Trade Set-Up: BABA

I was looking at the charts of BABA today for a member and normally I'd expect about 2/3rd of the market to move directionally with the broad market averages. The market averages are the most influential force on any given stock, although the details and relative performance can vary.

I'll show you what I like about BABA for a short term trade, likely options to make up for the shorter term nature. Also where/when and why I'd consider BABA a trade. I did consider it for a long equity position here and now, but given the overall picture in the market, I have to demand a higher standard and if the trade comes to us, then we have that, if it doesn't, nothing lost.

However this is my standard, you may see something additional that you like here. One other option I considered was a partial (1/2 size) long equity position and then "If" the trade set-up described below fell in to place, I'd either add the second half or open a call (option) long position.

 This is a 5 min chart of ES. I  see two negative divergences in the same area suggesting resistance. I also suspect this is short term resistance and in the context of the forecast bounce, it will likely be broken to the upside, but remember this morning's intraday weakness in breadth which just so happens to be occurring near resistance which is why I decided not to open the BABA trade right now, but rather wait.

When you see the VXX/VIX post, I think you'll gain a greater appreciation for the risk in the market on this bounce and you'll see that it's more than just "local" resistance here (above).

 This is the daily chart of BABA. If you look to the far left you'll see a Channel Buster with increased upside ROC in price that breaks above the channel; a "seemingly" bullish event, however this is often a red flag that the trend is about to change as it did with a break under the channel very shortly after as is the case most of the time with this version of a head fake move.

Since there has been a large flat area. I'm not going in to whether I think this is a base, I don't see good evidence for it and it would be counter to the market. While there will always be stocks that run against the market, the probabilities just aren't on your side.

 However locally the last 2-days something more in line with the near term market expectations has turned up, a 'w' base pretty much at $80.10 with increased volume on bullish m=hammer reversal candles at both lows.

The near term market resistance above represented by the 5 min ES chart is interesting because a head fake move would be the highest probability if BABA were going to bounce off this small base which is also about in line with market expectations for the current bounce since Friday. Being the whole number of $80 is just below a known area of support, it would be likely that any BABA longs would place stops at the psychological magnet of a whole number like $80.

The BABA 15 min chart has a similar divergence as the broad market averages ...

And on this more detailed 2 min chart we see the second low with more strength than the first suggesting continues accumulation, in line with the type of bounce we expected/expect in the market.

Using the same 2 min chart, I'll be setting price alerts for a move in BABA BELOW $80 and if they trigger, I'll check the charts and see if we have increased volume (stops being hit) and a stronger 3C positive divergence telling us those stops were accumulated on what would be a small head fake move which as we have discussed at length, is one of the best price-based timing indications for a reversal or in this case a bounce.

So I'm looking for the break below $80, volume on the move and a stronger 3C chart. Call premiums should drop, but I don't want to wait too long as BABA has earnings coming up at the end of the week and the premiums will likely start to rise.

Early Market Update

It seems the 3C weakness in the 1 min Index futures from pre-market is taking a toll, so far mostly unseen in market breadth (intraday) as you'll se in the two TICK Index charts, but nothing looks to have changed for at least the first half of the week's forecast for a bounce and $USD counter trend bounce.

My main concern is position management from last week for this bounce (VXX puts/NFLX calls) with the VXX puts at about a +60% gain. I'll update those individually, but just as we saw last week (Friday), on the slightest pullback of VXX there was immediate and unambiguous accumulation so someone with deep pockets is loading up very early and in large supply considering the condition of the averages. As mentioned Friday, typically we'd see 3C distribution in to the bounce in the major averages before or at the same time as we start to see a rotation in to VIX related products, this time that's different and VIX related assets are being accumulated on weakness immediately which tells us 2 things: 1) this bounce is not expected to last which we already knew and 2) the move following the bounce to the downside should be larger than anything we have seen all year as the effort to accumulate protection is much stronger than anything seen this year.

The charts...

 This is the larger picture of the April cycle since our April 2nd forecast on a 30 min chart. The size of the divergences and even shape of the price action is easily identified as a set-up to sell / sell short in to price strength as we anticipated in the April 2nd forecast.

However, whether a matter of semantics or not, from a "staging" perspective of the April cycle, this is the exact same chart as above (you can reference the divergences using the chart above) with the possible cycle stages...

