AAPL Update and Example

AAPL is an example of a stock that moved to the upside today and broke through an important resistance level, BUT still needs to consolidate before we can count on a solid move higher. If this were all the divergence that AAPL would put in and we had to go long on what has been put in thus far, I would not be re-entering AAPL on the long side, it needs time, it needs to consolidate, this is healthy and gives us better confirmation and higher probabilities for a much more impressive move.

The Q's (QQQ) are a good example of  tight range today, I suspect though with an AAPL pullback that range will loosen up a bit. I'll cover the QQQ next.

 Take a look at the ROC on the AAPL 5 min chart, note how AAPL stayed almost perfectly lateral before breaking down, but ROC showed the probability of the breakdown long before price action did, it also went positive before price action did as did 3C and the reason I opened the Calls in AAPL Friday for a 13.5% profit today (apparently there was more that I left on the table).

 The 3 min chart in a leading negative divergence before AAPL broke lower, this is the same kind of range that is important to a downside move just as a range is important to an upside move; this is where we typically see the heaviest institutional activity and I think part of the reason is the stable prices which are in part created by the middle men filling the orders at VWAP like market makers.

 The 10 min chart was very negative, leading in fact before AAPL broke in price. Note how I use the red box to illustrate not only the leading negative divergence, but the top of the red box is like a lateral trendline under price. We have a leading positive today, but not the range yet, APL need to come down to create a range and put in further positive divergences.

 Here the intraday 1 min chart shows the probability of an intraday reversal to the downside in AAPL, this is needed to create a stronger base for AAPL to bounce/rally from.

 Even though the 2 min chart went in to a leading positive divergence today, it is also showing the probability AAPL pulls back on an intraday (at this time in the day-a day to day) basis.

I'm just guessing, but perhaps AAPL's range looks something like this.

AAPL to pull back now

MCP Update

I had an email question about whether I would add to MCO right here, my answer is no, although I do like how MCP is shaping up, it needs to mature a little more and give us the high probability signal that we want to add on, it is moving in that direction and I think MCP is another good example of what was addressed in last night's post and the previous post.

I'm as guilty as anyone in thinking the market should turn on positive signs, but it never seems to happen like that. Last weak we had 3 days of negative divergences in the SPY and I was starting to doubt if we'd even get a move down or we would just get a consolidation, I even explained in a post that it's not uncommon for divergences in the 1-2 min timeframe to cause consolidations through time rather than through price, but I had not seen that with a 10 min chart before, Friday all at once that divergence played out and I still haven't seen a 10 min divergence that causes only a consolidation through time. The point still being, reversals are a process and rarely an event, last week the SPY went lateral for a couple of days on a very negative 10 min chart before breaking down, it didn't move up, it just stayed in the range before making the reversal.

As for MCP, here's what I like and here's why I would not be in a rush, but show some more patience. Believe me, I know what it feels like to want to be actively doing something in the market to produce gains, but some our most successful trades have been more about waiting until it was clearly time to act, think about the core shorts like BIDU which was a process of several weeks, but paid off well or PCLN that was also something we expected to happen, waited for it to happen and then pulled the trigger and had another great trade that made good money short against the market's tide.

 Here's MCP's range before  reversal from up to down, it's rather short and tight, now we are starting to see a range develop in MCP again, this is where it is tempting to add or start a new position.

 Agin the Rate of Change in price dropped quickly from the lateral trade in MCP at the top to a move down, I cannot tell you how valuable ROC is as a tool to enhance other indicators or just to get a real perspective on market action rather than an emotional one.

 MCP 3 min went from upside confirmation to a negative divergence in the top' range to a positive divergence (leading) currently as this new range develops.

 The 3 min chart looks great, if the 5 and 10 min charts looked the same I'd probably add to MCP, it does take some time though for the divergence to migrate to longer timeframes and this is why the range is so important, this is where that happens. So this 5 min chart and the 10 min chart below are the reason I would not add quite yet.

All of the indications in MCp are looking good for a 5/10 and perhaps 15 min positive divergence that we want to add to, for me it's just not matured to that level yet.

Futures/Market Update

As I pointed out last night, we need a lateral range and there will be intraday volatility, both rallies and declines in that range, but that's how we'll get the positive divergence we need for the upside move I expect. I have some updated charts and examples. The SPY is down .50% which is well within the volatility (especially intraday) for the range as I was trying to express to you last night and prepare you for.

