Daily Wrap

I'm not sure what the bigger story is today, the collapse of the yield curve (2y v 30 y spread) or the 4th consecutive new record low volume for 2014 excluding holidays? Neither bodes well for the market or show much confidence.

Yields were well in to it before the open in Europe this morning as was addressed in the A.M. Update.

Italian, Spanish and German yields were sent to record lows, everything out to 3 years in German notes is now at a negative yield, that's pretty interesting even if there is a strong expectation of ECB QE, IT'S NOT THE SAME AS US QE, it's ABS to compliment LTRO.

Then it's the US's turn, the 2year vs 30 year spread flattened to new leg lows.

 The spread is now the flattest since December of 2012 as the yield curve flattens. While I don't subscribe to the idea the yield curve must invert for a recession, as Japan has proven wrong 6 of 7 times, over the last 50 years in the US, it has a perfect track record of 7 for 7 in predicting recessions.

 Treasuries were bid today with the 10 and 30 year yields dropping to 2.36% and 3.10% respectively with the 5 year at 1.62%.

Either case, it would seem someone will be proven wrong here shortly even if the talking heads have accepted this and record low volume and no follow through as the "New Normal".

The 30 year yield just continues to diverge from the SPX negatively, typically if the market is rallying, treasuries are being sold and yields rise, this is a situation in which the market has been in a risk on rally mode while treasuries have been in rally mode, the "Flight to Safety Trade", which has been alive and well almost all of 2014, but is really getting out of hand now. Someone is wrong here and I'd prefer not to bet against the bond market.

The other story is today is the 4th consecutive day of "New record lowest volume of the year after having seen the market rally the prior week on 40-50% average volume. There's no follow through in the SPX, in fact,  just as posted in last night's Daily Wrap...

"There was only 1 Dominant Price Volume Relationship today which was the Russell 2000 at Close Up/Volume Up, the most bullish of the 4 relationships, but also the one with the highest probability of creating a 1-day overbought condition typically sending the average closing lower the next day."

And the IWM closed... LOWER today, in fact the worst performer on the day at -.21% with the Dow-30 the best at +0.09% or in other words, TOTALLY FLAT.

The SPX LOST 2000 today as the European close sell-off effect seems to continue...

IWM selling off in to the European close.

Here the SPX loses 2000 intraday, it's only some money stepping in creating the divegrence I talked about in the last post that sent the SPX back to VWAP and a +2000 close at $2000 and 12 cents.

ES/SPX futures bullied back up to VWAP right before the close to maintain the illusion of a strong market, that has essentially ZERO follow through and the worst volume of the year after three previous days of worst volume of the year.

High Yield Credit also diverged wider today from equities.

HYG as a manipulation lever is probably done and soon to roll over, it would seem there are some people there who don't want to be caught holding HY Credit that has seen massive outflows recently, when the music stops... FAVOR DONE YELLEN, they're taking their ball and going home.

The Dow-20/Transports is a position I'd like to add to, it is a current short from the last entry and looks good for a new entry as discuss

 This 60 min 3C chart of Transports shows the last place we entered a partial short position looking for better prices to fill it out as 3C went negative, now we have slightly better prices and I think we get a bit more as 3C is in a worse divegrence as more transports are distributed making for an excellent entry in IYT short.

And the short term 2 min positive divegrence that should bounce Trannies and give us that entry we are looking for, much like the broad market today.

Of the 9 S&P sectors, only 3 closed green, a much different feel in internals than ever before since the bounce started, you might guess which group led with a +1.09% gain, the defensive Utilities; Financials came in last.

 Utilities see a sharp upward move on volume and...

There's the divergence/accumulation responsible for it.

As for Morningstar Industries/Sub-industries, of 239, only 124 closed green (which can include 0.01% as green as many were).

We expected a move up in gold, but especially GDX (gold miners ) and NUGT (3x long gold miners) which we are long, yesterday we saw a +6.19% gain, I said I thought we were in for a little pullback, today GDX pulled back -0.31% and NUGT -0.97%, but there appears to be much more in the gas tank over coming days and weeks for both although I favor the miners.

 GLD's 5 min 3C chart, accumulation at an island-like bottom and the push higher and consolidation today, it looks like we have a lot more room on the upside over the next week or two.

And the same for GDX/NUGT as the 10 min chart clearly shows, we have even stronger divegrences , but for now it's a minor consolidation.

