Daily Wrap

Today we got more or less exact;y what we expected as of Friday's The Week Ahead post, the only problem as some of the averages still have a rather "V" shaped base...

 While the Q's have a positive divegrence that was there Friday, they have more of a "V" bottom, imagine trying to build something and move higher and higher with such an unstable base.

The IWM on the other hand where we opened out calls last week which closed in the green today...

created a more stable "W" base and you can see it in the size and type of divergence, thus I'm glad our bounce calls are in the IWM, I really wouldn't have added to QQQ or any other like base today because of the inherent instability.

However, as you
'll probably hear, the "Bounce was because of the BEES bailout", it was really an oversold breadth condition.  I don't care about stochastics or RSI oversold, but only 24% of the NYSE above their 40-day moving averages is majorly oversold.

The intraday breadth looked a lot like a late morning short squeeze as did price which is not surprising...

After initial a.m. weakness in TICK, look at the steady trend up and in to the +1000 range, this looks a lot like a short squeeze and ironically one of out retail sentiment indicators was the most bullish ever on Friday, the buy the dip response is alive and well.

There are still some solid divergences considering on the day and I suspect we'll have more upside to cover, but again at this point other than managing IWM calls, I'll be looking for short entries such as AMZN in the coming days.

Even though the SPY didn't build a stronger "W" bottom, it still has a respectable10 min leading positive divegrence so I'd expect this to have more legs on the upside which is great for the calls and will be great for short trade entries.

There are still some long positions I'd consider ONLY if they build that larger base, take XLF or FAS for example, otherwise I'm not taking the risk and will just wait for the next pivot.

Surprisingly, breadth didn't move that much, which may mean there's more on the upside just because of that. Take the Percentage of NYSE stocks above their 40-day moving average, it was 20.99, today only 24.32, take a look...

The white trendline is Friday's breadth close, it barely moved today and this is the kind of breadth you see in a bear market.

Of the 9 S&P sectors, 8 closed green, , they were the reverse of Friday with Utilities rounding out the bottom. Of the 239 Morningstar Industry and Sub-Industry groups I track, an amazing 207 of 239 closed green, this is why I'm surprised breadth barely improved.

The Dominant Price Volume Relationship was Close Up/Volume down, this is the most bearish of the 4 relationships, but considering Friday's capitulation (short term) volume which is helpful on a reversal with all of the Doji star candlesticks, I wouldn't be too concerned about that yet and still suspect we have more on the upside so I'll be leaving the IWM calls in place until I have a good reason not too and of course looking for the larger trade set ups that are in line with the highest probabilities such as AMZN which was featured today, AMZN Trade/s Set-Up.

So, from where we stood late last week, things are pretty much on track. I'd think that breadth would have to improve a bit more than it did today before this bounce is over, but as I said last week, this is by no means a game changer, it ,ay look impressive at some point, but it's no where near a game changer, just part of a normal market which is to say something since we haven't seen that in over 5 years.

Quick Update

So far the market is pretty much in line intraday, there's some slight weakness in the QQQ intraday, the 5 min charts never filled out. If the market keeps moving on this pop, I'll just leave the IWM calls in place and close them at the appropriate time and look for the entries in to the bigger trades.

Without the 5 min charts having filled out, I don't dare take on more risk for short term long/bounce trades, it's just management of existing positions from last week and setting up in to new positions, but first lets see how much of this holds, the VIX really looks like it wants to pullback and as I said, most intraday charts are confirming even though they never built anything much bigger than what we had Friday except in the IWM's case.

XLF / FAZ Financials Follow Up...

Friday I closed a partial FAZ long position, Closing FAZ Long,  and decided just to leave it at that for the time and decide after I see how the charts play out, whether to add a short term FAS (3x long Financials) or XLF call position.

I'm seeing a lot of confirmation in multiple assets in different industry groups that look a lot like my expectations for the market this week, I believe there's a strong probability of a bounce, but until I see the charts looking stronger than they were Friday, I can't justify adding that FAS position and  really the bigger trade or higher probability position is XLF short which would be a fantastic entry with a bounce.

