The Week Ahead

So far from what I can see we have positive divergences on 1 min charts in Index futures, we have negative divergences in Index futures on 5 min charts. A 1-day oversold condition usually ends with a move higher the following day, but I suspect we were pinned most of today and the base was late forming so I suspect we'll see some additional upside Monday, maybe a bit longer than that, but I don't think it will be long before we are looking back to the downside which means Monday any opportunities we have with upside moves and negative divergences in to them, we'll want to take advantage of as the market starts to show cracks that the move off today's approximately 5 hour base starts to fold.

Perhaps this is the reason for EUR/USD and thus a market corrective move...

I already showed you the intraday transition from Index futures being tightlly correlated with USD/JPY earlier today and since we first saw the initial hint of a positive divergence in the market and I said that it would need to create a broader base if it were to move any more than a few tenths of a percent and an hour, it has done so.

Other than the market knowing the Goldman Sachs alumni who currently runs the European Central Bank, former Goldmanite Mario Draghi, being all words and no action, thus the half life of Draghi inspired market move is down to hours rather than days or weeks, there may be a second reason for EUR/USD to rally and take Index futures with it...

After Draghi's second blast of hot air this week which is full of plausible deniability, while hinting that QE is imminent and Reuters glad to act as the ECB's cheerleader much as the WSJ's Jon Hilsenrath filling the same spot for the F_E_D and take an ambiguous statement and act like it is a fact against all odds, it may have just been Michael Fuchs, deputy parliamentary floor leader of Angela Merkel's Christian Democrats, told Deutschlandfunk radio on Friday: "We shouldn't pump extra money into these states, but rather make sure they continue along the reform path." Fuchs further added, "I'd be grateful if (ECB President Mario) Mr Draghi would make statements along these lines."

That's a German Smack-down retort to Draghi's earlier comments because even though their are few alive who lived through it, Germans still remember how effective QE was from the Weimar Republic days and that's not a story with a happy centrally planned ending.

While the Index futures/major averages are off their lows and seemingly starting the corrective oversold move from Wednesday's Daily Wrap forecast, the EUR/USD is still in base, but with 5 min Euro and $USD charts looking like this, I don't think for long.

This is still a sell in to strength opportunity.

 5 min Euro futures positive divergence...

5 min $USDX negative divergence, that should= EUR/USD HIGHER

Leading Indicators Are Confirming

I just did a quick run through Leading Indicators and they are confirming the probable 1-day oversold bounce theory from Wednesday. I believe the EUR/USD will lead. I don't think this is anything more than the "jiggles" in the market, trying to shakeout traders as the market is a zero sum game, for Wall St. to make money, they need someone to lose. I still view any bounce as an opportunity to set up short positions you may like, I posted several charts of 3x leveraged inverse ETFs earlier.

As for leading indicators, both VXX and more so, spot VIX are under performing, but more so in the afternoon around the area of where we are seeing a "W" type base in most of the averages.

TLT is also lagging in the afternoon which is causing 30 year yields to lead the market ever so slightly, nothing I'd be concerned about at all, more an intraday event, although it's getting late in the day.

HYG was leading as far as relative performance, but get this, just as the base area, since it has fallen off so it was almost as if it was brought in as a lever to stabilize the market, to build a more stable intraday base and then it was sold again, I'd say another sign this is meant to be a short term oversold bounce.

The other credit assets I follow are split, one is down, one is leading positive and one is in line. It remains the professional sentiment indicators near term that have been the strongest signal since late Wednesday, I use two for confirmation and both are leading, although these are nimble and can and will flip on a dime when they are ready to get out, for now, it looks like they are expecting a bounce which again fits with the 1-day oversold conditions apparent at the close Wednesday.

Market Bounce is Looking More Probable

Not only in the major averages, but the Index futures. Interestingly the $USD is looking bad, but I think the correlation between currencies has changed, the USD/JPY was the earlier correlation and now it looks like the EUR/USD which I think will also be seeing upside briefly on $USD weakness and some Euro strength building. The Yen short term is in line.

