Trade Idea (Swing+) GLD / UGLD & GDX Update

I'm going to go ahead and open a partial (50%) long GLD position, actually I'll be using the 3x leveraged UGLD (3x long gold). Gold and GDX (gold miners) which I am VERY interested in for a NUGT (3x long GDX) entry, typically have a very tight correlation, we've even noticed some of the pre-F_E_D intervention correlation reestablishing itself in which gold miners use to lead gold before the F_E_D's money printing caused gold to soar and end the miners leading correlation of years ago.

First lets look at gold generally...

 First, the 60 mi chart of gold futures with a large leading positive divegrence.

 Next, gold futures 30 min chart with a sharp leading positive just as the quarter ends, it takes a lot to move a chart this long this far and this fast, so it seems that something (which we have expected recently with numerous signals coming in) is going on with gold, and especially right after the quarter ended

 Here's GLD's daily trend, the downtrend is being broken by the typical base forming lateral trend, it's easier to see on an intraday chart.

On this 60 min chart the turn from down to lateral is more visible and this is the area we typically see bases being built, plus we have been getting small positive signals over the last few weeks which is why I have recently been talking about gold and perhaps GDX, being close to a position entry.

This is GLD's 30 min chart, you can see why we expected a pullback much sooner than we actually got with this negative divegrence in June/July, this is also the same type of divegrence that caused us to exit our first NUGT long at a 40 & 50% gain on July 9th, right as it was breaking out, it was a perfect exit as we didn't leave anything on the table as a lateral trend developed right after that. The negative divergences caused me to expect a pullback in which we'd be able to enter a new NUGT long for a longer term trade than the previous one as I suspect there's something going on here that will cause GDX to enter a primary uptrend , you'll see below.

 GLD's 15 min chart has an odd look to it being leading positive that long, but as I go through other timeframes, they show the same divergence early on. I suspect a large gold position has been accumulated which would make sense as far as our forward looking expectations are concerned on both gold and miners.

 For instance this 5 min GLD chart shows the same early positive divegrence and a stronger leading positive as price has turned sideways from the preceding pullback.

 I'm entering a partial position here because I may look for a slightly better entry to add to UGLD or , as I'd prefer, I'll take the other 50% set aside for a NUGT/GDX long entry which would be my preferred trade. I don't want two full size positions (gold and gold miners) as they are so closely correlated so in essence, the second half of this position may very well be for a NUGT long.

As you can see, the GDX base is over a year long with a huge leading positive 60 min divegrence as well as longer timeframes. You can see the neckline; we exited  NUGT on the first day price broke through the neckline and as you can see that was the right call as price turned lateral for months before finally pulling back as initially expected.

 There are a lot of assets I use to confirm GDX signals, Junior Gold Miners (GDXJ) are one of several, you can see the 15 min chart here is leading positive after the confirmed pullback trend.

DUST, the 3x short Gold miners) is another of the assets I use to confirm which should be showing negative divergences if GDX is positive which it does above on this 60 min chart as well as below...

 On a closer, near term signal 5 min chart.

The one issue I have with a GDX entry or NUGT long entry at this moment, is I don't believe the base area is wide enough yet or mature enough yet. I'll give it a few more days and keep an eye on it as I would like the second half of the position to be NUGT long, I suspect with a little patience it will give us a more stable base, capable of supporting the kind of real breakout move GDX needs to move to stage 2 mark up in a primary bull trend.

For now, I'll be opening the UGLD long at 50% full position size.

DJ-20 / IYT (Transports) position follow up and set-up

The IYT short which was entered in 2 phases is going as planned, the position is in the green and I thought now is probably a good time to update it.

From my perspective since it's a full size core position (there's a little room to add, but by and large it's a full position), there's not much to do other than be patient and let the position work. There's a decent chance of a gap fill from this morning's gap , especially if we get some stronger market signals, but it's not anything I would even consider trying to trade around, this one is set and I'm leaving it in place, at most I might add what is about 10% still available without breaking rules on max. position size, but only if a worthwhile opportunity presents itself and is enticing enough. Again, otherwise I don't think there's much to do here other than let the position work.

