If you wonder why technical indicators gave so many bad signals above and beyond the fact that Wall St. uses the dogma of Technical Analysis against traders as they refuse to adapt, just look at the S&P's performance during QE or similar operations or more specifically look at the market's performance between operations, there's an eye opener!
I mentioned that to mention this; before QE, 3C timeframes were VERY predictable (this was also before HFTs dominated the market, but that seems to have less effect as the very nature of their speed is built more for scalping, arbitrage plays and front-running rather than position trades (you don't need to be able to trade in micro-seconds for a position you plan on holding for 6 months).
One minute charts were market makers/specialists moving the market intraday, 2 and 3 minute charts are essentially the same. At 5 mins we have the first or fastest time-frame that picks up institutional actibvity intraday (although that can be seen on longer term trends of faster time-frames like 1-3 minute). A divergence on a 10-15 minute chart was almost always a clean swing trade, in fact in an experiment after the July/August 2011 plunge, there was a range bound market from early August until early October. We used 5-15 min charts and traded EVERY swing up and down with 2x leveraged ETFs and hit everyone for a portfolio gain of +85% for the period which is normally a very difficult market to trade or what most traders find to be a meat grinder as few trades lasted more than 3-5 days. In addition to calling the August bottom 2-days ahead of time, we caught 9 swings with 100% accuracy as well as calling for a new head fake low to be followed by strong rally (which came October 4th).
*Note this was also a period in which there was no F_E_D accommodative policy in effect.
The 30 and 60 minute charts typically were very good at calling intermediate move such as the 2008 USO decline of -80% after we had gone through the G.W. Bush-era oil boom.
As the F_E_D unwinds QE via the taper, these charts are once again becoming more and more accurate or perhaps timely is a better word as they have shown underlying trade with uncanny accuracy as we recently learned when Bank of America/ML released this infographic of the net positioning of Hedge Funds, Institutional Money and Retail.
The 3C divergences and the velocity of them matches up nearly perfectly with Institutional "Net Sellers". Look who the net "Buyers" have been... Once again, retail will be/is holding Goldman's bag.
In any case, I won't enter or exit a trade without strong, objective evidence which has led to periods of inactivity, most recently an approximate 2.5 month period just after the February Rally in which we had no good signals for several months and our trade ideas fell off by 90% by the end of the period...
I just wrote about "Patience" Monday night, which dovetails nicely. I'm always learning something new from 3C as the market changes, but one of the most important lessons I've learned this year is to wait for the signals, if they are not there, there's probably a good reason and missing a trade is a lot better than taking on a low probability trade. It took a while for me to learn to take losses and be happy about it (before they turned in to catastrophic losses), it also took a while to learn (and I'm still fine-tuning the lesson) to understand that missing a trade is not the worst thing in the world, in fact it's no bigger a loss than opportunity. However, as I said earlier, "It's a lot easier to keep it than to make it back" with the example of a 50% loss requires a 1005 gain just to get back to break-even.
With all of that in mind...I've shown some bases forming and it appears we were right on these lateral trade areas being bases. Last Friday's (8/8/2014) Week Ahead Market Update said the following,
"Last week as the market was moving down and things were getting oversold (breadth), the "Week Ahead" post (8/1/2014) 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....
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.
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." 8/8/2014 1:30 p.m.
So our forecast from 8/1 was for a wider base to be built which was actually wider than originally anticipated. Friday's (8/8) Week Ahead Market Update forecast was for early week intraday weakness that could be used to enter some bounce longs and a move up in to this week off this base...
Here's what I've noticed about the market thus far today...
Yesterday's late day positive divergences in the 1-3 min timeframes which developed very quickly, never made it to the 5 min timeframe which is essentially the line in the sane, unless there are very good reasons, I rarely take a trade without the 5 min charts confirming as the concept of 3C migration would mean a 5 min divegrence shows institutional money is active and probabilities are on our side for a short term trade.
Last night the late afternoon divergences were described as a late day ramp attempt to unchanged and/or VWAP.
Today...
Monday and today both saw similar price action right as Europe closed.
