Daily Wrap

Today was an interesting day for sure, a lot of yesterday's indicators were pointing to a short term oversold condition, specifically in the Dominant Price/Volume relationships, but from the laymen's view of price, today was a 4th consecutive day of weakness, remember last week and the same thing, 4-5 consecutive days of red closes? Just saying... Changes in character...

The end of day shenanigans really would throw most traders for a loop, we have an internal view in to the market and it' has me a little unsettled, but when you can see it and predict it before it happens, I think you have to give that some credibility. As I'm always saying, Wall St. is never going to make it easy and for all those that bought the dip today, already feeling unsure after buying yesterday's early dip and then seeing that fail, I can see how such a move would send them running and it did in many cases.

The call I made in this late afternoon post was for a decline that would 1) kick new longs out and 2) create a common price pattern which they'll need when they want to launch this, here's what we got.

With the move down in to the close forecast earlier, we got exactly what I expected and drew in the post linked above, an inverse H&S bottom, that's a bullish price pattern so when they are ready to go, they have an easily recognizable , bullish price pattern. Until then, new longs seemed to be shaken loose on the move which was another aspect, right as the averages dropped below afternoon support sell-side volume picked up in all of the major averages.

I don't see any reason why you'd need 5 min positive divergences and in the 2 and 3 times leveraged products if you were only trying to buy some time moving sideways, there's not much point and it could have been done with less firepower.

Interestingly, as you know I consider 5 min and up Index future divergences to be valid for some move, well we not only had 5 min, but in the SPX and R2K futures, we have a 15 min as well.

That's pretty strong for such a short period which may be the point, lack of time. In any case, it's hard to imagine a 5 min positive not seeing upside, with 2 averages with 15 min positives, it's very hard not to imagine seeing the upside move we prepared for today.

VIX futures weren't bid like they'd be if we were expecting a rest today and a move down tomorrow...

5 min VIX furures, negative.

So I think that's pretty much that, unless we get some new and impressive information, I think the late day move was the typical Wall St. snatching people's money, they have a price pattern in place that everyone can identify with (bullish) to launch this thing and as I said, there's just no point in divergences like today's just to hold the market lateral.

Oh and by the way, they did it with no SPY Arbitrage at all and in fact, no JPY carry cross support, take a look...

ES in purple and EUR/JPY in candlesticks, ES didn't follow the pair, but if you are building a base, you can't really.

However this has larger implications as well, the crosses didn't move the market overnight either, that means to me, on a downside move (the next leg down,) there's no support from the traditional levers.

If they are going to pull off a move to the upside, they're going to likely have to do it with minimal short interest/short squeeze support as well.

I know a lot of you want to know what I think about how far a bounce could go and some of you feel frustrated that the market is down a bit and bounces, but this is the volatile area, longs are just as frustrated, look at what they've had to work with...

In more than 6 trading weeks the SPX has a gain of exactly 0.20%, yes, one fifth of one percent over 6 trading weeks, the Sentiment update I got today was as follows...

"pretty nasty week for me... lost everything i made last week... so far"

And if that wasn't a tough enough environment, take a look at the Index that has the Bernanke Put behind it...

Anyone in the R2K over the last 7+ trading weeks...

Is at a loss except for about 3 days, but that's still 7 trading weeks. When you look at the market from the other side of the fence, it's not as green as you'd think and if you knew what we know about signals, breadth, leading indicators, etc., I doubt you'd take the risk of staying in, the probabilities aren't on their side.

As to the question of where a bounce might go, I have no way to predict that, I just know that if it was put together by Wall St. then it has a purpose, usually that's to move emotion and a sharp move is required, but that doesn't mean a long move, we've had some sharp moves both up and down that were reversed completely the next day and while it's normal for the SPOT VIX to consolidate here and there during a directional move, it's not for long.

This isn't a great model because these were not the same energy coiled up as the recent VIX breakout (the market moves opposite), but in the first one we had 11 days that added to higher highs and 11 days that consolidated, the second one 6 days of higher highs and 3 that consolidated, so it's not unusual for there to be bounces even during a sharp sell-off/correction.

I'm guessing though it has a lot more to do with this as this is the dividing line for a lot of traders between long and either on the sidelines or short.

 The leader of risk on, the Russell 2000 right at the cliff's edge on the 50-day.

I trust you don't need a ROC on price to see the failure taking place in the Dow.