For those interested in diversifying out a bit in to transports, there's still an excellent opportunity here for a longer term position trade, transports are still in an overall EXCELLENT area for a short entry and tactically, you may even get a slightly better entry. However, just as I phased in to the position in 2 parts, I'd have no problem with a partial entry here and setting price alerts looking for a little bounce to fill out the rest. For that matter if we are taking a wider view of the market, I'd have no problem filling out the entire position right here, but if the opportunity is there, why not try to take advantage of it.

While IYT (Short) is the actual asset , I use DJ-20 to confirm the IYT charts so I'll have some mixed in with IYT for that purpose.

This is the same chart shown earlier today, the Ascending Wedge, the false break lower as would normally be expected which transitioned in to the August cycle's base around 8/1-8/8 followed by mark-up which would have shaken out initial shorts on the break down from the wedge and provided some extra momentum on the upside to make the Wedge head fake we have come to expect over the years , followed by the conclusion of stage 3 top of the August cycle with a head fake move just before transitioning down to stage 4 decline. As our concepts go, this is textbook.

 On the 60 min DJ-20 3C chart, the change in the upside price ROC is the first warning signal that a seemingly bullish change of character is actually warning that a top is nearby (orange arrow). The divergence in to the Wedge's top developed quickly and with a lot of confirmation so we entered the first half of the position at #1 and as the break below the Wedge failed and moved to the August cycle base and eventual breakout, we entered the second half of the position, the position is now in the green and you can see the deterioration in 3C since the August cycle which was always expected since we first identified the base forming in early August.

 IYT's 15 min chart, being a faster timeframe shows more detail with the first negative and entry, the divegrence for the August cycle's base and the distribution in to stage 3 as well as the head fake move before transitioning down.

Note the current leading negative divegrence, in line with the 60 min chart showing this to be a stronger area of distribution than the initial entry, as expected.

 DJ-20 5 min shows the area of the stage 3 top and the head fake move, the divergence is pretty obvious. Any counter trend moves to the upside since have been distributed in pretty dramatic fashion.

Very short term on the IYT 2 min chart, like many of the averages, we are seeing a small divegrence (positive) develop, the initial target would be the gap around the $150.90 level, it really depends on the size (time) and quality (intensity) of the divegrence, but if you are interested I'd set price alerts in the gap area at minimum and maybe a few just above at technical levels you deem appropriate. 

I'll be setting alerts as well for anyone who is interested in the position so I can follow up if we get the bounce here which I'm leaning toward.

Opening Indications and Market Outlook

This morning's first 45 minutes of trade has been more interesting than the last 13 hours of trade for the new week.

First I want to start from a bird's eye perspective  because "if" we do get the bounce I suspected after Q3 ended yesterday at the close, it needs to be put in to context. Then we'll look at the very early indications, of course some of the intraday charts "may" be out of date already by the time this gets posted, but the concepts at least are worthwhile and thus worth posting.

 The SPY Daily chart shows a macro version of a concept we have held to be reliable for years now regarding bullish Descending Wedges and bearish Ascending Wedges. The classical definition or expectation of a wedge, in this case a bearish Ascending Wedge such as we see to the far left is that as the Wedge approaches an apex (convergence of the two trendlines), a break to the downside should occur, the sooner the break before the actual convergence of the apex of the wedge, the more bearish the break is and we saw just such a break at the green arrow. We have NEVER trusted that interpretation of this price pattern, although I believe the wedge's overall presence is a real one and a bearish one, it's just what technical traders expect to happen after that is where Wall St. steps in and changes the game, using Technical Analysis against traders.

We have always held that the Wedge will always make a head fake move ABOVE the apex, which nullifies the Wedge's importance to technical traders, seen as a failed price pattern.

