The Case For Trend 2

We have talked a lot about trend 1 and how it may end and before trend 1 took off we talked about trend 2, for a while even 3, but I think it was becoming too confusing as this is a rare situation.

First lets just quickly deal with anything I may have left out about today.

In to the close, High Yield Corporate Credit which is right at all time high short interest, sold off a bit in to the close. Yields also failed to follow the market any higher after about 11:30 (off the 11:20 lows). High Yield Credit lost a little ground as well in to the close after showing better relative strength all day.

Commodities which were tracking way below the SPX correlation, then tracking with it, showed early strength today and faded the rest of the day, what is strange about that is they almost tracked perfectly following the $USD lower when they normally have an inverse relationship. There's little doubt the lower dollar in the afternoon contributed to the market's afternoon ramp attempt like yesterday (even though both days have closed down-we're still above support for the Trend #1 move).

Finally the last thing is the Dominant Price/Volume relationship for the components of the 4 major averages, in all 4 today the dominant relationship (and it was dominant) was Price Down / Volume Up. There are 4 different relationships, in the context of the price trend right now this is actually a short term bullish relationship suggesting a sort of short term capitulation. Remember this is not the price volume relationship for the index, it is for all component stocks within each of the averages.

I still think it's likely that we make a move above the intraday highs of this past Friday which is very fertile ground for a real downside reversal as we are creating more and more of a range every day we trade like this, it becomes much more obvious where stops will be placed, where limit orders will be placed, Technical traders are just too predictable in that way, plus anyone with TotalView can see it, the market makers, specialists and other Wall Street types have a much more in depth view of the complete book, this is why I never place an order until I place an order, you wouldn't show me your hand if we were playing poker would you?

As for the case for Trend #2, I've pretty much laid it out and there's probably a little bit of it in each post throughout the day, such as Financials not looking very good, etc.

As for real hard, objective evidence, there was a cycle that started November 16th, that's what we have moved up from, those lows that were accumulated so it was a planned cycle ahead of time. Now we are on the other side of that process, if you wanted to stage it, I'd say stage 3 (Top/Distribution) which is also the most volatile stage, stage 4 is next, that's decline.

Here are a few charts that argue for Trend #2 which is a move to the downside, I expect at least a new low below the 11/16/12 low to be made, but as always the market tends to be more volatile and extreme than we expect so something even worse wouldn't surprise me.

As of now, here are a few of the charts that are calling for the next move to be down, not only down, but larger and more intense.

I'm not going to go in any particular order.

First the averages from the 11/16 cycle low/start...These are mostly 15 min charts, they are a strong timeframe and a decently long trend.

 DIA accumulation in to the 11/16 low, distribution in to mid-Dec. and our current move (Trend #1) with a deep leading negative divergence and no attempt to even move toward confirmation.

 SPY 15 min with the same, a current leading negative divergence suggesting trend 1 was used to create demand and higher prices to sell in to or short in to by those who need a lot of demand to move their positions, this is partly why this move was predicted and it dovetails almost perfectly (head fake) in to trend 2.

 QQQ 15 min w/ accumulation going in to the 11/16 low, distribution by mid-Dec. and a leading negative divergence at trend #1.

The Futures charts are a bit more damning I think, especially the ES (SPX).

 This is a 60 min NQ (NASDAQ Futures) leading negative on the move up.

And a 30 min ES (s&P Futures) with a VERY clear leading negative trend. I always warn about ranges like this, even if they are only intraday, people get bored, lose their focus. I have an analogy for these ranges, "Their like the kids in the room next door being a little too quiet". You assume not much is going on, this 30 min chart of underlying action shows you there's a lot going on.

 Treasuries at 15 min with a leading positive divergence, this is the flight to safety trade so it wouldn't surprise me if the negative divergence or money flowing from ES is flowing right in to Treasuries which tend to move opposite the market.

 The VIX has certainly seen some odd times due to hedging the Fiscal Cliff and now the Debt Ceiling, but the daily 3C chart has always worked well, the positive divergence in 2011 created a 20% drop in the SPX.

 The 3C daily divergence (leading positive) in the VIX right now is about as strong as it has ever been, this suggests a strong VIX move up, the VIX also trades opposite the market and has seen historic volatility over the last 2 weeks or so.

 Look at the trend in the 2 hour VXX (Short term VIX Futures), 3C moved with price because they are short term, but this leading positive divergence seems like someone is even building a large position here , expecting volatility to shoot through the roof and the market to drop like a rock.

Even the leveraged UVXY has a large change in character and this on a daily chart, it's not very often a short term instrument like this sees a daily leading positive divergence. Someone is planning ahead.

