Broad Market Update

The trend most of this week were minor intraday 3C divergences (1 min), they seemed aimed at making slight corrections, however just past 1 min and underlying trade was very clear and consistent through the week. Remember that this is the area we expected around mid-May to hit BEFORE a move lower would materialize, to REALLY understand why, I'd suggest reading our two articles,
"Understanding the Head Fake Move" as this is a concept in every asset, every timeframe and it's seen at least 80% of the time, usually just before a reversal so it's worth reading or re-reading.

* Understanding the Head-Fake Move Part 1 "How Technical Analysis Went from an Asset to a Trap"

* Understanding the Head-Fake Move Part 2 "Motivation"

As for the chart examples...

 For the most part the 1 min intraday charts just made small adjustments/divergences, today was the first day of the week that a larger divergence was seen on the timeframe (negative)

However, after 1 min charts, there was a lot of underlying activity, this is a 2 min chart's trend, notice the trend as the SPX crosses above the range resistance at $1900, the trend is nearly straight down.

In addition, the price trend change shouldn't be ignored, we often see an increase in the Rate of Change just as we did yesterday, just before a new trend/stage is introduced. This is a concept that works on any asset in any timeframe, for example...

 Whether a 5-day chart or..

A 15 min chart. "Changes in character lead to changes in trends".

 Again, as for the underlying action above the multi-month range which we expected to be a head fake move weeks before it started as that's another broad concept that works in any asset and any timeframe, note the longer term chart's trend .

 This goes back to January, but I'm most interested in where the February cycle/rally started and the range forming after it and what has happened during that time.

 The longer term charts remove noise and some details, but they give you a broader perspective of the trend. I found this interesting because another money flow indicator which is not 3C, had almost the exact same signals, definitely the same trends.

I'm pretty much looking at both charts starting from the distribution around January leading the market lower in to the February lows and rally, then the indicator unable to make a new high with price and quickly falling to a new low, exactly the same as 3C above, although I have no idea how this indicator is constructed.

 The 1 min Q's also just saw minor "steering " adjustments, again that is until today which is the largest 1 min divergence of the week (negative like the SPY today).


 The longer timeframes beyond 1 min showed a negative trend and again, in this case it starts right around the time price crosses resistance from the Feb. high in the QQQ which was completely retraced in the Q's.

 Again, close to inline until price crosses in to the "Head fake zone" above resistance, the breakout level where retail will buy and offer demand institutional money can sell/short in to. 

The trend of this week (red) is notable.

 QQQ 15

 Although the Q's have their own underlying trend, it is reminiscent of the other "Smart Money Flow" indicator.
Again, distribution in to early January leading to the Feb lows and rally, distribution at the start of the Feb rally top and a new leading negative low. The signals aren't exactly the same, but it's also the Q's rather than the SPX  and of course different indicators, but showing the same broad trends.

Compare...

Note there's no distribution here in the IWM (yellow) as there's no higher prices, as soon as there are higher prices to sell in to/demand, note the change in 3C.

I had been saying I expected the IWM to outperform as it had underperformed and was slipping, it had its best week of 2014.

 There were several reasons I expected the IWM to show better relative performance vs the other averages, here's one, however the positive divegrence sending it higher has turned negative quickly today.

And the broad trend , Jan distribution, February distribution, new leading negative lows in which the IWM followed.

As for leading indicators...

 This is the trend in High Yield Credit, Institutional money's "Risk on" asset, they aren't quite so excited as the SPX.

This is HY credit today specifically.

Again, the trend among smart money (our smart money sentiment indicators) shows they aren't buying either.

This is the second sentiment indicator we use for confirmation. Ever since the cross above the range, pros have not been keen to follow.

 This is 20+ year treasuries today, I'm still not sure I understand the dynamic or new dynamic in Treasuries, but, this is not suppose to happen...

 TLT vs SPX, this is a risk on trade and a flight to safety trade at the same time, for months the argument is one has to be wrong, I'm not sure as Treasury sentiment has changed massively as the F_E_D backs out of purchases with no other major buyer left. Or it could be distribution in one frees up funds to buy the other, it's one of the puzzles I'm interested in solving quickly.