SPY 30 min showing stage 1 accumulation/Base going in to our April 2nd forecast for a completion of the price triangles and a head fake move above them that would see distribution and ultimately fail as a false breakout. Stage 2 is mark -up or the rally section and stage 3 is top/distribution.

The semantics is whether last week's decline was the start of stage 4 "decline" with a counter trend bounce currently or just a wider stage 3 top. I don't think it matters either way as I believe after this bounce that we called last week starting around Wednesday, price will make a new lower low below last week's low. About the same time the $USD counter trend bounce (no question there) should fail and make a definitive lower low after already having made a lower high in its primary trend..

I've explained why the $USD's movements right now are so important, it's not a matter of bounces and pullbacks, it's a matter of a complete trend change in the $USD's primary trend which will cause the carry trade to go from neutral or even slightly profitable to all out losses that will snowball and cause risk assets such as equities and the typical assets bought with carry proceeds (bonds) to fall as a result so this is a VERY important area for the $USD and as suspected since April 2nd's forecast for the $USD as well (same day as the market forecast), it has made every move that suggests the primary uptrend is now well in to the reversal process.

 This is the SY 15 min chart much like the ES 10/15 min chart (or any of the Index futures) which this current bounce is based on as well as the VXX/NFLX positions,  it is still in line and has gas in the tank.

On Friday, my forecast for this week was that we should see this bounce continue until about mid-week (but we will tweak that as the signals come in) and then the reversal process should start somewhere around that area. Normally I'd be looking at exiting VXX puts around that time, but  the way they are acting, I could see a scenario in which they are closed before then.

This is the 1 min intraday SPY (as of the capture this morning) which is still in line and in confirmation of the price trend, however the last two 3C dips are larger so it's getting closer to putting in its first negative divergence as some light distribution is already taking place, but not enough to change any plans right now.

 The 1 min QQQ is also confirming price action so far.

As is the IWM.

This is the NYSE TICK Index and as you can see, since Friday afternoon in to this morning, intraday breadth has been declining suggesting a pullback intraday or consolidation. I don't believe at all that this is anything that will change the expectations laid out last week or above.

The same could be seen in our custom TICK/SPY indicator.

You can see deteriorating market breadth through the morning since last Friday.

Since these charts were captured, here's what has happened...

 TICK fell out of the channel and hit an extreme (selling) of -1325. I believe this is one of the fist definitive signs of heavier distribution. The SPY 1 min 3C chart since the earlier capture above has come closer to making its first leading negative divergence.

Rather than the last 2 3C dips being deeper than the previous ones, at the breadth decline above the most recent 3C dip on the same 1 min intraday chart nearly hit the previous level, once it does it will be a relative negative divergence and once it surpasses the low of a previous swing low in 3C, it will be a leading negative divergence and then the process of migration (strengthening of the divergence in which divergences move to longer timeframe charts-HEAVIER DISTRIBUTION) should start to take place.

I'll update VXX, NFLX and USO.

A.M. Update

I hope everyone had a great weekend!

Overnight the most important macro economic data came out of China and Europe in the form of HSBC's final Manufacturing PMI with Chine sliding to 1 year lows on a contractionary print of 48.9 vs the expected 49.4.

The final Eurozone Composite Manufacturing PMI jumped a little to 52 from 51.9 with Germany making up most of the gains while France slipped further in to contraction at 48 (anything under 50 is contraction in manufacturing).

As for our bounce, we may see some early day weakness....

 ES 1 min with a 1 min negative divergence.

I suspect this is because Energy is starting to see a decline from overnight strength in oil...

 Brent Crude futures with a much sharper negative divergence.

but ultimately the positive divergence from last week that was behind our bounce forecast for earlier this week like this ES 10 min chart should hold up.

 Brent Crude/USO however, looks ready for that decline I'm looking for on this 5 min futures 3C chart

As well as this 15 min which shows a reversal process in place.

 The $USD 1 min chart is showing a little early 3C 1 min weakness as well, but again, I expect the USD to bounce so this should be minor.

The 10 min $USD's positive divergence for a counter trend bounce as forecasted last week...

