Daily Wrap

As we had expected based on some very nasty diveregnces at the close on Friday, today and specifically the open was weak with 3C picking up where it left off.

The early gaps up on the open like the Dow above, were immediately sold off in line with Friday's closing 3C divergences. The weakness helped Friday's SQQQ long +.55, but more so the SRTY at +2.52%.

The averages saw an early positive divegrence, it looks like it was used to sell in to VWAP intraday (SPX Futures 1 min), more on that shortly.


One divergence in particular that was noted was the $USDX, after having its best day in 15 months on Friday it saw it's biggest loss in a year today as we had mentioned the $?USD distribution in Friday's Energy post and the Daily Wrap/Week ahead post.

$USD negative divergence and worst daily loss in a year on Euro strength.

Our positions in gold and miners were up today as were broad based commodities on $USD weakness with UGLD up +3.98% and Friday's NUGT long up +7.98%.

Commodities vs. SPX (green) intraday, up on $USD weakness.

As I posted Friday, I believe we have some early week weakness that can build a bigger base as last week's base was too thin and "V" shaped to do much so we may get a bounce from that. I posted Index futures which should give you some idea, but here's another look...

 The big picture is definitely not looking good, interestingly this 60 min 3C chart of the IWM looks a lot like breadth indicators.

 The QQQ 60 min is showing the same big trouble, however from this general area, a bounce creating something like a right shoulder in the Q's and SPY/SPX below wouldn't be out of the question with a strong enough base which is what I've been talking about and why I moved back in to core shorts until/unless the market proves it to me.

SPX 4 hour leading negative divegrence.

 Locally , other than a double bottom, an Inverse H&S base is possible too, although I doubt it would be a real base with appropriate volume, rather a cardboard man as most traders don't know how to verify an Inverse H&S base.

I have marked a left shoulder a head and the current negative divegrence (this is how IWM closed on the 1 min leading negative), could create a right shoulder or a double bottom.

 As you can see, there's still a lot of weakness in the IWM chart especially so I'll hold the shorts re-entered Friday, specifically SQQQ and SRTY.

Looking at a 30 min ES/SPX Futures 3C chart, you can also imagine an Inverse H&S forming, it has the divergence for the head, it needs a right shoulder/pullback.

The 5 min ES chart suggests that's exactly what's going to happen, at least the pullback or move down part.

Russell 2000 Futures have the same deep leading negative divergence.

The QQQ Futures do too, but they look the best on a relative basis,  so we'll let the market prove it to us, otherwise, I'm content to stick with the shorts and add where we can. If we can play a H&S top, right shoulder bounce after a stronger base is created, I'll take that too, but we are not there yet, just something to consider.

As for Leading Indicators, HYG stayed with price today, but remains in short term leading position and long term leading negative position.

Pro-Sentiment indicators are biased slightly toward leading positive, but not by much. Yields did what they were expected to and pulled the market lower toward them as they most often do.

HY Credit remained "supportive " today, not leading, but still in good position overall to be supportive if the market can put together a small base,  again, we'll let the market prove it and decide if it's worth the risk, so far the trades and signals have been spot on.

The SPY/RUT Ratio Indicator is quickly becoming one of my favorite leading indicators and here's what it has to say about near term price action...

On a short term basis it is saying what 3C is saying, it is not confirming price in the area, but rather suggesting a pullback toward last week's lows which is what I initially was thinking, if we see that, we can verify accumulation with 3C and tell whether it's a base for a bounce or likely to just slide to the downside more.

Our MCP long today was also of interest, putting in a +8.09% gain on volume as we have recently covered its rounding bottom behavior.

As for internals... Among breadth indicators there was virtually NO movement today, almost a wash and I saw quite a bit of that in TICK as well with very wide swings, +/-1250 not uncommon.

The Dominant Price/Volume Relationship was Close Down/Volume Down with 15 of the Dow, 48 of the NASDAQ 100, 729 of the Russell 2000 and 241 of the S&P-500.

