Daily Wrap

Friday's The Week Ahead forecast started with this paragraph:

"There are numerous smaller indications that make me think we either open higher early next week or we try to put in more of a base for a bounce, but I mean bounce in the most nearly meaningless way, nothing I would trade (other than a speculative position) and nothing that would make me think that our course is going to be interrupted by anything more than some short term noise if that."

Today looked a lot like that "trying to put in more of a bounce for an early week bounce", however it's important to take the forecast above for what it is. This is the 5th consecutive red close for the SPX, with the 200-day expected to act as a brief speed bump and after that, everything changes. 

It appears the retail crowd who was so bullish on Friday with the "Buy the Dip" motto have changed their mind today which is perfect for the Week Ahead (early option of the week) forecast above.

Although staging and cycles sound like arbitrary malarkey, do you remember what I said in last Friday's The Week Ahead forecast? 

"I'm fine carrying some downside positions in to next week, including Trade Ideas from this week including FAZ (3x short Financials), SRTY (3x short Russell 2000), UVXY (32x long Short Term VIX futures), SQQQ (3x Short QQQ), QQQ 8/21 $112 Puts, BIS (2x short NASDAQ Bio-Techs).

The EUR/USD which as a carry cross has sponsored this week's bounce along with HYG, some VIX smack-downs, is clearly looking to make a downside reversal."

I say this often because I mean it, "You have to know where you are to know where you are going" and staging a cycle, especially when we know what the underlying trend is well before is the easiest way to not only know both of those things, but to use price to your advantage. For instance I asked numerous times during this bounce from July 10th after showing the short term and long term 3C charts, "How would you trade this?". The answer from the charts alone was simple, sell/short in to price strength.

 After enough time you see the little hints such as HYG being activated, VIX dumps, or even just price trend itself such as the choppy lateral range at #1 proceeding a decline, it's likely to be a stage 1 base for a bounce. In this case we knew well before the bounce started that it would be used to sell in to by 3C charts , breadth charts and numerous other indications. 

Stage 2 mark-up has decent confirmation (3C) and stage 3 top/distribution goes negative and puts in the tell-tale Igloo/Chimney head fake (yellow) that we see before 80% or trend reversals in any asset and any time frame, it just needs to be confirmed and the negative divergence on this 15 min chart confirms, although more detailed charts did it earlier.

Stage 4 comes nest, that's decline, that's what we knew at last week's The Week Ahead, that the week ahead (last week) was due to move to stage 4 decline and has now erased the entire bounce.

Also not the long 100-period Stochastics I use not as an overbought indication, but as a trend strength indication; it dumps right at the head fake (the best entry we can ask for and exactly where we opened QQQ puts). 

A more detailed 5 min chart shows the previous bounce off the SPX's 150 dma as well as the small accumulation at stage 1 which was not strong enough to show up on a 5 min chart telling us this bounce was doomed to fail before it even started, so how do you trade that? The same way smart money set up the bounce to be traded, tom sell or short in to price strength. These cycles are all pre-determined, they are not random.

As for the market strength, look at point "A" and point "B" which have nearly the same price level in the SPY, yet look at how much lower 3C is at point "B" as it sees continued distribution as the primary trend.

So any bounce we may get early this week should see what in to price strength?

Speaking of which, earlier today I was showing you the Daily Candles and where I thought they'd close to set up a bounce. Remember I wanted to see price come back down intraday toward the a.m. lows (Intraday Update and Possible Trade Plan/Idea)? This helps set up a stronger base that can support a bounce, although I clearly don't expect anything of much significance, but the retail crowd have already flipped sentiment from "Buy the Dip" Friday to bearish today. The market seems to do a great job of making the largest number of people WRONG at any given time.

From the link just above this morning:

"Since capturing the charts above, the NYSE TICK (intraday) looks like it will break the channel to the downside, that could lead to the conditions I'd be looking for to add to the Trade Idea: VERY SPECULATIVE IWM call partial/speculative position from Friday. Usually right around the European close we get a change in character in intraday prices so it may be a point of interest in any short term speculative long positions."

This gave us the exact closing candles I had posted earlier in the day that I hoped we'd see on the close...

 DIA 3 mi chart positive divergence with lateral trade intraday today.

 QQQ 3 min intraday positive on lateral trade as well.

 IWM which is my favorite for a bounce has a positive divergence, although small, out to the 10 min chart.

 And the SPY has a similar chart to the DIA/QQQ 3 min leading positive and lateral trade.

 This gave us those closing reversal candlesticks that make a bounce more likely such as the DIA's Morning Star candle on increased volume which makes the candlestick reversal 3 to 4x more effective or probable.

