The Market Into Next Week

Going through the charts, there's a lot today that looks similar to yesterday, which is to say quite a few newly formed divergences have been either run-over like yesterday or deteriorated pretty badly.

Right now, the 1 min charts for the averages and Index futures are negative. There are scattered positives, mostly in the 2 min area, a few out to 3 min and the IWM has been able to maintain a 5 min positive looking signal, but not quite a clean, clear divergence. I mention this to contrast it with the 5 min SPY which is just seeing more damage today. It has been a while since I've seen this kind of activity, but I'd say there's a real sense of fear and the hedge fund herd that usually moves together, seems to be breaking up in to an every man for themselves or "Whoever sells first, sells best" mentality. I believe that's why it has been so difficult to hold together positives that have formed.

HYG is still supportive of a bounce, although the asset itself has seen deterioration which I showed in last night's Daily Wrap; whatever deterioration was on the charts in last night's post, you can pretty much triple that today, yes, massive deterioration in HYG so I am amazed it's still able to hold in position.

Professional sentiment indicators are similar to last night, 1 is showing what looks to be a very short term bounce, the other is pretty much in line with price which in itself is a bit on the bullish side as it's not leading price lower.

Yields and commodities look the same as last night, yields are in line with price, commodities, apparently because of Iraq and perhaps some safe haven gold buying, are leading the market.

The dominant theme among watchlist candidates is a fairly large H&S top like NFLX that appear to be at the top or the right shoulder and close to the decline to form the right side of the right shoulder.

It's my opinion based on F_E_D communication and the way the 3C has acted since SPX 1900 was crossed (along with these right shoulders everywhere) that the F_E_D / F_O_M_C next Wednesday is going to do or say something to pop the exuberance they see in the market, I suspect it will be subtle so they aren't charged with manipulating the market as we all know they do, but they are clearly unhappy suddenly with the lack of respect for market risk.

The bounce I had envisioned considering I used a partial IWM call position with expiration next Friday, would be along the lines of pre-F_O_M_C and looking at the market as a whole, right now I can't say that I would expect much. In fact I am starting to wonder if it is even possible given it seems any kind of underlying strength that builds is so quickly torn down.

This is why I'll leave all shorts in place, add to them where appropriate and essentially have a small IWM call position as a short term hedge that I know the max. risk of. 

I'm not going to make the mistake of chasing small, ill-formed short term moves when there are large, well formed negative divergences and right at an area where there are so many right shoulders.

Last Friday I said I expected the head fake move that began on 5/23-5/27 to start to be resolved to the downside this week, thus far, that's exactly what has happened.

From what I see right now, I'd expect a pre-F_O_M_C relief bounce and the move to really start generating downside momentum, however as to any bounce, I don't think (at this point) you can count on positive divergences much past 3 mins, meaning I think you'll need to be nimble to capture gains and likely need a fair deal of leverage to make it worth the risk, while also pre-dfining that risk to a tolerable level which you can do with options as the premium paid is the maximum risk.

Beyond that, there has been an exceptional amount of damage done this week and I'm talking about damage being done while the market has lost ground as we usually see distribution in to higher prices, this week we have seen it in to lower prices as well, which is what gives off an aura of panic.