Daily Wrap

It was another day of volatility induced headlines such as we have seen all week. You may remember months ago the warnings that as we get closer to sliding off the top and in to a bear market decline, volatility will pick up and the days of new SPX all time highs on a tenth of a percent (+01.10%) gains that were celebrated so foolishly would be seen for what they were, foolery, no one in their right mind trusts a market that makes a series of all time new highs on nothing larger than a 0.25% gain. Also along with that warning was, "As volatility picks up, market unpredictability will pick up as well", that part we haven't seen so much yet, but there's always a ramp in volatility between stages like from stage 1 base to stage 2 breakout (at least in a healthy market) and stage 2 mark -up as it peels away from moving averages higher in to stage 3 top/distribution and stage 3's volatility pick up as we move to stage 4 decline which we are seeing now.

The headlines are fast and furious and other than keeping CNBC in business as viewership plummets. the headlines are about as useful as CNBC itself. For instance, here are just some of today's headlines:

"Futures a Sea of Red", "Stocks Rebounding", "High Beta Stocks Hammered", VIX at highest since Dec. 2012", "Stocks Decouple Higher from Bonds" and all of that back and forth was just from this morning to 12 p.m. today. 

For some other useless headlines, but certainly an exclamation point on the subtle negative changes in character seen since July 1st...

-Dow Industrials lose all 2014 gains, red on the year
-NASDAQ has worst week in 2.5 years
-Dow Transports worst week in 3 years (loving that IYT short)...
-S&P-500 closes at 200-day moving average (which is one of the head fake targets posted from yesterday)
-VIX second biggest week in 4 years
-Yields close at 2014 lows
-30 year yield (remember our TLT pullback and new high called August 28th) at 17 month lows
-10 year yields under 2.3%, lowest in 16 months
-$USD up 2nd day in a row (recall Wednesday's charts suggesting a short term $USD bounce followed by a bigger move lower to come) but first losing week in last 12 and worst week in 6 months.
-Gold best week in 6 months (glad we held on to the UGLD long)
-WTI Crude worst week in 9 months (Don't forget last week's Complete Energy post from Friday October 3rd, Energy Sector/Oil Update, that ended with the warning, "I'd stay away personally. However, I would consider what these charts are telling you about the global economy and how that impacts the stock market as well as our businesses, our homes, our every day life."

The simple reason for the back and forth of headline from pre-market to noon time is most likely exactly what I said last night in the Daily Wrap,

" without the Dominant P/V relationship, I feel it's a bit shaky and would suspect we spend a lot of time tomorrow in today's lower range, just as a gut feeling."

Which is exactly what we did as we saw a lot of short term steering divergences that suggested the options expiration Max-Pain pin effect was in play, usually until about 2 p.m. as most contracts are wrapped up, giving the market that choppy feel that generated one after another conflicting headlines before 12 p.m. 

 Here's today in the SPY to the right of the red line and yesterday to the left, with most of today spent in yesterday's lower range as the op-ex pin usually opens somewhere close to Thursday's close.

The one thing we were looking for today as posted in last night's  Daily Wrap,

"I believe we are still on track and I believe a head fake move is still probable to give us a good timing indication, I couldn't think of a better day to get this done than tomorrow on an op-ex pin."

Note around what time the move lower that we need to see to confirm a head fake stop run and short magnet, actually headed significantly lower... Right after the normal op-ex pin expires between 2 and 3 p.m.

In fact...

One of the things we look for as the head fake move is only effective with it, is volume and we didn't see any strong volume during the earlier op-ex pin part of the day, only when we headed lower after 2-3 p.m. did volume pick up which is a prerequisite for any head fake move.

While there are numerous, very interesting signs and signals, patience is essential and this is where the emotion of greed comes in to play as I don't want to miss a move in such a volatile environment, but as posted at 12:49 today in, Quick Market Update

" I think we still need to be patient, I'm not convinced the low is in yet " and in fact it wasn't, the volume that a head fake move generates (one of the main reasons for the move), wasn't there at that point.

As for head fake moves, as I often repeat and did so this afternoon in the UNG/UGAZ Follow Up / Trade Management post, "head fake moves have to be convincing. UNG's break of range lows wasn't a convincing head fake move, however today's move in the averages was a bit more so...

The support area was so obvious, in the most watched ETF, there's almost zero possibility of any bounce without a head fake move lower first. Not to say all breaks of support are head fake moves, but in this case, it's a prerequisite to a bounce and I'd say it fall sin the "convincing" category. From what I understand from some of my sentiment followers, retail traders were long thinking support would hold and bounce. Hmm...

In fact, I told you already about the SPX target for a head fake being below the 200-day moving average yesterday in the post, A few Downside Target Areas which included the SPX breaking below its 200-day which it closed right at, the Dow breaking below its 200-day which it did, the NDX closing below its 100-day moving average which it did today and the R2K closing below it's 500-day moving average which it is about 9 points from doing or about 0.009% from hitting. So as far as head fake moves go, you can see from yesterday's post of expectations we aren't Monday morning quarterbacking, but expected a strong, convincing move.  The second and most important part of a head fake move is verifying it...

Interestingly, we had very few positive divergences in the averages beyond 5 minutes as of about a week ago and while intraday trade was earlier characterized as "steering" divergences to hold the max-pain op-ex pin like this 1 min chart that's nearly perfectly in line...

 1 min SPY intraday...

