Market Update

This is one of those days in which Kenny Roger's theme song about playing cards really applies, know when to press your advantage, know when to back off and know when to look for tells in other player's faces (I'm not sure if he covered that one).

In any case, today just isn't a day for doing much other than observing for the most part and position management, but that doesn't mean it won't be an actionable area very soon, it just comes down to objective evidence, how much there is, what the probabilities are looking like, the risk, etc. before we jump off and make a bunch of moves.

In that spirit, I'm updating the market again, I think you know what my basic premise or theme is for the week, a pretty decent probability of a post Q2 end (Wednesday) bounce or building in around that area. When I say bounce I am not saying anything other than that, a normal market corrective move, not a change in our long term analysis/Highest probabilities.

Leading Indicators are REALLY pulling their weight and give us a perspective that we wouldn't have without them. That perspective is not useful at all unless it's taken in whole, if you take the signals from the Leading Indicators using multiple timeframe analysis, they virtually tell you what to do, how to do it and when to do it. The longer timeframes are always the strongest probabilities and the trend I want to trade with, the shorter term indications are tactical ends to that mean.

 The SPX chart (Daily) shows a possible candlestick formation known as Falling 3 Methods, a consolidation/continuation pattern that ends with a move lower, however typically the second day that is inside the large down candle body (Thursday) would be higher than Friday's, that doesn't look like a certainty. Another possible candlestick formation would be several inside days or what would be considered a Harami Reversal and that would be to the upside, very short term and with a hammer like candle developing today, this looks like a stronger possibility and it's in line with our hypothesis for near term trade for thee week or the middle of the week.

 The VIX Inversion and more importantly here, the SPX/RUT Ratio Indicator in the middle on a 1 min chart, from left to right shows Thursday as being a small base as the indicator is positive and Friday we get the bounce off that base which sees the indicator turn negative right in time for this morning's drop to a new cycle low, yet the indicator is positive at the lows this morning and we have a gap fill or thereabouts and at #4, we're pretty much in line. The VIX Inversion is close to a buy signal, even though small ones are for small moves and larger for larger moves as you'll see below.

This is a longer term 15 min chart of the same above covering the July decline and the Augsut cycle with the indicator at #1 contradicting rising price which turns to the July decline, at #2 a positive indicator as the SPX makes lower lows in a small range we identified as a stage 1 base and as we reach stage 3 top in the August cycle, the indicator is negative through stage 3 as well as the "Chimney" head fake or failed breakout attempt and at #4 we have a new low so the larger picture here is calling SPX prices lower, the very short term picture, while not decisive yet, is in line with the ideas we had about this week and the end of Window Dressing/start of the new quarter.

 This is the SPX price inverted so you can see the relative performance of VIX futures vs the SPX, they are outperforming on an intraday basis, so there's a sense of  fear in the air which is what we usually will see at a short term bottom.


 Spot VIX vs the SPX is showing the same, nothing out of hand, but it gives us a hint of what sentiment is broadly speaking.

HYG continues to do as predicted not only in making lower lows, but in leading the market as it has down for several months now. After this morning's new low it went essentially neutral on the day.

 This is a VERY clear break on a long term chart for HYG, it is one of the clearest signals as to where the market is going. There are reasons beyond just "Equities follow Credit", there are arbitrage relations as both are arbitrageable and while this can get in to all kinds of areas, the gist is, I've never seen Credit diverge from the market like this and the market not respond (poorly in this case).

Again, as mentioned above, the perspective offered by leading indicators isn't all that useful for actually making money (although you can impress your friends with stock market macro predictions) without looking at multiple timeframe analysis.

 Pro Sentiment  is improving as the day goes on which is about right as you may remember one of the things I was looking for earlier this morning was for prices to pullback a bit to create the rounding bottom and leading indicators responding positively in to that process is just more evidence.

Our second version of Pro-sentiment used for confirmation shows the same so it looks like pros are getting ready for a short term bounce trade as well.

Of course back out and look at the big picture and you have a different view, take the two together, first understanding the big picture and then the near term and you have a road map for which way to trade and when/where you'll get the best entry and the lowest risk.

 Yields are still calling the market a bit higher, nothing crazy, not even nearly as strong as the divergence at the head fake move for the week of the 15th.

 HY Credit, this type is not used as a lever like HYG, is deteriorating, again telling us that near term price strength is an illusion if you're thinking it's anything other than the short term move (still a probability, not a high one yet).

And the long view of HY Credit shows what I've said numerous times, as Q3 started on July 1st, everything changed for the worse and has been getting worse since.


The TCK...

The near term TICK trend (1 min)...


As for 3C charts I try to save for last so they are the most up to date.

As for Index futures divergences, I usually look for at least a strong 5 min chart's divegrence to trade from, in the current situation, almost every timeframe of 3C applied to Index futures is simply confirming the downside trend. The 5 min charts do not have either a divegrence or one that's anywhere near reasonable size for me TO CONSIDER CLOSING SRTY, SQQQ (3X INVERSE ETFs) and try to trade the long side and then re-enter back on the short after a small bounce.

I can't say that this may not develop tomorrow and perhaps I'll take a different view, but for now this looks like a lower high/lower low swing to the upside that's barely stronger than the last lower highs that have defined the downtrend, so thus far, just not enough evidence to let go of these positions that have been making money nearly every day and have created a nice smooth equity up-trend.

 The 5 min SPY has a positive divegrence, it's just, "Is it big enough to warrant taking the risk of letting go of winning positions as the market gets more volatile and less predictable such as the nearly 1% gap lower on a Hong Kong protest.

The divegrence on the SPY 3 min should be obvious, I drew in the rounding reversal process, at this size it's ok, but not worth the risk of changing positions,  at this point the play for me is still the same as last week, short price strength is appropriate assets like PCLN.

 QQQ 5 min and its divergence which are really 2 distinct ones, but the second is stronger than the first.

 And the 1 min chart so far leading, so unless there's a deeper pullback and bigger base, I can't justify the risk of letting go of shorts that are working for some small long gains that could give way any minute with such a minor base for support.

 IWM 15 min, a nice divegrence, just not a big enough base area so I'd want to see price follow the yellow arrow and the divegrence to continue positive to consider trading around this area.

It's not a matter of probabilities as to whether the market bounces or not, it's a matter of the quality and reliability of that bounce.

 IWM 2 min

And the afternoon TICK, not anything extreme, about +/- 1000, again, this is all in line with the 1-day oversold readings Friday, it's in line with the Week Ahead idea of a bounce in to Q3 on Wednesday or in to it, it's just not enough to take the risk of going against the path of highest probabilities.