We also expect to see some upside in USO, I'll take a closer look at indications tomorrow and decide whether it's worth the risk (risk/reward).

USO 60 min positive divegrence and base area.

There was only 1 Dominant Price/Volume relationship today, the same as yesterday, the Russell 2000, but this time it was Close Down/Volume Down which doesn't really have a next-day implication for short term overbought/oversold, I just kind of consider it, "Carry on doing what you were doing" which is ironic as the IWM was the only average not showing a positive divegrence intraday in to the close.

Just for future reference, CD/VD is the thematic relationship of a bear market. There were no other averages even close to a theme.

Finally and maybe most importantly, market breadth was TOTA::Y FLAT, yesterday was the exception with the R2K short squeeze, but before that we had 4 or 5 days of no breadth movement at all, today is another, none. It feels like we've reached the apex and stalled and are ready to roll back over as SKEW is back to elevated/red flag levels, breadth charts look the same, but I'm always looking for that last head fake move.

As I said last night, 

"We're now no longer near that record oversold breadth condition which apparently was the cause of the base/bounce. However we have an all new set of weak conditions like the average volume being half of normal all last week and 3 consecutive new lows in volume the last 3 days with very weak market tone and right around the area of a reversal process.

The rest should be pretty evident just based on objective evidence."

Charts for "Looking Ahead"

While I wanted to get that last post out before the close, I wasn't kidding that there are just too many charts I have looked at to capture, notate, upload, post and explain so I'll try to do it with fewer, but enough to make the points, to show confirmation among multiple timeframes and assets, but this is really a sample of something that at this point is more art than science.

Lets start with an average like the Q's which have been strong, in fact they are our leader for this move, almost 1 percent above the rest of the averages when measured from the 8/7 lows (8/8 is the completion of the base and 8/11 is the breakout to stage 2).

*I really should have run these from long term to short term as long term is the strategic or highest probability resolution and short term is timing and tactical which should work hand in hand with the strategic view or resolution of highest probabilities.

 In any case, this is a minor intraday timeframe of 1 min on the QQQ, it is typically used for intraday moves, often the trend is useful as well, but it's for small moves. As you can see there was a positive divegrence at the lows this morning that sent the Q's higher and above yesterday's close before losing that just around 3 p.m., but that ran in to a second positive divegrence.  One of the concepts we see over and over again (and this makes sense as what we are watching is smart money setting up positions in advance), 3c and price almost always pick up where they left off on the next trading day, even over a 3-day weekend. So this positive divegrence at the close forecasts some price strength in the Q's, of course proportionate with the timeframe the divergence is found on, just look at this morning's to get some idea (the size of the divegrence and quality also matter).

 The original base positive divegrence for the Q's was on the 15 minute chart, you can see the reversal process in yellow, which is really just a period of time proportionate with the preceding trend and with what they have planned for the cycle to follow. We see VERY few "V" reversals, for instance a 1-day upside reversal rather than a full week of the reversal process. Reversals are a process, not an event and there are many reasons why, but one of the easiest is to imagine yourself as a trader dealing with half a billion dollar positions, say you want to get out of one. Would you put up the entire position at once and see the entire market front run you and drive prices down or would you feed that position out in pieces in to higher prices and demand? Now you understand part of the reason head fake moves exist.

To the right you see the downside reversal process, they are almost always about 2x the length of a bottom reversal process in the same cycle. *I was a little unsure about this one because of recent events and recent bounce attempts since July 1 and their change in character toward the ugly, but in the end we have a normal reversal process we have seen numerous times.

 Like I said, I should have started with the longest chart and worked my way to the shortest, but in this case we have the longest chart above, the 60 min with a small relative negative divegrence to the left which led to a move down of -3% and then the stage 1 base/accumulation from 8/1 to 8/8. The distribution right now is insane as a leading negative divegrence on a chart this long (60 min).

I drew in the rounding top of a normal reversal process, but I'd say 80% of the time, no matter the asset, no matter what timeframe the cycle is in (weekly chart or 1 min intraday), there's almost always a head fake move right before the pivot/reversal. In this case I describe tops as looking like an "Igloo with a chimney", the igloo being the reversal process, the chimney being the head fake move and then resuming down to complete the rounding over and a new stage 4 trend of decline.

This head fake move is one of the best short entries (in this case) or Put option entries you can get, it's the best price and the least risk, although emotionally difficult to enter, we usually have very good 3C confirmation that the move is a fake or will be a failed move which makes it a bit easier to enter.

