***I appologize for this post taking so long, I've actually been working on it since 6 p.m., nearly 7 hours. I hope you find it useful. The bottom line is I expect near term market strength to the upside, it needs to be convincing and turn sentiment bullish. I believe that move will see a lot of distribution / short selling in to any such price strength, at this point the market is getting very unpredictable as the divergences are so negative and breadth is so thin, there's no support. If you recall AAPL's plunge from $700 after Dan Loeb's Third Point Fund dropped AAPL from their top 5 holdings, everyone rushed for the same small door at once and AAPL lost over 200 points or about -40% or nearly half its value in about 6 months. Once the first sellers really step in to the market (he who sells first sells best), there's no telling how fear will take over as hedge funds tend to flock much like retail money.***
First I want to point out a concept that is part of the lost art of volume analysis, traders have forgotten or just never learned volume analysis, instead they tend to flock to the newest or trendiest indicators.
"Every one of the major averages was CLEARLY dominant today, ALL THE SAME- Price Down/Volume Up, this is a 1-day oversold or short term capitulation... I suspect today it's the more common 1-day oversold and most often the next day closes higher."
Today all of the major averages closed green except the NASDAQ 100 which was unchanged, the R2K was the leader and up +.76%. So yesterday's dominant P/V relationship called today's close.
The day before on Tuesday in the Daily Wrap the Dominant Price/Volume Relationship was the same in the Dow, the SPX and the NASDAQ 100, it was Close Up/Volume Up of which I wrote,
"The Dow has a dominant P/V relationship of Close Up/Volume Up, this is the strongest of the 4 relationships, however it often acts as a short term overbought signal. Since it's not the same for all the averages, I'd give it some leeway and not assign a directional move tomorrow, but normally if all the averages were the same, we'd expect a short term overbought situation and a close lower the next day. "
Wednesday every average closed lower as the Dominant P/V Relationship predicted the night before.
While we are discussing it, here's today's Dominant Price / Volume Relationship, I show you the actual relationships for each of the component stocks making up the average so you get a feel for what "Dominant" looks like.
Dow-30 is dominant Close Up / Volume Down,
every average has the same relationship as the Dow-30.
NASDAQ 100 (when more than half the stocks of the average share the same relationship, this is dominant, which is important).
The Russell 2000 and the Russell 3000 both have more tan half of their components with Close Up/Volume Down.
The SPX shares the same relationship, all 5 of the major average share the same relationship. When the Dominant relationship is Close Up / Volume Down , this is the most bearish of the 4 possible relationships. Whenever price closes up, you want to see heavier volume. This relationship tends to mark a 1-day oversold and most commonly the averages close down the next day. We have an options expiration tomorrow (as the weeklies are seeing pins just as often as the monthly option expiration). The close tomorrow is not definite, but it tends to be most likely.
Some of the other indications...
Breadth indications were slightly better today, but nowhere near as strong as yesterday's horrible breadth readings which were, in many cases the biggest 1-day decline in breadth I can remember ever seeing (the market lost more breadth in 1 day than over the course of a month which was already very bad) as seen in last night's post.
The CONTEXT model for ES doesn't look very good and the SPY arbitrage wasn't good today, but really declined in the afternoon.
Here's the description of the CONTEXT model for S&P Futures (ES):
"The world has become an increasingly inter-connected place to trade. Whether due to central bank liquidity or the shortening of business cycles, asset-classes tend to behave in highly correlated ways most of the time. The CONTEXT framework attempts to distill the world’s ‘risk’ asset-classes (interest-rates and curves, credit risk, FX carry, commodities, and precious metals) into a single-measure that can be judged against the US equity market in order to comprehend potential mis-pricings (or technical flows and liquidity impacts). Institutional and algorithmic clients tend to use CONTEXT as a confirmation tool for positioning against (or with) a trend. CONTEXT provides a 24-hour-a-day real-time indicator of the world’s risk appetite and whether US equities are over or under-pricing that risk."
The ES CONTEXT model looked pretty bad as regular hours trade started with about a negative 4 to 8 point differential in the model most of the day, very recently there's been improvement in the model suggesting higher prices in SPX futures as the model moves up toward parity with ES.
The SPY Arbitrage model is defined as:
"In much the same way that a company’s valuation varies due to business condition uncertainty and its cost of capital, so the broad market can be modeled based on its capital structure. Through years of ‘capital structure arbitrage’ experience in the credit derivative markets, Capital Context has created the ‘SPY Arb’ model which identifies a tradable relationship between the stock market (SPY) and its value implied from interest rates (TLT), credit risk (HYG), and volatility (VXX). "
Unlike CONTEXT, the SPY Arbitrage only is available during normal market hours. The day started out near parity between the SPY and arbitrage model, as the day went on, afternoon trade saw a large differential of $1.00. It seems most of this was due to TLT gaining in price and HYG (High Yield Corporate Credit) falling significantly, but 3C underlying trade shows some interesting divergences that the model can't account for.
