Daily Wrap

I'm actually pretty impressed today that so many concepts held up so well from the F_O_M_C Knee Jerk Reaction most often being wrong and retraced as it was today to parabolic moves being inherently unstable and ending just as spectacularly as they began which we also saw today.

The two concepts here are "Parabolic moves don't usually hold and fail as spectacularly as they begin, whether up or down" and the second is a "A Base is a process, not an event",  as you can see with the last 2 bases, however a larger base looks to be creaping in to place.


We also saw the Dominant Price/Volume Relationship calling for a close lower today as well as the overbought S&P and Morningstar sectors, the SPX/RUT Ratio and today the VIX Inversion signals, all playing out perfectly thus far, leading indicators like Yields yesterday suggesting a move lower today, High Yield Credit ignoring the move yesterday and calling for a move lower, the 5 min 3C Index Futures charts divergence as well as last night's 1 min negative divegrence after the close, and even the increased volatility, just about every indicator and concept we use was spot on today.

Think about the increased volatility and the ATR chart posted in last night's Daily Wrap with my comments, 

"This 10-day Average True Range of the SPX shows the declining ATR as the market was celebrating new all time highs on gains of +0.10%, a tenth of a percent, which at the time I had said numerous times, "We'd ignore days like this as pure noise, a 1% move was an average day"

"You have to put the volatility in perspective when the market 's volatility increases and headlines about the best day in 3 years abound, there's a reason and it's the same reason that bear market rallies are some of the strongest rallies you'll see, as they finish and go on to make a lower low."

Thus because of volatility, you have headlines like yesterday's "Market biggest rise in 3 years" while the very next day you have the headline, "MArket's biggest plunge in 6 months"  THE DAY AFTER!

Every major average lost ALL of yesterday's post F_O_M_C minutes gains and then some...

All gains since the minutes release erased including transports.

This is exactly why I said yesterday, "There's a probability that the market rises today, but this is not the same as a high probability/low risk trade. I would not sleep well at night if I were long any market gain put in today as there's no support/base to make this a high probability/low risk trade"

Today could have gone a lot differently with the overnight session gapping down and losing all of those gains on the open, the point is simply, if you play Russian Roulette often enough, you'll be carried out in a bag, thus we have standards for what we look for in a trade, not just probabilities.

And the averages on the week thus far...

 Averages on the week including Transports and the averages...

Over the last month...

And as mentioned earlier today, the Russell 2000 has now broke below it's topping pattern...

Remember, there's a very specific reason I don't short an asset that just broke below the neckline of the topping pattern, there are 3 other places I consider excellent opportunities, one is coming up, but this is not one of them...


Here's another headline for you from the good folks at Nanex...

Hmm... on a simple retrace of a F_O_M_C Knee Jerk Reaction or maybe there's more to this market than meets the eye on a price chart alone...

I still have not changed my tune since last Friday's Week Ahead Forecast which was for weakness in the market the early part of the week and building a base by the mid part, around Wednesday when AA kicks off earnings, obviously the unexpected dovishness of the F_E_D minutes caused a delay of a day or so, but I believe we are still on track and I believe a head fake move is still probable to give us a good timing indication, I couldn't think of a better day to get this done than tomorrow on an op-ex pin.

As for the market, indications, charts, strategies and tactics, I'll try to cover this as briefly as possible while not leaving out key concepts you can use like the mention today of the NYSE TICK Index intraday as a heads up/ear;y warning indicator.

Here is one of several reasons I believe the bounce / base is still on...

 The ES/SPX Futures 60 min chart is showing a start to a base at last week's lows with a positive divegrence, this base alone is too "V" shaped and not stable, this is part of the reason the move up from it only lasted a COUPLE OF DAYS. SINCE, WE HAVE BEEN LOOKING FOR A WIDER DOUBLE BOTTOM OR "W" SHAPED BASE,  we pretty much have that, but one other thing forecasted Friday was the probability of such a base to put in a head fake move on the downside in the form of a stop run which allows accumulation of large supply on the cheap as well as being a momentum slingshot for the next move, the bounce to the upside.

 The 7 min chart of ES was leading negative as of this morning as were the 5 min charts, this was posted in the A.M. Update with the forecast that price risk was certainly , clearly to the downside, A.M. Update

"The short term risk is to the upside for the $USD as seen on this positive 15 min chart"

"All in all, it is as I suspected yesterday, it's shaping up to look like an unreliable knee jerk reaction."

Both early forecasts this morning at the open were correct.

The 5 min chart's negative divegrence in the morning has ended the day with reversion to the mean or 3C confirmation, this is more bullish than how we started the day, but I'm still not convinced until I see at least 5 min positive divergences, although I did take off some 3x short ETF positions to maintain the gains in them and get some dry powder ready for new positions on a swing trade basis.

