I find it ironic, but strangely comforting to have just said last night as well as Thursday and Friday that,
"There's no significant reversal without a head-fake move first".
As you know, this is something I've seen and we've all seen a number of times, I estimate 80% of all reversals will see such a move-whether we call it a head fake, a failed breakout, a stop run, etc- so this is not a new concept, this is in fact a concept that is so common that it is actually useful in timing of a reversal. This phenomena didn't exist or at least not to this degree before the year 2000, but as soon as the Internet became a mainstay in every household and stock brokers were replaced with discount online brokers, Technical Analysis exploded and with that, very predictable actions from technical traders which Wall Street has been using against them ever since in an increasingly more frequent way, that's why I wrote the first 2 parts of what will eventually be a 3-part series, "Understanding the Head-Fake move which is linked on the member's site near the top right.
You know how long I have been watching the carry pairs largely centered around the Japanese yen, really at the first site of a change in character and a lot has changed since. Last week the correlation between the market and the yen was seen on even an intraday scale that was and is stunning.
So I find it ironic and comforting as well that the single currency yen futures have been in what I have called a rounding bottom with 3C accumulation, which I also said last week, "I think the bottom is more than halfway done". Friday I showed how the USD/JPY was used to move the Yen down and help the SPX up and how that entire slight currency manipulation ended and reversed at 4:01 p.m. a minute after the market closed on Friday. So Friday we did have a head fake move in the Yen, I wasn't surprised as I had said before that, "I'm surprised we haven't seen a head fake move in the yen yet".
The next trading day after that head fake move (which I believe is also an excellent timing indication for a reversal)
the yen closed up around 1% vs the $USD for its best gain in a month and that happened as soon as the futures markets opened last night, the day after the head fake move in the yen and carried through today's close!
The $USD/JPY pair is sitting right at $102.24, just above the afternoon low of $102.18 and the violent spike down over a period of about 3 minutes shortly after futures opened yesterday to hit the stops @ $102 with a low for the new week at $101.97.
This is part of what I've been expecting and it's not irrelevant with regard to the market, in fact it seems to be more relevant than most realize.
Just last week I said that both Gold and MORE ACCURATELY, Silver had moved under a support area (another type of head-fake move) and would likely set up a few nice opportunities for us to trade this week. Most people have heard how Silver and Gold were both Monkey-Hammered, but wow did they make a swift recovery move with gold having it's best day in a year and silver made an +11% move off its lows (futures).
Here's the 15 min 3C chart of gold futures...
3C did an excellent job calling the negative divergence at the top left, then trend confirmation at the green arrow, the positive divergence started yesterday as futures opened and it was leading positive by the time the US markets opened (yellow arrow) already having made up significant ground.
This was a high probability position, not necessarily a low risk, great entry unless you were able to trade futures around midnight last night, still I think this still opens opportunities for us so long as we let the trade come to us. That being said, I find the entire episode which occurred mostly in very thin volume, middle of the night futures trade, very suspicious, but not surprising that a big move up occurred, just when and how.
Silver futures on an hourly chart even show a 1 hour positive divergence already, so there was a strong accumulative move in a short period, but this gives you some idea of the magnitude of the move...
Note the dates at the bottom stretching back to the last week of April.
I decided last week to keep the AGQ (2x leveraged long silver/SLV) open because of this positive divergence and others, seeing as I picked AGQ as a longer term trade.
That's a 15 min leading positive divergence in SLV, the 2x leveraged long AGQ position is only down about -4.5% (not bad considering the 2x leverage). If you are long SLV or AGQ when I opened the position, I can just tell you that I have no intention of closing it. For those who didn't get in last week, but may want to consider it, I personally would not chase here, we have a lot of volatility, but I do think we'll have several chances to get in at lower risk levels and a better trade setup.
Again, this is another example of a head fake move (one which I mentioned last week as being likely to bring us trade opportunities as support had been broken with a large positive divergence-the calling card of a head fake move)
not only giving an excellent entry and very low risk, even if entered last week, but also the concept of these moves being an excellent timing flag as well.
For the logic as to why these are excellent timing flags and why these head-fakes usually rebound with such intensity, I have explained it all the best I can as per my observations in the two articles linked at the top right of the member's site, "Understanding the Head-Fake Move, Part 1 and 2.
Credit markets, which are the assets Wall Street's brightest locals play in and tend to be some of the best informed traders, thus the maxim, "
Credit leads, equities follow", remain very skeptical of the market's enthusiasm, I can show you quite a few, but not all so I borrowed this chart that includes IG Credit as well.
Above we see most of Thursday, Friday and today with credit diverging even further-allthough there was a short term (approx. week) bounce last week that brought them closer on an intraday basis only. Credit has no interest in following risk today whatsoever and these are the risk assets of choice for some of the biggest players in the market.
