Daily Wrap

OK. still lots of volatility, but we moved toward some ranging behavior today and accumulation which is what I suspected we'd see Friday and last night we had further evidence. There are some things that seem like dichotomies, but I think they are actually not only explainable, but part of this process.

First, the EOD trade was horrible, that's something I saw earlier as I didn't want to open hedges (longs) this early as I knew they'd come down to a better price, but I had no choice being I'm out tomorrow, however you may find some good deals, if you're not using 3C, look at possible bottoms (you won't see them in the morning)  and use things like the NYSE intraday TICK, draw a channel around a downtrend and when you see evidence of that trend changing like not making a lower low or breaking out of the channel to the upside, that's likely your buy spot. You can use RSI intraday as well to look for a divergence and as I recently showed a member, you can add Rate of Change to your indicators to make them more efficient, here's an example using Worden's TSV 50 (you might use OBV or another money-flow indicator).

In white is Worden's TSV alone (50 bar), it calls the second top pretty clearly, I like to use it for macro trends. However if you add ROC to TSV (then make TSV invisible) at "A" the ROC version called a positive divegrence that TSV alone missed, at "B" ROC called a negative divegrence on the first top that TSV alone missed, at "C1-C2" the lows are shown to be accumulated with a positive divergence that ROC shows, but TSV alone missed and at "D" they both call a large top from left to right as well as a top to the far right, but that's a lot that you can pick up by adding ROC to almost any indicator (here I used a 25 period ROC). You can even put ROC on price and see when momentum is changing before otherwise visible. If you have trouble attaching ROC to anything, put a 1-bar invisible moving average on the indicator, say price which is the exact same as price, no averaging and then add ROC to the moving average and make it visible with price, only the m.a. invisible). You know I prefer to check multiple timeframes, but most of the intraday stuff will be 1-5 min. charts.

As to what we saw last night and followed through today...
There were those 5 min positive divergences in Index futures, those are a little sloppy today...

ES stayed positive and today you get a better mental image of a range that you didn't see last night, I didn't say it would be neat, in fact I said volatile and choppy, so far that's what it has been. ES held up well, NQ/NASDA doesn't look as good, but it got pounded by AAPL's guidance tonight, TF is somewhere in the middle, but the 15 min NQ/NASDAQ is positive so I think all in all it's still okay. I expected this range to take at least 2.5 days which puts us right at the F_O_M_C release of the policy statement Wednesday at 2 p.m., should be interesting and I don't think the market action is coincidental.

As for the averages, you know I always say that 3C picks up the next trading day right where it left off, this is why I said I don't think you'll see the lows in the morning as far as maybe buying some quick trading longs or short hedges (longs).

 If we pick up where we left off, then we have more downside to go, probably at least to the lows of today, maybe a bit deeper if this is going to be "U" shaped, so this is what you want to watch for as I described above (ROC/Indicators/TICK).

 The 3 min chart even went negative so either AAPL's earnings leaked (and there is a chance of that) or this is just the process moving to the lower end of the choppy range.

AAPL...

It's hard to say if this is a leak because the entire market was negative in to the close, but AAPL was almost perfectly in line all day until the close in which there's a deep leading negative divegrence, someone was getting the heck out of dodge quickly and apparently in some size.

The QQQ 5 min is leading positive so it looks like overall there is a range being built or what will be a base and there's accumulation so it looks to be what we expected Friday afternoon for this week and last night.

There are a number of other curiosities...In currencies I talked about carry trades needing to help out on the upside for the market to pull off a bounce and posted some charts.

This is the USD/JPY trend since 2014, this is what the market is not showing, a clear downtrend of lower highs and lower lows, although the market has stuck to the carry pair like velcro for over a year so this is part of what tells me we are on the right side of the mountain and coming down even though you don't see it the same way in the averages, the highly correlated Carry Trades that finance long positions are in a downtrend, I'll show more.

This chart I wanted to show what a possible USD/JPY bounce might look like which would help the market bounce.

 Remember the chart oof the USD/JPY vs ES like this I showed you where there was clear weakness in the carry cross vs ES from Jan 1 to Jan 21? It was clear in the carry cross and 3C and I noted that BofA made note of this as well in changing their market outlook from positive to neutral so we know they are watching the same thing.

