Leading Indicators

I captured these just before the last post to see if I could glean any additional insights. We'll start off with leading indicators (later we'll check internals and the Daily Wrap as they are really where all of this began being so deeply oversold (worse readings than bear market readings).

First, probably the most important of the Leading Indicators and the predictable instigator and support mechanism of the market from early August, HYG.

HYG vs SPX (leading indicators will always show SPX in green, unless otherwise noted like "SPX prices inverted").

Clearly HYG wasn't supportive of the market at all,  that is until the close. Look at HYG in to the close and the SPX, that's not an accident and it fits well with the The Week Ahead post which is the same thing I've thought all week. I'll show you more in a minute, just remember the SPY charts from the The Week Ahead post this afternoon.

I suspect the market is far too weak to stage a breakout, even a head fake -failed breakout without some help from the market levers. Take a look at HYG's intraday charts and remember the week ahead SPY charts...

 The 1 min above and 2 and 3 min below have an intraday positive divegrence just like the SPY, note the move up in HYG at the close, also like the SPX in to the close.

2 min HYG positive today

3 min HYG positive today.

I suspect if this were going to be a longer/stronger divegrence, it wouldn't have started upward toward the close, but rather stayed in the area and continue to accumulate.

As I said with the SPY in the Week Ahead, the roof on the move is at the 5 min chart which is not positive, but leading negative, that's the same situation for HYG so it looks like it's clearly being used as a lever to help push the market to our head fake move and looking at the close, I'm guessing it will be right off the bat Tuesday morning.


Earlier I showed you the trouble HYG is in, HYG As A Leading Indicator,  I suspect HYG will give out first and lead the market lower in to stage 4, I just don't think anyone will be wanting to hold HY credit so close to a decline.

This is the August rally and even with today's move, HYG is still very much in a reversal process, the 9th day of lateral trade, this is likely one of the main reasons the price gains in the overall market have slowed to almost nothing and the averages are headed sideways in their own reversal process.

Longer term on a 4 hour chart, HYG gave out back in May, it gave out again in June/July, the next leg down should be substantial and remember, credit leads equities.

Here I have inverted the SPX's prices so you can see what the normal correlation would be between the  VIX (spot) and the SPX, normally they'd move almost exactly together, but this week as we expected to be in the reversal process with deeper distribution, the VIX has outperformed the SPX which suggests protection is being bid.

In fact of all of the market correlated assets, the VIX has one of the clearest, cleanest reversal processes.

The red box is the market base from 8/1-8/8.

Here VIX Futures (VXX) are also outperforming the SPX (also prices inverted), especially toward the later part of the week. We often see this when the correlation is broken because there's real demand and a real bid for protection.

I like to use short term yields as a leading indicator because short term the market is drawn to them like a magnet. You can see yields have been supportive of the move (short term), but have broken away as the market has turned lateral, the topping/reversal process.

This is a longer term look at the same with the August rally at the last yellow box on the right, you see short term reversion to the mean, right now Yields are pretty severely dislocated and will be exerting pressure on the market to the downside.

Earlier in the week I posted TLT (20+ year treasuries) looked like they might pullback,  TLT / Treasuries. The divegrence is still there and we saw some late day selling in them, remember they are part of the SPY arbitrage and them moving down helps the market move up with two other assets, HYG moving up and VXX moving down, we already saw HYG at the close, now TLT. I doubt this is coincidence as weak as this market is they'll likely pull every lever.

I took a quick look at the averages and the Trend Channel, except at "A" when the Ukrainian government claimed to have destroyed an armed Russian Column that upset the market, there hasn't been a single stop and the channel has held the entire uptrend until the red arrow, that's about when prices started moving more to the side/laterally, which is exactly what the Trend Channel is designed to do, keep you in during the trend, pull you out when the trend has ended, but that doesn't mean an immediate reversal, in fact I've addressed this a couple of times this week, but it is telling us the easy gains on the upside are over.

The DIA also had the same stop at the Ukrainian news, but otherwise held the entire trend until the two red arrows, you'd stop out on the first and the trend has obviously turned lateral since.

Here's the QQQ Trend Channel and recent stop, note the change in trend from up to lateral.

