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Friday, June 24, 2016

Futures Update BR-EXIT Edition

So the conventional wisdom couldn't have been more wrong. Those chasing risk and closing hedges couldn't be in a worse place right now. I would still remind you that a massive shakeout on both sides was expected and there's still dust to clear, not that I don't believe this market belongs lower or will go even lower moving forward, but we deal in evidence and realities.
Most of the severe downside is pretty well confirmed, but we do have some small possible divergences starting, this isn't to say that they last the night, it isn't to say that the market reverses all losses, it's just to say what's on the charts. There's still a lot of dust to clear, still a lot of players (central banks) to come on the field.
In fact, I believe the central bank intervention is already underway, I'll show you. First...
ess 1A small, but definite divergence in ES even though it's still down  almost -4.5% !
nq 1And the same in NQ, in fact in Dow and Russell futures as well, similar to the above.
VIX futures which are up over +48% also have a clear divergence.vxVIX futures...
 yen 1And here's where I see central bank intervention, the flight to safety Yen that was being accumulated all day today was a VERY clear negative divergence. Someone is selling Yen in a big way as USD/JPY broke just under $99 earlier.
I do see in line signals in 5, 10 and 30-year Treasury futures so there's a definite solid bid in flight to safety assets, but those will likely come under selling as well if they're to try to stabilize the market.
There also working the $USD end of things, selling there as well.
dx 1This is not as clear of a divergence, but there is a relative negative divergence I the USD (Part of stabilizing USD/JPY) as Nikkei 225 is down over -8%.
The Euro is still in line to the downside, the pound which hit lows not seen since 1985 in the single biggest drop ever, also has a minor positive divergence, likely central banks working it.
Crude is also down (futures) nearly -6%, there's a positive divergence there too.
cl 11 min 3C chart of Crude futures (CL) positive divergence.
As I said before, Treasury futures are in line to the upside, remember the positive divergence developing in them before the vote was even over, well before counted.
I'm not sure what tomorrow morning will look like, Black Friday? Perhaps, the market is not in good position even before the Brexit, but I hope I was very clear the last few days that this kind of volatility, both what we saw this afternoon and tonight, is very much expected. That's not to say the market won't go lower, our charts say this is just the start, but how it gets there is what we'll be focusing on.
I'll check in again in the morning once the dust starts to settle and the other players make their presence known.
Oh, by the way, SKEW, the Black Swan Index closed today at a red flag extreme of $145.69.
Enjoy the rest of your night.

