Monday, September 22, 2014
I try to post analysis from our member's site,
(for more information about our member's program, click the link above)
When there's something very big going on, now would be one of those times, but please keep in mind this is just 1 post of approximately 10-15 a day as we follow the market in real time every day so try to keep what is posted in context.
Wolf on Wall Street's Daily Wrap for Monday Sept. 22nd, 2014
Lets back-up. Friday's Daily Wrap which was posted after our The Week Ahead forecast for this week, ended with this paragraph summing things up nicely and scary accurate...
"Finally, as I said in the week ahead forecast, I think early Monday we'll see some weakness, perhaps in to a bounce later in the day and maybe in to Tuesday, I expect HYG to decline from there as it has already started falling apart. If the 3C charts don't put together an intraday positive after Monday morning, the market will be in big trouble fast, however based on breadth like the S&P and Morningstar sectors, I'd expect at least 1 day of correction to allow them to try to work off some of that oversold tension, but oversold can quickly turn in to bear material, that's how this market will end.
I also mentioned Prechter of Elliot Wave notoriety saying they are short the 3 majors averages, this was Friday.
In addition, UBS's Art Cashin has noted how Sept 22nd, especially after new all time highs, tends to lead to market crashes.
BofAML also came out ad noted the bearish seasonality of the week after triple/Quad Witching in September as being one of the worst weeks of the year (Quad Witching was Friday), with the SPX down 62% of the time over the last 32 years and down 10 of the last 12 years.
EVERYONE apparently knows about the Russell 2000's DEATH CROSS today,
The death cross is considered a bearish (although we've known that about the R2K for quite sometime, especially as this is the average that should lead risk on rallies) cross-over of the 50-day moving average below the 200-day moving average, we've been talking about it for about the last week, but now it's out there for everyone to see.
A long term member also pointed out that in the vicinity of out Igloo w/ Chimney top which was predicted over 3 weeks ago, are some interesting moving averages...
60 min SPY with a 200 bar moving average right at the head fake move completion (Igloo's chimney from last week)...
60 min QQQ with a 200-bar moving average...
And the DIA on a 60 min chart with a 50-bar moving average sitting right there, all technical no-no's that can shift sentiment much more than it already is.
Keep in mind my last paragraph from Friday's Daily Wrap and specifically...
If the 3C charts don't put together an intraday positive after Monday morning, the market will be in big trouble fast...
oversold can quickly turn in to bear material, that's how this market will end."
Keep these two sentences in mind throughout this post.
I digress... Compared to last week's F_O_M_C, Scotland's independence vote, the BABA IPO and AAPL's I-Phone 6 release, this week is pretty boring, although we do have some important macro economic data culminating with the 3rd revision of Q2 GDP on Friday, however, there's a distinctly different flavor and last week seems almost perfect in hindsight for the head fake chimney move we forecasted the previous Friday.
Trade was ugly from the overnight session as the "It's different this time" crowd quickly found out from the BOJ, the PBoC and the ECB that they'll not likely be substitutes for the F_E_D's lack of liquidity as QE ends and rate hikes start. The conspiracy theory that the F_E_D was passing the mantle off to these other central banks was blown to pieces over the weekend although Draghi did seem to try to walk back some of the weekend hawkishness from his comrades today during a speech, but what is clear and reflected in overnight trade as well as early trade, the punchbowl is finally being taken away, NO IT'S NOT DIFFERENT THIS TIME, IT NEVER IS!
The averages looked like this today, kind of an inverse European close effect...
All closed lower, but that right turn we wanted to see earlier this afternoon/late morning based on our forecast....If the 3C charts don't put together an intraday positive after Monday morning, the market will be in big trouble fast... actually was there right on time, which is really just about allowing certain watchlist assets complete their process and offer us the best entry and lowest risk mostly on the short side. The green arrow is the European close.
I always warn about the F_E_D / F_O_M_C knee jerk effect, but here's the evidence of those warnings...