I just want to show you the trouble Financials are in, why I'd absolutely consider them a short and what I'd be looking for to enter a short term long like FAS long or XLF calls, it's basically nearly identical to the overall market expectations, but again looking as bad as Financials do, I can't justify entering a long bounce trade unless there's significant improvement that will likely only come on an intraday pullback.

 XLF Daily chart has seen strong distribution from 2013, but the last couple of months have been very strong.

I had been waiting to add to FAZ long on a break above the XLF range (head fake move), which never came, however, with the break below the range, this often provides the short squeeze momentum to make a move to a target such as the one I was hoping to get just above the range as it draws in new breakout longs and shorts cover providing plenty of demand smart money can sell in to, that's ultimately where I'd like to re-open the FAZ long/XLF short.

The XLF 15 min chart has a positive divegrence, the probabilities short term are for a bounce, but probabilities are not the same as high probability low risk trade. 

There's a strong 2 min positive in XLF which is a good start, but not yet a high probability/low risk trade (for a bounce).

 FAS (3x long XLF) has a similar 3 min leading positive, but not much beyond, I usually look for at least a 5 min chart looking like this for a trade.

 5 min FAS isn't there.

This is why I would like to see a pullback to strengthen the 5 min charts as accumulation takes place in to weaker prices and heavier supply.

As for the FAZ position closed Friday, it was a partial position and I think protecting that position was the right thing to do, but entering a new trade and putting those assets at risk is a lot different from protecting gains or the position.

I see the same pattern in XLK, the major averages and numerous short watchlist stocks such as AMZN covered earlier. I'll continue to be patient, if the right signals for a high probability position don't materialize, then I'm content with just waiting for the next trade set up which is to short assets like XLF in to price strength/3C weakness.

Market Update

The IWM did pullback and saw accumulation of the pullback, other averages like the Q's looked like they would and may still look like they will, I suspect we will not get a move higher that sticks (bounce) without a wider base like the IWM.

Here are a few charts.

 IWM 1 min with a positive divegrence at its pullback today, this is what I expected to see.

Overall this is adding to the IWM 5 min positive

As well as the 15 min.

The SPY hasn't done much on the pullback side, but also hasn't lost anything.

?Note though the 10 min chart hasn't gained much either.

QQQ 1 min looks like it will still pullback intraday with this negative divegrence.

It can even be seen on a 5 min chart so I suspect we are still looking for the same thing as we were on Friday to lead to a bounce.

UNG Position Update

Thursday I posted Trade Idea: (Swing Trade +) UNG / UGAZ after having given UNG some time to build a proportional reversal process  and Friday afternoon I posted, UNG Should Lift Off Next Week.

I think the trade is likely somewhere along the lines of a swing trade perhaps with a head fake move (hitting stops or triggering new longs) as an extra cherry on top. I'd prefer either UGAZ long (3x leveraged long) or maybe a call position at least out to August 16th if not longer.

I was looking for the possibility (usually a probability) of a stop run within the reversal process which would make for a great entry, but seeing how mature the reversal process is and proportional, right now I'd settle for a long here, however if there are other trade that I'm considering that look to have better profit potential or risk/reward profiles, then I might make a UNG long entry (or UGAZ) contingent on a head fake move to allow for better positioning and if it doesn't do that, then just move on to something else,  I always want the trade to come to me than chase it.

As for the charts...

 This 60 min chart of UNG shows that it is likely to be a longer duration position than say our market (SPY, IWM, QQQ, etc.) bounces.

Looking at price only, there's a very clean downtrend that transitioned in to a beautiful reversal process, there's no head fake/stop run at the lows of the reversal process, but that doesn't mean UNG won't pullback a bit intraday.

NG (Natural Gas Futures) show some smaller intraday negative divergences suggesting some intraday pullback, whether it's enough to form an actual stop run/head fake, I don't think so at this time, but these are all things you may want to consider in determining whether the trade set up is worth it to you.

