Daily Wrap

From yesterday's Daily Wrap

"I think I have been clear about what I expect from a market bounce, an oversold bounce, not something that is supported and to that end, today put in the second Hindenburg Omen in a row. The last two clusters sent the market lower so this also fits with our near term and longer term analysis.

As for Leading Indicators, none of them are really screaming near term. "

Today there were some short term signals and some migration of bounce signals to some longer term charts, however I think this may be a scenario in which short term nose is mistaken for something credible that's developing, at this point it's difficult to say,  but I think the only two things that really matter right now are #1  an oversold bounce off 5-days of decline and the worst 3-day start to January ever recorded. And #2, that the bounce will fail making it a great opportunity to sell or short in to. Beyond that, some of these signals that showed up today may not warrant the attention I'm giving them unless they prove to be more than just a passing bit of noise over a single day.

Today did see a short squeeze in the Most Shorted Index as you might imagine after the last week's performance, this was the strongest squeeze among the MSI in a month, it was evident at the open and then again around 1:30 going in to the Minutes release.

Opening MSI squeeze prints at +1750 on the open (TICK).

Leading Indicators weren't really "screaming" just like yesterday. Today VXX and VIX were mostly in line with SPX performance, HYG was about in line and acting as a lever with a positive divegrence out to about the 3 min chart, but that's about it. TLT outperformed a bit and this showed up in 30 year yields exerting some downward pressure on the market. We'll have to watch, but this may be the start of a larger 30 year yield/SPX divergence leading to the next lower low.

 TLT's outperformance (SPX prices in green are inverted to show the correlation).

 As you can see, 30 year yields put in a positive divegrence at the SPX lows yesterday and helped lead in to today, however today after the European close, they moved to the downside which may be the start of a larger divegrence in yields which is important as the longer term chart below shows.

30 year yields vs the SPX (green) w/ yields leading the market.

Our SPX:RUT Ratio and VIX Term Structure ended the day rather flat, but may have accomplished what would be a stronger base...

I mentioned the chance of a market pullback very early today to make a more symmetrical inverse H&S bottom/base. It seems that the SPX: RUT Ratio (red) was reflecting such a base (roughly) being carved out and now returns to in line.

The Pro Sentiment charts really aren't showing much, pretty close to in line, but not leading either way, just kind of blah.

HY Credit is still a bit mixed, although the PIMCO HY Fund which was leading in to today was more in line today, perhaps having already established a position for a bounce and not willing to chase much beyond that.

Again HYG is still positive out to about 3 mins, after that it goes flat and then negative so it's just a matter of a few timeframes turning and we'll have an idea of where our best entries are.

Some confusion was in the $USD which closed higher on the day, but lagged i to the afternoon and the Yen charts, these suggested a decline in the USD/JPY and after a bounce followed by a larger decline (multiple timeframe analysis).

It seems this did play out to some degree, although not effecting Index futures much. There's still a chance of seeing more of this overnight.

 USD/JPY (candlesticks) on a 1 min chart vs ES (purple), note the afternoon weakness in USD/JPY which is something I saw earlier and assumed it might be part of a short term knee jerk reaction to the minutes, instead the FX pair lost some ground in the afternoon, but didn't have much effect on the market if any.

 This is the 1 min Yen chart today with a positive divergence around the European close that led to higher prices in the Yen and combined with some $USD softness in the afternoon, lower prices in USD/JPY in the afternoon. There's a possibility of more overnight...

 5 min Yen leading positive.

5 min $USDX leading negative, so the chance of overnight weakness in the pair and perhaps index futures looks to be pretty real. 

At the 7 min charts they move back to inline and reflecting the end of the market bounce, at 15 min charts the Yen is positive again and the $USDX is negative, which just is more confirmation that this is a bounce to sell in to.

The index futures also look like they could see some overnight downside as they have leading negative 1 min divergences right now after the close. They are really not too different from the USD/JPY and the same scenario laid out above for the FX pair.

However as I said above, the most important themes for me are a bounce which are represented largely out to the 5 min 3C charts like this IWM 5 min chart...

 5 min IWM positive.

Then the 10 min charts are either in line or turning negative, at 15 min we have clear leading negative divergences that are horrible looking and just get worse as you move to longer timeframes.

15 min IWM, I purposefully didn't draw on the chart. This reflects the strategy of shorting in to short term price strength as it will not end well, but a bounce in the area at important moving averages or support after such an oversold set of conditions, is not at all surprising and for bears, actually healthy that the market doesn't get so oversold that it pops up like a rocket on huge oversold tensions.

Anything we can add to the above two themes is icing on the cake, but these are the two dominant themes and 1 dominant strategy.

Speaking of Dominant, the Dominant Price/Volume Relationship was the most bearish of the 4 possibilities and the same for all 4 major averages, Close Up / Volume Down with 23 Dow stocks, 70 NDX 100, 898 R2K and 338n SPX. Usually the next day close would be red based on a 1-day overbought condition, but this market is at extremes so I think we can see a couple more days like this, but make no mistake, this is not bullish.

Also indicating a near term overbought condition, all 9 of 9 S&P sectors closed green with the leader Healthcare at +2.35% and the laggard, Energy at +0.21%.

Among the 238 Morningstar groups, we had another short term overbought condition with 218 of 238 groups closing green.

That will about do it for tonight unless something pops up in futures, but you already know I would not be surprised to see some overnight weakness.