Market Update, Still Just a Bounce

Yesterday as you probably know, the 3C charts were all over the place, not much at all in the way of confirmation so I had to pick up bits and pieces of information where I could find them which included leading indicators like our SPX:RUT Ratio, HYG's price action, but not 3C action, and especially on VXX and the VIX derivative ETFs both leveraged and inverse which gave some of the best confirmation along with Yields.

I said last night that we get these blackouts in which underlying activity simply isn't there or is mixed as the markets were yesterday and that these rarely last longer than a day or so. Today we have much better clarity.

The original idea from Tuesday when AAPL and QQQ puts were closed was for a near term bounce that would allow us to re-open the March expiration puts at a better price, a more appropriate strike and better timing while taking the gains off the table in the puts we had closed Tuesday as time decay and any bounce or even consolidation would start hurting more and more with time decay.

It seems nothing has changed since Tuesday looking at the charts today, this still looks like a bounce that is quite normal and an opportunity as we saw it Tuesday. This is a post from Tuesday showing some of the divergences that we had , they weren't the best or fully developed, but they were a lot more than anything that was added yesterday, Quick Marke Update. This update shows the charts we have now for the bounce we on their way to where they are now, we did have confirmation of that, just through alternative means such as using VIX short term futures (and derivative ETFs) as mentioned above. So far we are even below our anticipated target zone of Tuesday's gap down, except in the IWM, which as mentioned, looks like it may rotate out as far as relative strength between the averages goes as we saw yesterday (quite mixed).

Here's where we stand...

 The IWM closed the gap which was the minimum bounce target as the market has just been utterly ruthless about filling gaps since about 2007-2009 (that's when I really started noticing a shoift as gaps were some of the best support/resistance tools we had so it's unfortunate that they are filled so often).

You may recall, I tried to give an example of what this might be akin to in showing the SPX at the September head fake highs and the move to the October lows , the chart below...

You may recall, I said that the current bounce situation isn't quite like the first as that was a head fake move or the Chimney on top of the Igloo (rounding top ) and we were already past that stage which is the late portion of stage 3 that usually directly precedes a transition to a stage 4 decline.

I also showed the second area which is not quite appropriate as it is a little different, but it's the same general concept, a small counter trend bounce in the midst of a stage 4 decline and we know we have hit a stage 4 decline area for numerous reasons, but one of the easiest is the complete retracement of the entire head fake in a couple of the averages like the SPX, as well as several averages going red on the year, below their 50-day m.a.'s and approaching red since the end of QE3 on October 31st which I posted a chart of last night.

Daily SPX 500 chart with the 2015 range, as it became more clear and before the bounce and head fake move above the range started, I had said the market isn't going to make any serious downside moves until this very obvious range is taken out on the upside.

Since the head fake move , the entire move was retraced and then some. At #1 we have our theoretical target, the shakeout concept so any new shorts are taken out and the "Buy the Dip / Perma-Bull" crowd is locked in place holding the bag.

At #2, this is the anticipated return to stage 4 decline and on the break below the range which I'd call, "TROUBLE" and trouble that likely challenges the October lows , although there will be areas of congestion and support, I fully expect that these lows will be taken out. At that point, we'll have a full blown panic as the October lows were the first primary trend lower low and break of a serious trendline, a second lower low in the context of a primary trend will cause panic and this is where I have expected the market to move to for some time now.

The positive/bounce divergences have largely been around the 10 min. timeframe with some bleed through here and there as a matter of relative performance.

 SPY 10 min after a nasty leading negative divergence which is still in effect.

 And QQQ 10 min, this is with confirmation from VXX/UVXY/XIV, TLT, HYG, etc.

However the same chart in context...

QQQ 10 min which is why when we were first taking action because of an expected bounce this Tuesday in the post linked above showing many of the charts, Quick Marke Update, I said,

"And even SPY 10 min when compared on a relative basis to the former divegrence which is still the main divergence for this cycle and still in effect, that's multiple timeframe analysis, a small box wrapped inside a larger box put in to a shipping crate and they all have their roles to play."

VXX/UVXY which trade opposite the market as short term VIX futures (and 2x leveraged) as well as XIV which is the inverse of VXX and trades with the market, have strong confirmation and have been very helpful in situations like yesterday in which intraday data is all over the place.

