Quick Market / SPY Update

First, don't forget we have the ECB's policy announcement tomorrow, personally I think expectations are way too high, the press conference will be a big deal as well, although Draghi does a lot of talking and hasn't followed it up, but they're having a real inflation/unemployment problem so I'd think, despite lofty expectations, he has to do something, although I do have a gut feeling it will fall short. Look for volatility between the policy announcement and the press conference, in fact I'd suspect most of the day.

Friday we have Non-Farm Payrolls, another biggie.

Here's a look at the SPY, there are just divergences there that the ECB would have trouble budging. The theme has been the same most of the week, 1 min intraday charts as steering divergences with longer charts distributing. I did warn of the "Igloo top with a chimney", it looks like we have a little of that today.

 The Most Shorted Index saw a little bounce today and yesterday, it looks to have started to give way toward the close. HYG is still not able to support the market, there was a serious move out of that one, more than 2 weeks of gains erased in a day.

This is where the action has been all week, 2 min and up charts while 1 min charts have steered intraday trade to stay largely rangebound, this is pretty nasty, but put it in trend perspective and...

That 2 min chart looks even worse. Note the rounding top and the "Igloo with a chimney" look that is  are seen often at these reversal process. May 30th was when I had said we needed at least a couple more days for the reversal process to mature.

 This is what really matters, the bear flag head fake that gave the market a short squeeze (see the MSI index on the first chart above), distribution through that period is exactly what we expected before the move even started, it was kind of neat to see BofA's numbers showing institutional distribution right in to the hands of dumb money.

The 30 min charts are showing a lot of damage since the February cycle, that's what created the 3-month top/chop zone.

And from a longer, cleaner trend perspective, the 4 hour chart...

TLT / TBT

Here's yesterday's TLT update, Treasuries / TLT Trade...

" This is that channel on a 15 min 3C chart, there is some recent weakness developing in the channel, but I'd expect to see some kind of channel buster before a significant move, this would be VERY tradable and with a channel that defined, a Channel Buster looks to be the highest probability."

And not long after that 12:37 p.m. post yesterday,

 The defined Channel TLT has been in, because of some of the longer term 3C charts, I expected this channel to give out soon, but it will likely see a volatile Channel Buster and by the close we got the first part of a Channel Buster.

What did that do?

The same as most head fake moves, created supply.

A Channel Buster will often see an extreme move (in this case, above the upper channel trendline before failing which is something I've been looking for, a move back toward $102.

 From the intraday charts, the break below the channel is seeing a leading positive divergence.

We are looking for migration of the divergence in to longer timeframes showing it is strengthening, this is the next timeframe at 2 m also leading positive.

 The 3 min went negative at the top of the channel and is leading positive at the break below it from yesterday/today.

The same is true of the 5 min chart, this is where my minimum divergence needs to reach for a trade and there it is.

It's long charts like this 4 hour (clean trend) that show a nice base around $102 and a recent negative setting in, the reason I thought/think the channel will fail, but likely it will put in an upside channel buster to kick start downside momentum first.

As for TBT, the actual trade is short TBT, this is the 5 min chart leading negative which confirms the TLT 5 min leading positive.

Trade Idea: TBT (Short)

I just mentioned the probability of a channel buster in TLT soon, that was yesterday and by the close we had it. There are good signals for a TLT long and the Channel Buster can add to momentum, but TLT doesn't have the profit potential to make the trade worthwhile for me so I'm going with TBT which is the 2x leveraged inverse of TLT, but I'll open it as a short, effectively giving me a 2x leveraged TLT long.

I'll have charts out in the next post.

MCP Follow Up

Our Call position in MCP from yesterday Trade Idea: MCP Filling out Long Equity & New Calls Position gained +25% while the equity side we entered or filled out has seen a 8+% gain today is still looking good, you know I just like to get out of options as fast as possible on the "Vegas" premise, the longer you stay, the higher the probabilities you're going home broke".

Here's the Call position P/L, the equity long position is still open and will stay open.

 MCP +25% / $3,000

Here's what I see going on longer term and why I decided it was maybe time to take those call gains and wait for the next set up.

 This is the entry yesterday after we were looking for the $2.50 level to be broken on volume (stops/orders hit-essentially supply on the cheap, just what institutional money needs).

