Getting Ready to Add Core Shorts Back-FAZ

Last Friday's The Week Ahead forecast was, 

"it wouldn't surprise me if we were very near the end of this bounce, maybe a day or two more, but I suspect we'll be seeing a lot more lateral (sideways) trade next week, a reversal process. which is where we'll find most of our short entries."

So far we've been right on track with additional gains Monday and Tuesday and today seeing the market flatten out ("a lot more lateral (sideways) trade") today, which is nearly perfectly on track.

SPY's Monday/Tuesday additional gains, "maybe a day or two more " (of additional gains) and today flattening out toward the reversal process. RATE OF CHANGE (ROC) IS VERY IMPORTANT IN DETERMINING WHERE A REVERSAL PROCESS/PIVOT POINT IS.

On 8/1 when it was clear a base was going to form and a bounce from that base would be high probability I closed my long FAZ position , but kept the bulk of short exposure in place. Closing FAZ allowed me some resources to play short term piggy back trades, allowed me to protect the gains in FAZ and will ultimately allow me to re-enter FAZ at a better price in full size as the previous position was not all the way filled out. I'm looking for an area to add to that FAZ position and be ready for the next leg in the market (down) as this bounce exhausts it's resources.

While the minutes just released were not taken favorably, it's still a short term intraday event so I'll treat it that way until/unless I see larger signs/signals that there won't be a reversal process, but rather a reversal event.

You have some idea of what I'm looking for in XLF and thus my FAZ long re-entry, lets take a closer look with an eye specifically to add short exposure in FAZ long (3x short Financials).

*These charts were captured just before the minutes were released at 2 p.m. EDT.

 XLF or Financials look like a solid primary trend short play as this 4 hour leading negative divegrence makes pretty clear. I'm not looking for a move of 20% in FAZ, I'm looking for a move of likely 80-100% over the primary trend's term so recent gains in FAZ have really been small trades, not positions.

Speaking of FAZ, this is the 1 min trend, you can see the positive divegrence and a buy area as well as the negative divegrence (there were more than a single chart that caused me to close FAZ) which was particularly acute on 8/1 which is where I sold the 3x short Financials ETF. As you can see, I didn't leave much on the table.

XLF on the other hand on this 3 min trend chart shows the same base at the same period from 8/1 through 8/8 with the bounce starting 8/11, since then XLF has shown significantly more distribution over the last several days than what went in to the base's positive divegrence,  in other words, on the whole this was a net distribution event. The base was only set up and strong enough to create a sustainable bounce that could be sold in to.

The Rate of Change for price this week is very important as it reveals the end of the bounce phase (with the caveat of some noise here and there and maybe a head fake move). It's clear this week that the bounce phase is ending and the reversal process is starting. How long will the reversal process be? Usually it's a bit larger than the base, that has been our experience, but many things have changed since Q3 began starting right at July 1 so this dynamic may change as well as this is the first respectable bounce since July 1 so i'll assume the concepts that have worked will continue to work, but be mindful that there have been many changes and the size of the reversal process may be one of them.

For traditional technicians, note RSI (one of the traditional indicators I still like) is positively divergent as FAZ flattens out from it's downtrend.

FAZ's 2 min chart also shows the 8/1 divegrence, again the exit from FAZ on 8/1 left nothing on the table other than open market risk, but no additional gains as that was the same period the market was building its base (8/1 through 8/8). However note the recent leading positive signals in FAZ.

The FAZ 5 min chart shows the negative divegrence leading negative by the time we reach 8/8 (the end of the market's base) and a nice 5 min positive divegrence.

What is important to remember is we are following underlying price action that contradicts real price action, a divergence alone is not a signal to buy, but an inside look at what is transpiring under the surface that is masked by real prices. I want the strongest divergence possible before entering, I also want to follow the concepts that have proven to work so well which include allowing time for a reversal process and usually a head fake move just before a an upside reversal (in this case), that would mean any strong support that develops in FAZ raises the probabilities of stops being run just before price moves to the upside. PRICE ACTION IN THE MARKET IS VERY DECEPTIVE, BUT IF YOU UNDERSTAND THE CONCEPTS AND WHY THEY EXIST, THESE PRICE MOVES THAT ARE SEEMINGLY AGAINST OUR POSITION, ARE SOME OF THE BEST ENTRIES/MARKERS WE HAVE.

