Daily Wrap

The bottom line today is the weakness in underlying trade from late last week was worse today and more apparent in price, I certainly don't think today would count as "follow through".

If anything, today looked to be about the reversal process, we don't often get an angular or "V" shaped reversal and there's a reason why which has to do with institutional trade and position size, but today looked like a textbook reversal process as several of the averages saw even worse deterioration.

For now it looks like the 3 main trends (short, sub-intermediate and primary) are all still in effect, the 1-10 and some 15 min. charts are reflecting short term weakness while the 15-30 min charts (close on some 60 min) are reflecting what should be the next trend, up and I'll go in to more depth, then the 60 min, 2-4 hour and dailies all reflect a very bearish primary trend.

If these current trend expectations hold, then I have an idea what I'd expect to see, Janet Yellen tomorrow morning may be a wild card.

As far as trend implications, I thought I'd show the Dow Primary trend now vs 1929 just for perspective.

 Dow 1 day 3C chart now

Dow 1 day 3C chart 1929

Which do you think looks worse? No matter, that's our primary trend.

As for sub-intermediate...

 SPY 30 min positive divegrence from 1/27 through last Wednesday. This is still intact and hasn't seen the damage that some other strong charts have seen (timeframes). I can't see this much accumulation over this long of a period for a 2-day move so I think we will have a sub-intermediate up trend, the same one I've been talking about, although I think we get a shorter term down trend or washout move first, more on that in a minute.

QQQ 30 min, again a large area for a 2-day move.

Here we even have a positive 60 min QQQ chart, not a really strong one, but the fact it's on this timeframe is impressive and there's no damage to the 30 min charts from the recent change in underlying trade.

In yellow I drew the "Reversal process" or "Igloo with a chimney" that I was talking about today, the market rarely just stops and turns on a dime and that "chimney" is a small head fake move near the end of the reversal process. Head fake moves are seen in EVERY timeframe.

I also wanted to point out how the bottom reversals are almost always tighter than the top reversals, the bottoms are more compact and the tops tend to be more like an umbrella, but they are almost always proportionate with the preceding trend or stage.

This is the IWM positive on a 15 min chart and again, it's from 1/27 which is a pretty big accumulation area for it all to culminate in a 2-day move, despite how strong it was.

In addition, Index futures out to the 60 min chart are still strong...

This would still be the sub-intermediate trend, this would be after a short term downtrend and before the longer term bear market primary trend.

As for the short term trend expectations from late last week (Friday), I believe they are negative and we saw some deterioration making them worse today.

 SPY 10 min saw worse 3C deterioration today, I also drew in the reversal process at the bottom of the "W" from last week and where we are today, but the deterioration in the 10 min chart makes this move look more serious, thus I changed a few things by taking long gains in TQQQ off the table to better hedge the trading portfolio by adding SPXU (3x short the SPX) this is in addition to the VXX call position from last week that I think will fire to the upside.

If tomorrow 3C deteriorates more and there's time, I'll add more short trading positions and perhaps take off some of the longs that are there for the sub-intermediate trend.

The SPY 5 min saw even worse deterioration today with a nasty leading negative divegrence and once again the reversal process, few things just stop and turn on a dime.

 This is the QQQ 10 min, it should be above with the sub-intermediate trend, but I wanted to show how there was a little damage there today, also the size of the initial accumulation area, much larger than just a 2-day move in my view.

 QQQ 5 min saw nothing but deterioration today which is why I chose TQQQ long to close and mentioned SQQQ (long) as a possible short term short sell trade.

The bottom reversal process here is perfect as it shows the lower low just before the reversal to the upside, it's very common.

The IWM which tends to lead was looking really bad on the 2 min as if it could give way any time.

In imagining what the possible trends might look like, I'd ask you to "Think like a crook" or Wall St.

Wall St. knows what the 200-day moving average means to technical traders, they aren't going to just let that juicy set up go to waste. One thing I wondered about today was whether the failure to breach SPX 1800 ($1799.94 was the intraday high) was on purpose? In this scenario, retail traders have given up on "Buy the Dip" and have embraced, "Short the rip" in which case resistance at 1800 would be viewed as bearish and they'd pile in short today. Or, as we saw at the end of the day, were they trying to breach $1800, you saw HYG pulled out and the USD/JPY to goose the market in to the close, still they couldn't break 1800. I'M NOT SURE WHICH, I SUSPECT THEY WERE TRYING TO GET ABOVE $1800 AND LET IT FAIL FROM THERE, THAT WOULD BE A MORE IDEAL SET UP FOR A SHORT.

In any case, the question is, what would the short term bearish move look like and why?

 If the head fake move under the range last week producing the best 2-day rally all year (4 months) was impressive, then how much more impressive would a head fake move at the 200 day moving average be considering it's the most watched area by retail technical traders and Wall Street knows that and knows how retail traders will react at that level, they'll short a break of the 200 even if they have to chase a 3% day down.