The IWM was just a bit wide in the body for a star, but there it is right at last ditch local support.

The QQQ daily shows the head fake above the multi-month resistance range to have been a head fake as we called it with out entry in QQQ puts at the very top on the 20th of July.

Note the head fake below the Ascending Triangle that drew in new shorts and created short squeeze momentum once they started covering as price moved back in to the triangle with another head fake above it as we saw distribution up there. This also gives us a Crazy Ivan shakeout on both sides of the triangle which is too large for a normal consolidation/continuation price pattern in the first place with volume completely wrong.

And the SPY putting in a bullish reversal Morning Star right at the 200-day, the only thing that would have made it more probable would have been an increase in volume over Friday's.

Remember this morning's sell off as depicted by the NYSE TICK with an extreme of -1819, Opening Indications?

That was a pretty extreme reading for TICK even during the stage 4 decline, something about weekends and traders who have a 9 to 5 putting in their orders to fill at the cash open. In any case, at the same time market support came in the form of yields, take a look...

 30 year yield in red vs the SPX as the TICK hit an extreme of over -1800, it seems yields ad their magnetic quality lifted the market right out of the pits early on.

As a reminder of yields' ability to act as a magnetic leading indicator and what this market looks like beyond an intraday stick save, here's a longer view of the 30 year yields...

First they led the market to the upside at stage 1 and the start of stage 2, then they negatively diverged in to stage 3 and were leading lower by the time the SPX made its head fake and are still leading lower bigger picture.

Leading Indicators were pretty subtle today, but they were either in line or slightly positive, not leading negative as they have been the last 1-2 weeks.

 Our custom SPX:RUT indicator went flat on the day vs the SPX (green).

Pro Sentiment turned lateral with the SPX.

And HY Credit which had been leading to the downside made a right hand turn lateral. However this is intraday and I don't want to make a bigger deal of a probable bounce than it is so for some context...

HY Credit in to the last bounce cycle starting 7/10 vs the SPX (green).

And the longer term HY Credit vs the SPX leading negative with only 1 positive divergence right at stage 1 /base of the mid-July bounce.

I wouldn't say the market is screaming for a bounce, but I do think it will get one. This wouldn't change any trend positions whatsoever, other than to maybe open a few new ones if we get a decent enough move to make them worthwhile, otherwise  I've just been letting positions work.

As for futures tonight...

The Yen and Euro Futures look to come down short term...

 Yen 3 min Futures negative

Euro futures 5 min negative,

Both would suggest the $USD benefit and thus the USD/JPY benefit which has been pretty ewell correlated to ES/SPX futures which are now just about in line...

USD/JPY in candlesticks and Es/SPX futures in purple have reverted to their mean near term so any weakness in the Yen or Euro would benefit the USD/JPY and help support the market, but these are all VERY near term, along the lines of the probable bounce.

Beyond that, I expect the USD to head lower...

 60 min $USDX large negative divergence.

Daily $USDX should head lower later in the week.

As for Index futures, VERY near term the 1min Russell 200 futures look the best going in to the overnight session, but this is intraday 1 min charts ONLY!

 TF 1 min positive divergence going in to the post market session.

However at the 5 min chart which is the minimum signal for any position not considered absolutely speculative, 3C is in line with price which indicates confirmation of the downtrend. This would need to have a positive divergence to consider any trades that weren't speculative on the long side, otherwise it's a great indication for letting current shorts continue to work for you.

The more important 10 min chart is also confirming the downside, although not leading like last week, this still points to lower prices this week and when we talk about a bounce, we are talking about something at this point that is so minor, it's nearly noise. We have 1 speculative position out, but even at a total loss on that position it would hardly put a dent in the gains of core shorts we have opened over the past week/s, months.

I really don't see much sticking out other than what I showed you intraday and with the daily bullish candlestick reversal signals, but those don't have any target, they could be a 1-day reversal and then back down and only about half had the increasing volume.

As usual I'll take a look at futures before I turn in and if anything stands out I'll post it. Otherwise tomorrow I expect a bit more of the same, we should have a better grasp on the probabilities for a bounce and if so, where to, but the theme for the week looks to be lower and once the SPX 200-day is broken, sentiment is going to change fast and for the worse.

Have a great night.

USO Crude

I haven't put out any new positions in USO.Crude because it is doing what we expected longer term, but it blasted right through short term expectations to the downside. Until There's a clear confirmation at this point of longer term expectations, I don't see a lot of reason to put out new positions.

Here's where we are in a nutshell.

