"Capitulation Volume"

I sent out a quick note about "Capitulation Volume" building in certain assets and that it would likely produce a change in intraday trend and a few people wanted to know what I meant, what this might mean for the market.

First if you understand capitulation in a sense of Dow trends, there's usually a burst of volume when all sellers who are going to sell all do so at once after a prolonged stage 4 decline, that's often known as capitulation. In that sense it means one thing, in other timeframes it means other things, however, the market is fractal in almost all senses so what applies to one usually applies to another in a totally different timeframe.

In a not so important sense as described above, "Ending a stage 4 trend", you've often heard me say that a reversal candlestick is about 2x more likely to be valid if it's on high volume, this is true whether a bullish or bearish reversal candlestick even though candlesticks don't tell us anything about the length of the next trend, just that a trend change in coming. For example...

This is a 5-day chart of USO with a bullish Hammer reversal candle and it's on about 33% more volume than the preceding bar, this makes this reversal candlestick about 2 times more likely to work than one on lower volume than the bar before.

In another sense, we have high volume on a reversal candlestick, but it's not capitulation, it's churning, however it still makes the reversal function of the candlestick much more probable.

This "Evening Star" candlestick has gapped away, it has a small body so it didn't get much traction from open to close, however there's a lot of volume, this is called churning which is in short, strong hands handing off their shares to weak hands and the stock typically falls.

There's an entire art in volume analysis that has been lost for half a decade because of the F_E_D's medalling in the market, but when we see organic events like the raw emotion of this afternoon, volume analysis works and I suppose once the F_E_D is out of the market again it will make a comeback and once again be one of the most valuable, but least used indicators.

As far as today, nothing moves in a straight line for very long (even though it may seem like it).

We had some capitulation like volume that looked like this in the IWM, but I saw it in a number of places and thus the warning.

In this case, I'm guessing, but we have a semi panic going on and there are few shorts in the market or few that are interested in taking profits on a move that's just starting meaning there are few natural buyers as a short is actually a healthy thing for a market because when it falls, there's guaranteed demand as a short cannot realize their gain until the "Buy to cover" so in a falling market they are often buyers and provide a natural bid.

In today's situation, I'd be willing to bet that market makers and specialists absorbed a lot of shares which is their job as long as the order is at market, they facilitate an orderly market by matching buyers and sellers or becoming the buyer of last resort at market, not limit. 

Considering the market is fractal, the same concepts apply, even intraday, a large volume spike as we see (and a bullish reversal candle) is likely to produce a bounce, in this case we can even call it a dead cat bounce, it doesn't mean anything as far as accumulation or distribution, but if you are a market maker that just took on a bunch of inventory at lower prices, you'll want to bounce the market to lighten up on that load.

Even though we haven't seen it since the F_E_D intervened in 2008, higher prices on lower volume is a bad thing for a price trend and often marks the end of a trend unless you have a Bernanke put in place, but in a organic moment in which the market is being moved by the real market forces of fear and greed and not intervention, you can see as prices rose in to the close volume fell off as did the upside in the bounce of that small trend. Keep that in mind, it's likely to make a reappearance as QE is unwound from the market. In today's case, it really didn't mean much at all unless it was something you could use to enter or exit a position.


 

NFLX Charts

First off, whatever you do, don't panic, this kind of market volatility can cause you to make some choices that you might not otherwise make. There's ALWAYS another bus.

As far as NFLX, I do like it a lot as I do PCLN, GOOG and lots of others, they'll give plenty of opportunities.

As for the NFLX charts though I want to show you why I consider this a core or trend short.

 This 2 min chart is the post I referenced earlier from Tuesday regarding parabolic moves in GOOG, NFLX and PCLN, I was saying that these moves weren't as they seemed, you can see the clear leading negative divergence rather than any confirmation of the moves.

 You'll notice a trend as we move to longer charts starting right after this small accumulation zone, you only see it on very short term charts because it was not large enough to show up on stronger charts, usually this means they are putting enough money in to the asset to move it in their direction (to sell or short), but they aren't putting that much money as their intention is not to accumulate, but to distribute, but they need higher prices and demand to do that in the size they trade in otherwise they drive the position against them,selves.

 10 min you can't see any sign of the accumulation from the 5 min chart, the distribution above that is still there because that's the heavier underlying flow.

I love these charts that go from confirmation of a healthy trend and transition in to something else, in all cases it's the run after that little island accumulation bottom area.

60 min chart. No words required...

