Broad Market Update

Slowly the reversal process has been unfolding from the rally off the August 1 through August 8th base; it has been very present in breadth readings recently in which they recovered a lot from the July 31st close in which I posted in the Daily Wrap,  that I expected a base to form and a bounce from there, mind you that July 31st was a -2% day in the SPX, not usually the type of day that most traders would associate with a halt in the downside and a lateral base being built for a bounce.

It wasn't the nearly -8% drop in the IWM , it wasn't oversold indicators, it was purely based on breadth indications which I had said at the time, "After 15 years of watching breadth indicators, I've only seen them this bad one other time and that was at the 2007 top", they gave even worse readings the next two days to the point that only 20% of NYSE stocks were above their 40-day moving average, a reading that is often rare in even a bear market. This is what I based my base/bounce call on in the Daily Wrap after hours July 31st.

Since then we've seen distribution in to higher prices, but more importantly the lever of HYG that is used to manipulate the market higher and which started leading about 2-days in to the base building and through out a good 2/3rds of the rally, is now in its 8th day of a reversal process and creating a resistance level that's a very high probability head fake move which we see very often right before the downside reversal or the pivot.

However even more important has been breadth itself, it has shown a lot of weakness like 4-5 days of no more improvement, just stuck in place. Last night I mentioned that in my opinion breadth which was the reason I was looking for all of what has happened since July 31st, is now no longer an issue.

As such, I've collected some charts from the major averages and two of the most important industry groups for those averages. While I'm not prepared to say we are right at a pivot (especially without a clear head fake move unless yesterday's SPX $2000.02 was the head fake move), I'm prepared to say we are exceptionally close and at a dangerous area.

Here are some of the charts collected. In almost every one you'll note the base process/positive divegrence from 8/1 to 8/8 and you should see the ROC of price bending to the right from a strong uptrend.

 QQQ 60 min and the positive divegrence at the start of August, in line and a leading negative divegrence that is huge, especially in relation to the positive divegrence that got us here.

QQQ 15 min which was one of the main leading positive bases that I've been watching for distribution,  the negative divergence/distribution trend is clear and if you look carefully, it's right around the same area QQQ sees a ROC in price.

 Here on a 2 min trend both the 3C trend and the ROC of price are clear as well.

I'd say in strategic terms, we are at the pivot, in tactical terms, it's a matter of putting together the small clues and finding the best timing unless a solid head fake move presents in which we'll know that's likely the pivot as we tend to see these about 80% of the time in every asset and in every timeframe reversal up or down.

Being the NDX / QQQ is tech heavy, I monitor Tech including NASDAQ Biotechs, this is XLK, the Tech sector.

Again the divergence leading to the July decline and then the positive divegrence creating the early August base are clear, the current leading negative 60 min divegrence is certainly the largest on the chart by far.

Again from a strategic perspective, we are there, it's the timing/tactical I'm most concerned with now.

XLK 30 min moving from "in line" or 3C price/trend confirmation to a leading negative divegrence hitting new leading negative lows.

The 5 min chart shows where in the reversal process (often a rounding top) we are seeing heaviest distribution.

Just as importantly is seeing the reversal process because I've seen very few turns to the downside or upside on a pin, or a reversal event, it's almost always a process which is a function of the size of positions by those who move the market, they can't just buy and sell a position in a trade like most of us can.

XLK 2 min showing more deterioration at any chance of higher prices.

The IWM which has been a laggard through most of the cycle, while the other averages were hitting some of our upper targets, the Russell 2000 hadn't even broken above the very lowest target or the minimum target. Yesterday a lot of that was changed allowing the R2K to catch up on a short squeeze in the R2K. The R2K is now on board with the average performance during this move.

 The Russell had a very different looking basing area, totally unlike the other averages, but leading positive nonetheless. The 15 min chart was the one to watch and it is clearly in a large relative negative divegrence. I expect that this will turn to a clear leading negative before this is over, but judging by some of the recent charts, that can happen in about a day.

*also note that while the close is not in, the R2K was the only average (which easily outperformed the others) with a Dominant Price/Volume Relationship, it was posted in last night's Daily Wrap.

"There was only 1 Dominant Price Volume Relationship today which was the Russell 2000 at Close Up/Volume Up, the most bullish of the 4 relationships, but also the one with the highest probability of creating a 1-day overbought condition typically sending the average closing lower the next day."

 The 5 min chart is showing distribution at the recent moves to the upside in the R2K.

The intraday chart is as well,  this comes back to the simple concept of large institutional positions needing demand and volume to sell in to.

The SPX/SPY

 The 30 min chart shows the last pivot down in July, the base in August and the leading negative position of 3C currently.

The 5 min chart as a faster chart will always show sharper divergences and details, again the base and a leading negative divegrence hitting new leading lows.

 And the trend of the 2 min chart shows the clear distribution in smaller chunks through higher prices as we observed very early in the move, it too is at a new leading negative low as the SPX just made a new high.

Financials have a strong presence in the SPX so XLF is one that I monitor.

 You may recall the range in XLF and its inability to make a head fake move to the upside, then it started seeing 3C deterioration at which time I put out the FAZ (3x short Financials ) call, then the break below the range on August 1st and we closed FAZ long for about a 8-9% gain on the first day of the break below because that's what signals were saying, allowing us to preserve gains, but just as important as I said at the time , "You can take FAS-3x long Financials for a piggy back trade to the upside, but the bigger trade is going to be adding FAZ back above the range". The head fake move below the range created the upside/short squeeze momentum needed to get the position we had been looking for in FAZ, which I've already added back in a partial position and am looking to fill it out to a full size trend position.

 The 10 min chart with the negative divegrence in the range to the left, the August 1 closure of FAZ and the base forming right after so we didn't leave anything on the table. Also a clear deterioration in Financials.

 XLF 5 min leading positive /base and an obvious leading negative divegrence as XLF seems to be getting close to that FAZ addition to bring it up to a full size XLF (3x) short.

 And the 2 min chart's trend with the base , some early confirmation until we started breaking above the former range resistance and distribution as that was always the target, we knew that on 8/1 as we had planned to add FAZ back above the former highs/range resistance.

Recently some strong deterioration in XLF. I need to be spending a lot of time now looking for the specific entries for core positions as well as option positions which are a different entry set up entirely.

Bottom line, we're there, it's just a matter of timing and I suspect different assets will present at different times within several days of each other.