The point being (although I ran the charts in reverse order) is that the strategic short has formed, the tactical entry is best entered in to a head fake trade, but if we don't get one (which is rare), we still want the best timing possible and the intraday 1 min chart shows a bounce likely to start tomorrow morning on a smaller scale basis, but we're only a quarter percent or so from a head fake move in the QQQ so it's not far to go as the last 3-days have created a resistance zone (where long limit orders will be placed for a breakout move) around $99.65

The SPY 30 min is in the right order this time, you can see the last relative negative divegrence ( a weaker form than the current leading negative) then the base from 8/1-8/8 just like just about every other risk asset. and of course the reversal process and leading negative divegrence on a serious timeframe.

If Technical (retail) traders weren't so predictable, that it makes Wall St. predictable in the ways that they'll use TA against retail, then we'd likely not have head fake moves and just rounding reversals.

 The intermediate 5 min chart (the fastest of the institutional displaying timeframes) shows a clear trend of distribution in to higher prices of large positions just as I asked you to imagine above. It's a delicate balance of selling, but not too much at once---hitting technical levels that traders will buy and taking advantage of the demand created. Why do you think the SPX futures last week were always hitting the upper standard deviation of VWAP and pulling back and doing it again as VWAP was rising? Now VWAP is falling meaning we are well in to the reversal process.

ES/SPX futures 1 min with VWAP... Every little change in character matters if they all are lining up giving you the message of the market. Last week VWAP was rising and they were able to sell at the upper channel/standard deviation, now VWAP is flat or falling, indicative of the reversal process and the target sell zone is VWAP itself without letting out too much supply and crashing VWAP and the market before their orders are filled.

The one time I remember clearly that this was totally abandoned was AAPL 2012 as all sellers tried to squeeze out of the same small door at once and APPL went from all time new highs to a -45% haircut in 8 months.

 This is the SPY 3 min intraday chart with a positive divegrence, there are positives on the 1 and 2 minute also, I used the 3 minute because it is the strongest. Otherwise, 3C was confirming the moves in SPY price most of the day. These divergences are our edge, they are where our opportunities are.

DIA

 The long term 60 min DIA 3C chart which is interesting for a number of reasons. First the positive divegrence at early August (same as the other averages except IWM)  and the confirmation for a short period followed by distribution or selling.  It's important to understand that a short sale and a sell both come across the tape as a sale, so distribution can mean short selling as well. Simple logic dictates that early distribution is sales of longs, even longs taken on at the base, "The piggy back trades" we were putting out in early August, later distribution is likely short sales as the long position has been handed off to retail (weak hands) which makes the other side of the trade attractive.

If you don't believe in the simple logic of that concept on a micro basis, here it is from BofA/ML on a macro basis.

Note institutional selling (orange) as net sellers and hedge funds as well (blue) as net sellers and look who's buying , WEAK HANDS, retail.

Also note, just as Appaloosa said in May of last year, "We've been selling everything not nailed down for the last 15 months". This chart would tend to confirm that as would 3C. You may wonder, why sell that early? Why give up all that upside? They saw the market as priced to perfection and additional gains were to be used to sell large positions in to as they expect something way worse on the downside.

Let me remind you, it took about 12 months to wipe out all of the 5 year bull market rally gains from the 2007 top. It took an additional 5 months to take out another 3 months to wipe out an additional 25% below the 2002/2003 bull market base/lows, or in other words, 5 years of bull market rally were wiped out plus 25% in about 15 months.

 The 3 min DIA, although leading negative shows a relative positive divergence between the open today and the afternoon lows.

 The DIA 2 min chart which is more detailed shows the same positive divegrence.

The IWM is the one average that didn't seem to put in a positive divegrence, but recall last night's Daily Wrap and the Dominant Price/Volume relationship, the IWM was the only of the averages to have one and it suggested that the IWM close lower today.

NFLX is one of my favorite long term position shorts, but has been a monster on this latest rip. I suspect a lot of you will be happy to see what has happened the last 2-days in NFLX.

 This 60 min chart dipped in to one of the largest , fastest leading negative divergences I can find in the market, meaning institutional selling on almost a panic scale.

As an aside, note the head fake move (under yellow trendline) before the upside reversal. Also, I believe NFLX is a large 90-degree Broadening top. All H&S patterns start first as Broadening tops and there aren't too many you see, but this looks like a good modern example of one.

