Daily Wrap

Last week (around Wednesday) we got out first hint there would be "Loitering" around important support/resistance in the form of the major triangles we had forecast not to only develop, but to be the object of a head fake move and to see that move fail before making a significant move lower in the market as we have been largely lateral all of 2015.

This "loitering" concept isn't the norm for typical head fake moves/resistance/support areas, it's common at important head fake moves that are meaningful for the market and in this case I believe it will ultimately be shown, the market's primary trend. Here's an example of the bounce behavior we expected going in to Friday and as of Friday's "Week Ahead" forecast, I believed until right about mid-week (Wednesday)...

 The SPX daily chart/Triangle and a poor example of a head fake move as we could tell through April the market was weak. The former resistance trendily turned support , turned resistance is the "Loitering" area in orange. Rather than a clean slice through support/resistance, this meat grinding loitering as I have come to call it, occurs and it is like a meat grinder for many traders use to chasing momentum moves like Friday's for instance, today those guys are wiped out.

The NDX made the best head fake move, a good example of we what a head fake move should look like (in scale), the point of it is to hit areas that move traders emotionally  get them to make trades based on emotion rather than logic or objective evidence. Of course I wrote 2 large posts that are linked on the members' site on the right side about the head fake move so I won't try to summarize it in a sentence.

However the point here is this meat grinding loitering that takes place. Even at the September 2014 Igloo/Chimney top (head fake move) that led to the October lows had a period of loitering around the trendline and that was an important move for the market (October lows), how much more so this one?

And AAPL which I used as a proxy/example for the broad market in the April 2nd forecast with a healthy head fake move, a failure of the move and loitering around the apex of the triangle. This will go on for a short period and grind up traders, throw everyone off guard and get them second and triple guessing their analysis before it resolves, but it does resolve just as the September 2014 head fake did.

Yesterday it was clear that we'd start the day with weakness, what happened next was not as clear, but I suspected we'd end up seeing the market hold in the area until about mid-week. Internals yesterday were not at 1-day extremes, but they were at areas that were indicative of weakness in to upside moves.

TODAY'S INTERNALS ARE AT EXTREMES AND THE PROBABILITIES FOR A MOVE HIGHER TOMORROW ARE HIGH BASED ON THEM ALONE.

The Dominant Price/Volume Relationship was in all 4 major averages today and the same relationship in all 4, Close Down/Volume Up. There were 19 Dow stocks, 80 NASDAQ 100, 1019 Russell 2000 stocks and 308 S&P 500 stocks, that's seriously dominant of the 4 possible relationships.

Close Down/Volume Up is the strongest 1-day oversold relationship of the 4 and almost always sees a green close the next day.

 One of the first things I talked about in last night's Daily Wrap was the "Shooting Star-like" candles in all of the major averages and how despite the fact they weren't textbook, they conveyed the psychology of price action which of course is bearish on a Shooting Star.

While we are on internals, of the 9 S&P sectors, all 9 closed red with Utilities lagging at -2.23% and Consumer Staples leading at -0.80%. This is an exceptionally strong 1-day oversold condition in addition to the Dominant P/V relationship.

Of the 238 Morningstar groups we track, an amazingly oversold 15 of 238 closed green. Take all 3 of these together and you have a recipe for a 1-DAY OVERSOLD CONDITION and most typically a close higher/green the next day.

The Averages seem to support that theory at least on a 1-day basis.

 The QQQ's best it could do positive divergence today on a 5 min chart to the right,

The IWM's 5 min positive today...

And the SPY's 5 min positive, all in line with the theory of a bounce/green close tomorrow.

However, DON'T FORGET THE BIG PICTURE...

SPY 30 min with a negative divergence through the entire chart, but a much worse distribution signal through 2015 and especially in the area of our triangle head fake area.

I mentioned earlier today after looking at FX/Currencies that I though there was a carry trade unwind under way today ...

 If you look at Treasuries represented by TLT (20+ year Treasuries) in white vs. the SPX in green), you see the normal flight to safety or risk on trade in which treasuries and the market are near inversely correlated (left), then treasuries and the SPX rise, this is in large part due to the F_E_D's buying of Treasuries during QE, but it's also one of the signs of the carry trade being opened /expanded.

Conversely, one of the signs of a carry trade unwind is a fall in treasuries...

 This is the SPX (green) and TLT both falling at the same time, not the typical "Flight to safety trade you'd normally expect on the SPX losing ground. This is just another hint that the carry unwind is well under way.

 Well before we had any positive divergences in the averages today which I talk about in the first sentence of this Market Update from this afternoon, it was VXX (Short term VIX futures) which were pointing at a bounce being built (which we should see tomorrow) as VXX was seeing negative 3C divergence like this 3 min chart today.

However, applying the same logic to the bigger picture for the market...

This strong 15 min chart (and long) of VXX shows an outstanding positive divergence/accumulation. As we have seen over the last several weeks,. VIX derivative assets and futures are being aggressively accumulated by smart money,  they know what's coming next as I believe do we.

Additionally some intraday Leading Indicators were also pointing to a bounce in the market. Take our custom SPX:RUT Ratio intraday...

 Note the flat trend through most of the day and leading trend in to the close.

Remember the big picture though...

 Two bases forecast by this indicator and one major top...

Our Pro Sentiment also led most of the day and in to the close in a big way.

As did High Yield Corp. Credit in to the close.

This is part of the reason I decided to go ahead with the Trade Idea: VXX Puts (speculative) position. I believe this will be short lived, thus the leverage of options.

Speaking of which, we got out right in time today with NFLX, I didn't have a chance to post the P/L earlier, but here it is....

A +75% gain. I normally would have stuck with it longer, but it didn't look right and considering the closing candle...

 A bearish Shooting Star on higher volume which in my experience makes the candlestick (reversal) 2-3x more likely to be accurate.

On the other hand, the BABA close was beautiful...

 Not only a hammer on increased volume (bullish reversal), but a head fake move that hit stops with clear support being broken.

This is the BABA 15 min 3C chart it looks like those stops hit today were accumulated in size.

As for our other position, USO...

API inventories came out after the close with the first draw since the first week of January at 1.5mn barrels.

 Crude futures intraday distribution and a push higher on the API data after the close, still not very impressive.

The 5 min Crude futures negative...

And 7 min.

USO 3 min didn't come close to confirming the gap on the Saudi oil minister's comments and instead showed a worsening picture in 3C.

As did the 10 min chart going from a huge relative negative to a sharp leading negative today.

The bounce above the base's resistance area was a theory put forth last week as a head fake and momentum switch to the downside, I still believe this trade works for us.

As for futures tonight, there are some decent signs of improvement and I suspect we are going to see an oversold bounce tomorrow, the question is how long does it last and I don't think it's long based on what I'm seeing now.

Everything else is fairly quiet right now, but I suspect by the morning things will have changed...

NASDAQ 100 futures short term...

 NQ 1 min

NQ 5 min

After this, all bets are off as this was about where I expected the market to hold up until (Wednesday).

We'll of course let the market tell us, but everything it has told us so far like my gut feeling yesterday that we'd have a sharp/fast reversal down like we saw today, has been pretty darn close. Just remember those longer term charts, VIX, SPY, IWM, Leading Indicators, and the $USD.

I'll check futures as usual before turning in, otherwise I'll see you in the morning and hopefully we'll have another few trades with double digit gains under our belt before things really tear lose.