"Remember why I wanted to close the puts before the market turned lateral today? Well it has turned lateral inviting a change of character. I'm not worried about it and maybe it's strong enough that I can replace the AAPL and QQQ puts with the longer expiration which was the point of closing them earlier before this lateral trend developed."
Truth be told, I was expecting a closer, intraday bounce, but by yesterday I had revised that based on the scraps of data that could be found to "Finish the base today (Wednesday), rally tomorrow (today), lose some momentum Friday on an op-ex pin and finish up in to the F_O_M_C next week culminating with the MArch policy statement Wednesday at 2 p.m.
As for the psychology of a bounce, from the same post Tuesday...
"Your emotions are the best reverse indicator when they reach extremes and you feel like all hope is lost, that's usually when you want to be taking action that directly contradicts everything you fear). The simple fact is, YOU GET PAID TO TAKE RISKS. Often those risks are going to be diametrically opposed to every emotional cell in your body screaming you don't believe it and this is not how it's suppose to be. If the market is moving in a comfortable way and you don't feel that conflict, you are on the side of the bag holders and enjoy the good feeling while it lasts because it will turn on you."
The reason I said above, "today cleared up quite a bit and the market is trying to bounce as we first put out Tuesday morning ", is because the Dow just slipped in to green on the week, joining the Russell 2000, however the SPX and NDX remain red on the week. It's rather amazing how we can sometimes focus so close on intraday or short term trade that we miss the big picture completely, for instance watching today with the Russell up +1.71%, the Dow up +1.47% , the SPX up +1.26% and the NDX up +.72%, it's easy to forget that half the market averages are RED on the week still with the DOW just barely managing green today.
It's even easier to forget that the same market dispersion that was worse yesterday with the Russell up and everything else red, which carried on today as most of the averages nearly doubled the NASDAQ's performance, is actually not a good sign, but as you can see above, I haven't really been too concerned with this bounce which is just part of the market. However if the market is going to bounce, it's going to do so convincingly and for a reason and that is usually to sell the deception. A market needs to look strong or weak to change market sentiment which is market perception which is one of the main drivers of market movement with the scholastic supply and demand being a function of greater market forces of greed and fear.
So today saw the WORST retail sales since the Lehman collapse, the F_E_D's GDP now is plummeting (real time GDP forecast), Jobless Claims remain above 300k for the second week in a row on the widely watched 24 week average of Claims, Intel cuts their guidance citing "Weak demand", there are all kinds of macro economic problems plaguing the world starting in ASia and making their way through Europe and to the US. In fact...
Still I don't deprive the market of the gains today, I merely point out perception can be an emotional masquerade as half the market is still red on the week despite today's gains and price action can be very deceptive.
On that note, while breadth indicators finally saw a decent move today on the bounce (as they were dead flat for a month or so during the February cycle/bounce, the fact remains that less than half of the stocks in the largest market index , the NYSE, are above their 40-day simple moving average. To be exact, only 46% of all NYSE stocks are above their 40-day moving average.
While I expected a faster, smaller bounce, I probably shouldn't have knowing that the market doesn't do anything without a reason and in the case of a bounce, the reason is to be believable, to make traders forget that the entire SPX head fake move above the 2015 range was erased and then some as of yesterday.
In addition, the market gave technical traders exactly what they expected, I posted this last night as the SPX retraced the entire head fake move and then some which in itself opens a door for a bounce as bullish traders start to get weary of the market as it broke support, but as I also pointed out last night, the much watched 100 and 50 day moving averages are exactly what traders expect to come in to play. When forecasting a bounce Tuesday, I should have thought a bit more like a crook and forecasted a bounce off the 100-day as that's what technical traders would expect. While we can say that Technical analysis is correct as the market did bounce off the 100-day, how do you account for the fact that we saw it a day in advance of that actually happening?
Looking at the S&P sectors, at least things make some sense despite the horrible macro data today and if we even consider the additional two easing movements by Central banks in Thailand and Korea, we just need to think back to last week when we had 3 surprise easing movements in a single day of which the market cared NOTHING about.
Eight of nine S&P sectors closed green today, a far cry from Tuesday's 9 of 9 red. AS mentioned Financials led, Energy lagged at -0.64%.
Of the 238 Morning star groups which only saw 5 close green as of Tuesday, a deeply oversold short term (usually 1-day) condition, today a mind-numbing 223 of 238 closed green, again a LONG way away from Tuesday's 5 of 238 green, 233 red!