VIX was pounded today, in fact to Feb. 2007 lows, and anyone wonders why the F_E_D is worried about complacency in the market?

 However as VIX hit its new low, the market gained nothing from it today.

And talk about  strange...

Look at the After Hours volume spikes in VXX, the first one sent price a bit higher on the hit. What is going on here? I suspect we'll find out over the next few days as VIX futures (not spot) were showing strength today as seen in today's futures update.

As for breadth...

 The NASDAQ Composite (all NASDAQ stocks) is seeing strong deterioration in its advance/decline line (A/D in green, COMPQX in red).

 The Absolute Breadth Index is also falling off to one of the worst historical readings on record. 

High levels are associated with bottoms as you see in 2009, low levels are associated with tops as you see an extreme divergence through 2014.

Looking at a longer view...

 The 200 top can clearly be seen as ABI falls off, the 2002/2003 bottom can be seen as it rises, the 2007 top is seen as well as the 2009 bottom, compare price vs the fall-off in 2014, that's extreme.

 Here's the same chart as above so you can see it with no notations..

And finally, NYSE new highs, again not a picture of health, especially given the recent short squeezes.

I'll be looking through my 300 stock watchlists and looking for trends as I did last Friday and had decided to wait on any new entries, the trend of several hundred stocks often becomes clear and gives you a different or unique perspective.

Have a great weekend!

EOD Update Coming....

The Week Ahead

Looking at the 3C charts in to the close in both the averages and futures, my feeling is the head fake move above $1900 which was resistance of the 3 month range and the area we expected a head fake move which in my opinion is more than large enough to do what they are intended to do, will start being resolved to the downside next week, it looks from the 3C charts going in to the close that this will likely start early next week. I'm not sold on one lump sum move, but rather more of something like a stair step, when $1900 is broken on the downside, I think that's where we get a lump sum move.

The move above has been very hollow, mostly short squeeze, large institutional selling, large retail buying, this is called "Leaving retail holding the bag".

As my earlier post, F_E_D Correlation, indicated, I think the excess 25-30 point SPX disconnect with the F_E_D balance sheet and/od CONTEXT is reflective of the head fake move. I do think that the market will front run the F_E_D and as I indicated in mid-May, I believed we needed a failed move above SPX $1900 (head fake) before that process could start.

There are numerous assets I'm interested in, I'll see what the watchlist (as I have 300 stocks on there now) looks like over the weekend.

More to come

Futures Update

The divergence on the 1 min Es chart that I posted earlier is quite a bit worse right now. As mentioned earlier I received several sentiment updates from members yesterday who monitor the Twitter stream and the prevailing sentiment seems to have been to fade the short squeeze yesterday, I would imagine they'd go for the cheapest rout with the most bang for the buck, weekly puts, likely expiring today (I made a fat finger trade and the first set of IWM puts opened with today's expiration when I meant to open for next Friday's, the second set are for next Friday. If I open a 3rd set, they will be at least a month out). This may be why we are seeing so little movement after 2 p.m., however if they (those who control the pin) wanted to, they could take the market higher and achieve the same effect.

Here are the charts...

 The intraday ES chart has deteriorated even more, this won't hold up over the weekend like a chart of the averages, not 1 min. futures divergences, but at 5 mins they will and that has often been a timeframe where I'll look at trades.

In any case, I didn't need to draw on the chart, the divergence leading negative is VERY clear.

This is what is important , the migration of the divergence to longer timeframes like this 5 min NQ chart, these will hold up over a weekend.

And the move out to 15 min like this TF, that's migration or the divergence getting stronger.

 VIX Futures are interesting, not only the ROC in price from down to sideways to now a slight "U" shape, but the continuing leading positive divergence that is also migrating .

 Here it is on a 5 min chart, mostly today only and ...

A sharp leading positive on a 15 min chart.

2 p.m. Op-Ex Pin Removal

Friday's are some of my least favorite days since weekly options, we use to have to deal with the Max pain options expiration pin once a month (monthly/standards). Many people calculate max pain which is the price level where the greatest number of options (both puts and calls) will expire worthless since it tends to be smart money who writes option contracts and retail that buys them (again, calls or puts).