 The last time Commodities diverged with the SPX (green) you can see what happened to the market, look at the size of this divergence currently.

 This is commodities vs the Euro, usually they track together, that hasn't been the story lately though, I think a large part of it has to do with the end of the year and European banks repatriating Euros to fix their books.

 This unfortunately did not load in proper order, but commodities vs the $USD (green) tack almost the mirror opposite as they should, that's a correct correlation, stocks should be following it too, the fact the Euro fell out of bed with the correlation to the $USD argues for Euro repatriation during December.

 Yields are lie a magnet for Equities, eventually they revert to the mean, the divergence in March to May was our first core short area, look at the size of the divergence now.

 Long term look at the divergence in Yields from the 2000 top to the 2007 top and now the 2013 area, this has EVERYTHING to do with the F_E_D's intervention. Remember, unwinding accommodative policy is the hard and painful part, but it has to be done at some point. This is probably way beyond just trend #2 and more of a secular long term trend.

 The Euro was supportive right before the Market jumped on trend 1, after it jumped the Euro went negative as these are typically closely correlated, I expect before a turn to trend 2 comes, this divergence will be even deeper, it can happen much faster than you might think.

 The $AUD is a great leading currency, it's tied close to several carry trades so when it is negatively divergent, things aren't good behind the scenes. This however isn't a huge divergence, at least not yet, perhaps it will grow.

 The McClellan Oscillator, a lot of people use it different ways, I prefer it as a divergence indicator, it's called some serious bottoms like the October 2011 bottom and some serious tops as you see.

 This is the NASDAQ 100 Advance / Decline line, also negative like the broader Composite.

 This is the broader NASDAQ Composite advance/decline line, note reversion at the October 2011 low we predicted as a new low that would lead a strong move up, the reason? It's a head fake move.

Finally the Russell 2000 Advance./Decline line also has fallen out of bed. It's been a while and while this may not be as connected to trend 2, it tells you something about the state of the market as we have moved forward from 2009, it has become more and more fragile.

Really the SPY, DIA, QQQ, IWM divergences are enough for me, add the futures in and I don't have much trouble calling for a pretty strong move down, but there are a lot of other things. This may not be and I don't expect it to be the final break in the market, unless the F_O_M_C minutes released last week change things significantly, so we still have time for some monster divergences in leading indicators as well as longer timeframes in the market.

We just need to watch for that tactical opportunity that really could pop up at almost any moment, but I think it's much higher probability above the SPY intraday highs of this past Friday.

As for futures right now, both the NASDAQ and SPX futures have 1 min negative divergences in them, that doesn't mean a lot when you consider the entire overnight session, but it's always something I want to watch in case it goes south fast.

Have a great night, see you in a bit.

Interesting Closing Charts

Earlier today I could see this trend developing in the 3C charts, but among the 4 major averages, there wasn't a single one that I could use to demonstrate what I was talking about as each average was at a different place in the process so I used ES (S&P Futures). You could see the 1 min chart which is really just intraday signals most of the time and it was sloppy, not in line with the market, but trying. Then you could see the 5 min chart (1, 2, and 3 min are what I consider to be intraday timeframes, each stronger than the previous- but 5 min is where there's a real difference and we start to see bigger institutional activity. We can see market maker/specialist and probably HFT activity on the intraday charts, but between 3 and 5 min, there's a big difference) which was putting in the first solid positive divergence of the last few days, this hints at a stronger move coming in the near term and as you know I've been looking for a break above Friday's intraday highs, I think that's the most likely area for us to start seeing some really strong signals that are worth acting on and that lead us to the next trend which is worth trading rather than chopping sideways.

However by the close I am able to show you what I saw early in the process now clear in all 4 major averages.

 DIA 1 min had several smaller intraday negative divergences today, but the main theme was confirmation as 3C moved largely to higher highs with price.

 The more important development under the surface is the longer charts that hold more sway, like this 5 min DI chart with a positive relative divergence and then adding a leading positive divergence in to the afternoon. This is what I was seeing hints on, but had no good example until now.

 IWM 1 min was positive at the 11 am lows, but failed to make higher high on the 1 min chart, however there was something bigger going on below the surface, something price can't reveal.


 The IWM 5 min chart in a leading positive divergence just like the DIA.

 The QQQ was negative yesterday afternoon in to higher prices as mentioned last night, I thought it would create some early weakness today as posted yesterday, it did. Even though the Q's put in some decent leading 1 min positives today, the negatives during the afternoon were noticeable. Yet again...

 A 10 min chart with a leading positive divergence nearly all of from today alone.

