Important Market Update Part 2: The Forecast Plays Out & The Beauty of the Market

In yesterday's post, Important Market Update Part 1: The Forecast I touch on some of the elements that led to the April 2nd market forecast, IMPORTANT: AAPL Set-up & Market Movement post with regard to, "What to expect" near term. Timing of a market is always difficult. I receive regular updates from some of the most respected Elliot Wave forecasters and they change from day to day, sometimes dramatically not to mention the "alternative count" which to me is like saying "Today is going to be partly cloudy with a 50% chance of rain"...No matter what, you can't be wrong.

Instead our forecast in this particular circumstance was based on a number of specific "EVENTS" that were to take place, whether the market would do that quickly or take a longer period of time, I can only give a best guess. However upon reflection, I think the market needed more time than I would have guessed for 1 specific reason, that reason is the forecasted Head Fake move from April 2nd.

I have been clear that these moves, broadly known as "head fake", can occur as bullish or bearish events in any asset and in any timeframe from a 5 min chart of a penny stock to a monthly chart of a Dow Blue-Chip. I have always approximated their occurrence before a significant reversal to be about 80% of the time, although few people ever recognize them as they happen. They may be in the form of breaks of support/stop runs in which case volume should expand and the stopped out shares are accumulated by smart money or a false breakout that eventually reveals its failure and makes a fast reversal to the downside in which retail chases price and smart money can off-load shares or sell short or both (both transactions come across the tape as a sale or distribution) and create a bull trap.

The main reason for the rise in head fake moves, that are actually Wall St. using the predictability of technical traders against them, was when cheap online brokers became widely available due to the advent of the internet and people looked for an easy way to manage their accounts. Compared to fundamental analysis which is completely flawed from the start, Technical Analysis such as simple moving average cross-over schemes seem very simple in comparison. I remember the days that Technical traders were mocked as using "Voodoo Analysis" in the late 1990's, then it became mainstream and over 100 years of technical dogma never changed, but Wall St. did. 

Wall St. knows EXACTLY how a technical trader will react to a breakout above a triangle or a drop below a significant support level and they use this to their advantage and against Technical traders. Again, this can all be found in my two articles linked on the members' site:

Part 1: Understanding the Head-Fake Move... How Technical Analysis Went From an Asset to a Trap

Part 2: Understanding the Head-Fake Move... Motivation

The point I'm getting at is what I have said every day for nearly 2 weeks, "The more obvious the technical level, the more important the ultimate reversal and the closer watched the asset...THE MORE PROBABLE WE'LL SEE A HEAD FAKE MOVE" just as we did in a weak way in Dow, SPX and Russell 2000 and a more appropriate way in NASDAQ 100 this week.

Thus, I believe the triangle and SPX resistance trendily from March had to be made more obvious, thus took a bit longer.

 The additional week or so in the SPX before the breakout above the triangle as forecasted, was probably worth it as it created another 4 points of resistance making the SPX's March trend line a VERY obvious target and breakout area that retail traders will chase which is precisely what smart money needs and is on of the most important reasons for a head fake move.

However, as I expressed Thursday in the Daily Wrap, THIS IS NOT THE KIND OF HEAD FAKE MOVE THAT TOUCHES ON STRONG EMOTIONAL REACTIONS AND CREATES THE NEEDED MOVEMENT.

YESTERDAY'S NASDAQ MOVE IS.

NDX 100 with a beautiful head fake move, on a Evening Star gap and higher volume which often indicates churning (distribution). The gap creates a much weaker candlestick on the day than if it were to move up in one large bodied candlestick to the same level and close near tor at the highs of the day.

Again, the additional week or so allowed the poorly formed triangles of April 2nd to take on a very obvious form with very obvious resistance levels which once broke, retail traders would chase. If you read the two articles on Head Fakes, you'll understand EXACTLY why and WHY THIS MOVE WAS FORECASTED TO OCCUR ALMOST A MONTH AGO ON APRIL 2ND LONG BEFORE ANYONE HAD ANY HINT THAT IT WOULD OCCUR (see the last post, Important Market Update Part 1: The Forecast).

The point of this post is to share with you our edge, those "3 things" I have been looking for in this forecasted move to tell us we are near a pivot point/reversal.

