After 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."
Thursday, December 17, 2015
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.
After 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."
After 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…
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...
Remember "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...
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.
The 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...
You 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.
And 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.
1 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.
Around 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.
Things look to be going sideways for the USD/JPY right now, I suspect we see this in the $USD overnight.
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.
USD/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.
ES 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...
ES 1 min 3C goes from an overnight negative divergence to a leading negative divergence right in to the cash open.
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.
SPX: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.
The 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.
VXX 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.
Here'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).
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...
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 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.
Commodities (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...
Even 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.
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.
This 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.
Here's the same time frame in Dow Futures with the same positive divergence to the right.
In 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.
This 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...
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
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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.
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...
EUR/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 ..."
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.
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 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.
The 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.
Our SPX:RUT Ratio custom indicator has been very effective, especially on the close. Today there was no confirmation at all.
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/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.
NQ/ NASDAQ 100 futures (7 min), again you can see the quality and the differences between the negative and positive divergence.
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.
Wednesday, November 04, 2015
From our member's site,
Today's Daily Wrap
I almost had to laugh when I accidentally (as I try hard to ignore CNBC and other Financial media's subterfuge-trying to explain why the market did what it did for the day in a 30-second soundbite) heard the Bloomberg round-up on my local news/talk radio explaining that the market was down today on a more hawkish F_E_D tone from testimony in front of the House Financial Services committee today. Here's why...
The Financial media would have us believe that a more "Hawkish" F_O_M_C a week ago to the day, was responsible for the market rally since. However a more hawkish in front of Congress today was responsible for the exact opposite, market weakness.
I'm not going to make any case or give any opinions beyond what we had said in advance of BOTH events, then you decide.
The following excerpts are from the Daily Wrap Tuesday, October 27th, the day BEFORE the F_O_M_C last Wednesday:
"However as you know, I have suspected that the clear resistance range in the would be broken on a head fake move, specifically tomorrow’s F_O_M_C knee jerk reaction just after the policy statement...
Today I believe we saw a Crazy Ivan shakeout, a shakeout of both sides of the triangle making shorts and longs both wrong before heading lower, essentially clearing the deck. Note the break below the support trend line of the IWM’s ascending triangle today on this daily chart. This failure of the triangle would have pulled in new technical shorts who saw the break of support as a short opportunity, but if we are to see an upside move without Wall St. having to buy up a lot of the market to make it happen, the easiest way is to force a short squeeze of today’s new shorts.
And on a 5 min chart of the , the positive divergence built all day until this afternoon when I said it was at saturation as the divergence migrated out to a 5 min chart by the close. New shorts are caught in a bear trap and likely have stops just above the resistance trend line of the triangle. This is the same thing we are seeing on the shorter timeframes in Index futures above.
Remember, it’s a F_O_M_C day tomorrow so as always, beware the knee jerk move, they are almost immediate and they are almost always wrong. In this case as I have thoroughly explained, I believe it will be used for a Russell 2000 breakout above its range, a head fake move that will fail, but should offer us some nice entries in shorts as well as options like calls.I can’t put a timetable on the actual failure as we’ll have to let the market/3C charts tell us that, but the last one was within the 2 hours left before the close. Other times it’s a few days, sometimes a week or more.."
As most of you will remember, we were looking for this head fake breakout above 14 days of resistance well before the F_O_M_C. The F_O_M_C's typical knee-jerk reaction seemed like a PERFECT place and time to make the breakout, again a head fake or false move that will fail. Lets look at the daily chart...
Here's the daily chart with the break BELOW the triangle or the first step of a Crazy Ivan shakeout, the second step coming the very next day with a breakout above the triangle, squeezing all new shorts that entered the day before on a technical break of an Ascending Triangle just as was posted the day before the F_O_M_C above.
However as you might recall, the knee jerk reaction almost failed the market and had to be "Stick-Saved" at the last-minute on Wednesday just after the F_O_M_C had been released at 2 p.m.