This would set up a huge head fake move and short squeeze that is probably more on the level with the sub-intermediate trend and the accumulation from 1/27 to last Wednesday, that's a big area of accumulation and they'd take on more below the 200-day for the SPX, the Dow is much closer and could be the fuse that lights the move.

First a break of the 200 would bring out all the shorts, however there's need to be enough time for the 1-10 minute charts to repair, go positive like the 30 min so I'd expect some kind of bearish consolidation under the 200-day like a bear flag which I drew in. The point of a bearish consolidation price pattern would be to keep the shorts interested and just before any upside reversal, we'd almost certainly get a break below that bearish consolidation just before an upside reversal, the reason? The more aggressive shorts will short the pattern, but most will wait for a break below the price pattern or what they'd call confirmation, I call it chasing, this would set up a major head fkae move and short squeeze that seems to be on par with the 30 min positives as well as the 60 min Index future positives.

This is just thinking out loud, but it makes sense and it's what I'd do if I were running the show on Wall St. and it's obviously something we've seen many times (the concept). However, IF ANYTHING changes in the charts, my analysis will reflect that. This is what I'd consider to be highest probability according to what we have now, but this is not a static market.

That's that for now, lets get back to where we are now.

As far as other indications of near term weakness, you saw the end of day charts, here are a few additional or for emphasis.

 This is the SPY (green) vs the short term VIX futures (VXX) in red. I showed the strength in VXX during market hours and especially toward the end of day, here you see it again, when the SPY is trying to break the 180 level or SPX 1800 VXX is making higher lows when it's natural correlation would be to make lower lows, there was clear demand for protection against a downside move and it was showing up not only in 3C, but in price.

Professional sentiment has been in line with the SPX on the way up and through the "W" bottom, but notice it has gone negative in the red box.

 Then Yields being one of my favorite leading indicators show the positive divegrence between yields and the SPX at the "W" bottom just before Thursday/Friday's move to the upside, since we've had a large leading negative relationship which tends to pull equities down toward yields or up towards them if that were the case.

 I haven''t seen a correlation between commodities and the SPX for a long time, but it seemed to exist at the "W" bottom and if so, then it's going negative now which is interesting because the GLD/SPX inverse relationship that was so strong and easy to call now looks like it's changing, either that or it's just not as reliable, but that could have something to do with commodities now starting to act as a leading indicator again after a long time of not doing so.

 Transports (for the loyal Dow Theorists) got smacked today, note the bullish hammer reversal and today's bearish engulfing pattern, this doesn't bode well for the Dow or the market as a while.

I'm not sure if this is accurate, but the bid/ask when I captured this chart in AH was at the yellow arrow and this is a daily chart, either way, the correlation broke between industrials and transports.

Finally, I can pull certain types of credit and we say how HYG was used today in to the close to try to ramp the market unsuccessfully, however the other form of High Yield and Investment grade I can't pull so I borrowed this chart of today...

Investment grade and High Yield Credit both diverged away from equities which is not a good sign for the market as they say, "Credit leads, equities follow".

In addition as I was poking around tonight, the very effective Dominant Price Volume Relationship Scan that I use has all 4 averages with a Dominant P/V relationship today which is Close Up / Volume Down, this is THE MOST BEARISH OF THE 4 POSSIBLE RELATIONSHIPS  and almost always acts as a 1-day overbought signal with the next day (at least) closing lower so that was interesting.

As for the carry trade, it was frustrating today for analysis...

 The Yen has a small 1 min negative divegrence in it which is helpful usually for stocks as it lets the USD/JPY rise, however...

The 1 min $USDX also had a 1 min negative divegrence, toward the end of the day the Yen dumped a little allowing the USD/JPY yo move up as the SPX with the help of High Yield Corp. Credit (HYG) seemed to attempt to break the $1800 level for the second time and for the second time... FAIL...

 However the 1 min chart (which is the only really reliable signal we can get on the pair alone) shows a clear negative divegrence in to the EOD and that ramp attempt.

There was no HYG / SPY arbitrage because VXX and TLT would not move down as they were under accumulation (flight to safety).

This is the 60 min USD/JPY trend for the year, the first downtrend in the carry trade since November of 2011, you can see the lower highs and lower lows, if you are a trend follower and in this case at 100:1 leverage I would be, the next move should be to a lower low. Index futures move almost identical to the carry cross and that would give us our target at SPX < 200-day average.

I'll check in on futures later tonight and see if anything is developing, but so far it seems all the trend expectations are still intact, it's just the near term downside trend expectation grew a lot uglier as it put in a reversal process today that shows up almost as a bearish Hanging Man on the daily SPX chart which is a bearish reversal signal.