Daily Wrap

All time highs in the NASDAQ and S&P on+0.38% & +.24% respectively. I'm not really impressed, but I am happy to see that we are making progress. This as the macro economic surprise index hit fresh six year lows today.

 The major averages intraday today with transports leading and the Dow lagging...

The major averages on the week with transports leading as well as the NASDAQ 100. It wasn't too long ago we were looking for a bounce in transports to set up a short trade entry.

I think the worst part of expecting a head fake move is waiting for it, there's that natural concern that it will not be a head fake move and rather a true breakout. As most of you know, we confirm whether or not the longer term charts' probabilities that reflect a probable head fake move are correct upon the actual 3C/ price action as the move occurs. In a normal state, 3C should follow price, it's when it significantly diverges with price that we have a divergence and an edge such as happened today.

I can't count how many times I've presented the evidence for a head fake move over the last week+ ever since the SPX's March resistance trend line became such a visual element in the most watched index in the world, all things that contribute to the probabilities of a head fake move (or in this case specifically an "Igloo with Chimney " price pattern) which are normally around 80% to start with. The more visible the resistance/support level (or other price pattern, moving average, etc,) and the more visible the asset, the higher the probability which put today's breakout statistically probably somewhere around 95%.

I can't stress enough, if you haven't already read the two posts that are always link on the member site at the top right, please try to find time for them:

Understanding the Head-Fake Move... How Technical Analysis Went From an Asset to a Trap

Understanding the Head-Fake Move... Motivation

I'll be adding a third soon.

As I said, I can't count how many times I have posted the probabilities of a head fake move, but I can refer to the most recent and significant post which would be last night's Daily Wrap...

" It would seem to me that the gut feeling of a head fake move above a well known average and a VERY visible resistance trendline (SPX) based on numerous examples of the concept taking place approx. 80% of the time, that a head fake move was and is the most likely course of action as I said last night (Tuesday), although unlike past head fake moves, there have been no divergences to support the theory beyond the probabilities of the concept...thus the strange action in 3C charts today (Wednesday) (in conjunction with ES spoofing as confirmed byNANEX) off no significant divergences at all, just as we have thought the last several days...It would take some other lever."

The strange 3C action I mentioned above can be found in yesterday's tongue in cheek/ sarcastic post, Unusual Market Activity-I Wonder Why...

Today we obviously found out why, although not a surprise.

While some would claim it is the "Bad news is good news" meme, I think we can prove this incorrect quite easily...

After the Bank of Japan came out overnight saying that they're likely to miss there 2% inflation target this year and likely will not hit it until April 2016, which diminishes the probability of further stimulus at the April 30 meeting; we then saw futures dip on EU in China PMI misses (red). Shortly thereafter, US PMI(Flash) messed followed by new home sales also missing and the very strange 11:51 a.m. ramp job. Thank you for all the responses to my question, "Did Bullard speak", however once again it was tongue-in-cheek and slightly sarcastic. The market has not been able to get it done, thus they left it to the Algo's. For such a parabolic move, it's surprising the percentage games are so small. The job of a head fake move is to swing emotion which swings perception which creates opportunity… for Smart Money. After all in the size of a trade, they need demand and higher prices to sell and/or short in to.

As you probably saw in numerous posts today there were plenty of indications showing distribution in to today's limited gains but headline highs.

As to last night comments regarding leading indicators in the Daily Wrap post, here's an excerpt:

"Leading Indicators like HY Corp. Credit which have been the last to diverge are doing so now, if there were to be a head fake breakout and HYG continued to diverge, that would be the typical strong Leading Indicator signal that we have in so many other indicators, Yield need to turn as well in my view. Until then, I think patience is still the best policy lest you get chopped up in a wave of large swinging volatility. Let the trade come to you, let it be on your terms at the time of your choosing with the confirmation that gives you a real edge. BELIEVE ME, I'M MORE ANXIOUS THAN ANYONE FOR THE NEXT PIVOT AND POSITIONING, BUT KNOWING WHEN AND WHERE TO PICK YOUR BATTLES IS MANY TIMES THE BIGGEST EDGE YOU HAVE."

As to high-yield corporate credit specifically here's an additional excerpt from last night:

" HYG (blue) vs the SPX intraday, it seems the lever of choice wanted nothing to do with following or leading the SPX any longer and I suspect the late day weakness in the averages that likely prevented them from a breakout (SPX head fake) may have had roots in the collapse of HY Corp. Credit as a short term ramping lever as it gave out."

The recent weakness in HYG charts did exactly what I was hoping for today in creating a larger divergence...

 HYG (blue) vs SPX (green) intraday, HYG sold off into the close and red on the day. I don't care about the percentage move it's the divergence as HYG is the go to leaver for the market.

HYG on a slightly longer term with a larger leading negative divergence. For those who want more she last nights daily wrap for additional charts including 3C distribution and HYG is well as HYG's primary downtrend. As the saying goes, "Credit leads, stocks follow".

I also specifically mentioned yields above in last nights post, additionally there was this excerpt:

"Yields for example have been supportive locally, but dislocated negatively on a big picture basis. They still seem to be offering support, thus I still suspect a head fake move is in the cards"

 This is five-year yields(red) versus the SPX intraday, note that is exactly what I was looking for last night occurred today. Yields diverged from the market rather than in line and supporting. Remember yields trade opposite Bond prices. So a risk on move in equities and safe-haven bond complex? Or perhaps are leading indicators for doing exactly as expected on a head fake move.

As also shown last night and numerous times recently, ten-year yields in red diverging with the SPX in green, But on a significant trend changing basis. This is why we use yields as a leading indicator whether 5, 10 or 30, they're all doing the same thing. Generally you can think of yields as a magnet pulling equity prices toward them. This is why today's intraday change in trend in yields versus the SPX at a head fake breakout point is so important as was mentioned last night well before any breakout.

