Daily Wrap

Today was actually one of the more boring op-ex (weekly) Friday's in a while. I showed you the charts that really matter near term on a tactical basis vs. the longer term strategic charts, I think this is a pretty important pivotal moment and it comes at the right time which I'll elaborate on.

The kind of bounce I expected last Friday, Market Update / NEXT WEEK is exactly what we saw  and even though I expected distribution and weakness as bounces recently haven't had the umph that they use to have (they can't keep a short squeeze rolling anymore), I was a little surprised in just how weak this one was. I feel pretty good on the decision to enter URTY for an extra gain this week, but feel much better about exiting it the next day and returning to the default SRTY position which is up almost 4% since in addition to the +9% gain taken when selling it to open the URTY position which was another 3.5% on the week. The point really being the divergences were correct in not only the bounce, but in its weakness (getting out of URTY and back to SRTY).

Today started with another major company, V which is the largest Dow component by weight, giving poor guidance which has been a theme this week and this is the most important part of earnings (ever wonder why a company that missed rallied or a company that beat sold off? Guidance).  Of course AMZN earnings were a disaster (AMZN is one of our core shorts that we/I was/am looking to add to).

In what many probably thought nothing of unless they trade Index futures, the CME hiked ES and NQ margins by 6 and 11% respectively. The last two days my broker has sent a list of several hundred stocks each day that they've raised margin on. While this doesn't prove anything conclusively, the action doesn't exactly come across as the CME/Brokers expecting a low volatility environment going forward such as we have had all year.

On the open, for the first time all week, the Most Shorted Index DID NOT ramp stocks, the MSI hasn't been able to hold a short squeeze all week beyond the opening pop, which again was completely missing today after yesterday's very poor relative performance of our MSI Index vs the SPX.

While it seemed there was an attempt on intraday 3C charts to close the gap in to the afternoon, no such luck, in fact even a USD/JPY ramp was useless.

 ES had traded with USD/JPY most of the day, but note the afternoon ramp in the carry cross with ES (purple) going in the opposite direction.

This looked like a purposeful attempt to close the gap...

USD/JPY saw a positive divegrence at 1:45 which is right around the time (2 p.m.) we usually see the options expiration maximum pain pin released as most contracts seem to be settled by then. In to the close it looks like the failed ramp was being distributed in USD/JPY.

The only interesting mover in to the afternoon and close was GLD which we had expected to bounce as posted at 10:30 in GLD/SLV/GDX Bounce , this was one of the intraday charts from the post...

 One of the GLD charts from the post linked above.

Here's the afternoon move in GLD.

The Dominant Price/Volume Relationship for the components of the major averages was Price Down/Volume Down which is the dominant theme seen during bear markets. The relationship doesn't have any 1-day oversold implications which we often see with price down/volume up which typically leads to a close higher the next day on a short term oversold condition.

Eight of Nine S&P Sectors closed red, only materials closed green. Of the 239 Morningstar Industry and Sub-Industry groups I track, only 49 closed green today, a trend we have been seeing exacerbated all week.

Many breadth indicators are close to making significant lows, the Russell 2000, 3000 and NASDAQ Composite Advance / Decline lines all declined for a 3rd day in a row and the SKEW Index ticked up again today, still in the red zone for the entire month, the longest period since it has been published.

While I expect the market to make a turn lower and specifically this is very important to the Russell 2000...

It looks like the Russell will start a new leg lower which is getting close to breaking an important 9 month top.

There are still a great number of stocks on the watchlists I went through today that look like they could make a small bounce and set up beautiful shorts. As I said in the "Week Ahead" post, I expect a broad move lower next week, despite some short term noise, that short term noise would be the bounces that set up a number of the stocks I have flagged for trades, literally talking about very small moves, but mostly timing.

HYG's 5 min positive divegrence from last week which I expected to help bounce the market has deteriorated significantly and no longer looks like it will be an issue, however a major issue is HYG's position vs the SPX....

