Daily Wrap

Tonight I want to start with the macro rather than the micro of what happened today. I think first it's important to know we are in a multi-month top formation. The four stages of a market cycle that we often talk about, are like the 4 cardinal directions. Just like a map with North, East, South and West, with the market you have to know where you are to have a good idea of where you are going.

I'm using a 4 hour chart with the SPY because it shows the underlying trend with the least amount of noise and the choppy/top area has been in effect since the February cycle transitioned from stage 2 mark-up to stage 3 top and in some cases like the IWM, stage 4 decline and has already retraced the entire February short squeeze rally.

I am in no way saying that this area is easy to trade, most traders seem to only recognize two trends, up and down , but the third trend, lateral is one of the toughest, it requires patience, skill and nimbleness, it's more about surviving than making big gains, but the choppy lateral trend is just as much a part of a top as it is a bottom or an uptrend is stage 2 to a downtrend's stage 4.

Now on to expectations of the market, once again the "Turbo Tuesday" and POMO attitude of "this is going to ramp the market" was completely wrong again. Last week I showed how the last two Tuesday's were red and POMO is no longer the risk free upside ride that it use to be a couple of years ago. This is the same reason I came out against the charts that compared the market several months ago to the top of the 1929 market, even though I'm bearish, I think it's very dangerous to make assumptions about the market without evidence. Today's evidence included "Turbo Tuesday for the 3rd week in a row and a $2.5 Billion POMO on deck this morning, yet the major averages all closed red between -.44% and -1.50%. The point is not just Tuesdays and POMO, but all generalities that people have held to be truisms, things are different, they always are.

For instance, today ES/the market didn't track the USD/JPY as it held around its 200-day moving average, instead bond yields (one of our leading indicators) led the way for the market much of the day, as faithful as the carry trade correlation has been, it couldn't be counted on today.

Tomorrow we have the last F_O_M_C meeting's minutes coming out at 2 p.m., more often than not this creates a F_E_D knee jerk reaction which is usually wrong and typically reverses the initial knee jerk within a couple of hours to a few days, we'll be watching to see if there's any leaked information as we have found it in the past, not often, but there have been several times.

As far as what I felt where the most telling charts for the major averages today...

 The DIA 5 min chart lost ground yesterday and came in pretty close to in line of its 5 min chart which is where most of the upside probabilities/divergences formed late last week.

The 5 min IWM which went negative yesterday added some positive divergences today at the 5 min mark as it was the worst performing of the averages.

 The QQQ added to its leading negative divegrence as it was the best performing of the major averages today.

And the SPY was in line most of the day.

This wasn't the direction I had hoped we'd see today, there's a lot of rotation depending on how the major average performed, but it does look like a bit more time than what we ended with yesterday.

TF 5 min was leading negative and price fell toward what 3C was forecasting.

There were some interesting readings among leading indicators today, especially credit...

 HYG (High Yield Corp. Credit, an often used lever to manipulate the market short term) fell off today at the close rather than leading the market as it has been the last several days.

Looking at HYG's 3C chart..

There was some very strong 15 min deterioration today that we haven't seen in the asset recently.

High Yield Credit was seeing the SPX move more or less in line with it's less favorable view of the market.

 As for sentiment, it was positive last Friday and led the market, went negative yesterday and led the market, today it's in line.

 Yields have been negative on the short end and tend to pull the market toward them like a magnet, in red you can see where Yields dislocated negatively with the market and the market followed them lower.

Don't forget where the longer term picture is...

This is about where the multi-month range/top is and yields are disconnected to the downside fairly badly.

 Here you can see at the EOD they tried to hammer or did hammer the VXX to try to ramp the market, not a lot of success...

This is the same chart with the SPX prices inverted so you can see the underperformance of the VXX in trying to lift the market in to the close.

And Treasuries, as expected in yesterday's TLT update TLT / TBT (trade) Update were knocked lower vs the SPX.

I have a feeling we'll see a bit more resolution after the F_E_D minutes are released at 2 p.m. tomorrow, but just to remind you, the positives that we saw Friday for this week only reached out to about the 5 min chart and although each is dispersed, there has been quite a bit of damage to each of them whether yesterday or today.

