Daily Wrap

On a day when the Russell 2000 has its best day in a year and best 10-day run in 3 years, I think sometimes looking back to when things were a bit different and a lot less emotional gives you better insight in to forward looking events, this is why I post certain analysis under the heading, "Anchoring Expectations".

Right now, this is one of the most important concepts that was posted October 15th in the Daily Wrap...

"I suspect we will see a sharp upside move taking out shorts and breaking above obvious resistance like 200-day moving averages and top trendlines as well as the August lows, remember these moves HAVE to be convincing, it doesn't mean there's a real change in character so if and when the time comes to start shorting in to that strength, it's a gift, although you can bookmark this post, I promise you , you will not feel it is safe to short in to strength as the market moves higher on a bounce like you do now, the moves are that convincing, which is all the better for entering new or adding to existing shorts."

This is from September 30th, the last day of Q3 Window Dressing,  the Daily Wrap.

In the excerpt below I'm theorizing about a post Q3 rally and the reasons why, this is very early before we had any real evidence, I'd put this kind of analysis under the heading, "Mass Psychology".



 "I'd say the amount of selling underperforming assets (Window Dressing in to quarter's end) with probably something near 50% of the NASDAQ Composite and 50% of the Russell 2000 stocks in a technical bear market, there certainly wouldn't be much accumulation during window dressing,  this is the reason in the Week Ahead post I suspected if we saw anything it would be post window dressing, Wednesday. I think there's enough room to work with to put in that post Window dressing bounce as a lot of small and mid caps are oversold or viewed as such as they were the worst performers on the quarter and thus sold the heaviest this past week or so. I do think we'll have a clear signal and be able to make a choice of whether to participate or not..."

This is just to remind you of what sentiment was like just a mere 2 weeks ago...

Monday October 13th, 2 days before the lows were in and the rally was off...Daily Wrap

"From a conceptual point of view, the bearish sentiment among retail is exactly the kind of bear trap we expected with a head fake move not only below the previous week's lows, but below the larger support level of the August stage 1 market lows which were surpassed. In effect, the Head Fake move is there for several reasons, one includes creating supply from sellers and short sellers that can be accumulated cheaply and another is the upside reversal catching what is now a majority in a bear trap in which higher prices cause them to cover and eventually buy, instant demand and upside momentum without Wall St. having to spend a penny to drive prices higher as the initial short squeeze does the heavy lifting and the bearish sentiment change to bullish does the rest, assuming the move is powerful enough which is why I suspect this is going to be a very strong upside move, even though there's no real change in the underlying situation, it is a quick and rather effortless trade worth a lot of money to institutional traders."

Wednesday October 15th's Daily Wrap... This was the low before the market rallied...

"On the day today, lots of stats...

The Dow has lost nearly 1200 points in the last 3 weeks... remember I warned a while back that I wouldn't take the risk of being long as fear is stronger than greed and markets fall much faster than they rise.

The NASDAQ Composite is in official correction, down over 10% from recent highs. This Average also has one of the worst Advance /Decline lines I've seen.

The VIX's intraday high of 31.06 is the highest reading since December 2011.

The Dow Industrials are down -4% Year to Date, so much for long and strong. It's also down close to the official -10% correction levels.

The Russell 2000 is down -9.6% year to date and this is the average that should lead the market.. The SPX is now down -1.5% year to date."

And as to what we were seeing Wednesday October 15th...

Important Update

"The Fear and Greed Index is at zero, the most bearish it can be, Wall Street often flips the script when there are too many people on the same side of the trade, you can't make money like that in a zero sum game."

"The VIX, after last night's "VIX futures were going negative on the 5 and 7 min charts very clearly and a bit further out"  hit a new high at 331.06 intraday, the highest since December 2011, before closing lower at 24.92, creating a bearish Doji star with long legs or bearish "Shooting Star"  (remember the VIX moves opposite the market). As for fear though which was obvious in the VIX intraday, not as much on the close, the Fear and Greed Index closed again at zero, the most fearful reading possible. Remember the VXX, short term VIX futures was also showing 3C distribution today as posted in a market update.

