We have talked a lot about trend 1 and how it may end and before trend 1 took off we talked about trend 2, for a while even 3, but I think it was becoming too confusing as this is a rare situation.
First lets just quickly deal with anything I may have left out about today.
In to the close, High Yield Corporate Credit which is right at all time high short interest, sold off a bit in to the close. Yields also failed to follow the market any higher after about 11:30 (off the 11:20 lows). High Yield Credit lost a little ground as well in to the close after showing better relative strength all day.
Commodities which were tracking way below the SPX correlation, then tracking with it, showed early strength today and faded the rest of the day, what is strange about that is they almost tracked perfectly following the $USD lower when they normally have an inverse relationship. There's little doubt the lower dollar in the afternoon contributed to the market's afternoon ramp attempt like yesterday (even though both days have closed down-we're still above support for the Trend #1 move).
Finally the last thing is the Dominant Price/Volume relationship for the components of the 4 major averages, in all 4 today the dominant relationship (and it was dominant) was Price Down / Volume Up. There are 4 different relationships, in the context of the price trend right now this is actually a short term bullish relationship suggesting a sort of short term capitulation. Remember this is not the price volume relationship for the index, it is for all component stocks within each of the averages.
I still think it's likely that we make a move above the intraday highs of this past Friday which is very fertile ground for a real downside reversal as we are creating more and more of a range every day we trade like this, it becomes much more obvious where stops will be placed, where limit orders will be placed, Technical traders are just too predictable in that way, plus anyone with TotalView can see it, the market makers, specialists and other Wall Street types have a much more in depth view of the complete book, this is why I never place an order until I place an order, you wouldn't show me your hand if we were playing poker would you?
As for the case for Trend #2, I've pretty much laid it out and there's probably a little bit of it in each post throughout the day, such as Financials not looking very good, etc.
As for real hard, objective evidence, there was a cycle that started November 16th, that's what we have moved up from, those lows that were accumulated so it was a planned cycle ahead of time. Now we are on the other side of that process, if you wanted to stage it, I'd say stage 3 (Top/Distribution) which is also the most volatile stage, stage 4 is next, that's decline.
Here are a few charts that argue for Trend #2 which is a move to the downside, I expect at least a new low below the 11/16/12 low to be made, but as always the market tends to be more volatile and extreme than we expect so something even worse wouldn't surprise me.
As of now, here are a few of the charts that are calling for the next move to be down, not only down, but larger and more intense.
I'm not going to go in any particular order.
First the averages from the 11/16 cycle low/start...These are mostly 15 min charts, they are a strong timeframe and a decently long trend.
DIA accumulation in to the 11/16 low, distribution in to mid-Dec. and our current move (Trend #1) with a deep leading negative divergence and no attempt to even move toward confirmation.
SPY 15 min with the same, a current leading negative divergence suggesting trend 1 was used to create demand and higher prices to sell in to or short in to by those who need a lot of demand to move their positions, this is partly why this move was predicted and it dovetails almost perfectly (head fake) in to trend 2.
QQQ 15 min w/ accumulation going in to the 11/16 low, distribution by mid-Dec. and a leading negative divergence at trend #1.
The Futures charts are a bit more damning I think, especially the ES (SPX).
This is a 60 min NQ (NASDAQ Futures) leading negative on the move up.
And a 30 min ES (s&P Futures) with a VERY clear leading negative trend. I always warn about ranges like this, even if they are only intraday, people get bored, lose their focus. I have an analogy for these ranges, "Their like the kids in the room next door being a little too quiet". You assume not much is going on, this 30 min chart of underlying action shows you there's a lot going on.
Treasuries at 15 min with a leading positive divergence, this is the flight to safety trade so it wouldn't surprise me if the negative divergence or money flowing from ES is flowing right in to Treasuries which tend to move opposite the market.
The VIX has certainly seen some odd times due to hedging the Fiscal Cliff and now the Debt Ceiling, but the daily 3C chart has always worked well, the positive divergence in 2011 created a 20% drop in the SPX.
The 3C daily divergence (leading positive) in the VIX right now is about as strong as it has ever been, this suggests a strong VIX move up, the VIX also trades opposite the market and has seen historic volatility over the last 2 weeks or so.
Look at the trend in the 2 hour VXX (Short term VIX Futures), 3C moved with price because they are short term, but this leading positive divergence seems like someone is even building a large position here , expecting volatility to shoot through the roof and the market to drop like a rock.
Even the leveraged UVXY has a large change in character and this on a daily chart, it's not very often a short term instrument like this sees a daily leading positive divergence. Someone is planning ahead.
The last time Commodities diverged with the SPX (green) you can see what happened to the market, look at the size of this divergence currently.
This is commodities vs the Euro, usually they track together, that hasn't been the story lately though, I think a large part of it has to do with the end of the year and European banks repatriating Euros to fix their books.
This unfortunately did not load in proper order, but commodities vs the $USD (green) tack almost the mirror opposite as they should, that's a correct correlation, stocks should be following it too, the fact the Euro fell out of bed with the correlation to the $USD argues for Euro repatriation during December.
Yields are lie a magnet for Equities, eventually they revert to the mean, the divergence in March to May was our first core short area, look at the size of the divergence now.
Long term look at the divergence in Yields from the 2000 top to the 2007 top and now the 2013 area, this has EVERYTHING to do with the F_E_D's intervention. Remember, unwinding accommodative policy is the hard and painful part, but it has to be done at some point. This is probably way beyond just trend #2 and more of a secular long term trend.
The Euro was supportive right before the Market jumped on trend 1, after it jumped the Euro went negative as these are typically closely correlated, I expect before a turn to trend 2 comes, this divergence will be even deeper, it can happen much faster than you might think.
The $AUD is a great leading currency, it's tied close to several carry trades so when it is negatively divergent, things aren't good behind the scenes. This however isn't a huge divergence, at least not yet, perhaps it will grow.
The McClellan Oscillator, a lot of people use it different ways, I prefer it as a divergence indicator, it's called some serious bottoms like the October 2011 bottom and some serious tops as you see.
This is the NASDAQ 100 Advance / Decline line, also negative like the broader Composite.
This is the broader NASDAQ Composite advance/decline line, note reversion at the October 2011 low we predicted as a new low that would lead a strong move up, the reason? It's a head fake move.
Finally the Russell 2000 Advance./Decline line also has fallen out of bed. It's been a while and while this may not be as connected to trend 2, it tells you something about the state of the market as we have moved forward from 2009, it has become more and more fragile.
Really the SPY, DIA, QQQ, IWM divergences are enough for me, add the futures in and I don't have much trouble calling for a pretty strong move down, but there are a lot of other things. This may not be and I don't expect it to be the final break in the market, unless the F_O_M_C minutes released last week change things significantly, so we still have time for some monster divergences in leading indicators as well as longer timeframes in the market.
We just need to watch for that tactical opportunity that really could pop up at almost any moment, but I think it's much higher probability above the SPY intraday highs of this past Friday.
As for futures right now, both the NASDAQ and SPX futures have 1 min negative divergences in them, that doesn't mean a lot when you consider the entire overnight session, but it's always something I want to watch in case it goes south fast.
Have a great night, see you in a bit.
