I'm sure you know who said that about a century ago, I've posted it enough times, but it is a truth that can only really be understood once you've mastered patience in the market and the market is no friend of patience. We are bombarded with advertisements, interviews, trading systems, hot tips, everything that will keep you trading and keep money flowing in to the accounts of those who profit from a lack of patience or overtrading. In fact a study found that over the long haul, the two biggest contributors to retail traders' losses were overtrading and chasing (whether that be hot stocks, stories of the day or even in the case of the 3 areas I'll enter a short in a H&S pattern, chasing technical dogma that Wall St. turned against you years ago).
Trades like "Z" are not my favorite, in fact I don't care much for options trading at all (although you might not know that by some of the trade ideas). For me options are simply a tool, not a trading system. I'd say options are much like a tool for getting in to a tight place, there may be a really important thing you need to do (or a really nice looking trade set-up), but the only tool that will allow you to do that is a specialized tool to fit in small areas, that's sort of what options are for me.
In any case, the market update this afternoon, Intraday Update, in which I showed some improving 1 min charts and suggested ....
"As far as I'm concerned, there's really nothing to do here, but I did want to show you what is going on.
On some of the 1 min charts it looks like a possible bounce in to the close, this is why I felt to fade today's upside move was too speculative, but I don't think that changes the original story line of a continued pullback...Or for that matter, a continued move higher after a pullback and certainly not the bigger picture move lower after that."
Here's how that intraday move resolved and how we sit going in to tomorrow which is still the same story line for early trade this week, "A pullback followed by a move higher off the 1 week base" (This is why I closed the XLF calls, took the gains and will wait for a new entry at a lower price with less risk)...
This is the chart from the Intraday Update from this afternoon...
The IWM 1 min intraday chart went from a deep leading negative divegrence to a more positive posture that "could" have pivoted higher creating an end of day positive divegrence that would likely rally in to the close, at the point this chart was captured, that upside pivot had not happened so it was possibility, but not one that would interfere with a continued pullback that would likely at least fill the gap as 2, 3 and some 5 min charts were still very negative intraday.
The resolution led to this small bounce before failing and leading negative to a new 3C low with a very small/short move in price, thus there was nothing really to do and the IWM ended the day retracing 50% of the intraday highs.
This is the same chart as above from earlier today right up to the white arrow. Had 3C made a new higher high, we would have likely seen a strong close, rather that small improvement intraday led to the move in the white box before seeing distribution leading to a new 3C leading negative low on the intraday / 1 min chart. Other than take very short term gains today, there wasn't much to do.
Very short term (as in tomorrow) probabilities show a continued short term pullback, this is the same pullback I mentioned Friday in hoping to enter some short term leveraged long positions for a bounce this week.
By the time the market is ready to make good on an upside bounce, 5 min charts like this should be in positive position. This "could" all happen tomorrow, finish a pullback, put in a reversal process and positive divergences, this is what I'd be looking for before entering an XLF, QQQ or IWM call position which would be short term in nature as well.
I suspect that with the size of the base area and the 15 min divergences that a bounce would be good for at least a swing trade which I prefer to use at least some leverage with like URTY, TQQQ or FAS, however this is a little different situation as I'm maintaining short position trades as the market is getting a bit more volatile and unpredictable so I want to be able to hedge those (although looking at the bigger picture no hedge is really necessary) as well as make a little extra $ in the process. The IWM calls from last week were hedging the SRTY short position by a ratio of about 5:1 at the time I knew I should have closed it rather than let it run as long as I did.
This 10 min QQQ chart is a pretty good representation of the wider base we were looking for last week and the improving positive divegrence as the base widened.
QQQ 10 min (swing+ timeframe) with about a week+ base, wide enough to support a decent bounce with a decent positive leading divegrence. Any short term call positions entered on a very near term pullback, would be to play the upside bounce from this base/divergence.
