.

I'm pretty well set for longs as I set them up at the bottom of the range last week, but even with the uncertainty of events this week, I feel pretty confident that the cycle was set up and Wall Street will run it and you will know when they do.

BIDU Chart Request

Although I personally don't have a desire to trade BIDU, I know some of our more nimble traders follow it and I'd say the probabilities in the near term are skewed towards BIDU making a move to the upside, because I don't see longer term, strong probabilities, I'm not personally as interested in it, I might be on the short side if it can make a decent upside move, but one bridge at a time.  Here's what BIDU looks like.

 Another obvious range and a break below that range, whenever you see this you have to question whether this is a head fake move or not, many times they are.

 Today BIDU's 1 min chart has shown improvement as BIDU has started to make a move sideways, this is where we often se divergences-in an area that no one thinks anything is going on, but what they miss is the stable prices this provides big money.


 What I noticed here is Friday's opening negative divergence on the gap up like the rest of the market, I also see the 2 min chart improving so there's migration of the divergence from the 1 to 2 min chart which is a start.

 Here's a closer look at the 2 min chart, leading positive in the flat price range as we'd expect to see.

 The 3 min chart is also seeing migration of the divergence, this means the divergence is growing, the underlying activity is getting stronger and is a good confirmation signal.

 We even have migration and a change in character out on the 5 min chart.

Finally the 10 min chart, I don't include it because it's a huge divergence, but it's solid and it migrates through 4 or 5 timeframes, that's pretty good short term confirmation and probabilities for BIDU to see some near term strength, I'd be interested in BIDU once it is above the range as a short, but some of you may like the idea of a long position on a head fake move.

MCP Update

Friday as MCP  broke below a clear support line (it's important that it is clear as that's where all the stops and orders will be), I added to the long position there on what I feel is a highly probable head fake shakeout move that we see very often before a reversal (in this case to the upside).

Here's MCP's updated charts today, I still feel fine about Friday's add to.

 This is a 2 hour chart of MCP, sometimes to put things in proper perceptive we need to look at the larger picture and remember why we are in certain positions. This is a leading positive divergence on an important timeframe, it fits very well with the feel I've had about MCP since we first started looking at it, that MCP was likely in a base, it would be more volatile because of that, but the bigger the base, the stronger the move that comes out of it.

 Here's what I suspect is a head fake move last Friday on the daily chart, MCP has a lot of traders out there and it's a very obvious level to go trolling for stops and limit orders.

 The 1 min chart shows a very short, but very visible negative divergence just before MCP made the move I suspect is a head fake move, it was not a large divergence or of any amount of time that would have me suspecting solid, real distribution, instead it looks just like a head fake move. Since MCP's looks to be pretty neutral which is good because there's no downside follow through, but it also looks like much of the market today with the 1 min charts looking neutral while longer term charts see more underlying action.

 For instance the MCP 5 min never confirmed the downside move even after nearly 2 days, rather it stayed leading positive.

The 10 min chart is also starting to actually improve since the move lower to a higher leading positive divergence, so all in all, I feel fine with having added, holding and if I didn't add on Friday I'd have no problem adding here.

Just remember that because MCP is in a more volatile base, a wider stop is needed, it's better to take on fewer shares with a wider stop initially any way.

AAPL Update

Late last week, I showed a few charts that suggested AAPL has hit an oversold area, including my DeMark inspired custom indicator and several other indications,  here's the follow up.

 The DeMark inspired chart with Friday's close outside the Bollinger Bands, an extreme move with current buy signals.

 Late Friday there was quick improvement in the short term 1 min AAPL chart which is a big deal for AAPL as the charts just haven't been looking good there at all the last week, today it's adding to that leading positive divergence.

More importantly the 5 min chart that was in line with price is not only holding its ground, but going leading positive here.

AAPL and the market moving together will be important to any bounce coming from the range that was established last week.

What I Found So Far

While the market has good reason to be rather quiet today, usually I equate a dull market with a child that's too quiet in the other room, you just know they're up to something!

In any case, the short timeframes aren't really showing anything all that interesting, it's the longer timeframes where it counts the most.

 DIA 1 min is more bullish than the market would otherwise indicate.

 This is where it is more interesting, the 5 min chart seeing some significant repairs from Friday

 The same with the IWM 1 min short term, not too interesting

 The 10 min though is in very strong position.

 The QQQ 1 min looks pretty good.

 The 5 min look a whole lot better.

 SPY 2 min is almost perfectly in line.

The 15 min is leading positive from today only.

It's interesting that these longer chart are seeing the most improvement in an important area/timeframe.

Market update

So far it's been pretty quiet today, I suppose considering what tomorrow is, we shouldn't expect a lot of big moves on a day like today.

Short term 3C charts are biased toward the positive, but not screaming; leading indicators are neutral to a slight positive bias, again not screaming.

However I do think I might be something developing, it's not where I'd usually look, it looks a bit further out and more bullish than the rest of the day has been so far.

I'm keeping an eye on it and trying to confirm in other areas, I'll have some charts up very soon as I'm starting to see enough to start collecting them.

Opening Indications

Thus far the opening indications are a carry on of the late Friday change in character we saw that I just posted-the late Friday action seems to be continuing.

 DIA 2 min on the open today

 IWM 1 min leading after the open

 QQQ leading after the open

SPY leading after the open.

So far it looks pretty interesting, we'll see if there's good migration through the timeframes, we may have an opportunity setting up.