Daily Wrap

Tonight's Daily Wrap may be a bit shorter than usual because not much new has been added. Friday in the The Week Ahead post there were a couple of luke warm opinions about this week, first...

" If there's any substantial corrective bounce, I'd expect it to come AFTER Wednesday with the signs of accumulation of sold small caps and mid caps during window dressing, potentially being bought back on an oversold/short squeeze basis, yet still a trade, not a shift in positioning."

If 3C charts showed us anything today, they showed at least that much, some accumulation, nothing big enough to warrant taking long risk or trading around (closing 3x inverse ETFs for 3x long until the move is over and re-entering the 3X short ETFs), even with the leverage, I don't see what we have on the charts right now to be worth the risk, the risk of being long and the risk of letting go of short positions that are working rather well.


Secondly from the same post,

" I'm thinking some more short term downside early in the week, perhaps a lower low than yesterday's before they build a base large enough to really bounce from...leading indicators look like the next move near term early next week will be down a bit as does HY credit."

And obviously today's action on the open was a bit extreme , but comparing where the 3C signals were on Friday, we ended up not only with the lower low, but somewhere around the expected downside and the expected timeframe of early week.

As for what actually happened today, it was almost a snoozer, but things were happening. This is not the kind of market AT ALL, that I want to take any new positions in, just let what's on the table work and wait for the right entry with good confirmation, obviously I suspect that will, if it does indeed come, be in to Wednesday as the new quarter starts, but I don't know for sure whether today's bounce back in which none of the major averages except transports made it in to the green was part of a divergence that can lead to a post Q3 attempt to close the averages at the best levels possible for the quarter or whether it's the divegrence that could lead to a post-window dressing bounce.

The major averages on the day with transports (red) closing green

On the day, it seemed a lot more to me like the price action was more geared toward the best close for the averages for the month and quarter, not necessarily the divegrence that could produce a post-window dressing bounce in which thousands of stocks that have been sold because of VERY poor quarterly performance are picked back up after the reporting period is over on a deeply oversold condition and bounced. The main issue I see with that is according to the charts I'm seeing, the shorts that are left in the market are strong hands that aren't going to be squeezed.

Initially HY Credit was beaten down hard this morning, although it let up later in the day and while Investment grade credit saw a flight to safety bid, it underperformed stocks.

One asset that didn't underperform stocks were treasuries as they ignored the attempt to make it back to green off that ugly open with a TICK plot of more than negative -1800.

treasuries were bid early and despite stock snap back, remained bid.

I mentioned this morning there was an attempt to ignite some momentum overnight in USD/JPY which failed...

 Since futures opened this week (green vertical line), it has been down obviously Hon Kong is weighing on the market and even a sharp pop in USD/JPY was totally ignored by ES 9purple)... However, the currency most reactive to events in China, the $AUD had a bit of a different relationship...

AUD / JPY 1 min vs ES intraday, the only time they really peeled away from each other is during the last hour in which it seemed like they were trying for a green close and missed.

For me, nothing has changed, if there's going to be any accumulation for a post Window Dressing Q4 start, the market needs to pullback and be accumulated more so than it was today which seems as if it was meant specifically for today, gas up as much as possible and try to make it to green which I suspect will be the same theme tomorrow. If so, then the Wednesday date for any potential move to even really start would be about right, but a lot can happen between now and then, especially considering we are already trending down, we are already in stage 4 for the August cycle, we are making lower highs and lower lows and HYG is leading as expected with another lower low.

As far as breadth today, you could draw a sideways scribble next to any of the breadth indicators and that's about accurate for the day, NOTHING MOVED , nothing improved and for that matter, nothing deteriorated much either.

Short term 1-day oversold events did occur with 8 of the 9 S&P sectors red, Utilities, the Flight to Safety Trade were green at a +.65% gain and Consumer Discretionary was the laggard at a -.52% loss, which really wasn't that bad considering the way the markets opened.This is almost the opposite of Friday's close in which all closed green which is a 1-0day overbought condition that usually closes red the next day. Today therefore is a 1-day oversold that "usually
' closes green the next day, the issue is we have been seeing 2 and even 3 of these days in a row before seeing any relief in the market,  but they have been very useful.

