Daily Wrap

Today was interesting from a conceptual point of view alone, specifically I'm talking about yesterday's Put Option Contingency post in which the rounding top of price action yesterday made it seem highly probable, enough so that I'd put out a post and warn that this is a great potential opportunity to pick up put options art a significant discount, usually the only way I enter them... the chart as posted earlier today and the original from the post above yesterday...

The initial move which had not happened at the time of this chart being posted yesterday was a break under the uptrend line since the 10/15 lows (recall we had a long position call on 10/14, the day before the lows...Trade Ideas: (Swing+) UPRO / FAS Long , these are 3x long SPX and 3x long Financials) , later in the day we broke the trendline as the red arrow forecasts and the "Chimney" or head fake above yesterday's highs is represented in yellow to take place today, thus allowing us to enter put positions at a significant discount, then a move lower represented by the second red arrow, which we saw a little of by the closing hour, but it's intended to represent the next day or so moving forward (remember tomorrow is an op-ex pin day which means not a lot gets done until the last hour or two of the day as the max-pain op-ex pin is in effect).

Today...

We saw the break of the trendline that has held uninterrupted since 10/16, but it's not so much the trendline or the rounding top as it is all of the above with the deep negative divergences yesterday. Today the pop higher, which initially didn't seem like much of a sentiment moving event, which I commented on early today,


"That means for a head fake move to be effective and worth running, it has to achieve a goal which is usually sentiment related. A higher high is what forms the chimney above the rounding top (Igloo), so when price moves enough to be convincing to traders to abandon short positions and go long, it has done its job, that's what I'm looking for....

Again, these moves have a purpose and function, there's no point in running them if they aren't effective, so when it feels a bit scary to be thinking about entering a put/short, that's when they're doing their job."

Today we got what we were looking for yesterday, all based on the experience of seeing it so many times it has become a concept.

 I was going to post these charts yesterday, I had mentioned them , but I didn't want them to be part of an intraday update as they were bigger concepts. Take the 2013 SPX trendline which was recently broken along with the SPX-200 day moving average. Technical Analysis use to teach us that these were short selling events or for the very cautious, wait for a test of the trendline and moving average, both of which should act as resistance and then be sold short on the failed attempt to break above them.

Technical Analysis just doesn't work like this anymore and I have copies of books like "Technical Analysis of Stock Trends" by Edwards and McGee that are nearly 50 years old, teaching the same things that TA teaches today, Wall Street caught on a long time ago.

 Take this SPY BEARISH Ascending Wedge which we have been taught should come to an apex between the two converging trendlines and then break below and retrace the base, well below the April lows, yet that's not what these price patterns have done for years. Sure, the initial break lures traders in as they see what they expect to see and perhaps enter short as TA teaches only to see their stops which are placed at the top of the apex, overrun by a volatility shakeout. TA also teaches that if you have a failed trade in one direction, you should reverse course so in this instance after being stopped out on a short you "should" according to Technical Dogma, go long and as you can see,  this was the August cycle which eventually made a stage 3 Igloo/Chimney head fake top and a new lower low so technical traders would have been stopped out a second time.

Wall St. knows how Technical Traders think which will bring me to another point about news in a moment.

I mentioned IBB/NASDAQ Biotechs and the range which saw a head fake move below it to create upside momentum above the range which smart money sells in to, I said it was just like what happened in the above chart XLF in today's Trade Idea: (Swing+) IBB NASDAQ Biotech Short / BIS Long post.

I captured this chart yesterday as well, meant to be part of the post I never got to. I was in FAZ (3x short XLF) when we were in the middle of the range, I had a half size position and wanted to fill it out above the range at better prices and lower risk, but that move never came,  instead a break below the range came at #3 and I exited FAZ long on the first day we broke below the range even though that was putting my position at a gain. Why did I do that? Because between the concepts and 3C I knew it was a head fake move that would not move lower, it was meant to suk in shorts and then use a short squeeze to move XLF above the range, something they couldn't do inside the range without buying a lot of XLF which they were trying to sell so they used momentum and technical concepts against traders to get it done.

