Early Update in Multiple Assets

Since this morning's A.M. Update, not much has changed. It looks like we are set for some opening weakness, but the Index futures 1 min charts look like that will fade pretty quickly, gap fill at least being likely.

 This VERY clear, very tight range and very distinct price pattern is the issue I was speaking to directly last week, specifically Friday as I said and I will say again, "This is the best looking head fake set-up I've seen in...well I don't remember when I last saw one so big and obvious."

That would mean a false breakout above very clearly defined resistance where a lot of orders are likely waiting, but as I also said, I feel 99.5% confident it would be a head fake false breakout and from failed moves come fast reversals.

One of the interesting things I found over the weekend was along the lines of what we have already discussed, volatility precedes changes in stages at any of the 4 stages so an increase i volatility is likely before a trend change. Normally I'd say there's about an 80% chance of a head fake before all reversals, you ,may not notice them on intraday charts or small swing charts, but typically the very last thing you see before a reversal is some sort of head fake whether a stop run before a move higher or a false breakout before a move lower as I recently showed at the September highs with a head fake move directly preceding the move lower to the October lows. Even Crude made a head fake/stop run move below support on March 18th just before it ran up to the top of the base and above resistance. If you look for them and the volume that accompanies them, you'll see they occur all of the time and this is because Technical Analysis has become immensely more popular since the late 1990's when the Internet allowed cheap online brokers. The flood to TA made it very easy for Wall St. to know how technical traders would respond to certain situations like a price pattern like this big ascending triangle above and they use that against traders, for instance a breakout that gets technical traders to chase and buy providing demand which Wall St. can sell in to. Ot in USO's case with clearly defined base support, a break below that on March 18th hitting stops crating a lot of cheap supply they can scoop up before the move higher commenced virtually the next day.

This is why I say (out of experience) that these head fake moves occur about 80% of the time before a reversal in the opposite direction and that is in any asset, any timeframe and any type of trading (day trading, swing trading, trend trading which of course is all just coming back to the "any timeframe" theme).

The more obvious the trigger (in this case clearly defined resistance with an ascending triangle price pattern), the more popular the asset, the bigger the trigger, the more likely a head fake move it (above and beyond the normal 80% approximation).

The research I found showed there have been VERY few markets since 1950 that have been this range bound and the majority outcome has been negative returns on a 1 week, 2week, 1 month, 2 month, 3 month, 6 month and 1 year basis.

However this is taking all information with such ranges which were identified by extremes in ADX under a reading of 9. The skewing factor is that head fake moves didn't really start showing up until the late 1990's and since with ever increasing frequency to the point that they are a staple that we look for as a timing cue and a trade entry/exit signal, such as the recent TLT long trade idea (add to): first from May 7th looking for a head fake move to fill out the position... Trade Idea: Long Bonds / TLT and then the follow up with the pullback conditions met and looking for a head fake to use as an entry for the second half of the position, TLT Position Management / Trade Set-up and the most recent follow up looking for a TLT pullback...TLT Position Management / Trade Set-up.

I cite the TLT example because you can see how the head fake concept played a role in the actual trade set-up as it tends to be that consistent.

So as I said this morning and last week, I would  normally say the chances of such a move would be extremely high, but there are also historical records of such a tight/long range and the outcome not being good on numerous timeframes. Basically we'll be looking for the clues to answer the question in advance if we can and then we'll be looking for the signals to use it to our advantage if it does occur.

Since last week, the charts on Index futures have started falling apart. You may recall the Week Ahead forecast from Friday May 8th was for "weakness early in the week as in Monday" which ended Tuesday morning to be followed by a bounce to start around mid-week which would transition in to a much larger move lower.

The example 10 min Index futures charts shown last Friday and in this morning's A.M. Update look similar to this 10 min ES/SPX futures above, with clear negative divergences. I said there was a few charts in the averages/cash market that I wanted to see fall apart as the process of migration of the negative divergence in to whatever strength the market mustered since Tuesday morning's lows. Friday's The Week Ahead said,

"I feel that we'll definitely be moving toward the 3rd trend forecast from last week, the one that comes AFTER the bounce.

I don't think the bounce is quite complete or its reversal process is not quite complete which means that my first assumption would be that the market would be rangebound and choppy in the area finishing the reversal process, but we also have some very easily recognizable resistance areas that are a hot bed for a head fake move, I have not doubt any head fake move or false breakout would be exactly that."
And...

" In the simplest terms, the 15 min SPY is already very negative, distribution.

It's the 10 min bounce chart below that looks to me to need a deeper divergence which it wouldn't get on an op-ex pin today....SPY 10 min which is the gas in the tank for the bounce expected this week, it has turned negative, but needs to be leading negative ...The same is true using QQQ as an example-the 10 min bounce chart needs to fall apart more before the next trend/DOWN"

You'll see an example of the exact chart I was talking about below...

As for the last post, Quick Update, suggesting any opening weakness would see the gap filled fairly quickly as it now has on all of the averages,  was based on improving 1 min Index future charts like this ES chart above. Earlier this morning only NASDAQ futures showed the kind of divergence that would fade that opening gap down.

