"It doesn't matter too much what the market does price wise from this time (meaning 2:30-close after the op-ex max pain pin is no longer that important).
The reason why? Simply, if we have some very negative signals in to the close, the probabilities are higher that next week the market picks up where the actual signals left off, not where price left off, we have seen this numerous times whether it be day to day trade or over even a 3-day weekend.
In fact, if underlying trade is suggesting a move down via negative divergences, then a strong closing ramp draws in the weekend warriors who work 9-5 and place their limit orders "based on what price did", over the weekend or early Monday morning before they head off to work. THESE ARE THE SUCKERS THAT GET CAUGHT HOLDING THE BAG IN A BULL TRAP SCENARIO, it's for this reason that EOD price action on a Friday after the op-ex effect of "Max Pain" has diminished is of little concern to me, but EOD 3C signals are very important to me."
For newer members, what I'm saying is the 3C underlying action is far more useful than the price action near the end of day (EOD), especially on a Friday when the op-ex pin has expired by and large by 2:30-3p.m. For example, as can be seen in the Market Update/EOD Hints post from Friday afternoon...
While most traders would have only seen the late day ramp higher and seen that as bullish late Friday, what I was saying in the post (and say almost ever Friday) is that the 3C signal (distribution) is far more important in telling us what is most likely to occur the start of the next day or new week.
The 3 min QQQ chart for Friday shows 3C in a leading negative divergence, what I was saying Friday in the post linked above is the 3C signal is FAR more important than the end of day price ramp.
The same is true for the SPY on Friday, especially in to the end of day or last hour. 3C tells a VERY different story than price alone.
In the same post, I showed our OBJECTIVE stops like the Trend Channel and a 5-min/50 bar average, either of these broken is a serious short term change in character and changes in character lead to changes in trend, look at the Trend Channel at the bottom window of the chart and remember this was posted Friday before the close.
My custom Trend Channel is not like an envelope channel that is set to a specific period, my channel automatically adjusts to a stock's behavior and uses a multiplied Standard Deviation above the normal behavior to create the stop so a stop out is a serious change in character and late Friday we were very close.
Many of these charts through the day were the reason I decided to add to the VXX call position at 1:10 p.m. on Friday, it was already evident then. Our momentum Screen had been showing a failure in momentum. Numerous 3C charts such as the ones above had been showing a failure, all along the lines of a short duration, but fairly strong pullback.
There were many more signals, this was from the same post, a screaming leading positive divegrence in short term VIX futures, VXX (remember the VIX trades opposite of the market)...
Remember our earlier VXX Put last week that made 40% in 4 hours? This positive divegrence in the VXX alone was enough for me to add to the VIX Calls, but there was so much more, although many of you may remember a longer term VIX sell signal last week as well.
This is my custom buy/sell indicator based on DeMark principles...
The Daily signal was a buy back in July and worked well and we have a recent sell VIX signal from last week and thus far it too has worked well so you might ask, "How do you reconcile the VIX call position (VXX) with a VIX sell signal?"
I'd say, remember that we are using multiple timeframe analysis. Remember that the signals we have across the market right now are for a short duration market pullback and likely a constructive pullback. In that scenario we'd be looking for the market to see a short duration pullback and the VIX to rally, but that pullback still appears to be a short duration move and if we see accumulation in to the pullback, then we know we are headed in the right direction and the daily VIX sell signal (for now) still stands.
As a matter of fact, in the post that followed, the EOD Wrap, I said,
"The only reason a correction is important is for 1 VXX Call position trade of speculative size and more importantly, to give the market a wider footprint or base from which to launch it's bounce/rally from, THAT'S IT!"
I even gave 3 different scenario (pullback areas) with varying degrees of probabilities (see the post for those areas).
Interestingly and somewhat ironically, I made mention of what I thought was a very accurate SPX futures/CONTEXT (ES) model which as of Friday right after the close, showed an -18.5 ES negative dislocation from the current ES price...
This is the CONTEXT Model from Friday at 4:45 p.m. with an -18.5 point ES drop, now...
Consider ES opened tonight down about -19.5 points from Friday's closing high to tonight's opening low!
Here's ES from late Friday's highs to Sunday's open with a low of $1680.75 or -19.50 points lower which is amazing considering CONTEXT's model which is based on things like Credit risk and carry trades, had ES overvalued by 18.5 points, a 1 point difference!
I knew we could trust CONTEXT, at least directionally, in fact one of my 3 price targets was based on the CONTEXT model, but "Why did I trust CONTEXT?" It has been amazingly accurate, but it's also been way off and in need of regular realignment. Here's one of the reasons and one of the approx. 90 charts I almost posted Thursday night which I think you and I are both glad I didn't.
In our Leading Indicators layout, we track institutional assets, HYG is High Yield Corporate Credit, an institutional asset and one that is part of the CONTEXT model, take a look...
Accumulation earlier in the week matched the VIX sell signal and HYG and the market headed higher as HYG saw accumulation, but Friday in addition to all of the other assets I already showed you suggesting we get that pullback, look at the massive leading negative divegrence or distribution in HYG! Remember, VXX was another, the charts of carry trade currencies, the 3C charts of the averages, the TICK charts.
So what do we expect for the week ahead? How can we have a short term VIX signal (that we are long) suggesting a strong VIX move up and market move down, but that market move down being a "Constructive pullback, meaning we still have a leg higher? Theoretically as we approach Thursday when the Treasury could run out of money and default on our debt, the market would obviously be worried, but what happens if there's an 11th hour agreement of even before? It makes sense the market sees a relief rally and that's about all we need to get the market in to the upside position where it once again becomes a screaming short. This is just a scenario, but it's one that is easy to imagine and does everything from short term market correction to slightly longer term rally to setting up the core shorts for a large move to the downside as the F_E_D would likely now feel safe to Taper QE once the government removed the threat of default, that was obviously what stayed their hand at the last F_O_M_C meeting.
