Daily Wrap

What a week, but the end of the week may have been most interesting.

This was some of the worst weekly performance for the averages in months.

Biotechs, the momentum Energizer Bunny was halted dead in its tracks...

Not only was this the worst weekly performance since the October lows that broke some important long term trendlines for the broad market, it was also the HIGHEST VOLUME EVER! This gives a lot more credibility to the case for a "Blow-off top" in biotechs, down -6% on the week. Now you can see why Bios are near the top of my list for assets to short in to price strength on a market bounce.

The intraday Biotech chart closed like the averages as you'll see below. Sticking with the concept that price usually picks up where the 3C divergence left off, we should see weakness in bios on Monday morning/Monday and then a bounce along with the rest of the market.

However, take a look at the last sell-off in October and compare the 4 hour 3C chart's divergence then compared to now...

There was a large negative divegrence in to the Q1 2014 highs and the strong pullback of over 21%, but the next divergence is the October pullback of approximately -9%. Even though the percentage loss wasn't as big this week, look at the leading negative divegrence since the October lows, it seems smart money has been using this parabolic move for months on end to get out of bios as retail holds the bag at unsustainable prices. This one is going to be ugly, thus I want in at the best place possible as a new position or an add to position as long as it doesn't violate risk management rules.

Financials are another, you'll see their performance in the sector performance and of course transports.

Financials look set to bounce, but again they look horrible. I love FAZ long here and would add to it on a bounce in Financials.

This extremely strong 6 hour chart of Financials (XLF) is so ugly that it's beautiful, I couldn't bring myself to draw on it, although I doubt you need any hints as to where the worst divergences are and how bad it has gotten over the [past several months.

Remember the oil/USO pullback we were expecting just before the Yemen conflict erupted? Well Crude was on track to have its best week since July 2013 before our negative divergence kicked in and pushed Crude RED ON THE WEEK!!!

As you know, we have near term expectations (lower) intermediate expectations (more base building) and longer term (upside reversal).

The Averages this week...

 The averages on the week with transports looking horrible, another group I'd like to add to an already open short position on a bounce. This was the biggest weekly decline for transports in 6 months!

Almost all of the averages have retraced all gains since pre-F_O_M_C knee jerk. Transports have been destroyed.

And Year to date, the SPX, Dow and Transports which never confirmed the Industrials this year, are all red.


As for sectors...

Today's performance isn't surprising given the daily candle (close) which sets up a bullish short term reversal...

S&P with a Star yesterday and today.

Thus the daily sector performance isn't surprising with 6 of 9 sectors in the green. However...

 On the week, this is what the 9 S&P sectors looked like with Financials performing the worst.

Since the F_O_M_C knee jerk reaction...

As for Morningstar Groups today, again not surprising given the last two flat days, 168 of 238 closed green.

Yields were up slightly on the week, bonds slightly down as we had an ugly 5 and then 7 year auction mid-week.

The $USD lost -4% on the week, I suspect this is directly related to the carry trade unwind.

Yellen was on deck today (afternoon) and as I have maintained since 2012 when the F_E_D started changing or even talking about changing their model for forward guidance, they were already looking for the exit way back then.

As you may recall, the F_E_D first talked about which was my first hint and then actually did, change the yardstick for guidance from  quantitative as in "We will raise rates 6 months after the end of QE3 " which is what Bernanke said to a Qualitative one which sounds like, "It depends on the incoming data".

What is unique and special about this is that it gives the F-e-d the ability to change interest rates or other policy long before objectives are actually achieved like 2% inflation. The F_E_D even said that they would raise rates as long  as they "FELT" comfortable that inflation would move to their 2% comfort zone. This allows them to say anything about what they feel despite the data and hike rates even when inflation data is very poor.

Well for all the "Buy the Dippers" out there and the "F_E_D has our back " crowd, the "This time it's different" folks, Yellen just confirmed everything I've been saying since we first saw the first hints that the F_E_D was looking for a way out. From today's Yellen speech:

"I would first note that the current stance of monetary policy is clearly providing considerable economic stimulus. The near-zero setting for the federal funds rate has facilitated a sizable reduction in labor market slack over the past two years and appears to be consistent with further substantial gains. A modest increase in the federal funds rate would be highly unlikely to halt this progress, although such an increase might slow its pace somewhat.

Second, we need to keep in mind the well-established fact that the full effects of monetary policy are felt only after long lags. This means that policymakers cannot wait until they have achieved their objectives to begin adjusting policy. I would not consider it prudent to postpone the onset of normalization until we have reached, or are on the verge of reaching, our inflation objective. Doing so would create too great a risk of significantly overshooting both our objectives of maximum sustainable employment and 2 percent inflation, potentially undermining economic growth and employment if the FOMC is subsequently forced to tighten policy markedly or abruptly.In addition, holding rates too low for too long could encourage inappropriate risk-taking by investors, potentially undermining the stability of financial markets. That said, we must be reasonably confident at the time of the first rate increase that inflation will move up over time to our 2 percent objective, and that such an action will not impede continued solid growth in employment and output"

And that's what is known as a "Hawkish F_E_D". Given today's statement in which Yellen (you must read between the lines with the F_E_D, they can't come out and say it if it's not in the F_O_M_C forum) all but told the market RATE HIKES ARE COMING and likely JUNE, I wouldn't be surprised to see the "bounce" divergence run over.

This is what I would consider new, fundamental data that the market hasn't discounted. I don't mean a June Rate Hike, the market believes that, but this is  THE CLEAREST YELLEN HAS BEEN ABOUT A RATE HIKE AS SHE USUALLY TRIES TO EMPLOY GREEN-SPEAK AND WALK A FINE LINE IN WHICH SHE TELLS YOU NOTHING.