HYG (High Yield Corp. Credit-blue) vs SPX. High Yield ETFs and funds have seen huge outflows the last month, THIS WEEK SAW THE LARGEST OUTFLOW FROM HIGH YIELD FUNDS  IN MORE THAN A YEAR! Much of the flow has gone to low yielding, defensive Investment Grade Credit.

While you've heard me say many time, "Credit leads, stocks follow", here's a brief synopsis as to why , specifically in the current market atmosphere where low interest loans haven't been used for Cap-Ex spending by companies, but rather for a dangerous sugar rush reason....

"The last few years' gains in stocks have been due to record amounts of buybacks  which makes EPS look stronger and also provides a non-economic bid to the market no matter what happens. This financial engineering - for even the worst of the worst credit -  has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to re-leverage their firms all in the goal of raising the share price, not adding any value to the actual company, like I said, a short term sugar rush.

Equity prices cannot rally for long without the support of high-yield credit markets - never have, never will - as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking... it ends with equity and credit weakening together. That is the credit cycle."

While the  The Week Ahead charts showed just about everything we needed to know about this week's trade, the VERY Important Update I think is a pivotal post at a pivotal moment. Next week we have some key data such as Non-Farm Payrolls, but even more important is Q2 GDP. If GDP doesn't print at +2.9% then the first half of the year will have zero growth, some would consider that a technical recession. Otherwise a recession is considered two consecutive quarters of negative growth so this time next week the US economy "could" be in recession.

Have a great weekend.

Trade Idea/Set-Up (longer Term) IBB / BIS NASDAQ Biotechs

This is one of my favorite trade set-ups right now for a bunch of reasons. I don't consider this a reason to trade an issue, but the F_E_D and specifically Yellen did come out and say Biotechs were over0valued in congressional testimony along with Social Media stocks, you might know the turn of phrase I'm thinking about at this moment... In any case, this is still not a reason to enter a trade.

In the "Week Ahead" post, I said that I expected the market to move lower, "other than some minor noise", perhaps a gap fill, well this trade set-up would benefit from some minor noise and it looks like it will get it. In fact many of the trade set ups I have flagged today could and look like they'll benefit from some minor noise and I do mean that exactly that, "Minor Noise".

The charts will explain the rest, but the specific asset I'd likely look at would be BIS long, "UltraShort NASDAQ Biotechnology".

 This 5-day chart shows one of the concepts I pay attention to, that's changes in character of a stock. On a 5-dday chart everything is more compressed and looks to be happening faster than it really is, but at point 4, IBB (NASDAQ Biotechs) is virtually vertical, these are "seemingly" bullish moves that are red flags that a change in trend is to follow and just after, IBB saw a major correction in excess of 20% on huge volume, but much more than that happened.

The trend also turned lateral, this is a very typical stage/cycle trend from stage 2 mark up to stage 3 top, the next stage is 4, decline.

 Here's the daily chart.

The 100-day moving average seems to be important lately, for those less aggressive you may want to consider an entry in that area, although there are often shakeouts of new shorts after a clear support area is broken.

This is what I was referring to when I said a lot more happened at the top area, this is Worden's Money Stream which just plummeted, it looks like a lot of capital exited all at once. I checked BIB the Ultralong and it looks exactly the same and I checked BIS, the Ultrashort and it is the exact inverse with a huge leading move up so there is multiple asset confirmation of this huge distribution event.

 My Trend Channel shows where the trend broke, even if I use a 9-day channel to capture more of the trend, it still has broken. The Trend Channel is unique among channels because it takes the stock's trading character and adjusts to it over time which allows you to have a stop that isn't arbitrary but based in something major changing in the stock. I use a multiple standard deviation of what "normal" character of the stock is so any break of the channel (note the first trend line in Q2 of 2013 was not a stop out as price did not close below the highest point of the lower channel)  is an exceptional change in the character of the stock and as I often say,  changes in character lead to changes in trend".

 I don't think the 4 hour 3C chart needs much explanation, it's in line with what Money Stream was showing in the same area.