 This is a weekly chart. We had strong negative divergences last summer in the red square for USO/Oil to come down. In to 2015, we started getting strong positive divergences suggesting it would start turning lateral from the prevailing downtrend which it did. This looked initially like a counter trend bounce would take shape and oil would head lower, but after a few weeks, there was too much accumulation in the area for a simple counter trend bounce and it started taking on the look of a large stage 1 base that could (if it did some more work), support a primary trend reversal to the upside.

 Remember the head fake move (confirmed) is one of the best price-based timing signals we have as they occur about 80% of the time just prior to a reversal either up or down in any asset and in any timeframe the trend you are interested in may be in.

On March 18th we had a head fake below support, a stop run which was accumulated as it hit stops and drew in new shorts who were squeezed as price moved back above the lower (support) trend line I've drawn in. From there we saw a +30% rally which we also suspected would break above the upper trend line in another head fake (false or failed breakout). We were looking for USO to come back down toward the bottom of the range to the $16-ish level, but USO moved lateral in a choppy range for a lot longer than anticipated, but did eventually not only confirm the head fake/false breakout, but headed lower with $19 being the area it had to break below to escape that choppy lateral range. At this point the bigger picture expectation was for USO to make a move to the lower trend line area of the range around $16 or BELOW the range in setting up another head fake/stop run which if USO had done enough work, "could" be the pivot to the longer term price /trend reversal to the upside.

"A" is the stop-run head fake that also created a short squeeze with new shorts entering and squeezed as price moved back above the $16.50 area with a run all the way to "b" which was about +30%, but we also saw that as a move that would not hold and mad a stage 1 base, a base that was incomplete and NEEDED to come back down to the lower range to finish its work.

At the small trend line to the far right by the white arrow, USO looked like it would make a short term gap fill bounce, but it just broke lower ultimately heading for our longer term/higher probability move to the lower end of the range and/or below it on a head fake.

This is the 30 min 3C chart showing the accumulation of the stops hit on the break of support at "a" and the confirmation to "b", but then a lateral range with a l;leading negative divergence suggesting not only a false breakout that wouldn't hold, but the anticipated return to the lower end of the range.

So far the 430 min chart is roughly in line with the price trend (confirmation).

 This 15 min chart shows the same thing with the lateral choppy range after the breakout failed to follow through with an increasingly negative divergence suggesting the move to the lower end of the longer term range or stage 1 base (if confirmed).

We have a slight positive right now on the 15 min chart which is actually a strong timeframe, not the largest divergence though. Also volume has been interesting in the area.

Here's a closer look at the 15 min chart.

This is mostly downside/price trend confirmation at the green arrow which means the gap at the 21st saw no 3C confirmation and quickly failed following 3C lower. However to the far right as price makes a move below the range as we anticipated months ago, we have some interesting volume and a 15 min relative (weaker form)  positive divergence.

I'm not fond of shorting an asset that has just made a potential head fake move with potential confirmation on a 15 min chart so soon. I'm also not fond of calling this a long entry as there's no reversal process in price and you know I don't expect a "V" shaped reversal here would be of any use to longer term expectations.

 Looking at USO from the more detailed, although weaker intraday 1 min timeframe, you can see where it went negative in the lateral range and finally broke below $19 although the resistance area was around $10.25, the area above $19 has become part of that lateral chop. The short term positive divergence that looked like a gap fill was probable before a move lower seems to have failed and I say seems as the gap fill theory did fail, but the larger expectation of a head fake below such a large range has not necessarily failed. This would be the much larger trade that we've been considering almost all of 2015-it's just USO needed to do more work for a base that could hold a primary trend reversal.

The 2 and 3 min chart (above) also show the same positive divergence that I suspected was for a gap fill, but now it looks as if it may be part of the larger process of the additional; base work USO would need to do.

I highlighted the increase in volume in red at the initial positive divergence as that looked like a short term downside capitulation event that was p[rimed for a gap fill before head ing lower to what has always been the expectation; a move to the lower end of the range where USO would be accumulated and with a range this large, there's no way there would be an upside reversal without a massive shakeout as the shakeout alone would be nee scary to create the kind of supply needed to accumulate in size and on the cheap to fill out and finish the base area.

 This is a stronger, more meaningful 5 min chart with the same positive divergence in the same area.

If you look at price alone you can probably easily spot the one thing I would want to see... The reversal process as a reversal on a trend this big would be a process, not an event.

 Taking a closer look at today's intraday action, there were several interesting larger volume bars among an intraday positive divergence.