Two-thirds of stocks will move directionally with the market, there will be differences in the relative performance, but you can almost bet that if we have a market update calling for an upside reversal, most of the stocks you own WILL move up and the same goes with a downside move.

I missed an opportunity on Friday in the Daily Wrap to point out something I think is as close to beauty in the market as I have seen. It's also the edge that we use and the "things I'm looking for". 

In Friday's Daily Wrap and over the course of April as the forecast has played out, I've updated you on where we are in that process, whether the expectations of the April 2nd forecast were being met. For the first time on Friday since this entire move off early April lows began, we saw all of the ES timeframes negative, even more than what I had been looking for which was the 7, 10 and 15 min charts. Some of the other averages still have some catching up to do and I think some of the averages still haven't made the kind of head fake move that moves emotion like the NASDAQ did on Friday, but I suspect we are running out of time for the market to do that and it must hurry, not only because this move has so well timed and looks to end right in to this coming week's F_O_M_C, but because the indicators have deteriorated so badly.

The chance I think I missed in Friday's Daily Wrap post was pointing out the current indications and how most have moved in to the zone I was looking for to denote not only the very high probability of a head fake move, but at it's pivot which should be very close by. Instead, I posted several charts which show that beauty, that coordinated ballet between seemingly non-correlated indications that almost ALWAYS all line up together in a way that's almost like seeing a rare formation of herring schooling in a ball, something very unusual, very powerful and somewhat rare, our biggest edge...

 Ironically this "ball" schooling behavior is called a "Bait Ball", which is appropriate because as we can see the process taking place, the fish if you'll excuse me starting to get nervous and moving toward the projected outcome, the actual event, the time when we have our greatest edge to strike, actually happens very quickly. It's the progression of our expectations that tell us this is a probability and thus to be patient, this is why I haven't put out a lot of trade ideas recently, they would have been ill-timed.

As I've shown before, our best entry with the lowest risk and best probabilities are at these pivots.

3-day chart of SPX since April 2nd with a Price Percent Change indicator (blue histogram). This is especially important for options traders, our largest gains are right after the pivot, after that we have much smaller gains, higher risk and the Risk:Reward proposition begins to lose its allure. Beyond that, being caught at the wrong time having enter at anything less than the ideal area can be much worse than simply a diminished Risk:Reward ratio...

Looking at the start of the February cycle we had forecast with the same Price Percent Change histogram on a Daily chart, it's obvious that entering near the stage 1 base is the best, lowest risk entry and the initial gains are the best risk:reward prospect of the entire trend. But, those returns are diminished and rather quickly if the entry is much beyond the beginning of stage 2 mark-up. You could have entered at stage 3 expecting the trend to continue just as many retail traders expect the primary trend since 2009 to continue because "This tine it's different", the motto of all asset bubbles.

I'm not saying gains can't be made, I'm proving the risk:reward prospects diminish significantly on entries outside the base area. Once in the stage 3 "Top" area of the cycle, you could have had nearly 3 weeks of dead, at risk money and opportunity cost. If you waited just a day or two too long, you'd have losses. These pivot points which are most often accompanied by head fakes are EMOTIONALLY the most difficult trades to enter, they go against everything your emotions tell you, everything you see on the price trend chart, but we don't enter any of these long or short based on opinion, gut feeling or anything else. Just as I mentioned I have not called out many new trade entries recently, there's a reason, if I had, those positions would be underwater and they would have been called on anything but the objective evidence of the charts.

WHEN I START CALLONG FOR AN IMMINIENT REVERSAL OR START PUTTING OUT NUMEROUS TRADE IDEAS, YOU CAN BET THAT WE ARE AT THE PIVOT, THAT WE WILL BE AT AN EMOTIONALLY DIFFICULT PLACE TO ENTER AND THAT THE SAME 2/3RDS OF STOCKS WILL MOVE DIRECTIONALLY WITH THE MARKET.  In other words, when the pivot point is here (which I suspect may be in to this week's F_O_M_C as the timing of this April bounce is just too unbelievably close to the F_O_M_C to actually believe it was random), you can more or less expect about 2/3rds of long stocks will move directionally with the market..

