Daily Wrap

Today started out with what is likely another "Boy who yelled Wolf", which at some point may backfire on the Ukrainian government, claiming to have taken out two Russian tanks inside Ukraine as well as capturing 2 tank personal (Russian), of course there were no witnesses, no evidence, etc, much like Friday a little over a week ago which the market believed, but no longer reacts to these fabrications. You have to wonder who is really advising the Ukrainian leadership as the President, Poroshenko disolved parliament today and announced it on his Twitter account first!

From over the weekend (Saturday) at the Jacksom Hole Symposium, the BoJ's Kuroda made it clear that there was no more easing/QE on the horizon (in his words) for years and that the current plan, despite all economic data to the contrary, is on its way to meeting the objective of stamping out Japanese inflation. The key take away is NO MORE STIMULUS, for a market addicted to printing.

Then this morning we had some diverging data points, depending if you still believe the "Good news is good news, bad news is good news" motto that use to be nothing more than a F_E_D increasing their balance sheet from 850 billion to over 4 trillion since pre-Lehman to now, I'm sure you can guess where most of that money went to create Bernanke's version of trickle down economics known as the "Wealth Effect", one Yellen and Crew and promptly cutting off at the spick-et as well as raising rates by...well no one knows which is the thing the market hates the most, uncertainty and rate hikes.

In any case, this is about a cycle set in motion, a cycle that's nearing completion no matter what the data, but as long as we are on data, Markit's US Services PMI dropped to 58.5 (3 month lows), although anything above 50 still represent expansion. This was the biggest M.o.M. drop in 6 months. Employment trends continue to slow, essentially this print says, "The recovery lost momentum".

New Home Sales were expected t beat consensus of 430k after last week's strong Housing Starts, instead New Home Sales printed at a miss of 412k making this the 5th miss of the last 6 and the lowest print since March's 403k. The NorthEast was the brunt off the slowdown with a sequential drop of 31% (only 18k new homes sold) and a Y.oY. drop of 44%. The median house price fell and there's about 6 months of supply, the highest amount in almost 3 years.

The Dallas F_E_D missed at 7.1 vs consensus of 12.7, the biggest miss in 16 months. Production, Cap-Ex spending and Employment all drug the index down. New Orders fell at the fastest rate in over a year and they also now sit at 2014 lows.

Then we saw diverging data as the Chicago F_E_D came in at +.39 vs consensus of +.20 and a previous of +.12 (subsequently revised up to .21 for June). Manufacturing was strong, Employment indices held up and Sales, New Orders and Inventories all saw slight gains. Consumption and Housing were the 2 dark spots, both weak.

So? Buy the bad news or buy the good news? Perhaps sell the geo-political news or ignore it? My point is pretty simple, a cycle is a cycle, it has been predictable, it has hit most of our targets and the pivot for where this would end for the IWM which was drawn and posted 11 trading days ago (over 2 weeks) is exactly on spot. Be careful about 30 second soundbites explaining the market.

On all of that, the SPX hit $2000 today...

 SPX hits 2000+ and then loses it just after the European close  AND AFTER ALL OF THE RECORD LOW VOLUME LAST WEEK FOR 2014, TODAY SET A NEW RECORD LOWEST VOLUME DAY OF THE YEAR!

Here's the SPX since the 8-1 through 8/1 base with a reasonable move off a base that size and a market that was as oversold breadth-wise as it was, which was monstrous versus the actual percentage point decline for the same period. More on breadth in a bit, it's definitely something you want to understand.



What is going on with the market after Europe closes? 

 We saw this several times last week and the week before; just after Europe closes the US loses a lot of the a.m. gains as you can see all of the major averages above including transports (salmon). However, bonds (Flight to safety) rallied after the European close!

 It's not like they didn't try to push the SPX to a +2000 close as HYG was used intraday just after the European close losses.

You can see the 1 min intraday 3C chart go positive in to the lows, but it wasn't enough.