 $USD 10m

And the 60 min view of the USD with our initial bounce to the upside followed by a much larger downside move which has already seen 1 counter trend bounce (yellow), this second should be no different as the $USD is in the area of intraday support, but it should ultimately break lower and make a lower low in $USD changing the landscape for numerous assets, carry trade, etc.

Daily Wrap

As we have had numerous signals of an impending base and bounce to come, it was the USD Andy yesterdays internals that drove it home for me.

From yesterday's Daily Wrap :

"As for internals today, I knew what the Dominant Price/Volume relationship was going to be before noon time. You may recall yesterday's which suggested additional downside today, but sector performance was moving toward a short-term or one day oversold condition.

Today was a definitive short term or one day oversold condition.

The Dominant P/V Relationship was Close Down/Volume Up, the most likely of the 4 possibilities to produce a bounce or next day close green (even though tomorrow is an op-ex day). There were 70 NASDAQ 100 stocks at Close Down/Volume Up, 1332 Russell 2000 and 264 SPX500, that's a DOMINANT relationship.

In addition, all 9 of 9 S&P sectors closed red with Energy leading at -0.31% and Health Care lagging again at -1.40%.

Incredibly, only 13 of 238 Morningstar groups closed in the green.

THIS IS A DEFINITIVE SHORT TERM OVERSOLD BREADTH CONDITION, WAY MORE RELIABLE THAN INDICATORS TRYING TO DETERMINE THE SAME.

That means these readings are also supportive of a near term bounce."

Clearly the dominant price volume relationship and sector performance showed a short-term oversold market which is much more accurate via breadth conditions then any indicator such as RSI. So in addition to all the other indications which ranged from leading indicators to currency indications  just plain old 3C charts, we started to see the bounce unfold today.

Macro data was horrible today sending the Bloomberg macro data surprise index to a new six year low. However macro data was horrible on Wednesday as well and did not have the"Bad News is good news" effect. I don't believe today's macro data had anything to do with the market's performance either. This was set up in advance as we saw earlier in the week when first calling for a bounce.

When we see purposefully constructed market moves such as this bounce, there's always a reason for them. One of the reasons that became obvious early today was in VIX related assets such as VXX. In addition to other indications today, this post More confirmation of our Near-term Price expectations shows short-termVIX futures as well as actual VIX futures being accumulated. Typically we don't see accumulation of VXX until we start seeing distribution of the bounce, however in this case accumulation was near instantaneous on lower prices indicating to me smart money is trying to load up on protection hand over fist as fast as possible with as much as possible.

One of the very obvious reasons for this move was recapturing SPX 2100, Dow 18,000, NASDAQ 5000 which was all achieved today. Although it was on half of yesterday's volume and approximately 30% less volume than the recent average for S&P e-mini futures. Obviously a lot of this can be explained away by the numerous closed markets observing May Day.

A typical, non-manipulated market bounce would look something like this...

SPY and a series of lower highs. However with a preplanned, constructed bounce, they always have an objective and part of that objective was clear on VXX accumulation today. To get traders to move and either stop out or enter positions, the market has to do more than the typical price action above, it needs to touch emotional extremes that causes traders to make emotional decisions. That being said, I don't have a target in mind other than something higher than today.

Here's the performance of the major averages in various time frames...

 The major averages today with Transports leading and the Russell 2000 lagging.

 The major averages since the F_O_M_C again with Transport leading and the Russell 2000 lagging

The major averages on the week once again with the Russell 2000 lagging. This was the worst week for small caps in six months which should tell you something about the nature of the trend change we are currently in.

While I could go on and on with different 3C charts, there are a select few currency futures, Carry trades and index futures that make the coming week's price action clear as well as what is to follow.

Into the end of the day, if you were paying attention to the NYSE TICK index, you would have had early warning, but I do not see it as significant into next week's early trend.

 NYSE TICK Index intraday falling out of the channel after hitting+1250 bullish extremes.

This gave you early warning as to what the close was going to look like...

SPY 1 min at the EOD... Nothing to worry about at all, just some profit taking in to the weekend.

You have to remember that few people see the underlying action that we see, therefore, a chance to book some gains or get out at breakeven is an attractive option.

 This is the USD/JPY (candlesticks) vs. ES in purple. Clearly our US dollar analysis is very important in multiple Time frames/ trends.

 Looking at the one minute intraday USD/JPY 3C chart, we can see a slight negative divergence which fits very well with the TICK Index readings. While many technical traders do not see it, the pros can see a change in one asset that will effects another.

