THE WEEK AHEAD Part 2

Leading Indicators are largely in line very short term and longer term, this would be the "Week Ahead" forecast as we have largely completed the reversal process, we have moved from an uptrend to a lateral reversal process trend and today's events have broken the charts, but I suspect Wall St. will not accept the losses represented by the gap and there's still some question as to whether or not we see a head fake/false or failed breakout as the SPX daily chart has the MOST obvious resistance line in the most watched index, with a concept that occurs any way about 80% of the time before a trend reversal (the reversal of the price trend since the April 2nd forecast and upside since).

While I believe a gap fill is the most probable outcome based on the concept and more so on the losses intermediaries like market makers, specialist and the numerous HFT algos that fill the liquidity demand of market makers and specialists as the bid/ask spread is their profit on thousands of trades run per hour, in some cases I'm sure they could do that per minute if the demand was there.

While the short term Flameout occurred today as posted in the last update, Intraday Flameout-
from here the difference between a gap fill and a head fake shakeout/false breakout is significant and I suspect will only be answered as we see the intraday trade next week and whether or not it is capable of forming a base strong enough. Either way, I would encourage you to start worrying less about the very near term intraday or day to day trade, and start focussing on the longer term trend positioning as represented in today's earlier post, Important Trend Market Update
Granted, a new high on a head fake move would be emotionally moving event near term and cause doubt about the trend, however, everything that we need to know is already in place regardless of whether we get a gap fill, a new lower low or a head fake / false/failed breakout based on the VERY obvious SPX resistance area / trendline that is exceptionally obvious in the form of the March trendline...the more obvious and closer watched the asset, the more probable a head fake move, but just like we used the +25% 1-day gain in HLF to short in to, knowing it was a head fake move in advance, I'd urge you to not focus on any such possibilities beyond the opportunity to use them to your advantage and rather focus on the longer term trend PROBABILITIES.

 The intraday capitulation event on a spike in volume and bullish candlestick lifting prices since, but if there's to be a gap fill where there are likely significant institutional losses from market makers, specialists and HFT algos, there needs to be a stronger base formation and/or a closing bullish candle on what is already increased volume. Although we closed off the lows, we did not get the kind of bullish reversal candle such as the one seen above intraday at the intraday capitulation event, not only represented by the bullish Hammer candle on a 5-min chart, but the increased and significant volume on the same candle. This concept works in EVERY time frame and in any asset, so you can use it with intraday, daily, weekly, monthly charts, etc. The concept here is capitulation or a selling climax that represents (in this case, a short term) bottom. 

The inverse coming after an uptrend with a "Hanging man" candlestick or a Star/Doji Star on large volume represents the exact opposite, a Distribution or "Churning" event in which a top has been hit. THE KEY IS NOT ONLY THE CANDLESTICK, BUT SIGNIFICANTLY INCREASED VOLUME. Again, this concept can be used with any asset and in any timeframe from an intraday high to a longer term trend capitulation/top on something like a daily or weekly chart...ONE FOR YOUR TOOL-BOX.

As you can see above, the price/volume trend since the intraday flameout is losing impact, suggesting a pullback to form a stronger /lateral base near the flameout lows.

The Daily SPX chart with a deep, large bearish candlestick thus far (which closed slightly higher off the lows, but not enough to represent the kind of daily flameout we saw intraday). If this candlestick and trend today are to be overcome for a bounce to the gap (yellow lateral trendline) or even more impressive and helpful, a breakout (HEAD FAKE) above the March SPX downtrend line (#2 where the yellow arrow up represents the head fake and the arrow down represents the failure of the move-thus these are EXCELLENT timing indications and in this case, Put Option entries) where the last 2-days have put in bearish downside reversal candles EXACTLY at resistance, then the market will need to gather more strength in the form of a larger base than just the lows of the intraday flameout above. #1 is the gap fill, #2 would be the head fake/false breakout ABOVE the March resistance trendline which is now VERY obvious and the obvious target for the normally high probability head fake/bull trap set-up (I'd estimate this occurs about 80% of the time in various timeframes as an event just before a trend reversal which in this case would be lower as it reverses the trend forecast on April 2nd and starting the following Monday after the Easter Holiday) before a stronger downside reversal.

It is the longer term downside reversal trend I would start paying attention to and not have your attention dragged to other corners of the market based on short term intraday or day to day price action which if effective emotionally and is designed to touch emotional extremes and cause you to make short term decisions based on short term factors rather than focus on the longer term realities.


AS FOR LEADING INDICATORS...