Here are the Leading Indicators (starting with the assets in the above model).
Looking at HY Corp Credit which should trade similar to the SPX (green) we see divergences over the course of trade this week, positive divergences in HYG's price vs the SPX are in white and negative divergences between HYG and the SPX are in red. The green arrows just show SPX direction after an HYG positive price divergence and orange shows SPX price movement after a HYG negative price divergence (not the same as 3C divergences in underlying trade). HYG was supportive around the 4//2 opening lows as well as the 4/4 opening lows and most of the day Thursday, although HYG fell off badly in the afternoon starting at 2:30 pm.
Looking at HYG vx. SPX (green) intraday on Thursday, HYG was supportive most of the day, but fell off at 2:30 through the close. However, interestingly High Yield Credit did not act the same way.
HYG's intraday 3C chart (1 min) shows negative divergences in HYG in the first half of the day that sent HYG lower in the afternoon, ending with a leading negative divergence in HYG.
TLT-20+ year Treasuries (a flight to safety trade) on a 10-min chart shows accumulation sending TLT higher and a deep negative divergence in underlying trade over the last few days which suggests TLT will be heading lower in coming days, this is positive for market risk (risk on or higher prices).
TLT's longer term 30 min chart shows the longer term trend in the flight to safety trade. There's a large relative positive divergence followed by a strong leading positive divergence, even though short term trade may see lower TLT prices, the underlying trend has been a strong move toward safe haven assets like treasuries, this is why Yields on the 10-year are hitting lows for the year today.
The short term VIX futures (represented by VXX) vs the SPX (red) today show volatility futures moving lower around noon time and seeing a bid late in the afternoon as the SPX moved higher in to the close.
VXX's longer term chart for this week shows a positive 3C divergence (accumulation) at the lows of 4//2 and 4/3, as VXX moved higher in to 4/4 it saw a long term relative negative divergence (distribution) in to higher prices sending 3C to a leading negative divergence late today, suggesting VXX moves lower (the SPX trades opposite VXX) and the SPX moves higher short term.
I checked the leveraged version of VXX, UVXY for confirmation of the VXX signals. The 2 min 3C chart shows the same accumulation in to the week's lows and the same stronger intraday distribution in to today's highs, again suggesting the SPX sees higher prices and VIX short term futures see lower prices in the very near term (even intraday).
For further confirmation I also checked XIV which trades opposite VXX/UVXY and tends to move with the SPX. The 3C signals should be the opposite to confirm VXX / UVXY. Intraday today we saw 3C accumulation at XIV lows (VXX intraday highs) and has a leading positive divergence in to the close, exactly the opposite of VXX and UVXY's leading negative divergence in to closing trade, XIV confirms VXX and UVXY, also suggesting the probability of short term higher prices in the market.
As for other leading indicators in our layout...
High Yielding Junk credit trades almost exactly the same as HYG, here we see it intraday for Thursday vs. the SPX (green). Early in the day Junk Credit like HYG was supportive of the market, toward the EOD Junk credit fell sharply like HYG, yet the SPX saw a move higher.
Interestingly the much less liquid High Yield Credit (vs the SPX in green) over the last couple of weeks shows HY credit in line with SPX movement at the green arrow, negative price divergences between HY credit and the SPX in red and positive price divergences between HY credit and the SPX at white arrows.
HY credit was negative at SPX highs and positive in to Thursday's trade and moved to new highs at the EOD Thursday, exactly the opposite as HYG. Being HY credit is much less liquid than HYG, I feel move in HYG are more manipulative while moves in HY credit are more indicative of real risk sentiment.
Moving in to Thursday's open, HY credit was showing a positive divergence at the SPX lows and supportive trade in credit all day and leading positive in to Thursday's close as HY credit moved to new highs for the week, in fact for the last couple of weeks.
I first noticed this pattern in the VIX, but didn't think much of it as the VIX was in a triangle so trade like this wouldn't be that unusual, but I saw another site point out the same in the SPX, this is odd.
For the last 12 days, (2 days short of 3 trading weeks) the SPX has moved between up and down every other day,
Here's the same 12-day pattern in the VIX, which I didn't think was as unusual. Wednesday's move higher in the VIX did not see follow through today, in fact the 2-day candlestick pattern is showing resistance (at the longer upper wicks of the candlesticks) and a Harami reversal pattern (to the downside) or what we call in the west, "An inside day". This would fit with the VIX analysis from a few nights ago
that I mentioned and linked today in this post. This tells you what I expect in the VIX and therefore the market both near term and slightly longer, I think it's important analysis,
On a 60 min chart of the VIX with my DeMarketor custom buy/sell signal indicator, you can see the current sell signal fits with the candlestick analysis above as well as my VIX/market analysis linked above.