All major averages have lost all gains since the F_O_M_C knee-jerk reaction last week except the Dow, still hanging on to a minor gain. The Russell 2000 is down about 2% since the F_O_M_C (yellow). The R2K saw its biggest 2-day drop in 5 months in addition to its Death Cross. The R2K is now down -2.5% for the year to date and -6.8% from July highs.
Of the 9 S&P sectors since the F_O_M_C, the defensive Healthcare is the only one still holding gains.
The VIX, which I have posted numerous times as a picture perfect reversal process...
An inverted Igloo with Chimney reversal process and head fake move, saw its biggest move up in 2 months.
As we are watching Gold and GDX and to a lesser extent, Silver (because of the manipulation), Dr. Copper was down 1.52% on China growth issues...
Copper vs the SPX (green)...
You saw today's important near term and longer term Leading indicators, an important post...Leading Indicators / TLT Update
Keep those in mind as you look over the next series of charts as well as what the two important sentences were from Friday's last paragraph of the Daily Wrap
If the 3C charts don't put together an intraday positive after Monday morning, the market will be in big trouble fast...
oversold can quickly turn in to bear material, that's how this market will end."
On the divergences front we expected to see based on a very oversold breadth condition in the market that can quickly turn from simply oversold minor bounces to what I warned of in the same paragraph right above...
SPY 3 min positive divergence today but...
However, vs the strong 60 min chart, well you know what's coming, it's just a matter of how long we can get it to hold to finish positioning.
Along the lines of positioning, our HLF short was down -10.31% today, putting it at a -37.5% gain...
The 3 places in a H&S (HLF) I'll short and the one I won't, the red arrow is our last short entry.
Our SCTY position (short) is at a +15% gain, FXP just entered is at a +14% gain, NFLX is at a +7% gain, FSLR short is green as well, but there are still a lot of great looking set-ups, almost there.
The QQQ negative divegrence last week as expected and the positive today, but on a 3 min chart so we are seeing what we expected for the early portion of this week thus far... however...
QQQ 30 min leading negative right at our head fake move...
The IWM put in a 5 min positive divegrence today as expected...
Our Dominant Price Volume Relationship saw a STRONG Dominant relation in every average, 25 of the Dow 30, 89 of the NASDAQ 100 , 1506 of the Russell 2000 and 415 of the S&P-500, the relationship was Close Down/Volume Down or what I call, "Carry on". The volume was bound to be down vs. Friday's Quad witching, but the sheer number of component stocks down on the day (and that's just 1 of the 2 down relationships) is overwhelmingly bearish and 1-day oversold.
Of the 9 S&P Sectors, EVERY ONE closed red. Of the 239 Morningstar groups, 227 of 239 were red on the day. This is one of the worst 1-day oversold conditions we have ever seen.
However, t doesn't stop there, take a look at a few of the breadth charts, I added many more last Friday and Thursday...
This is the August cycle with the head fake, the green is the indicator, the red is the SPX unless otherwise noted. The 4 week New High/New Low Ratio at new lows despite price being up, it's at the same level where our original oversold bounce started, this is bad.
The same indicator on a 13 week new high/new low ratio...
The 26 week new high/new low ratio
Can you see the destruction in breadth right at our head fake move?
The New High/ New Low Ratio...
The Percentage of NYSE stocks 1 Standard Deviation Above their 200-day moving average...Now hitting new lows for the August cycle, compare to where prices are...
The Percentage of NYSE stocks Above their 200-day moving average...again, another new low for the August cycle, comparing where price is, is essential...
The Percentage of NYSE stocks 2 Standard Deviations Above their 40-day moving average...Another new low for the cycle and note the destruction in breadth since July 1, the end of Q2 Window dressing.
This is The Percentage of NYSE stocks 2 Standard Deviations BELOW their 200-day moving average... HITTING NEW HIGHS FOR THE YEAR AND BEYOND!!!
