Daily Wrap

Interestingly last night we saw some strange timing of the 2 week old BOj/GPIF news and more strange timing just after the Mutual Fund fiscal year closed Friday with, well I covered the event at 2 a.m. so you can read about it here, Nikkei chaos.

Then it got more interesting as the tin foil hat in my closet was dusted off as I had to question Bullard's comments as the market completes the move many credit him with starting , although we saw divergences up to 2 weeks ahead of the bottom as they grew, we knew this would be a serious rally, but the timing, well again take a look as I covered it here...A.M. Update: Bullard's Back At It, You Know We Are Heading Down

I also covered currencies and my thoughts that the charts are suggesting a lower USD/JPY and higher EUR/USD, again they were covered here...A.M. Update: Bullard's Back At It, You Know We Are Heading Down and look at the two this evening...

 USD/JPY is flat like the market and the divergences in Yen and $USDX futures are leaning toward a decline in the pair while the futures in the $USD and Euro, again covered in the post linked above, suggest higher EUR/USD prices which ironically look like this after this morning's analysis...

EUR/USD.

Of course the Nikkei was volatile overnight as I posted early in the a.m. hours and diverging from the USD/JPY...

 USD/JPY (candlesticks) vs Nikkei 225 futures (purple) on a 5 min chart, clearly diverging. If that wasn't enough, I suspect the Nikkei sees lower prices than just what happened in futures overnight.

The 15 min /NKD 3C chart and the...

30 min leading negative Nikkei 225 futures 3C chart.

As well as the US election results, which are largely anticipated to see Republicans gain control of the senate, which would put the F_E_D under a spotlight as Republicans are eager to cross examine the F_E_D's decisions re: QE, rates, etc., they may not be the only central bank under pressure.

While the ECB meeting Thursday is not expected to introduce any new QE, just a day and a half before the meeting we get the following mutiny against the ECB's Mario Draghi, perhaps making it difficult for Draghi to pass any controversial policy and more than likely having some roots that lead directly back to the F_E_D as they warned the ECB last Wednesday as the Euro dropped on the F_O_M_C, "Not to push too far" and that they "noticed" the drop in the Euro. Interestingly just after that and just before the meeting, Draghi's leadership is called in to question, via Reuters from this morning...

Reuters:

• NATIONAL BANKERS FAULT SECRETIVENESS AND COMMUNICATION STYLE
• SOME MEMBERS PLAN TO RAISE CONCERNS AT GOVERNORS DINNER
• DRAGHI KEPT AIDES IN DARK ON POLICY STEPS
• IRRITATION COULD MAKE IT HARD FOR ECB TO TAKE BOLDER STEPS

National central bankers in the euro area plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources said.

The bankers are particularly angered that Draghi effectively set a target for increasing the ECB's balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public, the sources said.

"We specifically agreed at the meeting... not to put any numbers on the table," one central banker. "Draghi's reference to the balance sheet of 2012 irritated a lot of colleagues. So he has had to backtrack a bit ... to compensate."

"This created exactly the expectations we wanted to avoid," an ECB insider said. "Now everything we do is measured against the aim of increasing the balance sheet by a trillion (euros)... He created a rod for our own backs."

Even members of the ECB's executive board - the six-member inner circle that runs the bank - were not informed in advance about two key recent policy announcements, two sources said.

"Mario is more secretive... and less collegial. The national governors sometimes feel kept in the dark, out of the loop," said one veteran ECB insider.

...

At times, Draghi has appeared to pay little attention to national governors' comments in the monthly rate-setting meeting after chief economist Peter Praet and board member Benoit Coeure report on the economic situation and financial markets.

"He sits there with these three mobile phones in front of him and sometimes he’s sending text messages or going out to make or take phone calls," one source usually in the room said. On at least one occasion, a national governor has skipped his turn to speak because Draghi was not present."

In addition, the market reacted to the Draghi mutiny with some risk off behaviour before popping back to VWAP, which may be what our intraday positive divegrence was all about and perhaps nothing more...
Dynamics of Intraday Trade

ES 1 min and today's events relative to VWAP.

