Important Market Update

The last market update I warned to watch for lateral (sideways) price movement and that would very likely indicate positive divergences building,

well both have happened since my last market update, more so in the IWM and QQQ than the SPY and DIA, but there has been a lot of market dispersion with one index moving over 1% (like the Russell 2000) and others barely moving at all, or even closing the opposite direction.

None of this is strange or indicative of any special market strength, this is normal market behavior and it is very useful for entering and exiting positions as well as short term trades.

I'm trying to figure out what I want to do with it and before I can decide that, I'll likely need a little more information like the size of the final base/accumulation area, the strength of the divergences, leading indicators, what treasuries, FX breadth indicators, etc are doing.

I'll almost certainly enter some kind of short term call (long trade), maybe in weekly options. I doubt I'll move any short positions as the major underlying trend still favors trading the short side.

Breadth wise...

 intraday breadth has clearly improved and is trending, but not at extremes, still topping in the +750 area.

My custom TICK/SPY indicator shows the change in breadth here.

As for the averages themselves...

 QQQ 1 min intraday shows a clear transition to a much cleaner positive divegrence than what we saw yesterday.

There's migration of the divergence to the 2 min chart so it's moving along at a fairly fast pace, I have to wonder if this has to do with the 2 p.m. release of the F_O_M_C minutes tomorrow.

The 3 min chart is even seeing a divegrence strong enough to migrate to this chart in a few hours today

The 5 min chart is "nearly" in line, not much of a divergence there, but I suspect this will change before the day is over.

IWM 1 min also very clear and...

perhaps giving us a hint that this bowl shaped intraday bottom may turn down to form a larger "W" type base which would give the base a greater ability to sustain a longer move. How long in duration? I can't say, I'd guess if it was a full "W" maybe a day and then a day of reversal process, but the minutes could be a fundamental game changer as they "shouldn't" be discounted, but as we all saw, the F_E_D itself leaked the minutes about a year ago to 154 of the largest institutional and private equity firms via email almost 2 days ahead of the release. 

Why would the F_E_D have a mailing list for distribution of a release that is suppose to come out for all investors to see at the same time? Why would they send it to 154 of the biggest firms? The same firms that are likely the ones behind the record window dressing via the F_E_D 1-day reverse repo in which they borrow collateral which the F_E_D buys back the next day and they do this on the last day of not only the quarter, but the second highest amount ever was the end of the month just this past April, telling us the banks are in much worse shape than they want investors or regulators (who happen to be the F_E_D who loaned them the collateral in the first place) to know despite the fact the F_E_D is the banks' regulator.

ANYONE WONDER WHY I SAY QE AND THE LAST 5 YEARS HAVE BEEN NOTHING MORE THAN A STEALTH BANK BAILOUT SO THE PUBLIC WOULDN'T BE OUTRAGED LIKE THEY WERE WITH AIG AND GM?

 The 2 min IWM show migration of a healthier divegrence (positive)

As does the 3 min chart

And,  even the 5 min chart for the IWM!

If I were to buy some weekly calls, it would likely be in the IWM or if I were to trade this using leveraged ETFS, URTY (3x long the IWM) would be a good choice.

This however, is the 5 min IWM chart within context of the recent trend, so the divergence is not something that is overwhelming, a big deal, a sea-change in character, it's garden variety bounce you'd expect to see after the last 2-days , actually 3 as the IWM didn't perform after 11 a.m. last Thursday.

 This is the 2 min SPY, that's about as far as the divergence here goes.

The 3 min chart, not horrible, but not a clear positive divegrence like the Q's/IWM

The DIA may be worse, the 1 min chart positive divegrence today, but after that, no migration.

The 2 min chart is in line.

I'm going to keep looking for hints and decide if I want to play a call position for a bounce or not and if there's anything else that I can learn from the charts.

As for the Most Shorted Index, there's no squeeze or anything as of now...

 intraday vs the Russell 3000.

And the longer term MSI, as shown earlier, has seen the worst 1-day performance in 3 months yesterday, today is not looking much better.

The USD/JPY is moving in similar fashion, but in this situation, it's a "Chicken or the Egg?", it's unclear as to whether the USD/JPY is helping the market move sideways or just following it via arbitrage.

More to come....

