Daily Wrap

Last week (around Wednesday) we got out first hint there would be "Loitering" around important support/resistance in the form of the major triangles we had forecast not to only develop, but to be the object of a head fake move and to see that move fail before making a significant move lower in the market as we have been largely lateral all of 2015.

This "loitering" concept isn't the norm for typical head fake moves/resistance/support areas, it's common at important head fake moves that are meaningful for the market and in this case I believe it will ultimately be shown, the market's primary trend. Here's an example of the bounce behavior we expected going in to Friday and as of Friday's "Week Ahead" forecast, I believed until right about mid-week (Wednesday)...

 The SPX daily chart/Triangle and a poor example of a head fake move as we could tell through April the market was weak. The former resistance trendily turned support , turned resistance is the "Loitering" area in orange. Rather than a clean slice through support/resistance, this meat grinding loitering as I have come to call it, occurs and it is like a meat grinder for many traders use to chasing momentum moves like Friday's for instance, today those guys are wiped out.

The NDX made the best head fake move, a good example of we what a head fake move should look like (in scale), the point of it is to hit areas that move traders emotionally  get them to make trades based on emotion rather than logic or objective evidence. Of course I wrote 2 large posts that are linked on the members' site on the right side about the head fake move so I won't try to summarize it in a sentence.

However the point here is this meat grinding loitering that takes place. Even at the September 2014 Igloo/Chimney top (head fake move) that led to the October lows had a period of loitering around the trendline and that was an important move for the market (October lows), how much more so this one?

And AAPL which I used as a proxy/example for the broad market in the April 2nd forecast with a healthy head fake move, a failure of the move and loitering around the apex of the triangle. This will go on for a short period and grind up traders, throw everyone off guard and get them second and triple guessing their analysis before it resolves, but it does resolve just as the September 2014 head fake did.

Yesterday it was clear that we'd start the day with weakness, what happened next was not as clear, but I suspected we'd end up seeing the market hold in the area until about mid-week. Internals yesterday were not at 1-day extremes, but they were at areas that were indicative of weakness in to upside moves.

TODAY'S INTERNALS ARE AT EXTREMES AND THE PROBABILITIES FOR A MOVE HIGHER TOMORROW ARE HIGH BASED ON THEM ALONE.

The Dominant Price/Volume Relationship was in all 4 major averages today and the same relationship in all 4, Close Down/Volume Up. There were 19 Dow stocks, 80 NASDAQ 100, 1019 Russell 2000 stocks and 308 S&P 500 stocks, that's seriously dominant of the 4 possible relationships.

Close Down/Volume Up is the strongest 1-day oversold relationship of the 4 and almost always sees a green close the next day.

 One of the first things I talked about in last night's Daily Wrap was the "Shooting Star-like" candles in all of the major averages and how despite the fact they weren't textbook, they conveyed the psychology of price action which of course is bearish on a Shooting Star.

While we are on internals, of the 9 S&P sectors, all 9 closed red with Utilities lagging at -2.23% and Consumer Staples leading at -0.80%. This is an exceptionally strong 1-day oversold condition in addition to the Dominant P/V relationship.

Of the 238 Morningstar groups we track, an amazingly oversold 15 of 238 closed green. Take all 3 of these together and you have a recipe for a 1-DAY OVERSOLD CONDITION and most typically a close higher/green the next day.

The Averages seem to support that theory at least on a 1-day basis.

 The QQQ's best it could do positive divergence today on a 5 min chart to the right,

The IWM's 5 min positive today...

And the SPY's 5 min positive, all in line with the theory of a bounce/green close tomorrow.

However, DON'T FORGET THE BIG PICTURE...

SPY 30 min with a negative divergence through the entire chart, but a much worse distribution signal through 2015 and especially in the area of our triangle head fake area.

I mentioned earlier today after looking at FX/Currencies that I though there was a carry trade unwind under way today ...

 If you look at Treasuries represented by TLT (20+ year Treasuries) in white vs. the SPX in green), you see the normal flight to safety or risk on trade in which treasuries and the market are near inversely correlated (left), then treasuries and the SPX rise, this is in large part due to the F_E_D's buying of Treasuries during QE, but it's also one of the signs of the carry trade being opened /expanded.

Conversely, one of the signs of a carry trade unwind is a fall in treasuries...

 This is the SPX (green) and TLT both falling at the same time, not the typical "Flight to safety trade you'd normally expect on the SPX losing ground. This is just another hint that the carry unwind is well under way.

 Well before we had any positive divergences in the averages today which I talk about in the first sentence of this Market Update from this afternoon, it was VXX (Short term VIX futures) which were pointing at a bounce being built (which we should see tomorrow) as VXX was seeing negative 3C divergence like this 3 min chart today.