I already showed you the bigger picture again in both Leading Indicators and 3C charts...
Broad Market Update and
Leading Indicators and the Reversal Process.

However, that's not where the divergences stop...

 NQ 15 min leading negative at the tight range...

ES 30 min leading negative at the tight range..

TF 60 min leading negative at the tight range.

"Perhaps the kids in the room next door are a a little too quiet and up to something".

On the day just about everything was sold, stocks, bonds, the $USD as forecasted , oil, Treasuries and you've sen our leading indicators and HY Credit, especially HYG...

Stocks on the day after pulling out of the Draghi downturn and just before visiting VWAP, also seemingly are back to moving on the European close.

European close and the major averages today...

I featured some monthly Heiken Ashi Candlestick charts as I believe they're a bit more robust than normal candlestick charts, although they are read slightly differently. You saw the monthly bearish Doji star last week, here are some closer to home signals in the major averages... "To make money you have to see what the crowd missed"...

The daily SPX H.A. candlestick chart with a bearish Doji Star, indecision or loss of momentum candle, not good after a face ripping, sentiment changing rally like that.

The Daily Dow with a bearish Star and a Harami pattern (Mother With Baby), also known as an inside day in the West.

A bearish Doji Star and Harami in the NDX100

And the NASDAQ Composite's 2-day chart showing the bullish star and Harami reversal starting the move and almost the mirror opposite bearish star and Harami reversal right now,  we already know how dislocated the NASDAQ Composite's Advance/Decline line has been through most of 2014 and getting aggressively worse.

 The Russell 2000 bearish star and Harami reversal, also showing a bullish star and Harami reversal that started the move (white)

And the VIX with a bullish Doji star reversal candle.

In addition as you have seen in recent posts in both relative performance and 3C charts, Transports are in the cross hairs, these are one of my favorite shorts in this area right now, I'll have an update out tomorrow.

While the averages themselves didn't move much today, we saw a lot of underlying movement over the past several days reaching extreme levels, commonly seen in a tight range which is what the market has been in the last several days leading to some monstrous negative 3C divergences.

As for internals today, there wasn't a Dominant Price/Volume Relationship among the major averages today, yesterday's was the most bearish and usually ends with a close lower the next day in which 3 of the 4 major averages did close lower.

The S&P sectors saw 3 of 9 close green with Consumer Staples leading at +.51% and Energy lagging at -2.15%.

As for the Morningstar groups I track, only 78 of 238 closed green. 

While most internals or breadth indicators didn't move that much, the ones that did were the important SPX vs percent above moving averages (40/200), those saw more deterioration today than I'd expect given they barely moved yesterday. The New High/New Low Ratio, the 4, 13 and 26 week versions of the same all deteriorated materially and just because I have the 2007 breadth readings memorized, I thought this breadth indicator is starting to look a lot like 2007...

 Cumulative Volume Index as of today vs the SPX...

And the same at the 2007 top, it fell apart right at the top and not before.

I'll be keeping an eye on futures tonight as I did last night leading to my 2 a.m. post on the Nikkei 225 futures and their huge intraday decline, you saw the Nikkei longer term 3C charts above and they didn't look good.

Although we're just getting started, it's not on the good foot as the NKD 225 futures have lost 17k again...

NKD 225 futures in decline...

I have to say, I feel pretty comfortable we're at the top/pivot, that's why I was a bit more aggressive without caveats on using any strength today to short in to, hopefully you're already pretty well positioned.

I may be talking with you soon, otherwise have a great night.

Dynamics of Intraday Trade

Earlier today I put out a Quick Market Update followed shortly after by an  Intraday Update. The fact that these were the two main events intraday tells us something in and of itself, while market prices are roughly in the same area (down about 1/3 to 1/2 a percent today), underlying indications like 3C, Leading Indicators, overnight market sentiment in Japan which it seems (not from our members), a lot of people are still having trouble understanding how futures in the Nikkei could take such a hit while the cash market closed up 3+% and how this was not a positive event for the Nikkei, although it did level out a bit.