In fact, the Trend Channel pulled the SPX and Dow out after 10-days of rally for a gain of +4.34% and +4.10% respectively. Over the 6 days since then until today's close, the SPX and DIA have gained exactly +0.55% and +0.35%... Not exactly worth your time or the risk is it.

For the Q's the Channel stopped out later, 14 days in to the trend with a gain of +5.63 and since then only +0.26%!

 This is VWAP today on SPX futures. As mentioned this morning, it seems a Citadel algo under the direction of the NY F_E_D pushed SPX futures to new highs >$2000 which were promptly lost as VWAP was broken at B and headed to the lows of the day at "C". At "D" we have the intraday highs (until the close) which faded right after the European close back to VWAP.

Looking at the VWAP/ES trend for this move, it's pretty easy to see the change in trend.

I looked at single Currency futures, this is AUD and it looks like it's going to come down with this 30 min negative divegrence

The 30 min Euro is still in line with its downtrend, this may change if Draghi acts next week.

The $USDX also has a deep leading negative on a 60 min chart, this isn't the first time I've seen it this week.

I didn't cherry pick these, they were the ones that stood out the most. These are not short term intraday divergences, but more along the lines of short term/Swing (or a bit longer ) reversals.

Interestingly the Yen's 60 min divegrence is leading positive. Taken with the above currencies, this would suggest there's no carry trade that will come to the market's rescue, rather it looks like the carry pairs are about to see a decline which would be in line with a market decline as well.

All in all, it looks like the same concept we see about 80% of the time is going to play out again as we have maintained all week.

Not that I subscribe to any of this as I have shot down these fractal correlations and Hindenburg Omens numerous times as I feel each market is different even though I may agree with the end result, but the 1929 high was the day after Labor Day which is coming up Monday, again, just an interesting aside.

I'll have much more for you this weekend.

Have a great weekend and safe holiday.

The Week Ahead

Barring an geo-political sparks starting WW3 over the long weekend, the week ahead looks exactly as I've expected to be the highest probability all week and as a concept in general, a head fake move, but I will say this does look like a very weak move which may have something to do with positions being taken off in to the close over the long weekend and uncertainty. I'll use the SPY as an example because it is actually the strongest which isn't saying a lot,

 There was no need of this late day 1 min positive as SPX 2000 is secure, this looks like it's where we will pick up next week, right in line with a head fake move.

The 3 min chart is in line and the cap on the move is below..

The 5 min chart so this being the strongest of the averages, it's not a very strong looking move.

Leading indicators will be posted after this, but they essentially agree, HYG has fallen out and every one of the major averages has stopped out on the Trend Channel.

TLT looks interesting, earlier in the week I suspected a pullback, there are additional signs as well as price action. More to come..

Market Update

There's remarkably very little underlying (3C) movement in the market averages after this morning's early ugliness and the pop to the upside of roughly 10 a.m. lows. The negative divergences intraday on that pop were at no other time than the European close, most started their divegrence about 30 minutes before and just shortly after the European close the averages topped for the day thus far and headed down a bit, 3 of the 4 averages look almost exactly the same intraday, the IWM being the only exception as it held up a bit better after the European close.

Still, since the 11:00 a.m. to 11:45 negative intraday divegrence sending the averages off their intraday highs, there has been very little movement in underlying trade.

Typically on an op-eex Friday most contracts are pretty well cleaned up by 2 p.m. and the op-ex pin starts to lift, price can do whatever it wants, but it tends to be the 3C indications the last 2 hours that give us the best forecast of what to expect the week ahead.

As the averages sit right now, they are all in good striking distance of a head fake move as they are near the top of the rounding over reversal process. For example...

 DIA and a head fake would be above the red trendlune.

IWM the same for a head fake move...

QQQ

And SPY.

I haven't noticed much movement in the watchlist stocks wither, whether this is op-ex action or just similar to the broad market is hard to tell, what is easy to tell is the damage on intermediate on long term charts (from about 5 min to 60 min) for this run is very much in line with a downside reversal next week which will most likely make it a very busy week as far as getting Trade Alerts out.

