Daily Wrap

The gist of last week's forecast and Friday's "Week Ahead " forecast was,

"I expect next week, at least early on, we'll continue to see a bounce.Make no mistake though, this market is BADLY damaged, I'd think by mid next week we'll be turning to the downside and making a lower low"

When I say by mid-week, I don't mean we'll be making a lower low by mid-week, but the bounce should lose momentum somewhere around there and typically we'd expect a couple of days of reversal process. However I noted several times today a "gut feeling", not backed by objective evidence, that we may see a sharper "V" shaped turn to the downside. As you know I don't typically expect sharp reversals or reversal events, rather I expect a reversal process, but something doesn't feel right about this market the second day in to the bounce.

Europe was closed Friday and volume was low, this week Japan is closed until Thursday (the Golden Week holiday) and the UK was closed today for May Day. Volume was even lighter today than Friday.

On the day small caps led +0.42% (you may recall last week I mentioned their underlying trade / divergences looked better than the other averages) and the NDX lagged , barely closing green at +0.08%. The SPX and Dow were around the same at+0.29%/+0.26%.

On the day the major averages looked like this...

 The NDX is in blue, Transports in salmon and the R2K in yellow.

This is what intraday breadth looked like via our custom NYSE TICK/SPY Indicator...

Thursday's expected stop-run/capitulation is seen at the large red histogram, Friday was rather flat, but improved, today lost ground and saw worse breadth.

All of the averages closed with something akin to a bearish "Shooting Star" on the daily chart like this SPX...

Daily SPX with the large triangle, the head fake / false breakouts last week, Friday's strong close (but weak volume) and today's "Shooting Star-like" candles with longer upper wicks indicating higher prices were tested ad rejected.

The $USD was one of the first assets to give us a clue we'd be looking at a (short term) bounce which started Friday, but the $USDX barely moved today despite some Euro weakness. Thus the USD/JPY was essentially flat on the day as well.

The divergence for a counter trend bounce in the $USD is still there and I don't see any good reason why it shouldn't bounce. 

 10 min $USDX futures positive divergence and a base.

The 10 min negative divergence in the Euro should certainly be of some help.

As to the Yen, it's mostly in line with recent weakness so I don't expect any major changes there very soon (next couple of days), thus the USD/JPY "should" bounce and give the market some support.

It's the VIX short term Futures as shown earlier today, VIX, VIX Futures, VXX, UVXY, XIV and last week that are really raising my eyebrow, they closed green today despite all of the averages closing green.

I also noticed on a very short term intraday basis, not a huge signal yet, the Index futures that had something in the way of gains to sell in to had the divergences showing that selling in to higher prices...

 ES 1 min showed early distribution in to opening gains(SPX closed +0.29%).

 NQ/NASDAQ 100 in line, no distribution signals (NDX closed +0.08%) so there really wasn't much to sell in to in the way of higher prices.

However TF/Russell 2000 futures saw the strongest negative divergence on the day (intraday 1 min).

And as for VIX futures, look at the accumulation of the dip with VXX outperforming the normal market correlation by a wide margin, even closing green today...

 SPX in green is inverted so you can better see the relative performance, normally the two would travel almost in perfect sync, but today VXX (short term VIX futures) showed strong relative performance just like last week indicative of a bid supporting the flight to protection.

 The 15 min VXX 3C chart already has a huge positive divergence, thus as soon as I see momentum fading and I believe we are close to a pivot, I'll be closing the VXX puts which are up about +.45% right now and looking at VXX calls or maybe UVXY long.

 As for the SPY 1` min intraday, distribution right on the open and very close to a leading negative divergence with the opening divergence almost lower than Friday's late afternoon. We saw some mid-day accumulation intraday for an attempt higher and that fizzled out.

Early today the 5 in chart showed no near term damage, but by the end of the day, we already had this leading negative divergence on the day. Again, it seems smart money is very quick to sell on any price strength and is maintaining a solid bid under protection (VIX related assets).

 The 10 min SPY shows some deterioration, but I believe there's still gas in the tank for something more along the lines of the bounce I was expecting late last week that started Friday. I just am not so sure we'll get a normal reversal process, as I said, I suspect we may see something a lot faster, sharper and more "V" shaped than "U" or "W" shaped (again that's a gut feeling as of now).

Thursday was the stop run we were looking for, that's when the UVXY long was closed in the afternoon (3:15) Taking UVXY long off the table and the VXX Put was opened, (3:30) Trade Idea: Extremely Speculative (Options/Puts) VXX.

