Daily Wrap

Again, another day in which the talking heads' narrative has nothing to do with market reality. When the market moves by chance with some news , economic or geopolitical event, they trumpet that as the reason the market did "XYZ", however few seem to see the simplicity of a base set up almost 2 weeks ago and the bounce we've been expecting since about that time which is playing out now. The message is quite clear, Wall St. controls a good portion of market movement in the short term, how else could we forecast last week's base widening, this week's early intraday weakness followed by a bounce off the base almost a week before it happened?

This is obviously a distribution event as most bounces have been, but this one is much more like the last 2 and nothing like previous bounces from the last several years that were extreme sentiment changers.

You don't have to dig deep to see that this is a selling event even though at this point it's really not any different than a normal run of the mill corrective move, although with a base like it has and 10-15 min positive divergences, it should be a lot more than it has been thus far.

IWM daily, the bounce is no different than an ordinary correction at this point.

There are clear signals that this is probably one of the last really good positioning short entry opportunities we get, but first we have to finish the process started with the base.

This Monday's Daily Wrap... I posted some probable price levels we could expect from this bounce, for the S&P, a couple of those were taken out today.

Those levels include the 50-day expo, 22 day simple and hammer support from July 10th. The SPX is testing right at the 50-day simple moving average today.

For the Dow...

That included the light blue 100-day expo, trendline resistance which is yet to be hit and of course the psychological magnet of 17k.

For the NDX...

Targets included the light blue 22-day simple m.a., the gap at the orange area and of course the psychological magnet of $4000.

The R2K included...

This cluster of moving averages (50 expo, 100 simple, 200 simple) which it has had a hard time with, the 50 simple is above, about halfway between here and trendline resistance, not a very strong showing from the R2K which only reinforces my decision to leave core short positions such as SRTY open.

The R2K is still quite a way away from even my example "forward expectations" which wasn't an estimate of where the R2K would move to, just the 2 important pivots with #2 being far more important than #1.

While pivot #1 was almost exact, we are still a ways away from pivot 2 around $116.20 (IWM) as we currently sit at $113.59... Another reason taking sub-optimal trades, despite probabilities, is not wise.

Transports which we have a short in and are looking to add to, were expected to bounce as posted last week, Transports To Bounce. IYT is now about 3.5% off the recent lows and should be near an area where we can add to the short or enter a new one soon.

The bottom line is that so far, for the most part we are pretty far from some of the higher end target areas and right around the minimum targets as this bounce has been pretty weak thus far with a lot of distribution in to anything resembling higher prices.

The most reliable way to tell when we should be looking toward entering shorts (as early entries while the bounce process is still in effect will likely result in draw down and sub-par entries as about 2/3rds of any given stock's movement is dependent on the broader market) is to simply watch the migration process of negative divergences and look for the base's positive which is mostly 10-15 min positive divergences, to fail and turn negative .

For those not familiar with this process, once the base's positive divegrence has been put in place (in this case on the intermediate 10-15 min charts), any new divegrence like distribution will start on the fastest charts like 1 min and if it's strong enough or as it gains strength, it will migrate to the longer timeframes like 2 min, 3 min, 5 min and so on until the original base positive divegrence itself starts to turn negative, at that point we'll come back to the intraday 1-5 min charts and look for the strongest divergences (again migrating through the timeframes) for a timing indication. We also look for a reversal process as 90% or reversals are an actual process like a rounding top or double top and are rarely a reversal event like a "V" or sharp shaped reversal,  this has a lot to do with the size of institutional positions which can't just move from long to short in a day like we can without driving price against what are often billion dollar positions or without attracting the predatory HFTs like "Iceberg Hunters" which ping for the iceberg orders above the surface knowing the rest of the large order is beneath the surface like an iceberg. Once they identify an iceberg they front-run them using their speed, costing the institutional entity a lot of money in the process.

One reason retail traders fail to understand the way the market truly works is because they look at the market through their own experience in which a trade can be opened and closed in many cases within a minute and suffer no damaging effects. They fail to understand how the large orders of professionals demand a different approach. I often say we are like jet skis that can turn on a dime while smart money is more akin to an oil tanker that takes a mile to come to a stop.

Updating where we are thus far in the process, I'll post the original base / positive divegrence and how far the migration process has come and in some cases, the actual base divergences is already starting to show signs of distribution and thus much closer to a reversal or "Pivot 2" as shown above, which is where the larger, important trade entries are for us.