Imagine a 1000 pound load held up by 1000 lb capacity jacks, you don't really have any problem to worry about other than a mishap. However when you maintain that same 1000 pound load (in this case price) and the support mechanism (like the pier/pilings example) starts dropping to say 500 pounds, well you may be lucky for the load to hold in place, but it's an unsafe environment.

I don't want to get too hung up on intraday trade as today's dominant theme because not much else seemed to be going on, there were significant events. The load bearish structures like 3C confirmation deteriorated significantly the last 3 days now. Leading Indicators which I sometimes expect may skip a beat in a faster moving market are solid and steady as she goes with even more deterioration. Our 1000 pound load lost a lot of support and it was visible in numerous ways from 3C charts to Leading indicators that have even surprised me with their consistiency.

However, since I did post the intraday chart movements and the possibility of a wider "W"base and the potential of higher prices intraday that I would short in to at this point, no more information gathering needed, well I might as well go ahead and show you the end of the day and explain a few things about these intraday dynamics.

I've been flying more often with Andrea, my significant other who is a helicopter pilot, and while at first I was just in awe at her skills and the excitement of being in a helicopter, I didn't pat much attention to the 4 different controls (talk about multi-tasking) which would be the anti-torque pedals which are at the feet similar to an airplane, these control the tail rotor, without the tail rotor the body of helicopter would just spin in circles from the main rotor so these are fine adjustments made to keep directional flight. There's a joystick like lever in the middle which is called the "cyclic" which essentially changes the pitch of the main rotor hub, tilting forward for forward flight, to the left to turn left, etc. and there's a large lever to the left like a big emergency break which is the "collective"; it's function is to collectively change the pitch in all rotor blades on the main rotor producing the effect of lift.

Andrea and the helicopter she now flies.

When watching her fly (because I'm sure I can do it too!), I notice the minor adjustments in the anti-torque pedals she controls with her feet, say if a strong wind gust blows or she is making slight movements and not full turns. This reminds me of intraday timeframes in the 1-2 minute range, it's probably an appropriate analogy as well as these timeframes were first defined during the days of market makers and specialists (not that they're not still around, it's just HFTs has invaded a lot of their space). Market makers and specialists are often paid for their services to execute large orders  for institutional customers in the stocks they make a market in. Intraday timeframes use to show what they were doing with a pretty high degree of accuracy as they move price slightly this way or that way to stay within the execution band/price , often VWAP. So more often than not, we see smaller movements in these intraday timeframes, almost corrective movements like the anti-torque pedals on the helicopter.

Today's charts...

 This is the SPY 1 min chart, a short timeframe, more akin to slight changes in intraday movement, than large directional changes that might be made by something like the collective (producing lift) or the cyclic producing directional flight.

We had a 1 min positive at the 11 a.m. lows which was enough to send prices higher and toward yesterday's close,  however before the close someone applied a little "left pedal" so to speak and caused a small negative divegrence. I can guess that they may be taking price back down to the accumulation band seen earlier forming a "W" or double bottom base intraday which would have the effect of producing lift, higher prices, however I can't confirm that as a probability until I see price actually decline and see if there's accumulation ( a positive divegrence) as we near today's intraday low. If I see that, then I know here's a pretty good chance there's a larger divergence in place, essentially like a pilot pulling up on the collective which controls lift, in this case lift of prices.

With a 1 min 3C divergence there's about a 50/50 chance that it's either a simple consolidation to keep prices in a general area like today or that it's going to turn in to something larger and produce a price move, which i said I'd short in to because of all of the incoming data and how extreme it is getting.

If we have a positive divegrence on the 2 min chart as well, then the chances are very high that we will see a directional move, not just time killing/consolidation, but we did not see any 2 min positive divergences today and the market had almost the entire day to migrate to a longer/larger divegrence which would migrate to the 2 min chart and display a positive divegrence there as well, perhaps even to stronger charts like the 3 and 5 min and then we have a pretty good idea that someone will be applying lift to prices, of course the amount of lift depends on the size and intensity of the divegrence.

