Daily Wrap... Futures, TF & NQ coming down

Another stunner of a day in the markets unless you were long IWM and were using leverage, Closing Friday's IWM Calls. SPX up 0.23%, NDX up +0.04% (REALLY?!?!?), Dow up 0.16% and the R2K, +0.83% as the big winner.

In S&P sectors, remember that XLF positive divergence yesterday, XLF was the winner today with a 1.02% gain, most other sectors closed somewhere around the mid. 0.20's, no big losers to speak of, Utilities which lead yesterday were down the most at -0.14% and XLE at 0.07%, not much of a move, just a flip flop from yesterday's winners to today's.

Commodities, except oil were up on this morning's strong miss in CPI as commodities gain in value in an inflationary environment and today's CPI print is already above the F_E_D's goal of 2.1%, the real trouble is CPI was only 1% 8 months ago, so the inflationary trend is strong, that will likely be the main topic at the F_O_M_C meeting which started today, ends tomorrow with the policy announcement and another Yellen presser. As ALWAYS, beware of the F_E_D knee jerk reaction. If the F_E_D is very clear about interest rates rising before mid-2015 as the market expects, we may see some real fireworks and no knee jerk, just panic (plus the F_E_D wants to introduce some volatility in to the market , meaning sending the VIX up, equities down). Typically the F_E_D knee jerk reaction is right after the announcement and can last a couple of hours to a couple of days, it's almost ALWAYS WRONG (the knee jerk move).

As of the close, the IWM put position opened today was at a modest 7% gain, although I didn't get in exactly where  wanted (as I put the trade ideas out for members first), but so far in AH trade, the Russell 2000 (IWM) and NQ (QQQ) futures are seeing some downside. Es's intraday divergence looks like it won't be far behind.

 R2K futures...

NASDAQ 100 futures, regular hours in red, in AH we are seeing some much more aggressive downside than we did during normal hours... interesting.

I also noticed VIX futures are putting in a positive divergence, this is the idea (long volatility in to the F_O_M_C I had mentioned earlier, but didn't have the charts to back it up, well they are developing right now.

This is just a start, but the earlier negative was right on at the highs, this positive is early, but it wasn't formed before and price is moving sideways rather than down. There are signs of a positive here too migrating to a 5 min chart surprisingly.

In fact, I hadn't checked on it near the close because nothing was going on earlier, but VXX (VIX short term futures) put together their own positive divegrence out to 5 mins in the last 2 hours of the day.

 VXX 1 min

2 min

3 min

5 min.

This may not seem significant, but with the snail's pace of the market today, to put together a positive out to a 5 min chart from nothing in 2 hours is pretty impressive, this will be high on the list tomorrow before the policy announcement, we may be seeing something interesting considering how big the short volatility trade is.

The R2K futures beyond intraday deteriorated as well, as did ES and NQ.

TF 5 min got worse today.

And as mentioned, although Es hasn't moved as much in AH, I'm pretty sure it will...

Es 5 min with even more deterioration than earlier today, a significant change since Friday, especially for R2K futures.

Remember we anticipated a pre-F_O_M_C bounce early this week, kit hasn't been stunning except for the 1 asset we chose to go long, IWM.

I pretty much made my case as far as the F_O_M_C goes in last night's Daily Wrap , but I can't emphasize enough how bad this morning's CPI print was for the equity bulls as the F_E_D has hit both of its mandates and any QE, even tapered as well as ZIRP policy is now HURTING the economy as we have inflation running hot and hourly wages running well below, in fact negative on the year.

I think the F_E_D has to sell the idea that the economy is recovering and I expect there will be some language that ZIRP (Zero Interest Rate Policy) the market expects to last until mid-2015, is data dependent and recent data shows the economy accelerating even though we know that's not true with a -2% Q1 GDP print and unemployment is a farce, of course it's going to go down when you don't count 90 million people who currently don't have a job in your unemployment figures (the smaller labor pool is what made the UE rate go down, not actual uptick in employment).


Oh, now ES intraday is heading south (4:50 p.m..)


As far as who was in charge today, the MSI (Most Shorted Index), I showed the early accumulation after a -1000 opening TICK (lots of stocks selling off on the open), that bit of accumulation sent prices near vertical which I recognized as a short squeeze, updated my most shorted list and confirmed.

