Opening Indications

There's still a good deal of divergence in relative strength (underlying) in very short term intraday charts as you'll see below, the DIA has been in the worst shape as it joined and surpassed the Q's yesterday.

 The DIA's leading negative divegrence in a flat-ish range yesterday is quite noticeable, remember that 3C charts often pick-up right where they left off the next day, so with a leading negative in the DIA it's not surprising that it is slow to try to fill the gap which (gap filling) has been a defining feature of the QE regime or perhaps the rise of HFTs (both happened essentially at the same time).

The DIA is at confirmation in the green box right now. 

The DOW theory of confirmation between the Industrials and transports is why the 3C weakness in Transports has been important to me, although the R2K is probably a much more relevant average than the Dow in today's market, still the underlying weakness in transports needs to be there for this market to crack and right now transports are very close to breaking an important semi-intermediate trendline.

 The IWM which has been closest to confirmation on intraday charts did not confirm the gap down, but rather had a 1 min positive divergence which is fine and I'll show you why (the 1 min chart is losing strength right now, but it's a long day, it likely will fill the gap, UNLESS THE F_E_D & FINANCIALS SITUATION CREATES A 2008 LIKE PANIC, in that case even the NY F_E_D's Plunge Protection Team is pretty helpless to control the descent).

 The QQQ intraday did not confirm the gap, but rather moved right back to in line status, as I said, the 3C charts pick up where they left off the next morning. There's a hint of some weakness starting in the Q's, but in this case a 1 min chart in line is not a bullish thing, it's more or less "time".

Since in line status on an intraday chart is essentially neutral, it falls to the longer charts to determine the probabilities and they have been and remain solidly negative.

You just don't see major reversals in trends when there are very familiar price patterns and the longer they persist, the more stops/orders collect and the higher the probability is that they will be run, that's the head fake move as the run is not a show of bullish accumulation, it's use of higher prices and demand to sell in to, that's the negative divergences since the move above the range intensifying.

Imagine it this way....

This is the 3 month range in the SPX/SPY. At the first reaction high, traders (retail) are going to place limit or BTC orders above the last reaction high. That high is tested again and it becomes a stronger area of resistance, trendlines can now be drawn and even more orders for a break out Long or a "Buy to Cover" of a short are going to continue to build (white hash marks), then as resistance and the range persist longer (especially in the most watched ETF in the world), more and more orders are sitting up there, this is why I keep all orders mental and never place limits/stops with my broker, you are showing your cards to Wall St., but the fact is people do so you have to be aware of this.

At this point at the end of the range, there's so much demand there, it's easy to sell in to or short in to and when you are carrying billion dollar single positions or putting them together as an institutional investor, YOU NEED THAT DEMAND AND HIGHER PRICES TO SELL OR SHORT IN TO. Even beyond that, the money made on the bid/ask spread or volume rebates is incredible, they have EVERY reason to run that area, create bullish demand, scare shorts out as everyone can't be on the same side of the trade in a zero-sum game.

However, we are able to differentiate between a price breakout and a head fake move, which is something few others can do, thus we can use this to our advantage in several ways (hitch-hiking trades, short sales, cleaning up old long positions, etc). This concept is true of every asset in every timeframe , even a simple half day bear flag will be head faked 80% of the time due to technical traders' predictability in following 100 year old concepts and not adjusting to new dynamics.



 The SPY had a relative 1 min positive divegrence, but right now that's starting to fall apart.

Here's why a gap fill is not such a bad thing and time is not such a bad thing.

If you look at enough charts, you'll notice a proportionality to the reversal process, there's a reason it's there, we are like jet skis that can make fast, sharp turns because of the size we trade in, but with billion dollar positions, Institutional money (which is who makes the market move) is more like a super tanker that takes several miles just to come to a stop. THIS IS WHY REVERSALS ARE VERY RARELY "V" SHAPED AND MORE OFTEN "U-SHAPED" OR ROUNDED.

Those large orders and setting up the next trade as we do in this area take a lot more time as they have to be broken up in to smaller pieces and sold in to demand, otherwise predatory HFTs (Iceberg hunters) will front run the orders if they can uncover them. THIS IS NOTHING NEW, BACK IN THE 1920'S JESSE LIVERMORE DESCRIBES THE SAME CONCEPT, THEY CALLED IT "CORNERING". 

If you know where your competitors are active and what they are trying to do, you do the opposite (if you are large enough) and you force them to take a loss in a zero sum game, which becomes your gain, often this is achieved by front running their orders and pushing price against them while you feed them the shares they need.

This is why the above chart looks a bit "angular", maybe not "V" shaped, but Angular.

Most reversals are going to look more like this...

Rounded.

I'm not saying that there aren't straight down drops, if the Financial information that just came out of BAC starts to become epidemic, you'll have a 2008 waterfall sell-off or something similar to the 2012 AAPL sell-off, that's when the losses taken by waiting will be much larger so everyone tries to fit through the same small exit at once. WITH FEW SHORT SELLERS AFTER A SHAKEOUT RUN LIKE THIS, THE DECLINE IS WORSE AS THERE'S NO NATURAL DEMAND (COVERING/TAKING PROFITS BY SHORTS WHICH MUST BUY TO CLOSE THE TRADE).

I don't have specific information that this will be the case, but conceptually I'd imagine something more like this...

I would expect initial support and maybe a bounce at #1 (support) as this is still viewed by Technical traders as a breakout move and this would be buying the dip as they are more bullish than ever, see example 1 below. Next a move in to the range, however, just like the Crazy Ivan around the Mid-May bear flag created upside momentum, the move above this range is a large version of a Crazy Ivan that should create the same extreme downside momentum and fear moves 5x faster on average than greed (declines move about 5x faster than rallies as fear is a stronger emotion and the market is emotion driven) .

Finally a break below the range is a solidly failed breakout, we'll talk about what happens after that, but this is where I see intense downside momentum and I'd say we will be near the F_O_M_C somewhere around #2 or #3 and I have a feeling that they'll put out a hawkish statement or action as they have clearly voiced their displeasure with the lack of volatility and the complacency of investors in a bubble market.

Example 1

This is the LEAST BEARISH Dumb Money has EVER been, note former lows at 1999/2000, 2007 (you know what happened next).

Finally in what may be the straw that broke the camel's back, I don't know because I refuse to listen to CNBC unless it's for a F_O_M_C statement, but I've heard the Fast Money guys were all bearish until just the last week in which they threw in the towel and became bullish. 

I remember the week of the top in 2007, CNBC had numerous guests saying this market was just getting started, there was even one who was the author of "Dow 20,0000". The same week, the market started to break.

If the F_O_M_C does more than voice their displeasure with the market bubble they created in speeches and actually puts something in their statement (remember original guidance was for QE to end at 7% unemployment, then 6.5%, then it became arbitrary with qualitative analysis as forward guidance which essentially means, "We will make it up as we go along".

There's no need to chase assets, there are plenty out there and there will be plenty more, but I am happy to have a full size SQQQ and FAZ, I'll cover financials later today and give you a run down of the timeframes.