In a Market Update from last Wednesday (F_O_M_C day) just after the 2 p.m. F_O_M_C, things didn't go as I believe the market had planned (an upside breakout) and the initial reaction to the F_O_M_C saw the market selling off, although you wouldn't know that by the daily close of the above on last Wednesday's F_O_M_C. Here are some charts and excerpts from that Market Update, again just AFTER the 2 p.m. F_O_M_C policy statement had been released...
"SPY 1 min, the lows of the post F_O_M_C period were accumulated, not a large accumulation period for something big, but apparently enough to stem the downside, I suspect, as mentioned earlier, no matter what the F_E_D says today, Wall St. already set up this move and they are likely going to see it through."
What you see above is the initial reaction to the F_O_M_C last Wednesday in the SPY, it was an immediate sell-off, like the September F_O_M_C. However as you can see, the initial downside move saw 3C support almost immediately. As I said above as it happened, it wasn't a lot of support, just enough to stem the downside move and get the market moving back in the direction the market had already been set-up for in the days leading up to the F_O_M_C, that would be up and specifically a breakout of the through 14 days of resistance as technical traders would chase prices higher allowing Wall St. to sell in to stronger prices and stronger demand which they need in the sizes they trade.
More from the post above just after the F_O_M_C...
"...it wasn’t the kind of accumulation of an institutional long position, just enough support to halt the intraday losses, I suspect to let their plan play out as yields are cooperative, USD/ and USO/Oil are all cooperative as expected the last 2-days, at least for now.
It looks like I don’t really even need to continue to make this case as since I started capturing charts for this post as…
In other words, the outcome that was set-up days in advance was in peril as the initial reaction to the F_O_M_C was not what Wall St. had planned advance as we tracked it as it happened. You might even recall another post that I have cited recently relating to and expectations there more than a week in advance, "Trade Set-Up: " from October 26th., 2-days in advance of the F_O_M_C:
"Energy was the sector that we identified in September as being the most crucial to any counter-trend rally that had a hope of holding gains for more than a couple of days. If the reason isn’t obvious on this chart as prices move toward the recent “W” shaped lows, then put all of the 9 major S&P sectors on a comparative chart over the last year and it should quickly become obvious. Energy was by far the worst performer and as such had the thickest short presence. If you put that comparative chart together, roll it back to October 1st and take a look over the next week.
Now looks very close to slipping back down to resume the longer term seen on the chart above this one. The intraday 1 min 3C chart shows recent negative activity, but also some positive 3C signals at the local lows and they seem to be building. This could also be an obvious support mechanism especially with today’s price action down over 2% and breaking local support. That would likely drag in some new shorts and provide a little upside short squeeze momentum.
I don’t expect any high move here, but it’s getting a lot closer to an upside move as these charts continue to develop.
I’d like to see break ABOVE at least $69.50 and much better would be above the $70 area. I’ll be setting price alerts for any such move. They started this entire October counter-trend rally with the Energy sector, why not end it with the same?"
The point? This was a Trade-Set-up, meaning we were looking for something specific to happen to set up the trade. In this case we had breaking below support on October 26th when the post above was published. The post clearly says that "I don’t expect any high move here, but it’s getting a lot closer to an upside move as these charts continue to develop." and very specifically that the trade set-up is predicated on a break of support, setting a bear trap with new shorts entering who will be squeezed sending ABOVE its resistance zone around $70, this was 2-days before the F_O_M_C.
The post was written on October 26th as started to break support, an area where technical traders would short the hugely underperforming sector over the last year. While didn't look quite ready as accumulation of the sellers and short seller's was taking place, the next day we had enough accumulation to force an upside short squeeze just as had been envisioned in the trade set-up with the breakout level likely being where most shorts placed stops, forcing a short squeeze at the trigger area of $69.50 to $70, making and excellent short in the local area now. Very little happens in the market that's not telegraphed in advance. Looking back, we had no way of knowing whether a short squeeze would be a 1-day event that happened on the F_O_M_C or several days later as was the case, but interestingly the "F_O_M_C typical knee jerk event" which can last a week or more has been supported by in a trade that was set up on 3C charts more than a week in advance.