THE YELLOW ARROW IS WHERE THIS INDICATOR OF DEEPLY OVERSOLD STOCKS WAS JUST 2 DAYS AGO.
Basically, the conversation I suggested you consider between the best entries and the big picture, as I said Friday, is pretty much no longer a dialogue, although we'll always try to get the best entries, it's a necessity now in my view, I'm prepared and very excited for an opportunity I think no one alive has seen.
However, one bridge at a time, the next thing is whether those divergences hold and what assets are giving the best entries and the lowest risk, you saw the Financials post today, FAZ Trade Follow Up/ Set-Up I think this is a great set-up, there are many more and if that bounce can hold and it should on a market this oversold, we hit the jackpot. If it doesn't hold as I mentioned in red from Friday, we still hit the jackpot. There's almost no downside, based on nothing but downside.
I suspect we get out early week bounce, HYG's chart seems to support that.
Thursday, September 18, 2014
Alibaba's unusual IPO and how HYG may fit in to selling $8 billion in insider shares with no lock-up period
It has always been an interesting concept to be able to see underlying trade, but not know why or exactly when underlying trade will kick in, just that the probabilities are highly in favor of underlying trade signals (3C for example).
HYG has had an enormous amount of influence on the market. If you follow our posts and Friday afternoon, "Week Ahead " updates, 3C divergences and Leading Indicators have given us a pretty darn accurate call of the week ahead from late July (31st's) deeply oversold BREADTH (I really don't care about oversold indicators as they aren't very reliable) and expected base/bounce which was the August cycle to the forming of the base for the August cycle in which not only 3C positive divergences told us an upside move was coming off the base being constructed, but in other assets, especially HYG which bottomed on 8/1 and led the market higher as opposed to the SPX bottoming or ending its base on 8/8 with a start higher on 8/11. The Week Ahead updates calling for more upside, then a choppy topping range and eventually HYG moving to stage 4 were all telegraphed via either 3C and/or HYG. I've published these charts at least 2 dozen times over the course of the August cycle, but as a quick reminder of the degree of correlation, this is the SPY vs HYG (green and red respectively).
This 30 min chart of HYG (red) and SPY (green) shows the leading correlation I'm talking about above, although it does not show the early HYG divergences calling out HYG's likely shifts that create leading price divergences between HYG and the market/SPY, although they are there.
HYG has long been one of our favorite leading indicators because it's one of the most liquid ways for smart money to trade credit since the banks that use to loan credit to institutional firms rid their balance sheets of most credit after the financial crisis, making HYG one of the most diversified and liquid ways for institutional money to trade HY credit which is viewed as "Risk on" sentiment via smart money and as such, HFT's and algos are programmed to follow the signals and buy stocks on HYG gains, sell them on HYG declines, this is the entire basis of Capitals Context's ES Context model as well as their SPY Arbitrage model except in the first case many other assets are used including rates,/bonds, precious metals, commodities, other forms of credit derivatives, etc. while the SPY arbitrage is only 3 assets, the risk on HYG and risk off VXX and TLT.
This has made HYG one of the easiest levers for short term market manipulation, rather than the old days of buying or selling the most heavily weighted stocks in an average to get the average to move, now 1 asset alone can be manipulated and the HFT/Algo correlation programs follow it.
Above, while a little confusing, I show different stages of HYG's August cycle at the white arrows such as the bottom/positive divegrence of 8/1 while the SPX just started it's base/stage 1 accumulation on 8//1 which lasted through 8/8 with stage 2 mark up on 8/11. As you can see, by 8..2, HYG was already in the mark-up/stage 2 phase, once again its price divergences vs the market/SPX leading the broad market averages.
HYG transitioned to stage 3 top which is characterized by a lateral (sideways) trend before the SPX (I have marked the SPX's important transitions with yellow arrows). As you can see, HYG has led the SPX on average by about a trading week, even it's move to stage 4 decline was followed shortly after by the SPX's trend of lower lows and lower highs. The bottom line is HYG has led the market by approximately a trading week.
