Daily Wrap

Today marks the 3rd day in a row the SPX has failed to meet $2000...

However the daily closes tend to mask recent trends with lower highs/lower lows and increasing volatility which we see near transition points. The closing prices tend to also skew the trend of lower highs/lower lows.

This in itself is not a smoking gun, but given the stage 3 position of the current trend and other information such as intraday and closing breadth, it is part of the evidence of a weak market which is probably why we are seeing a divergence in HYG as the carry trades (JPY based) are not acting anything like they have over the last several years with USD/JPY disconnecting completely and AUD/JPY which recently picked up the ball also falling short.

 AUD/JPY recently picked up the position USD/JPY had occupied, however this longer term 15 min chart doesn't quite show the failure in the carry correlation today.

The 1 min chart of today shows ES disconnect from AUD/JPY, also you can see the $AUD weakness that is taming the USD.

Interestingly, the MSI (Most Shorted Index) which has been very quiet the last several weeks, took on a burst of life today, apparently in higher beta Russell 2000 stocks.

Our collection of Most Shorted stocks built in to an index (yellow) vs. the SPX (green). You can see the squeeze in some of the higher beta names which is part of the reason I've been putting out trade set-ups this week as these kinds of moves are what I'm looking for to use for entries to lower risk, get a better entry, better timing and to verify that the move we are shorting in to has acted as probabilities suggested, verification of underlying weakness in to price strength, an ideal entry.

HLF may be one of our best examples of this recently as a short position as we shorted it in to it's biggest 1-day gain ever, although we weren't just shorting price strength, in fact that had very little to do with it, we were shorting underlying weakness in to price strength on July 22nd which gave us an excellent low risk entry, although at the time, pulling the trigger on the biggest 10day gain the stock has ever seen is a bit difficult emotionally, but seeing underlying trade as weak as it was helps out. The HLF short is now at a 28+% gain...

HLF position...

This is the same concept behind the trade set-ups being posted.

Despite the move in the MSI, end of day breadth readings show that even the momentum stocks overall showed no improvement today. The Percentage of NYSE Stocks above their 40-day, 200 day and 1 and 2 standard deviations above their 40 and 200 day moving averages ALL FELL TODAY! Even though we didn't have any big price gains other than the IWM and of course the move in the MSI, I would have expected them to at least hold their ground. This tells you what's going on below the surface of the price action in the averages, even with a short squeeze which can't be sustained for long considering the 27 year low in the Bull/Bear ratio from Investors Intelligence. This also creates a very hollow, thin market, not just from a breadth point of view, but a healthy short presence is the promise of future bids in the market when they are needed most, during a decline as shorts must buy to cover to realize gains (for the most part, my article "How to make more than 100% on a short" gives some examples of how some short gains are realized without covering).

While HY Credit didn't participate in any intraday gains, HYG has built a positive divegrence and helped the market from 2 p.m. through the close, although it closed flat on the day which is a far sight better than its recent downtrend.

Despite several smaller failed HYG positive divergences, I do not believe this divegrence will be run over and I don't think it's there for no reason, although the reasons may be more than just an upside lever as we head in to an op-ex Friday, it could be to get price closer to a max-pain pin, or...

HYG 10 min positive over 2-days. All I know for sure is it is enough to help ramp the market while at the same time it's not nearly enough to pull HYG and eventually the market as it follows, out of the stage 4 decline it has been in for 7 days now as it has retraced 66% of the August move counting from the very low Aug 1 intraday lows, from the Aug 1 close, it's quite a bit deeper.

The averages on the day...

While the R2K and transports were easily leading, the Dow and NDX were lagging and the SPX had to scramble in the afternoon to make it to a green close.

As mentioned, HYG was of some assistance in to the last 2 hours of the day.

As well as the MSI...

As for Leading Indicators, our Pro Sentiment indicators were split with one retreating in to the close and the other advancing, all in all with what I see in HYG and the MSI, I'd give the advancing indicator the nod , although this is a 1-day indication as the longer term has made a clear leading turn lower similar to HYG.

