Daily Wrap

I'm going to keep tonight's Wrap short so I can cook dinner (have the Fire-station on speed dial) for my significant other who is on her second 15 hour day of flying (leaving home at 4:30 a.m. and returning at 7:30 p.m.).

The lovely Andrea...

Andrea in Iraq (Black Hawk Air Assault Leader)... These days she's flying for Medivac and the local News station, but some long days so I thought it would be nice to surprise her with a burnt mess in the kitchen...wish me luck!

As for today, the NASDAQ finally broke its winning streak apparently on the news they lost a lawsuit brought by Smartflash for patent infringement with a penalty of $533 mn. In addition, AAPL as well as several other companies including CISCO were booted off the Chinese state procurement suppliers list as they are accused of being an extension of the NSA's cyber-spying, thus no more AAPL products for the Chinese government.

Who knows how much of this stuff is known ahead of time, I was actually a little surprised to hear Appaloosa has sold its entire AAPL position in Q4 2014, just because AAPL in a bear market would be the cleanest dirty shirt in many ways, although Appaloosa has the ability to go short.

The fact the NASDAQ couldn't close green on AAPL's -2.56% day (one of the biggest drops in 6 months that is non-earnings related) makes last night's Daily Wrap post and chart showing the 5 NASDAQ stocks that are responsible for ALL of the NASDAQ's 2015 gains which included AAPL at the very top, very timely indeed. This is the magic of index weighting. At one point after NASDAQ has released historical weighting (they have a proprietary formula for weighting the NASDAQ Index which will cost you a $10,000 a year subscription to find out), I figured that AAPL's weight on the NDX-100 alone was equal to the bottom 50 NDX stocks combined, so if we took those bottom 50 weighted stocks and added AAPL and the bottom 50 averaged -2% on the day and AAPL was up +3% on the day, the NDX would close up 1% on the day despite the fact that 50 of 51 stocks declined by 2% on the day.

I'm not going to try to take any victory laps for the break in the NDX as we opened a recent Put/short on the QQQ because of AAPL, which we also opened a recent short / Put on as well, I work too hard on my analysis to take a cheap victory lap on a lawsuit and claim it was analysis. However we have seen something not very refreshing about AAPL, thus the put position there.

In some background news, Ukraine has shut off the gas supply to the rebel held/Pro-Russian separatists of Donetsk in eastern Ukraine, a move that has enraged Putin which he called reminiscent of "Genocide" today. In response, Russia's Gazprom has said they'll be cutting off Ukraine's gas supply if they don't make a pre-payment in 3 or 4 days which Ukraine says they didn't receive the gas from their last payment. What does all of this mean? Escalation for 1, for 2 Ukraine is the pipeline to Europe from Russia. Europe gets 1/3rd of the NG from Russia and cutting off Ukraine means cutting off Europe so there could be even more fireworks there as Ukraine also enters in to HYPER-INFLATION.

In the USO set-up, it looks like we got exactly what we were looking for, a head fake today that hit stops on the EIA petroleum report and a move higher. I put in a half size normal position being a little cautious until I see a bit more as I expected a head fake to be a little longer, but as far as the elements of the trade-set-up go, everything happened exactly as we forecast, USO Follow Up....

This is the bullish closing candle I hoped to see on heavier volume which makes it about 3x more likely that it is an effective reversal candlestick. I'll update USO again tomorrow.

As to the averages, it was a mixed bag with the SPX and NDX closing down while the R2K just barely closed green and the Dow hit a new record high on a gain of +0.08%!!! Seriously? I wouldn't be celebrating that one.

Again today (as all this week) there was no Dominant Price/Volume Relationship, that's usually a little strange, but given these micro moves, I'm not sure I'd trust any relationship any way.

As for sector performance, of the 9 S&P sectors, only 2 closed green; Consumer Discretionary at +.77% and Energy, the laggard was Utilities at -1.64%. As for the 238 Morningstar groups, again a meager 121 of 238 closed green, not the picture of market strength via breadth.

