Futures Telling the Story of Changing Tone

Last week we were able to use the futures charts (ES and NQ) the SPX and NASDAQ respectively very effectively. The 5 min chart would diverge with price telling us which way to position our short term trades (most using options and even weekly options) and following along intraday with the 1 min chart to find the best tactical exit to the previous trade and tactical entry to the new trade indicated by the 5 min chart.

As I said last week (all of this is in last night's post and there are some excellent concepts and indicators/indications that you can put to very good use), "Expect volatility to increase". The heralded Dow 14k came and went on extremely low volatility and ATR without a single correction, what I have been calling, "A very dumb money friendly environment" and dumb money which had been flooding out of the market last year bit, they swallowed, hook, line and sinker and that was the point of the environment.

The increase in volatility is a common (pretty much a prerequisite) at turning points, especially at tops. Rather than fear the volatility or get knocked out of trades that are increasing in volatility, ATR and daily percentage moves, that are up big one day and down big the next, we chose the correct tool for the trade and used this to our advantage, but for dumb money, this is PANIC time.

What to do? Cut and run after they sat out the market for the last 6 months or year and saw the Dow break $14k just like CNBC has literally been ADVERTISING and risk missing out on further upside gains (these are the emotions of both FEAR and GREED together, a deadly combination ) or stick it out because after all, the economy is getting better (wink, wink) and the GDP print was just because of Super-Storm, SANDY!

This is the bull trap Wall Street masterfully created, knowing exactly what dumb money will feel comfortable in and where they need to take the market to cause them at best, indecision which can destroy a portfolio that is not well managed in an hour in some cases.

Here you can see for yourself that this recent short term (daily trade) goldmine we have been taking advantage of, is getting more unpredictable, inherently unstable and is yet another indication of the market transitioning to trend 2. You want to know when Trend 2 will start? It is starting right now in my opinion, the start of these reversals are always difficult to spot in the moment, only afterward do they become apparent. For example we get a 1% day up and a 1.15% day down, then a .85% day up and a 1.10% day down, then comes the .50% day up or maybe even 1.50% day up and then the 2.8% day down and it is days like this that you want to be in the market, in the trade because through the noise we are creeping lower and at some point the big moves that make a trend a trend, actually only occur once every 4 or 5 days (of course we often get a string of 3 or 4 days down as well).

  The fact is, bear markets fall faster and harder than a bull market rises-look at the SPX from 2002 to 2007 and then from the 2007 top to the 2009 bottom, most of the damage was done in 6 months, the totality of the bear move was about 16 months and took back 5+ years of bull market trend and then some!

Furthermore to help you anchor expectations and understand the nature of a bear market, in most bear markets I have studied, you will typically see just as many if not more up days than down days, the down days just tend to be much more extreme. You will also note that volume is characteristically low which is a hallmark of a bear market, with the exception of some initial breaks, margin calls and stop levels being hit.

Finally, the sharpest, most intense rallies you will see in the market are counter-trend rallies that occur within a primary bear market trend, that's right, these are the biggest, fastest, strongest rallies. If you think about the concept of a bear market counter trend rally, you'll understand why they need to be impressive, why they need to sway emotion and why they need to come off as, "believable".

In any case, I have wondered off topic, here are the charts and the ever-chaning nature of the process.

 ES didn't show any real divergences yesterday, but overnight and JUST BEFORE the European open, the positive divergences popped up, note the lack of any confirmation in ES right now, I suspect this is a persistent negative divergence, if so it won't be useful as an intraday indicator for intraday trend changes, but will be useful as a larger picture indicator and lean more in to trend 2 (the move down).

 Here we see the 5 min chart of ES and the last time it gave a signal as ES was up Friday, remember the short positions for Monday taken last Friday, then the price move down as 3C suggested and we did get positive signals for today in the market averages, but not here in ES like we had over the last week; so the character of ES is changing again toward the negative and more unstable/unpredictable (as far as a downside break).

 This is the 1 min NQ / NASDAQ futures, these CLEARLY showed a positive divergence yesterday, but the 5 min chart hasn't been working at all lately here. See last night's final post for the signals, which included a large positive divergence in the Euro, we will review some of these because they are excellent real time lessons and there's a lot to be learned, to read that post and not take in those concepts is a real waste of some great, very telling market action.