In any case, as you can see by the 2 min chart above, that didn't happen so we are still stuck between a 50/50 chance of consolidation or perhaps something bigger.

I should note that consolidation at this time is not unreasonable right in front of the ECB decision Thursday, traders may not want to make many moves before then and smart money may want to use it as a catalyst to help move prices in a predetermined direction which is looking more and more like down as always expected.

 If the 1 and 2 min charts are like the anti-torque pedals, for slight alterations to flight, the larger 30 min divergence is like the collective, producing lift or decent. In this case with 3 top pivots and each one seeing a worsening divegrence, the current being by far the worst, we can be with a pretty high degree of confidence that we'll be seeing lower prices in the very near term, after all, the move up did exactly what it was meant to do.

 The IWM 1 min positive and leading positive also went negative by the day's end, perhaps to make another low near the 11 a.m. lows or perhaps just to take price altogether lower as today may have been a simple consolidation day in which they weren't ready to move price anywhere yet in a significant way which could be part of the reversal process or waiting the ECB out.

Again, the 2 min chart, which could easily see positive migration in a matter of an hour saw none and it was no better intraday than in line while in a larger sense it was in a leading negative divegrence.

This still leaves us a t a 50/50 chance of consolidation through time or perhaps consolidation through a price move. We'll know if prices move lower and 3C either responds positively or fails to respond, but the chart below is giving us our highest probability for the resolution of these short term charts...

 IWM 10 min, again is more like the collective control producing lift or decent, not the subtle intraday movements akin to the anti-torque pedals which make small adjustments.

The Q's are in the same boat with the 1 min intraday, not much better than in line

And the 2 min no better than in line and on a larger scale, the dominant feature of this chart is the larger leading negative divergence.

 The 15 minQQQ chart's deep leading negative divegrence is altering near term probabilities and timeframes as it has really deteriorated quickly, these are not divergences that produce small movements, but divergences that produce large directional moves.

 Given the Leading Indicators, the 3C charts and the break down in breadth, today almost seemed like a hover which would be controlled via a series of small movements or corrections with the foot pedals, but the case is quickly building for a directional move and one to the downside as we suspected from the start after this run.

If we get the chance to take advantage of intraday prices and shot in to some, I almost certainly would, the ECB is just as prone to knee jerk reactions as the F_E_D, just like the BOJ as we saw Friday so we may have some interesting opportunities, but all in all I'm very comfortable with short positions in place here and more than likely adding where we can on good opportunities.

Leading Indicators and the Reversal Process.

I've talked a lot about the reversal process in terms of price formations, head fake moves, confirmation of head fake moves, etc., take the "Igloo with Chimney top and head fake, it is a reversal process differentiated from a reversal event which do occur, in fact every average except the IWM underwent a reversal event at the lows on this upside move while the Russell 2000 had a wider reversal process.

As it related to leading indicators, as volatility picks up and the surprise moves like last night's Nikkei 225 futures plunge, I sometimes suspect or anticipate that certain leading indicators may not give the reliable signals they have given in the past at broader reversal areas, however what I'm finding in looking at Leading Indicators today is that the signals they give and the time it takes them to give the signals are in fact,  part of the reversal process and in this case, it's comforting to see them as it relates to forward looking market forecasts and expectations which as you know I'm clearly in the camp of not only down, but down sharply, likely a new low for the year.

There's something very comforting about the predictability of these leading indicators flashing their signals (whether it be for a move up or down) and the reliability in which they do it and the fact they are doing it again right now exactly as expected and seen so many times before at reversal areas.

Leading Indicators...

 SPX/RUT Inversion...Note I haven't been displaying the VIX Term Structure/Inversion because it is no where near a long signal. The last long signal was around the first week of October and the one previous to that was the first week of August, both were correct, but they are not that common or I should say inversion of the VIX's term structure is not that common and that's why I don't display the indicator as it is offering no new information.

