A.M. Update

Now here's something you don't see everyday and beyond being a novelty or point of interest, more importantly it's a "Change of character" and changes of character lead to changes in trends.

You may recall the several posts over the last week or two about the "Broken levers", one after another they failed, with HYG failing most spectacularly this week, taking out at least 2 trading weeks of gains in one day.

Now, overnight the USD/JPY tried to ramp in to about the midnight hour, but guess what assets didn't follow?

 This is the USD/JPY Carry trade in the candlesticks and ES/SPX E-Mini futures in purple, notice in to the midnight (EDT) hour, USD/JPY ramped to a high for the week, just shy of $103, now look at ES moving in the opposite direction, DOWN until they finally reconnect and both head lower.

 This is a 60 min chart of the same, short term ES and USD/JPY have reverted back to their correlation, however...

On a 4 hour chart you can see that ES still has significant downside just to revert back to the longer USD/JPY mean as the carry pair is caught in its own range for the moment, I suspect now that it is unable to ramp the market, it too will start its next leg lower, but I'll look at the pair more closely to confirm.

As of Friday when I posted our forward looking forecast for this week (especially early in the week), I started by going through my watchlist of shorts or my "short list" (in both senses of the phrase), what I noticed was deterioration and all looking like good shorts as of Friday as far as 3C was concerned. However as far as our reversal concept (vs a reversal event), NFLX was representative of numerous charts I had looked at, if any of them had reversed to the downside as of Friday or Monday we would have had "reversal events" and those just aren't common. A reversal event refers to a sharp "V" shaped reversal and those are not typical.

So in NFLX Trade Idea Follow Up  from Friday afternoon, I posted the following...

"As far as adding the other half, I'm going to wait, I'm thinking 1-2 days and I'll show you why... NFLX dominant 4 hour trend at a H&S top, probabilities for longer term resolution are solidly down...The 15 min chart is leading negative, i'd like to see a new leading low, but more importantly I think the reversal process needs at least another day or 2, the left shoulder's took about 4-days."

Then following that post, I posted Forward Market Forecast before the close,

"I'll put out a more complete EOD update, but for now, everything I'm seeing is making a lot of sense, signals are very clear unlike the last 2.5 months.

Essentially, if you take the NFLX Trade Idea Follow Up from earlier today and apply the same expectations and the same logic, you have the market forecast in to next week, which doesn't end well for the market. However, you do have time to position, I would not try to chase the market, just be patient and let it come to you."

And finally, The Week Ahead,

"Some of thee things we have expected included a run above the range (head fake) before a downside reversal, there was no accumulation for that move, instead it was built around a bear flag and a sling shot until short covering took us the rest of the way.
As far as that short covering, these are the 100 most shorted R3K stocks in one custom index the SPY...Most shorted in red, SPY in green. Note how the short squeeze fell off today...It looks like the transports rally is over and that is a big deal when we are talking about market expectations...not all credit was so impressed, High Yield actually went the other way.

Nor were professional traders...VIX was also   monkey hammered in to the close, but closed up on the week...As for the market, there was a little end of day strength, which is why I said,

"Essentially, if you take the NFLX Trade Idea Follow Up from earlier today and apply the same expectations and the same logic, you have the market forecast in to next week, "

This is the trend since the bear flag that sling shot the market in to a short squeeze and head fake move, the fact we have a negative divergence on a 15 min chart tells us the probabilities are very high we have a head fake move. (Not that I don't trust 3C, but it's always interesting to see hard evidence that the signals 3C are giving, are actually right on, TRACKING UNDERLYING PRICE as real price is VERY deceptive, which was covered in this post...3C Distribution Confirmed by BofAML which also confirmed all of our forward looking expectations as to a head fake move, how the head fake move would get it's energy or lever and what would happen to prove it was a head fake move and of course, why which we have known for years).

As I said about NFLX, I think there's a day or so left in the reversal process, THIS WAS A THEME THAT WAS MARKET WIDE ACROSS NUMEROUS WATCHLISTS AND DOZENS UPON DOZENS OF STOCKS WE ARE TARGETING."

Back to today...

 This is the SPY since last Thursday, I used NFLX as a broad market proxy and short list proxy, what NFLX needed, so did the other shorts and the market would have to provide that via its own reversal process as you see above. I had said Friday I expected we needed about 2 more days and two days later, yesterday, we entered / filled out our NFLX short position (yesterday) Trade-Idea: Bringing NFLX Trading Equity Short to Full Size

As for NFLX and other short watchlist equities...

 There's the continued reversal process (rounding top), remember yesterday my warning of the "Igloo with a Chimney reversal process", essentially a small head fake of the reversal process itself, this serves to generate downside momentum , you might call it a bear trap. While I have no specific evidence of such a move, it is one of our concepts, not seen quite as frequently as other head fake moves, but always a possibility. However as I pointed out, the chart damage is so extensive in NFLX (and others), it would simply be noise, perhaps even useful for those who might want to get in on the NFLX position which gapped down this morning. The post covering the chart damage in NFLX is right here from yesterday, NFLX Charts Follow Up

While I can't post EVERY asset on the watchlist, this is the same reversal process that was needed in PCLN. Try to imagine price moving almost straight down on 5/30, this would be a reversal event and if you look at enough reversals, you know that this kind of "event" is not often seen. Right now NFLX is continuing the reversal process as you can see this morning's price action thus far continues to trace out a rounding top.

As far as the Short Squeeze that we expected as a way to move the market above the multi-month range and create a head fake move, that was off a bear flag around May 15/16th that had a positive divergence, that positive divergence in a bearish consolidation/continuation pattern is what alerted us to the probability of a head fake move (Crazy Ivan) to create a bear trap and a short squeeze.

Here's our Most Shorted Index vs the SPX...

You can see the bear flag to the far left, the Crazy Ivan shakeout that moved below bear flag support, drawing in shorts and the subsequent squeeze. As noted above, the squeeze started failing Friday, it has failed badly since then (MSI in red vs SPX in green).

If you add another popular lever, HYG (High Yield Corporate Credit, which is used to manipulate the market by making algos think smart money , who almost exclusively trades HY Credit as a risk on asset, is in a risk on mode. These algos are meant to do one job, they aren't able to take apart knowledge from various assets, they simply follow correlations like HYG up, they think "Institutional money is buying" and they do the same in stocks.

Now lets add HYG to the same chart and something interesting happens (remember we had already seen negative divergences earlier last week well before the MSI fell off Friday).

SPX in green, MSI in red and HYG in blue, note they both failed at the same time, HYG took out two+ trading weeks of gains in a single day.

It's my opinion that once Wall St. noticed the short squeeze which was the lever to lift the market, had abated, there was no reason to hold HYG as it was pure risk being the mechanism to lift the market had just failed.

AGAIN,

"CHANGES IN CHARACTER LEAD TO CHANGES IN TRENDS.."