However, take last night's Dominant Price/Volume Relationship, one of the most overlooked objective data points,
From last night's Daily Wrap
"Close Down and Volume Up, a short term oversold signal as I mentioned before that often leads to a bounce the next day and often beyond."
From that one data point we not only rose from the early gap down ashes which 3C pre-market on the Index futures predicted in the A.M. Update, with an opening positive divegrence and upside recovery...
On the whole averaging the averages, we had a green day today, even though the headline I see most tonight is "Dow Closes Down for 6th Consecutive Day", breaking a streak not seen in 14 months, still a good 182 points off the morning lows!
While only 1 of the 4 averages hit yesterday's lows this morning (I would have preferred them all hit yesterday's lows to show stronger accumulation) , that average, the NASDAQ 100 also showed some of the best intraday work on the positive divegrence, it were those positive signals and the work being done to establish a strong bottom in the NDX which led me to chose the QQQ for an initial Call option position entered today, Trade Idea (Speculaltive Options Call position) QQQ.
I started last night's Daily Wrap with,
"Looking at the market from yesterday's perspective, I entered some partial positions based on the fact I expected, “because I think there can be some more work done in the area.”
So today's market action with the exception of the IWM, fit nicely in to forward looking expectations for the day, which were also posted Wednesday before the close with closing divergences all suggesting a lower open in every average except the IW
Also form last night's post,
"The R2K ended the day with a bullish Engulfing Candle just a little bit after I had said I was considering going long some leveraged IWM ETFs,"
We also talked about VXX and VIX futures distribution last night, with spot VIX posting a strong downside reversal candle yesterday and today (remember the VIX moves opposite prices)...
IF YOU ARE A NEWER MEMBER, YOU ARE PROBABLY FIGURING OUT BY NOW THAT WE DON'T FOLLOW LAGGING INDICATORS LIKE MOST OF TECHNICAL ANALYSIS, for instance a moving average or MACD is a lagging indicator, it has already happened, WE FOLLOW UNDERLYING TRADE, WHAT SMART MONEY IS DOING WHICH WILL ALWAYS GIVE US AN EARLY HEADS UP, THE CHALLENGE IS DETERMINING WHERE THE HEAD'S UP TURNS TO ACTIONABLE TRADES, but I'd much rather have an idea of what's coming than follow price around led by the nose.
Like yesterday, again the Dow Transports lead the Industrials, a Dow Theory divergence with transports up +1.12% leaving the two looking as follows...
In green the Dow Transports led the Dow Industrials lower until recently as they have led the Industrials higher if you are a fan of Dow Theory confirmation.
And today the move in transports certainly can't be blamed on oil as our Monday USO long call option position, Trade Idea (Short term Call/Options) USO was seeing green with USO as today's USO Update shows, we should expect more upside there. Our IYT short is still at a +5% gain and I have no problem leaving it in place as a core short.
Contrast and compare, if the SPX's volume was the highest in 3 years yesterday, then today's ES / SPX E-mini Futures volume, was abysmal, a strange back to back occurrence as noted earlier this morning with a chart from NANESX showing the absolute failure in liquidity, although yesterday's high volume looked like short term downside capitulation and when I say short term, I mean as in about the length and strength needed to give us the bounce the 60 min IWM charts are depicting which would be a monster bounce.
From this morning's A.M. Update...
In fact, liquidity was so low, this is what happened this afternoon on a 500 contract TF_F / Russell 2000 transaction, only 500 contracts did this...
My gut feeling..., other than what this portends for the future as the market really crashes and HFT's pull all liquidity making it nearly impossible to get out of a decent size position without running through the bid stack and the completely insane volatility (which I noted this morning doesn't mean down, it means crazy moves either way), is the assumption that today's move in R2K futures had more to do with options expiration tomorrow which is a monthly, not weekly and I suspect most options are puts and most are in the R2K, meaning a higher close/move will send the most possible percentage of contracts expiring worthless, a brief pause in our longer term upside bounce projection which may not be done building out to collect some easy op-ex profits as the pin causes most options to expire worthless letting the writers of the contracts (almost exclusively smart money), make a quick and very easy buck.
Right now, this is the most dominant pivot/trade on the table...
Index future price action around VWAP smells of accumulation, although I don't think we need extra evidence, just take a look at R2K futures vs VWAP...
Interestingly for the second time in as many days, F_E_D regional presidents have been making QE noises, first the San Francisco F_E_D talking about the "possibility" of QE4 and today, Bullard's comments to Market Watch that "perhaps", QE 3 shouldn't be phased out so quickly.
This is all Draghi/ECB playbook propaganda. As the F_O_M_C minutes showed, the F_E_D is concerned with the $USD's strength and the effect on growth in the global economy, thus I don't believe for a second, not even a 1% chance that they are seriously considering QE4, I believe they are doing what Draghi has made in to an art form , Jaw-boning the currency to where they want it without actually doing anything. You have to admit, 2 F_E_D presidents in 2 days, all of the sudden talking about the one thing that we know will knock the strength out of the $USD at a time when $USD concerns of strength emerge just a week earlier. However, for our bounce purposes, after this morning's Initial Claims came in, all but totally eliminating any F_E_D accommodative policy, just hours later we get the one thing that would restore some "HOPE" (the Obama kind), that the F_E_D actually does have retail's back. I suspect this will be a centerpiece theme to any upside market move once the shorts are drawn in once more and run out of town on a sharp/volatile move. It was obvious from retail sentiment reports today that they were looking for the IWM to hit the area it hit to enter shorts, thus one more go-round knocking additional shorts out of the trade with a swift upside move would create intense head fake momentum as shorts first cover, reducing supply followed by longs entering on a short squeeze, even further reducing supply, the whole point of a head fake move, insane momentum without spending much if anything at all.