As to the chance I missed on Friday in the Daily Wrap, while it was important to show you where we are and the process of confirmation of the expected forecast, I should have pointed out this process in the past which was visible on the charts of several assets I posted that day. In pointing those out, the concept is not hypothetical, it's not somewhere off on the future right side of the chart, you can see for yourself. While pointing out these concepts in passing, I should have showed you how much more there was to them and how "BEYOND RANDOM" they were as they are becoming now.

Here are two such charts from Friday's post I should have made note of to a more significant degree as this "ballet", this one brief , beautiful moment that is our biggest edge, takes place and note that even though we may have seen it coming a week or more in advance, the process itself happened fairly quickly.

 One such indicator is our custom SPX:RUT Ratio which under normal "confirmation of price" circumstances "should" move with the SPX (green), to the far right you can see the second half of a "W" base and even a small head fake move (stop run) just before moving up as the April 2nd forecast had projected. I was pointing out the lack of confirmation since which is important to our near term , next pivot, but the indicator proved itself and I missed the chance in Friday's post to show you in a meaningful way.

At the EXACT same time, 3C which is based on money flow, not the relationship between the SPX and RUT, A TOTALLY DIFFERENT INDICATOR, was giving us the same positive base signal in to the April 2nd forecast (in white on the time axis.

While only 2 charts, how is it that two totally unrelated charts (in their construction and input dat) could be giving the exact same signal at the exact same place if this wasn't one of those rare moments of beauty in the market where/when everything aligns and the probabilities are without question?

I could show you hundreds of charts and you could probably dig up many yourself, but I'll try to not bore you to death and show you a bit more as I should have on Friday.

Keep in mind I had looked at probably somewhere near 100 individual stock charts on my watch list that day as well,  until I saw a repeating pattern over and over again that finally convinced me of the path of highest probabilities. As I posted that day on 4/2 ands numerous times since, the April 2nd forecast, IMPORTANT: AAPL Set-up & Market Movement it was more chance and AAPL's better developed chart that led me to use AAPL as a "Proxy for the market". In truth I could have used numerous other stocks , ETFs or market averages, but it just so happened that I had seen enough by the time I looked at the AAPL chart and it had a much better triangle formation at the time which is what I was basing my forecast on, so there's nothing special about my choice of AAPL as a "Market Proxy" beyond that...

First I think anyone would agree that based on what we could see in price alone on April 2nd, it would be very difficult to forecast a clear triangle/resistance area and a breakout above it as well as a head fake breakout above the triangles without using our other resources...

The SPX daily chart as of 4/2. To that point, all we had seen for the majority of the year were choppy, range bound lateral trade.

THIS IS WHAT WE KNEW BEYOND PRICE AS OF APRIL 2ND WHEN THE FORECAST WAS MADE.

 This is our SPX:RUT Ratio custom indicator which is clearly diverging from the flat range in the SPY. As you'll see with many charts, note that the last day to the far right is April 2, so this is all we knew as of that day.

This is a strong leading positive signal in the indicator (red) which just so happens to take place at a small double bottom or what I would term a"W" base. You'll see this numerous times in the charts below.

 This is high-yield corporate credit which is one of the go to levers used to ramp the market short-term. We use it as a leading indicator, But 3C will usually give us a heads-up well before HYG itself actually moves as you can see in this scenario with April 2 to the far right. HYG was already leading the SPX by April 2 which can be seen to the far right on the time axis. Another strong indication backing the April 2 forecast.

 This is HYG in blue versus the SPX in green. Note "W "base in the SPX and how HYG is already leading positive well before April 2 to the far right. Another strong indication.

 This is the SPY 30 minutes 3C chart which had just come off a negative divergence and pull back into a positive divergence at our"W" base. So far every chart above argues for a move higher as of April 2.

 This is a broader view of the SPY on a 60 minutes chart showing a larger negative divergence toward the end of February, another small"W" base around mid March which has the same reversal although not a negative divergence as it was not strong enough to migrate to the 60 minutes chart unlike the 30 minute chart above. Then to the far right is the base on a 60 minute chart right into April 2 with a positive divergence in 3C.

As I said it was not only the averages or leading indicators, but individual stocks as well as most will move directionally with the market. We can call this herding like the "Fish Ball", we can call this manipulation, but I doubt we can call this coincidence. 