The Morningstar groups had 174 of the 238 red today, that's almost the opposite of Friday's 220 of 238 green. While not quite as extreme, Friday's figures pointed to a red close today while today's are supportive of a green close tomorrow. 

The Dominant Price/Volume Relationship Friday was EXTREME at Close Up / Volume Down, the most bearish of the 4 combinations and again suggesting a 1-day overbought condition that should close red today as we did. Today's Dominant theme was non-exxistient so the only thing that's 1-day oversold is the S&P sectors and to an extent the Morningstar groups, but not nearly as bad as they were last week, thus today felt "LUKE WARM" and one of the reasons I think today was more about closing the quarter as best as they can. 

As you can see, when these indications are at extremes, they are very effective, the same in a large way can be said of 3C signals, because they didn't pullback and build today, instead chasing the best close possible for the quarter, they looked a bit like warm.

HYG did put in an interesting 3 min leading positive that stops there, again whether for the end of the quarter or a post Q3 bounce, I can't say and that's one of the best reasons to sit on my hands right now until things become clear in this regard and I know what kind of probabilities I'm looking at and what kind of risks.

Of course there is the new Indicators, VIX Inversion and the SPX/RUT Ratio that seem to suggest the general theme for the week or at least mid-week is on track...

And I'm not saying there's not gas in the tank with the 3C signals, the question as tomorrow is the last day of the quarter is a matter of intension.  We're not betting on red or black like a Roulette table, if I was, based on what's left of the divergence and the character today, I'd say a green close is in the cards for tomorrow, but a green close doesn't mean it's worth the risk of being long or closing short positions to trade around a corrective move.

Until that aspect of the market becomes more clear, I'm sticking with the Stage 4 trend, the distribution on a big picture basis, horrible market breadth and any other one of a hundred other indications showing this market looks a lot like the two pictures posted Friday , the first 3 actually in Week Ahead charts. & Daily Wrap.

Market Update

This is one of those days in which Kenny Roger's theme song about playing cards really applies, know when to press your advantage, know when to back off and know when to look for tells in other player's faces (I'm not sure if he covered that one).

In any case, today just isn't a day for doing much other than observing for the most part and position management, but that doesn't mean it won't be an actionable area very soon, it just comes down to objective evidence, how much there is, what the probabilities are looking like, the risk, etc. before we jump off and make a bunch of moves.

In that spirit, I'm updating the market again, I think you know what my basic premise or theme is for the week, a pretty decent probability of a post Q2 end (Wednesday) bounce or building in around that area. When I say bounce I am not saying anything other than that, a normal market corrective move, not a change in our long term analysis/Highest probabilities.

Leading Indicators are REALLY pulling their weight and give us a perspective that we wouldn't have without them. That perspective is not useful at all unless it's taken in whole, if you take the signals from the Leading Indicators using multiple timeframe analysis, they virtually tell you what to do, how to do it and when to do it. The longer timeframes are always the strongest probabilities and the trend I want to trade with, the shorter term indications are tactical ends to that mean.

 The SPX chart (Daily) shows a possible candlestick formation known as Falling 3 Methods, a consolidation/continuation pattern that ends with a move lower, however typically the second day that is inside the large down candle body (Thursday) would be higher than Friday's, that doesn't look like a certainty. Another possible candlestick formation would be several inside days or what would be considered a Harami Reversal and that would be to the upside, very short term and with a hammer like candle developing today, this looks like a stronger possibility and it's in line with our hypothesis for near term trade for thee week or the middle of the week.

 The VIX Inversion and more importantly here, the SPX/RUT Ratio Indicator in the middle on a 1 min chart, from left to right shows Thursday as being a small base as the indicator is positive and Friday we get the bounce off that base which sees the indicator turn negative right in time for this morning's drop to a new cycle low, yet the indicator is positive at the lows this morning and we have a gap fill or thereabouts and at #4, we're pretty much in line. The VIX Inversion is close to a buy signal, even though small ones are for small moves and larger for larger moves as you'll see below.

