Daily Wrap

I'll be honest, this may just be one of the stranger markets I've run in to. Signals late last week (Friday's Index Futures Like Last Week) and in to the open of trade this week in futures (Sunday night's,  Futures Opening Indications for the New Week) had such strong and obvious 3C signals, that it felt like cheating.

Even the move in to Tuesday morning with a sharp decline lower and a retracement of all of those losses to end the day near the highs was somewhat easy to call the day before in Monday's latte day Market Update starting with the following excerpt...

"While the trend remains firmly negative, as I usually warn, "Wall Street will never make an emerging trend easy for you to hop on", they shake the tree in every which way to throw off the most number of people at any one time, but I have little doubt lower is where we are headed, yet I do believe we'll have some continued near term price volatility."

Which followed in the exact spirit of, "I do believe we'll have some continued near term price volatility." the very next morning on the open and throughout the rest of the day.

However today's market, although pretty darn easy to call once the night time futures started to reveal 3C divergences, Quick Futures Update with the following excerpt...

"I feel pretty confident that the bounce that seemed destined for today will occur tomorrow, perhaps even through the overnight session and in to tomorrow."

As of this morning, the overnight trade had done exactly what was expected in last night's Futures post (above), as the overnight session led futures and the market higher, the cash open led the market higher just as forecast in the first paragraph of last night's, Quick Futures Update.

I said I'd use any strength to sell short in to, however I didn't see what I needed to see to offer up some of those opportunities, such as AAPL...

For example, one of the stocks we have been following as a potential short (and I know some of you already entered on the continued 3C deterioration) had the divergence for a bounce allowing us to sell short in to price strength, but the intraday 3C charts for the averages, just weren't cooperating. In other woprds, before I'd enter an AAPL short, I want to feel pretty sure that the broad market is ready to begin its decline, however despite the declien in prices today off intraday highs, there was something still missing that I'd consider a clear signal that the market is ready to head lower.

Thus putting AAPL out as a short idea , while great for intraday traders, felt unsure as a longer term position.

Take my custom NYSE TICK Indicator.

 Each of the past two days have seen intraday gains that faded in to the close. Yet neither produced the higher high that we'd want to short in to with deteriorating 3C charts. Market breadth intraday certainly collapsed and there appears to be VERY real selling, but something just didn't feel ready as I pointed out a possible scenario in this post, Market / Futures Update- Russell 2000 False Breakout Attempt Likely

Yes, a Russell 2000 breakout, even what would be expected to be a false breakout/head fake move as it's probably very high probability with 6 weeks of a trading range that has averaged no more than a -.30% decline since. Just like the August cycle's stage 3 top with the September head fake / false breakout high, the IWM is in such a position and would make for an excellent head fake move and perhaps that's what I'm seeing or failing to see in the averages. After all, such a move in the IWM would create far better opportunities in most assets to enter short at better prices and timing, although I will say AAPL really deteriorated fiercely removing the reasons I was looking for a price concession in the first place as the longer charts were still fairly strong, not any more.

 AAPL 10 min leading negative

The AAPL 60 min chart that was in line and the reason I wanted a price concession (bounce) to make the risk worthwhile, is no longer an issue.

And unbelievably, just over a few days, the 2 hour chart that was in line was totally collapsed.

However, as ugly as AAPL's 1-5 min charts, they are not beyond a bounce and as such, I can't put it out there as an immediate trade idea when there's still that short term uncertainty, although the longer term/big picture charts have changed horribly and quickly which is perhaps one of the messages of the market that we should be paying attention to. A chart that I felt was a swing trade at best just a week ago has deteriorated so badly it's starting to look more like a core short.

Using my custom TICK indicator, we can see since the last low at October, we are now seeing intraday breadth in even worse shape and this is near the cycle highs rather than the stage 4 decline lows, again, another message of the market when breadth looks worse at an elevated high than it does near the end / bottom of a sharp decline where breadth should look worst.

Other than the IWM range and possible head fake breakout, the other consideration is tomorrow is Friday, an options expiration max pain pin so some of the near term activity, especially on a Thursday which usually sets price near the max pain pin, 'may" explain why this area looks so difficult to forecast in the very near term, although on a bigger picture basis, nothing has changed and that's why I maintain my short positions without a second's hesitation.

