Daily Wrap

I'm already pretty much set with short positions, both for the trades I put out here and in the tracking portfolios and my own account which I funded earlier in the year which hold SRTY, SQQQ, FAZ and MCP all long and all trades given to you first. I've considered whether I might take some of the leveraged shorts off the table to ride a bounce,  but unless I see a very strong base, my problem is I have seen a gap down like we saw this week on the Portuguese bank(an event very few saw coming) gap the market down and at this stage of the game, those gaps can often be so severe that they take several months of market gains with them. The Russell 2000 just wiped out all of 2014's gains in 5 days.

The point being, it's a lot like the AAPL trade and maybe I needed to learn that lesson to keep my head on straight when it really matters. For newer members, 3C was tracking strong distribution in AAPL at the time AAPL was the stock that could do no wrong and anyone who said anything different was a pariah. However, like it or not, someone was distributing AAPL right in to its all time highs.

AAPL was making new highs (this was pre-split) and we were seeing heavy distribution, unfortunately I can only go back that far on a daily chart, but it was on numerous other charts, it can be seen clearly on the daily chart as well. I put out a trade idea, AAPL short and had been in it for a week or so as we waited for the downside move from all that distribution and then a small bounce, similar to what I'm seeing now setting up looked like a very high probability, I closed the AAPL short with every intention of letting it bounce and re-opening the short at slightly better levels (higher), however...

Before I could get back in to the AAPL short, Dan Loeb (one of the leaders among hedge fund managers who tend to flock together just like retail) had been selling AAPL in his Third Point Fund, one filing Loeb had AAPL as a top 5 holding and the next it had disappeared which set off a panic among hedge find managers as Loeb is known as one of the brighter minds in the business, this caused an all out sell-a-thon among hedge funds, all trying to fit out the same small exit at once which had the end result of taking AAPL down by 390 points or -45%, NEARLY CUT IN HALF IN 8 MONTHS!

The point should be fairly obvious, I say a large macro trend and treated the trade as if it were a nimble in and out swing trade and in doing so, missed the bigger picture by trying to get slightly better positioning.

The point in the present situation is we have an elevated SKEW Index meaning institutional money perceives a highly probable threat of what is known as a "Black Swan Event" like the crash of 1987, in fact SKEW was developed in response to the Crash of '87. Our watchlists have had numerous H&S tops, all at the top of the right shoulder much like the IWM, except many were much cleaner H&S tops, since then they have already started the decline from the top right shoulder.

I showed you what I have in the averages and leveraged ETFs that often give early signals. Earlier today I showed you the trends in Index futures that tell us the same thing, A.M. Update, Parade of Confidence in Portugal & ESSENTIAL FUTURES CHARTS pay attention to the 60 min and 4 hour Index futures, they are giving clear signals.

I posted a very strong case several weeks ago in 10-Year Yield (Bemchmark) vs. the Market in which you can see for yourself how this indication has called several market tops and a bottom, has not given a false signal and is giving us a market top signal once again that has only gotten worse since.

Yesterday I posted the strongest signals in our Leading Indicators and their divergence with the market that we have seen in years if not since we started using them in the post, Big Picture Charts / Market Map

Wednesday's Daily Warp laid out the near term market scenario including a move below Tuesday's lows that would be accumulated (I even drew my expectations on a chart) which came to pass the very next morning, Wednesday on the open. This was the most likely scenario and I believe it still is.

Here are a few charts I gathered before the close that all scream "bounce" to me...

*First the chart that screams bounce and then the chart that screams, "sell in to the bounce, Short in to the bounce". If you look at the Leading Indicators post again, it's not hard to see why we have little time left to get set up...Big Picture Charts / Market Map

About a year ago if Wall Street wanted to create a market bounce, they'd buy the most heavily weighted stocks in each market average and they'd move the average that way while making gains on those stocks. For example, before AAPL got all turned around, at one point it accounted for nearly 20% of the NASDAQ 100's weighting, to give you some idea, if you took the bottom 50 weighted stocks and combined their total weight, they were about the same as AAPL by itself. Theoretically you could take those 50 NASDAQ 100 stocks and AAPL and create the NASDAQ 51 using the same weighting, all 50 stocks other than AAPL could average a 2% gain for the day and if AAPL closed down -3%, the NASDAQ 51 would be down 1% on the day despite the fact that 50 of 51 stocks all closed up 2%!

