Daily Wrap

Today the SPX made a new all time high on a +0.49% gain as did the Dow on a +.63% gain, even though intraday trade was as flat as a nail, at least until the afternoon push. However, I wouldn't be breaking out the bubbly or hitting the panic button.

 First, as the SPX (daily chart above) makes the new high, it's in to the "Igloo with Chimney" head fake move we have been predicting and waiting on for over 2 weeks now. The 3 stages of a 4 stage cycle are evident, from stage 1 accumulation early August to stage 2 mark-up on 8/11 to stage 3 distribution / top and the Head fake move that we see 80% of the time. Even when the SPX was making lower highs/lower lows, we still expected a head fake move as a matter of concept and probabilities as we see them about 80% of the time and the larger the range (stage 3 top) and more visible the asset (SPX is as visible as you get), the more probable the head fake move, but THEY ACT AS EXCELLENT TIMING INDICATORS FOR THE END OF STAGE 3 AND TRANSITION TO STAGE 4  or conversely from the end of a stage 1 base to stage 2 mark up as shown earlier today with an inverted Igloo w/ Chimney head fake on an upside reversal.

Stage 4 decline is the next move expected.

However all is not good news , even among price only indications...

 The Russell 2000 is gaining a lot of attention from Technical Traders as it's only about a day or two away from the infamous  "Death Cross", when the 50 day (yellow) crosses below the 200-day (blue).

One of the more notable issues here beyond the death cross that will get traders to react to the technical concept, is the larger century old confirmation concept presented by Charles Dow. The fact the Russell is not confirming the SPX is trouble, in fact in a risk on move, the Russell should lead the other averages, so more than a few issues there that are problematic for even the most basic technical trader.

 The Russell 2000 is at a -0.35% loss for all of 2014, it's not the loss that is significant, it's the change in trend and character from a clear uptrend that changes character as price peels away from the trendline on the upside, an event that often "looks" bullish, but almost always is a red flag warning of a major change in trend and while the R2K is not in a primary bear market yet, the trend has certainly changed from 2013's (and before) +37% gain to a -0.35% loss.

 This is my new VIX Inversion Indicator, I'm showing it with the red areas being buy signals just to show what they are on the next chart. The last buy signal was at the August cycle base in early August as we warned July 31st.

As for the chart above, this is the SPX/R2K ratio indicator which "should" confirm. At the far left at a stage 3 top price in the SPY is rising, however our SPX/R2K ratio is negatively diverging which sent the SPX down 4%, -2% in one day alone on July 31st and sent the R2K down -8%. From there as the SPX heads slightly lower early August as 3C forms a positive divegrence, the same indicator puts in a strong positive divegrence calling a base/bottom. In to stage 2 mark-yp, the indicator calls another divegrence as 3C shows distribution in to higher prices and we enter stage 3.  You can clearly see we have one of the strongest negative divergences in the indicator right now in to today's new SPX high. This indicator has been remarkably accurate and combined with 3C and leading Indicators like HYG, it is near bullet proof.

As for the averages today, I showed several times how incredibly flat trade was as if it was just trying to hand on either to the new high or appear strong in front of the Alibaba IPO tomorrow which benefits the underwriters and insiders.

 After the open, the averages were remarkably flat today, TICK indications showed this very clearly.

Yields were also flat today, except without the gap up.

The 5, 10 and 30 year yields intraday today, just about as flat as stocks intraday. TLT is of some interest as recent updates have shown as we expected a pullback in TLT's August 26th post which we have seen, now it seems TLT may be preparing for a leg higher.


It almost seemed as if the $USD's legacy arbitrage correlation was at work in stocks...

$USDX (candlesticks) vs ES/SPX futures (purple), however the draft lower in commodities spoils that assumption, although there were some notable indications in gold and gold miners that need to be watched closely as we have been waiting for this pullback since July to re-enter a potential long term long trending trade.

Breadth on a new SPX and Dow high was horrible today, ironically I'm just seeing some of the major financial media outlets pay attention to the red flag we've been on for most of the year and especially recently as it has been almost able to call market moves on its own if you are looking in the right places.

For example...

