Market Update

***NOTE-since putting this update together we are getting some stronger deterioration in the shorter term intraday charts. I will post another update of that deterioration next, but this update is still valid.

Keep in mind the shortened market hours today. Other than that, volume has been light as was expected on the mid-week holiday.

This is definitely a "unique" market. As you know, since mid-may, perhaps even before, we expected a STRONG short squeeze in the market above the SPX's major resistance level and above the EURO's major resistance level. Las Thursday afternoon we saw something that we haven't seen this year any way, probably quite a bit longer; late in the day on Thursday as the market was at the afternoon lows I put out a post that there had been a positive divergence and to expect a move higher in to the close. Later that day after looking at more charts, I realized that we saw a large divergence that skipped right over a lot of the intraday timeframes and went straight to the longer term charts, this only happens when there is sudden, strong accumulation. I described it this way, Accumulation and distribution are typically a process, what we saw late Thursday the 28th was an event" and apparently a well timed one at that as someone seems to have known something in advance as Friday's open gapped us right over major resistance and in to short squeeze territory, I also talked about this Sunday night in the " Week Ahead" post.

We have dismal volume, it doesn't seem we have a lot of strong institutional activity, but we are in an area in which a short squeeze can feed off itself.

 Here's the area we are in that is above major resistance and where we expected a short squeeze to take place, however with an early close today and July 4th tomorrow, I'm a bit hesitant about chasing this, luckily we or at least most of us were already prepared for this as we entered long (mostly leveraged long ETFs) as a hedge at the June lows in anticipation of such a move.

The other thing that bothers me is the Euro is very close and recently was in short squeeze territory, our expectation were for both to get squeezed together which would also provide the market some support, here we see the Euro has not followed the SPY/SPX/market higher which would make any short squeeze right now, unstable without $USD weakness and Euro support.

As for the opening indications,

The DIA

 We have a slight intraday a.m. negative divergence on the 1 min chart. The 2 and 3 min charts are in line with price.

 The 5 min above and 15 min below continue to suggest a pullback, however as I mentioned Sunday night, we are in short squeeze territory, we saw a little of the action late yesterday particularly in the IWM.

DIA 15 min suggesting a pullback in the DIA.

 The IWM 2 min in line as I mentioned above with a slight negative intraday this a.m., the short squeeze of yesterday's close is visible.

 The IWM has seen the most improvement of all of the averages and it happened quick, there's still a 15 min relative negative that is in the realm of a pullback signal.

 QQQ 1 min opening with a slight negative

 QQQ 2 min trend has moved together with the market, but is still in a negative divergence.

 And the 15 min showing the strong accumulation event of the 28th and the current negative divergence pullback signal.

 SPY 1 min on the open...

 SPY 2 min with a little short squeeze actibvity at the green arrow and a slight negative intraday divergence.

The SPY 15 min with the accumulation event of the 28th and a current negative divergence still suggesting a pullback .

Overnight and in to the open

It seems to be all about commodities and the Middle East...


Overnight the Chinese "Securities Journal" reported the potential for further Chinese Central bank (PBoC) Reserve Ratio Requirement cuts. We have been on top of this Chinese story since last year, months before their first PMI data showed they were in trouble, it was obvious in the way commodities were trading. Further evidence comes from a member who frequently travels to China, companies his company does business with are feeling the pinch and taking some drastic measures.

Chinese Services PMI were also released overnight with a slight improvement over the prior month and above the key 50 level which is the level that divides growth from contraction.

In the EU, Bob Diamond, the CEO of Barclays has resigned amidst the scandal engulfing BCS the COO also joined him in resignation ; There are stories that the BOE was actually involved, pressuring Diamond to resign as fears grew that Diamond might spill some sour beans taking down much of the UK political establishment. BCS is pretty much unchanged on the US open, but swung from down 3% to up 3% in European trade. Lloyds, RBS and HSBC are underperforming in European trade as the investigation in to the LIBOR and Banking Standards scandal continues.

Speaking of the BOE, the English Central Bank has a rate decision due out Thursday of this week.

As mentioned Sunday, watch Finland and the Netherlands and the entire ESM structure as disagreements between Northern EU and Southern EU countries continue. In the latest news from Finland (and not unexpected as this has been mentioned before), Finland want to secure collateral against loans to the Spanish banking system; so keep an eye on those Spanish 10-year yields as it seems the entire "Bazooka" proposal remains nothing more than that.

EU data saw weak Construction PMI, which was offset by better than expected Mortgage Approvals.

Oil gained significantly today even though the $USD was stronger yesterday and somewhat flat today, apparently on several events and news items, one coming from the NYT:

U.S. Adds Forces in Persian Gulf, a Signal to Iran

"The United States has quietly moved significant military reinforcements into the Persian Gulf to deter the Iranian military from any possible attempt to shut the Strait of Hormuz and to increase the number of fighter jets capable of striking deep intoIran if the standoff over its nuclear program escalates."


Furthermore...


