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Friday, May 20, 2016

Wolf on Wall Street Market Update

There's so much going on today that I've just been all over the place trying to put probabilities together both intraday, near term over the next several days/maybe week or so and of course the big picture as to how it all fits together. I've realized I can't get all 3 in to 1 post so I'm going to try to deal with what I see and have seen since early May, as the near term probability. I reiterate, this doesn't effect the big picture probability at all, in fact that's why I wanted to post both together so you are not swayed or skewed unduly and have some context to put this information in to. For now, just take my word for it that this is the base/bounce area we have been following this month, it looks more probable and it does not have any effect on the downside resolution whatsoever, it just gives us better entries.
Intraday I opened a SQQQ position which I considered early today as a fade of today's move that is also on the side of the big picture probabilities so if I was wrong about this May base, then any market downside would be profitable as the SQQQ position reestablishes my short coverage tat I had trimmed down. I expect it to be a trade for the present period. If we can get a pullback, which I think we can, than what happens next ill be very important and will be crucial to any trading positions if you didn't already pick up some longs yesterday as I know a few of you did and as I considered as well.
This will be my 3rd time recapturing these charts as I intended to post this article well over an hour ago, there have just been other things come up in the market since, so I'm going to post them as they are.
OK, so we have been watching this base area that initially started May 2nd through the end of the week on May 6th. My guess is that it was initially for a rally or strong bounce to fill some gaps like the QQQ ($108-$110) on what was expected to be a dovish reading of the minutes. It's clear the market has underestimated the F_E_D the entire time, nearly every F_E_D speaker except Yellen has said as much. My guess is that the minutes threw the knee jerk bounce plan off, but there has been a lot of work put in to this base area and as I always say, Wall Street doesn't do things like this and just let them go, they have a reason and they rarely abandon it which is why it was important to see if the near term damage on intraday charts after the minutes would be repaired as it was yesterday to some extent.
As you know the 5 min charts never lost their standing or positive divergence for this period, they held up throughout.
Yesterday the market did a lot more work than it looked like. I'll try to include some charts that will put the suspected move to the upside in perspective and show the big picture downside has not changed and will not change. Ironically, it as just last night I said I had been looking at my UVXY position and thinking I'd like to add to it if we could get a pullback that would give me the discount/incentive to do so, this may be it.
qqq 5This is the 5 min QQQ trend that was showing distribution in to the April highs and even worse at the April highs which also formed a VERY bearish Island top. We haven't seen many gaps like this that have held for very long if at all, which tells me that the market will either A) try to fill the gaps at $108-$110 or B) they'll be left open as a sort of latent reminder or forewarning of how bearish this market is. Note the 5 min positive divergence since the start of May within the context of the trend. That alone should give you some idea of the context that the divergence falls within, to be taken seriously, but not a threat to the downside resolution.
qqq 5.2This is the closer look we have been following . Note how much work was done yesterday, sending the divergence to a new leading positive high.
Just to show you that this is multiple timeframe and multiple asset confirmation, I'll use the SPY below.
Most are familiar with the concept of migration of a divergence. A 5 min divergence , especially a near 3 week trend like this is pretty respectable and should be taken seriously, but the longer the timeframe, the more significant the divergence, that's migration.
spy 7Here's the 7 min SPY trend has been negative or in line, confirming market downside. It wasn't until very recently that the 5 min positives on all of the market averages started to migrate to a stronger 7 min chart. As you can see, the divergence is not as long, it shouldn't be. As the 5 min chart strengthened, it migrated over to a stronger 7 min chart right around mid-month.  If nothing else, the change in character from downside confirmation to slightly positive should be clear.
 spy 10The SPY's 10 min chart has also seen migration as a stronger timeframe. The trend before is clearly negative or downside confirmation, but the last week or so, actually it wasn't until yesterday that the divergence locked in.
At the same time, VXX/UVXY 5 min charts have shown some near term deterioration which makes sense as they trade opposite the averages, this is true multiple asset confirmation and shows that this was not random price action, but something planned and executed in advance.
vxx 5
VXX 5 min with relative negative divergences but yesterday's higher high with a lower 3C high is the strongest of these relative negative divergences and lends extra credibility to the "Bounce" base theory which I still believe is centered on a technical price pattern, a Triangle.
2016-05-20_14-52-34
From a technical trader's point of view, a triangle like this is considered a consolidation/continuation pattern. What is continuation ? It's the trend immediately preceding the triangle, the downtrend at the red arrow. Technical traders expect the triangle to resolve to the downside and start the next leg lower. This is where our head fake concept comes in. Just imagine the technical traders' perspective as the triangle is expected to break lower and we get the hawkish F_E_D minutes followed by a break below the triangles support yesterday!
This is why there was so much work done on the 3C charts yesterday, technical traders took that as the start of the next leg lower. All of the sell-side/or short volume yesterday was cheap, easy shares for the pros to accumulate, that's why the 5 min charts look so  much stronger today as yesterday they picked up a lot of shares on the cheap with no one the wiser except the positive divergence we followed yesterday in real time.
Likewise, for a technical trader, a break ABOVE the triangle which did not happen today, at least not yet as the upper trend line acted as resistance, would be seen as the triangle having failed and a signal for technical traders to reverse position from short to long which creates snowball momentum that Wall St. need not add anything to, their work is done. traders will do the rest for them. Of course Wall St. will be selling in to any breakout / price gains the entire time, that's the entire point of the exercise and when you see the bigger picture charts, it will be even more obvious. Considering the minutes, imagine how confused traders will be, but they'll follow price.
As for VXX/UVXY...
uvxy 7UVXY 7 min tend has increased in its accumulation so I can't see much of any kind of move changing this which is the bigger picture resolution to the downside for the market. While we have 7 min positives in the market averages, their trends are less than a week old, this one is  months old.
uvxy 7.1A closer look at the same chart reveals a relative negative divergence that migrated over from the 5 min chart yesterday. You have to consider we are looking at multiple timeframe/multiple trend analysis here for it to make sense and fit.
vxx 10The VXX10 min chart's huge positive divergence, this isn't going to be cleared away, so the resolution is still very much to the downside, but there obviously appears to be an upside event with the triangle acting as the starting line for the breakout/bounce. Again, it will be sold in to.
We still have some near term 2-3 min negatives which is why I entered the position I did just an hour ago. Index futures have a long ways to go to catch up with positive signals in the cash market, so a pullback would be very useful and very interesting in judging exactly what we are looking at and what positions we might want to take and what target area we will want to reverse positions back to the downside.
There's even a chance that a pullback doe a lot of damage and nullifies this analysis, but I put a very low probability on that.
I'll give you the rest of the picture including Leading Indicators both near term and big picture as well as the big picture charts.
Again, this is something we first noticed May 2nd, by May 6th there looked to be something to it. I suspect it was meant for Wednesday and has had to make adjustments since, but they seemed to be favorable conditions for this divergence to improve.