I updated that position today.

 As for the Q's, they just didn't look good all day and I suspect we start tomorrow off on a weaker tone.

The IWM is the one that looks like it wants to continue to lead for now.

We'll see how fast these divergences develop, but you know my gut feeling for now.

Treasuries are selling off and yields are rising, normally as a leading indicator we'd take that as a positive for near term market movement as yields tend to attract equity prices toward them like a magnet...

TLT as yields rise and Treasuries sell off. Normally we'd use this as a leading indication, the problem is as mentioned last week, when the Carry Trade unwinds, bonds tend to sell-off. We have no historical precedent to compare to, but I suspect that we are seeing bonds selling on the carry trade unwind and as such, yields may not be that useful in the near future as a leading indicator. I'm still looking in to this, but bonds selling is one of the signs of the carry unwind and with USDX failing to make a higher high and moving to a lower low, it looks like the carry unwind is already in effect.

As for some other leading indicators...

 Our SPX:RUT Ratio going negative in to recent highs and failing to confirm, then confirming on the downside (white) and now failing to confirm, but moving a bit more neutral.

As to the big picture...

There were two "W" bases, the second is the April 2nd forecast with the positive (white) signal being part of the reason for the forecast, but in to the April trend, no confirmation and in the Yellow box, things have absolutely fallen apart. This is one of several reasons I believe we are on our way to make a lower low in the market relative to the October lows.

 High Yield Corporate Credit which has been in line is not following risk in the SPX at all, this is exactly what I expected last week and said that the SPX moving up with HYG continuing to lose ground would create a larger leading negative divergence...

And from a relative negative to what is now a leading negative, it was only 2 days and we have this much large leading indication (negative). "Credit leads, stocks follow."

As for internals today, there wasn't much of a Dominant Price/Volume Relationship so I don't think we are at an area in which this bounce is done. The closest thing was the SPX with 221 stocks and the  Dow with 13, both Close Up/Volume Down, which is not dominant enough to be a 1-day overbought condition, it's just reflecting the poor tone in the market.

As for S&P sectors, 7 of 9 closed green with Financials leading at +.99% and Materials lagging at -0.27%. Again not enough to create any next day movement.

Of the 238 Morningstar groups we track, 167 of 238 were green, again in line with a bounce, but not close to an overbought situation.

For now I'm sticking with the "bounce" theme early in to this week, I don't see a reason to abandon it yet, but I suspect some early weakness tomorrow morning based on the way the 3C charts closed intraday. From there we may get a helping hand higher from the $USD as suspected last week.

The 10 min ES chart I believe is telling (SPX E-mini futures)...

We see the distribution at last week's highs. Then the accumulation in to Thursday's stop run, BUT REMEMBER HOW I SAID THAT THERE WAS A RESPECTABLE DIVERGENCE ON RESPECTABLE TIMEFRAMES FOR A BOUNCE, BUT A VERY NARROW BASE THAT LIKELY WON'T OFFER GOOD SUPPORT FOR VERY LONG?

Well there it is and we already see some damage today (distribution) or rather since Friday, not enough to call a pivot to the downside, but this is part of the reason I suspect this bounce could fail quickly.

We still should see a $USD counter trend bounce and that may help to offer more support, but in the end it will make a lower low and the carry unwind will start to snowball in my opinion.

 Since our April 2nd forecast for the $USD (not the April 2nd market forecast-two different posts), I expected a bounce (green arrow)m followed by a much larger move down (red arrows). At the yellow base and arrow we have a counter trend bounce, nothing unusual and you saw the 10 min $USD positive divergence above, that should build the next "yellow" counter trend bounce and the market should be fairly well correlated to it, but all in all, it ends and makes a new lower low.

On the daily chart you really see why the $USD is getting to be so important right now beyond the F_E_D and rate hikes...

At #1 3C distribution at the high. At #2 our forecasted bounce and failure to make a higher high for the first time in the primary trend and at #3 a lower closing low. At #4 the $USD intraday lows and the area of support I thought would back up this/current bounce attempt. However after it is done, I expect a new lower intraday and closing low, the carry unwind should accelerate, the F_E_D won't be worried about raising rates because of the strong dollar and of course all of this will have a dramatic effect on risk assets.

I'll check Futures again before turning in and will likely update a few of the major pairs tomorrow as well as some requests I received today, but for now I don't see any change and expect a near term bounce to continue in to this week.