 SPY's 10 min positive divegrence and base area which is still "in line" at this time.

So far the SPY has migrated to the 5 min chart with increasing negative divergences as higher prices are sold/shorted in to. The next step for the 5 min SPY is to move to a leading negative divegrence at which time the 10 min chart should be starting to go negative.

 QQQ 10 min positive/base which is also still in line.

However the 5 min QQQ chart has turned from a relative negative divegrence to a stronger leading negative divegrence so it's likely the Q's start to show some signs of the 10 min chart breaking down soon.

The DIA 15 min positive/base is now showing the first relative negative divegrence, from here it should only deteriorate more.

 DIA 10 min chart negative has bled through to the 15 min above.

IWM 15 min positive divegrence is also starting to show the first sign of a negative divegrence with a relative negative in place.

However, unlike most of the other averages, short term IWM charts are positive which is likely a function of the lagging IWM trying to catch up.

As for signs that all is not well, today and really since 8/13 when Retail sales came out (but also the same time we had the first real move up in the broad market), Treasury Yields which move opposite treasuries and generally with the market have seen some nasty divergences, for example today the 30 year yield hit a 15 month low of 3.18% which means that while the market "appears" to be in a risk on mode, the bond market is clearly risk off or a "Flight to Safety".

About a month ago I posted about the 10 year benchmark yields diverging from the SPX and how it looked a lot like the 2007 top, not long after as you can see (these are 30 year yields in red) the market broke down from a bearish ascending wedge. While many economists believe an inverted yield curve must come before a bear market or recession (because it has happened 6 of 6 times in the US since the 1950's), there's a lot of evidence to show that's not true. Over the last 20 years Japan has had 7 recessions, only one have an inverted yield curve prior to the recession.

What this does tell us though is that while stocks rise, the safety of bonds are being bid up, today in specific, the 30 year hit 15 year yield lows. The 10 year closed at 2.4%. You may recall how we use yields as a leading indicator as stocks tend to be drawn to yields, so a lower yield vs the market tends to pull the market down to reversion to the yield.

Dr. Copper is also not buying in to this move...

SPY vs. JJC (red)

As for the enablers of the market, I already posted on the deterioration in HY Credit, HY Credit is Starting to Give Out , the USD/JPY was also in control today until about 2:30 at which time the market moved up without the carry cross.

Our Most Shorted Index is underperforming the broader Russell 3000, so much for the days of a bounce/short squeeze...

MSI (yellow) underperforming the R3K.

The closest we had today to a Dominant Price/Volume Relationship was primarily in the NDX and SPX, both Close Uo and Volume Down which is the most bearish of the 4 readings, it doesn't create the same 1-day overbought as Close Up/Volume Up, but it's telling us a lot about the quality of the move. In fact, we had 2 days this week with SPX Futures volume 40% below average volume, yesterday it was 50% below average and today was the worst day of the week with S&P Futures 55% below average daily volume.

Interestingly 7 of 9 S&P Sectors closed green, but the two top leaders were both defensive, Healthcare +1.18% & Utilities +.92% and 194 of 239 Morningstar Industry/Sub-Industry groups were in the green today. Again, Utilities and healthcare related sectors were in the top 10.

The Percentage of NYSE Stocks Trading Above their 40-day Moving Average moved up to 41.29% from 36.59% today, I'd say we need to be somewhere at least around 50% before we can start considering the market out of the deeply oversold breadth condition which initially led me to believe we'd see a bounce,  we saw readings as low as 20% which are worse than most bear market readings.

One of the most surprising breadth readings during this bounce has been the NASDAQ Composite's Advance/Decline line's inability to recover.

COMPQX red vs A/D line green.  This should give you some idea of how horrible the breadth situation truly is out there and what a ginger bread house this market is.

Other than that, breadth looked pretty much in line with price action.

Tomorrow is a monthly options expiration Friday so we should expect to see a max-pain market pin which usually is somewhat close to Thursday's close. The pin is usually in place until about 2 p.m. as contracts are cleaned up and after that the market tends to move as it wants,  however this is the best 2 hours of the week for 3C information and usually gives us a good idea of what to expect for the week ahead, the last 3 Friday's forecasts for the week ahead have been almost dead on so I'll be looking for that.

Again, while I don't pay too much attention to intraday/1 min Futures charts overnight, we do have some leading negative readings in Index futures.

NQ/Nasdaq 100 futures are leading negative as are TF and ES. I'll check in on these later tonight and see if it's something that is turning in to something that needs to be watched.