"Iran said on Tuesday it had successfully tested medium-range missiles capable of hitting Israel in response to threats of military action against the country, Iranian media reported. The Islamic Republic announced the "Great Prophet 7" missile exercise on Sunday after a European Union embargo against Iranian crude oil purchases took full effect.


And...

Turkey's armed forces command said on Tuesday it had scrambled F-16 fighter jets for a third consecutive day on Monday after Syrian transport helicopters were spotted flying near to the Turkey-Syrian border, but there was no violation of Turkish airspace.

It said in a statement a total of six jets, four from a base in Incirlik in the south and two from Batman in eastern Turkey were scrambled in response to Syrian helicopters flying south of the Turkish province of Hatay, within 1.7-4.5 nautical miles of the Turkish border

And from Stratfor, the newest movements us US Naval Assets...

Apparently my closing of USO calls on June 29th was a bit early, but the profit and what we knew then, I'm not shedding any tears.

Over 100% profit

As for ES and EUR/USD...

 ES pretty choppy overnight, the European open is at the green arrow.

 ES with the EU open to the US open at the white arrow. Before the US open, ES had moved from the 4 pm close yesterday of 1359.50 to the 9:30 US open at 1359.75, pretty much unchanged.

 The Euro since start of FX trade this week has lost important support which is also where a Euro short squeeze becomes more likely.

Since yesterday's 4 p.m. market close the Euro is pretty close to unchanged so we'll take a look at USD denominated assets moving against the legacy arbitrage correlation such as the gap up in gold and oil as well as the opening indications market update.

Risk Asset Layout Update

Generally the risk asset indicators, most of which have leading qualities to them, look pretty much in line with the expected pullback. There are a few that are off doing their own thing, one a bit worrying as far as the sub-intermediate trend.

First, CONTEXT for ES...

 As we saw earlier in the day, the CONTEXT model for ES remains quite a bit lower than ES itself, this divergence implies a pullback in ES as ES looks over-valued compared to the risk assets that should rally with ES.

 Commodities were moving out of sync and were becoming a concern for a while, they have moved back in sync with the SPX (SPX is always green as the comparison symbol unless otherwise noted). Even though the $USD took a pretty good whack last week, it was higher today and a such it was a bit strange to see commodities in sync and in the green.

 High Yield Credit stayed in sync with the SPX intraday so that's a pretty good signal as credit generally leads and equities follow.

 Longer term HY credit was becoming a concern as it diverged negatively from the SPX, but over the last few weeks it has really shaped up and is in line with the SPX, when we see a divergence between the two, usually there's a trend reversal coming shortly.

 High Yield Corp. Credit showed excellent relative momentum last Thursday and was in sync Friday, today it fell out with the SPX and seems to me to indicate the probability of a pullback, although it's hard to say just how much JPM's whale trade is effecting the various credit indices.

 As you can see longer term, HYC credit is a little divergent with the SPX today, but not so much to cause concern, I take this more as a pullback signal. Note the positive divergence in credit in the white box and the SPX's response after that.

 Yields are becoming a bit of a concern, typically yields are like a magnet for the stock market, this intraday divergence seems excessive.

 We have seen some decent size divergences in the past that have shaped up, but the current negative divergence in yields is the one aspect of this layout that causes me some concern. Again note the positive divergence at the June lows and the SPX's response.

 The $AUD is one of my favorite currencies as a leading indicator, Friday it was showing better momentum, today it was about in line, again, I take this as confirmation of a pullback in the SPX.

 Longer term they are pretty well synced.

 The Euro fell out of bed today with the SPX, it seems to me the legacy arbitrage correlation would suggest the SPX pulls back to sync up with the Euro.

 However longer term there's also some concern, it would be nice to see the two meet in the middle with the SPX pulling back and the Euro gaining some ground. Furthermore the market showed some resilience today in the face of a lower Euro and higher $USD, which makes me wonder if we were seeing an attempt today to set up a bit of a head fake move before a pullback.

 Sector rotation vs the SPX's momentum today saw financials gain a bit in the afternoon, Energy and Basic Materials did well too. Tech seemed to fall off a bit and some of the more defensive sectors fell off a little in to the close.

Since Friday, Financials seem to be rotating in (relative), there's more momentum in the defensive sectors like Healthcare, Staples and Utilities. Energy seemed to maintain, Basic Materials were off since Friday, Industrials showed a big change as they look to be rotating out and even though Tech didn't look as good at the end of day trade today, all in all it seems to be building some steam.

Other than the few concerns I have with the Euro and Yields, everything else looks fairly good for a move higher with regard to the sub-intermediate trend, short term there were some signs that appear to support the pullback signal we started seeing last Friday.

I'm really most interested in how credit reacts to a pullback, that will tell us a lot about the strength of the sub-intermediate trend and the probability of a short squeeze on a much larger scale.

Some Short Squeeze action

AAPL looked specifically like it got a little help to get a short squeeze underway. Think about it from a scalper's perspective or a middle man who's making money on volume rebates, if you see a bunch os orders all lined up at a level not too far away, that can be a pretty big pay day just by hitting that level.