Market Update-Dow loses 17k

The USD/JPY lost about another 15 pips since the 9:30 open which didn't help equity futures, but there seems to be more to this than just the USD/JPY. Last night and Thursday I compiled a list of odd market behaviors,  think they are not the cause, but symptoms of the cause and I believe this is mainly about the market starting to front run the F_E_D , especially because of the uncertainty factor. The market knows the F_E_D cannot give solid guidance for when rate hikes will occur even if they absolutely wanted to because inflation has taken control over that out of their hands, the market knows it and is going to front run any rate hikes as they always front run the F_E_D.

The signs have been building all year, but some are pretty extreme, like SKEW, like the 10-year rates since the F_O_M_C on 6/18. All of the major averages have erased all Payrolls gains from last Thursday.

The Dow lost 17k on more volume than it took it with. Yesterday my question was, "Why didn't the Dow see follow through? Why was support tested 9 times yesterday?"

 Dow losing 17k this morning.

Yesterday I pointed out the Most Shorted Index I keep, saw the worst 1-day selling in 3 months yesterday, today it has taken back all short squeeze gains since the F_O_M_C squeeze which was substantial, but looks dwarfed here on 6/18, not only are all of the averages below Thursday's jobs report lows, but many assets/indicators are below the F_O_M_C short squeeze/knee jerk reaction.

(MSI in red, Russell 3000 in green).

As for what's going on intraday, the market is trying to get a toe-hold. If it can, it will try to build a lateral (price) positive divegrence and bounce which I' simply sell in to and open more puts on any price strength considering underlying weakness. However the divergences started for the toe hold are VERY weak, yesterday's IWM had better ones by this time yesterday that were run over, the same "could" happen today.

Looking at Index Futures and some market averages...

 ES intraday is trying to get a toe hold, but it will take a larger , lateral base to get any kind of bounce of note.

NQ is not that far along

Nor is TF.

The DIA intraday is not very far along

Nor are the Q's

Or the IWM, it's really a matter of time. If you see more lateral movement start to form, you can assume with a fairly high degree of certainty that intraday positive divergences are forming, but that's still only intraday.

Finally for the moment, I wouldn't chase, I think it's a horrible strategy, look at those who chased Dow 17k on the upside. I'd be patient, there are a lot of busses out there that have not left the station.

Out of NFLX

The final fill was $22.90...

For a 122% gain since the position was opened on July 1st.

Going to be Taking NFLX July $465 Puts off the table

There's a little intraday move down, I'm going to close the position in to that, I was hoping the B/A spread would tighten up a bit, still pretty wide.

I want to close options before any reversal or even loss of momentum and we are at a loss of momentum, I'd rather re-open them on a bounce and book the gains now.

 I'm not sure what the final gain will be yet, but this is more than adequate for what I was trying to do in a quick trade.

intraday 1 min, NFLX looks as if it will lose intraday momentum and move sideways, the put premium will fall and I want out before then.

Quick SCTY, NFLX, Z Update

All of these are shorts we recently entered, all are doing very well thus far today (although for shorter term trades like the NFLX 465 puts, we need to watch them a bit more carefully) and all shared concepts that we use in every asset.

SCTY, if you recall was one I posted a Trade Idea/Trade Set up looking for something VERY specific...

First the original trade idea, Trade Idea/Set Up: (Longer Term) SCTY Tuesday June 24th

"Typically with a Doji/Star as a reversal candle, the confirmation candle of a downside reversal in about 50% of the cases over the next day or two, will gap up and then close down forming a bearish engulfing candle, confirming the downside reversal, that gap up with the 1-5 min charts going negative is an ideal entry and the lowest risk entry for a SCTY short position which I'd view as a longer term trending trade because of the size of the top.

I'll be setting alerts for a move/gap above $71.20 to look at a short in SCTY."

Trade Idea: (Swing Trade Plus) SCTY, Monday June 30th

"I'm going to open a partial (half) size SCTY equity short here and will consider adding to it if there are any unique developments that have high probability outlooks like the gap up with distribution that would be a high probability bearish confirmation Engulfing Candle, in fact I might even wait for something like that to be formed."

That's exactly what we got, this is the head fake concept, but also multiple timeframe analysis. Take a look.

 Another concept seen on the daily chart of SCTY which is a volume confirmed H&S top price pattern, is the parabolic move which I never trust as they end as extreme or worse than they start which we are already off to a good start on that concept, I just don't trust them and I wasn't worried about SCTY's +50% right shoulder because of this. The gap up is when I filled out the position as the charts were deteriorating so fast, I had already opened a partial short position in SCTY.