Monday, June 20, 2016

Brexit Daily Wrap-Wolf on Wall Street

I actually came in to this week looking forward to the market, but to be honest, after today, this feels much more like a casino than a market and I don't care for that at all.
Before we get to the latest which I'm guessing you have already seen, I saw an interview on Bloomberg TV after the close with the head of Ladbrokes, one of the two large bookmakers that essentially swung the British Pound higher over the weekend not on polls which were very close, but on bookmaker odds which were showing a lead in the "Remain" camp of up to 75% probability. As an aside, the Bookmaker said in the interview with Bloomberg TV that 95% of bets today were on "Remain" (Talk about chasing and the herd mentality of mass psychology).  After seeing the interview, I realized how easy it is to move the bookmaking odds. The the lad from Ladbrokes was asked what kind of money was being bet and whether a $35,000 (pound) bet was still the largest to date to which he answered "Yes" and added they took in a $25,000 pound bet "this morning" which would have been the overnight session for the US market and that the $25,000 bet moved the odds in favor of "Remain".
In other words, GBP (GBP/USD) and Index futures have largely moved not because of polls, but because of the bookies putting up to a 75% chance that the "Remain" campaign wins and this on bets no larger than $35,000 pounds. Put another way, a trillion dollars in assets look to have been moved since Friday based on some bets of $25,000 which was said by Ladbrokes, to have "Moved the odds"!!!!
What a way to manipulate the market! Never before has it been so cheap, a $25,000 bet can move over a trillion dollars in assets!
We ended last week with a few posts including  Friday's Daily Wrap with some of the following observations from throughout the day and the week.
There was the 11:45 a.m. post, "Market is Trying to pull it back together" which touched on some of the early, market supportive positive divergences. This was one of the earliest signs of accumulation in the market averages, although light/weak and in the category of being at risk of "being run over".
In the afternoon...
"Leading Indicators-Something's Up"
In the post Pro Sentiment Indicators, High yield Corp. Credit, Yields, Cable of course, Crude and some VIX smothering were all noted as near-term supportive of price, while at the same time there was movement in VIX futures, expected movement in Treasury futures and currencies like USD which gave the impression of a continued move up off Thursday morning's News lows as well as a sign of a risk off element building. The post ended with:
"So while we have intraday support in Leading Indicators and a few other levers, at the same time protection or risk off assets are seeing attention as well. I suppose it would make sense going in to an uncertain weekend, but it directly contradicts everything above including the spike in GBP.
I’m wondering if we might not be setting up for a Monday morning surprise?"
From the Daily Wrap Friday:
"The fact is, the market didn’t look quite ready to turn south again, but the divergence put in from yesterday’s lows is small and one I don’t trust, the same issue as last week, a divergence not strong enough to stand on its own feet, not strong enough not to be run over.
However to visually show you the change in sentiment since Jo Cox’s killing, this is the NASDAQ 100 futures TICK chart, one of the weakest timeframes we use, but still showing accumulation (not nearly anywhere near what I’d trust)…
nq 1
NQ TICK with accumulation to the left at yesterday morning’s low on the news of the Cox’s death and again to the right at today’s lows."
This is the way we ended the week with a  detailed NASDAQ Futures 3C Tick chart showing small accumulation at Thursday's lows as news of Jo Cox's murder broke, sending GBP/USD higher as well as the SPX, off the lows of the week (in fact lows not seen since May for the SPX).
Continuing...
"So we have some very short term/weak positive divergences suggesting the market tries (sp) to move higher Monday and we already have traders moving back toward protection or accumulating larger positions in Bonds, VIX futures, etc,"
The Dominant P/V Relationship...
"...the Dominant Price Volume Relationship was at least half of all component stocks coming in at Close Down/Volume Up, the strongest 1-day oversold condition that usually sees a bounce the next trading day"
"The Dominant Price Volume Relationship today was heavily skewed today toward a bounce perhaps early Monday, Internals less so.  Again news is the main driver right now so the weekend could be crucial. Does the market know something we don’t about weekend news?"
In conclusion...
"Either way, I don’t think this ends well, but next week could see some incredible volatility, especially if the Brexit vote swings to “Stay” in the EU. If that happens, expect to see a sharp relief rally, however it will not hold."
I believe that's a fairly accurate summary of where the market went since Friday, largely on bookmaker odds putting the "Remain" campaign at a 75% probability of winning even though the polls are no where near those kind of odds. The asset catalyst Sunday was a GBP (GBP/USD) ramp as futures opened for the new week. It's insane to think that bookmaker odds on bets no larger than $36k (pounds) moved a trillion dollars in assets, but there was something there as we saw at Thursday's lows and Friday to a lesser degree.
I think the gist was best summed up from Friday's "In to the close" post,
"The market has 1 chance to work off the near term oversold conditions of the last week or so before it starts fretting about Brexit Thursday, assuming nothing has been changed"
Starting the week...
The first move upon futures opening for the new week was a push higher in Cable largely based on the Jo Cox murder which caused fading momentum in the "Leave campaign" as well as Bookmaker odds hitting 75% in favor of "Stay".
cableGBP/USD 5 min chart showing the Thursday lows and reversal on the a.m. "assignation" news of British MP, Jo Cox . The white arrow shows Cable's pop higher as the new week in futures opened Sunday.