Or perhaps like last night, I just need to wait a few hours for signals to clear...

INTERESTINGLY, SIGNALS AS YOU'LL SEE NEAR THE END OF THE POST FOR INDEX FUTURES HAVE CHANGED DRAMATICALLY SINCE THE CASH CLOSE!

Let me be clear, I'm only talking about VERY near term trade as in the next day or two, as far as the market's trend, well let me just put it this way...

This Crazy Ivan Shakeout, being one of the largest in the series of the concept occurred at a Broadening Top and has since broken below the upper trendline of the broadening top, thus completing the Crazy Ivan and while some short term price volatility may still be in the mix (what I'm trying to determine now), the clearest , highest probability for the market is now to make the move we have expected since the 2nd week of October, the move that followed the monster uptrend we forecast almost 2 weeks in advance which would be followed by an even stronger move to the downside making a new lower low below the October low.

JUST TO BE CLEAR...

While it's not at the top of my list of important events, no doubt you'll hear of it, today formed ANOTHER Hindenburg Omen, the same breadth/technical signal that appeared at the September (August cycle's stage 3 top) head fake high. Now we have a cluster of 6 (yesterday's was invalidated by the sharp sell-off end of day, but that's a cluster of 6 in 8 days, significant even from my standpoint, although not the top of my list of screaming red flags.

PErhaps of some interest along the lines of "Messages of the market", today's 30 year Treasury Auction was an insane event, such an outlier you have to take notice. The 30 year was trading at a yield of 2.875% today at 1 p.m. (when issued) as the Treasury Auction took place, with the auctioned Treasuries (30 year) hitting a high yield of 2.848%, well below the 2.875% they were at when issued (today's auction was at 1 p.m.) which is the lowest yield for new treasury (30 year) auction in over 2 years! Remember, yields move opposite the Treasury's price.

Dealers had the lowest take down ever at 25.9% while inderects and directs had the highest take down on record at 49.8% and 24.3% with a very high bid to cover at 2.762. Here's what happened to the 30 year yield at 1 p.m. during the auction...

Yields dropped in parabolic style.

It seems a lot of "someone's" are seeking deflationary protection or... the search for high quality collateral (likely both).

From NANEX, just look at what happened to liquidity during the 1 p.m. auction...

30 year Treasury futures liquidity hit a record low during the 1 pm auction of 30 year bonds.

Something is definitely afoot here.

 TLT (20+ year bond fund) traded with a  short term negative divergence through the day. The first thought is a short term pullback would cause yields to rise and thus help the market push a bit higher, for instance if my thesis about the IWM making a head fake/false breakout move from, Market / Futures Update- Russell 2000 False Breakout Attempt Likely is correct or perhaps a knee jerk reaction to the Government spending bill getting done as Obama joins forces with House Republicans.

 However the long term 60 min TLT chart is still strong as stone, indicating higher prices which would not be surprising given today's auction and lower yields which tend to act like a magnet pulling equities toward them, which is in line with our broader market perspective beyond intraday and day to day moves.

 The 30 year Treasury futures also showed the same short term negative divegrence. While it's not really for me to try to interpret what the meaning of the divegrence is as we jsut want to follow the money, perhaps they are planning a short term shakeout to try to grab some of those Treasuries bid and won today in such high demand.

Again, like the TLT 60 min chart, the (/ZB) 30 year treasury futures have a rock solid 60 min chart suggesting higher prices, lower yields and a lower market.

Also of note today was the government spending bill which saw its vote delayed as an earlier procedural vote narrowly passed, bringing the Obama administration together in an unlikely alliance with Republicans to try to sway enough votes from Democrats who overwhelmingly voted against the bill, all in an effort to get the vote done before midnight when financing for the government runs out. This certainly played some role in the market today as prices dropped further (although already trending down) as the vote was delayed.

Vote delayed after it was clear a majority was unlikely...

However, something still looks out of place near term as the market closed with some positive divergences even though there was a late day/closing ramp attempt as well.

 The 1 min SPY chart showed a late day positive divegrence, this may have been to try to ramp the close as there was an attempt, or it may be something that's not finished yet, the "W" base and/or IWM false breakout head fake move which by concept alone with a 6 trading week range that has moved less than -.35% over the period, looking like an attractive bull trap allowing institutional size investors the kind of price and volume they need to sell or sell short in to demand without crashing prices around their positions. Also it creates momentum in the form of a bull trap , as prices drop and stops are hit, supply overwhelms demand sending prices lower, a common way to create momentum that we often see.