Then, Filling Out the SCTY Short Position Monday July 7th

"You may recall there were a few things I was looking for in the initial SCTY trade set up, one of which was a bearish engulfing pattern which is playing out on a longer 2-day chart which is even better as far as I'm concerned. Last week I brought the partial position up to 2/3rds size on the gap up as that was the first step in a bearish engulfing candle and the lowest risk entry (the phased in 2/3rd size position is up about 3% ), I said I'd fill it out on the confirmation, although we haven't closed there yet and there may be a better entry intraday later, I'm not that concerned about it, I'm looking at this from a bigger picture perspective."

on a 3-day chart, which is the only way I know how to give some target assumptions using candlestick reversals as they don't carry a target implication, but obviously the larger timeframe the signal, the larger the move. The chart shows a flawless typical reversal with a strong momentum candle, a loss of momentum or indecision (also a balance in supply/demand) and the gap up above the real body of the star and close below it, the confirmation candle. Recall this it the top of the right shoulder of a H&S top, 2 of only 3 places I'll short the price pattern.

On an intraday 3C chart since the gap up, we could immediately see there was no confirmation, but distribution on the gap up which made an entry/add-to a safer bet as it is the best price point with the lowest risk.


As for NFLX, there are two positions, an equity short for the longer term and a July $465 put for the near term which is up over +70% today, I'll need to watch that closely.

Both NFLX posts from July 1, the day after window dressing for Q2 ended.

Opening NFLX July $645 Puts Now (although that should read $465 puts, I corrected it later that day and had mentioned the $465 idea numerous times earlier that day).

And right after that post, NFLX Charts

And right now...

 This is the reversal process I often describe as being shaped like an "Igloo with a Chimney", the chimney is a head fake move that typically precedes the actual reversal, it builds momentum, there are actually a lot of reasons for them and there are links on the members' site to the top right with two articles, "Understanding the Head Fake Move",  we entered the NFLX move on that head fake move, it's emotionally difficult to short/buy puts in to price strength, but if we can confirm a probable head fake move, it's the best entry and lowest risk.

 Again on multiple timeframe analysis (2-day) there's a perfect candlestick reversal with a confirmation candle to the far right, this is what we want to see on what was similar to the top of a right H&S shoulder.

And the 3C chart that made confirmation of the head fake move simple, in the red box.

As for Z, there were a lot of things I liked and only 1 thing I didn't...From Wednesday July 2nd, Trade Idea: (Swing) Z

"I'm going to open a speculative (1/2 size) short position in Z....As you know there are VERY FEW "V" shaped reversals which this would have to be to work, the reversal process is something I take seriously, the only reason I consider even taking the partial short is because of the parabolic move in Z, they tend to have much narrower reversals areas and a more tight "U" or even "V" shape and as you know, most parabolic moves end just as badly on the downside as they were impressive on the upside."

Subsequent posts showed how Z widened its reversal process which is what I wanted to see.

The charts (and these look worse now)...

 Z has broken the increased ROC trendline of price which is seemingly bullish, but the change in character is often a red flag that something big is about to change in the trend, often seen as a transition between stages.

 "Z" broadened out the reversal process which I'm happy to see, it was VERY narrow when first entered.

And the chart that made the decision easy (really the intraday charts falling in to line were the easy timing part, the easy strategy part is above), note the leading negative divegrence at a new low right in the reversal process area.

POSSIBLE EARLY HINT

Given yesterday's IWM attempts to start an intraday positive divegrence (essentially a bounce, but when I say bounce I don't mean anything other than the garden variety , normal market movement as it doesn't move in linear fashion) as well as the Dominant Price/Volume theme among the component stocks of the major averages, I wonder if HYG is giving us an early hint of what we may see today, which may be the market attempting to put together an intraday positive divegrence for that normal bounce. Even in the ugliest of bear markets there are typically more or as many up days as down days, the down days are just much larger.

HYG on the open...

 HYG is one of 3 assets (TLT and VXX being the other two) that form the manipulative intraday SPY Arbitrage which can be used as a lever to move markets for a short period of time. With both TLT and VXX gapping up, is HYG perhaps trying to mitigate those moves as well as the one below?

USD/JPY falling more on the open and just prior? 

The market would typically need more of a lateral trend to put together an intraday positive divegrence, HYG up with TLT and VXX falling activates the SPY Arbitrage, of course if USD/JPY just keeps selling (you saw the correlation with Es in the A.M. Update), it may all be for nothing. This is a very early presumption, but I found the move in HYG to be odd all things considered.