This is a longer term 15 min chart of the same above covering the July decline and the Augsut cycle with the indicator at #1 contradicting rising price which turns to the July decline, at #2 a positive indicator as the SPX makes lower lows in a small range we identified as a stage 1 base and as we reach stage 3 top in the August cycle, the indicator is negative through stage 3 as well as the "Chimney" head fake or failed breakout attempt and at #4 we have a new low so the larger picture here is calling SPX prices lower, the very short term picture, while not decisive yet, is in line with the ideas we had about this week and the end of Window Dressing/start of the new quarter.

 This is the SPX price inverted so you can see the relative performance of VIX futures vs the SPX, they are outperforming on an intraday basis, so there's a sense of  fear in the air which is what we usually will see at a short term bottom.


 Spot VIX vs the SPX is showing the same, nothing out of hand, but it gives us a hint of what sentiment is broadly speaking.

HYG continues to do as predicted not only in making lower lows, but in leading the market as it has down for several months now. After this morning's new low it went essentially neutral on the day.

 This is a VERY clear break on a long term chart for HYG, it is one of the clearest signals as to where the market is going. There are reasons beyond just "Equities follow Credit", there are arbitrage relations as both are arbitrageable and while this can get in to all kinds of areas, the gist is, I've never seen Credit diverge from the market like this and the market not respond (poorly in this case).

Again, as mentioned above, the perspective offered by leading indicators isn't all that useful for actually making money (although you can impress your friends with stock market macro predictions) without looking at multiple timeframe analysis.

 Pro Sentiment  is improving as the day goes on which is about right as you may remember one of the things I was looking for earlier this morning was for prices to pullback a bit to create the rounding bottom and leading indicators responding positively in to that process is just more evidence.

Our second version of Pro-sentiment used for confirmation shows the same so it looks like pros are getting ready for a short term bounce trade as well.

Of course back out and look at the big picture and you have a different view, take the two together, first understanding the big picture and then the near term and you have a road map for which way to trade and when/where you'll get the best entry and the lowest risk.

 Yields are still calling the market a bit higher, nothing crazy, not even nearly as strong as the divergence at the head fake move for the week of the 15th.

 HY Credit, this type is not used as a lever like HYG, is deteriorating, again telling us that near term price strength is an illusion if you're thinking it's anything other than the short term move (still a probability, not a high one yet).

And the long view of HY Credit shows what I've said numerous times, as Q3 started on July 1st, everything changed for the worse and has been getting worse since.


The TCK...

The near term TICK trend (1 min)...


As for 3C charts I try to save for last so they are the most up to date.

As for Index futures divergences, I usually look for at least a strong 5 min chart's divegrence to trade from, in the current situation, almost every timeframe of 3C applied to Index futures is simply confirming the downside trend. The 5 min charts do not have either a divegrence or one that's anywhere near reasonable size for me TO CONSIDER CLOSING SRTY, SQQQ (3X INVERSE ETFs) and try to trade the long side and then re-enter back on the short after a small bounce.

I can't say that this may not develop tomorrow and perhaps I'll take a different view, but for now this looks like a lower high/lower low swing to the upside that's barely stronger than the last lower highs that have defined the downtrend, so thus far, just not enough evidence to let go of these positions that have been making money nearly every day and have created a nice smooth equity up-trend.

 The 5 min SPY has a positive divegrence, it's just, "Is it big enough to warrant taking the risk of letting go of winning positions as the market gets more volatile and less predictable such as the nearly 1% gap lower on a Hong Kong protest.

The divegrence on the SPY 3 min should be obvious, I drew in the rounding reversal process, at this size it's ok, but not worth the risk of changing positions,  at this point the play for me is still the same as last week, short price strength is appropriate assets like PCLN.

 QQQ 5 min and its divergence which are really 2 distinct ones, but the second is stronger than the first.

 And the 1 min chart so far leading, so unless there's a deeper pullback and bigger base, I can't justify the risk of letting go of shorts that are working for some small long gains that could give way any minute with such a minor base for support.

 IWM 15 min, a nice divegrence, just not a big enough base area so I'd want to see price follow the yellow arrow and the divegrence to continue positive to consider trading around this area.

