Daily Wrap

Last Friday in the The Week Ahead post I wrote,

" 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."

We had the start of a divergence, but too narrow of a base, a "V" reversal which is not common, this is why I was looking for a broader "W" shaped base that we could bounce off of. We ended up with something a bit wider by about 2-days, the wider the base, the more upside it can support.

SPY since last Friday 8/1, positive RSI and...

 A number of swing-timeframe (10-15 min) positive divergences like this 10 min SPY or...

This 15 min IWM leading positive.
We also have a lot of near term divergences that we use for timing suggesting the base is ready to go, the question is do we get some kind of pullback or head fake move first which is what I was looking at this afternoon in, Don't Chase- Market Idiocy , Market Update-Timing , and Going to Wait Until Monday to Add Longs .

At the close I'd truly say it's a toss up as there were some clear divergences , but still short enough timeframes they could be run over and not as numerous as they were a bit earlier. I still have the XLF calls which are at a gain, the IWM calls for this bounce (weekly) that expired today , I closed at just about break-even as that was a loss I didn't want to take, but after 4-day old news seemed to move the market, those calls ended the day at a 100% gain. We'll see about adding some early next week, otherwise the bigger picture trade is what we should really be looking to.

Index Futures did dump a bit after the close.

NASDAQ futures took out the last 2 hours of trade after the close on a 3C negative divegrence.

The Carry trades seemed to be in charge for most of the day...

USD/JPY vs ES (purple) , however today's performance wasn't due to a rising USD/JPY as it has been in the $102 range, likely arbitrage trading.

High Yield Corp. Credit is supportive of a bounce as a short term market manipulation lever...

HYG (blue) leading the SPX as our base widened out this week.

The Most Shorted Index is suggesting we see a move higher next week...

MSI vs ES shows the MSI seeing better relative performance as the week moves forward, perhaps lining up for a full-day short squeeze as breadth has been so bad.

Shorter term , short term VIX futures look like a pullback Monday is probable...

The out-performance of VXX today looks like there's not too much fear going in to early Monday which would be the case on an early pullback.

 10 year yields were nearly perfectly in line with the SPX today, however...

remember several months ago I was pointing out the falling 10 0year Y's and how they looked just like the 2007 top, that was before the market dropped with several averages giving up all 2014 gains, they are still is bad shape. As far as yield curve inversion, while it has called recessions in the US, 6 of 7 times it hasn't in Japan, I don't think it's a good measure considering all the F_E_D screw-balling with rates. The 10 year closed at 2.41%

As for internals, a BIG difference today. Of the 9 S&P sectors, all 9 closed green, however Utilities (Flight to Safety) lead . Of the 239 Morningstar groups I track, an amazing 227 closed green, a mirror reversal of several days this week including yesterday.

Breadth wasn't dramatically improved today, but much more than any time this week with the Percentage of NYSE stocks Above their 40-day moving average going from 20% on Tuesday to 28% today (23.1% yesterday), there's still plenty of room for the market to bounce based on oversold breadth alone.

As for the Dominant Price Volume Relationship today, we had a meaningful one, Pice Up / Volume Down, this is the most bearish of the 4 possibilities and heavily dominant with 25 of the Dow 30, 78 of the NASDAQ 100, 1051 of the R2K and 377 of the S&P 500. Typically this is a 1-day overbought event and the following day closes down which would fit nice with a pullback or head fake before a bounce higher, but as I said, at this point I feel it's pretty close to a toss up, either way we'll be able to get something good out of it.

That will do it for today, have a great weekend and I'm looking forward to next week already!

Going to Wait Until Monday to Add Longs

I'll keep the XLF calls in place, but as far as adding to anything, it's a tough call, this market is ready to bounce, but there are quite a few intraday negative divergences that should pick up where they left off and give us a small pullback, otherwise, it's not a big deal as I'm not taking the risk of chasing.

I do definitely think we do get that bounce early next week which opens up a lot of short opportunities toward the middle/end of the week.

Transports To Bounce

Basically if we have a market that's going to bounce (relief or not), the phrase, "A Rising Tide Lifts All Boats" applies to 2/3 rds of the market. Our Transports (IYT) short that we entered about a point off the all time highs looks like it too will see a decent bounce. Whether I close it to re-open at higher prices and keep the gains we have logged so far is really a matter of trading and opportunity, longer term it won't make any difference in my view.

Here are the charts and how I intend on approaching them..

 This 15 min leading positive in Transports is similar to what we are seeing today market wide and this is a timeframe that's associated with swing trade type moves. We have a base of at least 5-days so it can support a pretty decent move.