Friday, April 29, 2016

Stock Market's Intraday Bounce Forecast

From our 9:15 A.M. Update:
"Remember how the 3C charts ended yesterday. Even if there were to be n attempt to bounce the market, as I said yesterday it would likely take several hours of accumulation on 3C charts before that happened so we’ll follow events as they develop."

From the 10:15 "Early Indications":
"As ugly as the open has been for stocks and crude, I suspect that there’s going to be that bounce attempt we talked about. It’s not here yet and I couldn’t even say to what degree we are talking about, but there’s a change in the charts this morning as I had laid out last night and this morning"

From our 11 a.m. "Market Update":
"There’s more development, but again this isn’t a threat to the market breaking down, it may in fact be tradable for those who are a bit more speculative and have the time to be nimble."

From our 12:40 "VXX/UVXY Coming Down Intraday"
"The moves in VXX/UVXY are nothing compared to what I believe we’ll be seeing moving forward, but as mentioned earlier, in support of a market bounce and just normal, VXX should be coming down intraday, XIV should be heading up for the market bounce that has been developing pretty much since the open...

s1
VXX 1 min chart negative today, but 1 min chart ONLY, everything else is in line to the upside."

And as of the close, the SPY 3min 3C chart showing yesterday's distribution at the intraday highs and today's minor accumulation.

spy
SPY 3 min w/ 3C distribution at yesterday's intraday highs and accumulation process as envisioned early this morning for a bounce off intraday lows and then some.

