Daily Wrap

We may just have a market interesting enough to do something along the lines of an IWM bounce with the other averages either not participating or with poor relative performance.

The major averages closed at SPX -0.23, Dow 0-0.28, NDX -0.15 and Russell 2000 00.45%, yet almost every stock listed Friday for a bounce, NFLX, Z, P, TWTR, PCLN, AAPL, SCTY, TSLA,  other than one or two that I listed as "needing a pullback" were up today:

NFLX +1.76%, Z +2%, P +2.05%, TWTR +2.67%, PCLN +.26% (marked as needing a pullback), AAPL -0.52% (marked as "Needs to pullback"), SCTY +3.78% and TSLA +0.17% also marked as "needs pullback).

The point is the stock market is acting more like a market of stocks and the same could be true for the averages moving forward. A quick look at the charts for the averages...

 SPY closed with an intraday negative divegrence 1 min.

The 2 min chart is also showing distribution from Friday afternoon through all of today's price action in trying to fill the gap.

The 10 min SPY chart is a picture of distribution, even the price action/range is distributive in nature.

 QQQ 2 min was in line intraday until the afternoon where it too saw a negative divegrence, probabilities are it opens lower in the morning or sees early weakness.

Look at the distribution on the 3 min QQQ, this is not a chart that is accumulating or even holding in line, it seems ANY price strength, even intraday below Friday's close is being distributed/

The 5 min chart for a broader look since we first saw the bounce divegrence on the 10th, again very much like the SPY, but here's where it gets strange because the averages usually have similar divergences, I often use them to confirm each other.

The IWM ended the day with a leading positive intraday divegrence.

The IWM did show accumulation of lower prices as I was hoping we'd see at least from an informational standpoint, the other averages look nothing like this.

Keep in mind the positive divegrence in the IWM has been there at least a week and we've been talking about it every day.

The 5 min chart gives you a feel for it, but cleaning up some of the noise at a 10 min chart (compare to SPY 10 min) ...

A very clear positive divegrence that IS showing positive divergences in to lower prices, typical accumulation.

Even index futures are showing a similar trend...

5 min Russell 2000 futures leading positive

 ES leading negative

And NASDAQ futures leading negative.

This is definitely one of the stranger market cycles I've seen and this is why it has been such a difficult decision, whether to go with a long IWM bounce trade before returning to the highest probability SRTY (IWM short).

THERE'S NO DOUBT IN MY MIND IF YOU HOLD SRTY, SQQQ OR ANY OF THE INVERSE MARKET ETFs, YOU ARE GOING TO BE AT A SUBSTANTIAL GAIN AND SOON. In my view, the Russell is the bellwether and I'd say it topped definitively as of July 1 , the first trading day AFTER window dressing was complete and a rush of new retail money flooded all sorts of equity funds,  it's the perfect hand off of strong hands to weak hands, but more than that, something big occurred on July 1 and we saw it the last week of Q2 and every day since July 1. It doesn't matter if it's 3C charts, breadth charts, SKEW Index, Credit (which leads the market), Leading Indicators, July 1 was the definitive change in the market.

I've shown numerous examples, but as we go through a few charts tonight you'll see even more.

I try to keep you up yo date on breadth charts as they are pure math, there's no interpretation, there's no bias. You've seen the % of stocks trading above or below moving averages at the worst level since 2007, perhaps worse in some ways. Tonight I'm showing you the Worden T2 breadth series "$ week New Highs/New Lows" which is usually an uneventful indicator. It is constructed by taking 4 week new highs and dividing them by 4 week new highs plus 4 week new lows, a high reading tends to be bullish, a low reading tends to be bearish. I don't think I've ever featured this indicator before because it has always been so non-descript, but the fact it is standing out now tells me something.

To the left you can see a predictable pattern and range, since mid-June you can see a clear trend making lower lows and lower highs or a downtrend in the indicator, something you rarely see other than a sort of EKG kind of look.

I've featured this before, but it fits so well with the decline in stocks trading above and 1 and 2 standard deviations above their 40 and 200 day moving averages which is what I've been talking about recently falling to lows I have only seen twice in 15 years or so of using these indicators, the last time was the absolute top at 2007. The Advance / Decline line for the NASDAQ Composite (not the NASDAQ 100, but the composite of all NASDAQ stocks excluding pink sheets), which is showing the same thing, more and more stocks falling than gaining which is the opposite of what should be happening, or at least they should be holding their ground.

The NASDAQ Composite in red, the Composite's Advance/Decline line in green, it hasn't only been lagging badly since May, but specifically since July 1 it has been trending nearly straight down.