Like XLF's 4 hour primary 3C trend leading negative divegrence/distribution, FAZ has a confirming 4 hour leading positive 3C trend. As far as upcoming market price action, I want to be on the side of highest probabilities which is Financials short.

 

Still, the probability of a false breakout/head fake move above XLF's range is still high. This may not happen as XLF is falling apart quickly, but it could still happen as a result of a reversal process and a head fake move which would be a break of FAZ's reversal process support and a break above XLF's reversal process resistance. For now, unless/until things show definitive changes in character and the concept of the reversal process, I'll wait for the best entry possible, b however as far as primary trend positions go, looking back a year from now, catching an entry a few percent better than today's will hardly matter.

Gist of Minutes

Rate Hikes Are likely coming sooner than later

Minutes Are Due out

I wouldn't be afraid to use any knee jerk momentum from the minutes to your advantage if they present one

IYT/ Transports Trade Set-up

The last time we entered IYT (short) the divergence setting up the downside turn was very quick, at least the tactical timeframes, the strategic had shown damage ever since Transports saw an increased rate of change in upside price movement which often precedes a downside reversal even though it appears to be a very bullish event.

I'm very close to pulling the trigger here to fill out the IYT partial position which has room for about another 1/3rd addition.

Here's the initial position entered and held since the last top.

Even with nearly a full retracement of the July decline, the position has held up well because of a good entry for the first portion.

 The intraday chart is falling apart in to the last 2-days , many of the watchlist stocks have a similar appearance today.

The 2 min chart is going negative in the same area,

As is the 3 min chart which shows the exact same base area as the broader market, August 1 through August 8th.

The 5 min chart shows the trend of underlying trade during this bounce which is what the broader market shows as well.

And the 15 min chart would be the bases's positive divegrence for the bounce, again from 8/1 through 8/8 with recent deterioration like we are seeing in the same charts for the major averages.

 The stronger charts which don't show the same divergence (positive) as it was not strong enough to show up on them , shows the very fast deterioration of the last top when we entered, I believe there were only a couple of days before it turned down, much sharper than typical reversal events. The 3C posture here is in even worse condition.

The 60 min chart shows transports in line as price's ROC to the upside increases, again this seemingly bullish event often leads to a much bigger top/ reversal. Again, 3C is in worse position on this second near double top.

It's the strategic 4 hour chart that shows the long term underlying trend which deteriorates badly as the increase in upside price ROC begins (the steeper second trendline on price). This is the highest probability intermediate to primary trend resolution or in other words, a bear market.

I'm tempted to fill out the position here today, however, the concepts we have learned over the years would suggest the highest probability would be for a head fake/failed breakout above former highs or a failed breakout from a double top.

Since I don't have any daily bearish reversal candles in place yet and the head fake area is so close, I'll set DJ-20 price alerts for a break above $8515 and look for my entry at that level.

However as a longer term investor./trader, I don't think an additional +.005% is really that big of a deal over the longer haul, it really only matters to me for the purpose of timing.

Market Update

You already saw a lot of this earlier today, but from what I'm seeing now when I said yesterday that we may already be in the reversal process, that statement looks more and more true as today continues. I do not think this is nervousness before the minutes although there will obviously be some, this is about the right place considering the positive divergence/base's size and recent market behavior during bounces.

 IWM 1 min has failed to fill the gap, again underperformance by the IWM which is significant because the Russell 200 "should" lead any risk on move and in this one it has been the laggard.

