Daily Wrap

What can be said about the market that it didn't say itself today? Remember those days earlier in the year in which the SPX was making all time new highs on gains of a 1/10th of a percent (+0.10%)? I was trying to express back then that in a normal market, that would be noise, not something to celebrate or be afraid of if you were short, it was a sign of the market's weakness. Some are saying today's move was because of Goldman questioning US Growth today, however as I have been trying to illustrate with pictures, charts and everything else, the market is like a pier with rotten pilings that may look fine on the top side, but as soon as some pressure , like waves crashing in to the pier, are applied, this is what you get and it can all be traced back to market breadth which can be traded back to 3C distribution divergences.

That said, it wouldn't surprise me if this move below key technical indicators that traders watch as if they were the only thing that mattered, may have its roots in the potential post Window Dressing bounce theory that couldn't begin until...Today.

Today the market is really showing you a sign of its weakness with the SPX down 1.32%, the NDX down -1.60%, the Russell 2000 at an official 10% correction and down -1.48% with the Dow almost neutral on the year with today's -1.40%, which puts it only up +1.34% on the YEAR! As we know the Russell is already down more than 5% on the year.

And Dow theory confirmation, the Transports were down -2.51% on the day, the biggest 1-day drop for them in 8 months. It looks like our timing on that entry was near perfect, but we haven't seen anything yet. This is EXACTLY why patience pays and letting the trade come to you gives you significant advantage.

I said I thought we needed to come down to the lower end of this week's range if any accumulation was going to occur for a bounce, but today's move was 1000% better as it created huge supply that could be absorbed on the cheap. Although I did switch some positions around at the end of the day, it's not because I've changed my thinking on the market, not even close. I do think it's likely that we'll have some more time for the market to put in some stronger signals before any potential bounce, however my half size positions are well covered by the gains they already brought in so I have some wiggle room, but if the 3C charts don't continue to show positive divergences as they did today, I'll be out of those positions faster than I got in them.

All of the major averages  (except the R2K which has already broken all), broke significant moving averages that traders would pay attention to and take action on. As I was suggesting, this creates huge supply at cheap levels, very easy to accumulate and no one  ever asks "Who's on the other-side of the trade?", as if their shares just disappeared in to thin air. Watch the volume around the time of the break of those 50 and 100-day moving averages. If the market bounces from this area, all you'll hear about is the support of the averages, but you'll know why it really bounced, it won't be because of some magical moving average or smart money finding value at those averages and deciding to get bullish.

The post-Window Dressing bounce theme from last Friday's week ahead post is still on the table.

While stocks were selling off, the safe haven treasuries were rallying. In fact, the 10 year's yield closed at 2.403% (interestingly as a sign of  the European economy, for the first time ever Germany issued new 10 year paper at a <1 i="" yield="">which is interesting because it illustrates the flight to safety today in to treasuries with the 10-year's move being the biggest 1-day decline (yields) in 13 months.

I did see some evidence of some distribution in to the 10 and 30 year Treasury futures today, which may be indicative of some rotation toward equities for a bounce and it happened end of day, the same time I noticed some stronger 3C market signals and weaker inverse ETF signals.

For instance..

30 year Treasury futures intraday first in line with the Flight to Safety Trade and then afternoon distribution, both the 10 and 30 year Treasury futures did this. While TLT wasn't quite as sharp and didn't go past 2 min charts, it also showed the same negative intraday signals in to the afternoon, but by and large, since our 8/28 call for a constructive pullback (meaning we expect TLT to go higher after a pb), TLT has done pretty much everything we've forecasted right down to 1-day pullbacks.

Some interesting quarter end data was out today as well. The quarter saw a huge plunge in High Yield Junk Bonds, the biggest quarterly loss since 2011 -1.7% and yields at 1 year highs. Because of the F_E_D's ZIRP Interest rate policies, the "reach for Yield extended to CCC and worse rated bonds being hit the hardest as people were willing to take on virtually any risk for yield as they believed the "F_E_D had their back", but there's a more ominous effect.... These cheap garbage bonds/credit saw new issuance fall to the lowest in 22 months, WHAT DO YOU THINK COMPANIES HAVE BEEN CONDUCTING STOCK-BUY-BACKS WITH? DEBT!

We already know the buyback party ended the previous quarter, but this just nails the coffin so the only marginal buyer of stocks left, corporate buybacks are effectively out of here which has additional market ramifications as we approach the end of POMO later this month.

Also of some interest today was how the system performed with a bit of pressure on it, the CBOE Futures like VIX shut down at 3:42 this afternoon (EDT), we've seen several other , actually quite a few market cracks, declarations of self-help and the such, meaning, once the real nasty stuff hits the tape, you have to wonder how robust the market actually is and the panic it will create when traders can't get out of losing positions due to a broken exchange, just the latest example today for those trying to buy (or sell) VIX Futures on the CBOE (or any other futures).