The two professional sentiment indicators as leading indicators have actually worked out well and have been quite accurate both short term (next day) and trend. Above you see the trend indication turning lower on this chart from the start of the August rally at 8/11.


The $USDX has been flat for 3 days after hitting 15 month highs, this is due to strength the last 3 days in the GBP and Euro as the latest Scottish polls suggest the referendum next week is a non-starter (although a new poll comes out in just a little while tonight) , combined with JPY (Kuroda) and $AUD weakness, the result...

The $USDX flat for 3-days after hitting 15 month highs.

As for the Dominant Price/Volume relationship, there was none today in any of the averages, not even the Russell 2000.

7 of 9 S&P sectors closed green, this is a far cry from Tuesday's 9 of 9 red, the leading sector was the defensive Utilities +.84%. The laggard was Healthcare at -.28%.

Among the 239 Morningstar sectors, 166 of 239 which again is a far cry from Tuesday's 17 of 239 which created what is called a 1-day oversold condition which typically only effects the market for a day or two.

The bottom line is we are now out of that oversold condition, there are no dominant P/V relationships to guide trade for the next day, the only thing standing out is the short squeeze in the MSI which didn't even move the higher momentum breadth stocks, in fact they went down today so a pretty weak squeeze, but HYG's divegrence still can push the market, although as mentioned it's nearly impossible to tell what for, a head fake move? I kind of doubt that. Maybe an SPX 2000 close over the weekend or considering where and when it formed, perhaps to move tomorrow's price action to the area of the max pain options expiration pin which is typically pretty close to Thursday's close, even though the close struggled today and needed help from HYG and the MSI.

The bigger bottom line is that breadth indicators did improve off the early August lows which were some of the worst I've seen, certainly on par with the 2007 top. That improvement lasted about 10-days and lifted the breadth indicators by about 20%, but they are deeply disconnected from the market making it very shallow , thin market. In other words, imagine the market as a thin shell of a box and the support for that is a nice full support of stocks near their highs as the market is, however when those supporting mechanisms aren't supporting the top of the thin shelled box and aren't supportive until about half way down the box, you have the ingredients for a fast collapse like the sink-hole of vortex/whirlpool analogy I used last night.

For the time being, the most constructive thing to do (is certainly not trading in a lateral chop zone), to set up trades that look like they have high probabilities, the more the better as not all are going to come to us. Once the alerts for target levels are hit, we can check the underlying action and make sure it's in line with the negative divegrence probabilities and enter at the best levels with the lowest risk, that's what this week has largely been about, just setting alerts.

I have a few new leading indicators I'll be introducing as they give relevant signals in the coming days and weeks, I'll be glad to share their code with anyone who would like to try them.

Finally the poll expected out of Scotland seems that the no vote is looking more likely sending the GBP higher, however the $USDX remains rather flat overall within the 3-day range.

Here's the move tonight at 5 p.m. EDT as the poll says the vote is likely to fail for Scottish independence. This is still only a 52% No poll, and they've been all over the place, we'll see next Thursday, Spain may be the one to watch as well over a million demonstrators have gathered for a similar independence vote for the Catalonia region which could lead to a civil war as the government does not recognize any such vote, if it were to be taken, as legal.


*As a reminder, I still would like to hear from you as far as "Content Types" for posts so you can choose which posts you'd like to receive by email (all posts will be available on the site or you can choose all posts to be delivered), if you have specific article content types such as "Option trades" or "Day trades", etc, please send them to me so we can get this new website with many enhanced user features, online.

BIDU Trade Setting Up

BIDU looks like easy pickings so long as you have some price alerts set. Tuesday I updated BIDU, BIDU Follow Up which is the post with longer term charts so you can se why I like BIDU. It's also the post I pointed out a volume concept...

"Intraday you see the large volume to the far right? That usually will produce a short term oversold condition followed by a bounce that can be used to enter on strength, however BIDU is in the general area of "It doesn't get much better than this" as far as entries if you look at the daily chart."