The 1 min ES chart actually went positive in to the afternoon as we saw the downside momentum falling off.

The averages look like this...

 SPY intraday 1 min showing afternoon positives as price started to flatten out.

Those made it to the 2 min chart and like the ES 30 min chart, the bigger picture SPY 15 min...

Also shows a larger base divergence in the process of forming.

QQQ made it positive to 3 min chart...

IWM was mostly in line as you see above on the 2 min and...

 out to the 10 min so there is some work to be done here before a long position can be considered.

The DIA 2 min went positive in to the afternoon, but these are just starts.

The 5 min chart is just a tad better than in line.

In my opinion, the same opinion from Friday, we need to see something along the lines of...

A head fake move/stop run below well formed support which we predicted Friday for the week as you can see above, this is obvious support in  widely watched asset so a head fake move is high probability as stops will be lined up just below making it a very effective use of technical analysis against traders.

As for some of the Leading Indicators and our newer custom indicators...

 VIX fear has climbed and is now inverted to the highest level since the early August stage 1 base leading to the August rally and cycle, the red bars are actually a buy signal that run a bit early, but have been very accurate. 

As for the SPX/RUT Ratio in the middle, it is calling for a head fake move as it has moved below the trendline while the SPX sits right at support, well defined support which is an easy target for a stop run, thereby confirming the SPX/RUT Ratio indicator that has been right on every call since we introduced it.

 Our Pro sentiment indicator (1 of 2) is going neutral, I'd expect to see it leading the market before a move to the upside.

Here you can see it leading the SPX during stage 4 decline of the August cycle and mellowing out to accommodate a bounce.

 The second sentiment indicator is in line with the SPX, it too should lead positive as they usually do.

HYG Credit was perfectly in line again with the SPX today, however the first positive divergences were building there late today and...

The longer 10 min chart shows support building in the area for a market bounce, but keeping things in perspective as I sought to ANCHOR EXPECTATIONS TODAY...

THE LONG TERM HYG DIVEGRENCE IS HORRIBLE AND GOING TO PULL THE MARKET LOWER OVERALL.

YESTERDAY'S FLAT HY CREDIT WHICH TOLD US THERE WAS NO INTEREST AMONG SMART MONEY IN CHASING YESTERDAY'S MOVE WAS RIGHT ON AS THE MOVE FAILED TODAY.

However there are hints of a more positive tone now that we are back at the base forming price levels.

Yesterday Yields closed at the white arrow, I said that they tend to pull price toward them until they revert to the mean, that's exactly what happened today as price fell right to yields and reverted to the mean in green.

On a side note, UNG pulled back exactly as we expected, but better yet, speaking of another likely head fake move, it started working on a solid positive divergence today as expected when the breakout failed.

A for intraday breadth today... early selling was pretty intense near the -1700 levels , but as the afternoon went on the TICK Index ranged between -1500 and about +1200.

The Dominant Price/Volume Relationship was sticky today, the Dow had 18 in Close Down/Volume Down and 12 in Close Down Volume Up. The first relationship doesn't have much of a next day implication which is interesting in to an o[p-ex Friday, the second relationship which was less dominant is a 1-day oversold and usually sees the next day close higher.

The NDX had 63 in Close Down/Volume Down, what I usually refer to as, "carry on" as it has no distinct next day bias, which is interesting from a needed head fake perspective.

The R2K had 1119 in Close Down/Volume Down, also "Carry on" and the SPX was spilt with 251 in Close Down/Volume Up and 237 in Close Down/Volume Down.

All in all, this is not a Dominant P/V relationship among all of the averages, but all in all I'd say it leaves room for a downside head fake move which we must confirm.

Like yesterday, the S&P sectors are the mirror opposite of the day before, that meaning today 9 of 9 closed red rather than green, creating a 1-day oversold condition with the laggard being Energy at a -3.67% loss and Consumer Staples coming in the best at a -1% loss.

As for the 238 Morningstar groups, again 3 days of mirror opposite of the previous day with 231 of 238 closing red, another 1-day oversold signal, although without the Dominant P/V relationship, I feel it's a bit shaky and would suspect we spend a lot of time tomorrow in today's lower range, just as a gut feeling.

Finally, unlike yesterday, a majority of our breadth indicators did move today and at least half hit new lows for the year, meaning breadth fell apart even worse than it was, this happened before the August rally, although I don't anticipate anything that strong as that was a well formed base, I do expect an upside move that we can not only trade, but use again as an entry in some remaining positions that have been hard to get in to like PCLN.

We'll take it as it comes, verify and take action. I've been okay with trading this market a bit more aggressively as the ATR has opened up significantly making it worth the while and over the last month my own portfolio has seen a gain of +17.1% without trading any options. 

