Broad Perspective

Consider this an "Anchoring Expectations" post or maybe better a "Perspective post". I thought about this a lot last night, I spoke with Andrea who is also in the stock market for 30 minutes and we rarely talk shop. It sunk in more last night as Im was watching the Nikkei sharply selling off (I almost posted, but it was pretty late) overnight with the USD/JPY in one sharp move...

 NKD 225 futures with a sharp decline last night as I was watching in real time, the USD/JPY was also making a similar move at the same time. This was a nearly 500 point move from high to low in a very short time.

Watching these intraday moves is interesting, sometimes exciting, but it's not what's really important here, just like the intraday moves around October 14th and 15th, they were interesting, but it was the culmination of nearly two weeks of evidence that created the move higher, the "Face Ripping " rally. It was the larger perspective, for instance looking at the Nikkei above and below are two very different things, one was immediate excitement, nearly 500 points lost in less than an hour or...

The Nikkei 225 futures in line/ 3C confirmation to a huge leading negative divegrence. It's this chart which is important, it's this kind of chart that told us the face ripping rally was coming when 100% of traders in the Fear and Greed Index survey were bearish.

It's also this chart that's the hardest to get people to believe and take under consideration as we tend to watch the market too close and put too much importance on intraday trade.

So far this morning, everything is in line intraday...

 SPY in line

QQQ in line

IWM is in line, but stepping back just a little, the IWM is not in good shape...

This is still a simple 1 min chart, but in context it's far from in line, still this is looking at the market with a microscope.

 This 5 min trend of the Face Ripping Rally and the 5 min QQQ leading negative divegrence is a serious divergence,  this is the kind of divergence I say, I never ignore".

I have 100% confidence (myself), this is coming down and hard, I suspect it will make a new low for the year.

However, this too, as hard as it is sometime to get people to see the value of this signal, is still looking at the market too closely and getting lost in lines, although very important for tactical trade set-ups...

 This 60 min chart of the QQQ with the July divergence sending the SPX 4% lower and IWM 8% lower was strong, the August cycle's top in the middle was even stronger sending the market to new cycle lows below the early August base, but the current divergence is by far the worst of the lot, especially vs price, that's the key to a divergence, the difference between the indicator and price and there's a huge one here.

As I said to Andrea last night, "As strong as I suspected the upside rally was going to be, I suspect this move down is going to be even stronger", after all, this move was set up to shakeout shorts as the trade is a short trade, this was a distraction, it had to be strong enough to change sentiment, that was the job as there were too many people on the same side of the trade, short.

I also said to Andrea last night that in mid-October when I was saying this will be a face ripping rally and challenging members to bookmark the page/post that said it will be so strong you'll doubt yourself, you'll fear the fear and it will be hard to take action (something no one could imagine at the time as bearish as the market was).

Right now is exactly the same as when I challenged members to book mark a 3 week old post telling them the upcoming rally (as we were in the worst bearish sentiment since 2008) was going to be so strong, "When you feel fear it will have done it's job" and that's considering you knew that it was coming and why.

We're at the same kind of perspective place right now, it's almost impossible for many to imagine there could be a downside move from here. A downside move from this shakeout, which is what this was meant to be the entire time, a convincing shakeout of shorts, was a means to an end. The trade remains on the short side.

Many of you know the concept of why I won't short a H&S top on the break of the neckline, because even though the top is legitimate, the initial shorts will always be shaken out so it's on that shakeout move that I'll short a H&S top, in to price strength. In fact that's the last of 3 places I'll short a H&S top.

So now lets really back out and look at the market.


The IWM in a nearly year long complex H&S top, a sharp break of the neckline where everyone went short and the Fear and Greed Index was pinned at ZERO for almost a week consecutively, the worst readings eve, the most bearish readings ever. Roo many people were on the same side of the trade, Wall St. had to shake them out and it had to be convincing. 

Looking at the chart above, the last move to the upside after the break under the neckline looks like what? The 3rd and last place I'll short a top or H&S top.

This is the perspective that matters the most, this is the strongest message of the market with everything confirming from leading indicators to sentiment extremes.

And  here we are, right at that spot...

This move looks like nothing but a bearish market that anyone would recognize and be short, the 2007-2008 top/bear market...

 SPY daily 2007 top.

However what few realize is that the moves to the upside in each of these rallies (most of them) were actually stronger than the ones now! People watched too closely then too because I remember trading this market.

If you look at the SPX top like this, we are at the same place in the IWM right now as the SPX's 2007 chart's red arrow, the move after the initial break down to shakeout shorts, the 3rd and last place I'll short a H&S top...

Perspective as we are sitting right on the top of that move...