The Sweet Spot

I may be a little quiet today, not because I'm not here or not going through as many charts as normal (probably a lot more), but because this looks to be the sweet spot I'm looking for.

Back in mid-May when we were looking for a head fake move above the range I was considering "Hitch-hiking longs", they are just a long play to take the elevator up, however the much larger play by far is confirming a head fake move and then finding the sweet spot to use it to short in to price strength, whether that be new positions or filling out partial positions.

This looks like the sweet spot and here's what I mean...

About 2/3rds of stocks or you might say about 2/3rds of the directional influence on stocks is the broad market, it is by far the strongest gravitational pull on any given stock on any given day. The sweet spot is aligning a reversal area in the market, here is perfect because you are getting a better short entry as a short is nothing but a long in reverse, you want the same thing, to sell high and buy low, you just sell high first with a short and buy low second.

This also gives you a lower risk profile, for example, there are reasons the only 3 places I want to short a H&S top are where they are.

Take a look at the charts...

 Yesterday I talked about the multi-month range and looking for a move above it BEFORE we can go lower, this is simply the head fake concept, at the time we didn't even have a shred of evidence to suggest it until the bear flag that showed accumulation in mid-May. In any case, I spoke of the move above the range in terms of the common reversal pattern that looks like an "Igloo with a Chimney", this is what I was talking about on a daily SPY chart.

I said Friday that I'd expect a slower move from this area to the $1900 area as the buy the dip crowd comes in, but a break into the range and/or below it would create strong momentum and fear moves about 5 times faster than hope.

So if we are at a pivot point in the broad market and it has the most influence over assets...

SPY 5 min and the 1 min positive yesterday that formed what looks like a right shoulder on a small H&S, really just a reversal process.

 then assets like these are giving us near perfect entries or just about as good as you can ask for...

Daily PCLN, the first place I want to try to enter is the top of the head, the second place is the top of the right shoulder, the last place is the shakeout after the neckline is broken.

I'd like to see a little bounce here for a better entry, but all in all, this would still be an ideal price level.

 NFLX is in the same situation, this is not coincidence that these are both at the top of right shoulders at the same time as the market is seeing strong deterioration the week I suspect we see the head fake move resolve to a failed move. We had short trade ideas on 6/3 in NFLX and a reiteration on 6/5.

This is the sweet spot, aligning the market, Industry groups and then stocks all at the same area or pivot is where we increase probabilities about as far as we can take them and at a great entry with low risk.

I have a lot of assets to look through, I will keep my eye on the market and I'll be updating the market when necessary.

A.M. Update

Overnight, in fact just after the North American close, USD/JPY started selling off, futures limped lower  in near perfect 3C confirmation, to a very strange level as you'll see. There really was no macro data or news that caused this, I suspect it's part of the unwind of the head fake (or what would be more specifically a failed move) above the 3 month range around SPX $1900 (last Friday I said the signals looked like that move would be unwound this week).

 5 min USD/JPY selling since right after yesterday's close

The 1 min USD/JPY found some support with small accumulation right around the 4 a.m. low which bounced it. 3C does look to be in leading positive position, but this divergence is so small, I'm not sure that it will be very effective and 3C hasn't pivoted up yet to lock it in, it may just fade to "in line" or worse.

The carry pair and ES moved like this...

 USD/JPY overnight, ES in purple  1 min chart...

I talked last week about the dislocation of SPX/ES prices at least 25-30 points above the extrapolated final F_E_D balance sheet expansion meaning it has priced in the full expansion until the end of the taper and is still 25-30 points rich or above the long term correlation, the CONTEXT model for ES showed us the same, my view is that those points are part of the head fake move above the range we expected, thus part of the reason not only Treasuries are bid as a flight to safety, but VIX is seeing the same since late last week as well in a bid for protection from downside.

You might as well add this to the list of dislocations as it's about right, I mean right at the move above the range.

 USD/JPY and the ES correlation is lost as ES (purple) moves above the range (red trendline) which is the 4 month range in SPX.

This is what I thought would be a head fake move before any significant downside, so far we have had excellent confirmation that it's a head fake move and not an authentic breakout that is supported.

This is ES overnight in to premarket, as I said above, nearly perfect 3C confirmation and the same for all Index futures.

The more important charts though which have been falling apart since last week are the 5 min and up...

5 min ES leading negative.

 TF, recall the warnings last week that the IWM would see better relative performance than the other averages, it's 15 min chart has a good deal of distribution in to that move.