In this case specifically, new shorts following the initial break below the wedge would be caught in a bear trap as the break rolled right in to our August cycle low/base at Stage 1 (S1) followed by stage 2 (S2) mark-up which creates the actual "Wedge" head fake with a breakout above the apex. 

Technical Analysis dogma dictates a failed price pattern means you should reverse you position so all of the initial shorts at the first break would cover and go long giving price enough momentum to break above the wedge's apex or high, which in this case creates a large Crazy Ivan shakeout eventually, taking both shorts and longs out.

As we follow the August cycle it moves from stage 2 mark-up to a stage 3 top and we expect to see a rounding reversal with a head fake just before a turn down to stage 4 decline, this is the "Igloo with Chimney" price pattern we look for in yellow with the chimney being the last head fake in the August cycle and almost immediately after that price starts to decline as the head fake move is one of our best timing indications for a transition from one stage to another like from stage 1 to stage 2 or stage 3 to stage 4.

THUS FAR THIS IS A PERFECT ASCENDING WEDGE HEAD FAKE PATTERN WHICH USES NEARLY CENTURY OLD PRICE PATTERNS THAT ARE STILL FOLLOWED AGAINST TECHNICAL TRADERS AND THE AUGUST CYCLE'S STAGES HAVE PLAYED OUT EXACTLY AS THEY SHOULD COMPLETE WITH THE "CHIMNEY" HEAD FAKE.

So in essence, we have a very complete, very bearish overall picture above.

 As for the IWM's daily chart, I've held for most of the year that we are looking at a type of H&S top, they almost never look like the textbook in real life, this one would be considered a "Complex H&S top" and beyond 3C charts and Russell 2000 component stock internals, the volume action is one of the best confirming indications as volume should be light on the rally and heavy on the decline as you can see heavy volume in to every decline throughout the price pattern,  this is why volume analysis is so important, as well as being severely under-apprreciated and overlooked by most traders; it's giving us strong confirmation which we couldn't find anywhere else.

 Transports, the Dow-20 / IYT should confirm the Industrials as Dow Theory goes, but the US is not an Industrial economy anymore, it's a services economy so confirmation with the SPX is fine while the IWM typically leads the market, it's clearly leading to the downside.

As you can see transports have the same price pattern (Ascending Wedge) which is why our first entry was right near the top of the Ascending Wedge and based on the belief that this price pattern that we have seen so many times would play out like it did in SPY above, we filled out the Transports short on confirmation of our price pattern concept at the second high, the one that breaks above the wedge's apex to average in a better entry, while still giving us short exposure to Transports (IYT short) which is at a profit already.

 As far as the stage 4 decline, I'd say we are clearly right in the middle of it or at least the start as the IWM has done nothing but  make lower highs and lower lows, a perfect downtrend.

*Note the large volume today to the far right on this 15 min chart.

A closer look at that volume reveals heavy volume this morning below support,  this is very often short term capitulation, meaning we can often expect a base to start to form or finish up if the break is deemed a head fake move.

Here's a clearer picture of the break in IWM, the heavy volume is key here, more often than not traders take it to be a bearish sign, but it typically is a short term oversold sign.

 As far as this week's trade, the only real base area we had in the SPY 15 min chart above was way too small to be of any use, the base area needed to broaden out and accumulate which is why I kept saying it needed to come down toward the lower end of this week's range,  but it wasn't entirely clear if they were going for the best close they could get on the quarter which would prevent any such move or if it was just a pin to try to keep the market where it was rather than a worse close.

Also note volume here today below the support area.

 The DIA has done the same this morning, pulling back to the right area as well as higher volume below support.

 And the Q's were close to doing the same at the time of capture, they have now done the same.

 The SPY was in line early this morning on the decline.

However, the IWM was showing initial signs of accumulation of the large supply of shares as volume increased.

It has not migrated to the 2 min chart, but these are very early captures just after the open.

HYG from yesterday saw a negative divgerence sending it lower today, you may recall it infected the 1, 2 and finally 3 min chart.