While I think we have the opportunity to trade around certain positions, other longer term core shorts such as SCTY , HLF, etc that we have significant gains in, I'm content to leave those in place with the probability of highest resolution as use the leveraged ETFs to trade around pivots.

I'll see you in a few hours...

A few Downside Target Areas

I'll have some charts up in a few minutes, but I decided to go ahead and move primarily to cash to preserve gains and open up options, but some of the levels I suspect may come in to play as today's downside is losing momentum, positive divergences are building and the VIX Inversion indicator has given its first buy signal since early August.

For the Dow I'm looking at the 200-day moving average around the $16895 area and as a secondary $16671

For the SPX I'm looking at the $1904.86 area, the 200-day and as a secondary the $1968 area.

For the NDX I'm looking at the 100-day moving average around 3925 and a secondary at 3935.

And for the RUT I'm looking at the 500-day average at 1046 and a secondary at 1071.

Closing SRTY and SQQQ longs

This is just to preserve gains, this isn't a long entry.

I'll decide how to proceed as we get more data, but for now I'm going to protect these gains.

Interesting Market Update

Market action and 3C signals as well as numerous other indications I've posted over the last 24 hours seem to show that our original forecast from Friday in the "Week Ahead" post saw a temporary F_E_D Knee Jerk reaction/interruption which I always warn about and you can see why now as well as parabolic moves, but otherwise, it looks like it is on track for the base widening near last week's lows as originally forecast for about this time, mid-week, specifically Wednesday although the minutes were a wild card.


Soon I may take the short positions I've been holding (I'm more referring to my own personal portfolio right now as it is easier to describe tactical movements in a real portfolio rather than a tracking list of over a hundred stocks) since re-entering them on Oct. 3rd and move to cash and wait out a new entry for swing trade purposes.

For longer term trend trade purposes, I'd probably wait to see what the base looks like, if it develops and decide what action to take whether cutting some exposure or hedging.

As far as long term core shorts like SCTY, NFLX, HLF and the like, as long as there's nothing drastically wrong with them, I'd leave them in place and use the leveraged ETFs to trade around signals.

Here are some interesting charts, they must be taken in context of all of our indicators and evidence.

First Index Futures...

Risk remains to the downside, but the move today in the averages has nearly wiped out all of yesterday's gains.

Yesterday's parabolic move up came with the warning that they tend to end just as spectacularly as the begin and we can see that's the case today.

As for Index futures which are still calling on negative downside, although at a reduced pace...

 ES 7 min still leading negative, this will have to be positive before any long positions for swing trades are considered.

NASDAQ 100 futures 7 min look similar, still suggesting additional downside risks.

And TF/Russell 2000 futures still leading negative,  but close to reverting to 3C confirmation.

A look at the 5 min charts which move faster and get signals first shows the trend on the downside is losing some steam, although I'm not convinced it's over.

ES 5 min is closer to reverting to 3C's leading negative divegrence.

NQ/NASDAQ 100 futures are similar, but look a bit worse, perhaps more downside.

And Russell 2000 (TF) futures are about reverted to the mean, but still negative on the 7 min chart.

The reason I'd move to cash at the right time is to protect gains in these shorts, SQQQ/ SRTY which have been significant performers for me since re-entering them Friday.

I would not call that a long trade endorsement, more locking in gains and waiting for confirmation, but I'm not quite at that point.

As for the 3C signals in the market averages...

 SPY 1 min intraday is still in line, this is important because any new positive divegrence will likely show up on the 1-2 minute charts first, giving us our first clues that the downside momentum is falling off.

 IWM 1 min has a minor positive divegrence which may be the first sign of accumulation of a larger base, although this is typically done in to flat or lower prices, so it's not of immediate concern for my 3x short IWM ETF, SRTY.

 The signal in the IWM is minor because it is not yet strong enough to migrate to the next timeframe at 2 mins, thus it's interesting, but not actionable.

And the QQQ 2 min looks like it too has more downside as the Index futures suggest.

The TICK chart's intraday breadth, like yesterday when they hiccuped and warned of trouble for the parabolic rally, also hiccuped this afternoon, probably close to the IWM 1 min positive divergence.

 The intraday NYSE TICK Index is one of the most powerful, yet simple tools to use, as long as you can draw trendlines and get use to what are extreme levels and what are not,  you can get early warning more often than not in changes in character, which ultimately lead to changes in trend, this is like advanced long range radar giving you an early heads up and there's no reason you shouldn't be using it no matter what your trading style.

The Custom TICK trend also shows that little bump intraday today.

However, things get much more interesting and I haven't even made it over to my full Leading Indicator layout yet.

Recall the Index futures' 30 min chart and that being part of the basis of my belief that we create a wider, stronger base? Well take a look at our newest custom indicator, the SPX/RUT Ratio...