There's no strong next day relationship with this one, I call it, "Carry on" as the market tends to do what it was doing so I would suppose moderate weakness? The market breadth definitely wasn't oversold today.

Of the 9 S&P sectors, 3 closed green with Energy leading @ +.11%, barely a move and Consumer Discretionary lagging at -.59%, again, barely a move. Of the 238 Morningstar Industry/Sub-Industry groups, 56 of 238 were green, a bit on the oversold side, but nothing like last week's extremes.

My opinion of the market going forward this week hasn't changed at all from Friday's The Daily Wrap and the Week Ahead or anything that I posted today.

On an interesting side-note, I've created a new scanning indicator for the major averages, based on their 50-day and 200-day moving averages for their component stocks that make up each average. Here are some interesting findings...

57.1% of the Dow component stocks are above their 50-day moving average leaving approximately 43% under. About half of the NASDAQ 100 are under their 50-day moving average and Only 23% of Russell 2000 stocks are above their 50-day moving average! Less than half of the SPX's component stocks are above their 50-day moving average...

Gold Update

First, I would reference the GDX/NUGT update, GDX / NUGT Follow Up,  if you are interested in either GLD or Gold Miners because as I mentioned, the two have a very close correlation, although I did want to keep the analysis separate. In this way you are doing analysis of each asset independently and whatever similarities or confirmation you may find, it is more objective and provides multiple asset confirmation, which is combined with multiple timeframe analysis given you a sharper edge and a better view.

This is GLD in green and GDX (gold miners) in red on a 60 min chart so you can see there's a very tight correlation.

Gold miners actually use to lead gold, however when Bernanke unleashed QE, which is printing money out of thin air, inflationary expectations rose as would be normal and gold is usually bought on inflation expectations, not actual inflation which shows you the market's discounting mechanism.

However, as QE /POMO ends this month, many small things we see on a daily basis seem to be getting back to pre-F_E_D intervention levels or correlations, so while I'm not claiming GDX is leading gold right now (it does tend to have better moves), I would not be surprised to see that old correlation come back along with the $USD's historical legacy arbitrage relationship with dollar denominated assets.

Because Gold and Gold miners have such a tight correlation, when I entered the UGLD (3x long gold) position Wednesday, Trade Idea (Swing+) GLD / UGLD & GDX Update I decided for risk management purposes that I'd enter a half size position because I am eager to see if what we anticipated or forecast as far as 3C signals go, are  actually confirmed, thereby confirming our theory as to GLD long and secondly and more importantly, since I closed the NUGT long position on July 9th I've been waiting for a deep pullback, back in to the year+ long Inverse H&S base so GDX/NUGT could build a head of steam allowing them to breakout of the long term base with follow through. 

The day we exited NUGT, , even though it was a strong move of 7.64% on the day, the intraday 3C signals were obvious in that this wasn't the breakout we were looking for. In any case, because they both trade so alike, I can't see any reason to have two positions that move nearly exactly the same from a risk management perspective.

As for gold... It is the futures charts that I find interesting in that gold futures not only confirm the GLD signals, but also seem to confirm the idea of a head fake move which is the concept of the "Igloo with a chimney", the chimney being the head fake move in a topping pattern which directly precedes a reversal (in this case it would be mirror opposite).

 The long term 4 hour YG (Gold Futures) chart shows a positive divegrence that really is defined at a range and break just below the range, this is where I suspect we have a head fake move which would be significant from a timing perspective.

The 60 min gold futures shows the same thing with more detail, also note the uptick in volume as price slips below support, stops run which makes it very easy to accumulate in size and on the cheap without anyone catching on to the position you're building.

 The 15 min chart's leading divergence at the area shows there was something unique that happened in the area.

 And the short term timing 5 min chart shows the same.