For now, this is looking more like a stock picker's market until the averages line up (they've had a lot to jostle them today) or better yet, maintaining dry powder and patience and just waiting for the choice opportunities is probably the best course. You really don't want to be caught in the lateral chop that has dominated the market the last several months and we haven't had a lot of trades not because of the chop, but because of the 3C signals apparently forecasting a less than favorable environment in the chop.

I'll check futures tonight and bring you anything that stands out, but I have a feeling the market will be rather flat until the minutes are released at 32 p.m. tomorrow, it would be great to get some signals for trades before they are released.

SCTY Update

I haven't forgotten about the momentum stocks watchlist that I talked about on Friday, it just hasn't been  a very interesting list since Friday.

You may recall that one of the breadth indicators I use from Worden's T2 series, is the Percentage of NYSE stocks trading  2 Standard Deviations Above their 40-day moving average; these tend to be momentum stocks and besides just knowing generally that they have been beaten down lately, we can see it on this indicator as they went from over 40% to 30% to 10% in just a matter of months, in other words they were beaten down pretty badly and this makes sense from an asset manager's allocation p.o.v., they want to get out of the high beta names and in to the blue chip, dividend paying names if they are going to be long.

SCTY is one of the stocks on my watchlist, it is also one that looks to have a little promise, although not as much as it may have had with a similar price pattern months ago before these started getting pounded (around March for SCTY as it has lost about -44% since then).


Here are the charts and why SCTY is starting to look timely and interesting.

 Initially I was looking at this as an inverse H&S type pattern. For a true counter trend move to the upside after a 40+% loss, this would be the kind of base I'd expect, but the market tends to have the most influence over any individual stock's directionality and while I'm sure the market will have counter trend moves as it did just two and a half months after the initial break in 1929 for a bounce of about 50% over the next 5 months, we need a break lower before a true counter-trend move emerges (there were about 5-6 counter trend moves from the 1929 break to the 1932 bottom).

We have been talking a lot about H&S and Inverse H&S bottom volume lately. I put together a cumulative custom volume indicator just to make it easier to track volume/price trends as that's the most important aspect in identifying a true pattern from randomness, it's even more important for an Inverse H&S bottom than a top.

The blue line is the custom cumulative volume indicator. At #1 there's typically more volume (the blue line would be higher), but it is not essential until you hit the head area, then volume takes on a very important role. At #2 volume surges as price sells off in to the lows of the head, this is as it should be. Even more important, volume surges even more on the rally from the bottom of the head back up to the neckline, this is essential for an Inverse H&S bottom.

At #4 volume should have picked up on the rally to form the top of the right shoulder and it fell off on the decline at 5 which is fine. From here, an increase in volume is essential, it should be one of the largest volume readings of the entire pattern, especially on a breakout above the neckline, any pattern missing that volume is very suspect.

 The recent 3C charts at the bottom of the right shoulder are showing the kind of divergences you'd want to see for such a price pattern, here the 1 min trend is leading positive at a new high as the lower right shoulder is formed, perfect.


 The 2 min trend shows positive divergences at the left shoulder, the head and the right shoulder with smaller negative steering divergences at the neckline to send price back down to the accumulation zone.

 The 3 min chart shows a positive at the lows of the head and an even stornger leading positive at the lows of the right shoulder, just as you'd expect to see.

 At the 10 min chart we do have a positive at the right shoulder, there's little else through the rest of the pattern other than some divergences forming resistance at the neckline, but this alone should be tradable being positive out to a 10-min chart, it probably won't live up to the measured move of an Inverse H&S, but likely still worth a shot.

 At 15 mins, we don't have anything but an inline status as 3C follows price, confirming the downtrend. This tells us the divergences that we see above are there, but not that strong which is another reason I don't think we'll get a true counter trend rally from SCTY, but still likely something that's worth a quick speculative trade, especially if the market lines up with it.

The longer 60 min trend is also clearly in line after going negative at the very top, thus we can't expect a huge move from SCTY, but it still has some decent divergences that so far are better than most other averages.