About a year ago we stopped seeing this and started seeing other manipulation levers like VIX slamming (Which was recently slammed to lows not seen since February of 2007) or pumping HYG to make algos think institutional money was buying or in risk on mode or the biggie, TLT, VXX and HYG all used together in the SPY Arbitrage in which HYG moves up while the flight to safety treasuries /TLT and flight to protection/VIX move down. Also short squeezes have become very popular with very little investment needed to ignite the fuse to get the market above a certain level, say Dow 17k and let the short squeeze take over and do the rest.

The point in the change of how the market has been manipulated over the last year is smart money is unwilling to buy and hold stocks to move the market and they are using ways that take the least amount of investment and allow them the greatest ability to sell or short in to the bounce.

The levers...

 HYG, while hugely out of sync and Leading negative vs the SPX as seen in Big Picture Charts / Market Map, has a short term positive divegrence on a 5 min chart, this means HYG will likely move higher fooling algos in to thinking that Institutional money (about the only one who trade credit as a risk asset) are buying.

However, the truth about High Yield Corporate credit is vastly different as you can see in the post linked above and as you can see in the stronger/long term/higher probability 60 min 3C chart.


HYG has been under huge distribution since the end of June. In fact, looking at the even stronger underlying flow of funds, distribution in HYG has been strong since March...

The daily HYG 3C chart was in line/3C price/trend confirmation at the green arrow, large scale distribution took place as early as March and has continued at an increasing pace ever since.

In fact, it really broke with the market in May of 2013, this may seem unreasonable as we can move in and out of positions with a single trade, but when an average position size is a billion dollars for many of these funds, it can take a while and they need higher prices and demand so they don't crash the market/asset with the supply/demand imbalance, this is why they set up and create bounces and ridiculous new highs on a 0.10% gain and the lowest volume of the year, to get retail to buy their junk.

3C (3-day) large scale distribution in HYG since May 2013. If you think that doesn't sound right, consider a name that should be familiar due to our recent MCP trade, Leon Black of Apollo who spoke at the early May 2013 Milken Institute, 

"Apollo Group's Leon Black says his firm has been a net seller for the last 15 months, and that they "are selling everything that is not nailed down." Critically lost in the mainstream media's diatribe is his point that as the markets push higher, juiced by the Fed's policies, his firm will be selling more and more into that and harvesting gains (realizing profits) as opposed to watching unrealized gains (and the mirage of a wealth effect). Apollo has had $13bn of 'realizations' in the last 15 months - the most ever - as he sees "the market is pricey... in our view, priced for perfection.""

Translated, Apollo Group has been selling "Everything not nailed down" for the last 15 months (this was in May of 2013) and had already taken $13 billion of gains off the table as the way he saw it, this was the time to be selling in to market strength as their positions are so large, they need demand, they need that kind of time.

Point being, HYG under distribution since 2013 is no big surprise, in fact, that's when it fell out with the SPX.

HYG vs SPC May 2013.

To hear Black at the conference, go to 15:45 in the video...

Here's the YouTube link, http://youtu.be/y3fYRwYvqB8

Another short term manipulation asset in the SPY arbitrage is TLT, it needs to move down which fools the algos in to thinking the "Flight to Safety trade", treasuries, are being sold in favor of risk on assets.

Short term on the 5 min 3C chart we have a negative divegrence just as TLT reaches a resistance level, however longer term...

TLT's 60 min chart shows a "W" base with a head fake move (we see these 80% of the time before a reversal starts) right before the upside reversal below support at the yellow trendline, a stop run to gather shares on the cheap as they are stopped out. This head fake move can also be used to lure shorts in to TLT as they see support broken and chase prices below support, when price reverses back above the trendline the shorts are squeezed and have to cover creating more demand and more upside momentum. See my two articles , "Understanding the Head Fake Move" on the member's site to see how and why they use these and why they are so useful for us, just think about our +120+% 1-day gain in MCP calls, that was based on a head fake move.

I expect a pullback in TLT, maybe a gap fill around $111.75 and then I suspect it moves much higher with the market moving much lower.

