Daily Wrap

I'm actually at a loss for what occurred today, this is what I have been warning about, as the market gets closer and closer to a full blown decline, volatility and unpredictability pick up which is the reason I would not close any core short positions even if I thought there was a high probability I could trade around them. Instead I chose to open some smaller speculative hedges using options like the 8/8 IWM $110.50 calls or XLF 8/16 $22 calls,  all speculative size and when working, doing more than a sufficient job at hedging short exposure as yesterday IWM calls were at a gain 5 times the SRTY decline, unfortunately I broke some of my own rules in opening too short a duration (8/8 expiration) and didn't take gains as quickly as I normally due, of course expecting we'd be in a bounce by today.

The day was characterized by a lot of volatility, futures were down overnight on the Italian triple dip recession as well as poor eco-data from Germany and the UK with Bunds hitting record low yields as the flight to safety trade was on.

The US opened to a 13 month low in 10-year yields at 2.3%...

An initial flight to safety trade, but short lived as 10- year Y's closed at a still low 2.47%

Treasuries in general acted a bit strange compared to what I was seeing in the 3C charts (intraday) of the averages.

For example...

TLT (20+ year Treasuries) were mostly in line with their normal correlation vs the SPX earlier today (green arrow), but then sold off with the SPX in an apparent flight away from safety which would have been fine  if there was strong intraday accumulation among the market averages, but there wasn't, which forces me to consider some other possibilities that we may not have out in the open, but smart money does. For example, the Treasuries sudden fear that they may not be able to finance government if they lose access to markets for more than a day or two, why this fear right now and what would cause them to lose access to markets (in the past super storm Sandy and 9/11 caused them to lose access)? In any case, as I said earlier today, I'm not going to cry wolf or make major forecast changes due to some short term moves in the market intraday.

Speaking of which, you may recall about a year or so ago when I was tracking the ROC of the carry pairs looking for the exit of smart money from the carry trade they use to leverage up their AUM in a risk on environment. You may know that to close a carry trade, it's basically the reverse of opening one (borrowing/selling low yielding currencies like the Yen and buying higher yielding like the AUD or USD), thus we look for selling in the $USD (which can be difficult to tell why) and the purchase/return of the Yen which is what I stated back in April of  2013 in "Currency Crisis", most specifically to look for a rising Yen around the same time of a falling stock market.

Today's "What the Heck" moment came with the fall of the $USD around 12:15 p.m. as over $3 bn notional of Yen was purchased sending the green back lower which looked like this...

$USDX in candlesticks and Yen futures in purple as the Yen gained on large volume and the $USD fell. I can't be sure if this was a large carry trade being taken off or the BOJ intervening in the market as the USD/JPY was above the BOJ's line in the sand of $102 (approx @ $102.30 just before the event, but in decline from yesterday/week's high of $102.91). The pair is currently at $102.11 as a good deal of the decline was retraced.

This is around the same time we started getting unusual 3C readings as they had opened on strong intraday positive divergences 

carrying over from the last 2.5 hours of trade yesterday.

1-min chart of QQQ last 2-days... #1 QQQ positive divegrence.
 #2 exceptionally strong leading positive during the last 2-2.5 hours yesterday afternoon.  As you know and have seen numerous times, 3C divergences on the averages and equities (although not Index futures) will pick up where they left off the next trading day (even over a 3-day weekend) which is what we saw on the gap down open as 3C was in leading positive position on the open sending the market higher and filling the gap plus some. 
#3, which looks like a small stop run (I'm guessing this was an SPX 100-day moving average stop run-see charts below ).
#4 a negative 3C intraday divegrence just before the $USD dump.
#5 3C is in line with price which is not unusual, but...
#6 3C is leading negative intraday.

The 2 min chart doesn't look much better, but it hasn't migrated to the 3 min chart, thus I think a little patience is worthwhile. The IWM looked similar, the SPY showed 3C relative out-performance and the DIA was in line intraday and leading positive both on 2 and 3 min charts which only adds to the confusion...

 DIA 2 min is already leading as shown earlier today, the 3 min adds a leading positive intraday about the time I said I expected the IWM to reverse to the upside intraday, Market Update.

In addition, as I was trying to express, it's not generally wise to make longer term decisions or forecasts based on short term events, thus whenever I'm having a difficult time with short term timeframes I look to the longer term trend that reduces noise, such as this DIA 5 min leading positive divegrence which is still very much in line with the bounce forecast for this week from last Friday, 

DIA 5 min leading positive divegrence in the area we expected the base to widen out. From this chart and others in the other averages, it looks like the bounce is still very much on, however don't forget that the last 2 (minor) bounces have been exceptionally weak with instant distribution on any price strength unlike the character of a bounce just 3 months ago.


SPX & 100-day moving average

 SPX just breaking the 100-day this morning and bouncing off it, but technical traders take these areas of support and resistance to be exact levels rather than areas , thus stops are often placed right at or below exact levels of support.

The SPX daily chart now only breaking the 4-month increased ROC trendline (which is a seemingly bullish event, but often leads to major red flag changes in character) and trendline support broken with the SPX putting in a bullish daily Star (bullish upside reversal candle). Again, I don't consider the market oversold on a percentage basis or an indicator basis, oversold can stay oversold longer than you can stay solvent as you may have heard. I base the oversold status on market breadth including only 20% of NYSE stocks above their 40-day moving average, a reading that is often worse than what is seen during a bear market decline as well as Industry groups closing red in huge proportions.

Not to stray too far, but UNG long, which we entered July 31st, Trade Idea: (Swing Trade +) UNG / UGAZ and expected to bounce this week as of last Friday, UNG Should Lift Off Next Weeklooks as if its reversal process (nearly textbook) is over and the mark-up (stage 2 in this smaller cycle) is underway with a +1.26% gain today and our UGAZ long at a +13.30% gain.

UNG daily reversal process and entry  (5-days ago including today) looks strong for it's break to stage 2, mark-up or in this case of a smaller cycle, counter-trend bounce.

Our HLF Short which we just added to on July 22nd, Adding 25% to HLF Short Position is up +22.5%,  however it looks like it's near a bounce which should be useful to bring the 75% position size up to a full position size, I'm looking to add in the area of $61.50-$66.30 (it's a wide gap). I'll cover this in more detail tomorrow, however as a core short, this one is doing excellent and is a textbook example of our H&S top entry and add to areas which can also be seen in a recent update from July 30th, HLF Position Follow Up.

Our NFLX core short is doing well, but I suspected we'd have a second chance shorting opportunity or add to on a bounce which I played with NFLX 8/16 $420 calls that are up +9.5%. Looking at NFLX today, it reminded me of the broad intraday market action as well as a number of individual stocks and industry groups, which almost caused me to close the call position,  again this is not my norm to let them run this long.

 NFLX 2 min intraday showing the same leading positive divegrence yesterday afternoon that all of the major averages showed as posted in last night's, Daily Wrap .  However, like the broad market today out to about the 2 min intraday chart we see a negative divegrence that moves to leading negative.

Much like many other assets and market averages, this 15 min NFLX positive divegrence suggests more upside, but we could be seeing migration of a negative divegrence that is making its way to the longer timeframes like this 15 min chart which is what I'm most concerned about right now after today's activity, not so much because of the call, but just to make sure all of our short positions are filled out or back in place in time.

The larger, highest probability 3C forecast on a 2 hour chart shows small accumulation at #1 which is support of a Broadening Top running in to #2 which is distribution on a head fake move or "Failed breakout (also known as a bull trap). #3 is the area I was hoping we'd be able to add to NFLX shorts or open new positions for those interested and #4  is a deep leading negative divegrence making NFLX one of my favorite longer term position shorts.  While the probabilities are quite clear,  the timing of the trade makes all the difference which is why our core short is in good shape as we entered at an average of $416.08. I'll cover NFLX more extensively in an update tomorrow.

Transports are now down the most in 6 months, we entered the short position in IYT on July 25th at $150.85 which is just off the all-time closing high of $151.62, Trade Idea: (Longer Term) IYT Short as Transports set up a head fake move above a bearish ascending wedge. Today Transports added another +.60% to our equity short currently at a +4.95% gain as we entered just off the all time high. Today like so many other assets, transports ended the day with a bullish (short term) Star candlestick on increasing volume making it a likely bounce candidate which is good as I have room to add to the position. What is odd about today is the intraday charts depicted some worrying weakness for our bounce forecast, however the daily charts taken by themselves look very much in line with a bounce.

For example, the SPX closed at a minor loss of -0.01%, but formed a bullish Star closing candle and at 100-day support which was cleared of stops early this morning. The SPX also formed a bullish short term candlestick reversal called a "Tweezer Bottom"...

SPX with what is about an appropriate size (proportional) reversal process with a Star and a 2-day "Tweezer Bottom) right at the 100-day moving average. Part of me wonders whether today's intraday negative 3C action is setting up an early morning, more aggressive stop run below the 100-day before reversing to the upside. Again, we need to show some patience and see if this may be the case or if the negatives on mostly 1 and 2 min charts (perfect for an a.m. stop run below the 100-day, creating upside reversal momentum as new shorts entered and are squeezed) are going to start migrating (showing a stronger negative divergence) to more important timeframes like the 3 and 5 min charts.

However, on a daily chart basis, this looks very much like an upside bounce is more than ready to go.

The Dow has a similar chart pattern (+0.05% today), also with a bullish candlestick reversal Star and a bullish reversal "Tweezer Bottom".

Today is a Star, the last 2-days form a Tweezer Bottom.

The Russell ended the day with a gain of +.44% with several opportunities today to take the IWM calls off at a significant gain (which I should have done considering expiration). The NDX closed down a mere -0.03%, the IWM being the out-performer and Transports being the weakest on the day.