As for other leading indicators, it was quite a bit of analysis regarding USD/ JPY which is a carry trade. Here's USD/JPY versus ES yesterday providing support...

 USD/JPY (candlesticks) vs. ES (purple). Note yesterdays correlation between the FX pair and ES.

From last night's post,

"As for futures as always I'll check them again later tonight, but the US DJP why more listed what was expected on a negative divergence and pull back a bit then added some additional gains and still negative or showing distributive signals signals"

 This is the correlation between the two today.

It seems our  $USD analysis from April 2 is also on track. The analysis called for a bounce in the USD followed by a larger decline which likely will affect the primary trend as the $USDX failed to make a new higher high and I suspect it's moving toward a lower low. It is interesting as the $USDX has lead the market recently. Not to mention the fact there is $9 trillion in USD based carry trade open as well as the influence a lower dollar will have on the F_E_D which is very concerned about a strong dollar before hiking rates.

 $USD intraday today losing ground

 Since the April 2 forecast we were looking for a bounce higher followed by a larger move lower which I believe we are ready have the pivot in place with a minor corrective move recently which likely has had something to do with the overall market head fake move.

 This chart shows the pivot to the downside as well as the recent corrective move and what looks like a new divergence that should take the $USD lower.

 On a daily chart of the USD you can see the strong trend in the dollar which was confirmed at the green arrow as well as the strong 3C negative divergence more recently. At the two yellow trendlines you can see the UST failed to make a higher high end is in a triangle like much of the market. A lower low here would be significant to the USD as well as the carry trade and F_E_D policy, both having an enormous impacts on the market.

Wow this may not be of much interest unless you are trading USD/JPY, the trend change from down to lateral which also saw 3C confirmation on the downtrend and a leading positive divergence at the lateral trend suggests that USD/JPY is about to see a significant change. With carry traders using leverage of 100 or even 300 to 1, losses can snowball quickly. The effect on the equity market should be obvious. I have maintained for two years that Yen will be in an uptrend at the same time the US equity market is in a bear market. While today's Bank of Japan inflation data may not be significant to the larger trend the recent move away from accommodative policy it is interesting (see comments on Bank of Japan inflation targets and the probability of no stimulus at the April 30 meeting).

To finish off leading indicators...

 The SPX:RUT Ratio intraday which showed some support into the close. I suspect our move is not done just yet.

 However, Looking on a longer basis the same indicator in red shows a positive divergence going into the April lows or "W" base, which was part of the analysis included in the April 2 market forecast. You can see since then the indicator that should be confirming SPX prices by moving together with it is diverging significantly. This has been one of our most reliable leading indicators.

And professional sentiment, obviously not willing to chase risk today.

As for crude oil or the USO trade, last night I had the following to say in the daily wrap:

"As for USO, you may recall yesterday's update, USO Update-Swing Position,  looking for a near term bounce as a second chance position for those interested, I think that's still in play."

Looking at crude oil futures, I believe we are still on track for a swing down although as you know I like oil on a longer-term primary trying basis.

 The daily crude oil futures chart with 3C confirming the downtrend at the green arrow and as prices turn lateral forming a base, 3C is leading positive which is why I like oil on a longer term basis.

 More material to our trade is the 60 minute chart showing several areas of minor accumulation and the proceeding move higher into strong distribution and a lateral trend indicative of a topping or reversal process which I believe will lead to a swing low toward the base lows. USO puts are still in play.

The oil futures 30 minute chart shows a larger leading negative divergence with a short term bounce or corrective move within it, however the larger leading negative divergence is the dominant signal.

Finally as to internals, the daily rock last night had this to say:

"The Dominant Price/Volume Relationship among the component stocks of the major averages were all dominant today unlike yesterday, the Dow had 14, the NDX 51, the SPX 198 and the R2K didn't have a relationship.

Once again it was Close Up /Volume Down, the most bearish of the 4 relationships and as a 1-day bias event, usually the next day closes lower, but in this case it could be as I said Monday, reflecting the weakening market as it tries to break resistance.

S&P Sectors saw 9 of 9 green which argues for a 1-day overbought event, similar to the Dominant P/V relationship. The leader was Tech at +1.02 and Consumer Staples at +0.06%.

As for the 238 Morningstar groups, they too are near a 1-day overbought event, but not quite there with 174 of 238 closing green. The market still feels like it's not done and in looking at watchlist trade set-ups, many of them feel like they are not done so I think my overall feeling is the same as yesterday, even though there's not strong 3C evidence for the set up of a head fake breakout move and there's very strong evidence for the failure of one, I believe the probabilities of the concept are very high and this situation makes them even higher with such defined resistance that traders will chase in such a well known index as the SPX."

As for tonight internal's… there's nothing too exciting. Only two of four of the averages had a dominant price volume relationship; they were the Dow with 12 and the NASDAQ with 60.  Both closed at Close Up/Volume Up which is the most bullish of the four relationships on one day breadth basis. However, ironically this typically leads to a red close the following day. I wouldn't hold my breath on this one being the relationship was not very dominant with only two of the four averages. Seven of the nine S&P sectors closed green with energy leading and consumer staples lagging. As for the MorningStar groups 175 of 238 close green. Again nothing that really stands out

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Tomorrow is an options expiration maximum pain pain even though it is a weekly so we typically see Price open somewhere around Thursday's clothes and hang around that area until about 2 PM which time we get some of the best three C data of the week during the last two hours..

As far as head fake moves go, I am not impressed as of yet; I believe we have a little more to go but I also believe that trades will be setting up now and in the days ahead.

I'll have a comprehensive futures update for you in the morning. The bottom line… so far so great.