Today's market and $USD reaction to Bullard's QE4 comments...
While Bunds hit a new record low yields on a flight to safety as Europe is likely already in the rip of a triple dip recession, although the periphery saw the opposite happen with Greek bonds up 200 basis points in yield this week alone, I have suspected that TLT (20+ year Treasuries) as well as 10 and 30 year treasuries have been selling in to higher prices with asset allocation in to risk assets and it looks like we have evidence for that, in other words, smart money "seems" to be moving away from protection and the Flight to Safety trade to the "Risk On" trade or our market bounce... You have to remember, accumulation is in to lower or stable prices while distribution is in to higher or stable prices, otherwise they'd drive price against their position and one of the greatest recent examples of this is Apollo Group's Black saying last May they have been net sellers of "Everything not nailed down" for 15 months, not because they were wrong on the timing, but because a moderate size position can easily be a billion dollars in a single equity, in other words they have to feed those shares out slowly as to not crash their gains.
As for asset rotation from risk off to risk on...
As for the benchmark 10-year Treasury Futures..
Whether the IWM keeps going from here or pulls back as I'd like to see over the next day or two (I say two because of the op-ex pin tomorrow), the clear trade and path of least resistance for the next swing pivot is to the upside. TAKE this 60 min positive seriously, we have seen huge bounces just on 15 minute positives.
What I'd like to see over the next couple of days and in this case days are a drop in the ocean, is a pullback in the market averages, that's what I wanted to see today, but beyond the a.m. DECLINE, WE WERE HIGHER MOST OF THE DAY. ACCUMULATION OCCURS IN TO LOWER PRICES...
So I'm looking for a pullback toward the lows of the range with higher 3C divergences as well as leading indicators, almost everything suggests that's a high probability and a couple of hours of divergences like yesterday near the lows of the range or EVEN a HEAD FAKE MOVE BELOW THE LOPWS, would give us the high probability/low risk entry that I'd feel comfortable in expanding my long position.
Remember the short term Treasury futures and TLT chart, it seems to me that's a possibility looking at them and the intraday negatives in the averages, although tomorrow is about one thing and one thing only, Pinning the market at the max-pain op-ex level to collect and keep all those premiums, after that we can move on, or maybe even after 2 p.m. tomorrow when the op-ex pin is typically removed as most contracts are wrapped up.
To give you some idea of why I said a day or two is a drop in the ocean as far as this move is concerned, look at the last time our SPX/RUT Ratio indicator and VIX Term structure were inverted at the August lows preceding the August rally...
You may remember the rally after that stage 1 base completed on 8/11... Now compare the same indicators to now...
With HYG under accumulation and VXX and TLT in distribution, the SPY Arbitrage would also be a lever for lifting the market (HYG up and VXX/TLT down), not to mention HYG on its own as a leading indicator under accumulation as shown today, HYG Update.
I hope you can see now why patience and the evidence that the base started October 2nd making it huge, is worth the patience....
As for breadth indications at the close, here's what we have, although it's small potatoes compared to what we are looking at.
Dominant Price/Volume Relationship...Tonight we have dual Dominant relationships which isn't hard to understand given the difference between the IWM and the rest of the averages the last 2-days.
The Dow and NDX are both Close Down / Volume Down, this is the least influential relationship, I call it, "Carry on" as it has no real next day implications, this also happens to be the dominant relationship during a bear market. There were 18 Dow stocks and 51 NDX stocks.
The R2K and SPX were both Close Up/Volume Down which is the most bearish of the 4 relationships with 905 of the R2K and 221 of the SPX, this usually has a next day close lower, although with op-ex tomorrow it's a toss up, but will be interesting.
As for the number of stocks in each of the majors above their 50-day moving average, the Dow has 3, the NDX has 18, the R2K 685 and the SPX 59. When I taught Technical Analysis for the Palm Beach County School system's Adult Education program, rather than teaching the intricacies of Dow Theory, moving averages were close enough with assets below the 200 in a primary downtrend, assets under the 50 being in an Intermediate downtrend, in other words, we are pretty oversold on a breadth basis.
Of the 9 S&P sectors, 5 closed green with Energy (surprise, surprise) leading at +1.79 and Consumer Staples lagging at -.74%.
Of the 238 Morningstar Industry and Sub-Industry groups I track, 156 of 238 closed green, similar to yesterday so the deep, deep oversold conditions have worked off and it looks like we are seeing a sub-intermediate or short term bottom being put in.
As for Breadth Indicators, largely positive indicating a shift in breadth. The New High/New Low Ratio, the 4 week version and the 13 week version were all up significantly. The NASDAQ Composite Advance/Decline line as well as the Russell 2000 and Russell 3000 were significantly up, the Percentage of NYSE Stocks Trading Above their 40-day moving average were up more than you'd expect and the the Percentage of NYSE Stocks Trading Below their 40-day moving average and 2-standard deviations below (the dogs and most shorted stocks) fell dramatically. In other words, considering the price gains or relative stability of the market, breadth has improved dramatically.
Last night's forecast in the Daily Wrap for both GLD and USO remains unchanged and the USO charts were right on today and that was without any significant decline in the $USDX, in fact pretty flat.
Stay patient, let the trade come to you. I think this one, as long as we are patient and wait for the strongest signals, is going to be well worth trading. Trading bear market rallies is one of the fastest ways to make money and we're not even in a bear market yet.