The VIX did close up on a bullish Hammer reversal candle and VXX (Short term VIX futures) also closed up on a bullish hammer with rising volume.

It also closed on a positive divegrence which makes it all the more likely that it's a valid reversal candle (to the upside-the market trades opposite VIX)...

VXX 10 min 3C chart leading positive.

Out leading Pro Sentiment (Leading Indicators) closed down on the day and worse than the averages, in fact seemingly aware of the AAPL decline in the afternoon, take a look...

Pro Sentiment intraday seemed to be aware of the impending AAPL led decline this afternoon as it sold off all day, but specifically in to the afternoon highs just in to the AAPL led decline (on volume).

As for TLT, which we have been calling for an upside reversal (sending yields lower and pressuring the market lower), we have an enormous divergence brewing, I was wrong about a quick intraday TLT pullback...

Since the cycle started 1/29-2/2 (SPX prices in green are inverted to show the normal bond/equity relationship and the current dislocation), TLT has been trading as it should according to the correlation, but 3C charts have been forecasting a reversal in both and TLT is leading here which means yields are leading to the downside and act as a magnet for the market....

While some are calling a strong 5 year auction evidence that the market believes the F_E_D is not hiking any time soon, I see it as an overall wider bond rally starting that has to do more with the market than the F_E_D, otherwise why would 30 year yields be crumbling as well?

That really leaves 1 major lever, HYG which is still in line or a little better intraday today, despite the negative 3C divergences. I'd expect treasuries, VIX and HY credit to all signal at the same time, right now we have 2 of 3.

Beyond that, there's not too much to tell as Index futures are nearly perfectly in line intraday at this point. Beyond that, this would not be true. For example, here are multiple timeframes in the various Index Futures, the yellow rectangle is the "Chimney"...

 NQ 5 min

ES 7 min

TF 15 min

NQ 30 min

ES 60 min.

I probably don't need to comment on the above charts.

I'm off to cook, but I will check futures tonight before I turn in as usual.

Have a great night!

XLF/Financials/FAZ

The thing about a top is many times you don't know it's in until after the fact. We live at the right edge of the chart, that's the one that doesn't tell you what happens next in the plot so if we were to take for instance the 2007 top at the right side of the chart, how many of you would have been able to identify this as a top?

 Judging by price action alone all you would have known at the 2007 top is the SPX just made a new high, this is why we need help from indicators (ideally the kind that shows us what the market missed), breadth indications, etc.

There's a lot of psychology involved in investing/trading, which is why I consider it one of the most spiritual exercises you can engage in, "Know thyself" or die in the market. For instance, did you know that most retail investors will lose everything they made in a bull market? There have been numerous studies, I've read several. I think one reason is they truly believe, "This time is different". It's easy to fall in love with stocks or a market when you've made money, it's hard to accept that it's over and bear markets move approximately 3.3 times faster than a bull market which doesn't leave you much time to make a decision. Also once losses start acruing, there's a cognitive bias that retail investors use which sounds something like, "well as soon as the market gets close to where my break-even point is, I'll get out", this is the basis psychologically of resistance and the truth is, the market almost never does what they hope. In fact most investors will finally give up and sell at the bottom of a bear market. Even professionals are not immune to this. You may recall me sharing with you the interview I saw on CNBC at the market top by the author of a book called "Dow 20,000", even then no one including (if we are to believe it), the F_E_D including Yellen saw that bear market coming.

From a Professional Fund's site, note the date...

July, 2007 — S&P 500: 1503

Market Outlook Memorandum

Our “Top Ten” Reasons the Bull Market Is Far From Over

Since the Fed finished raising interest rates a year ago, stock prices have risen by about 20%. In this Outlook we review ten reasons why we think this bull market can last at least two more years. These include: (1) market history of bull markets generally lasting about two years following mid-cycle economic slowdowns like we currently are experiencing; (2) the world economy remains healthy with contained inflation; (3) bull markets generally do not end until 6-12 months after the Fed resumes a tightening program; (4) stocks are fundamentally undervalued; (5) there is an estimated $1.5 trillion of private equity funds awaiting investment; (6) corporate share repurchases will continue to boost stock prices; (7) the active mergers & acquisitions market will help to raise stock valuations; (8) investor sentiment generally remains cautious, which is a positive factor; (9) the recent market advance has been quite broad, indicating much strength left in the market; and (10) weakening home prices could attract retail money back to stocks from real estate investing. Consequently, we think stock prices have the potential to advance by roughly 15% over the coming year.