I caught another mainstream financial media source talking about market breadth today, they were focussed on the NYSE New Lows at 14 month highs,  I really wonder how ignorant the vast majority is to what's really going on under the hood or the pier as it might be?

Speaking of which, breadth declined today as you'd expect. On an intraday basis, TICK and my custom TICK indicator show some interesting things...

 NYSE TICK Intraday was hitting some -1500 readings today, several a bit worse, but note the end of day trend break to the upside, that's around the same time I noted divergences changing rapidly and TICK hit some positive +1000, even close to +1250 readings.

The custom indicator shows TICK hitting a new low for the month today, almost like a capitulation event and then ...

TICK increased to the upside in to the close.

However, the breadth damage is done. Among other things, the New High/New Low Ratio hit lows not seen since 4 years ago.

The NASDAQ Composite's Advance/Decline line is almost unreal when you look at the NDX still where it is, it won't be for long...

 NASDAQ Composite (red) vs its Advance/Decline line (green) hitting new lows for the year...

 The Percentage of NYSE Stocks Trading ABOVE Their 40-Day Moving Average hit a new low for the year at a mere 17.88%!!! This is not only a new low for the year, but all the way back to November of 2012!

The Percentage of NYSE Stocks Trading ABOVE Their 200-Day Moving Average also made a new low for the year with only 40% of NYSE Stocks above their 200-day!

As for the McClellan Summation Index used by trend traders, that's about the most negative short sell signal I've ever seen it give.

As for our daily tracking, the Dominant Price/Volume Relationship was Dominant in Everything but the Russell 2000 which had co dominance of Close Down and Volume Up and Close Down and Volume Down.

All of the other averages had a dominant relationship of Close Down/Volume Up, 21 of the Dow 30, 73 of the NASDAQ 100 and 307 of the S&P-500. This relationship represents a short term oversold or mini-capitulation event and most often the market closes higher the next day.

Taken with the other indications, it's probably not too far off from such a bounce (either this week or in to next week-obviously depending on ongoing divergences).  The 9 S&P groups had 1 close green, the Flight to Safety Utilities at a +.57% gain with Materials lagging at a -2.36% loss.

Looking at the history, we see a major negative shift...

On a 1 day basis 1 of 9 were green, on a 5 day basis, 1 of 9 were green, on a 10-day basis (2 trading weeks) 9 of 9 were red and on a 21 day basis, almost a full trading month, 9 of 9 are red.

As for the Morningstar Industry/Sub-Industry groups, only 12 of 238 closed green today. On a 5-day basis that's 15 of 238, on a 10-day basis 10 of 238 and on a 21-day basis, 16 of 238 closed green.

As for Leading Indicators, HYG was pretty much in line with the SPX which is better than a stick in the eye looking for a bounce.

 My SPX/RUT Ratio Indicator failed to make a lower low this afternoon with the SPX, not a huge signal, but interesting considering the timing and other events this afternoon.

Pro Sentiment is leading which is very interesting, not just one, but...

two as we use two to confirm, this is usually a pretty accurate indication of short term trade as a leading indicator.

And interestingly, High Yield Credit is also giving a short term leading positive signal.

Well that's what I have for you tonight, the divergences end of day that were enough for me to close some core shorts and open some smaller leveraged long IWM/QQQ, breadth significantly oversold as well as the next day Price/Volume Relationship along with the S&P and Morningstar sectors with several leading indicators leading positive.

It's up to 3C at this point to confirm, if I see that, I'll likely bring the short term long positions up to full size before returning back to a full short positioning other than a few small longs like MCP.

It's starting to get exciting and even better, profitable.

Have a great night!

TQQQ (3x QQQ long) & URTY (3x IWM long) Follow Up

I wish I could have gotten the Position Management & Trade IDea : QQQ/IWM post out sooner, but the pros come out at the end of the day and sometimes move indicators in the last 10 or 15 minutes. I needed to decide if this was a big enough move to not only temporarily close two of our best performing shorts (SRTY for sure one of the best performers out there), but also whether it was better to leave the proceeds in cash or to take a position and it wasn't an east decision, the signals are not as obvious after the fact.

I ended up deciding to close SRTY (temporarily) and SQQQ and rather than book the gains and stay in cash, to enter the reverse ETFs, TQQQ (3x long QQQ) and URTY (3x long IWM), but to do so in half size positions.

Given the risk reward profiles of both new positions and given the gains in the two closed positions, I can easily justify half size positions considering what SRTY alone has brought in.