SPX:RUT RATIO

 Intraday the indicator (red) vs the SPX showed broad confirmation, but a leading signal right at the intraday market flame-out lows as seen above with the potential to come back down early next week and form a "W" base that has a better chance of fulfilling a gap fill or even a head fake move, which doesn't "look" like a strong probability right now even though conceptually it is always a strong probability when we have the end of a trend with very defined support or in this case resistance (The SPX's March trendline).

Looking at the same indicator on a slightly longer basis, the 2-days (Wed/Thurs.) of the reversal process are seen with non-confirmation and a leading negative indication in the indicator leading to today's downside, whether coincidentally or whether that was going to happen any way, but perhaps not to the same degree in relative price terms. Going in to next week, the indicator is largely in line with the SPX and not offering much in the way of directional input other than staying with the current trend of downside/lateral trade.



 Since just before the April 2nd (Thursday just before Good Friday) forecast, the SPX:RUT ratio diverged positively vs the SPX pointing to a short term bottom from which the market could push higher from, one of the many indications that went in to the April 2nd market forecast for a triangle based breakout to the upside  FOLLOWED BY A LARGER DOWNSIDE MOVE, very similar to the $USDX forecast made on the same day as it has led the SPX (see the Daily Wrap after this post for more on that).

PROFESSIONAL SENTIMENT

 Once again, our leading indicators make a perfect bottom call as the SPX moves laterally before the forecasted move higher while our Pro Sentiment Leading Indicator leads the SPX to the upside. So why should we take the leading negative divergence between Pro Sentiment and the SPX any less seriously? We shouldn't, these are EXACTLY the kinds of Leading Indicator divergences that I was looking for in to the trend higher (based on triangle price pattern breakouts from April 2nd).

Yesterday and Wednesday's "Tweezer Top" and Harami Top were both confirmed by the lower leading print in Pro sentiment just as it called the bottom and rally on the 7th, 8th and 9th of April.

Confirmation/2nd Indicator

 This is the second Pro Sentiment Indicator used for stronger confirmation. Intraday today it has been leading the SPX, pointing to a gap fill or perhaps even a head fake move, in either case, the lows put in this afternoon on selling capitulation leaves the market in a neutral area early next week to build a stronger short term base to effect either of those potential outcomes, however as stated above, it's time to worry less about intraday and day to day and time to worry more about the larger trend which was also forecast in advance on April 2nd in both $USd terms (and its leading correlation to the market) and AAPL/Broad market terms.

YIELDS

 INTRADAY 30 YEAR YIELDS LED THE MARKET LOWER WITHOUT ANY DOUBT. This is a flight to safety trade in to bonds as yields trade opposite bond prices.

On a larger time basis,  the basis which I think is most important to focus on now other than intraday moves or day to day short term moves that may be useful for tactical trade positioning,  the 30 year yields trend is doing EXACTLY what we expected to see from leading indicators as it has called the last 2 tops in the choppy 2015 range-bound trade and now it's calling a 3rd top here and the worst of the year.

 Intraday the 5 year yield was initially strong early on as the market looked for an early low/capitulation selling event as we were also looking for, Market Looking For A Bottom posted at 11 a.m. where yields are leading, of course the market did not find that bottom and yields led intraday to lower lows and then reverted short term / intraday to the mean.

The larger trend view is what's most important right now as it was in line very early in the year at the green arrows and then called a top at the February cycle highs, the March bounce highs and once again in what looks similar to a bear flag  (white arrows represent the trend of a bear flag)  with a new leading negative low in yields.

THE BASIC CONCEPT IN YIELDS IS THAT THEY ACT LIKE A MAGNET FOR EQUITY PRICES, THUS AS THEY DIVERGE EQUITY PRICES ARE DRAWN TO THEM, (In this case when looking at the more important trend view, a move to the downside).

 The 5 year yields since the forecasted trend (April 2nd) with "In line" confirmation early in the trend and then  the expected leading negative signal that is now in effect and clearly seen at new leading negative lows.

THIS IS WHY I BELIEVE THE LONGER TERM TREND VIEW SUCH AS THE ONE ABOVE IS FAR MORE IMPORTANT TO POSITIONS/POSITIONING THAN SHORT TERM INTRADAY OR DAY TO DAY TRADE. LEADING INDICATORS HAVE DONE EXACTLY AS EXPECTED AND CONFIRMED DISTRIBUTION AND WEAKNESS IN THE MARKET ON THIS MOVE AS EXPECTED WHEN FORECAST.

 On an even larger trend view, the 10 year yields have a huge dislocation to the downside, remember that yields tends to pull equity prices to them like a magnet, thus the importance of focussing on the larger trend view now that we seem to be at the ending phase of the forecasted move to the upside (with the gap fill and head fake caveats).