And on the close, we know that VIX futures have outperformed their SPX correlation several times the last week, but look at Spot VIX which WOULD NORMALLY BE SMASHED TO PUSH THE MARKET HIGHER IN TO THE CLOSE.

 The VIX (green) vs the SPX (red), note the VIX pop rather than drop in to the close!

The VIX closed green today despite the SPX being up +.48%, but missing $2000 at 1997.92.


AS STOCKS FELL, BONDS RALLIED, in fact I wonder if anyone finds this to be more than just an oddity that should be ignored because after all, the SPX did touch $2000 and closed at a new all time high?

 The SPX vs 30 year yield, as of 2014 (incidentally the same time breadth fell off the face of the chart), I HAVE A FEELING MANY TECHNICAL TRADERS WILL POINT TO CHARTS LIKE THIS IN THE YEARS AHEAD AND TALKING ABOUT, "HOW THE WARNING SIGNS WERE THERE THE WHOLE TIME, BUT GREED GOT THE BETTER OF TRADERS".

Here's the same SPX vs. 30 year yields since the base on 8/1-8/8 and what happened next. THIS CHART IS LITERALLY DEPICTING A BOUNCE IN THE MARKET WITH A FLIGHT TO SAFETY TRADE ON AT THE EXACT SAME TIME!

USO  was down a bit, presumably on the stronger dollar, although we had a trade set up out for a USO short as the charts looked horrible and USO has lost about 9% since, however, it looks like something may be brewing there, even if it's a counter trend move.

We had a 2-trade set up, the first a short term long in USO at A and a longer term USO short at "B", now it looks like a new divegrence (15 min) with a decent base in place for a new USO bounce, although the choices for leveraged ETFs are not my favorite.

Gold and Silver were both down modestly on the day (-.37 / -.48% respectively), but as mentioned several times today, there appears to be something going on with gold which seems to be bleeding over to gold miners as well.

 GLD 10 min positive after a break just below support.

GLD 60 min with several accurate divergences and a positive now, there are many timeframes positive in GLD, nearly all.

With gold and oil looking this way and CITI's announcement they have sold all $USD longs, it makes you wonder (as they never disclose anything that's not to their advantage unless forced to) whether they've already set up their $USD shorts and/or USO/GLD longs as commodities/precious metals typically move opposite the $USD.

 The divergence in the $USDX was mentioned last week as it blasted higher, this 60 min is very sharp and in a small period of time.

The 5 min is also negative (timing), so I think there's more to the CITI announcement than just letting everyone know they think the $USD is overbought.

As for the carry trades, almost all of them (JPY crosses) are negatively diverging from the market which means it's very likely that the carry trade financing for risk on leverage of AUM is being shut down as there are fears for what comes next and as long positions that were bought with the proceeds are closed.

I showed some Leading indicators earlier today and last week, HYG is clearly leading the market to the downside as it lead the market to the upside starting around 8/3 and through most of the rally with about 5 days now of leading to the downside.

Other than treasuries/ yields, some interesting activity in VIX and VIX futures, the Pro sentiment indicators have been right in nearly every day, here's what they are looking like now...

 As I said, out Pro Sentiment indicator (Leading indicator) has been right on as far as the SPX bounce/rally (green), however it has recently taken a turn for the worse right where we expect the reversal process to likely be about half way through the actual process and moving toward stage 4 decline which I suspect will not only make a new lower low, but likely take the Russell 2000 down to its neckline, maybe below on this leg.

On an intraday basis over the last several days, pro sentiment which confirmed the entire move to the upside is now showing them heading for the exits ,  the same for High Yield credit, one of the smartest markets out there; even the manipulated HYG!

I MENTIONED BREADTH BEFORE AND THIS IS IMPORTANT BECAUSE IT WAS THE COLLAPSE IN BREADTH THAT MADE ME SAY ON JULY 31ST THAT I THOUGHT WE'D RALLY/BOUNCE BASED ON AN OVERSOLD CONDITION, BUT NOT THE MARKET'S 4% DECLINE, THE MARKET BREADTH DECLINE TO LEVELS I HAVEN'T SEEN FOR YEARS.

