Daily Wrap

In many ways today was very much like what we were looking for in concept and in many ways there were some big surprises such as the GDP beat which will almost certainly be revised lower as the two components adding the most to the print were estimated for June. I'm not sure the market knew how to take the GDP print after the ADP print which has recently been more reliable. The ADP print was bad, but not bad enough to warrant any action from the F_E_D. The GDP print was initially ramped along with the USD and carry pairs like USD/JPY, but on the open as the Most shorted Index was squeezed, the market quickly lost ALL GDP gains and the squeeze amounted to little more than a +750 TICK reading, very moderate and nothing like a squeeze.

MSI (Most Shorted Index) was squeezed, but to little effect as a short squeeze hasn't held for weeks now.

Soon after GDP's exuberance, it seemed the market figured out this just allows the F_E_D to claim the incoming data is supportive of the normalization of policy...

I didn't think much of the 1 min negative Es divegrence at the time, but after the GDP ramp the divergence not only stayed negative but confirmed the downside loss of all GDP gains.

The $USD has a bumpy day as well, initially shooting higher on GDP and a positive divergence and then seeing a leading negative divegrence in to the highs of the day shortly followed by a decline and loss of most of the GDP ramp...

$USDX intraday and ending the day with a leading negative making a lower low.

Perhaps some of the most interesting movement was in treasuries which ended the day up just about 10 bps, the most in 9 months which looked something like this in TLT...

TLT 15 min negative divegrence on yesterday's head fake move/failed breakout.

5, 10 and 30 year yields on the day vs. the SPX (remember yields move opposite treasuries).

This however did not help the SPY Arbitrage as the VIX closed higher...

Although it did so with a longer upper wick, indicative of higher intraday prices being rejected.

And HYG was down on the day as I pointed out the horrendous 3C charts today, High Yield Credit (HYG) Heavy Distribution which just added to the massive red flag of HY Credit vs. Equities, a  strong leading indicator...

Junk and HY Credit didn't fare any better on the day or in the above trend.

Our professional sentiment indicators were horrible looking today and give you a feel for the very recent drop off a cliff and these are the signals/timeframes we actually started using the Leading Indicator layout for as they are so accurate.

Action after the F_O_M_C didn't see its typical volatile knee jerk reaction...

While short term intraday divergences pointed to an upward response after GDP, they weren't strong nor was the move and shortly after just about all of the majors except the Russell 2000 gave up their gains.

the SPX closed at a meaningless +0.01%, the Dow -0.19%, the NDX +0.42% and the R2K +0.42%


Performance on the day looked like this...

And now on the month, the Russell 2000 is down -4.2% for July, the worst monthly performance in 2 years.

Major averages for July...

Oil had a big day as well...

On 7/14 I posted a dual USO trade, the first half being long and the second half being short, USO Trade/s 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, of course there needs to be a reason to short USO. "

And on July 22nd, Second Half of USO Trade Setting Up

 Here are the two posts, the first with the long and short idea on July 14th and the second with the USO short setting up on July 22nd,

Brent Crude looks like this

With the bounce area and the 7/22 short area, Brent closed under $100 and near 3 month lows.

The "BEST" looking charts of the averages by the close were the following...

 DIA 2 min leading positive...

IWM 2 min leading positive

QQQ which is in line at best...

And a small relative positive divegrence on the SPY 5 min which was there this morning.

All in all it's not clear at all that a larger base is being built, we may very well just be seeing some consolidation just as easily.

Five of nine S&P sectors closed green on the day with Utilities being the worst performer at -1.69% and Consumer Discretionary the best at +0.55%.

Of the 239 Morningstar Industry and sub-industry groups I track 141 of 239 were green,  this alleviates the oversold breadth readings we had been seeing the last several days that could have led to a bounce on that alone.

There was no Dominant Price/Volume Relationship today.

While most Advance / Decline lines improved marginally today, major breadth indicators like the Percentage of NYSE stocks trading ABOVE their 40-day moving average continued to deteriorate badly today.