VIX bearish shooting star close after a bearish Harami Monday/Tuesday."

Today SPX Futures volume was the highest in 3 years, this kind of smells like short term capitulation or a mini selling climax which makes room for a bounce.

If we get the same kind of late day positives we saw today, we only need a couple of hours before I'd feel comfortable filling out existing longs and adding to them including Call option positions."

I think you probably get the point I'm trying to make, when you're at sentiment extremes, there's a reason, Wall Street designed the move to trigger those emotions and no matter how far in advance I warn, no matter how accurate the warning is, there's a reason that the majority of our concepts work in any time frame and with any asset, HUMAN EMOTION NEVER CHANGES AND THE MARKET IS MORE ABOUT EMOTION AND PERCEPTION THAN ANYTHING ELSE ON THE WHOLE.

I use to read a lot about the competing theories of "Random Walk" in which the market's moves are essentially random vs. "Efficient Market Theory" in which the market discounts ever bit of information that's out there. After years of watching these crooks set up rallies like this one which we called in concept, weeks in advance and which we called with actual positions right to the very day, I don't believe in either. For the most part, smart money is smart, they may not control everything in the market, but they exert enough control that you can beat the market by following what they are doing. 

This rally wasn't an accident, it was predicted days and weeks before it even started and confirmed with objective data like the VIX distribution highs, the selling climax lows, the emotional warnings that "You aren't going to feel safe shorting anything" while we were in one of the most bearish periods in years.

I think it's probably pretty safe to say that we all get it, these market moves had to be extreme as the preceding bearish move was more extreme than anything we had seen in years in many cases and to shift sentiment, you have to d something bigger or faster.

As for technical levels, this may be what they were working so hard to hit yesterday with HYG accumulation and a VXX slam , both of which were ineffective....

 The Russell 2000 daily above its 50, 100 and 200-day moving averages, those are all technical triggers for Technical traders.
 

 The SPX-500 above its 50, 100 and 200-day moving averages.

The NDX also above all major moving averages and highs

The Dow 30 which over 2 weeks earlier was down 1200 points in 3 weeks!!!

The Dow also broke the psychological technical level of $17,000

Yet....

The NASDAQ Composite's Advance/Decline Line (green) is way below where it should be vs the NASDAQ Composite (red), there's a major problem here in breadth and this isn't an indicator, it's not something to be interpreted, these are hard numbers, these  are fact.

And while all of the averages are above their 50, 100 and 200-day moving averages....

Less than half of ALL NYSE Stocks are above their 200-day moving average, in layman's technical terms, the market of stocks is in a bear market.

Barely above half of all NYSE stocks are above their 40-day moving average at a mere 55% (vs the SPX in red).

It's not that hard to see, something remains, VERY WRONG with this market.

Again, volume for the SPX was 40% below average, I found the chart I was looking for that shows SPX Futures volume vs price, I think it may be enlightening...

Anyone who's read the first chapter about volume knows that an advancing market that doesn't see rising volume is always suspect, in this case it's not just a couple of suspicious days, but a trend.

I showed how HYG fired off today and helped the market...

 I also mentioned HYG distribution had already started, this is wht it looked like around 3:30, this is what it looked like by the close...

HYG at the close, distribution picked way up.

As already mentioned, the HYG divergence from yesterday wasn't like the one at the bottom in to the intermediate timeframe charts, this divergence only went to the 1 and 2 min charts, above the 3 min is still in leading negative position  so the intent of the accumulation was for a short term move, but a move that needed help and an obvious target in mind, I think we can safely assume it was the technical moving averages.

HYG also responded to the distribution in to the close as it slides lower (blue) vs the SPX in to the close.

And it's still in a deep leading negative position, but note how it was perfectly in line and leading the market early in the move...

The Most Shorted Index also helped out today, there was a massive short squeeze, I doubt there's many if any significant shorts left, WHICH WAS THE POINT OF THIS ENTIRE MOVE AS TOO MANY PEOPLE WERE ON THE SAME SIDE OF THE TRADE.

The official MSI (GSCBNSAL) saw it's biggest move since December 2011 today, SHORT SQUEEZE. This move changed sentiment as it was meant to.