Otherwise, I think the Tuesday Daily Wrap that started out with "Patience" is right on track for the week. I'd much have preferred to be in some positions making some money on piggy back trades, but I'm not taking unnecessary risks for small gains when we are so close to an important position entry point (The R2K has only moved 0.11% since Monday and 1.05% since Friday's close, not exactly the kind of bounce gains I was expecting).

Lastly, as we moved toward a base/bounce I noticed some inflow (small) in to HY credit which I figured was for a bounce and I noticed SKEW dropped below the elevated zone which I thought the same of, however the one thing that has been most important when looking at and forecasting SKEW is not just the number/reading, but the Rate of Change in the readings which have suddenly started moving fast again... Take it for what it's worth, but an elevated SKREW means someone is paying up for deep out of the money puts.

SKEW drops from highly elevated levels just as our base forms and now is moving to the upside very quickly, once again at red flag levels tonight.

HY Credit is Starting to Give Out

Other than follow the divergences in the averages until they start chewing away at the base divegrence (mostly in the 10-15 min range) the other things I can look at are the flight to safety trades like Treasuries or flight to protections like divergences in VIX futures and how SKEW acts, I can look at the enablers like HY credit which we have noticed has been leading the market since the base was forming making it pretty clear that some bounce was coming.

Well those enablers are giving way now in a more serious manner which I take as, they will soon be gone from those positions as they don't want to be caught in them when the market cracks back lower and as those enabling assets crack, the market has less and less support.

Looking at the biggest enabler and leading asset for the market, HYG, High Yield Corp. Credit...

 SPY (green) vs HYG (red). To the left the two are moving in sync, just before that HYG was leading the market lower. From the formation of the base that we are currently bouncing from, HYG has been leading the market most of the time (it tends to be one of the biggest manipulation levers anyway other than the carry pairs).

However all is not what it seems in either the market or HYG.

 This is the intraday trend in HYG which has deteriorated the last few days, but not a very interesting signal taken alone.

It's the migration of that negative divegrence that is interesting and how quickly it is turning. The 2 and 3 min charts are already leading negative and now...

Today has seen the 5 min chart start leading negative. Also a 5 min chart making this kind of move intraday is indicative of large distribution activity today by institutional money.

As I said at the top, they don't want to get caught holding HYG when the music stops and are packing their bags now which will have a direct effect on the market if not a direct correlation.

GDX Follow Up...

Years ago before the F_E_D's quantitative easing, gold miners use to lead gold. As the F_E_D backs out of accommodative policy, it seems that gold miners may be starting to lead gold again. Gold is usually bought in anticipation of inflation which is a rend that was clearly developing around June, however it seems (as is usually the case) smart money has been involved in this trend for a lot longer than that just like they were accumulating home-builders as the 2000 Tech bubble popped, a couple of years before the housing boom really took off.

In any case, the long term GDX chart shows a year or so long base which we've been tracking and trading here and there for the last six months or so.

 On a 5-day chart, this is the inverse H&S pattern with an RSI divergence as well as volume confirmation, at least until the breakout, that's when volume should have gone up and didn't , we also didn't get any follow through days. The best we got were some divergences suggesting a pullback, but rather GDX just ranged.

GDX has been one of the easiest assets to confirm signals in as there are so many derivative ETFs that can be compared, but over the last 2 months we haven't been able to get anything approaching a decent signal which once again makes perfect sense since it has been stuck in a meat grinding range which we don't want to be caught in any way.

What I've really been looking for is a pullback in which we can confirm accumulation and strong signals to enter GDX on a long term basis.

The white box on this daily chart is where we entered NUGT (3x long GDX) long and exited it just at the breakout as signals were not confirming the breakout, there's been no upside follow through since we exited NUGT.

 This is what has happened since exiting the NUGT long (+40 & + 50% gains), this is exactly the kind of range we don't want to be stuck in and haven't had a trade in GDX since the NUGT exit.

The pullback I've been looking for would be below the neckline support (red trendline), as long as we can confirm accumulation on that pullback, GDX should be a very strong long term long candidate.

 This is the 4 hour chart during the base, it looks great, but price has been hung up.

 This 30 min chart shows the difference between a strong signals (when we went long on a strong positive divegrence) vs the trendless lateral slop.

 Several charts have been calling for a corrective move which can come through a price pullback or through time consolidation, however the volume on the breakout was so bad, the entire thing looked like a head fake deal and the breakout is just about when retail finally noticed it after we had already booked a 50% gain in NUGT.

