Daily Wrap

After looking at just about everything I need to look at (except futures, as you know I like to give them a little time), I feel pretty good about today's decision and the reason why.

Here we can clearly see what I was talking about as far as a "larger footprint" in the reversal process.

 Intraday (1 min) ES/SPX Futures shows the intraday negative divegrence from 2 p.m. to 4 p.m., this is very much in line with the kind of pullback that gives us more of a "U" shaped bottom and should give us stronger positive divergences on the upside as pullbacks are expected to be accumulated.

Almost every asset I looked at had this same intraday behavior including the market averages.

Also interesting was the same behavior being confirmed in an asset that trades opposite the market, the VIX or in this case the VXX's 2x leveraged version, UVXY.

Earlier there was a negative divegrence which I used to open a VXX put which is already at a double digit gain today, but I think we get another chance tomorrow as short term trade would suggest some upside here (downside in the market), however...

The longer 5 min chart has so much damage that I doubt any intraday upside can sustain itself, leaving the VXX / UVXY open to being shorted again and the market putting in that larger rounding reversal process.

Also suggesting the VIX has had it, my Custom DeMark inspired buy/sell indicator gave a rare signal today.

You can see the last buy signal to the left and today with a long upper wick candle, a sell signal on the VIX which trades opposite the market.

The NYSE TICK suggests the same probability, at least the first part of it...

 There was a lot of volatility in the TICK today from about +1250/-1250, The EOD or last 2 hours show a clear downtrend. However if we look at my Custom TICK Indicator vs the SPX...

The overall trend for the day is positive suggesting short term down turn which should do something like I suspected in this last post and this larger trend signal should bring us back up just as the longer UVXY chart suggests as well as the longer 3C charts in most assets and averages, it's almost universal in every asset I looked at.

We can even look at the VIX futures and get the same feel...

 the short term futures suggest intraday upside, but this is not a strong signal like the 15 min below...

This is in a leading negative divergence and has much higher probabilities for the longer term, so taking both in multiple timeframe analysis along with other assets, the implication is the market pulls back a bit, but in a healthy way and finishes strong.

This is what the same pair of  signals look like in the SPY.

 SPY 1 min intraday strong all day, with a relative negative in the late afternoon. I would suspect price would move as I drew with the green arrows, there's always the probability of a shakeout/ stop run below today's intraday low just before an upside reversal .

However the probability of that upside turn went way up as the 30 min SPY chart locked in a positive divergence today, this is a very meaningful signal.

Every single asset or indicator above all suggest the exact same thing and I could give you 50 more right off the top of my head.

There was no Dominant Price Volume Relationship today like there was yesterday, yesterday's being a reversal relationship and extremely dominant, price down, / volume up, of the 4 possibilities, this one suggests a selling climax occurred yesterday. Today's closing daily candlesticks suggest the same...

***On all 3 charts below I've drawn in an example candle for tomorrow's closing candle, it is just an example***

 Daily SPX closing candlestick pattern is a bullish Harami reversal with today's candle being a Doji which increases the probabilities. I drew in (#3) an example candle which would be a confirmation candle, a bullish engulfing candle, however I should have drawn the open (lower end of the candle)
 below today's intraday low, that would give us not only the wider foot print, but the head fake move as well.

The Dow-30 is also a text book bullish  Harami reversal pair (as long as today's candle is inside yesterday's real body which it is). The Japanese call the Harami "Mother with Baby" as the two candles resemble a pregnant woman. #3 I drew in as a confirmation candle, but I should have though more about it as it shows a gap up and that gives us more of a "V" shaped reversal which is possible, just not the highest probability. Today's Star alone is bullish after yesterday's candle, it shows a loss of momentum and conviction to the preceding trend.

The R2K daily chart doesn't have a known reversal candlestick pair, but the longer lower wick with the higher close is reminiscent of a bullish Hammer, however the lower wick would need to be at least 2x the size of the real body which is placed perfectly. However today's candle does tell us lower prices were tested and rejected. #3 is what I drew in, this would give us the move lower, the head fake move and a bullish engulfing confirmation candle for an upside reversal.

As for leading indicators, not much changed since today's update...

Credit is still well above the SPX locally including High Yield Corporate, Junk, and HY Credit. Sentiment  shows one of our indicators lost a little in to the close which fits with the scenario I'm laying out for tomorrow while the second has a much stronger move that started yesterday after weeks of negative readings and it closed up much higher in to the close, so I think we are just seeing the opinion of two different timeframes short and longer just as I'm presenting them above although I believe both should fulfill tomorrow. VXX as you probably figured from the price chart above, underperformed its natural correlation in to the afternoon so it looks like there just isn't a strong bid there, it wasn't to activate the SPY arbitrage so again I suspect the fear is fading as today's VIX candlestick hints at with that large upper wick. Yields which attract price to them, made a consecutive 3rd day higher high and the SPX is dislocated from them, it should move to revert to the mean. Dow transports saw much better 3C underlying trade, I suspect as usual the old school Dow Theory guys want to see transports confirm even though it's ridiculous as we are no longer an industrial nation, however when Wall St. is trying to sell a weak rally, they often push transports.