The 2 min intraday chart looks like transports should pullback, just as I posted in my last post in numerous other assets. Again the difficulty with only 30 minutes left is to see how strong this intraday divergence becomes. If it is strong enough to create a head fake move which would be a move below the $142.40 area in IYT, that's an ideal entry for long positions like the FAS or XLF calls / URTY or IWM calls. I'd also consider taking gains off the table in some shorts, again I still want the majority of my positions in line with the highest probabilities which means on the short side, but in certain assets in which we have strong gains, I'd consider protecting them and a move to a new head fake low would provide a good area to do that.

Market Update-Timing

There are several calls I'd like to enter or add to like XLF and IWM, there are actually quite a few stocks that look good, but for a bounce I'd rather use something that's going to represent the broad market and with some leverage (URTY or IWM calls, GFAS or XLF calls).

As I said earlier, "Don't Chase", however this bounce is now looking very strong for lift-of, something we haven't seen all week so at the same time, I don't want to miss it.

It seems we'll get a pullback starting now, whether this is just a pullback intraday or the move I'd really like to see, a head fake below this week's support for the various assets is what I think will be difficult to determine in the next hour (only having an hour).

As far as a pullback, here are a few of many assets suggesting it.

 Index futures like ES above have some nasty intraday negative divergences.

 FAS -3x long financials also looks to come down intraday, even though it looks ready to launch early next week.

XLF intraday also confirming.

QQQ 2 min looks like a stronger intraday negative leading divergence.

 VXX 1 min and 2 min below both have positives starting, they move opposite the market of course.

VXX 2 min

And the TICK trend has turned to a downtrend channel.

Still it will be difficult even with a pullback to tell whether migration has gone far enough to suggest  strong head fake move Monday like we see 80% of the time before a significant reversal or whether this is all we get.

I'll be looking for the closing charts as they tend to pick up where they left off just like today and yesterday. Thus I may throw some trade ideas out there very quickly, my main focus right now is on Financials and the IWM.

Trade Idea-Set-Up (Swing) XLF / FAS

XLF/FAS looks pretty good for an upside move next week.

On 8/1 I posted, Closing FAZ Long but I didn't open anything to replace it such as FAS long, I wanted to wait and make sure there was a strong trade there. Right now, FAS/XLF long looks like one of the stronger positions out there for a market bounce.

If XLF comes down a bit intraday I'll likely enter August 16th $22 calls, if not I'll probably enter FAS long (3x long Financials), I'll let you know either way before I do anything.

Take a look at the charts, this one looks strong.

 XLF 30 min with the last set up (distribution with a FAZ long), I closed that FAZ long (3x short Financials) right at the bottom on 8/1 (green box), since there has been a strong positive leading divegrence.

 This is the XLF 15 min chart showing essentially the same with a little more detail.

 The near term charts look ready to go, this 2 min is at a new leading positive high, I may not get the kind of call entry I prefer (  a head fake move below support), but all in all I think it looks good even on some intraday weakness otherwise FAS long will do nicely.

Just to be clear, the longer term or big picture in financials is very ugly, this is a 4 hour chart of FAZ (3x short Financials) and this is confirmation...

A 4 hour leading negative in FAS (3x long Financials).

XLF looks even worse.

As for FAZ, this is a trade I "could" stick with, but decided to trade around any potential draw down and since this base has formed, FAZ has seen a deeper leading negative divegrence,

 The FAZ 5 min chart I'm showing for timing as it has bridged the short and intermediate term charts so timing looks good for a move lower in FAZ, higher in XLF/FAS.

This is the 2 min chart, again for the timing.

I'll be setting some intraday alerts for XLF prices to come down a bit and likely go with August 16th XLF $22 calls. If premiums don't come down today I'll likely look in to FAS long instead, finally replacing the FAZ position, but you can probably see why I waited for confirmation as well as not having money at risk for a week in a flat market.

Don't Chase- Market Idiocy

The market is moving up like it's in a short squeeze on the news that Russia has ended its air defense drills and sent forces back to permanent bases, the stupidity is that it was announced Monday by Russia that these drills would end Friday, 4-day old news is what the market is moving on, thus I wouldn't make any hasty decisions based on that unless they are to your benefit.

Week Ahead Market Update

This is pretty early in the day for the "week Ahead" post, usually the data after 2 p.m. tells us a lot so I "may" have to revise it, but I doubt it.

Last week as the market was moving down and things were getting oversold (breadth), the Week Ahead post expected a wider base to form early this week and a bounce off that base. It seems we have a wider than anticipated base and I say that because there's improvement on the intermediate charts that represent a bounce of the scale that can move the market from deeply oversold (breadth) levels which it has been sitting at all week, to a sentiment changing move. This would be the first major pivot/trade set up since the short from late July. I typically want to enter my trades at these major pivots and then let them work until the next one sets up. 