 SPY 1 min was largely in line with price, the story was on the 5 min chart though...

Another leading positive divergence. This should get us to where we need to be.

I'll be back in a little bit after I check out a lot of other charts.

VXX and UVXY

Although their real strength is on the longer 15 min timeframe which we don't get to until a reversal to the downside, they are acting very well as far as underlying trade goes late in the afternoon as the market is taking some off the table in front of earnings, this would suggest to me that there's hedging activity going on as well, nervousness in front of earnings.

Quick Update

The TICK is getting very negative, very quick. The market averages are for the most part still doing that 1 min either in line or negative with the longer charts like 5 min positive like the ES example from earlier, here's a DIA example.

DIA 1 min in line with price, but the more important development is below.

The 5 min chart is where intraday trade is distinguished from institutional activity, this, like ES is the first really nice 5 min positive divergence in several days so the larger underlying tone is still holding up.

"IF" I absolutely had to play AA, I might take a long (equity) and sell in to the first bit of strength whether that be after hours or tomorrow morning, if it is strong, I'd be taking profits. That's the general rule or tone-any double digit gains in after hours I'd certainly take. I'd want to see how the market reacted most likely before I just sold it, but again, double digit, I'd take it and it is of course speculative.

Market Update

All Leading Indicators except for Yields are signaling a risk on tone (this is of course relative to this range we have been in the last 5 days). The fact is intraday all credit, High Yield, Corp HY, Junk are all leading higher, I doubt credit would be moving higher with an impeding crash in the last hour of the day or even tomorrow, at least early in the day (I say this because as I've said from the start re: trend 1, I have a feeling it reverses uncharacteristically fast-an event rather than a process).

Currencies are cooperative with higher prices, some of our odd-ball leading indies are also supportive of higher prices. For newer members, these are not the strong, really clear signals that constitute a high probability trade, these are weaker signals, less money flowing and we have to dig a bit more.  In any case, it put's Friday's intraday highs back in site.

Interestingly Treasuries are moving quite close to the market direction, I'll try not to rad too much in to that, but I do suspect it's part of the trade unfolding in treasuries that is represented by that 15 min leading positive in TLT.

Nothing much has changed in AA, the 1 min positive divergence suggests someone is buying based on near term upside, perhaps after hours, perhaps early tomorrow.

The longer charts for AA that were negative and still are, look more like a rotation with the market to trend 2, but they do extend a bit further than most other stocks. The long term chart is very bullish, if I was a longer term investor, I'd be looking for a base or some kind of washout low because I believe AA may have a secular bull in front of it, or at least a primary bull, but that trade is still a way's off.

For now I like the AAPL call still, it will stay open.

CAT Trade Set Up

CAT is a former core short position from Q1 2012 which gained nearly 30% in just a few months. I lie CAT overall as a longer term short and it looks like it will be setting up again.

If CAT does indeed set up as these charts suggest, this would also mean that the market expectations we have had for that move above Friday's intraday high, are still probable. This may not seem to make any sense, but it is this area where the ground is most fertile for a fast and deep reversal and it is the area where we can get the best entries with the lowest risk.

 This is where we phased in to CAT the first time as a full size position, it did well for us.


 This is the weekly MoneyStream Chart, note the 2007/2008 negative divergence and how the 2011/2012 is not only negative, but leading negative a price is higher than 2008, but MS is lower right now, this is the house of cards Quantitative Easing built.

 The weekly 3C chart shows virtually the same exact thing and these are completely different indicators: Trend confirmation at the green arrow, a leading negative divergence at 2008 highs and a deeper leading negative divergence at 2012 highs with a new leading low being hit recently.

 The 60 min chart looks like CAT is setting up again as another decent short position, likely one of the core positions (positions we just leave alone and don't try to trade around them, just let them work).

 The 30 min chart is confirming the migration of the negative divergence. We just need the set up now.

At the shorter 5 min chart we do have a positive divergence, it is leading and even though we are right at some resistance, we should be able to get a move higher. I'd like to see a move above the green trendline with the indicators falling apart in to that move, that would be my ideal situation.

I'd keep CAT on your radar, it was an easy trade last time, we barely had to watch it, just let it do its thing.

Market Update

I can see the intraday trend unfolding, but I'm having trouble finding one average that is a clean, clear example, then I found ES.

