Daily Wrap

In mid-October after a horrendous decline and even worse bearish sentiment, at zero on a scale of 0-100 in the Fear and Greed Index, we predicted that this wasn't going to be a bounce, but a sentiment changing move, that it likely was going to be a sharp upside reversal rather than the normal reversal process which it was as well. The SPX regained its 200-daym, it's 100-day and the area we expected on a short trade volatility shakeout, the same concept as the H&S initial neckline break and following shakeout of new shorts.

SPX breaks above the blue 200-day, yellow 100-day, 2013 uptrend line and the Broadening top's neckline, which was the main target. In the process the SPX saw the best 2 week swing since December 2011 and the best week since June 2013, that should change sentiment as the boat was way too crowded on the short side and just to illustrate a point, the Most Shorted Index saw one of the biggest moves in years which was the initial premise of such a move after Q3 window dressing was completed and before we had the first sign of any accumulation. Small and mid-caps were among the most shorted and they were squeezed higher, although on today's op-ex pin, small caps underperformed.

This is what nearly 2 weeks of accumulation buys, remember it started Oct. 2nd and ran through Oct. 15th. True to the concept, ALL of the major averages ran above the level at which we first saw accumulation despite how much longer it went on at lower prices as is always the case.

Still, the SPX is red for October.

Once again, as the trend has been for October (above average volume days have been down and below average volume days have been up-the exact opposite of a healthy market), NANEX proves to us that liquidity in the S&P E mini contract was abysmal...

NEAR RECORD LOWS!

And that's how they get it done, just like this week's break in the NYSE of 150 symbols including XIV which ripped higher on no liquidity and the market followed it. Otherwise they've been breaking exchanges (whoever they are) with quote spam, 10,000,000 quotes a second until an exchange breaks and liquidity falls apart, interesting all of the ways they have learned to manipulate a market.

However the big event the market may be looking to front run next week is the F_O_M_C on Wednesday, this time no press conference after and Monday is the last scheduled POMO day with a Billion dollar POMO scheduled which "should" finish QE unless Bullard gets his way and they continue at a pace of $15 bn a month until December, but we didn't hear about that ever before until the minutes from the last meeting were released with concerns over global growth due to a strong $USD, then QE noises were made which of course drives the $USD lower so I think it's jaw-boning the USD which just had the first weekly close up in the last 3 after about 12 weeks of gains previously on EUR and JPY weakness.

I personally doubt they change QE, I don't think it's a matter of QE, employment, inflation or anything else, I think it's a matter of the F_E_D's balance sheet as the BIS recently stated, it's so bloated they don't have the capacity to respond to even a run of the mill recession. Don't forget, the F_E_D has shareholders too.

Despite how strong this rally was, despite whether it succeeded in swinging sentiment, it did succeed in getting shorts to cover, the bottom line is market breadth hasn't improved and is as broken as ever which is just a house of cards waiting to come down, actually a house of cards that has already started coming down.

As to the additional charts I mentioned, as I said I suspect early weakness next week judging by this short term SPY chart.

 SPY 1 min

QQQ 1 min in a range

And the larger picture, IWM 10 min, although I suspect there will be some initial relative performance issues between the SPX/QQQ and the IWM early next week.

Other charts...

While no one chart is a Holy Grail, as I said earlier today, it's a matter of probabilities and which way they are pointing, that's the best you'll get unless you wait for the move in which case you missed it.

 The longer term Custom NYSE TICK Indicator showing breadth running low in the uptrend.

HYG distribution as I posted in the middle of the week,  you may recall before the move started me showing HYG accumulation and saying, "There's only 1 reasons they'd accumulate HYG, that's to support a market rally", now we have the exact opposite.

HYG's actual price is the leading indicator as you can see it has been lagging the SPX the last few days, 3C signals are just early warning that this scenario is a high probability.

 Professional sentiment has also been lagging this week and today specifically...

Pro sentiment refusing to follow the SPX any higher, in fact moving lower.

And one of my favorite, Yields as they tend to pull equity/SPX prices to them like a magnet as they are leading negative, wait until you see the 30-year yields vs the SPX below.

Interestingly the VXX/Short term VIX futures was one thing I was looking for to enter final short positions, today it clearly outperformed the SPX in green which has its price inverted so you can see what the normal correlation would look like. Perhaps hedges in to the weekend? Perhaps, but with everything else, I suspect there may be more than meets the eye beyond hedges.

Given everything we see above, remember the 15 min VIX futures leading positive I showed earlier in the week? This doesn't look like last minute Friday hedging for the weekend.

15 min accumulation of VIX Futures nearly all week, but growing in strength in to the later part of the week.

And spot VIX vs inverted SPX prices also showing more resiliency than would be expected.

That comes complete with a VIX Bollinger Band Channel Buster and...

a clear VIX sell signal from our custom DeMark inspired buy/sell indicator meaning it looks like we may have seen a flameout here as well.

And the 30 year rates vs the SPX. The last several times they diverged negatively the SPX lost, the only time they diverged positively the SPX gained and now they are at one of the largest divergences again.

The Dominant P/V Relationship for all of the averages except the Russell 2000 which didn't have one was a second day of Close Up/Volume down, the most bearish of the 4 relationships. During the decline we saw these in clusters as well rather than the normal 1-day overbought/oversold. There were 24 Dow stocks of 30, 76 NDX of 100 and 319 SPX of 500 so it was VERY Dominant.

As for the S&P sectors, again 7 of 9 were green like yesterday but with Healthcare leading and Energy lagging. Of the 238 Morningstar groups, another whopper at 194 of 238 green, like yesterday creating a 2-day overbought condition and...

Market breadth is still no better for it, the pilings under the pier are as rotten as ever (% of NYSE Stocks > 40-day m.a).

I look forward to getting back on the short side and making more money on the next inflection point, I hope you have a GREAT weekend.