Based on a 3 year study of information gathered from the CME analyzing 5 options markets, the S&P 500, eurodollars, Japanese yen, live cattle and Nasdaq 100, three out of four options expire worthless. Looking at put options alone, 82.6% expired worthless for these five markets *this is subject to the trend of the underlying asset. a 3-year CME study (1997-1999) found the same, of options held to expiration , between 75.8 and 77.5 expired worthless.

In any case, the actual open interest use to be used to try to calculate where max pain would be, now there are plenty of online calculators that use the dollar amount rather than the open interest, but very few are real time and only updated at the close which makes it difficult.

Note today we've stayed pretty much in a tight range...

SPY, yesterday's short squeeze just after the Draghi disappointment and market decline setting in and just after the Appaloosa call in to CNBC around 11 a.m. (covered in last night's post). Note the range today. Yesterday numerous members who track the trends of retail traders via StockTwits were emailing me that the overwhelming sentiment was to fade the short squeeze, if that was done with put options expiring today (as this is a weekly expiration), then the pin level today would make sense as those contracts would expire worthless.

In any case, I don't know if your broker bothers me as much as mine does, but come Friday I have emails and numerous phone calls asking what I intend to do with option positions that still may be open. I've noticed by about 2 p.m., most contracts seem to be closed and the market starts to move away from the op-ex pin.

However, more importantly the last 2 hours of Friday tend to give me some of the best 3C information for the following week, this has included the February rally that we were able to predict as early as Jan 28th, especially the head fake move on Monday February 3rd and all of this at least 7-days before the actual move started which was described as going to be "Very scary". We've been able to forecast ranges , even head fake moves of major consequence all from the last 2 hours of 3C data which may be very different than price data as 3C tends to pick up right where it left off on the next trading day, even over a weekend , even over a holiday weekend.

I'll be looking for those underlying trends for next week and may open some positions. Looking at QQQ, PSQ, QID, QLD, TQQQ and SQQQ, they all are EXACTLY the same with the worst leading negative divegrence since at least early February. *I'm holding SQQQ long and will continue to do so.

Here are the charts of the 6 different leveraged versions of QQQ long/short, although they move almost exactly the same in terms of their leverage vs underlying asset movement, 3C is largely based on volume, the volume between the 6 different assets is totally different, therefore any divergences that match up, are because there's something going on there, not because of the correlation between the assets.

 60 min QQQ ... #1 the start/accumulation of the February cycle we had been looking for since the first hints popped up Jan. 28th, the move up started Feb. 6th. At #2 QQQ went negative in a range and then retraced the entire February rally at #3 which had a small positive divegrence . The head fake move we were looking for would be above resistance at #4 and the leading negative divegrence at #5 is the largest and strongest divergence on the chart by far. So far EVERY divergence on this chart has forecasted a move.

PSQ is the inverse of QQQ (no leverage), to confirm it should give roughly the opposite signals, there aren't too many out this far at 60 mins as they have to be very strong to reach this timeframe, however there is a leading positive right now that confirms the QQQ's leading negative and it is under support, which would be the inverse head fake move that the Q's saw.

QLD is the 2x leveraged long QQQ ETF, again at #1 the accumulation of the Feb. cycle, at 2 distribution which is leading negative, but looks more like a relative divegrence (weaker form) compared to the current leading negative and the smaller divergence at #2 retraced the entire February rally at #3. Resistance or where a head fake move would be anticipated is above #4's trendline and as that happens, the 60 min chart is leading negative confirming the above charts with another very strong divergence over a relatively short period compared to the divergence at #2.

 QID is the 2x leveraged bear ETF of the QQQ, it sees distribution at early February where the Feb cycle starts as it should, a positive divegrence at #2 that matched the QQQ and QLD's negative divergence at the same area, support at #4 and a huge leading positive divegrence as price drops below support which is how we confirm a head fake move from a real move as a real move would see 3C move with price as you see it do at so many other areas on the chart.


TQQQ is the 3x leveraged long QQQ ETF, it too is in a massive leading negative divegrence as soon as resistance is crossed, a breakout.

Finally...

