Broad Market Update (Mini-Cycle)

I think the reason this particular mini cycle from March 27th is important is not only that it's the first one that has  been or was able to break the relative strength in VIX futures or VXX as I have posted recently VXX which should move opposite the market was showing such broad relative strength that it was moving up with the market (there are some reasons that can happen that have to do with hedging, but I don't think they are relevant in this particular situation, at least not to the degree of true demand that we saw supporting VXX/VIX futures) and this breaking of that relative strength has been an issue for 3-4 weeks. I think nearly 3+ weeks ago I said, "I'd like to look at some VXX longs, but there's too much relative strength in them to be able to buy them on price weakness, thereby lowering risk, which may not have seemed important then, but it sure would right now if we had bought by chasing the asset...we'd have bought near highs in VXX and be at a loss right now, that's why we don't chase assets, but rather let them come to us.

The other reason that is VXX related is Wall St. knows what the tape is, like Jesse Livermore of old who could read the tape and know where the market was going to go, it wasn't immediate like some wonder indicator that said, "NOW", but he could read the trend as he started out as a runner as a young boy in a bucket shop and learned tape reading. In much the same way, except to a much more advanced degree, Wall St. knows the tape,m they know the flow of funds that aren't represented in price action and they use price action now to get their positions in line with the underlying flow of funds or the tape which is what we are doing, piggy-backing the big boys, right or wrong, they move the market.

It was and is my opinion that VIX futures (VIX is also known as the "Fear Index" and as we know Fear and Greed are the emotions that move the market with fear being the stronger of the two) will be accumulated hard before a serious downside pivot, but in order for that to happen, just like us, they aren't going to chase the market, they'll bring VIX prices down, accumulate them before the market is to make a significant turn and that's what I have been looking for. If you are looking at price alone of VIX futures or VXX, you might conclude that the pros are rotating out of protection and in to risk assets, but that's an incorrect view of how the market works for so many reasons, from the chasing to just the logistical difference in how they have to trade because of size and how if they aren't careful, they'll push prices against their position (say dumping a large block and knocking prices down when they have more to dump, now they have to do it at lower prices or even a  loss).

So this mini cycle has been important and when we look at it in the perspective of "Multiple Timeframe Analysis" it's even more important. I don't have to get in to what the "flying divergences" (extremely strong leading divergences that we tend to only see in fear based assets like the VIX futures/VXX) look like and when they appear we know there's a major trend change at hand as well as how fast they can develop, we've beaten that horse enough.

In any case, we saw this mini cycle last Thursday the 27th, in fact the first part I saw earlier in the day and took some action to protect profits in puts like Closing XLF April $23 Puts for a +55% gain. Later in the day, after not seeing any divergences in the averages beyond 2-3 minutes, that Thursday the first 5 min (respectable) positive divegrence showed up.

You may recall how I felt about it at the time (the difference between probabilities and high probability/low risk positions not being the same thing)...

"So after a week of divergences that were in place for 2-3 days, but none beyond 2-3 mins., today we transform from a slow signal environment to a suddenly increased signal environment in which we have many market averages with at least 5 min positives and some even with 10  min positives, yet I have not been running around crazy throwing positions out there... I did close a some that I felt were not going to gain any more or not much more that would make the risk I'd face a reasonable proposition.

So why not add long positions like 3x leveraged ETFs or Call options? 

On a day like today with divergences building and some building to quite long timeframes, it's hard to keep your finger off the trigger, but just like I had to conquer fear, I've learned over the years, "IT'S OK IF YOU MISS A TRADE, THERE'S ANOTHER BUS COMING". 

If I don't feel that the situation is as favorable as I can get, sometimes I'd rather let go of greed, take a chance and possibly miss the trade, I think it's far better than taking what might be considered a sub-optimal trade."

And then there was a list of the reasons I didn't feel this was a move that was worth the risk.
This is the smaller cycle that aligns with the larger February cycle, thus for me, it's important... first because of the VIX futures accumulation and as it has developed a little more, because it is lining up in multiple trend/timeframe analysis with the tail end of stage 3 and in some cases like the IWM stage 4 of the larger February cycle.

 This is the Feb. (larger) cycle in stage 3 for the SPY, the IWM already made stage 4 with a volatility shakeout. The smaller cycle that I'm showing below started with 5 min positive divergences on March 27th (Thursday), but 1 day only which isn't enough for me to feel strongly enough about the probabilities to deploy assets, but rather to be patient, manage current positions and wait for the market to get in to position where we can enter larger trades that come to us with much stronger probabilities.

Note how the mini cycle aligns with the Larger cycle?

 This is the smaller cycle from FMarch 27th's 5 min positives which were 1 day (that Thursday) and were the first time on more than a week of preceding trade that any positive divegrence moved past the 3 min mark which is kind of my unofficial line in the sand, as asset must have at least a 5 min divegrence to have enough reason to trade.

Again, you can see how this smaller cycle has dovetailed with the larger one nicely, so now it's not only the VIX Futures that are a good timing indication for a strong market pivot to the downside, but the health of this mini cycle as well.

SPY 2 min...If we look at the SPY you may recall we had symmetrical triangles in all of the major averages on 3/27, for technical traders these are consolidation/continuation patterns, they have no inherent bias of their own like the ascending or descending triangles, but rather depend on the preceding trend entirely to give them a bias and the preceding trend was down, meaning most technical traders would expect that triangle to break to the downside and start the next leg lower, this is where Technical traders get chewed up and used all of the time because they are so predictable in what they will do or how they will react to these price patterns, thus as we could have predicted even without 3C signals, the triangle does the opposite of expectations and breaks to the upside.

The stages are color coded, stage 1 accumulation in white on a 5 min leading positive divegrence market wide that day, stage 2 in green which is mark up and you see 3C making higher highs and lows with price, then stage 3 distribution or the top in red and you see 3C makes the first lower low with a leading negative divegrence, thus I liked the SPY puts yesterday and continue to like them as a hold as they are at a double digit gain right now.

 SPY 3 min, remember the longer the timeframe the less detail, but clearer the trend.  Again we have moved from stage 2 to stage 3 and thus the SPY Puts from yesterday are working today as the divergences looked great, this had nothing to do with price position for me, it may have in creating the divergences, but I wasn't shorting a new high.

 And the SPY 5 min with the original 5 min positive on the 27th and the leading negative right now.

If we were to overlay the smaller cycle on the larger one note the overall 3C position, more an d more deterioration the further in to stage 3, even at a new all time high.

If I labelled the larger cycle, you may recall we first saw accumulation Jan 27th and it ran with a head fake move lower, then a small "W" at the lows that all we positive divergences or stage 1, you can see stage 2 which was noted Feb. 4th that it would have to be incredibly strong to change sentiment to bullish which is the reason it was run, to allow the pros to off load shares via selling or shorting (they both come across the tape as a sale).

Note the position of price and 3C at Points "A" and "B", again further deterioration of stage 3 and the entire Feb cycle looking exactly as we predicted before it even started to move, this is where the cycle is moving to stage 4 (IWM already has).

 DIA 2 min from the 27th

DIA 3 min

And most importantly the DIA 5 min

IWM 2 min, this is a bit sloppy, always move to the longer timeframes if there's not a clear picture, remove the noise.

 IWM 3 min has a cleaner trend than the 22 min chart above.

And IWM 5 min.

However in the IWM's case it is already in to stage 4 and a volatility shakeout.

IWM 10 min trends are clearer.

QQQ 2 mi again you can count the stages, 1 (accumulation), 2 (Mark up), 3 (Distribution) and the leading negative is moving to 4.

 QQQ 5 min, that makes things pretty clear.