So far we have two well known market levers with divergences that are used to create a market bounce,  this is not real demand by smart money, it's made to look like real demand so dumb money will buy the assets smart money is selling or selling short as both selling and short selling are sales transactions.

And one of the afternoon favorites, the VIX Smack-Down. This is VXX, (Short Term VIX Futures)... This would have to move down to create a market bounce...

Note where the recent positive divegrence/accumulation which sent VXX higher actually began, right after Q2 window dressing was completed as early as July 11st, the first trading day after the quarter's end. As I had said during window dressing in late June, these funds often only own the hottest performers for a week, some a day until the quarter's end so they can look smart for their clients, however as I said back then, there's nothing stopping them from selling the very same asset on July 1st and most clients won't know for another 3 months. "THE ART OF LOOKING SMART"

The point is, we have short term divergences in all 3 assets needed to create a short term bounce, and with this next chart...

10 min VXX accumulation on a much larger scale, we also have all 3 assets showing larger scale moves that suggest a strong market decline, why else would VXX which has been performing horribly be under such heavy accumulation at lows?

In another sign that a bounce next week will take place, our Most Shorted Index has its worst week in 25 months, this means the MSI is ripe for a short squeeze.

As for the market averages, the short term divergences run from Tuesday at best to this afternoon, they are not well formed, they are not large, but they should be enough to get the job done. You can see them here, Charts as they haven't changed in to the close, but also be sure to see this morning post and the Index futures, specifically the 30/60 min and 4 hour, A.M. Update, Parade of Confidence in Portugal & ESSENTIAL FUTURES CHARTS

All of the major averages closed red for the week...

The notable under-performer is the Russell 2000 which closed down -3.98% from last Thursday's close, the worst weekly performance in 3 months.

However, look at the daily chart's candlesticks and by that alone you can tell the market's probability is skewed highly toward a bounce.

The R2K's daily chart reveals a Star yesterday and a Doji Star today, both are reversal candles, although they carry no implied target and a reversal can mean from down to sideways, but with the other evidence we have, a bounce is still the highest probability as it was on Tuesday when we first started seeing signs of accumulation.

Speaking of SKEW, it closed up today and still lingers in the 140 area, well within the all0-time highs since the CBOE started publishing it and well within the range where the market has seen past crashes like July/August of 2011, yields were down then too, not nearly as bad as now.

Yields vs the SPX for the week, were down 13 basis points, the biggest weekly move in 4 months, again if you understand the implications via the post, 10-Year Yield (Bemchmark) vs. the Market then you are probably looking forward to using a bounce to your advantage while you still can.

3 of 4 averages closed green today with the Russell closing red, the Dow and SPX barely green and the NASDAQ leading with a +.63% gain, however as noted all are down on the week. 

Our Dominant Price/Volume Relationship was dominant for 3 of the 4 averages and came in at the most bearish reading of the 4 possibilities, Close Up / Volume Down.
We'll have to see if a clearer base develops or this is it, if it does, I may consider a hedge/piggy-back trade until we get to where we are going and 3C turns to short term distribution, that's where we want to short or sell longs. Just remember, Wall St. doesn't run any cycle without a reason and those reasons usually need to move emotion. After the R2K being down 4%, sentiment needs to be moved to the positive side for them to be able to sell/short in to demand so these moves tend to be VERY believable, that's why I always try to anchor expectations ahead of time because hearing it now and living it next week are two very different things, but every indication we have says this is likely our last chance to short at these levels before we head lower to the neckline or below, for example...

 With a -4% move this week, we are well off the right shoulder, I'd think to re-engage retail and turn sentiment positive, right shoulder resistance is likely to be targeted, however we have had some major changes in the market since the last mid-May move and it's unclear whether the Hedge fund herd will stick together or act like they did with AAPL and sell ANY strength making it difficult to push the market to impressive gains, most notably a bank in Portugal this week caused contagion in sovereign European bonds as well as across the Atlantic, things are definitely a lot more touchy then they were a month ago; also evident in Banks' window dressing setting a new record at the end of June for the F_E_D's 1-day reverse repo facility, banks with an apparent short-fall of collateral somewhere around a third of a trillion dollars.

