Market Update / Leading Indicators

Details in the market can be dangerous, for instance you might have read my often repeated warning, "Don't get lost in the lines", meaning you can miss the forest for the trees, especially when you trade and/or watch the market all day.

In the same spirit, as of Friday's "Week Ahead" forecast,, I was expecting some early morning/Monday weakness, but only minor from 1-3 min intraday charts which was meant to actually strengthen the base and let this bounce finally get on as we have been tracking it for over a week now.

Much in the same way I'd say "Don't get lost in the minor details, wether the base is finished as expected and I think it clearly would have been had it not been for over the weekend statements by a PBoC governor hinting to the possibility the PBoC may have to ease as  Chinese growth has tumbled further than they are comfortable with. Then overnight,  that being followed by a fictitious rumor from Shanghai Securities that the PBoC may pull out a surprise rate cut as early as today, that's what really sent futures up overnight.

From my perspective with the Yemen news last week sending futures lower or pinning them in place and not allowing a bounce to get started, I'd say this entire bounce process or event is running more than a few days behind.

Looking around all morning, I realized we were already expecting the bounce to start today after a little base finishing up, why get lost in the lines of fine details when a fundamental news event overruns them?

This to me looks like a bounce underway, the bounce we have been expecting and I see no reason for the gap to be filled right now as it will be filled on the way back down.

On  daily SPY chart we had the two reversal candles last week for the bounce early this week in yellow and you can see today, just normal gut feeling from being in the market for sometime would tell me it would be very unlikely to come back down just to finish a small part of a base and give up a catalyst that got a bounce started without having to do anything other than let the headline scanning algos chase the false rumor, it just wouldn't make a lot of sense from here.

The market has to be one of the most dynamic (I would say) living organisms in the world which requires you adapt or you fall by the wayside, I think it's pretty safe to adapt to a few 1-3 min charts getting run over as is more common here any way as warned numerous times and specifically in this instance well over a week ago with one example of that already having taken place, YEMEN.

As for Leading Indicators, as posted Friday, they were mostly all set up for a bounce an way as of Friday, despite very early morning action expecting some backing and filling around the base area, the bigger picture was the expectation of the bounce to begin today , thus why get lost in lines of minor expectations that were run over?

In Leading Indicators there are pretty much 3 or 4 distinct phases, for the purposes of a bounce there's support in building the base which is a larger trend in the space of this base , but not talking about anything beyond this specific bounce. 2) There's a very minor backing and filling, mostly from Friday that fit well with the Averages' 1-3 min divergences suggesting an early pullback, finish the base, maybe a quick head fake stop run to squeeze some shorts as a way to start the bounce and then the 3rd signal which is that of the bounce itself.

If we include a 4th indication, that would be the bigger picture and eventual failure of the bounce.

Within the last week or so I posted some charts on  the concept of price reversing to at least the area of where we first saw the 3C divegrence start.

In a nutshell I've explained and showed evidence of this concept numerous times which essentially states that if (in this case) price is moving down as it was, the first area in which we see a POSITIVE 3C divegrence suggesting the very start of a possible base to form is the area that upon the actual bounce reversal would be the minimum upside bounce target.

The example I have given and shown to worked in the past has been, "If we first saw the 3C positive divergence (not strong, but the first sign of a change) around the SPY $209 area, no matter how much further SPY drops (in this case to $204.12) the expected reversal or bounce on the continuing 3C divergences should carry price at least to and most often above the area where it was first noticed (in this case around $209 SPY). Thus, conceptually, if you bought the SPY on that first day and held, by the time the bounce came and went, that position of SPY long at $209 should at least break-even or more commonly be at a gain as the $209 level would be the minimum target".

Leading Indicators

This is our custom SPX:RUT Ratio in red vs the SPY in green. We have been tracking a positive divergence in the indicator (red) moving up as SPY has moved sideways, one of the pieces of the puzzle of evidence suggesting the bounce theory was correct.

Today that indicator is more or less in line with price. Had the indicator been pointing down today, then I'd say a pullback to finish the base has some evidence, but that's not the case.