You've already seen the SPY charts, in this update I think the IWM best represents probabilities, but I'll show you the Q's and SPY as well.

First intraday charts of the Index Futures...

 ES looks weak intraday, but you may recall yesterday the 60 min charts I posted that all looked like this week's consolidation had been accumulated and likely a bounce still, just with a bigger base which means it can support a larger move.

Intraday though I don't expect much strength, although these charts can change quickly, they are pretty ugly right now.

NASDAQ Futures intraday also not looking great.

And Russell 2000 futures intraday.

Based on these charts, "if" I had IWM calls that were expiring next week rather than today, I'd still likely close them when I did and look for a new entry , still calls , but at a better price.

This is the IWM 15 min chart, it has improved since yesterday with a new leading positive high added (white vertical arrow). As you can see, since the last large divegrence (negative) sending the market lower, this is the first decent set up for a swing+ trade.

 While the 1 min chart "can" move quickly and change intraday character and thus where a new potential entry is added or if it is added, the 2 min charts look like we'll see some weakness moving forward today, maybe in to early next week,  it is this weakness that I want to use to re-enter a call position, likely in the IWM, but it will depend on what looks like the best set-up at the time.

The QQQ 10 min also shows the last good entry (short) for a swing + trade and this being the first chance for a new entry on a basis that is probably worth trading. Note the improvement in the Q's as well, this typically happens close to the start of the move which is why this week's (or at least the last 2 days) readings have been so frustrating.

QQQ 1 and 2 min are just about in line intraday and also looked to be in the best shape of the Index futures.

SPY 10 min positive, obviously the negative divegrence was larger and tells us something about the longer term market probabilities, but this is the first decent set-up. I want to trade divergences like the negative at the left and let it work until I see the next set up, trades in between are difficult as the market is responsible for about 2/3rds of any given stock's movement.

2 min intraday the SPY also looks to see some near term weakness.

I'll keep an eye on intraday charts in case anything changes,  but ideally from here we get an ugly intraday pullback that can be used to enter a leveraged long ETF or call options. I still consider this speculative as the larger trade and best use of any bounce is to short in to price strength for long term core positions.

That's what I see as of right now so I suspect that we will be seeing a stronger bounce next week so I want to look for the right entry for something like the IWM calls closed earlier.

SPY Full Update

I was going to just give the intraday-local- update, but I think it's essential to plan ahead and to do that you have to have an idea of what's ahead and I know most of you have seen these charts forward and back, but it's worth remembering what we are up against to motivate and get us taking things seriously as market activity like this week's consolidation (probably base) can lull us in to complacency.

The daily SPY chart shows a bearish Ascending Wedge, I do not consider this the best measure or price pattern of the market considering underlying trade, breadth, credit, etc, I consider the Russell 2000 much more appropriate and more in line with when breadth , credit, 3C charts, etc. all really declined and the R2K is in the late stages of a H&S top, already past the right shoulder's top and heading toward the neckline which will put us in a bear market regardless of the financial media's definition.

Typically a price pattern like this breaks to the downside before reaching the apex of the wedge, however in recent years we've observed these being head fakes like every other major price pattern, typically a break below the wedge attracting new shorts and shaking out weak longs and then a run up and over the wedge (yellow) on a head fake move that forces shorts to cover and sends longs in to a "New High" buying frenzy. This sets up a large bull trap before price moves to a new lower low as a failed breakout results in a fast and powerful reversal.

RSI is divergent here for those who like more traditional indicators and volume is up on the break of the wedge.

I can't say the market has the ability to make a move above the wedge as every one of the last few bounces we have seen since July 1st have shown exceedingly weak tone; this is more the type of move we would have seen 3 months ago, I just don't know if the market can hold together such a move, but if there's any chance of it, I suspect it will come off this week's consolidation/base.

 The 10 min intermediate SPY chart shows a clear distribution process at recent highs and a smaller, but still respectable positive divergence over the last week, the bigger the base, the more of an upside move it can support.

The SPY is the only average that has a positive divegrence all the way out to the 60 min chart, as weak as it is, it's still there.

Once intermediate charts are in place we look to shorter timeframes for timing. The 1 min has shown recent positives , yesterday especially for the SPY.

 The 2 min shows the same as well as positive divergences at each of the pivot lows in the range.

There's very little distribution/negative divergences on this chart during the consolidation area which puts probabilities in the corner of this being a short term base for the market to bounce from as we expected last Friday moving in to this week.

The 3 min chart has less detail than the other two, but a cleaner trend, it is clearly in a relative positive divergence.