From: www.Wolf-on-WallStreet.com


Thursday, December 17, 2015

Wolf on Wall Street's Daily Wrap

From our members' site,

Amazingly the overnight market started one way (very bullish) as overseas markets took their cue from the US reaction to the F_E_D's rate hike which as explained before is a sham as no rate hikes are good and although the talk was in dovish tones, the dot-plot indicated nothing of the such, in fact it indicated 4 rate hikes for next year, not what the market was hoping for, but I doubt most (other than the pros) were paying that much attention and rather chose to listen to Yellen's soothing tones or Cramer's, "Time to look at stocks". Really? After the first rate hike in 9 years your first sentence is "time to look at stocks?"
If you recall Quantitative Easing, what it did was put more liquidity ($$$) in to the system. In fact, the F_E_D increased their balance sheet from about $800 minion at the start of the Financial crisis to a staggering $4.5 trillion after all of the QE and other programs. You can literally put the S&P next to the change in the F_E_D's balance sheet and watch the two rise together.
A rate hike may sound benign, however it's not just the setting of a rate higher like banks did with their Prime rate one after another yesterday. The New York F_E_D's open-markets desk is in charge of moving the rate to the F_O_M_C's specified "TARGET" rate, which in itself implies something needs to be done to get to that target and in fact you'd be correct. It's the job of the NY F_E_D to execute the actions that need to be taken to move the rates to the F_E_D's current 25 basis rate point hike (target rate).
If you want to understand more about how this process is achieved, there's an excellent article at MorningStar News you might enjoy.
The F_E_D started to adjust the rate today with a Reverse Repo operation involving 49 banks and just over $105 billion in Treasury collateral. In layman's terms, the F_E_D drained $105 billion of excess liquidity from the system, the same liquidity that pushed the market higher along with the increasing size of the F_E_D's balance sheet. In layman's terms, the EXACT opposite of what QE did. That's $105 billion drained from the system and that's the first operation since yesterday's rate hike. There are varying estimates of how much liquidity will have to be drained from the system to affect a 25 basis point hike, the range I've seen thus far is from $300 billion to as much as $1 trillion which was a Citigroup estimate . That's for 25 basis points!
While there's a lot of "maybes", "What if" and general hypotheticals, the most current dot-plot from the F_O_M_C members of where they see interest rates remains unchanged and is at 1.4% at the end of 2016 which indicates there would need to be 4 rate hikes in 2016. Even taking a rough median of the amount needed to raise rates 1/4 point (25 basis points) call it $650 billion, you have something like $3.25 trillion in liquidity that would need to be removed from the system, some would say $4 trillion. The point is very simple regardless of how many hikes, what the target rate is at the end of 2016 or how much it costs to move rates 25 basis points, as I said yesterday, a rate hike is never good for the market.  It is that excess liquidity of some $3.7 trillion dollars that lifted the market from 2009 lows to its 2015 highs.
Last night I said that the first look we'd get at underlying trade since the F_O_M_C yesterday would be the overnight session. Look at the A.M. Update's charts and commentary. In an excerpt...
" I was saying last night, we won’t get much of a feel for the market within an hour or two at the most, the first feel we’ll get is from the overnight action and the most important feel we’ll get is from today’s cash market.
es 1After being in line all day yesterday, the 1 min ES/SPX futures chart has severely diverged. This is much more important to see in the cash market, but this is a first clue."
The second clue came right in to the open as the 3C signal went from bad to worse as seen in this morning's The Open.
"In case you were wondering what happened to the solid looking gap up in the market as overnight trade telegraphed for hours and hours, it took just minutes for these signals to develop in an already negative market from overnight…es 1
 The ES chart I captured for the A.M. Update rapidly turned more negative right in to the open."
Perhaps more importantly, even a rather dull afternoon market (with a lot of excitement on the open), things picked up in to the close despite measures taken to stabilize the market through the afternoon you simply can't get around the facts...
1Remember "Beware the F_E_D Knee-jerk reaction, it's almost always wrong"? It took about an hour and a half this morning to erase ALL of yesterday's post F_O_M_C knee jerk gains, that's about as fast as they were made. 
On the close, we wiped out the entire day and then some. That left EVERY single major market average with the very ugly...