While I've drawn the next move to the neckline, a straight line move is unlikely, but possible depending on how bad the market (professional) sentiment is, a more typical decline to the neckline and then below would look like the decline from the top of the head...

A series of lower highs and lower lows, also known as a downtrend.

We'll figure out whether or not it's worth a piggy-back trade, I doubt very much I'd move any of my shorts, but may add a long hedge/piggy-back "if" the signals are clear enough to justify the trade on its own two feet, not just because a certain scenario is likely.

The week ahead we have a very slow macro economic Monday, but things pick up the rest of the week including lots of reports that could shed more light on inflationary pressures as well as the probabilities for GDP which could invite a lot of negative volatility, especially if inflationary pressures look to be rising as the trend has been and/or GDP looks like it might print negative putting the US in a recession. We also have 3 F_E_D speakers with Yellen speaking twice next week and another being Jim Bullard, the "Market is Wrong" F_E_D president on Thursday so if I had to guess where a bounce might end, I'd guess around Thursday might be a reasonable assumption, although the market has never been known for being reasonable.

Macro Data include: Retail Sales, Empire State Manufacturing Index, Import/Export prices, Business Inventories, MBA Purchase Applications, The Producer Price Index, Industrial Production, Housing Starts and the Philly F_E_D Survey... lots of stuff that will give the market a better handle on how soon rates are likely to start rising and whether we are moving towards stagflation.

Have a great weekend. There are several assets I see trades setting up in of a longer nature that I may post over the weekend, hint USO is a biggie.

THE WEEK AHEAD

I find usually whatever our initial suspicion is, it's usually the correct one, too much second guessing tends to cause you to miss the obvious pattern right in front of you.

Our initial scenario that started Tuesday of this week was the market was putting together a base to bounce as Right Shoulders of H&S tops have already started breaking which is a timing signal telling us we are very close to the end of the F_E_D spiked punch-bowl.

For example, take the Russell 2000 Futures as the Russell 2000 is the Index that should lead the market, that's why Bernanke always referred to the R2K in Congressional testimony although the Dow or S&P are much more familiar household names, Bernanke knows what we know, the Russell 2000 has the largest cross section of US business and should always lead a bull market and often a bear market.

My contention is,  the market already topped, too many people have been so caught up in "New SPX and Dow highs" on moves of 0.15% as we are now nearly at 60 consecutive days in which the SPX hasn't made a 1% move up or down, a record not seen since the early 1990's. 

While most have been following the head lines, they've missed the tiny volume, pitiful quarter percent advances, the S&P sectors with 8 of 9 closing red and the only one closing green being the Flight to Safety trade in to Utilities.

Back to my original statement, for all intents and purposes, the market already topped as this is the underlying theme through out mu watchlists, they all look very similar to this...

 Tf / Russell 2000 Futures 4 hour chart, the 3 arrows represent the two shoulders and 1 head of a broad, near;y year long H&S top. I purposefully did not draw in the 3C divergences so you can see them for yourself, however it is easy to see 3C is at a new leading negative low to the far right, no matter how you look at the price pattern, a lateral top of nearly a year with 3C slicing diagonally down from left to right is distribution as clear as you can ask for.

The IWM with the same/similar pattern. It was just a little over a week ago I was saying "We are sitting on the top of the right shoulder of a H&S pattern and not just in the IWM, but it's a dominant theme among many stocks on my watchlists, especially momentum stocks.

Now the right shoulder has broken, but nothing moves in a straight line, there are actually as many ad some times more up days in a bear market than down days even though it's a bear market.

I looked at Leading Indicators today, they are all just about perfectly in line with the SPX so they tell us nothing, however yesterday's post using leading indicators, Big Picture Charts / Market Map, tells us everything worth knowing if you really want to be ahead of the market.

Looking at leveraged ETF which give signals earlier than the averages many times because of the leverage shows me a high probability we bounce next week, however I don't know if I'd piggy back the bounce, but I would sell short in to it and sell longs.

Here's an idea using the IWM's 3x long and short ETFs, I'm already in the short, SRTY, but would consider a URTY long if there were stronger bounce signals, the way they are now, we could have a bounce and a collapse the next morning with almost no warning, that's where we are.

SRTY 3x short the IWM

 2 min chart with a small negative divegrence suggesting a pullback/market bounce.