I did add the FAZ position back, but only once it was above the range at #4 and #5. #6 was stage 4 decline, #7 was a break of a technical level that would bring in retail shorts so it was time to exit again at #7 and shortly after we posted the FAS (3x long financials) on Oct. 14th, Trade Ideas: (Swing+) UPRO / FAS Long because it was clear they'd again, use technical traders' predictability against them and run XLF up which they did at #8.

THAT'S HOW PREDICTABLE RETAIL TRADERS CAN BE AND THUS HOW PREDICTABLE WALL STREET'S REACTION CAN BE.

The event that sent futures higher overnight and in to today's open was the MARKIT European Flash PMI/Composite PMI headline beat which almost seemed to be a goal sought number to get the move we were looking for today. No one who has seen the entire PMI report can understand how the Flash PMI came in at a beat, not even Markit's own Chris Williamson who said,

“The Eurozone PMI rose in October but anyone just watching the headline number misses the darker picture painted by the survey’s other indices, which show  the region teetering on the verge of another downturn. 

“Growth of new orders slowed closer to stagnation and backlogs of work fell at a faster rate, causing employment to be cut for the first time in nearly a year.

“Business confidence in the service sector also slid to the lowest for over a year and prices charged fell at the fastest rate since the height of the global financial crisis, adding to an increasingly downbeat assessment of business conditions. 

“While the survey suggests the euro area has so far avoided a slide back into recession this year, a renewed downturn cannot be ruled out. Growth is so anaemic that increasing numbers of companies are being forced into laying off staff and slashing prices in an attempt to cut costs and boost sales through discounting"

Yet... Markit's PMI for Europe and China beat, sending futures higher at 3:30 a.m. today (EDT).

Today I was asked if I thought the New York Ebola story contributed to the decline in the afternoon. All I can say is the market was weak as of yesterday, add more gains on to such an unstable base and nearly anything "could" topple it.

However, I've seen so many events I'd think should move assets that didn't like the Arab Spring which I thought should move oil, but it didn't or the Syrian conflict which put us at odds with Russia, but it didn't move the market or the recent Ukraine situation, but it didn't appreciably move the market, then... I saw this chart specifically on Ebola and the market correlation yesterday.

While it was correctly pointed out that correlation is not necessarily causation, the chart above is a bit strange, but if we take this with a grain of slat, then the market should have rallied on the Ebola story out of NY as the above chart shows, the more stories, the higher the market.

I THINK THRE ARE MUCH REATER, UNSEEN FORCES AT WORK THAT USE NEWS WHEN ITS CONVENIENT TO COVER UP WHAT THEY ARE DOING.

Like many of you I started with fundamental Analysis and quickly realized that if your information is garbage, your analysis will be garbage and all we have to do is look at the Financial sectors use of the F_E_D's 1-day Reverse Repo facility as it sets new record usage on the last day of the quarter only, essentially allowing banks to hide huge collateral shortfalls nearish a half a trillion dollars and they facilitator hellping them hide it with a 1-day loan of collateral on the last day of the quarter is the very same entity that acts as the banlks' regulator, the F_E_D so Fundamental Analysis is a no go.

We know Technical Analysis is used against traders, although there's some use, but the concepts that have worked above are all Mass Psychology, a 3rd form of market analysis that few know anything about,  but what is the market if it's not a huge living, emotional organism that is led around by the nose via its own emotions and sentiment?

This is why I said what I said today about the usefulness of a head fake move,

"so when it feels a bit scary to be thinking about entering a put/short, that's when they're doing their job."

While there's obviously no correlation with Ebola stories and lower stock prices, if anything higher, the one correlation we have seen a lot of lately is quote traffic/cancelled orders as NANEX has been pointing out for weeks so these tweets from NANEX seem to be more likely to me than the Ebola story and don't forget, we already had significant distribution yesterday when we entered the first positions short...

