PSLV-Silver

Yesterday I talked about why there would be a need to speed up the up cycle in silver, we also noticed behavior that was out of character with the normal cycle progression, character that looked a lot like they were speeding up the completion of the accumulation, markup, distribution, decline cycle.

Today PSLV looks to have ended that particular cycle, at least from what we see at this point.

Even for a short cycle up, this is extremely short. These cycles tend to be more bell-curve shaped, yesterday looked more like a hard right angle.

Why The Q's are Off on Their Own

This morning the QQQ is up while the SPY, DI and IWM are down. Here's a possible reason.

 The DIA did make a new breakout closing high as well as an intraday closing high.

 The IWM made a clear breakout close

 The Q's did make a new recent closing high, but there's a much juicier level close by that would attract a lot more buyers, the other averages aren't as close to this area. Remember the post last night and why there's a need for false breakouts.

The SPY made a new recent closing high, but again is far from making a new high. It's not so much the high or the breakout location as it is about finding a zone that creates buying interest for the reasons I mentioned last night.

MCP's earning miss provides a good example of the false breakout

They just missed in AH, pretty badly too.

 on a daily chart, note the big volume breakout above resistance, this sets up a type of bull trap. any shares that need to be unloaded or shorted are done here into demand and what creates the demand? The breakout above a known resistance level on decent volume. The next day we have a slightly higher open and then it all falls apart.

On an hourly chart,  the negative divergence into the breakout tells us this is not likely a true breakout, but rather the often seen false breakout before a reversal.

And that's an example for those of you who haven't seen it before. I'm not saying every breakout i a false breakout, but I will say that most reversals start with a false breakout. How do we know if a breakout is real or false, volume , price action (there was no follow through) and 3C helps as a true breakout would have moved 3C higher with price.

A look at the close

In case you didn't catch the significance of the article I posted toward the end of the day, it was simply this, in a low volume trading environment, Wall Street looses one of their avenues of revenue, volume rebates, a kickback to send their order flow through certain channels. With the SPY being close to an area in which limit orders are piled up and in a low volume environment, it doesn't take a lot of money or expertise to trigger those orders, this making a few bucks on the volume, but for our purposes, this also is a good place to sell or short into retail demand crating a sort of bull trap, this is why reversals are so commonly preceded by a false breakout. Even without a healthy supply of shorts, the losses incurred by longs as price breaks back below the trend line (breakout zone) creates a supply, snowball effect. In an environment where there's little short interest you can magnify that effect as there aren't any shorts to provide a bid in a falling market.

Take a look at the end of the day breakout via volume and 3C in the SPY where it appears most of the spark was provided.

 Looking at a 1 min chart, nothing jumps out at you with regard to volume during the late day rally.


 Expand the view to an hourly chart and a volume price pattern emerges, the downside or lateral volume is twice that of the breakout/rally volume.

 a 15 min chart provides a bit more detail. After the breakout, volume declines. Any healthy rally should see expanding volume. When price gets to the white arrow it forms a star and volume picks up, this is churning. After that (even though volume isn't as important on a decline), volume picks up into declining prices near the close.

 as for 3C, it makes the lowest low of the day on a 1 min chart...

 Here's the same chart zoomed out a bit for perspective so you can see it was already in a bad position and the low in 3C is a multi day low (I can only zoom out 2.5 days, so the low could have been even greater then 2.5 days).

On the 5 min chart, we saw an early change in character mentioned earlier today, but look at the continuous lower highs/lows even into a late day rally.

From what we see here, it looks like this rally was used for what I assumed it was used for when I first mentioned it and that would be distribution into demand and setting up a little bull trap. The only way bull were buying was if a significant technical level was taken out, I showed you this was not just an intraday high, but a multi day resistance point so it looks like it's served its purpose.

This Short Article Sums It Up

And this is how the game is played.

Market Breakout

Picking up where I left off, people are often confused by 3C signals and price behavior, such as now when price makes a breakout move. If you have been around long enough, you probably have observed that most reversals are preceded by a false breakout above a technically significant level, or breakdown in the case of upside reversals.

 Looking at the 1 min chart, we have a volume surge and a breakout through today's intraday highs.

Looking at an hourly chart, you can see this is a more important resistance level. Now we watch for signs of distribution into the breakout and ultimately a reversal below the breakout point, this is also a pretty accurate timing indication of a reversal.

Some Leveraged ETFs

When something seems like it's moving in a direction and there's enough evidence to consider it to be a valid assumption, I try to look for contradictory evidence, yes contradictory. When you have an assumption, you often look for supporting evidence of that assumption and that's similar to indicator fitting which is another way to squeeze the information out of the market that you want and if you look and try hard enough, you can always find what you want. The key is not, "not having an opinion", it's in being open to information that contradicts your opinion. High probability trades don't come from a few observations, but multiple observations that seem to reinforce the original observation.