HY CORPORATE CREDIT

 HYG has been showing 3C negative divegrence suggesting HYG's prices fall. It is actually the divergence in price between credit and the market that forms the basis of a leading indication, however the 3C divergences are early warning as HYG is one of the most overused assets to manipulate the market (Part of the SPY Arbitrage scheme also using TLT and VXX). There's a clear negative divegrence at the SPX candlestick reversal "Tweezer Top" and Harami top of the last 2 previous days.

 While High Yield Corporate Credit is most often used for short term manipulation of the market and is deeply dislocated on a primary trend basis as HYG is already in a primary trend bear market...

SPX (green) vs. HYG High Yield Corporate Credit (red). Note  the confirmation at the 2013/2014 green arrow then a series of at least 3 lower highs and lower lows putting HY Corp. Credit in a primary downtrend and leading the SPX o the downside.

This is one reason why I'm very focussed on the larger trend of the market as I've never seen HY credit fail like this and not take the market down with it, especially not Corporate High Yield credit.

As to the less manipulated HY Credit (doesn't have the liquidity of HYG , therefore is not used for short term manipulation like HYG is)...

HY CREDIT

Intraday it posted a positive divegrence in to the reversal process of this week (tight range running mostly lateral or rounding over)  and then leading negative before today's decline and now in line or near term reversion to the mean.

However, as I said, it's about the longer term trend now, not the short term signals we have been watching in trying to uncover the end of this move...

 Since April 2nd, HY Credit is initially confirming or in line at the green arrows and then leading negative at the red arrows, so whether this morning's Bloomberg/China events occurred or not, it is pointing to a move lower on a larger trend basis.

As for the 3C charts. interestingly they remain negative in just about everything beyond 1 min charts

 SPY...

 SPY 3 min with a relative positive divegrence suggesting some attempt in to early next week to fill the gap from today, possibly more if there's a stronger base built, but the market is in a very dangerous spot right now based on the trend and signals.

 SPY 15 min was in line for quite some time, but we stayed patient and waited for the 15 min chart to go negative as the other averages had already done,  there's a clear and resilient 15 min negative divegrence now in SPY which was 1 of the 3 indications I have been watching for in order to forecast the next move in the trend.

QQQ

 QQQ 2 min has been leading negative and pulled the Q's down, however today at the Flameout lows, there's a slight positive divergence.

QQQ 3 min calls the negative divergences at the top areas well, in fact despite the unexpected events this morning/overnight, the chart looks as if it called the move perfect and has a very small, short term positive divegrence at intraday flameout lows.

The longer term 30 min trend was leading negative and was the highest probability on April 2nd which allowed me to forecast not only the bounce, but what comes after the bounce and the fact it WOULD NOT hold. The last two significant tops were called by 3C divergences as was this one, nearly flawlessly.

 IWM

 The EXACT same can be said for the leading negative IWM 2 min, as I have been saying, anything beyond 1 min has been very ugly and as of 2-days ago, started forecasting the market well on an intraday basis as well despite being deeply dislocated. The leading negative divegrence of the last 2 previous days (Wed./Thurs.) which were also Bearish Candlestick Reversals, called today's move perfectly.

Again, there's a small intraday positive divegrence at the flameout lows of the day this afternoon.

 IWM longer trend 15 min chart which was already negative on 4/2, has only deteriorated more with previous positive divergences calling lows/upside pivot points and and extremely large negative leading divergence recently at new leading negative lows, it seems hard to believe someone in the market wasn't aware of events that transpired overnight leading to today's losses.

DIA

 DIA 2 min is both leading negative and then positive at this afternoon's flameout lows which were also an intraday head fake/stop run below intraday support levels. Again, like most everything else, it points to some early strength next week, but not a lot of it.

 The DIA 3 min chart shows the break of intraday support and then the flameout lows with a 3C positive divegrence right at those lows as institutional money picks up the stopped out shares represented by the higher volume, allowing them to set up for a gap fill, even if the gap fill doesn't reach yesterday's close, the fact they were able to buy at lower levels allows them to get out closer to break even or a profit on the upside move.

And DIA 15 min with the previous 2 "W" base lows as well as the previous two tops and the current top area with the deepest leading negative 3C signal of the year.

As for early Monday, I'm expecting some market strength and likely either a pullback to create a larger intraday base for either a gap fill or perhaps even the head fake breakout move above SPX $2111.

The IWM 1 min chart's close argues for early Monday strength in price, however everything else above argues for weakness in the trend.

Intraday IWM 1 min showing a leading positive divegrence in to the close and at the Flame-out lows of the day. This argues for the market to pick up where it left off on Monday with price strength based on this leading positive intraday 1 min divergence, however the larger trend doesn't tell us anything even close. In fact, quite the opposite.