This is the daily chart, again confirmation to the far left right during the prime of QE and a negative divergence, it's seemingly not that big, but in reality before 2009 that would have been considered a respectable divergence. You can see a clear stage 1 base (rounding) with accumulation on a daily chart and the trend that emerged from the base. You might notice the ROC in price as it gets more and more vertical, this is what I mention often, that seemingly bullish price trend is really a red flag to tighten stops as it is seen just before a top, again, "Changes in character lead to changes in trend".

You can also see very clearly the area we have been looking at which looks nude all alone and green up there with no 3C confirmation at all, but rather a leading negative divergence. This is why I like NFLX on a longer term trend scale, although I think we get many opportunities to trade NFLX from both directions.

Short term capitulation Volume

I'm seeing volume shoot up and it will form numerous small bottoms for now, capitulation bottoms. I'm not concerned about these, but they may give you some opportunities.

GOOG, PCLN, NFLX

This was from Tuesday, Feb. 25th this week...

Tuesday, February 25, 2014

GOOG, NFLX & PCLN

All 3 have little parabolic moves up, I don't trust any of them, if you are building short positions in any of them it may be worth a look. I'll get some larger updates out on them once we are through a.m. trade

***I was able to cobble together positions in NFLX and PCLN, but GOOG I had not gotten around to. I'd consider GOOG an add-to Core short (trend trade) position on a bounce, I hate chasing, but you know what trend I expect to come next.

Adding 1/2 GOOG Short Here (Core Position)

Trade Idea

Entering FAZ (3x Short Financials) in the Trading Portfolio. This is a position I have been watching all day, I've just been waiting for it to put in enough lateral time to be a viable reversal process.

This is a TRADING position only.

NFLX's Charts Are Looking Horrible

Not sure if you can do anything with that, as for a core short I wouldn't mind adding or starting a NFLX position, I wouldn't be chasing it with options right now.

I'll try to get some charts up, yesterday I featured quite a few I believe on the NFLX put position opened.

Market Update

Friday Afternoons I like to try to get the 3C direction after 2 p.m. as weekly option expiration pins are removed, more often than not, the divergences in place Friday afternoon will pick up where they left off the next trading day, even over a weekend.

I have a selection, mostly intraday timeframes so you can see migration, but also some of the real trouble, the reason I believed they'd run such a strong price move long before it happened and what would come next as it was to set up the next move just as the head fake move was to set up this move or yesterday's XCrazy Ivan was to set up yesterday's closing move.

DIA

 1 min intraday turning negative and leading at that.

2 min leading negative

3 min leading negative

5 min leading negative, which sets up an interesting chart, it makes yesterday and today's move look very much like a confirmed head fake, the same as the head fake that gave this rally it's initial momentum to force a short squeeze, just in reverse.

 15 min chart, this is actually much worse, but there wasn't any need to scale it out further.

This 60 min is where the next trend that we had predicted BEFORE the Feb 6th/7th move even started has its roots, this rally actually in my view has a purpose and that is to set up the next trend, there are other benefits, some of which we take advantage of, but that was the reasoning and explanation behind our trend expectations. From the looks of the chart, I don't see that they've changed much.

IWM

 3 min which is one I saw starting to fall apart more along the lines of the 5 min yesterday, today it never confirmed despite only being a 3 min chart and remains in leading negative position.

This is the 5 min chart I mentioned, the 3 min joining it is more of a timing issue than a divergence or trend issue.

The 15 min chart making a fairly substantial move on an intraday basis, as I said earlier, some of the leveraged market ETFs were giving signals earlier and we see they appear to have been right, SRTY, 3x short IWM was one of the stronger.

 Again as far as the next trend, this is where the real trouble is for the market on this 60 min chart, it's not only that it didn't move up with the rally, consider the relative divergence between the 3C level and price level at point "A" and "B", it's a quite significant difference.

QQQ

 Intraday 1 min

Intraday 2 min

Intraday 3 min

Intraday 5 min leading negative and adding quite a bit to the leading component.

SPY which has been one of the better looking as far as relative strength goes, but it had more to gain.

 Intraday 1 min as we saw with futures earlier and other ETFs.

 3 min intraday

5 min intraday has lost quite a bit

And 10 min intraday.

Considering the way these trends are positioned now in the 1-5 min range, if they are to pick up where they left off on Monday, I wouldn't expect a very pretty day.