 While the 1 min SPY can be dismissed as even random, the 3 min chart can still form a positive divegrence as it has not yet entered a leading  negative divegrence, thus there's still the opportunity for higher prices and a potential head fake like we saw at the last cluster of Hindenburg Omens, which was the August cycles' stage 3 top with a head fake move (the rounding top and head fake that looks like and Igloo with a chimney).

This is the same "Concept" I'm talking about in the IWM at the SPX's August Cycle (4 stages of a trend w/ the head fake just before the reversal)...

Stage 1 accumulation was apparent to us early in August, in fact July 31st we had seen the indications that we'd be making a bottom on a day that was down over 2%. Here's the "near emergency" update of July 31st calling for a bottom and bounce which became the August lows and base, from July 31st's, Daily Wrap

After stage 1 accumulation comes stage 2 mark up or rally and then stage 3 distribution or top which lasted quite some time followed by a slight new head fake high at the yellow arrow (the September highs-the last time we had a cluster of Hindenburg Omens) and as always, a head fake move is one of the best timing indications we have as stage 4 decline promptly follower taking the Dow down over 1200 points to the October lows where bearish sentiment hit 5 year highs, which is one of the first reasons we called for a strong bounce, shortly after we had the objective evidence (3C accumulation in the averages as well as HYG).

In any case, it's the head fake concept I'm currently talking about and the IWM has a very clear area of resistance in a 6 week range that has moved a total of - 0.54% since 10/31 with today's losses, earlier it was +0.34%, but the point is, there has been virtually no movement in 6 trading weeks, thus the range makes for an enticing head fake move which traders will buy allowing smart money to sell/short sell in to demand/higher prices/volume-everything they need in the size they trade as well as setting a bull trap that adds to reversal (downside) momentum as new longs are stopped out (supply and demand dynamics force price lower quickly), thus our concept, "Failed moves produce fast reversals"

Back to the closing charts...

 SPY 5 min, the time frame I have been watching to see when this particular stage we are in is ready to make the next leg lower, is still within reach of making another positive divegrence and as such, perhaps the Russell 2000/IWM head fake breakout move, which would be an excellent timing indicator and short sell area for a downside move, which we already have overwhelming evidence for including the break of the SPX's Broadening Top's head fake move above the top which for technical traders tells them the top is invalidated and is a green light to go long, again with the break below, their stops are hit producing stronger downside momentum as a simple function of increasing supply and lower demand.

 While I wouldn't say the DIA's 2 min chart looks good near term, it also doesn't look bad enough to call for a bunch of new short positions right now. Although as I have made clear, I'll hold all short positions as I'm much more interested in the bigger picture and the larger gains than in day trading around 1 day volatility moves.

 The QQQ 1 min at the close, not a positive divegrence, but not that far gone that it can't make a comeback with a little help.

And the QQQ 5 min, the yellow trend line is the base lows which the Q's are still above and can still put in a positive for a move higher.

 The 5 min QQQ chart looks a bit worse, but remember we use multiple asset confirmation and we are not getting strong multiple asset confirmation presently, although I'd say the probabilities remain to the downside. Again we are strictly talking about VERY near term trade, the next day or so.

 The IWM 1 min chart actually looks pretty good, which would be the case if it were the one looking to make the head fake false breakout.

As far as market levers go, I checked HYG for any short term accumulation to help the market in the very near term, not only did I NOT find it, but HYG's downtrend has near perfect 3C confirmation.

As for VIX, if we were looking for near term market support and using VIX as a lever, we'd expect to see clear negative divergences, but instead, as pointed out in both today's  VIX Futures and VIX Short Term Futures (VXX /UVXY) Being Accumulated and the later, Leading Indicators Suggest We Are Not Done which showed relative outperformance in Short Term VIX Futures as well as spot VIX, it doesn't look like VIX is being prepped as a market manipulation ramping lever.

 Intraday VIX futures were under accumulation until they pushed higher and saw a small negative divegrence at the close.

 The 5 min VIX Futures is perfectly in line with the uptrend.

As are VIX 7 min Futures.