Here we see a 5 min chart of the carry pair and ES (purple), but this time it's the opposite, the carry cross is outperforming ES, so the same principle should hold even in reverse especially when we have the same confirming 3C signals.

As far as actually moving the pair up, we need Yen weakness and $USD strength...

 Although the Yen has been strong all year, it has had pullbacks and this 15 min chart of the Yen alone shows a 3C negative divegrence, that would do the trick alone even if the $USD stayed flat like it did today.

However, the $USDX 15 min chart has a positive divegrence, exactly what the USD/JPY needs to move higher and support ES/the market so I think our bounce principle is sound, the only thing that I think would throw it off is a fundamental news event that surprises the market like the failure of a Chinese Trust, a lock up of global liquidity as there were hints of that in the UK with 2 major banks overnight. Tonight is the PBoC's regularly scheduled Reverse Repo liquidity injection, last week they blasted the market with $255bn CNY, the market rallied on the liquidity injection until it asked the question, "Why so much?" and realized the answer that a Trust and the Shadow banking system were potentially on the verge of collapse, then the knee jerk good news wasn't so good anymore and you know what's happened since in the market.

I'd pay attention to what they do, just check the news and Google keywords like, "China Reverse Repo", "liquidity injection", or even a drain, "repo" operation and of course "PBoC"or "People's Bank of China". 

Here are some other interesting events, I said last night gold was set to move lower...

I even opened a GLD March $22 Put today that's already up 10%. Gold has been trading opposite the market so a pullback in gold would suggest a bounce in the market. Here are gold futures, 5 min. Note the positive divergences to the left and the negative to the right, it would seem from the way gold is acting that the market will bounce, these are just pieces of the puzzle we put together to try to find the most probable outcome.

I also said last night that I had signals for 30 year treasury futures (TLT 20+ year ) to pullback, which is good for an eventual long TLT position, but right now it would suggest money is NOT moving to safe haven assets like TLT and instead moving out and why would that be? If they were allocating that money toward risk assets for a market bounce. In fact...

Some found it strange today that the market and treasuries were pulling back together, I didn't.

 This 5 min chart of 30 year treasury futures (candlesticks) vs ES (purple) show both pulling back, usually they move opposite each other, but if money was coming out of treasuries and going in to ES (long) as it builds a base/range, that makes perfect sense. The red arrow is the start of the new trading week.

 Here we have TLT (20+ year Treasuries) in light blue vs the SPX in green, again, both pulling back to some degree as SPX was more ranging.

And our Leading Indicator, Yields shows Yields exerting downward pressure on the market at the red arrow, but recently they have flipped and are at least neutral is not positive.

VIX was also acting strange today for a flight to protection asset, we noticed it first thing today and it went on all day, it looked strange, but I think it could be similar to my Treasury theory.

 You may recall last week we were talking about another Bollinger Band squeeze ion the daily spot VIX chart, it popped to the upside as would be expected, but look at the bearish Harami from Friday/Today, or "Mother with Child" or a bearish inside day. In either case, it's a bearish signal short term for the VIX and as you know, it generally trades opposite the market.

Now, "IF" the VIX just breaks loose to the upside and walks the upper Bollinger Band, all bets are off, the market would be in free-fall, but for right now, that's not what the indications are.

Remember this morning I closed a long UVXY position for a +13.57% gain based solely on price behavior, the parabolic move? Then shortly after we saw the negative divegrence come in to play in VXX (Short Term VIX futures).

This chart of VXX (light blue) with the SPX's price (green) inverted, allows us to see how VXX performed vs the correlation which should be almost exactly the same, instead as the SPX was selling off in to the EOD, the VXX was underperforming significantly, which would not normally make sense because traders reach for VIX protection in a sell-off, unless, like treasuries (theory) they were moving out of VXX short term and buying the market weakness in to the close. It's just simple rotation from safety to risk and short term, not a big deal, but hints that there's a coordinated effort to bounce the market as we saw hints of Friday.

In addition, professional sentiment (actually retail sentiment was EXTREMELY bullish before the open today, I think they are BTD again which is what a bounce would be used to encourage so smart money can do the same thing we want to do, sell short in to higher prices in select assets, take GOOG or BIDU for example).

 Oddly intraday professional sentiment knew exactly where to sell (as did we as we saw it in 3C) and where to start buying weakness as can be seen above vs the SPX (green).

