Daily Wrap

Today marks the 3rd day in a row the SPX has failed to meet $2000...

However the daily closes tend to mask recent trends with lower highs/lower lows and increasing volatility which we see near transition points. The closing prices tend to also skew the trend of lower highs/lower lows.

This in itself is not a smoking gun, but given the stage 3 position of the current trend and other information such as intraday and closing breadth, it is part of the evidence of a weak market which is probably why we are seeing a divergence in HYG as the carry trades (JPY based) are not acting anything like they have over the last several years with USD/JPY disconnecting completely and AUD/JPY which recently picked up the ball also falling short.

 AUD/JPY recently picked up the position USD/JPY had occupied, however this longer term 15 min chart doesn't quite show the failure in the carry correlation today.

The 1 min chart of today shows ES disconnect from AUD/JPY, also you can see the $AUD weakness that is taming the USD.

Interestingly, the MSI (Most Shorted Index) which has been very quiet the last several weeks, took on a burst of life today, apparently in higher beta Russell 2000 stocks.

Our collection of Most Shorted stocks built in to an index (yellow) vs. the SPX (green). You can see the squeeze in some of the higher beta names which is part of the reason I've been putting out trade set-ups this week as these kinds of moves are what I'm looking for to use for entries to lower risk, get a better entry, better timing and to verify that the move we are shorting in to has acted as probabilities suggested, verification of underlying weakness in to price strength, an ideal entry.

HLF may be one of our best examples of this recently as a short position as we shorted it in to it's biggest 1-day gain ever, although we weren't just shorting price strength, in fact that had very little to do with it, we were shorting underlying weakness in to price strength on July 22nd which gave us an excellent low risk entry, although at the time, pulling the trigger on the biggest 10day gain the stock has ever seen is a bit difficult emotionally, but seeing underlying trade as weak as it was helps out. The HLF short is now at a 28+% gain...

HLF position...

This is the same concept behind the trade set-ups being posted.

Despite the move in the MSI, end of day breadth readings show that even the momentum stocks overall showed no improvement today. The Percentage of NYSE Stocks above their 40-day, 200 day and 1 and 2 standard deviations above their 40 and 200 day moving averages ALL FELL TODAY! Even though we didn't have any big price gains other than the IWM and of course the move in the MSI, I would have expected them to at least hold their ground. This tells you what's going on below the surface of the price action in the averages, even with a short squeeze which can't be sustained for long considering the 27 year low in the Bull/Bear ratio from Investors Intelligence. This also creates a very hollow, thin market, not just from a breadth point of view, but a healthy short presence is the promise of future bids in the market when they are needed most, during a decline as shorts must buy to cover to realize gains (for the most part, my article "How to make more than 100% on a short" gives some examples of how some short gains are realized without covering).

While HY Credit didn't participate in any intraday gains, HYG has built a positive divegrence and helped the market from 2 p.m. through the close, although it closed flat on the day which is a far sight better than its recent downtrend.

Despite several smaller failed HYG positive divergences, I do not believe this divegrence will be run over and I don't think it's there for no reason, although the reasons may be more than just an upside lever as we head in to an op-ex Friday, it could be to get price closer to a max-pain pin, or...

HYG 10 min positive over 2-days. All I know for sure is it is enough to help ramp the market while at the same time it's not nearly enough to pull HYG and eventually the market as it follows, out of the stage 4 decline it has been in for 7 days now as it has retraced 66% of the August move counting from the very low Aug 1 intraday lows, from the Aug 1 close, it's quite a bit deeper.

The averages on the day...

While the R2K and transports were easily leading, the Dow and NDX were lagging and the SPX had to scramble in the afternoon to make it to a green close.

As mentioned, HYG was of some assistance in to the last 2 hours of the day.

As well as the MSI...

As for Leading Indicators, our Pro Sentiment indicators were split with one retreating in to the close and the other advancing, all in all with what I see in HYG and the MSI, I'd give the advancing indicator the nod , although this is a 1-day indication as the longer term has made a clear leading turn lower similar to HYG.

The two professional sentiment indicators as leading indicators have actually worked out well and have been quite accurate both short term (next day) and trend. Above you see the trend indication turning lower on this chart from the start of the August rally at 8/11.


The $USDX has been flat for 3 days after hitting 15 month highs, this is due to strength the last 3 days in the GBP and Euro as the latest Scottish polls suggest the referendum next week is a non-starter (although a new poll comes out in just a little while tonight) , combined with JPY (Kuroda) and $AUD weakness, the result...

The $USDX flat for 3-days after hitting 15 month highs.

As for the Dominant Price/Volume relationship, there was none today in any of the averages, not even the Russell 2000.

7 of 9 S&P sectors closed green, this is a far cry from Tuesday's 9 of 9 red, the leading sector was the defensive Utilities +.84%. The laggard was Healthcare at -.28%.

Among the 239 Morningstar sectors, 166 of 239 which again is a far cry from Tuesday's 17 of 239 which created what is called a 1-day oversold condition which typically only effects the market for a day or two.

The bottom line is we are now out of that oversold condition, there are no dominant P/V relationships to guide trade for the next day, the only thing standing out is the short squeeze in the MSI which didn't even move the higher momentum breadth stocks, in fact they went down today so a pretty weak squeeze, but HYG's divegrence still can push the market, although as mentioned it's nearly impossible to tell what for, a head fake move? I kind of doubt that. Maybe an SPX 2000 close over the weekend or considering where and when it formed, perhaps to move tomorrow's price action to the area of the max pain options expiration pin which is typically pretty close to Thursday's close, even though the close struggled today and needed help from HYG and the MSI.

The bigger bottom line is that breadth indicators did improve off the early August lows which were some of the worst I've seen, certainly on par with the 2007 top. That improvement lasted about 10-days and lifted the breadth indicators by about 20%, but they are deeply disconnected from the market making it very shallow , thin market. In other words, imagine the market as a thin shell of a box and the support for that is a nice full support of stocks near their highs as the market is, however when those supporting mechanisms aren't supporting the top of the thin shelled box and aren't supportive until about half way down the box, you have the ingredients for a fast collapse like the sink-hole of vortex/whirlpool analogy I used last night.

For the time being, the most constructive thing to do (is certainly not trading in a lateral chop zone), to set up trades that look like they have high probabilities, the more the better as not all are going to come to us. Once the alerts for target levels are hit, we can check the underlying action and make sure it's in line with the negative divegrence probabilities and enter at the best levels with the lowest risk, that's what this week has largely been about, just setting alerts.

I have a few new leading indicators I'll be introducing as they give relevant signals in the coming days and weeks, I'll be glad to share their code with anyone who would like to try them.

Finally the poll expected out of Scotland seems that the no vote is looking more likely sending the GBP higher, however the $USDX remains rather flat overall within the 3-day range.

Here's the move tonight at 5 p.m. EDT as the poll says the vote is likely to fail for Scottish independence. This is still only a 52% No poll, and they've been all over the place, we'll see next Thursday, Spain may be the one to watch as well over a million demonstrators have gathered for a similar independence vote for the Catalonia region which could lead to a civil war as the government does not recognize any such vote, if it were to be taken, as legal.


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