Friday Wrap

This isn't going to be like most daily wraps because the situation isn't like most. Right now it's much less about "Figuring out what the market is doing and more about entering positions"

Between what I always say about Friday Options expiration and my very first post of the day, analysis was pretty darn accurate on all counts.

First the normal concept that the market will trade near Thursday's close or Thursday will close near the options expiration pin, that happened today.

Then I saw the start of a bunch of signals that were small so not yet a high probability, but I took a whack at it any way and what is interesting is that the path they led me toward was forked or a dichotomy; on one hand it was excellent entries in to price strength which is the best short set up (one that comes to you) that you could ask for, but at the same time we know that the market frees itself of the market pin around 3:30 and is free to do as it pleases and often does, which would make it difficult to distinguish between the right entry or the market just doing what it always does on Friday right around 2:30 as you can see the white arrow on the intraday SPY.

Most charts will be open or positions I'd like to open and what's going on with them because they tell us just as much as the market averages can and often more.

One of the first assets I looked at was HY Credit (HYG for arbitrage value) and this is what I found.

 HYG 1 min was going positive very early today, obviously to help the market out.

The 2 min chart is positive by the EOD, but the positive action stops and there's none on the 3 min chart at all, the next timeframe looks different at 5 min...

 This is clearly negative.

The point being, HYG is helping, but its commitment is skin deep unlike action in previous weeks, they could close and be out of HYG in minutes if need be.

And the 30 min chart shows that credit traders have known its over for a while, but they have been very aggressive, perhaps shorting the last several days on this 30 min chart. Those who are responsible for the 1-2 min positives are not credit traders, they are market manipulators.

Then I saw evidence on some of the averages, I saw clear evidence in the TICK that we were in an Options expiration pin and that we were heading for a directional move around 2:30 as usual, from what I've seen I think my very first post today pointed out the entire day's happenings.

As such, most of what we need to know about the market, timing, etc. can be found out by looking over our watchlist of assets, most are so close that if I had not spent time fine tuning 3C, I'd be calling them out as shorts now, we might have a day or so go against us and I'd likely be very popular over the next month or so.

Because the VXX correlation was pretty close to normal and TLT was out of sync as it was strong today and thus making the SPY arbitrage weak, HYG HAD to be used just to maintain the op-ex pin. I'm glad I have some TLT, but I wish I had figured a better way to leverage it up.

Both risk sentiment (not retail/stocktwits) leading indicators were sharply lower from the SPX, telling us "smarter money" is growing very uncomfortable with this market.

Yields and the SPX reverted to the short term median yesterday, perfect timing to start a new divergence and as TLT headed higher today, yields moves lower. I HAVE TO WONDER IF MY VERY SIMPLE ANSWER TO THE BANKING SECOTRS' DILEMA WITH AFS SECURITIES ISN'T THE SAME ANSWER THE F_E_D IS THINKING? 

If unrealized gains are truly losses in the banking sector's AFS portfolio (mostly treasuries), the obvious answer would be to knock the market down to rescue the banking sector without having to actually "rescue" the banking sector. Furthermore if this has been (which it has) a known trend/problem, I wonder how much of the F_E_D's QE taper is in direct response to the losses banks face right now in unrealized "losses" of T holdings, thus T's were up today and perhaps we now know why I've seen something in treasuries I've really liked for several months.

Lets face it, this week the BLS released Initial Claims data a day early, the F_E_D released and EMAILED the minutes to 154 banks and private equity firms a day and a half early, it's not even like they accidentally sent them to the news station. What in the hell is the F_E_D doing emailing minutes to Private Equity Firms? How do I get on their mailing list? The point is, information is so routinely leaked, they hide it in plain site now.

As mentioned last night and as a general concept mentioned often, High Yield credit being less liquid than Corp. Credit, is and will be the first to panic. While HYG stayed with the market today, High Yield did what I said I thought it would last night...

" HY is illiquid vs HYG so this will break down fast and hard right before a market waterfall, just like the time a couple of months ago it went from nearly new highs for the year to erasing all the gains in 2-days."