A few of the market averages saw some short squeeze action, but it looks more like patterns that traders have been conditioned to react to were broken to the upside and sentiment which is overwhelmingly bearish, created a bit of a short squeeze. We talked a little in some of the market updates below about where some key intraday levels would be and what it would take to get traders to react.

Lets take a look at the averages...

 The first level of resistance for the DIA would have been yesterday's close and then the intraday highs from mid-June.

 That level was hit early this morning and quickly gave up the level within the next 30 mins. Note there's no look of a short squeeze in the DIA toward the close because there was no important technical pattern of level breached. The red arrow shows where th bid/ask is in after hours which as you can see is off the closing levels.

There was no interference in the DIA/3C as 3C traded almost perfectly in line with price through the afternoon.

 The IWM did see a short squeeze in to the close; Friday's high is seen at $79.73, but the level in which the IWM was squeezed was $.10 higher as it was reacting to an intraday pattern and resistance.

 The intraday triangle would have been more obvious to traders than the DIA which had no real technical price pattern, the resistance level of $79.83 intraday in the afternoon just happened to be the same level as the breakout from the triangle and after that you can see the tell-tale signs of a short squeeze.
 A close look at what a short squeeze looks like, typically there's almost no pullbacks, just a diagonal line up. Note volume picking up as price moves higher, this is a mini version of the snowball effect created by short squeezes and head fake moves.

 The IWM had a leading positive divergence around 12:45, but there was no obvious positive divergence before the squeeze, this seems to be all about technical traders reacting to a price pattern.

 The QQQ's first resistance was at Friday;s closing highs.

 Although not as strong as the IWM's, the QQQ also saw a short squeeze as it broke out of the intraday triangle.

 As for 3C action, again there's no obvious push to effect a short squeeze like there was in AAPL, it just looks to be more price pattern based and that's the predictability of technical traders. This could indeed set up a nice head fake move for a reversal in to a pullback, with the same caveat I mentioned on Friday- once we hit a short squeeze, small pullback divergences can be run right over by the snow-ball effect momentum of a short squeeze and ultimately the short squeeze is the last part of our expectations going all the way back to mid-May, especially at the June 4th lows.

 The SPY had resistance from Friday and the next level at the red arrow.

 At the white arrow is an area I believe I mentioned as an area of interest that would have to be broken to see traders jump back in the market, on this 1 min chart volume surged at the white arrow just as that high was crossed. The green arrow is the daily resistance on the chart above (at the red arrow). The SPY is trading down in AH.

And again while 3C 1 min stayed constructive and in line, there was no obvious interference from smart money to push prices through particular levels, if there was interference, it came by way of working the bid/ask higher and not any actual accumulation to soak up supply and send prices higher.

Keep an eye on these obvious levels, traders reaction to them is unbelievably predictable.

As for the chart of the XLF I posted with several major head fake moves, here they are...

 First a bearish ascending triangle. Traders expect the ascending triangle to break down and retrace its base around $12 as it reaches the apex, instead as we saw dozens of times during this time period, XLF broke out to the upside. Shorts would have had to cover, but to make things worse, technical analysis teaches. "If a price pattern fails, reverse your position", which means technical traders would have gone long XLF after having to cover shorts, of course that didn't work out either as XLF finally broke down. This is the kind of head fake move I love to take advantage of.

 Next a bear flag/pennant former, this is a consolidation/continuation pattern that traders expect to break to the downside and create a second leg down roughly equal to the first. We saw a Crazy Ivan shakeout, first an upside breakout that failed, this may have stopped out some early eager shorts, but as it failed it would have given shorts confidence in that the breakout couldn't hold. Next there was the break to the downside that technical traders expected, often they'll wait for price confirmation like this and short the break, several days later they were caught in a bear trap and would have been at a loss; this is exactly why I don't like chasing price, but more importantly, our tools told us this was a bear trap way before it even broke to the downside so it became an excellent buy point as this pattern was pretty much market wide (see the SPX).

Lastly, traders could and probably would have interpreted this as a bear flag, expecting it to break down and would have shorted the break at point "B", again, another bear trap as prices went up and above the resistance level of the flag.

Take a look at 3C during these moves and keep in mind I'm only using 1 timeframe to illustrate the head fakes, we typically use 6.

 The ascending wedge was a bearish pattern, 3C shows that clearly, but it's an obvious pattern that is likely to be manipulated. At the white arrow the breakout is coming, we know it's not going to immediately break down, at the second red arrow we know that's the area to short XLF.

 As for the bear flag/pennant, the pennant formed in to a leading positive divergence, the break below it in yellow shows while retail was shorting it, smart money was accumulating, using the supply from retail's shorts to accumulate on a strong leading positive divergence.

The final chart of the bear flag could have been traded, the 15 min chart showed us it was going to break down, but as it broke, again it was accumulated at the white arrow and leading positive divergence, time to cover and take the profits.