Here on a 10 min chart of HYG/SPY, while the SPX was in a downtrend, arguably entering stage 4 with a series of lower highs and lower lows, so distinct that it was our minimum upside target in Friday's "Week Ahead" forecast; HYG had been in a nearly week long flat range and positive divergence which was also part of the reason the forecast for this week was looking for strength in to the F_O_M_C, Tuesday our forecast took on legs after a day and a partial morning of accumulation in the major averages out to about 5 min charts.
Obviously our minimum target was hit wand volume surged on the breakout, which is why I chose the downtrend as a technical feature that would create the desired effect of any head fake move to the upside, to get bulls to buy and for that as most everything they do is price/confirmation evidence based, a break above the downtrend was the closest area to get them to make moves and create demand that can be sold/shorted in to.
On a 5 min chart, HYG and SPY move almost perfectly in tandem, better than any other correlation like the former leader, USD/JPY and more recent leader, AUD/JPY. HYG, by far has the tightest correlation as seen above.
On a daily basis, the SPY is struggling with the knee jerk failed highs from yesterday and HYG is of no help at all, although not declining as of yet either.
Just put these two on your chart and watch the correlation intraday.
What grabbed our attention last week and guided last Friday's "Week Ahead" forecast was the flat range in HYG with leading positive divergences which made it clear that this week we'd see market upside which I speculated was either to be used in conjunction with a F_E_D / F_O_M_C knee jerk upside rally on the grounds that the market had already discounted the bearish removal of the "Considerable time" language in the F_E_D statement and after the policy announcement, Yellen would give one of her typical dovish Q&A's walking back any bearish fall out from the language removal which had already been discounted by the market as a sure thing. The idea being, between HYG support and this F_O_M_C knee jerk-boost, our head fake move on a large month long stage 3 reversal process which we have been expecting for weeks , would finally pop and give us the entries in short assets as well as these moves being an excellent timing indicator.
Interestingly, neither the language was removed from the policy statement yesterday although Yellen made it abundantly clear in the press conference in which she was not her normal dovish self, that it is meaningless from the F_E_D's perspective as everything is data dependent. So why not just remove the language altogether? I suspect it was a red herring to distract from the fact that the median forecast for the F_E_D Funds rate continues to rise and did so again yesterday (the infamous "DOTS" ) for both 2015 and 2016 with yesterday being the first time the F_E_D put out 2017 guidance.
As I said above, we can see the underlying trade and divergences, but we can't know exactly why they are there. After yesterday's VERY weak knee jerk pop higher was completely erased before the close, one of the fastest F_O_M_C knee jerk fades I can recall, I started wondering about other possibilities for the HYG divergence.
Tomorrow's main event struck me as a VERY good reason for broad market support right now, THE ALIBABA IPO which may just be one of the largest, most over-hyped IPOs ever.
While the average IPO has raised about $5 billion and traded up +10% over the first week, you may recall from the FB IPO that they don't always tend to fare so well much longer. The last 5 largest US Initial Public Offerings fell on average -17% in their first year of trade according to Bloomberg.
However Alibabe may be one of the largest IPOs in history. At the median of the expected pricing of $66 to $68, Alibaba could potentially raise $25 billion, one of the largest IPOs in history with an approximate valuation of $165 billion.
However, this is where things get interesting and may have an HYG/Market support connection.
While typically an IPO is brought to market by 1 bank, Alibaba has five structured in the IPO deal. While the typical 6 month lock-up period which forbids insiders and deal makers from selling before the first 6 months, the top shareholders stand to make a fortune from the shares they agreed to sell in the IPO despite whether they are in the 6 month lock-up period. The 4 biggest potential beneficiaries include Soft Bank, Yahoo, Alibaba founder and executive chairman Jack Ma, and executive vice chairman Joe Tsai who aree all under a 1 year lock-up , but will own 58% of the company's shares after the deal.