This morning's short squeeze in the MSI (red), but not much after that. I find it a bit ironic that we could forecast this Friday, the signals , although weak, were there, we know Wall St. works pretty far in advance just by watching cycles and set ups like the mid-May bear flag head fake, so I guess it shouldn't be surprising, what you should be thinking about is why they set up this timing, remember to "Think like a crook".

I'm still suspicious of a gold/GDX pullback, but at least we know now why these assets have been accumulating, what do people buy when inflation is an issue? Gold. As mentioned earlier today, before QE, gold-miners would lead gold, with QE ending, I suspect some of those correlations that traders have disregarded (including volume analysis) over the past 5 years will come roaring back as "This time is NOT different".

I'll keep an eye on futures tonight, if I see anything interesting I'll be sure to post it, if you are watching, you won't get much from VIX futures as they don't trade 24 hours, but I would watch Treasury futures as well as gold and of course Index futures.

Market Update

This has been an exceptionally boring day and you'd think I'd feel a bit different with a 70% 2-day IWM call wrapped up, but it has been a slow, grinding day, it's no wonder that there's very few set-ups in this environment. However there has been at least come confirmation in the trend.

 SPY 1 min from early opening accumulation to late distribution.

SPY 2 min confirmation

SPY 3 min confirmation

SPY 15 min you can clearly see a bear flag, the probabilities are usually for a head fake move above the flag before a move below it, but there's just not the kind of accumulation we usually see before a move like that.

QQQ 1 min, I'd look at shorting/fading this if there were something more to work with than  0.08%

 QQQ 2 min confirmation

3 min with a few divergences, but mostly in line

And QQQ 10 min trend during this area.

IWM 1 min intraday

2 min showing Friday's positive divegrence and in to today's much more negative divergence.

IWM 3 min migration

And the trend on the 10 min chart in the area.

While it may be slow moving trade, at least there's robust confirmation between the timeframes and averages.

Leading Indicators

Taking a quick look at Leading Indicators, it seems the market hardly notices tomorrow is "The most important F_O_M_C meeting ever", as each one is.

There's not a lot of movement or indications standing out like a sore thumb, however there are a few that we have anticipated a bit that have moved in the anticipated direction, specifically HYG / High Yield Corp. Credit which has been holding above the SPX, which is one of the smaller bits of evidence for a bounce early this week which has largely been contained to the one asset we picked to go long Friday, the IWM, of course I closed that out this morning for a 2-day 70% gain and just recently entered a fade trade (IWM puts), I see some evidence for those working in the Most Shorted Index as it seems to be firmly in control of the market today.

As for HYG, it had been slightly leading which is why I also anticipated we'd get some bounces in some assets that would set up, trades that come to us like NFLX which is one we expected a bounce, apparently up on news or an upgrade. AAPL, IYT, PCLN, etc.

Here are the charts...

 The SPX (green) is meeting up with a declining HYG which is not surprising on either count (one being we anticipated a pre-F_O_M_C bounce), remember HYG had been showing and still is, underlying deterioration, so the two have almost reverted back to the mean.

However I am interested in the broader credit market and how it's reacting, I'll have to wait to get IG and some other HY until after the close, but High Yield Credit below...

 Is clearly deteriorating intraday today, not buying in to the bounce.

Sentiment indicators are mixed so I'm ignoring those.

Yields are pretty much in line with the SPX so there's no leading indication there (that's the default relationship, it's when Yields diverge from the SPX that we get a leading indication).

 Yesterday we saw significant outperformance in the VIX, it is outperforming today as well, but that's a function of yesterday's gains, I inverted SPX's price so you can see what the natural correlation would look like (usually move exactly together).

I was considering getting long some volatility pre-F_O_M_C, I don't see the signals supporting the trade, although fundamentally it makes sense, so I'll wait on that, see if anything pops up tomorrow (likely after 12 p.m. when the F_O_M_C has been leaked by a network with the information on embargo).

Finally... the Most Shorted Index which appears to have led the market all day.

The MSI in red clearly led the market today, however as short squeezes go, this one looks like it was spent this morning on the initial squeeze.

I'm going to look at futures, currencies, Volatility and some more individual assets/trade ideas.

IWM Fade Trade Follow Up / Market Update

Friday I said I thought you;'d have to be very nimble this week or at least early this week to make trades work.

The Russell 2000 (IWM ETF) historically has led "risk on" moves or what you might call bounces or rallies, the fact that the R2K as of yesterday's close was the largest laggard, with the Dow right behind it at a 0.28% gain on the entirety of 2014 from the 12/31/2013 close, is telling me something about the market.