There are a lot of short duration longs (most need some leverage) setting up and many will set up long duration shorts that need no leverage, I have them tagged in my watchlist, but a good example is IBM...

*For newer members, short term 3C signals like the 1-3 minute usually dictate intraday trade, as they become stronger (either accumulation or distribution) they migrate to longer timeframes. Signals at 5 mins are about where we see the first real institutional activity, a 15 min signals is quite strong, in normal circumstances it will signal a swing trade. 60 min signals are very strong and often can signal trend trades, daily & multi-day are the strongest. However they also suggest a timing component as I'll demonstrate below with IBM.*

 The 2 min chart is intraday; it was positive yesterday afternoon and in to the open sending IBM higher today, but later we have a pretty strong negative divergence suggesting IBM see some downside, likely toward yesterday's lows and we almost always see that signal take shape at the start of the next day's trade.

You can think of this the exact same way as the examples at the top of this post regarding market direction, both very short term intraday and longer term for a strong reversal.

The 10 min chart from left to right shows a negative divergence or distribution at the mid-September highs and price is confirmed by 3C on the way down or rather the downtrend in until we get this amazingly strong 10 min leading positive divegrence, this is serious institutional activity.

Looking at the two charts, the way I want to play this is to wait for an intraday pullback tomorrow and buy on that price weakness, I'll likely chose an option for some leverage being IBM isn't much of a momentum stock. The leading 10 min chart suggests a strong move and the target is likely above the mid-September highs.

Looking at the strongest of the 3 charts, the daily IBM, this daily chart shows a strong leading negative divegrence in red, but it has been seeing distribution for some time, this is quite common for smart money to feed out a small amount of shares at a time in to rising prices as to not effect the trend, get a better sale price and be able to move a large position over time without moving the market against them. However the leading negative in the red box should not be underestimated, IBM's strongest trade is to the downside.

Now note the range in yellow. The 10 min chart's positive divegrence above is capable of sending price above this range (yellow arrow); this is where longs will consider IBM a breakout buy and shorts are forced to cover, both actions provide demand which Wall St. can use to sell short in to in some size without sending price against them. Ultimately, that is the trade we want, although I already have an IBM equity short started, this would be a trending trade of long duration and doesn't need leverage.

So the play is to ride the upside, I call it "Hitch-hiking" until we get in to the upper end of the range or above it and look to close out the leveraged long and look to enter or add to the core short position.

This could serve as a model for almost any index in the market as well as many industry groups.

That's it for now, I'll take a look at futures later tonight.

Gist of the Day

This is not the Daily Wrap, I need to look at a lot of indicators, assets, futures, market breadth, etc.

However, the basic theme of today was there was strong underlying (3C) activity and the probabilities for an upside reversal went up, but that's not the same as a "High Probability Position".

Over the last month, every time we've had sufficient downside market action I've looked at the "Tracking Portfolio" which is dozens of mostly core (trend) short equity positions and they have consistently been beating the market on a relative basis somewhere between 6.5 and 7.5 to 1. Normally you can expect a lot of stocks to just about double the market's performance on a strong up or down day, but 7x better performance (not once, but every time we've measured over the last 2 months or so) for a tracking portfolio which is WAY over-diversified (which kills the portfolio's average performance) is excellent.

So the gist is, while I have no problem entering specific positions that are throwing good signals, for the most part I wasn't in any rush today to add to short duration leveraged longs as I don't want to tie up dry powder on positions that may not only be sub-par, but really are positions entered solely because we're afraid to miss a move, that's not a good reason to commit capital to a position.

I think there are VERY good chances tomorrow may be a very busy day with a lot of potential trade ideas, I just didn't feel the process was mature today.

Here's an example using the SPY.

 This 30 min chart shows the F_O_M_C knee-jerk reaction we're always on the lookout for. Then we have a range that showed accumulation although the majority of the range had fairly weak signals until the end when they started to pick up.

The range is VERY obvious, which makes it a high probability target for stop runs as well as triggering shorts to enter, both provide supply in large quantity and lower prices which is exactly what institutional money needs to enter positions in the size they  trade.  I was watching something last night with a hedge fund trying to fill their own orders rather than use a market maker or specialist and in the first day (they didn't say what stock it was), they moved price AGAINST their order by $5.00. Of course that's relative, but the way they mentioned it, they were clearly saying, they had no skill in filling a large order like that without moving the market against them. A good fill for an institution will be at progressively better prices for an average fill.