This is a correlation we have seen nearly a dozen times, high quote traffic and cancelled orders leading to lower prices, now look at the E-Mini contract during this period this afternoon...

Again from NANEX, the E-mini SPX contract losing ground as the high quote traffic comes through just as we saw last week and the week prior.

In addition to 3C distribution, we know HYG is used to lead the market, which is why this post from earlier in the week showing HYG under heavy distribution was important to events later in the week, HYG Support Giving Out

For instance....

 HYG performance vs the SPX since our post above and...

HYG intraday selling off even harder...

Ebola? Was this story out 3 days ago, because HYG distribution sure was.

Yields also continue to lead the market lower as do commodities, something we have been tracking most of the week and then there's simply this....

SPY distribution well in advance of the Ebola story...

As for the Dominant Price/Volume Relationship,  it was dominant in all of the major averages with 21 of the Dow 30, 71 of the NASDAQ 100, 911 of the Russell 2000 and 298 of the S&P-500 of 4 possible relationships, all 4 were Close Up/Volume Down, the most bearish of the 4 possibilities and a relationship that usually sees a close lower the next day.

Of the 9 S&P sectors, 7 of 9 closed green with Industrials leading at +2.15% and Consumer Staples lagging at -.15%

Of the 238 Morningstar groups we track a whopping 209 closed green,  we have a 1-day overbought scenario which usually leads to a close lower the next day although tomorrow is an op-ex max pain pin day, usually we don't see that pin released until 2 p.m. or so, but everything we see tells us this has been brewing, it's not a last minute Ebola story.

Don't forget that all of the major averages broke their uptrend line for this leg as well as the 2013 uptrend line and all of them stopped out on our trend channel set at 60 min (wide).

Finally, it has been my opinion that we have already topped, the Russell 2000 being the bellwether for the overall market. Looking at market breadth, I don't think you can make a bullish case or any case that doesn't end with significantly lower lows.

For example, the "Percentage of NYSE Stocks Trading Above Their 40-Day Moving Average"

 or...

 the "Percentage of NYSE Stocks Trading Above Their 200-Day Moving Average"

or...

The NASDAQ Composite's Advance/Decline Line...

Trade Idea: (Swing+) IBB NASDAQ Biotech Short / BIS Long

I'm going to post the charts for this one quickly and enter a half size trading position because of a range and I want to see how it reacts around that range, otherwise it's a perfect example of head fake moves and specifically a Crazy Ivan move around the range. The actual position I'm looking at2x short NASDAQ Biotech Index) and again, at a half size position for now.

 Note the range in yellow. It's a bit difficult with so much to make out the 3C negative divegrence in the range that leads price lower and below the range, these are the kind of moves that are often momentum drivers for a breakout to the upside that IBB couldn't do on its own inside the range without first drawing in shorts and using a squeeze to create momentum for an upside breakout where institutional money can dump their positions. Financials did the EXACT same thing (XLF).

After the failed breakdown (Remember failed moves lead to fast reversals), the shorts who chased it lower , which is not hard to imagine after Yellen singled out Biotechs as being overvalued, become the creators of momentum as they are squeezed sending prices higher and eventually drawing in longs on a technical breakout above the range, allowing smart money to do what they could not do inside the range, distribute at higher prices without buying more to drive it higher which is the opposite of what they want to do (they want to sell).

 The intraday timing timeframes like 1 min are very clear, I don't have to draw anything.

 Look how the 5 min institutional timeframe reacts once above the range,a deep leading negative divegrence.

And the 10 min , which is why I'm not convinced about this as a longer term short yet and why I'm okay with a half size position until these intermediate 10-15 min charts become more clear.

Market Update

From earlier today in Quick Market Update...

"That means for a head fake move to be effective and worth running, it has to achieve a goal which is usually sentiment related. A higher high is what forms the chimney above the rounding top (Igloo), so when price moves enough to be convincing to traders to abandon short positions and go long, it has done its job, that's what I'm looking for....