You might think that breadth would continue to improve as market prices make higher gains,  you'd be wrong!

In fact, breadth made an initial gain from the close of 8/8 (the end of the base) to Tuesday 8/19 and has gone nowhere since, some even lower than they were in the 19th even though the SPX sits at all time new highs today on the lowest volume of the year.

Market Breadth fails to make anymore gains...

 This is the Percentage of NYSE stocks Trading One Standard Deviation Above Their 40-Day Moving Average or momentum stocks, they collapsed to lows of the year with less than 10% of NYSE stocks trading above this level, compare the SPX (red) and the breadth indicator (green) to each other at points "A&B", breadth "should" have recovered, not only did it not...

 If you look at the white trendlines I drew, the 8/11 is actually the 8/8 close, so the recovery in market breadth was from the close of 8/8 to the close of Tuesday (last week) 8/19, since then there hasn't been ANY additional gains in recovery meaning while the market makes a higher high, there are no more stocks making gains that put them a standard deviation above their 40-day moving average, 4 days of nothing.

This is Percentage of NYSE stocks Trading Above Their 40-Day Moving Average, pretty simple, if a stock is recovering with the market, it should be able to cross back above its 40-day moving average, especially if the market is making new highs. This is the importance of breadth, there's no interpretation, these are hard numbers. Again, all of the repair in breadth, all of the stocks that were going to recover their 40-day moving average did so by last Tuesday, since then, they haven't added anything to market breadth or the number of NYSE stocks trading above their own simple 40-day average, The last 4 days have been a wash that have gone nowhere.

This is similar to the concept that a healthy market should see rising volume, but in this case, even a beaten up market should still see breadth recovery, it seems there are enough sellers to offset any gains there should have been in the indicator, after all, if stocks aren't crossing back above a moving average they recently slipped under, then they are quite weak.

AGAIN, COMPARE BREADTH AT THE JUNE SPX HIGHS VS THE NEW ALL TIME HIGHS! Just a reminder, there's no interpretation of this, it's hard math.

Also among breadth indicators (almost none moved which has been going on for several days now), the Russell 3000, Russell 2000, the NASDAQ 100, the NYSE and the NASDAQ Composite all saw their Advance / Decline lines stop improving as of last Tuesday, August 19th like the other indicators above, interesting given the market's move, but that's part of the cycle.

As for some more hard numbers, all 9 of the S&P sectors closed green with Energy performing the best at +.89% and Tech performing the worst at +.10% (think about the recent AAL charts).

Of the 239 Morningstar Industry/Sub-industry groups, 176 closed green, Biotechs and Energy were among the leaders, gold and silver were the laggards.

As for the Dominant Price/Volume Relationship, 4 of 4 major averages had the same one, the Russell 2000 had no dominant theme. The dominant theme was "Close Up/Volume Down", which is the most bearish of the 4 themes. The Dow had 19 of 30, the NASDAQ 100 42, the SPX 252.

Typically this results in a 1-day overbought condition, it's not as strong of an overbought condition as Close Up/Volume up, but often it will lead to a close lower the next day, however it was not dominant in all 4 majors (R2K excluded and that's a lot of stocks).

Finally there were a number of bearish reversal candles in the averages or their ETFs like the IWM's Evening Star, the SPY's long-egged Doji Star, the DIA's Shooting Star, the long upper wick on the Dow, the NASDAQ Composite's Evening Star, etc. The thing missing was increasing volume, which is key for these reversal candles to be high probability.

From everything I see, I think we are right there in the reversal process and the only thing left other than some more extreme indications/readings are the watchlist component stocks offering up excellent short entries which are starting to come around, AAPL was shown as an example, but there are quite a few more. I've noticed when there are a lot (and you'll see "Trade IDeas" flying left and right), we are at the final area within about a day or so.