A.M. Update

Overnight major world markets largely traded with a weaker tone, with the Nikkei finishing the day out for another red close of -0.42% (Europe still open) while at last look European markets were hovering in the red around half a percentage point (FTSE 100-0.56, CAC 40 -0.49% and DAX -0.52%, the out-performer in Europe is none other than... you might have guessed it, the defensive Utilities sector.

The Nikkei saw overnight data showing imports declining as consumers are clearly spending less after the recent sales tax hike the BOJ thinks went over so smoothly, just like their QE-Zilla and Abe-enomics in general.

Just as an aside, the Cyclically Adjusted P/E Ratio (CAPE) has only been higher 3 times in history than right now, 1929, 2000 and 2007 and we know how they all ended.

US Index Futures have a slightly weaker tone, don't forget the Dominant Price Volume theme that I track which was the most bearish of the 4 possibilities last night, Price Down/Volume Up, however this can create a short term oversold situation with the market bouncing the next day (today).

 The cause of overnight weakness rather than the usual overnight ramp? The Carry pair of USD/JPY, the same one that sent the Dow over 17k on Thursday amid a half day and very light volume as it pushed through the BOJ's line in the sand of USD/JPY $102 (thus running stops and taking Index futures higher with it, remember from Thursday's Daily Wrap that as soon as the market closed, the pair fell like a rock). The USD/JPY of course fell yesterday to its 200-day moving average, but overnight, it fell below that same average.

 USD/JPY, like many other assets covered last night, NFP KNEE JERK WIPED CLEAN, is clearly below the Non-Farm Payrolls print from Thursday that sent the carry pair and equity futures one way while bonds and credit took the NFP print a totally different way. As usual, the knee jerk reaction is retraced within a few days as you can see above.

Speaking of which, the 2 year yields have seen a rise of 18 basis points since the lows on May 20th with a full 6 basis point move since the June 18th F_O_M_C while the 10 year UST rates are more stable at +8 bp since May 20th lows. Taking a quick look and extrapolating the changes, one could be forgiven for thinking the bond market is pricing in a sooner than anticipated rise in the F_E_D Funds rate as the 2 year rates are out-performing the 10-year with a 6 bp move just since the F_O_M_C.

Above is the USD/JPY since yesterday's 4 p.m. EDT market close.

 And here's the 1 min chart of the same pair below the 200-day moving average overnight and this morning.

USD/JPY in red/green candlesticks and ES/SPX futures purple line on a 5 min chart.

ES 1 min and other Index futures don't have any interesting pre-market divergences at the moment, but on a longer scale where trends are more serious and often much clearer...

 TF/Russell 2000 Futures can be seen with a leading negative divegrence in to yesterday's open and in line with the move lower which is 3C/price trend confirmation.

On a longer basis, also where the highest probabilities (for resolution) are to be found, the Es / SPX E-mini Futures on a 60 min chart shows some minor positive divergences which I believe have been used, as we saw in mid May and right before the June 25th flag-like/channel with a pop (Dow 17k) right above the channel, to create upside momentum (including short squeezes and a flop of a Dow 17k breakout)  to sell in to higher prices as has been the trend for most of 2014 with a number of unrelated indicators confirming such as breadth.

Also trading weaker overnight (as many of you know as I have been tracking a large multi-month negative divegrence in UNG), Nat. Gas futures which also broke their 200-day moving average, expect to see them move lower and DGAZ higher.

 1-day chart of NG / Nat. Gas futures and the 200-day and where I've been tracking a UNG negative divegrence.

Here's the 5 min NG chart and 200-day being broken.


As a reminder, AA kicks off earnings season today after the bell as we enter the 56th consecutive day the SPX has not traded with a single gain or loss of 1% or more, a record not seen since the early 1990's!

We have Richmond F_E_D President, Lacker speaking at 1 p.m. on the topic of "Economic Outlook" and at 1:45, Minneapolis F_E_D president, Kocherlakota speaks on "Monetary Policy". I think the BIS summed it up in saying it has diminished effects and undesirable side effects, I wonder if Kocherlakota will feel the same?

The market "may" be a little dull today  in anticipation of tomorrow's F_O_M_C minutes from the last meeting which seemed like a dud, but sent 10-year yields falling since June 18th as well as  a number of other assets as smart money seemed to grab that the F_E_D might have no choice other than to raise F_E_D Funds rates sooner than later and perhaps Yellen is behind the curve as she was in 2007 as well as Bernanke. The market itself took the headline news and ran with it, not seeing anything especially interesting, many assets have retraced the knee jerk since then, others have just deteriorated since then.

The minutes are due out at 2 p.m., in fact...

The Calendar for the rest of the week.

See you shortly.