Daily Wrap

Is the phrase, "Head-fake" some conceptual idea that sounds good, but you've never really felt like you witnessed?

Well the last 2 days in the DOW and SPX have been the best 2-day period of the entirety of 2014, in fact the best in 4 months, GUESS WHAT? YOU JUST SAW A HEAD FAKE MOVE IN ACTION!

In case you missed my articles or want to brush up on them again (often you find a new meaning to certain concepts once you have some experience to relate to)...

Understanding the Head Fake Move 

Part 1 

Part 2

Earlier this week I said we were setting up one as we broke below last week's range. Take a look...

 While it would take too long to explain all the concepts that are in the articles, first is the rectangle range that is considered to be a "Consolidation/continuation " pattern and a bearish one because of the preceding trend, down. Retail technical traders will short it, but usually on confirmation which is a break under the range at the yellow arrow.

The next day we put in the start of a "W" base and a closing bullish Harami reversal candle, Wednesday we finished the "W" base and put in a bullish Hammer candlestick (bullish reversal).

We know it's a head fake if we see accumulation which we did at the "W" bottom. The first day's move above resistance (Thursday) or back inside the range is where a lot of shorts would have placed their stops quite predictably. Today was nothing short of a short squeeze and that's one way a head fake move creates momentum or the snow ball effect. "From a failed move comes a fast reversal", to technical traders the break below the range became a failed move Thursday and it created a fast reversal.

 There's the SPX "W" bottom this week, there were plenty of 3C charts showing accumulation as I posted, I have RSI downstairs.

 Still don't believe it? This is the USD/JPY in the candlesticks vs ES in purple, look how ES underperforms the carry cross until regular hours open and then ES/SPX takes off and leaves the USD/JPY correlation in the dust, Why? The head fake created so much momentum it created a short squeeze and that's the head fake move.

If you're still not convinced, look at ES vs the CONTEXT model, only stocks among risk assets were ripping, they left a nearly 25 point gap between ES and risk assets that should have moved with ES, but there was no risk on move in these assets, just an equity short squeeze born from a head fake move.

As far as other assets, we saw some real fear enter the market in VIX futures which oddly we did not see on the way down, TLT or Treasuries also saw a flight to safety...

 VIX futures 5 min with a clear negative made VXX puts a decent play, but now the divergence has reverted to price, however the 1 min futures divegrence is very positive as is VXX, see my late day post for some of those charts...End of Day Charts

This morning around 11 a.m. I said this about VXX,

"I'm liking this more and more. Just looking at the chart, it just looks like price needs to finish a reversal process." 

Well above you see the correlation of VXX vs the SPX (SPX price is inverted so the correlation is clear), at the end of the day we not only had a reversal process fairly well in place, VXX started outperforming the SPX!

TLT is also outperforming its correlation with the SPX, showing some near term fear or flight to safety, it seems like the late day post showing continued negative divergences in the averages and positive in VXX, UVXY and VIX futures seem to point at a quick move early next week (likely starting Monday), I'd guess the 200-day would be the target.

As pointed out earlier, one of my favorite among leading indicators is Yields, they just pull the market to them like a magnet... Wednesday's Daily Wrap had a a section about Yields as a leading indicator, here's an excerpt...

Yields are one of my favorite Leading Indicators because they are so effective and consistent and in any timeframe. Here's a macro view of Yields going negative vs the SPX and the resulting fall in the SPX until the two revert to the mean (green box), then a change in trend often takes place.

At our "W" you can see Y's are positive between the two "W" bottom lows or leading positive and even during this afternoon's flat trade area we see Yields continue to lead higher. Yields are like a magnet for equities, so this appears to be a bullish indication of not only the base low, but what came after.

---------Getting back to today....

 Yields were negative yesterday, they were leading negative today, the short term implication is the green SPX reverts down to Yields in red.

Here's the complete picture with the "W" base, the pop up and reversion this morning and a lower Yield indication or leading indication.

As for currencies, not a lot of movement, the market blew out its correlation to the upside so the SPX/ES should revert back down to the USD/JPY, in the mean time the Yen was working on a positive divegrence today which is a short term negative for the market as they trade opposite.

Yen 1 min 3C futures with a clear negative just before this morning's Non-Farm Payrolls volatility and a positive divegrence the rest of the day despite what the SPX was doing.