Trade Idea: FB (Long term Short)

I'm going to go ahead and open a FB core short or a trend short. A couple of weeks back I said I'd be watching FB and I have been, there's an intraday chance for a little better entry, but judging on the weight of the charts, I'm not going to scrap over loose change.

The funny thing is when FB came out it was called, "The most hated stock", I believe we were the first ones to trade it long after that opening IPO debacle between GS and MS, we also caught FB at the very lows and made from 30-300% on the position, some of us used options with it. We got involved a few other times and got out at exactly the right time, but it has been a while.

I'll be opening the position after I post this in the core model portfolio and this is why I'm taking on FB (other than their clicks scandal).

 This is a 5-day chart, I encourage you to always look at multi day and even multi week/quarterly charts, they can depict changes in character that a daily chart would never show.

If you look close at the last 3 weekly bars we have a big loss of momentum from a strong up candle to a Star to a Bearish Shooting Star Reversal Candle this week.

I said before that candlestick reversal formations don't really give us targets, but used in this manner (multi-day chart), you can count on there being a reversal that will show up on at least a multi-day chart.

The daily 3C chart shows the first positive divegrence we followed long before anyone liked FB, it was literally called, "The Most Hated Stock", so when we went long at a new low, it was a bit difficult for some, but we had excellent signals and the trade lasted (the first one) until the area where the white arrow stops.

The current 3C daily divegrence is leading negative in a big way and it is reflected on the longer minute charts.

 Here's a 2 hour chart, unfortunately that's all the history I can gather which is quite a bit, but you can clearly see FB being at it's or near its high is not seeing the same thing from 3C, 3C is nowhere near confirming by being at a new high. Furthermore, since the area where the Trend Channel broke, there's a clear negative leading divergence seen on almost every chart in the same area.

 This 60 min chart is an excellent example of what I'm talking about, leading negative. That recent acquisition sent FB up higher, I can only speculate that it's not only priced in, but this "Likes" and clicks controversy is going to be very hard to wash themselves clean of.

 The 30 min chart shows the same trend at the same pivot where the Trend Channel breaks.

We see the EXACT same thing on a 15 min chart, I'd almost be suspicious if these weren't all so consistent in where they start and how strong they are.

 A 10 min chart has more detail, it shows a positive divegrence that's not strong enough to make it to longer charts and it shows the result of that positive divegrence, it may have been a leak way back then as farm as their recent acquisition. In any case, 3C is still in leading negative position.

 The 5 min chart about since the time I said I'd really start paying attention to FB, another very clear leading negative divegrence or distribution.

The scale of distribution appears to be larger than almost any other equity/asset I've seen.

The 3 min chart...

The 2 min chart makes the timing look a lot better.

On the 1 min it may see a little better entry, but given the weight of the evidence, I'm going to enter now.

Quick Look At Futures

This is what I was talking about in the last post on a visual basis. It's important to remember that there have been NO significant positive market divergences since the head fake move and the small "W" bottom around Feb 4th, everything else has been powered on BTC, Short Squeeze, some correlations here and there, a Crazy Ivan break with some momentum on a bullish price pattern, and today a ramp in USD/JPY that couldn't hold out for long followed by a ramp from HYG (1 of the 3 components of the SPY Arbitrage market lever) which is failing now too.

However, as was clearly spelled out late January / early February in trying to anchor expectations, "Expect a very strong move" in fact as you have seen several times I had said before it even put in the first point of upside that my inbox would be full of emails asking "Whether you are sure?", BUT DON'T FORGET THE TREND THAT COMES AFTER THIS ONE, THE REASON THIS ONE WAS RAN IN THE FIRST PLACE, IT'S JUST A PART IN THE LARGER PICTURE.

 USD/JPY'S PARABOLIC MOVE JUST BEFORE THE OPEN ...

Note around 11 a.m. the pair was done, it wasn't up for a second leg.

ES at 11 a.m. was up for a second leg, but needed some help, HYG had been pretty flat until about 11 a.m.

And then HYG was the lever taking up the slack, but as you can see HYG's intraday 3C chart and price action is fading .

This is NQ, it looks a bit worse now than the capture, in all cases note the extreme drop off in volume.

And Russell 2000 / TF with a leading negative intraday divergence, remember I had said SRTY (3x short R2K ETF) was one of the better looking long positions building today.

Levers, levers, levers... that's not organic and there's always a reason for moves Wall Street runs.

