It was a great trading week as we finally saw some nice 2 way action with a few surprises thrown in such as the heavy Russell thumping we’ve been discussing and trading every which way. Welcome back volatility oh how we’ve missed you. Get the Martinis ready, things are getting shaken up a bit. Yet in summary one can argue that nothing really happened as this was just the regular week before monthly OPEX Thursday low.

In fact, one can certainly make the case for business as usual. On the weekly chart the $SPX simply moved back into its prior channel and closed above the weekly 5 EMA:

The daily $SPX chart could be argued is just setting up for another bull flag:

Even the two slight beauty flaws could be argued away: The close below the 5 EMA (who cares, all breakdowns are fake anyways) and the ever declining MACD: Those haven’t mattered either, besides it’s OPEX week and they are always bullish and Yellen is yapping about no bubbles and no inflation twice this week, $SPX 2000 here we come.

It sure looks that way and I’m prepared to trade this direction if it so unfolds. Yet the market looks a bit more shaky under the surface and the cool demeanor can’t disguise the wounds underneath. Let’s examine some of the bleeds:

$NASI sell signal:

The $VIX developed a pulse and moved out from a descending channel, even Friday’s $VIX crushers couldn’t contain him back into the cage:

And while the daily and weekly $SPX charts give the usual bullish signals the monthly chart continues to bring into question those optimistic views. For the 2nd month now the $SPX has yet to reconnect with its 5EMA: Currently sitting at 1922 it would make for logical place to visit before the end of the month:

That’s a 45 handle move from here and nothing to sneeze at in the current tight range environment. With a monthly RSI reading over 77 any such corrective move should really not surprise and couldn’t even threaten the over 2 year channel ascent. While all these markings are mere surface wounds, the larger wound does stir deep inside the foundation of this bull. This week’s Fed minutes alerted investors to the coming end of QE by October this year.

I’ve long ascertained that small caps have benefited the most from the QE liquidity thrown their way and it appears the markets has already started taking this into account. The market is forward looking they say. How far? Well:

For the better part of 2.5 months now small caps have started to underperform significantly culminating in the recent double top. Pronounced as it stands a simple Fib outline shows the depth of the drop that could be in the cards:

For now the descent was halted by the 50MA and this coming week’s OPEX may indeed be bullish, no doubt helped by the usual super dove risk free Janet Yellen and her still sizable POMO package to conveniently flood the market next Thursday a day ahead of expiration. But like Brazil was suddenly obliterated by Germany in the World Cup the world has revealed that the unexpected still exists and sometimes things never expected to be seen indeed unfold before our very eyes: