Getting Ready to Add Core Shorts Back-FAZ

Last Friday's The Week Ahead forecast was, 

"it wouldn't surprise me if we were very near the end of this bounce, maybe a day or two more, but I suspect we'll be seeing a lot more lateral (sideways) trade next week, a reversal process. which is where we'll find most of our short entries."

So far we've been right on track with additional gains Monday and Tuesday and today seeing the market flatten out ("a lot more lateral (sideways) trade") today, which is nearly perfectly on track.

SPY's Monday/Tuesday additional gains, "maybe a day or two more " (of additional gains) and today flattening out toward the reversal process. RATE OF CHANGE (ROC) IS VERY IMPORTANT IN DETERMINING WHERE A REVERSAL PROCESS/PIVOT POINT IS.

On 8/1 when it was clear a base was going to form and a bounce from that base would be high probability I closed my long FAZ position , but kept the bulk of short exposure in place. Closing FAZ allowed me some resources to play short term piggy back trades, allowed me to protect the gains in FAZ and will ultimately allow me to re-enter FAZ at a better price in full size as the previous position was not all the way filled out. I'm looking for an area to add to that FAZ position and be ready for the next leg in the market (down) as this bounce exhausts it's resources.

While the minutes just released were not taken favorably, it's still a short term intraday event so I'll treat it that way until/unless I see larger signs/signals that there won't be a reversal process, but rather a reversal event.

You have some idea of what I'm looking for in XLF and thus my FAZ long re-entry, lets take a closer look with an eye specifically to add short exposure in FAZ long (3x short Financials).

*These charts were captured just before the minutes were released at 2 p.m. EDT.

 XLF or Financials look like a solid primary trend short play as this 4 hour leading negative divegrence makes pretty clear. I'm not looking for a move of 20% in FAZ, I'm looking for a move of likely 80-100% over the primary trend's term so recent gains in FAZ have really been small trades, not positions.

Speaking of FAZ, this is the 1 min trend, you can see the positive divegrence and a buy area as well as the negative divegrence (there were more than a single chart that caused me to close FAZ) which was particularly acute on 8/1 which is where I sold the 3x short Financials ETF. As you can see, I didn't leave much on the table.

XLF on the other hand on this 3 min trend chart shows the same base at the same period from 8/1 through 8/8 with the bounce starting 8/11, since then XLF has shown significantly more distribution over the last several days than what went in to the base's positive divegrence,  in other words, on the whole this was a net distribution event. The base was only set up and strong enough to create a sustainable bounce that could be sold in to.

The Rate of Change for price this week is very important as it reveals the end of the bounce phase (with the caveat of some noise here and there and maybe a head fake move). It's clear this week that the bounce phase is ending and the reversal process is starting. How long will the reversal process be? Usually it's a bit larger than the base, that has been our experience, but many things have changed since Q3 began starting right at July 1 so this dynamic may change as well as this is the first respectable bounce since July 1 so i'll assume the concepts that have worked will continue to work, but be mindful that there have been many changes and the size of the reversal process may be one of them.

For traditional technicians, note RSI (one of the traditional indicators I still like) is positively divergent as FAZ flattens out from it's downtrend.

FAZ's 2 min chart also shows the 8/1 divegrence, again the exit from FAZ on 8/1 left nothing on the table other than open market risk, but no additional gains as that was the same period the market was building its base (8/1 through 8/8). However note the recent leading positive signals in FAZ.

The FAZ 5 min chart shows the negative divegrence leading negative by the time we reach 8/8 (the end of the market's base) and a nice 5 min positive divegrence.

What is important to remember is we are following underlying price action that contradicts real price action, a divergence alone is not a signal to buy, but an inside look at what is transpiring under the surface that is masked by real prices. I want the strongest divergence possible before entering, I also want to follow the concepts that have proven to work so well which include allowing time for a reversal process and usually a head fake move just before a an upside reversal (in this case), that would mean any strong support that develops in FAZ raises the probabilities of stops being run just before price moves to the upside. PRICE ACTION IN THE MARKET IS VERY DECEPTIVE, BUT IF YOU UNDERSTAND THE CONCEPTS AND WHY THEY EXIST, THESE PRICE MOVES THAT ARE SEEMINGLY AGAINST OUR POSITION, ARE SOME OF THE BEST ENTRIES/MARKERS WE HAVE.

Like XLF's 4 hour primary 3C trend leading negative divegrence/distribution, FAZ has a confirming 4 hour leading positive 3C trend. As far as upcoming market price action, I want to be on the side of highest probabilities which is Financials short.

 

Still, the probability of a false breakout/head fake move above XLF's range is still high. This may not happen as XLF is falling apart quickly, but it could still happen as a result of a reversal process and a head fake move which would be a break of FAZ's reversal process support and a break above XLF's reversal process resistance. For now, unless/until things show definitive changes in character and the concept of the reversal process, I'll wait for the best entry possible, b however as far as primary trend positions go, looking back a year from now, catching an entry a few percent better than today's will hardly matter.