Every measure of breadth declined more today, the NYSE's A/D line is below levels last seen in March!

As far as assets we've been looking for a opening in or a pullback, we have gold and GDX on deck, I think they need a bit more time, but we'll be close, USO should be close, USO should see a pullback and today's DGAZ should benefit until we can re-open UNG or just use DGAZ to hedge it.

So with positive divergences all day, a lack of bids in VIX futures (No P/V relationship tonight), a price pattern that was predictable and new longs getting the boot at the close, along with 5 and 15 min Index futures positives, I'd say the chances for a bounce are good and we should be perfectly positioned, after that I'd say we are perfectly and/or will be for the next leg down as all corners of the market continue to deteriorate at a faster pace.

Basically, it's just about patience and keeping emotions in check and objective data flowing.

If anything pops up in futures tonight (and this market has been pretty easy for us to predict, from yesterday's analysis of today to last night's index futures lows right on the hour) I'll of course let you know.

End of Day Trap

I'm really not sure what to call it, I've been wondering what kind of price pattern they may come up with and an inverse H&S seems reasonable, with the last 40 mins or so of trade, it looks like they are going to try to scare some people out of positions, that's my initial take any way.

For instance...

 1 min intraday, these divergences on a 1 min chart are meant to call intraday moves and here it looks like a pullback from the current intraday position, although the candle looks strong.

At a 3 min chart there's no damage at all.

TICK is seeing a decline from that afternoon trend, but not through the channel yet.

I'd imagine for an inverse H&S we'd need a bit of a pullback for the right shoulder, I'm sure the price pattern will be something recognizable to the masses.

Market Update

I've spent a lot of time today looking through individual assets while trying to keep an eye on the broader market which is what this seems to be all about.

As I said earlier, these divergences should be on the 1-5 min charts and that's about where they are. Yesterday was a fail, but I suspected last night they'd be back today and that's why I went ahead and wrote the second article last night.

My intentions aren't necessarily to try to milk avery last drop out of a move on the upside, I'd like to see us make a few extra percent, but I really want to be ready with dry powder for when we get there because I don't think I'll have quite as much time to put together an asset list.

I haven't had a chance to look at everything and some of these are not the best charts, but they are the averages. Other trades that we want to get back in to (longer term) are shaping up (certain areas) so we should be rolling from one asset to another, I think last night's article couldn't have been more timely, especially the part about going back and looking at historical markets from an emotional perspective and knowing what's normal and what's not, I'm glad I got that out and I hope you make the best of the exercise, it's for your benefit.

Index futures, you know what I'm looking for, 5 min+ charts.

 ES 5 min w/ a potential head fake move in place.

  NQ 5 min w/ a potential head fake move in place.

  TF 5 min w/ a potential head fake move in place.

SPY

 1 min w/ yesterday's fail

3 min

nice 5 min

and stops at 10-min

15 or course is as nasty as it was yesterday.

QQQ 1 min

QQQ 3 min

QQQ 5 min, so there are some pretty good signals, yesterday we had a pretty good idea of what to expect, it seems we were right on.

IWM 2 min

IWM 5 min, the reversal process is proportional, but a bit small which is what I'd prefer any way for this kind of move, but I can't say for sure it's done.

The NYSE intraday TICK, as you'd expect, the people in fear from yesterday opened the session (as retail does) with some -1500 net TICK, lots of selling early, but look at the trend in the afternoon.

My custom TICK indicator...

 1 min transition

3 min transition, it's not that long, but it's quite clear.

I'm going to check some other assets, Wall St. will NEVER make anything easy, so you've got to watch for everything and know what are scare tactics and what is real.

Trade Idea: Dow / UDOW (long)

Again, this is another (as almost all of today's ideas) short duration/bounce trade, it's in the trading portfolio, all of the core positions have been left alone, they'll ride this out and I'm sure be fine.

The last place I could use some diversification is in the large caps/Blue Chips and UDOW (3x leveraged long Dow-30) fits the bill.

This will be a full-size position.

Reiterating IWM (long)

As a short duration trade, basically a bounce long. I chose URTY, the 3x leveraged long version, but in general this appears to be the best looking thus far of all the assets and this really looks (as I go through numerous watchlists) a "Market-Based" bounce, in other words the goal is to drive the market rather than the "Rising tide lifts all boats", that tells me the bounce does have a purpose and it's psychological.

