Daily Wrap

I don't have too much to add tonight to what I posted earlier, Forward Looking Update at least not on a actionable front, however if your tracking all of the little pieces of the puzzle, then there are a few things to add.

The market is obviously in need of some help,

 Our Most Shorted Index has been squeezed 3-days in a row on the open, but can't produce anything beyond that (you probably know what a short squeeze looks like, low volume, almost diagonal price action with almost no pullbacks). *Remember this index is severely dislocated to the downside, see last night's Daily Wrap to see just how badly.

Intraday the MSI had trouble even keeping pace with the market which I suspect weighed on the intraday action.

Of course we knew this last week with HYG positive 5 min divergences which are being eaten in to, but still have some gas in the tank. To see how dislocated both HYG's 3C chart (long term distribution ) as well as the price dislocation largely since July 1st, also see last night's post.

High Yield Credit however (HYG is specifically used to move the market is the SPY arbitrage) is acting a bit differently, not as enthusiastic.

This borrowed chart from ZH points out HY credit's decline after the European close and after POMO ends, I'm not sure I believe this is anything more than coincidence as at least the second decline is counter intuitive.

The market largely tried to follow AUD/JPY after a hot inflationary print down under overnight, but had some trouble. Earlier this morning I could already see distribution in $AUD, although not in $AUD/JPY at the time, interestingly in to the close the negative divegrence built and AUD/JPY has dumped...

 AUD/JPY vs ES (SPX futures purple) since 4 a.m. to present, ES had some trouble making the higher highs with the carry cross and...

The negative divegrence in $AUD seen earlier today finally manifested in the carry trade in to the US close and dumped just after. Hmm...

Bonds have not been drinking the Kool-Aide that stocks are, however this isn't surprising in a set up cycle/bounce...

*These are the yields which move opposite the bond, however yields typically move with the market, in this case SPX in green

30 year yields want nothing to do with this move, this suggests a flight to safety, although there has been a notable decline in rates since the CPI print Monday morning.

 On a longer term basis, this was what I was pointing out in the post on 10-year bonds and the yields looking a lot like 2007, this is still 30 year.

 10 year yields also not buying what the market is selling.

 And 10 year yields near 2014 lows.

 10 year yields since CPI was released...

And the 5 year yields I like so much as a leading indicator as they tend to pull equities to them like a magnet, I imagine on a larger, bigger picture basis, that's likely exactly what we'll see (regarding the longer term charts above).

I pointed out  yesterday the VIX'x bullish Rising 3 Methods candlestick pattern, that held today...

 The daily pattern is still holding implying a move significantly higher in VIX which moves opposite the market.

Earlier today I pointed out the VIX futures outperforming their normal correlation, in fact closing green on the day despite SPX new highs...

VIX (spot) yellow vs. VXX (Short term VIX futures) green and above yesterday's close (trendline).

Of the 9 S&P sectors I track, 6 closed green, however...

Healthcare which has been acting like a Flight to safety trade, often #2 on the day when Utilities are number one, was right at the top.

Even more interestingly, of the 239 Morningstar Industry and Sub-Industry groups I track, only 119 closed green today.

There was no Dominant Price/Volume Relationship today except for the Dow which was Close Down/Volume Down (these are the component stocks, not the average), which is the most benign of the 4 possibilities with really no next day indications like yesterday's that suggested a lower close, we did see significant weakness if not the lower close (except the Dow-0.16% on BA weakness, shaving off about 20 DOW points).

Finally, while not a smoking gun, this is significant. The NASDAQ Composite closed up +.40%, the Russell 2000 + 0.17% and the Russell 3000 +0.18%, all 3 averages saw their advance /Decline line tick DOWN today, which is interesting especially for the Composite which already has a huge dislocation from May, but especially from July 1.

If anything significant pops up in Futures I'll let you know, otherwise it's just patience until the next strong signal comes. Speaking of which, we "may" have a DUST or JDST trade, confirmation across the 6 assets has been difficult the last several weeks which is good seeing as they've gone nowhere, but we may be getting a workable signal developing now.