It's not a matter of probabilities as to whether the market bounces or not, it's a matter of the quality and reliability of that bounce.

 IWM 2 min

And the afternoon TICK, not anything extreme, about +/- 1000, again, this is all in line with the 1-day oversold readings Friday, it's in line with the Week Ahead idea of a bounce in to Q3 on Wednesday or in to it, it's just not enough to take the risk of going against the path of highest probabilities.

UNG / UGAZ Follow Up

Our lastpost for UGAZ (UNG 3x long) trade management was Sept. 24, UNG/UGAZ Update which was a look at the asset which looked great and addressing Cramer the night before saying he liked it, but saw a pullback below July 28th's low of $28.59. While I agree in principle, commodities are a bit different with head fake moves and as I said in the post, "I have no objective data that points to such a move being a probability".

In any case, since then UGAZ is up over 18%, our UGAZ long is up +19.32 % and it's making a breakout move today which needs to see volume pick up and hopefully some follow through so I suspect we'll know a bit more about this move of  over 3% in UNg today , by the end of the trading day, again look for the breakout to hold and increasing volume which we saw on the breakout intraday.

Updated charts...

 Here's the range and if this weren't a commodity, I'd say a downside head fake/stop run below support would be extremely high probability, I simply had no evidence that this was any probability as of the 24th and still don't unless this breakout fails, then it might start showing signals with some probability, but overall this is an excellent long position even on a head fake move/stop run  and I think it has trend trade capability.

The orange area is resistance from a gap and former resistance, the red trendlines are the stage 1 base area. We have price above the base, but volume hasn't picked up on the day yet, although it did at the breakout intraday.

Here's the volume on the intraday breakout which is a nice start, but the close it what really matters here and after that, follow through on the upside. I'm not worried about UNg/UGAZ, if it fails here, I have little doubt it will make the breakout, although I'd rather see it just make it here of course.

 Since the last update, he 30 min chart just grew stronger and has a sharp leading positive divegrence.

 So far the 5 min chart is in line, confirming price action so I don't see any big threat of a failure at the moment. There is profit taking on the move as it is very parabolic which I wish it weren't, as impressive as they look, I don't trust parabolic move, hopefully that fades a bit and we get a few intraday pullbacks creating some support and shaking loose the weak hands.

This is an intraday 2 min chart and the profit taking on a very steep parabolic breakout so not a surprise, but we don't want to see that migrate to the 5 min chart. Volume increasing at the close and holding the breakout would go a long way toward confirming this breakout and of course the one thing the market can't do on the upside (but does easily on the downside) is follow through with additional gains the next day or within the next week as they often will consolidate a bit after a breakout.

Congratulations to UGAZ longs, I imagine most of you got in near the bottom and have a decent near 20% profit in a few days which is nice on its own.

Trade Set-Up: PCLN

PCLN is one of the watchlist stocks that looks great; it was part of the September 16th Short Sales Asset Watchlist in Here they are... with the note including some upside pice alert target zones...

" ...Just looking for the right bounce... Last night PCLN was mentioned in the Daily Wrap as a likely bounce candidate for today based not only on the wider expectations, but the hammer closing candle on higher volume.

> $1175, $1185, $1200, $1220, $1230, $1240, $1250"

PCLN did bounce off the 15th's hammer and came right back down to the long term top/H&S neckline as it was one of the many smaller counter trend bounces seen in this morning's charts of SPY/IWM, "Lower Highs/Lower Lows".

This Sept. 11th post, Trade Idea / Trade Set-Up (long Term) PCLN gives you a wider perspective of PCLN's BIG picture and just why it's such an interesting short sale on a bounce which I think it's a,bout to attempt again, however this time if it has a little market support, some of those better entries listed above may be in play.

I'll leave the longer term charts for the post linked above and just kind of catch up to where we are now.

 This is a 2-day chart just to show the stage 2 mark up in 2013 which was a gain of +87% and the stage 3 H&S-type top, with a loss on the year of -0.33%, essentially flat, that's your change in character in the trend, that's the stage 3 identification and it's pretty low in the top, meaning it likely doesn't have more than another bounce in it before it break below the neck line and transitions to sage 4 decline.