I don't believe this is an oversold bounce in the traditional way of looking at oversold such as Stochastics, RSI, MACD, etc... I believe this will be an oversold bounce based on how bad market breadth is with the Percentage of NYSE stocks trading above their 40-day moving average as low as 20% last week which is (in many cases) worse breadth than what you see in a full-blown bear market.
When I talk about "Keeping your eye on the prize" and "What a bounce like this is really useful for", I'm looking at the longer term and by that I mean Primary Trend. For the last 5 years we have been in a primary bull market trend, I believe that we have already topped, but because of the F_E_D induced/Bernanke Put, Pavlovian, "Buy the Dip" mantra... it's not easily recognizable from most of the averages. I think the IWM/Russell 2000 is the closest to reality and I say that based on what Leading Indicators are doing vs. the IWM, what market breadth has been doing, what 3C charts have been doing, etc.
So the truly patient longer term trader/investor may just choose to ignore all of the short term calls and even bullish swing trades and just wait for a bounce to create opportunities to enter short positions and some select long positions at better prices and significantly reduced risk. For example...
IWM H&S top (these rarely look like the textbook, however volume confirmation can give you an excellent idea of whether it is real or not). Note the stronger leading negative 60 min negative divegrence in 3C as the pattern unfolds. During this time market breadth has fallen off a cliff, High Yield Credit has deteriorated beyond the point of repair, numerous other H&S tops have formed in bellwether stocks, etc.
When people ask me if I'm bullish or bearish the market, the answer depends entirely on what timeframe we are specifically talking about. Unlike other types of analysis in which targets are forecasted in advance, I want to always read the message of the market and while I may believe a bounce off the week+ base with 10-15 minute positive divergences is very high probability, I will always change my analysis/forecast based on new information rather than stick with rigid targets based on a formula, the market is simply too dynamic and we are at the end stages of one of the most unique markets we have ever seen (F_E_D intervention & Balance sheet expansion, QE, Zero Interest Rate Policies, the unwinding of all of that, a global economic crisis that in most countries never recovered, traders lulled in to believing this time is different with record levels of margin and investor negative net worth, out of control derivatives/re-hypothecation, a financial sector that I believe is at least 1/3rd of trillion dollars short collateral , and on and on).
To give you some idea of what my current thinking is as far as trends/timeframes, I'll use this chart to show what trends I expect, however none of these targets or estimated timeframes should be taken as analysis, just example.
I'm using our current position from the right shoulder decline of the IWM's larger H&S price pattern based on what we can observe from 3C charts, Leading Indicators, Breadth, etc.
Here's the base we expected to form just a little over a week ago, the 3C divergences during this base have been posted numerous times and there's one above (QQQ 10 min). We started a move up today which I expected to see early weakness as of Friday's "Week Ahead" and "Daily Wrap" which started today with a 50% retracement from intraday highs. at #1 we have the expected very near term pullback and reversal process, this is where I'd enter any call positions (speculative) or swing trades (which I prefer using a market average like the IWM with leverage like URTY - 3x long IWM). While there will undoubtedly be smaller/short term surprises along the way, the general idea is for the base to send the market higher along the lines of a swing trade. At #2 we have the most important part of the analysis which would be the start of the reversal process back to the downside, THIS IS WHERE I'D WANT TO CLEAN UP LONG POSITIONS AND START ENTERING ANY REMAINING SHORT POSITIONS (for instance, I want to replace the FAZ long that I closed near the lows on 8/1). In my view, participating in the first leg is insignificant, if you have the time and risk tolerance it's probably worthwhile, but entering shorts at #2 is really a last call as my first and second favorite place to enter shorts has already passed and even at this entry (unless the bounce is significantly higher), you are not getting as good of an entry or as low of a risk profile as you would have entering at my second favorite area which would have been the top of the right shoulder on July 1. Based on longer term charts, breadth, Leading Indicators, etc. I believe the next leg will be a lower low possibly breaking the IWM's neckline.