2
Bearish Engulfing Candle and a textbook one at that.
There are three concepts that come to mind right away: The Knee-jerk reaction, the Dominant P/V relationship of yesterday which showed us weakness and "There's no such thing as a dovish rate hike".
From the end of our "Stage 3 top" ending with the Head-Fake/False Breakout high of 12/1 (We always look for a head fake immediately before a trend change out of a base or a top), just look at this volatility that I wrote about at length all of last week.
3The first candle inside the yellow box is December 1st's head fake/false breakout, look what happens the very next day and the overall price volatility since.  All of this back and forth has sent the Dow and S&P green and red numerous times TYD, today both finish red ytd.
The averages on the day...
avg todayYou may not know the color coding, but one of the notable features other than the horrible open and close is yesterday's top performer Transports, was today's worst performer.
sectorsAnd you might remember the color coding of at least one of the S&P sectors, that would be XLU in blue...Utilities. For the second day in a row, the Defensive Utility sector was the best performer, in fact the only of the S&P sectors to close green on the day, although barely.
Treasury yields were lower on the day with the long end outperforming, which makes me happy for now the TBT long position was closed yesterday (-2.3%).
Although there was some hanky pinky in VXX today, our UVXY position which was started yesterday afternoon, is up 10.5% today.
The $USD acted as conventional wisdom would expect on a rate hike and moved higher today, yet it still has short-term negative divergence in it and I still suspect it comes down near-term. It also still has the intermediate to longer term leading positive divergence in it, I can say for sure I'm not certain how to interpret this, but I still believe we see both moves, or at least the first and then see how the longer term charts develop.
dx 11 min 3C chart of USD with a negative divergence here through the cash market (green arrow). Earlier this morning my suspicion was USD/JPY was held together overnight as overseas markets moved higher along with Index futures.
dx 3The 3 min USD 3C chart has a leading negative divergence.
dx 7As does the 7 min chart.
dx 15Around the 15 min chart is where the $USD starts showing longer term, stronger positive signals, but there's a local relative negative divergence even in this chart.
usdjpy 1Things look to be going sideways for the USD/JPY right now, I suspect we see this in the $USD overnight.
usdjpy 30
Remember the overhead resistance I mentioned when talking about the USD/JPY ? We're right in it now and as you see above, it's not reacting well. Furthermore, with any top pattern including a H&S top, we always look for the neck line or "Resistance" to be broken shaking out shorts, emboldening longs before the real collapse. This would be a textbook example of that concept should the USD/JPY continue breaking down from here.
As noted earlier today, I did suspect the pair was held together overnight for the benefit of global markets and overnight Index futures which puked on the open (excuse my graphic language, but that's the best description). Here's the FX pair vs the S&P futures today, a LOT different than yesterday or any other time this week.
dd 2USD/JPY in candlesticks and ES/SPX futures in purple. The first red arrow is on the US cash open, the second is in to the US cash close. Things have gone sideways since.
The tighter correlation during the US cash market right from the open today.
clesES in purple vs Crude futures (candlesticks) at the US open through the close (green arrow/red arrow), except oil held up better after the close. You know what I suspect,  as crazy and counter-intuitive as it may seem.
Other than the early price action and 3C charts as I showed this morning as the charts broke down in Index futures (worse) on the open...
a1ES 1 min 3C goes from an overnight negative divergence to a leading negative divergence right in to the cash open.
a2
The IWM chart was one of the sharpest examples of an intraday leading negative divergence.
However through the rest of the day (beyond the large overnight negative and opening leading negative), we didn't get many strong signals. Keep in mind Index futures NEVER confirmed any of this move off Monday's lows as was pointed out numerous times.
As for Leading Indicators, there wasn't much of particular interest other than some manipulation of a few assets. I noted that our SPX:RUT Ratio was essentially flat on the day, but it did kick up in to the close interestingly.
2aSPX:RUT Ratio (red) was mostly flat until the very late day in which it put in a positive signal right in to the ugly close.
I don't have too much argument with the VIX vs SPX, except it did severely underperform on the close (should have been higher).