There's still an overall sizable HYG 3 min positive, even though the most recent signal is a smaller negative, but I'd say, on the whole, there's probably still gas in the tank from the initial positive divegrence here, meaning HYG, could be supportive of a market bounce.

After 3 mins, HYG is just in line so this doesn't indicate anything other than support for a bounce, not any serious change in character to a bullish market.

Most Leading Indicators have turned supportive including sentiment and High Yield Credit, this is on a very short term basis (late afternoon yesterday through this morning for HY Credit). % year yields are an exception as they have fallen to revert to the SPX's lower price and our new VIX Inversion indicator and SPX/RUT Ratio indicators are silent on the matter, in line with the Russell 2000.

The MOST recent 3C data from this morning is showing the SPY, IWM, QQQ and DIA all with positive divergences in to this morning's lows through the 1-3 min timeframes, so far right on track for what we suggested we may see Wednesday in last week forecast, the Week Ahead.

 IWM 1 min

IWM 2 min

QQQ 2 min

DIA 1 min

Interesting

A.M. Update

Other than the first confirmed case of US Ebola, the other bad news overnight was that European PMI readings were not only bad, but with the core of the European economy, Germany now in manufacturing contraction, printing at 49.9 down from 50.3 and consensus of the same has entered the fray. It's one thing for peripheral countries or the PIIGS to print badly, but when the engine of European manufacturing misses and comes in at contraction things are quite bad and the European Triple-Dip recession is looking very real.

In addition to the miss in Germany, France also continues to be in contraction printing at 48.8 (anything below 50 is contraction.

Also, while New Orders fell for the Euro-Area which also missed, input and output prices fell, also known as deflation which is an ongoing problem for Europe.

In addition to EU misses, the UK missed, printing at 51.6, down from 52.5 and consensus of 52.7.

Oddly you'd think, commentators are surprised futures aren't sky-high on the bad news as bad news is good news when it comes to Central Bank liquidity pumping measures.

However, I'd note that in order for the market to have a favorable reaction as I have suspected we might see now that today is the end of Q3 Window dressing and the start of Q4, WE NEED TO PUT IN A STRONGER DIVERGENCE AND BASE WHICH REQUIRES PRICE TO COME DOWN TOWARD THE LOWER END OF THIS WEEKS RANGE.

Incidentally, that;s exactly what's happening right now.

So we'll see if in fact we do get the positive signals today for a post Window Dressing (small/mid-cap sell off) bounce.

Daily Wrap

So much for any hopes of ramping the market to the best possible close for the quarter as late day action  was anything but impressive with HYG initially appearing to try to ramp the market even though we saw distribution through the 1, 2 and 3 min timeframes today (3 min is the longest timeframe its positive divegrence hit), obviously it was an unsuccessful attempt...

 HYG (blue) vs SPX intraday ramped just before 2 p.m. and to no effect.

russell 

The major averages closed between the NDX's +0.06% and the Russell 2000's -1.45%.

For the quarter the R2K saw a loss of -7.95 and a loss of -5.2% on the year . The SPX saw a modest gain of +0.50% on the quarter, the worst quarterly SPX performance since Q4 2012 , the Dow +1.2% on the quarter and the NDX +4.7% on the quarter, an obvious huge divergence between the R2K and the NDX with the SPX and Dow somewhere in the middle close to unchanged.

As a reminder, this is the 15 min chart for all of 2014 and then some of HYG vs the SPX (green).

Treasuries 
The spread (as of yesterday's close) between the 30 year and 10 year is 69 bps, the lowest since the 2009 lows of March 6th which means the yield curve is at its flattest since the worst of the worst for the market.

The yield curve typically looks something like this...

 The shorter maturities like notes, 2, 5, year have a lower yield while the longer maturities like 10 and 30 pay higher yields. However the inversion or flattening of the yield curve is indicative of economic troubles ahead, inversion is a predictor of economic recession. We already know the spread between the 10 and 30 is at the flattest since the 2-009 market lows on MArch 6th, meanwhile for the quarter, the short end at 5 years dramatically underperformed sending 5 year yields higher, again, a flattening like behavior.