I still want to take a closer look at VIX futures which seem to be holding up very well, even though they'd be subject to a pullback on a head fake move which despite them looking as well as they do, this has kept me on the sidelines for the moment, as I don't like getting involved with VIX futures unless I see an instantaneous grand slam on the charts.

I want to take a closer look at Leading indicators, individual currencies and the carry pairs as well as treasuries, I'll let you know what I see and hopefully as we usually always post every Friday, we'll have some 3C indications for the Week Ahead although from a cycle/timing standpoint, we are near the end here, from the oversold breadth standpoint which was the biggest motivation and outlying indication for a bounce, we are back to acceptable/not deeply oversold levels.

The wild card next week is Thursday's ECB meeting and of course geopolitical tensions, which may precipitate some selling in to the close with a 3-day weekend, if 3C were to rise during that, we'd have a very good idea about the probability of a head fake move.

I will say, some of the largest tops like 2007, DID NOT have a head fake move associated with the reversal.

By the way, if you like Transports short in to some short term strength, make sure to keep them on your radar, they look like a very high probability trade.

HYG As A Leading Indicator

We've been using HYG, High Yield Corporate Credit, as a leading indicator for several years now. HYG should not be confused with the High Yield sector (credit) as a whole. Credit is rarely traded by retail, but it's a very popular asset to trade among smart money.

Before the Lehman crisis, large traders/firms would put together baskets of credit for diversification which mainly came form banks and they'd essentially trade a risk on move in the market with HY Credit and when it was time to move to safety, they'd sell HY credit and move to IG (Investment Grade). However, as banks started selling off their credit exposure in the wake of Lehman, there was less and less liquidity in the HY (conventional) market for them to put together diversified baskets as opposed to just 1 HY credit type like HY municipal bonds.

Then came along HYG, a diversified HY corp Credit ETF with lots of liquidity which is what most of these large firms are using now, however because it's so well known as a liquid instrument that large traders can use, it's often manipulated short term or as the credit markets are generally better informed than the equity markets, they may front run a move before equity makes the same move, thus the saying "Credit leads, stocks follow"; if that's true the market is in for a world of trouble.

Other paid institutional advisories like Capital Context run their ES model vs fair value to see where divergences are and the model is made up of numerous assets from bonds/rates, credit, currencies, commodities, etc. However, their SPY Arbitrage model is expressly made up of 3 assets, HYG, TLT and VXX.  When HYG is up it's a risk on mode, typically at the same time TLT (treasuries) will be down and VXX (VIX futures will be down as there's little appetite for safe haven/protection assets in the middle of a risk on move so the SPY Arbitrage model runs something like this, HYG up/VXX and TLT down and it's compared to the SPY to see where there may be pockets of divergences.

Again, HYG is one form of HY credit, Corporate with good diversity in that form and good liquidity, but it's not representative of HY credit as a whole. We've been using HYG as a Leading Indicator to help forecast market moves.

I'm going to show you the charts of HYG as it has a strong influence on the market, but I'm going to ask that you do this part for yourself. We know the market's base for this August rally started on 8/1 and lasted through 8/8 with the following Monday, 8/11 being the start of stage 2 from the base.

Overlay HYG from 8/1 to present over SPY/SPX and you'll see a couple of days in to the base that we had predicted as early as after market July 31st on a day the SPX was down 2%, HYG was already moving up and leading the stock market while most of the market was basing sideways with a few averages basing, but leaning toward lower lows. Through 2/3rd of the rally you'll still notice HYG is leading the market, then HYG started moving lateral (sideways) which is a sign of stage 3 or a top. Again HYG is leading the market, this time it's early in to the top just as it was early in to the base, just like the saying, "Credit leads, stocks follow".

I've showed you this in many charts this month, but seeing it for yourself really lets it sink in and hopefully this will become a useful tool for you.

As for what the 3C charts for HYG look like, they are right in line with price action and cycle staging.

 This is HYG with a deep leading negative divegrence on a 4 hour chart as of July 30th just before it made a sharp move lower to it's August 1 low, which is when the market base started, although HYG started up well in advance of the market as you'll see when overlaying the two assets.

 This is the 60 min chart showing the post July 30th decline to 8/1 lows and up from there while the ,market based for nearly another week.

Also note current distribution in HYG as it's now in its 8th or 9th day of lateral / topping stage 3.

