Daily Wrap

It's days like today and op-ex pins, the dulls days for the most part or just dull days in general that are the most time intensive as far as work load because they don't have screaming divergences that are easy to see so they require a lot more work to figure out or confirm what we already know or suspect; in this case a dull, risky bounce that's probably not worth trading is probable.

This irrates me to no end because it's a lot of work for a much less meaningful move. For example I went through futures today (100+ charts) and basically found out exactly what I forecasted in yesterday's Futures Update.

Let me give you some examples (keeping in mind there are 100+ charts I go through so you'll have to take my word as to the trend as I don't think posting 9 different charts for each individual asset is anything you or I want to do or read)...

From yesterday's Futures Update:

 "The 1 min Euro Futures is the only chart that shows an intraday negative divergence in to its biggest move in 6 weeks to the upside (EUR/USD up), so this looks like an overnight/maybe tomorrow correction in the EUR/USD, it makes sense to assume the same for USD/JPY which again sets the market up for some excellent positioning in to some price strength ,  but severe underlying damage."

This is a 7 min chart of the Euro futures leading positive, absolutely no damage done to the divergence today and is pointing toward more price action in the EUR/USD such as we saw today.

Note the white hash mark on yesterday's Euro 7 min futures chart and the 1 min (newest divergence) already giving us signs it would be pulling back which would only make the Euro/Yen futures' charts stronger.   The point I was making overall was that a pullback in Euro futures and Yen futures was likely going to come down to the white hash mark, creating a stronger base for Euro/Yen to move up and EUR/USD and USD/JPY to move down, thus bringing the market lower.

Now take a look at the same 7 min chart of Euro/Yen Futures today.

 The same 7 min Euro futures with the white hash mark in the same area which Euro futures DID pullback to just as forecasted yesterday. Using divergence in the Euro I extrapolated the same for Yen - USD/JPY so now Yen 7 min Futures..

Again, the exact same pullback expected as of yesterday's analysis as both were heading higher and only showing small, initial divergence that played out so far today.

The Yen/Euro futures are positive through all of the fastest and intermediate timeframes, but what I'm really interested in beyond short term intraday or one day movement is what the highest probability is as you have seen, USD/JPY has been the motor driving the Index futures through this most recent bounce since about July 10th.

 USD/JPY (candlesticks) vs ES (purple) since the start of the bounce, note the correlation. Thus if Yen and Euro futures are putting in stronger local positive divergences on charts such as the 7 min, the short term effect is to support the market, the longer term effect is to send the market lower as Yen and Euro futures rise and $USD drop.

We knew all of this yesterday which is why I put a guesstimation of where Yen/Euro futures would pullback to today, thus supporting the market to some degree as we saw right before the cash open today.

USD/JPY in candlesticks vs ES in purple taking off after a flat overnight session just before and at the cash open with the USD/JPY's short term move  strengthening the longer term decline in the carry pair, while giving the market some very near term support in the meantime which is EXACTLY what we talked about yesterday.

However while yesterday's futures update gave us a god idea the market would try to bounce in the very near term with USD/JPY short term support, the thing that really matters is what is the pair most likely to do, what is the strongest divergence? I don't "HAVE" to go through 100 charts for that information, I just like to be as thorough as possible. U can find that probability on the charts that have the strongest underlying trend.

 $USDX 30 min leading negative

Yen futures 30 misleading positive. This means the carry pair supporting the market since July 10th's most probable direction is down and the market with it. I didn't need to go through all of the charts for a pretty good idea of what would happen as a more lateral, longer base in the Yen would be a stronger move down in the USD/JPy, but I do it anyway to get the highest probabilities and most detail. Today I simply confirmed EXACTLY what I expected yesterday which means a high probability of a short term bounce followed by an even stronger probability of a deep decline.

So, it's the same amount or more work for a very small move that I can make a pretty good estimation of.

In terms of actual Index futures charts confirming the EXACT same, which was already expected yesterday before the close, I simply look at the highest probability Index futures. While the intraday 1-7 min have short term positive divergence in them, something we expected yesterday and knew this morning before the open, the highest probability is simple...

