I just wanted to bring you up to speed on several indications we have been following since last Monday as we move in to this week, apparently working on a larger "W" base. I do believe this is a tradable base and that we are VERY close to an area where we can take some low risk/high probability positions, however I have no reason to move the targets on the upside I posted Tuesday and Friday of last week, posted again today.
Basically I want to show you several assets we have been following and some leading indicators and roughly what I'm looking for over the next day or so.
First the basics of the market and the divergences at the "W"-ish bottom, I say "ish" because it's not a true "W" bottom as we rarely see those anymore, they are shaken out as technical traders and where they place their stops and orders are very predictable and easy to trigger.
I mentioned today that we are usually looking for the second divergence in a "W" bottom to be larger than the first, that's what we see on this 10 min SPY chart as well as a leading positive component, I suspect we have some time to open positions and keep confirming as the divergence isn't leading as strongly as I'd expect before an actual move, but this can happen in a matter of hours.
The 15 min QQQ is showing the same stronger second divergence and is out to a 15 min chart. One of the reasons I believe we have some time to enter positions is because of the many stocks on multiple watchlists I looked at today, they just weren't there yet otherwise I would have posted them as Trade Ideas.
Another reason is because the head fake concept is so prevalent, even this small support area (yellow trend line) would likely be run before any upside reversal which would be a fantastic area to enter positions which are essentially somewhat risky hitch-hiking longs, a means to an end and that end being selling short in to price strength.
Most of the averages also put in a Tweezer bottom, however...
There wasn't increasing volume on today's candle which is a bullish reversal hammer, Friday was increasing volume and that may be close enough, but typically we'll have a mini-capitulation event before a reversal and a run under support as mentioned on the chart above this one "could" provide that increasing volume.
The Dominant Price/Volume Relationship for Monday was the most bearish of the 4 possibilities, it was in all the major averages and dominant, that was Price Up/Volume Down, the Dow had 22 of 30 components in this category, the NDX-100 had 80, the R2k 675 and the SPX-500 had 361. Typically this is a short term overbought event and the next day closes lower.
I mentioned one of the best pieces of evidence we have are the Index futures themselves and showed charts of those today here, Index Futures Update.
In addition to the averages and their divergences as well as Index futures, one other thing we were looking for was the USD/JPY carry trade which broke $103 and hit a lot of stops and made a large downside move, to start forming a lateral base which would be used to support a market bounce, take a look at the USD/JPY since we first saw the first hint of lateral movement...
That's EXACTLY what I was looking for to develop as the correlation algos are turned back on to support the market in a bounce.
Looking at the single currency futures, I have every reason to believe this is a solid base that will rally, I'm not sure if it will break above $103 which is now strong resistance and may cap a bounce's upside, but if you saw the targets, you know we aren't looking for new highs, we are looking for a move above the downtrend lines and likely a move that breaks the pattern of lower highs/lower lows, that should be enough to change sentiment and that's what these moves are designed to do, create demand to sell and sell short in to.
The very same divergences we first saw developing (positive in the $USDX and negative in the Yen which would support a USD/JPY upside move and thus a market upside bounce) have now reached 30 min charts like this $USDX positive, however there's also some recent 3C weakness that may be just enough time for a head fake move in the averages below the support line (yellow) displayed on the second chart of this post (QQQ 15 min) which would give us an excellent tactical entry.
The Yen has a 30 min negative divegrence which has grown significantly since we first spotted the first vestiges of it, the $USD moving up and Yen moving down as 3C is indicating via divergences would move the USD/JPY Carry Trade up and thus the Index futures / market with it,
but perhaps not before we get a nice entry on a quick (small) head fake below support of the tweezer bottom present in just about all of the averages.
Other indications come from Leading Indicators, these are clear, clean signals...
HYG puts in a positive divergence on this intraday chart at the EOD today as Es/SPX move to VWAP at the close as we expected.
A larger 5 min chart of High Yield Credit which has been showing positive dislocations from the SPX (green) is now showing a large, clear positive dislocation that should lead the market higher on a bounce.