Short term charts look like this is one of the strongest pullback signals we've had in well over a month.

In my view, probabilities are high that this turns in to a long term long position,I'd just like to get a pullback/better entry that allows us to confirm with the kind of long signal we got (above) on the initial long trade. 

I may consider a DUST or GDX pullback trade, but it would really have to look great and I really don't see that happening right now.

GDX UPDATE

GDX looks to be bouncing off the 8/11-8/12 gap support, it may make a decent DUST long trade, however unless there's a very strong set-up, the larger trade is confirmation and a long term GDX/NUGT long position.

Take a look at the intraday charts and see if DUST long is a trade you might be interested in. For me, I've been waiting since mid-July for GDX to pullback and confirm a nearly year long base. What I'm really excited about is a primary long (bull market) in GDX or NUGT (3x long gold miners).

I think the DUST long pullback trade is ok, it's not really for me. GDX long is a position I have been tracking for 6 months or so and after our last NUGT +40 & +50% trades, I've spent the rest of the time waiting for a pullback below the $26.25 area, that's the trade that is worth the risk for me, that's the trade that is a long term primary long with the possibility of a strong stage 2 mark-up trend that can run in to a primary uptrend.

I'll have some charts out in a few minutes, but after well over a month of waiting for a pullback, it looks pretty probable that we get it and are able to set up a core position that is in line with the long term probabilities and an early stage 2 uptrend.

Quick Z Update

I took on some Z 8/16 $136 calls on Monday, Trade Idea: (Short Term Option) Z for a speculative trade, I still like "Z" for a pop to the upside although longer term it's getting in to some trouble.

Her's what I'm looking at and looking for as far as Z goes as I'm getting the feeling we are close to seeing a move.

The "Z" positive divegrence is along the lines of most of the market averages in the 10-15 intermediate timeframes, the base size is also similar and it's right around its 50-day moving average which doesn't mean much to me other than the fact that it means a lot to other technical traders.

 The intraday chart is shaping up as well so there's a level I'm looking for as a primer to get this move started.

A lot of short term technical traders use the 50-bar moving average on a 5 min chart for trade signals, I'm looking for a move above that average to kick start a  move in Z. Once that happens, I think it won't be long before...

The 50-bar 60 min average is broken and Z starts its run.

XLF Trade Set-up & Update

On August 1st I closed a FAZ (3x short Financials) position, Closing FAZ Long ...

"This is just for now to lock in gains, I'll decide later if I'm going to add a long like FAS for a bounce."

It was already obvious at the time that we were going to be building a base of some sort and I didn't see the risk of holding FAZ any longer as being worth the potential reward, but I also didn't see a strong enough set-up to open a FAS (3x long financials) bounce position.  Again, I don't trade on probabilities as I knew the probabilities were for a bounce in XLF, but rather on high probability/low risk set ups.  The reason why? Even though I would (so far) have been correct in entering a FAS long on August 1st which would be up about +5.53%, the risk of that position suddenly failing as often happens at this stage of the market, is too high. It's not uncommon in a weak market to have some fundamental event that hasn't been discounted send the market gapping lower, erasing months of long gains in days, for instance, late July 2011...

On this weekly chart of a 3x long SPY (UPRO) it took about a week to wipe out all of 2011's gains, -21% and at B over 2 weeks almost an entire year of gains were taken out.

This is why I don't just trade probabilities, but look for high probability and low risk, FAS never gave us a good entry.

 Here's XLF now, the white arrow is August 1st when the FAZ long was closed to lock in gains, as mentioned I had considered entering a FAS long for a bounce-piggy back ride, but there were never strong enough charts and a set-up to make that risk worthwhile so for the moment, I protected the FAZ gains and decided to wait for the next set up. 

The FAZ position was entered as a partial position because the resistance area in XLF was so clear, it seemed an obvious target for a head fake run, but it broke to the downside first. This could very well be considered a "Crazy Ivan" shakeout in which the initial break of support hits stops and draws in new shorts, that supply of sellers/short sellers is easy to accumulate which is what happened at the base area that formed just after closing FAZ (white trendline).

One of the reasons Crazy Ivan trades/head fakes are run are to create momentum without actually having to absorb all of the supply (invest a lot to create a bounce that you just want to sell in to). See my two articles, Understanding the Head Fake Move Parts 1 and 2 .

