In the case of Transports, they were very hot as a momentum play and therefore any asset in the Transport Sector would likely outperform the majority of the broad market. Likewise, since transports have become one of the worst performing sectors on the year (YTD), it stands to reason that any transport stock , generally speaking can be expected to underperform. *There are exceptions to every rule or concept, but the market isn't about absolutes, it's about probabilities. Card counting , while frowned upon in Vegas to put it mildly is establishing probabilities rather than blindly accepting the hand you were dealt and letting fate do the rest, that's gambling.
I like to think we have much better tools and many more than simply card-counting to establish probabilities as anything less is simply gambling and lucky or not, over a period of timer, just like Vegas your luck runs out, thus we look for an edge in the market and that includes the way we look at the market, sectors and individual stocks.
Much in the same way I'd look at the broad market first and determine the most likely course which helps me establish the most probable outcome for any individual stock, imagine I was in a new area of land that is unfamiliar and I wish to set up a temporary residence like a tent as I'm passing through. I want to start at the longest charts or the widest view and see what the landscape tells me, then I may narrow things down to a specific area in which I want to pitch my tent whether that be on high ground to have a good vantage point or near a watering hole to have access to life giving water. Say after surveying the broad landscape, I've determined that there's a watering hole about mid way between the highest plateau that offers me a wide viewing vantage point and the canyon floor which I may wish to avoid because I don't want to be caught in an area in which perhaps a flash flood may put me in jeopardy. So after deciding what the larger prospects look like, I've narrowed things down to an area or the intermediate term in relation to the market (or perhaps sector relative performance). Now I want to take a closer look at the area and make sure wherever I decided to pitch my tent, I'm in a safe place, perhaps partially elevated to stay dry in case of rains and off beaten trails that may be animal/predator trails to the watering hole where predators may lurk , waiting for their prey. It's just rational decision making and the same applies for the market. The last thing I want to do is nail down my exact spot which is akin to picking the stock that best suites all of the prior observations I've made.
While the example may be a bit esoteric, it's survival the same as the market. You would not believe how many people do nothing but look at a stock with little observation of the broader market that we already know has the most influence on an individual stock's performance. I don't know if it is laziness or just not knowing better.
In any case, in looking at Index Futures, I want to start with a broad overview, determine the most likely outcome or what I often call the 'strategic outlook", then I want to narrow things down to the "tactical perspective". In the context of out example, I may choose a location to camp at when in survival mode that takes the strategic outlook which is traversing the area safely and even better, using its resources to increase my chances of a successful journey. In doing that, I may have decided that the watering hole midway between the highs of the Plateaus and the lows of the canyon made the most sense from a safety, outlook or vantage point and survival perspective. Tactically I may even set some traps on the animal trails that are close to my camp, but not in the middle of it and thus I let the natural resources come to me rather than expend energy chasing or stalking prey. I know what the probabilities are and I simply set up my tactical trap to enhance my strategic goals.
Starting with the longer term Index Futures (I can't cover EVERY chart in every timeframe, but I did my best to pick the best chart representative of all of the avergaes') to gain a broad perspective (which we have done long ago)...
Starting from the broader view with the ES/SPX E-mini 1-day futures (*ES-SPX Futures, NQ=NDX futures and TF=Russell 200 Futures*)....
Note the negative divergences or distribution in to the September highs to the left that led to the October lows which broke an important longer term trendline and set up some potential megaphone or Broadening Tops in several of the averages.
As 2014 transitioned to 2015, note the bad start to the year in this 1-day chart which is some of the strongest underlying flow of funds (accumulation/distribution concepts) as the 2015 Macro-Economic data is the worst start to the year in something like more than a decade despite the advantage of seasonal adjustments during the 1st quarter.
Just after that divegrence is a range that as well established and VERY visible, so much so in fact that I had said well before it occurred, that the market would have to run a head fake shakeout and set a bull trap ABOVE the range before we see any significant new lows that stick, it was just that obvious and just that easy to set up smart money's larger positions so they could sell in to strength and/or short in to strength just as tAppaloosa did reducing their equity exposure by 60% in Q4 2014 or Soros' SPY put position, expanded by 600% to levels not seen since Lehaman for Soros during the same period.
These are "STRONG HANDS", they don't run at the first sign of a bounce, their positions are large, they take time to set up and they have what you'd call conviction.