Where this really gets strange is the 6 month lock-up period as public filings have shown $8 billion in shares from insiders/early investors have NO LOCK-UP PERIOD WHTSOEVER, and none of them are identified, meaning come tomorrow, approximately $8 billion in Alibaba shares can be sold immediately for a quick cash out, which is highly unusual for an IPO with the standard 6 month lock-up before any of these people would be able to sell. This obviously includes insider as well as the IPO staging companies, 5 banks, which is unusual as well. THIS IS ABOUT 1/3RD OF ALIBABA'S SHARES THAT AREN'T UNDR LOCK-UP, HIGHLY UNUSUAL.
Why put in such a clause if these insiders/early investors and IPO staging banks didn't have an intention of selling on the IPO or shortly after? The best description of these people from public filings are called, "Some holders of preferred shares", that's as far a identification of the group not under the IPO lock up goes.
In any case, if you want to exit at the IPO, one thing that would be helpful in market support to get out at the best prices possible.
We know that the market works days, weeks, months and even years in advance as shown with home builder accumulation in 1999 and 2000, well before the start of the housing mark-up and eventual bubble. Point being, the HYG positive divegrence that I assumed had more to do with a head fake move being completed , may have more to do with one of the largest, most over-hypped IPOs in the market's history, which could also kill two birds with one stone as far as our initial head fake move/support goes as well.
We won't know until we know, but we do know that HYG which is in a lot of trouble on a big picture basis, was used over the last week, was accumulated for market support and just before this historic IPO.
As for HYG divegrences, we did see the first signs of weakness after yesterday's knee jeerk reaction to the F_O_M_C faded and gave back all post F_O_M_C gains.
Right now HYG looks like this...
Intraday this is one of the first problems we have seen with HYG since the positive divegrence, right at yesterday's knee jerk highs.
There's at the end of the nearly week long HYG divegrence which just so happens to put in a head fake /stop run right at the white box, positive divegrence, before reversing to the upside, the head fake/timing concept in action. We also see some migration of the intraday negative to today's chart leading negative, but this is still small beans compared to the size of the positive divegrence over that week long period.
This is the primary divegrence we have been following and have based near term market upside forecasts like Friday's "Week Ahead" post on. This divergence is leading positive as it has been and still in line. This divegrence will have to deteriorate before I suspect a move to the downside is on its way, however interestingly the expected F_E_D motivation hasn't done much which makes me wonder if one of the largest possible single pay-day IPOs tomorrow, may be the real reason, it's a good reason.
Intraday the 5 min chart is showing some deterioration.
And the 4 hour chart shows the highest probability resolution for HYg which is clearly down. Interestingly we saw a lot of deterioration in nearly every indicator as of July 1st, the first day after Q2 Window Dressing ends, we see the same here with a leading negative divegrence.
The green arrow to the left is upside confirmation of the price move.
And worst yet, the daily HYG chart which hasn't shown any exceptional signals until 2014, which should be very clear as the deepest leading negative divegrence on the strongest daily timeframe chart.
Thus I have no doubt of the resolution to HYG's current stance and the market with it, as far as whether BABA is the reason, tomorrow will offer a lot more insight.
We've also had excellent luck with IPOs, some of you may recall the FB IPO which was a nightmare and it quickly became the most hated stock, we were the first to enter a long position on the FB decline which paid off big time while it was still the most hated stock so I'm looking forward to BABA, but more so to unravelling the short term signals and whether Alibaba is the real reason market support was needed as $8 billion is distribution on an IPO would need some significant market support to make it profitable, but why else put in such a clause allowing nearly a third of the shares usually under a 6 month lock up to be excluded right from the get go tomorrow?
Perhaps large IPO performance as cited by Bloomberg above might be a good reason given the market's condition?
Tuesday, September 16, 2014
The last several months our "Week Ahead" post posted on Friday before the close has been right on track for action in the upcoming week, so far this week is no different as we have called nearly every move in the market from price to breadth and internals as well as a number of trades.