One thing I have seen decline all year is market breadth, it's horrible, but I looked at some past tops and there's a really sharp decline in market breadth right at the top, first intraday...

While this is my custom SPY/NYSE Tick Indicator, you can use TICK much the same (1 min) and you can clearly see where stocks were trending up and down and even when there were signs of a reversal in price before it happened. TICK is the number of advancing NYSE issues per bar less the number of declining issues so a negative means more stocks are falling or declining than advancing, we look for extremes and divergences.

However the real news in market breadth can be seen on this one of about 8 examples below...

This is the Percentage of all NYSE stocks trading 2-standard deviations ABOVE their 40-day price moving average, the momentum stocks vs. the SPX in red. You can clearly see a divergence from October to present, far fewer stocks are above their 40-day (2 SD's above) than in October, even though the SPX moved higher.

What is truly shocking and very interesting is there are about 8-10 different versions of this indicator using just the moving average or 1 standard deviation or 2 or trading above or below the moving average and using the 40-day and 200 day. All are showing the same MASSIVE deterioration the last 2-days. We went from 28% which is low compared to October's approx. 40% down to only 6.85% in 2-days. In almost EVERY CASE, EACH VERSION OF THIS INDICATOR HAS SEEN BREADTH TUMBLE BY AT LEAST 50% OR MORE (like this one) ,OVER THE LAST 2-DAYS ALONE.

So as you can see, massive damage, not just in the Carry Crosses downtrend or in 3C, but everywhere.

OK, so you know what I'm looking for, you know how we can trade it, whether you want to hitch-hike/hedge like I did today or just wait for the move to set up are longer term core positions or add to them. I think tomorrow will be volatile and choppy, but I think it will continue to do what we expected and that makes tomorrow the best day for me to have this surgery so I can be back for Wednesday where we'll really have to be on top of things.

That will do it for tonight, I don't really care what the futures are doing, the 3C signals from the close should pick up in the morning and we go from there, don't forget what I said about pimping indicators, for instance to me OBV is absolutely useless without ROC applied to it, then you can get some signals out of it.

THANK YOU ONCE AGAIN FOR ALL THE WELL WISHES FOR MY SURGERY TOMORROW, I HAVE 50+ EMAILS SO I CCAN'T RESPOND TO THEM ALL, BUT THANK YOU AGAIN, YOU ARE THE BEST!

Closing Update

From the way the 3C charts are closing, I'd expect tomorrow morning to be a pretty decent time to look at any short term long trades you might be interested in, the intraday signals should pick up where they left off tomorrow and that is pulling back to what may be the intraday lows and we have a rectangle bottom or a bit deeper and we have more of a "U" shaped bottom". Either way, if I was able to add tomorrow (Remember I will be in surgery tomorrow for skin cancer, but be back Wednesday) that's where I'd probably be doing the bulk of my positioning for a short duration move. I did not say a weak move because there's no point in setting up the market and then popping a weak move.

These moves are set up for a reason and to be effective, especially as the market starts to harbor more doubts, they need to be even more believable.

So that's going to do it for the moment, I'll take a look around and see what else is interesting.

I WILL SAY IN LOOKING FOR SOME LONG TRADING HEDGES LIKE THE URTY POSITION, I WASN'T IMPRESSED WITH FINANCIALS AND REMEMBER I SUSPECT THERE MAY BE A GLBAL LIQUIDITY CRISIS SO THAT WOULD EXPLAIN THAT AND I WASN'T IMPRESSED WITH INVERSE VIX FUTURES, I SUSPECT PEOPLE WILL CONTINUE TO BID THEM UP EVEN IN A MARKET BOUNCE (COLLECTING/ACCUMULATING PROTECTION) AND THAT MAY BE THE REASON THEY ARE NOT PERFORMING WELL TODAY AND DON'T LOOK LIKE INTERESTING HEDGING POSITIONS.

SO FAR IT'S THE IWM AND QQQ, THE SPY IS THE WEAKEST OF THE 3, IT ALSO HAS THE MOST EXPOSURE TO FINANCIALS IRONICALLY.

Trade Idea: Adding TNA Long

Basically since I'll be in surgery tomorrow, I have to set up my hedges now, I'd prefer to wait for the IWM to pullback a bit or TNA, but in the bigger picture, I think it will be fine so I'm adding TNA long which is a 3x leverages small cap, it's very similar to the IWM so keep that in mind. I looked at the volatility products and just was not as sold on them as some of these others.

