This morning's first 45 minutes of trade has been more interesting than the last 13 hours of trade for the new week.
First I want to start from a bird's eye perspective because "if" we do get the bounce I suspected after Q3 ended yesterday at the close, it needs to be put in to context. Then we'll look at the very early indications, of course some of the intraday charts "may" be out of date already by the time this gets posted, but the concepts at least are worthwhile and thus worth posting.
The SPY Daily chart shows a macro version of a concept we have held to be reliable for years now regarding bullish Descending Wedges and bearish Ascending Wedges. The classical definition or expectation of a wedge, in this case a bearish Ascending Wedge such as we see to the far left is that as the Wedge approaches an apex (convergence of the two trendlines), a break to the downside should occur, the sooner the break before the actual convergence of the apex of the wedge, the more bearish the break is and we saw just such a break at the green arrow.
We have NEVER trusted that interpretation of this price pattern, although I believe the wedge's overall presence is a real one and a bearish one, it's just what technical traders expect to happen after that is where Wall St. steps in and changes the game, using Technical Analysis against traders.
We have always held that the Wedge will always make a head fake move ABOVE the apex, which nullifies the Wedge's importance to technical traders, seen as a failed price pattern.
In this case specifically, new shorts following the initial break below the wedge would be caught in a bear trap as the break rolled right in to our August cycle low/base at Stage 1 (S1) followed by stage 2 (S2) mark-up which creates the actual "Wedge" head fake with a breakout above the apex.
Technical Analysis dogma dictates a failed price pattern means you should reverse you position so all of the initial shorts at the first break would cover and go long giving price enough momentum to break above the wedge's apex or high, which in this case creates a large Crazy Ivan shakeout eventually, taking both shorts and longs out.
As we follow the August cycle it moves from stage 2 mark-up to a stage 3 top and we expect to see a rounding reversal with a head fake just before a turn down to stage 4 decline, this is the "Igloo with Chimney" price pattern we look for in yellow with the chimney being the last head fake in the August cycle and almost immediately after that price starts to decline as the head fake move is one of our best timing indications for a transition from one stage to another like from stage 1 to stage 2 or stage 3 to stage 4.
THUS FAR THIS IS A PERFECT ASCENDING WEDGE HEAD FAKE PATTERN WHICH USES NEARLY CENTURY OLD PRICE PATTERNS THAT ARE STILL FOLLOWED AGAINST TECHNICAL TRADERS AND THE AUGUST CYCLE'S STAGES HAVE PLAYED OUT EXACTLY AS THEY SHOULD COMPLETE WITH THE "CHIMNEY" HEAD FAKE.
So in essence, we have a very complete, very bearish overall picture above.
As for the IWM's daily chart, I've held for most of the year that we are looking at a type of H&S top, they almost never look like the textbook in real life, this one would be considered a "Complex H&S top" and beyond 3C charts and Russell 2000 component stock internals, the volume action is one of the best confirming indications as volume should be light on the rally and heavy on the decline as you can see heavy volume in to every decline throughout the price pattern,
this is why volume analysis is so important, as well as being severely under-apprreciated and overlooked by most traders; it's giving us strong confirmation which we couldn't find anywhere else.
Transports, the Dow-20 / IYT should confirm the Industrials as Dow Theory goes, but the US is not an Industrial economy anymore, it's a services economy so confirmation with the SPX is fine while the IWM typically leads the market, it's clearly leading to the downside.
As you can see transports have the same price pattern (Ascending Wedge) which is why our first entry was right near the top of the Ascending Wedge and based on the belief that this price pattern that we have seen so many times would play out like it did in SPY above, we filled out the Transports short on confirmation of our price pattern concept at the second high, the one that breaks above the wedge's apex to average in a better entry, while still giving us short exposure to Transports (IYT short) which is at a profit already.
As far as the stage 4 decline, I'd say we are clearly right in the middle of it or at least the start as the IWM has done nothing but
make lower highs and lower lows, a perfect downtrend.
*Note the large volume today to the far right on this 15 min chart.
A closer look at that volume reveals heavy volume this morning below support,
this is very often short term capitulation, meaning we can often expect a base to start to form or finish up if the break is deemed a head fake move.
Here's a clearer picture of the break in IWM, the heavy volume is key here, more often than not traders take it to be a bearish sign, but it typically is a short term oversold sign.
As far as this week's trade, the only real base area we had in the SPY 15 min chart above was way too small to be of any use, the base area needed to broaden out and accumulate which is why I kept saying it needed to come down toward the lower end of this week's range,
but it wasn't entirely clear if they were going for the best close they could get on the quarter which would prevent any such move or if it was just a pin to try to keep the market where it was rather than a worse close.
Also note volume here today below the support area.
The DIA has done the same this morning, pulling back to the right area as well as higher volume below support.
And the Q's were close to doing the same at the time of capture,
they have now done the same.
The SPY was in line early this morning on the decline.
However, the IWM was showing initial signs of accumulation of the large supply of shares as volume increased.
It has not migrated to the 2 min chart, but these are very early captures just after the open.
HYG from yesterday saw a negative divgerence sending it lower today, you may recall it infected the 1, 2 and finally 3 min chart.
There's still an overall sizable HYG 3 min positive, even though the most recent signal is a smaller negative, but I'd say, on the whole, there's probably still gas in the tank from the initial positive divegrence here, meaning HYG, could be supportive of a market bounce.
After 3 mins, HYG is just in line so this doesn't indicate anything other than support for a bounce, not any serious change in character to a bullish market.
Most Leading Indicators have turned supportive including sentiment and High Yield Credit, this is on a very short term basis (late afternoon yesterday through this morning for HY Credit). % year yields are an exception as they have fallen to revert to the SPX's lower price and our new VIX Inversion indicator and SPX/RUT Ratio indicators are silent on the matter, in line with the Russell 2000.
The MOST recent 3C data from this morning is showing the SPY, IWM, QQQ and DIA all with positive divergences in to this morning's lows through the 1-3 min timeframes, so far right on track for what we suggested we may see Wednesday in last week forecast, the Week Ahead.
IWM 1 min
IWM 2 min
QQQ 2 min
DIA 1 min
Interesting
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