This indicator (mentioned above) is now near new lows for the year, it rarely sees large dips without large pullbacks and hasn't seen any such pullback.

Just as a reminder, I've been watching these breadth indicators for 15 years and have only seen them look like this twice, now and...

This is the same indicator just previous to the 2007 top, most of these same breadth indicators looked the worst at the 2007 top. The current reading is far worse in a much shorter period.

Just something to consider...

We'll continue to look for the entries like NFLX as well as any other trade opportunities, but I think by now it's pretty clear we should be focussing and preparing for the bigger picture. Don't forget we have the very important Non-Farm Payrolls Friday morning, tomorrow we have Initial Claims, Employment Cost Index and Chicago PMI, I'm sure all will be closely watched considering the F_O_M_C's comments about "Slack in the labor market".

NFLX Correction

NFLX Calls are actually up over 50% since entered Monday, Trade IDea/ Follow Up: (Swing Trade) NFLX

NFLX Call Position Update

After going over the NFLX chart, I have no reason at this time to close the call position as I was a bit nervous about them earlier.

I still think this NFLX move sets up a beautiful short entry/add to and I suspect I no just about where.

 NFLX Aug $420 calls entered as a hedge for the NFLX short equity position and to make some extra gains up +38.4% , easily hedging the short and adding gains.

This is the 10-min chart and why I opened the call position, plus there was a beautiful reversal process that gave us a great entry.

NFLX hit some shorts and squeezed them just above the yellow trendline, price action during a short squeeze looks like a diagonal line with almost no pullbacks. The 1 min chart above isn't showing any distribution starting yet either so I'll leave calls in place until that process starts, I'm thinking NFLX will likely be a set up around the $450 area.

High Yield Credit (HYG) Heavy Distribution

In another example of "If it bounces, short it", the market will have a VERY hard time putting any bounce together without HYG and as I've shown many times in the past the price divegrence and the 3C divergence are the highest probability resolution and now that resolution is , well actually continuing to the downside as it is already significantly divergent with price.

This is pretty much a full house with almost every HYG timeframe leading negative or confirming the downside move.

 1 min

3 min (no local bounce support from HYG)

5 min

15 min

And the biggies, 60 min and the highest probability resolution...

4 Hour leading negative...

This market is in trouble, it's just whether or not we can get some better entries like NFLX is giving us, specifically I'm looking at XLF today.

Quick Market Update

Right now I'm trying to decide or discover whether we are seeing deterioration in the averages or whether they are pulling back to form a larger base and a larger positive divegrence, the difficult part is averages such as the SPY look more like deterioration and the IWM looks more like a larger base, the Q's to an extent as well and the DIA actually looks like it may be trying to form a larger base.

Here's the IWM as an example...

 For most assets for the intraday chart to pullback, the 1 min chart will go negative, this is like intraday steering and has little influence on what is ultimately happening, but those divergences can migrate to longer charts like 2 and 3 minute and still be able to build a larger base, it just depends on how much it takes to turn them . The IWM's 1 min is leading positive despite the Post F_O_M_C pullback.

Take the Q's for example...

 The 2 min QQQ has gone leading negative, but if it starts to move positive as price moves lower to the accumulation zone, we'd see longer charts like the 5 min chart below actually improve.

QQQ 5 min still in line. However if this negative divegrence on the 2 min. chart gets stronger it will eventually show up as deterioration on this 5 min chart.

The IWM is not acting like this...

 The 2 min chart is in leading positive position as well on the price pullback.

And the 5 min chart is leading positive.

Charts like the DIA are also holding up pretty well...

 DIA 2 min still leading positive and the SPY...

It has seen a little more short term damage on 1 min charts, but the 2 min chart is still holding up.

We'll have to wait and see if a bigger base is actually built, but as I said before, this is not a game changer, if anything it's a bit of noise at this point.

My main interest is in deciding when to enter some larger core short positions, I'd like to enter them on price strength and if we are going to get a small bounce, that's helpful, if it looks like we are not, then I want to get in to those positions ASAP, XLF is one that I'm focussed on now and NFLX will be within the next day or so I believe.