"The Percentage of Stocks Above Their 200-day Moving Average" barely moved today, a mere 0.5% change (in terms of the percentage of stocks , not the daily change ). The breadth indicator, which is hard, factual numbers, not an interpretation, is now at 28 day lows after the lows of the July decline and August cycle's base from which it repaired for a bit by about +20%, it has now fallen to a level LOWER than the start of stage 2 mark -up for the August cycle on 8/11, yes breadth at a new high is lower than it was after coming off a deeply oversold decline,   rather than making a new high or at least a higher high.

Advance Decline lines are no better...

 The NASDAQ Composite's Advance/Decline line (green) led the Composite (red) through 2013 and in to 2014 before reverting to the massive average of all NASDAQ listed stocks, something big changed on July 1st as we were seeing in to the end of Q2 window dressing, it was only apparent a month or so later just how many things deteriorated the first day of Q3 or the end of the Q2 reporting period, including a massive decay of the NASDAQ Composite's Advance/Decline line which now has 47% of NASDAQ stocks in a bear market with losses of over 20%. 

The Russell 2000's Advance/Decline Line also failed around the same time and we have 40% of the Russell 2000 at a loss of -20% or more ( a technical bear market, sop  nearly half of the NASDAQ's stocks and 40% of the Russell 2000's are IN A BEAR MARKET NOW . This is just another reflection of that tall pier over the water that looks so nice walking on top, however look under the surface of the water and all pilings/support structures have rotted completely away, leaving the market exceptionally vulnerable to what I'd compare to a Pier crashing in to the water, not slowly dilapidating over time.

The Russell 3000 has the same kind of A/D line problems.

Interestingly today as stocks made a late day scramble to stay in the green, the Most Shorted Index actually declined!

 The Most Shorted Index was squeezed yesterday a.m,  these squeezes use to last for 2-3 weeks 4 months ago, now they last little more than an hour and in to today's action after meandering to the mean vs the SPX yesterday post F_O_M_C, Most Shorted Stocks seemed to be shorted as they declined vs the SPX (yellow vs green respectively).

 So what helped stocks other than JPY? The VIX vs the SPX (sSPX prices in green are inverted to show the correlation) was weaker earlier and slammed right at the time the market needed some upward momentum (seen here as down).

As far as who was in control of the market/correlation all day, look no further than HYG (blue).

 HYG vs SPX on a longer timeframe including all of the August cycle shows that it is negatively dislocated despite the recent support which should be put in perspective (the white area), the probabilities are near 100% that HYG continues lower. In fact, I suspect one of the reasons the VIX was slammed late in the afternoon besides the fact the Most Shorted Stocks were declining and unable to help, HYG is also deteriorating at a faster clip...

 HYG 3 min leading negative intraday, this is the first negative divegrence on the timeframe which is the one responsible for HYG's base and move to the upside.

However it went further than that and on the 5 min chart which is the first timeframe (fastest) that we see institutional activity intraday so it looks like they have done their job and are now backing out of HYG as predicted Friday.

ONE OF THE MOST NOTABLE SIGNALS TODAY WAS THE SKEW INDEX WHICH HAS JUMPED FROM 126 TO 142 (THE BRIGHT RED DANGER ZONE) IN A MERE 2 DAYS. 

THE CBOE SKEW INDEX (SAME PEOPLE WHO PUT OUT VIX) IS ALSO KMNOWN AS THE "BLACK SWAN INDEX", IT SHOWS OUT OF LINE, LARGER PREMIUMS BEING PAID TO COVER TAIL RISK OR IN OTHER WORDS, HIGHER PREMIUMS TO BUY DEPP OUT OF THE MONEY PUTS either hedging long exposure or expecting a rapid drop to much lower pricEs in which the puts would be of value as they are so far out of the money and a heavy premium is being paid for them, which is why the SKEW rises. Anything above 115 is the danger zone, but above 130 is extremely dangerous and a 16 point climb in 2-days  IS NEAR PANIC!

Tomorrow morning I'll post some more breadth charts and show you the comparison between them now and at the very top (SPX new high as well) of the 2007 market, you might be surprised how similar they look.

For now, let me finish with internals.