The positive divegrence in a 15 min chart is pretty exceptional so I'm not concerned about equity longs, but you know how quickly options can change when momentum dies down, especially with such a narrow spread.

The 30 min chart went leading positive as well at the stop run, that's a lot of underlying movement for a single day so I'm happy with our entry in MCP.

And of course the 60 min chart leading positive at the post earnings decline/range and in to what was becoming a very obvious range increasing the probabilities of a stop run as traders place stops / orders right at or just below support, it's just too juicy to pass up, especially the supply end of things. Ism't it funny how few traders think about the question, "Who took the other side of the trade?"

However, my biggest concern about this chart in the VERY near term is the "V" shaped reversal. Granted it's such a small reversal that not much of a process is needed, but I'd rather take the gains and look for the next opportunity rather than lose them.

 This is not a big deal at all, but the 2 min chart has an intraday negative, with a gain near 9% right now on the day, there's going to be some profit taking. This may be just enough to drop momentum in MCP and I want to be out of the calls before that happens.

The 3 min chart that was accumulating in to yesterday's lows is still confirming the move up and leading so I'm very happy with out entry and will be looking for the next option position opening.

Taking MCP Calls Off the Table

You know I like to get out as soon as there's the first sign of a loss of momentum and we have a pretty decent gain for 1-day. I'm more than happy to look at re-entering the call position, but for now, I'll take the gift and run.

The MCP long equity position will stay in place.

Market Update-Possible Fade Trade

There are several intraday charts getting ugly here, I'm not a huge fan of intraday fade trades and would treat them as speculative, but it looks like there's an opportunity to fade to the downside a bit in to the close.

 DIA 2 min, my least favorite...

IWM 2 min, not much better...

QQQ 2 min looks interesting, but I really like...

SPY 2 min as it's leading negative intraday and...

ES/SPX e-mini futures are also leading negative intraday.

The custom TICK indicator is also going south as far as intraday breadth. Or you can just take in the information.

TWTR Update

Several weeks back I had posted a piece on momentum stocks, these have been beaten down pretty bad as the "Percentage of ALL NYSE Stocks Trading 2 Standard Deviations Above their 40-day Moving Average, aka "Momentum Stocks" had dropped significantly.

This is the breadth indicator I just spoke of, the T2 Series, there's no interpretation here, these are real numbers. In green is the "% stocks 2 SDs >40-day M.A." and in red, the SPX-500.

Note that in October momentum stocks were at about 40%, when I posted the "Momentum Stocks" post about 2 weeks ago, that had fallen off to a mere 10%, in other words momentum stocks have taken it on the chin.

I expect a nice move up in momentum stocks, but there were a few things I expected to see first. TWTR is a perfect example for the general idea.

However we have quite a few members interested in TWTR so I thought I'd not only go over a TWTR update, but come back to the general idea of what I'm looking for and when/how momentum stocks should offer an amazing trade (long). 

Note that even after the most recent short squeeze off the May 15th bear flag only lifted this class of stocks from about 10% to just a bit above 16%.

What's important to grasp with the 4 stages of a cycle applied to TWTR (stage = mark-up/rally, stage 3=top/distribution, stage 4= decline and stage 1=base/bottom. The "C" = "Capitulation", basically all weak hands selling at once, generally accompanied by a large gap down and very high volume.

One common misconception about capitulation is that it is the low or bottom and people expect a rally shortly thereafter, this is not typical. Usually after capitulation price will drift lower over a period of several months or so, however it tends to be proportional with the preceding stages, the more charts you look at, the more you get use to estimating the proportions of each stage or event.

After the low is put in, there is a stage 1 base that forms, the size of the base gives you some idea of how far stage 2 / rally can move. I don't think TWTR is putting ion a primary trend base, meaning a new bull market, I do think it is or will put in a base that is significant enough to cause a counter trend rally that might retrace 50-65% of the stage 4 decline. The point of a counter trend rally as you'll see is to change sentiment from bearish to bullish, they are a lot of fun to trade and some of the strongest (in percentage terms) and fastest rallies you'll ever see (while in a primary trend bear market). I'll show an example of this.