AAPL Update / Trade-Set-up / Bellwether

AAPL makes for a nice bellwether for the simple reason that it had one of the strongest positive divergences or at least one that was in line and confirming the trend, which is now doing something else.

I have a stop for you as well as I know some of you entered AAPL long as a piggy back trade from our base and/or a hedge.

 AAPL formed a base the same 6-days as almost every other asset and market average from 8/1 to 8/8 and broke out 8/11. The 60 min Trend Channel has held the entire move up in AAPL without a single stop out, the current stop level (which should lock in some more upside gains over the next few bars) is currently at $101.25, with a 60 min candle closing below that level acting as a stop.

I can see the channel's Rate of Change is starting to turn off to the side which suggests a stop soon and a reversal soon after. AAPL would be one asset I'd be very interested in a put position. Look for a well formed area of resistance just above, a move through that would be where I'd want to enter a put position, although as always it needs to be confirmed. However probabilities on the daily chart says it's exceptionally high that any potential head fake move would be a great put set-up, otherwise an AAPL equity short would work from these levels as well as I suspect you probably have over 50% of potential downside over the next year.

 AAPL's Trend Channel  ROC

The first AAPL top we called (which was the worst as everyone thought AAPL could do no wrong) as AAPL was just hitting new highs was mostly on intraday charts, the daily did show trouble brewing in the area, but the charts in the 60 min to 4 hour range were the ones that really did the bulk of the work as AAPL lost -45% in 8 months right after Third Point filed a 13F that showed AAPL was no longer a top 5 holding, creating an institutional panic. The rally in AAPL is interesting, but its in far worse shape now than it was in 2012, I'm sure it's not hard to understand why when AAPL "seemed " bullet proof and was a major growth stock, then came the dividends, buybacks, etc. and AAPL transitioned toward a MSFT story which had been an even bigger growth story until the dividends, etc. when it became a range-bound large cap.

 AAPL's 60 min chart doesn't show a very distinct positive divergence , that's because it's not that strong as to be very clear on this timeframe. There has been good confirmation of AAPL's trend by 3C, however that has recently changed.

Not being as strong as the 60 min chart, the 30 min chart does show a clearer positive divegrence, again at the same time as the rest of the market, it also shows a clear negative divergence, the divergence doesn't start at the left side of the red arrow, but rather the right side. However some faster timeframes will show distribution before the 30 min chart for the same reason the 30 min chart shows the base better than the 60 min chart.

The 15 min chart isn't looking at underlying flow as heavy as the 30 and 60 min charts so the divergences will be more pronounced.

 AAPL10 min also showing the same so there's a good deal of confirmation here.

The 3 min chart.

I didn't get in to timeframes below as they'll develop as we go, but the changing trend is clear, it's just a matter of the entry and the type of trade based on short term price action. I suspect AAPL's 60 min trend channel stops out within a day or so.

Z Stop Update/ Trade Management

Although as an options position I would have been out of Z already, as a swing trade (equity long) position, it took out the wider 60 min Trend Channel stop which has held its entire move since the base. When the Trend Channel is broken, that's telling us the easy money of stage 2 mark-up or the trend has changed, it's not a signal to go short Z right then and there. Typically there's a short period of lateral chop, sometimes some prices that are a bit higher than the stop out area, but as far as probabilities go and easy money, I've often found it's best just to take the position off , book the gains and start looking for your next position.

 The 60 min Trend Channel hold the uptrend with no stops until today. As I said, there's typically chop and if you get lucky sometimes you can get a few extra percent, but as a systems trading screen, I've found it's best just to move on after the stop is hit.

The 5 min chart showing strong distribution on what looks like it could be a head fake move/failed breakout.

And the strength and set up for this position was the 15 min chart's positive which is clearly leading negative. I wouldn't enter Z long here, I see no reason I would keep Z long here.