(Click the link above for more information)
I hope you enjoy the insights.
The Daily Wrap
September 16th, 2014
Today couldn't be forecasted much better from last Friday's (during the market) The Week Ahead
"While I can't pinpoint the exact moment, my guess is HYG is used to boost the market, maybe even our head fake move because the market itself just doesn't have the positive short term divergences to do it alone. However after that, I'll say HYG will be headed straight back down and I'm guessing this happens before the policy announcement on Wednesday. Judging by the scramble toward our set-up targets in several of our short set up plays today, despite a red market, it looks like they are in a hurry to get that move in place and I suspect HYG is going to help early in the week and then retreat before the market.
So rather than last week's "More of the same" sideways chop, I think the SPX's downtrend of lower highs and lower lows I have posted several times this week is a target for technical traders and HYG will likely sponsor the move"
This is exactly what has happened. Then our Important Market Update Post later Friday, with the simple..
"*If you miss everything else, don't miss the breadth indications near the bottom of the post."
This is because breadth had deteriorated so badly on a short term basis, a market bounce on a short term basis was the gist and thrust of all the breadth charts for near term activity this week, however, something much uglier stepping back and looking at the big picture.
HYG led the move as expected just as it has led every move since late July with uncanny accuracy...
HYG's lateral trend and positive divegrence which sent it higher, with some news from China so who knows if there was a leak or not, but the market was clearly telling us this was coming.
This is the intraday distribution already starting in HYG, although it still has a ways to go to take out the larger divegrence.
This is the SPY in green and HYG in red today, a near perfect correlation as expected for almost a week.
The AUD/JPY which gave out yesterday also saw leadership as Chinese QE was unleashed to 45 major Chinese banks (more on that), but $AUD is the currency that will react to China especially the dismal data coming out, make sure you see this morning's A.M. Update for more details on the situation in Asia and the horrible performance.
AUD/JPY (candlesticks) leads ES, but look near the end of the day as ES stays in line with HYG rather than AUD/JPY (AUD/JPY dips).
A great many of the stocks we have set-up plans already put forth are doing what we need or want them to do, for instance...
After the recent decline on BIDU, I wanted to see a bounce for a better entry or filling out partial positions, we got that, at least a start today on a positive divegrence which is what the market ha been doing since yesterday just as BIDU has. However...
We want to see higher prices in to weak underlying trade just as the BIDU chart (2 min) is showing (distribution in to higher prices).
Others on our list like SCTY...
Look ready for a move, however this is a small positive next to the negative and the longer term negatives making this an excellent entry opportunity, exactly what we were looking for not only this week, but conceptually from the August cycle's head fake move which we are still waiting on.As I said earlier , a F_O_M_C knee jerk reaction may get us there, but at the same time, beware of the knee jerk reaction as they almost always turn out to be wrong or faded.
The SPY even broke to our minimum target that will get bulls off their butts and chasing stocks, to distribute or sell large positions short, you need retail demand and the break above the channel mentioned last Friday in the "Week Ahead" post, was exactly what we saw today.
From Friday's post...
" I think the SPX's downtrend of lower highs and lower lows I have posted several times this week is a target for technical traders and HYG will likely sponsor the move"
And today's SPY move above the technical channel and on volume, EXACTLY what was needed to get technical, retail traders to chase and create demand.
Surprisingly, there was barely a short squeeze, or VERY week. Our Most Shorted Index...
The SPX in green pops today, but the MSI in yellow is really of no help at all. In fact, on a relative basis it's lower!
The HYG ramp and AUD support along with some helpful Hilsenrath/China headlines were still not enough to get the NDX or Russell 2000 green on the week. From a "Technical" perspective, there's been a lot more chatter about a R2K death cross in which the 50-day moving average moves below the 200-day. You may recall last night's post on the internals of the NASDAQ Composite as well as the Russell 2000, Daily Wrap.