HYG wasn't the only thing to slip in to the close, pro sentiment did as well.

Pro sentiment...

Of the 9 S&P sectors, all 9 closed green with Energy leading at +2.28% and Consumer Staples lagging at +0.39%, an exact flip flop of yesterday's leader/laggard. 

Of the 238 Morningstar groups, we had a massively 1-day overbought 115 of 238 green.

We had a strong Dominant Price/Volume Relationship in all 4 averages, Close Up/Volume Up, this is the count of actual stocks within the averages, not the average itself. The Dow had 19, the NDX 67, the R2K 1468 and the SPX 269 which is a strong relationship.

Ironically, although this is the most bullish of the 4 relationships, it's also the one most likely to produce a next day sell off.

I'd say we have a very sharp overbought condition and we have a very sharp breadth problem, all in all, the move has achieved its goals, which is why I had no problem using the move today which forms a chimney on the recent igloo top, for buying puts in to. As I said October 15th,

"bookmark this post, I promise you , you will not feel it is safe to short in to strength as the market moves higher on a bounce like you do now, the moves are that convincing, which is all the better for entering new or adding to existing shorts."

Remember, tomorrow is the F_O_M_C meeting, I'm not even going to guess what they say, do or anything else, but I will watch for signs of a leak as we have found about 3, not many, but they do happen. As always, BEWARE THE KNEE JERK REACTION.  Here's the last F_O_M_C knee jerk reaction from the September17th meeting...

 September 17th 5 min chart, F_O_M_C at 2 p.m., lots of upside volatility, the knee jerk this time ended quickly...

And here's what happened next...

From a "conceptual" point of view, I'd think they'd want to keep price above these averages for a few days to build a bigger bear trap, but today was pretty overbought at an extreme, just like the market was oversold at an extreme when it turned up, I don't have evidence suggesting we stay above the averages for a few more days, it just makes the most sense to me, of course the F_O_M_C is a total wild card.

And... FB soiled the bed in AH tonight with earnings and it seems to be having some effect on Index futures... Congratulations FB shorts!

Russell 2000 negative divergence in to the afternoon and after hours ...

Although it's not like there wasn't already trouble brewing...

 R2K 5 min negative, the minimum timeframe I need to see divergent for a trade, I would not trade this long under any circumstance.

R2K 7 min which has been doing a great job in calling out turns like the bottom that led to this rally.

Just keep your cool, use what you can to your advantage. This market is damaged and this rally didn't changes that as I showed you in the breadth charts, but we already knew it wouldn't change anything before it began.

Have a great night, see ya soon.

HYG is Starting to Fail

Yesterday's 1-2 min leading positive divergences in HYG were meant to send it higher as it is an arbitragable asset that is one of the most liquid ways to trade credit since the banks all but eliminated their exposure to HY credit, making it nearly impossible for institutional money to put together a diversified basket of HY Credit, thus the rise of HYG and the manipulation of it. You may recall in mid-October as we were still heading down, part of my case for a strong, "Monster , sentiment changing rally" was accumulation in HYG, I said, "There's only 1 reason they'd accumulate it". Since it has seen distribution except for yesterday when it was accumulated again , but in much smaller size on 1 and 2 min charts, HYG is not positive beyond that. HYG didn't fire yesterday, the VXX whack/Smackdown didn't work, however today in what looks like a textbook Igloo/Chimney topping process, it led the market higher (algo arbitrage), yet HY Credit fell, this is because HYG is specifically programmed in to algos.

In any case, HYG is now showing a negative divergence that should wipe yesterday's positives off the chart given a bit more time.

 HYG positive divegrence from yesterday, it finally fired today.

Here's HYG's intraday divergence as you can see, it's seeing distribution.

This is just common sense, if you accumulate shares in something, especially in the size needed to act as a lever, you need to be able to sell them as well, you need higher prices unless you are willing to flood the market with supply with no buyers as you already saw, HY Credit is not buying this move today, it's just simple logic.

