Forward Looking Update

It has taken a good week or more since we first expected the IWM to bounce off the 10 min positive, but there's nothing on the 15 min charts. This is a decent size divergence, but just as with the SPY and Q's last week, the character has changed dramatically, distribution is immediate and the bounces are nothing like past bounces off similar divergences.

The IWM (as well as a number of watchlist components) were all coming off the top of a right shoulder and since the IWM has lost over 6% in 11 days, giving up all of 2014 gains year to date.

Before the move started I suspected we might be looking at something very different and I'll try to illustrate...

Past bounces off similar divergences have come at sentiment lows like the Feb. lows that led to the Feb. bounce/short squeeze, these were clearly sentiment changing moves which of course triggered short squeezes. However, before this one began I suspected it would look a lot more like the decline from the March highs, a series of lower highs and lower lows better known as a downtrend, but even in a downtrend the market bounces. In fact in a primary bear market there are just as many up days as down days.

In any case, the Feb. rally had a different tone, the bounce now I suspect is much more like the lower highs/lower lows coming down from the right side of the R2K's head which is a volume confirmed H&S price pattern, not textbook at all, but that's the point, using the dogma of a century of Technical Analysis against traders as they have failed to adjust ever since TA became mainstream around the time of the Tech rally/bubble.

I think the R2K is a much better bellwether or barometer of the market than the SPX or Q's as does Bernanke as he always referenced the Russell 2000 in Congressional testimony rather than the more household S&P or Dow, it's a better overall economic indicator with much broader components.

Take a look at the SPX...

This is much more range bound.

 I looked at leading indicators and some others today (recently) and I don't see a smoking gun suggesting that the bounce is over which I would not expect anyway. I am on the lookout for signals from Leading Indicators and things like candlestick patterns and volume events as you can see in the past they tend to call significant pivots both up and down. The IWM is at its 50-day moving average right now, but I suspect the Dominant P/V relationship as mentioned last night has more to do with today's underperformance in everything but the Q's which are benefitting from AAPL, I doubt for too much longer though.

There are also a number of stocks as mentioned earlier I expected to bounce including Z which thus far have been a bit of a disappointment although several have done so.

Damage in the IWM and other averages is heavy this early in a bounce, it's the same thing we saw when we called last week's SPY/QQQ bounce the preceding Friday, a change in character from what we would have seen only a month or so earlier.

This is the 10 min IWM and the reason I've been expecting a bounce, as I said yesterday, the inverse H&S shape of price I do not believe is coincidence, the "Buy the Dip" crowd is still out there, seemingly not realizing what kept BTD alive, the Bernanke put which is now not only being removed entirely not to be replaced, but the F_E_D is signaling clearly that they'll be hiking rates sooner and more aggressively than previously thought. If you pay attention, Yellen expected (in congressional testimony), the F_E_D Funds rate to be at 1% by the end of 2015, they meet 4 times a year and typically hike 25 bps at a time, that would put the first hike in Q1 2015, which is a quarter ahead of the most hawkish estimate from JPM who recently moved their expectation forward by 2 quarters, that's still a quarter behind Q1.

Other signs of deterioration are in the futures where we saw R2K futures (5 min) go from leading positive Monday to in line yesterday to leading negative today, that's exceptionally fast.

TF 5 min leading negative.

Treasuries have not been on board for 2 days in a row, but I do suspect we have a bit more to go on even a run of the mill bounce as you can se from looking at the IWM chart above in which I drew in the typical bounce of lower highs/lower lows.

I'll be keeping IWM calls that were put in place as a hedge at least 1 more day, but I'm not moving the SRTY long re-entered yesterday, I just think the market is too fragile and the probability of a divergence being run over here is higher than ever so I don't want to be caught on the wrong side of bigger picture probabilities and I think while there are going to be trading opportunities on the long side here and there, it's really time to be thinking about bigger picture probabilities in a very serious way.

I'll have some more in a bit, especially on breadth figures after the close.