 The intermediate 1 5min chart shows the same very fast pace of distribution in NFLX over the last 2-days.

 As does this 10 min chart which also shows a monster base, this is one of the stocks we expected to rally several months back, I think that base shows you why it has been such a monster, but things are changing quickly for NFLX which I specifically chose for this post because of how strong it has been.

 There are other divergences in the 2  min range as well, again this hints at an early move up or perhaps some additional strengthening before that move, but I do think we get some sort of move, likely a head fake to enter short positions and fill out others like FAZ.

 FLSR 30 min shows a different, but very strong base/positive divegrence and equally as impressive distribution

Here's the 2 min chart showing a small positive divegrence so again I expect the broad market to either build on to this and create a stronger positive divegrence, but still within the topping stage, or simply early strength,  we'll want to be looking for our entries and in some cases, exits.

Looking Ahead

There are too many charts to post in too little time to make the case I'm going to make right now, but this is based on leading indicators, HY Credit, HYG specifically, some assets like NFLX, AAPL and many others on the watchlist and last the averages themselves.

The damage is now done and pretty significant in any of the above assets, however in HYG's case, while it has been in a reversal process for about 8 days and is leading the market the same way, very short term intraday it leads the market by a little, about the same amount that I see on SPY intraday 2 hour or so positive divergences as well as watchlist assets like NFLX.

I think we'll see more lateral chop with today chopping down and tomorrow likely chopping up, however as mentioned, the deteriorating is now in the red zone, so these are the kinds of bounces and timing we want to short in to. Being we have a 3-day weekend and Options expiration (2weekly) Friday, I'd say we'll likely set up trades between now and then and likely see the pivot next week, based on what I see now. I'd normally guess Tuesday when the market re-opens but we have the ECB meeting September 4th in the middle of the week which may cause the market to hang in the area until they see what Draghi does.

I have a feeling the next day or two will be very busy for us. This is the first pivot for new positions since early August, this is pivot #2 as it was displayed on my bounce / target chart/map.

Market Update

While this is not as important as the broad market update today, I'm looking at the daily chart and the most significant charts for each of the averages today. It "seems" last night's only Dominant Price/Volume Relationship, the IWM, was right on with a forecast of a close lower the next day.

The lack or inability of SPX follow through/volume issues seems to be showing up in NYSE TICK data, hitting -1250 this afternoon much different than the R2K's short squeeze yesterday.

 DIA's reversal process area, the dual "Shooting star-like" candles the last 2 days and today's bearish engulfing on increasing volume is notable, it has been something that's hard to expect, but it's a concept that almost always comes through so despite new record 2014 lows in volume, I'm still looking for this concept to give us a solid signal on timing, today may be very close here.

 60 min DIA is probably one of the most significant timeframes, but...

Very short term the 2 min chart looks like a small bounce which would be very similar to the pivot move I've been looking for for entries.

IWM finally hit was was posted as a reasonable upside target 13 trading days ago now.

The short term 1 min chart has fallen apart badly, this was expected last night from the Dominant Price/Volume relationship in IWM and it's forecast for next day trade.

QQQ and of course volume.

Te 2 min trend is seeing an increased ROC of distribution. AAPL should come in to play in QQQ soon.

 SPY right where our top target was, taking out short stops on the move below the ascending wedge and stops in it right around this level, the Doji stars and bearish engulfing today are interesting, although volume is not getting me too excited about today's candlestick.

SPY 5 min is an important timeframe as far as institutional intraday activitiy so a new leading low is always of interest.

AAPL FOLLOW UP

By the time I got out the last AAPL post, the target I had in mind had already been hit, but didn't create much in the way of demand, although the psychological level of $102 obviously had some limit/breakout orders sitting right there...

Note the 12:58 p.m. breach of the psychological magnet of $102 (whole numbers attract our minds and thus stops/limit orders). Volume surged a bit on the break of $102, not so much at new high territory, but this is what smart money is looking for in these set ups. As I've posted before from some 13-Fs, a billion dollar position is pretty average for a lot of funds, but they do take a different finesse to move in to or out of, very unlike what we are use to.

In any case, no significant 3C developments since the breakout.

AAPL Trade Set-Up

Monday I posted, AAPL Update / Trade-Set-up / Bellwether which showed the 3C charts as well as the stops, the main difference between Monday's post and yesterday's AAPL Stopped Out other than the "Trending Stop" being hit, was the deterioration in the 60 min chart from 1 day to the very next.

