Market Overview / Opening Indications

I knew I had some time from the way the charts ended yesterday, few things in the market just stop on a dime and reverse so as I was just reviewing multiple timeframes, I thought I'd show you a few things that I find to be interesting given the AP data re: the SPX not having a single +/- 1% gain in 41 days, a streak that hasn't been seen since 1995 which makes for a very difficult trading environment no matter which side of the market you are on, but more importantly, as the IWM/Russell 2000 leads the market, I find that it's larger term price structure is so similar to the dominant theme among the watchlist components, which is the way it should be, both are telling us something.

 Looking at the 3C structure during the 2014 Russell 2000/IWM price pattern, beyond the damage already done on the daily charts, looking specifically at 2014 with a 60 min chart we see the first rally to the left with a relative and then leading negative divegrence at the top, "A". Then we see a deeper , worse, leading negative divergence at the second major rally at "B". Finally 3C can't get off its back at "C" and sees the worst leading negative divegrence at "D" toward what I'd say with about 80% certainty is the top of the current rally.

If you are aware of volume analysis, worsening volume through a price period/pattern like this would almost certainly point to a specific price pattern even if you hadn't the opportunity to look at price and only followed volume, 3C is doing the same thing and I would come to the same conclusion or suspicion if I had not the benefit of seeing price...

Does this look a bit more familiar and more in line with the dominant theme among the watchlist components?

 A large (all of 2014) H&S top. The first thing you need for a H&S top is a preceding up trend, then of course there are the shoulders and head, but that's far from being enough to confirm as many traders found out with a similar large price pattern in 2010. Note the increase in volume during this large range, it's certainly not an uptrend anymore, at best a large lateral trend, more likely a H&S top.

This is the same view of the IWM/Russell 2000 2014 H&S top, however I've overlaid a quick custom cumulative indicator so volume analysis is easy, it makes the chart look pretty sloppy, but all you need to know is that in a H&S top, rallies should see diminishing volume as they progress and declines should see increasing volume as they progress. I've used red arrows to indicate diminishing volume on a rally and circled the op of the rally and I used yellow arrows to show increasing volume during declines and circled the bottom of the declines in yellow, this is exact confirmation of a H&S top with volume getting worse from the right side of the head to present as is commonly the case for excellent confirmation.

Yesterday I made mention that if nothing else, equity bulls should be cautious and concerned about the lack of symmetry in the market, usually the averages move together, while some might argue rotation, that's a concept among industry groups that can have an effect on averages, but not to this degree, perhaps for a period of weeks or a month or so and rotation is found in healthy bull markets.

Note how the QQQ/NASDAQ 100 looks very different from the IWM/R2K for 2014.

 However, this is a topping price pattern, some call it a bull horn, others a Broadening top and even though there's no volume requirements for confirmation as volume tends to be random in these tops (all H&S tops start as Broadening Tops first and volume can be an easy way to distinguish an early H&S from a BT), the QQQ show the same volume trend of diminishing volume/demand on rallies and increasing volume/supply on declines.

With a Broadening top, typically the last rally fails to reach the upper trendline, often only making it between half and 2/3rds of the way to the upper trendline before reversing to the downside and breaking through the bottom support line. 

 Here's the same custom cumulative volume indicator showing the QQQ's seeing bearish declining volume on rallies and bearish increasing volume on declines.

 The S&P-500/SPY looks like something else altogether, specifically a bearish Ascending Wedge. This is a fairly large one compared to what we've seen the past 6 or so years. Typically volume decreases as it reaches higher in the wedge, often not making it all the way to the apex and breaking down somewhere after about 2/3rds of the way to the apex of the wedge. We also have seen these head faked before to the upside before they fail, but that tends to be when they are very obvious, unless you draw the trendlines, it's not as obvious as it looks with the trendlines and they are not perfect, but it's the psychology that forms the patterns, not the trend lines, they just help us identify the psychology/price pattern.

 And the Dow/DIA?

Although the Ascending Bearish Wedge here could be drawn a different way, I thought this was the most fair/objective, which would give us a head fake move of the wedge, volume is flawless for the price pattern.

So there you have it, 4 different averages, 3 different major top price patterns.

As for intraday...

 This is a 60 min close up of the IWM showing the damage, especially recent done to the IWM.

Even on a 15 min chart as I showed on Monday after the market close, distribution was heavy Monday and confirmed on the Russell 2000 Futures, all of that leading negative divegrence is since Monday alone.

In other words, major damage done in a very short period of time.

Intraday there's a slight positive divergence on the 2 min chart, this is how I knew I had the time for this post as it takes more than a 2 min divergence and more lateral time to create a base large enough even for an intraday bounce. Of course there are other possibilities such as a lateral consolidation or even these divergences being run over as we saw over the last 2 weeks, which is pretty rare to see, I think the last time I saw that was when AAPL came down -45% from its all time highs and is typically seen in a panic situation such as the AAPL decline.

So far the IWM 1 min has been in line since yesterday's leading negative divergence, it remains in line meaning there's no divergence.

 QQQ 60 min, just to give you a feel for the 3C activity during a broadening top, it's just as bad, in fact worse than the volume chart for the same pattern above and the leading negative at "C" is reminiscent of the type of damage you'd expect to see at this point of a broadening top, as you might recall, they rarely reach the upper trendline on the last rally before breaking down, typically they break about halfway to 2/3rds of the way to the top trendline and an early turn down in a broadening top at this stage of its formation is early warning that the pattern or top is about to break.

 Intraday 1 min damage yesterday, this is why I chose the Q's for a put option play yesterday, the 1 min has a positive divegrence which has led to the upside a bit more since capturing the chart, but...

The 2 min (showing more history to include the non-confirmation of the F_E_D Knee-Jerk reaction, shows no positive divegrence at all currently. Often when we have a 1 min divergence only, there's about a 50/50 chance it will be either a bounce or a consolidation, when the 2 and 3 min diverge with the 1 min, the probabilities go way up for a bounce.

The 3 min chart... Still no divergence.

SPY small 1 min positive , this is about all there is, since the capture it has been in line, this is why there typically needs to be more lateral trade, meaning price coming back down and heading sideways so a stronger divergence can develop as smart money doesn't chase. Or there are the other options laid out above, consolidation or a failure of the divegrence in which case it's just a short consolidation.

 There's no positive on the SPY 2 min intraday, but lots of damage from yesterday. Right now the 2 min is struggling to even stay in line with price.

And no divergence (positive) at all on the 3 min chart.

Thus I knew I had time as there needs to be a lot more work done before there's anything that might stick for more than an intraday move of no importance.