Quick Market Wrap

As you know we have several different signals representing several different trends which is unusual. Our analysis led us to believe that the first trend would be the shortest in comparison to the other 2 trends and it would be a sharp move to the upside, it would also likely be so strong that we even fail to appreciate how strong it will likely be. I also have a gut feeling that this trend will (when it's time) reverse in an event kind of way rather than a process, meaning much faster than normal, perhaps even intraday.

Trend 1 came, here's what it looked and still looks like...

 This is the IWM which made an all time new high on Trend #1, it's also been about a +6% move thus far.

The QQQ was even in decline and made a move of over +5%.

Here's the SPY which has been the focus of our attention for tactical purposes being our strategic view is for trend #2 to be market downside.

As trend #1 created a range, it became more and more likely that we'd see a head fake move as there's too much money for Wall Street to leave on the table when they just need to make a slight move above resistance and tag all of the orders on the books which most of us can see, but they can see the full depth of orders and know where they need to take the average. Friday (to the left), we had a 30 min break above resistance at the end of the day, it's enough to tag orders, but there's another reason for a head fake move, it's to draw in retail, get them to buy and create demand and higher prices which Wall Street can sell and short in to.

If you haven't already seen the two article of the 3 part series, Understanding the Head-Fake, here they are...

Part 1: How Technical Analysis Went From an Asset to a Trap

Part 2: Motivation

Since last Friday, this week I've been looking for the market to make another move above Friday's intraday highs, for Wall Street's purposes (in creating and using Head-fake moves), price needed to spend some more time up there. How much more? We let the market tell us that, but the size of the head fake is usually related to the size of the move it's working on which would be trend #1.

The larger trend started at the 11/16 lows, a move up that had been accumulated right in to the 11/16 lows, the QQQ 15 min chart best illustrates this cycle, I call it a "cycle" because it was clearly planned out ahead of time.

There's early accumulation at the first white arrow, but the really strong accumulation was near the lows as the divergence went leading positive (in the white box). From there we saw distribution of the move, a larger head fake move above the yellow trend line that saw distribution and then Trend #1 which has a deep leading negative divergence suggesting heavy distribution in to higher prices.

IBM is a good example, it's a short position that's currently open at a gain of nearly 9% and not only shows how we stalk a trade, let it come to us (because we get the best price, lower risk and higher probabilities and timing), but also how we use the head fake move to enter positions which is only possible because technical traders are so predictable that it makes Wall St. predictable in many ways. This is just 1 trade, but nearly every one of our core positions was entered like this...

 This is a daily chart of IBM, at #1 we have the resistance level traders will be watching in the future, at #2 we have a bullish "Bull flag, but we already knew there was a negative tone to IBM at that point, now it became a matter of the entry. At #3 IBM breaks above resistance which pulls longs in, this is the day we shorted IBM as you'll see below and #4 is a head fake set-up.

Zooming in on the tactical area or entry, You can see the bull flag at #2 and from that a breakout that should have move much higher according to the measuring implication of the bull flag, but we just needed a break above resistance. We also went short at #3 as you can see below at a price of $210.74. Between #3 and #4 there's a bullish ascending triangle that is taken by technical traders as a consolidation/continuation pattern to the upside, instead it broke to the downside and IBM failed quickly and hard, "From failed moves come fast moves" and that's part of the reason head fakes occur just before  reversal.

Here's what 3C looked like and this was our edge in knowing the difference between a real breakout and a head fake move that is best used as a short entry.

 I've rolled the history back to the entry area and just before. This is a long term 60 min chart. At #1 we have the bull flag, but 3C is already telling us there's distribution in IBM, we now have a strategic view, we just need a tactical set up. At #2 this is the breakout above resistance and where we shorted IBM, notice the 60 min 3C chart is now in a worse leading negative divergence.

While the 60 min is one of the strongest indications of what's going on, it's not the best timing timeframe.

I can only go back 5000 bars so I can't show yo how all the timeframes came together, but this important 15 min. chart also shows the bull flag at #1 and the breakout above resistance at #2, the same day we entered just about as close as you can get to the absolute highs i IBM. Again, the 15 min chart was confirming what the 60 in chart was telling us. Shorter timeframes gave us more confirmation and when IBM broke out, instead of 3C confirming it or leading it, it showed us distribution so we knew this was being used as a Wall St. Head Fake and they were selling and selling short in to the new highs, we did the same.