 ES which was negative pre-market and I said I thought it would lead to downside volatility, but also that it is an intraday timeframe, it's not a long term timeframe with bigger implications. In any case, it is positive in to the last decline so I would expect some upside from here.

 This is the SPY 2 min chart improving, remember as I said earlier, to get a positive divergence we need a pullback, smart money is not buying in to strength. The red line is today's open.

 The 3 min chart is in a good position, leading positive and hasn't given up any ground.

 Here on the 5 min, this is kind of an example of how we should see things develop, 3C should start to put in a new high and a stronger positive divergence, the SPY as of now is losing downside momentum and who knows what it looks like by the close, the lateral range can be loose or tight, but I expect it to be more lose, so intraday rallies and declines are part of creating that range.

 SPY 5 min with Rate of change applied to price, as you can see the ROC is positive here as the downside subsides, I still expect chop up and down, but when it is done and you look at the bigger picture the range should be clear, it's hard to envision it now with only a decline and not a bounce in place or more importantly a series of them.

Between each advance or decline there is the process of a reversal, some are more "U" shaped, some are quite sharp like last week's that stayed pretty flat since mid week and then just dropped on Friday, I can't say what the range will look like, but it is important. Leading indicators are stronger now than in past advances so we may have a smaller range.

We'll take a look again at the close or as it develops and becomes more clear. However with the positive ES intraday divergence we should see some upside and that may give us a better feel for the look of the range/process.

Speaking of Energy-ERX/ERY

ERX is the 3x leveraged long Energy ETF, ERy is the 3x leveraged short energy ETF. Friday I entered half of a speculative position in ERY leaving room to add another half at better prices. More or less I think there will be rotation in any move up or down and the 3 main sectors are Energy, Tech and Financials, I want to have some representation in each as rotation is becoming more and more of a theme, I chose Energy broadly rather than USO which is narrow (oil only).

I am looking to add to ERX, but I'll be a bit more patient before doing so.

Here's an A/B comparison on where we are with both and remember I am not expecting a new primary uptrend, I'm looking for a fast, sharp shakeout. Fast could mean a week, maybe two weeks.

 ERX 1 min Bull positive divergence on today's pullback in Energy.

 ERY bear negative relative divergence on the 1 min chart


 ERX (bull) 5 min positive divergence on the pullback in Energy.

 ERX (bear) relative negative on the same 5 min chart


 ERX (bull) 10 min improving positive divergence.

ERY (bear) 10 min deteriorating 10 min divergence at highs. I'd like to see some more lateral trade in both before adding the second half of the position in ERX.

USO Update

USO is just not my trade right now, I see probabilities there and there may even be some short term upside probabilities, but it's just not the place I would chose to put money right now, at least not much; I think there are better places to put money with better probabilities both on the long and short side.


USO is also a good example of how well 3C worked even in an environment when QE3 was announced (oil typically did very well under QE programs, 3C was saying oil didn't look good around the time and USO followed 3C.

 First on a daily chart there's a strange price pattern, I'd like to call it some kind of bear flag or pennant, but the fact is the flag area is a "bullish" ascending triangle and makes ZERO sense where it is, furthermore volume does not confirm the consolidation aspect of any kind of flag or consolidation in that area. I can only assume this is a random price pattern that doesn't mean too much.

We also see a break below the pattern, in the VERY short term this "may" lead to an upside bounce above resistance, but I still don't like the probabilities compared to other assets.

 4 hour USO has shown several negative divergences and a positive at the June lows, the Sept. QE3 announcement was the last major negative divergence in USO and you know what has happened since then.

 Here's the QE3 negative divergence in USO on a 2 hour chart, the 3C signal right now really is, "There is no signal".

 On a 15 min chart 3C is negative at the Sept 13/14 QE3 announcement and knee jerk reaction, remember what I say about F_E_D inspired knee jerk reactions, "They are almost always wrong".

USO remains in a leading negative divergence, with the 15 min chart this negative it is hard to justify any long position in USO, as far as short positions, we'll get to that.

 A number of head fake moves in USO all fail on a leading negative divergence, the slight 2 min positive divergence is why I'm not crazy about shorting USO either here, perhaps it develops more and opens a better opportunity soon.