The 15 minute chart is where this gets really interesting. The 3C trend is what you'd expect considering the 4 hour chart and a distribution phase, but this one looks special when you take a closer look.

This is the same 15 min chart zoomed in a bit, you can see in line movement to the far left,  positive divergences at the white arrows/price lows. However the most recent leading negative divegrence is what really interests me as far as timing which is why we use multiple timeframe analysis as well as multiple asset confirmation (even though BIS and BIB will move a specific amount relative to IBB, the volume is not the same, which is why we sometimes won't get confirmation-Gold and GDX has been very difficult to get confirmation from lately). This last move up has been sold from the moment it started moving, it wasn't the process that distribution normally is, but more of en event or a very strong signal.

Although I'd have no problem taking a BIS long here, the 1 min chart shows a day and a half positive divegrence, judging by the size of the previous one and the following move, I'm guessing this bounces toward $260 so that gives us a better entry, less risk and better timing. I'll be setting alerts for this one as this really looks attractive.

The Week Ahead

Early this week upon expecting a bounce in the IWM, I had switched over to URTY for a single day and gained over 3.5% on a larger core position and closed it after that day and went back to SRTY which was the core position I've been holding (it was closed at about a 9% gain to enter URTY). As you know, after seeing the initial weakness I closed URTY early this week and went back to SRTY which was lucky as that day had been the largest move in the IWM for the week and the SRTY position I added back is already and has been green since I switched back.

Last week we had a clear positive divegrence, not huge, but enough to expect a bounce, other than everything else that has happened this week and continues to develop, I'm focussing on what we have seen this week and what that is likely to lead to next week. My opinion is other than maybe some minor noise, the trend should move down, this will be reestablishing the preceding down trend in the Russell 2000 that has been in effect since just after July 1st as Window dressing for Q2 ended.

I'll use the SPY as an example...

 The 2 min trend for the week has been clear and constant distribution

 The 5 min chart shows the same thing for the entire week, I don't see any hint of a positive divegrence that would even be able to lift the market next week in even the shortest timeframes, there is the gap so maybe there's some noise, but it's the trend I'm interested in.

 10 min chart clearly leading negative.

The 15 min chart leading negative

The same for the 30 min chart, this is migration of a divergence unlike IYT.

And all the way our to a 60 min chart so the bounce we expected to see this week, I also expected to see it distributed and create a counter trend or correction in the IWM's downtrend off the right shoulder highs, we have seen. I am looking for a move lower next week.

IYT Charts

Again, what caught my eye about IYT was the longer term or larger underlying flow of trade and the  speed at which multiple long term timeframes were hit.

According to Technical Analysis and specifically Dow Theory, Industrials and Transports should confirm, for a long time though I've made the case that I believe the Russell 2000 rather than the Dow 30 makes a better comparison as Dow theory is from the early 1900's when Industrials were dominant, the US is a services economy now. The R2K is a much broader economic indicator than the Dow 30 and I think better suited to modern Dow Theory.

 Daily chart of IYT/Transports (green) vs. Russell 2000 (red). Transports do have a similar bearish Ascending Wedge price pattern like the SPX. I often look for a break above the pattern (or below a Descending Wedge) and a divergence in the area for entries.

The daily candlesticks are also calling a confirmed reversal off Wednesday's Shooting Star" reversal candle which has since been confirmed.

 The 2 min chart's trend shows an area of accumulation sending IYT higher, but it's the recent leading negative trend that interests me.

 This is a 10 min chart, a lot less detail than a 2 min chart, but a clearer trend, it is also leading negative in the same area

As is this 15 min chart

And a little surprisingly the 30 min and now even out to ...

A 60 min chart.

There's a relative negative divegrence at the red arrow, then 3C makes a new lower low or a leading negative divegrence.

One of the things that's a bit different about IYT which has confirmation in DJ-20 is this doesn't look like the normal distribution pattern of migration from short timeframes to long timeframes over a longer period, this looks like it was almost all done at the same time.