MY POINT IS SIMPLY THAT THE FINANCIAL MEDIA'S REASON FOR PRICE ACTION OVER THE LAST WEEK IS ATTRIBUTED TO A HAWKISH F_O_M_C, YET TODAY'S WEAKNESS IS ALSO ATTRIBUTED TO THE VERY SAME HAWKISH TONE FROM .
As for today, well before testimony I had posted the A.M. Update this morning with the following excerpts just after having explained what was likely to move the market today and how it was likely to stay within the range of the reversal process...
"This may actually work out well as stable or slightly higher prices or even slightly lower still keep us within the reversal range and allow more distribution to continue."
The Index futures looked like this BEFORE the cash open and BEFORE today...
ES 1 min BEFORE the US cash open as of 9:20 a.m. this morning. Note there's a very clear intraday negative divergence hinting at those "slightly lower" prices I had alluded to in the A.M. Update, but somehow we'd remain "Within the range" of the reversal process of the last 2-days.
This is what happened on the US open as the 3C chart above had forecasted...
The green arrow at the top above price represents the 9:30 US open. Note the ES 1 min intraday negative divergence forecasted the early market weakness as you can see above as S&P futures fell almost immediately on the open.
So after seeing the evidence posted in ADVANCE of both events, I ask if you buy the Financial Media's 30-second soundbite/market reasoning that the market's strength over the last week was because of the F_E_D's hawkishness, the very same that they attribute today's price weakness to?
I know my answer. The market, the pros in the market know exactly where this market is going. One of the few hedge fund managers I respect as he's one of the leaders of the hedge fund herd is Third Pointe's Dan Loeb who has revealed that he's net short right now. The price action of the last week or today, has nothing to do with the of the F_E_D, it has everything to do with a counter-trend rally which is by definition a bear market rally and the distribution in to that rally which is the reason they exist. Again from my September 29th Daily Wrap's "Anchoring Expectations" portion of the post...
"A COUNTER-TREND RALLY IS ONE OF THE STRONGEST RALLIES YOU’LL EVER SEE, EVEN IN A BULL MARKET. These rallies have to be extremely strong to convince traders that what happened on the downside was just a price anomaly and that the trend is still very bullish. This is how smart money sells in to strength with retail demand as they believe the rally and the only way to make them believe the rally is for it to be incredibly strong. The first portion will consist of short covering sending the market in a diagonal up-trend and then technical levels will be hit drawing in long breakout traders. While they are covering/buying (the same thing on the tape) institutional money will use higher prices and increased liquidity/demand to sell /short in to, ultimately leaving retail holding the bag.
...bookmark this post. If we get the counter-trend rally that we have been getting signals for, THE LAST THING YOU’LL WANT TO DO IS SHORT THE MARKET AS IT WILL HAVE AN INCREDIBLY STRONG UPSIDE MOVE THAT YOU, YOURSELF WILL HAVE A HARD TIME NOT BELIEVING EVEN THOUGH YOU KNOW WHAT THE LONGER TERM/HIGHEST PROBABILITIES ARE. It’s just an emotional extreme that Wall St. has used as long as there has been a market. Look at the first counter-trend rally after the initial 1929 Crash. Most people don’t even notice it, but it was a 5 month move almost entirely up and with a gain of nearly 50%, That’s not a hard move to believe and that’s the job of a counter trend rally, that’s why they are some of the most explosive moves you’ll ever see"
This is a perfect time for me to post the Futures charts which are the strongest timeframes with the stronger underlying trend (3C flow of funds)...Then, look at everything above and see if these charts make sense, I think you'll find they do.
ES/S&P Futures on an extremely strong 2 hour chart, one of the highest probability indications of market resolution. Above there's a very clear and very strong leading negative divergence in 3C right at the October rally and through its entirety. This is smart money selling in to price strength,m initially selling/shorting as shorts BUY to cover and after that as retail longs take the bait and chase prices higher. This 3C distribution signal is even stronger than the one preceding the August decline.
We see the exact same thing on the 2 hour NASDAQ 100 Futures with distribution before the August decline and at the October rally.