 This is ES/SPX futures.

 NQ 1 min

TF 1 min

The $USD 1 min chart looks like it's about to see a nose dive and the Yen 1 min is in line so the USD/JPY wouldn't make sense as the pair correlated to the market on a bounce, however by now the Draghi jawboning half-life has probably expired (that which sent the Euro down overnight and this morning).

 USD/JPY was well correlated to ES above earlier, but something has changed.

EUR/USD has something USD/JPY does not, a positive divegrence, even though short term on a 1 min chart.

This is the EUR/USD vs Es/SPX futures, I'm not saying the correlation was good earlier, I think it is swapping out though now.

Here's TF/Russell 2000 futures vs EUR/USD. the correlation is much better. I suspect both are going to bounce as was my expectation Wednesday on a 1-day oversold basis from Wednesday.

Note the Single currency Euro futures with a positive divegrence that has been building as I showed this earlier today.

And even more impressive on a 5 min chart while the $USD 5 min chart...

looks horrible.

I'd guess we are close to a EUR/USD bounce and the market averages will likely correlate with the pair and bounce as well shortly.

Trade Idea: Adding to SPECULATIVE USO Calls

Although buying USO seems like trying to catch a falling knife and it may very well be, that's why it is SPECULATIVE, I do believe there's an edge, pardon the pun.

The last USO call position entered was here, Trade Idea: USO (Speculative Options) Jan $22 Calls on December 12th. When I said speculative for the January 16th, $22 calls, I meant speculative, the position was 1/5th the size of a normal options position and what I'd be adding today would bring it to 2/5ths, less than half size which is my normal speculative size position (half size), so even in adding, this is still smaller than the typical speculative position.

I could go in to some fundamentals like the US probably NEEDING to do something to save the higher cost domestic suppliers that Saudi Arabia is choking out of the market, but at a cost to their own economy. I didn't read beyond the headline, but I believe this oil war is causing Saudi Arabia it's first budget deficit ever, but it's hurting US oil producers worse as many can't get oil out of the ground for the price it's selling at now. Perhaps this has something to do with the US military build-up along the Iraqi border in Kuwait? A little something to cause uncertainty and send oil prices higher?

In any case, this is based on charts and the position size is commensurate with the charts.

I'm keeping the January calls in place, and while I'd like to add to the January calls at these prices, I don't think that is the best decision when you look at it from the perspective of a new position and not trying to save an old one. So the new position will be February 20th expiration/ $20 strike.

 First of all, this 2 hour USO chart should show pretty convincingly, I do not expect anything beyond a short squeeze, not a trend change.

Now that we have that settled, exhaustion gaps, even if only temporary, tend to fall a bit more before they settle and create a base to move up off. The price ROC is clearly moving in a much shallower, more lateral, base-like direction since the gap with a 15 min leading positive divergence.

 The CL/Crude Futures 15 min chart doesn't have the same amount of history, still it's showing a nice recent leading positive divegrence as well.

 The 10 min chart is leading positive and note the last couple of days refusing to make lower lows and looking like USO has established a toehold here.

 The 5 min trend shows 3C in line and confirming the downside and even becoming more negative just before the gap, both the gap and 3C movement just before it look like a selling capitulation or exhaustion event. This was a long trend down and a strong one so I wouldn't ever expect a "V" shaped reversal, the market tends to have some proportionality to it. At 3 note the change in character of 3C after the gap and at 4 the change in character of price's rate of change.

 The very short term intraday 1 min also shows something interesting in the flat area of the last couple of days as well.

And looking at my long term custom DeMark inspired buy/sell indicator, even if you took the earliest portion of each buy/sell signal, these are the returns you would have made long and short and we have a current buy signal in effect.

Thus I think it's worth a speculative position or add to.