 The SPX/RUT ratio confirmed yesterday intraday, but not on a bigger picture scale, it confirmed a lot of today until the last hour , but again, on a larger scale, there's no confirmation of the price move, thus it's not likely to hold as this indicator has been spot on.

There's no higher high in the SPX/RUT ratio, unlike the higher highs in to lower SPX lows that formed the base, a positive development, what we have now is the opposite.

There are additional leading indicators that I'll post after the close and internals should be more than a little interesting tonight.

I'm loaded up for bear at this point, I just have a gold/GLD position (call) I need to decide what to do with, other than that, I feel good about the positions and the near term future, whatever the knee jerk tomorrow.

More to come after the close.

Trade Idea (Options/Leveraged ETS) QQQ Put

I've already set up my short positions for the next leg, today's move above the rounding top already looks like the Chimney/head fake of a reversal process, the move itself has to be convincing, head fake moves are not half hearted efforts as they need to swing emotion and sentiment. When a strong trendline breaks from a rally like the one off the mid-October lows and starts to round over, traders are going to start to become skeptical, I believe that's one of several reasons we see head fake moves just before a reversal whether to the upside or downside, there are numerous other reasons that have more to do with logistics and momentum that you can find linked on the member's site at the top right, "Understanding the Head Fake Move " parts 1 and 2.

In any case, here's a quick look at NASDAQ Index futures...

 NQ/ NASDAQ Futures 1 min intraday leading negative in to the move, that's the confirmation we look for in a head fake move, distribution in to the move (or in the case of a downside head fake move , take UNG for example, accumulation in to a move lower).

I was a bit concerned earlier about yesterday's HYG divergence that was still hanging around today, it's only on 1-2 min charts and stops at 3 min so I'm not that concerned about it, but it did help do today what it was trying to do yesterday.

SPY in green intraday today vs HYG in red, note HYG momentum intraday vs SPY.

 However we still have strong negative divergences and last Friday in the Week Ahead post, the main theme for the week was down, since then , since Sunday's open of Futures, the divergence has only grown stronger (negative).

 NQ 15 min, again leading negative and stronger since Friday's close in to this week.

It's anyone's guess what the F_O_M_C brings tomorrow and what the knee jerk reaction is or if there is one (typically there is at least 80% of the time, but not always).

It seems to me this rally which we first theorized based on Window Dressing in late September (the last week) and saw build through the first couple of trading weeks in to mid-October, was timed to get off right down to the "Chimney" before the F_O_M_C which is tomorrow.

I'm going to open a normal size QQQ November 22nd Put position here.

UNG Update

I've had UNG / UGAZ on my list to update since yesterday, however I have dozens of assets and indicators on my list.

You may have noticed this and I've talked about it a lot, "The leaders of the last bull market will not be the leaders of the next bull market", that's assuming we do have a next bull market and don't enter a secular bear market which is a very real possibility if not probability. Most will agree that we have been in a secular bull market since 1980 even though we've seen crashes like 1987 and the 2000 Dot./Com bubble, the 2007/2008 Subprime Bust, we have still stayed in a secular bull market, for so long I'm willing to bet that most people don't even recognize there's such a thing as a secular bear market. My opinion on the matter was elaborated on in depth in a 5-part series back in 2007 in which the 2008 decline was called out, but beyond that, looking toward the future, there are so many things that have created inter-woven problems that reinforce each other so that their sum outweighs the individual problems singularly. This is not the point of this post, however, my thoughts that Natural Gas is a candidate for a secular bull market moving forward are relevant.

In 1999 when I was trading stocks like HGSI, CSCO and JDS Uniphase or any of the dot-coms, I never would have thought that something historically as boring as housing would lead the next bull market after the entire world changed with the advent of the internet. However, over nearly 4 years of teaching Technical Analysis, well over a decade of publishing over 10,000 posts, the one chart I find to be of great interest and will often bring up is the accumulation of Home Builders during the 2000 tech bubble burst. Who would have guessed years in advance that housing would lead consumer spending and the next bull market years before it happened and stocks like HOV jumped over 2500%? 

The point in showing the charts, talking about the subject is that  Wall Street knows a lot more than you think a lot earlier than you think and it takes them a lot longer than you think to build large, multi-year positions and longer than you think to distribute them.