Essentially we are in the same position now in the market, we have broken out to the area that would be like the new highs in IBM, we just need confirmation of the 3C charts showing us distribution of risk assets as the breakout came very late in the day, they'll usually run price up a bit if the demand is there and sell in to that.

We just wait for the message of the market and objective data to confirm.

AAPL Calls and a 3C example

The AAPL Call trade is in the green and still open.

A member who also uses 3C sent an end of day email trying to better understand how to interpret the AAPL 3C signals, I thought it was an interesting question and answer that some of you may be interested in, so here's the email response from me and the charts I'll add to this post.

Divergences start on the shortest timeframe usually (unless there was a decent chunk of accumulation and one of the longer timeframes caught it at exactly the right time). If a divergence, buying or selling, is strong enough, it moves to the next longest timeframe and so on and so forth. So we watched AAPL today move from intraday charts in the 1-3 min range to the 5 min and at that point right before the move there was a stronger signal in the 5 min chart, a leading positive divergence (leading divergences are the strongest and often found near the end of an accumulation or distribution phase). So basically looking at AAPL only and today only, the positive divergence built out to the 5 min timeframe.

Here are the 2, 3 and 5 min charts as they developed at 1:45 and 2:45 today for AAPL...

 AAPL 2 min chart is in a leading positive divergence, 3C is making a second higher high as price is flat or even lower than the previous positive divergence earlier in the day.

This strength migrates to the next timeframe, which will not look as strong, but the longer the timeframe, the more important the divergence.

 The 3 min chart is also making its second higher high, but it has not quite made that higher high, still it is positive.

The strength here has migrated to a more important chart, the 5 min which is the first timeframe where we typically see institutional activity.

 Here there's less detail, but the trend is clear.

Now at 2:45 today...

 The 2 min chart is now making its 3rd higher high, the divergence is growing stronger as the day moves on.

 The 3 min chart is also moving to make a 3rd higher high in a flat price range.

The 5 min chart is now even higher, it has less detail as it should, but the divergence had enough strength to migrate through the timeframes.

This is what the 5 min chart looked like at the end of day.

Now back to the email...

The negative on the 1 min is showing there's no confirmation and the signal is telling us there's distribution in to both demand and higher prices, the two things institutional money needs to move around (or on the flip side they need supply and lower prices for accumulation).

This is what the 1 min chart looked like as AAPL rallied this afternoon...

Note that not only is the 1 min chart not following price higher, it's actually making a lower 3C reading and then a new leading negative low, back to the email....

I'm guessing that the 5 min signal is strong enough that they still have some selling to do, although it's hard to say as that 1 min chart didn't budge(move higher). The charts past 1 min (like the 2 or 3 min) don't matter unless the divergence from the 1 min is strong enough that it migrates to those longer timeframes which it didn't. Right now they are just moving in confirmation as they should until something bigger shows up there. My gut feeling here (and I hate when they run these plays so late in the day like last Friday, but that's when they come out and play) there's probably more distribution to go (meaning there's probably more upside in AAPL).

FX

There's a lot to talk about today:  individual stocks like AAPL and some interesting short term behavior,  a possible war between  Ackman/Tilson and Loeb over HLF (Short vs. Long)- aren't you glad we waited for a solid signal and didn't get caught up in that mess?

There's market behavior that is part of a reversal of the Trend #1 we hit on the head, a strong move to the upside (one that we may not even be able to imagine) that took the IWM to new all time highs.

A Big drop in the $USD and parabolic EUR/USD trade today.

Possible F_E_D POMO influence in the market (POSSIBLE!)

Which assets are looking the best right now and whatever spring cleaning might need to be done, like the AAPL calls.

More importantly, today's action, just like Friday, the level we were looking for was hit so late in the day that no one is fast enough to look at all the assets and correlations that need to be seen to tell where we are at, but we are in the zone now that I've been looking for and my next trend (bigger Picture) is trend 2, a stronger, longer move to the downside.

Apparently we also had Demark call a top, I'll have to look at my custom "Demark-based" indicator.

I can't get to all of this tonight, it's just too much, but I'll get to the important stuff. One of the first things is the biggest drop in the $USD in 4 months. The EUR/USD pair traded in parabolic fashion which is supportive of almost all risk assets, I know for sure some didn't play along, but the question is how long can this parabolic move hold. You know how I feel about parabolic moves, they are not to be trusted.

So right to it...