Brief Intraday Update, Perhaps Some Opportunity

While this market has been very fluid all day, doing some things that Wednesday's Daily Wrap were not projecting, with the caveat that short term divergences that have not amassed any strength are much more likely to be run over when volatility picks up, but Wednesday's late day analysis wasn't based on divergences, it was based on a deeply 1-day oversold condition.

 Note the IWM probed below the range's top, former resistance, current support and really the most important level right now for triggering the next strong move.


The IWM 1 min and intraday charts are showing a positive divgerence that is just working in now.

Here it is in the SPY 1 min and it's visible in the Index futures as well. I don't think this can get any real upside, "Bounce" traction without forming a larger intraday base, price coming back down for a small double bottom or "W" bottom, without that I wouldn't call this anything more than intraday noise.

 The NYSE TICK's trend changed with the recent move, but before it did note the probe of the -1650 level, that's an extreme level and heavy selling. The NYSE TICK is all advancing NYSE issues less declining issues for the bar, so -1650 means 1650 more stocks are declining than advancing and that's an extreme selling level so there's real fear out there and it's palpable. 

Still, without an adequate base, no intraday bounce will be able to hold out long or move far, especially with market sentiment right now as seen in breadth above (TICK).

While the market is moving to the downside, I prefer to just sit still and let my short positions works rather than chase price which usually tends to turn on you as soon as you enter. With any potential intraday bounce, you have some nice potential opportunities. For example, the 3x leveraged inverse ETFs of the major averages would pullback, offering a discount for an entry along with lower risk.

SPXU 3x short SPX

 SPXU 1 min intraday negative, along the lines of the SPY 1 min positive.

However where it counts beyond intraday jiggles, this 5 min SPXU chart is showing some impressive 3C strength and nearby, meaning it's not some move in the future, in fact it has already begun so any potential entry is really a pullback buy in a great area.

 The SPXU 30 min chart should speak for itself, compare the current positive to both the former positive and the negative that sent prices lower.

And as far as long term, this is the 2 hour chart is showing an obvious change in character on a timeframe that is well beyond a swing trade, this is core position material.

SQQQ 3x short/inverse QQQ which I've already featured, but as a reminder...

 1 min SQQQ negative intraday

However a very impressive 15 min chart and...

 And the SQQQ 2 hour chart is showing a very obvious change in character

SRTY 3x short IWM, this and SQQQ are among my personal core short positions.

 Again like the others, the 1 min shows a small intraday negative, confirming the SPY/IWM charts above.

 The 10 min SRTY with a very nice divegrence as the market hit the breakout area.

And the big picture, 60 min SRTY....

I think any of these would be a nice addition or add to as a core short position with some leverage, but not the concerns of options.

December 12th Forecast on Deck

 Our original December 12th forecast was a theory at first based on a few signals and mostly Mass Psychology and largely based on the concept of head fake moves before reversals in topping patterns. The more obvious a breakout area is and the more watched the asset is, the more probable of a head fake move creating a bull or bear trap that creates among other opportunities for smart money, strong momentum on the conclusion of the trap.

The 6 week range in the IWM that had not moved more than -0.38% over the entire period was the most obvious range in one of the most widely watched assets out there, thus it was the perfect candidate for a head fake move and the probabilities in my estimation were around 95% that this would happen as opposed to the concepts more broad probabilities of about an 80% chance before a reversal either up or down depending on whether we are at a top or bottom.

 After the data that backed up the theory started pouring in the very next trading day, a Crazy Ivan shakeout became part of our forecast, it's a shakeout on both sides of the range, the first creates a bear trap and provides upside momentum to do what the IWM could not do by itself for 6 weeks, break above the range. The second is another head fake move setting up the larger scenario which was our forecast since Friday December 12th, a head fake move above the range in the IWM, luring in confirmation seeking bulls who'd buy the breakout, creating demand for smart money to sell their large positions in to or short (again larger positions) in to that demand.

To date, everything has happened as we expected, even the area of the IWM breakout, which had to be at least above $118. The two yellow boxes represent each of the head fake moves taken together creating the Crazy Ivan shakeout concept.