The highest probability trade would be to catch SCTY and the overall broad market both in positive divergences and looking ready to make a move, the market will give SCTY something to draft.

If you are interested in SCTY (long trade), feel free to email me for continuing updates, if I see anything really interesting I'll be sure to post it.

SQQQ Position Update

SQQQ is a 3x leveraged UltraPro Short QQQ that I've been holding as a long in the trading portfolio, it's at a very minor -1.68% loss (considering it's 3x leveraged) which is not a concern.

Given this large topping pattern across the various averages, I have no problem holding SQQQ here, I would have no problem entering or adding to it here, although there may be a slightly better entry in the coming days.

I think SQQQ is more interesting as far as its charts go not as keeping up with the long position there, but getting a feel for the averages themselves as leveraged ETFs tend to give signals earlier than the averages in many circumstances.

 This intraday 1 min chart with a slight negative fits with the averages that I just updated, thus there may be a slightly better entry in to SQQQ, but at this point it's really semantics to a large degree.

 The 3 min leading positive says a little more about the state of the Q's than it does SQQQ, although that is the long position.

 This 5 min SQQQ relative and then leading positive at a "W" like formation also is an interesting chart, again it tells us a lot about the Q's and the broad market, although the position is SQQQ long.

 The leading 10 min chart at the same "W" formation is also telling, there's a clear pattern of migration through longer term charts and stronger and stronger recently.

This is a 30 min, so the divegrences are migrating fairly far out.

And this is a 4 hour leading positive which is a large signal as far as the underlying trade.

I'll continue to hold SQQQ, I would add to it at some point if I had room, but either way you look at it (from a SQQQ long trading position or as an indication of the health of the QQQ, it tells us quite a bit and this matches up well with confirmation from the averages in similar timeframes as well as Index futures).

Market Update

If you caught last night's Lowest NYSE Volume of 2014 post's Dominant Price / Volume Relationship, it looks like it was right on as far as its forecasting probabilities.

"The Dominant Price/Volume Relationship is pretty easy, Close Up/ Volume down which is the most bearish of the 4 possible combinations, typically the next day closes lower."

As for the intraday action, it's just as it was earlier today, it seems a lot more about mitigating damage until tomorrow's F_O_M_C minutes release at 2 p.m.

While the Dominant Price/Volume Relationship yesterday suggested that today's close be lower, we still have an hour left and there are some divergences, again the same as earlier today, nothing serious, but just enough to try to mitigate the damage done yesterday and keep the markets from all out collapse for the moment.

Here are a few of the charts...They are not the kind that inspire action, but are definitely telling as far as near term action that may arise pretty quickly (we want to stay out of the chop as long as possible and enter only when it looks like the probabilities are highest for an actual move beyond the multi-month top.

 DIA 2 min positive is just enough to keep the Dow from an all out collapse, but not really much to inspire even a very short term long trade.

The 5 min's damage from yesterday is in line today as the DIa moves lower.

IWM 3 min is positive intraday, again, I'd never go long this signal alone...

The 5 min looks better at this point than the DIA which held the edge earlier today as far as relative performance in the averages.

QQQ 1 min intraday is perfectly in line with price, no divergences, just confirmation of the move lower.

 The 5 min chart saw significant damage yesterday and has added to that today with a deeper leading negative divegrence, obviously telling us that the multi-month top is having a VERY hard time even getting the most minor bounce off.

SPY 1 min intraday looks better than some of the others like the Q's above.

The 2 min chart looks pretty good as well vs the other averages on a relative basis, this hardly looks good from any other perspective than relative comparison.

 The SPY 3 min is in line with price on the downside so the positive divergences are only in very short intraday timeframes.

 SPY 5 min is in line on the downside from yesterday's distributive action.

And of course as I showed earlier, the bigger picture continues to deteriorate in the multi-month top.

This is intraday TICK for NYDSE components, you can see the bearish trend earlier today and a more positive breadth in the late afternoon as divergences appear in intraday timeframes.

The same can be seen in my custom TICK indicator.

Here it is vs the SPY showing better breadth performance intraday in the late afternoon.

