Financials Update

Financials look like a decent short, I kind of prefer the 3x short Financials ETF, FAZ right now.

Just like the head fake is a concept that we have learned about through 3C and paying attention to the market, understanding why it's important; the "Reversal Process" is a concept as well and this is where I have a little trouble committing to Financial shorts at least in XLF right now.

The "Reversal Process" is exactly what it sounds like, a process rather than an event. We look at the market through our experiences and biases and we know that if we want in or out of a position we can usually do it in seconds, however, Wall Street's positions are so large that they can't put their entire position out there like we can otherwise they move the market against their position and a gain can become a sharp loss. This is why we see reversals that look like "W" or rounded tops/bottoms, but very rarely do we see a "V" reversal because that's an event, not a process.

Other than a few charts in XLF that I'd like to see catch up in the longer end, my only real reservation right now is the reversal process is not proportional to the move and they tend to be proportional (as well as include a head fake move most of the time toward the end of the process).

Charts... XLF

 This is the longer term 30 min chart, there's a clear top which I believe is part of a sloppy H&S top and this last run at the green arrow would be the top of the right shoulder which is one of only about 3 areas I'll short H&S tops at.

You can see the 3C chart is not very positive, more in line, but some of the shorter term charts are very negative and I think it's a matter of time (the process) before they turn these longer charts clearly negative.

This is the intraday 1 min chart showing a flat range which is where we most often see accumulation or distribution. You can clearly see why I closed the XLF $20 calls yesterday, there's no more upside momentum after I closed them so they'd just be losing value ever since they were closed yesterday so that was a good decision.

The other obvious point is the distribution, leading negative.

 We see the same on the 2 min chart, it's a bit more serious than you might think, essentially nearly all of the upside gains have been sold in to, as I said, Wall St.'s positions are so large they need to sell or distribute them in smaller chunks and in to price demand other wise their long positions with too many shares out for sale, would alter the supply/demand dynamic and send XLF crashing lower, this is a large part of the reason that distribution in to higher prices is common.

The 3 min chart shows the same, from accumulation where shares would have been bought by smart money in anticipation of a move higher to the area where the market should have pulled back Monday and a strong leading negative divergence ever since.

I originally thought the distribution here was to facilitate a head fake move to send prices back to the bottom of the range and the large upside rally was still on, at this point though it's hard to say. Only the size and strength of distribution is going to give us the probabilities there.

 XLF 5 min leading negative is really the first serious institutional timeframe so this is serious distribution, this is why I prefer FAZ right now over an XLF put option, the matter of draw down and time decay until we have a better understanding of how long the process up here is likely to take.


XLF 10-min is also confirming heavy distribution.

FAZ, 3x short Financials, this is the opposite of XLF

I show this 30 min chart and the accumulation there for 1 reason, to show what the reversal process looks like and how they tend to be proportional to preceding moves. This current base in FAZ is not very old, not very well formed. Can you imagine a straight up reversal right now and the "V" shape FAZ would take on to the far right? You just don't see those reversal events very often, so to me it looks like XLF and FAZ both need some more time to build a base and distribute a top.

FAZ however is confirming XLF distribution with FAZ intraday accumulation in to a flat price range. As I mentioned before, accumulation/distribution most often occur in quiet, flat markets.

 The 2 min is leading positive in FAZ

as is the 3 min

and the 5 min so we do have the concept of "Migration" which tells us if a divergence is just noise or it's building a stronger trend which FAZ is doing.

As for the XLF H&S top, this is the daily chart. The reason I say, "sloppy" is because the move from the top of the head to the neckline on the decline fell way short. There was a small gap above that XLF filled so other than that which is now filled, the only thing I see that is holding me back (I'm actually just showing patience) is the reversal process, take a look at the process at the top of the left shoulder or the head, you can see it's much larger than simply 2 days. However with the market in the position it is in, I expect to see increased volatility and sharper moves, but I'd still expect a little more of a process.

We'll keep watching it, this may be a great candidate to phase in to and their may be some more mature individual financial shorts available.