Here's a 30 min version of TF/ Russell 2000 futures, note not only the relative level of 3C vs price at points A & B, but the more recent leading negative divergence out on a 15 min futures chart. This is the same kind of damage I was talking about yesterday.

And here we are all the way out to 60 min, the last negative divergence (following the green confirmation arrow) took TF down, the new leading negative is a lot bigger and in worse relative position.

And VIX 15 min as it start to see positive divergences last week.

Gold is up, there are a lot of reasons being thrown about, but I remind you of the correlation between the market and gold recently.

SPY green/GLD red, 60 min chart. It's not perfectly inverse, but pretty close.

Quick EOD Update

There's a very small 1 min positive in the SPY, and a 1 min positive in ES and NQ at 2:30,  not much of anything else though.

The amount of damage done between Friday and today (emphasis on today) is staggering, every time I look three''s a new, deeper leading negative divegrence and these are not 1 and 2 min charts, I'm seeing them on 30 and 60 min charts.

If I had to guess, I'd say if you ;look at the SPY, around noon today would be something like a mini H&S top with non time being the top of the head. I don't see how the market can not do what we expected Friday and start to wrap up the head fake process and send the market lower. In all honesty, I didn't see anything on the charts Friday that would lead me to believe we'd see this level of deterioration today, I'll post a few screen captures after this.

When we first expressed the probability of a head fake move and identified the bear flag that was a dummy flag put there to create the initial momentum, the idea was to use some long hitch-hiking trades to ride it up and then switch to the short side, use the price strength to short in to at better prices. I see no reason we shouldn't be using the time we have to enter positions we are interested in and I'll likely be spending most of my time tomorrow just throwing ideas out there, because I think we are past the analysis stage of what happens next.

MCP Update

MCP is a full-size long trading position, hopefully a trend position (that's what I really expect as it breaks to stage 2 mark-up).

We recently filled out our MCP partial position on Trade Idea: MCP Filling out Long Equity & New Calls Position and added Calls to that as well as MCP triggered stops on a run below $2.50, the next day MCP was up over +12% on the day without leverage (not the call positions, the stock only).

That same day (the day after filling out the long and entering the calls on the +12% gain) we exited MCP calls Taking MCP Calls Off the Table as the move was too much of an event rather than a process.

I'd still be willing to enter another call position if it sets up like the last, but for now we are still holding the MCP equity long position.

As far as I can see, so far so good as it has been since the post earning's decline, the charts are holding up extremely well.

 The flat zone with the dip on the 3rd is where we entered long on equity and calls as the move below $2.50 hit massive stops which were accumulated.

I wanted to move out of the position that day because the reversal process (that "V") is too tight to sustain a larger run and the next day MCP came down and has come right back to the range so a good thing we did exit the calls.

This 60 min chart is still leading positive and adding every day or so, I have no problem holding MCP, honestly I wouldn't have any problem opening a new position right here.

The 30 min chart shows the accumulation of the stop run and the positive activity since.

This is starting to look a little like an inverse H&S bottom, this is a much more appropriate place for it than the usual places people identify them. As far as volume, the volume is correct for one as well. Either way, I think this is a strong long position for a trending trade on the mark-up / stage 2 (break out from the base).

The shorter charts have a lot more detail so I included it just to show the additional accumulation in MCP since the +12% one day move as it came back down.

I think if you are long equity, all you need to do is watch and manage the trade, really just be patient. As far as call positions, I'd need to see something that tells me the set up for an options position is favorable enough to make up for the premium that puts you behind the 8-ball as soon as you enter.

Quick Market Update

Honestly I think we can all see that the momentum and market strength as hollow as it was as it was short covering and weak retail hands buying, is not on display today.

Friday in the The Week Ahead post, my take on the signals from the last two hours of trade as well as everything we know about this move since before it began around mid-May when we knew something was building, seems to be culminating, I do think the F_E_D Correlation post was very on the spot as far as the market front running, the richness of the market vs the known F_E_D balance sheet extrapolation all the way out the the end of QE3 as well as the 25-30 point divergence in CONTEXT, all pointed to a head fake move as we suspected mid-May.
In any case, from Friday's The Week Ahead


"Looking at the 3C charts in to the close in both the averages and futures, my feeling is the head fake move above $1900 which was resistance of the 3 month range and the area we expected a head fake move which in my opinion is more than large enough to do what they are intended to do, will start being resolved to the downside next week, it looks from the 3C charts going in to the close that this will likely start early next week. I'm not sold on one lump sum move, but rather more of something like a stair step, when $1900 is broken on the downside, I think that's where we get a lump sum move."