And a closer look at the entire October rally on a 60 min chart of Russell 2000 futures with fairly strong accumulation in to the end of September and early October, enough to lift prices off a low that either sat at the lowest lows since the August lows or in the case of the Russell 2000, at a new lower low than the August decline lows. There's initial confirmation to make sure the move sticks and they don't sell too much too early and knock the rally down and pure 3C distribution through the entirety of the rest of the move which continues right through this week.
This post of the 60 min 3C chart shows the distribution since the June highs in the and the largest negative divergence by far is through the October rally, the very same thing we see above on all of the Index futures charts, that's multiple timeframe/multiple asset confirmation.
That's what all of this is about as we laid it out late September BEFORE this strong counter trend rally even started as we already had signs of the rally to come. You can see for yourself it was described in very accurate detail on September 29th, that's at the very low of the decline, below the August lows and 3-days before the rally started!
In any case, now you know why I don't listen to Financial Media who try to describe a crooked and complex market in 30-second soundbites as to not scare away their viewers who don't want to consider how crooked the market is and want to believe that it behaves predictably. The truth is it does, but only if you watch the how the money flows.
As for the rest of today, you saw the intraday divergences which are necessary for the reversal process which is distribution, to complete. That was apparent when looking at Futures today. The long-term charts above tell us what the highest probability resolution is and that's down, the shorter term tactical charts for timing require that we keep our thumb on the pulse of the market and watch for very specific signals that are already pretty well in place in some of the index futures like NASDAQ 100 futures, it won't be long before the rest join as most have already started to.
The Global economy is in worse shape than we knew yesterday as China's container freight has hot a new record low.
What was likely a direct result of testimony before Congress is the F_E_D Funds futures discounting a 60% chance of a rate hike in December, that's a jump of 10 percentage point since yesterday. Treasuries are reacting with the short end underperforming, rising 5 basis points on the day in 2 year treasuries, however as mentioned earlier today, we might want to take a look at as the Index futures for 30 year treasuries look significantly better, they also closed the day flat, not selling off at all while the short end of the curve was up 5 basis points as it was sold off. Again, a direct effect of comments today.
Our :RUT Ratio was a bit stronger than the today which reflects the intraday positive divergence I posted earlier in Market Chart Updates
As usual I have inverted the prices in green to show the normal correlation between the and . As we have seen the last several days, is outperforming the normal correlation and this was taken to a new level today. Looking at the chart alone with the recent signal of our custom indicator,
It's hard not to believe the market can last even another day without a severe turn to the downside. As I said earlier, while I expect some market bounce as I have most of today from the intraday positive divergence building, I wouldn't be surprised if they were to turn in the middle of the day. That's not a forecast, just a thought as the looks read to explode higher.
short-term futures ( ) were also out-performing today as they have been recently, but today was to an all new level. I don't think this is without meaning and it's certainly not bullish.
Both our long position and Calls are in the green on the , however this is not the move I'm looking for, obviously I'm looking for a much move on a downside break in the market.
High Yield Credit diverged further away from the /Market today as the correlation and support of Credit early in the October CT rally is pretty much obliterated. This is a big picture Leading Indication that we have used for some time. When there's a divergence this large, we have typically seen some pretty nasty moves lower.
Our Pro Sentiment Indications have also continued to diverge away from the in a way we haven't seen in so,e time, another leading indication on a primary trend scale pointing to a new lower low coming in the market.
Commodities underperformed today, part of that was on oil weakness which makes me thankful we closed the USO Call yesterday, even though we have a positive divergence today. I'd very much like to use any upside price strength in to open a put position. I don't see the utility in waiting much longer as has hit our target zone. I would like to see higher prices from today's close to enter the puts at a discount and Oil may help in that early tomorrow. The strong $USD on comments likely didn't help either. However longer term or on a primary trend basis, I expect the $USD to break lower. Here's another one of the long-term Futures charts for $ .
This is the 3C chart for $ on a 60 min timeframe, the highest probability resolution is lower. It may sound counter-intuitive, however I've seen these divergences in the $USD before with a seemingly impossible scenario for the dollar to move in their direction and they have every time. Perhaps on Carry trade closures?