Our pro sentiment indicator shows a positive divergence (blue) vs the SPY (green) on Monday, thus the start of the bounce early this week and likely Monday looked high probability and today they have reverted to each others' mean, SPY up to the leading signal of Pro Sentiment.

 HYG, High Yield Corp. Credit, being one of the most liquid HY Credit assets and one of the most over-used for short term market manipulation was leading the SPY as of Friday and other days during the base area (white) and today, the two are nearly perfectly in line (green) or reversion of SPY up to HYG's leading position, this of course is an intraday basis and you should remember the intermediate and primary HYG trends which are in a primary downtrend and severely dislocated to the downside. Bigger picture, the market should revert down to those deeper primary trend lows the same way the short term price action reverted up to HYG's leading high position from Friday.

So once again, despite the finer details of finishing a base early Monday, the larger picture for this bounce section was that it would start early this week, likely Monday as well so there's really nothing that's contradicting that other than the fact some intraday divergences that really only had  minor weight early today, are run over after the surprise PBoC news and false rumor from Shanghai Securities News of an impending PBoC rate cut as early as today.

 VXX-Short Term VIX Futures in blue with the SPX (green) with its price inverted so you can see the normal correlation between the two that have an inverse relationship, shows VXX leading lower or on the weak side Friday, suggesting the bounce in the market we have been tracking was on its way as VXX positions were closed out, the same as I wanted to close the UVXY position before the bounce (2x long VXX).

Today, they've reverted to the mean and are in line. I see no evidence anywhere above to suggest any gap fill or further base building is likely.

 The Spot VIX shows the same thing as VIX futures above.

Yields (5 year) also show a leading position as yields tend to pull price (SPX in green) toward them as a LEADING INDICATOR, and they did that as the bounce base was being formed (white). There's some slight deterioration in Yields Friday which is in line with the original assumption of a minor pullback to finish up a sturdier "W" base early today before bouncing higher, that didn't happen and the two have reverted to the mean (green), however already suggesting that there's some sell in to strength occurring.

Just remember this as almost everything in the market is a process, not an event, just as the base formation was a process rather than a 1-day "V" shaped reversal  event.

The longer term view of the same 5 year yield shows it leading the SPX lower to the left at the F_O_M_C knee jerk and at the highs just after (red boxes) which pull prices lower before entering the base/bounce area (white) and of course reversion to the mean in green,  essentially telling us price is where it should be, right where yields are as they act like a magnet.

 The 10 year yields larger picture for 2015 shows the two in line in green, the market losing Yields' support at yellow as we enter stage 3 top and distribution and then the market following yields lower from stage 3 in to early stage 4 decline,

However even on a shorter term chart of just the last few months Yields are still severely dislocated lower, the larger the picture we look at, the worse we can see how badly this divergence really is.

Again, just as price reverted up to yields short term today, price will revert down to yields as has already happened on the chart above and to the larger, longer term dislocation. This is Multiple timeframe analysis.

 Commodities shows the same, positive at the base building (white) , a short term pullback early this week on Friday (yellow) and thus far no confirmation on the upside suggesting early on that the bounce will fail as expected, but this is very early probable evidence of that already building.

 A larger trend of commodities and how they diverge or lead the SPX lower in red squares as you can see the divergence and then the SPX catching down to yields.

Note the divergence today specifically with the SPX green up and commodities (brown) down.

Finally HY Credit (Credit leads, stocks follow), again showing support at the SPX bounce base building area only AFTER the significant divergence of HY Credit at the lows as the SPX tried to bounce on the F_O_M_C knee jerk reaction, While it didn't happen immediately (it''s a process), SPX reverted back down to HY Credit's lead. Tot he right in white is Credit minor support for the bounce we have been looking for.

Again Credit is significantly dislocated to the downside big picture. Just like short term the market reverted up to short term leading indicators and slightly longer term it reverted down to leading indicators as ween above in the red area and following credit at the green confirmation area, the big picture will also see the market revert down significantly to the deep dislocations lower of leading indicators.

For now I see no evidence or need for the market to pullback to the base for anything.

The main thing was we would be looking for the bounce to start early this week, it's here.

Now we watch for our opportunities to enter short positions and or sell longs.