As posted in AAPL Stopped Out yesterday as well as the post with the stops the day before, I had reminded you of how the Trend Channel works and what to expect after a stop out...

"Once we have a stop out that doesn't mean a higher move can't be made, in fact they often are, but the easy money of the trend is now done and it is very susceptible to a reversal. I've noticed over the years I'm almost always better off exiting the trade when the Trend Channel issues a stop out than trying to capture a few extra percent as there's usually a nasty surprise and the money can often be used in better performing assets as the reversal process, which AAPL's declining ROC already shows it to be in, is often a choppy, meat grinder and any additional gains are usually pure luck."

Along those lines I ended yesterday's stop out post with,

"I am not getting too much in to the intraday charts as there's usually more lateral slop, the one thing I will look for is any kind of resistance forming, IF YOU LOOK AT ALL OF THE BASE CHARTS ABOVE WITH POSITIVE DIVERGENCES FROM 8/1 TO 8/10, YOU'LL NOTICE A HEAD FAKE MOVE TO THE DOWNSIDE JUST BEFORE AAPL TAKES OFF TO THE UPSIDE, THE SAME IS TRUE OF A DOWNSIDE/TOP REVERSAL PROCESS, A MOVE ABOVE RESISTANCE JUST BEFORE A TURN TO THE DOWNSIDE IS HIGH PROBABILITY.

Therefore the 1-3 min charts will come in handy in such a situation. Beyond that I'll be setting price alerts for AAPL including downside moves , head fake moves as well as resistance/support areas like the 5-day moving average, the last high in 2012, the 10-day and 22 day moving average and the 50-bar 5 min and 30 min charts. I want to know about any significant technical moves as I'm looking at an entry at this point."

It was some of yesterday's price alerts that went off today alerting me to a possible set up in AAPL.

 This is the daily chart, it's not too hard to see why the Trend Channel that has held the entire trend since 8/8 was stopped out yesterday as AAPL starts to move lateral,

Also note the declining volume.

Here's the same on a 60 min chart.

And yesterday's stop out as the Trend Channel self-adjusts to changes in character that are outside a certain average and standard deviation of that average over recent trade. You can see the Channel turning to the right, which was less obvious Friday so I used a ROC indicator to show you.

 The 15 min chart is the main difference between yesterday and today, you can see "about" where it was yesterday , but a closer look reveals something that is not a surprise considering what I told you about behavior after a Trend Channel stop out.

 This is the same 15 min chart zoomed in, note the flat range in AAPL, I often say , "It's the quiet zones or flat trading ranges that see the most underlying activity making them dangerous as people fall in to complacency" 

Here we see a clear positive divegrence and even a head fake move at the yellow arrow on a break below support just before the reversal to the upside.

So far the 5 min chart is in line, 3C confirmation of the price trend , also note the slight head fake move (stop run) just before the upside move.

We'll need to see the 5, 10, 15 min charts go negative from here and we'll likely have an entry in AAPL, whether a better equity short or options entry remains to be seen, although if I were a long term position trader, I wouldn't have a problem starting a partial short position here as long as risk management allowed for plenty of room to add to the position, but this must be done BEFORE you enter the first share of the trade.

From this point, we have a new intraday move in AAPL and a new short term divegrence which means we have to go back to the fastest charts where any changes in the trend will be first seen. As of now the 3 min chart is in line as well, so the 5 min chart will not be negatively divegrence while the 3 min chart that is more sensitive to smaller moves is still in line.

The 2 min chart shows some last minute (what I use to call Market Maker or Specialist  front running as they typically filled the larger order that's about to move the stock) accumulation. We also see the first signs of 3C falling out of line with AAPL, although nothing to be too alarmed about yet, which means the more sensitive 1 min chart should also have some sort of negative divegrence.

It too sees last minute accumulation before the move up which happens to be on a head fake/stop run move intraday. There's 3C falling out of line here as well. The next move is for the 3 min chart to start to go negative and for the 1 and 2 min to worsen, this way we know we are getting close and can start to forecast what kind of move to look for and what kind of trade best suits the entry that is setting up.

I suspect since we are so close to new high resistance we'll see a move above $102.17 as this would be a new high/breakout and the breakout buyers usually expected to show up, although they were notably absent from SPX 2000 the last two days it hit the level.

I'll be setting alerts above this level and looking at 3C's performance as those levels are hit. I suspect this will make a good equity short entry as well as put position considering the new high.