The 30 min chart is the first chart we actually see accumulation in HYG, meaning the longer term charts would have shown heavier accumulation if they were positive, so this was accumulated and run up for a reason, just not in huge size and for a very short period which is now spent as the chart leads to a new leading negative low.

The same concept is on the 5 min chart, note the distribution at the flat stage 3 range.

And the 2 min trend shows the same, of course the accumulation looks stronger here as it's only a 2 min chart, but again we are at a new leading negative low, it shouldn't be long before HYG turns lower and it shouldn't be long before the market is right behind or with HYG.

Trade Idea / Set-up: Transports

I don't usually hold too many positions at one time, the market is so correlated with the broad market accounting for about 2/3rds of any given stock's movement. There are not as many non-correlated assets as you might think, there are a lot of assets with large discrepancies in relative performance, but for risk management and diversification, it's surprising how small the equity universe is, although there are other multi-layered/timing strategies that seem to work just as good if not better.

In any case, Transports are one area I do like for some diversification as well as being a main component in Dow Theory which I think has obviously mutated over the century as the US has transitioned from Industrial to services, but transports are still important even as a part of Dow Theory if you replace Industrials with transport, think FED-Ex.

We entered a partial position in IYT short (about half size core equity short), expecting it to make some further gains in which we could add to. Even now the IYT short is in the green for our last entry and has acted well on the downswing.

In last night's Daily Wrap I said I'd consider picking up IYT/TTransports (short) on virtually any upside gain. I think it will be a bit tough to get that upside gain, but not impossible, in fact I think the opportunity is likely, but may be very brief so if you are interested you may want to set several price alerts above the current level at areas you think may be appropriate, such as above Wednesday's intraday high.

Here are the charts for Transports (DJ-20 and IYT), they have good overall confirmation.

 This daily chart of Transports shows something I mention often under the heading of, "Change in character". The peeling away and increased upside ROC of price from a long term trend is seemingly bullish, but more times than not, this is a red flag telling us a major transition point is nearby. In fact between every stage in a stocks's cycle, there's a character/ROC price change leading to the next stage. A move from a stage 1 base to stage 2 mark-up almost always sees a sharp head fake move to the downside taking out stops before moving up in to the trending stage which is something we saw exaggerated this week on GDX/NUGT's close on 8/25 before stage 2 started 8/26. Then there's this upside peeling away from the long term trend as stage 2 ends and moves to a stage 3 top (lateral) as we are seeing now. Stage 3 transitions to stage 4 after a typically predictable rounding top starts to get close to rolling over and runs a false breakout head fake leading to stage 4 decline and stage 4 decline almost always ends with an increased downside ROC on heavy volume that we call capitulation.

"To make money you have to see what the crowd missed".

 The last time we entered transports (still an open/green short), the daily chart had not gone negative, you may recall it was a very fast forming large 60 min negative divegrence. Now the daily chart is leading negative at a double top-like formation.

 The 4 hour chart was in line with the trend and goes leading negative as price peels away to the upside.

This is the 60 min chart that caused out last short entry in IYT at the negative divergence , now that divergence is worse, leading to a new low.

Once again, almost every average, group and asset saw a base at the same time in early August, transports too. I can't be sure as this is a lot of damage on a 30 min chart, but the most recent action points to a possible upside final move or head fake which would be an ideal entry.

The 15 min chart shows the same thing.

Where I'm a little stumped is the 10 min chart, although it agrees with the distribution, it's not showing anything that might support a bounce.

The 3 min chart's trend has been very accurate in confirming the move up and then showing distribution as that move starts turning sideways, or as they say, "The trend is your friend until the end when it starts to bend".

 And the 2 min chart is leading negative as far as the trend goes as well.

The 1 min chart's trend is similar, but also suggests 1 more upside move being prepared for, which would be the move I'd want to short in to, of course always double checking it for distribution on any upside to be sure, but as all of these charts lune up negative, probabilities are very high any upside move would be useful for shorting in to and would not hold as Transports are in big trouble here.