This is an interesting area for price to flatten out and let USO do the work, whether it confirms as it did at the past two head fakes which formed a Crazy Ivan shakeout on both sides of the range, remains to be seen, I suspect we do see it and Brent Futures have a number of positive divergences as well, but without some reversal process in place, I wouldn't call a new position here. That said, it wouldn't take much to create such a process.

As for the Trend Channel, it's a little difficult to deploy in what is really a large range through most of 2015, but you can see the March 18th head fake and run to the upside and where the Trend Channel called out a stop at the red arrow which was not the ultimate high of the run, but it would have taken a large chunk of the move and take you out before 6 weeks of lateral chop which is pure open risk and opportunity cost.

Today's closing volume was significantly higher so we may see some near term upside, remember tomorrow after the close we have the API crude inventories and Wednesday the DOE / EIA inventories at 10:30 a.m., either event could be a catalyst to what looks like a potential head fake area.

I think this is  dangerous area for new positions without additional confirmation. While the downtrend looks pretty secure, it's also right to the exact area we expected back in May/June. It's also a potential head fake area which was expected no matter what on any upside trend reversal, the range is just to large for there not to be one.

As for taking on a new USO long position, I would much rather see more lateral price action and  3C confirmation. While a "V" shaped reversal event is certainly possible, I don't believe for a minute it would support the kind of move I think oil is capable of. However oil still has not put in the work that needs to be done at the lower end of the range, but it has finally moved to the lower end of the range.

I think patience here is absolutely necessary. There are a lot of puff pieces out in the Financial media that make me think this may indeed be a workable bottom as they are pushing hard for oil not basing until 2017. No pro tells you what they believe, they tell you what they want you to hear ad they don't do it for charity.

I just don't want to put out multiple updates with information I don't consider to be actionable, but I will update any changes of character or anything I believe is relevant.

USO is on the radar,

VXX /UVXY Update

As for UVXY long positions that have recently been put on, I suspect we see a bit of very near term pullback in them as they have a 7-8% gain.

I don't plan on making any changes and plan on leaving the position open as I want them aligned with the highest probability big picture or in the case of this particular asset, at least the highest probability swing positioning. I don't really worry about any short term movements unless it were an options position, then I'd probably consider taking some action.

 VXX 1 min intraday negative pretty much fits with the positives we've been tracking in the market averages.

 SPY 2 min leading positive.

We're seeing the same thing in VIX futures (1 min intraday leading negative)

The VXX 2 min was in confirmation at the green arrow and is leading negative (confirming the SPY leading positive above).

 UVXY 3 min in a leading negative divergence.

However it's important to keep these charts which are very short term , in perspective. For instance, at the much more powerful 5 min timeframe...

This is VXX with the last positive divergence to the far left leading to the last market decline slicing through the SPX's 150-day moving average and then a relative negative divergence sending VXX lower on the July 10th market bounce (thereabouts) and a new leading positive divergence which is significantly larger than the previous positive divergence, which is partially a reflection of what I believe the next pivot to the downside is going to do- in essence change the entire market psychology with a break of the 200-day convincingly.

I want the UVXY long to be in line with that trend rather than trying to catch every swing in this case. There are times I think it's worth trying to catch the smaller swings, this just isn't one of them.

TLT (20+ year Treasury Fund)

TLT is pretty darn close to 30 year Treasuries which I track using "ZB", 30 year Treasury futures.

For longer term members you may recall the 2014 Carry Trade funded rise in Treasuries that saw Treasuries outperform equities for 2014. However something changed in the normally confirmed uptrend in TLT late last year as 3C started going negative in long term confirmation timeframes, soon after TLT topped and started a downtrend. Then TLT broke an important longer term trend line and we've been in and out of TLT a few times looking for a counter trend rally/head fake back above the long term uptrend trend line that broke, before Treasuries head lower which I suspect they will do. There are a lot of more recent dynamics/fundamentals in treasuries and one of the main concerns is liquidity. In a counter trend bounce where a lot of traders are short Treasuries, that decreased liquidity could cause an incredible counter trend rally/Short squeeze, but just as dangerous is a herd mentality stampede for the exits in a thin market creating the same kind of momentum, except to the downside.

I believe Treasuries are going to pullback VERY near term (Yields rise) and this should coincide with the very short term market bounce I'm currently looking for as per the add to position in IWM calls. I believe it's probable that such a pullback offers a long entry in TLT for a counter trend rally attempt, which may offer another trade in TLT. We'll see if A) TLT/Treasuries pullback very near term and B) if there are positive signals in to the pullback, if so, then it may make for a nice long entry in TLT.

Here's a more complete view of the charts.