The SPX/RUT ratio however on a short intraday basis is showing an earlier positive signal as the indicator didn't confirm a new intraday low at the "+" sign and then on the bounce off what I suspected was the first part of a "W" intraday base, the indicator gives another signal, this time negative as it fails to confirm the move higher and price responds by failing at the area.

 On a slightly longer basis at the top area there's a lack of confirmation at the SPX highs and again at today's highs (to the right, seen above this chart in more detail).

The longer cycle is clearly negative on a primary basis.

 HYG has been breaking down since the negative divergences late last week were mentioned and price is following. Note the lack of confirmation by HYG at the SPX highs here and the move lower in SPX and again intraday today just as the SPX/RUT Ratio indicator shows.

 HYG was under accumulation before price ever started to rally, one of the leading signal that we'd see a rally, as I said, "There's only 1 reason to accumulate HYG". Now as you have seen before, despite even the 1-2 min positives of last week, HYG is dislocated and leading price lower, it's just a matter of time asHY Credit has been one of the most reliable leading indicators.

And on a longer term basis, at every high HYG has fgailed and the SPX has followed its lead lower, the current signal is the worst failure of the year.

Pro sentiment is again negative today.

 At the top area it is clearly negative in trend  and...

Like HYG, at the last 3 SPX pivot highs, Pro sentiment has been negative at all 3 sending the SPX lower with the most recent the worst of the year.

Our second Pro sentiment indicator (for confirmation) shows the same selling in to the SPX's range here.

Ad in the October trend, it moved from confirmation to outright dislocation and leading lower and lower. These are the signals I sometimes wonder if we may go without, but just as the reversal process is there, they are there every time, part of the reversal process and part of the confidence I have in our forward looking forecasts.

Last you have seen how the SPX resolves whenever it disagrees with 30 year yields which is happening right now again, the largest of such dislocations since the September decline.

Intraday Update

Since the last intraday update, Quick Market Update, I wrote:

" In any case, I don't think this divegrence alone is enough to do much with so watch for something like an intraday "W", I'll expand on that below."

Ironically that's exactly what the IWM (strongest intrady divegrence) did , the others didn't, but the NYSE TICK did. We haven't seen any serious migration to the 2 min chart, in fact I don't think anything beyond in line intraday, still leading negative other wise.

 IWM 1 min went on to make that "W" base intraday, although not much has happened off it yet, I'd say it's still in intraday positive consolidation.


Here's the 3C divergence intraday IWM with the trendline making the "W".

QQQ did not make a "W", but is still leading on the 1 min chart

The 2 min chart is no better than in line right now, so no migration meaning it's not that strong of an intraday divegrence as of right now.

 QQQ 2min in context, it certainly isn't showing up here as anything.

 SPY 1 min intraday didn't make the "W" either, although I'd say it is possible.

These 1 min charts move fast, since capturing this one and uploading them ll, this is what the SPY 1 min looks like now...

This "could" pullback to make that "W". All we know as of this moment is the initial divegrence ran about as far as it can go intraday before turning negative. "If" we see a decline and no intraday positive in to the decline toward the white trendline, the move is over. "If" there's some accumulation in to the decline toward the white trendline, then we have a larger "W" base, still 1 min, still intraday, but capable of more than just this small run .

This doesn't change anything regarding how I'd use higher prices at this stage of the game considering the Broader market perspective and the amount of damage done.

 Intraday the 2 min SPY is no better than in line, but within context it's still massively leading negative, so again this isn't any kind of move setting up that's of any serious interest and may in fact already be over.

 The TICK custom indicator doesn't show anything special.

While the IWM did make the "W" and the SPY/QQQ did not, the intraday NYSE TICk did make the "W" in market breadth.

Here's the first and second low putting in the same "W" pattern as the IWM.

Index futures aren't giving us anything solid to stand on above what we have above.

I just want to reiterate, with the shape the charts and leading indicators are in, I can't see any other use for this potential move than using it to short in to price strength, that's it.