"HYG's positive divegrence this week is still there and it's not for nothing , it's not a coincidence.
While I can't pinpoint the exact moment, my guess is HYG is used to boost the market, maybe even our head fake move because the market itself just doesn't have the positive short term divergences to do it alone. However after that, I'll say HYG will be headed straight back down and I'm guessing this happens before the policy announcement on Wednesday. Judging by the scramble toward our set-up targets in several of our short set up plays today, despite a red market, it looks like they are in a hurry to get that move in place and I suspect HYG is going to help early in the week and then retreat before the market.
So rather than last week's "More of the same" sideways chop, I think the SPx's downtrend of lower highs and lower lows I have posted several times this week is a target for technical traders and HYG will likely sponsor the move, however breadth and 3C charts are so weak, that's the time to use any strength as charts like FSLR and SCTY that are up today, are so VERY close to the targets they need to hit. That's when we want to get those positions, not that having them now is a problem, I'm just looking at the best timing.
That's my take based on what I see right now, HYG sponsors an early move in the week before Wednesday breaking the SPX downtrend and getting longs to bite and by Wednesday I suspect the F_O_M_C will move us from stage 3 to stage 4 and if they don't breadth will."
This of course was all before I could see the updated, end of day breadth charts, but I had a very strong feeling that the breadth charts were going to look horrible based on the intraday NYSE TICK hitting extremes and staying pegged pretty darn low.
I think Friday's Important Market Update is crucial to understanding near term action, why taking action on any near term market gifts we may get is crucial or one of the best market gifts you can ask for and especially how badly this market has fallen apart. If you didn't read Friday's post at the end of day, this is probably one of the more important posts in over a month.
Short term we are very oversold on a BREADTH basis which has been all that has mattered. Breadth is what led us to make a call after the close on July 31st after the SPX lost 2% on the day that we expected to see a sideways price formation, a base and a bounce off that base, all based on breadth readings from after market July 31st. Last Tuesday the market has such horrible 1-day oversold breadth we were forecasting a bounce Wednesday which was the strongest for the majority of the averages for the entire week. Friday is very similar, although a bigger dichotomy and fits with the "Week Ahead" forecast, before we were even privy to the data.
I say dichotomy because between HYG (or even without HYG), short term breadth on a 1-day basis is definitely oversold with every sector red and nearly all of the 239 Morningstar Industries/Sub-Industries red.
This, taken with the Dominant Price/Volume relationship suggests a deeply oversold market on a 1-day or very short term basis right in line with the "Week Ahead" forecast, but at the same time, you can consider this as deeper erosion of the pilings that hold up the pier that we'll call the market. While most market participants are only viewing the market from a price perspective, they are missing what's happening below, the deep erosion of the support structures (I suspect this new CME rule was meant to lower market volatility as they know what's coming, but in the near term it may hasten it).
In any case, if you saw the breadth section near the bottom of Friday's EOD post, then you know that there are a fair percentage of stocks, likely nearly a majority now that are already in a bear market while the averages are held up by pier pilings that have been chipped down to virtual toothpicks, the effect of the structural failure of such a pier wouldn't be much different than the effect on the market itself, especially as liquidity providers (as they like to call themselves), HFTs back out of the market and leave it to the market makers and specialists WITH RECORD NUMBER OF SHORTS, THERE'S NO FUTURE PROMISE OF A BID WHEN THINGS GO BAD. What I mean is, a lot of long only managers won't buy a stock unless it has a healthy short interest and one of the reasons is, if there's a decline, those shorts represent the promise of a future bid when it is needed the most, during a decline. For the shorts to take gains they have to buy to cover which is nothing more than buying, a bid during a collapse and that's a promise that they have to keep, without that, there's not much to keep the asset/market from continuing to fall.
To the charts....
In yellow you see the head fake move of the pattern doing what it should and then kicking out new shorts following it. The 3rd day of this break was July 31st when we said there would be some kind of bounce coming on a -2% down day. The reversal process or August cycle's accumulation/base is seen in white, the run above stops at the yellow trendline takes out remaining stronger hand bears/shorts and the orange reversal process or stage 3 top (Usually shaped like an igloo with a chimney, the chimney being a head fake move to trigger new long orders above the rounding top's resistance before using that momentum to break down just as the break down from the wedge used the short covering momentum to send the market higher) has not seen a head fake move above the reversal process and may not, but I do think we bounce a bit from here based on the "Week Ahead" post findings and the breadth short term oversold readings Friday. Maybe we hit a head fake move, the chimney to the right (ornage) on top of the igloo/rounding top.
Note Friday's volume was higher, which is also a short term oversold signal and part of the Close Down/Volume Up Dominant Price/Volume relationship that dominated the market Friday, with the most often outcome being a short term bounce from the oversold BREADTH readings, however longer term breadth damage is done.
We do have the F_O_M_C Wednesday and as we often see, more often than not we get an initial knee jerk reaction that is almost always wrong, so perhaps they are setting up a bounce to coincide with the F_E_D's release as short term trade immediately after the release which they can control with HYG gives the first perception of whether the F_O_M_C was more dovish or hawkish , although actually reading the policy statement tells you the truth, the MARKET IS ABOUT PERCEPTION so they could easily use the post policy announcement to create a knee jerk reaction. With a great percentage of stocks already in a bear market, they need upside to either get out of longs or enter shorts at better price points.
The lateral price plot and the longer positive divegrence are still holding up, if not somewhat damaged.
I suspect this still leads and the averages get as much short term support as they can over the next day, maybe two until the F_O_M_C at 2 p.m. EDT Wednesday.
There is "some" chance that some very short term call longs may work for a bounce move as we are so desperately oversold on a breadth basis, just look at the same from last Tuesday and the reaction last Wednesday, this is much worse.
However, that's trading against probabilities, although if a good set-up appears, I don't see why we shouldn't take it. I doubt much will pop today as it is base building time.
There are issues I have set price alerts on and "Trade Set-Ups" like COF that are higher today, as I said, different trades will set up at different times, this is why the price alerts are so important. I'm not saying I would short COF right now, this is just the start of the bounce we were looking for to enter a short at better prices, but again, that desperation to get these positions off before the pier crumbles seems to be a theme.
I'll be marking more watchlist candidates for targets and posting trade set ups. As for COF, here's last week's trade-set up saying, it's a decent short here, but I'd wait for a bounce...
And on a daily chart, the bounce has started since our Thursday (last week) post looking for a bounce to use as an entry. I'd set some alerts above the previous pivot high, it may not make it that far though. Check the original post if you are interested and I'll keep it updated. Expect to see more of these the next day or two.
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