I purposefully tried not to draw on these charts, some do have reference to the bear flag where we saw accumulation and knew that it was not a real bear flag, but a bear trap to set up upside momentum which turned in to a short squeeze as well as the retail "confirmation/breakout crowd" chasing.

Take a look at some of these charts and how quickly they are falling apart (this doesn't mean we won't still see intraday bounces and lots of volatility, Wall St. is never going to make things easy), but there's a distinct change in character and it was obvious in ROC of price.

 The 1 min DIA (and other averages) steering divergences which looked more like "in line" started showing significant changes in character Friday, today a lot of them are just adding to that downside in a big way.

 There's migration as well, even though this is a closer view (as the trend view has been pretty bad through the entire process from mid-MAy).

 Look at the migration to the 3 min chart and the ground lost really since about 12:45 today AND ON A POMO DAY NO LESS (I guess we know what those are worth now).

 And 5 min migration...

The IWM was showing signs as you know from numerous posts last week that it was going to be showing better relative performance than the other averages as it had fallen behind them, that "better relative performance" turned in to the best week for the R2K for 2014, but again on pretty weak ground, short squeeze covering and weak hand buying as we know fairly certainly that the pros have been selling for this entire period and that's not just me saying that, 3C showed us, but that's hard facts and figures from BAC and GS.

 The IWM 15 min is actually in a very ugly downtrend or had been with perfect 3C confirmation, the run on a short squeeze in most shorted names and small caps sent it higher, but there's absolutely no confirmation whatsoever, which makes SRTY long a very interesting prospect, although the R2K doesn't have the same lofty position as the other averages despite the strong relative performance.

QQQ 1 min, as I said Friday, it was the first day we saw real divergences in the 1 min timeframe, look at what was added today.

And the 2 min which I tried to balance between trend view and intraday so you can see both, that's a lot of leading today.

QQQ 3 min, also trying to balance between trend view and intraday, the last 2 days have seen marked deterioration, thus the reason I felt this (what I fell 90+% certain is a head fake move >SPX 1900) is wrapping up this week.

SPY 3 min trend view showing the bear flag we first saw and knew something wasn't right, just after I had said that I thought the market would not see a serious downside move until that 3 month range was head faked. Then the Crazy Ivan which gave the market sling shot momentum around the bear flag with initial short squeezes.

Look at the new leading negative low in 3C! Add the price differential and you have a major divergence, this is what 3C was designed for, these are the kind of charts, i don't ignore.

 SPY 5 min seeing migration just from the faster intraday charts, also nearing a new leading negative low.

 And the trend of the short squeeze from the bear flag and Crazy Ivan through and above $1900 as we expected or at least thought was necessary before any downside reversal could begin, if you look at the BofAML data, and the new Institutional selling and new Retail buying during the same period, YOU CAN UNDERSTAND WHY HEAD FAKE MOVES ARE SO COMMON.

This is the 1 min intraday, the market is fighting to get a toehold, so far most of the Index futures have at least a reasonable 1 min intraday positive divegrence.

This doesn't surprise me, there are some assets I have seen that are on my short list (either long or short) and they do look like they are a day or two off, others look ready now and those are the ones I'm trying to get out there.

Quick Market Update

Last week we had a very parabolic move to the upside, I showed in a few posts how easy it is to recognize a short squeeze, most of that was short squeeze based, not risk/demand.

In any case, Friday I said I was looking for the unwinding of what I view as a proportional head fake move above the 3 month range in the SPX, however, the normal reversal process that tends to have a wider umbrella like top looks to me to be a low probability. I could make the argument that the short squeeze late last week was the "Chimney" part of an "Igloo/Chimney " top or reversal process, with that process starting as price crossed SPX $1900, either way the charts are really falling apart quickly and as I always say I don't trust parabolic moves like we saw last week because they tend to end as badly as they begin, just in the opposite direction. This is why I'm throwing more trade ideas out there quickly today.

Trade Idea : SQQQ Long

I already filled out the SQQQ long position so I won't be putting out an add to, but if I had not filled this position out yet, I'd be putting out an add to or a new position alert right now.

I'll have charts up in just a few minutes.

In the mean time, there was excellent confirmation across 6 different leveraged / inverse QQQ based ETFs I looked at Friday after posting QQQ Looking Interesting Here last Friday.

Transports / IYT

Transports are not looking good, there's a lot of momo stocks in the sector, thus it's not great for a market that has relied on squeezing these stocks the last month.

Lets just get right down to the charts (Dow-20/IYT).

