Daily Wrap- Lowest gets Lower

The one metric/indication that virtually no one cares about (and perhaps while the Bernanke put was in place and promises of always being there for the market it truly didn't matter) which I guarantee will come raging back with a vengeance as the new crop of "BTFD" traders has grown up in the market with no clue as to what to do with it,  and that indicator is Volume .

On August 1 through August 8th we built a base with pretty decent accumulation, enough to hit all of the upside targets we set well over a week ago (except the Russell 2000 which still has barely made it above our minimum target), but as I said back then, despite what price looks like during this bounce, THIS BASE/DIVERGENCE ARE NOT A GAME-CHANGER, it's a bounce off a deeply oversold market in terms of breadth (with only 20% of NYSE stocks above their 40-day m.a. at the lows).

One of the most ominous indications of this rally being a suckers rally unless you know what to do with it is volume. Last week which is the week we forecast as being a solid move up ( as opposed to this week being more transitional) saw S&P futures volume at -40 to -55% below average. Yesterday volume collapsed to the lowest non-holiday volume of the year, today it set a new record low for the year (lower than yesterday's). Any trader around since before 2009 knows volume matters and with the Bernanke put almost completely removed and rate hikes obviously coming sooner than later, volume will be one of the most important indications in judging a move, in this case it's an abysmal failure.


For me, one of most interesting events was the much anticipated and patiently waited for, break above XLF's trading range. To understand the concept here as it is such a common concept in every asset and in every timeframe you might trade, I'd point you to my two articles that are always linked on the member's site,

Understanding the Head-Fake Move... How Technical Analysis Went From an Asset to a Trap

and

Understanding the Head-Fake Move... Motivation

To give a brief synopsis (as there are probably close to 50 posts on the subject since June) XLF was in a range, when we have well defined areas of support or resistance in popular assets, the probability of a head fake move is almost certain.

XLF is one of my core short positions (actually FAZ-3x short Financials) that I use as part of my diversification.

 While we were inside the range, I carried a partial FAZ long position with the intention of adding to it on a break above the range, as that no longer looked like a probability as the market's 3C charts started falling apart, I added to the FAZ long and gained approx. an 8-9% gain.

On 8/1 as XLF broke below support I closed FAZ long, Closing FAZ Long and the reason was the simple, to lock in gains and as a positive divegrence was already showing, I had a good feeling I'd be able to add FAZ back above the range or pretty close.

On August 5th (while we were still forming a base), I posted, Trade Idea: (Short Term) XLF / FAS

"XLF has done what I wanted to see, a wider "W" base as well as a head fake move under Friday's intraday lows. I'll post al of the charts next, but for now I'm going to enter a speculative size August 16th XLF $22 call position. For those who prefer not trade options, but would still like a little leverage, there are the two ETFs,  UYG 2x long Financials and FAS 3x long Financials."

This was a "piggy back" long trade as the base in the market/XLF was looking strong for a bounce, but a bounce that we knew/know will fail.

On 8/8 I posted a reiteration, Trade Idea-Set-Up (Swing) XLF / FAS, this was the last day of the base before the market took off to the upside.

"XLF/FAS looks pretty good for an upside move next week."

"On 8/1 I posted, Closing FAZ Long but I didn't open anything to replace it such as FAS long, I wanted to wait and make sure there was a strong trade there. Right now, FAS/XLF long looks like one of the stronger positions out there for a market bounce."

On 8/14 the following was posted, XLF Trade Set-up & Update

"On August 1st I closed a FAZ (3x short Financials) position, Closing FAZ Long ...

"This is just for now to lock in gains, I'll decide later if I'm going to add a long like FAS for a bounce."

"It was already obvious at the time that we were going to be building a base of some sort and I didn't see the risk of holding FAZ any longer as being worth the potential reward..."

This is the actual chart for the XLF/FAZ trade set-up from the post linked above...

As you can see, the entry I was looking for in FAZ long was a break above the XLF range which happened today, thus the partial position entry today (about 75% of a normal position size). 

This is how XLF acted today upon a very parabolic move above the range...

 A clear 3C negative divegrence/distribution which is the confirmation we look for in a head fake move.

The daily 3C chart already shows the highest long term probabilities are down so the head fake trade will resolve to the downside putting the FAZ position at a gain, but I left a little room to add.

The Daily MoneyStream chart shows the distribution in XLF just as 3C does.

Ultimately it was the concepts (Understanding the head fake move" that allowed us to forecast this trade set up a week in advance, you knew exactly where to set alerts, what to look for and what the purpose of the trade was, a longer term position/core short.

This is an excellent example of the concepts linked above that can be used on any asset, any time frame chart for any style of trading. Now, it's just patience, letting the reversal process finish up, but I have my core positions back in place while keeping the 9% gain and getting a better entry with lower risk and higher profit potential.

As to the market today, we ended the day with VERY sharp leading negative divergences as you saw in EOD Market Update that were all at VWAP's upper channel, for instance...

 The DIA's deeply leading negative divergence. although this is part of the reversal process and expected to be seen, there are a couple of other possibilities.

Tomorrow is an op-ex Friday (not standard), there may be a pin lower. I think most probably though this has to do with Yellen's JAckson Hole appearance tomorrow. It may be someone knows something or it may be taking risk off the table in front of an unknown. The vast majority of pundit opinions is that she'll come out uber-dovish to calm the markets after the hawkish minutes yesterday. I'm not hazarding a guess, but if she's hawkish it won't be pretty for the market and the FAZ position will pay off, if she's dovish we may get a kick to the upside, but the FAZ position will still pay off as the charts are far too damaged.