The more we see averages like the R2K/IWM move down, the stronger Wall St. is going to try to reinforce the Pavlovian "Buy the Dip", which in essence keep the bulls in a rut of, "Well if a 3% decline was a good deal to BTD, then a 5% decline must be better", this is how you stick retail with the bag, especially when they are so self conditioned.

If I add one more position it will likely be exposure to large caps so I may look at a leveraged Dow long.

Trade Idea: IOC

This is a specific stock, we've traded it several times in the past and it can not only move, but it's throwing some pretty decent short term signals, again because of the nature of the chart and recent activity, I'm keeping this at 50% of a regular size position in the Trading portfolio. I'd keep a pretty tight stop on it, which probably means wider than most as I like wide stops, but I don't want to give this much room to go against me, it either moves or it's out.

Trade Idea: DGAZ (Long)

This is a play on a pullback in UNG, but in looking at it, I'd say it has a chance to be a larger duration position than the others that are market bounce connections.

I'm going to go with a 50% trading position long DGAZ.

Trade Idea: Materials

I really like XLB, Materials, but I can't find anything leveraged with decent volume, if you want to check them out there's MATZ, UYM and MATL, again for me there's just not enough volume in the leveraged ETFs and XLB just doesn't have the profit potential.

Market Update

As you can probably guess by the small flurry of activity, much of the market is looking pretty good for that move, that includes the QQQ (long). I'm considering some other assets, but I want to try to stay away from specific assets and more toward broad, like instead of AAPL long, QQQ long and I'm also trying to use leverage of 2-3x.

At the same time maintain some diversification. There are certain assets such as VXX you might think is a short if the market is going to move higher, but I won't touch those, I may take profits off the table, but not go short those, that's asking for trouble.

I'm still looking for assets that fulfill those criteria that look reasonable, DGAZ on a UNG pullback is one I'm considering, I'll let you know as always.

Trade Idea/Execution: FAS (Long)

You'll also likely recall FAS (3x long Financials) mentioned earlier as a short duration position. I will add the entire intended position right now, but it will be 75% of a full position, URTY would be a full position and I normally run about 6 positions in a trading portfolio.

Earlier Financials/FAS Update

Trade Idea/Position Update: URTY

You'll recall URTY is the Russell 2000/IWM's 3x leveraged long ETF which I opened a partial position in today in the trading portfolio which means I expect a shorter duration move, a normal bounce, even though I believe all moves Wall St. sets up serve a purpose.

In any case, I'll be adding the other half to that position to bring that to full size, again this is the new shorter term trading portfolio.

VIX / VXX Follow Up

The spot VIX daily Bollinger Band Squeeze/Breakout and the VIX Futures 4 hour leading positive divegrence are still two of the most recent red flags for the market on the downside and VIX on the upside, this is why I want to maintain some exposure to the VIX at all times now, even if only a VXX long.

Short term, I like the momentum in VXX, that's where I usually try to take profits and we did pretty well with the position.

The P/L looks like this...

With a cost basis of $3.25 and a fill of $4.90, the VXX calls came in at +50.7%

 This is what the intraday VIX futures look like on a 1 min chart.

The more concerning for the short term and for option positions, especially if they are December expiration is this 5 min chart, this is where I take a signal seriously with futures.

However, the long term is still VERY solid and I'd love to re-enter VXX calls and UVXY long in the trading portfolio, this is the 15 min chart so you can see there isn't that much damage done, more or less along the lines of a bounce and that's about it.

The big picture that's driving the Bollinger Band Squeeze in spot VIX is this never before seen (by my eyes) 4 hour leading positive divegrence in actual VIX futures.

Closing the other Half of VXX Calls Jan. $45

As for positions in VXX or UVXY that are meant to be longer term (meaning other than the trading portfolio), I'm leaving those in place, just taking gains on the call position, as you know I don't like to be in these long and on any pullback I can reestablish the position at a better price.

Trade Idea: Financials

This, like all of the others, can be looked at a couple of ways, depending on how aggressive you are about the trade.

First the position I'm watching and considering is FAS (3x long financials), this is for a short duration trade, any positions in FAZ (3x short Financials) that are in the core portfolio would just stay as they are and perhaps if there's room I'd add to FAZ upon certain conditions.

First I want to give you the overall feel or the "Highest Probabilities" because this sector has been destroyed.

I'll start with XLF which is the non leveraged ETF for Financials...