 TF 7 min positive, nothing we didn't already know, a bounce in the average that has had the worst relative performance and therefore is the  most likely to bounce

 As for probabilities, ES 30 min negative-by far the highest probability, but again we already knew this , it had been developing through the bounce and more recently.

Dow-30 Futures 60 min leading negative.

I guess what I'm getting at is for the least meaningful move, a highly predictable move and a very dull market, it's virtually more work than determining the highest probability trade.

I still think a bounce is likely, but it 's far from the probabilities of the larger picture, in fact so far at this point I wouldn't even consider it a trade because of the risk involved, yet it's just as much if not more work.

The problems in the market's relative performance persist, they just flip-flopped today from the R2K being the worst relative performer to the best, but again that was something we saw and expected yesterday. It's the larger picture of the divergence in relative performance that is more telling for the big picture along the same lines s the dislocation between the Industrials and Transports.

Ironically for such a dull day, I had about 3x more emails than usual. Perhaps that's why I put so much effort in to a seemingly meaningless, predictable move. I'm not complaining, it's my job and I don't want something getting by me that I should have seen, I guess I'm just venting that a short term, minor market move or attempted move takes so much more effort than the big picture,  but it;s these small moves that allow us to best time and set up the big picture positions, for instance the one asset I haven't put any short calls out o is the IWM and the reason is simple, until now, it hasn't offered us a discount, a high probability/LOW RISK entry.

As I pointed out yesterday, the bounce in the IWM essentially crested last Tuesday, not giving us a low risk entry.

Since 7/10 when the bounce got underway, the IWM only had a +0.29% gain as of yesterday's close. The market gave us an overall negative signal after that which is where we want to enter new IWM/SRTY or put positions, but it didn't give the upside set up which was what yesterday's analysis was all about and today, we are looking much more likely to get that positioning.

I showed you several levers pulled today, while retail may be buying the dip as my trusted real world sentiment sources tell me, it likely wouldn't happen without some support mechanism in the market and it's not pro traders, they are running the other way. HYG was activated today...

 HYG 3 min intraday mild positive divergence, enough to keep HYG from making a lower intraday low today and likely forming a small base.

However, no where near the degree it was activated just before the bounce as you can see in white on a much stronger 15 min chart.

As I mentioned, VIX/VXX were slammed today to support the market.

 VIX intraday vs the SPX in green. Remember I invert the SPX's prices so you can see the normal (approx.) 0.8 correlation with the SPX, VIX was hit much harder intraday today-just compare to yesterday.

And the same for short term VIX futures. 


Without these levers of short term market manipulation, I'm not sure the Buy the Dip crowd would have been interested in a market that would have been making more severe new lower lows.

Finally the 3rd lever, which a site hat I have some respect for was calling out earlier today as being the same Bond buying (yield declining) move that preceded yesterday's market decline. I showed pretty quickly that as usual, price can be deceiving and while I don't blame them for not being able to see what we see, I dd want to show you an additional lever being pulled in an asset that may be more complicated than first assumed and that's Treasuries/yields-today's post showing the move up in Treasuries and down in yields was likely not sustainable moving forward very near term-Market Update look for TLT in the post.

TLT 20+ year Treasuries (moving up means yields moving down and pulling the market toward them). Note the negative short term divergence in TLT, making it less likely yields would hold lower ground in the very near term, thus another lever activated.

Actually with HYG, TLT and VXX all activated, that's the typical SPY Arbitrage, or short term market support. This isn't a result of institutional support for the market, it's a result of smoke and mirrors.

Even Capital Context's SPY Arbitrage model couldn't pick it up today and that's because they are based on price only, so far as I know, no one else sees the data we see that leads price, in other words, everyone else is working off price only, we are working from the most probable move in price before it occurs, which would tend to support the near term bounce theory led by the IWM we were looking at all day yesterday.