 NG 1 min with a small intraday negative

NG 5 min with the same.

The 15 min chart is a clean , strong divegrence along the lines of the type of move I expect as seen with several targets below...

There are a couple of gaps that seem very reasonable and easily achieved, the higher gap puts price so close to a potential head fake move that forces nat gas shorts to cover as stops just above former support of a large multi-month range are likely to be in the area, I can't imagine UNG would move so close and not hit that area as well at which time we can look at it again for another potential trade set-up.

AMZN Trade/s Set-Up

AMZN has been a long term short trade favorite and one that I'd like to add to. I see one potential short term / bounce trade, but I think the bigger opportunity is a longer term short set-up/entry that gives a better entry and lowers risk.

Here's the AMZN daily chart and top pattern...

 AMZN H&S-like top pattern (these never look like the textbook in real life). AMZN has already come down off the right shoulder which is the second of 3 places I'll usually short a H&SA top, but with a gap fill of the gap coming off the top of the right shoulder, you have a pretty decent entry.

This is the daily 3C chart for AMZN, not only is this a large divergence and on a very powerful (
primary trend) timeframe, it's a large overall top pattern of over a year.

 On a short term basis the 5 min chart is leading positive right now, ideally for a long "bounce" trade into the gap (I'm not sure I'd say it will fill the gap, but I'd rather let the market tell us that) I'd like to see AMZN come down just like we are seeing in the Dow and IWM intraday (both of which are responding as expected in to lower prices, showing intraday accumulation).

If AMZN doesn't come down from here, I'd probably skip the short term piggy back long trade and set price alerts in the area of the gap and look more toward the longer term primary trend AMZN short, that's where I'd like to fill out the partial position open now.

The 2 min chart is similar to the overall market, as I said, unlike the Dow and IWM which have already hit Friday's intraday lows (thereabouts), I'm not sure if AMZN will, but if it did, especially if it broke below them with a positive intraday 3C divergence showing accumulation of the stops that are hit, I'd consider a short term long trade with the gap area as the upside target. Personally I'd prefer the leverage of options as this is a shorter duration trade with lower profit potential and I'd rather not allocate so much in resources to that lower profit potential, but it depends on risk tolerance and of course dry powder availability. Otherwise, I'd rather just be patient, wait for a bounce and look to short the price strength/3C weakness in to higher prices near the gap area.

 This 60 min chart of AMZN shows there's no strength here at all like the daily chart so again I suspect any bounce would  be just that, these short term positive divergences aren't a game changer for the probabilities of AMZN's primary trend (bearish).

This is a 15 min chart and even here there's nothing resembling a positive divegrence so again I think any bounce is capped by charts like this and selling price strength or shorting it is the bigger and higher probability trade.

I'l be setting price alerts for both potential positions.

Early Indications

So far the early indications look very much like expectations for this week , at least the early or first stages as posted Friday in The Week Ahead. The first step in an oversold bounce is widening out a base to bounce from which would have been an unstable "V" if the market just moved up this morning and kept going without coming down a bit and allowing for a larger footprint for the base, it looks like that's what is happening with the bounce probability still likely.

 SPY 5 min is leading positive, but still a narrow base, as I posted Friday afternoon, I expect a pullback to Friday's intraday lows, possibly a shakeout move below before a bounce has a stable enough base to move up from.

The very short term 2 min SPY chart this morning has a small negative divegrence that should bring price down to the level I expect to widen out the base's footprint and allow for some stronger divergences in doing so, I'll be watching for accumulation on the short term timeframes and for that to move to longer ones like the 5 min as we get closer to Friday's intraday lows.

 The IWM 5 min looks similar to the SPY 5 min above with a positive divergence and needing a wider base and thus an early pullback toward Friday's lows.

So far the 1 min IWM intraday chart is negative on the open and sending the IWM lower.

