Market Update and 3C Concept

I wanted to show you a few charts as there's some early deterioration in a price pattern that is considered to be a consolidation/continuation pattern, it's a bear flag and therefore considered bearish.

This is the uptrend from October 9th, there's a VERY clear change in character and changes in character lead to changes in trends. In fact the trend did change from an uptrend to at minimum, lateral. 

It's just a market truth, but we sometimes forget it and get easily frustrated when we focus to intently on one small portion of the market like intraday trade (today's minute by minute trade), I call it "Getting lost in the lines" and missing the bigger picture in front of you if you just step back.

Nothing goes straight up or down and that's why we have so many consolidations and the market spends so much time in one form or another of a consolidation. The Bear Flag above is considered bearish and a consolidation/continuation pattern, but because it's also so well known, it's susceptible to manipulation like a breakout on the top side instead of the expected break down on the bottom side, these are almost always short term manipulations to catch the largest number of traders off guard at any one time and to create opportunities and wiggle room.

I see some weakness developing intraday in the flag and this is where a 3C concept comes in, that is Any new divergence (change in a price trend- whether it be the major uptrend or the minor bear flag) starts on the fastest charts and if it is strong enough it moves to the longer timeframes.

There's perspective that we have to keep in mind, I'll use a 2 min chart of XLK (Tech) as an example. Often when we are using 1, 2, 3 and 5 min charts, we are using them to find changes in intraday trends, it can be helpful with tactical entries or short term trading, but there's a bigger picture you are not seeing when we are focussed on short term intraday trade.

 When looking at this XLK 2 min chart on an intraday basis, we see the bear flag and we see 3C in line or moving with price, for now that tells us there's no major problem with this bear flag continuing higher, 3C on this chart is confirming the uptrend in this flag area.

However if we take the exact same 2 min XLK chart and focus on the area in the green box that we are watching intraday and we zoom out or scale the chart for the larger trend that started off the Oct 9 lows, then we get this...

This shows the 2 min chart going back to Oct. 9th when the uptrend started and 3C is in line or even better initially and stays reasonably connected with price and on the 18th we see a dramatic change in character in 3C, distribution. Now if we look at the same section in the green box we have been focussing on, it doesn't look so good as it is in a leading negative position. 

This is the difficulty in learning "Multiple TimeFrame Analysis" and it should be applied to EVERY indicator you use.

In the very short term, the 2 min 3C chart is confirming the continuation of the move up in this bear flag, but the bear flag is just one small piece of the trend. The larger or more important trend is this one above, this is why Charles Dow laid the foundation through his columns in the Wall Street Journal in the early 20th century defining "Trend Classifications" or "Dow Theory".

For a 3C chart, the longest chart is the strongest underlying signal, but that doesn't mean intermediate and short term price action can't deviate from that longer term chart, it just means at the end of all of the movement, the probabilities are highest price moves as the longer term chart indicates. It's a market truth that nothing moves straight up or down, however this is one of the most frustrating areas or truths of the market for most traders.

Take a look at the SPX...

2011 was largely a lateral trend for nearly the entire year that fell nearly 20% to another lateral trend.

The numerous small red and white arrows depict areas of days, weeks and even a month or more of up and down trends, yet the major trend is up, we sometimes just see the major trend and forget about the weeks and months of downtrends that caused a lot of doubt and sometimes expectations of how a market should act aren't always realistic.

As for 3C...

The main trend for this move off the October 9th low is a large 15 min negative, but this started on a 1 min chart that went negative instead of moving with price, it was strong enough distribution to move to a 2 min chart and it became stronger and moved to the 3 min and 5 min and so on until we are left with the major underlying trend for the SPY...

From accumulation in to October 9th lows to distribution that picked up especially fast and deep October 18th, the first day China withheld major cash/liquidity injections in to their economy.

Now if we look at the SPY trend that defines the bear flag moving up, close up it has moved from 1 min charts yesterday to 5 min charts (short term/intraday).

5 min intraday defines the strongest part of the flag right now.

However again the same 5 min chart put in to perspective...

Is very negative in a leading negative divegrence. So intraday it is supporting the flag moving up, but the larger trend, the larger flow of money and probability, is very negative.

This flag likely doesn't change until a new divergence appears and that's what it looks like we have this morning.

 The 1 min intraday went from leading positive yesterday sending prices higher to a clear negative in to today, this is likely the start of a new divergence that will effect the trend of the flag moving up.

 There's only a hint of this negative on the 2 min chart, remember that the divergence has to be strong enough to move to a longer, more important chart, that concept is called "migration" of the divergence.

At 3 min the 3C trend is perfectly in line with price so before this trend (flag)  ends, it will almost certainly need the 2 min chart to go further or deeper negative and effect the 3 min chart sending it negative as well.

Finally the 5 min chart will have to go negative, even though the larger trend is already negative on the 5 min chart. what this tells us is the larger trend will likely win and this 5 min intraday will eventually fail, but until it does, we assume this flag keeps moving up intraday. 

This is how we use multiple timeframe analysis for trade entries. We know the larger trend is negative thus I want to trade from the short side, but as to when to enter, I want to do it as I see the probabilities for this flag reversing, jump up and that happens when the 2, 3, and 5 min charts start going clearly intraday negative.

Again, the larger trend of the 5 min chart.

This is almost an unfair advantage because we already know what the highest probability resolution is, to the downside, but often the difference between being right and losing money and being right and making money is timing.

So the SPY has some initial weakness that we need to watch.

As for the other averages...

As of these captures the QQQ 1 min was also showing the start of a new divergence, negative, but...

it needs to turn this 2 min leading positive and go down the line.

The IWM 2 min is also transforming to negative, but...

The divergence will have to be strong enough to knock out this 3 min leading positive that will still pull the flag higher until it turns negative.

In any case, we have the potential for a new trend to emerge in this bear flag.

The other thing to consider is tomorrow is an Op-Ex pin Friday, the market is right in this particular area, I'm wondering if this is the area of Max Pain, where the most number (dollar amount) of options contracts will be pinned and expire worthless...

Yesterday I expected some upside today, "Noise" as far as the larger trend is concerned, but perhaps useful for trading positions/entries/exits.

I have to wonder if this yellow area is going to hold up until tomorrow on an Op-Ex Pin?