Market Map

Earlier in the week we had some good 5 min positive divergences building in assets like VXX and VIX futures, I'd never enter a VXX trade that early on, but it shows a process taking place away from risk and toward protection.

The VIX charts are continuing to build.

 This is a VXX 15 min chart, the 5 min positive divergences were strong enough and growing that they've migrated to longer timeframes like this 15 min chart,  I would not enter this as a long trade here because there's not a sufficient reversal process, but I do want the majority of my portfolio shifted back to the bearish stance (thus adding FAZ back today, but leaving some room to add to it).

As you know, VIX/VIX futures trade opposite the market for the most part, there can be differences in relative performance and they are often good indications, although subtle. The downtrend in VIX futures correlates with the market bounce off its Aug 1 through Aug 8th base, that's about a week long base with positive divergences on 10-15 min charts. It's not just the chart timeframe that tells us something about the strength as almost all of the averages have now hit our upper targets, it's the size of the base and similarly in a reversal / top, size counts as well.

In the area of the reversal process where you can see VXX's price rate of change start moving more to the side than down, VXX is building stronger divergences/accumulation while the market averages are doing the opposite.

Looking at a 30 min chart of the Q's, it was in line with price (moving together) at the rally/bounce area, but this week as we expected a couple more days in the bounce and then a reversal process to start, you can see the divergence form on a very strong timeframe, you can also see the rate of change in price changing as well and QQQ is moving more sideways than up.

Looking at the NASDAQ 100 Index Futures, again you see 3C confirming the bounce/rally until about this week where 3C goes leading negative on a strong 30 min chart as well.

VXX's divergence has continues to grow larger, this is no different than the market's positive divegrence as it grew larger from Aug 1 through August 8th, this is the process of a reversal.

We're even starting to see it migrate to a very strong 60 min chart.

Looking at intraday charts is a lot different than looking at a daily chart, intraday charts seem to drag on forever, but looking at a daily chart and the previous reversals both up and down, you see a proportionality to them depending on the preceding trend , top and base. If QQQ were to just head nearly straight down from here, you can see it would be out of character with the Q's normal trading character. there's a process for a reason,  this is why many technical traders won't take a divegrence on an indicator like MACD until there are 2-3, that's their rule, but if they understood why it's usually 2-3 divergences before the MACD signal is correct, it's the time it takes to create a reversal process.

This is a rough guess as we do have Yellen tomorrow and everyone has a different opinion, most that she'll come off as an uber dove to counter yesterday's minutes, some think she'll be hawkish, many think she won't get in to monetary policy at all, but taking away that unknown, this is what I'd say we have left in the reversal process, a bit more sideways either a rounding top as shown or a "W" or rectangle range like the base in white. I'd say about 80% of the time, especially if there's a clear resistance area formed during this time, we see a head fake move that shakes out shorts, brings in new longs and then fails, that's at #4. Number 1 is the standard cycle of base/accumulation, #2 is mark-up/rally, #3 is top/distribution and usually 4 would be decline, in this case I put in the head fake move we usually see right before a reversal takes place so what I have labelled as #5 is actually #4 in the cycle, decline.

For now, VXX as well as other assets are confirming the process is moving along.