You know what out 10-30 and 60 min charts look like and what that means for the market and you know what early next week should look like as this post shows where 3C left off today as it almost always picks up where it left off even over a weekend, so we may have some unique opportunities to A) clean up some trading shorts and B) add to some trading longs (I'm already full).

As for positions cleaned up today (I didn't post yesterday's SPY and QQQ positions either),

The QQQ $85 calls filled at $2.40 for a gain of +27.6%

The SPY March 175's filled at $4.99 for a gain of +19.95%

The Feb IWM 109 Calls filled at $2.61 for a gain of +13% 

The IWM March 109's filled at $3.84 for a gain of  +12%

And the HYG March 93 Calls filled at $.75 for a gain of +15.4%

Again as for Monday/Early next week's bias, just review the EOD signals with good VVIX confirmation.

Have a GREAT Weekend!

LAST MARKET UPDATE-IN TO MONDAY

As I point out every Friday, after the market's option expiration pin ends around 2-2:30 pm price can do whatever it wants, what is really important is what 3C does because as I also often point out, divergences pick up where they left off the next trading day, even over 3-day weekends.

We have clearly negative divergences in to the close and positive in VXX which is confirmation so I expect early next week we see a downside market move as signals appeared yesterday.

I also think VXX makes a nice move up.

 QQQ 1 min

QQQ 3 min

QQQ 5 min

IWM 2 min

 IWM 5 min

 SPY 5 min

SPY 10 min

VIX futures 1 min

UVXY 2 min

VXX 5 min

UVXY 10 min

That's all the confirmation I need, but let me remind you 5 min Index futures are all negative as well

FSLR Update

As I was preparing this post I was interrupted by a quick update I needed to get out. I want to make a point though, although the market is probably the most dynamic entity we'll ever be involved with, there are probabilities and this is what I was talking about earlier, "Aligning your trades with the probabilities".

I probably confirm what I already know have a 80+% probability just because I get a little myopic about stuff, I think most traders would say, "OK, here's the signal, just wait for the pullback and buy" whereas I say, "OK here's the signal, wait for the pullback, lets just confirm the pullback and make sure and then buy".

However, for your information, I want to let you know that, once probabilities are established, the chances a tactical entry will go the way you expect are very high.

For instance...

 When we have a 5 min chart like this QQQ that is negative, the probabilities of a short term trade moving to the downside are very high, thus as long as you align the trade (you don't want to treat this as a dat trade, nor a trend trade, but maybe a short term swing move) you should be on the side of probabilities and that's all we get in the market unless you are doing something illegal.

So this is why I can look at a chart like this and say, "I want to short in to that price strength" and almost did today, because I know where near term probabilities are.

As for the larger  move (lets call this a swing trade+plus ), you can see the negative divegrence and the probabilities it created and the price move following it. Now you can see the positive leading divegrence and it has the same high probabilities of firing a move to the upside. This chart is a stronger set of probabilities than the one above, but it doesn't negate the signals above. If anything, having as many charts as possible all pointing the same direction is the best set up you'll find.

Imagine this is a car, the shorter term charts above lining up in the same direction would be the key to start the car, otherwise it's a great looking car waiting to be taken out for a spin.

Our longer term PRIMARY trend on this SPY 4 hour chart is clear, significant distribution for a long time and you can see the start of a turn in the market, what you can't see yet is how much price damage will be done because of that significant distribution.

Still, this chart likely will not fire even though it is the highest long term probability, until the 30 min charts go negative again and align.

I hope that helps...

Back to FSLR which ties in to this topic.


This is a PERFECT reason why I'd rather hold dry powder in to a market pullback as I think we can saw with some certainty, the next major move is going to be the one we've been tracking for 2 weeks, it's not going to change the primary trend/signals, but it will cause a ruckus.

I'd rather try to get in to something like FSLR long on a pullback move.

 We have a clear downtrend, but there's something I say often, "Price can be very deceiving".  As a trend trader I'd be short all day and night and not thinking of anything else, but there is something else going on.

 I'd like to see a bit more of a base/lateral move or reversal process which means FSLR needs to come down from current levels.

 Here's the Trend Channel, but often we'll get 3C data first telling us to act or warning to maybe tighten things up.

This is an hourly positive divergence it is similar to the market, except larger so the trend trader doesn't see what's lurking just below the surface.

 This is a sharp leading 15 min, price needs to pullback a bit for this to make a new leading high.

And intraday that looks like what is going to happen as there's a very sharp, sudden leading negative just after the op-ex pin is done for the most part.

