Market Update

We have certain concepts because they are so common, they can be used with any asset I can imagine in any timeframe and they have high probabilities. This particular one is that of a head fake move, whether a stop run, false breakout/failed breakout, Crazy Ivan, etc.; they come in all different forms and there's a reason it is such a strong concept and why they are so often seen at just prior to a reversal.

The main theme regarding their probability is how obvious a technical level is, how large it is and how visible the asset is. If you haven't already read the two articles I posted which are always linked on the member's site at the top right, try to find some time as you'll understand a lot more about market probabilities and how these moves that may seem to be counter to your position are almost always the biggest freebie gift the market will give you. Here are the articles, but you can always find them on the site:

* Understanding the Head-Fake Move Part 1

* Understanding the Head-Fake Move Part 2

The concept is so strong, that even without any evidence of such a move last Friday Feb. 6th, it was included in the Broad Market Update and at least in 3 Daily Wraps as well. This is from the linked Broad Market Update from last Friday...

"I have to include the head fake concept as I preach it all of the time, it would be disingenuous for me not to include that possibility as I think many of you probably had already figured out on your own being we use the concept so often."

What was I reffering to?

This range, since the descending triangle target (up) was a breakout above the bearish triangle's resistance (a head fake move in itself as traders view descending triangles as bearish consolidation/continuation patterns), we had to redraw the trendlines which gives you a very obvious, 2015 range. This is just too juicy of a target as it is an east way to trigger buy orders, buy to cover orders and in general produce demand that can be sold in to.

In fact it fit with additional views that VXX and TLT needed to come down and since they are inversely correlated with the market/SPX, that meant the market needed to move higher. Here are some specific recent examples of this analysis...

From Tuesday, Feb 10th's Market Update:

"...as I said yesterday, although most people have a hard time viewing the market in this manner, I believe as I did yesterday before any (down-side) move, that the upside move is the means to an end and that is accumulation of the Flight to protection and the flight to safety (VXX/TLT) as both were too high for Wall St. to chase them and they come at just about the right time considering the Russell 200 charts posted earlier today...."

From Monday February 9th's Daily Wrap

"Looking at leading indicators, just remember I suspect both TLT and VXX want to accumulate at lower prices to be ready for the market roll over and the end to the 1/29 to 2/2 base/bounce cycle, so them pulling back , although not making a lot of sense in the normal order of leading indicators, it would make sense in the case of accumulation, smart money will very rarely chase an asset higher, instead they knock it down to accumulate or ramp it up to distribute, the opposite of what many technical traders think "

A head fake move in this scenario would create a bull trap which creates reversal/downside momentum. If you look at the SPY chart and the base from 1/29 to 2/2, on 2/2 there was a head fake move intraday hitting stops, pulling in shorts and creating a bear trap that was a head fake move directly preceding an upside reversal, again, the same SPY chart...

Although the downside head fake in yellow to the left doesn't look very impressive, those are the lowest intraday lows of 2015, bound to hit stops and create a bear trap, it was also the reversal momentum needed to start the upside move. The current move above the range mentioned several times this week as a probability just as a concept alone, even without evidence supporting it, has the same effect on the downside  as long as it is confirmed as a head fake move.

Since that move, as far as VXX and TLT which were sitting a bit too high to think they'd be accumulated in any size without a move lower, here's what they are looking like now as both stocks and bonds are bid today...

 TLT needed to come down to be accumulated, it now has a respectable positive divegrence, the flight to safety and the bottoming/rounding process is evident as TLT moves higher today with bonds and stocks bid.

 Here's a stronger 15 min chart of TLT, as was posted earlier, "TLT needed to pull back as smart money doesn't chase assets higher".

 As for the larger picture in VXX (short term VIX futures) with net spec VIX positions at an all time high (via CFTC futures data for the week) this probably shouldn't be that surprising, but it has been the near term charts for timing that I have been watching.

A closer look...
There have been 3 base and bounce/breakout attempts in 2015, Jan 6th, Jan 14-16th and Jan 29-Feb. 2nd, the last two are visible and at those market bases, note the VXX tops as they trade opposite each other. Also note the most recent and larger positive divegrence to the far right.

Honestly I can't even say that this was an intentional head fake move or one that would have been possible without the help of outside events, such as the incorrect CNBC Greek/EU rumors late yesterday that were subsequently shot down, the Minsk Ukraine cease-fire (not to be pessimistic, but we've seen this tried, it didn't work, but it did move the market) and  the surprise/overnight Swiss Central Bank rate cut and $10bn SEK in QE. No matter...

Almost all of this analysis is based on concepts alone, however we still have to be able to determine whether a move is likely a real, supported break out or a head fake, other than the highest probability/longer term charts which give us an idea before a move even starts, I always like to confirm at the present time.

Here is some of the evidence thus far, although it's still early...

 The SPX:RUT Ratio still refuses to confirm price going on a 3rd consecutive day, somewhat ironically the SPY has been above the resistance/range trendline for 3 consecutive days.

 This HY Fund (PIMCO) and HY Credit in general diverging from the SPX (in green), in this assets case, it has been up since the first trading day of January so this divergence vs SPX is notable as the first of the year, although HY Credit has been dislocated for a longer period.

 In red this is 30 year yields, remember they act like a magnet and pull equity prices toward them, unfortunately they aren't well scaled, they should be lower in relation to the SPX (green), for instance, this is what the two looked like near the close yesterday, so you can see the red 30 year yields should be scaled even lower, a larger dislocation/divergence.

30 year yields vs the SPX yesterday, note how they are together around noon, if you look at the chart above this one and pull yields down so they are together around noon, you see how dislocated yields are from the SPX, also the first strong divergence which pressures the market lower suggesting a head fake move.

However some of the best data has been there, it started Thursday and Friday...

 The yellow trendline is the top of the range, the previous breach was intraday only. The base area is the same for all of the major average- the 29th of Jan. to Feb 2nd and the strong negative divergence started last Friday and has worsened above the range, that should tell you something about how and why the head fake concept works and why it exists.

QQQ, again the same base area, it had the first strong neg. divergence on Thursday and then Friday more broadly and you can see how it has gone since .

And the IWM showing the end of the previous base/bounce attempt from 1/14-1/16 failing to the left in to the 3rd try for 2015 at the same area, also the same strong divergence on Friday like the other averages and of course the tone since.

And HYG's underlying trade trend for this most recent bounce cycle.

This is one of my favorite Put Option set-ups as premiums are reduced and head fakes tend to be excellent timing markers as they more often than not, directly precede a reversal (down in this case).

It's now just a matter of looking at intraday timing charts.