SRTY 10 min leading positive suggesting only a small/short duration market bounce as there's no negative divegrence here, only leading positive as this is getting ready to rocket higher.

 SRTY 15 min with a large, strong leading positive divegrence/base, this is getting ready for a substantial move to the upside which means market to the downside.

60 min SRTY with the strongest positive divegrence/accumulation. The orange areas are where I think a pullback might reach next week.

URTY, 3x long IWM

 There are short term positives like this 3 min suggesting a near term market bounce

However on a 10 min chart it's almost invisible, so it can't do too much on the upside, although it can and likely will seem impressive, it's more like a gingerbread house.

The 60 min URTY with a huge leading negative divegrence, meaning this and the market should see bear market downside after a bounce next week.

I can't say early as there may be more base to build, I can't say it won't seem very convincing, that's their job, I can say I have ZERO problem selling longs in to it and selling short in to it.

I have more after the close.

Charts

These are a bit odd as many don't have the normal migration pattern from a 1 min. chart to 2, 3, 5 min, etc.

The market averages.

 SPY2 min, the 1 min is in line as is the 3 min. The 2 min responded to all the previous divergences, but this leading positive this afternoon is by far the biggest on this timeframe for the week.

Since there is so little to no migration, I'd be inclined to dismiss this as an anomaly, but it has shown up on other market averages as well.

SPY 5 min really nothing happening, take a closer look intraday.

A small negative earlier sending price down a little and in line since 12:30 or so.

IWM...

 Again the 1 min chart is unremarkable which is strange as new divergences usually start here.

The 2 min chart gives you a hint of this afternoon's leading positive, but in the concept of migration, the 2 min chart should have a stronger signal than the 3 min chart unless a very rare scenario occurs in which larger accumulation takes place quickly.

 Thus it is strange to see the IWM 5 min chart leading positive like this with the 2 min chart so much weaker.

In any case, this is a difficult divergence to ignore, it should lead to something on the upside, but it's not a very larger base if any base at all really so it may be a flashy move, strong, but also a flash in the pan.

QQQ 1 min this afternoon is unremarkable.

As is the 2 min, you might make a case for a divergence pre-today on these charts, but it wouldn't be very strong.

 However the 3 min chart is showing early signs of the same leading positive afternoon divergence SPY and IWM have in place.

Strangle Index futures look quite a bt different. The 1 min intraday charts will not hold up over the weekend, the 5 min charts should, but there's a lot of difference between these and the averages which is difficult to reconcile.

ES/SPX futures 1 min has a slight intraday negative as if it will come down a bit shortly

 ES 5 min has a leading negative divegrence in place, this will hold over the weekend.

NQ / NASDAQ 100 futures 1 min are negative in the afternoon  and appear right now as if price is going to respond to the intraday distribution with a downside move.

The 5 min NQ chart is even more negative than ES, which makes no sense vs the QQQ 3 min unless the QQQ divergence is just so new it hasn't registered here yet.

IWM 1 min is perfectly in line intraday, no divergence

While the 5 min is leading negative , not badly, but much different than the IWM 5 min chart.

I'm going to look at some other assets.

The worst that would happen in my view (which would actually be a bit of a market gift ) is a bounce as we have been talking about since Tuesday, with other charts so deteriorated, selling/shorting in to higher prices should be emotionally easy and give us excellent entries/trade set ups.

Quick Market Update

Right around 2 pm on options expiration, the pin is removed and the market free to move, however price movement and 3C movement are often at odds and very often however 3C ends Friday, we see that divergence pick up where it left off on Monday, even over 3 day weekends.

I'm seeing something strange, around the 3 and one 5 min chart, there's a very sharp, fast building positive divegrence in 3 of the 4 averages, however intraday Index futures look horrible. Perhaps an EOD pullback with a building positive divergence? I'm not sure and need to look at other assets, Leading Indicators, watchlists. I'll get the charts out next and then I'll be out of radio contact for a little bit until I can make some sense of these contradictory signals.

MCP Update

It looks like MCP is consolidating in an intraday bull flag at just under a 9% gain on the day with our calls from yesterday doubled in value,  AT THIS POINT YOU CAN TAKE THE ORIGINAL INVESTMENT OFF THE TABLE AND LET THE GAINS RUN.

