Looking at pricew only, 15 years ago I would have called this a slam-dunk decline with the SPX closing at the lows of the daily chart.
Volatility is almost always the key to a real, sustainable and deep move. Check out how the SPX fooled around from 9/18 2014 to 10/8 2014 before getting serious about downside as volatility picked up. Or not as good of an example, but closer to home, 3/3 2015-3/6 2015. We too often just expect the market to do an about face and without a fundamental catalyst that the market has failed to discount, that's just not the highest probability so volatility where we are is good.
Since last Friday's close..
And for all the momentum monkeys, remember that move in copper in last night's Daily Wrap and the commentary?
And today for anyone who chased momentum...
As for Leading Indicators, as you'll see below, the changes in character including volatility and later 3C divergences took place just after the 1 pm area. Our custom SPX:RUT Ratio was failing to confirm the market as it made lower lows intraday, right in line with our end of day post, Tomorrow's Market-Patience Pays
You can start to see the case building for a bounce tomorrow in assets you'd never consider. At one point I use to be able to use candlesticks and volume alone, but Wall St. has changed and if you don't change with it, you die (figuratively).
Last night I mentioned in to the close HYG was trying to offer some support as were yields as the last hour sold off. You might recall the earlier post from today, Leading Indicators Point to some SPY Arbitrage and a Tug of War in which HYG was still a factor in near term trade. As of the close...
Like I often say, "Underlying trade is telling you things that you can't understand or confirm until the chance to make money has already passed you by".
Carrying on with Leading Indicators, not everything was a bowl of cherries for a bounce tomorrow as the EUR/USD charts are clearly showing.
As mentioned earlier in the Leading Indicators update, the SPY Arbitrage assets seemed to be active which you can see by one of the 3, HYG above, but also I mentioned the underperformance of VXX/Short term VIX futures, 2 of 3 SPY Arb. assets...
Our Pro sentiment indicators were also supportive of the market for a bounce tomorrow, although one saw a bit heavier selling at the close than the other.
However not everything and at least one of the SPY Arbitrage assets were not cooperating. BONDS. Bonds were bid all day.
If you are at all concerned that yields might bounce and support the market and take away that leading negative divegrence, the "Not everything was a bowl of cherries for the market bounce tomorrow", don't be.
Again, as always looking to close gives you tunnel vision and high blood pressure, back up and take a look at Yield' reality vs the SPX and remember they act like a magnet which has already begun.
Finally commodities were supportive today as well as a Leading Indicator, but on a bounce basis since the area around 3/10, they are still significantly dislocated and leading negative.
Sector performance today wasn't all that hot and you may have read several times that I'm interested in Financials and a Financial short, but would like to see a bounce/gap fill first to do that.
Utilities were the worst performer at -1.11% and the best performer was Materials at -0.33%, however Financials have my attention, if not for today's -.81% move, for the move since the F_O_M_C knee jerk reaction which you'll see, was a knee jerk reaction as more and more assets retrace the initial knee jerk including...
Briefly on to volatility...
I'm not sure how many times I've posted examples of how volatility changes, almost always increases just before a change of trend and more specifically between the 4 stages of a market cycle. These market cycles can be intraday, they can be a bounce over the course of 2 weeks or 2 months or they can be a primary trend over the course of 5-10 years, but the 4 stages almost always play out over and over again and in just about any asset you can trade. This is just part of human nature and how human nature has been taken advantage of by the criminal syndicate that runs both Wall Street and our economy.
In any case, yesterday I said volatility had really dies down and that in itself was worth taking notice of as it's a message of the market, a piece of the puzzle as there's no Holy Grail that will just give you the entire picture. We have to take all the pieces and put them together the best we can, see what the probabilities are and make the best decisions we can with the information we have at that moment.
The 4 stages of a cycle are 1) Accumulation/base 2) Mark-up/participation 3) Top/distribution 4) Decline
As most of you have probably seen, the breakout from a base is in itself a large increase in volatility and it's a change in trend from lateral to up. As the end of stage 2 starts to appear, volatility increases as price pulls away from its channel or moving average to the upside in a near parabolic move, again volatility increasing and a warning that a new stage is about to begin. A perfect example of this was gold or GLD back in 2010/2011.