However, much like the 60 min ES positive divergence, we are now seeing clear SPY 15 min positives right at the "W" base anticipated, the red trendline is the area we expected a head fake move below today. I'd like to see 3C turn up from here early next week as well as the intraday charts, but those can turn very quickly, within an hour or so.

Surprisingly, we have a positive divegrence in SPY all the way out to...

a 60 min chart with a probable head fake move already in place which is an excellent timing indicator once it is confirmed.

The SPY is not the only one... as a divergence persists over a period of time it migrates or accrues on longer timeframes, all of the other major averages have the same 60 min positive as well.

 IWM 60 min

QQQ 60 min

DIA 60 min

This fits with the ES 60 min positive...

ES/ SPX Futures 60 min positive divegrence.

The 5 min chart has held up, but because we are looking at a bigger base than the typical quick swing trade, I want to see more than just a 5 min positive which is why we added the 7 min chart as well.

You can see that there was distribution in to the F_O_M_C Knee-Jerk reaction that we warned of as it's so commonly seen, plus the parabolic move wasn't going to hold. We have a slight NQ/NASDA 100 futures positive here, but this needs to be a clear and clean positive divegrence before we are ready to consider a long trade.

As noted several times today, UPRO was toying with my patience all day today, but I couldn't enter a position based on one very strong leveraged ETF, where we often first see signals and strong signals...

UPRO (3x long SPX) is not only a strong looking chart, but leading positive in to today's decline, calling it a head fake move. I suspect rather than the normal QQQ/IWM, SPY is going to be near the top of the list for potential long plays.

It was pretty clear to me today that we needed more time, especially as the potential head fake really didn't take place (judging by volume) until after 2:30 p.m. and it takes some time to accumulate the supply that is created. Leading Indicators weren't of much use today which is one of the best reasons to be patient.

 Pro sentiment was calling the market's bluff on the minutes rally Wednesday as it refused to move, but at the same time during the decline today it also refused to move lower, a positive divegrence followed by the earlier minutes negative divegrence, it's not screaming, but it's also not plunging.

 The same was true of HY Credit Wednesday as well as today, it was used as a leading indicator Wednesday and the same standards hold true today.

HYG tracked the SPX nearly perfectly to the downside so it is not leading at the moment, however the start of positive divegrences there may be some indication of what HY may be planning, along with the first minor inflows in to HY credit this week  which is the exact same thing that happened at the August lows/ cycle base.

 HYG with a late day positive in to lower prices and...

a larger, stronger 2 min leading positive in to lower prices today.

As for our VIX Inversion custom indicator and SPX/RUT Ratio Indicator...

First the red highlights are VIX inversion buy signals, I mentioned this week we got the first one since the August cycle lows and accumulation base of the first week. I also mentioned these run a few days early as you can see above.

As for the SPX/RUT Ratio, I've been showing this 60 min chart that has been suggesting the SPX move below the August cycle's base, completing stage 4 decline before it's ready, this is part was why I expected a head fake move this week.

However on anearer term basis...

The same indicator intraday started flattening out and is NOT confirming the SPX's afternoon lows as it is still above the trend line, this indicator has been spot on since we introduced it.

Other wise, we are left with market breadth.

Interestingly, our custom NYSE TICK Indicator v. SPX didn't make new TICK lows in to today's decline, but rather softened to the upside a bit.

Our Dominant Price/Volume Relationship was Close Down/Volume Up, which is a 1-day oversold event with the following day usually closing green, think of it as mini-capitulation. In that theme we saw 13 Dow stocks, a whopping 81 NASDAQ 100, 756 Russell 2000 and a strong 241 of the SPX-500. A Dominant relationship among all 4 majors.

The S&P sectors unbelievably had 2 green of 9, Consumer Staples +.48% and Utilities +.47% with Tech lagging at -2.56%. Of the Morningstar groups, 21 of 238 closed green, a bit on the oversold side as well.

All breadth indicators declined as you might imagine, but BOUNCE OR NOT, REMEMBER THE PIER AND PILING ANALOGY I HAVE MADE ABOUT THIS MARKET? Look at these select breadth indicators and tell me you can't see how easy it will be for this market to just completely collapse...

 The NASDAQ Composite's Advance/Decline line (green) vs the NASDAQ Comp.

The Percentage of NYSE Stocks Trading Above Their 40-Day Moving Average  is at a measly 13.5%!!!

And  The Percentage of NYSE Stocks Trading Above Their 200-Day Moving Average is at 31%.

While this is a market on the brink and not coming back, it is also these very deep oversold breadth conditions that led to the July 31st post predicting a bottom and a bounce which was the August cycle, of course breadth only repaired for about 10-days before sinking again, but on a near term basis, we are deeply oversold by breadth alone, I don't count price.

I still expect we will see confirmation of a head fake move which as you can already see, gives us an excellent call option position as well as entries in to swing trade longs, I prefer the 3cx leveraged ETFs, but we'll only enter them after confirmation.

This has been a fantastic month and out longer term positions we have been setting up haven't even started the first 10% breakdown of the roughly 70% gains that are made in stage 4 as most are still stage 3 so we have a lot more gains to look forward to.

We'll be looking early next week for the signs and signals to enter new longs on a strong swing trade or non conformation in which case we keep managing short positions and adding to them when and where we can without chasing.

I'm really looking forward to next week, I can see some huge potential in all of this volatility.

Have a GREAT weekend.