2 min IWM with a deeper leading negative divegrence today, but more importantly look at the right turn price is taking, this looks to be the reversal process, it may be a bit too early to make that statement, but considering it may only be several days, we'll need to determine this quickly. Going through the watchlist and seeing a change in character would be pretty solid confirmation and I'm making my way through that list now. Any volatility from today's minutes release is temporary (on the upside), the support for the bounce or "gas in the tank" is now in the red light area. While the minutes could cause a knee jerk reaction, it would be one without support and therefore not really a factor in this process other than perhaps giving us a tactical advantage on some entries.

 QQQ 1 min is seeing a deeper leading negative divegrence which really got started yesterday , remember the NDX did hit our $4k target.

QQQ 2 min chart is seeing migration of the divergence like the IWM .

SPY 1 min is the 3rd average giving good confirmation and showing we are not seeing a difference in relative performance (3C), but rather a trend among the averages/market.

And again the 2 min chart is seeing migration of this increased downside negative divegrence.

I'll let you know what I find as I finish up going through the watchlist , there may be some assets that are close to entries.

Market Update, A Quick Look Around

A quick look around being this week's forecast was for a couple more days of bounce and transitioning in to a pivot with lots of evidence along the way that this is what wer'd be looking at is now starting to yield some of the larger signs I was looking for as to where the pivot would occur or the reversal process begin. We already know that Index futures have deteriorated badly, here's what the averages and a few other indications are looking like....

 SPY daily reversal areas, this looks like it could be the start of a reversal process in the SPY, it would be right about on schedule.

 The same for the QQQ

And the IWM which has failed to meet anything more than the minimum target set out last week.

The SPY 1 min intraday trend, it's actually worse than this zoomed out, but the most recent divergences are the sharpest.

The SPY 2 min trend shows what I have been saying since the first day above the base, immediate distribution in to any thing that resembles higher prices.

The SPY 5 min chart...

 However it has been this 10 min base/divegrence that I've been waiting for to turn, it's already in leading negative position so I think we can assume that the formerly in line divergence is now at a point of deterioration that is reaching saturation for this move.

 QQQ 1 min leading negative and the ROC in price is clearly turning more sideways.

 The 10 min chart is the base divergence I've been watching in this case, while it doesn't appear to be negative, I'm pretty sensitive to changes in character and the most recent decline in 3C looks like an increasing downside ROC.

 The 15 min chart which never made it to a positive divegrence is in horrible shape, this is essentially the roof or lid on the rally/bounce, ultimately it prevails.

 IWM's 10 min  divergence as already starting to lead negative, pay attention to where 3C is at 3 exact same relative levels (price).

 IWM's 15 min base positive divegrence that has been in line is showing signs of falling apart as well.

XLF which has been a barometer as I do expect a move above its range is struggling here on the 10 min chart.

However, just as XLF was the worst relative performer yesterday, the market can start it's decline/reversal process while XLF finishes to move toward my target level (relative performance), then again the IWM didn't meet any of my upside targets.

HYG's 3C trend has been shown several times, it has definitely been an influence as it has been leading price since Aug 1 when the base started, it's now starting to falter.

And the 10 min HYG chart shows this on a larger scale.

Essentially we are pretty much on schedule from Friday's "Week Ahead" forecast.

Z (long) Position Update

I know quite a few of you have Z calls expiring this or next week and I'm already getting emails about it so I thought I'd address it here. After the initial move, last Friday I posted, Z Should Continue Higher in to Next Week and more specifically, Monday's Z Position Update.

The gist of Friday's post was that the charts that caused Z (which is a longer term short candidate on a bounce) to pop up on the radar as a short term speculative long (call) position, the 5 and 15 min charts in leading positive divergences in to it's pullback through mid-August. The gist of Monday's post was the following,

"...right now it looks to be in a consolidation between support and resistance, I think support will win and resistance will lose and I suspect it will happen in the next day or so, so I wouldn't be very concerned about weekly calls (this Friday)."