Quick MCP Update

Although MCP often moves on its own without any problems from the market, it seems like it may be taking advantage of the markets consolidation.

In any case, I still love MCP long, I'm guessing that it will launch at the same time as the market and it's charts are showing steady accumulation so I'd still pick it up here long if I had room.

A clear 5 min leading positive in MCP, much more developed and larger than the broad market, I see this as more than a hitch-hiking/ bounce move, I'd have no problem opening or adding as a core long  or a trading position long.

MARKET UPDATE

It feels like we are batting 1000 today, the market has done exactly what we expected Monday right down to the exact details of what it would look like, the pullback I just mentioned looks to be right on course.

For time's sake because I have more important things to do than watch URTY for the EXACT best entry, I'm going to get that partial position in place.

 SPY 1 min suggests a pullback as mentioned in the last post.

SPY 3 min continues to chop sideways which is what I said would need to happen for this positive divergence to develop, smart money trades in big size, even their small trades so reversals are a process, this sideways movement and accumulation near the bottom of the range is part of their positioning.

QQQ 1 min also suggesting a pullback, this is likely where we see stronger divergences develop (in to a pullback) as smart money wants the same as us, to buy on the cheap with less risk.

The 5 min QQQ chart had no such divegrence Friday, so this is what I was talking about, "We need to see a reversal process and it will likely last about 2-2.5 days".

IWM 1 min as you already know

And the 5 min.

Now... Remember me closing the UVXY position (long) earlier as it trades opposite the market?

 Remember there was no negative divegrence, just confirmation when I made the decision based on volatile, parabolic price movement. Then came the negative divegrence and as the market is looking to pullback intraday, VXX / UVXY are giving the opposite signal as they should, this is further confirmation.

However, the 3 min chart that was perfectly in line earlier for the VIX short term futures, is now showing more significant damage indicative of money moving from safety to risk for our bounce.

The TICK chart shows a pullback being likely in the channel.

As does my custom TICK indicator.

SO FAR, SO GREAT

Trade Idea IWM / URTY (long)

As mentioned Friday, the IWM was the first and really only average to start putting in positive signals, that carried on through the Index futures as well.

I like the IWM a lot as a "BOUNCE" trade in the trading portfolio. I said I wouldn't close trading short positions and I won't but I do have room after closing out UVXY and I could use a little hedge there and I feel very confident that it would not only be a hedge, but it would be a money maker and when it's closed the shorts start working again.

So I've decided (given the price pattern) that a 3x long IWM ETF is how I want to go and that would be URTY, I'll likely enter a bit bigger size than normal, but I'll also likely phase in to the position and I'll show you why as the market continues to do exactly what we suspected last night, to chop along in a lateral fashion rather than carry through with more downside from Friday's close.

 This is the IWM 60 min so long term there's significant damage and that's why I want my positions leaning short.

The 10 min chart is even leading negative so the damage in this are is very clear.

Even the 5 min chart does an excellent job of highlighting it, but on a short term basis which is what we are looking at (since late Friday and last night's post), zoom in intraday on the same 5 min chart.

We have a leading positive divegrence, the QQQ also has a really nice 5 min leading positive so TQQQ might be an alternative to URTY if you prefer long exposure in the Q's for a short duration trading position.

 The intraday 1 min chart tells me probabilities are high that the IWM pulls back and continues this lateral chop and that's where my ideal entry for URTY would be, but I may enter a partial position earlier based on time and having something in place and then set price alerts to fill out the position at lower levels or if you prefer, maybe just wait for lower levels, if you miss the bus, there's always another one coming.

 This is the 5 min chart of the actual asset, URTY and it shows the same distribution at the same place and the same leading positive divergence and who the IWM was the first and only one working on accumulating as early as Friday.

As for the intraday 1 min chart, it shows the same thing as the IWM, probabilities are high that this will pullback and build a larger choppy, lateral base before making a move higher.

I said last night I'd expect that process to continue through Tuesday (which would be nice considering I have surgery tomorrow) and a move to the upside would fit nearly perfectly with Wednesday's 2 p.m. F_O_M_C meeting, even if they taper (which is largely priced in), a more dovish "maybe we'll slow down" tone would send the market higher and what we may be seeing is the market preparing for something like that, I don't think it is coincidental that the maturing of this small base around the time of the F_O_M_C is coincidence at all, if anything, you'd expect them to be taking off risk in an uncertain environment, UNLESS THEY HAVE INFORMATION that makes it less uncertain which wouldn't surprise me.