 Sometimes we need some extra help, this is the daily chart of the exact same SPX 2007 top with one small difference, the 3C divergence at the very top.

Breadth was horrible as well, not as bad as it is now, but it was a screaming red light.

If we look at the SPX now, we see a very similar divergence, this is far from the largest, but a timely one on a daily chart.

Do you see the change in character? The Broadening top and the concept of common technical price patterns like a Broadening top being head faked just before they reverse ? The top formations are real, it's the head fake moves that are used to convince traders that they are not real, that they have been nullified, it's the ultimate bull trap whether on a 1 min chart or a weekly chart, the concept is exactly the same.

Here's a 30 min chart of XLF/Financials. You can see a positive divergence and the distribution of a common cycle in the red box, but take a broader look at the same chart...

 The October lows, a time and just before the October lows WHEN EVERYONE WAS CALLING A MARKET TOP IS THE ONE TIME I DISAGREED FOR THE SIMPLE REASON THAT TOO MANY PEOPLE WERE CALLING A TOP AND ALL ON THE SAME SIDE OF THE BOAT. Wall Street will almost always flip the script as the market is a zero-sum game, if everyone's on the same side of the trade, how can anyone make money with no one to lose it?

In any case, the broader picture is that XLF looks to have topped in December.

If we look at this as a common H&S top (and they never look like the textbook which is why we use volume confirmation), we see the 3 areas I'll short a H&S top and the one area I will now. This isn't something I just made up, I've held this as a major concept for over 2 years once I identified the pattern that plays out over and over and it's all based on the predictability of technical traders and TA dogma. Technical Analysis teaches to wait for confirmation, ideally according to Technical Analysis which identified H&S tops almost a century ago so they are well known, the break of the neckline at the red X is where you want to short a H&S top or if it bounces back toward the neckline, but does not cross above it.

I'll short a H&S at the head (1) if I can identify it that early, at the right shoulder (2) and NEVER at the break below the neckline, this is exactly what everyone else does and gives Wall Street every reason to shake those traders out as their positions and stops are as predictable as the sun rising in the morning. We identified the "Shakeout which takes prices back above the neckline after the initial break below it, which is where the shorts' stops are, either right above the neckline or right above the right shoulder. Additionally TA teaches that if a major price pattern like this fails on you, reverse your position so as they are stopped out of their short they are entering a long that they'll soon be stopped out of as well. 

The H&S is real, it's the shakeout that confuses things and often makes traders 2x losers on the same price pattern, actually 3x as they often miss the short so the last place I'll short a H&S top is after the shakeout has run its course above the neckline and after the initial break of the neckline as traders are starting to go long the asset again.

 In 2010 there was a large H&S-looking price pattern that a lot of traders were taken in by, but it was not a real H&S and shot up to new highs.

The reason they fell for it is they only looked at price as the art of volume analysis is long gone. A true H&S should show increasing volume on declines and declining volume on advances. This is a custom indicator that cumulates volume so it is easier to track, as you can see volume rises on declines and falls on advances like the right side of the chart now.

 We also formed an Igloo/Chimney price pattern here this week. You may recall my FAZ pullback set-up from last week, Leveraged ETFs / FAZ.

In other words, we were looking for a bounce in XLF (chimney) and pullback in FAZ, that's the trade set-up from last Thursday.

The intraday XLF charts aren't looking very good here.

However, some of you have asked if I still like FAZ after all this time and the answer is yes, this is a daily chart and it's not often you see a leveraged inverse ETF give a leading positive signal on a daily chart.