 The same on the 3 min chart.

And the positive only reaches to the 5 min chart, it's not enough for me to go long with such an ugly 15 min chart and with the positives in place, I don't want to short it here either.

If you are interested in a USO position, I'd give it some more time to develop, maybe a short on a move above $35 or so if the signals are there.

Financials

Friday I started opening partial position in leveraged long, I passed on Financials as I didn't think they were there yet, not even for a partial position, but that seems to be changing and I may start looking at adding part of a position (phasing in) in something like FAS (3x Bull Financials). As expected last week, rotation has begun, but it recently has been short lived, Tech is outperforming Financials today, however this relative weakness in Financials may indeed just be offering the opportunity to add the position on price weakness and building underlying strength which just wasn't there Friday (the reason I passed on Financials Friday).

First we'll look at XLF (Financials) and then an A/B comparison of FAS (3x Bull Financials) vs FAZ (3x Bear Financials). XLF and FAS should have similar signals, FAZ should be exactly the opposite for confirmation.

 The one op-ex pin Friday that came in just about on schedule was XLF at $16, which I pointed out would be right at the triangle's apex, basically the point of no opinion on a triangle that is a sign of a highly directional breakout.

 Intraday there's a bearish consolidation/continuation pattern in XLF/Financials with a descending triangle, this implies to Technical traders that the preceding down trend will continue (the pattern size is relative to the trend on the same timeframe), volume is confirming the price pattern as well. I would expect a break lower from this pattern and since capturing the chart, it has broken lower, now we look for the head fake move and perhaps a lower priced entry with less risk to begin phasing in to a FAS position.

 XLF 1 min positive divergence developing.

 3 min XLF positive divergence

 XLF 5 min leading positive just starting to develop-this was NOT there Friday.

 XLF 10 min in leading negative position, but making progress today.

FAS vs. FAZ

 FAS 1 min leading positive today

 FAZ 1 min leading negative today.

 FAS 2 min positive today and Friday

 FAZ 2 min negative today and Friday

 FAS is just starting to see a 10 min positive divergence, this is what I want to see and see develop a bit more before committing too much.

FAZ is showing the opposite 10 min leading negative divergence just starting.

We have excellent confirmation in XLF, FAS and FAZ, a long position in FAS (phased entry and speculative size) is starting to look better, Friday is had no appeal at all.

Leading Indicators

So far, I'm very impressed by the leading indicators (formerly Risk Asset Layout). Credit is doing especially well and as the saying goes, "Credit leads, stocks follow", but there's a lot more than just credit looking good here.

Currencies

 First the $AUD (FXA) tends to be more of a leading currency because of its relationship in the carry trade hedge funds and others use to finance risk on positions, not only compared to the positive divergence at the mid-October lows, but right now vs the SPX (always green comparison), the $AUD is in a very positive leading position.

 The Euro has some leading qualities to it, but it's a better near term leading indicator or confirmation indicator, here intraday it is holding up much better than the SPX, which suggests the SPX is in fact building that lateral consolidation we talked about, in essence, the flat trade in the SPX is much more bullish than it appears to be when just looking at price alone (remember this is also what we wanted to see in Friday's late analysis as well as last night's and today's).

 The Euro bigger picture is also much more positive than the SPX alone would make the situation out to be.

 Yields are like a magnet for stock prices, they tend to eventually attract the market (SPX seen here in green as usual) toward them, this leading position as well as Friday's initial positive indications are a good development.

 Again, longer term like the $AUD, Euro and others (below), yields are dislocated bullishly to the upside.

Credit

 Intraday High Yield Corporate credit (HYG) which is very liquid was not only showing positive signs late Friday, but has continued on an intraday basis today.

 Longer term there's a very positive divergence in HY Corp. Credit as you can see by tracking the SPX's trend vs Credit's, we haven't seen many positive divergences in credit this year, but this is a nice one.

 Another look at the same chart without all the annotations.

 Junk Credit (also high Yield-a risk on asset) is doing well vs the SPX intraday

 And also has the same longer term positive divergence as seen in HYG.

As for sector rotation, as expected, Tech is starting to take the lead from Financials.

All in all, another good set of indications for at least our expected volatility move up/shakeout.