So the very thing I suspected would set up a trade in BIDU, looks like it is. Again for the reasons why BIDU (short) or even a piggy back long, but in my opinion you are trading aggressively against the probabilities, are in the post from Tuesday linked above, but let's see where that chart from Tuesday has led us...

 I didn't include this chart which beyond the daily distribution trend (see Tuesday's update) has a more specific divergence at an area where the indicator should be making a higher high, this is the first failure of the year making this area extra interesting for a trade entry. All we are looking for is a little better price, a little less risk, a trade that comes to us on our terms and confirms everything we suspect BEFORE we enter it, although I like BIDU short just about anywhere in the area.

You'll need to set some price alerts in the direction of the yellow arrow.

 This is the exact area I was talking about on 9/9 (Tuesday) from the quote above. The increasing volume in size is a short term oversold situation that should hold up BIDU's decline and give us a potential opportunity for a better entry. As you can see, price has moved sideways since then, now to see if it has put in the divergence we'd like to see to show a probability of a move to the upside in which we can short in to as the strength of the move would be minor without a large base and large divergences which don't get put together in a couple of days.

 The 15 min chart looks bad, it is bad, it is where the probabilities are, but within that if you take a closer look...

You have a positive divegrence within a larger negative. The larger negative is like the Rock to the shorter divergences' scissors. In other words, the probabilities of a successful entry are already in place.

 Compare the 10 and 15 min charts above with Tuesday's and you'll see these are new divergences since then, they aren't large, the base isn't ;large, but they don't need to be to get the job done and offer us a trade that comes to us on our terms, allows us to verify before any entry and already has the probabilities highly skewed in our favor.

I'm just showing the 5 min chart which is just more confirmation.

I'll be setting alerts from here to the 225-$235 area and then double checking, but I'd say there's probably about an 80% chance that this is the entry and it works out fine.

These are by far my favorite trades, they come to you, give you all the advantages and you don't have to enter them if they don't look right upon doing what you expect, in other words they are verifiable that they reacted in line with probabilities.

Quick MCP Update

I'm glad to see MCP doing better, Tuesday was about as close as I've ben to stopping out there. I was looking for 1 or 2 things Tuesday, higher volume than the preceding day which came in almost 2x as high and a Hammer or some other bullish candlestick, it turns out we had to wait until yesterday for a bullish Harami to form or what's otherwise known as an inside day. Today thus far MCP hasn't done anything wrong or worrisome.

 Tuesday volume nearly doubled the preceding day which is usually a short term sign of a move exhausting itself and opening up to a reversal . Remember , other than whatever has been holding together the long term MCP charts, this one is part of our Most Shorted Index and the squeeze here would be nearly epic.

As for the Harami bullish candlestick reversal pattern of Tuesday/Wednesday, confirmation would be a close above $1.63.

Today saying inside Tuesday's real body does no harm whatsoever to the candlestick set-up.

 Short term timing charts are improving significantly, even the 1 I showed yesterday on a 10 min chart...


 The signals was young yesterday, but has continued to lead positive today in near straight line divegrence.

And the 30 min chart's larger divegrence is still in place, again reminiscent (as shown yesterday) of Home builders during the 2000 Tech bubble pop, as they were under accumulation that looked very similar to MCP.

Market Update

The lateral chop and increased volatility is continuing off Tuesday's deeply oversold 1-day condition , the day 9 of 9 S&P groups were red, only 17 of 239 Morningstar groups were green, the strong Dominant P/V relationship that suggested bounce at least the next day.

Yesterday's P/V relationship suggested deterioration in to yesterday's bounce from Tuesday's new cycle lows with Price Up/Close down, the most bearish of the 4 configurations and breadth returned to normal in S&P and Morningstar sectors, the actual breadth internals made no gains whatsoever, just treaded water looking exactly like what I suspect this is , just a work off of the deeply oversold condition from Tuesday.

As far as today, the only things of interest really are HYG's divergence and what's going to happen with carry trade correlations.

 Part of the reason Treasury Yields may not be very correlated to the USD/JPY may be because BOJ governor Kuroda pulled a Greenspan on speed with comments that QE was likely and then there's no need for additional QE sending USD/JPY in to a tizzy trying to keep up with all of the contradictions from the central bankers mouth today.