I will not be moving many if any short positions because the market is simply in that bad a shape, but I may take some positions or preserve some gains here and there, however for the most part I still want my positioning to be leaning strongly to the short side where the highest probabilities are as stage 4 volatility can be extreme and the unpredictability factor rises exponentially, just look at AAPL before it's mini-crash and loss of -45% in 8 months.
Sentiment (pro) was leading the market negative at the right place it is now leading the SPX positive and in the EXACT area of the "W" base we have been following since we first got wind of it on Friday April 4th near the close.
Yields are one of my favorite Leading Indicators as they act like a magnet for equity prices, yields are leading the market or SPX here and I believe this is another clear indication among leading indicators.
We also had what I consider to be a short term buy signal in the VIX today...
Friday we had a VIX close outside the Bollinger Band Daily channel, today that failed to close back inside the channel.
We've been following this development and it looks much more cohesive just after the first day of a Holiday shortened trading week (Good Friday the markets will be closed).
As far as overnight developments...
All of the Index Futures are in a tight range, this is a quiet market and I always pay attention to a quiet market as this tends to be where the action is happening in underlying trade, I often compare it to,
"The kids in the room next door being a little too quiet, you know they are up to something".
We can see that "something" is a leading negative divegrence in ES 1 min futures.
NQ 1 min looks the same way
as does TF.
As you might know however, I rarely trust a 1 min futures signal overnight, that's why this 5 min Es signal is interesting.
While the larger positive needed at the second low of the "W" is there, we also have a negative overnight which could be enough to give us the head fake/stop run under Tweezer Bottom support, tagging stops and leading shorts in to the market on confirmation or a break of support, a perfect head fake bear trap to give an upside move/reversal the initial momentum that I love to take advantage of with options and then with some leveraged ETFs for a swing-typee trade.
NQ and Tf do not have the same 5 min signal, but the fact they have the strong 5 mi positive is good enough for me.
NQ 5 min
TF 5 min.
I can't be sure because of the 1 min chart
(currency pairs don't tend to give great signals beyond 1 min charts, thus the reason we look at the individual single currency futures, but tonight they are inconclusive), but it looks like the $USD/JPY is on board with the ES 1/5 min signal for a head fake move.
1 min USD/JPY with the same overnight negative divegrence that ES is seeing, suggesting a head fake move that we can buy in to for a hitch-hiking long trade, this is a short term trade as the market is in a rough place.
The NASDAQ 100 has nearly retraced all of the February cycle and has a CLEAR trend of lower highs/lower lows which is the definition of a downtrend which isn't surprising as the NDX is in a stage 4 decline from the February cycle.
The Russell 2000 isn't far behind and this is the average that typically leads the market, again, we have a series of lower highs and lower lows and are clearly in stage 4 decline.
It may be this pattern that has started to become predictable that Wall Street is looking to use to change sentiment and psychology and give the bulls something to buy in to, however when Wall St. is giving you something, you generally don't want it if you are following the century old dogma of Technical Analysis without thinking for yourself.
The Dow is not as far along, but it has entered stage 4.
Note the head fake failed breakout just before the reversal down to the break to stage 4 decline.
You can also see several Tweezer Tops and Bottoms on the chart.
The SPX also shows a
clear head fake in the form of a failed breakout or a bull trap as longs will buy a new breakout high above resistance, they are trapped and their eventual selling as the pain becomes more unbearable creates and sustains the downside momentum that stage 4 declines are known for (sort of the mirror opposite of a short squeeze).
The near term HEAD FAKE targets we'd be looking for in the averages (ETFs) if you care to set alerts would be BELOW: SPY $181.31; DIA $159.88; QQQ $83.91 and the IWM at $109.65.
At that point we'd just want to confirm accumulation of the move and get a reversal process which could happen quickly (partial day) and this would give us excellent, low risk/high probability entries. Being it's earnings season I prefer to stay away from specific stocks and rather go with ETFs or leveraged ETFs as I'd envision this to be a swing move, if it were longer I'd do away with the leverage. A head fake lower would also provide an excellent set up to buy calls, but one bridge at a time.
Lets see if we can't cash in on some of these set ups and set up for a continuation of a lower stage 4 low.