Gold as we saw today and GDX put in sharp divergences, although positive. Remember, these fell on the minutes knee jerk...

These charts are why I added to yesterday's NUGT position today, Trade Management: Adding 25% to Yesterday's NUGT Long , this wasn't dollar cost averaging to escape a losing position, this was a position entered with room to add in the risk management purposefully as I even referenced my willingness to add on a break of local resistance which happened today.

HYG has been deteriorating and is one of the leading indications that will be useful in timing our entries for our short watchlist...

As you've seen, HYG has been leading the SPX since the base started on 8/1 and reverted to the SPX yesterday (no longer leading), you can see a clear transition for intraday in line or price / trend confirmation to a trend of distribution and especially this week as we forecast last Friday. HYG started falling apart in to the close today.

Bonds are getting interesting, I showed the TLT accumulation on it's knee jerk lower on the release of the minutes, it keeps looking more and more interesting as mentioned in this morning's A.M. Update.

There are several potential reasons, chief among them is the lack of high quality collateral banks need which was addressed last night in Daily Wrap, F_O_M_C Knee Jerk Style..., particularly in the part about Bank Window Dressing and about 1/3rd of a trillion shortfall in collateral they borrowed from the F_E_D on a reverse 1-day repo setting a new record use of the facility to make their balance sheets look stronger than they are.

Another reason may be the rotation among pension funds out of stocks and in to the flight to safety bond complex. Finally today German 30 year Bunds and US T's hit a record wide spread with German bunds yielding 1.85% while UST's are at 3.19%. We'll be covering TLT a lot more in the very near term. Here's how it performed vs the SPX today...

This is TLT (white) vs the SPX intraday,  anyone notice a problem here? SPX is in a weak risk on trade (+.29% today to set a new record high, which is pathetic) while treasuries are rallying as a flight to safety trade at the same time... Perhaps it's the rotation cause by the reversal process? 

One of the other "Minutes" knee jerk moves was the $USD, I warned in this morning's update that there were negative divegrences there and $USDX looked like this...

 The 5 min $USDX with a negative divegrence has retraced a good portion of the knee jerk higher on the minutes yesterday.

Part of the reason the $USD was weaker today was Euro strength, here's the 5 min Euro single currency futures with a leading positive divegrence so I'd be on the lookout for additional upside in the Euro near term, we'll look at how it develops longer term in the days ahead.

As expected this morning, AUD/JPY led ES as you can see today.

I don't see anything that suggests an imminent decline for the carry pair.

Today's price action (other than the IWM intraday off the lows) was that typical low vol. melt-up that we saw back around the first half of the year with new highs being made on +0.10% moves, that use to be a flat day that was nothing but noise.

The major averages looked like this intraday...

The laggards were the recently very strong NASDAQ 100/QQQ and the recently strong, as well as recent short set-up and current partial short, IYT/transports which were posted as a set up yesterday, IYT/ Transports Trade Set-up. The Dow led at +0.36%, the NASDA lagged at + 0.16% and transports were the worst at -0.39%.

Like yesterday, both our Leading Indicators/Professional sentiment fell off again, yesterday was the first time in more than a week of confirming the bounce, today they looked even worse.

Note today's rapid rate of decline vs the SPX,  another clue we are well in to the reversal process.

I showed recent positive divergences/accumulation in VXX/VIX futures, that has grown from a 5 mi chart all the way out to a 60 min chart today and VXX is outperforming its correlation with the SPX.

Just another clue pointing to a downside market reversal.

As for market breadth, it barely moved at all today or yesterday.

 The Percent of NYSE stocks > than their 40-day moving average was 82% late last year, it should rise or hold with a rising market, it fell out earlier this year and recently git an unrecoverable point with lows within a week or so at 20%, worse than a full fledged bear market. This is why I expected a bounce, deeply oversold market breadth, but it has barely recovered and I don't expect it will. The orange hash mark shows how much breadth in this indicator has moved the last 2 days, almost nothing.

 I found this old note using the same indicator in which I was demonstrating how it was used to call a bottom at 2009, in similar, but opposite fashion, here it is calling a top now.

Note the inability to make a new high or even meet the last high even though the SPX made a new high today, this is bad news with almost half of all NYSE stocks trading below their 40-day average.

There was no Dominant Price/Volume Relationship today, not even co-dominance.

^ of 9 S&P sectors closed green, you might guess which one led, Financials at a gain of +1.18%, at #8 (second worst performing) was yesterday's leader, Industrials. There 's a lot of that today, worst performing yesterday are best today and vice-versa.

Of the 239 Morningstar Industry/sub-industry groups, 151 closed green, 5 of the top 10 were Financials.

Gold and Silver were the 2 worst performing sectors today (-2.39% and -2.19% respectively).

VIX has the look of a possible bottoming candlestick, while the Q's look the opposite. I still think the IWM makes another shot at a move higher being such a laggard.

Other than all of that, it's just a matter of time//patience.

Of course the main event is Yellen at 10 a.m. tomorrow at Jackson Hole, we'll see if she tries to tone down the minutes even though the market knee jerked on hawkish minutes, but as usual, the knee jerk reaction is almost always wrong.