This is the 10 min QQQ chart mentioned above that "needs to fall apart". This is the timeframe and one of several charts from the week previous to last that was behind the forecast on Friday, May 8th that we'd see a bounce last week after initial opening weakness on Monday. You could call this chart, "the gas in the tank" for such a bounce. It is limited, it is finite and the charts are moving in a very negative direction toward this 10 min and that's what I want to see before calling a downside pivot or the positions that would come with that.

For example...

Just below at the QQQ 5 min timeframe, you can see the negative divergence or 3C distribution that occurred in to higher prices last week off Tuesday's intraday lows as well as the positive divergence the previous week that led us to forecast last week's bounce off weakness. This chart's negative divergence should migrate to the QQQ 10 min chart and start turning it more negative like the 5 min above, that's what I want to see since that was the "Gas in the tank" chart/timeframe.

As for Treasuries, I posted the TLT trade idea, what we were looking for and this morning's 3C signals for a pullback in 20+ year (30 year) treasuries. That too has occurred with a gap down in TLT which I'll be looking at closely for a long entry to fill out the initial partial position entered May 7th.

TLT breaking below a long term trend line on a sort of head fake move, similar to a channel buster. In my strong opinion TLT will put in a counter trend rally above the trendily and it should be quite spectacular, but after that it should fail and resume its downtrend which would be the next trade opportunity after the long counter trend rally trade.

You can see Friday we had more strength than I had hoped (I was looking for a stop run before a move above resistance) and did not get the head fake move before Friday's strength, but we also forecast a pullback in to early this week which you can see by the open in TLT in underway.

This showed TLT's bid/ask in pre-market just before the open, but it was the Treasury futures 3C chart that made it clear such a pullback was high probability which I believe was also posted in the A.M. Update this morning.

This 30 year Treasury futures 3 min chart not only shows the positive divergence leading to Friday's +2% move in TLT, but the negative divergence on what we suspected Friday would be a pullback early in to this week allowing us a better opening position.

This is the 7 min chart of Gold. I do like gold on the upside, in fact our original trade idea was all about gold on the upside. It was the strange $USD reaction to Retail Sales I believe that was a bit extreme and looked as if it had been a set up to get the $USD in a better basing area to complete its bounce and as an effect of the Legacy Arbitrage correlation gold ran higher with Greek fears exacerbating the situation. Thus a bouncing $USD should have the opposite effect on gold and pressure crude as well.

As the 3C chart above also posted last week and in this morning's A.M. Update shows, the negative divergence should pull gold lower and it is off this week's intraday highs from the overnight/early morning session already.

As for crude, it was also posted in this morning's earlier A.M. Update. This is the pre-market bid/ask as crude sits right at the trend line at the top of its base, but has failed to follow through on the initial upside breakout which we had forecasted in advance would not only take place, but would be a head fake move (failed breakout).

Oil is also ooff the new week's intraday highs and lower than pre-market.

Here's the 1 min Crude Futures 3C negative divergence since the new week's intraday highs early this morning .

And all of this ( a possible market head fake move above the trend line, weakness in gold and crude and a bounce in treasuries) looks to be closely correlated to the $USD and specifically our call for a counter trend bounce in the $USD.

The 5 min $USDX 3C positive divergence showing that it's nearly ready to begin its bounce...

The larger/stronger 15 min chart showing the positive divergence and "W" base in the $USD and...

The 60 min chart's downtrend which we forecasted on April 2nd with counter trend moves at each of the yellow arrows. With the positive divergence in place on charts like the 15 min, I fully expect a counter trend bounce in the $USD and that alone through strong correlations I have posted several times could be responsible for the price moves we are looking for or suspect may be a high probability from above (Gold lower, crude lower, Treasuries to bounce on a counter trend bounce/rally that will ultimately fail and the probability of a head fake move in the broad market above a large, clear resistance zone with a tight range and ascending triangle).

So far the $USD is headed higher this morning...

 $USDX 1 min chart with price heading higher, but not quite at the base's breakout area yet or at least not through it yet...

$USDX 5 min "W" base with a leading positive 3C divergence.

Ironically through correlations, it looks like it will fit all of our expected trades above in place now and to come on a $USD counter trend bounce. The $USD first would make a bounce similar to the ones at the yellow arrows on the 60 min chart above this one, although I suspect stronger and then fail and make a lower low. Gold short term would pullback on $USD strength as would Crude oil, both I expect to pullback near term but have high expectations for them after a pullback which would coincide with the $USD finishing its counter trend bounce and moving to a new lower low as well as treasuries making a counter trend bounce and then failing and moving to a new lower low.

Finally, the broad market's head fake move, the probabilities would be with a break above the clear ascending triangle with the $USD's counter trend bounce and the move being revealed as a false breakout and then head ing lower in a trend change along with the $USD once its counter trend bounce is also complete.

From what we've seen the last few weeks and where futures are at right now, all of this seems to fit like a glove.