5 year yields (green) vs. 10 and 30 (white and blue respectively) for the quarter. There's approx. 30 basis points of flattening for the quarter between the 5 year yield and 30 year.

Not a great bit of news from the treasury complex.

Breadth for the quarter doesn't even need to be addressed, just look at any of the breadth posts and you'll see it dramatically declined starting July 1st, the end of Q2.

On the day, leading indicators had some interesting take-aways, for example, Professional sentiment was up on the day,  which fits with Friday's Week Ahead forecast of a post Q3/Window Dressing bounce as small and mid-caps have been hammered hard, they may be looking interesting as an oversold corrective move, at least that was the thinking Friday as we'd likely have to wait for the quarter and window dressing to end today.

 Our first indicator has been range bound with the market, but up on the day today.

Our second a little different, but accurate and up on the day today.

It's important however to take in the full picture and the very same indicator on a 30 min chart vs the SPX looks like this...

30 min pro sentiment, not far off HYG, 3C charts in the space and certainly breadth.

Also similar to our newer leading indicator, SPX/RUT Ratio, especially at the August cycle head fake highs.

 The indicator, like HYG and many others, led the market to stage 4 decline lows, especially the RUT.

Interestingly as this indicator has been 100% accurate so far, the positive signal it put in at the white trendline allowed the market to hold its ground in to the end of the quarter, but over the day a new leading low, not confirming where SPX price is, developed.  However it is much closer to the IWM and confirming its new low for the cycle.

Indicator (red) vs RUT (green)...

3C charts

In my view, unless the 3C charts were positive just to hold a consolidation pattern, which is usually only a short term e vent on a very short timeframe, I'd say the amount of selling underperforming assets with probably something near 50% of the NASDAQ Composite and 50% of the Russell 2000 stocks in a technical bear market, there certainly wouldn't be much accumulation during window dressing,  this is the reason in the Week Ahead post I suspected if we saw anything it would be post window dressing, Wednesday. I think there's enough room to work with to put in that post Window dressing bounce as a lot of small and mid caps are oversold or viewed as such as they were the worst performers on the quarter and thus sold the heaviest this past week or so. I do think we'll have a clear signal and be able to make a choice of whether to participate or not, at this point I would not because of the small size of any base, but again, I wouldn't expect any kind of accumulation that can move the market while net selling during window dressing is underway.

So window dressing is over, guess what also ends this month? POMO, QE ends Oct. 28th as the F_E_D released the last POMO schedule, after that, all of the retail crowd who believes the F_E_D has their back, will be on their own.

As for Dominant Price Volume Relationships    today, only the Russell and the SPX had one, it was Close Down/Volume Up which is typically a 1-day oversold event with the market closing green the next day, the Dow and NASDAQ had no dominant relationships.

S&P Sectors  Only 3 of 9 sectors closed green today with Tech leading at +.30% and Energy lagging at -1.25%.  The 5 day performance has 8 of 0 red, the 10-day has 9 of 9 red and the 21 day (close to a trading month) has 8 of 9 sectors red, there's certainly a notable change in character there as well.

Morningstar Industry/Sub-Industry Groups  Only 42 of 238 were green today, not as bad as we have seen over the past few weeks, but pretty bad.

On a near term basis, breadth from a S&P and Morningstar Sector perspective is oversold and would be due for a normal corrective bounce.

While breadth did deteriorate today, especially among the Advance / Decline lines, the glaring red flag in breadth indicators is in place already for example, the NASDAQ Composite's Advance / Decline Line...

 NASDAQ Composite A/D line green vs NASDAQ Composite...

 "The Percentage of NYSE 1 Standard Deviation ABOVE their 200-day Moving Average" vs the SPX. These are considered healthy stocks, they have fallen way off to just about 2014 lows.

However we don't even have to look at momentum stocks , just the standard 40 and 200 day moving average and it's clear that this market is not long for the world.