NASDAQ Biotechs Getting Close (BIB / IBB /BIS)

NADAQ Bios have been one of the momentum plays and are one of the watchlist assets . I'm starting to notice the Ultra and 3x long/short ETFs giving stronger signals, they typically do give earlier signals than the underlying with no leverage, the simple reason I suspect is the leverage. For instance, FAZ and FAS are giving stronger signals than XLF and by the looks of both, I'd have no problem (I have no problem) holding FAZ long (3x short Financials).

As for NASDAQ Bios... IBB (NASDAQ Biotechs)...

 These may be further along in the reversal process. Note the clear resistance area that built over a week+ timeframe, that's going to be a very high probable head fake move/false breakout as the breakout triggers limit orders and technical traders chase the breakout/confirmation above a clear area of resistance, the bigger  the better. The 5 min BIB chart is leading negative and note the volume on the gap up this morning above resistance, this is why head fake moves are run, always look for that volume and 3C confirmation or something else, in this case it's something else, distribution in to that volume.

 The leveraged long ETF for NDX bios is leading negative right at the break above resistance, volume is up.

The leverage short for NASDAQ bios is confirming the two charts above with a leading positive at the mirror opposite break below support.

While I'd say this isn't a bad entry, there's usually a little bit more work on the divergence, but if this were one I was really interested in, I'd be looking at starting a partial position just like FAZ last week.

LEADING INDICATORS...

Right up front, before I forget, Gold/GLD is looking strong for a move to the upside, apparently whatever we were seeing last week is directly tied to the $USD and the expectation for a $USD shakeout as CITI essentially put it this a.m. when saying they closed all $USD longs.


As for Leading Indicators, many have been right on track, whether HYG which is one of the most popular market manipulation assets right to our professional market sentiment which had been confirming upside trends until last week.

The very basic concept of the 4 stages of a cycle with this cycle starting on 8/1 (base through 8/8) has gone through base, mark-up. rally and the expectation was for lateral/reversal process or stage 3 top, everything is in keeping with those expectations.

I think we probably have a few more days of chop, both gaps up and down like scribble, the larger trend though should be seen as a clear turn to the side from up, HYG is leading so lets start there.

 This was one of the best indicators that we were going to see a broader base as HYG led the SPX for about 4 days to the upside, algos follow the HYG signal as a sign of institutional risk on or risk off and buy/sell accordingly, the more complicated version is the SPY arbitrage where VXX and TLT are used as well, but I don't think they can pull off the manipulation of safe haven assets right now as they are seeing flow as we saw last week as  they outperform their correlations, TLT continues to do so today.

 Near term HYG vs SPX leading negative, tells us the same thing about market probabilities as the leading positive HYG did, recall also last week the internal 3C signals for HYG just fell apart warning us this lateral / down move in HYG was right around the corner.

HYG has now been leading sideways for 5 days, a little longer than the 4 days it lead to the upside at the base, but top reversals are generally a bit broader than bottom reversals so that's not surprising.

HYG intraday vs the SPX, credit continues to underperform and this is the manipulated credit, however the manipulators don't want to be caught long HYG when the music stops making HYG a great leading indicator that has called many tops and bottoms for us.

 This is HYG's 30 min chart from negative and leading the SPX out of its ascending wedge (daily chart) and down, to the positive divegrence leading the SPX on the upside at the early August market base, obviously the negative divegrence right now is not a positive sign for HYG or the market, but this isn't new, we saw many other charts of HYG negative last week and before it started sideways.

 5 min trend at HYG's flat, reversal process area, essentially the market is following HYG with a several day lag.

 ES, this is the second day in a row and the only two days since 8/11 in which the SPX Index futures' VWAP has headed sideways rather than up and some of the only times it has touched the lower standard deviation.

TF/Russell 2000 futures' VWAP also headed sideways the second day in a row and seeing a lot more of the lower standard deviation which I don't think was touched once except the first time the Ukrainians said they destroyed a Russian Convoy a little over a week ago.

 Today's NYSE TICK starts off with the gap up and a +1250 reading which is immediately lost as it treads water sideways, since there have been several forays below -1000 as the lower standard deviation of daily VWAP has been penetrated.