Yesterday's Call position is already at +120% gain, normally I would have taken the gains off the table before the flag/consolidation started, however I feel there's something bigger going on in MCP and with August expiration, I have a fair amount of time.

The intraday charts look like a flag with some profit taking (red) and now a positive divergence building in to the flag/consolidation on the 1 min.

This same behavior is migrating across longer timeframes already like the 2 min suggesting the divegrence is building strength

And starting on the 3 min chart.

Money Stream is still looking very strong as it leads price.

MS 5 min, also note volume at the price flag, it is dropping as it should for a bull flag.

GDX / NUGT /DUST Update

This has been a very easy base to predict and follow and a very difficult pullback to confirm. GDX/NUGT are the main trade, DUSt (3x short GDX/Gold miners) is a short term play on a GDX pullback.

Here are the charts, some are about 45 mins old as I have been capturing them and monitoring the situation ion GDX at the same time.

 This is the long term Inverse H&S base in GDX, it's well over a year old, volume confirmation is present and 3C confirmation on this 2 hour chart is quite present, this is why you don't want DUST going against you and hoping it comes back as it is the opposite of GDX with 3x leverage, it likely won't come back.

The main trade idea is to buy NUGT on a pullback or GDX, which they are long overdue for.

 GDX recently broke out above the base's resistance or neckline, but this is the most important part of Inverse H&S confirmation, volume at the breakout should be spectacular, which is one of the reasons I suspect it is a head fake which is something I suspected the morning (pre-market) of the day it broke out so I already had doubts, the lack of volume and follow through just increased them,

On the other hand, there are at least 6 assets that should offer multiple asset confirmation, GDX, NUGT, DUST, GDXJ, JNUG and JDST and it has been very difficult to get apples to apples confirmation, thus the speculative DUST trade idea until/unless charts improve more and become more clear.

"A" is a head fake move we expected and where the largest accumulation on the right shoulder of the major base took place, this is near the area we went long NUGT.

"B" is where we took +40 and +50% NUGT gains off the table as a pullback was looking very likely and I wanted to protect those gains, I still think it was the right thing to do considering the information we had at the time and even what we have now.

"C" is the breakout to stage 2, there are quite a few things missing, not the least of which is volume and 3C confirmation.

 GDX 15 min shows a clear negative divegrence at the breakout area, this would trap new longs on a pullback and create downside momentum which would allow institutional money (the ones who have been building the base over the last year-plus) to accumulate at much lower prices with heavy supply available as trapped longs sell at a loss as former resistance (neckline) becomes broken support.

NUGT (GDX x 3 leverage long) is also showing a 10 min negative divegrence at the breakout area. Typically a stock will pullback just before the breakout and gather strength as well a shakeout the weak hands on the pullback, I believe that's what it coming in GDX, just with momentum as the failed breakout will lead to a fast and stronger reversal which is good for us as our last position made up to +50% which we kept, "Wash, Rinse, Repeat".

 GDXJ (Junior Gold miners which have nearly a perfect correlation to GDX) also showing a 15 min negative divergence at the breakout area, it seems this is a true head fake move, which makes a DUST long entry here a much lower risk trade.

DUST (3x short GDX)  shows an in line status and then a positive divegrence as GDX breaks out and DUST hits lower lows making the entry an excellent price entry with much lower risk,

 Short term GDXJ (Junior Gold miners) shows a negative 2 min divergence at the breakout highs and a small bounce today that has been in line since the small positive divegrence creating the intraday bounce.

However the faster 1 min chart for GDX shows that the bounce today is seeing distribution in to it, which means DU?ST should be seeing accumulation in to it's pullback today.

NUGT (3x long GDX) is also showing the same intraday distribution in to the bounce today.

As DUST (3x short GDX) shows a 1 min positive divegrence in to the intraday pullback, which makes for an excellent entry.

The latest charts since capturing the above...

 I've largely been waiting for intraday charts to turn which is happening in NUGT above


JNUG above

And DUST

If there are better signals or more extreme ones, I'll add to DUST, but make no mistake, if you want to play it safe and with an eye toward the big prize, just wait on a GDX/NUGT pullback and buy that.