It was VXX which looks like it was used to "manage" support in the market at 3 separate lows in the same area.
As you have seen, I invert S&P prices so you can better see the normal correlation between VIX/VXX and the SPX, but first let me show you the area I'm talking about.
2bThe SPX (1 min) from the open (white vertical trend line) sees 3 touches of the same support level and then breaks to a new low in to the close. Now keep in mind the SPX in green will be inverted below vs VXX in blue.
2dVXX is at its normal price scale while the SPX is inverted. Note that VXX makes equal highs at the first two S&P lows but then goes on to severely underperform coming off the second VXX high/SPX low (red arrow). Then at the 3rd touch of SPX support, VXX was whacked lower to support the market in the area and at the close, look at the weak relative performance in VXX. Now look at the 3C chart I mentioned in the VXX/UVXY Update this afternoon.
v 2Here's the VXX 3 min 3C chart today which is in line at the first SPX low, then sees intraday distribution at the second SPX low which is when VXX starts underperforming (supporting the market) and in to the close it remains in an intraday leading negative position. VXX was purposefully pressured lower today. This is the normal market manipulation we see as opposed to yesterday's VERY overt manipulation.
The market was in line with HYG's intraday price movement, even though HYG broke down on the day as the intraday 3C chart suggested (as posted earlier).
hyg 1aHigh Yield Corp. Credit (blue) vs SPX (green) intraday today.
hyg 3
The intraday 3C chart of HYG with "early warning" positive divergence and negative divergence. I don't think it will be more than a week or so before we start hearing more about the crisis in High Yield Credit, the Triple Hooks (CCC-rated debt) leveraged loans (Leveraged Loan 100 Index) and even Investment Grade credit, yes Investment Grade.
While hardly as bad as HY Credit...
hyg 11HY Credit vs the SPX...
lqd
I'd say there's a pretty obvious problem in Investment Grade as well. In fact, I think it's fair to say that the credit cycle (business cycle) has turned. 
Corporate Fundamentals have deteriorated, HY credit has been reflecting deteriorating balance sheets while equities whistle past the graveyard. There are record levels of Corp. leverage and an increasingly larger share of Corp. debt issuance has been in HY. In addition credit ratings and downgrades are near levels not seen since 2009.
In fact I and many others have recently compared the emerging Credit crisis as similar to the Bear Sterns/Lehman subprime crisis. Think about what happened with subprime: The housing market firmed up quickly. In 2003 I was looking at houses for nearly 6 months in the same area, I knew every house for sale. I went on vacation for 3 weeks and came back and homes that had not sold in a year were now 30% higher than before I left. The home I eventually bought more than doubled in value based on the land itself over a 3 year period. This created an investment boom that I witnessed in the form of friends who were house-wives had suddenly become real estate speculators (Flipping houses). The banks facilitated increased leverage, I got an equity line of credit on my house for the same amount I initially paid for it! My friends were using these to buy houses to flip and taking out additional lines of credit on those houses to buy more. Some friends that would have NEVER been approved for a loan were suddenly getting all kinds of exotic loans on multiple houses! Eventually a lot of those subprime loans went south and then a whole new standard of underwriting practices and home prices took hold, the exact opposite of what we had seen.
This is an almost point by point description of the current Credit market and how the credit cycle ends; it has many more parallels to subprime than you might expect for two different assets.
The point for equity investors is simple. Do you remember the markets in 2008?
I digress... back to Leading Indicators..
The Pro sentiment indicators were a bit more positive than price performance so we'll chalk that up with the SPX:RUT Ratio's stronger than expected close and perhaps we know the reason...(Crude?)
30 y
30 year yields lower today (good thing I closed TBT yesterday). As we often see, yields tend to act like a magnet for equity prices. To the left both are in line, then Yields lead the SPX higher by a day each day the SPX gains and were leading it lower by late yesterday and through today.
It may take some time for the S&P to fully revert down to commodities ( a risk/growth asset), but near term I expect some kind of reversion to the mean.
comCommodities (brown) lead the SPX lower and have been negatively dislocated since the bounce off Monday's lows. If my oil suspicion is correct...we may see a different kind of reversion to the mean, but only very short term as I have been very clear about regarding any move in oil.