The SPX hit 2000 but couldn't hold it closing at 1999, but we still have a possible (maybe even probable) knee jerk from the F_O_M_C tomorrow if Jon Hilsenrath actually has an inside line that the "Considerable Time" language or guidance really won't be changed which is partly what the market has been so concerned about going in to tomorrow's F_O_M_C policy statement at 2 p.m. Then we have a Yellen presser and to add more volatility and unknown factors, the Scottish independence vote Thursday.
As shown earlier in the Leading Indicators... update, almost no leading indicators supported this move including my newest Russell/SPX ratio, failing to confirm, HYG even gave out a bit toward the EOD holding the market back from ramping the close. While our professional sentiment indicators were looking ugly most of the day, they looked better in to the close which is one of several reasons (mostly 3C of the watchlist, the averages and HYG) that I think we have some more upside to go on this move.
As mentioned several times the last 2 days and as recent as last night , yields did do what we expected or rather the market closed in on them as we have used them for a long time as a leading indicator.
Here we have near perfect reversion to the mean as the SPX is pulled to yields.
Also as shown earlier, High Yield Credit (other than HYG) was not buying the move today, the environment is near perfect for entries in to our watchlist stocks (entry levels or alert price levels for many posted today, Here they are...).
The Legacy Arbitrage we suspect in the $USD seems more real today as commodities (shown last night) surged on a weak dollar today led by oil and coper. It seems more and more like the correlations and dynamics are returning to pre-F_E_D accommodative policy.
We had been seeing signs of a $USDX decline last week, today was the worst $USD decline since May, however, interestingly in front of the F_E_D, we have an interesting $USD divergence...
Today's $USD weakness is obvious, but interestingly there's a positive divegrence in to today's weakness in front of the F_O_M_C.
As for China's "Stealth QE", credited with sending the market higher around 11:30, around the time the Hilsenrath / WSJ story about the F_E_D not messing with the guidance timeframe vocabulary. I thought something was strange about that as HYG's correlation was much tighter and a bit earlier, it turns out the China Stealth QE has been announced during thee Asian session much earlier in the day!
In any case, China put out $500 bn CNY to the 5 biggest Chinese banks ($100 bn CNY each) for what I believe is a 3 month period as China's banks have been having liquidity problems. The last time China pr the PBoC did something like this, it was July 28th and used a new facility called the "Pledged Supplementary Lending" facility, in which China Development Bank was the recipient of a Trillion CNY! Here's how that QE episode ended if you're curious...
The Pledge of $1 trillion CNY to China Development bank on July 28th and the next two days ugly with the 31st seeing the SPX down 2%, which is the day in which all of the August cycle was first revealed in this post on the night of July 31st...Daily Wrap , Personally I think it's quite revealing and educational to go back and see what we were seeing when the future was the right edge of the chart, especially in the context of breadth which is one of the biggest factors to extreme market weakness just lurking below.
As for market breadth, one of the most interesting indications in the market and probably one of the most overlooked...
Dominant Price/Volume Relationship (this is not the relationship for the Index, but the component stocks that make up the index).
As you might expect with weakness on the day in the R2K on a relative basis, there was NO Dominant P/V relationship. The NASDAQ 100 had a co-dominance of Close Up/ Volume Up and Close Up/Volume Down. I can't count this as it's not dominant. The SPX had 258 in Close Up/Volume Up and the Dow had 20 in Close Up/Volume Up, which were the only 2 Dominant P/V relationships. This is the most bullish of the 4 possible combinations, but often leads to a 1-day overbought scenario with the averages closing red the next day, however being a wild card F_E_D day and the fact it was not Dominant through all 4 major averages, I think I won't put too much stock in the reading, but in the days ahead, it will be important to remember.
Nine of Nine S&P sectors closed Green with Healthcare leading at +1.37% and Financials lagging at +0.43, however, this relationship is similar to the P/V (DOW/SPX) in that it often signals a 1-day overbought condition with the close the next day being red. Again, the F_E_D wildcard is a bigger issue.