Essentially the new shorts provide the squeeze for a reversal to the upside. Once the range's resistance has been broken, new longs will enter XLF creating the second head fake or a bull trap. As prices start to fall back below former resistance, now support around the $23 level, the bull trap concept/head fake comes in to play, best described as, "From failed moves come fast moves", it's essentially the opposite of a short squeeze as longs have their stops hit which should be just under the range's resistance level and as price accelerates downward, shorts enter adding more supply and accelerating the sell-off. 

This is why I wanted to save some room in the FAZ position to add to it above the range which never happened. However, as soon as the base started forming, that area once again is in play and that's where I'd like to re-establish my new FAZ long (at the yellow arrow).

The long term daily 3C chart for XLF shows strong distribution through the range whereas this chart had confirmed price action prior to the range.

The 4 hour chart shows the same thing so the probabilities for XLF's longer term or primary trend are strongly to the downside, it's the high probability/low risk trade set-up I'm looking for now to re-establish the FAZ long.

Like the market averages, XLF has a 15 min positive divegrence and I doubt we get any major downturn until this chart deteriorates,  the longer term 4 hour and daily chart put the probabilities of this bounce failing very high, but I still want to enter at the lowest risk/highest reward.

Like the market overall and like the last two market bounce attempts and VERY unlike bounces before July 1st, there's has been immediate distribution on any hint of stronger prices so smart money with deep pockets are moving out of XLF/Financials even at these levels, but because their positions are so large ( a billion dollar position is considered average for many of the larger funds), they need time, rising prices/demand to exit these positions. Volume hasn't been stellar as of late so that only makes it harder and  the process takes longer, but in the end they should end up with an average exit somewhere between the bottom of the base and the top of the bounce or an average short entry. 

Our advantage is we don't trade in that size so we can be much more nimble with our entries/exits.

This 2 min chart of XLF shows exactly what I have been talking about, as soon as the base was done, the first hint of higher prices saw distribution rather than confirmation as it use to be the case until prices were higher, then distribution would start so there's a definitive change in character now that we have seen 3 times, essentially smart money is moving out at a faster pace which is evident by looking at breadth charts alone, you don't even need 3C to see more stocks trading below their 40-day moving average than almost any other time over the past 5 years.

The concept of migration of a 3C divergence, meaning to move to longer time frames, shows us that the distribution is getting stronger so we should have a good XLF/FAZ set up above XLF $23 if the market can hold out that long which I suspect it can judging by the 10-15 min charts and the size of the base.

XLF is one of several assets I want to have a short presence in so I'm setting price alerts from here to >$23 and will be looking for the next FAZ long entry. I'd prefer to have made some extra money on the bounce, but without the charts to back up the trade, I'm not risking capital in a sub-par trade, I'll just be patient and wait for the stronger trade to set up. At least the XLF short entry I waited for for several months finally looks probable.

Market Update

This move in the market feels like death by a thousand needles, it's slow, there's really nothing worth trading as far as strong set-ups go, every little gain in price is being sold and keeping volatility low, the TICK all morning has been in a narrow range of +/- 750 with no spikes above or below, just a slow, mindless grind;  it's a market that's very easy to lose your concentration in which are the most dangerous.

As far as this morning, all Index futures are negative intraday. As for the averages...

 Intraday the Q's went negative -AAPL had a little something to do with that in my opinion.

The 5 min Q chart from yesterday that really shows what's going on here still looks horrible, but not that much action added today.

I doubt we see much action added unless there's price gains/demand to sell in to, thus the very slow, low volatility.

The base with the positive divegrence on the QQQ 10 min chart is still intact and until this turns south, I suspect it's just more of the same. The one major difference is several months ago in Q1 or Q2, a base like this could be counted on for an easy pop that was had decent enough signals that you could trade it, but those seemed to be more sentiment shake-ups, this one has a different character that is along the lines of the last two, every little gain in price is essentially sold.

 SPY intraday still leading negative overall and negative intraday today.

It too though still has that 10 mi base supporting this somewhat boring grind.

The IWM is of some interest today as it has had the best underlying charts and that is starting to change today as the intraday 1 min goes negative, but this isn't really that interesting, it's the next chart.

The 3 min where there's heavier underlying trade activity is starting to lead negative like the Q's saw yesterday.

The TICK is extremely boring, like I said, nothing above or under +/-750 which is pretty much a range bound market's readings, no channels, nothing thus far.

The only thing that the market is concerned about right now are these charts...

 VWAP! This is for ES and..

This is for NQ.