And almost as if right on cue from last night's post, High Yield Credit dislocates with the SPX today as soon as the SPX shows any upside ambition, like I said, this will fall first before the market goes over the waterfall.

Moving on... Here are several stocks on the watchlist...

JPM Although retail may be fooled by their earnings as EPS beat due to the release of loan loss and litigation "RESERVES" to act as actual earnings for the quarter (every bank is and has been doing this) , smart money knows the truth and now with Assets held "AFS" at an unrealized loss, suddenly Financials aren't looking very healthy.

 There's the head fake move to the right, if JPM is anything like numerous other assets and market averages, then this second leg up starting at the Junr lows will be nothing but straight distribution, this is a trend among numerous assets with similar price patterns.

The 15 min JPM chart doesn't let us down, just like numerous other assets, JPM also follows the trend suggesting this last leg up has been nothing short of massive distribution, a head fake, and ready for a deep downside reversal.

However, like almost every other asset today, the intraday charts are positive suggesting early Monday at least we see some ranges that are yet to be broken, broken, take XLF/Financials for instance.

The 2 min chart is the largest positive in JPM, 3 min has nothing, 5 min is negative, so again, like HYG, it's bare minimum support to move JPM. Obviously the only thing keeping JPM from a short position is Financials as JPM's sector and the head fake move needed there. For the 1 and 2 min chart to go negative, that can happen in an hour.

This is SQQQ (QQQ 3x short), we already saw the Q's today. I decided to take the gain in the recently opened QQQ $76 Puts (July 17th)  for a gain of +39% for 2-days, it could have been more.

I'm using SQQQ for those that may not want to use options, but still have some leverage. I don't think using a leveraged ETF is a great idea for a longer term position, but to see what the initial move brings and then be able to see where you might want to open some true shorts, I think SQQQ (leveraged ETFs ) are great for that, so long as you don't stay too long.

 The 30 min SQQQ chart doesn't show any of the previous divergences because they weren't strong enough to make it to this timeframe, but the most recent accumulation/positive divegrence stands out like a sore thumb doesn't it?

*Also look at price action in the accumulation zone, you know how I always say a reversal is a "Process", not an event? That's a perfectly proportioned process.

The 10 min SQQQ chart shows some more divergences on shorter timeframes as they showed up there, again, the nice rounding bottom.

While the Dow closed down 0.05%, the SPX up 0.15% and the R2K at 0.00%, how did we know two days ago to pick the QQQ as our short/put trade as the NDX closed down a massive -1.09%, far under-performing all of the other averages?

I can't claim any special knowledge other than what 3C charts were telling me, that's pretty impressive.

This is SQQQ's 5 min chart, a pretty decent divergence, I think we'll see the gap filled before we move on to the waterfall, which gives us some amazing opportunities, if you can just get past the emotional difficulty of shorting an apparently string asset, Price is above all, DECEIVING.

FAZ and XLF (3x short Financials and the Financial Sector). These are very simple trades to figure out if you understand the headfake concept, they are also very good entries very soon if you can get through the emotional stress of placing an order against what appears to be strong price action.

 XLF 5 min. When we see flat ranges like this, these are some of the best indications that smart money is at work in the asset, if you understand why and how orders are filled at VWAP, you'll understand these flat ranges that I often compare to, "The kids being a little too quiet in the room next door, you just know their up to something".

3C tells us very clearly what that something is above, distribution, but if 80% of all reversals on any timeframe see a head fake move above or below a VERY obvious support/resistance area, then where do you think out highest probability, lowest risk entry is in XLF?

If you said a "Head fake /false breakout ABOVE the range", you are 100% correct.

 And on the 1 min XLF intraday chart, look what 3C is showing, XLF is obviously getting ready for something. With that small, but consistent positive divergence on a short timeframe, what do you think the probabilities are?

This sets up an easy trade for us, we know where to set alerts and just about where to enter.