Even though TWTR's base is not nearly the size I'd expect before a real counter trend move, it has formed a bull flag and this bull flag does have positive divergences, it also looks like it was specifically constructed, which I'll show you as well as TWTR is a popular trading stock and a flag is a common technical price pattern that even a newbie trader will recognize after reading their first T/A book.

Volume for the flag is right, it should decline in to the flag, which is a parallelogram trading away from the preceding trend (the flag pole) which was up.

Today it looks like we have a breakout from that flag , but even with the divergences, there's something I don't trust here and it's largely centered on the base's size.

The 4 hour 3C chart went negative at the top and then confirmed the downside move, it has NOT put in a positive divergence as of yet.

The 60 min chart shows the same things, but has a small positive divegrence, this is not the size I envisioned when I put out the "Momentum Stocks" post.

 The 15 min chart shows divergences brining TWTR down to what I suspect to be base support and to the far right ids the bull flag ( a bullish consolidation/continuation patter). We know a high percentage of these flags are manipulated in many ways, usually 3C will give a contradicting signal like a bull flag will have a negative divergence and we know to expect some form of fake out, kind of like the mid-May bear flag with positive divergences that led to the short squeeze recently.

Still, this is a pretty respectable positive divergence at the flag and just before the rally that created it. I have little doubt these divergences are part of a larger base, but they also seem to be part of the bull flag.

I have to wonder if tomorrow's ECB policy event which has very high expectations has something to do with today's action.

10 min chart also positive at the bull flag.

The 5 min chart is the one in which the signals are strong enough to cause the moves that they forecast, a negative at 1, a positive at 2 that leads to the flag pole, a negative at 3 that causes the pullback that forms the flag and a smaller positive at 4 in the flag area.

This chart is probably the one that makes me most suspicious of TWTR's ability to maintain a move beyond a short term swing if that. The divergence at #4 should be much larger for a strong breakout from the flag.

 Intraday charts are useful, but you have to remember that they are not showing the same size of underlying accumulation/distribution as the charts above. Again, a negative at the top of the flag pole to create the flag consolidation/pullback and a positive in to the flag pullback/consolidation.

 The 3 min chart shows a positive just before the move up that forms the flag pole and a negative at the top of the pole to form the flag consolidation as well as a positive which again is not that large considering. At this point I have some trouble trusting this move.

I have used the Dow 1929 crash below to show an example of a trend and a counter trend rally and what I expect moving forward for momentum stocks to make for decent longs. Remember, this is probably the worst bear market move of the last century.

From the 1929 break, and you'll notice almost every break of a primary trend turning from bull to bear will be at new highs, just as it was in 2007 or for the NASDAQ in 2000. The following decline lasted 2 months, then we saw a 5 month nearly +50% gain which is a "Counter trend rally". Even though we already know what happened, imagine being a trader back then not knowing what comes next. All you know is you saw a rally of EIGHT YEARS and 500%, during the "Roaring 20's" (which also used Quantitative Easing by the F_E_D before the crash). There was a sharp break that lasted 2 months and then you saw a strong 5 month rally of nearly +50%.

I'd be inclined to think a lot of traders would have assumed the 1929 break was a fluke and the uptrend was resuming. THIS IS THE POINT OF A COUNTER TREND RALLY, THAT'S WHY THEY ARE SO STRONG, THEY HAVE TO BE CONVINCING AND CHANGE SENTIMENT FROM BEARISH TO BULLISH AND 5 MONTHS OF UPTREND AND A +50% GAIN WOULD PROBABLY DO THAT.

This is how Wall St. creates the demand they need to sell in to or short in to as many were likely left holding large long positions as the 1929 crash caught many off guard (by the way, 3C telegraphs distribution on a massive scale at least a year before the 1929 crash).

What does this have to do with TWTR? Well first consider the base size of TWTR, it's not as big as I'd expect for a true counter trend rally that is strong enough to change sentiment, but momentum stocks leading such a counter trend move (by the way there were at least 6 during the bear market from 1929 to the bottom in 1932) bin itself would be psychologically important to selling the counter trend rally.

My expectations...

First I expect a significant break in the market, we even have the F_E_D right now concerned about the lack of any fear in the market as they know they created a monster bubble and the larger it gets, the worse it will be and harder for the F_E_D to manage. John Hilsenrath of the WSJ, the F_E_D's unofficial mouthpiece just put out a column saying the F_E_D was very worried about the lack of fear in the market, it almost sounded as if the F_E_D itself might pop the bubble.