This sent Global markets higher with US Index futures tagging along. One of the most interesting today has been Nikkei 225 futures (NKD)...
nkdThe green box shows last Thursday morning's lows and reversal as well as accumulation on this 3 min 3C chart Friday with a gap up as the new week's trade began, yet as we saw a good portion of the day, NKD saw a leading negative 3C divergence through today's gains and the US cash market.
GBP/USD made its largest move today since August of 2008.
gbpusd most 2008GBP/USD (1-day) see the Price Percentage Change indicator in blue with the biggest 1-day move higher since August of 2008.
gbpusd v esES in purple has been moving WITH GBP/USD and to a lesser extent, the Euro (EUR/USD) as we saw last week, this is both up and down as it's obvious the market is fixated on the Brexit referendum this Thursday. However as you can see above, USD/GBP made a larger move off last Thursday morning's lows and especially on the new week, ES in purple is lagging a bit today.
gbpusd v es eu close
Intraday this is GBP/USD since the new week started Sunday (at the gap up to the left) and ES/SPX Futures in purple which dislocated from their correlation overnight with GBP/USD, this was around the European close as USD/JPY came down on a rather flat $USD, but a higher Yen (flight to safety trade) just after the European close.
21
USD/JPY in candlesticks (1 min) vs. S&P E-mini (ES) futures in purple with the US cash open at the green arrow (9:30 EDT) and the European close at the blue arrow.
While we're on the subject of USD/JPY which many of you likely remember as one of the most popular correlations for Index futures over the last several years, lets take a look at the bigger picture...
ES divergent from USD/JPY since the February counter-trend rally...
usdjpy v esUSD/JPY in candlesticks vs ES (S&P futures) in purple on a daily chart going back to 2013. The point here is the USD/JPY's influence on the market as a carry trade lifting risk assets like S&P futures higher and the expected closure of the carry trade sending USD/JPY lower. ES in purple inside the yellow box represents the February counter-trend rally with the USD/JPY correlation much lower. This is the first really significant divergence between their correlation in several years.
USD/JPY at multi-year closing lows today...usdjpy aug 2014 closeUSD/JPY closed at lows not seen since August 2014 as the carry trade which is used to finance risk asset positions, is unwound.
The USD/JPY Cary Trade correlation...carry tade 2012
This daily chart of USD/JPY (candlesticks) vs ES (purple) shows the two assets moving higher as the carry trade expands, proceeds are used to finance risk on positions like S&P futures seen above. Note the correlation as both ES and USD/JPY seem to top for this bull market started at 2009 lows. Also note the February counter-trend rally in ES sticking out and divergent from the USD/JPY carry unwind. This may not be an immediately significant chart, but this is one of the many reasons I feel very confident the market resolves to the downside in a big way.
The S&P hit $2100 within the first hour of trade and started to fade with USD/JPY around the European close, so did Dow Futures.
ES/S&P Futures broke below VWAP (Volume Weighted Average Price) right around the European close as USD/JPY headed lower.
es vwap eu closeES breaks below VWAP right after the European close as USD/JPY heads lower on the Yen being bid higher (flight to safety).
Russell 2000 and NASDAQ 100 futures broke below VWAP around the same time Cable made a mysterious spike lower, which we later found out was in response to a senior Pro-EU (Stay campaign) director's leaked phone conversation which the Telegraph broke:
"Leader of pro-EU campaign accused of 'morally unacceptable' plot to use Jo Cox MP's death to make case for Remain ahead of referendum"
I suppose the headline tells the story, but for more color, Cable had a mini flash crash as the story of a leaked phone call was published in which the Executive Director of "Britain Stronger in Europe" (a Pro-EU campaign/group) sought to use Jo Cox's death to push their agenda in the final days leading up to the vote.
“We need to recognise that people have been pulled up short by Jo Cox’s death.”
He added: “It is now time to make a very positive case for why we want to be in the European Union to… set out the risks that we face if we leave, but to call out the other side for what they have done to stir division and resentment in the UK.”
There's an obvious risk that such a blatant attempt to politicize Jo Cox's murder will backfire on the "Stay" campaign.
Otherwise in currencies today the $USDX ended -.6% with commodity currencies. the Euro and Pound gaining. The Pound gained +2.6% vs the $USD while the Canadian dollar gained +.6% vs the $USD, lending some support to crude +2.6% and commodities broadly.
Treasuries ended near the lows of the day, sending yields higher in support of the market as we have recently seen.  However Treasury futures there have been building positive divergences along with TLT which we warned on the 15th and 16th of last week, was due for a pullback (again sending yields higher in support of the market).
zf 2
ZF (5-year Treasury Futures). As Treasuries came down at last Thursday's morning lows in the market, yields have moved higher in support of the market, but after going through my review of Futures today I noticed a lot of Treasury Futures charts (5, 10, 30 year) putting in positive divergence like ZF above since the start of the new week. I suspect this continues just as expected Friday (on our dead-cat bounce expectations) with a likely reversal to the upside in Treasuries in the next day or so (sending Yields lower and pressuring the market lower).