In fact, it almost looks like there was a small distribution event, letting out just enough supply to drive prices below the range where a lot more stops would be hit and the shares and then some could be replaced at much cheaper prices.

GLD Charts...

 The GLD 2 hour chart shows an overall leading positive divegrence , but what is also shows is an accumulation range in which each time price starts to rise above a certain level, small negative divergences send price lower where we see large positive divergences, in other words it looks like someone has been working price to accumulate at the low end of the range and controlling price by simple adjustments of supply at crucial times, this is what market makers and specialists are paid to do when they fill orders on behalf of large institutional clients in the stocks they make a market in.

 I just showed the 30 and 60 min GLD charts in the last update from last week, linked above, but I'll show this 30 min leading positive divergence again as it has added to the leading positive position in the area of a probable head fake/stop-run move.

The 15 min chart also gives clarity to the leading positive divegrence just as stops would have been hit as well as showing a smaller negative divegrence near the upper end of the range that was likely used to push prices below support where all the stops were gathered, allowing the accumulators to buy in bulk at a discount to where prices were a few months before.

 The 5 min timeframe is sharper and shows more detail, it leads positive at the range and just under it.

And the 1 min chart shows a positive divegrence below support, leading to a pop above support/ If this is indeed a head fake move, then out entry in both assets (UGLD and NUGT) would be near flawless.

Intraday 1 min, much like GDX and NUGT, there some afternoon weakness which I speculated would bring price down a bit and just widen out the base area (move laterally) which would be healthy for an upcoming breakout attempt.

Bottom line, I still like both and will point out any new entries that look especially interesting, otherwise I wouldn't mind owning either at these levels .

Index Futures Update

My apologies, it took some effort to get my futures charts up and running, which I actually wanted t use for the Gold /GLD/UGLD update (and will), but I thought the ES (SPX E-Mini) Futures update would be useful in understanding multiple timeframe analysis and multiple timeframe based trends.

Lets start from the view point of our tradable nearest term trend, that would be a bounce on top of what we saw last week, which has fallen apart since Friday for the most part.

 This 60 min chart of ES shows a negative divegrence at the head fake , failed breakout attempt after a large August cycle stage 3 top. The failed breakout led to stage 4 decline and as you can see, the lows we bought last week. This divergence suggests there's still gas in the tank for a move higher, although I still suspect we see lower prices first to strengthen the base, really the same thing I've been forecasting since last week.

If we go to the stronger, longer 4 hour chart, this is a different trend and story.

 Here we can see the distribution leading to the July decline and how much worse the distribution was through the August cycle to the right, so the larger picture beyond the bounce referenced on the chart above this one, is very bearish. The most probable timeline would be the current base gets a bit stronger, bounces and then falls to a new low as seen above.

 The ES 15 min chart shows the positive divegrence at the lows we bought last week as well as the negative divergence from Friday and the reason we sold those longs and entered 3x leveraged shorts for a pullback. This 15 min chart suggests a very strong probability that the anticipated pullback will materialize. 

This is the 5 min chart, it is also the minimum timeframe which must have a divegrence for me to trade and the current negative divergence for a pullback is very visible, this would eventually bleed over to the 15 min chart so if there's improvement in to lower prices, we should see it migrate to the 15 min chart, but for now, it is still suggesting more downside.

Intraday 3C has been confirming price with only a couple of small intraday divergences, one in the morning on the gap up in the cash market sending prices lower, an afternoon positive and slight bounce that is now going negative.

Really this is just about what we've been looking for, I just thought it might be easier to understand in multiple timeframe analysis

GDX / NUGT Follow Up

Although Gold has a close correlation with GDX (Gold miners), I'm going to keep GDX and Gold updates separate, but you may want to consider both as far as the bigger picture.

Friday we entered a "Swing-plus" position in NUGT long (3x long gold miners), Trade Idea: (Swing Plus) GDX/NUGT and the charts, GDX / NUGT . I'm also going to leave the longer term GDX/NUGT charts to Friday's update linked above.