There was a Dominant Price/Volume Relationship, 20 of the Dow 30, 63 of the NASDAQ 100, a smaller ratio of 643 of the Russell 2000 but still dominant and 234 of the Russell 2000. Of the 4 possible combinations, today's Dominant P/V Relationship across the board was Price Up/Volume Down which is the most bearish of the 4 relationships and often sees a next day move lower or over the next couple of days.

Adding to that was 7 of 9 S&P sectors in the green with Financials leading with +.98$ and the Defensive Utilities lagging at -.72%.

Also adding to the near term 1-day overbought signal were the 239 Morningstar Industry/Sub-Industry groups with a whopping 190 of 239 finishing green, often an overbought signal we specially with the P/V relationship.

so why all of the fear all of the sudden in SKEW? Well if we are right about the head fake move in the market (Igloo with a chimney) that we are seeing now, then stage 4 decline is right around the corner as a head fake move is the best timing indication we have from price itself and with breadth as ugly as it is now at new highs, as bad as it was after an 8% decline in the Russell 2000, there's absolutely no support in the market, as already mentioned, nearly half of NASDAQ stocks are already in a bear market and 40% of the Russell 2000.

As for tomorrow, the Scottish vote which looks like it will fail should be a risk on event at least for Europe and in the US we have the Alibaba IPO pricing around $66-$68, recall what I said earlier about $8 billion in shares not covered under a lock-up covenant and to add to all of this, it's Quadruple Witching, not just options expiration.

I'll have those breadth charts out tomorrow, I think they need to be seen to really have a more complete perspective of this market. It's never different this time as you'll see when looking at the same charts from the absolute 2007 new SPX high or market top.

SCTY Trade Management Follow Up

SCTY is a current Core Short position, there's a little bit of room to add if the right scenario popped up, maybe an additional 10% or so, but by and large it is filled out.

Even though SCTY has not broken down from the primary trend H&S top, we still have a decent 8+% gain on the position, leaving plenty of risk management room to add if we are lucky enough to get that break, but SCTY ha just been about relative weakness.

Here's the daily H&S top and the first two of 3 area I prefer to short a H&S top, the head and right shoulder, the last being the initial shakeout move after the neckline is broken, that's also the last place I'll short this pattern, but almost never at the break below the neckline as those shorts always get shaken out with stops just above the neckline.

 This is why SCTY is among the list of other trades on the watchlist, a 2/4 hour chart leading negative through the entire H&S top and increasing at the right side of the pattern to a new leading low.

As for the right shoulder, because there is somewhat of a range, I had price alerts set above the range for an add to or new position, but the relative weakness has prevented any such move.

 Te 15 min chart (and many others) confirm the same signal through the right shoulder making an entry really anywhere in this area a nice long term position, although I hate chasing, I think 6 months from now it really doesn't matter if we entered 4% higher.

 Short term like the 5 min there's no hint of anything that may send SCTY above the range any time soon, just the opposite in fact.

And even at the 2 min chart, the strongest signal is distribution in to a move toward the top of the right shoulder range.

At this point if you are interested, I'd probably cancel upside price targets and look for any strength on an intraday basis or a short term basis which may be possible via HYG and the broad market, but SCTY itself doesn't have any of its own gas in the tank. An excellent looking core short position for a trend trade.

Market Update

*I may be posting an MCP call position very soon, I've been watching for increased volume on the day, an area of stops/short orders hit and I've seen those, a closing bullish hammer would be a nice end to the day as the inside day range of 6 days makes for a clean, clear stop level for a head fake move. I have initial positive divergences growing since the intraday volume surged, I'm pretty close to pulling the trigger, but am looking for just a bit more confirmation. I'm looking at October 3rd expiration, $1.50 calls and of course as always, I'll post any position BEFORE I enter it, just a head's up.

As for the market, it's nearly frozen in a lateral trend as if waiting for something, BABA?

 Remember this week's positive divergences in the averages from Monday to Tuesday morning reached as far as the 5 min charts.

The DIA is seeing quite a move on the 2 min chart, in actuality, strip away everything other than this week's early divegrence and the cycle and this is about where I'd expect a 1.25day divegrence on a 5 min chart to run out of gas so this isn't anything really surprising.

 The 3 min DIA is seeing migration from the 2 min chart.