 This is the EUR/USD pair since FX trade opened this week, to the right of course is our parabolic rally in the EUR/USD.

 A closer look shows a loss of momentum as the Rate of Change slips, this "may" be that little "U" shape that is followed by a nearly vertical drop, this is how most parabolic moves end.

 As for the 3C signal in the $USD,  you can see through December it was largely confirmation (trading with price), then a leading negative divergence in early January around the 4th and a larger relative negative divergence yesterday. Today we have the start of a positive divergence, in fact it's even leading a little.

 On the other side of that coin, the Euro/FXE with several negative divergences on the way down , a large relative positive divergence that really took off the last 2 days and the gap up today with a small negative divergence.

Usually these ETF's of the currencies (somehow no matter what the overnight trade is) manage to pick up almost exactly where they left off, so there may be a lot of volatility i the EUR/USD tonight on the downside and upside.

Either way, it doesn't look like a sustainable move, at least that parabolic portion would have to be dealt with and it fits our trend expectations as it gave the market that extra support it needed to break the level we have been predicting since Sunday night.

If the EUR/USD falls, the $USD rises and that's broadly bad for risk assets whether commodities or stocks.

 Here's a closer look at the Euro/FXE and the 5 min leading positive yesterday and a smaller leading negative today.

 This 1 min ES (S&P Futures) chart shows the entire day and the overnight action including the European open. The divergence I'm most focussed on right now is the start of a leading negative divergence during the last hour to present.

NASDA Futures are showing the same. This may be based on trade in the EUR/USD, quite often divergences in FX end up bleeding in to equities. 

I'll be updating you on other developments, I have a lot of charts and indicators as well as internals to look at. However you may want to watch the Futures as well as the EUR/USD, that could lead to some excitement.

Overall tone is turning negative

However it's not screaming. Remember my gut that this could turn very fast once we get above the level we crossed today, but I'd still think a bit more time up here would be desirable

AAPL Calls in the Green

Everyone has a different methodology with options, my preference is to not go for home runs, but to use them when I feel there's a good signal, but not enough profit potential, so the leverage of options is appropriate at that point.

I want to get out of them before the first major consolidation or pullback.

I'm probably going to leave the AAPL calls open for now, but I'm not very comfortable with it because of where we are in the market (today's move) and because the intraday 1 min chart in AAPL is not confirming which would suggest (if the divergence migrate out to the longer timeframes) that this move is being sold in to which is the reason I expected it to be a quick move and therefore preferred calls/options.

The 5 min leading positive is where the accumulation of the lows moved to today, it is not indicative of the action on the way up (underlying action).

This 1 min leading negative divergence is indicative of underlying trade on the move up.

On one hand I think the 5 min is big enough that it should have some more upside, on the other, the 1 min chart didn't even try, it looks like immediate distribution.

Market Update

This is intraday, but the SPY and IWM are starting to show a negative intraday divergence and the TICK data just doesn't look right here.

 TICK should follow the market (SPY red)

Look at the TICK trend here and the SPY, not good. This should be in everyone's tool box.

Another Step

Here's the SPY, we have been predicting (as a function of market behavior ) it would move above last Friday's intraday highs, which were a breakout we were also looking for.

As I said today in this post

"At this point most of the averages are looking pretty negative on a lot of timeframes which is what I wanted to see today, although I'd rather price stayed up longer." 

This was the reason I was looking for this move this week because price was only above the level for 30 minutes on Friday which doesn't allow the market to do what it needs to do, which is the whole reason we expected it to move to that level. Today we gapped above the level, but again did not hold it, it has to be held for at least a little bit, it's part of the head fake behavior, that's what the prediction was based on, simple market behavior.

A few times this week the probabilities didn't feel very good, but here we are.

We already have several of the indications in place that we need for Trend #2, but as I've said all week, "We aren't going to get strong signals, the signals we need until we are above that level".

I have a lot to check on, perhaps there will be a few positions to enter, perhaps not, it depends on where the other indications are. I'll report back shortly, but this is very exciting.

AAPL Charts

Here's the last AAPL update from today so you can compare and see the 3C differences if you are interested.

Now lets see if we can get a decent gain on those Feb. Calls.

Here's the chart update, also you'll see where multiple stop (BTC) levels and perhaps some limit orders were as these levels are always predictable, because Technical traders are predictable and AAPL is a large bellwether that everyone is watching. The point is this is why I don't like leaving any orders with brokers as you are showing the world your plan/position as well as the predictability of stops at support and resistance levels, yes even intraday.