SQQQ, the 3x leveraged inverse or bear QQQ ETF which is the position I hold long. There's distribution as there should be early Feb., a positive divegrence at #2 and at the break under support (head fake move we were expecting around mid-May) has a huge leading positive divegrence, larger than anything on the chart.

All 6 charts have nearly perfect confirmation and very strong divergences.

F_E_D Correlation

Data from the BLS (Unemployment data) shows some frightening things for the US economy. While the unemployment rate is at 6.3% (which is below the F_E_D's former guidance of 6.5% for them to start raising rates which freaked the bond market out which in turn caused disruptions in every interest rate linked to the benchmark 10 year from mortgages to car loans) the labor force participation rate has hit an all time low, I had to borrow a chart...

The breakdown of full time vs other categories. When you fall off unemployment benefits as some 3 million people are set to do this year as Congress failed to continue extended benefits in their budget, you are not considered unemployed, you are considered "Not in the labor force", therefore you are not counted when they put together the unemployment data, you are not in the labor pool even if you want or desperately need a job, this is the magic of goal-seeking numbers just like seasonal adjustments.

The truth is since the 2009 economic lows, every job gained has been matched with one lost that has fallen out of the Labor force participation rate so naturally unemployment looks better than it actually is. The number of people not in the labor force has increased since early 2009 by 12.8 million with another cumulative 3 million to be added through 2014, which is a record high at 92 million Americans not in the labor force.

The point here is not so much about how bad the US economy truly is and why the market is where it is compared to 2005 when consumer spending (mostly from home equity) was propagating a "healthy" economy at the time of course until it didn't with the burst of the bubble.

The point is what did QE do? The F_E_D has expanded their balance sheet to nearly $4 TRILLION and much of that went straight to the market through QE or more specifically POMO operations. It is my view that QE was nothing more than a stealth bailout of the banks, you may recall the public outrage of the bailouts of AIG, GM, etc? Well what better way to do it than QE. This was tried before, actually right in to the 1929 crash, at least it did something for the economy back then for a while before crashing the market.

Volume should advance on moves to the upside, even with such a large F_E_D balance sheet expansion going largely in to the market, can you imagine what would have happened to the market without it?

This weekly SPX chart has a moving average on volume, note what volume does after 2009 with all of that F_E_D POMO money flooding the market!

The recent April window dressing that saw a record of 1-day loans by banks from the F_E_D to prop up their balance sheet might tell us that they're in more trouble than you might think despite the stealth bailout.
Again, this is not the point. The SPX has discounted (as markets do, usually 6 to 12 months in advance) the F_E_D's balance sheet expansion during multiple episodes of QE, Operation Twist, Twist light, etc and there's a correlation, how ever with the F_E_D not only backing out of accommodative policy, but now for the first time openly warning about the market's exuberance, that part is ending.

If you take the correlation and extrapolate out the rest of the F_E_D's balance sheet expansion through the end of the taper, the SPX is now about 25 points above the correlation to the F_E_D's balance sheet that is about to meet an abrupt halt in market timeframe terms.

The point is more about the market's propensity to front-run the F_E_D, meaning to act on what the F_E_D is expected to do before they do it. To demonstrate this I borrowed another chart (as I don't have time to make Excel charts during or even after market hours), the data comes from the St. Louis F_E_D...

As some of you know, the antiquated Rate of Change is one of my favorite indicators, add it to just about any standard technical indicator and you'll increase sensitivity and performance. This chart shows a 13 week ROC of F_E_D assets (blue) vs a 13 week ROC of the SPX (red).

Now you have to look closely, at the bottom of the 2010 period the SPX front ran the FED, at the top of the ear;y 2011 period, the SPX front ran the F_E_D. At what looks like an Inverse H&S bottom from late 2011 to mid 2012 (in blue), again, the market front ran the F_E_D.

As the taper is in effect, the market is right there at the F_E_D's correlation, actually as mentioned, when extrapolated out to the end of the taper, the SPX is about 25 points rich to the correlation.

Now, you may remember back when we were still in the large +3/-3% range in May, based on our concepts alone and then especially around the bear flag starting on the 15th which obviously was not a bear flag as there was accumulation on a smaller scale, but enough to kick start the market through the range resistance, I had posted numerous times that it was very high probability that the market would not make a break lower until there was a head fake move above the range in place.

