Leading Indicators / TLT Update

When it comes to Leading Indicators, the analysis is much the same as 3C, we look at these in multiple timeframes and multiple asset confirmation, divergences are almost always the signals of choice. In fact you can apply the very same concept to almost any market indicator and multiple timeframe analysis with higher timeframes representing the highest probability for the longer term resolution and shorter timeframes representing near term price action, using divergences, are almost always superior to how the indicators are put forth by TA. For example, a Stochastics oversold/overbought signal is no where near as useful as a Stochastics divergence and the longer timeframe represents the larger trend while the shorter timeframes represent the bumps in that trend. I can almost guarantee, whatever your favorite indicator is, its most powerful signals are divergences.  Take MACD for example, many people use either the two moving averages and will enter or exit a position on the cross over or for those using a histogram, the same can be said of a cross over below or above the middle / zero line, however 2-3 daily MACD divergences in a row are a far more powerful signal giving you crucial information about the trend. From there you can fine tune the actual timing with multiple timeframe analysis using a 60 min, 15 min chart, etc.

For any who aren't already familiar with these concepts as we use them every day, here's an example using TLT, which we originally put out a "Pullback" warning on August 26th, TLT / Treasuries. If you look at the post from 8/26, you'll see the longer term charts were all in good condition and only shorter term charts were negative suggesting a pullback. Once a pullback starts, it will almost always surpass the area in which we first identified the divegrence even if the divegrence wasn't mature, TLT pulled back further than our initial warning so even an early TLT short on the 26th would have made money. *This has some severe implications for the broad market.

While we expect a pullback and not a reversal of trend, we can only verify that as TLT pulls back and check for the accumulation that should accompany a pullback.

The first HINT of a positive divegrence in TLT came September 9th, TLT-20+ year Treasuries , Update although this was only telling us that the pullback was likely in fact a pullback, not giving us a strong reversal signal.

By September 11th, the divergences needed to suggest the pullback was ending were starting to form and TLT, although just recently turning up, has nearly surpassed that area where the first stronger "end of the pullback" divergences started.

Here are the charts and the concepts of multiple timeframe analysis using TLT, which was just posted in Friday's Daily Wrap and earlier in the Week Ahead (so this is timely for those interested in TLT long, 

From the "Week Ahead" as part of the week's Dominant Analysis...

"The daily TLT chart with out initial post calling for a TLT pullback on 8/26 , the pullback and recent posts calling for an upside reversal which we got today. This should send leading yields lower and the market is attracted to them like a magnet as we saw this week again." 

However for near term TLT analysis and it's effect on the market short term:

"recall our recent posts that TLT was about ready to end its pullback and move higher, well it did so today with a +1.27% move and that's with giving quite a bit back this afternoon as we forecasted earlier today for a short term correction allowing a long entry."

Today TLT closed up +0.10%, losing momentum and forming a reversal star candle, right in line with TLT's major trend and minor trend, which has market implications which are in line with both trends.

This is the initial longer term perspective calling for a TLT "Pullback" starting 8/26, as you can see, the pullback surpassed price from 8/26. However in to that pullback (and what we needed to see to confirm a pullback), we have a positive divegrence that sent TLT higher Friday, even though very near term we expect a small correction allowing for a better TLT entry. Remember that yields move opposite bonds (TLT =20+ year bond fund) and the market is drawn to yields like a magnet.

So far so good for the initial TLT pullback theory as the pullback from 8/26 looks to be over and verified as a pullback.

The shorter term 5 min TLT chart shows the accumulation of the pull back's base, this is what we want to see, without this accumulation (if 3C just follows price), the move down would more likely be a trend reversal than a pullback which is an excellent entry point.

Note the upside down Igloo with a Chimney (head fake move) in TLT's base and the positive divegrence throughout sending TLT higher least week. Also note the smaller, most recent negative divegrence along the lines of the short term correction we predicted Friday in TLT.

So far the longer term 5 and 10 min charts confirm a pullback that is complete and very short term correction as we suspected Friday making TLT a good looking long still as a slight pullback will allow us to enter at better prices without chasing the !.2+% gain from Friday. However this also has market consequences as a leading indicator as stock prices are attracted to yields which move opposite bonds/TLT.

So we go to shorter timeframes now that the bigger picture looks established.

 The 3 min chart shows a negative divegrence today that is about in line with the market averages' positive divegrence today which is great confirmation as a pullback in TLT will send yields higher and market prices are attracted to yields most of the time supporting the positive divergences seen today, even though they are very minor.


