3C Distribution Confirmed by BofAML

If you've looked at long term 3C charts, have you ever wondered how we can have charts like this that show a trend of multi-year distribution, yet the market can still rise?

 Dow-30 with distribution in to 2011 and worse from then to present as price moves higher.

Russell 2000 accumulation at the 2009 lows and distribution in to 2011 and worse ever since.

NASDAQ 100 with several years of sharp distribution, larger negative 3C divergences than seen at any other time over the last century that we have data for.

SPX 500 with distribution in to 2011 and much worse through present.

Really it was easy to understand how the market could move higher despite horrible unemployment and an economy that never recovered, the F_E_D and their multiple Quantitative Easing programs backstopped the market and threw money in to it, but that's ending, however it did move a market to ridiculous levels that are far from justified considering the economic situation, it was far better in 2005, yet we are far higher.

3C is meant to show us what smart money is doing beneath price action, the above 3C charts tell us they have been selling for a good portion of this time since 2009 lows. We've even seen huge hedge funds come out and admit (which can be verified by their SEC releases quarterly and yearly) that they have been "selling everything not nailed down for the last 16 months" as one put it.

How are these signals possible and if they are truly this bad, what does that mean when it's time to pay the piper? As you may have seen before, the 3C signals for the Dow now are worse than they were in 1929 just before the crash...

 If 3C was this bad and caused this much damage in 1929...

What does the current Dow 3C signal tell us about what's coming?

Today we have a release from Bank of America Merrill Lynch that explains a lot, both long term and shorter term...

Source: BofAML

From the BofAML chart above, we can see that "Smart Money" (Institutional Money) were net buyers until about 2011, then Smart Money became "Net Sellers", we've talked numerous times about how large these positions are and how long they take to put together or distribute.

Don't forget our 2 years of Home Builder accumulation as the Dot.com bubble burst, how did they know to accumulate home builders and that housing would lead the next 5-year bull market years in advance with some of these accumulated positions making 2500%?

Not only were institutional clients net sellers, Hedge funds were net sellers since approximately January of 2011.

Institutional money became extreme net sellers around 2013, when 3C really got bad. Who were the buyers smart money was selling to, the green line that increases, Dumb Money or retail.

More importantly right now, look at the Institutional money distribution trend and who they are selling to, retail!

To put a finer point on it, remember the bear flag of May 14-19th and what we expected at that time and how we thought price would get there?

We were expecting the large multi-month range/top to see an upside head fake move before it could reverse to the downside as the range was too defined and too large not to have a head fake move which are seen about 80% of the time in every time frame and every asset just before a downside move.

It turns out we were right, well before price ever crossed above resistance, we had expected this as this is one of our most common concepts seen.

If you recall one way we thought it might get there, it was based on a bear flag in the SPX and what we thought would be a head fake move below the bear flag to trap shorts and then a move back above it to force them to cover, s short squeeze would provide the momentum to break above the range in a head fake move.

From left to right, resistance at the top of the multi-month range, the bear flag we suspected would be head faked with a Crazy Ivan creating a bear trap rather than break down as technical traders expected and that bear trap forcing a short squeeze.

We know it worked as it happened almost exactly as we predicted before hand, as for the short squeeze...

Here's our Most Shorted Index (red) vs the SPX, note how the short squeeze lifted the market, but the last few days the squeeze has ended and all off what we have been calling, "The Bear Flag/Bear Trap Sling Shot Short Squeeze Momentum".

Today I put a post together laying our expectations out, what happened next and where we are now, in essence breaking down what happened above and why that's important in this post, Market Update then additionally more information was added in this post, SQQQ Trade Position Update / Market Update and Finally Leading Indicators verified what we expected to happen above the range...Broad Market Update.

However we can just look at a chart like this to understand the trend of last week which is when the market was above the range.

This SPY 30 min chart shows VERY heavy 3C distribution as the market moved above the range and that's how we confirm this to be a head fake move rather than a real breakout and why we want to short the move at the right time in the right assets.

What is interesting is BofAML's more recent Institutional activity charts...