Point being, taking the market below this obvious range is an easy way to generate the volume needed to accumulate and to keep prices from going against your position while accumulating, THIS IS ONE OF THE MAIN CONCEPTS IN THE TWO ARTICLES I PUT UP ON THE MEMBER'S SITE, "UNDERSTANDING THE HEAD FAKE MOVE".

However as I said, today didn't feel "mature" to me.

 The 3 min chart for the SPY did what it should in transitioning from a weaker relative positive divegrence to a stronger leading positive divergence.

For me the main concern was I thought the signals could standout more and the reversal process is a little too tight, if it were to reverse up tomorrow on the open, we'd have a wide "V" or an event, if we pulled back and established a larger footprint, we'd have a "U" or "W" reversal which is a process and much more common, much better equipped to support a stronger upside move and gives 3C time to add to the positive divegrence as I drew in on the chart above (both price and 3C).

That's about the gist of today's trade, tempting, but I'd rather miss a short duration trade than enter a position that I don't feel very positive about, especially when the difference between the two is roughly 4 hours.

USO Looking Interesting

I have November Calls for USO, I'd consider adding a little here, but the position size is already at max size for risk management.

This is what I like about USO which is a channel buster so it's return back inside the channel is very high probability before any signals were given.

 USO 2 min is seeing positive action today on an intraday basis.

At the intermediate 10 min we have a positive divegrence too, note the accumulation areas, they are the lows of the range.

Now a 30 min leading positive divegrnece, again the accumulation areas are the low of the range with emphasis on the more recent trade.

A 60 min chart makes the trend very clear, USO looks primed for a run / Short squeeze back in side the channel is busted out of on the lower end. A likely target would be above the channel.

Overview of GDX

This is not meant to be specific, however it is meant to address what some people are seeing as a break of a H&S trendline. This is also one of the reasons I prefer NUGT (3x long gold miners) ETF over GDX calls, I think time is on GDX's side and NUGT seems like a better way to play that than options.

 This is the H&S people are seeing in GDX on a 60 min chart, today it would have broken the neckline so other traders are seeing it as well, but many technical traders only see the price pattern and assume it's a H&S top, a lot of bears got burned in 2010 because they looked at price only and did not verify a H&S top with volume and it broke out to the upside after they were shorting this for 6 months.

I'll just mention for new members, there are only 3 places I'll short a true H&S top, 1) is the top of the head, 2) is the top of the right shoulder and 3 is AFTER a break below the neckline and a rally that technical traders EXPECT to fail at resistance (former support/the neck line),  I'll only short it AFTER price has moved above the neckline and shaken out all of the recent shorts, this happens with increasing frequency no matter how many times you see a textbook/cherry picked H&S failing at the neckline every time, that's not reality any more.

 The check for a H&S is volume, to make it easier I created this cumulative volume indicator real quick, in a true H&S it should see volume diminish in to rallies like the shoulders or the head and volume should increase in to the declines down to the neckline, that's not what's happening here.

Beyond that, the first rule is a H&S top MUST proceed an uptrend, this doesn't so the very first test it fails and it fails the volume test.

 An alternate view that volume does confirm as well as the preceding trend is an inverse H&S bottom, it would also be at the right place for a shakeout of a true H&S top, that 3rd place I'll short a H&S.

This would be a complex pattern with 2 left/right shoulders.

 On a 5-day chart here's the large H&S that you couldn't see before, the area with the yellow arrow is the inverse H&S bottom. The yellow arrow shows the shakeout of shorts (the last place I'll short a H&S) and the red arrow shows what happens after all the shorts are squeezed out above the neckline.

Obviously this too is a complex top.

Looking at a 15 min chart, the recent break today below some support or what some see as a neckline has a VERY positive divegrence, smart money wants to accumulate on the cheap, not in to rising prices, hitting stops and triggering limit shorts is an easy way to produce the kind of supply they need to accumulate without moving price against them.

This 30 min chart shows the same powerful positive, it's very powerful on a 30 min chart and we even have 60 min signals.

I'm fine holding NUGT long, I'm not so happy about GDX calls, but I think we will get there. I'll be keeping an eye on the intraday charts, the NUGT long is still in play.

Market Update

There are still some great signals developing and I'm still weary of this potential reversal (probabilities are increasing) being too much of an event and less of a process, UNLESS AS I MENTIONED SEVERAL TIMES EARLIER, THE NY F_E_D'S TRADING DESK PUTS OUT THE MARKET'S ENDORSEMENT OF YELLEN.

Can't you just see the dumbed down CNBC headlines? "Market rallies in support of Janet Yellen"...Oh I swear if that happens my stomach will literally turn.

I still prefer the SPY/SPX and Financials overall, but everything is making progress.

