Broader Market Perspective

As we are watching price action this morning, things aren't looking good, but volume is also getting a bit curious, it's rising which is okay if it's taking out stops along the way, but from a very short term perspective like last week's "Week Ahead", "early strength in the week followed by weakness", it could cause a short term oversold capitulation event or what I'd visually call a "flame-out".

I noticed the very ugly divergence in HYG which is worse this morning and it's one of the very best leading indicators for the broad market, remember how ugly its 3C charts were last week and the week before, it was screaming that it was going lower and now it's screaming that it's taking the market lower.

However even there intraday volume is rising, whether this is a break and stops are being hit or a short term mini oversold event, will be part of what I'm looking at today for short term traders and for tactical positioning, not for the broad market perspective that was forecast last week of weakness and continues weakness as I believe we are already in to stage 4 decline of the February cycle.

TICK has been very ugly this morning (intraday breadth)...

 NYSE TICK has hit extreme extremes this morning of -1800, that's an insane level. TICK is the number of advancing stocks less the number of declining stocks, so you have an imbalance of -1800 at one point, anything around 1250 + or - I consider to be extreme, but we rarely see anything more than 1500.

This can create a short term oversold flameout, there's a lot of inventory at cheap prices and just like we took advantage of the +25% gain in HLF to enter it as a core short which is now one of our best performing core shorts down over 50% on what was one of the most emotionally difficult entries (but had solid objective evidence to back it up), smart money or HFT traders will do the same, that's not the same thing as accumulating for the long run, that's TRADING and taking advantage of blood in the streets on a micro basis.

In any case, that's not what this post is about, in fact the exact opposite. I hope to give you a perspective that untangles what I call getting "Lost in the lines" which happens when you look at something too close and only see a part of the overall picture. This is something I learned about when I had my own custom furniture shop and when I managed a big high end custom furniture/Interiors shop. We'd get samples of a finishing technique the designer wanted on a piece of furniture, but they'd often be 1 square inch swatches. Finishers would often try to repeat the pattern they saw on the sample with no regard for scale, they were too close, they needed to move back and look at the full scale of the piece so I had them strip entire half million dollar jobs and start over with the warning, "Don't get lost in the lines this time".

The more closely you follow the market, the easier it is to get lost in the lines. If I had gotten worked up about every jiggle in HLF, it wouldn't be at a 50% gain right now.

That being said, hopefully a chart is worth a thousand words like a picture.

 The Dow in green vs Transports in white, note there's NO confirmation for this sector that has been a momentum pushing behemoth, yet it refuses to confirm the Dow both in a larger (red box) sense and a shorter term (yellow box) sense. The daily Ultimate Oscillator (like Wilder's RSI) also is not confirming, far from it in a larger sense along the red trendline and a smaller sense from the white arrow.

Why should transports confirm industrials? Goods and ever more increasingly, services are run through transports, while this is more of an old-timers way of looking at the market, the fact that transports were such a high beta moved and refuse to confirm should be something everyone is aware of.

As for the weakness and transition to stage 4 expected this week, it's interesting to see how futures that trade all week look compared to daily candlesticks.

 This is the 7 min ES chart, price has caught down to each and every divergence this week and the trend of weakness forecast last Friday for this week, well I think it's pretty clear even before this morning's jobs report.

This is TF/Russell futures on a 30 min chart showing the transition area I expected last Friday in to this week, the "Chimney" if you will and while there are a couple of divergences that keep the normal wave pattern of price alive, the trend is also clear as 3C diverges again to the downside, but these are still looking a bit too close, I just though they were interesting from a forecast perspective and a cycle perspective.

This is the chart that allows me to sleep at night with short positions...

 NQ and the Feb cycle which I can't fit entirely as it started 1/29-2/2, this chart starts at 2/5, but close enough, the early confirmation of stage 2 mark up is there, the negative divegrence of stage 3 top is there and it's a doozy.

Taking away all of my scribble...

The ES 60 min chart. These are the charts with the most trend, the least noise and the least detail, just underlying trend, I think it's pretty clear and I don't think I need to point out the rounding over of price.

Remember what I posted about volatility this week and the normal ups and downs or the jiggles, but in this case, I'd focus on the trends not only of price which has had an absolute stall in ROC upside momentum and is turning down, but in the 3C chart itself, just as it led HYG and HYG is leading the market.

I'll get some shorter term updates out as well, to me at this point (I'm pretty much already set), they are really only interesting from a tactical point of view, entries and exits of certain positions, but mostly entries, being ready for stage 4 which I suspect is going to break some more long term trendlines like we saw in October, especially with the recent very bullish sentiment posted last night.