If you don't believe me about the R2K's importance (it use to be the SP-500), just go back and listen to any of Bernanke's Congressional testimony, he never references the household name, S&P-500 or even better, the Dow which everyone has heard of, trader or not, he talks almost exclusively in terms of the Russell 2000. I had seen a study someone had put together showing how many rallies/bounces were solid vs how many failed depending on whether or not they were led by the R2K, the ones led by the R2K had a much higher chance of being genuine whereas the ones like this year's gain in the SPX vs the IWM, tended to be the ones that failed or were shorter lived / weaker.

As for the charts specific to today, you probably recall the earlier "Change of character " post, Change in Character Index Futures... which was exclusively the Russell 2000 futures, then add these charts to today's trade.

 IWM 1 min leading negative...

2 min shows the opening positive divegrence and a leading negative migrating from the intraday 1 min

The 3 min also showing migration of the negative divegrence and...

The 5 min , the reason I chose IWM calls last Friday  is no longer leading as it was yesterday at the close, but is now in line. I would expect at some point the 3 min chart's negative divergence will migrate to this 5 min.


Looking at the TICK Index, you can see mid-morning weakness at extremes of more than -1000, then a range with really little trend, the most recent new trend seems to be developing to the downside again and hitting -1000 levels on the TICK. This just doesn't look right considering the IWM's position, intraday trend and gain today.

I'm really starting to like these Heiken Ashi Candlesticks, unlike normal Japanese candlesticks which are constructed using the current bar's open, high, low and close, these H.A. candlesticks use the previous candle's information as well, they are a bit more delayed as it's almost the same effect as putting a moving average on data, but they seem to give good signals and I like the ease in which you can follow the strength of the trend, again, like volume analysis, I'll likely put up a link for Heiken Ashi candlestick use as it is different than normal candlesticks, I like to use both as H.A don't have the patterns that normal candlesticks have which can be an advantage as well.

Also, just after I entered the position, this showed up...

IWM 15 min chart

Trade Idea: I'm going to Fade the IWM

As mentioned before, I'll be using June 27th expiration puts with a strike of $117, this is a spec position, half size like the last.

Considering Fading IWM

I'm looking at the IWM for a downside fade using June 27th IWM $117 puts.

If I decide to do it, it will likely be quick, it may even be a day trade. I'm looking at some other assets as well, but this looks to offer some more potential and has better signals thus far.

Trade Set-Up (longer Term ) IYT/Transports

First we had a post on 6/9, Transports / IYT Are Looking Horrible with a follow up and then a Trade Idea, set-uo, Trade Set-Up (Longer Term) IYT / Transports.

As it says above, I see this as a potential longer term candidate. I like the idea of a position (short) in transports as they move and adds some diversification, especially as the F_E_D (in my view, HAS to exit the market not only because of their balance sheet and the fact they have share-holders, but inflation and unemployment mandates have not only been met, but surpassed), which means it is very likely that these very rich multiples are going to come back to fundamentals , in short the economy and despite what the F_E_D says, we all know that the economy is not doing better with a Q1 2014 GDP print at -2%, one more consecutive negative print="RECESSION". The point is, as the Bernanke Put is removed, fundamentals will matter a lot more.

On the 9th at the exact top, Transports / IYT I had posted..

" I think IYT is in a very interesting spot to consider it. If you are a bit more cautious, maybe see if there's a bearish confirmation candle tomorrow, I think there's plenty of downside and this would be an excellent entry area even if you have to wait on a confirmation candle of today's possible/likely bearish reversal candle."

Too bad I didn't open a position right there, but the idea after that was because of the channel buster (trendline), there was a good chance of a second chance opening in IYT if we were patient and let the trade come to us, which it is doing, which is why I don't chase trades.

I'm going to go through multiple charts to give you a macro view of Transports...

 First a 5-day chart so you can see the character change in IYT, pre-2013 price action acted like it should, highs, lows, pullbacks, consolidations, corrections, basically the same as any normal stock would look. An important concept in volume analysis which hasn't mattered at all while the Bernanke put has been in place is "Rising price should see rising volume", however when you look at the move off the 2009 lows, volume does the exact opposite because this isn't real demand, this is a F_E_D induced sugar high in which prices move up on declining volume, AS THE F_E_D MOVES OUT OF THE BUSINESS OF MARKET MANIPULATION, YOU CAN COUNT ON THE LOST ART OF VOLUME ANALYSIS TO COME ROARING BACK.