Very short term intraday (1 min) there's activity similar to yesterday afternoon as the market was ramping up late afternoon, but the 1 min charts were going negative. However as this is happening, which I think is probably little more than consolidation, some longer term charts are surprising in that they are turning positive. Now when I say longer term I'm not talking about anything outside of the trend thus far of trend #1, I mean 5 min charts, maybe a slight positive on a 10 min chart here or there, so it looks like some stronger support is building in, this is why I wanted to see some lateral price action today as we did (between 11 a.m. -1 pm in the SPY). This is more along the lines of the original expectations of a move that can take us above last Friday's intraday highs, which is the area I consider to be very fertile ground for a sharp downside reversal.

ES is the best example of this....

 ES 1 min positive,  but seeing a little loss of momentum and congestion in 3C, but note how thus far it has pretty much just caused a bit of a consolidation in prices.

Meanwhile for the first time in days the 5 min chart of ES is showing a signal and it's positive.

Perhaps this will change some of the signals in AA, I'll check closer to the close.

There are a couple of other stocks I want to show you, they should be on your radar as they look like they'll present the kind of opportunity we like, when the trade comes to us on our terms: low risk, excellent entry, high probability and good timing. I'll be posting those for you shortly. For newer members I like to post the trade set ups, what we are looking for as we try to always let the trade come to us and never chase trades. If things go as we expect them to we have a great trade, if not, we didn't lose out on anything as there are plenty of opportunities.

Leading Indicators

Now we are getting the move the 3C charts have been moving toward all day, lets see if it has the kind of legs we need. A strong move and a strong signal of a reversal would be ideal. Otherwise we're still in waiting mode.

Yesterday Leading Indicators were really accurate, they were giving very clear signals as well. There are two things with leading indicators that I'm looking at, short term which includes intraday trade up to a reversal and longer term which is mainly focussed on a reversal.

Today's signals are not as clear, but the positive divergences in the averages suggesting we get some upside today, particularly if we could get a little lateral action which we did, are getting intraday support from High Yield Corporate, Junk and High Yield Credit, all suggesting an intraday move higher.

Yields are not as supportive right now. The Euro is supportive and moving with the market as it normally does. Commodities have seen some intraday volatility, I'm not sure what it's from, but even though they are less supportive now, I could see them shaping up.

The more bothersome issue is the longer term divergences in Leading Indicators, there are only a couple, mostly in currency, but there aren't the strong divergences that have marked major turning points over the last year, but I suppose this would not be a major turning point, from a 4-5 day move up to a longer move down, I suppose a major turning point would be a reversal of the longer move down to a move up.

Speaking of AAPL

AAPL still looks good to make that move, the thing is it looks like it could be a bit more than just a quick intraday move as I had planned for yesterday. There are signs of positive divergences out to 15 minutes, not strong, but they are there.

 AAPL 3 min has been the mover today in the intraday charts, it also is one of the most accurate (short term) timeframes in my experience. Note the negative bringing AAPL down and then the 3 min positive that's added more today, in fact without all the drawings the chart looks really nice...

 The same 3 min chart, it's added quite a bit today to the leading positive divergence.

The 5 min is still in an overall leading positive position, it's basically because this is where the clear divergences stop that I'm looking for a shorter term move in AAPL, but as I said, there is a 15 min, although faint.

This doesn't gel really well with the AA charts, this more suggests waiting to see if the SPY makes it above last Friday's intraday highs, whereas the AA chart feels like there's more urgency to setting up or finishing setting up short positions.

As usual, we'll wait for the market to tell us, hopefully I can find that fleeting glimpse.

AA (Alcoa) Earnings

We have caught a pretty decent number of stocks in what can only be described as behavior so suspicious pre-earnings that we have to assume it's a leak. As some of the longer term member may remember, I spent one earnings quarter looking at a lot of stocks that were reporting, the point of the exercise was to prove to you there's inside information, even with regard to earnings, that is leaked and used in the market. This is not the norm, I think of all the stocks I looked at I found 22 that had strange behavior-some of you may remember when we caught GOOG 15 minutes before the close and their earnings.

In any case of the 22 that I posted which direction I thought the stock would take (the after hours knee-jerk move is rarely the reaction sen the next day, in fact many times it's the exact opposite) as I have no way of predicting earnings, just what smart money seems to be doing, 19 of the 22 were correct; that's a pretty high average. Now to be fair, I probably looked at 500+ stocks.

I don't recall every catching Alcoa, although I did go back and check some previous earnings analysis and found short term negatives in July of 2012 with a longer term positive, AA fell to lows right after that and then took off to the upside in to September.

So I figured we'd take a look at AA today pre-earnings, but also to see if it said anything about the market overall whether it be in this particular move or earnings related movement, which may be what trend 2 is based on. I found some strange chart in AA.

