I wanted to show you a quick look at the market in the stage 3 perspective, which is always a larger reversal process than a stage 1 bottom, although there's no exact proportions, I suspect many of the theories like EW, etc. are following these processes simply with different names, looking at them more as a number or place than what the event is.
On a daily chart of the SPY, while many may not see it, this is a bearish Ascending Wedge, draw in the trendlines, follow the volume and you have a textbook Ascending Wedge until just after point B. As a general rule of thumb, an Ascending Wedge's price based implied target is, "Wedges retrace their base, so you could probably draw it back to the Feb. low, however that's a general rule for the price pattern alone.
For those here for a while, you may know our expectations of an ascending wedge. Technical Analysis teaches that once the wedge reaches its apex where the trendlines converge, price should break below the wedge support as it did at "B" and then continue lower to retrace the base.
However, since Technical patterns like this are so common, for a long time (actually about the time online brokers appeared and everyone started using Technical Analysis), Wall St. has head fake these patterns so they no longer look like the charts you'll find in Technical Analysis of Stocks Trends (Edwards and Magee) which has roots nearly a century old in many technical price patterns.
Our expectation is for the initial break to occur (or sometimes an upside false breakout and then a downside Crazy Ivan shakeout) followed by a new high ABOVE the wedge's apex. THIS DOES NOT MEAN THE TECHNICAL PATTERN ISN'T VALID, IT USUALLY IS, it means Wall St. knows how to shakeout traders because they follow the rule book to the letter.
When a price pattern like this fails and the failure is at"B" because it did not move to retrace the base, but broke back above the apex, Technical Analysis teaches you to reverse your short position and go long which is exactly what Wall Street takes advantage of again, knowing the predictability of what traders will do.
Why do you think the recent Investors Intelligence Bull/Bear ratio has a record low number of bears stretching back to 1987? That makes for an awfully lopsided trade and crowded one, which makes for an ugly resolution.
This has been our take on Wedges, both ascending and descending for years as this is what the market has shown us.
From a cycle perspective, the Aug. 1-8 base is a reversal process at the yellow arrows moving to stage 2 mark up and stage 3 reversal process/top, although we often see a head fake move making this rounding top look like an "Igloo with a chimney", the chimney being the head fake move to a new high above the rounding top area before heading lower to stage 4 decline (I'd estimate we see these head fake moves on all reversals up and down on all timeframes about 80% of the time.
From a closer perspective inside stage 3, volatility is picking up as we have seen a new low to a 3 trading week low.
You can also see the trend of lower highs/lower lows.
From a breadth perspective, the initial low breadth readings that first got us thinking a base and bounce were coming, breadth was repaired for about 10 days and then has been lateral for about 2 weeks before it started heading back down several days ago, meaning the internals of the market and their weakness is concealed by price action which is largely lateral.
My custom TICK indicator shows the trend in breadth.
The SPY hit a 60 min chart on the base's positive divegrence and that's the longest chart of any of the averages, obviously leading negative now.
Although we knew Tuesday night that highest probabilities were for a move higher yesterday on a 1-day oversold basis with 9 of 9 S&P sectors red and something like 17 of 239 Morningstar groups green, there was NO REAPIR TO BREADTH WHATSOEVER YESTERDAY.
Intraday the SPY isn't showing much today so far.
I've been using the 5 min QQQ as an indication of whether we are seeing institutional distribution day to day as the 5 min timeframe is about the earliest in which we see institutional activity intraday. As you can see yesterday, there wasn't much going on which I suspect has more to do with the fact that they are looking for higher prices and demand to sell in to, yesterday was mostly a buy the dip day.
The Q's aren't doing much either, although you can see the concept just mentioned, "they need higher prices which brings demand to sell in to". At each of these highs are negative divergences.
The IWM 10 min chart is acting like a barometer for me like the Q's 5 min chart.
As you can see on a 5 min chart, there have been NO significant positive divergences through this entire process.
However intraday the IWM does have the best looking chart as has recently been the case.
HYG which seems to be one of the only levers left as the carry trades flip back and forth,
apparently even AUD/JPY lost its correlation with ES today, now has nearly 2 days of a flat range and a 3 min leading positive divegrence , several others here have failed, not sure whether this one will get off the ground, but it doesn't have much more than a head fake move in it if it can fire off.
An HYG 5 min divergence would be much more impressive, but there is none and other than this brief stop, HYG is on it's way to a significant lower low changing it's Dow Theory trend status to a much more bearish classification.
Where HYG goes, the market follows...
Intraday breadth thus far has been a bit better except the open with a -1500 print, otherwise it has looked better today than any other time this week.
I'll be back to going through watchlist stocks today, as that's really the best use of my time and I suspect yours as well. Use what the market gives allows, take what the market gives.
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