However, applying the same logic to the bigger picture for the market...

This strong 15 min chart (and long) of VXX shows an outstanding positive divergence/accumulation. As we have seen over the last several weeks,. VIX derivative assets and futures are being aggressively accumulated by smart money,  they know what's coming next as I believe do we.

Additionally some intraday Leading Indicators were also pointing to a bounce in the market. Take our custom SPX:RUT Ratio intraday...

 Note the flat trend through most of the day and leading trend in to the close.

Remember the big picture though...

 Two bases forecast by this indicator and one major top...

Our Pro Sentiment also led most of the day and in to the close in a big way.

As did High Yield Corp. Credit in to the close.

This is part of the reason I decided to go ahead with the Trade Idea: VXX Puts (speculative) position. I believe this will be short lived, thus the leverage of options.

Speaking of which, we got out right in time today with NFLX, I didn't have a chance to post the P/L earlier, but here it is....

A +75% gain. I normally would have stuck with it longer, but it didn't look right and considering the closing candle...

 A bearish Shooting Star on higher volume which in my experience makes the candlestick (reversal) 2-3x more likely to be accurate.

On the other hand, the BABA close was beautiful...

 Not only a hammer on increased volume (bullish reversal), but a head fake move that hit stops with clear support being broken.

This is the BABA 15 min 3C chart it looks like those stops hit today were accumulated in size.

As for our other position, USO...

API inventories came out after the close with the first draw since the first week of January at 1.5mn barrels.

 Crude futures intraday distribution and a push higher on the API data after the close, still not very impressive.

The 5 min Crude futures negative...

And 7 min.

USO 3 min didn't come close to confirming the gap on the Saudi oil minister's comments and instead showed a worsening picture in 3C.

As did the 10 min chart going from a huge relative negative to a sharp leading negative today.

The bounce above the base's resistance area was a theory put forth last week as a head fake and momentum switch to the downside, I still believe this trade works for us.

As for futures tonight, there are some decent signs of improvement and I suspect we are going to see an oversold bounce tomorrow, the question is how long does it last and I don't think it's long based on what I'm seeing now.

Everything else is fairly quiet right now, but I suspect by the morning things will have changed...

NASDAQ 100 futures short term...

 NQ 1 min

NQ 5 min

After this, all bets are off as this was about where I expected the market to hold up until (Wednesday).

We'll of course let the market tell us, but everything it has told us so far like my gut feeling yesterday that we'd have a sharp/fast reversal down like we saw today, has been pretty darn close. Just remember those longer term charts, VIX, SPY, IWM, Leading Indicators, and the $USD.

I'll check futures as usual before turning in, otherwise I'll see you in the morning and hopefully we'll have another few trades with double digit gains under our belt before things really tear lose.

UNG / Natural Gas Update

It has been about a month since the last UNG update and this one seems timely.

The trades that would be available would be a pullback/swing short, perhaps an ETF like DGAZ (3x leveraged inverse/short Natural Gas) and after that, on a trade set-up in which we confirm the probabilities of the pullback being accumulated (much like the BABA trade set-up), long UNG, UNG calls or UGAZ (3x leveraged long Natural gas) or Nat Gas futures.

Thursday morning at 10:30 a.m. we have the EIA Natural Gas Inventories which may be an interesting time to look at entries as the initial volatility will sometimes give us a better entry. I'll be setting price alerts and following up on UNG to try to determine the best probabilities for a trade/entry.

Lets take a look at the charts.

 4-day UNG chart shows a recent Hammer/Doji bullish reversal candle (second from the right) followed by a bullish candle on increasing volume after nearly the entire year of 2015 trading in a lateral range after breaking important support in Q4 of 2014.

 Our Custom X-Over Screen shows the 10 and 22 day price moving averages in yellow and blue respectively. I add two additional indicators to avoid the false signals or whipsaws that are so frequent among moving average systems.

In the middle window I have a custom indicator I created with a number of different conditions (yellow) and a 22-bar moving average applied to it (blue).

The bottom window is a standard Wilder's RSI (period 14/use Wilder's smoothing).

There was a confirmed SELL / SELL SHORT Signal at the 3 red boxes to the left of the chart as the 10-bar ma crossed below the 22 ma. The custom indicator in the middle window (yellow) crossed below the blue 22 bar ma and Wilder's RSI (you can substitute the Ultimate Oscillator for RSI) crossed below its mid-line (50). All 3 taken together give a signal and that signal doesn't change until all 3 change together.