Recently when Bloomberg terminals went dark globally, trading came to a near halt, but not because of the lack of quotes from the Bloomberg terminal or the lack of analytical tools, but in interview after interview that day, institutional traders talk about the chat feature of the Bloomberg terminal and having to pick up the phone like the, "old days" and how inefficient it was to trade like that. This, even to the point of canceling deals and offerings.

 While I think Bond traders, FX traders, market makers, specialists, Etc. can see changes in other markets (or the "tape") and start to prepare which may cause some of this herding, I think it is clear that beyond the tin foil hat conspiracies of central bank market manipulation which is very real, these smaller moves are clearly coordinated and the Bloomberg terminal outage seems to give us a new understanding of the interplay between institutional traders and the mechanism of it.

This is an NFLX on a 30 minute chart showing the previous gap up off earnings and a leading negative 3C signal as well as our short entry on February 26 at the yellow arrow and the absolute high of the move. Note once again, how price has turned lateral toward the right side of the chart which ends at April 2 with relative positive 3C divergences at the white arrows and white box.

Not only are leading indicators giving us indications of a low and pivot to the upside, but so is 3C in the averages as well as individual equities.

 This is a 15 minute chart of the NASDAQ biotech Index with a W base/bottom at the exact same time as the SPX with February 2 to the far right. I'm guessing the positive and leading positive 3C divergences are clear. Had I drawn the trendline a little higher as I should have at the first W low, you would see the second low pierces that on a head fake move or stop run just before a reversal to the upside. This is the concept I keep talking about of head fake moves being one of our best price based indications for the timing of a reversal. This is also the exact reason I expected a head fake move on a breakout above the triangles and it is contained in the April 2 forecast. 

I will show you below why I expected the breakout move, such as QQQ Friday to be a false or head fake in the April 2 forecast. As such these head fakes are one of our best entries with the lowest risk and highest probability. For example long option calls for IBB on that day would have been at a discount.

IYT/Transports at April 2 with a positive 3C divergence on the 60 minutes chart. You'll see on a chart below that there was actually a strong head fake move just before IYT made gains and ultimately a breakout above a range.

HOW THE PROBABILITIES OF A HEAD FAKE MOVE/FAILED BREAKOUT ABOVE THE TRIANGLES, WERE DETERMINED ON APRIL 2ND WELL BEFORE ANY MOVE HAD TAKEN PLACE...

With the forecast already fairly clear, it became about what happens next so we can use the forecast to our advantage; using higher prices to close long positions or open/add-to short positions.

 This is the 4-hour long term chart (very strong depiction of the underlying trend/high probability outcome). Note the strong leading negative divergence into the triangle in ES/SPX Futures (e-mini). This was posted on April 2 and tells us the probability of any short term move to the is institutional distribution as has been the trend through this similar triangle (to the SPX) in ES.

 This daily chart has the strongest probabilities showing several smaller divergences that lead to downside moves and a very large leading negative divergence which is the most notable formation on the chart. This tells us the process of distribution has long been in play and there's no reason to believe that this trend was/is about to change based on what would otherwise be considered a small accumulation zone in early April in fact so small it doesn't even show up on either of the above charts.

This is a 60 minute chart of the ES, a very strong timeframe on its own. To the far left you can see the W bottom and positive divergence in 3C (like SPY, NFLX, Biotechs, Transports, Leading Indicators, etc) as well as the April 2 date marked on the time axis. What is special about this chart is the confirmation of our expectations and forecast from April 2, specifically distribution of higher prices

SOME OF THE CHARTS ABOVE AS THEY APPEAR NOW....

Our SPX:RUT RATIO and what has happened since April 2 (highlighted in white on the time axis). Note to a very similar negative divergence in this indicator which has nothing to do with the ES or the way 3C works, yet the trend is very similar.

 This is a 60 minute chart of HYG, High Yield Corporate Credit which is also one of the go to levers to ramp the market as Algos interpret HY Credit's move higher (which is almost exclusively traded by Institutional money as a risk asset) as institutional risk on, thus the very tight correlation between HYG and the market. 

The positive divergence on the 60 minute chart to the left is the same one you saw above. The green arrows indicate 3C price/trend confirmation or what I call "in line".

I have spoken many times recently about multiple time frames in HYG showing distribution, they have migrated to the 60 minute chart which is in a strong leading negative position as HYG forms its own small triangle in yellow.