Again, these moves have a purpose and function, there's no point in running them if they aren't effective, so when it feels a bit scary to be thinking about entering a put/short, that's when they're doing their job."

While a new higher high can sometimes be enough to hit stops and make a head fake move work, most of the time they are sentiment changers, just as was posted earlier, they need to be somewhat extreme and when you start to feel it, they are doing their job.

It's not too surprising that the last hour of the day is when this move starts to fail after having made a more substantial push higher, either way it was worth waiting until today for puts rather than yesterday.

Here's a quick chart update, as always, if you don't have some unique indicators, the much overlooked intraday TICK will usually give you an early head's up.

The early move just above yesterday's highs didn't seem like the kind of sentiment changing move we needed, the 1-2 p.m. move was more like it, but it has already seen significant distribution the last several days so I'm not very concerned about positions already entered and certainly not about new positions or put positions.

 There are several leading indicators that have been pointing toward this and a move lower, which I already went over in some detail, the SPX/RUT ratio was one and it was interesting intraday as well.

Here it is intraday not confirming the move above the earlier intraday highs, it's the kind of sentiment move we needed as a "Chimney" head fake, Wall St. doesn't usually do things half hearted as they know like any good trader, the market is largely an emotional animal.

 Since the HYG divegrence post, HYG has been lagging or leading negative, it has been just calling for a move lower, yesterday the signals lined up pretty well with HYG and today is just a bonus.

And intraday, again ZERO HYG confirmation.

As usual, keep an eye on TICK, it broke the uptrend channel and gave early warning before things got ugly on the downside. Those are some nearly-1600 readings on that break.

SPY is leading negative to a new low

As are the Q's

And IWM is pushing that way.

I still think this is an excellent area for inverse ETFs or short equity positions, as for puts, you'll have to see what kind of discount today's move created, but this is why I warned of this yesterday as it's a nice opportunity.

Road Map

Based on the charts we have, the concepts that have worked and have been repeated so often that we've made them part of our system, like the Igloo/Chimney head fake that we had no signals for yesterday to believe it was a probability for today, yet an exact chart was drawn yesterday showing what we would expect conceptually today and it looks exactly the same. So based on these things, I have a sort of road map of what I'm expecting, of course timeframes, targets and the nature of the market itself make a perfect forecast nearly impossible, but the longer term expectations are by far the strongest probabilities, it's the shorter term stuff in between that is more difficult to forecast.

From where we are now....

 Yesterday the SPY broke the uptrend since last week's bottom which are both moves we have been expecting, up and down shortly. Today's price action has been below that trendline.

Even at a wider 60 min chart, the SPX has hit a stop out, yesterday.

Intraday the SPY is getting uglier which is what we expected to see in a chimney head fake move.

 The 3 min chart is calling for a pullback as it leads negative

As are charts out to 15 mins now. I suspect a pullback to last week's lows and maybe some. The accumulation this month or gas in the tank is sufficient to take the market higher, but if you only have 3 good wheels and the fourth is flat, you have a problem and that problem is and has been in the base.

If you look at the last base/cycle from early August, it has a wider bottom, a rounding bottom and even a head fake move to the downside (an upside down igloo/chimney) before it moved up. At it's top the same price pattern we forecasted in advance, a rounding stage 3 top and an igloo/chimney head fake move played out and just before the downside reversal or stage 4 decline which we had predicted would make a new lower low even before the base of early August had broken out to stage 2.

The very sharp "V" base is rare, it's a reversal event rather than the much more common process seen at the last base and the last top, it is also parabolic in nature and I suspect the decline to the downside will be parabolic in nature as well, especially since markets fall faster than they rise.

As you know, I suspect that we make a wider "W" base that gives the rally 4 good tires and it should have enough gas in the tank,  we'll know as price drops lower as it should see accumulation, if it doesn't, then this was just a counter trend bounce and it will make a new lower low and we'll simply hang on to the trading short position just entered and stay with them as trending positions until the next inflection point.

