Broad Market Update

This doesn't include everything that we have uncovered, in fact it's just scratching the surface, but there was a reason we suspected a strong move that would be hard to believe and even harder emotionally to short in to. In all the years of watching Wall Street set up rallies and declines, I have come to the belief that there's no "Random Walk" in the market and the efficient market's theory is just about as baseless, from what I've seen, Wall St. sets up nearly every cycle and they have a reason for them. As such, terms like overbought and oversold and indicators that display them like Stochastics, have little meaning for me. What I do find meaningful are overbought/oversold breadth situations because there's opportunity there. 

You may recall the near emergency post of July 31st showing the market was so deeply oversold on a breadth basis, any further and we'd virtually have just about every NYSE stock trading in a bear market, that couldn't be allowed to go on and it was based on that, that I suspected we'd see a base for a rally build. The next day, the first evidence of the base came in and kept coming for a week which led to the August rally, b however it did virtually nothing beyond the first 8 days for breadth and by the time we were in the rounding top, breadth was dropping to new lows.

Much in the same way, before we had any hint of a rally, I suspected Q3 Window dressing would see the worst of the worst, largely in small caps, sold of leaving them at a big discount, heavy short interest and ripe for a short squeeze rally, but by the time we got to a bottom sentiment was so bearish, everyone was on the same side of the trade and in a zero sum game you can't make money...someone has to lose for someone to win, thus the October rally became all about changing sentiment and it would require a monster move to do that and we posted that well before we had the evidence of such a monster move, HYG accumulation as a lever, Leading Indicators, etc and I even challenged members to book mark the post warning what was coming. If the move is hard to believe even with the advance warning, then it did its job which brings us full circle, "Wall st. rarely does anything without  reason.

To change sentiment, think about what it would take for you to cover shorts and what it would take for you to believe this market could make new highs and keep on going. Think about what it would take the financial media and the scores of market analysts and newsletters to change their tune from ultra-bearish to, "This time really is different, this market really can keep on going". What would it take?

We knew via the VIX term structure that this was going to be a stronger rally than the August cycle, we suspected it wouldn't be as long, but it would make up for that in volatility which has been correct.

 The IWM in my opinion is the average that most accurately reflects the breadth conditions in the market of all of the averages (not to say it accurately reflects breadth as it was just trading with nearly half of all component stocks in a technical bear market decline of 20% or more just 3 weeks ago, thus the large top should look worse), not only on a time basis as to when and where the market internals broke badly, but in the type and size of top.

If you have heard me talk about H&S tops (or complex H&S tops in the IWM's case which is confirmed by volume analysis), then you've heard of the 3 places I'll short a H&S and the 1 place I won't which is almost the exact opposite of what Technical analysis teaches. 

I'll short the top of the head, T/A does not support such a move as the top of the head represents a new breakout high with no downside confirmation. I'll short the top of the right shoulder, T/A doesn't usually endorse this strategy because the neckline hasn't been broken yet and the top hasn't been proven to be a top. The one place I WILL NOT short a H&S is at the break below the neckline, which is EXACTLY where T/A teaches us to short a H&S top on confirmation of the downside break which leaves you chasing price, way extended from any reasonable stop other than the neckline itself which T/A teaches to use as a stop which is why I won't short a H&S there as the result 80% of the time is a move back ABOVE the neckline, hitting all of the BTC stops of the new shorts (as they expect neckline resistance to hold- which is another flawed technical concept). The last place I'll short a H&S top is after the neckline has been broken and after there has been a rally back above the neckline, just like HLF shown last night, this is where we shorted HLF and this is the last place I'll enter a new H&S top short which is RIGHT WHERE WE ARE NOW (THE RED ARROW IS THE BREAK OF THE NECKLINE, THE YELLOW ARROW IS THE SHAKEOUT I'LL SHORT ABOVE THE NECKLINE). Again, see the HLF post from last night and where we shorted HLF on a strong +25% 1-day move, the biggest 1-day move in HLF ever...

HLF Reports, Not Even Stock Buybacks Can Save It... We may ride this to zero

 For the SPX, you can draw several different formations, but looking at volume and price patterns, I suspect this is a large megaphone or more commonly called a "Broadening Top. All H&S tops first start as a right angle broadening top. In this case the typical 5 points of contact to define the top were made and on the 5th price broke the top's support. While I'll ride that short lower, I won't short the break of the support line itself because like a H&S top, the shakeout of new shorts is coming.