I pointed out some of the moves and 3C charts of credit in a recent post,
"Leading Indicators" today. In the post I showed HYG's bounce
(most people would see it as a correction, but it was very specifically accumulated the prior week-we saw it - and it was specifically used to support the SPX/SPY as an arbitrage asset) and HYG's distribution in to all 3 bounce attempts, which was no surprise,
as I had posted that I expected HYG to see distribution on any bounce before HYG even made its first attempt to bounce. I believed this not just because of 3C signals
(which were short term positive at the time I wrote that), but
because I have observed a trend of distribution of risk assets in to strength and accumulation of Flight to Safety or protective assets, it only made sense that an institutional risk asset like HYG would see distribution in to any strength.
Even if you didn't look at a single 3C chart of VXX, if you simply look at VXX (Short term VIX futures) or VIX, you can see they have support under them because the buyers are seeking protection from a bear move in the market.
i.e.-
Here's the VXX intraday today in light blue vs. the SPX, these two normally have a near mirror opposite correlation -the SPX moves higher, the VIX futures move lower, but not here. Note the VXX's refusal to make a lower low as the SPX moves higher intraday? Then VXX just shot up some more.
On a longer term basis, which is the most revealing...
The VXX shows a normal correlation to the SPX at the far left, but as the SPX moves higher, the VXX refuses to move lower in mirror opposite form or any form for that matter,
other than what was probably some Arbitrage manipulation on Friday to help the SPY as VXX is one of the 3 Arbitrage manipulation levers for the SPY. Could that be a VXX head fake? I'd normally expect a bigger move, but it did manage to hit stops and pull volume which is the point of the move.
The VIX itself is no longer making new 7 year lows and instead has held fairly steady with a MACD positive divergence and more interestingly, a Bollinger Band Squeeze on the daily chart I pointed out last week-although it's even tighter now.
The last two BB squeezes resulted in sharp directional moves as a Bollinger Band squeeze should, but this time the bands are even tighter. Remember the VIX moves opposite the SPX/market, the fact it stopped making new lows which were moving to 7 year new lows shows the same support or demand for protection that I pointed out in VXX above.
The sharp move lower in FCT, an asset we use to gauge market sentiment as it is not correlated to any particular asset, was very sharp today and indicated there's a strong risk aversion.
The longer term dislocation is there in FCT, I have been looking for the shorter term, which taken together are far bigger than any dislocations I have ever seen (which we use as timing indications for market reversals implying this would be the largest we have seen).
For most of the day the market had all of the currencies on its side, the $AUD was rising, the Euro and the $USD was falling, only the Yen was being troublesome as it was moving higher as we have expected from this rounding bottom.
Perhaps two of the most interesting events today were a near flip-flop of F_E_D members, Evans and Fisher, the first a perma-dove (for QE) and the second a perma Hawk (doesn't believe in QE).
What was really interesting is bot were out before the F_O_M_C minutes for the last meeting (which was strange in its own right) are released Wednesday at 2 p.m. It seemed they sent the Hawk out to do some preventative damage control and as I mentioned, he had some strange comments, if you didn't have a chance to read the post, here it is again. I think this is fascinating.
The second speaker, Evans (the Dove) said something you'd expect to hear from Fisher as he opposes more QE, Evans said,
IF FED CONTINUES TO BUY ASSETS AT CURRENT PACE THROUGH YEAR END,BALANCE SHEET WOULD BE 'VERY LARGE' $4 TRILLION - FED'S EVANS.
As you might imagine, the market didn't seem to be in a very good mood after the comments. So it looks like the doves have come around to Fisher's point of view and perhaps that's why Fisher sounded, well as I put it in the post ...
"Fisher makes clear, QE hasn't done what it was expected to do-but his tone was not as hawkish as he usually is, it sounded more conciliatory toward Bernie as if he was finally winning the argument."
And I wrote this well before Evans spoke so obviously I had no idea what he would say.
Beyond some late day positive divergences trying to form in the major averages, on the whole there was quite a bit of damage done today, without going through every asset (Credit, VIX, Treasuries, etc...), here's some idea of the damage done, the damage done in a specific spot where it was expected to be done and the damage continuing in grander scale.
SPY 5 min leading toward new lows for nearly a week and a half, perhaps more...
"A" the first failed SPY triangle, "B" the less ambitious triangle that had every lever lined up and ready and "C", the distribution we look for in a head fake move coming out of what I already addressed, a seriously obvious triangle set up-in fact two in a row after the first one failed.
And the 15 min IWM as this is the leader of risk, from a large relative negative to a growing leading negative which is most often the way in which divergences develop (relative first, then leading as they get worse).
I'll be back in a bit with Futures, which DO NOT look good right now for the Index Averages and some single stock analysis.