First off, the daily candle for IYT is looking like a bearish Shooting Star thus far, volume is already above Friday's which is something that tends to increase the likelihood of a reversal candle being effective.

 The strategic end of the trade has to be right first, here we have a 4 hour of transports and a theme you'll see over and over again. When there's a change in character of price, a change in trend is usually right around the corner. Some of the strongest rallies have led right in to market tops and we often see momentum rate of changes in price as stocks move from one stage to the next in all 4 stages. The take-away though is where the divegrence gets extreme and it coinciding with the more extreme momentum of price.

 The 60 min chart has the same theme of a leading negative as price picks up momentum.

 The shorter charts give us more detail, this 30 min shows a positive divegrence that leads in to what I suspect is enough upside to create a short squeeze, much like the market from the mid-May bear flag.

 The 15 min chart just confirms the theme

And as we get to more tactical timeframes, the 5 min chart goes leading negative, this is what I was seeing last week when I put out a note that I thought transports were going to give out soon.

And right down to an intraday basis, leading negative on a very tactical timeframe.

I think IYT is in a very interesting spot to consider it. If you are a bit more cautious, maybe see if there's a bearish confirmation candle tomorrow, I think there's plenty of downside and this would be an excellent entry area even if you have to wait on a confirmation candle of today's possible/likely bearish reversal candle.

Quick Market Update

I'd still like to see strong daily volume by the close for a downside reversal, the way the IWM sits right now, oif it loses ground in to the close, it will form a bearish reversal candle, Shooting Star, higher volume than the preceding day would make it a much higher probability reversal candle.

First TLT is seeing positive action, you have to look at the updates I posted in the TLT/TBT reiteration this morning, but I have suspected distribution in equities via a short squeeze is going in to safe haven and protection assets. This is one of the reasons I like TLT long or TBT short creating essentially a 2x leveraged TLT long position.

As for the actual 30 year Treasury futures...

This is the same type of positive divergence being seen in TLT right now on a suspected Channel Buster, which should give it a nice upside move through the upper channel. Also note volume.

I mentioned last week VIX FUTURES, not spot or the rolling 2 month VXX, are seeing positive activity.

 VX 5 min, also note volume.

VX 15 min, again note volume. If VIX ix a protection trade, Treasuries are a flight to safety trade, the volume is certainly interesting as well as the after hours volume seen in VXX two times last week which I posted here, Broad Market Update.

Transports looking as weak as they are looking taken with the COMPQX's major decline in the A/D line and Leading Indicators, all here Broad Market Update make me think this is the head fake move we were talking about around May 15/16th and as I said Friday, I expect it to start winding down now, it was clear that the IWM was going to see relative strength first as I think I posted that about a week in advance.

As for today...

As mentioned earlier, intraday breadth was falling apart...

The early action was trending up, it wasn't hitting any extreme bullish readings, then it lost the channel, early warning.

As for the SPY, that damage from last week that was on the charts other than the 1 min is still very much there.

 This is the SPY 5 min. You may also recall that the Index futures are seeing negative leading divergences in some cases all the way out to 60 min, but really once they get to 5 mins, they are worth paying attention to.

 SPY 10 min is showing how much ground the SPY lost in 2 days.


As I said Friday, (DIA) the averages all saw minor divergences on 1 min charts, steering divergences until Friday when they put in the largest divergence, really the only divergence of the week on the 1 min timeframe, another change of character.

 Again, a lot of damage in 2 days on something as long as a 15 min chart.

 The QQQ 1 min like the others was nearly perfectly in line on the 1 min with only tiny divergences here and there, like little tweaks to price, but come Friday everything changed, that continues today.

This is interesting because it was right about this time I had said the range was not likely to break down without a head fake move above it as it was a 3 month range and in the most watched ETF in the world, then we saw the bear flag with accumulation and suspected this was going to be used as a sling shot for upside momentum to break through the resistance of the range, we got that right down to the Crazy Ivan right after the bear flag, then short covering took over above the range or SPX 1900, however as the trend makes clear, there's been strong distribution in to that covering.

There are several reasons to sell/sell short an asset, but one of them isn't, "I think this is going higher".

QQQ 3 m also showing the change in character and deterioration late last week on a much stronger scale.

With transports not looking very good (I may look at a position there) and the Flight to safety and flight to protection trades both strong and the increased ROC in price , there are several very notable changes in character.

I'll try to get transports up next.

Transports / IYT Are Looking Horrible

I'm trying to get a market update out, but it seems there's quite a bit to do and quickly.

I'm going to get an abbreviated market update out and then the transports / IYT chart, I may be inclined to look at a position there.