 The 4 stages of TLT's primary trend cycle from 2014 with stage 1 base, stage 2 mark up which was all carry trade funded (USD/JPY) , stage 3 top when 3C's 60 min charts stopped confirming upside price action and we knew something was changing and stage 4 decline which made 3 lower highs and lower lows and broke the long term up trend trend line.

I've been expecting a counter trend rally to break above the former up trend trend line and create a short squeeze/counter trend rally before failing and making a new lower low.

The 1 day 3C chart of /ZB (30 year Treasury Futures) also went negative at the top as you can see, as distribution set in and the down trend and trend line break started and progressed further.

This is still, in my opinion, the dominant trend. However counter trend rallies can be incredibly convincing and turn even the most bearish Treasury short in to a long...This is why counter trend rallies exist. See the Dow after the initial break lower in 1929 and the downtrend to follow. There were at least 5 major counter trend rallies, the first was the most spectacular  The concept is the same whether the Dow-30 in 1929 or Treasuries in 2015.

 This is a closer view of the daily TLT chart after it broke below the long trend up trend. Ito has been ranging since which honestly I expected a CT rally by now. The recent breakout above the range has small candles on the daily chart just like the market averages, except Treasuries and the market averages typically trade opposite each other so this would be short term confirmation of the same daily candles on the charts of the major averages I showed just 2 posts ago. There's a strong probability of a short term downside pullback in TLT/Treasuries.

This 30 min chart of 30 year Treasury Futures shows the same price action as the chart above rallying off support in the range to the current small bodied reversal candles on the daily chart above this one with accumulation in white at support, confirmation on the move up and recent distribution which is part of why I think a pullback in TLT and Treasuries is likely very near term.

 The 60 min chart of TLT shows the negative divergence and positives forming the lateral range as well as upside confirmation on the latest run off support in the range.

 The 15 min TLT chart shows the recent negative divergence on a strong, but less important timeframe compared to the 60 min above. This suggests a pullback near term, but the pullback should lead to accumulation and as a constructive pullback, offer a long opportunity which would fit with the market turning back to the downside after a minor bounce.




The 60 min chart of ZB/Treasury Futures shows the same thing with a bit more detail such as the last accumulation area at the bottom of the range, confirmation of the bounce and recent negative divergences indicating the probability of a near term pullback.

 The 1 min chart is much closer in timing, much more detailed, although not as strong. It too is pointing toward a near term TLT pullback which would fit with a market bounce near term.

 The TLT 3 min chart shows migration or a stronger divergence than just the 1 min chart, again pointing to a near term pullback with yields rising and the market moving toward yields.

TLT has migrated out to the 10 min chart as well with the positive at the base or bounce area and a recent negative.

 ZB 15 min showing confirmation of the bounce and a recent negative like TLT above.

 ZB10 min negative with more detail and confirmation like the area on TLT 5 or 10 min.

 ZB 7 min from confirmation to a negative, more confirmation and detail.

And the 1 min intraday chart, which fits nicely with the idea of the market stalling here to the downside and getting ready for a bounce (very short lived) to the upside.

Treasuries and Yields tend to make for excellent confirmation and/or leading indications for the market. In general, a rotation in to treasuries indicates a risk off stance and yields fall as Treasuries are bid. The market tends to follow yields like they were a magnet.

Conversely a pullback or decline in Treasuries typically means there's more of a risk on attitude and money is rotated from safe harbor assets like treasuries and pout to work in stocks, this lowers treasury prices and raises yields and once again, the market is drawn to yields as if they were a magnet.

The catch is during a Carry trade unwind (it was the carry trade expansion that saw Treasuries nearly double the performance of equities last year) we typically see the assets purchased with carry trade proceeds sell off as the assets are sold to cover or close the carry trade, thus the price action and/or normal correlation between Treasuries and the market is likely to change as the cary trades are unwound, which we already see the effects of in TLT as it topped and made lower highs and lower lows. In this case, Treasuries and equities can both decline at the same time as both are funded with carry proceeds and the assets funded are sold to cover or close the carry trade. This is why the USD/JPY and or the $USDX and Yen futures are so important to us right now as this is one of the main carry trades that has already begun the process of unwinding carry leverage.

We'll watch for a possible pullback and long TLT entry as a counter trend rally would give pros the higher prices to exit positions and cover their carry crosses at better prices, but  you must always be aware of how fast these can turn as a carry trade usually uses 100:1 to 300:1 leverage so the minute it starts going south and panic starts, it's like a stampede and I suspect this could happen very soon if the SPX breaks its 200-day.

Just be aware of the dynamics and we'll look to see if there's a constructive pullback and entry or whether TLT looks more likely to unwind and head lower WITH equities as both are financed or have been financed with carry trade proceeds.