 VXX 10 min, in the same timeframe as the averages above with a negative divegrence in the same place they have their 10 min positive in other words, confirmation.

 However once again, take the same chart and put it in perspective and the 10 min VXX negative divegrence is just a hiccup in an otherwise much more important trend, a leading positive position which also confirms the leading negative of the averages on the same chart.

 The 15 min VXX (or UVXY) has a beautiful leading positive divegrence, there's no negative here even on a short term basis as the market bounce simply isn't strong enough to reach the charts out this far which show much heavier underlying flows (accumulation/distribution).

As confirmation, as you've probably already seen...

 The inverse of VXX, XIV which trades WITH the market, shows the exact same stage 1 base and start to the February cycle at Jan 29th through February 2nd, this shows a remarkable degree of market planning and I suppose you could say, "manipulation" as multiple assets across numerous classes, some only having a connection through loose correlations, all show the exact same start date to the day and the same confirmation since.  The leading negative 15 min is confirming the VXX/UVXY leading positive 15 min and for market confirmation, just look at SPY...

This is all of 2015 for perspective and the head fake move, I probably don't need to point out the leading negative divegrence or the degree of confirmation just between these 3 assets.

On a closer intraday basis and what we can expect and what we'll be looking for to confirm those expectations, first it may be worth remembering what my gut feel forecast was which was finish up the base yesterday, bounce today, likely have a wasted day for the most part tomorrow on an op-ex pin and bounce in to next week or more specifically the F_O_M_C.

That was a gut feel based on what was available at the time and considering events. However things change fast and the primary idea to consider is what I want to do, sell/short in to price strength which was the entire point of closing the AAPL/QQQ puts Tuesday to re-open them at better levels with better positioning/expirations/strikes.

 SPY intraday 2 min is already showing 3C weakness in to higher prices,  this is not a divergence that I'd act on, but it is confirming expectations of selling/shorting in to higher prices as I reminded yesterday, whatever repositioning smart money wants to do, they only have a few days to do it before the F_O_M_C in which whether wrongly or rightly, it seems perception is that they remove "Patient" from the policy statement opening the door to a June rate hike. At that point, if "Patient" is removed, the market won't wait for the rate hike, they'll front run the F_E_D just like everyone front ran the ECB in buying bonds and now the ECB is confronted with buying negative yielding bonds.

The key thing to remember is smart money positions, whether selling, shorting or building a put position, they need higher prices and they need more time than we do, so it's the process and the continuation of the deterioration of the process that we are looking for. Note the SPY intraday divergence above...

 On the EXACT same intraday timeframe and scale as the SPY above, the QQQ divergence isn't nearly as bad, why? The market needs something to sell in to, RIGHT NOW I'M TRACKING THE SPY TRADING 2X HIGHER THAN THE QQQ, IF THERE AREN'T HIGHER PRICES TO SELL IN TO , THEY CAN'T SELL IN TO THEM. This is just a common sense reason I expect some rotation from the IWM.

 The QQQ 5 min is still in a positive position as are the 10 min charts, it still hasn't broken free of the base/bounce area.


The IWM on the other hand looks a lot worse than the QQQ doesn't it.

However since yesterday was so sloppy in these timeframes, I've found the Index futures to be a bit cleaner.

This is the 5 min TF/Russell 2000 chart, it looks significantly different than  the ES chart below...

ES/SPX 5 min futures.

Here's the ES 10 min chart, somewhat close to the SPY 10 min chart although there are some slight differences between the two timeframes.

You can see last week;s negative divegrence sending it lower and of course the closest thing to a positive divegrence.

The very same timeframe in TF , 10 min which is the Russell 2000 futures looks a LOT different.

What's the difference? The Russell has provided higher prices to sell in to whereas the SPY and especially the Q's have not yet or not to the same degree.

We'll be watching for continued deterioration, if we have a strong set-up for the IWM in which it doesn't look like it could consolidate until SPY and QQ are done, than some IWM puts may be worthwhile.

Otherwise, this is as good a time as any to get some trade set-ups out so we can let the market come to us and do the same thing smart money is doing, selling/shorting in to price strength on what is otherwise, an uneventful and expected market bounce.