After a significant break, the counter trend move has to be sold to retail traders, it needs to be convincing, it needs to change what would be very bearish sentiment to bullish so there's demand that Wall St. can sell/short in to or just shakeout the shorts. You can't have everyone on the same side of the trade and make money in a zero-sum game, someone has to lose for someone to win and counter trend rallies serve that purpose.

Just using some "rough" eye-balling of TWTR's chart and current base size, I figure by the time an initial break comes and changes sentiment, TWTR's base should be large enough to lead a counter trend rally and that's where I'd want to trade TWTR long and any other momentum names that have put in a similar base (they have to be the ones already beaten up, not the NFLX or PCLNs.).  By the time the counter trend rally (and these are seen in just about EVERY bear market) ends, we should have very good signals and long trades in names like TWTR can be closed out and switched back over to shorts, giving us a great short entry.

It's for this reason as well as those stated above that I'm not quite on board with TWTR, even though it is doing the work. There are a lot of assumptions there, but certain things in the market just repeat because human nature never changes.

We'll keep an eye on TWTR, but I'm not ready to take that risk yet.

Real Life Stop Run

A member sent me this this morning, it's from the Twitter feed. You obviously recall the $2.50 stop run in MCP yesterday and what we saw that caused us to finally add the other half of the position as well a some calls...

Here's the purpose of the stop run from one guy's point of view, but this is obviously on a mass scale, this is the kind of analysis I call "Mass Psychology".

$MCP I sold all my holdings at 2.47 .. LoL .. The foolish step of my life. ??

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Quick Market Update

So far there's not much of interest as far as intraday trade goes, all of the averages' 1 min chart (intraday) are in line except the IWM which has a slight negative. The "inline" status doesn't move beyond the 1 min chart so there's no kind of migration to longer charts and they remain negative as they have been all week (1 min steering divergences to keep prices stable as you'll see, while the longer charts have shown significant deterioration over the last week+).

However, as noted yesterday, the IWM does look like it wants to play a little catch-up to the other averages as it has had the worst relative performance. Since the close on Friday, the SPX has gained (to present) +0.15%, the Dow-30 +0.04%, the NDX100 +0.11%, Transports have lost -0.42% as they were covered last week showing significant deterioration there as they had been very strong (price only) recently and that had to stop before the market can reverse. The IWM is down -0.42% so nearly 4 times worse than the SPX and worse vs the other averages.

As mentioned yesterday I saw some short term positives that made me think the IWM will try to play catch up a bit, here's an example...

 IWM 3 min, this is the kind of signal on the kind of timeframe that tells me it's probable that the IWM which has a much different trend than the other averages, will try to play a little catch up. I'll keep an eye on it, but unless something changes dramatically, I wouldn't even consider this for a scalp trade.

The IWM 10 min, meant to show the underlying price action since the May 15th bear flag and subsequent short squeeze/head fake breakout, is in leading negative position, essentially the distribution through the short covering that we saw and confirmed.

 As for the Most Shorted Index (60 min) vs the SPX, there's a slight uptick since yesterday afternoon in to today, but nothing of consequence and...

HYG is still pretty broken.

Results of Last Night's DeMArk (inspired) Custom Indicator Scan

Not all stocks are going to give a signal, from what I see, about 10% will give a "Current" signal when we are at market extremes. I've put each of the assets with current signals in to separate watchlists, one for assets that are giving a buy signal, but you have to remember an SQQQ buy signal is really a QQQ short signal and there were more than a few of those in the first smaller scan earlier yesterday Scan Candidates.

The point of this post is to show you a VERY clear trend in the market.

These are the two watchlists created from last night's scan alone, the Buy Candidates and the Sell/Sell Short Candidates, there are approximately 10x more sell/sell short candidates giving current signals right now (*these are not the only assets worth looking in to, this is just one measure or tool I use in selecting or narrowing down wider pools of assets).

The results of the scan alone tell you something about the nature of the market. Obviously I have my work cut out for me, I'll be spending a lot of time this week going through these candidates with a fine tooth comb.

MCP Follow Up

It has been a long time since I've been willing to add to the MCP partial long position, but after yesterday's stop-run/ head fake under $2.50, I felt pretty strongly that we were in the right place, Trade Idea: MCP Filling out Long Equity & New Calls Position and the charts MCP Charts.