No indication they are being prepped for a market ramping lever which suggests the market is going to head lower.

As for the Spot VIX buy signal in our custom indicator as well as the pinching Bollinger Bands I have been talking about for well over a week, which indicate a highly directional price move, VIX has started that highly directional price move to the upside (the market trades opposite VIX). While there can be pullbacks in such a move as we saw the last time VIX shot up, they are short lived before VIX moves higher.

While I feel there's a decent chance for higher prices in the market VERY near term,  IT IS VERY HARD TO ARGUE AGAINST THE OVERWHELMING EVIDENCE CLEARLY SUGGESTING THE MARKET SEE A SUBSTANTIAL FALL.

As for tonight's Dominant Price Volume Relationship,   it does nothing to help the short term bullish case.

The Dominant Relationship is all 4 major averages was Price Up/Volume Down which is  the most bearish of the 4 possible relationships and it was VERY dominant with 19 of the Dow 30 (across 4 different possible outcomes), 58 of the NASDAQ 100, 1169 of the Russell 2000 and 245 of the S&P 500.

The most likely next day implication of such a dominant relationship id a close DOWN as Price Up/Volume down is the most bearish and suggest a loss of buying momentum or a short term overbought event that usually sees the following day close red.

As for the 9 S&P sectors, they do nothing to help as they confirm the Dominant P/V Relationship above. Eight of nine closed green with the defensive Utilities leading at +1% and Energy lagging at a mere -0.07%, this also suggests a short term overbought condition that usually sees the next day close red.

On the week, of the 9 S&P Industry groups...

Eight are in the red for the week with Energy leading the way down (white). ONLY the defensive Utilities Sector is green on the week (blue).

Of the 238 Morningstar Industry/Sub-Industry groups I track, an overwhelming 183 of 238 closed green, again like the S&P sectors on the day, a 1-day overbought condition suggesting the next day close red.

However TOMORROW IS AN OP-EX MAX PAIN PIN FRIDAY, SO THE LEVEL IN WHICH THE MOST DOLLAR AMOUNT OF OPTIONS (WEEKLY) WILL EXPIRE WORTHLESS WILL BE WHERE THE MARKET PINS TO, USUALLY IT'S PRETTY CLOSE TO THURSDAY'S CLOSE. After 2 p.m. most option contracts have been settled and the market releases from the pin and will act however it wants, but  the last 2 hours of the day are the best 3c data of the week on friday, often telling us what to expect the week ahead.

While few Breadth indicators were changed today, most in a standstill, I thought I'd point out the Total number of NYSE Stocks Trading Above their 200-day and 40-day moving averages as they roll-over...

 The Percentage of NYSE Stocks ABOVE their 200-day moving average is rolling over and now at a mere 45%, more than half of NYSE stocks are below their 200-day moving average.

As for the Percentage of NYSE Stocks ABOVE Their 40-Day Moving Average, they too are rolling over and now at 44.6%, again, MORE THAN HALF OF NYSE STOCKS ARE BELOW THEIR 40-DAY MOVING AVERAGE.

If we look at this as a market of stocks rather than the deceptive weighted stock market, we have a bear market with more stocks below their 200 than above while the averages are near all time highs, something is definitely broke in the market and it won't be long before it's obvious in the price of the averages.

I'll check of futures before I turn in for the night, earlier there were some divergences that started to stir my interest, but have since calmed down, I'll let you know if they pop up again, BUT IF I HAVEN'T ALREADY MADE IT CLEAR, ALL OF MY POSITIONS WITH THE EXCEPTION OF ONE ARE IN LINE WITH THE MARKET'S OVERWHELMING PROBABILITIES, THAT'S TO THE DOWNSIDE AND THE POSITIONS ARE SHORT. I HAVE NO INTENTION WHATSOEVER OF CHANGING THAT.

Leading Indicators Suggest We Are Not Done

A quick look at Leading Indicators, along with the averages, suggests we are not done, however I will maintain all short positions as this market is in too weak of a state to handle any more external shocks like the Chinese tightening earlier this week, plus my big picture/core positions should be aligned with the highest probability resolution, not bouncing back and forth with daily market volatility.

There are still some mixed signals and I suspect they may be traders taking a larger picture approach vs the normal intraday leading indications that have always been effective.

