Trade Idea IWM Short/Puts

I'm opening an IWM short, I think an equity or ETF short such as SRTY would be easier to navigate chop, but I suspect I'll go with June 19th $124 Puts, they have some time on them.

I'll post the charts in a moment, but TICK is not cooperating. The averages are in a short squeeze, not an accumulated rally, you can tell by the very linear [price action with no corrections intraday and it makes some sense where we are on the daily chart.

Meanwhile VXX continues to accumulate, XIV is distributing which would be the exact signals expected for a move that was near failing.

I have confirmation on the IWM negative divergence in both the IWM and TF/Russell 2000 futures.

I want enough time to let this play out a bit, but I suspect this is just about the right timing for an entry.

Important Market Update

Again, I'll go back to Friday's The Week Ahead forecast expectations as this tends to be some of the best data of the week (the last 2 hours on Friday) and because there are some key words there and some information on the charts that raises my eyebrow a bit.

"I believe  we will see early weakness on Monday. HOWEVER THIS PART OF THE FORECAST IS NEAR MEANINGLESS COMPARED TO THE REST SO I WOULD NOT GET TOO HUNG UP ON THAT.

I'm still expecting a $USDX led bounce in the equity market as well as the bond market, certain stocks are going to be shorts before others, but this gives us a chance to open or add to any positions we may want to tweak a little.

As I have tried to make clear, it doesn't look like smart money is even participating in this move, thus my own participation level is so low at present having closed VXX puts today.

In comparison to what comes next, this bounce is nearly meaningless like Monday morning's forecast.

The main theme is strong market weakness and any chance we get to open or add to positions we like should be taken."

I'd call the initial early week weakness about half fulfilled, but had certain correlations held, the move expected , the move that would have allowed short term 3C charts to tighten up and offer a more stable long swing entry before the next trend which is at the bottom of the excerpt.

One of the key parts of the forecast is, "I'm still expecting a $USDX led bounce in the equity market as well as the bond market".

This is based on a correlation that I'd say is nothing short of a carry trade unwind. Remember the days not so long ago in which if you knew where the USD/JPY (Carry trade) was trading, you knew what Index futures had done or would look like as the correlation was that tight? That was carry trade based.

In an unwind situation, things are a bit different, nearly mirror opposite. I'll post this chart now, but it's not the thrust of what I'm getting at, but because the $USD has such a tight correlation with USD/JPY for obvious reasons, it's not far off the narrative.

The USD/JPY is in purple and the ES/SPX futures are in red/green candlesticks. Note how tight the correlation has been until the last few days, even the better part of this week to a lesser extent.

However once again, the Week Ahead forecast was calling for a $USD-based bond/equity bounce. I should remind you I have been expecting a counter trend bounce in the $USD which would have a similar effect on USD/JPY above.

This is the daily 3C chart of $USDX which shows a large area of distribution at the highs and a leading negative divergence since.

 A closer look at the same chart shows the failure to make a higher high @ #1, the break below to a lower low in the area of #2 and intraday lows at 3, which is around the area I expected the $USD to gather some steam and produce a counter trend bounce to the upside, not a change to the downtrend though.

On April 2nd in a market update I posted my expectations for the $USD as follows...

"The $USD is seeing some weakness which is something I expected near term before a larger bounce and then an even larger decline"

4/2 (April 2nd is the Thursday to the far left of this 60 min $USDX chart. On that day the $USD was weak, but just days later it out in a base and the near term larger bounce  which is in green, the accumulation for that at the white area to the far left.

The next expected trend after the bounce according to our 4/2 forecast was an even larger decline which you can see at the series of red arrows with normal counter trend or corrective bounces at the yellow arrows.

This week's $USD led market/bond bounce was to be another counter trend move like the yellow arrows, except I expected a bit of a stronger move.

As of Friday, here's why the correlation , $USD charts, 10 min QQQ (and similar charts) were so key to the "bounce" part of the forecast...

*The $USDX is represented with a  purple line, the comparison assets with candlesticks...

 This 10 min $USD vs ES/SPX E-mini futures has a near 1.0 correlation between the two assets which would not be surprising in a carry unwind. I marked Friday's cash market in red on the time axis. Note the sudden divergence between the $USD and ES as the $USD heads lower in line with what the short term charts of the averages were telling us about price action early in the week. ES has stayed in a range, but had it come down as expected to last week's intraday lows area, it could have built in that stronger base that would have been more trustworthy for a long swing/bounce trade. That still hasn't happened.