I've drawn several areas of potential support that may hang price up on a consolidation temporarily, those include the former base at the ligh blue dotted line, the 200-day moving average at the dark blue dotted line and if we do make it to the lows of last week, a head fake move below what should be a support area would be high probability.
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If at that point we have seen accumulation on the way down, we'd want to enter some trading longs on that head fake stop run below last week's lows, but we need to confirm the divergences as this is a road map, but we still confirm.

With 4 good tires ( a stronger base) and gas in the tank, I'd expect a move higher than what we have seen. Last week when I was trying to "Anchor expectations of what to expect BEFORE we even saw the first day higher, I expected a stronger move than what we have seen thus far, but one that ultimately fails.

 The 60 min chart went negative at the last Igloo/Chimney top and is in line now, it should be positive if a stronger base forms.

However the highest probability is with the 4 hour leading negative chart and no matter what the market may or maya not do, this is the highest probability, down and significantly down.

So drawing in some more from left to right we have the August stage 1 base leading to stage 2 mark-up, stage 3 top/distribution and a head fake move "HF" followed by a new lower low as stage 4 decline sets in.

Now at that lower low I expect a wider stage 1 base to form, but again we'll be able to confirm that as prices move lower as they'll need to accumulate and create positive divergences, if they aren't there, then this was a bear counter trend bounce and the market is further along and in more trouble faster than I thought, but we'll still be fine as we'll just hold the current shorts.

Assuming we see stage 2 mark up and a rally to a stage 3 top, I don't have any exact target in mind, it just needs to be strong enough to switch bearish sentiment to bullish, we eventually get to stage 3 top and stage 4 decline, there will be fewer choices of shorts as many have already broken down like one of our long term favorites, NFLX or PCLN. This is the top pattern I'd expect if this scenario plays out and it all really depends on the next decline and whether that is accumulated or not, again, if not, then this was a bear counter trend rally that will move to a new lower low.

Although I don't have the scale to properly draw the price pattern, for the SPX it would be a megaphone or Broadening top. The characteristic of a Broadening top is the final push on the upside almost always falls significantly short of the upper trendline, most of the time only about half way there before failing and breaking below the lower support which has already been broken once, however just like with the initial break of a H&S top, the early shorts are almost always shaken out with a volatility shakeout just like what we've seen thus far.

That's what I'm expecting near term, if we have confirmation we can trade short, then long and back to short again with some significant volatile swings, all moves well worth trading. If there's no accumulation on the decline, we simply stick with current shorts, let them keep working and move forward from there.

Trade Idea: (Swing/ Options)

The rest of the 3x leveraged ETFs are looking pretty good here as well, SRTY (IWM short 3x), SQQQ  (QQQ short 3x), SPXU (SPY 3x short) and FAZ (Financials 3x short).

Accordingly, the bounce higher today has reduced the premiums on the underlying: SPY, QQQ, IWM, XLF so I don't think this is a bad area for entering those if you're interested in some put options. Even though I suspect this will be a shorter term swing-type move toward the lows of last week, I still prefer to have some time under my belt and like the November monthly and in the money a bit, however everyone has their own risk tolerances and ways they like to trade options, I just like some room on them.

Trade Idea: (Options or ETF Swing) XLF/FAZ

I'm already set with FAZ long (3x short Financials) from yesterday, but if it's something you might have been interested in and missed it, this looks to be a pretty good second chance buying opportunity.

I personally am going to add some November 22nd expiration, XLF $23 Puts, about regular size for the position.

While I like several assets, this is one I like right here and right now.

Quick Market Update

So far we have the price move, but remember the entire premise of this move that was forecasted yesterday was based on a concept that we have found to be true more often than not, it wasn't even based on market signals as this was a fundamental news story (European PMI overnight)....