The entire reason we expect a head fake move is the breakout will cause RETAIL to buy, creating demand that the large institutional traders need to sell or short in to, this is the reason we expected a break out above the range before any significant downside reversal.

The 3C charts are clear that the move above the range was met with strong distribution from smart money, here's another...

The IWM distribution in to the short squeeze.

REMEMBER WHY WE EXPECT TO SEE HEAD FAKE MOVES AND WHY THEY ARE ESSENTIAL TO INSTITUTIONAL MONEY BEFORE A REVERSAL, (THERE ARE 2 LINKS ON THE MEMBER'S SITE, "UNDERSTANDING THE HEAD FAKE MOVE" THAT EXPLAIN SEVERAL REASONS WHY WE SEE THEM SO CONSISTENTLY BEFORE REVERSALS.

KEEP IN MIND WHY WE EXPECTED A HEAD FAKE MOVE AS OUTLINED ABOVE...

Now, BofAML's charts for Institutional Money's net Buys for LAST WEEK, when we were above the range and when 3C showed consistent smart money distribution...

The first chart shows Institutional money were net sellers (that includes short selling) for all of last week with only 1 sector seeing any net buying, the defensive Utilities, EVERY OTHER SECTOR SAW INSTITUTIONAL NET SELLING/SHORT SELLING LAST WEEK AS WE WERE/ARE IN THE HEAD FAKE AREA.

However, there's a reason for the breakout/head fake, it gets retail to buy so guess who the net buyers were last week?

The second chart shows what RETAIL did last week, they were net buyers of almost every sector except a couple (materials, staples and healthcare). THIS IS EXACTLY WHY WE EXPECTED A HEAD FAKE MOVE ABOVE THE RANGE, RETAIL WILL BUY THE BREAKOUT AND PROVIDE THE DEMAND THAT INSTITUTIONAL MONEY NEEDS TO SELL/SELL SHORT, THERE IT IS IN HARD NUMBERS , NOT JUST 3C, ALTHOUGH 3C TOLD US WAY AHEAD OF TIME.

From Bank of America/ML...

"BofAML notes, institutional clients are net sellers of US equities since Mid-April (and are cumulative net sellers year-to-date)"

Last week - as stocks soared, it was institutional clients who were piling out of stocks... and retail/private clients piling in...

And that's the concepts we used along with objective 3C data to forecast this move and what it would be used for and why it's important to us.

Was AAPL Rescued (and the market) Today?

As many of you know ( I know several of you took gains on the trade today), our recent Trade-Idea: AAPL Scalp (Puts) from last Wednesday is in the green, some of you did pretty well closing it out today, but was AAPL saved?

Around 2:29 p.m. today, the Bloomberg feed started flashing SEC Reg Sho (SEC Short Sale Rule 201) which according to the SEC... does the following...

Rule 201 restricts the price at which short sales may be effected when a stock has experienced significant downward price pressure. Rule 201 became effective on May 10, 2010.

Among other things, Rule 201 requires that a trading center establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution or display of a short sale order of a covered security at a price that is less than or equal to the current national best bid if the price of that covered security decreases by 10% or more from the covered security’s closing price as of the end of regular trading hours on the prior day. Once the circuit breaker in Rule 201 has been triggered, the price test restriction will apply to short sale orders in that security for the remainder of the day and the following day, unless an exception applies.

In essence, just as AAPL was breaking down (see our earlier post about "light AAPL support" and the price alert levels that were important in AAPL seeing more downside, the first of which was $625, AAPL June $625 Put Update)...

 As AAPL breaks lower (1 min intraday) and breaks one of our key levels of $625 for our Trade-Idea: AAPL Scalp (Puts) AAPL scalp trade, all of the sudden the heaviest weighted stock on the NASDAQ 100 sees a little help as Bloomberg data feed spits out Reg. Sho alerts which effected numerous NASDAQ stocks. Within the same minute the same stock would say, "Reg Sho "In Effect", "Not in effect" and "Continued", these messages could all be seen in the same stock all at the same time, forcing NASDAQ to admit they were, "broke"...

NASDAQ declares investigation in to Reg Sho dissemination at 2:42 p.m.