I'm not going to make more of the intraday 3C signals than there is to them. The real warning was in the overnight 3C signals of Index futures and on the open. Of course the Index futures really have never confirmed a move in the market which has been the most damning set of charts, for example...
es 7Even on the more sensitive 7 min Index futures' charts like ES above, there was never any kind of standout 3C divergence in to Monday's lows, no 3C support and as you see, price is coming back down to 3C just as it did when 3C and price were confirming on the previous downtrend.
Finally tonight's Dominant Price/Volume Relationship. Last night we had an extremely dominant P/V relationship despite the very strong knee jerk close in the market, this is what was said in last night's Daily Wrap...
"What I found most surprising today was the Dominant Price/Volume Relationship...
Tonight’s Dominant Price / Volume Relationship is even more dominant than yesterday’s with 24 of 30 Dow stocks, 84 of the NASDAQ 100 and 345 of the S&P-500. The relationship was the same as yesterday, Close Up/Volume Down which is the most bearish of the 4 possibilities and extremely dominant both yesterday and today. Without the F_E_D tomorrow, it’s much more likely to serve as the 1-day overbought condition that it represents, but more than that, it represents weak market internals, a majority of stocks rising on striking volume."
Today's Dominant P/V relationship was not quite as dominant, but still about half the component stocks which is strong. The relationship was Close Down/Volume Down. This is the least influential next-day bias which often means that there's no 1-day oversold condition and the market can continue lower. It also means there's no strongly bearish relationship like yesterday, This is however the most common relationship found during a bear market. 
I'd guess that tomorrow has a lot more to do with a multi-year record high level of S&P options. If there was ever a time for a max-pain pin, than tomorrow is it.
Beyond that...
I've sat on my hands for the most part this week other than adjusting a few positions here and there. There are still clear divergences I want to see. HYG should be leading the market lower in price divergence beyond the 3C divergence.  I still suspect that there's a short-squeeze in oil and you know how the rest of my equation plays out through the Energy sector and on to the broad market. The positive divergences for a short-squeeze type of move are still there in crude futures/USO. If I'm wrong and I see solid evidence of it, I'll gladly take the loss and carry on with core shorts, but I don't think a divergence like this just comes out of nowhere and is abandoned, it represents money. Beyond that, there are 100 different ways this market is in trouble, breadth has been the one I've put a lot of focus on recently.
However remember what I wrote about nearly every day last week in the Daily Wrap, VOLATILITY tends to precede a major break in the market. At the top of this post that's one of the first things I get to for that very reason as I'm sure you remember all of the posts last week centered on the subject.
The bottom line is, I'll wait until our edge is screaming or jumping off the chart. That's where the highest probability trade with the lowest risk is to be found.
Going in to the overnight session, we do have some interesting signals to start the night.
ess 1This is the overnight negative in ES/SPX futures and the cash market. Note after the close in to the overnight session we have a strange leading positive divergence. this is not only in ES, but every Index future.
ym 1
Here's the same time frame in Dow Futures with the same positive divergence to the right.
vxxx qIn addition and somewhat confirmation, VIX futures have a confirming 1 min negative divergence at the same area. It seems someone is trying to move overnight futures and is telegraphing it already. We have a similar, but smaller positive divergence in NKD/Nikkei 225 futures.
dxx qThis is the 1 min negative in the $USD. I also see short term positives in silver and gold along the lines of the VERY short term speculative ERX/NUGT trade ideas today. This smells like a $USD down/commodities up move and you know where I'm looking...
cl 1
Other than the much stronger/longer timeframe positive divergences in Crude futures and USO, the 1 min overnight Crude chart has a large positive divergence through the entire cash market.
USD/JPY is really not of relevance here, the $USD is. So I'll be looking in to this later tonight and in the morning. I've suspected an oil short squeeze for a week+ now. Perhaps this is just part of tomorrow's massive options expiration, but perhaps it's something else. I'm still holding January USO calls and will continue to until/unless the divergence disappears or weakens.
We'll see shortly, but considering how we closed, this is a most interesting start to overnight trade.
See you soon.