Trade Idea: (Longer Term) IYT Short

I've been watching Transports the last couple of days , I almost put IYT out yesterday, I've decided to go ahead with an equity short position in IYT, full size, but I can see a partial position and look for a move >$152, but I'm more interested in a longer term position and a few extra percent (possibly) isn't worth it to me.

I'll have charts up momentarily.

Intraday Update

The Q's and the IWM have enough of an intraday divergence they should be able to fill their gaps from this morning, honestly I'm a bit surprised they haven't made that move yet.

Credit is falling off, this time HYG (HY Corp. Credit) which is used often to goose the market higher, it had a positive divegrence last week before it started moving higher in support of the market's bounce attempt.

It's the dislocation or leading negative divegrence of intraday charts that seems to be an issue.

There are several assets I like a lot such as FAZ (long), but XLF is so close to a resistance level that it should have broken on a head fake move during this week's bounce. I'm still a bit on the fence whether to go ahead with a position in an asset like that or see if it can do what it should heave already done, which would be a much better entry.

I can see in intraday breadth (TICK Index), there have been a couple of attempts to move the market in to the gaps, but they just can't hold.

I'm not sure where the VIX (spot) will close today, but if it does close a bit closer to its intraday highs, that would be a pretty strong indication the market is about to correct on the downside as there's still that perfect rising 3 methods, I've been watching the VIX futures pretty intensely to see if there's any hint there.

The last 7 candles (daily) of VIX make up the bullish consolidation/continuation pattern, Rising 3 methods. Wednesday we saw a downside loss of momentum with a Doji Star, yesterday a bullish engulfing candle of Wednesday's Doji which would be confirmation of the reversal although not a very large bodies engulfing candle and today we have a higher move in VIX, it would look a lot stronger if it didn't leave much of an upper wick and closed near intraday highs which would look a lot like the VIX is getting ready to make a move higher, likely a higher high,  the market moves opposite the VIX.

Bottom line, the market seems to really be struggling to fill a pretty small gap. Nothing about the bigger picture has changed.

VERY Important Update

If you are looking at the SPX as the bellwhether for the market, you probably see somethings like a bearish Ascending Wedge throughout 2014, if you look at multi-day charts you'll see candlestick loss of momentum to Doji stars (depending on the timeframe), but you're probably not too panicked looking at it.

The fact is, the Russell 2000 is and has been a better barometer of the market for sometime as it is a broader measure of US economic activity through a more diverse component list of business. If you need proof (other than the fairly well known idea that the Russell 2000 leads the market and should always lead a rally/bounce), just look at Ben "Helicopter" Bernanke's Humphrey Hawkins bi-annual Congressional testimony. Whenever Bernanke mentioned the market (likely out of habit) he always referenced the Russell 2000 (typically regarding the "Wealth Effect"), I found this a bit strange as the Dow and S&P are household names, the Russell isn't so much, but it gives you insight in to what the F_E_D is looking at as their barometer. The R2K has a VERY different look than the rest of the averages and one that fits very well with the NYSE component Breadth Indicators, Credit markets, etc.

The bounce we forecasted last Friday for this week (on Friday July 18th), Market Update / NEXT WEEK was looking for an IWM led bounce with weaker relative performance in the S&P and NASDAQ 100, this is why I only switched my core short position in SRTY (3x short the IWM ) which was closed at about a 9% gain and opened a bounce/trade position in URTY (3x long IWM) which I closed the following day at a 3.5% gain after seeing the initial weakness. In last Friday's "Week Ahead" post I said,

"As I have thought all week, I think the IWM has to bounce before anything else on the downside happens. The IWM is down -6.28% for the month and almost a straight line decline, a bounce here would not be anything out of the norm."

And thus far, it has been nothing out of the norm at all, but like the forecasted SPX/NDX for last week, we saw the exact same weakness immediately which is a large change in character for the market as we'd normally see several days of bounce before distribution started showing up, both weeks saw distribution immediately on the first gap up in the a.m.