Enough of the hypotheticals, lets look and see what we have now and for the record, let me just state that if overnight trade were to deteriorate to the point of "Flash Crash", I think we can be reasonably sure the NY F_E_D's trading desk and the B_a_n_k of International S_e_t_t_l_e_m_e_n_t_s would have their trading desks fully staffed and the PPT would be in full effect. **We alos have VERY little on tap, banks are closed tomorrow for Columbus Day, I think the bond market is closed as well and WE HAVE THE BERNANKE SPEAKING AT 8 A.M. (PRE-MARKET) SO IT COULD GET INTERESTING IF THERE NEEDS TO BE A PPT SAVE.
As of 15 minutes ago, CONTEXT reverted toward the mean as ES actually reverted toward the mean in gapping down.
There's still a negative differential of about -5.8 points, but most of that got cleared out with the ES gap down tonight toward the model.
As I posted Friday, EUR/JPY carry trade was driving the market, almost in perfect sync. One of the ways I knew the late day equities ramp was bogus was because the carry cross didn't support the move. Tonight there's not a lot to say about the pair vs ES thus far.
This is the pair and ES as trade for the new week opened tonight.
A 15 and 30 min chart of the single future Yen shows a positive divegrence suggesting it moved higher which would put downward pressure on the EUR/JPY pair and thus the market as well. The other single currency futures so far don't have any divergences that stand out like the Yen's so for now it looks like the carry trades are not going to be immediately supportive of the market early in the week, in fact probably the opposite and put downward pressure on them. If the markets see accumulation during any downward pressure, then we build that larger foot-print or base from which the ,market can find solid support to bounce and push higher, if there isn't 3C accumulation in to a pullback, we know things are heading south faster than previously thought as far as the remaining cycles expected to unfold before a serious market move lower.
One of our Leading Indicators for sentiment which has been spot on is now showing a negative dislocation as the SPX pushed above the Oct 1- Oct 4th range highs, the sentiment indicator would not follow, that also suggests the move lower we expected (the reason VXX calls were established last week) .
On the other hand, the sentiment indicator which is much longer term (whereas the first is great for intraday and day to day) is growing very positive, it lead the market in a reversal at the 10/9 a.m. lows. Between the two sentiment indicators and the timeframes in which they are useful, it still look like our initial theory, a pullback (thus the VXX call position) followed by a larger base for more stability on a final upside run to the area where a lot of shorts are set up nearly perfectly, take PCLN for example, this is a great set up and if it does as this set up usually does, we'd have a near perfect short entry.
You can see what some early minor Channel Busters did early in the trend, Failed to the lower trendline, but the most recent Channel Buster, triggering stops as you can see by volume, would be expected to shake out new shorts and suck in longs on a bull trap with a "Crazy Ivan" move above the channel, at the area with the yellow arrow, we'd have an unbelievable short entry, we just need to confirm with 3C, but this is how Channel Busters usually operate and thus far cycle expectations would fit with the Channel Buster behavior.
For the first time last week, the VXX correlation with the SPX was actually showing fear, that's in line with tonight's open and our belief this is what we would see, why else would we enter VXX calls last week and Friday specifically?
Also from L.I.'s.
Near term Yields have fallen, they are like a magnet for the SPX (green) so a reversion to the mean is expected meaning SPX downside as of last week was expected.
High Yield Credit had been bullish for the market since late September as I've shown many times, it spiked near the close last Thursday leading the market higher Friday, then HY credit spiked to the downside, leaving the SPX unsupported, again another sign of a pullback, however it remains a short term signal, thus a pullback is what looks to be highest probability.
The bottom line is multiple timeframe analysis still is right along the lines of the remaining cycles we have expected and the easiest way to show that to you without a lot of charts is to use 3 simple charts. The Russell 2000 should lead all risk on moves and is one if not the most important of the averages. Take a look. *Remember, shorter term charts are shorter term cycles, longer term are longer and much stronger cycles.
However, remember the PCLN example of when and where it's a great short, this is the daily and most powerful TF 3C chart, it saw distribution, but the distribution now is leading negative on a daily chart, it's about 5 times stronger than the previous distribution and probably 15 or 20 times stronger than what we'd see on a 30 min chart.
That's a quick synopsis of what multiple timeframes are telling us and most of the averages are telling us the same.
Gold is going to be a buy, it's just a matter of tactical entry, the 5-30 min are leading positive, for example...
This is the gold futures going negative and price following then positive, there's excellent migration from 5-30 minutes so our positions in miners should do well, but this will be tricky to trade in and out of and we need the right tactical entry as it's too "V" right now for a great move, but I think we;ll do fine here.
Silver doesn't have as strong of a signal, but there's a trade coming up there, we just need the reversal process and 3C confirmation.
The short term Crude futures look favorable for our position, we have some short term positive, but as I warned early before entering, this is going to be a finesse trade, it can set up some great other trades, but we don't want to hang around too long and get greedy.
So lets leave it there, take a look in the morning and see if there was any PPT action overnight, although I doubt it unless things were to really start falling apart fast and the reason I doubt it is because these were the EXACT signals we were given last week and what to expect, again, why else would we have entered and added to the VXX call position?
Hope you had a great weekend and see you in a few hours.