As for the increased volatility at a top, one good example is the 3 places I'll short a H&S top and the one I won't. This is a chart from one of the core shorts we have , HLF and here's the link if you are interested in more...HLF Position Management / Possible New Trade Set-Up
A good example of the transition from stage 4 decline back to a stage 1 base is what is known as "Capitulation" or a mass selling event. This is typically a large "Exhaustion" gap down on huge volume. This marks the end of the Decline phase, although price often drifts lower over a period of time before starting to build a new base. OFten just before capitulation you'll see a near vertical drop, much like a blow-off top might look like.
Again, the point is the concept of increasing volatility at turning points and this is why I thought it was worth taking notice of the lower volatility yesterday ad we should work in to higher volatility on stage 4 decline, tomorrow could produce that kind of volatility.
You have to keep in mind that everything is relative to its proportionality or scale so you wouldn't see a +25% move in the market here/tomorrow like we did in HLF which was a much larger topping pattern.
The Bearish engulfing candle I proposed last night in the Daily Wrap would be a great opportunity not only from an entry point of view for a put position, but from a volatility/signal point of view, although that may be asking a little too much with what we have to work with.
Check last night's post linked above for the proposal of a Bearish Engulfing Candle that I would have loved to see today. The chart I drew as an example from the post last night is below, just keep in mind that is as of yesterday's close, but the concept is still the same.
Last night's Dominant Price/Volume Relationship as well as the S&P sectors and the Morningstar Sector's performance told us one thing, the market didn't have any kind of short term oversold condition, not even on an intraday basis. You might even recall what I said about last night's Dominant P/V relationship and what I said taken with the S&P sectors and Morningstar groups,
"The Dominant Price Volume Relationship today was in everything but the Russell 2000 as usual. The Dow had 18 stocks, the NDX had 76 and the SPX had 276. Confirming there was no oversold condition even on an intraday basis, the Dominant Price/Volume Relationship was Close Down/Volume Down, the least biased of the 4 relationships which has earned it the nick-name, "Carry on" as in keep doing what you were doing which was selling off at the close.
Of the 9 S&P Sectors... 2 closed Green with Consumer Staples leading at +0.16, two closed at 0% and the other 5 closed red with Industrials lagging at -.84%.
Of the Morningstar groups, 120 of 238 closed green. These are very middle of the road readings, but what it tells us is that even on that last hour's sell off, the market didn't approach even short term oversold so theoretically from an internals point of view, the market could pick up right where it left off and continue selling off tomorrow."
That's essentially what the market did today with all of the major averages in the red.
Today the change in volatility was there if you were looking for it. You might recall earlier updates today with the NYSE TICK and the readings at a very mellow +/- 750.
Well by the end of the day, things had changed and as always, "Changes in character precede changes in trends" even on a very short term intraday basis.
This is today's NYSE TICK by the close...
For a good part of today volatility was average at +/- 750, but look at volatility with no trend other than choppy/lateral pick up in to the afternoon with extreme TICK readings hitting +/- 1235!
This is also almost the EXACT area where the intraday positive divergences formed.
Looking to the rest of the internals as I already mentioned 9 of 9 S&P sectors closed green (compare this section with last night's sector performance, Morningstar group performance and Price/Volume Relationships and see how yesterday they predicted the outcome today and how they differ today to predict the 1-day short term outcome tomorrow.
Only 68 of the 238 Morningstar groups ended in the green today, many more sold off than yesterday much like the 9 of 9 red in the SPX. See what we said about that last night in the Daily Wrap as to what it meant for the market on a short term 1-day basis, then compare and contrast, but you'll need one more thing...
The Dominant Price/Volume Relationships. These are NOT the price and volume relationships of the averages themselves, these tell us much much more about what's really going on. These are the relationships between price and volume for all of the component stocks in each of the averages, giving us a much broader view of the market as a whole rather than as a weighted average.
Interestingly the Dominant Price/Volume Relationship for the major averages was EXACTLY the same as yesterday, right down to the Russell 2000 having no relationship again which at this point must be at least 75% of the time over the past couple of weeks which is extraordinarily rare.
The Dow had 21 stocks of 30 with the Close Down/Volume Down relationship, the same as last night. The NDX had 54, the SPX had 226. This is slightly less dominant and as I said last night, this is the least influential relationship with the smallest effect on the market's next day bias which is why I call it "Carry on" as in do what you were doing and yesterday with the S&P sectors and the Morningstar sectors no where near oversold, the most logical conclusion was to carry on to the downside. However since this relationship has barely any bias on its own, the 9 of 9 S&P sectors and the more Morningstar groups closing red creates a 1-day oversold condition and the Dominant Relationship (P/V) has no real influence to counteract that.