 The first 3 resistance areas where stops would be placed, probably a few buy orders too.

Now check out the 1 min chart of volume rising as it hits each resistance level. Honestly, support and resistance aren't exact levels, they are zones, except for Technical Traders, then they are exact, but the mechanism that creates the areas dictates they are areas (broadly speaking) rather than exact levels.

 The 2 min chart, note the divergence pivots at each of AAPL's lows today.

 3 min didn't quite make the new high, but it looks better and was in leading positive position most of the day.

 The 5 min chart which is the shortest timeframe where we first start seeing real institutional movement has been in good shape and leading positive nearly all day.

 This is a 15 min chart zoomed to an intraday basis, the divergence actually hit as far out as 15 mins intraday, I still consider it a short term move.

I might as well show you the 15 min chart that I have mentioned that may build a nice long in AAPL, the distribution is obvious, 3C confirming price by making new lows with price at the green arrow is perfect, then a leading positive divergence through December . I'm not sure how this plays out tactically, but right now I see it as trend 3 and if that's the case, it would likely be huge by then.

And There Goes AAPL

Watch for the market to draft AAPL

Quick AMD Update

AMD is up +12% and still very much within a base, so I still like AMD a lot as a longer term long position. I plan on leaving it open because I plan on treating it more like a trending trade. Of course if I saw something that provided a high probability trade like a strong pullback in which I thought AMD could be sold at higher levels and bought back at lower levels, then I'd consider that.

Remember for bases or tops you need a wider stop and a greater tolerance for risk, there's a risk management link at the top right of the member's site, or right HERE. It all basically comes down to your risk tolerance (I prefer the 2% rule, which is maximum loss per position on the overall portfolio-this is not a position size loss; through position sizing you can have a 20% position loss and still a 2% or less portfolio loss) and what your rule are, then position sizing and/or tactical management like phased in entries, but these all have to be part of your trade/risk management plan before you ever enter the position.

As for AMD, it has a decent gain for what it is right now, it could obviously see some downside in the near future, but I don't see anything that I'm really concerned about. Here's a look at the charts that matter for the trade plan in AMD and the stop.

 Remember the 3C rule, "When in doubt, go to the longer/longest timeframe; it is here where the trend and the larger picture of underlying money flows show up without a lot of noise (you give up some detail, but you gain a clear understanding).

This is the daily chart, an extremely long and powerful timeframe, very few trades are based on the daily chart (at least right now) because of the way the market has been trading, but you can see CLEAR Distribution as the 2011 top and Clear accumulation at the current 2012 base-like area- both divergences are also the stronger leading divergence.

 The 60 min chart which is still an extremely strong timeframe shows the leading positive at the October-November lows and price moved up from there. There's a gap right in the area from $3-$3.20 which will probably ultimately lead to a pullback before AMD can enter stage 2 mark up, we may even end up with something more like a "W" base, but I think we'll get clearer signals if that is going to happen.

There's a slight relative negative divergence here, I'm not too concerned about it.

The Trend Channel is set to 3 days for a trending trade, it held the entire move down for a gain of 65-75% depending where you entered and exited obviously, but there's no arbitrary guessing about where to exit the short trade, the Channel would have kept you in when emotions may have been pressuring you to get out with a much smaller profit.

As for the upside trend, the current stop (that continues to move up and is totally based on AMD's own unique character) is $2.25, nearly every day it will move up. Personally I would not use $2.25, it's a bit too obvious, I'd pick something like $2.22 or $2.27 depending on which side of the stop I wanted to be on.

So for now, I consider AMD a hold, hopefully an add to soon.

Quick Update

Today reminds me a LOT of yesterday as there were a bunch of small, annoying signals and then later in the afternoon there was a very clear short term positive that led to futures moving higher overnight and our gap up today-I'm just hoping we get just as clear a signal today.

In addition to the last market update, ES is now negative as well.

ES 1 min from positive at the lows to negative here.

The SPY is negative to different degrees from 1-5 min.

The DIA is the same.

The QQQ and IWM had ugly underlying trade yesterday  and they are playing that out in price today, but that seems to have flip-flopped a bit. Both the IWM and the QQQ have a mixed bag that overall is more positive than the SPY/DIA. The QQQ is stronger than the IWM as far as the signals go, but again they are mixed from several positive timeframes, some in line and a couple of negatives.