 This is the correlation between the $USDX and long term 30 year Treasury futures in candlesticks, again a tight correlation with the $USD, but in this case bonds have moved lower as we expected last Friday for this week and as you've seen in the last few TLT/Bond posts, they have built a more solid base and look much more secure for a long trade/counter trend rally.

This is the "normal" USD legacy arbitrage correlation vs Gold in candlesticks. Remember our trade idea this week for GLD on Tuesday, GLD / Gold Long Trade Set-Up was for a LONG gold set up, the thing we were looking for first was a slight pullback to strengthen its base.

Oddly the $USD reacted or overreacted to the downside on the US Retail Sales data, I don't think this was a genuine reaction to Retail Sales, I haven't seen many reactions like that in $USD to retail sales, it's almost as if that was just the "catalyst" or cover for a move lower in the $USD which sent Gold higher.

There are a couple of scenarios that are starting to look probable or worth looking in to.

The range and clear resistance zone that we see in the SPX would not have been possible if the SPX futures had followed their correlation with the $USD this week like bonds did and equities have the last several weeks.

When I see a resistance (or support area) this clear in an asset as watched as the SPX, I immediately suspect a head fake run both hitting stops and limit orders/new orders as Technical traders see a breakout above a clear resistance line.

I have no doubt such a move would fail as the charts below show in terms of very high probabilities...

 The exceptionally large leading negative divergence on na daily SPX futures chart through 2015, this is a huge trend of distribution.

ES 4 hour chart showing the same with increasing distribution more recently.

The second scenario I'd consider is an Options Expiration Max Pain Pin as tomorrow is May monthly options expiration. While it seems less likely, there's some reason for the divergence in equities and the $USD where there's not between bonds and the $USD, it could be the max-pain level is in this area.

I'd normally give the tip to the first scenario, but the one thing that has been missing is the short term charts showing positive divergences which are like timing as they are the equivalent of institutional day traders or short term traders, they'll scalp a move like that, but as we have seen all week, they seem to not be participating which causes me some doubt about the scenario I'd normally call the most likely by far.

As for the $USD counter trend bounce (remember the correlation between the $USD and TLT/Treasuries is still tight....

The $USD counter trend bounce expectation is something that fits with other assets like oil expectations lower, gold expectations near term lower, Treasuries making a counter trend rally,  but the $USDX counter trend bounce and those correlations are secondary, the analysis of $USD is why I suspect a counter trend bounce.

 This is the 30 min (strong) $USDX 3C chart, still in a positive divergence.

This is the 15 min chart showing a clear negative divergence and lower prices in to accumulation , again suggesting the counter trend bounce expected this week from last week's forecast.

The 5 min $USDX positive divergence and it is here that we have an example of what is not happening in the market averages. 

They were expected to pullback and repair their shorter term charts just as the $USD has done, they haven't done that and that's WHYB I DON'T TRUST A LONG (MARKET AVERAGES) POSITION. I TRUST THE TLT OR $USDX BOUNCE A LOT MORE, THEY DID THE WORK.

And right down to the 3 min chart in $USDX which would tell us that such a counter trend bounce in the $USD is close, ironically the correlation that has held in treasuries with the $USD also looks very close to a counter trend bounce /Rally, it's stocks or market averages that have diverged and I'm not quite sure why, but I don't trust a long position in such an asset even if a bounce is high probability because without the support the $USD and TLT have built, you can easily wake up to a gap down taking out weeks of trade.

I'm still looking for what the probabilities are and any changes in the market averages, but these are the scenarios and odd market action this week. I'll try to give it to you in something you can trade, but sometimes standing aside is the more profitable stance.

Larger Market Update on the Way/ TLT Add-to long Close

I may put out that TLT second half position fill-out sooner than later. As the earlier intraday signals were suggesting, it has pulled back intraday and is offering a better entry/lower risk. I'm just waiting on some confirmation of accumulation of some large volume that went through about 10 mins ago.

I'm in the middle of a broader market update, please to read it if you are able.

Market Update

This morning in the A.M. Update I thought the overnight gains in Index futures (like yesterday) would not hold, there are multiple , stronger charts shown in the update that are showing negative divergences in to the overnight move (3C distribution).

"I don't think this holds, and I still believe we are going lower. Whether or not the market can put together a base tech and support something more than this chop remains to be seen."

Seeming much like yesterday, it looks like they will not hold. The market averages look like this currently...

 SPY intraday, yesterday you may recall the SPY 1 min was largely in line with price, it was the slightly longer charts showing it would lose the overnight gains. Today that's not the case.

 Speaking of those slightly longer charts, the intraday 2 min SPY is also negative here.

 As is the intraday 1 min IWM

 And worse the IWM 2 min, much like the Index futures in this morning's A.M. Update.

