IWM / SRTY Update

The IWM looks the best to me of all of the averages for a bounce which in turn may set up a nice SRTY entry (3x short IWM).

As for the psychology of bear and bull markets, I haven't received a sentiment update from some of my sentiment monitors, hopefully I will soon, but take the SPY for instance, it has just taken out 6.5 days of longs in 3 hours, this is because bear markets move on average about 3x faster than bull markets. The 5 year bull market from 2002/2003 to 2007 was erased completely in 18 months, most of the damage in 8 months after a 60 month rally, that's at least 3.3 times faster on the downside and the basic psychological reason is that fear is a stronger emotion than greed, of course there were a ton of extenuating circumstances, but in studying markets, a ratio of about 3:1 is about the norm. 

While I don't have today's specific sentiment update, just think back to yesterday and last night's Daily Wrap showing the VIX at all time record net long position and then that position being tore apart and recent net short in the VIX and as I pointed out last night, it looks as if it's about to be torn apart, these aren't coincidences. When everyone and their neighbor was bearish at the October low and sentiment indicators were hitting record bearish sentiment (as traders seem to have no conviction on the market other than which way it moved over the last 24 hours), despite my feelings re: the market, I said it can't be a top, too many people are calling a top. Essentially the same thing happened in VIX at a record setting long position.

As for the IWM,  SRTY would be the asset I'd be most interested in if it can bounce. Remember from earlier, I don't chase assets or markets, be patient and they'll come to you or offer you an opportunity; there's a bus every 30 minutes so to speak.

 The psychology of candlesticks is very useful when paired with volume analysis. This is a daily chart of the IWM; to the far left we have a candlestick that is far from a text book Hammer "Bullish reversal" candlestick, but we do have a longer lower wick meaning lower prices were tested and rejected and it occurred on volume, I've found the increasing volume (it doesn't have to be huge, just increasing noticeably) makes a candlestick about 3x more effective or probable as you see support at the white arrow to the left that held from January through February.

The green arrow shows some pretty normal candlesticks for stage 2 mark-up, the two just above the white line are hammer-like, not reversals, but their psychology is that lower prices were tested and rejected, but in yellow the trend loses momentum and this is where it gets dangerous for this stage of the cycle. The next several candles over the orange line show a higher rate of volatility, but not a bigger upside move, this is often associated with churning. The candlestick from yesterday on heavier volume has a higher upper wick meaning higher prices were tested and rejected and the higher volume would make that move indicative of bearish churning. Had the candle closed at the highs, it would be a totally different interpretation.

 Here's the IWM 60 min chart and what you might consider a Channel Buster, if so, then the highest probability would be a move just back in to the channel. Any new shorts chasing today's price action would likely be stopped out and the longs would regain their confidence, but Channel Busters are a type of head fake move. There's also a gap from this morning that would be an ideal area for IWM to target.

 Note the IWM, unlike the SPY did not break this support line, had it done so it would have put the last week's longs at a loss like the SPY in a mere 3 hours. This is the congestion in this area I have mentioned several times.

There's little doubt yesterday's underlying action was very bearish, this is the Russell 2000 Futures 5 min chart, you saw how ugly the 1 min chart was yesterday and last night, it has reached longer charts and there's nothing approaching confirmation.

 The TF 7 min chart makes it as clear as can be

And the 10 min chart which is from last week as well was a part of this week's forecast, weakness.

Intraday the IWM's price pattern alone got me looking as it's more lateral than the other averages which had been just trending down and the "V" shaped bounces have not held and they rarely do. We have a small intraday positive on the IWM 1 min

The 2 min which was weak from last Friday, which is why I said we'd probably see early strength in the week, but there's nothing behind it, it grew weaker on yesterday's actions. This is what I mean by "Price is deceptive",

In any case, at 2 mins there's a relative positive, it's the weaker form of the two.

I can't say these won't be run over and the IWM breaks support and trends lower, but it wouldn't surprise me if it were to target that gap or the Channel of the Channel buster, that's where I'd consider a position like SRTY.

If you chased the IWM or the other averages which could draft off an IWM move if it can hold together, you'd likely be put at a loss quickly which is why I don't chase, but let the trade come to us.

I'll update SRTY and others that may look interesting if the IWM can get this together, I don't see it as any kind of threat to the larger week forecast of weakness.

If all of this is run over and it's not hard for that to happen and the IWM also breaks support here, fear levels will be on the rise and things may get ugly a lot faster.