The longer term 3C charts linked in the September 11th post show the very high probabilities of PCLN losing a lot of ground in stag e 4 decline, which is what makes t attractive as a core short position or trending trade.

 Here's a close-up of the neckline, Ou=r September 11th post identified an area of support coming in to play which was September 15th and the bounce from there which was covered September 16th, although it didn't get far.

Again, today, like September 15th, we have another "Hammer" candle showing short term support right at the top's neckline, a perfect place to bounce and that bounce being a perfect move to short in to price strength/underlying weakness, although I'd like to see some of our upper targets hit and I think that's a higher probability now than last time.

 The 15 min chart shows a lot of distribution signals through the downtrend on slight price strength carrying PCLN lower,  however what I'm trying to point out with this chart is there is no strong or any positive divegrence on a 15 min chart, thus any upside doesn't have a lot of support, meaning I wouldn't have any fear that PCLN is somehow going to crawl out of the grave and come back to life.

 The 10 min chart however, does show the last positive divegrence and hammer support at Sept. 15th and currently, thus a little larger divegrence and hopefully a better entry closer to the >$1250 area.

 The 5 min chart is simply a bit more detailed and shows the two divergences as 2 separate areas, as the previous bounce failed, but it does look like a stronger overall position to bounce from.

Intraday the 1 min chart looks like it could pullback a little,  this would only be useful if you were trying to piggy back PCLN's bounce on a short term swing trade, however while you could do that and enter the larger play, the short position on a bounce, the higher probability trade by far with a lot less risk and a lot more profit potential is the short entry, although I think both can be played , but I'd want to try to time any long entry for a short term swing trade with the broader market as a whole as we have been talking about for this week going in to Q3 on Wednesday.

Overall I think this is a pretty good spot for a long piggy back entry, for a call position I'd want to see a more dramatic pullback which is a coin toss looking at the intraday chart.

Market Update

If this morning proved anything, it's that a jittery market combined with no support from market breadth is a dangerous combination.  I think Friday's Week Ahead charts. & Daily Wrap post best captured it with the pictures at the top of the post of a nice long pier over the ocean, followed by a market breadth chart, followed by a picture of the rotten pilings holding up the pier which would not be visible to those strolling on the pier, was the best analogy. When stress, such as the events in Hong Kong are applied, the pier wobbles until it collapses. Think back to the numerous geo-political situations like the Arab Spring, the near Syrian invasion and even the Ukraine situation; we had much more dire events happening and the market at the time shrugged them off, however a protest, admittedly one that stirs some nasty memories, was able to really knock futures down and even an overnight attempt to ignite momentum with USD/JPY failed, which seems to be the new norm...rather than trying to influence the markets overnight which you'd think would be easier, it seems the PPT is doing most of their saves during market hours, I'm not sure why, although it could be connected to the recent trend NANEX has uncovered of odd lot orders and 1 millions of 1 share orders, it may just be an easier way to influence the market at speed with HFTs.Who knows?

Friday's Week Ahead foresaw some possibility for a bounce around Wednesday, the first day of the new quarter, although I'm very interested to see what tomorrow's 1-day Reverse Repo Facility ends up using as the last day of the last quarter, banks set a new record use of the facility; this is Window Dressing at its height in which banks hold assets for a single day so at the end of the reporting period they appear to have a stronger balance sheet than they actually do which we saw In April and June on the last day of the month.

While I suspect most window dressing is done because of the Trade+3 settlement rule, the new quarter starts Wednesday. This is why I suspected on Friday that a lot of the small and mid caps being dumped from portfolios (due to severe underperformance through the quarter) so they don't show up on current holdings for the next filing and prospectus for new clients, may be picked up again Wednesday on an oversold/valuation basis or a short squeeze or even just a sharp counter trend rally.

There was some evidence of this in this morning's A.M. Update in some of our newest leading indicators, now I'll show you some evidence in the 3C charts and  how I'd expect this to develop and where the opportunities likely are.

I'll use the SPY as an example first...

