Rotation Still Possible

Last Friday our week ahead forecast was for early strength in the week which came on Monday to be followed by additional weakness, remember this is a short term forecast for the week ahead, not a stage 4 cycle forecast which is much different, we're more looking at the nitty-gritty and what we can use on a tactical basis, not a strategic one which should largely already be in place.

As you probably recall, by Tuesday I/ had a gut feeling we were going to see a bounce or I probably should have called it more appropriately, a consolidation/correction, however in a downtrend, a counter trend bounce is pretty usual, especially early on if you recall the charts from the September highs to the October lows and their bounce within that period.

I've suggested that the obvious outperformance in the Russell which is not a good sign with so much relative performance difference between the averages, may rotate out and at that point the SPY and QQQ rotate in as they have barely surpassed their base area for the week.

The charts below should give you a good feel for why I would not trade this "potential bounce" on the long side unless I had unbelievable evidence that supported the bounce. I think I've made the reasons pretty well known having to do with trading against the underlying trend, trading against the February cycle's staging (stage 4-decline) and the nature of counter trend bounces n a rising volatility, decline.

These charts just put a face on that reasoning...

 From the point we suspected a bounce on Tuesday, but had no strong charts to back up playing that bounce on the long side (rather I'd short in to any price strength as price comes to me), you can see the SPY not only barely broke above its base/range area yesterday at the red trendline, but as of today, is right back to where it was on Tuesday, that's a lot of volatility in a short period that has gone no where, in other words RISK without reward.

The QQQ didn't even make it out of the base area and is right back to where we were Tuesday, again, unless you're day trading, that's a chopping block of volatility and risk.

 The Dow which had a stronger day yesterday is only +.21% above where we were on Tuesday.

The only average to move and this is generally not thought of well when only one average moves with no confirmation, the IWM/Russell 2000, still only gained +1.45% as of now, I suppose with options at the right strike and taken off at the right time yes you can make money, the question you have to ask is what are the probabilities you would have and are they worth the risk?

I suppose a large part of that answer depends on what kind of trader you are, day trader, etc., but from a daily chart perspective as we see right now, this is stand down and hope the market comes to you giving risk free or at least much lower risk opportunities.

I'm still watching the underlying action, it is still all over the place as the relative performance between the IWM and the other averages is so not a big surprise.

 You can see on this QQQ 2 min chart the early strength in the week forecasted last Friday.

The last two hours on the week (Friday) often give us some of the best data of the entire week.

Right now I see the Q's have not been effected that badly from this morning's turn to the downside. This may change and this is what I'm watching, but as we stand right now...

This 5 min QQQ chart shows it still has gas in the tank. Unlike the Russell 2000/IWM that gave the market something to sell in to, the Q's haven't so the question is, "Do they rotate in?"

SPY 3 min also hasn't seen much damage from this morning's decline, this too may change, but for now...

Again on the 5 min chart there's still gas in the tank as the SPY never gave the market any price strength to sell in to.

As for the Russell 2000, the futures have had the cleanest signals..

 I've been mentioning this building leading negative signal and you can see the "W" base to the left, the R2K did give the market something to sell in to and the signals here make sense.

 This stronger 7 min R2K futures chart shows the same, the "W" base, the bounce and distribution in to higher prices.

As does this longer term 15 min chart that is now at a new leading negative low.

Just looking at the Russell in a vacuum which I'd normally never do because the averages usually confirm each other and usually move together with small deviations in relative performance, it looks like it is coming down.

Looking at the NASDAQ 100 futures on the same 15 min timeframe, I'd say they still have that gas in the tank mentioned above, which to me sounds like rotation which is perfectly normal among industry groups, usually they rotate in and out day to day causing slight variations in the relative performance of the major averages depending on how much of a certain industry group is represented on them, but this is unusual and unhealthy rotation/relative performance divergence in the averages.

ES 15 min may not look quite as good as NQ above, but ti too has gas in the tank.

So to rotate or not?

I suspect wre'll have much better data by the close, I do not think this changes how I'd play this which is to use price strength to sell/short in to. I'd be doing that right now if I saw deterioration in the shorter term charts of QQQ and SPY that suggested the IWM isn't coming back from this and I;d focus on IWM puts or inverse ETFs.

Otherwise, until our edge is clear, I wouldn't be trying to guess what the market will do near term, that's simply gambling.

I also wouldn't forget that we are talking about the market NEAR TERM, not in terms of the February cycle and even the October cycle and the downside probabilities not to mention the F_E_D next week.

From my perspective, I think patience was the key to staying out of trouble this week, I think for the moment it remains the key.