 QQQ 1 min which was negative right off the open yesterday and then in line the rest of the day and negative this morning.

 As well as a seemingly strengthening divergence on the QQQ 2 min like the IWM 2 min which was also negative yesterday and worse today.

This is a very odd week. Our The Week Ahead forecast from last Friday afternoon called for the following...

"I believe  we will see early weakness on Monday. HOWEVER THIS PART OF THE FORECAST IS NEAR MEANINGLESS COMPARED TO THE REST SO I WOULD NOT GET TOO HUNG UP ON THAT.

I'm still expecting a $USDX led bounce in the equity market as well as the bond market, certain stocks are going to be shorts before others, but this gives us a chance to open or add to any positions we may want to tweak a little.

As I have tried to make clear, it doesn't look like smart money is even participating in this move, thus my own participation level is so low at present having closed VXX puts today.

In comparison to what comes next, this bounce is nearly meaningless like Monday morning's forecast.

The main theme is strong market weakness and any chance we get to open or add to positions we like should be taken. There's simply no comparing the "bounce" charts (of the bounce expected) with those of the distribution and broad deterioration through all of 2015"

So to be clear, our forecast Friday afternoon for this week started with weakness early in the week...That weakness "should" have allowed the intraday short term charts to build better looking positive divergences for a mid-end week bounce higher which was based on charts like the one below, QQQ 10 min.

This QQQ 10 min was already in a positive position, but a frail one that needed early week weakness to strengthen a base area for a decent bounce. We did see early week weakness Monday and Tuesday morning as expected (red area), but not quite as weak and it didn't build a stronger base either.

The trend that will follow a bounce would be a significantly larger downside trend as two weeks ago we forecast we'd see price "Loiter" in the area of the triangles' upper trendily since the attempted breakout failed.

 The NDX's head fake/failed breakout we forecast in yellow and then the "Loitering" around the upper trend line in orange.

The SPX had a weaker attempted breakout/head fake move, but is also loitering in the area which is something we have observed before a large trend reversal, this happened in September after the head fake/failed breakout and between that point and the move to the October lows. Only this time it's on a much larger scale.

I had been looking forward to playing a bounce and then closing it out and moving to set up for the next trend, however, the base and the charts that should have strengthened early this week on initial market weakness, simply haven't.

At this point, I can't justify participating in any bounce that we might see coming as it was expected to take place around this time of the week, there's simply not the support necessary to hold it if it were able to get off the ground and that means a situation in which you could have a spectacular bounce one day and a gap down taking out 2 weeks of trade the next morning.

For now, I'll continue to take positions in the assets that are showing strong signals until this week's situation clears up. 

GLD Follow Up Add to

The GLD Put position (June 19 $117) on a parabolic move in GLD based on a parabolic drop in the $USD on bad retail sales data (at least that was the cover for it), looks to be in good position to come down as $USD positive divergences and a reversal process are in place and likewise the GLD intraday charts are leading negative.

The original position was entered yesterday as Trade Idea: GLD FADE- HIGHLY SPECULATIVE and as such a small position size.

I'm going to add to that position, but still keep it in the realm of speculative size, for me that would be a full position size of about half a normal position size. This is also a June monthly expiration, a lot more time than I'd usually use, but I prefer to have at least 3x more time than I expect I'll need.

TLT Trade Idea

The Treasury counter trend rally/TLT long Idea was from last week and there's a pretty good explanation of the trade idea from the original post here, Trade Idea: Long Bonds / TLT. There were also these follow up posts, Bond Rally / Swing , TLT/Treasuries Counter Trend Rally Follow Up and Treasuries/TLT Update...

However, the first post should be an adequate explanation of what I was looking for, why it was only a half size position at the time and what would need to happen to make it a full size position.

This is a counter trend rally play on the decline in bonds, a short squeeze, but these can be very powerful moves.

I was looking for a pullback and wider base with positive signals before entering the second half of TLT long...

 The white box to the left was the initial half size entry as I suspected we'd see a pullback to form a larger base. The condition for the second half of the trade was a pullback to the recent lows on the 6th or below those (head fake/stop run shakeout), but they needed to show positive divergences through the pullback.

The short squeeze , which is a very thick presence, should start when the highs of the 8th are surpassed and we are back above the long term trendily.

 Something like this on a daily chart, although a counter trend rally can look very convincing, either through momentum or the highs it hits. IT is meant to cause bond traders to question the preceding downtrend.

However, this is a counter trend move, not a return to the gold old days of last year when bonds outperformed even equities on the year.