Friday, December 04, 2015

Wolf on Wall Street's Daily Wrap

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I feel like maybe I didn't do a great job explaining how important the Euro was this week. Many of you know that I have been updating euro futures in my futures updates for well over a month now (along with Yen futures) and the trend has been accumulation. I have shown you some unbelievable charts of euro futures that show some huge 3C accumulation.
Let's back up though. In the time leading up to this week's ECB policy statement, the ECB's head, Mario Draghi, has been doing what he does best... Jawboning the Euro lower. In doing so he set expectations insanely high for ECB easing this week and as you can tell by the market reaction it was expecting a lot more than it got.
Draghi's Bazooka, was more like a cap-gun.
One of the biggest trades among hedge funds has been EUR/USD short. The CFTC's hedge fund net position, shows this to be the second-largest short among hedge funds in EUR/USD ever.
And if you weren't short EUR/USD, as I have detailed numerous times, the market is like a Rube Goldberg machine, traders were likely in other assets expected to benefit from ECB easing.
SLogo_Fig9_Goldberg_Machine
A Rube Goldberg machine.
The euro is connected to the dollar.  The dollar is connected to the USD/JPY, the USD/JPY is connected to stocks, the $USD is connected to precious metals, etc... The point is even if you were not specifically in EUR/USD, many traders were in positions based on high expectations from the ECB this week.
Mario Draghi and the ECB utterly disappointed the market and as a result hundreds upon hundreds of hedge funds took huge losses, as this happened on the ECB policy statement...
1EUR/USD... You don't have to be a currency trader to figure out what happens when you have near record shorts in this asset and have a sudden spike as we saw this week.
The pain trade  was not limited to currencies, many positions had been taken in advance on expectations of major ECB easing. Yesterday morning I told you that I had to turn off the Mario Draghi press conference because it was too painful and embarrassing to watch... literally!
At the first opportunity members of the ECB came out saying that the market had misinterpreted their actions. I am sure the members of the ECB received numerous calls from bank heads asking, "Why did you do that? Do you know how much money you cost us?". Draghi spoke at the Economic Club of New York today and did his best to walk back the damage done yesterday in what is being called the, "No limits" speech. Unfortunately, most know that Draghi is a lot of talk and little action which I pointed out Wednesday night in the Daily Wrap when I said I would normally warn of the central bank inspired knee-jerk reaction, but in Draghi's case, the half-life of any effects from his comments is extremely short.
In Wednesday's Daily Wrap, before the ECB the following morning, I had talked about the trend we had seen in the Euro for quite sometime and posted numerous charts including this one with excerpts from Wednesday:
"While I have no idea what the ECB may do or how the market may react, there has been one set of Futures charts I have been following for months now with great interest, that would be Euro futures.... 
The only window we have in to the ECB is the Euro ..."
euro 60
EUR/USD 60 min as posted Wednesday, December 2nd. The point of the chart is very simple, while there was near record EUR/USD hedge fund shorts, someone seemed to know something with a lot of money on the line trading on the long side. This is a huge 3C positive divergence or 3C accumulation. Some very big players we're set up in advance to take advantage of the ECB disappointment and resulting EUR/USD smash higher, annihilating near record hedge fund shorts.
Somehow in our little corner of the web, we had access to something that hundreds of hedge funds didn't. Although you know who did as they were covering their EUR/USD short last week!
As mentioned above this plays in to numerous assets beyond the currencies. In today's, "No Limit" speech by Mario Draghi, he tried to walk back the effects of yesterday. Later in the day in an interview with the former head of the Bank of England's, Mervyn King, King asked,  "Was today's speech deliberately designed to try offset some of the reaction yesterday?",  obviously meaning the market reaction. Draghi's answer was stunning to some but probably not to most of you:
"Not really... well, of course."
Many attribute the market's gains today to Draghi's "No Limits" speech. However, how do we explain numerous posts yesterday afternoon  (Thursday, December 3rd) along the lines of this afternoon update:
"Going in to the close, the end of day divergences in the averages are finally taking shape. Just as interesting, if you look at QQQ, IWM or SPY on a 60 min chart, you should see a bullish Hammer on large volume, this is often indicative of a short-term low or what I call a “Flameout” in place.
I suspect we may have to build a bit more tomorrow, or maybe the NFP is a catalyst. Either way, this is the best looking (positive) divergence and price/volume signal of the day. Perhaps we get a decent bounce that opens up some additional trades."
If Draghi's speech was responsible for today's gains, than somebody knew it was coming yesterday. And/or as I had also speculated, non-farm payrolls seem to attract a lot of volatility lately, which I thought might be a catalyst for the late day accumulation we saw yesterday. I doubt to many people would have been calling for market upside after going through yesterday's decline.