As for the move I expected as nothing "out of the norm" after a 6+% decline...

This "counter-trend" bounce from the decline off the July 1st (top of the right shoulder) highs, is very tame considering the previous decline, the retrace off the highs of July 1was only about 33%, not even half, in other words, exceptionally weak not only in 3C charts, but the norm for a counter-trend bounce.

I'D IMPLORE YOU TO TAKE THIS VERY SERIOUSLY...

The charts that I have been most interested in as far as forecasting the end of a bounce in the market and the area where we really want to have our ducks in a row and ready to go, have seen serious damage the last two days, the Index futures have seen damage all week getting worse each day from a 5 min leading positive R2K futures to in line the next day to a leading negative 5 min the following day to a leading negative 15 min yesterday. Just as I warned for nearly a week up through last Friday that the market would bounce, I've been warning all week that this has been an exceptionally weak bounce and I'm not even concerned with the percentage move which has been weak as well.

The SPX from Friday's close to its closing high this week + 0.49% and through today, -0.04%. The NDX from Friday's close to its closing highs of the week, +1.10% and through today, +0.35%. The Russell 2000 from Friday's close to its closing highs of the week +.56% and through today, -0.54% and the Dow at +0.08% to -.88% today.

Now the charts that have me "concerned" (which is really happy being I have my core positions set)...

 This intraday chart is not current, but I think it is likely the market bounces a bit today and maybe a bit more early next week, but that second part is a guess at this point, I don't have objective evidence for that as of yet. It would not surprise me to see the market close up after the 2 p.m. op-ex pin is lifted, however what price does the last 2 hours of an op-ex Friday is not important to me, what 3C does is as the market typically picks up right where 3C left off on the next day of trade, even over a 3-day weekend.


 As I have stated all week,  it is this IWM 10 min chart with a rather large positive divegrence that I've been focussed on; we haven't seen any significant movement until yesterday, today it is getting noticeably worse.

 For some context, this 60 min chart is the resolution of highest probability for the current market position; this is the right shoulder decline in the Russell 2000/IWM in a larger, volume confirmed, H&S top. The accumulation to the right is normal as this is like a large swing trade, but Wall St. knows what they are doing and what they expect, they sold very heavily in to IWM/R2K right shoulder highs and the current divergence is deeply leading negative (the strongest version of a 3C divergence).

 The daily chart is quite clear about the leading negative divegrence at the H&S-like top in the Russell 2000/IWM. The daily chart is by far the strongest timeframe of all the above charts, however often is less useful for our purposes other than to know what the big picture looks like and what the highest probabilities are. Again, we are at a deep leading negative divegrence.

With a divergence like this in place, any end of a current bounce means we should be looking for the next lower low and as a market gets closer to the edge of breaking, it becomes more volatile and less predictable (in a bearish way).

 When I warned of an IWM bounce, I didn't expect the bounces we have seen so many times in the past that move 4-7% and change sentiment from raging bearish to full on bullish,  I expected a move that would create a series of lower highs/lower lows, but even in creating that down trend you need a bounce. I used the right side of the head's decline as an example of what I expected this bounce to look like and thus far it's right on track, although weaker than I anticipated (which is why I had opened the IWM calls as a hedge against my core short positions-a position which I closed yesterday...Closing IWM Hedge Calls).

 The Q's intraday are not looking as good, but I'm much less concerned with intraday right now, in fact any bounce would be useful.

 The 5 min QQQ chart since the divegrence in which we called for a bounce off of and which we observed extreme underlying weakness. The move since has seen an even deeper leading negative divegrence.

 The 15 min chart is much more important, but shows the exact same trend, worsening distribution and a leading negative divegrence on a respectably long timeframe.

 The QQQ daily chart is part of why I have been so adamant about my position on the market, but this is just 1 piece of the puzzle, I;'d never form a position/opinion based on one chart,

 The SPY 15 min is similar to what is happening in the IWM on its 10 min chart, deterioration locally to a new leading negative low.