Market Update

Intraday market momentum is fading. Around 11 a.m. when the USD/JPY gave out and would carry the SPX no further, guess what kicked in... HYG, almost on the nose, it seems one lever or another needs to be used to get this ramp going and keep it going, but intraday momentum on 3C indicators is falling in a number of places, it's obvious on some of the averages such as the Q's and IWM and now even HYG which is starting to have an effect on the SPY, but it is very noticeable in the 2 and 3 times leveraged market average ETFs with one of the most impressive being SRTY, the 3x short IWM ETF.

I may have something for you too on AAPL, you may recall AAPL being used as a proxy for the market this week because the market had no accumulation of its own, not even at yesterday's Crazy Ivan break below the triangle that builds upside momentum, however AAPL did, I swore I would not take the AAPL trade because I wasn't going to trade against the primary undercurrent, good thing I didn't, but iit may be a little ironic that AAPL finally fired off yesterday. However today we are seeing the AAPL divergence that was being used as a proxy for the market come apart fast as it migrates through at least 4 time frames already just today.

More in a bit...

GLD & GDX Update

About a month or maybe 6 weeks ago the near term correlation between gold and the market was inverse, if you had a good divergence on one you knew what the other was going to do, but these were quick 1-3 day trades, then gold just ran up with the short squeeze coming out of the head fake move from the first week of February, I've been wondering what will become of the correlation, whether it will revert to what it was or whether we have something new.

In any case, I love Gold long term and I like GDX (gold miners) long term, but near term, as in a swing trade and maybe then some, I believe both are coming down and have DZZ (DB short gold ETN) and DUST (3x Bear Gold Miners) with the first at break even and the second up 3.5% so far, I expect a lot more and this is the reason I didn't go with an opotions posiiton, I think the trade has enough profit potential, I did juice it a bit with the 2 and 3x leverage.

I'm not saying it's going to be a perfectly smooth ride, but when the charts look like they do, they aren't something I ignore.

First the reason I like both long term...

 GLD 4 hour shows a broad base, at first I thought it would be a counter trend rally in the prevailing downtrend off the 2011 highs which we called as a top, but the base is getting too wide and I think GLD is going to move back down toward the bottom of that base so that gives you some idea of a plausible target for the DZZ long trade. You can even see the positive divegrence on daily and multi-day charts, but this was the most detailed.

 Gold Miners put in a head fake move or stop run on forming its base or at least the second bottom, this is the new normal for double bottom bases and to think Don Worden predicted this about 15 years ago as T.A. became more popular. I think there's an argument to be made for a long term position if/when GDX pulls back to a better price and lower risk.

For now though...

 We had good confirmation in the GLD uptrend until we didn't, the negative divegrence on a 30 min chart should be clear. It's not so strong that I think the overall gold story is being abandoned, but it's strong enough that I think a trip to the bottom of the range is reasonable.

The 15 min GLD chart with confirmation and a negative divegrence, this migrated to the 30 min chart , you can even see an oddly shaped H&S type island top.

And the 10 min chart is more than clear on the divergence in GLD, I don't see much point in waiting on a short here and I have started the DZZ position (long DZZ).

I thought I'd show you DUST, the 3x leveraged Gold Miner Short which is a long and doing well so far)...

 You can see several divergences on this 60 min chart, I don't think any are connected to form a larger, just independent moves, however there seems to be a clear run on the stops on this last or most recent leading positive divergence. This is the easiest way to accumulate as you can get a lot of shares on the cheap at once and no one ever seems to question, "Who took the other side of the trade?"

 Here's a point I've made a few times, as recently as yesterday with DUST's negative and positive divegrence and this seems to be with all assets, the bottom reversal process as we are in now almost always is much tighter than a top reversal process as seen to the left as a larger umbrella or rounding top. There's almost always some proportionality to each individual stock so looking for that can help you determine about when and where a reversal process is going to turn to a reversal, just be aware the market is always more extreme than what seems reasonable.

 The DUST 5 min, once you have divergences like 60 min in place you come back around looking for the near term intraday (and 5 min) to go positive, it use to be easy to explain, it was like market makers and specialists stocking up just before a move was to start and they'd know as they filled the large orders that are going to move the market. About 30% of a stock's volume a day back before HFTs was due to market makers and specialists trading their own accounts which they still do.

And the 3 min in D?UST looks like she's ready to go, of course we already have gains in this one, but I do think both GDX and GLD are about to roll over, what the market does and its correlation has been something I've been wondering about since about the first week of February when I noticed it changing and no longer was taking trades every week in GLD.