I don't have a lot of time to look for the exact posts from several weeks ago, but this one from May 23rd, A.M. Update, which was the first day above the range, however this was an a.m. post, before the market had moved above the range, shows we had been talking about this a lot as  head fake moves in almost any timeframe are seen about 80% f the time, the more obvious support/resistance, the higher the probability and with a 3 month range, there was very little reason to believe we wouldn't see one before any move down could start.


"one of the probabilities based on our concepts from earlier in the week was a head fake above the multi-month range, $1900 (where resistance of the range is) should do it if it happens which usually happens around 80% of the time before a major reversal (in this case with such a large top)."

The point of a head fake move is to change sentiment dramatically, Wall St. doesn't do anything without a reason. For more on Understanding Head Fake moves, these two links are always on the members' site near the top left....

* Understanding the Head-Fake Move Part 1

* Understanding the Head-Fake Move Part 2

Which brings us to our point, when the SPX was in the range, it was about in line with the F_E_D's expected/extrapolated balance sheet at the time of the end of QE3. The head fake move we expected came in to being as this is a general concept that we can expect most of the time and predict pretty far in advance with well formed ranges.

You already saw the 3C charts as well as another money flow indicator I had seen and posted that looked just like 3C's readings during the move above the range as well as the BAC data on Institutional selling and retail buying which was in this morning's post again.

Therefore one must wonder at what point does the market start front running not only the end of QE3, but the rate hikes which have always moved the market down? Supposing we are correct and I believe strongly we are that we are in a head fake move right now and that these moves precede a reversal (to the downside), and with the SPX 25 points above the F_E_D's balance sheet correlation, might this not be the exact spot?

Furthermore, I haven't posted these in a while, but from Capital Context, the ES CONTEXT chart...

This is the current CONTEXT model showing a differential of about 30 points (very close to the F_E_D balance sheet differential) between ES and the model, at the bottom of the post is a description of the model and how it's constructed...

The question is not one of reversion to fair value, the market never responds in moderate ways, it always moves in extremes, even when it's ranging, it's an extreme 3 months. The question really is how badly does the market front run the F_E_D and if this is the head fake move expected before a downside reversal from the range, then are we not at that point in which we back up the truck and load, especially on a short squeeze that has been distributed?

There are a lot of reasons for Institutional money to distribute/sell, but "We think the market is going higher" is not one of them.

weekly SPY

Context Model...

"The world has become an increasingly inter-connected place to trade. Whether due to central bank liquidity or the shortening of business cycles, asset-classes tend to behave in highly correlated ways most of the time. The CONTEXT framework attempts to distill the world’s ‘risk’ asset-classes (interest-rates and curves, credit risk, FX carry, commodities, and precious metals) into a single-measure that can be judged against the US equity market in order to comprehend potential mis-pricings (or technical flows and liquidity impacts). Institutional and algorithmic clients tend to use CONTEXT as a confirmation tool for positioning against (or with) a trend. CONTEXT provides a 24-hour-a-day real-time indicator of the world’s risk appetite and whether US equities are over- or under-pricing that risk."

Quick Futures Charts...

I have a more interesting post that specifically has to do with where the market is and why I might even take out longer expiration puts here, rather than next week's expiration, but it's a bit longer to explain and I wanted to get these charts out, a few interesting pieces of the puzzle come together.

In any case, relating to the last post of Futures and VIX future...

 ES /S&P E mini  intraday


NQ / NASDAQ intraday

 TF /Russell 2000 intraday.

I don't particularly believe in "V" reversals in any timeframe, however this does look like it's coming down, especially given the other evidence from the averages, the general concept of the multi-month head fake move, Leading Indicators , Treasuries rallying, but for now I'm looking more intraday for tactical entries.

And VIX Futures, not spot VIX or the 2 month rollling VXX short term futures, but VIX futures, the Rate of Change in price has fallen off from down to lateral and at that area it is leading positive.

At the same time, this morning's NYSE TICK Channel just failed.

I'll try to get the gist of the bigger picture out in the next post unless the market starts moving fast.