In to the move above the range, note the leading negative divegrence at new leading negative lows on a very strong signal 1-day chart, right where we expected that to occur as it was a head fake/bull trap allowing smart money to unload on retail who they knew would chase the breakout and the "all time new highs" title even if the market would then be at a loss YTD only weeks later.
The divergence to the right of the chart is the most important above as it shows the level of distribution in to what we forecasted would be a head fake move BEFORE it even started, it was just that obvious.
Again, the leading negative divegrence to the far right is huge.
To the left there's an accumulation zone where we first closed QQQ/AAPL puts that expired as MArch monthlies, a good thing as well as the market bounced from there which would have eaten up all profits in both. It was also a base that we couldn't be sure if it was alone or part of a wider base as I initially suspected as we saw the negative divegrence sending it lower (red box) and a second base area formed in the area, making it look like 1 larger "W" base. However, I see no 3C indication that this is 1 larger base, rather it looks like 2 distinct bases, each has shown signs of failing or having failed.
As the newest low was just put in place and ready to bounce Friday as the Week Ahead post indicated Friday afternoon, we haven't quite seen yesterday's negative divergences move this far out through the process of 3C divergence migration (when stronger divergences moves to longer timeframes).
Note the first base area from MArch 11th on , the F_O_M_C on Wednesday the 18th of MArch which we warned ahead of time would likely be a F_O_M_C knee jerk event which are most often wrong and retraced as this one was completely.
This led to the second base area from last week which was posted as most probably moving up early this week (Monday) as it did, yesterday as you'll see there was strong distribution in to the move, oe of the fastest distribution events on a bounce. To be fair, past bounces have been larger and have had specific missions like to break above the 2015 early year range and set a bull trap.
As I have said numerous times, I view this bounce as PART of a stage 4 decline as a counter trend , corrective bounce to keep the market from becoming oversold.
The same initial March 11th base (start) is seen, the F_O_M_C knee jerk reaction and the retrace of all F_O_M_C knee jerk gains sending the market to the second base area, initially suspected to be part of a larger "W" base, but I see no evidence of that now as it has formed.
Note the distribution in to the F_O_M_C knee jerk gains and the total obliteration of all gains for any longs who chased the move, they are sitting on nice losses.
On the above, 30 min ES chart, the distribution in to the F_O_M_C knee jerrk gains is clear as it was on all the preceding charts as is the second base area from late last week.
However note that the more detailed 30 min chart, which is still a strong timeframe shows something the others don't yet, distribution in to yesterday's gains and today's broader prices in the same area.
Coming back around from the shortest timeframes which will migrate to longer ones if they are strong enough, I want to start looking at those and see how the migration period or concept has progressed being we can see the 10 min chart above is showing CLEAR distribution in to yesterday's and today's gains or relative price stability in the area.
The green arrow is the North American Cash open, the positive divegrence was after overnight losses which were (again) forecasted last night in the Daily Wrap.
The A.M. UPDATE post showed this positive divergence and the probabilities of higher prices in to the cash open, but we didn't have any evidence that the market would do anything different than what it did today, such as make a new closing high.
"Index futures don't look good either. They saw distribution intraday and that has put them in a worse position as the day has gone on as we have seen in the averages as well.
The bottom line is this looks like the kind of bounce I suspected and it sees to be falling apart rather quickly, perhaps because it didn't have that base, but again, this was expected to be more of a counter trend bounce, a normal corrective bounce rather than the other types we have seen earlier in the year which had specific targets and goals like to break the 2015 range and create a bull trap."
Still, there are numerous charts above showing weakness in the Russell despite the better looking chart (5 min) of the R2K ON A RELATIVE BASIS! (Approximately 1/3rd of the losses of the other averages on the day).
In retrospect you can see now why I said well before any bounce started, "I would NOT try to trade this from the long side, but rather let the market come to you on your terms and at a time of your choosing and open or add to short positions or sell in to price strength".
That's what the best tactical plan was considering the probabilities were already laid out on the longer term strategic charts. As such, we were in a win/win scenario as any of our core shorts would perform on downside and any price gains would allow us to open new short positions, sell longs or add to existing shorts at better prices and less risk.
Even if we did nothing and just sat through it, we had a better tactical plan considering the strategic outlook.
I'll have more on today's update and what assets we might be considering and what the near term probabilities look like now that the charts from yesterday's Daily Wrap have been vindicated as having been accurate with all of the averages closing in the red as the Dominant Price/Volume relationship as well as S&P and Morning star internals suggested as well as the 3C charts of the cash averages and the 3C charts of the Index futures.
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