Worse than that, the last 3-days have seen increased distribution as  the 15 min leading negative has migrated to the 30 min chart and a move this steep in 3 days on a 30 min chart is not a common occurrence.

 For a look at the broader picture/context, this is the same 30 min chart zoomed out. I have believed ever since the range that formed from March through May that we'd see a head fake move above the range before any significant move lower. We already had strong distribution in the range, but it is dwarfed by the distribution since the breakout above the range which is where retail traders would buy as the range was a chop-fest destroying longs and shorts alike.

 This is the 4 hour SPY chart. Many retail traders mistakenly believe that a declining market is evidence of smart money selling, in reality they have VERY large positions, it's not uncommon for some of the larger funds to hold a billion dollar single stock position. These size positions can't be entered or exited in a trade or a day or even a week, there are predatory HFTs that look to "Ping for Icebergs", large institutional orders and front run them which costs the fund money. These funds are very quiet about what they do and it typically takes a while to move positions that large, AAPL's decline on the Third Point AAPL top 5 positioning (no longer there) was an exception that sent AAPL down 45% in 8 months.

Normally, by the time a market rises, smart money has long been in and they are exiting on demand and higher prices.

 This is the daily SPY chart with a strong 2014 leading negative divegrence.

The point Im trying to make is the damage is already extreme, just like any trade we enter, we are already looking at the longer charts for our strategic position and the shorter charts for our tactical entry/exit. The longer charts are in tatters and the short term charts are falling apart quickly, both the strategic and tactical are looking VERY bearish.

Don't forget to consider other things like the failure of the carry trades (clear uptrends have gone sideways or down), market breadth which has been falling apart for well over a year, but intensely now such as I have only seen twice in 15 years of looking at breadth charts, also the divergences in High Yield Credit, Treasuries, the Flight to Safety trades in to Utilities, and of course, the record setting elevated SKEW for the longest period since SKEW has been published.

To give you some idea of why I say this is an opportunity that no one alive has seen, if you understand the new market dynamics as they will not be the same as the previous  5 years and are on the right side of the trade...Look at the Dow now vs. the Dow from the 1929 highs just before the crash...

This is the 1-day 3C chart for the Dow-30, while this did creep up rather fast and there was a VERY strong 3C reading through most of the 1920's, this was NOT a total surprise, big money was moving out almost a year in advance as you can see above (note the year at the horizontal axis)

This is the daily Dow chart right now, all settings are exactly the same.

Some of the biggest funds have been net sellers for over 2 years. Last May Apollo said at a financial conference they had been selling "Everything not nailed down for the last 15 months" as they described the market as being, "Priced to perfection" and the market trend was useful in allowing them to exit their very large positions.

If you need more evidence beyond 3C and what funds have shown, let me remind you of the Bank of America Custodial Accounts for Institutional, Hedge Fund and Retail investors...

This was released a couple of months ago, Institutional clients have been insanely strong net sellers especially going in to 2012, while they have been handing the bag off to none other than RETAIL as they have been buyers during the EXACT same period. Shortly after this was released,  JPM released a similar chart.

On a stronger trend basis, the 5-day 3C chart for the Dow 1929 looked like this...

 There was very strong accumulation in 1921 and 3C confirms the Dow's explosive growth at the green arrow. This still shows strong distribution starting about a little overa year prior around 1928.

Now compare the exact same settings to now, 5 day DOW 3C chart. The 2002/2003 accumulation for the next bull market is obvious and the trend is confirmed until distribution in 2007 near the top, accumulation at the 2009 lows is seen.

You may be wondering why 3C is so low during the last 5 years, remember this market was not sent up by strong buying ,volume demonstrates that...

A market rally  should always be accompanied by rising volume and that was the case until 2009 and beyond.

What sent this market higher was a 3.5 Trillion dollar F_E_D expansion during the same period, much of that money flowing to the market, but now the same strong underlying purchasing of the 2002/2003-2007 bull market.

I have a lot of work to do in looking at several stocks, but I'd urge you to take this very seriously.