 And the 5 min positive from early in the week is at a relative negative divegrence as migration from the 3 min chart bleeds in to the 5 min chart's signals.

 IWM 2 min shows the positive divergence early in the week, also note the head fake move (yellow) just before the reversal, it is proportional with the cycle/trend. While this chart is largely in line with the price action or inaction today...

 The stronger 3 min chart showing some trends from before this week as well as this week's positive and head fake stop run is showing a relative negative divegrence, not extreme, but in line with expectations of how much gas was in the tank and how far we have moved and for how long.

 The 5 min chart shows a bit of a broader trend with deep leading negative divergences at the left, the positive this week and head fake/stop run in yellow and a bit of a leading negative on the day.

 QQQ 2 min accumulation early in the week, also a quick move to tag stops in yellow and a relative negative divegrence taking on leading negative characteristics.

 This is the chart I mentioned yesterday in QQQ 3 min which had a sharp negative divegrence , it has continued today.

 And the 5 min QQQ with the positive and so far an in line trend at the green arrow as 3C follows price thus far.

 The SPY 1 min is flat on the day just like price, a strange day for price, however these flat ranges that appear boring often have a lot of underlying activity, both positive and negative. This is what I refer to as "The kids being a little too quiet in the next room", you know they are up to something.

The 2 min SPY is showing deterioration, again nothing huge, but in line with the earlier positive on the week.

The 3 min, like the Q's is where we are seeing something a little out of the ordinary.

 And the 5 min looks pretty normal from a small positive to an increasing negative, in other words, distribution in to higher prices or the failure of something esxpected yesterday that didn't pan out.


 Today's NYSE TICK/Breadth is extremely flat like price with most of the action or non action in the -500 to +600 range, very quiet with a few outliers.

The same is seen on the SPY TICK custom indicator.

A very quiet day.

What does price action have in common?

HYG, in red. Price id literally pegged to HYG.

HYG Update / Alibaba

It has always been an interesting concept to be able to see underlying trade, but not know why or exactly when underlying trade will kick in, just that the probabilities are highly in favor of underlying trade signals (3C for example).

HYG has had an enormous amount of influence on the market. If you follow our posts and Friday afternoon, "Week Ahead " updates, 3C divergences and Leading Indicators have given us a pretty darn accurate call of the week ahead from late July (31st's) deeply oversold BREADTH (I really don't care about oversold indicators as they aren't very reliable) and expected base/bounce which was the August cycle to the forming of the base for the August cycle in which not only 3C positive divergences told us an upside move was coming off the base being constructed, but in other assets, especially HYG which bottomed on 8/1 and led the market higher as opposed to the SPX bottoming or ending its base on 8/8 with a start higher on 8/11. The Week Ahead updates calling for more upside, then a choppy topping range and eventually HYG moving to stage 4 were all telegraphed via either 3C and/or HYG. I've published these charts at least 2 dozen times over the course of the August cycle, but as a quick reminder of the degree of correlation, this is the SPY vs HYG (green and red respectively).

This 30 min chart of HYG (red) and SPY (green) shows the leading correlation I'm talking about above, although it does not show the early HYG divergences calling out HYG's likely shifts that create leading price divergences between HYG and the market/SPY, although they are there.

HYG has long been one of our favorite leading indicators because it's one of the most liquid ways for smart money to trade credit since the banks that use to loan credit to institutional firms rid their balance sheets of most credit after the financial crisis, making HYG one of the most diversified and liquid ways for institutional money to trade HY credit which is viewed as  "Risk on" sentiment via smart money and as such, HFT's and algos are programmed to follow the signals and buy stocks on HYG gains, sell them on HYG declines,  this is the entire basis of Capitals Context's ES Context model as well as their SPY Arbitrage model except in the first case many other assets are used including rates,/bonds, precious metals, commodities, other forms of credit derivatives, etc. while the SPY arbitrage is only 3 assets, the risk on HYG and risk off VXX and TLT.

This has made HYG one of the easiest levers for short term market manipulation, rather than the old days of buying or selling the most heavily weighted stocks in an average to get the average to move, now 1 asset alone can be manipulated and the HFT/Algo correlation programs follow it.