FAZ 3x leveraged short financials ETF. I shouldn't have even included this because all you have to do is reverse the order of things, but take a look for confirmation's sake.
 The longer term 15 min chart is clearly showing strong accumulation, that date of the 8th keeps popping up everywhere.

This is the intraday action, in a flat range at lows accumulation is what this range represents and we see it, there's no need for any distribution although the best entry for FAZ is below the range, the correlation with XLF will do that, but if smart money is buying here and they don't care about a slightly better price, they just want in, what does that tell you about the performance of FAZ in their view in the near future?

PCLN is one I get a lot of questions about, but I haven't been able to support any short trade in it until I looked today and things have changed dramatically since the last time I looked for a member about a week or so ago.

 If you look at a 5 day chart, this little area here looks much different and I think taking in to account the important price levels, you can clearly identify what it is.

Just recently the divergences have been getting stronger/sharper, this 30 min going from relative to leading is no joke, something is causing that.

 The 15 min chart gives you another perspective, what changed in price action that may have contributed to sudden and very strong distribution?

If you look at this intraday 3 min chart, the divergence isn't very big at all, but it only needs toi make it to a certain area before PCLN will go on auto-pimlot as retail steps in, what do you think that area is? I'll give you a hint, "When you go to a store, you'll never see $10.00, rather $9.99 because the human mind is attracted to..."???

I'm not saying that area exactly is the short sale, I'm saying it kicks off the chain of events leading to the short sale and it can be very fast.

MCP long was brought up on June 21st, as a new long or add-to position; it has been up as  much as +40% since then and we just closed out a partial position, I am looking to close out the rest and re-open the long at a lower price point, but why not close it out today? In fact, MCP may make for a nice swing short position at the same time the rest of the long is closed out.

 This 2 hour chart is showing HUGE flows of institutional money. There's distribution to the left, a huge accumulation zone and by the way the post on June 21st linked above was EXACTLY 1-day before the very June low. Recently we got out because distribution started again, but long term over 6-12 months or more, MCP will be significantly higher, for now though it's dead money on the long side.

This is a simple 2 min intraday chart, can you see why I decided not to close the remaining half of MCP today? That divergence is the same theme we are seeing market wide and the same thing I suggested I thought was probable in this mornings very first post.

MCP should float up with the market Monday, many stocks will be excellent shorts as that happens.

IOC was a core short at one point and was closed out for a -22% gain with no leverage, however today I opened an IOC $75 Call

 This is a 4 hour chart, the signals here are huge, everything for the last several months has been based on the apex of that ascending triangle, but what changed recently? Not only is the base proportionate "The reversal process", but the divergence is screaming.

On a 2 hour chart we can confirm the same thing as well as an hour and so on.

If you like IOC and din't get involved, there's still time whether an equity long or call position.

The last several days have been pretty flat, no reason to get involved, but like the rest of the market and assets today, something changed because the market is getting ready to make a move to resolve issues like XLF and so on, I would have rather spent my time today entering positions and getting it done so there's no rush, but when the market is telling you what it's going to do and that is helpful for you, sometimes patience is the hardest, but the best thing we can use to our advantage.

Over the weekend I'll put up some more assets on the WL, I'll show you how the =recent second leg starting the last week of June is much weaker than the first leg in almost every asset we look at, to the point of almost pure distribution.

Some other assets coming up include NFLX, GS, DDD, AAPL, USO, XOM, IYT and others.

I'll also be trying to complete an automated scan for divergences that are popping off the charts. The difficulty with scanning for divergences is that they are so subjective as cumulative indicators like 3C, MoneyStream, etc. are not fixed like an oscillator, the information is on a relative basis between two points so it's very hard to define, it's not like, "Show me where the 50-day moving average crossed above the 200 day".

Have a great weekend.

Oh, Full disclosure, I'll be out next Thursday and Friday as well as the weekend, this is my first vacation in almost 4 years and I'm going Snook Fishing on the west coast of Florida at Sanibel Island with my family and dogs.