AAPL Charts

AAPL made a very parabolic move today which has supported the Q's due to AAPL's weight on the index. NASDAQ has a proprietary weighting schedule which you can access with a NASDAQ membership for $10k, however from past weighting schedules we know AAPL has held as much as 20% weight of the NASDAQ 100 which at the time was the same as the bottom 50 weighted stocks combined, meaning if you took those 50 stocks and added AAPL and created the NASDAQ 51, all 50 stocks could average a loss of 2% on the day, AAPL could have a gain of 3% on the day and the NASDAQ 51 would close UP 1% even though 50 of 51 stocks declined 2%.

I opened an August AAPL $99 Put position on a spec basis (half size) which I'd add to under the right circumstances, Trade Idea (Short term Options) AAPL Put

In any case, this is what AAPL looks like, the main concepts being the flat range which seems to be very boring trade, I compare this to the "Kids in the room next door being a little too quiet, you know they're up to something". The other concept is that of a strengthening 3C divegrence via "migration" through longer/stronger timeframes which is what AAPL is seeing. I suppose the 3rd concept would be that of Technical Analysis being used against technical traders and the "Head Fake", which if you haven't read, I'd encourage you to read my two articles , "Understanding the Head Fake Move" that are always linked at the top right side of the members' site.

 This is a leading negative divegrence on an intraday 1 min chart, this is where any new divegrence will start and with AAPL up 2.61% on the day, we are looking at new divergences.

Just a quick note on AAPL, I have posted MSFT when it was a huge growth stock story and then when everything changed and it became more of a blue chip with the growth period ending, MSFT was actually a bigger growth story than AAPL, but it seems once they declare a dividend, the growth ends and they get somewhat range bound, this is what I think lies ahead for AAPL.

If the divegrence is strong enough it migrates to longer timeframes which are stronger underlying trade, that happened today as this 2 min chart is leading negative, but it didn't stop there.

The 3 min chart went from in line to leading negative and ...

The 5 min chart which is the first timeframe I consider to reflect institutional activity on an intraday basis is also leading negative.

The only concern I have with adding to the AAPL put, even though this was a true parabolic move on weak guidance which is the only thing that really matters to Wall St (not what you did, but what you'll do), is the clear resistance range created today, the clearer it is and the more noticeable it is (in a very visible stock like AAPL) the higher the probability of a head fake move which would manifest in this case as a breakout above resistance as limit orders are stacking up just above resistance. Ultimately it's a head fake move because it fails and we try to confirm that as soon as possible as a breakout that is showing distribution is likely to be a head fake move and even with the charts we already have, we can estimate that it would likely be a head fake move, but it does open up demand which is important for funds that carry billion dollar positions as a routine position size, they need the demand to sell in to and I suspect AAPL is up today for that reason and that reason only after guiding lower yesterday on earnings.

I'll be setting some price alerts above the range, I want to enter puts on price strength (discounted) so that would likely be the only scenario in which I'd add to the speculative size position called out today.

AAPL Spec. Puts Look Close to an Add-To

Charts to follow, the only thing I'm a little concerned about it the clear intraday resistance formed, that would be an obvious target for a head fake move.

Forward Looking Update

It has taken a good week or more since we first expected the IWM to bounce off the 10 min positive, but there's nothing on the 15 min charts. This is a decent size divergence, but just as with the SPY and Q's last week, the character has changed dramatically, distribution is immediate and the bounces are nothing like past bounces off similar divergences.

The IWM (as well as a number of watchlist components) were all coming off the top of a right shoulder and since the IWM has lost over 6% in 11 days, giving up all of 2014 gains year to date.

Before the move started I suspected we might be looking at something very different and I'll try to illustrate...

Past bounces off similar divergences have come at sentiment lows like the Feb. lows that led to the Feb. bounce/short squeeze, these were clearly sentiment changing moves which of course triggered short squeezes. However, before this one began I suspected it would look a lot more like the decline from the March highs, a series of lower highs and lower lows better known as a downtrend, but even in a downtrend the market bounces. In fact in a primary bear market there are just as many up days as down days.