Above, while a little confusing, I show different stages of HYG's August cycle at the white arrows such as the bottom/positive divegrence of 8/1 while the SPX just started it's base/stage 1 accumulation on 8//1 which lasted through 8/8 with stage 2 mark up on 8/11. As you can see, by 8..2, HYG was already in the mark-up/stage 2 phase, once again its price divergences vs the market/SPX leading the broad market averages.

HYG transitioned to stage 3 top which is characterized by a lateral (sideways) trend before the SPX (I have marked the SPX's important transitions with yellow arrows).  As you can see, HYG has led the SPX on average by about a trading week, even it's move to stage 4 decline was followed shortly after by the SPX's trend of lower lows and lower highs. The bottom line is HYG has led the market by approximately a trading week.

 Here  on a 10 min chart of HYG/SPY, while the SPX was in a downtrend, arguably entering stage 4 with a series of lower highs and lower lows, so distinct that it was our minimum upside target in Friday's "Week Ahead" forecast; HYG had been in a nearly week long flat range and positive divergence which was also part of the reason the forecast for this week was looking for strength in to the F_O_M_C, Tuesday our forecast took on legs after a day and a partial morning of accumulation in the major averages out to about 5 min charts.

Obviously our minimum target was hit wand volume surged on the breakout, which is why I chose the downtrend as a technical feature that would create the desired effect of any head fake move to the upside, to get bulls to buy and for that as most everything they do is price/confirmation evidence based, a break above the downtrend was the closest area to get them to make moves and create demand that can be sold/shorted in to.

 On a 5 min chart, HYG and SPY move almost perfectly in tandem, better than any other correlation like the former leader, USD/JPY and more recent leader, AUD/JPY. HYG, by far has the tightest correlation as seen above.

On a daily basis, the SPY is struggling with the knee jerk failed highs from yesterday and HYG is of no help at all, although not declining as of yet either.

Just put these two on your chart and watch the correlation intraday.

What grabbed our attention last week and guided last Friday's "Week Ahead" forecast was the flat range in HYG with leading positive divergences which made it clear that this week we'd see market upside which I speculated was either to be used in conjunction with a F_E_D / F_O_M_C knee jerk upside rally on the grounds that the market had already discounted the bearish removal of the "Considerable time" language in the F_E_D statement and after the policy announcement, Yellen would give one of her typical dovish Q&A's walking back any bearish fall out from the language removal which had already been discounted by the market as a sure thing.  The idea being, between HYG support and this F_O_M_C knee jerk-boost, our head fake move on a large month long stage 3 reversal process which we have been expecting for weeks , would finally pop and give us the entries in short assets as well as these moves being an excellent timing indicator.

Interestingly, neither the language was removed from the policy statement yesterday although Yellen made it abundantly clear in the press conference in which she was not her normal dovish self,  that it is meaningless from the F_E_D's perspective as everything is data dependent. So why not just remove the language altogether? I suspect it was a red herring to distract from the fact that the median forecast for the F_E_D Funds rate continues to rise and did so again yesterday (the infamous "DOTS" ) for both 2015 and 2016 with yesterday being the first time the F_E_D put out 2017 guidance.

As I said above, we can see the underlying trade and divergences, but we can't know exactly why they are there. After yesterday's VERY weak knee jerk pop higher was completely erased before the close, one of the fastest F_O_M_C knee jerk fades I can recall, I started wondering about other possibilities for the HYG divergence.

Tomorrow's main event struck me as a VERY good reason for broad market support right now, THE ALIBABA IPO which may just be one of the largest, most over-hyped IPOs ever.

While the average IPO has raised about $5 billion and traded up +10% over the first week, you may recall from the FB IPO that they don't always tend to fare so well much longer. The last 5 largest US Initial Public Offerings fell on average -17% in their first year of trade according to Bloomberg. 

However Alibabe may be one of the largest IPOs in history. At the median of the expected pricing of $66 to $68, Alibaba could potentially raise $25 billion, one of the largest IPOs in history with an approximate valuation of $165 billion.

However, this is where things get interesting and may have an HYG/Market support connection. 