The point about patience is, at this point there are essentially two areas to take action, the trend in between is management of those positions, while there may be some trades that set up during the trend in between, entering market positions is essentially chasing the trade rather than letting it come to you and increasing your risk while decreasing your reward. These are the two major areas where I see potential for action over the next week or two (of course any new data that changes these views will be posted). If I had to guess at some possible areas for #2 bounce targets for the major averages (remember, Wall St. created bounces are always there to serve a purpose. In the past they were sentiment changing moves that were quite impressive, the last 3 bounce attempts saw immediate distribution)...
Whether we slice through the 200 on the next leg down or not, there should be some short term support and loitering at the level.
The Russell 2000 met resistance at the 200, 100 and 50-day so that will be a first target and likely lead to some short squeeze activity. There's resistance at "A" and the psychological level of 1200 at "B", although this seems to be a reach.
Getting back to today specifically....
Despite all of the geo-political chaos today, the market still managed to gap up which is why I think the headlines are convenient for price moves when Wall St. needs them, but otherwise the market seems to care very little about geo-political events (Iraq ISIS insurgency, government/army coup, escalation with Russia/Ukraine and Israel/Gaza wasn't enough to hold the market back from gapping up). The argument that the F_E_D is dovish after the Vice-Chair's speech today being the reason the market up doesn't hold that much water either after intraday action, however our forecast from Friday which had no privy to any of these events was pretty much right on, point being, underlying action and Wall St's cycles are primary and geo-political events are secondary. And all of this on S&P Futures volume that was 40% below average.
The USD/JPY correlation with Es gave out by noon, around the same time the intraday negative divergences were growing sharper. However the USD/JPY still leads the market as does HYG as shown earlier today both on the day and since 8/5, both suggesting the bounce from the week+ long base is still on track, several other leading indicators suggest the same. In the very near term (as in tomorrow), the continuation of the very short term pullback looks probable not only from a 3C perspective, but yields tend to attract market prices toward them and the 5 and 10 year yields are both slightly lower than the normal correlation suggesting a quick dip for the SPX so I think our very near term and slightly longer and well as long term forecasts are on track.
There was a Dominant Price/Volume Relationship in all of the majors except the Dow, it was Close Up/Volume Down, 61 of 100 NDX, 801 of the Russell 2000, SPX 213 of 500.
This relationship is the most bearish of the 4 possibilities and often results in a next day close lower.
Six of nine S&P sectors closed green or marginally green, Utilities were in last place with a loss of -0.36%.
Of the 239 Morningstar groups, another sizable reading of 208 of 239 came in green which has been the recent trend (last couple of days) which is in contrast to a near mirror flip-flop several days previous to that.
The NYSE TICK Index spent the day trending down from +1250 readings to hit some -1250 and then back to +1000 by the close. Looking at professional sentiment and HY credit, I have little doubt we'll see our upside bounce this week so I'll be looking to add to the "Z" calls in either XLF or one of the averages like IWM.
Recent SKEW readings have dropped way off, I suspect it's a combination of lower prices and some hedges being taken off and an expected bounce (also some hedges being taken off. We are still in the 127 range, but below the elevated range of 132-143.
Among breadth indicators, various multi-week High/Low indications have recovered and the PErcentage of NYSE Stocks Above Their 40-day Moving Average is Up Sharply from last week, but still in a major divergence with the SPX, this is one of the oversold breadth measures I have been looking at.
The breadth indicator added 6 percentage points from Friday, but is still very divergent vs the SPX. This is what I expect to see bounce, g\however I doubt it will recover to a normal/healthy level as breadth has been warning all year.
As mentioned, various breadth indicators look much better, but still oversold. I suspect our bounce will have less to do with traditional targets and more to do with breadth readings moving out of the deeply oversold condition they have been in.
We have a pretty well roughed out plan, now it's just about patience and confirmation.