Other Leading Indicators...
Commodities vs the SPX 1 min chart (both are risk assets so normally both would trade in the same direction.
Last night I showed you the Copper charts which are indicative of economic activity and how the diverged badly with the market. Commodities have been leading the SPX directionally, today there was a bit of a bounce in commodities at the EOD, which fits with HY credit, VIX sell signals, VIX short term futures, VIX analysis as well as a number of other indicators. This isn't a huge move and I wouldn't draw too many conclusions from this, but it is a change in character and changes in character precede changes in market trends.
Intraday (Thursday) note how commodities almost led the SPX (green) lower in to 1 p.m., then commodities and the SPX moved higher together.
This is commodities intraday (Thursday) vs the $USD, normally these two assets have an inverse relationship, meaning they tend to normally trade opposite each other. In red the two assets traded together and at the EOD in green the dollar weakened and allowed commodities to move higher led by copper, oil, precious metals and steel to some degree- a fairly broad move in commodities.
This is FCT which we use for market sentiment without the manipulation as it is not correlated to the market, again note the late day "risk on" sentiment, which fits with our near term analysis.
HIO is used the same way for the same reasons, note how it traded against the SPX (green) also showing afternoon "risk on" sentiment.
Single ETF currencies vs the SPX (green)
The $AUD tends to lead the market, it was moving with the market lower earlier in the day and moved up as sentiment turned toward risk.
The Euro over the last couple of weeks has been heading lower, this is not the normal correlation with the market, the Euro and market tend to trade together, however at the area the market broke down through my trend channel,
also shown in last night's post the Euro became VERY dislocated from the SPX. note the last week or so the Euro has been moving higher, still deeply dislocated from the SPX, but this seems to be supportive of short term gains in the market as per most of our analysis.
The Euro intraday vs. the SPX doesn't show much correlation earlier in the day, but the afternoon move in the SPX received support from the Euro.
The $USD intraday vs the SPX (green) shows the normal correlation of the $USD moving lower (orange arrow) and the SPX moving higher (green arrow). The USD was moving as it should as the SPX made new highs this week.
Intraday the $USD and SPX were not respecting their normal correlation (in red), but later in the day as the $USD lost strength this supported the SPX in its afternoon ramp higher.
Sector rotation today was much more "Risk on" than we have seen recently (also covered in some detail in last night's post). Today moving toward a more risk on posture, Financials rotated in, the safe haven sectors like Utilities, Healthcare and Staples saw late day weakening. Energy also saw weakness broadly across the sector, while oil saw some late day strength. Also moving toward a more risk on sentiment, Basic Materials, Industrials and Discretionary.
As for the market averages (ETFs), we see some short term intraday accumulaltion while the longer term charts look VERY weak, as I mentioned last night, they look akin to walking out on a thinning branch and by the time you hear the crack, it will be too late.
Here are the shorter term signals that look like near term strength in the market averages and longer term weakness or ROT structurally, this is very clear in market breadth readings which are not subject to opinion or interpretation, they are hard, factual numbers and they look very bad.
Here are the divergences in the averages...
DIA 5 min showing a leading positive divergence today.
DIA 10 min is also showing a relative positive divergence going in to today's lows and a leading positive divergence in to the afternoon.
DIA 15 min chart shows how bad the damage is to the DIA as it is deeply leading negative, with market breadth so bad and this divergence showing such heavy distribution (no underlying support), the DIA could crack to the downside with very little notice.
IWM 3 min leading positive today
IWM 5 min where we see institutional activity , is in a large relative positive divergence in to today's lows and a leading positive divergence in to the afternoon.
The IWM 60 min chart shows the heavier flow of funds and shows 3C and the IWM moving largely in confirmation with several divergence, however the leading negative divergence is exceptioanlly sharp and nearly at a new low as the IWM isn't far from its recent price highs.
QQQ 2min intraday with a recent leading positive divergence in to this afternoon's move.
QQQ 5 min showing a strong leading positive divergence at the EOD today.
QQQ 60 min with a large relative negative divergence in to the F_E_D's QE3 on September 13, 2012 and a leading negative divergence since the market moved higher through 2013.
SPY 1 min leading positive divergence late today.
SPY 10 min leading positive divergence (this suggests a pretty strong move to the upside in the near term).
SPY 30 min negative divergence in to 2013 and a VERY sharp leading negative divergence over the last week or so.
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