 10 min XLF

15 min XLF

30 min XLF through the 10/9 cycle

4 hour XLF, clearly the probabilities are to the downside in financials so for larger/longer duration positions I prefer a Financial short, XLF short or FAZ long.

Short duration FAS (3x long Financials) for a bounce...

 Yesterday again we can clearly see where the divergence started and where it failed. We are getting a sort of inverse H&S look to the price pattern, although I can't say that is what it is because the failure was pretty obvious.

FAS 3 min, so we are not there yet.

Looking at it's opposite, FAZ...

 1 min so it looks like a pullback of short duration is probable making FAS long a play on that pullback.

And as far as FAZ goes, even for the trading portfolio, I look forward to re-entering the position as this 10 min chart makes clear, this is where the probabilities are.

For an aggressive trader you can try to ride FAS on a bounce, as it ends jump in to FAZ long for the next leg down.

A less aggressive trader can just wait for price to pullback in FAZ (hopefully) and enter it there.

The least aggressive trader who may be holding FAZ, I'd have no problem just holding it, you'll likely see some short duration drawdown, but things should resume right back on the upside as this possible correction ends. So, 3 different ways to play this not including options.

Remember if you have exposure to FAS long you may want to be careful about too much exposure to SPY long as well, about 22% of the SPX is financials.

Trade Idea: TQQQ (Long)

This is another short duration trade idea, I have not entered a position here as of yet. TQQQ is a 3x leveraged long NDX100/QQQ ETF. Many times in situations exactly like this (where a short duration correction is probable, we will see signals appearing in the leveraged ETFs before the underlying index (NDX/QQQ). I suppose this is because there's more demand for the leveraged product as there's less profit potential being a shorter duration position, but this is not only how we confirm signals (using multiple derivatives of the underlying), it's also how we can get a feel for what traders are thinking and this would suggest that they are thinking this is a corrective move that needs leverage to make it worthwhile, much in the same way I'll use options for their leverage.

I personally think that the IWM is more "oversold" on a relative basis vs the other averages and thus probably makes for a better position. In the past I would only chose 1 of these (either the IWM or QQQ) as they traded almost exactly the same, but we have been seeing the market splinter much more so that may not be the case to the same degree it was.

Remember if you enter an IWM/Russell 2000 based position, you'll want to be careful with any correlated trades which would be more along the lines of a small or mid-cap ETF and if you enter the Q's, then the correlation you may want to watchout for would be technology. Having a long QQQ based position and long Technology based position in my view is too much correlation.

 The 1 min is starting to lead in TQQQ

 This is yesterday's 2 min early positive divegrence that was being put together and you see where it just got run over and failed, now there's a second chance as I figured they'd try and we have a relative positive.

Remember they have some inventory in place most likely from BEFORE the fail, they'll want to free that up, although there are numerous ways they can do that, a bounce would be the simplest concept.


Also remember that just about EVERY Wall St. created cycle (even a super mini like this, which we know was Wall St. created because we saw it yesterday) HAS A FUNCTION, IT HAS A JOB TO DO, so don't just expect a little bounce to work off an oversold condition, there's a reason why they are putting it here. There are a lot of 50-day moving averages in the area for the majors on daily charts, technical traders pay attention to them, so that could very well be the game, but it's always going to be to shakeout as many traders as they can.

 TQQQ 1 min positive forming. You can see it needs more of a base built sideways.

To compare to some of the longer charts (TQQQ is 3x long, SQQQ is 3x short)

This is compared to the 3x short, SQQQ 10 min, this shows the negative probabilities for the market.

SQQQ 30 min again with a large base

and 60 min with a large base, all showing the bearish probabilities.

This is TQQQ's 60 min chart for comparison, leading negative while SQQ has a huge base in place.

However we are looking at short term /duration longs in TQQQ.

Trade Idea: URTY (long)

Again, this is the short duration trading portfolio, I'm going to open a half size position long URTY (3x long Russell 2000). If the base widens out more, I'll add to it. After this has run its course, it should set up a nice IWM short or SRTY long for a longer duration position.

Here are the charts that attracted me to the asset.

 URTY 1 min, note the flat range and positive divegrence.

The same with the 3 min

And the 5 min is leading positive.

As mentioned before, most of these are going to be in the 1-5 min range and will likely take a few more hours to fully set up.

These are the P/L's for the positions closed out this morning in the Trading Portfolio.