 The AAPL intraday 3C chart saw some small positive divergences right before the Reg sho fiasco and right at it, but not before breaking $625 on heavy volume (thus the reason we had $625 as a price alert level, the first in fact in today's AAPL June $625 Put Update

AAPL breaking $625 intraday (1 min) and the volume we expected as that was an important area to our larger downside trade.

This is the $625 area, you can see the earlier light support mentioned and why $625 was so important to us.

NASDAQ has proprietary weighting for the NDX100, to get the current weighting of AAPL in the index, you can pay $10k a year for a NASDAQ subscription, but from past weighting, AAPL has had near 20% weight, far more than any other NASDAQ 100 stock. In fact if you took the bottom 50 weighted NASDAQ 100 stocks and put all of their weight together it would be about the same as AAPL (from past weighting that has been disclosed). So if you took those 50 stocks and they were down an average of 1% and added AAPL to make the NASDAQ 51 with AAPL up 2% on the day, even though 50 of 51 stocks in our imaginary index were all down 1% on average and 1 stock (AAPL) was up 2% on the day, the NASDAQ 51 would close in the green, up +1%, that's how much influence AAPL has had and still has over the NASDAQ 100 / QQQ.

Who knows for sure, but AAPL had just broken a significant level we were specifically looking for on heavy volume before short sale restrictions flashed like mad from the SEC itself, disseminated by Bloomberg.

Get your tin-foil hats out...

Broad Market Update

These are Leading Indicators and they have been turning to the downside, they continue to.

 This is the manipulation lever asset HYG, it is falling off even worse in to the close.

That's after a gap down today that took out 2 weeks of gains. You may remember the 3C charts from earlier also showing distribution in HYG.

High Yield Credit is not buying at all, in fact the opposite. "Credit leads, stocks follow".

It looks like a little monkey hammering of the VIX in to the afternoon to support the market, but...

 VIX closed green last week for its best week of the last 5 weeks. Protection is being bid as it seems they are wrapping up this move that started with a sling shot around a bear flag a couple of weeks ago.

TLT is acting as normal, I'll update this later, there may be a new dynamic developing here.

 Here's a little larger view of 20+ year treasuries, as I said, I'll update these in another post.

Because of the reversal the last few days in treasuries, Yields have been supportive of the market, but they are still...

VERTY disconnected and they act like a magnet, pulling stocks to them, even with this little support (white) recently, there's still a massive dislocation.

This is professional sentiment, they are not buying this either, in fact the opposite.

As is this indicator.

I'll be posting specific trade ideas in a little bit as my watchlist is growing by the hour.

SQQQ Trade Position Update / Market Update

I have been going through my watchlists again as I did on Friday and there are just numerous stocks I have on my short list ("short list" in both senses of the word), I have a good 25 that I could put out right now as trade ideas, the theme is still essentially the same as Friday, it has just moved along as I was expecting names like NFLX (that I did post) are looking great from the strategic/probability level and timing, it's really just that reversal process or lateral time movement.

SQQQ is a position I like for general broad market coverage without having to worry too much about the best specific sectors. From a risk point of view as far as draw down, I really wouldn't have much of a problem entering or adding to it here, my main risk concern is open market risk, meaning if I don't feel it's the best possible timing or that there's more lateral movement, you have open market risk to unknown, unpredictable fundamental events.

The way all of these assets are moving, it almost looks like the market is setting up for disappointment in Thursday's ECB policy announcement (they do have pretty lofty expectations and in the past Draghi has been more talk than action).

Intraday charts like 1 min in the averages and these watchlist stocks are moving in a sloppy manner, but if you look close, it's what I call "steering divergences". If you think about how institutional orders are filled, they are graded (the market makers and specialists who fill the orders for large institutions are graded) by the fill relative to VWAP, the Volume Weighted Average Price. For a short fill, they want to sell short either at or above VWAP, for a long fill they want to buy/fill at or below VWAP. This is one of the reasons we see strong divergences in flat price ranges because the stability of price (which looks boring on a price chart and as if nothing is happening) has a lot more to do with making slight adjustments (as market makers and specialists can move price intraday by working the bid/ask and taking in or letting out a little supply, this essentially lets them get back to VWAP or a more ideal fill and continue filling the order.