The other thing that's noticeable is 2013 forward, this is exactly the kind of unbridled chase for yield that F_E_D policies have created with no respect for risk, I said it in a 5-part video series in 2007, "This market is going to end very badly, like 1929 style" and "At some point, the market is going to just take its medicine", that's point seems to be rapidly approaching and I would NOT want to be long a stock that looks like IYT /DJ-20 when the music stops and everyone scrambles for a chair.

I'll post some articles on volume analysis, it has been (until the F_E_D intervention) probably the second most important technical tool in your arsenal.

 I try to confirm as much as possible as you saw yesterday with the sector analysis ending with gold and silver miners, I had probably somewhere near 12 or more assets all confirming the exact same divergences.

This is one of the indicators I respect the most, MoneyStream by Don Worden who is the father of money flow indicators, he was selling them to Wall St. firms since the 1950's. Money Stream works like 3C, by divergence, higher prices should see higher MS readings, lower prices should see lower MS readings, we have a massive weekly negative divegrence in IYT, you may wonder why it looks so bad since 2009 while price moved up so much, the answer is right there in volume which didn't matter as long as Bernanke was printing and pushing that money in to the market via the mechanisms of QE and specifically POMO which are being tapered out of existence right now.

 The more recent action in MS on a daily chart is interesting because it follows the 3C trend and a concept we use often that we see over and over again...

3C daily trend, I'll show you what the concept is, but try to remember where MS and 3C fall off badly on daily charts.

 The concept is the ROC concept or "Rate of Change" in price. Nice steady trends tend to continue, but when we get a "seemingly" bullish increased rate of change as you can see on this trendline in yellow, it is a change in character that appears bullish , but it generally end up with a much more bearish event. These are also transition points between stages, like stage 2 mark up and then the increased ROC leading to a stage 3 top which was June 9th, note the "churning"-like green volume followed by a large red volume spike as several support areas are broken at once, you can see the trend line broken.

What we were looking for from here if you did not take the trade on 6/9 is a bounce, we have been looking for the same in several assets I'll cover, NFLX, AAPL, PCLN, etc.

There's also a horizontal trendline broken, right at the same area as the green churning volume. The yellow arrow is the bounce I talked about in  June 13th's, Trade Set-Up (Longer Term) IYT / Transports, it just took a little patience.


 Now remember the daily MS and 3C charts and where they fell off, look at this 4 hour chart showing again a break (leading negative divegrence) right as there's an increased upside ROC in price.

This is why I say a "Seemingly bullish" price acceleration.

The 60 min chart shows the same thing in both Dow-20 (Transports) and IYT (Transports ETF).

And the more detailed 5 min chart shows the 6/9 top and distribution in to it. We don't have any strong 5 min positive divergences so the bounce we are looking for should not be anything to fear shorting, we just want to get in at the best place to lower risk .

 Only a 3 min chart (not an institutional timeframe) has a small leading positive divergence at the downside reversal process area. So, I'd set some upside price alerts, that's what reminded me of IYT today, an alert, and we'll look for the exact entry, I suspect a bit higher.

Considering the big picture, I think if you were to hold IYT for 6 months or a year, any entry in this area would be fine and would look like semantics 6-12 months from now, in fact the thing we'd likely be thinking is "Why would we have waited , looking for the best entry and possibly missed the larger move?"

 Using  daily  Heiken Ashi Japanese Candlesticks, in white we have strong price performance, in yellow we have reversal areas, in red very weak price performance and again we have two reversal candles to the far right for a bounce-type move, the kind we are looking for and this is one of the reasons I believe an entry is likely a bit higher.

However, as I mentioned what we might think 6-12 months down the road, this weekly chart of Heiken Ashi Candlesticks shows a very clear, HUGE volume reversal candle to the downside (which as you know increases the effectiveness of a reversal candle by at least two-fold).

This might even be one to consider phasing in to, or you might take a look at the component stocks in the transport sector, I know FDX recently gave a sell signal on my Demark-inspired Custom Indicator scan and that has worked out pretty well so far.

Change in Character Index Futures...

Last Friday (see last night's post, Daily Wrap which quoted much of Friday's The Market Into Next Week) there weren't strong (positive/bounce) divergences, in fact from last Friday's post,

The key is the second paragraph...

"There are scattered positives, mostly in the 2 min area, a few out to 3 min and the IWM has been able to maintain a 5 min positive looking signal, but not quite a clean, clear divergence....