4SP-500 daily chart.
Although we had advanced notice on all of these moves, they all show volatility right around payrolls. October 2 is a date you should be very familiar with, it's also the day that September payrolls missed big-time. Next 11/ 6,  payrolls beat big time. And today payrolls beat. As you're probably very well aware from the late September, "Anchoring Expectations" post, forecasting the October rally, we had plenty of advance notice. However it is uncanny that volatility sits right around payrolls. It's almost a, "What came first the chicken or the egg?". So yesterday's theory of payroll being used as a catalyst to ramp the market today we're not without historical merit.
We've also seen one of the most volatile weeks in quite sometime. Wednesday the US dollar hit 12 year highs, Thursday it had the biggest one-day move since March 2009 in the opposite direction. You saw the treasury move earlier this week, and of course today's volatility which I had warned about last night saw the Dow and S&P go red YTD yesterday and bounce back to green YTD today. I have little doubt that today's action had a lot to do with making back major losses from a big surprise yesterday. Unfortunately for currency traders the EUR/USD didn't pull back.
As you know, crude was clubbed on OPEC leaving output the same (for all intents and purposes). Energy broadly had a bad week. However I suspect Energy stocks see a bounce on Monday, that should be useful as I've been looking for a good entry in to XLE short.
xle 1XLE 1 min 3C positive divergence. We have seen the energy sector cause short squeezes several times since the start of October. However this divergence does not go any further than the one minute chart.
xle 2The 30 minute XLE should tell you all you need to know about why I would love to short this in to some strength.
There were numerous other watchlist shorts we're looking excellent today, these are the same shorts I have been watching and have not given a strong signals I look for, in many cases until today. I would have no way of knowing as of Wednesday, that we'd see this kind of a bounce today. That information only showed up on our charts yesterday afternoon. However this is why I don't enter positions until the charts look right. Had we entered some of those core/ trend positions Wednesday, it would've made no difference today.  I'm not saying that the charts we're forecasting both a large drop any large bounce the next day, I'm just saying the charts were not ready as of Wednesday and they look a lot better today.  The basic idea is simple, "Do the right thing for the right reason and let the results take care of themselves".  This is why I did not enter any short positions today with the exception of DUST, because as tempting as the charts were, they weren't quite there.
USO this week is an excellent example of why we wait for the charts to line-up a high probability, low risk trade.
Interestingly, for the 3rd time in a row this week (every time there have been one), the Dominant Price/Volume Relationship was right on again. From last night's Daily Wrap:
"As expected, I did find the Dominant Price/Volume Relationship I thought I would.
Every average with the exception of the Russell 2000 had a Dominant relationship of Close Down/Volume Up. Again, these are not the price/ volume relationships of the averages themselves, but rather of the component stocks that make up the average.
This relationship is a one-day oversold condition, meaning we most often see a bounce the next day, which is very much in line with the candlestick/ volume charts posted near the close today."
Today's Dominant Price/Volume Relationship was clear, Close Up/Volume Down, the same relationship found in all four major averages Wednesday night. To save you the trouble of going back to Wednesday's Daily Wrap, this is a one-day overbought condition that typically results in a red close the next trading day. This is the same relationship we saw Wednesday night before Thursday's beating in the market.
I updated the leading indicators this afternoon. The only ones that are difficult without showing are our SPX:RUT Ratio and of course high-yield corporate credit and how dislocated it is from the SPX.
inv 1Our SPX:RUT Ratio custom indicator has been very effective, especially on the close. Today there was no confirmation at all.
hyg 1
And as we already know, HYG is severely dislocated. Here's a look at HYG since calling the early November high.
Futures charts look almost exactly like the averages did  throughout the day today, although not quite there yet as you know...
es 3ES/SPX Futures 3 min 3C chart negative through today. Note the quality of yesterday's divergence, this is why I said I'd have been more concerned if it had spent more time near yesterday's lows building a stronger base.
tf 5TF/ Russell 2000 futures (5 min) again not even a hint of confirmation.
nq 7NQ/ NASDAQ 100 futures (7 min), again you can see the quality and the differences between the negative and positive divergence.
ym 10And YG/ Dow futures (10 min). Notice a trend of similarity?
So into next week I see no reason to do anything different and simply wait on the charts to jump off the screen as many started to in several time frames today. There are a lot of great looking charts on the wwatchlists too, charts that I didn't put out as trade ideas earlier this week because they simply weren't there yet.
Have a fantastic weekend.



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