Daily Wrap

I just have to say this at the start of this post because I don't want to get lost in the lines or lead anyone else to that place where micro-managing and analyzing the market leads to forgetting what the very simple and effective trade is...

One member suggested we nominate this as, "Chart of the year" which was nice, but in reality, I posted it a few nights ago right after he said that because I'm so use to seeing the destruction and knowing how bad it is based on past experience, I think sometimes I don't do it enough justice with you and that may have a significant outcome on your decisions, so this is one of many charts, it's one of many indications or one of many pieces of the puzzle, but it is representative of what I've found for quite some time and as I have been trying to make clear the last couple of weeks , "We are not close to the big picture, we are in the big picture".

The unique feature of this chart is to the far right in the leading negative divergence that is almost uninterrupted on a 4 hour chart. I can't even describe the level of distribution taking place here because quite frankly, I haven't seen anything so severe before and that's likely because the entire rally from 2009 to recent highs has been built on a house of cards, F_E_D liquidity that is about to disappear.

There's no historical precedent for a market like this, not even 1929 because we didn't have a globalized economy with the rest of the world in as bad or worse shape, we've never seen F_E_D policy accommodation to this level before and while most traders know policy accommodation is easy to get in to and fun, few know how VERY difficult it is to exit, that's the really scary part to the F_E_D's experiment not to mention the probability of liquidity drying up when the HFT's just turn off as they have no legal obligation to provide liquidity as we have become so use to. No one knows what's going to happen, but it's pretty plain to see that there's nothing in place that will make things easier or better when the market takes a real tumble, every bit of structure of the market is set to make things worse, thus the reason for opening and having core shorts, even if we've had to sit on them for longer than we like.

I'd be remiss for not saying at least that much and that's probably the "pretty" way of describing it.

Now, as for today...

Honestly, things were much clearer going in to the F_O_M_C minutes than coming out of them, there's a lot of dust still in the air as you might expect with only 2 hours of data after such an event. I'm inclined to stick with the opinion given before the minutes and the probabilities expected over the last several days/week.

While I haven't read the entire minutes, I'm still very much of the opinion that the post minutes analysis found HERE are still very relevant which makes the market look one way to retail traders and another to the pros, although I'm surprised retail traders didn't take more comfort from the obviously more dovish tone this time around.

What I found post, minutes was that High Yield Credit, whether Corporate, HY or Junk, didn't bite on the intraday bounce from about 2:09 to 2:48 today, however the VERY oddly shaped and unusual "V" shaped reversal to the upside in HY Credit on the open yesterday is still leading the market and didn't give that distinction up. While this is not a higher high in HYG credit, the basic fact is credit leads equities and for HY credit to bounce at all means someone is expecting something on the bullish side, the fact HYG did this so quickly without any reversal process, seems to indicate something was known in advance of the release today, that something could have been the concessions the F_E_D hinted at regarding interest rates and when they'd move, both concessions or hints giving the market something it wants, but still just talk for now. As for anyone betting on the taper, the undisputed conventionally accepted wisdom was that September was going to be the start of the taper and it would be announced today, that fact alone that did not come to pass is information that is worth a leak, we just may not be seeing the outcome after 2 hours yet.

In addition to the VERY sudden change in HYG/Credit, this chart that we use for institutional sentiment as it is not correlated to the market in any way, is also very interesting, "To make money, you have to see what the crowd missed"...

Going from in line with the SPX to leading the SPX and about the same time as HY Credit made a "V" turn (which are exceedingly rare), this sentiment chart doesn't sit on the fence, it's clearly leaning toward a bullish event and has been a reliable Leading Indicator in the past.

None of these charts or any to come would really make a lick of difference if they weren't occurring over this backdrop (keep in mind that just about a week ago I couldn't find anything in Index futures that was even remotely bullish looking).

 The ES (SPX futures) chart started with a meager 5 min positive divergence, that was the initial clue a bounce may be coming, over the last 4 days or so it has moved out to a 60 min chart, that's about as extreme as the HYG "V" turn in terms of a rapid change. I highly doubt a divergence this large created this quickly almost out of a sense of urgency, goes by without making its presence known through a move higher in price.

At the risk of overstating the obvious,, what is one of the last things we see in a price trend (typically flat when it's under accumulation or distribution)  just before a reversal say to the upside in this case? The answer would be a head fake move or stop run, a move like today's and we see it in just about every reversal whether a 1 min intraday trend change or a 2 year double bottom.

The NASDAQ 15 min positive divergence also started as a 5 min , this is one of the better looking price ranges as this is where accumulation most often occurs, the move below the yellow line would be the head fake, increased volume is a good sign confirming it as well as 3C accumulation of that volume, we see the volume increased as the stops were cleared out.

TF Russell 2000 futures is one of the sloppier charts, but it's positive.

It wouldn't be right to just show the probable upside without showing the more probable downside that would likely follow, so if you have a good idea that you'll see a bounce shortly and you already know that the bigger picture almost guarantees a horrible decline, what do you want to do with that bounce? This is why I call them "Market gifts", I want to use price strength to short in to charts with significant 3C weakness.

Remember, these are 3C charts, just of futures and they are 4 hour like the SPY above.

 ES saw very serious distribution at point "A", on the second leg 3C never even made it to the former highs although price exceeded them, that is strong distribution of the highs and the leading negative divergence at "C", lower than anything on the chart is one of the strongest signals the indicator can give.

 4 hour NASDAQ 100 Futures

4 hour Russell 2000 Futures.

The fact that these all look similar and that they look similar to the SPY despite being completely different asset classes is EXCELLENT confirmation of the divergence. This is why I've built long term core short positions and have kept them open, we already saw last week their relative performance vs. the SPX on a down move was about 600% better.

Carrying on... I've noticed several sectors seeing nice 3C divergences, Financials has been one I've talked about, but one of the tricks of getting a bounce to work is making it believable, for any old-timers familiar with Dow theory, they're going to be looking for transports to play along.

This 1 min chart is spotty enough, I didn't think I needed to point out the trends.

This is the 5 min, in line on the way down and leading positive, all about the right time as well.

Speaking of XLF, I also like FAS and FAZ for different trades of course.

 XLF is one of those 15 min charts that needed a move lower like today (discussed yesterday) to create a bigger footprint/base and more stable divergence so today's price action was exactly what I was saying  charts like this one needed to see.

FAS (Financials 3x long)  looks ready for a bounce move to the upside. Again, without a move lower today, this would be another "V" shaped reversal and they just aren't that common and they aren't well supported at all.

 FAZ (3x short financials) for a longer term bear position has a great rounding bottom, it's coming up to the breakout area and has a great 3C signal, but look closer at recent action.

This is the same chart, just zoomed in tighter, this should have no real impact on FAZ as far as the great looking chart above, but short term it does look like probabilities of a pullback or consolidation are pretty high.

Other than some individual charts I was thumbing through today, there's not a lot more to go on given we only had about 2 hours of data.

This is how the SPY reacted, the most detailed data will be the shortest timeframe 1 min, after that it takes more data for the longer timeframes to fill out, but generally speaking, they'll show where the heavier action was and a cleaner trend with less noise, but in this case we have to remember that there wasn't a lot of time after 2 p.m. for the longer charts to catch up.

 Yesterday had a clear trend toward the late afternoon of distribution, leading negative which gave the SPY the gap down I thought it needed, there's some light accumulation just before noon at lows and on the initial knee-jerk, this is heavier accumulation as you'll see with longer charts.

SPY 2 min

SPY 3 min as a longer chart, the early 12pm accumulation doesn't show up here as it's not strong enough.

The 5 min chart shows the same, so the post-mins. dip saw heavier accumulation of that dip.


I'll show 2 more things just because we are a little short on post minutes data today, first the index futures are seeing some unique 3C divergences tonight, I usually pay no attention to 1 min charts as they tend to move a lot over the long overnight session, but since they were unique, I thought I'd post them.

 ES 1 min leading positive

 A very clean NQ 1 min with similar signals intraday to the SPY and a leading positive divergence tonight.

R2K 1 min leading positive, also similar signals to the SPY around the minutes.

It is also looking like the Nikkei 225 is going to be due for a bounce as this 15 min chart shows.

Nikkei 225.


We'll try to get the best probabilities as always, but when I said "I don't blame anyone for sitting on the sidelines and just shorting a bounce if we get one because at this point, it's like chasing nickels and dimes in front of a steam roller", I meant it.


Divergences can get run over when everything goes to pot, that happened with AAPL just as every hedge fund out there tried to squeeze out of the same door at once leading to the darling of the market taking a -45% loss.

A buddy pointed this out on ES, but it works for any major index, this is called "Walking the Bands"

This is the daily SPX-500 with Bollinger bands (20/20), also note our DeMark inspired buy/sell indicator with a huge sell in the bottom window. However what I wanted to point out was the SPX in the red box as price walks the lower band, this is considered to be a very strong trend, I give it a little leeway (meaning don't take it quite as serious) as it just popped out of a pinched BB so the bands have to expand with the price drop, but when you see a major stock market average walking bands like this for a week or two, it's a very strong trend.

For now, I don't have any evidence to change the short term expectation of a bounce and I don't think much will repair the big picture damage, this is why I haven't put out any new positions the last day or two (right now they'd be short term longs for the most part with leverage), the real prize is shorting in to price strength, it;s a market gift, as we don't want to be chasing prices lower with ever-widening risk.

I figure if we get the bounce that puts us in great position, if we don't, the core shorts will keep making money and we'll have a chance to set up again.

If I see anything irregular in futures later tonight when I check, I'll post them.