So what does it take? A break above the 50, 100 or 200-day moving average? A parabolic move nearly straight up, which we know are unstable and almost always fail just as spectacularly as the start? A certain number of days, which is an easy emotional barrier to break and turn when you watch the market closely every day. As my girlfriend flies news helicopters, I've learned a new ad interesting saying that applies to the market as well,  "When in doubt...zoom out."

Perhaps a new higher high is what it takes? I'm often surprised how even the most seasoned professional traders can have their otherwise unflappable emotional indifference to the market really manipulated against everything they know as objective evidence to the contrary once the market hits extremes that they didn't expect. I'm constantly surprised how extreme the market is vs. what would seem to be reasonably extreme, however I try to still maintain my composure based on objective evidence and if that evidence dries up, I'll be the first to flip sides.

As for some of the charts I want to share with you, they are more extreme in many ways than most I have seen or at least far more extreme than the market use to be before the F_E_D got involved. However at this point it's not just the long term charts and /or the intermediate charts, it's the short term timing charts and quite a bit more extreme than I'd have imagined, but then again, look at the volatility and moves we are getting from these extremes. Right now I'd say we are as close to a full house with regard to multiple timeframe analysis than we have been.

 IWM 2 min... Remember, the HYG positive divegrence I was concerned with last week was in place and looked like it not only supported the market through the roughly week long positive, but more specifically, the market right around October 30th, the day after the F_O_M_C, the day of the NYSE breakdown and the day before the GPIF announcement sending stocks higher. There are a lot of charts with strong distribution right in to the 30th that may not have made higher prices without the support of HYG's lever and other levers.

 IWM 3 min with the base and the divergence in to the 30th, then price supported by a market lever like HYG, news, etc, but not 3C as we get worse leading divergences. Sell price strength, but price weakness is Wall St's thing.

IWM 5 min with 2 of the cleanest examples of divergences you can ask for.

 IWM 10 min from an extreme leading positive at the lows to an extreme leading negative at the highs.

When you hear all of the newly christened bulls who were raging bears 3 weeks ago talk about how the market can make all of these insane upside targets, other than looking at a chart like this, ask them where they were 3-4 weeks ago and what they were predicting for the market.

It's amazing how market sentiment changes what people find in the market to support their views and how fickle those views can be based on sentiment moves over a small period of time.

IWM 15 min

QQQ 1 min and the rough area where it was already very negative, but got extra help from things like the NYSE breakdown, 2 week old news, USD/JPY,, HYG, etc.

QQQ 2 min trend leading deeply negative

QQQ 5 min

This QQQ 15 min is impressive in how deep and how fast it has lead negative.

And the longer term or highest probabilities at a 2 hour QQQ chart, this is one of the simple reasons I have strong conviction we make new lows and continue doing so. I always wonder during a strong move whether it is strong enough to make a change here where highest probabilities are, instead it's a reflection of how much distribution actually occurred in the move, not how strong it was.

SPY 2 min with the NUYSE break now becoming less and less of an anomaly of concern. The worst damage above occurred after the tainted data.

 SPY 5 min leading negative at a new lows and a VERY sharp move the last 2 days.

 SPY 15 min and the declining 3C highs right in to a leading divegrence.

 SPY 30 min,  I can't think of too many times in the past in which I'd ignore a chart like this and not be set up short by the time there's this much damage in place.

 XLF intraday 1 min trend really turning negative on a timing timeframe the last several days, a very impressive divegrence despite the sorter timeframe.

 XLF 5 min with the positive sending the market to the extreme highs, still not as extreme as a similar move at the 2007 highs. Tis nearly new leading low with price where it is should tell you how much damage can be done in a blink of an eye. Breadth charts as I tried to show Friday are in the same situation. This is what we would cal a gingerbread house, it looks good on the outside because of a new coat of paint, but that paint hides all sorts of structural problems just waiting to break down.

 XLF 10 min shows clearly the current divergence, but more than that, the more subtle signs on the chart include where price was at #1 and where 3C was at #1 vs where both are at #2, even without the leading divergence to the downside, there's strong information there if you just compare.

 XLF 4 hour is a nearly impossible divergence to overcome, this is the primary trend type divegrence seen in AAPL at all time new highs shortly before it lost nearly half of its value in 8 months.

XLK/Tech 5 min

XLK 10 min and another relative comparison telling us just as much as the leading negative divegrence.

 XLK 60 min tells us a lot, especially vs price action.

And XLK 2 hour is picture perfect with trend confirmation and distribution in to the first top and even worse in to the second, it pretty much tells you what Wall St. is up to, they aren't just buying and selling ranges and swings, otherwise the 3C reading at the far right wouldn't be where it is on such a long chart.

This is a pretty clear reason as to why I'd use any price strength available to back up the truck.