Daily Wrap

The headlines today are more or less, "Equities and bonds continue swell-off",  however I was surprised at the lack of movement in the major averages today, I expected more near term downside, but not for the bear's sake, rather to solidify a base for a bounce we may be interested in trading. The problem right now is that the charts don't support a trade for a bounce higher that is reliable no matter how long or short its duration. 

The SPX (green) vs TLT (20+ year bond fund) today with weakness in Treasuries more so than equities, but this is what we expected (of both actually), equities seemed to hold up better as soon as Europe closed with a lateral trend.

The dip in Treasuries/TLT is something we expected and are seeing constructive positive divergence in to, Treasuries/TLT Update... these were close to showing solid enough charts to ad the second half of Bonds long for a counter trend bounce.

The long bond which outperformed even equities last year (as a sign of the carry trade unwind) has seen the worst start to the year since 2009! Thus we are primed for a counter trend bounce/short squeeze and this is one of my favorite near term trade ideas.

As I've said all day yesterday, "The market needs to pullback and allow some accumulation short term to give us a more reliable base in which we can enter some positions before moving to the short side and selling /shorting in to price strength.

Either way, I think we were wise to stay clear of new positions yesterday as the daily close was essentially flat (SPX -0.03%, Dow -0.04%, NDX +0.13%, Russell 2000 -0.07%. Transports -1.04%). For all intents and purposes, the market was a meat grinder and pure open risk today with no moves worth trading whatsoever. Remember there are always 3 positions, long, short and on the sidelines.

 This range in the daily SPX is an absolute meat grinder. I would NOT trade this unless you have an edge...which I believe we have, still there are days that simply aren't worth it as you see in the closing percentages of the major averages.

We didn't take on any new short term trading positions yesterday, but I was close to opening a partial long position in Gold/GLD yesterday, but decided to wait for the trade set-up, GLD / Gold Long Trade Set-Up. In all honesty, I believe the move today in GLD would have been due to dumb luck, not the charts.

KNOWING WHAT I KNOW TODAY, I FEEL JUSTIFIED IN NOT HAVING TAKEN UP ANY NEW POSITIONS YESTERDAY, the objective evidence simply wasn't there to support it.

I'm looking for some kind of improvement in short term charts with the bounce being represented by (in this example), the 10 min QQQ low. It has been my opinion since yesterday that we need to see some downside to allow short term accumulation to form a wider "W" base bottom that is capable of supporting a bounce without suddenly falling apart, otherwise I'm content to stay out of the way. Above I have some arrows representing the pullback to the trendily to form a "W" base, the bounce in white and what comes next to the far right in red.

 QQQ 10 min positive divergence along the lines of a bounce, but nothing that will change the market, useful however in selling in to strength like NFLX which we recently opened some short positions and put positions that started gaining today.

 On the day most major averages were pretty close to each other with transports being the big laggard, this is and has been one of our favorite core short positions with at least 2 entries.

On the week we saw the initial early week weakness from Friday's "Week Ahead" forecast, and now we are flat. I don't really care whether we pullback or not for a bounce trade, as long as the charts improve, but in my experience, usually they need to pullback for that to happen.

As you can see, transports have been the laggard all week.

Again today macro data came in weak (export/import and Retail Sales) which had a dramatic effect on the $USD...

 The $USD crashed (now -1.1% on the week) at the release of retail sales at 8:30 a.m., but note the positive divergence in the $USDX futures today.

If you look at the 60 min downtrend in the $USD and the counter trend bounces off their bases (yellow trendiness), it looks like the $USD needs a slightly larger base before its ready for the counter trend bounce I expect which should be larger than the previous bounces.

As for the Gold reaction to the $USD drop, it popped at 8:30 a.m. (same time) and the 3C charts of gold futures show negative divergence/3C distribution all day-
'

 1 min

3 min leading negative to the far right...

5 min gold futures leading negative, so I feel the Trade Idea: GLD FADE- HIGHLY SPECULATIVE fade trade was the right choice.

As for currencies...

 The EUR/USD is showing a negative divergence as the $USD carves out a base/positive divergence from today's fall.  The negative 1 min divergence in the pair makes sense, although I suspect a little more reversal process time in the $USDX is needed.

The Euro futures also show a negative divergence. With the Euro losing ground, the $USD will gain ground.

Meantime...

 The USD/JPY saw a big move lower which is now working on a positive divergence which I think will be needed to support any bounce over the coming days.

The Yen futures had their strongest day in 2 months as i seems pretty clear the carry trade unwind continues.

As for our USO position (puts and equity short), Monday I said I expected a bounce of a day or so, I count yesterday as a day and today as "or So".

 USO daily chart and the move above base resistance than has always been expected to fail with churning at the first two yellow arrows on increased volume and a "Dark Cloud Cover" bearish reversal candle today on volume,

The 15 min $USO 3C chart is leading negative right at the break above base resistance which also tells me the move was never meant to hold, but to create a bull trap and downside momentum as bulls are stuck in a losing trade, creating a self-fulfilling event or snow ball event to the downside.

As for leading indicators, they are either pointing to downside in the near term as expected or they are simply deteriorating in terms of the big picture as expected or perhaps both.

As we saw last night, Pro sentiment has taken a hit, today it's even worse...

 Pro sentiment was leading the SPX lower yesterday, much more so today

*SPX prices (green) inverted* Interestingly as we saw this at the end of the day, VXX showed poor relative performance, how much more so today which makes me happy we did not put out any VXX long trades on expectations of near term market downside.

 The same was evident in Spot VIX today as well.

 High Yield Corp. Credit v. SPX deteriorated even more, this is usually the first lever they turn to for short term market support, but it looks like the pros are getting out of risk assets as fast as possible.

 This is the 3C chart for HYG 60 min leading negative with huge distribution. It may be worth repeating that Wall Street maxim, "Credit leads, stocks follow".

In that case, take a look at the bigger picture.

HYG in red vs the SPX in green. Note the confirmation through 2013/2014 and then the series of lower highs and lower lows in HYG which is now significantly dislocated with the SPX, this chart more than most is pointing to a very dramatic downside event in the market big picture.

As for internals, yesterday they were luke warm which may be why we had such a luke warm day today.

Yesterday's Dominant Price/Volume Relationship for the major averages was only in about half and it was the least influential. Today we have the Dow and NDX both dominant and the Russell and SPX very close to dominant with the most bearish of the 4 relationships, Close Up/Volume Down (remember this is a count of the component stocks, not the average itself). This would suggest a next day move lower which would fit with the scenario I have been looking for since yesterday.

The S&P sectors were more lukewarm with 4 of 9 closing green led by Tech with Utilities lagging. Of the 238 Morningstar groups, another middle of the road reading at 134 green of 238.

I see no reason to change our short term forecast and I see no reason to enter new trades without strong 3C chart confirmation, TLT is close, GLD I believe is looking decent and Oil is looking good as well as NFLX for the moment. If new trade opportunities present themselves tomorrow, I'll put them out, but like I said above, I'm glad we didn't yesterday, although that wasn't by choice or luck, that was because there were no charts backing a strong trade.

It's a bit early for Futures, but I'll check them a bit later and report of there's anything standing out other than the $USD seemingly getting its act back together. I have a feeling today's downside move wasn't just about retail sales, but about stop runs, etc. before an upside counter trend bounce.


Have a great night!