As you can see, the IWM is now moving to fulfill our big picture forecast as the breakout above the range was only a means to an end, it was the bull trap, the head fake move that creates so many different opportunities and necessities for smart money's large positions, see my two articles "Understanding the Head-Fake Move" parts 1 and 2 which are linked at the top right side of the member's site for more information on why head fake moves exist.

Although there was a little bump up in volume crossing below the $118 level this morning, it's not the volume that hits the long's stops and draws in new shorts, it appears the actual support level may be around $117.90, although $118 seems more reasonable as a psychological magnet, look for volume to increase on any move lower in the IWM, that's the bull trap being shut.

 Our custom SPX: RUT Ratio indicator wasn't screaming bullish Friday, but it wasn't confirming the lower lows in the SPX, which fit with the 1-day oversold event and a corrective bounce , but this morning, whether it was bad news taken as bad news for the first time in a long time or something else, the indicator collapsed leading the market lower or at least confirming price action thus far.

Looking at the averages, they all look similar to the SPY below which is further confirmation of our forecast and the last stage of it, the move down...

 SPY 1 min is not showing anything threatening to this downside move right now.

The stronger charts like 2 min are also in line with the move lower.

And the big picture charts that show the move above the range was a head fake as we confirm the breakout is showing distribution and thus will not hold- 10 min with the forecast date for this event highlighted, December 12th.

The larger picture, broader charts suggesting we'll see a new lower low below the October lows given a little time, not immediately, are also right on track.

There are some opportunities out there and overall this is still a strong area for a short entry, although I don't ever like or advocate chasing the market, I'd rather enter on a bounce (price discount, less risk and usually better timing).

I'll be bringing you some opportunities I think I think are worth a look.

Early Update

 While I'm not a huge fan of early trade as there tends to be a lot of game playing with limit orders and stops early in the day, there are some interesting events such as the continued plunge in European yields, the periphery or PIIGS nations (Portugal, Ireland, Italy, Greece, Spain) is understandable considering the spin on Draghi's comments, banks would be eager to front run a possible QE operation by soaking up the very bonds the ECB would intend to buy, but with the German 5 year going negative this morning for the first time ever at -1bps, even lower than the Japanese 5 year at +3 bps, that seems more like a flight to safety.

Additionally, it would "seem" bad news is bad news which is a change as US ISM manufacturing and Construction spending hit 6 month lows this morning, with the former's New Orders sub-index cratering.

This is the USD/JPY (candlesticks) vs ES (purple) this morning after the cash open (green arrow).

There's a bout of some Yen strength since the open, not huge, but a reversal since the open of the trend since new trade in futures opened.

The $USDX has made a relatively small move so I suspect most of the USD/JPY movement is due to the Yen which is what we saw earlier in the week as well until the $USD caught down and really moved the pair lower Wednesday.

Interestingly the short term VIX futures have rallied from the gap lower with a slight negative divegrence at Wednesday's close suggesting a gap down on the next day of trade, but shortly after a positive divegrence in to the lows on a 1 min chart and in line as it moves higher.

This isn't a screaming signal on its own, but it does look like a bid toward protection.

 The 30 year Treasury futures are also showing a similar bid to safety with an intraday positive divegrence and a ramp higher right at the cash open.

This can be seen in TLT as well which never really fell out of line as it moves higher this morning, but is starting to develop what may become a more interesting negative divegrence, at this point it's just noise.

What is really interesting is the NYSE TICK index, note the downtrend since the open and hitting some pretty deep levels showing there's some serious selling early on here.

 The SPY looks to be in line this morning on it's initial move lower.

 The Q's had the best looking 3C underlying action of all the averages with a positive in to the close Wednesday which fulfilled on the gap up, but didn't last any longer than that, now moving in line to the downside.

And the IWM which had a leading negative divegrence at the close Wednesday gapped up, lost the gains quickly and is in line with 3C moving lower.

As I'd always warn this early, "It's very early in the day", but considering the "January Effect" and TICK, there's some real selling going on here.