So Tuesday we have 9 of 9 S&P sectors closing red and 233 of 238 Morningstar groups closing red, today a near flip flop only 2-days later on some of the worst economic data of the week, with 8 of nine S&P sectors closing green and 223 of 238 Morningstar sectors green.
What exactly changed? Nothing changed other than a deeply oversold condition on Tuesday, but before that was even evident, we had a good idea a bounce was coming. Is the bounce based on the merits of earnings or macro data? You can see the chart above, I think the answer is a solid no. What about Central bank easing? Again, with 3 SURPRISE easing actions in a single day and the market caring less, I don't think Korea and thailand's easing made any difference.
What did make a difference? Again, I'd point out Mass Psychology and the break of support, the averages going red on the year and the bulls starting to get nervous. The market needs someone to trade against, someone to hold the bag until there's a move significant enough that they'll just keep holding the bag out of pure hope that it comes back. And of course there's the squaring of positions in to the F_O_M_C next week in which perception on a rate hike's timing and size have nearly doubled in a single week on last week's Non-Farm Payrolls.
Price is indeed deceptive, but more than that, Wall Street is dead crooked and realizing that and using it to your advantage is the only distinction between the sheep and the wolves.
While I'll keep my eyes on the 3C charts as today's TF/Russell 2000 Futures showed indications of heavy distribution, being the only average that has given smart money anything to sell in to...
We also want to watch the indicators that gave us clear signals when things were a bit opaque yesterday, for instance our SPX:RUT Ratio custom indicator that called out a bounce Tuesday and yesterday as well.
Interestingly our one Pro Sentiment indicator that was leading in to Tuesday and Wednesday as well, suggesting a bounce (as I mentioned I had to go to a bunch of our other sources like Leading Indicators as our main ones were opaque yesterday and all over the place) is now starting to lead negative, right on cue for a leading indicator.
This wasn't the only one of our leading indicators that were diverging again for the second time this week.
As I've mentioned numerous times in the past, it's rare that we get a solid signal (positive) on actual VIX futures, we saw a 1 minute chart positive earlier this week which was a surprise, but today's chart is even more so as I believe this may be the first time I've seen a positive this far out on actual VIx futures.
I suspect smart money and deep pockets have been accumulating on the cheap in the realm of protection while selling and shorting in to price strength, this is the exact same thing we have done or plan to do (long UVXY already, looking for the QQQ/AAPL put entry).
Yields have also bee in line with a market bounce and failure of that bounce. As of yesterday this is what 30 year yields looked like vs the SPX which we said looked like the SPX would revert UP to the mean before heading down.
As of today, that has been significantly narrowed... the exact same chart today...
Commodities are once again acting as a leading indicator, probably much more economic wise which probably tells us something about how the market is discounting since the end of
QE 3 at the end of October...
You've seen this chart more than once and commodities were all over the place today with silver up, gold flat, oil down and copper up, however we'l be looking closely at gold since it has fulfilled our pullback call and is showing strong signs of accumulation.
As for High Yield Credit and especially the market lever HYG,
Our Dominant Price/Volume Relationship tonight was the same for all of the averages except for the Russell 200 which was the most bullish of the 4 relationships at Close Up/Volume Up with 838 stocks, ironically though, this often acts as a 1-day overbought condition and with the breadth readings in the S&P and Morningstar sectors, that wouldn't surprise me at all with a close lower the next day most common.
As for the Dow at 16, the NDX at 63 and SPX at 241, they were in the most bearish of the 4 relationships with Close Up/Volume Down.
Considering the breadth of the sectors/groups, the market looks a bit overbought and that's a problem for a market bounce ( a rally would be a different story).
So we'll be looking for our entries, the SPX and NDX are yet to really break out of their base areas or even go green on the week so I still expect some rotation out of the R2K and in to those 2 averages, I suspect by Monday we'll probably be winding this whole bounce up and getting ready to continue stage 4 decline which is solidly in place. Both averages are in line and have the short term divergences needed to get their bounce moving, at least enough strength to sell in to. The IWM on the other hand is already starting to look dangerous, semi-parabolic and loosing its 3C support, I may be looking at IWM puts as early as tomorrow if the Options Expiration max pain pin doesn't get in the way. The Dow looks like it has some more upside so we may very well see a reversal like yesterday to a multi-directional market that's not confirming as the IWM was the only average green while the rest were at a loss, that rotation is a strong possibility.
As far as Index futures go tonight, there's nothing that I would deem that strong to overrun near term expectations as listed just above, although the R2K futures are looking a bit weak, which is in line with rotation.
Have a great night.
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