Daily Wrap

Today was an interesting day for sure, a lot of yesterday's indicators were pointing to a short term oversold condition, specifically in the Dominant Price/Volume relationships, but from the laymen's view of price, today was a 4th consecutive day of weakness, remember last week and the same thing, 4-5 consecutive days of red closes? Just saying... Changes in character...

The end of day shenanigans really would throw most traders for a loop, we have an internal view in to the market and it' has me a little unsettled, but when you can see it and predict it before it happens, I think you have to give that some credibility. As I'm always saying, Wall St. is never going to make it easy and for all those that bought the dip today, already feeling unsure after buying yesterday's early dip and then seeing that fail, I can see how such a move would send them running and it did in many cases.

The call I made in this late afternoon post was for a decline that would 1) kick new longs out and 2) create a common price pattern which they'll need when they want to launch this, here's what we got.

With the move down in to the close forecast earlier, we got exactly what I expected and drew in the post linked above, an inverse H&S bottom, that's a bullish price pattern so when they are ready to go, they have an easily recognizable , bullish price pattern. Until then, new longs seemed to be shaken loose on the move which was another aspect, right as the averages dropped below afternoon support sell-side volume picked up in all of the major averages.

I don't see any reason why you'd need 5 min positive divergences and in the 2 and 3 times leveraged products if you were only trying to buy some time moving sideways, there's not much point and it could have been done with less firepower.

Interestingly, as you know I consider 5 min and up Index future divergences to be valid for some move, well we not only had 5 min, but in the SPX and R2K futures, we have a 15 min as well.

That's pretty strong for such a short period which may be the point, lack of time. In any case, it's hard to imagine a 5 min positive not seeing upside, with 2 averages with 15 min positives, it's very hard not to imagine seeing the upside move we prepared for today.

VIX futures weren't bid like they'd be if we were expecting a rest today and a move down tomorrow...

5 min VIX furures, negative.

So I think that's pretty much that, unless we get some new and impressive information, I think the late day move was the typical Wall St. snatching people's money, they have a price pattern in place that everyone can identify with (bullish) to launch this thing and as I said, there's just no point in divergences like today's just to hold the market lateral.

Oh and by the way, they did it with no SPY Arbitrage at all and in fact, no JPY carry cross support, take a look...

ES in purple and EUR/JPY in candlesticks, ES didn't follow the pair, but if you are building a base, you can't really.

However this has larger implications as well, the crosses didn't move the market overnight either, that means to me, on a downside move (the next leg down,) there's no support from the traditional levers.

If they are going to pull off a move to the upside, they're going to likely have to do it with minimal short interest/short squeeze support as well.

I know a lot of you want to know what I think about how far a bounce could go and some of you feel frustrated that the market is down a bit and bounces, but this is the volatile area, longs are just as frustrated, look at what they've had to work with...

In more than 6 trading weeks the SPX has a gain of exactly 0.20%, yes, one fifth of one percent over 6 trading weeks, the Sentiment update I got today was as follows...

"pretty nasty week for me... lost everything i made last week... so far"

And if that wasn't a tough enough environment, take a look at the Index that has the Bernanke Put behind it...

Anyone in the R2K over the last 7+ trading weeks...

Is at a loss except for about 3 days, but that's still 7 trading weeks. When you look at the market from the other side of the fence, it's not as green as you'd think and if you knew what we know about signals, breadth, leading indicators, etc., I doubt you'd take the risk of staying in, the probabilities aren't on their side.

As to the question of where a bounce might go, I have no way to predict that, I just know that if it was put together by Wall St. then it has a purpose, usually that's to move emotion and a sharp move is required, but that doesn't mean a long move, we've had some sharp moves both up and down that were reversed completely the next day and while it's normal for the SPOT VIX to consolidate here and there during a directional move, it's not for long.

This isn't a great model because these were not the same energy coiled up as the recent VIX breakout (the market moves opposite), but in the first one we had 11 days that added to higher highs and 11 days that consolidated, the second one 6 days of higher highs and 3 that consolidated, so it's not unusual for there to be bounces even during a sharp sell-off/correction.

I'm guessing though it has a lot more to do with this as this is the dividing line for a lot of traders between long and either on the sidelines or short.

 The leader of risk on, the Russell 2000 right at the cliff's edge on the 50-day.

I trust you don't need a ROC on price to see the failure taking place in the Dow.

Every measure of breadth declined more today, the NYSE's A/D line is below levels last seen in March!

As far as assets we've been looking for a opening in or a pullback, we have gold and GDX on deck, I think they need a bit more time, but we'll be close, USO should be close, USO should see a pullback and today's DGAZ should benefit until we can re-open UNG or just use DGAZ to hedge it.

So with positive divergences all day, a lack of bids in VIX futures (No P/V relationship tonight), a price pattern that was predictable and new longs getting the boot at the close, along with 5 and 15 min Index futures positives, I'd say the chances for a bounce are good and we should be perfectly positioned, after that I'd say we are perfectly and/or will be for the next leg down as all corners of the market continue to deteriorate at a faster pace.

Basically, it's just about patience and keeping emotions in check and objective data flowing.

If anything pops up in futures tonight (and this market has been pretty easy for us to predict, from yesterday's analysis of today to last night's index futures lows right on the hour) I'll of course let you know.