HLF Position Follow Up

Our HLF position is doing well and it's not because of Ackman's "knock-out" blow presentation proving HLF is a fraud, it's not because of the Icahn/Ackman spitting contest, it's just based on the charts and the rest I pretty much have to ignore, even though I don't care to be on the other side of an Icahn trade.

Our current P/L after adding to HLF last week on the post Ackman Knockout presentation bounce now sits at...

12.55% and the top is just getting started.

This is the daily chart, a H&S (volume confirmed) and negative divergences through it. These are the 3 places I'll short a H&S, the head, the top of the right shoulder and after a break below the neckline there's almost always a shakeout of new shorts so where the "X" is, is actually a place I'd consider going long as new shorts entering on the break of support are run out of the trade. We just added to HLF at #3.

Here are the recent posts...

July 22nd: Adding 25% to HLF Short Position
July 22nd: HLF Trade Follow Up
July 28th: HLF Short Position Follow Up /Earnings

 This is the shakeout move after the H&S neckline was broken and the last area I'll short a H&S top.

We got lucky as the day before Ackman's presentation HLF fell as he made the rounds telling everyone he had proof they were a fraud. The next day of the presentation we saw a positive 5 min divegrence, not enough to change anything, but enough to move the stock significantly over a short period,  as I sais that day, I suspect this was Icahn trying to humiliate Ackman (they were in a shouting match on CNBC before Icahn entered the trade trying to squeeze Ackman out)  on the day Ackman gives his presentation HLF runs away 25.45%, its biggest 1-day move and a useful entry for us to add to our short.

 This is the 15 min chart, this is one of the reasons I wasn't worried about shorting that strength, it was a short term divegrence for a short term move, thus useful for entering a short at a better price with lower risk.

This is the 5 min chart since. We have solid downside confirmation after HLF blew earnings as they've been blowing cash on share buybacks or a cheap gimmick to keep share price up while adding no capacity to the company...

Right now we got in above the neckline and are back below the neckline, this top should be just getting started.

Add-to at the red arrow and back below the neckline with likely significantly fewer shorts this time.

F_O_M_C Statement

Another $10bn Taper, no surprises. I suggested we may see some slightly more hawkish tone as there was really nothing as far as major policy issues to take up as there has been very little change in data.

Yellen LLC didn't disappoint, the comment about "Slack in the labor market" reflects a slightly more hawkish tone and she found a face saving "slow boil the frog" way out of the "Inflation is noise" comment from the last F_O_M_C press conference,

"ODDS OF PERSISTENT SUB-2% INFLATION `DIMINISHED SOMEWHAT"

This isn't something only we could see, Yellen saw it and knew it, but a lot of what they say or don't say (Greenspan was famous for "Greenspeak"-talking for hours and not saying anything) is carefully selected as even the change in the placement of a comma in a policy statement receives attention.

All in all it's just about what I expected.

Thus far the market's reaction isn't too far off what I expected either

Market Update

Again looking at these divergences pre-F_O_M_C I suspect a knee-jerk initial reaction, however I don't see this worth trading beyond anything more than a speculative position like the GDX calls.

The divergences don't look like a leak, but moire like a plan to push the market initially on what will probably be uneventful, beyond that there's nothing much so if I can use it to enter XLF short, I will.

 DIA 1 min

DIA 2 min is one of the strongest, but still not anything even remotely close to a game changer.

DIA 5 min is as far as we go

QQQ 2 min

QQQ 5 min is as far a we go for a single day, not that much of a divergence.

QQQ 10 min shows nothing positive

The 15 min chart is leading negative, this is the direction of probabilities and I'll leave my SQQQ core short position open (short QQQ).

 SPY 2 min

SPY 3 min

And 5 min is as far as we go, remember the size of the divegrence (half day) matters as well.

And the 10 min leading negative.

IWM 2 min positive

IWM 5 min negative so this isn't big, it;'s not worth trading to me, but if I can get a short entry, I'll take it.