From an internals point of view, the market is more extreme than Friday's Dominant Price/Volume Relationship suggesting a near-term 1-day oversold condition that should see today close green. As already posted, today's Dominant Price/Volume Relationship was the exact opposite and very extreme. The relationship came in at the most bearish of the 4 possibilities, Close Up/Volume Down which usually leads to a red close the next trading day. We saw 25 of the Dow 30 components, 85 of the NASDAQ 100 and 379 of the S&P-500 which is about as extreme as we have seen in some time. Again, like Friday there's a volume anomaly from Quad Witching, but the price relationships are the same and this is more intense than Friday's which came in with a green close today as suspected.
Additionally 9 of 10 market sectors closed green, also a 1-day overbought condition with Industrials, Energy and Consumer Discretionary leading at +.9% gains followed by Tech at +.5%. The Counter-Cyclical (safety) Utilities were the only loss at -.4%, but Telecoms had the slimmest gain at +.2%. Once again the sectors as well as the number closing green all suggest a 1-day overbought condition like the Price/Volume Relationship.
Adding to the internals extremes, the NYSE saw 2371 Advancing Issues vs. only 687 Decliners. The NASDAQ came in at 2207/754, again a strong 1-day overbought condition suggesting weight on the market tomorrow.
On a daily chart the IWM and DIA came in closest to a bearish Shooting Star reversal candle.
iwmIWM daily chart/shooting star
In addition, throughout the day we have seen distribution in the averages very clearly.
spy7SPY 7 min chart showing distribution on a strong timeframe through today. I posted some other charts of the IWM, SPY and QQQ earlier today in the Market Update.
As we saw in VIX futures and VXX/UVXY...
vxx
Since Thursday morning's reversal low, VXX/UVXY have had positive divergences nearly throughout including today.
Going in to the overnight, several polls were released after the close today. ORB and the National Centre for Social Research came in with "Remain" having a 7 and 6 point lead respectively while the YouGov poll gave a 2 point lead to the "Leave" camp. The UK's Telegraph also endorsed the "Leave Campaign" tonight.
However GBP/USD seems a little conflicted or perhaps it was just the earlier divergence we saw in both the $USD (positive) and the British Pound (negative).
1aGBP/USD didn't make much of a move considering the polls, perhaps because they do not reflect opinion since the earlier scandal to use Jo Cox's death as a political means to the UK staying in the EU. Either way...
 1b
Index futures like ES above saw a brief bounce and faded.
In to the overnight session, all the same themes posted today among currencies, Index futures, Treasuries, VIX futures, etc, remain.
On the TICK timeframe, the earlier bounce in GDX off its gap down lows looks to be seeing selling as was expected, especially on a higher $USD as it is diverging as well.
gdx tickGDX tick with a negative 3C divergence in to the close Friday (left) and another in to the close today which has already seen a move starting lower.
Among Currencies/FX futures we have a lot of newly emerging trends since the shakeup Thursday morning.
euro 3The Euro gained at the lows on the chart at the time of Jo Cox's death as traders felt it would boost the "Stay" momentum , but there's a clear negative divergence on this 3 min 3C chart of the Euro futures.
 6bThe British Pound futures gained at the same time, same place for the same reason  and have the same 3C negative divergence suggesting GBP/USD downside.
x 2The $USD lost ground at the same area and has been building a positive 3C divergence since the new week started as seen above which would also (once it takes hold) would send EUR/USD and GBP/USD lower, especially if the other divergences above keep building and reverse as looks probable.
In VIX futures, we saw accumulation since Friday even while there was accumulation of the market averages for what looked like a bounce today, although not a strong divergence by any means.
x 2VIX futures saw the same negative divergence Thursday morning as VXX/UVXY and have seen the same positive divergence almost since the pullback (the new week's futures' trade starts at the green arrow). There are a number of timeframes /I could post as seen earlier today in the VXX update.
Finally Index Futures have negative divergences broadly speaking, but right now I'm looking more since the Thursday lows when the Jo Cox news broke and the market reversed.
ym 1This is YM/Dow Futures 1 min chart with the start of trade for the week at the green vertical arrow and 3C confirmation of the overnight gains, but as soon as the cash session opened on higher liquidity, we saw strong negative divergences/distribution.
 tf 2The stronger 2 min chart of TF/Russell 2000 futures shows the lows of last Friday morning (white) as well as the start of the new week (green) and today's distribution in 3C (red).
 es 3
And the 3 min ES chart showing essentially the same theme , but on a stronger timeframe / underlying trend.
I feel pretty good about the position opened today, I will be watching it though as there's still plenty of volatility ahead. However the GBP seems to have already fully discounted a "Remain win", which leaves downside room. As far as the averages, beyond Brexit, you know what they look like.
I will remind you that Yellen will be n front of the Senate tomorrow morning at 10 a.m. and Congress Wednesday morning at the same time and of course Thursday is the Brexit vote.
I wouldn't take anything for granted at this stage in near term trade, bigger picture is an entirely different picture.
I'll see you in the morning.

Friday, May 20, 2016

Wolf on Wall Street Market Update

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



Friday, April 29, 2016

Stock Market's Intraday Bounce Forecast

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

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

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

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

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

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

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

From: www.Wolf-on-WallStreet.com


Thursday, December 17, 2015

Wolf on Wall Street's Daily Wrap

From our members' site,

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



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