Thus the most likely outcome for tomorrow is the market bounces, although I wouldn't go so far as to say it closes higher because of the P/V relationship, it may just bounce and turn lower in to the close or it may just bounce as expected.
Either way, this puts us in the driver's seat to enter positions tactically with a strong strategic probability of the market moving lower, this is what I call a "Market Gift".
This is simply the stuff you can't pick up from most price/volume based indicators, but it is a jig saw puzzle of clues that need to be assembled. I've seen 17 years of traders searching for the "Holy Grail" of trading, that one system that is perfect, it's not out there and the search for it just highlights their laziness. If you are going to take from Wall St., you're going to have to work to get it.
I was browsing through some other screens/indicators today and noticed this, our X-Over Screen.
Since this is such a short cycle/bounce, it lags a bit, but on a 60 min chart, it is just about to give all sell signals.
As I said, because of the short cycle, the moving average based system (with custom indicators and Wilder's RSI/U.O.) gave a late buy signal, but it's giving a sell signal right now as the oscillators are below 50, the price average has crossed down and the final key, the custom indicator in the second window is about to cross down, likely tomorrow even with a bounce.
Winding down tonight's Wrap, I usually report on the Index futures and what they look like , if there are any smoking guns.
If we didn't know better as far as probabilities are concerned, I'd look at Index futures and say, "Look for more downside tomorrow". The great thing, if you already entered some positions while the market was near the top of the bounce is we are set if the market can't pull off the bounce and nothing lost. IOf the market can pull off the bounce, we have some second chance opportunities or better opportunities to enter strategic positions on a tactical basis, it's virtually a win/win scenario.
ES 1 min intraday with 3C perfectly in line with the downside. However, the accumulation we are looking for isn't to be found on steering divergences as we have some charts of the averages with 5 min positives even though they were less than half a day.
The 5-7 min charts reveal an in line status rather than a leading negative, these can change very quickly, but are additional confirmation of the bounce tomorrow seen in the averages, leading indicators and other signals.
When we get to the stronger 10 min charts, the distribution of the last several days is apparent, only to see slight accumulation for a bounce during the afternoon today, not much gas in the tank.
For whatever reason, the Russell 2000 futures (remember the RUT has had no Dominant P/V most of the time), looks worse than even ES futures below on the 10 min.
ES 10 min.
Where it really counts as we watch the strong underlying trend on a 60 min chart, you can see the stage 4 decline from the February cycle which transitioned as we sold our AAPL puts and QQQ puts on March 10th, Closing Down the AAPL and QQQ Puts for now, as we saw something that we thought would be a nearby bounce and as the puts expired on the 20th, we'd have at best, time decay, at worst we'd lose the nearly 50% gains in one and 30% in the other.
The base for the bounce started showing on 3C by the next day and the bounce above now has a leading negative divegrence, thus I have no problem shorting in to a bounce and Financials are high on my list.
As for the bigger trend, the one in which we said ahead of time, well before it happened that the range from 2015 that was so obvious in the SPX at the time...
That there was little chance of us seeing lower prices and challenging the October lows and eventually breaking below them with such an obvious resistance zone in place that traders would chase. IT WOULD BE LIKE YOU WALKING RIGHT BY A $100 BILL THAT YOU COULD USE IN A LEVERAGED SITUATION AND NOT STOPPING TO PICK IT UP.
THE SPX ALREADY RETRACED THE ENTIRE HEAD FAKE MOVE, IT WAS WHEN IT WAS BELOW THE RANGE AND SEVERAL OTHER AVERAGES WERE SITTING ON THEIR 100-DAY THAT WE EXPECTED THIS LATEST BOUNCE AND ITS FAILURE.
THE POINT WAS, IT WAS TO BE A HEAD FAKE SET-UP OR BULL TRAP.
So knowing what we know now and what we expected then, we can look at this ES daily chart and see if our assumptions were correct. Did Wall St. buy and or confirm the break above the range or did they do as we expected before the move even started and use it for distribution, leaving retail traders who chase breakouts holding the bag?
You tell me? 3C is at a new leading negative low to the far right.
That will do it for tonight, I'll check on futures later before I turn in and report on anything exciting, but I think we have a pretty high probability scenario already set up, now it's just time to see if it plays out as expected and to find the right assets at the right time as a market gift.