This fits with what we see in all NYSE stocks trading above their 40-day moving average which was at 77%, then 75% in late June, come July.we are down to 48% which is by far the lowest reading in a market that hasn't corrected. The 1-& 2 standard deviation, momentum stocks are far worse, some losing about 75% over the same period.

The SKEW Index, or the Black Swan Index remains elevated in the red zone, I posted an article by Bloomberg who finally picked up on this bright red flag last week, we saw it before it hit the red zone as the upside rate of change increased. The SKEW has been in the CBOE's defined red zone since 6/18 which also happens to be the day the F_O_M_C last met.

Some other important indications of the health of the market include what credit has been doing. I showed earlier today HYG (High Yield Corporate Credit) looks like it wants to bounce, this is short term and used as a manipulation lever to help the market by fooling algos in to thinking smart money is in a risk on/buy mode and algos buy stocks in response, however there's a lot more to this story.

 intraday all forms of high yield credit were underperforming, however 3C contradicts price and we saw a positive divegrence suggesting a bounce that I would have bought a call for if there was more liquidity in the options.

However, look at the bigger picture of High Yield Corporate Credit vs the SPX over a longer period, but  specifically after Q2 ended and July started.


HYG fell off a cliff, we have seen this once before that preceded about a -20% correction, but the divergence was a relative divegrence, not the stronger and much more obvious leading divergence and  institutional money seemed extraordinarily keen to exit the asset that they trade (not retail) as a risk on asset like retail might trade NFLX or TWTR. JHowever, the credit markets are much smarted than the equity markets, thus the moniker, "Credit leads, stocks follow", that's an ugly path for the SPX to follow.

Other forms of high yield credit look the same like high yielding Junk credit that Yellen expressed concern over in the "Reach for yield".

 The 5 min HYG chart with a fast forming, but intense positive leading divegrence , this does not compare in any way to the chart below...

A 4 hour leading negative divegrence, this is a horribly negative signal of intense distribution that has bled in to price. Again, I don't think we've ever seen such a strong 3C signal this far out in HYG.

Other July 1 indicator fails include sentiment (professional) which was split intraday today between the two assets we use, but the bigger picture is what is really standing out.

Note how close to in line it has been, but if we look at the past there were plenty of divergences that led to forecasted moves, they pale in comparison to this one though that once again pops or drops around July 1st as window dressing is complete.

Another interesting one has been our Most Shorted Index...

This has been responsible for a number of short squeezes, moving the market higher, but these (tend to be) momentum names are falling off a cliff and again, the red line is July 1.

On the day the MSI underperformed the market slightly, I'd say there's enough short interest here to get a squeeze going, I understand people are having trouble finding AMZN shares available to short, this could be another lift for an IWM bounce, however I don't think there's any squeeze that can get this indicator back in line with the SPX, there's simply too much damage and this is just another reflection of the NASDAQ A/D line or the % of NYSE stocks trading above a particular moving average.

On the close I found the Dominant Price/Volume Relationship was the most benign, also the most common during a bear market, "Close down /  Volume Down", this is the dominant theme in a bear market, it carries no 1-day implication like some of the others like Close Up/Volume down or Close Down/Volume Up (there are 4 possibilities), but this was the dominant theme today among the major averages' component stocks.

8 of the 9 S&P sectors closed in the red, only Energy closed green at +0.15%. Of the 239 Morningstar Industry and Sub-Industry groups I track, 176 of them closed red, 3 closed at 0%.

Speaking of USO/Energy... On July 14th I posted, USO Trade/s Set-up which was looking for a short term bounce higher which was a possible long trade and since then we've seen exactly that in to a short set up...

"Initially I was looking at USO as a long/bounce trade and I still think there's a decent long bounce trade there, but the bigger trade is shorting the bounce as you get a better entry at much lower risk"

The USO post on 7/14 first looking for a bounce higher and then a short set up as the larger trade in to the bounce.

So far...

 There has been distribution in to the bounce higher, I don't know what the catalyst for a turn lower is, perhaps the US getting more involved in Iraq as Iraq issued an ultimatum to the US to help or they'll look for another "super power" or "Big brother" to help (think Russia) to help out as ISIS now controls 30% of Syria and is making gains in Iraq.

The geopolitical situation alone between China/Vietnam/Japan/Russia and Russia/Ukraine vs US and Europe as well as the entire mid-east is more than enough uncertainty which is what the market hates the most, to send it lower on its own without the uncertainty of the aggressiveness of F_E_D action, but that's another subject and one I'm sure many of you are well on top of.

The 15 min USO chart which shows why I was looking for a bounce around the 14th still has a decent enough positive divegrence that I would not short it yet, but our set-up idea was correct in expecting distribution in to a bounce higher which ultimately will set up the larger USO short. This is one of many on my daily watchlist with the larger probabilities looking like this for USO...