 This is the same chart from earlier this morning of the SPY and IWM with lower lows and lower highs, the one thing you might notice is the shorter distance between those swings  recently, a loss of momentum as it seems most of the selling for Window Dressing is complete, which is telling in itself as there's not much buying, which isn't hard to understand when less than 50% of all NYSER stocks are above their 200-day moving average.

 What I think needs to happen and probably will happen in to Wednesday is price will flatten out more creating a sort of rounding bottom, that means price will likely come down from the current gap fill of this morning, today, maybe tomorrow.

 Last week we had some 10/15 min charts with some positive divergences , but for the moment they were nothing more than interesting and something to keep an eye on as the 5 min charts before them or 10 min charts in some averages, didn't link up with intraday charts, the bridge around the 5 min timeframe was missing so until it either appeared or these divergences disappeared, they are something to keep in mind, but not a strong probability in and of themselves at that point.

 This is the 15 min SPY chart with my rough estimation of price movement over the next day or so, note that it comes back down toward last week's lows and this morning's, creating a "U" shape.

 The one thing this morning gave us is the 5 min bridge as you can see above, again the heavy lifting of moving the market is done during normal hours rather than overnight on low volume which is a bit strange, but I think NANEX caught on to a new way to manipulate the market using 1 share and odd-lot orders in rapid fire succession using HFTs.

Obviously to come back down we would expect to see an intraday (1-3 min) timeframe start to go negative like this 3 min chart as the gap fill is near complete, which gives us that rounding bottom shape and fits pretty well with ideas about what may occur Wednesday on a massively oversold basis, also interestingly were the breadth, 1-day oversold readings Friday in S&P and Morningstar sectors and Dominant P/V relationships which where stretched to the limit.

One note on that, it was only a month ago that one of these days would create a next day move in line with the oversold/overbought condition, now it's taking 2, 3 and even 4 days or more of this condition to get any upside traction, whether that's a true change in character or a result of Window Dressing is hard to say, but I lean toward both.

 Here's the Custom TICK / SPY indicator, note Friday's action as well as today's.

As for the other averages, I always look for confirmation...

 The Q's 15 min positive is there.

The 5 min bridge is now there and...

The 2 min intraday pullback negative is there.

The IWM 15 min positive is there.

 The stick save this morning on the open gives us the 5 min bridge...

And the 2 min intraday negative for a pullback is there.

As for the MSI, it was of some help this morning, not a whole lot...

 Most Shorted Index (yellow) vs SPX...

Of course the easiest way to se the intraday reversal to lows to create that rounding is the intraday TICK which hit -1800 (actually more) on the open this morning, the uptrend channel is the gap fill and that channel has been broken, so the ideas about a Wednesday bounce don't look too far off.

If we get stronger confirmation, I might consider some trading positions in 2 or 3x long ETFS like TQQQ, UPRO or URTY. However the evidence would have to be pretty strong for me to let go of core shorts and trade around this area, which would means closing positions like SRTY (3x short IWM) and buying URTY (3x long IWM) for a bounce, then selling URTY and jumping back in SRTY (3x short IWM). I'm finding the counter trend upside trades have not been easy or very successful (options any way), although there's time for them to still work, but I have to consider that in deciding if it's worth risking letting go of something like SRTY which I'd do at the lows for the market and then buy the 3x long ETF for a bounce, SRTY alone has carried my portfolio's equity line higher.

So we'll see what the probabilities look like, for a pure trader on a short term basis, I suspect you'll find there's a trade there, however for the moment until we get back down toward the lows of last week or this morning, I'd probably sit on my hands as those would be the actionable area with the least risk so long as good signals mature more.

Other than that, , since I suspect there's some time of not doing much, I'm going to keep plugging away through the watchlist and may be adding some more alerts and see what is the most enticing looking of the candidates.

I'd caution one thing though, sentiment changes fast, we (some members and I) have figured it only takes about a day and a half for retail sentiment to go from desperation to wildly bullish, be careful not to get caught up in that, those pier pilings that are rotted through don't fix themselves just because there's no waves crashing in to them for a brief period of time, the stresses will be back, that damage is there, it's at historic levels as far back as I can see and it's not going away, in other words, while there's lkely opportunities for trades, now is not the time to disregard the big picture on a sentiment shift.