Again on another (normally overbought basis), of the 239 Morningstar Industry/Sub-Industry groups I track, 190 of 239 were green. Any other day than the F_O_M_C tomorrow and I'd say we've reached a 1-day overbought condition. This however is revealing, especially if we get an F_O_M_C knee jerk reaction tomorrow at 2 p.m. to the upside and have the same kind of breadth indications and some stronger negative divergences in HYG, the averages and our watchlist stocks as this would signify that what we have expected has not only come true to the letter, but is moving toward the decline/stage 4 phase, especially if the Market makes the head fake move in stage 3 of the August cycle.
This is the "Igloo with a Chimney" top I have mentioned so often, in fact as recently as today in the Asset List post with the chart from that post looking like this...
We already have the rounding reversal process, the head fake move is seen about 80% of the time in any asset and any timeframe, although the larger the technical price pattern and more noticeable as well as the more watched the asset, the more likely the head fake move which would put this one at a very high probability as we have been looking for it ever since HYG entered stage 3 and the SPX only a few days behind.
The SPX is getting a lot closer to it and HYG still has gas in the tank as do most of our watchlist candidates, it really comes down to a possible hawkish F_E_D surprise which may be difficult as the market has already expected a hawkish tone, which Hilsenrath threw some cold water on today.
A little closer to that "Igloo with a Chimney", which happens to be one of the best downside reversal timing indications we can ask for as well as setting up our Trade-Set-up entries at some better price and risk levels.
Finally, Market Breadth in our Breadth Series indicators. Stocks 1 Channel (Standard Deviation) > 40 day moving average (momentum stocks) improved ever so slightly today by 4% points to 19 from 15% yesterday, still well below the 2014 average of 55%.
Stocks 2 Channels (Standard Deviations) > 40 day moving average (real momentum stocks) improved by less than a percentage point, actually dismal performance and are in a world of hurt, this is the decay of the pier pilings those strolling the pier of price don't see.
It's not just the pathetic move today which is as good as n move at all (as the MSI showed no short squeeze of any value today), it's the bigger picture in the yellow area showing how damaged this market is, it's no wonder nearly half of the NASDAQ Composite and Russell 2000 stocks are in a technical bear market.
Stocks above their 40-day moving average improved from 34.68 to 39.17, another anemic move in the standard of market breadth, this down from an earlier 2014 average of between 70 and 80%.
There were no breadth indicators that showed anything interesting in repair on the upside today and the NASDAQ Composite's A/D line was virtually flat despite a gain of +.75% today!
In summary the Chinese Stealth QE is a virtual non-story except to point out what we already know from economic data and stock performance, they are hurting bad, why do you think the liquidity injection today went to the 5 largest Chinese banks and we saw how it played out last time.
The Hilsenrath story regarding F_E_D potential changes to forward guidance vocabulary may have more legs near term, but the street talk is still expecting a more hawkish F_E_D and could be disappointed if they do modify forward guidance.
From our perspective, we have been patient during stage 3, only adding short positions (and a few longs) when they had strong objective evidence. From here, it's just about letting those watchlist stocks make the move we hope to see and following the negative divegrence right in to our entry, so long as the market's divergence and HYG's doesn't fall apart first on a F_E_D wildcard hawkish tine tomorrow.
Remember, anything F_E_D related usually produces a knee jerk reaction that is almost always wrong, but it may be helpful in our case in entering some of these Trade Set-ups which I gave rough estimates of upside entry targets today.
We have caught F_E_D leaks a few times in the past, not that often, but when we do, they are obvious so I'll be watching the last 3 hours before the policy statement for any signs of such leaks as the media has the statement on embargo in advance so a leak is not that hard and the F_E_D themselves were caught red-handed leaking minutes almost 2-days in advance to major institutional players and private equity firms, 154 in all, almost 2-days in advance and by email!
As I've said many times today, SO FAR SO GOOD. We're right on track.
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