Closing Out FAS

Yesterday I mentioned FAS long as a quick trade ,  it's a t a little profit and I think I'll close it here.

I'll be taking a closer look at FAZ, although not making a move quite yet.

Leading Indicators-Credit

OK, finally some movement in the one are of leading indicators that we have been waiting for just like the 15 min ES charts that finally went negative.

High Yield Corporate Credit which has been right at previous all time highs in short interest, still hasn't made any negative move to the downside which is something we should see before a meaningful reversal to the downside.

Junk Credit (Also a risk asset) also hasn't turned.

However, High Yield has turned down, since 12 pm as the SPX has been correcting on a leg higher, HY credit is moving to lows seen several days ago, so finally some movement there.

The Euro and the SPX are moving together since the 11:15 bottom, this still leaves the EUR/USD in a very parabolic bounce and I don't trust these, you may want to keep an eye on the pair as an early warning indication.

Intraday Yields are starting to diverge negatively, remember they were and still are in a larger negative divergence with the SPX even though they did move higher today in what looked like early support of the SPX.

Commodities are flat, even though the $USD has been dropping pretty much all day-commodities normally would be headed higher with a falling $USD.

So we don't have a smoking gun here, but we do have some changes we've been expecting and waiting for, finally starting to take shape.

Quick Update

At this point most of the averages are looking pretty negative on a lot of timeframes which is what I wanted to see today, although I'd rather price stayed up longer.

Both VXX and UVXY are seeing positive intraday divergences so I suspect we are getting at least an intraday pullback -as I said the averages are already and have been negative.

AAPL Update

If there's one trade that seems to work with AAPL on just about any time frame you chose, it's fading a gap up. AAPL has been selling gaps up as soon as they start since (well the first I remember was 4/24 earnings). Back then we had signals that Tech and AAPL were going to come in to rotation, I believe AAPL reported that night and gapped up the next day, the 3C chart is so clear it's unmistakeable and so was price action after, the moment it opened there was distribution.

Well the same thing today on this morning's gap up. However as far as the short term AAPL long trade (it was considered short term and that's the reason it was an options trade rather than an equity trade), here's the update-it's been touch and go, but it looks to be shaping up.

 Even on an intraday 2 min chart an daily gap up there's distribution right on the open, since the 2 min chart has shown some improvement, I'd like to see 3C move to a new high like the blue arrow I drew in.

 A little bit ago the 3 min chart and 5 looked excellent, since the 3 min has pulled back a bit, it's still in a leading positive position, but again it would be nice to see this resolve to a clear leading positive divergence with a new high like the blue arrow I drew in.

 The 5 min chart also shows the opening distribution and a leading positive divergence that is pretty clean. Remember though, this was always meant to be a short-term trade, the longer charts....

Like this 30 min are arguing for more downside. Note again even on this longer timeframe, the gap is distributed almost immediately.

There is still a matter of a longer term trend on a 15 min chart, it would be trend 3 if anything, but if it builds over the next month or so, it could be an impressive trade.

As for the closely correlated QQQ today...

 3 min chart leading positive...

 5 min also leading positive, both went positive at the day's lows.

However don't forget the bigger picture, this 15 min chart makes it pretty clear, I always suspected "Trend 1", the fast, sharp move higher would be a segue in to trend 2 (down) as trend 1 would serve as the head fake move and from the looks of the leading negative divergence during trend #1's consolidation, it seems to be right on track with expectations.

URRE Update

For those who are long URRE, it's made a decent move that has put it back in the green at double digit gains, but I'd seriously be thinking about a trailing stop. If we get a pullback that shows accumulation in to it, then it may be worth a look as a buy again, the character is finally shifting.

 This daily candle with the gap and what so far is a star will probably also have higher volume today, it's a pretty strong downside reversal signal if it looks like this at the close. That reversal has no target based on the candle.

As for trailing stops, I prefer the Trend Channel...

 The 60 min setting has held the entire move and keeps locking in gains, I definitely don't want a stop at $.50 or $.49 cents, it's too obvious, that makes it a bit difficult and more of a subjective decision.

The X-over Screen with the 10 and 22 bar averages with RSI and our custom indicator also looks good, you might choose either the 10 or 22 bar on a 60 min chart as a potential stop, perhaps a phased exit with a partial at the 10 bar and the rest at the 22, although I feel pretty certain there will be some sort of pullback or consolidation.

I'll probably just close the position here because of time, time I don't have to watch it intraday.