In any case, the Feb. rally had a different tone, the bounce now I suspect is much more like the lower highs/lower lows coming down from the right side of the R2K's head which is a volume confirmed H&S price pattern, not textbook at all, but that's the point, using the dogma of a century of Technical Analysis against traders as they have failed to adjust ever since TA became mainstream around the time of the Tech rally/bubble.

I think the R2K is a much better bellwether or barometer of the market than the SPX or Q's as does Bernanke as he always referenced the Russell 2000 in Congressional testimony rather than the more household S&P or Dow, it's a better overall economic indicator with much broader components.

Take a look at the SPX...

This is much more range bound.

 I looked at leading indicators and some others today (recently) and I don't see a smoking gun suggesting that the bounce is over which I would not expect anyway. I am on the lookout for signals from Leading Indicators and things like candlestick patterns and volume events as you can see in the past they tend to call significant pivots both up and down. The IWM is at its 50-day moving average right now, but I suspect the Dominant P/V relationship as mentioned last night has more to do with today's underperformance in everything but the Q's which are benefitting from AAPL, I doubt for too much longer though.

There are also a number of stocks as mentioned earlier I expected to bounce including Z which thus far have been a bit of a disappointment although several have done so.

Damage in the IWM and other averages is heavy this early in a bounce, it's the same thing we saw when we called last week's SPY/QQQ bounce the preceding Friday, a change in character from what we would have seen only a month or so earlier.

This is the 10 min IWM and the reason I've been expecting a bounce, as I said yesterday, the inverse H&S shape of price I do not believe is coincidence, the "Buy the Dip" crowd is still out there, seemingly not realizing what kept BTD alive, the Bernanke put which is now not only being removed entirely not to be replaced, but the F_E_D is signaling clearly that they'll be hiking rates sooner and more aggressively than previously thought. If you pay attention, Yellen expected (in congressional testimony), the F_E_D Funds rate to be at 1% by the end of 2015, they meet 4 times a year and typically hike 25 bps at a time, that would put the first hike in Q1 2015, which is a quarter ahead of the most hawkish estimate from JPM who recently moved their expectation forward by 2 quarters, that's still a quarter behind Q1.

Other signs of deterioration are in the futures where we saw R2K futures (5 min) go from leading positive Monday to in line yesterday to leading negative today, that's exceptionally fast.

TF 5 min leading negative.

Treasuries have not been on board for 2 days in a row, but I do suspect we have a bit more to go on even a run of the mill bounce as you can se from looking at the IWM chart above in which I drew in the typical bounce of lower highs/lower lows.

I'll be keeping IWM calls that were put in place as a hedge at least 1 more day, but I'm not moving the SRTY long re-entered yesterday, I just think the market is too fragile and the probability of a divergence being run over here is higher than ever so I don't want to be caught on the wrong side of bigger picture probabilities and I think while there are going to be trading opportunities on the long side here and there, it's really time to be thinking about bigger picture probabilities in a very serious way.

I'll have some more in a bit, especially on breadth figures after the close.

Z Trade Set-up (swing+)

Z is one we recently traded short for an 11+% gain, Z Position Management and exited July 18th which was just about the dead bottom. In the linked post above from the exit I had said,

"I'm taking gains in Z short off the table, it's one I want to add to, but I figure I might as well add the entire position on a bounce and keep the current gains."

Z is also among the stocks I expected a bounce in (mostly momentum names) that I'd like to short in to the bounce, this is the list I'm a bit disappointed in thus far, NFLX, Z, P, TWTR, PCLN, AAPL, SCTY, TSLA. I posted the longer term charts in Monday's Daily Wrap so you'd know why I'm interested in them.

As for "Z", I DO NOT want to trade against longer term probabilities even if I think there's a pretty good chance it bounces, but what I do want to do is what I said above when I exited the last "Z" position, add a full position on a bounce. So this is a trade set-up, hopefully the trade comes to us on our terms and we have a nice entry with much lower risk.

As far as the longer term charts that have not changed, Z Position Follow Up has those charts so I'm not going to repost them, I'll just post what I think is relevant right now to a set-up for Z.