 We have a 10 min negative too, the idea here would be for price to pullback and the intraday charts to accumulate the pullback sending the 10 min to a leading positive divegrence, giving us a full house and likely firing with the market.

I'd put this on your radar.

Quick Update

I was just working on another post and saw this, this is a significant deterioration in the 3C /QQQ, I'd say a downside move is ready to start, but remember it's the 3C signals we end with that count.

You can't see the full negative from yesterday, well part of iit, it's the intraday negative 3 min that is sharp and does not look good at all.

Decision Time on Short Term Shorts

Yesterday I took on the VXX call exposure for a short term pullback and it has been nagging at me all day today whether to open a couple more positions in to the price strength today (likely op-ex related) even though yesterday I said I didn't want to get any further involved beyond the 1 position.

The IWM would be my most likely target and it looks like it's getting ready to start a move lower so it's kind of decision time.

I think yesterday's signals are real and we will likely see a move lower (very quick), I also think that now we have solid 15-60 min (60 min in some cases) positives, the 1-5 min charts would be a very strong statement going strongly positive on a pullback.

I think I'm going to stick with my VXX call (essentially short the market) and since I've cleaned up a bunch of positions and have dry powder, I'm going to wait and see if we get this move lower which I suspect we will and rather than hitch-hike it, look to use the dry powder on new positions once it has made that move lower and maybe clean up some short term trading shorts at a profit. Otherwise I'm pretty fairly well set with positions for medium term.

Here's the IWM, it's been a difficult decision, but I want to really start keeping my focus on bigger picture events.

 IWM 1 min intraday has been in line, it looks like an op-ex pin and has recently started going negative right on cue at the 2-2:30 hour as contracts are largely closed out.

The 1 min is more of an intraday steering timeframes, not a serious underlying trade. Once beyond the 1 min at the 2 min, things look pretty bad near term, but I don't see this as any threat to the move we have been hunting for about 2 weeks now.

 IWM 3 min is also in leading negative position ever since we got those negative signals yesterday.

And while we are positive at the "W" base , the 5 min chart since yesterday has not even stayed in line and in rather leading negative.

I was surprised to see this today on the IWM 15 min chart...

 Like the other averages or HYG we have that positive divergence since Jan 27th, but the last 2 days we have a negative, it's not enough to destroy our set up, but it is strange that it would make it out that far.

The other significant "short term" problem for the market is this...

 Not so much the Russell 2000 1 min futures, although they aren't even in line, but...

The 5 min chart.

Typically any trading positions I've taken have depended on the divergence in the 5 min chart like the VXX put position this week with a significant 5 min negative that is now in line.

Even though we have these signals and I think they do fire to the downside, I think the end result will be a full house with 1-30 or 60 min charts positive and we should be ready for that move we have been following as seen on the SPY 30 min below.

SPY 30 min.

Even though this is an exceptional positive divegrence for this market, it still needs the short term charts to light the fuse and they don't look like they are ready.

HYG Follow Up and Yields as a Leading Indicator

Especially being around 2 p.m. with a very parabolic move and trouble confirming, it made sense to take gains in HYG (I'll put the P/L up later. I use options as a tool, not a trading method or a lotto ticket, when there's a tight place that has a decent signal , but the trade doesn't look to have enough profit potential or the beta is too low (like TLT), then I use options, but essentially as a way to trade the asset, not looking for home runs although I wouldn't poke one in the eye either. Ever since I've used options in this manner, I've gone from blowing up options accounts to adding to them steadily, this week the entire book of options ideas has added +9.83% and ranked 25 of 772 and this with just hitting singles and getting out as quickly as possible as I see them much like Vegas, the longer you stay, the more the odds are in favor of the house.

As for HYG...

 I like HYG for the longer term, not the primary trend. This looks like a lot of the market averages we've been tracking since 1/24 - 1/27.

However...

Today is too parabolic and the 5 min chart is having a lot of trouble where it should see 3C at a new high.

Another Indicator that I love as it just has amazing predictive abilities has been our Leading Indicator set up for Yields, this too is signifying trouble ahead near term and ,why let the HYG gains turn against me?

I clearly remember showing this chart with Yields making a positive divegrence at the second portion of the "W" base as you see below. However yesterday they failed to track the market so they went negative, today they've gone leading negative. The market seems to be pulled toward yields like a magnet so this is in line with yesterday's signals, thus no reason to hand around some of these calls and HYG.