Speaking of the SPX and the recent topic of High Yield Credit outflows which I covered July 30th , High Yield Credit (HYG) Heavy Distribution,  and some very recent (Weekly/Monday) small inflows which I mentioned this morning in A.M. Update and suspect they are there as part of a short term bounce trade, the S&P has just seen the largest outflows since 2008!

While on the subject of  macro outflows, short term/small inflows into HY credit this week and my earlier post today showing some massive intraday deterioration in High Yield Corporate Credit posted this afternoon in Market Update, lets take a look at the market moving lever, HYG.

 Intraday it's almost as if the HY Credit market KNEW the $USD dump was coming as this intraday 1 min negative divegrence was showing distribution about 15 minutes before the Dollar dump. Later in the day HYG recovered to at least an in line (confirmation ) status rather than continuing to lead to a deeper negative divergence.

The 3 min chart which also shows clear distribution before the Dollar dump (also note that as I often point out, quiet, flat markets are often where we see the largest underlying flow of funds making quiet markets ironically deceptive)  also recovered to at least "confirmation" status.

 Toward the close, HYG (blue) led the SPX (green) which is one of the reasons we use it as a Leading Indicator, suggesting the SPX (even after a shakeout below the 100-day m.a. early tomorrow) should move toward HYG's position as HY Credit is used to fool the algos in to thinking institutional money has taken a risk on position which causes algos to buy.  A more elaborate version of this is the SPY arbitrage using HYG, VXX and TLT.

 On a multi-day basis, HYG is still leading the SPX higher at our anticipated "wider" base, even though HYG is seeing distribution on a stronger / longer scale (5 min charts) in the area.

So there's no confusion about the highest probability macro market forecast, this is HYG on a strong 4 hour chart showing distribution at "1", look at the size of the divergence and how much damage it did compared to the current divergence at #5. At #2 we have a small accumulation area sending HYG higher and at #3, price/trend confirmation. At #4 we have distribution with a strong relative negative divegrence which led to a stronger leading negative divegrence and took HYG down to new lows for the year, the 3C divergence is at multi-year leading negative lows meaning HYG has a lot more downside to go and as a leading indicator, the broad market hasn't even seen a scratch on the surface of the damage about to be done.

Gold, Silver and as expected, GDX (Trade Idea (Speculative Very Short Term) GDX Calls) were all higher on the day, even before the $USD dump.

USO was down -0.61%, however as posted today, USO Bounce , I expect a modest bounce in oil.

Brent Crude futures (15 min) are also showing a positive divegrence. At this time I don't think this is worth the risk in trading, however if a larger divergence is built, it may be.

As mentioned earlier, Treasuries saw a large "Flight to Safety" bid on the open with 10-year yields hitting 13 month lows at 2.30% which were short lived. In what seems like a move away from safety and toward risk, Treasuries spent the rest of the day selling off (rising yields). There could be several reasons for this, but again, looking at the longer term trend for our bounce, we still have solid divergences for the moment.

 SPY 60 min leading positive

QQQ 10 min leading positive

IWM 15 min leading positive.

I still have to stick with the short term higher probabilities despite today's whacky trade signals. Again, based on what I can observe, my "Guess" is for an early run below the SPX's 100-day m.a., shaking out longs and pulling in shorts which is a head fake move that leads to upside reversal momentum so long as any such shakeout can be confirmed with intraday positive divergences.

Other than that, the Dominant Price/Volume Relationship for the averages' component stocks was the most bearish at Close Up/Volume Down. This often leads to next day weakness, however I think we are seeing the broader macro trend in these readings and perhaps they shouldn't be taken for such short term indications.

Of the 9 S&P sectors, 4 closed green with the defensive Utilities being the worst performer, again a short term indication of a bounce.

Of the 239 Morningstar Industry/Sub-Industry groups I track, 137 closed green which is FAR better than yesterday's abysmal reading of 32 green of 239.

Of my Breadth indicators, most were almost completely unchanged from yesterday, however some are worse such as the MCO Summation Index at a reading of nearly -1500 (this is a trend since July 1st).

The percentage of NYSE stocks above their 40-day moving averages improved marginally to a mere 22.5% from yesterday's 20%! As I said, breadth indicators were little changed.

While I'm not specifically talking about near term possible bounce action, breadth indicators are at the worst levels I've seen in 15 years, surpassing the horrible levels of the 2007 top, this is horrendous breadth that is worse in many cases right now than what is observed in a full-blown bear market so ANY price strength in to any of our short set-ups should be considered while giving yourself enough room on a stop to let the position work as volatility will likely increase. You don't need to know the probabilities anymore, they are solid, you need enough time to survive volatility to let positions work. As Jesse Livermore (World's Greatest Trader) once said, "DON'T GIVE ME TIMING, GIVE ME TIME".

I can't wait to see how our MCP long reacts with some 66 million shares short on tonight's announcement of the financing that we suspected was behind the long/strong positive divergence.