If you are interested in an IYT short, again, I'd set those price alerts. I intend on filling out the partial position entered in July. The upside risk is pretty negligible at this point as a stop can be placed above the local all time highs give or take a few additional percent to leave room for any potential head fake move as to be an effective move, they have to get retail to buy in to the move which usually means taking out some significant and easily recognizable resistance.

Market Update

The earlier concerns were somewhat alleviated for a short period as the market ramped away from yesterday's close, but in to distribution as it looks set to come back down, so now will be time to watch the signals for any additional deterioration.

 IWM intraday distribution in to the ramp...

QQQ distribution in to the ramp and coming down...

SPY distribution in to the ramp as well as all of the index futures.

This action is fine, it still remains well within the lateral trend of the reversal process near the top of said process.

GDX / NUGT Trade Update

I'm going to do a quick review of the longer term probabilities in gold miners (GDX and the 3x long Gold Miners, NUGT) and also take a look at our recent long position which is the first in some time as we have had very few signals until now which is actually good as GDX has been stuck in a lateral range that would have produced little more than break-even at best and more likely, multiple losses.

 This is a long term volume confirmed inverse H&S bottom in GDX, there's a bottom in GLD too, but I prefer gold miners as before QE they use to lead gold and I suspect (as well as from the gains we've seen) as we exit QE, they'll likely reclaim that correlation.

The choppy zone or meat grinder I mentioned above is in the yellow box to the far right.

 This is a closer look at the area in GDX, the red trendline is the inverse H&S's neckline. We opened a long in NUGT as it slipped below support on a head fake move in the white accumulation area and sold it the same day it broke out above the neckline which is counter-intuitive as far as classical technical analysis goes, that would normally be where TA would encourage you to buy. There were a few problems, one is volume confirmation is exceptionally important in an inverse H&S top and the volume on the breakout was a red flag that something wasn't right. We also had 3C signals showing us that there was distribution in to the breakout so the closure of the NUGT position led to a gain of +40% and +50% as we had two different entries,  however as you can see, we didn't leave more than a half a percent or so on the table through that choppy range so the exit in my opinion was tactically perfect.

From there we received signals to expect a large consolidation and likely a pullback which I was looking forward to as we could confirm buying in to the pullback and enter a new position, but GDX/NUGT just moved laterally consolidating through time rather than price.

 As you can see the 60 min GDX chart has not fallen apart, but it has not offered any significant entries either, more or less in line with what would probably be considered a healthy consolidation, but nit a very telling one.

The thing that gives me confidence in GDX/NUGT on a longer term horizon likely as primary trend (bull market) trades is the chart below.

The GDX inverse H&S and a huge 2 hour leading positive divegrence, the 4 hour and daily charts have interesting positives as well, but none as strong as this one. I don't think this is off the table, just on hold.

 Very recently we entered a GDX/NUGT long as a positive divergence larger than any seen over the last 2 months popped up, Trade Idea (Swing) NUGT Long and the next day we added some to the position, Trade Management: Adding 25% to Yesterday's NUGT Long.

Recently I've seen some signs that a pullback/consolidation within the most recent trade is growing...

 For example the relative negative in GDX's 5 min chart, NUGT as well.

And NUGT's 3 min relative negative as it approaches gap resistance.

For right now, both are pretty close to in line as they have been since the move up started, but I suspect a pullback is coming as NUGT is now up +12.5% on the week. I do think there's still plenty of upside room on this current leg so I'm not planning on closing or cutting back the position unless something changes dramatically for the worse.

However if you are interested in some Trend Channel stops, here are two that have held this week's trend thus far and their stop out levels on a closing candle below the stop point in their respective timeframes.

A 60 min Trend Channel gives NUGT some room to consolidate a bit, but also is a wider stop in case it does pullback soon, right now it's around $44.25 and will continue to rise for the time being. Remember the stop requires a 60 min candle to close below the highest point of the lower channel (even if the channel dips after that, it's still the highest point of the lower channel.

The 30 min Trend Channel is tighter and has tracked the trend very closely, but no stop outs. Currently this is at $44.50, but will lock in more gains a bit faster than the 60 min, but also allow less room for consolidation intraday.

As I said, I have no plans on closing the position even through a pullback as the supporting 15 min positives have plenty of room to support more upside, that is unless charts deteriorate more and look like this run is being sold off.