Market Update

If this morning proved anything, it's that a jittery market combined with no support from market breadth is a dangerous combination.  I think Friday's Week Ahead charts. & Daily Wrap post best captured it with the pictures at the top of the post of a nice long pier over the ocean, followed by a market breadth chart, followed by a picture of the rotten pilings holding up the pier which would not be visible to those strolling on the pier, was the best analogy. When stress, such as the events in Hong Kong are applied, the pier wobbles until it collapses. Think back to the numerous geo-political situations like the Arab Spring, the near Syrian invasion and even the Ukraine situation; we had much more dire events happening and the market at the time shrugged them off, however a protest, admittedly one that stirs some nasty memories, was able to really knock futures down and even an overnight attempt to ignite momentum with USD/JPY failed, which seems to be the new norm...rather than trying to influence the markets overnight which you'd think would be easier, it seems the PPT is doing most of their saves during market hours, I'm not sure why, although it could be connected to the recent trend NANEX has uncovered of odd lot orders and 1 millions of 1 share orders, it may just be an easier way to influence the market at speed with HFTs.Who knows?

Friday's Week Ahead foresaw some possibility for a bounce around Wednesday, the first day of the new quarter, although I'm very interested to see what tomorrow's 1-day Reverse Repo Facility ends up using as the last day of the last quarter, banks set a new record use of the facility; this is Window Dressing at its height in which banks hold assets for a single day so at the end of the reporting period they appear to have a stronger balance sheet than they actually do which we saw In April and June on the last day of the month.

While I suspect most window dressing is done because of the Trade+3 settlement rule, the new quarter starts Wednesday. This is why I suspected on Friday that a lot of the small and mid caps being dumped from portfolios (due to severe underperformance through the quarter) so they don't show up on current holdings for the next filing and prospectus for new clients, may be picked up again Wednesday on an oversold/valuation basis or a short squeeze or even just a sharp counter trend rally.

There was some evidence of this in this morning's A.M. Update in some of our newest leading indicators, now I'll show you some evidence in the 3C charts and  how I'd expect this to develop and where the opportunities likely are.

I'll use the SPY as an example first...

 This is the same chart from earlier this morning of the SPY and IWM with lower lows and lower highs, the one thing you might notice is the shorter distance between those swings  recently, a loss of momentum as it seems most of the selling for Window Dressing is complete, which is telling in itself as there's not much buying, which isn't hard to understand when less than 50% of all NYSER stocks are above their 200-day moving average.

 What I think needs to happen and probably will happen in to Wednesday is price will flatten out more creating a sort of rounding bottom, that means price will likely come down from the current gap fill of this morning, today, maybe tomorrow.

 Last week we had some 10/15 min charts with some positive divergences , but for the moment they were nothing more than interesting and something to keep an eye on as the 5 min charts before them or 10 min charts in some averages, didn't link up with intraday charts, the bridge around the 5 min timeframe was missing so until it either appeared or these divergences disappeared, they are something to keep in mind, but not a strong probability in and of themselves at that point.

 This is the 15 min SPY chart with my rough estimation of price movement over the next day or so, note that it comes back down toward last week's lows and this morning's, creating a "U" shape.

 The one thing this morning gave us is the 5 min bridge as you can see above, again the heavy lifting of moving the market is done during normal hours rather than overnight on low volume which is a bit strange, but I think NANEX caught on to a new way to manipulate the market using 1 share and odd-lot orders in rapid fire succession using HFTs.

Obviously to come back down we would expect to see an intraday (1-3 min) timeframe start to go negative like this 3 min chart as the gap fill is near complete, which gives us that rounding bottom shape and fits pretty well with ideas about what may occur Wednesday on a massively oversold basis, also interestingly were the breadth, 1-day oversold readings Friday in S&P and Morningstar sectors and Dominant P/V relationships which where stretched to the limit.

One note on that, it was only a month ago that one of these days would create a next day move in line with the oversold/overbought condition, now it's taking 2, 3 and even 4 days or more of this condition to get any upside traction, whether that's a true change in character or a result of Window Dressing is hard to say, but I lean toward both.

 Here's the Custom TICK / SPY indicator, note Friday's action as well as today's.

As for the other averages, I always look for confirmation...

 The Q's 15 min positive is there.

The 5 min bridge is now there and...

The 2 min intraday pullback negative is there.

The IWM 15 min positive is there.

 The stick save this morning on the open gives us the 5 min bridge...

And the 2 min intraday negative for a pullback is there.

As for the MSI, it was of some help this morning, not a whole lot...

 Most Shorted Index (yellow) vs SPX...

Of course the easiest way to se the intraday reversal to lows to create that rounding is the intraday TICK which hit -1800 (actually more) on the open this morning, the uptrend channel is the gap fill and that channel has been broken, so the ideas about a Wednesday bounce don't look too far off.

If we get stronger confirmation, I might consider some trading positions in 2 or 3x long ETFS like TQQQ, UPRO or URTY. However the evidence would have to be pretty strong for me to let go of core shorts and trade around this area, which would means closing positions like SRTY (3x short IWM) and buying URTY (3x long IWM) for a bounce, then selling URTY and jumping back in SRTY (3x short IWM). I'm finding the counter trend upside trades have not been easy or very successful (options any way), although there's time for them to still work, but I have to consider that in deciding if it's worth risking letting go of something like SRTY which I'd do at the lows for the market and then buy the 3x long ETF for a bounce, SRTY alone has carried my portfolio's equity line higher.

So we'll see what the probabilities look like, for a pure trader on a short term basis, I suspect you'll find there's a trade there, however for the moment until we get back down toward the lows of last week or this morning, I'd probably sit on my hands as those would be the actionable area with the least risk so long as good signals mature more.

Other than that, , since I suspect there's some time of not doing much, I'm going to keep plugging away through the watchlist and may be adding some more alerts and see what is the most enticing looking of the candidates.

I'd caution one thing though, sentiment changes fast, we (some members and I) have figured it only takes about a day and a half for retail sentiment to go from desperation to wildly bullish, be careful not to get caught up in that, those pier pilings that are rotted through don't fix themselves just because there's no waves crashing in to them for a brief period of time, the stresses will be back, that damage is there, it's at historic levels as far back as I can see and it's not going away, in other words, while there's lkely opportunities for trades, now is not the time to disregard the big picture on a sentiment shift.