For example...

 The US dollar was seeing some end of day distribution on a small scale which naturally would have an effect on USD/JPY which is correlated to index futures. So some profit taking on perceived $USD weakness that would translate into USD/JPY weakness which would have an effect on index futures, is natural.

Speaking of the US dollar, considering our longer-term analysis and the effects that it will have as laid out in this post yesterday, $USD Update & Market Repercussions, the fact that the US dollar had it's fourth worst week in two years this week should not be lost on you.

 This is the one minute chart of Yen futures which are in line however the USD weakness had small effect on the USD/JPY carry pair.

As to longer-term, more important charts..

 The USD five minute is still positive, giving evidence to more upside early next week.

 The five minute chart of NASDAQ 100 futures is also leading positive short-term. This also indicates the probability of upside early next week. However take note that the base/ divergence is not so big as to cause a change in trend. However as I was getting to above, Wall Street set this move up for a purpose and I can almost guarantee you that it will look extremely strong even though there's no "gas in the tank" to support the move beyond a very short-term scale, but that is the nature of emotions, they can take over rationale extremely quickly and that is the end goal.

 With strength in the USD andUSD/JPY, yesterday we forecast strength near-term in the Nikkei 225. This seven minute chart of Nikkei 225 futures shows a positive divergence in line with our forecast. I'm looking for an impressive move early next week, not one that will hold as you will see below.

 This is the ES/ SPX futures on a 10 minute chart also showing the recent positive divergence behind this move.

 The USD futures were one of the earliest signals for a market bounce as you can see on this 10 minute chart with a reversal process in place and a leading to positive divergence.

The basic arithmetic goes: USD bounce, USD JPY bounce, index futures bounce, broad market averages bounce.

 The 15 minute Yen futures are in-line, that's a stronger USD should lift the USD/JPY.

 With USD/JPY strength comes yen weakness and Nikkei 225 strength as this 30 minute Nikkei futures chart depicts with a 3C  positive divergence after distribution earlier in the week.

Today's Nikkei 225 close which was near flat, represents a loss of downside momentum and opens the door to this bounce.

However looking at the longer-term charts, The probabilities of any short-term bounce are already set.

 This is a chart of the one day Nikkei 225 futures which were in line on the uptrend and led to a relative negative divergence, followed by a current leading negative divergence. I fully expect the Nikkei 225 to be in a topping process.

In addition, the one day ES/ SPX futures chart shows a much more developed leading negative divergence or distribution on a very large scale.

 The USD one day chart has also gone negative and leading negative at that. This is not just about the USD, it is about F_E_D interest-rate hikes and more importantly the carry trade unwind which is at nearly $9 trillion  $USD.

You can read more in any of this week's posts on the USD or specifically $USD Update & Market Repercussions

 Two years ago I wrote an article that is still linked on the member site which forecast a rising yen at the same time the market entered a primary bear market trend. As you can see, The yen futures on this one-day chart were in line with the downtrend and have sense moved to a leading positive divergence as the yen's trend has shifted from down to lateral which is indicative of a base.

All of these one-day charts taken together are extremely damning for the broad market.

This is a close-up of the one day USD chart posted above. As already mentioned the USD has seen the 4th worst weekly performance in two years.

Earlier in the week I showed how the USD failed to make a higher high and went on to make a lower low which was exactly the forecast that was made on April 2. I also suggested that the intraday lows at the yellow dotted trendline would be an ideal area for the USD to put in a countertrend bounce.

Looking at all of the charts above, whether intermediate term USD positive divergence occurring just as it makes a tweezer bottom at intraday lows, or the USD/JPY charts, ES charts, Nikkei 225 charts, they all come together perfectly.

I expect we will see the additional strength early in the week which will turn into a reversal process in which we will want to be shorting into price strength/ underlying 3C weakness and closing positions such as VXX Puts or NFLX calls (which I entered as a hedge to the NFLX equity short).

This is one of the rare moments in the market that I described last weekend in the two posts from Saturday and Sunday which I would recommend just so you can see how everything comes together like a ballet at the right moment in the market. This is what I consider the closest thing to beauty in the market.

The weekend is beauty and I hope you all enjoy it very much.

