Market Update

As suspected, the parabolic drop in stocks this morning didn't hold as is usually the case, which is one of the concepts we have seen over and over, therefore, for day traders, scalpers, etc. these parabolic moves often make good fade trades if you are quick.

One of the easier ways to identify when a parabolic move is ending and a possible fade or retracement about to begin is through a combination of price's Rate of Change (ROC) with the NYSE TICK (intraday) breaking a channel or trend, which most of the time will give you early warning.

This is the intraday NYSE TICK (the number of advancing issues minus declining issues gives you the current TICK). Note the uptrend channel which sees the TICK fall out of it, price has turned back down since. This second area in yellow is a much easier signal to identify, so you'd probably need some other indicators and watch the ROC of price earlier in the morning to fade the parabolic drop, but this is one example of one of the ways to get advance warning and a concept, the parabolic move, which is usually not very stable and can be faded quite often. Think of it as an emotional extreme and then cooler heads come in and prevail.

As for what I'm looking for, just to recap, January started off really bad, the first 3-days were the worst 3-day start for the market EVER. By the 5th and 6th of January we had massively short term oversold conditions everywhere, which would suggest a relief bounce, even in a full-blown bear market we see these. We also had 3C evidence on 5 min charts by the 6th and on shorter time frames a day or so before that suggesting an oversold (short term) bounce. This is what I had expected. 

Last Thursday got really ugly and it seemed/seems like something may have changed. The positive divergences that were set up were set-up in advance, Wall St. was already prepared for an oversold bounce, Thursday threw a monkey wrench in to the scenario as it introduced some objective evidence that suggested something may have changed on Thursday and they may possibly be backing out of the bounce scenario because the divergence (positive) for the oversold bounce, is stronger than any upside we have seen, it's not a game changer, it's not anything I'm concerned about as far as my short positions go, but it can be useful and we want to know if it is and how so and when.

Since Friday was an options expiration Friday in which 3C action is often largely concentrated around a max-pain op-ex pin to cause the greatest number (in dollar terms) of options to expire worthless, Friday itself was near worthless as far as gathering additional data to either confirm or refute the Thursday's action. So today is really the first day since Thursday in which we can gather the information needed to figure out whether there's still an oversold bounce as Wall St. did set up for it or whether they have learned something to spook them enough in to getting out of any short term long exposure.

That's pretty much where we stand for very short term trade, this isn't a reflection on anything else, intermediate charts and long charts are decisively negative, it's really a situation that extends to about the 5 min charts of the market averages (that's about how far out the positive "bounce" divergence made it).

Here's where we are and although I captured charts from the Q's and IWM as well and there are some minor variations , I think the SPY alone is sufficient to make the point without an additional 9 charts.

 SPY 1 min (a bit old for a 1 min chart) shows  what is a small leading positive divergence. I didn't update the chart because the same signal, with about the same strength is still there, it's no smoking gun and likely more indicative at this point of intraday steering since the parabolic drop this morning.

 I'd prefer not to draw on the charts to give you a better feel without the distraction, but I'm pointing out the stronger 2 min chart and the fact it hasn't seen a positive divergence this morning, it's actually leading negative and has been in poor shape since last Thursday. However, note the gap fill that this morning's decline created from the 7th/8th so this is part of playing Devil's advocate. Was Thursdays's very ugly trade a change in Wall St. plans or perhaps something to move the market to a gap fill?  I doubt this is just about a gap fill and the gap would be natural support for this morning's parabolic drop, so again, no smoking gun. It's really whether either of these charts (1 min slight positive or 2 min stronger leading negative) migrate or become stronger.

 The 3 min chart looks like there is migration from the 2 min's leading negative as it has made a new leading negative low starting with Thursday's ugly action.

 Still the key to a definitive answer (at least the highest probabilities we can hope for) is the 5 min chart. To the left if the positive divegrence for a bounce on the oversold condition; Thursday this chart gets uglier than it should be sooner than it should be. Right now we don't have a definitive answer at the right edge of the chart. I suspect today will be enough time for the 5 min chart to move and give us an answer which is really of more tactical value (making plans, knowing about when to execute plans, etc.)

Of course there's no great answer in any single chart so futures will matter, currencies, Treasuries/yields, leading indicators and market levers, they should come together to give a composite picture that is definitive.

Futures...

 Again, just a clean representation of why I don't trust parabolic moves (up or down) and the fact that these are fairly reliably unreliable, thus they can make for excellent trading, whether for day trades, perhaps longer term option trade entries or exits, or longer term trades' entries and exits.

The 1 min futures charts are more toward the positive intraday like the 1 min SPY above.

The 5 min charts that I mentioned last week and in this morning's A.M. Update have been leading negative. In many cases, price has caught down to the divergences and is in line (price trend confirmation).

Looking at the VXX (Short term VIX Futures)...

 On a 5 min chart you see the larger positive divegrence (larger than the SPY's 5 min positive divegrence which was formed at the VXX highs on the 5th and 6th) which suggests VXX has a lot more upside , however the negative divegrence at the 5th/6th has pulled it back. This does not negative the VXX positive divegrence or its implications, but nothing moves in straight lines in the market very long (look at this morning's parabolic drop), thus it appears that its smaller negative divegrence on the 5th/6th was part of a lever for a short term market oversold corrective bounce. VXX has put in some more constructive activity since the pullback lows around the 7th/8th, but it is still not yet back in position for continued upside.

Treasuries (20+ year)

 TLT's 1 min is negative this morning, if TLT pulls back, yields should rise and be supportive of the market following them higher, but again remember this is a 1 min intraday chart, not a stronger 5 min chart.

Like VXX's longer term positive 5 min chart , TLT's 5 min chart is also longer term positive(negative for the market) with an in line status.

*There are some separate issues with TLT that I'll be taking up, but they don't have to do with near term trade which we are currently assessing so this chart is fine.

That's where we stand just in case there's any confusion.

If you are at all concerned about anything beyond the possible continuation of the oversold bounce set-up, I would just say I am not.

Here are a few reasons...

 There's a reason I use multiple timeframe analysis and multiple asset confirmation. You don't have to go any further than the next timeframe that is in question (the 5 min chart) to see what the highest probability short term resolution of even an oversold bounce is. This 10 min QQQ chart shows you quite clearly, especially to the far right side at a new leading negative low and no confirmation whatsoever, even on a short term basis of the last several days other than negative.

 In multiple timeframe analysis, we are looking at multiple trends from short term to sub intermediate, intermediate and primary. This sub-intermediate trend off the October lows has a very familiar look to it (price), the Igloo/Chimney and the confirmation we look for at the head fake or Chimney is clearly visible without any drawing on this QQQ 15 min chart.

As a sub-intermediate cycle starting with stage 1 base at the October lows, we've already passed stage 3 top and are in to the head fake move (chimney) that 80+% of the time leads right to stage 4 decline and this is not a corrective decline, this is moving to an intermediate and possibly a primary trend.

As for primary trends, this 6 hour SPY chart isn't even as bad as it gets, but I wanted to be able to put the November/December area in to perspective vs trade from last year.

More as it develops...Try to stay patient and wait for your edge.