My guess is the US will NOT permit oil prices to rise beyond a certain level before they do whatever needs to be done as the economy is still a hollow shell, perhaps releases from the SPR.

As for some of those stocks I expected to make moves higher I posted last week, NFLX, Z, P, TWTR, PCLN, AAPL, SCTY, TSLA,  (and that was just a sample, but it's the big picture that is important as NFLX may have beat tonight, but  they did the only thing Wall St. is really interested in and guided lower... it doesn't matter to Wall St. what you did, it matters what they think you'll do and guiding lower is why NFLX is not flying in AH), it's the big picture that counts...

I've been waiting and by the look of the moves since the post, rightfully so, for this IWM divergence to resolve, but make no mistake, I chose these stocks for a reason. Here are some examples...

*With most of these you should be able to see stage 3 or worse and understand why I chose these just from the difference in the Rate of Change of their price patterns alone or trends that were strong moving up and are now lateral, lots of tops in there. If that's not enough, the 3C trends and the large/long timeframes show the extent of the underlying damage.

I recall all of the Tech/Dot.com darlings and I can tell you maybe 5% of them were darlings during the next bull market, they are flashes in the pan that are quickly forgotten after they lose 80% of their value in a year, look at the iron clad AAPL losing nearly half of its value in 8 months off ALL TIME NEW HIGHS. Yes, these darlings are the stocks that tend to fall the fastest and they all have the price and 3C patterns I look for so a bounce is perfect for what I want to use them for which is really why I posted them...

 NFLX 4 hour

NFLX 15 min closer to home, lots of trouble here.

Z 60 min trend

P 15 min trend...

TWTR 2 hour trend, lots of trouble long term and more recently.

PCLN 4 hour, again note the change in  the price trend alone, the 3C charts make perfect sense when you are looking at a nearly 9 month long top.

AAPL may not be the biggest loser of the bunch, but it is worth a trade when we get the shorter term negative divergences.

 SCTY has been a recent favorite, the price trend should show you a clear transition from stage 2 rally to stage 3 top, nect comes stage 4 decline and the distribution is there to confirm the top.

TSLA 60 min, this one looks like it's going to be a lot of fun.

So tomorrow we'll be looking like we were today, for the time being I'm leaving core shorts as that's the highest probability 3C trend unless there's a reason like IWM, which I'm still very uncomfortable with, but I think there's enough evidence to make the trade worthwhile, otherwise as Jesse Livermore said, "It's rare to find a trader who can be both right and sit tight".

We'll also be looking for answers to some other recent questions such as gold/silver, etc.

EOD Update

I'll post some charts, but essentially the only position I changed (SRTY/URTY) is the only one that looks worthwhile to be changes. The Q's and SPY don't give any hint of anything but weakness, Financials aren't giving any strong signals either, only the IWM. This would be a strange bounce if it were the IWM only, but it was left out last week as the other 3 majors did their best to bounce.

Charts to follow.

Overall, a lot of weakness in the market still including Index futures that also agree, IWM looks likely to bounce, but not the other averages.

UNG Update

I'm just going to get to the charts...

 UNG's original base looked like a strong primary uptrend candidate, but since being in a range to the far right, I've held open a DGAZ (short Nat Gas) position expecting some kind of large pullback and on that pullback, it would be a lot easier to determine whether UNG still has what it takes to make a move to a primary upturned.

It seems the Russian sanctions have been effecting UNG, I'm not quite sure what the connection is there in its entirety other than a few guesses.

 30 min UNG in the range mentioned, this made it worthwhile to hold DGAZ even though it has been at deep drawdown, I suspected I'd either get a much better exit or maybe even a gain on the position with this divergence so I had been expecting a move lower in UNG.

However, just like with a H&S top that just breaks the neckline, new shorts pile in and it's not unusual for them to be shaken out with a move back above former support where they place their stops , running them out of the trade before a lower low is made.

 This is where I expected a bounce recently as a nice reversal process took shape just below former support, I expected a move up, hit the BTC stops and a continued move down as the 30 min negative is quite large.

Instead, last week on US sanctions against Russia UNG gapped down and then was hit harder on the Thursday 10:30 EIA nat gas report, then today after more sanctions it gapped down again, but looks as if it found some short term support on today's gap with a slight bullish hammer candlestick and rising volume.

The 10 min chart is positive in the area as well as it was before the gaps below it, I suspect this divergence is still in play.

And the 3 min timing chart is positive in the area.

I'm not a huge fan of playing a bounce here, but I would consider a bounce an excellent shorting opportunity and would set price alerts just above former support/current resistance.