The 4 hour chart is just as interesting and inspiring, note the October market lows (highs for an inverse ETF) and what has happened with 3C since.

On a closer term 60 min chart, this is the area of the FAZ pullback I have been watching, note both divergences and the stronger second which usually means that both are part of one larger base.

FAZ 30 min on the latest cycle, not only has price flattened out and formed support, but the 3C indicator is calling this an area of accumulation.

 In last week's FAZ trade-set-up I said the 17th looks like the low, but look for a pullback and a positive divergence in to that, that's exactly what has happened since last Thursday.

Intraday, everything has gone sideways for the market, but FAZ's chart is leading positive, thus I think we've pretty much hit the area of the trade set-up we were looking for , otherwise I have no problem with FAZ long term as a trending trade.

FAZ Head's Up

Our Trade-Set-up for FAZ (3x short Financials), Leveraged ETFs / FAZ,  has triggered, I mentioned this yesterday as well. I'll be posting the charts as the market just turned sideways pretty quick since our last market update when most everything was green.

Transports (IYT)

IYT has been one of our longer term core positions, a position I'm quite willing to be patient with. It's also a former momo darling and as such, I can imagine there's quite a large unwind that would be necessary and I believe we have evidence of that. The current IYT position which I'd love to add to, but risk management rules won't allow for that as the position is already at max position size.

I think the charts speak the best to the subject...

 The daily chart of Transports with a clean stage 2 trend (Mark-up) through 2013 and most of 2014 sees a Channel Buster. You may recall several stocks we have traded on this set-up, typically a break to the upside followed by a downside break. This is the opposite, first a break to the downside and then a break above the upside of the channel, it's really the same concept as a head fake move, stops, momentum, etc. However while the Channel Buster is certainly a red flag warning, what is really standing out...

 Is the very clear change in character which inevitably leads to changes in trends. The uptrend is clean, but on falling volume until the Channel Buster business, after that, what do you see that has significantly changed in IYT's character other than volume? A choppy range and one that's quite a bit larger than your typical consolidation, any way consolidations aren't known for increasing volume, tops and churning are.

 This 2 hour 3C chart tells me all I need to know to confirm the 2 charts above. The chart goes from upside confirmation to, well I think you can see the divergence quite clearly as it is unrelenting and significant in size and timeframe.

 The 60 min chart which I can't quite properly scale as 3C should be lower along the uptrend with price, is also confirming the exact same and is where we first saw signs of trouble in transports.

As to smaller cycles, this is the most recent which is also clearly negative, 3C distribution in to higher prices, which are really just part of a large zone of chop.

The more recent timing charts like this 3 min are clearly deteriorating. In other words, as I said above, if I had room to add, I would, otherwise, I have no problem holding an asset like this short as a longer term trending trade.

Market Slipping/AAPL down on volume

After last night's list of 5 stocks that alone have been responsible for all of the NASDAQ's 2015 gains, AAPL being the chief among them and also one of our short positions, it is pretty clear that AAPL down on volume over the last few minutes is taking its toll on the averages... I'm sure you've heard of the Chinese action against US companies over spying, AAPL included. I'll just say that while this may be news to us, there's little that the market is not aware of an actively discounting well in advance of the news becoming public, yes it's illegal, but this is why we watch underlying trade. You've seen the examples of home builders being accumulated in 2000 during the bubble in tech as it imploded, who would have ever correctly guessed that after the tech revolution, one of the most boring asset classes, housing, would lead the next bull market? Well someone knew and they knew 2-years in advance.

 AAPL intraday confirmation on the downside move on volume.

Since, the QQQ intraday leading negative, obviously market makers see what's happening in AAPL and anyone else with half a brain and are moving out of the Q's.

The IWM just hasn't caught up to even intraday confirmation as the Chimney portion of its price pattern has been leading negative as well as longer charts.

And the SPY.

I'm looking at quite a bit now, I know some of you have questions and I'll get to them ASAP.

USO Follow Up...