 HYG in blue versus the SPX in green shows that tight correlation as well as the break in it; especially recently as HYG fails to make higher highs in a lateral trend.

 This is the SPY 60 minute chart showing the same positive divergence you saw above as of April 2 and a breakout area with 3C showing distribution into higher prices which is the purpose of a head fake move.

 This is a 60 minute 3C chart of NFLX showing not only the distribution and short entry on February 26 after the last earnings based gap up, But the accumulation as seen above before April 2 and the most recent earnings based gap up with a clear lack of confirmation and leading negative divergence in 3C.

Unlike the last gap up when NFLX showed a positive divergence just before, which I attributed to the need of market makers to fill a previous gap down in which they would have taken significant losses with inventory at much higher levels, I believe this divergence was broadly market related and not earnings related. Both earnings were a complete sham if you actually read anything beyond a headline print, but as always price action creates perception and no one can read an earnings report  faster than an also can ramp a stock. From what I understand the saving grace was new (mostly foreign) subscribers, with a little talked dark spot of a cost of about -20% per new subscriber. In addition NFLX used pro forma accounting, digging into the very deceptive but very common (now) earnings trickery of add-backs which is nothing more than an accounting gimmick to make results look better than they actually are. Typically we see large banks do this with legal costs, but NFLX shocked followers of this deceptive practice with a new slithering low of using FX losses from foreign subscribers as an add-back!

If you're engaged in international business, currency exchange rates are simply part of the cost doing business however NFLX used them to make their company look stronger then it is. 

If I run a ranch and the cost of grain that I use to feed my cattle goes up and my company is on the ropes, it is on the ropes. There is no hypothetical pro-forma accounting trick that will change that such as, "But if grain costs hadn't risen I'd be profitable ".

However this is the new norm in earnings reporting.

 IBB 15 min 3C chart like the one above at the April 2nd area which showed "W" based area as well as the white lateral trendline, which if I had drawn correctly at the first base low, would depict a head fake/ stop run showing the concept of Head fake moves being one of the best price-based indications we have for the timing of a trend reversal. 

Volatility also is an excellent indication such as the recent QQQ Evening Star candle (bearish reversal candle) from Friday which has fulfilled at least a minimum Head fake target which you may recall I was disappointed in as of Thursday's close.

Being there's no actual price level that must be hit other than a move through a common, highly visible price pattern or technical level that traders will respond to, the easiest way to judge is based on the emotional response such a move creates. If you are familiar with our two articles on had fake moves, you will know that they are SPECIFICALLY designed to move emotion whether through a new high/low, a strong momentum move or a clear break through a technical level. A halfhearted move is an unfulfilled move.

Which move is more likely to get longs to chase price and shorts to cover in a panic?

 NDX daily chart/close as of Thursday April 23rd

NDX daily chart close as of Friday April 24th.

You have no need to ask me whether a head fake move has reached its target area or not. All you need to do is consider how the move affected you emotionally or try to put yourself in the position of a trader that would be affected by the move. Perhaps someone who has been afraid to go long as the market has been choppy, everyone is talking about how over-valued it is and who now feels very confident on Friday's move to finally enter the market. These are the people that are captured in Bull traps or what is known as "churning". The very lack of intraday movement as represented by the daily candle's body combined with the large gap up an high-volume, tells us this is likely a churning event.  Or perhaps someone who is short that feels very concerned that this is the start of a new leg higher in the primary trend. These moves are all about touching emotional extremes to create movement.

After the NASDAQ gap up and the European close, the price trend through the rest of the day was absolutely flat indicative of turning.

Back to our continuation charts...

Finally IYT/Transports which I had hoped to see a bounce in as this is one of my favorite longer-term short positions. Again a similar W bottom going into the April 2 forecast and on the open of the very next trading day, April 6 as we had a three-day weekend, a head fake/stop-run is made in yellow which is not only the best entry(long), but as I have been saying one of the best price based timing indications of a reversal in trend.

The accumulation into early April has turned just like all of the other indicators whether leading, 3C of the averages or individual stocks, in to a leading negative divergence just as the longer term charts such as the ES for our an daily chart had predicted (through probabilities) to be the result of this head-fake move.

These are but a few of numerous assets that are on my watch list. There are a few additional indications I would like to see move like we have seen in the charts above as well as the confirmation through multiple negative time frames in ES.