As of this morning, MCP has been up over 5% thus far.

Charts...

 The post earnings drop and range, we had needed a head fake move before MCP could really break out of the year plus base, I showed the proportionality of the base and probable head fake even if it was earnings driven , the same thing happened with RIMM, but the accumulation was inside information on a huge management shake-up.

As is often the case, the more defined a range and support/resistance levels, the more likely a stop run will occur as traders keep adding stops and orders at these support/resistance areas and Wall St. can see all of these orders and know where they need to take price to create the most favorable environment (meaning the largest amount of supply at the best prices. Yesterday we speculated that was below $2.50 and finally later in the afternoon, $2.50 was taken out.

Here's the initial break below the May post earnings range and volume surge as stops and orders are hit and the quick move down through $2.50, with another volume surge as $2.50 is a natural psychological level (the same reason a store will price an item at $2.49 rather than $2.50).
 

This is the 60 min chart divegrence through the May post earnings range and one of the biggest reasons I maintained the partial long position, waiting for the right time to fill out the rest which was yesterday.

On a 3 min chart, the break under $2.50 can be seen as being sharply accumulated, the divergence is sharp as there was a lot of supply (volume) that had to be taken up in a short time.

When you have a 15 min chart leading positive in a single day, you know there's some heavy underlying flow (larger amounts of accumulation).

Thus far, MCP is showing perfect confirmation with the move higher.

I'll be setting new price alerts on the upside for >$2.70, $3.02 and $3.20

A.M. Update

Now here's something you don't see everyday and beyond being a novelty or point of interest, more importantly it's a "Change of character" and changes of character lead to changes in trends.

You may recall the several posts over the last week or two about the "Broken levers", one after another they failed, with HYG failing most spectacularly this week, taking out at least 2 trading weeks of gains in one day.

Now, overnight the USD/JPY tried to ramp in to about the midnight hour, but guess what assets didn't follow?

 This is the USD/JPY Carry trade in the candlesticks and ES/SPX E-Mini futures in purple, notice in to the midnight (EDT) hour, USD/JPY ramped to a high for the week, just shy of $103, now look at ES moving in the opposite direction, DOWN until they finally reconnect and both head lower.

 This is a 60 min chart of the same, short term ES and USD/JPY have reverted back to their correlation, however...

On a 4 hour chart you can see that ES still has significant downside just to revert back to the longer USD/JPY mean as the carry pair is caught in its own range for the moment, I suspect now that it is unable to ramp the market, it too will start its next leg lower, but I'll look at the pair more closely to confirm.

As of Friday when I posted our forward looking forecast for this week (especially early in the week), I started by going through my watchlist of shorts or my "short list" (in both senses of the phrase), what I noticed was deterioration and all looking like good shorts as of Friday as far as 3C was concerned. However as far as our reversal concept (vs a reversal event), NFLX was representative of numerous charts I had looked at, if any of them had reversed to the downside as of Friday or Monday we would have had "reversal events" and those just aren't common. A reversal event refers to a sharp "V" shaped reversal and those are not typical.

So in NFLX Trade Idea Follow Up  from Friday afternoon, I posted the following...

"As far as adding the other half, I'm going to wait, I'm thinking 1-2 days and I'll show you why... NFLX dominant 4 hour trend at a H&S top, probabilities for longer term resolution are solidly down...The 15 min chart is leading negative, i'd like to see a new leading low, but more importantly I think the reversal process needs at least another day or 2, the left shoulder's took about 4-days."

Then following that post, I posted Forward Market Forecast before the close,

"I'll put out a more complete EOD update, but for now, everything I'm seeing is making a lot of sense, signals are very clear unlike the last 2.5 months.

Essentially, if you take the NFLX Trade Idea Follow Up from earlier today and apply the same expectations and the same logic, you have the market forecast in to next week, which doesn't end well for the market. However, you do have time to position, I would not try to chase the market, just be patient and let it come to you."