 I just wanted to point out this concept again as it works on all timeframes, it's basically nothing more than a change in character concept. at "A" Z has a nice stable trend and at "B", we often see these seemingly bullish increases in the upside Rate of Chance (ROC), these are more often than not red flags that something is about to change such as a stage 3 top, in Z's case it broke the trendline, we had shorted Z at $140.11 on 3C signals. At "C" it's looking like it's going to shakeout any shorts and lure in the "Buy the Dip" crowd as it sits on its 50-day and would likely need to move above the trendline to hit short stops or at least where the trendline was when "Z" broke below it.

The rounding area or bottom is what we refer to as the reversal process as reversals are rarely a "V" shaped event, HLF would be an exception yesterday, but that seems very much like it was an attempt by Icahn to humiliate Ackman on the day of his HLF "Knockout" presentation.

 As for my X-Over screen, it went long at the 3 white boxes and the screen kept Z long despite several moving average whipsaws on price as the custom indicator stayed long as did RSI (all 3 have to move for a new signal) and we did get a new sell signal recently at the red boxes, however it's not uncommon to get a bounce on a new signal like this or when a stock falls out of the Trend Channel. The buy the dip crowd can't resist these.

 The 15 min chart (see linked post above for longer term charts) is negative at the top around the area we entered Z short and you can see a positive divegrence at the reversal process area. This is a decent divergence and "should" send Z bouncing higher which is when I want to watch it for distribution as the longer charts have gone downhill and look for that next short entry. With the market in the state its in (I do think the IWM divergence does have some more left in the tank, but it's not at all like past bounces), I DO NOT WANT TO PLAY THE LONG SIDE OF THIS ONE LIKE WE DID WITH USO.

 The 10 min chart is confirming the 15 min chat as well in both areas and has a leading positive divegrence currently, not a huge one, but enough to get the job done.

Short term, and this is why I posted this now, the intraday charts (used for timing) look like Z is just about ready to go, a failure here of this set up would be disastrous for Z, I doubt it fails, but I think the overall market has more to say about that, even though most of the stocks on the list did bounce on a very weak market.

If you're interested in a Z short trade which I think can be played either as a swing position like we have done or can be held as a trend position given the right risk management/stop set-up, then I'd make sure you set upside price alerts.

Market Update-DISCOUNTING

Does anyone remember the Arab Spring or the tension flare-up between the US and Russia over Syria? Does anyone remember the market or even oil for that matter reacting? No, they didn't, the Bernanke put was in place. I'd say the last month or so is the first time I've seen the market discount and it is VERY jittery.

This is not normal intraday distribution although we do expect to see it in to the IWM bounce we have been expecting (carrying the other averages with it, Q's are outperforming because of AAPL, but I wouldn't count on that too long).

 IWM intraday distribution

We saw this forming up earlier in the Q's, but I think that's more specific to AAPL.

The IMF cut US GDP from 2% to 1.7% which is consensus, blaming Q1 which was suppose to come in at 3%, it almost did, except negative. 

However, this is not what is causing the market this fear that it hasn't seen or reacted to since 2009 as long as a QE program or Twist was in effect.

Putin recalled the Russian Duma from a planned vacation for a "situation in Eastern Ukraine".

The thinking is that Putin will send Kiev an ultimatum legitimizing the pro-Russian separatists as their own political entity and demanding negotiations or else face Russian forces in Eastern Ukraine under the guise of peacekeeper. 

I remember how the US, Europe and NATO systematically peeled away former Soviet satellite states like Ukraine, but Putin is facing, in my opinion,  an ineffective US president as far as foreign policy (my political views are not important and I don't like expressing them, but Putin has been like a champion chess player in Ukraine). Putin is doing exactly what we expected months ago, he's going to take back Eastern Ukraine and won't stop there. The market is obviously reacting to the news on the matter, which shows what kind of real strength is left in the market, virtually none, just as the US is in a real mess if "Weather" is blamed for a -2.9 negative GDP print, if the economy is that fragile that weather can do that to GDP, I'd be looking for a recession on the next GDP print.