If there are additional signals of more strengthening, I have room to add up to another 50% to bring these up to full size position which is what I'd like to see, but make no mistake about it, I'll be back in SQQQ and SRTY long likely within a week or less, they are where the long term trend is.

As for the IWM and QQQ in the decision making process, they weren't as helpful as you might suspect.

IWM

 IWM 1 min intraday is showing a divergence, this is certainly not the kind of divergence that would have caused me to take the action I took, although it is interesting and developing.

 IWM 2 min has a leading positive divegrence, again, a nice migration from the 1 min chart, but not action worthy, especially not for selling SRTY.

Although this chart may look more bullish in to the end of the day, that was not obvious in the signal until at least 3:45 and then needed to be confirmed in multiple timeframes and multiple assets.

 The 3 min chart is HARDLY inspiring enough to do anything whatsoever, so this had to be taken in to consideration.

And the 5 min chart, while positive and a clean divergence, it's not JUMPING off the chart, I'd normally say, "Give it a few more hours or a day". There's not much of anything beyond the 5 min chart.

QQQ

 The 1 min QQQ shows increased accumulation in to the EOD, again though, this was not apparent until at least after 3:30 and then still it's only a 1 min chart.

The 2 min chart is leading positive, but again, the extent was not visible until well after 3:30 today, around the time the pros come out in force.

 The 3 min chart, like the IWM 5 min is clean, but it is still a 3min chart, not exactly what I'd wager a successful swing trade on.

And the 5 min chart inspires nothing at all...

As for the IWM itself and the August cycle, not only has it entered stage 4 decline, but is well through the start of the cycle at stage 1 accumulation, so again the concept of staging, "Knowing where you are to know where you are going" worked perfectly with HYG leading the market.

As for the 3x long ETFs bought (50% of full size positions), TQQQ and URTY (3x long QQQ and 3x long IWM respectively), they didn't quite solve the puzzle either.

TQQQ

The TQQQ 1 min chart went from a steady positive divegrence to a sharply leading one, however, once again this was late in the day before becoming obvious enough to warrant some attention.

 As you can see, the TQQQ 5 min chart is not nearly enough on its own to inspire the confidence to take on a position here, although I had other reasons, this is one reason I held off at a 50% size position for now.

URTY

 The URTY 5 min chart wouldn't cause you to buy anything.

While the 2 min chart did show some progress, on its own, it's not enough to buy anything.

This is what grabbed my attention as the leveraged ETFs are usually the first to show a signals and the most defined signal, I suppose because of their leverage. Remember the point I demonstrated yesterday, the shorts in place are strong hand shorts, not easily run out of positions.

SQQQ

 The 1 min leading negative divegrence in SQQ grew quite extreme at the end of the day.

This had migration to the 2 min chart leading negative as well and at the time the pros trade the market. There were some other signs, but SRTY grabbed my attention...

SRTY

 The 1 min chart has a steady negative divegrence, on this timeframe it looks like short term profit taking.

 On the 2 min chart it looks a bit more serious than just profit taking.

And on the 5 min chart, it was more than convincing as it led to a new leading negative low and most of that occurred in the last hour of the day.

All in all, I think it was a good decision, maybe a little quicker on the draw than normal, but we had expectations coming in to today which included the kind of price action and accumulation seen.

However, just as a reminder, I will be back in SRTY and SQQQ very soon...

 SRTY 30 min positive and still in line confirming more upside in the days/weeks ahead.

And SQQQ 60 min with an enormous leading positive divegrence/base . These are ultimately where the money is at, but in the near term, I think we can turn over some gains and compound and still be back where we need to be in time to use those extra gains for larger positions

Position Management & Trade IDea : QQQ/IWM

I'm going to close SRTY and SQQQ positions as they are seeing distribution.  At this point I'll replace those positions with half size URTY and TQQQ longs for a swing trade at half size rather than full size (IWM 3x long and QQQ 3x long).

I'll decide later if these positions warrant anything beyond those position sizes.

Market Update

*The latest 3C readings are at the bottom f the post.

This is such a beautiful day, and it's really nothing more than a drop in a bearish bucket, as I've seen numerous bearish breaks that wipe out months of longs in a single gap down, in any case, it's kind of hard to care right now whether there's a bounce or not if you've been adding shorts in to strength as we have planned since early August.

My SRTY position is up +18% , FSLR( a newer short entry) is up 7%, IYT up 3% (which is just a start for these longer term position trades), FAZ is in the green (the position was just recently added back after an August 1st exit at a gain and re-establishing the position in late August ( so it's just getting rolling again), HLF is over a 32% gain with no leverage, FXP which was entered Sept. 9th, at the bottom,  is over a  +23% gain, the position we have been building in SCTY short is at a +22% gain, our long term NFLX short is near an 8% gain, our recent partial position AAPL short is in the green, FB short is at a +11.25% gain (short), DE is at a +8.25% gain (again short), and out Tracking Portfolio is is in the top 3% of over 600 competing portfolios.