In fact, none of the carry crosses moved after the European close (USD/JPY, AUD/JPY, EUR/JPY)...
The "Short Squeeze" has been virtually a thing of the past. Earlier this year we had short squeezes that lasted weeks, since July 1 I can't recall one that has made it through an entire day, although the opening squeeze has been quite common.
In fact, take a look at the MSI on the day...
You may recall what happened the last time the MSI underperformed the market...
What is interesting as most of the averages sat near an ideal selling area of VWAP...
The IWM did end the day with several decent looking positive divegrence, but the overall look of multiple timeframes as well as the other averages would have me enter nothing longer than a 1-day (enter today, likely close tomorrow) position, but even at that, the risk just looks to be too high to even consider it.
Also, as pointed out earlier today and this morning in the first post of the day while the market was in an "apparent" risk on mode off our base, bonds were bid essentially creating a risk on and flight to safety trade at the same time.
However this flight to safety action in bonds started well before the horrible Retail Sales print at 8:30, you may recall as was the case with so many assets at the European pen until 5:30 a.m., 5, 10 and 30 year treasury futures were under accumulation and made their first move up not at 8:30 on retail sales, but 5:30 a.m. after 2.5 hours of accumulation.
High Yield Credit has been leading the market and supportive of a bounce as pointed out for over a week , yet underlying action in HYG is getting quite ugly, not at the point in which I'd call it a short, but at the point in which the near term resolution of price is becoming plainly obvious.
In fact, considering HY Credit's underlying performance or lack thereof, Treasuries bid, the only asset seemingly not in sync would be VIX futures, but notice I dais, "Seemingly",,,
Internals...
We've already seen S&P Futures at 40% below average volume 2 consecutive days this week, today marks the third, but at half of average volume (50%). As a reminder because the lost art of volume analysis is going to once again be front and center as the Bernanke put is completely removed from the market, "Any move higher in price on fading volume is highly suspect" and without the F_E_D to backstop the market, these concepts are going to be very important again, but I fear few traders of the "new normal" have any idea what volume analysis is. If I had only two indicators on my chart, they'd be candlesticks and volume.
The Dominant Price / Volume theme today was co-dominance between Price Up/Volume Up and Price Up/Volume Down. The first is the most bullish, but often leads to a 1-day overbought event with the next day closing lower. The second is ironically the most bearish of the 4 relationships ad tends to have a 1-day overbought condition attached as well, but not as strong as Close Up / Volume Up. Being it was a co-dominance, I don't give it much weight in forecasting.
Of the 9 S&P sectors, all 9 closed green with the recently defensive acting Healthcare sector leading the way at a gain of +1.21%.
Of the 239 Morningstar Industry/Sub-Industry groups I track, 191 of 239 closed green, this is a FAR cry from last week's readings which were polar opposite and the main reason (other than the 10-15 min positive divergences) I expected a true, "Oversold" market bounce.
As far as the oversold breadth condition which was worse than a full fledged bear market, new high/new low ratios have returned to a more normal state. As far as momentum stocks trading 1 or 2 standard deviations above their 40-day m.a. there was very little improvement which fits with today's MSI readings vs the SPX. The Percentage of NYSE stocks trading above their 40-day moving average barely budged today from nearly 33% yesterday to 36.5% today, still a small move considering 55% points were lost over the last month. Advance /Decline lines are moving as you'd expect on the day, but are no where near repairing the damage of recent. The Russell Indices being the most recent victim with the NASDAQ Composite being the most dislocated and longest running divergence.
I'd remind you that even with the slight improvements the last several days, the breadth indicators that I've been watching for 15 years and only seen them in this condition twice are looking as bad 2007's top.
For now, unless something is obviously standing out, I think Monday's message of patience is still the way to go, we have plenty of opportunities and plenty of positions already in place, now is not the time for a mistake.
*As of this moment, the intraday 3C charts for ES/NQ and to a lesser degree, TF are all leading negative, however this is not a time frame I generally trust overnight unless the trend continues. I'll check on it later tonight.
