Friday, November 8, 2013

Heavy Volume Distribution Day Across US Equity Indicies

Yesterday, I discussed my expectation of a higher market on the ECB rate cut given the uptrend and sentiment as my base case. Given the strong surging rally and prior firm bid, I thought the market would surge. However, after watching the sell the news trade over a twenty year career, I hedged my bet (and book) by offering following caveat:
Conversely, if the market stalls on this news or drops well into the red on an increase in volume that sticks by the close, this would cast meaningful doubt on my base expectation. It would show distribution and rally failure on clearly bullish news.
And that's exactly what happened: A very large, heavy volume distribution day across all the major averages. I had been mentioning in my blog about keeping risk very light and using short time constant moving average exits to trade tight given extremely skewed bullish sentiment. Moreover, I have been building a few short positions showing stalling, poor relative price action. There is a lot of rot under the surface of this market.

Here are my thoughts on SP 500 support:

Here is a graphic showing one week SP sector performance. Defensive consumer staples and utilities outperform while financial, energy, cyclical and materials underperform.  Note the shift. This adds rotational evidence we're in a late stage move. 

Please be aware of the crush occurring in Treasuryland this morning. The long end is getting hammered. After the 30yr price downtrend that began in May that bottomed in early September, the retracement of this large move was ONLY a classic 38.2% retrace.

This is paltry and suggests much lower prices/higher rates are in the cards. Again, this adds more evidence to the late stage, bottom of the ninth inning stretch for equities. This is not today's business, but note it and keep perspective.

The McClellan Oscillator has shown binge and purge bulimic internal rotation since late June as the indicator bounces from one extreme to another. This is rare. These extreme swings suggests higher odds that a larger top/correction may be at hand.  These McClellan swings dovetail with ebullient sentiment. Note the trend line break in the graphic below. It took a lot of selling work for the indicator to fall all the way to that trend line then crack below it as well.

The McClellan is at a really interesting trading juncture with overall market price action. The oscillator is at the first oversold green line on the chart above. There is certainly enough oversold room for the McClellan to rally hard and make a divergent lower high with a same/new high in the broader market. This would setup a very large net new high indicator divergence that I've been monitoring as well. I'm throwing this out there because it would hurt shorts and longs that puked out their positions yesterday thinking the bear turn is nigh. Additionally, it would reward complacency and buy the dip mentality that has been so entrenched. Conversely, sentiment is so bullishly skewed right now while the McClellan still has room to reach the lowest "extremely oversold" green zone. There is clearly room for further selling pressure.

JPM is up sharply this morning and it held its 200 day SMA for the fourth and increasingly obvious time. This is likely the tell that the market will hold this morning's payrolls spike down. If the market does decide to head higher, so far, the all time new high names in the left margin act reasonably well. I would expect them to lift first and the same rules apply: half normal position size and fast time constant exit to mirror the weakening foundation of a late stage market move.

The one position I've discussed, DDD, acts well. So far it begins to form a bull flag pattern with a tight consolidation at the highs. Note this is only the third day of stall that can take between 8 and 24 days to resolve. So far there has been no large volume reversal at the current high. Here are some of my thoughts on retracement levels.

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