Yesterday I posted USO Trade Set-Up which is an ongoing forecast not only since last week, but over a month now since we hot a low and popped higher as we had expected.

I don't mind saying that this is a bit of a head scratcher for me and I don't have all the answers, I wish I did, but looking at options for different trades and risk management should help clear things up and present some scenarios that may fit your goals or perhaps you'll find they are not in line with your goals.

Lets take a look...

Last night the API Inventories came out just after the close, there was a massive build of 8.9 mm barrels for the week. This morning's EIA Petroleum Inventories was posted last night as "perhaps" being the event that would give us a head fake run below support in the $18 area DURING CASH MARKET hours as last night's drop in crude futures didn't help our head fake situation with the stops we needed to hit on a head fake not trading normal cash market hours.

Sure enough, this morning's EIA Petroleum report came in at a build of 8.43mm barrels for the week above consensus of 8mm on the nose, yet crude is higher right now. Our stop run/head fake level was hit, although not hit as I expected, but my expectations really don't matter much beyond the fact that the expectation of a head fake move occurred as expected, how it happened are details that are just my opinion, not based on objective evidence.

I'm sure at one point or another you've heard me talk about what moves the market, it's not P/E's, it's not value, it's perception. While I'm taking a shot in the dark here, you know how companies report bad earnings, yet rally or great earnings but sell off, that's because what they did is of little consequence moving forward, it's the PERCEPTION of what they'll do next that matters. If earnings were bad, but it looks like things should improve, you have a positive perception and a stock rally o bad earnings. If earnings were great, so great that it looks like the company might not be able to top them next quarter, the perception is negative and the stock can sell off on spectacular earnings, this is generally based on the company's guidance which I think is the only part of an earnings report worth looking at.

Here are some factoids...

This is the 7th consecutive week of crude inventory builds which are now at a "Total Inventory" record high. Current inventories are 5 times higher than the normal 5 year average of inventories.

US oil production is at a new record high despite the falling rig count week after week.

Something doesn't make sense to me. Earlier it seemed simple, Saudi Arabia and OPEC were trying to crush the US Shale drillers as oil was /is being sold for less than most shale drillers can produce it. Previously the low prices in oil were said to have been to punish the Russians for getting involved in the Ukraine as Russian oil exports are big business for the country.

However, I suspect there's something else going on that we are not aware of. I could guess, maybe a showdown between the West and ISIS and we want to have plenty of supply on hand. Maybe something else.

Whatever the scenario, we know the perception is different than what we might expect. After 7 consecutive weeks of build at record levels, why has oil not moved lower and rather sits in our consolidation range after actually moving higher? Forward looking perception is obviously different than the current facts or what HAS occurred.

 As proposed in last night's Daily Wrap, the EIA report this morning may come in at a miss and give us our cash market head fake move below $18, the area I suggested you set price alerts at. While this doesn't look like the typical head fake, which tend to be stronger looking moves as different traders have different risk tolerances and they generally want to run them all out before a reversal, which means the head fake moves are extreme and believable, it is a head fake move in the form of a stop run and right at the psychological level of $18 as proposed (whole numbers attract the human mind and we subconsciously place stops and limits at whole numbers, which is probably why support was purposefully built around that level.

 On an intraday basis, you can see the 10:30 EIA report and USO drop below $18 on volume which are the stops being hit, that's what we were looking for.

From yesterday's USO Trade Set-Up, one of the two things we were looking for today...

"From here. if you are interested in the trade set-up, I'd set price alerts for a break and close below the psychological whole number of $18 (currently at $18.05). A break below $18 alone is not cause for an entry, it is our trade plan going according to expectations, after that we look for 1) Volume on the break below $18 where traders will naturally have placed stops and limit orders being the whole number is a psychological magnet."

As for the 3C charts intraday on the move...Well it's a positive divergence/accumulation of the hit stops.

The 5 min chart improved this morning as well on the stop run.

And the 1 chart I've been watching the most, the 10 min chart that signaled the probability of a lower move/head fake, is showing improvement here.

As for Crude Futures...