Leading Indicators are coming together, they started the week off slow , but continue to add, the most important of which in my view is credit and not just the highly correlated (to market manipulation) HYG, but HY, and JUNK too, they have no correlations to anything that can manipulate the market and HY is skittish because of liquidity issues, the fact they have held up means something as retail doesn't trade credit.

*ALL Leading Indicators are compared to the SPX in green unless otherwise noted*

Sentiment

 Intraday sentiment is looking up the last two days and this one has been very negative so any positive activity here is notable.

Longer term you can see how our second sentiment asset has acted as a leading indicator on this 10 min chart, going negative at tops before the SPX and positive at bottoms before the SPX, interestingly since the F_O_M_C, while the market has lost ground as we were 100% correct on the knee jerk reaction as well as the negative divergences going in to the F_O_M_C, the interesting thing is that sentiment has held up, this is not retail sentiment.

VIX / VXX correlation

 I saw this popping up yesterday, but as you can see, I inverted the SPX's price action so you can better judge the normal correlation that should exist. VXX has been underperforming that correlation since late morning after the a.m. trade washout was completed.

FX/Currencies-specifically components to the USD/JPY carry trade

 We've been following developments here all week, you can see that the $USD is acting a lot better as the 3C signals were suggesting.

Yen

 The other side of that carry cross is the Yen which needs to underperform , we've had the signals, we now have the price action and right as a.m. trade washes out, this is why a lot of pros won't even trade before 11 a.m. In any case, the carry pair, USD/JPY should provide support to the market and the pair is coming to life.

Yields

 Yields act like a magnet for equity prices, we saw yields moving higher Monday and they have continued to do so, this means the market is dislocated from the natural reversion to the mean.

Credit

 HY credit is a little skittish because of the lower volume, but it has still done a good job as a leading indicator, the question anyone who knows what this chart represents must ask, is why is HY Credit holding up so well vs the market?

There's only 1 good answer in my view, but we need more than just 1 asset.

High Yield Corp. Credit...

 We also have outperformance of HYG all week and then some.

Junk Credit has no correlation to any kind of manipulation or arbitrage scheme, so why is it holding up? Who invests in HY credit as a risk asset? If you answer that question, you answer the first question and the market suddenly takes on a very different dynamic than just price action.

A few examples of some of the averages with some impressive signals...

 5 min DIA

2 min IWM

1 min QQQ

3 min SPY

5 min SPY, recall the positive started showing up very weak on the 23rd, by the 27th it strengthened...

FAS, 3x bull Financials 15 min

XLK (Tech sector) 15 min

Intraday pullback

Nice, just before the Yellen announcement or maybe it's the Minutes from the last F_O_M_C meeting, I haven't had a chance to read them yet, either way we are getting signals for an intraday pullback which I think is good, it gives a lot of assets the chance to create a bigger reversal footprint and to add to positive divergences as they typically don't accumulate higher prices.

In addition, this will give me some time I need to get some analysis done as well as potential positions to enter before the close.

I'll just use the 1 min intraday futures to show the pullback divergences.

 ES/SPX futures 1 min

NQ/NASDAQ 100 futures 1 min

TF R2K Futures 1 min

VXX , UVXY and VIX Futures

It looks like pretty good timing on those VXX puts, I didn't want them to see downside momentum and have the premium jump, but there were enough leading negative divergences that it was really close to doing exactly that.

 VIX Futures on a 15 min chart have been in trouble since late Friday when the other negative divergences were evident especially in the afternoon. Despite the VIX making some record setting moves, the underlying trade suggested this was more retail than anything driving the moves or if anything, institutional involvement was on the manipulative side, otherwise, we'd see a new high in 3C which never came.

 VXX (short term VIX Futures) is leading negative on this chart in a single day, that's some serious distribution, that was about all I needed to see, but the intraday charts are the timing.

The 1 min VXX is strongly leading negative today and yesterday as well, which kind of backs up my view that the price action of the last several days has been to accumulate on the cheap, how else can we explain HY Credit's position?

UVXY is the 2x leveraged version of VXX, some say it tracks better, I use it for confirmation as it is a 2x asset and because it's managed by a different group (Proshares vs. Ipath) so the signals shouldn't be similar unless something is really going on.

 the 5 min leading negative so we have good migration from the 1 min chart through the 5 and on the 15 (10 min charts are neg. too).

 XIV is an inverse of VXX and managed by a third group (Velocity), this should show the opposite, a leading positive divergence, making it a buy and on this 5 min chart, it does exactly that so we have good confirmation between 3 different assets managed by 3 different groups with the actual VIX futures confirming, 3C "Compare, compare, compare) is pretty well satisfied.

At this point, I think the best entry for options has passed, but VXX can still move quite a bit and the leveraged version can certainly move so I would consider a short VXX trade or long XIV worthwhile, especially if they get a correction.