And finally, The Week Ahead,

"Some of thee things we have expected included a run above the range (head fake) before a downside reversal, there was no accumulation for that move, instead it was built around a bear flag and a sling shot until short covering took us the rest of the way.
As far as that short covering, these are the 100 most shorted R3K stocks in one custom index the SPY...Most shorted in red, SPY in green. Note how the short squeeze fell off today...It looks like the transports rally is over and that is a big deal when we are talking about market expectations...not all credit was so impressed, High Yield actually went the other way.

Nor were professional traders...VIX was also   monkey hammered in to the close, but closed up on the week...As for the market, there was a little end of day strength, which is why I said,

"Essentially, if you take the NFLX Trade Idea Follow Up from earlier today and apply the same expectations and the same logic, you have the market forecast in to next week, "

This is the trend since the bear flag that sling shot the market in to a short squeeze and head fake move, the fact we have a negative divergence on a 15 min chart tells us the probabilities are very high we have a head fake move. (Not that I don't trust 3C, but it's always interesting to see hard evidence that the signals 3C are giving, are actually right on, TRACKING UNDERLYING PRICE as real price is VERY deceptive, which was covered in this post...3C Distribution Confirmed by BofAML which also confirmed all of our forward looking expectations as to a head fake move, how the head fake move would get it's energy or lever and what would happen to prove it was a head fake move and of course, why which we have known for years).

As I said about NFLX, I think there's a day or so left in the reversal process, THIS WAS A THEME THAT WAS MARKET WIDE ACROSS NUMEROUS WATCHLISTS AND DOZENS UPON DOZENS OF STOCKS WE ARE TARGETING."

Back to today...

 This is the SPY since last Thursday, I used NFLX as a broad market proxy and short list proxy, what NFLX needed, so did the other shorts and the market would have to provide that via its own reversal process as you see above. I had said Friday I expected we needed about 2 more days and two days later, yesterday, we entered / filled out our NFLX short position (yesterday) Trade-Idea: Bringing NFLX Trading Equity Short to Full Size

As for NFLX and other short watchlist equities...

 There's the continued reversal process (rounding top), remember yesterday my warning of the "Igloo with a Chimney reversal process", essentially a small head fake of the reversal process itself, this serves to generate downside momentum , you might call it a bear trap. While I have no specific evidence of such a move, it is one of our concepts, not seen quite as frequently as other head fake moves, but always a possibility. However as I pointed out, the chart damage is so extensive in NFLX (and others), it would simply be noise, perhaps even useful for those who might want to get in on the NFLX position which gapped down this morning. The post covering the chart damage in NFLX is right here from yesterday, NFLX Charts Follow Up

While I can't post EVERY asset on the watchlist, this is the same reversal process that was needed in PCLN. Try to imagine price moving almost straight down on 5/30, this would be a reversal event and if you look at enough reversals, you know that this kind of "event" is not often seen. Right now NFLX is continuing the reversal process as you can see this morning's price action thus far continues to trace out a rounding top.

As far as the Short Squeeze that we expected as a way to move the market above the multi-month range and create a head fake move, that was off a bear flag around May 15/16th that had a positive divergence, that positive divergence in a bearish consolidation/continuation pattern is what alerted us to the probability of a head fake move (Crazy Ivan) to create a bear trap and a short squeeze.

Here's our Most Shorted Index vs the SPX...

You can see the bear flag to the far left, the Crazy Ivan shakeout that moved below bear flag support, drawing in shorts and the subsequent squeeze. As noted above, the squeeze started failing Friday, it has failed badly since then (MSI in red vs SPX in green).

If you add another popular lever, HYG (High Yield Corporate Credit, which is used to manipulate the market by making algos think smart money , who almost exclusively trades HY Credit as a risk on asset, is in a risk on mode. These algos are meant to do one job, they aren't able to take apart knowledge from various assets, they simply follow correlations like HYG up, they think "Institutional money is buying" and they do the same in stocks.

Now lets add HYG to the same chart and something interesting happens (remember we had already seen negative divergences earlier last week well before the MSI fell off Friday).

SPX in green, MSI in red and HYG in blue, note they both failed at the same time, HYG took out two+ trading weeks of gains in a single day.

It's my opinion that once Wall St. noticed the short squeeze which was the lever to lift the market, had abated, there was no reason to hold HYG as it was pure risk being the mechanism to lift the market had just failed.

AGAIN,

"CHANGES IN CHARACTER LEAD TO CHANGES IN TRENDS.."