 The 5 min chart started going positive on the API inventory build after the close yesterday and continued to a greater extent on the EIA miss this morning, not what you'd normally expect, but exactly what we expected.

The chart closest to the 10 min USO which is kind of the line in the sand, also shows improvement. Yesterday's post had the longer term Crude Futures as well all the way out to 4 hours where there's a strong leading positive or what I'd call, "Gas in the tank" for continued upside.

Here the USO 30 min which has been in line since we called for a consolidation after the first leg up is now leading, a change.

And the 2 hour USO chart that has a wickedly nasty negative divergence BEFORE crude fell, has an interesting and strong leading positive divegrence.

My opinion has been this is a counter trend rally setting up, but we are now seeing signals that are approaching large enough to be a viable bottom in USO for a primary or Intermediate uprtrend, to be precise, we are not there yet in my view and would likely have to come down a bit to recent lows to build out the base, but that doesn't mean we can't have a counter trend rally and then a pullback and finish building a broader base that can move higher as a trend change.

So if I were considering Crude and I think I will put USO long in the tracking portfolio today, I'd decide on which trend I'm looking to trade and if it's the larger one, I might be a little more patient or phase in to a position, if it's a counter trend rally then I'd just have some stops below today's intraday low. One of the key signals will be the close and whether we have a bullish candlestick and increasing volume, if that's the case, then we are likely right in the front door of the continuation of the first leg of the move higher. 

For now, I'm putting a half size position in USO long in the tracking portfolio as a trade on the counter trend rally, if I had more time I'd wait until  just before the close and look for a bullish candle and increasing volume over yesterday, I suspect we get it.

If you are thinking of a longer term trend trade and a real bottom, I'd urge some patience, while bottoms are almost always tighter than tops, I still don't see this as large enough to support an intermediate or primary uptrend.

USO Head's Up

Our trade set-up conditions were met this morning, I'll be posting a more comprehensive overview, but although not exactly what I expected, the fundamentals of our trade set up came to pass exactly as we had expected.

Crude is up on a big (bearish) build.

AAPL Update

This week I noted that along with the Q's the SPY and later the IWM all made an Igloo with Chimney price pattern more often than not, one of the best topping indicators for a particular cycle, not necessarily a primary top which is much larger, but there's no reason it can't be the end of a primary top.

I also noted that AAPL has made a similar, well exact price pattern. I liked AAPL as a short/Put on Feb 12th, about 3.5% lower, but since over the last couple of days, AAPL looks like it could start coming down any time. Again, it's not my favorite in terms of core short positions or trend positions, but it does look like an interesting opportunity for a trade. I don't bring AAPL up today because it's down, in fact I brought AAPL up yesterday as it was near ATH's as this Igloo/Chimney price pattern formed. It should not go unsaid that when numerous averages and assets, especially huge market movers like AAPL (shown last night to be 1 of 5 stocks responsible for all of the NDX's 2015 gains) all start doing the same thing, there's a trend there and this looks like the topping of the Jan29-Feb 2nd base/stage 1 trend or cycle.

Here's where the charts stand with AAPL, again, this is far from my favorite as a longer term trend short position, but there are all kinds of opportunities.

 After breaking the 2015 range the same as the broad market, AAPL looks to have put in the same rounding Igloo top with the right side chimney, just like the rest of the market and that's to say nothing of AAPL's weighting pull on the market and NASDAQ specifically.

 At the chimney area this leading negative divergence was not leading as AAPL declined, it was leading as AAPL was still at its highs before the decline started today.

This 5 min chart, if you look closely was also leading negative BEFORE today's decline.

As was the trend of this 3 min chart, all in the area of the Chimney portion of the price pattern which has been the head fake area that has been distributed in to in the past so often that we named the price pattern and it became one of our concepts.

Obviously I am not crazy about AAPL long here and believe we will see downside in AAPL beyond today's, if that doesn't matter much to you as you may not be in AAPL, it should tell you something about the broader market considering AAPL's weight and ability to single-handedly move the averages.