While typically an IPO is brought to market by 1 bank, Alibaba has five structured in the IPO deal. While the typical 6 month lock-up period which forbids insiders and deal makers from selling before the first 6 months, the top shareholders stand to make a fortune from the shares they agreed to sell in the IPO despite whether they are in the 6 month lock-up period. The 4 biggest potential beneficiaries include Soft Bank, Yahoo, Alibaba founder and executive chairman Jack Ma, and executive vice chairman Joe Tsai  who aree all under a 1 year lock-up , but will own 58% of the company's shares after the deal.

Where this really gets strange is the 6 month lock-up period as public filings have shown $8 billion in shares from insiders/early investors have NO LOCK-UP PERIOD WHTSOEVER, and none of them are identified, meaning come tomorrow, approximately $8 billion in Alibaba shares can be sold immediately for a quick cash out, which is highly unusual for an IPO with the standard 6 month lock-up before any of these people would be able to sell. This obviously includes insider as well as the IPO staging companies, 5 banks, which is unusual as well. THIS IS ABOUT 1/3RD OF ALIBABA'S  SHARES THAT AREN'T UNDR LOCK-UP, HIGHLY UNUSUAL. 

Why put in such a clause if these insiders/early investors and IPO staging banks didn't have an intention of selling on the IPO or shortly after? The best description of these people from public filings are called, "Some holders of preferred shares", that's as far a identification of the group not under the IPO lock up goes.

In any case, if you want to exit at the IPO, one thing that would be helpful in market support to get out at the best prices possible.

We know that the market works days, weeks, months and even years in advance as shown with home builder accumulation in 1999 and 2000, well before the start of the housing mark-up and eventual bubble. Point being, the HYG positive divegrence that I assumed had more to do with a head fake move being completed , may have more to do with one of the largest, most over-hypped IPOs in the market's history, which could also kill two birds with one stone as far as our initial head fake move/support goes as well.

We won't know until we know, but we do know that HYG which is in a lot of trouble on a big picture basis, was used over the last week, was accumulated for market support and just before this historic IPO.

As for HYG divegrences, we did see the first signs of weakness after yesterday's knee jeerk reaction to the F_O_M_C faded and gave back all post F_O_M_C gains.

Right now HYG looks like this...

 Intraday this is one of the first problems we have seen with HYG since the positive divegrence, right at yesterday's knee jerk highs.

There's at the end of the nearly week long HYG divegrence which just so happens to put in a head fake /stop run right at the white box, positive divegrence, before reversing to the upside, the head fake/timing concept in action. We also see some migration of the intraday negative to today's chart leading negative, but this is still small beans compared to the size of the positive divegrence over that week long period.

 This is the primary divegrence we have been following and have based near term market upside forecasts like Friday's "Week Ahead" post on. This divergence is leading positive as it has been and still in line. This divegrence will have to deteriorate before I suspect a move to the downside is on its way, however interestingly the expected F_E_D motivation hasn't done much which makes me wonder if one of the largest possible single pay-day IPOs tomorrow, may be the real reason, it's a good reason.

 Intraday the 5 min chart is showing some deterioration.

 And the 4 hour chart shows the highest probability resolution for HYg which is clearly down. Interestingly we saw a lot of deterioration in nearly every indicator as of July 1st, the first day after Q2 Window Dressing ends, we see the same here with a leading negative divegrence.

The green arrow to the left is upside confirmation of the price move.

And worst yet, the daily HYG chart which hasn't shown any exceptional signals until 2014, which should be very clear as the deepest leading negative divegrence on the strongest daily timeframe chart.

Thus I have no doubt of the resolution to HYG's current stance and the market with it, as far as whether BABA is the reason, tomorrow will offer a lot more insight.

We've also had excellent luck with IPOs, some of you may recall the FB IPO which was a nightmare and it quickly became the most hated stock, we were the first to enter a long position on the FB decline which paid off big time while it was still the most hated stock so I'm looking forward to BABA, but more so to unravelling the short term signals and whether Alibaba is the real reason market support was needed as $8 billion is distribution on an IPO would need some significant market support to make it profitable,  but why else put in such a clause allowing nearly a third of the shares usually under a 6 month lock up to be excluded right from the get go tomorrow?

Perhaps large IPO performance as cited by Bloomberg above might be a good reason given the market's condition?