Broad Market / Credit Update... VERY UGLY

We've been using High Yield Credit as a Leading Indicator for years now, typically we get small signals like the Aug 1st HYG bottom while the SPX didn't bottom until 8/7 and in this context with positive divergences in the SPY, QQQ, IWM, etc., HYG/Credit is acting as a leading indicator and telling us we're going to see a move higher, we were in front of the August move by about a week with the first hint of a base / bounce on July 31st when the SPX was down 2%.

It's not that often that we get BIG signals from credit, but when we do, I've learned you better pay attention.

I'm getting pretty jumpy about the market in this area. I still believe in the head fake concept as a high probability, but thus far we haven't seen it, just about 8 days of ranging.

I've already shown numerous times how HYG led the market as a Leading Indicator at the previous pivot high that sent the SPX down 4% and IWM down over 8%, how HY Credit led the market's base on 8/1 as the base didn't complete until 8/8 and the market low wasn't put in until 8/7 so HYG led there by about 4 days and of course the move from stage 2 mark up for this cycle to stage 3 / top, which HYG also led. Last night I said HYG was now leading the move to stage 4 decline, today has been nothing but proof that this was correct. How long the market has after HYG has transitioned to stage 4 is a guess, but looking at the past month+, it seems about 4-days, of which we are already in to 2 of them.

As I look at the averages, I'm seeing more rapid deterioration, yesterday's gap up and sell-offf on ugly 3C signals was one thing, but today as the market is basically doing nothing more than a lateral move by taking back early gains, I'm seeing more ugly signals, take this QQQ chart...

The leading negative divegrence on a 5 min chart which is about the earliest timeframe we see institutional activity on an intraday basis , is at a steep leading negative, new low. This is out of proportion with the ROC of 3C over the last 2 weeks.

As far as HY Credit and HYG especially as it is the lever that is most often pulled to goose the market, it's ugly...

 HYG (blue) vs SPY/SPX (green) intraday, today we see credit on the retreat, obviously the ECB was priced in and maybe a disappointment either way, this is a strong leading indication that we'd never ignore and rarely see this divergent.

 As far as the reversal process area from which HYG which led the market and the SPX , as they lose upside momentum and the ROC declines until upward price action is virtually lateral, again  HYG has led in stage 3 (top/sideways reversal process. HYG has also led now moving to stage 4 decline.

As I said yesterday,  if there wee enough beta or good leveraged alternative, I'd be short HYG right now.

 And here's the entire August cycle trend with HYG bottoming first and heading up first at least 4 days ahead of the SPX. HYG turns lateral first, days ahead of the drop off in upside momentum/ROC and it runs down first as it should as a Leading Indicator.

 As far as HYG divergences, this 30 min chart is at a 10 month, leading negative low, even though price is no where near the low of this chart, a new leading negative low for all of 2014.

If HYG can do anything to support the market over the next few days, it's not going to be for anything more than a head fake move. This kind of divegrence isn't recovered from on a whim or in a few days and I don't think smart money has any intention of bidding HYG up (for any other purpose than very short term head fake move if it can even do that).

The 15 min swing chart is at a new leading negative low for the year, but more importantly for the immediate cycle we're in. I'd say "IF" HYG is used as an market support lever, it's not going to see much more than a gap fill at the yellow area, there's too much damage here.

 The 10 min chart is at a new leading negative low for as far back as I can go , March and likely through all of 2014,  but look how sharp that distribution is.

And the 5 min chart is at a new leading negative low. Without a divergence here, HYG isn't going to do much if anything at all.

We haven't seen HYG lead on this kind of serious length for a while, mostly shorter term stuff, there's real fear in HY Credit and the markets almost always follow credit. I really can't see more than a couple of days left for this cycle before stage 4 decline and with the kind of bull/bear ratio we've seen at lows not seen since 1987, structurally the shorts aren't there to bud a decline (take profits and offer a bid).