For instance at the (3) red "X"s the 10-day price moving average crossed above the 22-day blue, in a normal ma crossover system this would have been a false signal or whiplash, however in this system it remained an open short signal as all 3 indicators need to signal. Although I didn't check RSI at each point, it doesn't matter as the custom indicator in the middle window didn't crossover its moving average any of those times.

We don't have an exact buy signal yet, although we have 2 of 3 signals and the 3rd is quickly moving in the right direction.

Here's a closer look...

Typically we could expect a pullback to either the yellow or blue moving average before a buy signal has been generated (when we are very close).

Once there's a buy signal, more often than not the first pullback will be to the 10-day yellow moving average with subsequent pullbacks in the trend pulling back to the deeper 22-bar/day moving average  (price).

Interestingly many of my indicators work together well. This is my Trend Channel which is the first custom indicator I won an award for. 

The Trend Channel is a self-adjusting channel that automatically adjusts to the volatility and character of the stock its applied to. Unlike the wild swings of Bollinger Bands and the inflexible Envelope Channel, the Trend Channel has no settings other than the timeframe you use it on, As mentioned, it automatically determines the "normal" volatility for an asset and then creates a channel with a multiple standard deviation around the mean, if price violates that standard deviation of the channel, we have a stop-out on a CLOSING BASIS,

As you can see above, once the Trend Channel is applied there's no close above the lowest point of the upper channel at the two "N"'s, but there is at the second to last candle from the right at the green "Y" as price CLOSES ABOOVE the LOWEST point of the upper channel for a short (it would be the highest point of the lower channel for a long).

The channel self-adjusts to changes in volatility in the stock as the trend matures and will almost always hold a normal consolidation without stopping out. While you'll never get out at the exact top using this channel, you will catch the meat of the trend without having to guess, "Is this far enough?" The channel will also continue to lock in gains every day so long as the trade is still in a trend.

Interestingly the Trend Channel just stopped out the downtrend of -41.70% just as the X-Over Screen is about to give a confirmed long signal.

The long term daily 3C chart for UNG shows a negative divergence at the chart's highs and confirmation as 3C follows price lower until 2015 in which the price trend changes from down to more lateral and 3C goes in to a leading positive divergence (exceptionally strong signal) indicating heavy accumulation of UNG through 2015.

The daily chart of Natural Gas Futures confirms the exact same thing even though it's slightly different than UNG...

NG (Natural Gas Futures 1-day show a 3C negative divergence and downside trend confirmation followed by accumulation/leading positive divergence in to 2015 with an exceptionally strong signal.

This 60 min 3C chart of UNG shows the details of the recent lift off the lows with a positive divergence.

At this point there doesn't seem to be a reasonable pullback entry in which we can enter UNG long as a pullback would give us a better entry, lower risk and the ability to confirm accumulation of a pullback which is a constructive pullback confirming the intent of smart money as they accumulate shares o the cheap.

The 30 min chart shows the same thing in UNG, a negative divergence and trend down with 3C confirmation at the green arrow and a leading positive divergence at thee white area with 3C uptrend confirmation at the second green arrow.

However, the intraday chart shows a negative divergence, not one with strong distribution, but rather one that looks more like a constructive pullback or consolidation is likely.

Looking at NG futures for confirmation...

 The 7 min NG futures show the same negative divergence, again not a strong distribution signal, just enough to turn Nat. gas to the downside in what I suspect will be a constructive pullback and offer us a chance to buy UNG or UGAZ (or calls) at a discounted price and lower risk as well as having the opportunity to verify the pullback is being accumulated as it should be.

The 5 min NG chart confirms the same.

Near term for those with high risk tolerance and the ability to get in and out of trades quickly, DGAZ 3x short natural gas could be played on a pullback for some extra gains or perhaps a quick Put position (UNG puts). However, the larger, higher probability trade is UNG long after it pulls back and gives us strong confirmation (UGAZ, UNG long or calls). This would be the longer term trending trade, but you could play both, first UNG short via puts or DGAZ followed by an entry after a constructive pullback in UNG/UGAZ long or Calls.

Trade Idea: VXX Puts (speculative)

Based on the charts, I believe we have at least a 1-day move down in VXX and UVXY, thus I'm going to open a May 15th VXX $21 Put position just a tad bigger than the normal speculative (1/2 size).

BABA Update

BABA as best as I can tell is slated to report May 7th (Thursday) before the open, watch those option premiums in front of earnings.

As for the actual trade set-up as posted yesterday, Trade Set-Up: BABA today BABA did EVERYTHING we expected in the forward looking "trade Set-Up" post.

I mentioned earlier today (as I would anytime), that a "V" reversal is not common and to look for not only a capitulation/stop run event which already occurred, but a reversal process in the form of a "U" shape of a "W".