The 10 and 30 year yields vs USD/JPY had some early correlation, but have lost that as the day and Kuroda's comments carried on.

The AUD/JPY which has been the correlation for ES is on its back and seems to have nothing to do with Es/SPX futures today.

HYG intraday is following the SPX broadly, but recall the HYG 3 min positive divegrence and nearly 2 days of flat range rather than downtrend. It remains to be seen if this old lever can pull anything off to support the market for another day or so.

 The probabilities though, whatever the short term outcome is, are firmly set with HYG having led the market and continuing to do so, a 1-day bounce isn't going to change this map.

 Pro sentiment has also gone negative over the last 2 weeks.

Intraday it's in line with the SPY, but again this is just like treading water, it's not leading, the bigger picture/probabilities are firmly anchored.

The intraday breadth has improved today in the TICK, I doubt ti will move breadth charts we look at after market as they failed to yesterday.

Very near term intraday that intraday breadth is losing momentum as it is falling out of the channel. I was thinking maybe HYG's divegrence was there to hit SPX 2000, but seeing breadth fall so easily and make no gains whatsoever yesterday isn't that inspiring, not that SPX 2000 is a monumental challenge from here, only about 5.25 points.

 intraday in the averages it is as if they are in live suspension, almost nothing going on, a slightly negative intraday chart.

The Q's look a bit better, closer to in line and the QQQ bellwether tmeframe...

 5 min is firmly anchored leading negative, but not adding to that as of now, so it's in the suspension expected Tuesday after seeing how oversold the market was on a 1-day basis, which is why I warned Tuesday night that we'd likely see better prices than Tuesday which was getting ugly, but not to become complacent because Tuesday was nothing compared to a stage 4 move, look at HYG for evidence.

 The IWM 1 min is in line and its bellwether chart..

10 min is firmly fixed leading negative, but also not showing significant intraday distribution, again there needs to be something to get buyers buying and fumbling around in the middle of a choppy range usually isn't going to do it.

So we wait to see if HYG can come through and keep looking at assets for longer term position entries.

Trade Idea / Trade Set-Up (long Term) PCLN

This one is a struggle for me because it's relative weakness through the entire month of August was opposite the broad market. It's also a long term top and has great potential downside. I don't have great reasons to believe it will bounce , although it has shown that it can move independently from the market, but in the context of weakness. PArt of me says, "Take it here, set a wider stop and put it away, you'll be happy you did" and the other part says, "Wait for a better entry with lower risk", the issue for me is determining whether the first thought is greed motivated (entering a trade or chasing a trade is usually greed motivation, but on the other hand it's relative weakness is an objective point) and of course the second perspective is the one I'd usually take based on, "There are tons of trades out there, wait for the ones that come to you rather than chasing a sub-par entry".

In any case, that's why this is posted as both a trade idea and a trade set-up.

 There are a number of indicators showing divergences at the Feb/MArch top which has not been surpassed showing broad relative weakness vs. the market on the year and there's another stronger divegrence in numerous indicators at the May/June top vs the higher August top.

 As for the Trend Channel, the last "reasonable" trend that could be followed started late 2012, through 2013 and stopped out in 2014 at the red arrow. The trend since then has to be characterized as lateral and while we may get a better entry by several percent, I feel comfortable saying the trend here is dead and the next significant trend will be to the downside. How you see this position is largely a matter of perspective, timeframes, risk tolerance, patience. I think either way you go (wait for a possible better entry or enter here), a year from now you are happy with the result.

 On a daily chart I've drawn this in (in no small part due to volume analysis) as a sloping H&S top.

The orange arrow shows a gap down on high volume, typically a short term capitulation even in which the asset can bounce from. However gaps are starting to make a comeback, they have always been excellent indications of support, resistance, breakaway moves, exhaustion moves, etc, but over the last several years nearly every gap has been filled I think that is largely a function of the F_E_D support and HFT's taking advantage of that support which is obviously being removed from the market,  I do hope that gaps fall back to their historical usage. 