Gold / GLD and YG charts

I captured these about 30 minutes ago, but I don't think anything significant has changed.

 As far as GDX, gold miners, they have been giving some different signals than GLD recently, I really don't feel good about that and here we have a 30 min negative

And a strong 60 min negative, it's not quite what I'd expect to see, as information develops maybe I'd consider a trade there, but I wouldn't consider GDX (gold miners ) and gold to essentially be the same right now as they have been in the recent past.

 GLD 4 hour, there's not doubt in my mind that Gold is going higher, getting a nice entry at lower levels with less risk would be great for a trend trade in Gold.

 The 60 min chart shows a cycle from accumulation to recent distribution. The distribution is more of a relative negative divergence (the weaker type of divergence), so I'm thinking pullback, but I'm not thinking major distribution event going on here and whoever is selling gold right now, I think they have the same outlook as us, take their profits here and re-enter at lower prices with less risk.

 The GLD 15 min chart nearly perfectly in line until very recently as the market has shown a change in character since Friday or thereabouts.

Remember that gold tends to trade opposite the market, however be careful around Wednesday's F_O_M_C, gold can be very QE sensitive, although it hasn't been since 2011, I'd still keep that in mind with Wednesday's policy announcement at 2 p.m. EDT.

 Intraday it looks like the gap fill was supported by 3C, this looked like the best place to get involved at the time, since things have deteriorated along the lines of our "Put position" thinking.

The 2 min chart clearly shows the gap fill isn't anything more than that so it looks to be a pretty safe quick short/put trade.

And the 5 min chart shows the same. This is also good confirmation for our market expectations.

YG Gold Futures

 This is a strong 1-day 3C chart of Gold futures, that's a huge leading positive divegrence on the strongest chart, but we've been watching a base being built in gold for 6 months or so.

This is the next timeframe that matters, the 15 min which is where the Index futures are going positive, we have Gold that trades opposite those index futures going negative so a GLD  put makes sense for a market bounce.

Note volume falling off in to the gap fill.

The 5 min chart also confirms, it's a better representation of timing, it also confirms the Index futures signals from last night so all in all, I think this is a great position for a market bounce.

Opening GLD March Put

I'd prefer something around a $125 strike, but I've been having trouble getting fills so I'm going to try $122.

I'll post some GLD and gold futures charts, this is more or less a play on a market bounce that I'd expect probably to take shape late Wednesday. I was considering replacing the UVXY trading position that was just closed with a GLD 2x leveraged short, but the leveraged products for GLD have very low volume, but I would not be opposed to a GLD short or a 2x leveraged Gold Short ETF either.

Charts coming.

UVXY / VXX Follow Up

As I said in the "Getting Ready to Close the UVXY Trading Position" post, I had no real 3C reason (negative divergence) to close the trading position, but what I did have was one of our concepts regarding market behavior, that's the parabolic move which is one of the strongest changes in price character and changes in character lead to changes in trends. Since closing the position, I've started seeing 3C evidence develop so this is a case in which the concept was working better and even before 3C, and this is why we follow these concepts which mostly have come from 3C lessons on market behavior.

Here's the P/L. I broke this up in to 2 positions hoping I'd get a better exit, but the same...

The P/L on the two fills came to +13.57%

 To me, this VXX / UVXY 60 min chart is too parabolic to me, these moves typically reverse to the downside just as fast or faster, although I still love VXX andUVXY long, I just rather take the gains here and re-enter them at more favorable areas.

Here's a closer look at the same chart, note the start of a reversal with the last candle being a large negative downstroke candlestick.

As I said, the 3C charts gave me no reason at the time, this 30 min leading positive and confirmation tells me that I want to re-enter VXX / UVXY long on a pullback which would fit (and confirms our theory) a market bounce. The market's long term charts are weak, the same charts in VIX futures are strong, so you can see how I want to use any price movement to set up my new positions.

 Even the 5 min chart gave me no reason to close it, except the parabolic move?

Even the 2 min chart was and still is in line!

However since that first post, the 1 min chart is starting to go negative and I suspect it will migrate to longer term timeframes, so I probably got one of the best exits I could.

We'll be back.