That means for a head fake move to be effective and worth running, it has to achieve a goal which is usually sentiment related. A higher high is what forms the chimney above the rounding top (Igloo), so when price moves enough to be convincing to traders to abandon short positions and go long, it has done its job, that's what I'm looking for.

As for the charts...

 Algos have been keying off the USd/JPY vs Es correlation since 3:30 a.m. when the European Composite PMI came out (Flash reading), there's an obvious negative divergence in USD/JPY so I feel pretty confident it's going to come down and Index futures with it.

 As for ES/SPX Futures intraday, they're already going negative, but I'd like to see them either move sideways a bit longer so this is more of a process than an event (reversal to the downside) and I think that's probable looking at TF and NQ.

 TF 1 min is relative negative, not leading yet so I think there's more time in the area, which is fine and should be expected proportionally.

And NQ is still in line so I do think we get what I'd like to see, either flat/sideways to widen today out or a bit higher which is better for put entries.

The VIX Futures have been leading positive on the stronger 15 min chart, I'd hope to see this make a new higher high in 3C before they move up/Index futures down and we'll be able to tell by the intraday chart...

1 min VIX futures, when they start leading positive, then I think we'll be at a pretty decent area.

The TICK trend has broken a bit, I'm hoping it can hold on a bit longer.

Again, these moves have a purpose and function, there's no point in running them if they aren't effective, so when it feels a bit scary to be thinking about entering a put/short, that's when they're doing their job.

More to come...

A.M. Update

This morning is almost too surreal to believe after yesterday's Market Update with this excerpt and chart of what we might see moving forward....

 This trendline drawn on the SPY 5 min chart of the last several days gains could be a tricky spot, perhaps even while I'm writing this as it's an obvious technical level and we know that obvious areas that draw attention of technical traders often get gamed.

This is why I mentioned the possibility of a move above the rounding top today which would set up a nice Options/Put play in to the price strength.

After that I posted the Put Option Contingency yesterday which referenced the linked Market Update comments and "Igloo/Chimney" chart above as a way to enter puts.

This morning on stronger than expected headline Euro-area PMI, futures jumped...

 ES/SPX Futures jump around 3:30 a.m. EDT just after the European open as headline Euroarea composite PMI readings come in stronger than expected along with Chinese overnight sending ES higher right at 3:30 in to a negative divergence in ES intraday right now.

 So far the averages haven't confirmed the gap up either, this is the SPY 1 min chart that should see 3C where price is to confirm the gap up.

So what does price look like this morning? Exactly as we said it might with the Put Option Contingency from yesterday, the EXACT set-up we'd need to see for a put options set-up as seen below...

 5 min SPY shows yesterday's rounding top and now the chimney on the right side of the igloo, exactly as drawn yesterday...


I'm going to let volatile A.M. trade burn-off and make sure the signals stay negative giving us a nice PPut option position entry with this gap up so long as it continues to show the distribution from yesterday. It's almost as if Markit's PMI reports which do have some strange circumstances surrounding the strength when so many sub-indicies are so weak my Market's own admission, were purposeful in creating this second chance shorting opportunity or the "Put Contingency" as posted yesterday, nearly a perfect forecast of events a day before hand.

Also as mentioned when covering oil in last night's Daily Wrap, I mentioned oil was down, but...

"The $USD saw its second day closing higher, now up +.55% on the week on Euro weakness, this in turn sent commodities lower including oil which suffered after the EIA report this morning, closing at an 18 month low, still there are some near term signals for a bounce."

And Saudi Arabia gave us that when admitting they cut supply in September and some think October as well just this morning, sending USO and our USO calls higher.

USO 1 min this morning gapping up.

Also our GLD Put is up on the day as well as Gold gapped lower on the open...

GLD's negative divegrence and gap lower this morning (1 min chart).

So far our USO calls that were just added to this week are moving up, our GLD puts are gaining as GLD moves down and the market  has done EXACTLY as forecast yesterday creating a put option entry that is favorable...

I'll keep you up to date on the signals, but I'll be setting up several tickers to be ready to enter puts....