This is one char of a home builder I often talk about when on this particular subject, HOV. It's funny how people see home builders now after they made over 200% advances and were the momo stocks of their day vs. how people viewed housing as dull and boring before 2002/2003 through 2005/2006.

 Here we see nearly a year and a half of accumulation , mostly in to lower or flat prices and right when the tech bubble was exploding. How did Wall St. know that such a dull asset previously would lead the next bull market that was still a good 2-3 years away? 

This is a 2-day chart, but there are positive leading divergences out to 5-day charts and even longer, the accumulation period is significant and this isn't a secular market, just a bull market of several years, but the points about Wall St. being far ahead of the curve and the time it takes to accumulate a large position in an asset should not be lost on you.

 This is a 5-day chart of UNG over a longer period with a stronger divegrence in a relatively flat price environment. I suspect the coming move in UNG is not a rade, it's not even a bull market, but likely a secular shift in US Energy structure, this is what secular markets are about.

"Large-scale national and worldwide events, which occur in combination. For example, wars, demographic/population shifts and governmental/political policies are all events that could drive secular markets."  

Without too much thought I think you might immediately think of the shifting dynamics in the Russian/US relations and the fact the Europe relies on Russia for 1/3rd of their natural gas which transits through the Ukraine, not to mention the upheaval in the middle east, the governments that have fallen after decades of rule in a matter of months and I'm sure you can envision how this may change US Energy policy as we are elbow deep in natural gas relative to oil.

Looking at UNG on a closer basis, this attempted breakout on September 29th was written about during the day with the warning that if it didn't close strongly above resistance and on volume, it had a very high probability of falling below the lower end of the range which it has done , this is summed up in a simple head fake based concept, "From failed moves come fast reversals".

This doesn't tell me anything about the larger secular view of nat-gas, but it is important to open or new positions. On Sept. 29th we weren't sure if UNG would make the breakout, but we were pretty sure that if it didn't, it would head below the range support which is how it builds support for a new momentum move that can breakout of the range, just like our recent example using Financials.

At #1 for nearly 2 months I carried a 1/2 size FAZ (3x short Financials) position, my intention was to add the other half ABOVE the range where I'd have a better entry and average cost as well as lower risk, that breakout never came.

Instead XLF broke below support and on the first day of that break below support as my FAZ position jumped to a profit, I closed it. It was obvious that the move below support was a momentum creating bear trap to do what XLF could not do in the range, to break out above the range and this is where I intended to add back my FAZ long (3x short Financials) position and did at #3 and closed it as we came down at #4 as it was obvious from accumulation that this move up from mid October was going to be a barn burner, but ultimately end so I'm long FAZ again in to XLF strength/FAZ weakness.

I believe this is exactly what happened with UNG with the failed Sept. 29th breakout and what is happening...

Failed breakout leads to a fast reversal, however price is always deceiving. I suspected on September 29h as UNG was trying to break out that if it failed it would break below range support, but for the same reason mentioned above, not as a failure and mass sell-off of UNG, but as a momentum ignition move as shorts are pulled in and eventually squeezed, just like the October rally in the market, UNG should be able to breakout on the next run up which looks to be closer than I thought.

 UNG 4 hours has been in line all year until the Sept 29th failure and decline in which the first major divergence of the year in a 4 hour chart appears and it's a positive divegrence, accumulation in to lower prices and higher supply.

The 2 hour chart shows the first range breakdown we expected during the summer and the September one at the right red arrow, again, I believe that range was trying to breakout and it has only added to its divegrence since then.

The 60 min chart which is a very strong timeframe on its own shows the exact same thing.

Looking at price action, you probably see the proportionality as well, the only thing really missing here is a reversal process as "V" shaped reversal events are pretty rare and this would be a much stronger base with a larger reversal process (price moving sideways here for a little more time).

 The 15 min chart since the Sept.29 breakout attempt, also leading positive in to the pullback, this is exactly what we expected on September 29th if the breakout failed.

 And the 5 min chart with the Sept 29th negative which is fairly small and the 5 min leading positive (timing scale).