The VERY long term 4 hour chart is leading positive, this would be a trend beyond trend #2, it may be part of some signals that implied trend 3 up, which I was assuming might be liquidity or QE based, however the minutes may have changed all of that so if this is based on that, then this is open to change,  I have no idea how much the market may have known or discounted about the minutes if anything.

In any case, that's a long term very positive signal.

 The 60 min chart has a minor negative divergence, I'm not sure how this fits in, if it is trend #2 divergences migrating out to longer timeframes or something else. It's not a very strong signal, but I would suspect it would lead at least to a fill of the gap.

 At 15 mins we have the positive at the same place as all the other assets we looked at yesterday and a negative that is leading a bit deeper than the 60 min chart as would be the case if this was migration of the divergence.

 Now starting from the other end, the shortest (1 min), there's a leading positive divergence suggesting AA makes a run higher probably before the close.


 Here's where it gets strange again, the 2 min chart which was positive at both lows is in a deep leading negative divergence. I would guess this is pointing to an end of day sell-off or a sell-off in to tomorrow.

The 5 min chart shows the same thing, not as sharp, but it shouldn't be with migration of a divergence.

The 10 min chart is just now starting to show the start of a leading negative divergence, again this looks correct for migration of a negative divergence from the 2 min chart to the 10 min chart.

Being the 15 min is also negative, which I assume is positioning fro trend #2 as that has been the most common timeframe to see it, the only thing I get from this is a late day run up and likely downside after that, whether it is specific to AA's earnings or more of a bellwether, I'm not sure. I do like the looks of AA very long term, like investment long, but I don't think I'd be a buyer yet with these other signals in the mix.

If this is more indicative of the market response to earnings, then we may need to push up adding shorts , as I already said earlier, Financials don't look good. Lets see if we get some strength to dump the AAPL calls in to and see what happens with that strength (assuming we get it). If it dissipates quickly, I think I'd be moving toward adding the shorts I like.

Financials

I'm going to give Financials a little more time, but whether the SPX can cross Friday's intraday highs or not, I'm really starting to sour on financials. As you know trend #1 was always supposed to be the smaller of the 2 trends (trend #2 next being down) so it would be natural to already be sour on Financials, but the issue has been more tactical than strategic in timing so we can get the best entry, the least risk, the highest probabilities and not sit in an asset that is stuck in limbo. However I'm really not liking the looks of the group. I'd like to see some intraday upside before considering the matter further and I'd like to see how they behave as we are still in the early part of the day, a lot can happen from here.

I'll be putting some charts up soon, I decided to wait just to see what they do in the next hour or so.

Just a head's up.

Market Update

First the S&P E-mini Futures (ES)...

You can see a lot of overnight action to the left, but what is important is right now with a relative positive and a pretty impressive leading positive divergence. NQ is still not showing anything that impressive at the moment.

Next the TICK data because this is something that you can use, they are good signals, just infrequent. This one happens to be longer than most and stronger as well.

SPY is in rd, note the trend to the upside in the TICk data, this is telling us more and more stocks are advancing as the market was moving lower, breadth on an intraday basis was becoming positive which is one of those things you just can't pull out of price and volume. The recent spike above the channel is a bullish event as well, nearly hitting +1000.

The averages...

 DIA 1 min keeps improving, I still think it could use a little lateral consolidation, but then again we are looking for a move higher, but not a sustained move so it may not be that important to have a larger base to work off.

 QQQ 1 min finally showing some respectable momentum in the positive divergence.

 We're even seeing that now migrate out as far as the 3 min chart which was negative yesterday afternoon so it had to reverse that and now it's starting to move positive.

 IWM 1 min still looking good as well as the 2 min leading positive...

 Look at the 2 min SPY leading positive, that's a really nice change in momentum and migration from the 1 min chart below. In fact since the capture of this chart, this is now moving toward a new high on this chart.

1 min SPY positive divergence


Finally the Flight to Safety trade, Treasuries-TLT

 The 5 min TLT is negative, we saw the 1 min negative earlier, suggesting the Flight to Safety trade is moving in to risk assets currently for the short term.

The 1 min TLT is looking even worse than before and starting to lose some ground in price. However remember that this is still a short term market move we're looking for, not a sustained move, the bigger trend is #2, which is negative. Look at the much larger, stronger and more important 15 min TLT chart below...

Just like in the volatility ETFs where someone has built a position, expecting some serious downside in the market, someone has built a position in Treasuries as a safety trade. Both are on longer term, more important charts and I'm sure both correlate to trend #2, which should be quite a bit larger and probably more intense than trend #1, at least more intense initially. You can see the difference in size when comparing the divergences.