So it's a little hard to get excited about a bounce when we are in the very early stages of stage 4, in other words, most of these assets and the market in general haven't even broken their tops yet.

However, just as was talked about since Friday and this morning as there was some surprise that all of the overnight bad news didn't translate in to a strong market today, the which is exactly what we were saying about Wednesday being the start of a chance to accumulate because if you are dumping the worst performing assets and need them off your balance sheet, but would also like to play an oversold bounce on those worst performing assets, you have to wait until the quarter is over, which was at 4 p.m. yesterday.

The numerous and very visible technical breaks in the market create an opportunity to accumulate huge supply on the cheap...

 The SPX breaking its 100-day moving average is a sell signal and a stop out area creating a lot of supply that can be accumulated on the cheap.


The Dow breaking its 50-day average is a widely followed sell signal, again creating plenty of supply on the cheap,  no one ever wonders about who's on the other side of the trade in these circumstances.

 The NDX breaking its 50-day and the Russell now in a 10% correction of the July highs, already under all important moving averages translates in to lots of supply on the cheap and no one questioning any entity that may be accumulating it by taking the other side of the sell orders.

Our Transports short just broke its 100-day moving average.

I think you probably get the idea, SUPPLY, SUPPLY, SUPPLY and cheap.

Still, although I really would like to see some near term swing trades just to compound and roll over gains, it HAS to be in a situation in which I trust the market for a counter trend move as stage 4 of the August cycle is firmly established.

Looking around, here's what I've found so far.

Leading Indicators...

 Whether applied to the SPX or the IWM, the SPX/RUT Ratio Custom indicator is not confirming a new low here.

Professional sentiment is on the rise, they are likely accumulating on the cheap getting ready for a counter trend move.

Yields reverted back to price rather than price up to yields, but that's to be expected as Treasuries are the flight to safety trade today.

 Although HY Credit has some serious Q3 holes in it that are going to end the trickle of corporate buybacks that are left as the trend dies last quarter, it is still putting in a short term positive divergence here. Again, this is a circumstance in which you can't consider this chart alone, you must consider the larger, much more negative HY Credit picture, that's where the long term probabilities are, this is where the short term, smaller bounce probabilities are. If you put both together, you can make some nice trades that work in your favor both short and long term.

 HYG is supportive of the market despite recent weakness yesterday .

The 3 min HYG divegrence is still intact.

Intraday as we approach some of the lows, positive divergences start popping up.

 There's migration on  HYG's 2 min chart as well showing this is building,  but not before they created lots of supply on the cheap as they have much larger positions to fill than typical 100-lots.

 The Custom TICK Indicator shows the market internals today, this has actually improved SIGNIFICANTLY since being captured.

 SPY 2 min in the positive position, still the 5 min chart is the Maginot line, divergences must hit at least 5 min before considering changing anything from the current longer term positioning for a shorter term trend trade.

 SPY 5 min trying..., still not there.

DIa 3 min trying intraday

QQQ 3 min accumulation intraday

Still the 5 min is far from screaming for a long swing trade here.

 IWM is most interesting with 1 min intraday above.

Migration to the 2 min chart...

As well as the 3 min chart and,..

The 5 min chart. If there's 1 asset I might flip for a swing trade it would be SRTY for URTY for a swing trade and then back to SRTY for the trend trade.

This is the latest NYSE intraday TICK capture, on the downside trend we hit more than -1500, but we have a little break of that channel...


I also want to see index futures post at least a 5 min positive divegrence before I consider changing any positions for a short term long swing trade.

Since things move so fast, the most current 3C chart signals are as follows...

SPY: the 2, 3 and 5  min have positive signals, they aren't nearly strong enough to consider any changes there yet, but they do seem to be accumulating weaker prices, although it seems there's a lower destination in which they really start to pick up shares on the cheap.

DIA: 1, 2, 3 and 5 min are all in positive position, thus far the 3 min chart has the strongest divegrence, it's still not enough to convince me the risk/reward ratio is worthwhile, after all I can sit on these shorts and ride out any potential bounce and still be fine, a swing trade here is just to roll over some additional profits/compound. I'm not risking long term positioning for anything less than a very strong reason.

QQQ: While there's some sign of a 5 min positive, it's the 2 and 3 min charts here that are shining so far, still not enough.

IWM: The 1, 2, 3 and 5 min charts are probably the best looking of all of the averages, they are positive, but  THEY ARE NOT JUMPING OFF THE CHART . They need to be at that position in which they are nearly impossible to ignore before I'll change any longer term positioning for a swing trade.