Quickly, touching on the $USD forecast from April 2 as well...
I include this not only because of repercussions of a weaker dollar and how it will likely help the Fed hike interest-rate earlier, but the repercussions on the broad equity market as well as other risk assets that have been financed by $9 in $USD Carry Trades.

As I have pointed out recently, the $USD has acted as an approximate leading indication for the broad market. There's little doubt that this is largely due to the carry trade, specificallyUSD/JPY which I have offered longer-term macro analysis on (USD down/Yen Up).

 ES in candlesticks vs. $USDX in purple. The general trend is up no doubt because of the carry trade.

 More specifically, the SPX in green versus the USD in red with the USD having a leading correlation to SPX moves (positive in white/negative at yellow).

 This 15 minute chart of ES in candlesticks versus the USDX (purple) also shows leading indication of the USD.

Thus the forecast for the USD has been meaningful on multiple levels all affecting the market. However unlike the historical USD Legacy arbitrage correlation (USD down=risk assets, equities, gold, silver, oil up OR... $USD up= equities, gold, silver, oil, etc. down), this would be the opposite due to the carry trade on wind ($9 trillion $USD in carry).

Note the ES/$USD correlation on a 60 min chart and the recent divergence in the $USD which has PRECISELY followed our April 2nd forecast for the $USD which was the same day as the market forecast, but in a separate post.

This is the actual $USD Forecast and chart right from April 2nd's, Market Update post, the same day as the market forecast.

"The $USD is seeing some weakness which is something I expected near term before a larger bounce and then an even larger decline"

Above is the actual $USD chart from 4/2 and the comments/forecast just below from the linked post above.

The USD was week as of April 2 second as you can see, but moved according to our forecast.

 The USD daily chart (3C). Note to Strong 3C confirmation in UST's strong uptrend until the new year as price began to peel away from the long-term trend line the upside which as we often know is a"seemingly" bullish event, but it actually is a red flag telling us a change in trend is coming .

"Changes in character lead to changes in trends"

Around this time 3C also diverges negatively on a very strong daily chart which indicates extraordinarily heavy money flow, which makes perfect sense considering the carry trade and its size.

The USD forecast and probabilities are not difficult to gauge as 3C moves to a leading negative trend and the USD moves from an increased upside move (peel away from the trend line-Changes in character lead to changes in trend)  to a triangular/lateral trend 3C she makes another leading negative low.

 The 60 minute chart as of April 2 was showing a positive divergence very early, but shorter term charts which unfortunately cannot look back this far were showing a positive divergence in the UST which was the basis of our forecast, ""The $USD is seeing some weakness which is something I expected near term before a larger bounce and then an even larger decline" and as you see the "Larger bounce" begins just after April 2 with some initial confirmation and then pivots at a negative divergence to the second part of the forecast, "and then an even larger decline" which is in process currently, With a small corrective balance last week (no doubt to help the market make a breakout Head-Fake high).

Looking closer at the one day USD chart, Three she is not only leading negative to a lower low but the UST has formed a triangle like much of the market. Large triangles tend to be tops or bottoms not continuation/consolidation patterns.

Perhaps more damning situation for the $USD is its failure to make a higher high at the yellow trend-line area. As many of you may know my forecast is for the USD is to make a lower low on a primary trend basis. As explained in previous posts, this would have a significant effect on not only the F_E_D's actions with regard to interest-rate hikes as they have been nervous about the stronger dollar and hiking rates with a strong $USD, but would also have a huge impact on the equity market as a lot of that $9 trillion in carry trade went to finance equity purchases. The carry trade can snowball in to huge losses because of the large leverage, commonly at 100 to 1 or even 300 to 1 leverage so a 1-pip loss could be a 300 pip loss because of the leverage used in Carry Trades.

 I think you can see how this could snowball into large losses spilling over into the equity market extremely fast. For some historical reading, check out, "Long Term Capital Management", the smartest guys in the room (with 2 founders receiving the Nobel Prize for economics) and how the carry trade effected their collapse in nearly the collapse of the US economy as a consequence.

I hope these posts have been helpful I will obviously be adding more with developments.

I hope everyone had a great weekend and I'm looking forward to a fantastic week ahead!