I'm seeing a lot of charts that look like this...

 The little bit of accumulation this morning just prevented SPY/market from dropping and lifted it to a more favorable area to sell short. This is what I'd call a "Steering divergence" and it's on the right timeframe for it.

However the larger underlying trend of what's happening can be seen on the longer charts that show the heavier underlying flow.

 Take the continued deterioration of this 2 min chart, notice the stability of prices where 3C is making lower leading negative divergences.

Or this 3 min chart which is doing the same. This is what I'm seeing on the watch lists.

As far as the high probabilities and why I'd say this is distribution in to the reversal process, there's a solid trend of distribution from all of last week which I pointed out earlier is at an area (in the SPX) which is above the range, it looks like a breakout, retail will buy and provide the demand that Wall St. needs to sell/short in to as their orders are significant in size, they need that demand to keep prices stable otherwise they'd crash the market/asset with the amount of supply they are putting out (selling/shorting = supply which= lower prices if not managed).

This shows all of last week under distribution in to higher prices, but the short squeeze that made this possible has died off as have levers like HYG, it's now really about managing price.

So as for SQQQ, 3x short the NASDAQ 1000,

 SQQQ's 60 mn chart has been nearly perfectly in line, our edge is in divergences, this 60 min leading positive is our edge and a strong one at that.

The 30 min chart is the same

The 10 min chart shows the reversal process as price action has transitioned from down to lateral, the reversal process.

These leveraged ETFs are great for signals, I think because the leverage requires that they be entered more timely.

The 5 min chart really leading at the reversal process.

The same with the 3 min chart, but...

Intraday trends are more steering, not letting this rise or get away from the accumulation area/reversal process.

This is what I'm seeing as the general trend in my watchlists and not just market averages or ETFs, but assets like NFLX, FB, AAPL, etc.

I'm VERY tempted to fill out all short positions, I just want to be careful of timing and not have dead money that is subject to open market risk. I'm thinking that the intraday 1-2 min charts will start to show a different character as we get to the best timing and with a 3-4 day or more, reversal process, the probabilities of a head fake move just before a reversal grow exponentially.

For super leveraged positions like options, I'd want to open those in to a head fake move as that would help remove the edge Wall St. has over you when it comes to the premium that options come with, in other words you are getting a better price and just as important (especially if you play your options expiration tight), the better entry timing reduces time decay.

I WOULD NOT FEEL COMFORTABLE NOT HAVING ANY EXPOSURE ON THE SHORT SIDE AND I HAVE MAINTAINED THAT EXPOSURE WITH PARTIAL POSITIONS THAT I'M FILLING OUT HERE AND THERE AS GREAT LOOKING CHARTS POP UP.

NFLX Update

Friday I posted NFLX Trade Idea Follow Up and what I'm looking for in NFLX which is really just a reversal process, mostly lateral trade forming a "U" shaped reversal at the top of a right shoulder, as mentioned before, so far so good.

Here are the charts, I think NFLX will be ready for a short entry or add to in the next day or so, it's actually pretty much ready now as far as price, it's more just an issue of timing and not having open risk  while waiting for the process to complete.

 This is the 30 min chart, this is where the downside probabilities are, the only thing missing as it was Friday is the "U" shaped reversal process, essentially time.

 As you'd expect, the 15 min chart which is still a very strong underlying timeframe is even sharper in a leading negative divegrence.

As is the 10 min and you can see price turning lateral (sideways) forming the reversal process.

The same with the 5 min chart.

However to keep price in this sideways type range (there may be a proportionate head fake on the actual reversal process which would be small, but offer an even better entry and an excellent entry for put options) the faster intraday timeframes will look more like noise as they are just steering divergences to keep price from collapsing.

This is the 1 min, again, it's just noisy as it's just steering divergences, the 5 min charts and higher will continue to deteriorate in to the reversal process as we move forward.

2 min chart.

I'm just looking for this process to look mature and proportionate with the preceding trend.