 This 60 min 3C chart of TLT shows perfect confirmation of the down trend, it will re-establish which  will set up another/new trade for us.

 However at the 30 min chart we have a significant divergence telling me this will be a strong counter trend rally.

 15 min showing the positive signals I was looking for in a probable pullback.

 The 5 min chart which is what caught my attention as it jumps off the screen.

 And timing wise more recently, the 1 min chart's positives at something like a "W" base and these have migrated showing a strong , building head of steam in the divergence.

That can be seen on this 3 min chart.

I believe it is probable that TLT pulls back a little intraday and offers a slightly better entry, even though this is more than good enough for me, but I'll wait a bit intraday looking for that better entry, then I'll be filling out the original trade plan and fill the second half, but this time with the TLT June 19th $120 calls I had originally intended. I couldn't get the order to go through so shorted TBT (the inverse of TLT) effectively creating a 2x leveraged TLT position. The remainder of the position size will be in the June 19th $120 calls.

A.M. Update

Once again the overnight session has seen Index futures rise and what seems like a heckuva stop hunt on no news our fundamental catalyst.

ES 1 min negative divergence

TF 1 min negative divergence as index futures took off shortly after the European open.


I don't think this holds, and I still believe we are going lower. Whether or not the market can put together a base tech and support something more than this chop remains to be seen.

 ES 5 min negative divergence

 TF 5 min negative divergence

As you can see, the divergences are there to send the market lower not only on the overnight stoppani but on the move we have been looking for since Wednesday.

 As for treasuries, this chart of 30 year treasury futures shows yesterdays decline has turned into a reversal process as expected which means we'll likely be entering the second half of the TLT long position

 This would be the entire base in 30 year treasury futures.

And I'm still very much expecting Gold to come down as you see YG/ Gold futures above and this goes for oil as well.

Daily Wrap

The headlines today are more or less, "Equities and bonds continue swell-off",  however I was surprised at the lack of movement in the major averages today, I expected more near term downside, but not for the bear's sake, rather to solidify a base for a bounce we may be interested in trading. The problem right now is that the charts don't support a trade for a bounce higher that is reliable no matter how long or short its duration. 

The SPX (green) vs TLT (20+ year bond fund) today with weakness in Treasuries more so than equities, but this is what we expected (of both actually), equities seemed to hold up better as soon as Europe closed with a lateral trend.

The dip in Treasuries/TLT is something we expected and are seeing constructive positive divergence in to, Treasuries/TLT Update... these were close to showing solid enough charts to ad the second half of Bonds long for a counter trend bounce.

The long bond which outperformed even equities last year (as a sign of the carry trade unwind) has seen the worst start to the year since 2009! Thus we are primed for a counter trend bounce/short squeeze and this is one of my favorite near term trade ideas.

As I've said all day yesterday, "The market needs to pullback and allow some accumulation short term to give us a more reliable base in which we can enter some positions before moving to the short side and selling /shorting in to price strength.

Either way, I think we were wise to stay clear of new positions yesterday as the daily close was essentially flat (SPX -0.03%, Dow -0.04%, NDX +0.13%, Russell 2000 -0.07%. Transports -1.04%). For all intents and purposes, the market was a meat grinder and pure open risk today with no moves worth trading whatsoever. Remember there are always 3 positions, long, short and on the sidelines.

 This range in the daily SPX is an absolute meat grinder. I would NOT trade this unless you have an edge...which I believe we have, still there are days that simply aren't worth it as you see in the closing percentages of the major averages.

We didn't take on any new short term trading positions yesterday, but I was close to opening a partial long position in Gold/GLD yesterday, but decided to wait for the trade set-up, GLD / Gold Long Trade Set-Up. In all honesty, I believe the move today in GLD would have been due to dumb luck, not the charts.

KNOWING WHAT I KNOW TODAY, I FEEL JUSTIFIED IN NOT HAVING TAKEN UP ANY NEW POSITIONS YESTERDAY, the objective evidence simply wasn't there to support it.

I'm looking for some kind of improvement in short term charts with the bounce being represented by (in this example), the 10 min QQQ low. It has been my opinion since yesterday that we need to see some downside to allow short term accumulation to form a wider "W" base bottom that is capable of supporting a bounce without suddenly falling apart, otherwise I'm content to stay out of the way. Above I have some arrows representing the pullback to the trendily to form a "W" base, the bounce in white and what comes next to the far right in red.

 QQQ 10 min positive divergence along the lines of a bounce, but nothing that will change the market, useful however in selling in to strength like NFLX which we recently opened some short positions and put positions that started gaining today.