We have been expecting a GDX/NUGT pullback since July, the idea was that this would be a constructive pullback that will build strength to try to break out of the year plus base which it just barely broke above on weak 3C charts so we exited NUGT long the very same day it broke out of the base on 7/9, a day with a +7.64% gain (our total gain on the two exits +40 and +50%) and it turns out we were as close as you get to the perfect exit as NUGT didn't do anything for months as we expected a pullback which finally came in September.

I still suspect this is a strong and strengthening pullback that will make a significant move higher, I also believe we got in near Head fake lows. The case for a head fake move is better made in GLD, but their correlations are so close I think it's reasonable here as well and volume tends to agree.

 As mentioned, the longer term charts are linked in Friday's post above, they haven't changed and look good.

This 15 min chart is a pretty serious timeframe and tight around the yellow box is what I suspect is a stop-run/head fake move. The divegrence in the area would make sense if that were the case as well.

The more detailed 5 min GDX shows the same accumulation of a move below support/stop-run which is an excellent timing signal for an upside reversal.

 Note NUGT (3x long GDX) has a 5 min chart that looks exactly the same at the same potential head fake move.

Intraday however, after excellent 3C price/trend confirmation, we have a small negative divegrence. I suspect even though it is likely a head fake move, it is not yet wide enough (same concept as the market) for a base that can sustain a strong move, thus some light distribution and a pullback in to accumulation would make sense.

Here's what I mean...

The base area is not proportionate to the preceding downtrend on a 60 min chart (the pullback), so I wouldn't be surprised to see some lateral price movement in the area, even though it looks good from the 3C charts, the base is what's missing. I intend to hold NUGT long and if I see another opportunity for a low risk/hiigh probability entry, I'll post it.

Remember to keep the GLD update in mind when considering GDX/NUGT and vice versa when considering gold.

Leading Indicators & Market Update

So far our short term 3C signals and Leading Indicators have been right on allowing for some decent small trades in both directions that probably wouldn't be worth taking if they were only in one direction, for instance, in addition to the 5.66% total portfolio gain (personal portfolio) for last week, since adding NUGT Friday and switching back from URTY and TQQQ to SRTY and SQQQ, the additional TOTAL portfolio gains for today alone are +3.18%, that's a larger gain than 80% of hedge funds make on the year. For me it's not boredom because overtrading is very dangerous, it's good signals that have good confirmation and the ability to create additional gains that keep compounding.

Our intermediate or sub-intermaditae analysis has also been right on, lets call that the August cycle and both 3C and Leading Indicators (as well as breadth) have been very accurate there as well.

The SPY August cycle with accumulation 8/1-8/8 led to the deeply oversold breadth bounce we expected, but also expected to see distribution and a failure of the bounce, even the head fake move just before the stage 4 decline, these are not only the 3C charts, but the Leading indicators as well as other analysis all coming together and of course you know what our long term primary trend expectations look like (hint, not good for the market).

In any case, looking at the market's divergences and Leading Indicators Friday, I expected something like the chart below.

This is last week's lows in which we moved out of market shorts like SRTY and SQQQ and went long for a short term trade in the 3x leveraged long, TQQQ and URTY at base #1, these were 50% normal full size positions because the base was too "V" shaped and not able to support a broad move. As I said last week when switching positions, "IF" the base broadens out and creates a more stable, predictable and reliable platform, I'd go in with full size 3x long positions rather than the 50% full size. 

The move below support in yellow, representing price, is a head fake move which we see typically about 80% of the time at visible support/resistance levels, these are excellent reversal timing indications.

The pullback signals from Friday created another sharp "V" shaped reversal, we can look at this one of two ways, a small counter trend bounce that failed and the market sees lower lows for the move off July highs, for example...