To me it looks like BABA is going to put in a "W" base, but I want to be careful not to add to this one until I'm sure that the second low is in place with accumulation and there's a chance of a stop run at the second low (although much smaller) as today's intraday lows act as near term support. This is EXACTLY the scenario we predicted last Thursday for the broad market, you may recall I did not close my UVXY long position on the initial losses as I expected the second part of the low to make a deeper head fake low and this is when and where I closed UVXY long and 30 minutes later opened VXX puts as posted again last night in the Daily Wrap. For an equity long position, it doesn't make that much difference in my view.


Here are the very basics of the situation...

 The strongest chart/underlying trade of the bunch, BABA 15 min relative positive to a leading positive. Note this morning's break below the Psychological stop-level of $80. After that was hit and volume confirmed, the next thing we looked for was a flameout which came and then a reversal process that is proportional to today's break of support at $80.10 and the psych level of $80 (whole numbers draw people's attention and they place stops/orders at whole numbers, why do you think everything in a store is some version of $.99 ?).

The most probable base from this point would of course be a "W" base which we are close to moving toward fulfilling.

 5 min also showing a positive at this morning's lows.

The shorter term 3C charts below are showing more intraday movement...

While this divergence sending prices lower from intraday recovery highs off this morning's lows, ,ay look to be an impressive divergence, remember this is only a 2 min. timeframe. This is intraday movement to move price, not accumulation or distribution. And at this point it looks as if it is moving it lower to make a "W"-shaped base to bounce off.

If we get that, if the market averages look better and we have continued positives in BABA, I would look at a BABA equity long, unless you know what you are doing with options as the premiums increase before earnings and even if you are right you can lose money.

Market Update

You might have noticed the one thing you haven't seen a lot of today are market updates. As of last week we anticipated a bounce in the market to last to approx. mid-week, that doesn't mean up every day, but generally higher by about tomorrow.

Today there's very little doubt that the Dominant Price/Volume Relationship will be Close Down/Volume Up and other internals will also point to what would normally be a strong 1-day oversold condition which would indicate a bounce or green close tomorrow.

However today the signals have been very poor as to the market resolving early weakness as anticipated and turning that in to a toehold the market can bounce off of. I find myself wondering if we get an oversold condition and bounce tomorrow or if the market is simply just falling apart.

Look at today's NYSE TICK index and its breadth which is horrible...

 The NYSE TICK Index today has hit exrttreme levels of -1250 pretty consistently and as deep as -1650,  this could certainly lead to a 1-day oversold bounce tomorrow.

 The most telling asset however has been Short term VIX futures(VXX) as it trades opposite the market and 2 min negative divergences like this suggest it pulls back and the market bounces same as breadth indications above.

 The VXX 3 min chart shows the same.

As does the 5 min chart, all in line with expectations for a small bounce in the market (pullback in VXX) or rather not a small bounce, but a short lived one.

Why short lived?

 This is the strongest chart of all of the VXX charts above, a 15 min leading positive divergence in line with intraday activity over the last 2 weeks showing extreme accumulation of protection as mentioned numerous times yesterday with much better relative performance than the normal correlation.

This tells me that no matter what kind of market bounce we get, this ends badly for the market.

This SPY 5 min positive which is not all that developed is just about as good as it gets.

To me this is not worth a short term bounce trade, there's a lot of downside risk and as I said yesterday, I have a git feeling this turns fast just as it did today.

Perhaps today was the turn I was speaking of, although some of the evidence above (VXX short term charts) argues against that at this point.

 However when you consider a market related long, remember this chart of SPY 30 min with a HUGE leading negative divergence/distribution that has gotten worse and right where it would be most expected, ON THE BREAKOUT ABOVE THE TRIANGLES FROM OUR APRIL 2ND FORECAST.

 QQQ 5 min also with something "close" to a "W" base and a positive divergence, but that's very near term and you can't forget this...

QQQ 30 min (much stronger signal) leading negative.

THIS MARKET IS ON THE EDGE OF THE CLIFF LIKE  WILE E. COYOTE

 IWM 5 min also with a "W" like base area and slight positive

 The 10 min chart looks better and again as I said last week, near term underlying 3C signals look better in small cpas than the rest of the averages.

However, sear this in to your mind...IWM 15 min deep leading negative divergence

As for Index futures, intraday there's no well-formed base to bounce off...

 But ES does have a 1 min positive

As does NQ

And TF.

Normally I might take up a VXX put or maybe IWM calls, I just think the risk:reward relationship is starting to skew way too much toward a surprise gap down event on some unexpected news that can and will take out months of longs in one morning.

For me this is time to sit back and let core short positions work and not take unnecessary risk just to have some trade in the air.