Right now "Z" is still battling this morning with the 22-day moving average which is the resistance area with the 50-day right below as support, my opinion was and is that the 22-day resistance gives way and Z moves higher. However there are some charts right now that may not matter much to short term weekly call positions, that are cause for some concern moving forward.

Specifically...

 Here's this morning's move on volume so far so that's great.

This is the larger 15 min positive divegrence, as we move out to longer term charts Z is in the early stages of trouble and will likely pop up as a short trade idea in the not too distant future, but for now, the 15 min positive at the mid-August pullback has a pretty good tank of gas to lift Z.

In early trade Z is trying to confirm, I suspect it will, however...

 The 5 min chart has deteriorated since Friday, right now it looks like the divergence there was the cause of or the result of the consolidation being trapped between support and resistance so close together.

This is a closer look at the 5 min chart.

"IF" the intraday charts confirm and the 5 min chart starts to improve, then Z should be fine for a longer period which is represented by the 15 min chart, perhaps even in to next week, however if there's no improvement in the 5 min chart or it gets worse, I'd be looking to take advantage of upside momentum to close the position in to it before Z starts turning lateral or losing upside ROC.

If this were a long equity position I'd treat it different, but for most it's a weekly call position which requires different position management as theta decay and the magnitude of position percentage moves are greatly exaggerated by the leverage of weekly options.

I'll update Z as I see any changes that are useful in determining a course of management, but until then I won't be updating it unless something noteworthy happens.

FEYE (Long) Position on the Radar

Yesterday's large volume, 3C signals and daily closing candle/volume look very much like an upside reversal point for FEYE, it's the intraday action yesterday that had me add to the small , speculative call position, Adding a Little To FEYE Aug. 22nd $30 Call, but it's yesterday's closing daily chart that has me putting this note out.

 This daily candlestick isn't a typical reversal candle, however the longer tail on the bottom means lower prices were rejected and the larger volume usually is a good indication of a turning point, sort of a short term capitulation event. So far FETE has broken above its 5 min/50 bar moving average this morning.

5 min leading positive divegrence in to yesterday's higher volume.

3 min chart confirming, I don't like FEYE much beyond the 5 min chart so it's not a trade, at this time, I foresee as being anything more than what we've taken it as.

And yesterday's larger volume areas with positive divergences.

Keep this one on the radar, any volatility from the F_O_M_C minutes may be useful in managing this position.

A.M. Update

There's not much going on overnight that's not going on almost every night such as heavy fighting in eastern Ukraine, there is the re-ignition of fighting in Gaza after an uneasy truce failed to hold, but these aren't really moving anything despite what talking heads would have you believe, Crude has made a pretty large decline as we saw last night, as we expected in our trade set up from last month for a long and then short USO/crude trade and seemingly on the back of US airstrikes in the Kurdish area of Iraq which was a guess back then when the trade idea was posted as being a catalyst to explain the larger negative divergences being seen at the time (in other words Wall St. already knew Obama would send in help). Interestingly I read that dropping crude prices were a result of geo-political tensions, I'd think they'd move in the opposite direction...

In any case the F_O_M_C minutes at 2 p.m. are the event of the day/week with Yellen at Jackson Hole Friday at 10 a.m. The Bank of England's minutes revealed for the first time in 3 years there was a split in the vote with two members looking for a rate hike to bring rates to +.75%,

The Global markets have quieted down with Shangjai -0.23%, Hang Seng +0.15% and China will have HSBC Flash PMI readings out tomorrow. The Nikkei +0.03% with Europe in decline, FTSE -0.47%, DAX -.74% and the CAC-40 -.70%.

We just gapped down. Looking at the Index futures, I think after today's knee jerk minutes reaction which "could last a few days, but usually is a few hours, we've pretty much reached the pivot area with the IWM severely underperforming the target areas, only breaking above the very minimum target.

I suspect we'll be preparing for a more important leg and one down. We still should expect some reversal process, but I'd like to be ready in case it's a sharper one than usual, I can imagine that in this scenario where most all of the action that had to be undertaken was undertaken starting the first day of the bounce.