Daily Wrap

Wel here we go with that early week weakness. Friday I didn't think we were quite there yet and had a little more work to do today, but there were all kinds of warning signs from biotechs behavior last week, Transports all year failing to confirm, breadth, 3C signal, the fact that we only expected this to be a bounce and then continue with the February cycle's stage 4 decline and eventually challenge the October lows and I believe break them.

 Look at the volatility on this bounce and then suddenly it dies down Friday on huge volume with clear resistance the last 4 days. The red and white arrows are now 9 consecutive days of the market closing up and then closing down over and over.

While the daily candle didn't look like a big deal, you probably felt a bit different watching the last hour.

 SPY plummets the last hour.

This is what I was trying to get across with the Intermediate Market Update as you notice it's not an intraday market update, but dealing with the charts that are really telling us something, the same something we expected when we first identified the probabilities of a bounce on Tuesday March 11th upon closing AAPL and QQQ puts.

We've gone ahead and added some of these back and added some other stuff today, but core positions have stayed in place as I want to trade with the probabilities of the underlying trend which means the distribution, the breadth problems , the non confirmation problems, the F_E_D itself taking away the only thing that gave the market legs, the punch bowl.

 As I was trying to show in the post linked above from earlier today taking a broader perspective look, charts like this 30 min SPY are telling us the market is out of gas from the accumulation cycle for the bounce in white. This 30 min chart is leading negative so we know it's out of gas, but I also added in the bigger picture or what I believe we will be calling the intermediate trend soon and the primary trend soon after that.

The same 300 min SPY chart properly scaled shows it has been a problem all year just as we forecast in December for not only the Santa Rally which didn't occur, but the January effect which we also forecast to be a bust which it was.

Hopefully I've kept you up to date well enough that we don't have to recap everything and can look forward, but I really think it's important to learn what we can from the concepts.

Take biotechs for instance. While we can't really say until after the fact, I started covering them again last week because they were looking horrible on the 3C charts, what looks like it may have been a blow-off top was just a symptom of the underlying condition.

Remember the channel busters and how they "seemingly" bullishly pull away from a trend or a moving average, this is almost always a red flag warning and that's exactly what we were seeing and focussing on last week in covering biotechs,  NASDAQ BIOTECHS / IBB

 A lot of you saw this pulling away from the trend and knew it is a red flag and asked about IBB often, the answer you got almost every time was, "Be patient", and I'm really proud to see so many of you were. I believe letting the trade come to you and tell you when it's ready is one of the best practices you can employ in trading, but it takes patience which is in short supply among many traders. This doesn't mean there aren't other opportunities out there in the mean time, it just means we want to pick our fights at the place and time of our choosing based on objective data, not subjective opinion.

Daily chart of NDX Bios. That sure has the makings of a blow-off top, large volume, a churning day.

Here's the interesting part, Blow-off tops , although difficult to call as they occur and very easy in hindsight, often occur as the broader market is at an intermediate or primary top as well so even if you didn't or have no intention of getting involved with Biotechs, there's still a lot they can tell you that you can apply to your trading/investing.

As was last pointed out Friday, Transports have not confirmed the Industrials all year. We've been following and building positions in IYT/Transports (short) for some time as they did the same thing that bios are doing, they peeled away from the trend to the upside which was the red flag and then changed trend to lateral.

Earlier today in the Intermediate Market Update we noted volatility in daily candlesticks was falling off, but so was volume, this is a chart an excerpt from the linked post from earlier today...

 "The Daily QQQ chart and note the Star candle which is also an inside day (not quite a bullish harami, but same concept) and note the increasing volume making that base and reversal candle about 3-4 times more probable to work. At the last 3 days of indecision or loss of momentum candles, note volume as well."


Interestingly today was on track to run about 30% below recent S&P futures volume and the lightest volume day of the year until the close. "Changes in character lead to changes in trends".

The $?USD got clobbered again, 3 of the 4 last days, this sent commodities like oil higher , gold and look at copper...

That's one parabolic trend I would not trust (Copper Futures).

Interestingly, even at the end of the day, TICK didn't hit extreme readings.

Maybe -800 on the day. This might be interesting as the market may be a ways from oversold even intraday, we'll see when we get to internals.

Today was a tight and narrow range just as we have seen in the last couple of days' candles on the daily charts, but the last hour or so of trade and all the sectors were hit.

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%.

Again, even on an intraday basis, we are not looking any where near oversold which means the Dominant P/V relationship from Friday that suggested we see a red close today, may have a significant role tomorrow.

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.

This is also the dominant relationship you'll find during a bear market as an aside.

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.

It looks like someone tried to use HYG to counter the selling late in the day, it totally flopped as HYG is under distribution.

 High Yield Corp Credit, the ramping lever of choice, even intraday as we know it's in a primary downtrend. Total fail as distribution intraday overwhelmed it.

Speaking of picking up where we left off, as you know that's a 3C concept that has held true probably 90% of the time, this is how the SPY left off intraday

The QQQ

And the IWM, I don't know how we could call this anything less than the end of the bounce.

As for Leading Indicators, they were pointing at a sell-off toward the end of the week. You may recall our custom SPX:RUT ratio that called the bottom and bounce and then went negative , refusing to confirm anymore upside late last week.

On an intraday basis yields weren't that far out of line although looking a little dislocated...

 In fact after the bond market closed at 3 p.m. yields pumped up a little like HYG, in a seeming attempt to peg the market in place through the close.

However you can easily get lost in the lines looking this close and miss the bigger picture.

Yields on a slightly longer basis than intraday. The white arrow is where they peeled away on the Non-Farm Payrolls data, the green arrow is where they reverted back to the mean with the SPX, but notice their trend since the 6th (NFP), straight down and now the two are pretty severely dislocated with the SPX needing to catch down to yieelds' reality (red).

Commodities were up intraday, but again they are severely dislocated to the downside like yields above when you step back.

HY Credit was flat most of the day, but again stepping back, severely dislocated to the downside.

I would normally end with futures' indications, but things look sloppy right now. Honestly I'm surprised EUR/USD didn't come down, but if the Gold/GDX/DUST and USO indications (as well as copper) suggest anything, it's that the $USD bounces here shortly pulling the pair down, but in the mean time, remember that big dislocation ES has from the EUR/USD correlation I showed this morning?

 The EUR/USD (candlesticks) intraday seems to be trying to catch up to the correlation while ES (purple) SPX futures seem to be trying to catch down to the correlation, although really nothing moved.

On the 60 min chart you can see they are still far from their recent/normal correlation with ES overvalued vs EUR/USD by 15 ES points.

Remember the early A.M. Update futures chart?

At the red arrow is Friday's close, at the yellow arrow is the downdraft around the European open and at the white arrow is the pop at the US open followed by the late day sell off, in other words the market hasn't gone anywhere, it's just seeing that volatility start to increase again.

While I'll check futures before I turn in, I think the answers are already in place and in posts like Intermediate Market Update, but what I'd like to see is maybe some kind of gap up in the A.m. perhaps on some Greek trial balloon rumor and see a nice bearish engulfing candle to end the day, something like this...

Something like the red candle I drew in, a gap up and close below one of up day candle's open. While I have no objective evidence for this set up whatsoever, just looking at intraday resistance levels, t would make some sense to hit the stops there before taking it lower and would be an ideal set up for puts of which there are still a few I'd like to get in place.

We'll leave it there for now unless I see something in futures before I turn in. Just remember the market makes its living by making the most number of people wrong at any one time, both intraday and on a longer term trend. While I'm focussed on the longer term trend and won't be run out by intraday volatility, it sure would be nice as a tactical set up.

Have a great night!