Apparently some of the intraday positives that are really not that strong, are coming from the USD/JPY divergence.

USD/JPY finally looks a bit more positive on the intraday 1 min chart, but the 1 min only.

As far as the usefulness of this information, this is what would keep me patient a little while longer before adding to NUGT long as the probabilities of a head fake move increase a bit with these divergences, I might take a closer look at MCP's long add to as well here,  but beyond that, there's not much more the market is building or telling us.

GDX/NUGT DAILY UPDATE

I'm not at all convinced that naming a price pattern is important, but knowing what a price pattern is in advance can be useful as far as expectations, the health of the pattern (if you know what the standards are) and even targets.

There are a couple of "possibilities" for GDX, this doesn't mean any of them are correct. One mistake technical traders make is to memorize the rules (or even worse, not memorize the rules), but fail to understand why the rules create the pattern. Almost every price pattern that is legitimate, has a psychological reason it formed, that's why they have formed for well over a century and are similar every time, human nature doesn't change and the two main drivers of price action are not supply and demand, but rather the psychological  human elements of emotion, specifically fear and greed and that's why these price patterns are so similar whether formed on a 5 minute chart in 1920 or a 5-day chart in 2000.

Here are a couple of possibilities...

 There's an inverse H&S bottom, the sloping neckline is not a problem, although it's generally not one of the cherry picked examples you'll see in a T.A. book.

The symmetrical nature of the left side of the head and right side of the head are actually quite common, even allowing quite a bit of room for fudging on the left side of the head, we still get at least two major shoulders and the right side is stuck at 1.

As mentioned yesterday, volume is key to identifying a H&S top, it's even more important in a H&S bottom.

This custom cumulative volume indicator (blue) just makes it easier to follow the trends of volume. No matter what the pattern is or isn't, the increased volume on the downside move is indicative of a selling climax event which allows a new trend to emerge, like a stage 1 base.

As far as the Inverse H&S bottom, the left side of the head volume is not critical, but by the head and to the right of it, it is very critical. Volume increasing on the move down at #2 is good, but it should be heavier at the bottom of the head and then even heavier on the advance from the bottom of the head to the neckline which it isn't.  At #5 the diminishing volume is okay, but the volume would need to pick up SUBSTANTIALLY on any advance off the lows on the right side.

This is not a great candidate for an Inverse H&S bottom.

As far as a Cup and Handle Bottom, typically a C&H is a continuation pattern with a preceding uptrend, we don't really have that here. The C&H can be a base pattern although less popular as one. We do have the cup, there are at least two different areas we could consider the cup and the downward sloping consolidation would be the handle. Volume isn't bad for such a pattern, the shape and size aren't bad, the handle is a little close to going too far, but still not bad.

If I had to put a name to it, I think I'd go with the C&H.

As far as the main issue I've had with GDX and the 3x long version, NUGT, it has been the repair of the 10 and 15 min charts, especially the 10 min.

I'm not going to go through all the timeframes today as they aren't that important, the 10 min chart update is exceptionally important.

THIS IS ANOTHER HALF SIZE POSITION I'D LIKE TO FILL OUT TO FULL SIZE AND I THINK WE ARE RIGHT IN THE AREA.

 GDX 10 MIN POSITIVE with a reversal process.

NUGT 10 min confirmation with a reversal process.

And finally, all 3, DUST 10 min negative with a reversal process providing all 3 assets giving confirmation.

I'd like to add to this position as well. The 30 and 60 min charts are pretty much already there, it was the 10 min that was troublesome. We do need the 15 min charts to migrate from the 10 min and just make some minor adjustments and a few intraday timeframes. I'm thinking we likely get the inverted "Igloo with chimney" head fake move as part of the reversal process, I will set alerts for a move below the recent rounding lows in GDX and NUGT as there's about an 80% chance that's where we find our add-to points, otherwise I'm holding the partial position that's already open and I'd have no problem opening a partial position here as long as my risk management allowed for enough room for a head fake move to add to the rest without violating position size.

This is one that told us what to expect back in April and has come to us, doing everything we expected, this is the kind of trade I don't ignore.