Potential Market Scenario, High Yield Credit and Momo Stocks (TWTR)

I realize this is an odd combination for a post, but in looking at numerous charts and keeping in mind the concepts that we see so often they have become our concepts, I see a potential market scenario that could begin with the minutes today.

Last week I talked about how beat up momentum stocks were over the last few months and showed it in a breadth chart. Since I've seen short term signals lending some support to a bounce in some of them, but those signals in many cases are degrading. The actual scenario I had in mind is more easily seen in a stock like TWTR so I'll use that as my example.

First let me get to the market aspect...

 First this is a 2-day chart of the SPY, the Tweezer bottom (white trendline) is the accumulation lows of the February cycle and since then we've been in a large, multi-month, sloppy range which I believe is a significant top.

However, when we have a fairly well defined range one concept we see quite often is a head fake move (in this case above the range) before a reversal to the downside. This range has been so wide and sloppy that I don't know if it really needs one or not, but a knee-jerk reaction from the F_E_D minutes "could" provide one.

This isn't crucial to this scenario, it would however open some interesting opportunities.

The second concept is that of  a top breaking support and moving to stage 4. There's a reason there are 3 places I'll short a H&S top, because we see this so often and those 3 places are at the top of the head, the top of the right shoulder and after the initial break below the neckline I will not short a H&S, but most technical traders wait exactly for that, thus we more often than not see a shakeout of the new shorts (Volatility Shakeout) in which prices move back above the neckline or in this case the range's support forcing new shorts to cover, THIS IS THE 3RD AND LAST PLACE I'LL SHORT A H&S AND MOST OTHER TOPS.

I drew what the scenario would look like in red and yellow arrows.

The 3C charts are very clear on this area, this 4 hour chart (which is actually much worse scaled out) shows a leading negative divegrence through the multi-month top/range, this is the direction of highest probabilities and generally the direction in which I want most of my positions.

 This isn't a textbook H&S top, but it does have all of the psychological makings of one including volume confirmation. The actual H&S could be drawn larger, but I think this is sufficient for our purposes.

And this is the 60 min 3C chart through that same area, we have  a lot of confirmation for this area to be a top.

I have drawn a larger sloping H&S here (white trendline=neckline)

Interestingly as noted yesterday, HYG (High Yield Corp. Credit has been deteriorating, but as you probably know it has been one of the most useful levers to manipulate the market either higher or to support it and keep it from falling.

I find it VERY interesting that the day before and the day of the F_O_M_C minutes release, there's a huge 15 min leading negative divegrence, this was not the usual process of migration, this was a lot of distribution all at once as if there was a mass exodus out of HYG as no one wants to be there when the hammer comes down, but it was necessary to be there until now to hold the market up.

You can see HYG in red vs the SPY diverging negatively and this is exactly what I've been hoping to see among Leading Indicators.

 This is HYG's leading negative 15 min divergence, it's quite spectacular.

As for TWTR...

Last week when I mentioned momentum stocks being a reasonable place to see a bounce, I was thinking they'd base a bit before such a move, this would allow us to look at entering some on short term trades.

If there's a volatility shakeout after a break below the top range, what better class of stocks to do it with than the popular momentum stocks? The point of the move is to convince traders the market has not rolled over and to get shorts to cover as someone has to lose money for someone to make money in a zero sum game so Wall St. and main street can't both be short and make money, someone has to lose, this is why I believe we see these shakeouts as retail traders tend to only enter the trade on price confirmation or put another way, the actual break below support, Wall St. knows and sees this, thus they know how easy it is to squeeze them out as well, just move prices back above the neckline where their stops are.

Using TWTR to consider this scenario...

 The intraday and near term charts are not positive, but mostly in line like this TWTR 2 min, even the ones that have seen upside are seeing negative divergences in these timeframes.

 However, looking at a 60 min chart, we not only see how badly TWTR has been beat up, but we see a positive divegrence forming on a long term chart, 60 mins.

Taking a closer look...

 The 15 min chart for TWTR is leading positive, but it looks like a pullback to the lows and forming a "W" base would make for a much more solid base and divergence, the pullback in TWTR to that base area could occur on a general market move below the range.

This is TWTR's 15 min positive divegrence which is leading.

Assume the market break under support to stage 4 also causes stocks like TWTR to move down to the recent lows forming a larger base, this would also allow momentum stocks to lead the shakeout of market shorts as they see the high flying names rally, psychologically that's very strong and as price moves above former support, their stops are hit, they are shaken out. We'd also get our rally in the momentum stocks, of course this would be the last area like the 3rd place of a H&S top, where shorts are worthwhile, but it all fits together rather well.

TWTR 5 min.

If you are interested in possibly trading some momentum stocks, I'll be looking for set ups like this and setting price alerts for a move to or below the recent lows (white trendline) and seeing or making sure there's 3C confirmation for a counter trend rally or that volatility shakeout (1929 had the exact same thing after the initial break).

The whole scenario fits together rather well, this wouldn't change the market's bearish tone or direction of highest probabilities, it would not rescue the momentum stocks either, but give them a brief reprieve in which they could be sold or sold short on the shakeout move.

Something to keep in mind, I'm going to book mark this post and see where we are in a month.