This is one reason I use 3 differently coded versions of 3C and why I look at multiple timeframes. I decided to look at not just the regular SPY, IWM, QQQ, etc, but also their leveraged counterparts to see if there was confirmation between those as well.

 QLD-leveraged long ETF for the NASDAQ 100 with a 10 min negative divergence.

 Compared to QID, leveraged short for the NASDAQ 100, the inverse, a positive 10 min divergence.

 TWM  leveraged short on the Russell 2000 with a 10 min positive divergence.

 UWM leveraged long on the Russell 2000 with a 10 min negative divergence

 SSO, leveraged long ETF for the S&P-500 5 min negative divergence

and SDS, leveraged short on the S&P-500 with a 5 min positive divergence.

Not only do these match up with the earlier market update, but each one is the exact inverse of the other. This lends more credibility to the assumption that there's a bearish move underway in the market today. As a reminder, a divergence is not a signal to buy or sell, it's telling you what the underlying action is in an equity. So today as most of the market is up, it's telling us that there's bearish undertones and that the price appreciation is likely being used to exit long positions or enter short positions. When we have multiple timeframes all confirming the same thing up to the 15 minute chart, then we are usually close to a reversal, although price confirmation is the ultimate confirmation.

Market Update

DIA 1 min, The 5/6 divergence was accurate, but not as sharp as the current divergence

 To see a negative divergence this sharp, this quickly on a 10 min DIA chart is a bit unusual.

 The Q's 1 min

 QQQ 5 min

 But look at this QQQ 10 min chart, that looks like a real change in opinion to see a 10 min divergence this deep this early.

 Here's the SPY cycle, remember yesterday I used PCLN as an example for a break of a major or important trend line and how we should expect a bounce. The 15 min chart here is already moving into a negative divergence.

 The 5 min chart has also gone negative

The same for the 1 min chart into higher prices today.

 However, the WM may be the most dramatic change, here's the 5 min chart.

This 10 min chart of the IWM is probably the most interesting.

Whatever the case may be, a cycle typically has a bell shaped curve to it, this particular cycle looks like it's being cut short and the change in character seems as if it occurred overnight. It is possible that stocks are being sold to meet margin requirements in commodities (silver/energy) or it may be just a change in the overall view of extended leverage in what some may view as an unpredictable environment. There are a lot of possibilities, but for now, what I'm seeing is what I expected to see for the most part, I'm a little surprised about the changes in equities, but just a little.

More on the Copper Relationship

A friend just sent me this article from Stock Growth Wire. Make sure you take a look at the next post, there's some unusual activity today. Here's the article re: Copper's relationship to the market.

The breakdown in copper last week is a bad sign for stock prices.

Copper and the S&P 500 have been trading in tandem for the past few years. In fact, the price of copper seems to lead stock prices by about two weeks. Traders can use the action in copper to gauge buy and sell signals for stocks.



I wrote about this relationship several weeks ago. Back then, the S&P 500 had just suffered a sharp correction. But copper was bouncing off its lows. That was a good indication the stock market correction had run its course. Here's what I wrote at the time…

If you want to know where stocks are headed next, keep an eye on the chart of copper. Right now, copper's bumping into resistance near 440. If it breaks above that level, it should be able to challenge its February highs, and stocks should continue to rally.

On the other hand, if resistance holds, support at 420 becomes the critical level. But if copper fails to hold at support, the rally in stocks should fail as well.

Copper didn't hold up. It broke below critical support at 420 and is now resting on secondary support near 400. Take a look at this updated chart…


This is a bad sign for stocks. With copper now trading below its March-correction low, the S&P is likely to follow suit.

In other words, last week's selloff in stocks isn't just a one- or two-day affair. It's probably the start of a several-week correction that should push the S&P 500 below its March low of 1,254. Based on the following chart, 1,225 looks like a reasonable downside target…


Stocks have bounced a bit over the past couple days. And there may be a little more upside to the bounce – if only to work off the oversold condition created by last week's decline. But unless copper rallies hard immediately, traders should sell stocks into any strength and use this as an opportunity to add short-side exposure.

It looks like there's more downside ahead for the stock market.

Best regards and good trading,

Jeff Clark

Possibilities...

Remember last week I mentioned what I said looked like a stealth move into TLT-the 20 year Treasury Bond Fund?

 When I mentioned it, I don't think TLT has quite broken out above the trendline and the breakout was very quiet volume wise. The pullback over the last few days has also been quiet.

 The 10 min chart shows a positive divergence into the pullback

So does the 5 min chart...

I suppose this is another possibility. Obviously we have a debt ceiling breach that is imminent. The Fed also talked last week about a 50 basis point hike, which would require the Fed to sell assets on their balance sheet. Bill Gross also came out yesterday talking about the scenario that would have to occur for him to start buying treasuries again, an odd statement from a Treasury Bear as of late and a very vocal one.

What is the Fed not only took down commodities, but also went for equities? What's left as a safe haven flight? And wouldn't that also benefit the Fed, even more so?