 On the day most major averages were pretty close to each other with transports being the big laggard, this is and has been one of our favorite core short positions with at least 2 entries.

On the week we saw the initial early week weakness from Friday's "Week Ahead" forecast, and now we are flat. I don't really care whether we pullback or not for a bounce trade, as long as the charts improve, but in my experience, usually they need to pullback for that to happen.

As you can see, transports have been the laggard all week.

Again today macro data came in weak (export/import and Retail Sales) which had a dramatic effect on the $USD...

 The $USD crashed (now -1.1% on the week) at the release of retail sales at 8:30 a.m., but note the positive divergence in the $USDX futures today.

If you look at the 60 min downtrend in the $USD and the counter trend bounces off their bases (yellow trendiness), it looks like the $USD needs a slightly larger base before its ready for the counter trend bounce I expect which should be larger than the previous bounces.

As for the Gold reaction to the $USD drop, it popped at 8:30 a.m. (same time) and the 3C charts of gold futures show negative divergence/3C distribution all day-
'

 1 min

3 min leading negative to the far right...

5 min gold futures leading negative, so I feel the Trade Idea: GLD FADE- HIGHLY SPECULATIVE fade trade was the right choice.

As for currencies...

 The EUR/USD is showing a negative divergence as the $USD carves out a base/positive divergence from today's fall.  The negative 1 min divergence in the pair makes sense, although I suspect a little more reversal process time in the $USDX is needed.

The Euro futures also show a negative divergence. With the Euro losing ground, the $USD will gain ground.

Meantime...

 The USD/JPY saw a big move lower which is now working on a positive divergence which I think will be needed to support any bounce over the coming days.

The Yen futures had their strongest day in 2 months as i seems pretty clear the carry trade unwind continues.

As for our USO position (puts and equity short), Monday I said I expected a bounce of a day or so, I count yesterday as a day and today as "or So".

 USO daily chart and the move above base resistance than has always been expected to fail with churning at the first two yellow arrows on increased volume and a "Dark Cloud Cover" bearish reversal candle today on volume,

The 15 min $USO 3C chart is leading negative right at the break above base resistance which also tells me the move was never meant to hold, but to create a bull trap and downside momentum as bulls are stuck in a losing trade, creating a self-fulfilling event or snow ball event to the downside.

As for leading indicators, they are either pointing to downside in the near term as expected or they are simply deteriorating in terms of the big picture as expected or perhaps both.

As we saw last night, Pro sentiment has taken a hit, today it's even worse...

 Pro sentiment was leading the SPX lower yesterday, much more so today

*SPX prices (green) inverted* Interestingly as we saw this at the end of the day, VXX showed poor relative performance, how much more so today which makes me happy we did not put out any VXX long trades on expectations of near term market downside.

 The same was evident in Spot VIX today as well.

 High Yield Corp. Credit v. SPX deteriorated even more, this is usually the first lever they turn to for short term market support, but it looks like the pros are getting out of risk assets as fast as possible.

 This is the 3C chart for HYG 60 min leading negative with huge distribution. It may be worth repeating that Wall Street maxim, "Credit leads, stocks follow".

In that case, take a look at the bigger picture.

HYG in red vs the SPX in green. Note the confirmation through 2013/2014 and then the series of lower highs and lower lows in HYG which is now significantly dislocated with the SPX, this chart more than most is pointing to a very dramatic downside event in the market big picture.

As for internals, yesterday they were luke warm which may be why we had such a luke warm day today.

Yesterday's Dominant Price/Volume Relationship for the major averages was only in about half and it was the least influential. Today we have the Dow and NDX both dominant and the Russell and SPX very close to dominant with the most bearish of the 4 relationships, Close Up/Volume Down (remember this is a count of the component stocks, not the average itself). This would suggest a next day move lower which would fit with the scenario I have been looking for since yesterday.

The S&P sectors were more lukewarm with 4 of 9 closing green led by Tech with Utilities lagging. Of the 238 Morningstar groups, another middle of the road reading at 134 green of 238.

I see no reason to change our short term forecast and I see no reason to enter new trades without strong 3C chart confirmation, TLT is close, GLD I believe is looking decent and Oil is looking good as well as NFLX for the moment. If new trade opportunities present themselves tomorrow, I'll put them out, but like I said above, I'm glad we didn't yesterday, although that wasn't by choice or luck, that was because there were no charts backing a strong trade.

It's a bit early for Futures, but I'll check them a bit later and report of there's anything standing out other than the $USD seemingly getting its act back together. I have a feeling today's downside move wasn't just about retail sales, but about stop runs, etc. before an upside counter trend bounce.


Have a great night!