Quick Market Update

There are some interesting things happening, they are right in line with the NFLX forward looking forecast (using NFLX as a proxy for the watchlist and market), you may recall NFLX's position entry (short) was not based on the charts, they are already there, it was based on the fact that the reversal process was not mature (Friday)...NFLX Trade Idea Follow Up and The Week Ahead so the lingering in the area (market) at pretty insignificant price action is really what was needed, TIME (to let the reversal process mature a bit more as a reversal in NFLX as of Friday would have been a "V" shaped event and those are not typical.

NFLX's price action today (recall it is looking like the top of a right shoulder) is exactly in line with what I was looking for in forward forecasting Friday...NFLX Trade Idea Follow Up

 The NFLX Head, neck-line and top of the right shoulder on a daily chart, note the last 3 candles (today, Friday and Thursday), the upside momentum has waned and the Doji's on the daily chart are indecision candles that open NFLX to a downside reversal. I'll only short a H&S top at 3 areas, the top of the head, the top of the right shoulder and after a break below the neckline and subsequent shakeout above the neckline as it starts to look like the right shoulder is now.

On a 15 min chart you can see the formation (rally from neckline) of the right shoulder and as I mentioned Friday, a reversal from Friday's close would have made a "V" shaped reversal, these are not typical, especially in widely traded, popular stocks like NFLX that have significant volume.

Today's price action thus far is perfect for the reversal process we are looking for, in addition the deterioration suggests that is exactly what we are seeing.

 DIA 1 min intraday "seems" to be in line, I think this is just intraday "steering currents" to keep us in the area, allow the reversal process to mature, but there's definitive additional deterioration as that's what we expect to see during a reversal process.

 DIA 2 min was already negative, it has turned sharply leading negative.

This is the 1 min positive from the IWM this morning and a leading negative, again this seems to be very much like steering currents, essentially keeping the averages in place to allow the reversal process to mature as it is pretty much market wide through multiple assets as of Friday's watchlists.

QQQ 2 min, the additional deterioration is clear, you'll see why in a moment.

SPY intraday 2 min

SPY 2 min trend.

TF/Russell 2000 futures 1 min intraday

 It's interesting to see the overnight action in Russell 2000 futures, as USD/JPY lifted Index futures since the open of trade for the new week, there has been a sharp leading negative (distribution) in TF, you can see how that resolved in price and the early morning intraday positive that is seen on the IWM chart is also seen on the futures.

 My custom TICK indicator went negative (intraday breadth), this has a lot to do with the failure of the short squeeze).

This is the Most Shorted Index (red) vs SPY (green). Friday we noticed the failure of the short squeeze, it has gotten worse today, thus the TICK index's poor breadth.

Friday I noted that other than the manipulative HYG (Credit) lever that is one of 3 main assets used as levers: HYG, VIX which closed green for the week last week and had the best week of the last 5 and TLT which I'll be updating soon.

High Yield Credit is one of the larger asset classes smart money trades to express a risk on position (like retail traders buying the momentum stocks), the divergence between High Yield Credit and stocks has been a defining feature since we moved above the multi-month range (SPX), only HYG had held up, but that's because it's used to move algos and fool them in to thinking there's a risk on atmosphere.

I pointed out Friday in The Week Ahead that High Yield Credit was NOT following along with the SPX/SPY/Market, but rather going the opposite direction as seen above.

Here's HYG which has taken a hit today making 2 week lows

 HYG was already showing distribution, today it has taken back all of the last 2 trading weeks which is inline with the support as a manipulation lever of the market.

 HYG 2 min dist.

HYG 3 min, we have migration of the negative divegrence.

And a VERY clear 30 min leading negative through the entirety of last week, juast like the averages, the importance of the distribution through last week is that's where the SPX was above the range and on a head fake move, we wouldn't expect to see any distribution until we were in the head fake range/area.

Last week (Daily Chart of SPX Above the range / Head Fake Area) , remember the averages showing clear negative divergences through the entirety of last week.

The SPX's daily candlesticks are showing a reversal process as well as upside momentum has transitioned in to lateral (reversal process) trade.

Note the SPX's ROC (Rate of Change) failing at the head fake zone (above the range's resistance).

So far, so good.