ALSO, THERE'S CLEAR CONCERN ABOUT THE MARKET BUBBLE AND IT SEEMS JUST AS THE F_E_D WAS DESTINED TO INFLATE IT, THEY ARE NOW READY TO POP IT.

MOVING ON, IN TO THE CLOSE THA MARKET GOT A BOOST FROM ANOTHER FUNDAMENTAL SURPRISE THAT HAD NOT BEEN DISCOUNTED, INTC IN TALKS TO ACQUIRE ALTR.

This is what caused the end of day ramp, not any divergences and I don't think this changes Monday morning as the concept of the market picking up where the 3C signals left off is a strong one, even over a 3-day weekend (which is next week).

Was the INTC news front ran by those with inside information? While we can never tell for sure, the market didn't show a positive divegrence today, the QQQ specifically did not show a positive divergence today, the Dow of which INTC is a component didn't show a positive divergence today, but strangely just after the open today, INTC did show a positive divegrence. If there was a leak, it was this morning.

INTC intraday had been in line, it had a very flat rangebound trend today like the market, yet 3C continues to move higher in a leading positive divergence all day as if more and more INTC stock was accumulated before the news broke. It's your call whether or not you find this "Fishy".

Looking at our Leading Indicators again to keep up on them from day to day...

 Our custom SPX:RUT Ratio indicator was in line Wednesday, but leading the market Thursday and today, suggesting a near term/short term bounce.

Pro Sentiment Indicators were slightly supportive today, thus signaling a short term bounce is highly probable.

Our second version of Pro Sentiment was looking better the last 2 days, but weakened a bit today which would be in line with the pullback to broaden the base Monday as I have expected and the 3C charts ended for the day.

High Yield Corp. Credit is still in a near term supportive area around the $209 (SPY) area which is about where I thought we might bounce to based on where we first saw the 3C divergence.

However looking at HY Credit for the year, at 1 we have the range I said needed to br broken on the upside before we see any serious downside as it was just that obvious and retail will chase the breakout.

At # 1 and 2 note HYG leading the SPX making higher lows and at 3HYG is in line with the SPX.At 4 and 5 HYG is in line with the decline and at 6 HYG is making a negative divergence which carries through the rest of the bounce, but still leaves some slight near term support.

On a primary trend basis...

HYG has confirmed the SPX in 2013 and diverged in 2014 and is now in a primary downtrend making lower highs (red) and lower lows (orange), just as with the charts above, HY Credit tend to lead the market so I expect the market to catch down to credit. Note the area in yellow, if you can't see the HYG divergences that sent price lower, below I zoomed in on the area just to show you HY Credit's leading quality as it is a smart money risk asset, if they are not buying risk, why would you want to be?

This is the area in yellow from above, note HYG's lower highs in to the SPX's higher highs, a negative divegrence which sent the SPX lower and to the right the HY Credit divergence that caused the sel -off to the October lows which is what happens if I scroll over to the right a bit more, you can see above to the right of the yellow box.

HY Credit (another form) sold off in to the last bounce sending it lower, but has slight support for the bounce I have been expecting, a smaller bounce, but watch out for volatility, that is actually what I'm most interested in as it will lead us deeper in to stage 4 decline where the large downside moves occur, check past charts of sell offs at the start and in the middle/end.

Also note pros who trade HY Credit are selling in to the F_O_M_C rather than a knee jerk buy, they understood the significance highlighted by Yellen today.

HY credit short term over the last several days is supportive of the bounce we have been expecting since just before the Yemen conflict sent the market lower.

Commodities are also near term supportive, but today suggest we see the pullback I anticipate early Monday to finish the base, then we should bounce on increasing volatility where we want to enter any additional and perhaps final (at least best positioning) positions before a move to make a lower low on higher volatility.

Look at the VXX/Short term VIX futures today vs the SPX (SPX in green is inverted so you can see the normal correlation). Today VXX underperformed the market, again suggesting a bounce early next week as well as accumulation of VXX at lower prices.

Spot VIX also looked the same and...

Look at this VIX slam on the open this morning, it idn't move the market up as it normally would, perhaps it was needed just to keep the market from collapsing on the op-ex max pain pin.

Yields (5 year) moved lower today, also hinting we see an early pullback Monday...

However on a larger basis we see yields falling in to the F_O_M_C just like HY Credit and the knee jerk move that has been all but retraced in almost every asset asI warned, don't trust the knee jerk move.

At #2 Yields lead the market lower at the top of the SPX's bounce and it follows at #3, yields have a slight positive divergence suggesting a bounce next week as we have suspected. Again, I would not try to play this bounce long, I think there's too much risk, but I would short in to its price strength as we see distribution signals setting in.

30 year yields intraday at the close moving lower , remember they act like a magnet for the market so another sign that we should expect early downside to finish the base Monday.

Adding to that is the 3C close for the averages, the market tends to pick up where the 3C divergence left off which intraday is negative for the SPY.

Negative for the IWM

And for the Q's.

All of these suggest the market sees early weakness on Monday, it should finish the base from the last 2 days and bounce, the bounce should be volatile so don't be surprised if it looks strong. After a week like this week longs aren't going to be tempted back in to buying easily without a strong looking move which they'll chase, putting them long near the top of the move where we'll be looking to short as smart money will be selling and shorting as well.

Well that's going to do it for today, I hope everyone has a fantastic weekend. Remember next week is a 4-dday week with Friday closed for Good Friday.