Have a great night!
Looking to the rest of the internals as I already mentioned 9 of 9 S&P sectors closed green (compare this section with last night's sector performance, Morningstar group performance and Price/Volume Relationships and see how yesterday they predicted the outcome today and how they differ today to predict the 1-day short term outcome tomorrow.
Only 68 of the 238 Morningstar groups ended in the green today, many more sold off than yesterday much like the 9 of 9 red in the SPX. See what we said about that last night in the Daily Wrap as to what it meant for the market on a short term 1-day basis, then compare and contrast, but you'll need one more thing...
The Dominant Price/Volume Relationships. These are NOT the price and volume relationships of the averages themselves, these tell us much much more about what's really going on. These are the relationships between price and volume for all of the component stocks in each of the averages, giving us a much broader view of the market as a whole rather than as a weighted average.
Interestingly the Dominant Price/Volume Relationship for the major averages was EXACTLY the same as yesterday, right down to the Russell 2000 having no relationship again which at this point must be at least 75% of the time over the past couple of weeks which is extraordinarily rare.
The Dow had 21 stocks of 30 with the Close Down/Volume Down relationship, the same as last night. The NDX had 54, the SPX had 226. This is slightly less dominant and as I said last night, this is the least influential relationship with the smallest effect on the market's next day bias which is why I call it "Carry on" as in do what you were doing and yesterday with the S&P sectors and the Morningstar sectors no where near oversold, the most logical conclusion was to carry on to the downside. However since this relationship has barely any bias on its own, the 9 of 9 S&P sectors and the more Morningstar groups closing red creates a 1-day oversold condition and the Dominant Relationship (P/V) has no real influence to counteract that.
Thus the most likely outcome for tomorrow is the market bounces, although I wouldn't go so far as to say it closes higher because of the P/V relationship, it may just bounce and turn lower in to the close or it may just bounce as expected.
Either way, this puts us in the driver's seat to enter positions tactically with a strong strategic probability of the market moving lower, this is what I call a "Market Gift".
This is simply the stuff you can't pick up from most price/volume based indicators, but it is a jig saw puzzle of clues that need to be assembled. I've seen 17 years of traders searching for the "Holy Grail" of trading, that one system that is perfect, it's not out there and the search for it just highlights their laziness. If you are going to take from Wall St., you're going to have to work to get it.
I was browsing through some other screens/indicators today and noticed this, our X-Over Screen.
Since this is such a short cycle/bounce, it lags a bit, but on a 60 min chart, it is just about to give all sell signals.
Winding down tonight's Wrap, I usually report on the Index futures and what they look like , if there are any smoking guns.
If we didn't know better as far as probabilities are concerned, I'd look at Index futures and say, "Look for more downside tomorrow". The great thing, if you already entered some positions while the market was near the top of the bounce is we are set if the market can't pull off the bounce and nothing lost. IOf the market can pull off the bounce, we have some second chance opportunities or better opportunities to enter strategic positions on a tactical basis, it's virtually a win/win scenario.
For whatever reason, the Russell 2000 futures (remember the RUT has had no Dominant P/V most of the time), looks worse than even ES futures below on the 10 min.
The base for the bounce started showing on 3C by the next day and the bounce above now has a leading negative divegrence, thus I have no problem shorting in to a bounce and Financials are high on my list.
As for the bigger trend, the one in which we said ahead of time, well before it happened that the range from 2015 that was so obvious in the SPX at the time...
THE SPX ALREADY RETRACED THE ENTIRE HEAD FAKE MOVE, IT WAS WHEN IT WAS BELOW THE RANGE AND SEVERAL OTHER AVERAGES WERE SITTING ON THEIR 100-DAY THAT WE EXPECTED THIS LATEST BOUNCE AND ITS FAILURE.
THE POINT WAS, IT WAS TO BE A HEAD FAKE SET-UP OR BULL TRAP.
So knowing what we know now and what we expected then, we can look at this ES daily chart and see if our assumptions were correct. Did Wall St. buy and or confirm the break above the range or did they do as we expected before the move even started and use it for distribution, leaving retail traders who chase breakouts holding the bag?
You tell me? 3C is at a new leading negative low to the far right.
That will do it for tonight, I'll check on futures later before I turn in and report on anything exciting, but I think we have a pretty high probability scenario already set up, now it's just time to see if it plays out as expected and to find the right assets at the right time as a market gift.
Have a great night!
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