High Degree of Confidence in our Forecast

I'll be posting charts shortly, but as I have gone through the indicators, assets and watch lists, I have a HIGH degree of confidence in our near term "Bounce" expectations with the Nikkei 225 seeing a bounce as well (today's price action in the Nikkei set it up for a loss of downside momentum and a bounce). The USD plays a major role as will the USD/JPY which I'll show you as well.

However, what happens after the bounce... DOWN.

I have a high degree of confidence in that forecast as well, not only from the charts, leading indicators, but the $USD and the effects beyond simple FX pairs such as the carry trade. Today's aggressive accumulation of VIX based assets (VXX/UVXY/VIX futures) doesn't tell me that the bounce is almost done, it tells me they are trying to pick up as much protection as possible because they know what is coming after this bounce which is likely the entire reason for the bounce in the first place.

Charts on the way... I hope you did well this week and were able to set up some positions for next week and the bigger picture.

The Week Ahead

I expect next week, at least early on, we'll continue to see a bounce. The USD/JPY has had some movement due to other currencies (namely the $USD), but only on a very short term basis. I believe the longer trend signals will hold through early next week giving us a chance to enter longs like VXX/UVXY at a discount, sell some of the counter trend bounce positions like VXX puts and NFLX calls and enter trend/swing trades in core positions, NFLX, AAPL, Biotechs , Transports, and other core positions we have built positions in.

For now, we'll take it as it comes, I can give you an idea of what Monday's early action will look like once seeing the closing charts, but I believe beyond the opening action, the bounce still has gas in the tank.

Make no mistake though, this market is BADLY damaged, I'd think by mid next week we'll be turning to the downside and making a lower low which should eventually take out the October kiows and completely change the primary trend classification.

More to follow, but that's the gist. THIS IS ALL BASED ON CHART SIGNALS, NOT MY OPINION.

NFLX Update

I think most everyone knows what to look for on a downside (or upside) "flameout" (intraday capitulation/short term selling event). We've had this scenario several times this week and I have posted what to look for and it seems you guys are making the concepts your own, which is all I could every hope for.

We have some history with NFLX...

 This 60 min chart of NFLX's two gaps up, both earnings based, shows the long term underlying trend of distribution. At #1 to the left is Q4 earning and the gap up which needed to be done to relieve market makers of underwater positions from the 10/16 gap down in which they likely got caught holding inventory at levels almost 20% higher.

Our entry (short) took place on 2/26, Trade Idea: NFLX Short, the best entry you could ask for, but we had to wait for it since the first Trade-setup, NFLX trade Set-Up, on 1/21, the day of the earnings gap up..We patiently waited for the right signals and finally entered on Feb. 26th, at the red arrow (vertical) Trade Idea: NFLX Short. A short at the highest close of the entire move, but it took patience.

After the most recent earnings (Q1) based gap up, on April 21st we started looking for the NFLX short entry, NFLX Update / Trade Set-Up. Our last short entry on April 27th, Trade Idea : NFLX Short

So why NFLX calls? We use multiple timeframe analysis and try to match the right trading tool (trade) to the timeframe we are trading. For a longer term position, the Trade Idea: NFLX Short is fine, but for a near term bounce....Today's, Trade Idea: VERY SPECULATIVE...NFLX Short term CALLS was the right tool for the time frame and expected move.

This is the 10 min chart showing strong deterioration.

However very near term the one minute chart is showing a positive divergence in line with the market balance we expected. Two thirds of stocks will move directionally with the market.

This two minute chart of Netflix shows a much cleaner divergence although it is only a two minute chart and thus we can't expect much more than a bounce. This is the reason I chose to use the leverage of options.

The three minute chart is also positive, But that's about where it ends.

This is the five minute chart as you can see, negative

At 12:13 PM today, I got this email:

"And there it is a spike below post earnings lows, yesterday low and this mornings low. High volume.

 

Let the short squeeze begin ..."

This is what our member was looking at...

As I have said over and over again, it doesn't matter what the asset is, It doesn't matter what the timeframe is. The best price-based indication of a trend reversal (on this short term trend), is a head fake move. In this case it would be a stop run. This is exactly what our member was referring to as you sent the email at the red arrow as price broke below the intraday lows on surging the volume (stops are being accumulated).

I'm glad to see the concepts being utilized.