The yellow arrow is a decline in the downside ROC which after such a high volume gap, does look a bit more like PCLN may try to bounce.

Also note the divergence in RSI as seen on earlier charts above .

 This is PCLN vs the SPY (red) at the August base for the market, note PCLN moved almost exactly opposite the broad market, topping at the time the market was basing and falling while the market was rallying.

 Here's a closer look at the gap area and the drop off in the downside momentum or ROC. This could easily form a decent short term base in the area and bounce, I don't think it would be significant if you are viewing the position from the longer term charts above, but again it depends on whether you really want the trade or you are holding out for the best trades that come to you on your terms.

 The multi-day 3C chart, some of the strongest signals we  get, shows clearly where the top formation saw severe distribution, it's little wonder PCLN never made a higher high through 2014.

*Also note how close PCLN is to breaking below the neckline, this is not my ideal spot for a short entry, but it is telling us something about the character/weakness of PCLN.

 The 4 hour chart looks as you'd expect considering the daily chart breakdown in the same area.

The 60 min chart is BEAUTIFUL as it confirms the upside move until the topping area and distribution, these are the charts I love as they are showing confirmation for a trend we know existed and falling apart where the trend ended and a top formation began.

Short term I don't have good evidence for a 3C inspired bounce, I'll continue to watch for one, but I'll be setting price alerts at levels from here to 1250-1275 just in case.

Trade-IDea/Trade-Set-up (Swing+) COF

While I suspect financials are going to be a longer term trade, especially with new, stricter capital requirements coming in to effect soon as well as their huge lack of quality collateral (thank you F_E_D). Personally I tend to prefer something more generic like FAZ for a Financial short position as it lessens impact of stock specific news/events, but there are advantages to being short an actual equity rather than being short via going long an inverse ETF, for some of those advantages, here's an article I wrote on the subject some time ago, Making More Than 100% on a Short. Remember, if you are short and they have a dividend, you are responsible for the dividend if it goes ex-divy while you're still short, however that's usually not a large concern for me (COF's div yield is 1.47% per year).

As for COF, right now I view it more as a swing trade set up (I suppose it could be entered here and now, but I prefer a little bounce to enter. I'd take it from there and see if the market gives more , if it does, I'd widen out my stops and maybe transition to a position trade.

 This trendline on the daily chart was drawn months ago, it was an expectation for COF to move above a clear resistance area with alerts set for that move and then just keeping an eye on it in the watchlist. I do like the failure of the August cycle to make an equal or higher high.


 As a swing trade, this one trends pretty well, the Daily Trend Channel captures significant portions of each swing trend, the two red arrows are where each of the 2 previous moves to the upside were stopped out on a closing basis and now it looks like a swing short is a pretty decent looking opportunity with the possibility of more.

The X-over Screen shows the most recent signal (sell/short) , I think  you could pick this up here and now as a swing short, but I'd prefer to see a bounce above the 20-bar (60 min) moving average in blue as an entry, so long as RSI stays under 50 and the 10 bar stays below the 22 bar (yellow/blue respectively. 

I use a third custom indicator for confirmation in the middle window (yellow) with a 22-bar moving average applied, if you have a Worden platform I can give you the code for it, otherwise usually these two indicators (the x-over with RSI under 50) work pretty good on their own.

 The 60 min 3C chart shows a much narrower base than the broad market at the start of August, I suspect that's why it has given out and headed down earlier than the broad market.

The 30 min chart is just confirmation of the 60 min above.

The 15 min chart is confirmation, in line with price and no major divergences in sight to possibly interfere with the trade.

The 5 min chart is the same and this is the timeframe I'd be most concerned about as far as entering above the 60-min 22 bar moving average, if there were a positive divegrence here, I'd be a bit concerned.

If you like the swing trade idea, I think it can be entered now or wait to see if you get a better entry above the 22-bar, there's nothing that says you have to take the trade if it doesn't come to you and do what you want to lower risk or you can blend and phase in only adding if that move above the 22-bar (60 min) happens, that would probably be my approach.