For the IWM's August Cycle, the anticipated base from July 28th's deeply oversold breadth condition formed between 8/1 and 8/8, a fairly sizable Stage 1 base,  followed by Stage 2 Mark-Up, which was followed by a Stage 3 top (more evident in the SPX), followed by Stage 4 decline, a textbook cycle. 

The current bounce from last week and now pullback is in the orange box. This could very easily be viewed as a simple counter trend bounce within the Stage 4 decline phase... 

Or it can be viewed as I suspect, a short term base/bounce, probably still a countertrend move within the downtrend, but larger as shown on the second chart of this post, above.

Some of these charts, because they are such fast timeframes, likely have already changed considering the time it takes to capture, upload, write and publish the post, but you should still get the idea.

As for the 3C charts, they are doing what we expected Friday afternoon and price is doing as expected as well. *Actually at this very moment we are seeing some intraday strength causing a bit of a consolidation intraday.

 The SPY 1 min chart may be consolidating a little intraday, but overall the 3C signal is still leading negative, suggesting price move lower. The base's accumulation can be seen to the left at the white arrow.

 The 3 min chart is in overall good shape for a continued bounce which is why I said that if I didn't switch back to shorts on Friday, I wouldn't be too concerned as I suspect higher prices will prevail in the short term.

The QQQ 1 min intraday is nearly PERFECTLY in line with 3C and remains so even right now.

The QQQ 5 min is leading negative, leading price and suggesting a lower low be made. This could give us a base in the area of last week's lows and a larger overall base that can support a larger move. Without that larger base, I doubt I'd get too involved in any long positions of any size as they just wouldn't have the strength to be reliable.

And the IWM 1 min leading negative.

On the chart above (2nd from the top), I drew in some "rough" expectations of market action and what to expect. At the point this chart was captured, there were NO positive divergences and we expect to see them in to a pullback, but usually only around the area where the base will be created so I wouldn't expect to see positive divergences starting quite yet because we aren't close enough to last week's lows, they want to buy low and sell high just like us even in a short term bounce and sell short high and cover low.

What I found interesting even before some of the intraday consolidation stuff started, was Leading Indicators suggesting our expectations are right on track.

Remember these are leading indicators so the first sign of a divergence is not a signal, but the start of a signal.

 HYG - High Yield Corp. Credit, which is used for short term market manipulation is an excellent leading indicator, it led the entire August cycle and here you can see it leads the base see in SPX (green) by several days.

Intraday it has been almost perfectly in line with the SPX, but is still in a short term leading position and longer term negative position suggesting a short term bounce followed by lower lows.

HY Credit which is not as manipulated is making higher highs while the SPX was soft, this is a positive leading signal for the market as we expected to see.

Pro sentiment is not moving up, but it is holding and not moving down today.

 Our second version is actually moving up as a leading indicator.

While TLT diverges from SPX, I suspect there's short term rotation out of TLT (being sold at higher prices) and in to the market (being bought in to lower prices), again I see this as short term.

Yields tend to lead and as you can see from Friday they were leading the market lower which is why this morning's gap up failed (among other indications).

NOW look at our leading indicator, SPX/RUT Ratio, it was pulling for a lower low which the SPX made, now it is starting to lead positively and thus far the market has reacted with some backing and filling, I suspect this continues to lead positively, even if the market makes some lower lows and this indicator will once again have called market movement correctly.

And the TICK trend moving down intraday in breadth since Friday.

My suspicion is the market could be ready for a bounce in to Wednesday's earning's season with A reporting WEdnesday, however that doesn't give much time to form the base I envisioned and drew in above. In this case I'll likely be very careful, if there's not a strong base to sustain a decent swing move, I may just sit this one out until it's time to short in to price gains, the market and market breadth is too unstable to trust it without a strong base so that's what we are going to be looking for.

However as you can see, Leading Indicators are now confirming what we suspected Friday, price weakness would be accumulated to form a stronger base. We just need to see the quality of that accumulation/base.