 The distribution intraday is migrating to longer term charts as well.  The IWM 10 min positive divegrence is like a gas tank, it can take the market so far, but it eventually runs out. However, the market in this instance is acting a bit more like it is less and less interested in the trip, that should still appear on the 10 min charts, but it will take more than an hour to get there which is a function of the size of institutional positions.

 This is the IWM 5 min, it is showing a lot of weakness for a bounce only 2 days old. At 1  I closed the 3x short IWM, SRTY long at a nice 9% gain as I expected a bounce and entered URTY (3x long IWM) at #1. I closed that yesterday at #2 upon seeing how weak the market was at a 3.6% 1-day gain and re-opened the SRTY position at 2 which is already in the green today.

I think most of you know how difficult that decision was as SRTY is a core position representing a large chunk of assets,  so I'm not moving these on a whim, I take the moves very seriously.

 This is the Russell 2000 Futures, this is an ugly mess and really shouldn't look like this unless the market is discounting which it is and it's good to see it starting to return to normal.

The larger issue is the continued deterioration in the 5 min R2K futures that were leading positive just Monday.

Most trades I make have to be in line with the 5 min chart so I would not enter an IWM long like URTY with a chart like this, I would and have entered a SRTY (3x short IWM) on a chart like this.

 Es/SPX futures as well as NASDAQ futures 5 min charts look almost the same as this ES chart above, the point is there's serious deterioration here.

The first real TICK trend of the day on my custom TICK indicator.

I need to look at underlying trade in some assets like HYG which is seeing distribution, but I'd direct you to take a look at treasuries again today as well as VXX, there's a lot better performance there than you'd expect considering where the market is overall right now.

It "seems" the reach for protection is intensifying locally, we already know it's quite strong on a longer term basis.

Trade Idea (Short term Options) AAPL Put

I'm going to go ahead and open a speculative (half size) AAPL August Standard $99 Put, I'll get some charts out, but this looks like a parabolic move and you have seen the parabolic failures.

Market Update

The NASDAQ Index futures finally look like they are going to give up that in line status soon and it's reflecting on the QQQ charts as well.

There are still certain things I'm looking for before I want to call out a number of shorts, I am a bit disappointed that a lot of them on our list to short in to a bounce really haven't given us much to work with.

In any case, 1 bridge at a time.

NQ looks like this...

 I know this doesn't look like a big divergence, it's the change in character that is catching my attention.

AAPL has obviously been behind a lot of this move, but I'm looking at AAPL as it is starting to look very interesting for a put set up.

 The Q's intraday are showing a more extreme version of that divegrence.

And the context of the Q's after last week's damage.

As far as larger macro moves and when I definitely want to have short calls out, this 15 min chart is a perfect barometer, I'd like to see 3C make a new low here or at least a strong pivot down to lock in this divergence, with a 15 min chart falling apart, we're on the edge of really needing to have those short in place considering how badly everything else has deteriorated, especially since July 1 which is really a very interesting market study for those who have the time (Window dressing, underlying market conditions, etc.).

 SPY 1 min intraday, by the time I capture and post these they often look a bit different on these fast timeframes.

 SPY 2 min damage from last week

The divergence for last week's bounce and subsequent damage

The longer term is already there as is the mid-term like 10 min, so these intraday charts are really all that's left and mainly the IWM 10 min.

DIA intermediate 10 min damage for example, similar to SPY/QQQ

However it is holding up best intraday as far as 3C goes.

The accrued damage from last week leaves it leading negative in context.

 And we can see this 5 min chart is really the chart to be watching to bridge the short term charts with the damage on the intermediate/long term charts.

 IWM intraday seeing the same kind of action SPY and QQQ saw last week when they bounced, but IWM didn't.

 However at this point, this IWM 10 min chart is all that really matters for getting shorts in place.

Ironically we knew a week in advance IWM would lead a bounce and this 10 min chart held strong, but it never migrated at all to the 15 min chart which just goes to show you how much difference there really is between these timeframes even though it seems like it would be relatively small, it is not.

15 min from IWM's right shoulder top and in line on the downtrend, never even a hint of a larger positive divergence.

The TICK has been VERY mellow considering the MSI squeeze and rather trendless, +1000 is not going to change the breadth charts at all.