The 5 min chart is starting to bridge the gap between the intermediate 10 min positive and the intraday timeframes, this chart showing a strong positive divegrence would usually be taken as a timing signal for a move to begin.

However, don't forget the big picture as represented on this 4 hour chart, this kind of damage can't be undone in a week or even a month of positive divergences, this is some of the worst on record for the SPy/SPX.

Speaking of which...

 Here's the SPX/3C going back to 2000. It's amazing how large these former divergences were before our current one that dwarfs them. You can see the 200 top, the 2002/2003 bottom, in line on the 2003-2007 rally, the 2007 top and the first negative after QE ended and no new program was announced until Jackson Hole in 2011 and the divegrence since then. Also note the near straight line march in price, this is VERY unusual for any market, this looks like a short covering event, but this is a 5-day chart. If you look at the F_E_D balance sheet expansion over the period it has strong correlation with the market's movement, The current leading negative divegrence is the largest by far, just like the current Dow's negative divegrence is worse than 1929.

 My Trend Channel set to 6-days has held the 2013/2014 rally without a single stop out, currently the Trend Channel stop is $191, about a point from where we are now.

Also note the long term RSI divergence at the bottom.

The Trend Channel set to 3-days to capture more recent tone of the market has held almost all of 2014 with the exception of early 2014 weakness. This Channel has already called a stop out which if I were a long term investor, I'd have taken and moved to cash or some other safe haven instrument, I would not be long the market any more in any way. Also note the RSI divergence and how sharp it is for July/August.

In my view, short term bounces (if they have signals that are able to stand on their own legs) can be piggy-backed, but it should be understood what they are and what they will not become,  the bigger picture is to use those moves to exit longs or enter shorts. For most position we have already put in place as core short positions, I'm taking a hands off approach. Like Jesse Livermore said, "Don't give me timing, give me time" which is along the lines of his recollection that many traders were right, it wasn't being right that made him the big money, it was "sitting", going on to say a trader that can be right and sit tight is a rare thing.

Closing IWM Aug 8th $110.50 Calls

These expire today and I'm probably about as close to break-even on them as I'll get. I'd usually use a longer expiration, this time I didn't, broke my own rules, but should come out of it okay, even though had I followed my own rules and closed them earlier in the week, I'd have had a nice gain.

A.M. Update

I specifically didn't want to write anything this morning before the market opened just to see what the open would look like after this post from late yesterday which is a 3C concept which has held up well in the past, Should See A.M. Strength Tomorrow A.m.

While the IWM is only up +0.35% right now, it is early, but what's more interesting is the -.70% plunge in Futures (ES) overnight after US airstrikes (which must have been fully priced in by last night) were announced and took the market lower.

ES from last night to present (1 min), dropping ES .70%, but shortly after the European open...

 It appears the USD/JPY which broke below the psychological barrier of $102 was ramped higher just barely back above $102.

However...

 As mentioned yesterday, 3C divergences tend to pick up where they left off, really the underlying trade picks up, it's as if the day crew puts down what they are doing at the close and the night crew makes sure that things stay in place for when the day crew comes back on shift and resumes what they were doing. Even after such a heavy overnight decline in futures, the IWM gaps up in the direction of yesterday's closing intraday leading positive divergence

 So far the 2 min chart is still in line, it was late in the day yesterday when some positive divergences (after a day of whacky, unusable signals persisted nearly all day as price acted very much like the signals or lack of them) so it would take a little time for divergences to strengthen and migrate to longer term charts.

The SPY which was leading positive at the close also gapped higher,  the point is not the "strength", it's how much futures declined overnight, yet the market picked right back up where 3C had indicated at the close.

 The SPY put together the best looking intraday divergence yesterday, positive.

In any case, there are a number of geo-political items from Ukraine considering cutting off Russian energy/gas transit lines to Europe to Putin "tweeting" about de-escalation (which has always been a play for time to set up his pieces on the battle field or in the Duma).

The fact is protection is bid, Bunds again saw a strong bid as Germany is becoming the focal point or barometer of Europe as it will feel the greatest impact. Think about it, the EU and its free trade zone basically benefit Germany more than anyone else and who seems to call the shots when it comes down to a crisis like Greek default? Germany.

US treasuries are also showing a bid or flight to safety as the Ten year is yielding 2.38%.

Of course it's an op-ex max pain pin day (even the weeklies) which typically means price hangs around Thursday's close until about 2 p.m. at which time price can randomly do whatever it wants, but we tend to get some of the best 3C information of the week the last two hours of the day as most option contracts are cleaned up by about 2 p.m.

As far as current indications, S&P and NASDAQ futures look much weaker on the intraday 3C chart and Russell 2000 futures look like they have a slight lag, but are close to in line.

More on the way....