 And the 2 min chart confirms the same. It seems through multiple timeframe analysis as well as multiple asset as we already know what the averages did as far as their divegrence today, we have a high probability scenario which is in line with Friday's Week Ahead expectations of the major dominant theme being market weakness, but an early in the week bounce as the weaker theme.

Leading Indicators...

Today we expected a bump in the overall theme for the week which is stage 4 decline, some of which we are already clearly seeing in price action, but we have nearly a full day of positive divergences being worked out in the averages, mostly in the IWM which I suspected would try to break it's downtrend line on short term price strength or the minor theme...

The IWM made a lower low today which I'm not complaining about as my SRTY (3x short IWM/Russell 2000) is racking up gains every day, however, to get retail traders off the bearish side of the boat, breaking a technical price pattern usually will do the trick and the IWM's is one of the most visible.

The concept of the break above are still short term only, but when used with the longer strategic charts, they are excellent for tactical analysis in determining the most likely near term price moves and how you want to use those price moves.

Here's a quick look of what we already suspected to be the highest Dominant theme and short term probability with the argument for the longer term probability over the course of the week being made in Friday's, The Week Ahead, DOWN.

 One of our newest Leading Indicators is the following screen with the SPX on top (although the price trend of the Igloo top looks compressed), in the middle my SPX/RUT ratio indicator used for confirmation/non-confirmation of price moves and in the bottom, my VIX Inversion Indicator, the red bars that are also painted on price show high probability long entry areas just as we saw early August as the 8/1-8/8 base was being formed with 3C positive divergences.

Also note the SPX/RUT Ratio Indicator did not confirm a lower low in price, but rather supported the VIX Inversion signal suggesting a move to the upside was likely as well as 3C showing the same and an extremely oversold breadth condition.

The major trend in the SPX/RUT Ratio currently is non-confirmation of higher prices experienced in the "Chimney" or head fake area of last week, so again we have strong confirmation from multiple indicators and multiple assets.

For those newer to 3C, I originally names the indicator as I did as a very basic, but important reminder to "Compare, Compare, Compare". Now I might say, "Compare, Contrast and Confirm" are equally as appropriate, but that's what you find when you compare as many assets in as many timeframes as possible.

 This is a short term 1 min chart of the same 2 indicators above and what this shows us is first there's no strong VIX inversion signal, although VIX fear is rising, but not to the level in which it is a contrarian signal.  The SPX/RUT Indicator however, on a very short term, shows both the non-confirmation of last week and some very basic confirmation of today's lower low. There are several takeaways, first since this indicator didn't make a higher low as compared to last week's trend, any short term upside is limited a expected in Friday's week ahead post. Also the indicator intraday looks a lot like price so it is not sending a non-confirmation signal on a very short term basis along the lines of today's short term signals, but it is capping those by having ultimately made a lower low for the entirety of the chart, which speaks to the dominant trend for the week, DOWN.

 As for HYG which has been used to amazing effect through all of August and most of September so far, it is slightly leading on a VERY short term basis, offering the market VERY short term support.

When looking at the entire August Cycle which we are still in and the preceding sell-off that brought t us to the August lows, you can see clearly how HYG has led the SPX anywhere from 4 days to over a week and at this point the dominant trend is HYG is already in stage 4 decline, despite the last week and a half's breather which supported the head fake move in the market last week and perhaps the BABA IPO.

The Dominant trend take-away from multiple timeframe analysis is the market's probabilities are to follow HYG and move to stage 4 decline, which the SPX is only about 15 points away from, the Russell 2000 has already entered stage  4 decline, the NDX is about 52 points away from stage 4 decline.

Our near term Professional Sentiment is exactly in line with price, it is not leading, it is not divergent, thus it's not telling us much except it's not standing in the way of today's divegrence, but it's also not showing any leading qualities for a near term bounce off today's underlying price action.

As for the dominant theme in the cycle...

 Interestingly Professional sentiment is nearly perfectly in line with the SPX until the SPX goes to make the head fake move or "Chimney" on the rounded Igloo top, at that point, pros want nothing to do with a head fake move, they are busy selling. This supports our Dominant trend view of the market for the week.

 Yields short term show regression to the mean in green, today they show slight positive leadership which again is along the lines of the divergences we saw which we weak and the move we expected from Friday for the early part of this week, a weak move and the dominant move being DOWN.

HY Credit shows the same intraday, in line with price, not leading either way. However....

On a longer term view, again, like Pro Sentiment, HY Credit falls apart at the market's head fake move last week forming the Chimney.

More to come in the daily wrap.