The QQQ 10 min is also leading positive and also looks like it needs to widen the base's foot print from what would have been a narrow "V" to something more like a "W" base.

And thus far the early indications on intraday charts suggest the Q's will also pullback as well.

So far so good.

Trade Set-Up FXI / FXP

I know quite a few of you like trading FXI and FXP (FTSE China 25 and UltraShort FTSE China 25 respectively) so I have been watching it and roughly expect it to look similar to US market, meaning an FXP long (or FXI short) looks likely to set-up this week. I'm guessing by the size of the reversal process area in place so far (which is similar to the US markets for a bounce (bounce in FXI and pullback in FXP) this will likely be more along the lines of a swing trade, perhaps a bit bigger and will likely trigger around the same time the US markets resume their move to the downside after an oversold bounce as expected for this week.

Remember FXI is the non-leveraged long FTSE China 25 and FXP is the Ultrashort. FXI has better volume and I prefer using those charts for analysis with confirmation from FXP.

 60 min FXP which is confirming the downtrend to the left and starting a small base to the right. This is a bit bigger than the US market base in terms of size as well as divergence as this is a positive divegrence out to 60 min whereas the SPY is just getting to a 15 min chart. I'd expect the US market to bounce while FXP pulls back to form a wider "W" or rectangle shaped base and by the time the US markets are ready to end their bounce and start a new leg lower, FXP should be ready as a long or FXI as a short.

 Using FXI's (because of the higher volume) 60 min chart we see the same confirmation of the FXP chart as the uptrend to the left is confirmed with 3C making higher highs with price until the recent negative divegrence confirming the FXP (Ultrashort) positive divegrence on the same timeframe.

FXI 15 min is a broader negative divegrence, but not very sharp yet, I suspect over the course of this week it will become sharper.

FXI 5 min which I suspect will act similarly to the US markets is likely to pullback very short term and bounce. It's at the end of this bounce I suspect the FXP base will be fully developed and ready for a long entry or short FXI).

 On a 1 min chart FXI's negative divegrence is sharp and I'd expect to see this migrate to longer timeframes/stronger divergence.

 You can see the divergence has moved to the 2 min chart

as well as the 3 min chart. I think by the time this is ready (likely later in the week), the 5 and 15 min charts will be very clear as well.

This is FXP's 5 min, by the same token I suspect later in the week FXP will pullback as US markets bounce and will have a better developed 5 min divergence here and a wider base to swing up from.

A.M. Update

The major market event of the weekend was the Portuguese central bank's $4.9 billion dollar bailout of Banco Espirito Santo which was not suppose to happen, however after realizing that the mega-bank would not be able to raise capital in the open market (see last week's stock/bond performance), there was no other chose and the bank was split in to "good bank / Bad bank" with senior creditors coming out "A-OK" while subs got the short end of the stick as to not burden taxpayers with a bailout.

This of course is being hailed as the risk on sentiment event although in The Week Ahead on Friday we had already said,

"I suspect Monday we are likely to see something along these lines.

 If you look at where we are now, any upside move would be off a "V" bottom and these are just not common, especially in a situation like this in which market breadth is so massively oversold. At minimum I think Monday we need to test today's lows,  there's a good chance stops are run on a head fake move just below today's intraday lows, but all in all we should have at least a "W" type base which is still fairly narrow, but these deep parabolic moves often have a more narrow reversal process. From the charts I see, I think a bounce is probably likely."

For now, I don't think anything has changed and we are still likely to see something develop along these lines. 

Earnings are winding down this week with 77 S&P companies still due to report.

There's not much on the Macro economic calendar so any outside risk will likely be geo-political risk.

MY TRADING PLAN FOR THE WEEK IS THE SAME, TRY TO TAKE ADVANTAGE OF A SMALL OVERSOLD BOUNCE WITH SHORTER TERM CALL OPTIONS WHILE LETTING THE LARGER CORE SHORT POSITIONS SIT AND WAIT FOR THEIR TURN AND ADD TO A FEW AS A BOUNCE NEARS THE END.