 The Percentage of NYSE stocks ABOVE their 40-day Moving Average (green) vs the SPX

The Percentage of NYSE stocks ABOVE their 200-day Moving Average

Houston, we have a problem....

And on that note, I'll see you in the morning. Have a great evening...

Final Window Dressing Is In- Toxic Financials...

I was very eagerly awaiting this information today. Some of you may recall the F_E_D's newer RRP (Reverse Repo Facility) that banks have been using the VERY last day of either the month or more often, the quarter to make their financial condition appear healthier than it is by renting treasuries (high quality collateral) from the F_E_D for a SINGLE DAY, which is the last day of the quarter clearly for Window Dressing to fool investors in to thinking the banks are healthier than they are and to "fool" their regulators who happen to be the same people lending them these assets in the first place.

When the F_E_D first introduced the RRP facility it was under the auspices of helping as a policy tool when it comes time to hike interest rates, but it has been shown to be ANYTHING BUT.

Back in January before we really caught on to what was going on with the new facility, the usage was $140 bn dollars. We really noted the use of the F_E_D's RRP program , supposedly a tool for hiking rates when the time comes , at the end of April this year when it set the second highest usage ever on the last day of April , month end window dressing.

From there, it became evident that the banks are not in the financial condition they portray by borrowing collateral from the F_E_D for a single day, and the highest usage is always at quarter's end, specifically the very last day of the quarter.

So we started paying more attention and found that Q2's June 30th, saw the usage of the RRP facility go up to a new record usage of $340 billion dollars spread among 97 institutions, 1/3 of a trillion in collateral shortfalls and all of this to fool investors and regulators, except regulators are the same ones loaning the bank the assets for a single day.

Naturally with today being the last day of Q3, I was very interested in what would happen with the Reverse Repo facility as this is the last day for quarter end window dressing.


Not long ago the F_E_D CAPPED the usage of the RRP at $300 bn and on September 17th, they announced that on September 30th, unlike all other days they conduct reverse repos between 12:45 and 1:13, Sept. 30th (today) would be conducted at 8 a.m. - 8:30 a.m. EDT, the only thing special about today vs any other day they conduct the operation is today is the last day of the quarter with a facility that clearly was never meant to be an interest rate hiking tool, but a bank window dressing tool.

I was expecting the entire $300 bn allotment to be taken up as the previous quarter's bank window dressing set a new record, to many people's shock and disbelief, the usage of the Reverse Repurchase Facility today reached a new record high, above and beyond the F_E_D's own $300 bn cap of a stunning $407.167 BILLION dollars, creeping up on half a trillion in collateral shortfalls at the banks. In addition the normal 5 basis points for using the program came in today at a spread of between 5 bps to a negative -20 bps.

Tomorrow the assets will be repurchased by the F_E_D, the banks will have completed window dressing and appear to be in better shape than they are, if only for a day and the regulators will be fooled, who happen to be the F_E_D!

There are a lot of reasons I like FAZ, 3x short Financials, but I think you can safely add this to the list of net negatives for the banking sector.



Interestingly about 2 weeks ago

Q3 Closeout EOD Ramp Attempt...

The only one of the major averages that pulled back intraday and had significant enough positive divergences to try to ramp the close for closing the quarter was the IWM, here are the charts quickly...

 IWM 2 min accumulation in to today's move lower...

 IWM 5 min accumulation in to today's move lower...

This is obviously enough to load up to try to ramp the close,  but is it enough to look at a long swing trade, I go to the Russell 2000 Index Futures...

The 5 min chart has NO positive divergence.

 The 7 min chart has nothing nut distribution sending futures lower.

The 15 min chart is no more than in line on the downside.

The 60 min chart is the same.

I can see no reason to take on long risk here, so we go back to Friday's Week Ahead and look for any possible accumulation tomorrow as the quarter has ended and window dressing with it.

The Custom TICK trying to ramp the close...

As well as NYSE TICK

HYG was even called in with a little bump.

Coming, as I hoped, I have the Window Dressing Data that supports Financial Shorts or a FAZ long position.