 Our pro sentiment indicator which was up just about every day just before the next day , acting as a leading indicator, however last week both of the versions we use turned to the downside as professional sentiment has soured and they appear to be moving out as would be expected in to stage 3.

Pro sentiment intraday, not biting on the early move up, instead showing what 3C shows and selling into the move.

We've seen VIX futures/short term futures outperform their correlation with the market several days last week,  the other "Safe Haven" or "Flight to Safety " rather than flight to protection asset is TLT, 20+ year treasuries which we saw flatten out in the 5-30 year curve to 2009 flats. There's a clear outperformance in TLT (SPSPX prices in green are inverted, normally TLT would follow along with inverted SPX prices).

Everything is pointing at the same thing, the same forecast from Friday a week ago as well as last Friday, 3C, the charts, the stages, even the informal map of IWM target expectations/pivots which is nearly perfect, but was drawn over 2 trading weeks ago and the XLF trigger, that's not considering the indicators we usually use. Right now it's just a mater of tactical timing as the strategic level has been reached and which assets. This is one of the main reasons I chose to add most of the FAZ position back, but leave some room for timing, it's much more important at this stage for me to replace that short coverage that has been out of the line-up since August 1st.

I think one of the last timing signatures here will simply be watchlist set-ups.

General Market Update

Other than the week ahead posts which have been pretty darn accurate as to building a base, bouncing, starting the reversal process, one of my best barometers which I posted in advance as a target expectation not only for the Industry group, but as a bellwether for the broader market (to know when we've reached the pinnacle of stage 2 and starting to move through stage 3/lateral/reversal process and then stage 4 decline) was a break out above XLF's range/upper resistance area.

You probably recall me closing FAZ (3x short financials) long right at the yellow arrow as it looked highly probable we'd build a sideways/lateral base and I'd be able to keep the gains and re-enter XLF short/FAZ long on a break ABOVE the range to the left. We reached that last week and I started the FAZ long position replacement.

Another indication/bellwether has been HYG as it was an early indication of a base as it led and now an indication of a reversal process as it leads again, but to the downside.

SPY 60 min green vs HYG red, the base is in white (8-1 through 8/8) and HYG continues to lead to the upside until there was reversion between the two last week and HYG now leading to the downside, similar to the base.

As for the averages themselves, there have been base/positive timeframes I've been looking out for, they confirmed the move up for a larger portion of it as faster charts showed distribution threw almost the entire bounce which is accruing on those base positive divergences now.

  QQQ intraday is seeing the same distribution that it has through the entire bounce. You'll note around the European close the averages just fail with deep intraday negative divergences.

 The QQQ 10 min chart has been the most tenacious , staying in line with price, however that has broken now.

 QQQ in about a week long relative divegrence now, leading negative.


 The IWM was one of the worst looking intraday charts today as it had gained the most, it's lost about half of today's gains from earlier today.

This is the trend through last week in which the forecast was for a couple more days of bounce before the reversal process (lateral or rounding top trade) begins with stronger negative divergences which you can see through all of last week from the 18th on. If this is a more rectangular reversal process I'd expect to see a head fake upside/failed breakout, it could even look like today. The more obvious resistance is, the higher the probability, but it tends to happen right before the actual stage 4 downside reversal in to decline. Rounding tops often do the same and that's why we often describe them as looking like an "Igloo with a right side chimney". We should see a lot of indications all building up at once as we are at the actual downside reversal point, but I suspect it is this week gauging the proportions of the entire move.

 IWM was positive to the 15 min, this chart shows the base and the 15 min going from a relative negative to a leading negative divergence.


SPY intraday also seeing that same distribution around the European close and losing upside momentum.

 The more recent trend on the 5 min chart showing the base and the increasing rate of deterioration/distribution.

SPY had the longest base divergence which has been in leading negative position, but getting worse.

Expect more volatility both up and down (gaps), however the reversal pivot should be very clear between all indications and watchlist components, otherwise this is dangerous short term trading environment.