SLV / Silver

Silver, like the other precious metals and miners has a large negative divegrence which has been signaling a pullback as there are longer charts and bases that imply a large uptrend to follow, but I'd have expected a pullback to be done by now and back long NUGT or GLD.

Take a look at the SLV/Silver charts, I'm almost wondering if there isn't going to be a mass sell-off across all asset classes, although this one , if that's the case, would appear to be intentional.

 60 min SLV clear negative divegrence like we have seen in GLD and GDX.

The 30 min as well with a clear range and anything outside the range (head fake move above) sold hard.

This gives the impression they are trying to maintain a range, for what reason though I'm unsure, whether to sell off the PMs with the market or perhaps something more fundamental.

15 min, again the head fake/false breakout is sold hard.

 Intraday 2 min the trend is obvious, lateral for price, 3C is sloping down

And the 1 min showing the head fake distributed and some small divergences to keep SLV bouncing in the range.

The only other possibility that has crossed my mind is that precious metals are bought on the expectation of inflation. The F_E_D has been increasingly hawkish about rates, sooner and faster. I am beginning to wonder if the market is discounting the F_E_D's new aggressive stance which is driven almost exclusively by inflation, as they say, "Don't fight the F_E_D". Perhaps the market believes the F_E_D is taking the inflation monster serious as almost everything they've come out with lately that has been increasingly hawkish would be to combat inflation (hiking rates sooner than later and more aggressively than previously thought).

For now I'd prefer to stay out of the asset class until something concrete develops. With the size of the base in GDX and GLD, if they were re-positioning, they'd need quite a bit of time and demand to sell in to, often these flat ranges are distribution areas, if that were the case it would mean they've changed their mind of the inflation issue and believe the F_E_D is solely focussed on inflation.

Interestingly, the cure for inflation would be the same that would kill the market and precious metals, so both selling off in tandem wouldn't be so far fetched.

IWM / SRTY / URTY Follow Up

In case you aren't familiar with the Russell 2000's ETFs and leveraged ETFs, IWM is the ETF for the R2K, URTY is the 3x leveraged long ETF of IWM so it's the same with 3x leverage, SRTY is the inverse , bear or short ETF with 3X leverage (3x short IWM), which is what I've been holding as a core short position, I closed that and opened URTY for a trade and not one I'm very comfortable with at the moment.

Here are the charts that show both sides of the story, just remember the more volatile a top and the further we are toward the right side, the more unpredictable it gets like the -1% and +1% move in the SPX we finally saw 2 consecutive days last week after a 67 day record that hasn't been seen in at least 16 years.

I'll compare SRTY to URTY and IWM at certain timeframe intervals, the longest timeframe is the highest probability, but that doesn't mean we won't have counter trend moves against the highest probability, that's just normal market behavior, that's how lower highs and lower lows are formed, the market has to bounce even in a full-fledged bear market to create that downtrend.

This is the SRTY Trading Portfolio long just closed, I WILL be back in this asset very soon.

 SRTY 60 min which is the long term probabilities or highest probabilities with a large leading positive divegrence.

 The 3x long URTY 60 min chart should have nearly the opposite 3C signal for confirmation which it does with a leading negative  and we have stronger signals than this in the 2/4 hour timeframes as well as the daily charts.

 The IWM should look like URTY above on this 2 hour chart which shows the top pattern, which it does. IWM is at a new leading negative low as would be expected from a mature top that has already broken from the top of the right shoulder.

SRTY in an intermediate timeframe like 15 min is still leading positive showing even intermediate probabilities for a near term move down in the IWM are very strong. This positive divegrence correlates with the top of the IWM's right shoulder.

And the 15 min IWM right shoulder has the confirming negative divegrence which sent prices lower since around July 1st without a single decent bounce.

 SRTY 10 min is where I was wavering until recently as the 10 min started leading negative today suggesting it pulls back and IWM bounces which is in line with expectations for the IWM over the last week and a half or so.

 URTY is negative on a 15 min chart, but at 10 mins. it has a confirming positive divegrence.

As far as making the decision, the 1 min intraday is more of a timing chart and it started leading negative today, thus I made the decision to switch positions for a bounce, but as I said earlier, I wouldn't fault anyone if they just rode out the bounce long STRY as the probabilities are skewed highly in favor of SRTY making large upside gains with some patience, I'm trying to capture some extra gains, I just hope I don't regret trading against the highest probabilities.

As for the SQQQ and FAZ longs, you'd think I would change those around as well to TQQQ and FAS being an IWM bounce should lift the broad market as a whole, I may but I don't even have halfway decent signals which is what I would consider the IWM, SRTY, URTY charts above, "half way decent signals", not strong.