And the longer term commodity chart vs the . Remember commodities are a risk asset so they should follow the market in a true risk on scenario. Commodities actually led the to the upside at the start of the October rally (at the white arrow), they even played along for a bit as the Energy sector shorts were hammered, however just like before the August decline, they have diverged significantly to the downside.
As for futures going in to the overnight and generally...
ES/ Futures on the 1 min chart look to have based very short-term in line with today's intraday divergences. Other index futures don't look ...well I want to say as strong, but this is not strong-looking. Lets just say other index futures look worse.
For example / futures on the same timeframe are more negative. There's a tight triangle forming and I suspect this causes a directional breakout, whether a Crazy Ivan or not remains to be seen. The bottom line is I still expect the positive divergences from today to play out in the cash market. The 3 min ES chart looks a bit stronger for very near-term trade.
I have been waiting on a few trades, mostly options for the best pricing and timing. I suspect tomorrow we get it and are able to open those trades at a discount, I fully expect to see distribution in to any positive price action from today's close.
As for USD/, it may be able to hang on through tomorrow, however I'm not sure it matters.
This is ES/ futures in purple overlaid on Crude futures (candlesticks), you can see that crude is clearly in control of the correlation which is why we entered the crude options position in the first place, although today I'm certainly glad we closed the position yesterday. There is a positive divergence in USO as posted in the last post.
As for USD/, there are some interesting things going on.
While the $USD is not immediately divergent, it is very parabolic and my bigger picture expectations are for a move lower in $USD, but it may not matter what $USD does as the Yen accumulation I've told you about the last 2 days looks to be coming to a head, I suspect because of carry traders realizing the end is near and covering/closing the USD/ carry trade.
This has migrated over to the 3 min chart as well so it's a strengthening divergence. Remember a higher Yen=lower USD/ unless the $USD moves significantly higher. In any case a higher Yen hasn't historically been good for the market, this may be partly the reason the Nikkei 225 futures have been giving building negative 3C divergences, it the US markets too.
Remember my baseline scenario for Crude is lower so even if it pops near term (overnight or tomorrow), it will likely be an excellent short entry along with the Energy sector (). With both USD/ and Crude looking to make a move lower, there's not much in the way of support for the market but I don't need to make a weak market theory argument based on crude or USD/, I think they are symptomatic of the market's underlying condition as we are obviously very near a downside break.
To that extent, it's also interesting to see the accumulation in 30 year Treasury futures. The short end is underperforming and doesn't look nearly as good. You may recall that after looking at Futures today, I said we might need to take a look at (20+ year Treasuries) long.
Here's 30 year Treasury futures...
3 min 30 year Treasury Futures building a strong positive divergence. Remember higher Treasury prices=lower yields. I wouldn't be surprised if the Yields correlation starts fading with increased F_E_D rate hike expectations, but I don't think a move higher in 30 year Treasuries will be good for the market and that's what they look like they are preparing to do.
Finally the NASDAQ Futures are starting to scream on the 5 min timing chart.
This is essentially the "Alligator Jaw" divergence I look for as for timing on Index futures. I'd like to see this on all Index futures and by tomorrow, if we get some upside to sell in to, we may have it. However I don't think this divergence can be ignored much longer.
Our AAPL short entered this week is at a gain, I'd like to fill out the rest of the position at better prices or open a put position as initially envisioned in the AAPL trade idea. I suspect we get a bounce in AAPL tomorrow as with the , I'll be looking to fill out the rest of the short/puts in AAPL in to any bounce.
As I said earlier, a bounce is sounds counter-intuitive to the market falling apart, but it's actually what we need to finish the charts and get Index futures all looking like the futures above and I think we get it tomorrow. Smart money doesn't sell in to weakness, they can't at the sizes they trade in-just look at the October rally on the 2 hour Index future charts above, they have clearly been selling in to the move which is what we said would happen on September 29th well before anyone even expected a move. This is what today was all about. They'll sell in to strength and I don't see this market holding much more distribution.
That will do it for tonight. If anything changes dramatically in futures before I turn in, I'll get a post out. Have a great night.
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