Today's move is pretty nice, but I don't think this is the ultimate move to break the 2 ranges above, I think it pulls back as the 1 min intraday chart suggests, widens out the reversal process and forms a base that can support the kind of move that is already accumulated. The gas is in the tank, we just need a strong corner stone./base to support the move, I suspect we see it very soon.

I continue to hold UGAZ long (3x long nat gas).

MCP Update

MCP is getting interesting in the area and active, the price pattern looks like a small Cup and Handle, we don't see these bullish price formations much anymore for whatever reason, but this is a "textbook" version from Investopedia.

 Cup and Handle, the volume is lighter on the handle consolidation which is similar to a bull flag, they consolidate against the preceding trend until a break out to the upside.

This would be a fairly small C&H vs. most of the textbook patterns that use to be everywhere several decades ago.

 This is the Daily X-Over Screen, because of the choppiness in a lot of assets of most of 2014, we've had to use a lot of 60 min charts here, a daily is a much stronger signal. The sell/short signal is confirmed at the 3 red boxes on the price moving averages, the custom indicator (yellow) with its moving average and Wilder's RSI at the bottom. We have 2 of 3 long right now and the 3rd, the custom indicator in the middle window is a hair from crossing over to a full buy signal.

The preceding downtrend before MCP started moving laterally was stopped out in the Trend Channel

 As far as long term, primary trend long positions, there are only a few that look very interesting to me, MCP has been one of them. A base formation of a year or more is not uncommon, before the big home builders run in to 2005, they were making bases similar to this for about a year and a half right in to the 2000 Tech Bubble implosion.

This is a 5-day leading positive divegrence, a very strong, long term chart.

 Intraday, the long 2 hour chart is positive and has seen a recent uptick in its divergence at this flat area.

The 15 min chart, with as much history as I can fit on the chart is showing the same trend with a sharper uptick in the same area, although being a shorter term chart the divegrence should look sharper as it does.

 in to the handle area.

Also with as much history as I can fit, the 5 min chart is showing the same trend,  note small negative divegrence right at Cup resistance that forms the handle and  the stronger leading positive divegrence 

Intraday charts also look good.

For now I'm going to continue to hold MCP long, as far as a new position or a potential call position, I'd like to wait and see if this is a true C&H bottom which would see a breakout on higher volume above the flag-like handle consolidation.

All in all, it's looking interesting.

Market Update

Still looking like a head fake Chimney or what is more commonly known as a bull trap.

 QQQ leading at a new low, most of that occurred in the space of 30 minutes. This would be the typical confirmation of a head fake move we'd be looking for, it just so happens it's in the right place , see the previous post showing yesterday's rounding top/igloo/chimney chart drew out...

QQQ trend from accumulation mid-October (and before) to mark up with 3C confirmation at the green arrows and a leading negative position where the rounding top is, which is also about the same place as the break of the trend line...

QQQ trendline break

It didn't take long for the divergence to migrate to the next longest chart (2 min) which shows a strengthening divergence. In simple terms, the distribution in to a head fake move. Since capturing this chart it has made another new leading low.

IWM also saw the same type of leading negative divegrence around the same time, I like to see multiple asset confirmation as well as multiple timeframe confirmation.

And the Igloo/Chimney that it seemed they were trying to get to yesterday whether it be the SPX moving averages, green on the month or a simple bull trap / reversal.

It's still up in the air as to what happens at the October lows. The 60 min SPY is confirming the downtrend as 3C makes lower lows with price until mid October with a divergence that just made it to the 60 min chart followed by confirmation with 3C higher highs with price right about to the level of the rounding top area and a leading negative divergence at the same 60 min chart now.

The one thing I'm not crazy about is HYG's 3C divegrence from yesterday is still in place, this may be a remnant that dissipates, we'll have to watch it.

This is an index of HY Credit I don't have access to with 3C charts, but it shows the utter failure of credit markets to confirm today's move, making it look even more like the typical "Chimney" head fake.

ZERO HY Credit confirmation, this is one of the best leading indicators among asset classes, thus the old saying, "Credit leads, stocks follow".