 The Indicator on a 5 min basis is still calling for lower prices and the SPX is not confirmed here, this move lower, if it materializes would put the SPX right in the forecasted head fake zone, the area I'd expect most base building to be done so this taken with 3C divergences in the averages and Index futures still have me holding shorts until I have a clear reason not to.

 The closer view from yesterday's parabolic move that was unconfirmed by the indicator shows some intraday softness allowing price to slow its decent, this is the area I'd expect to start seeing accumulation, although  as already mentioned, accumulation is most often seen in to lower or flat ranging prices.

 HERE'S WHERE IT GETS INTERESTING... 

Add my Custom VIX Inversion indicator and you can see a red bar meaning VIX has inverted, which is the first buy signal we have seen in the indicator since introducing it, although they tend to be a bit early.

Here's a longer term 60 min chart with the VIX Inversion indicator and it shows a minor buy signal to the far left, but larger than today's and you can see the bounce off pivot lows, however the large buy signal was at the August lows when we had positive divergences for a week at the August cycle's stage 1 base, that led to quite a move. I anticipate something in between the two.

So once again, I try to anchor expectations in advance because as they say in boxing, "Everyone has a fight plan until the first punch is thrown". Often people get fearful when they hear bounce (if they are short), but it is not a change of the highest probability outcome which is solidly locked in, it's just part of a natural process that gets more volatile the closer we are to a top and in the IWM's situation, it has officially broken below it's 2014 top.

So we want to be able to trade the upside swing if it is safe enough, but we definitely want to short in to price strength and this is where people lose their nerve, while it may make sense now as the market looks very bearish, on a bounce that is designed to be convincingly bullish, they tend to lose their nerve and use the gift they've been given in the form of higher prices to enter better positions at lower risk, this is why I try to set expectations BEFORE we reach that point.

Emotion is a fickle thing, going in to yesterday the Fear/Greed Index was at a bearish extreme of 4 on a scale of 0-100 with 0 being the most bearish and suddenly we have a huge move up, I'm sure sentiment was 94 today until prices fell, emotions are lagging indicators and often great contrarian indicators.

UNG Came Back...

Just as we forecasted earlier today, UNG Follow Up,  as UNG gained on the EIA Natural Gas Inventories, it came right back down to where we need it to be to make this in to a high quality long equity trade in either UNG or UGAZ or potentially on a head fake move that is more convincing and confirmed, an excellent call option position entry.

The red trendline is where the basing work needs to be done or better, below the red trendline. I wouldn't feel any immediate need to get in to a new position or add to, it will take some time to build a base and we still need to confirm it, however the longer term probabilities suggest it will be successful so at this point it's more a matter of timing and a little patience as UNG is doing as forecast as is the market despite interruptions to the upside that have now been resolved.

Quick Update

The parabolic move giveth and taketh away... Now you understand why I don't want to be involved with a trade that has no 3C support, especially a parabolic move. It took 2 hours yesterday to build the historic move up and a little less than 2.5 hours to tear it down and then some, but it could have gone a lot worse on the open.

"Parabolic moves typically fail just as spectacularly as they start"...

 SPY post minutes gains all gone and then some...

DIA, also taken all post minute gains back and then some...

As well as the IWM.

Intraday TICK has hit -1650, pretty extreme on the downside for intraday breadth.

The question remains, "W,here do we go from here?".

I still believe that Friday's forecast of early week weakness with strength coming in to mid-week earnings and a base being built in the area of last week's lows is still the most probable outcome. Remember the head fake move below last week's lows that most of the averages did not make, the IWM technically did, but it wasn't to the effect it was meant for in base building so that one may be interesting.

The immediate risk remains on the downside, this is a 7 min 3C chart of some of the Index futures like TF/Russell 2000 Futures...

 7 min TF Futures, the immediate risk still remains to the downside as expected yesterday and certainly this morning with negative 5 min charts.

However, this is part of what I based last Friday's "Week Ahead" forecast on, the 30 min charts of Index futures that put in some base building at last week's lows, price has still not made the move that such a base would be capable of if it was only wider with a stable footing rather than a sharp "V" such as it is. This is why I suspect we do finish building a base for a bounce, not anything more than that so I would not read in to it, although to be effective is achieving its ends, it will have to look very strong, this often causes people to lose their nerve which is why I try to anchor expectations in advance, although I'm probably getting ahead of myself at this point.

First things first and that would require a new lows in the SPX and other averages, although the IWM is somewhat of a question mark, it would also require some sideways trade so I wouldn't be worried about the market coming down and immediately shooting back up, we should have plenty of time to adjust positions once we confirm the charts and underlying trade.

Until we reach such a point, any trades I consider highly speculative. 

I'm going to take a look around some other indicators and watchlist assets as well as trade management, but for now I'd be patient, this trade will come to you, you don't need to chase it.