 As suggested in an earlier post, VIX Futures and VIX Short Term Futures (VXX /UVXY) Being Accumulated note the outperformance of VXX (blue)  vs SPX (green), as I have inverted the SPX's price so you can see where the normal correlation would be and today's VXX outperformance which I suspect is due to demand as we saw in the 3C charts across the board.

 Spot VIX is also outperforming the SPX.

These are two signals that suggest the market doesn't hold on much longer before the next leg down.

 To be fair though, my SPX/RUT Ratio Indicator (red) vs te SPX is supportive of higher SPX prices near term, longer term this indicator is negatively dislocated and calling for lower prices, the interpretation would be the continuation of short term market strength followed by a severe decline, which is similar to what I mentioned about the IWM and a head fake move above a range longer than a month and thus, VERY obvious, likely with a number of limit buys or traders willing to buy in breakout confirmation just above it\\the range.

 while mostly red on the day, TLT is also outperforming the SPX today intraday vs the correlation, a Flight to Safety trade,

 HYG which I suspected would be a lever is underperforming the SPX, this makes sense for a short term move as no one wants to be long HYG and get caught without a chair when the music stops.

HYG's near term trend has been negative as well as it's long term trend which is the worst I can recall ever seeing.

Credit tends to lead stocks.

This is HY Credit, also leading the SPX lower, but with a recent, small positive move at the SPX's second low in the "W" bottom.

Here's a closer look

Although intraday credit did lead the SPX lower.

5 year yields are jsut about in line with the SPX, so no interesting indications there.

However the 30 year yield has led the market lower numerous time as a leading indicator. It isn't severely dislocated right now vs the SPX, but it is dislocated.

Here's a closer look

And pro sentiment , as I said, some seem to be taking the same course I am and maintaining shorts no matter what, even on short term bounces or intraday strength.

FB Short Trade Set-Up

Although I think this area is just fine for longer term FB shorts or to consider as an area to phase in to a short position, for those who like the trades that come to us and are willing to wait for them and if need be pass some trades by when they don't come to us on our terms (the highest probability trades, but also the ones requiring the greatest discipline and patience), then this FB set up may be for you.

 FB's 2-day trend line appears to be strong and intact, but a closer look shows you that much like the IWM, FB has been in a lateral range for 3 months, while perhaps not breaking the trendline, it is surely a change in character that FB has not seen anywhere else in the trend.

 Here's an estimation of the range, but there's one area that stands out, the October gap down. This market for the past 4-5 years has been relentless in filling gaps, which is a shame because many gaps are excellent signals like break-away gaps or exhaustion gaps, but I suspect with the rise of High Frequency Trading, these gaps have been targeted for filling well beyond anything I've seen since first trading.

I suspect FB will try to fill this gap and that looks like a high probability, excellent entry with much lower risk in an asset that already looks to be in big trouble.

Another approach that could be taken is phasing in to FB with a partial short position here and adding the rest if it fills the gap, this is averaging, but not averaging down which is an attempt to get out of a losing trade by throwing good money after bad. In this scenario, you have to set up your risk management in advance to allow enough room for the add-to position at the gap fill and make sure your position size is reflected in the risk management. In other words, I don't allow any one position to be larger than 15% of total portfolio so phasing in to FB, I might open with 5% of portfolio and add the additional 10% which will be at a higher level when FB reaches the area- averaging down would see you already in a full size losing trade and adding more to it, making a larger position than risk management rules allow for and in this scenario, you never enter even the first share without the risk management plan in place first, unlike the emotional averaging down in which you throw good money after bad in an attempt to get out of a losing position.

 FB's long term 60 min chart is severely negative and at the range area I mentioned.

However the 15 min chart is still in line off an earlier positive divegrence which seems to be an effort to hit the gap fill target.

Here's the accumulation in what was a flat trading range and a stop run/head fake move just before FB trended higher, however while the 15 min chart may still be in line, there's clear distribution migrating toward that 15 min such as this 5 min and all of the timeframes below.

FB 1 min

FB 2 min

FB 3 min.

I'd set some price alerts at the gap if you are interested, somewhere in the area of $79.50, by them the 15 min chart should be sufficiently negative as well, but I'll keep updating FB.

Again, looking at the bigger picture, I'd consider FB a fine short position right here at $78, but for a better entry, I'd look to the gap.