Perhaps the easiest way to give you an update on the market can be accomplished with 2 charts, but part of what I hope to achieve is to give you the tools and concepts that I have learned so you can apply them to your own trading. I got quite a few emails today from members who took QQQ put gains and were very happy. While the appreciation for what I do is VERY appreciated, I suspect a lot of these trades that you are making on your own through the information we provide is due to your understanding of the concepts and that's ultimately what I want to achieve-to give you the tools to apply them as you see fit to your own trading style as there's no one right way to trade, but rather the way that's right for you.

In any case, I could summarize all of the above with2 simple charts of the SPY...

 The very short term 3 min positive SPY divergence pointing to a short term bounce and...

The longer term 30 min leading negative divergence telling us we are moving to stage 4 and when we break the SPX 200 dma, things will change and fast to the downside.

Breadth continues to fall apart in to an increasingly illiquid market full of retail longs, in other words, the primary trend bull trap is set.
I try to show you breadth charts on a regular basis as these are the hard math of the market, there's no weighting, no interpretation, just cold, hard math. While most breadth indicators were frozen in place today, here are two new ones showing more of the same.

 The Percentage of NYSE Stocks making New Highs less New lows on a Cumulative basis,

Note the recent sharp turn downward in the green indicator vs. the SPX.

And the Percentage of ALL NYSE Stocks Trading 2 Standard Deviations BELOW their 200-Day Moving Average. This percentage was around 2% just several months ago, now it's climbing rapidly and near 20%, nearly 10x more stocks are 2 SD's below their 200-day, meaning more stocks are declining faster and further.

I want to revisit the Treasury trade ideas, liquidity is drying up badly there and while that could be spectacular for a short squeeze, it could also cause a huge stampede for the exits while the exit shrinks because of reduced liquidity in treasuries. We'll take a closer look tomorrow.

While USO hit a new intraday low today, there's something that looks a lot like a head fake, although I don't see the volume, the charts look good.

 USO 1 min

USO 2 min

USO 5 min.

In addition as mentioned yesterday, there were a couple of longer term Oil Futures timeframes positive, today we added a couple more so it should be interesting as I suspect something is going on here that is looking interesting.

I had a few emails about VXX/UVXY today, I left those positions in place and I suspect the questions were regarding the VIX smack down, however, I'm not concerned at all with the positions for what they are suppose to be, a trade for the next downside swing.

 VXX 1 min in line intraday.

VXX 5 min leading positive with no damage.

And the beautiful chart, VXX 15 min with a beautiful rounding bottom and sharp leading positive divgerence.

The inverse of VXX is XIV, rather than trading against the market it trades with it so for confirmation we should have an opposite 3C signal...

And there it is, XIV 15 min leading negative divergence.

As for futures tonight, I'm not very impressed with the 1 min charts although the NASDAQ futures do have a slight leading position. As you probably know it's the 5 min charts that matter the most for new positions and they have been out of whack since this morning.

However "Out of whack" is not the same thing as impressive.

While I think the highest probability near term is a bounce, I would be lying if I said I thought it was a high probability/low risk bounce and I'd be misleading to say the 54 min charts are impressive.

This ES 5 min chart gives you an idea, out of whack, but not quite impressive and not the kind of divergence I'd buy even for a short term overnight trade considering how fast these charts can move.

Additionally as I went through futures tonight, I found the Yen and Euro charts to be improving as I showed above while the $USDX is in line. This will change and the $USDX should go negative short term as it has on the 15, 30 and 60 min charts. Meanwhile any improvement in Euro/Yen futures doesn't bode well for the future of the market and I'm not talking about weeks away. I have suspected we see a bounce (today and yesterday's analysis) as a gap fill or perhaps an op-ex pin, but I don't see this going much further than that, if we can get that.

Everything I see still begs the questions, "How would you trade this" and my answer is, I wouldn't, I'd be patient, if we can get a bounce worthwhile, I'd short/sell in to it with no doubt.

Have a great night, I hope I'm not giving you information overload on minutia, but I don't want to be the guy that missed that which the crowd missed, it's my job to find that which the crowd missed.

Have a great night.