The bounce I had envisioned considering I used a partial IWM call position with expiration next Friday, would be along the lines of pre-F_O_M_C and looking at the market as a whole, right now I can't say that I would expect much. In fact I am starting to wonder if it is even possible given it seems any kind of underlying strength that builds is so quickly torn down."

Essentially that's what we saw again this morning, the TICK Index really made that clear. Although there weren't the kind of divergences that I'd normally take even a short term speculative bounce trade on, the IWM at least had a clear 15 min positive in the Futures (TF).

What I'm seeing intraday isn't of great interest thus far, this isn't too much of a surprise given tomorrow's F_O_M_C, however the only real strength for a bounce as of Friday was the IWM (relatively speaking vs. the other averages and we saw that in relative performance as of the close yesterday  and thus far today) and that 15 min positive in Index futures, I don't think I would have taken the Trade Idea: Short Term IWM Calls trade idea without that 15 min chart.

The concept of migration is that any "new" divergence starts on the earliest charts (1, 2, 3 min ) first, if it is strong enough, it moves to longer charts like 5, 10, 15 min.

Take a look at TF/Russell 2000 (IWM) Futures...

 1 min intraday TF is really the only 1 min Index future of any interest , I suspect because it's the only thing moving, and it's not that interesting. The second move to intraday resistance/highs saw a negative divegrence as you see above, but that's not really where my interest is...

The 5 min chart is really the first chart timeframe (fastest) worth following beyond intraday activity and it's clearly deteriorating, the concept of "Migration of a divergence", would suggest that any deterioration on the next timeframe, 15 min would show a strengthening negative divegrence.

Remember, the 15 min TF chart had a very clean positive divegrence, in fact from the 12th's Futures Update post, the 5 min chart was building the divergence which was the same day the IWM closed at the lows from last week's downdraft or the start of the deterioration of the move above the 3-month range/SPX 1900. By Friday it reached the 15 min chart (migration), here's what it looked like Thursday...

Last week's (Thursday) building positive divegrence for the bounce expected this week pre-F_O_M_C.

Now the same timeframe right now...

There's a VERY clear change in character, but is it migrating...?

 This is the TF 15 min chart and the positive from last week around Friday which gave me enough confidence to enter the IWM call trade Friday. You can see the positive from last week at the lows of the R2k / TF /IWM and today, you see a clear negative divegrence in to today's relative strength vs the other averages.

At this point I'll remind you that last week we saw at least 2, maybe 3 positive divergences get run over which is not common, I think the last time I saw it was when AAPL lost nearly half of its value coming off all-time highs.

Opening Indications

Well that was interesting, last Friday for the "week Ahead", I was looking for a pre-F_O_M_C relief bounce as the market had been down nearly the whole week, that was the justification for the IWM call trade with weekly calls that expire this Friday which is a VERY short expiration for me, I usually use 3x the time I think I'll need so obviously I wasn't expecting much and in to F_O_M_C, well I think you know my opinion.

This looked and acted like a short squeeze...

 Note the red trendline on the way up, very linear, that's typical short squeeze behavior.

I would have got this post out 15 minutes ago, but I wanted to verify a short squeeze and had to update my Russell 3000 Most Shorted Index and then run it which takes a few minutes, as I thought, someone forced a short squeeze with minimal accumulation on the open.

 The Russell 3000 in green and the R3K Most Shorted Index in red this morning in the white box, you can see the most shorted stocks went straight up taking the index with them.

This is the minimal accumulation on opening weakness I was talking about, it's a small area and a 1 min chart so it's minimal, but likely targeting the right stocks with high short interest.

The intraday 3C action is "in line" meaning the buying on the squeeze was confirmed and the selling on the dump was confirmed, no divergence other than the opening one.

I always say, "I don't trust parabolic moves, they tend to end badly", this is about as parabolic as you get.

For some reason the first 15 minutes or so of TICK data has been missing the last 2-days, but you can see how quickly the TICK went negative to an extreme.

 This is my custom SPY/TICK index, note how quick it went negative and how deep.

This is the IWM call position with this Friday's expiration that was up about 14% at the close yesterday, over +70% when closed today.

Is that it for the pre-F_O_M_C bounce? I don't know, I have a feeling it's not, but like we saw last week with divergences being run over, this bit of strength was sold VERY quickly and RIGHT AFTER the CPI data came out which was not market friendly by any stretch of the immagination.