Market Wrap

Hopefully I don't have to go back and show you all the reasons and hints we have been gathering every day as to why this market is in big trouble, but for some of our newer members (And we are totally full, we'll be getting a new website soon as we can no longer accept new members or at least not many), we were tracking these changes before anyone because "Changes in character lead to changes in trend", so before these were screaming problems like they are now, they were clear hints of problems and taken with numerous 3C charts, market breadth, mass psychology, Remember all of those new dumb money bullish sentiment extremes like the 18 point bull/bear spread on the AAII weekly Investor's sentiment poll? The list doesn't stop, but perhaps the most important and everyone was so busy saying, "Don't fight the F_E_D" that they missed the message the F_E_D was clearly telegraphing since Sept 13th 2012 and particularly the day before the January minutes were released last week.

Many of you know one of our key tools and proprietary indicators is 3C, what you may not know is that the name 3C, while not powerful like the "Elder Ray", is a constant reminder to all of us to, "Compare, Compare, Compare" which is some of the best advice I ever received from one of my favorite, "Street Smart Traders", Don Worden.

For newer members, here's a VERY brief review of some of the things that were setting off alarm bells and red flags and why I have the faith to stick to the courage of my convictions and trust what my indicators are telling me after years of using them in some of the most difficult market environments.

Worden T2 Series Breadth indicators (green vs the SPX in red)-Breadth doesn't lie

 The McClellan Oscillator, one of my favorite ways to use this is as a divergence indicator, you could see the divergence earlier, but by Feb 1, everything was coming together.

 The Percentage of ALL NYSE stocks above their 40-day price moving average taking a dive from about 85% to 50% now, this is unspeakable horror, but also likely an indication of an oversold condition which would only be good news for us or those who want to set up shorts in to price strength rather than chasing them.

 The higher momentum stocks that are represented by the % of stocks trading 1 Standard Deviation above their 40 day moving average, from + 70% to 21%, but the trend was visible long before the trouble, in a healthy market this indicator would be moving higher.

 The momentum stocks, % of stocks trading 2 standard deviations above the 40 day moving average, from 44% to less than 5% today.

 The 4 week New High/New Low Ratio, obvious trouble there.

Now the first indicator I ever won an award for, inspired by the Turtle Traders and trend trading, my Trend Channel which takes the recent behavior of a stock and creates a channel "X" standard deviations around the mean, a break below the channel is a stop out and stocks/markets rarely come back from these. However for a Trending trade, there's no guessing about where the stop should be, there's no arbitrary stops, it's based on real data and many trades I would have exited at a 30% gain went on to make 4 times that because I followed the evidence rather than my opinion or emotion.

 Also in the bottom window is a 10-day ATR (Average True Range), the EXCEPTIONALLY low volatility that was sen during the melt up was as I said at the time, "A Dumb Money friendly market environment", sentiment indicators proved this as well, dumb money entered on an easy market with no volatility and CNBC talking every night about new highs even though they were often 0.10% to 0.30% moves!!!  As I said back then, smart money needs dumb money in the market to hand off the shares/risk and sell short to and Dumb money came in to the market in droves.

 The SPX 2-day Trend Chanel that held the entire trend until just the lat 2 days, a clear stop out. This doesn't mean the market can't move a bit higher, it means in my experience, trying to capture those minimal gains is the highest risk environment, it's almost ALWAYS best to exit the long that wait weeks or months through insane volatility and maybe capture another 3% is you time the trade perfectly.

Currencies and the CARRY TRADE-If yo want to know what Hedge Funds are doing, follow the FX Carry trade or the baskets of several FX pairs. Remember the leverage here can be astronomical so as long as the carry is working, they are making money, but one bad day can send their entire move in to a loss as we will see happened today.

 The EUR/USD daily chart, remember the pair moves with the market, the $USD moves against the market, the break of the trend line on the daily chart has been coming and we have been tracking it for weeks.

 This is the 5 min chart of the same pair, note the lower highs and lower lows, this is the definition of a downtrend, but few watching the daily chart would have seen this, when the Euro is down and the $USD is up like we see here, it's only a matter of time before the market move down to the correlation.

Here's one of the carry pairs, the EUR/JPY (Japanese Yen)

 The daily chart is just now showing the break of the trendline, but the evidence was there long before.

On a 5 min chart of the same pair, we see again lower highs and lower lows until the Euro broke the trendline and sent the Yen soaring as the Carry trade was in huge jeopardy and carry traders like hedge funds rushed to close out the carry which means closing out the stock positions they financed with the gains from the carry trade.

Take a look at today for a clear view of what happens when a carry trade goes wrong and remember for each pip the currency moves against your position, that can be 200x leverage!

 Remember last night the EUR/USD opened flat and then overnight was sent higher presumably on Italian exit polling data that was completely wrong compared to the results reported later in the day, in any case, the FX pair lifted the SPX and NASDAQ futures and the market gapped up on the open, apparently CNBC was doing their "DOW, ALL TIME NEW HIGHS IN SIGHT" on the open, soon after though the pair reversed and took the market down with it.*This is where I see some initial evidence of a reversal brewing in the FX pair and the SPX/NASDAQ futures as posted after market.

 This is the daily trend of the Yen which has been under a policy of total debasement by the Japanese government in order to make exports more competitive as China has boycotted Japanese exports in a feud over a couple of uninhabited islands.

Look at the daily close for the Yen today!!! This is a total reversal, a +2.29% gain, what's going on? It's the Carry trade.

Here's the Yen via the ETF, FXY intraday vs the SPY in red, the Yen opened lower as we saw last night on the UBER-SUPER-Dovish nominees for leadership positions at the Bank of Japan, however as the SPX fell more and more, the carry trade had to be closed out which means buying Japanese Yen, note the last plunge in the market around 3 p.m., this sent the Yen soaring, I doubt it's going to be a good night for the Nikkei.

As for the US, the fastest way to hedge exposure when you are a huge find and can't sell in to a declining market is to take out protection and it was bid today, take a look at the VIX.

 Look at the daily price candle of the VIX today! However this should have been no surprise at all. As far as Technical Analysis goes, the price pattern with the descending wedge suggested the VIX fall further and market rise higher, but we had warning weeks and even months ago as for 1, I told you the positive daily divergence in the VIX is the largest I have seen since the VIX was re-worked to include the SP-500 components in 2003.

But even more convincing...

My DeMark-Inspired custom buy/sell indicator gave a but signal in green, the Bollinger Bands went from huge volatility to a narrow pinching suggesting a highly directional move was coming.  At the time of the BB pinch I said, "I'd expect the VIX to hang around this area for a little while, crossing above and below the centerline moving average", in essence throwing traders in to a blender, then as predicted at the buy signal and the Bollinger Band pinch, the highly directional move over the last several days, but today especially.

Another area I look for confirmation is in TLT, the long bond ETF, this is also an important lesson on 3C and why I wait for 3C signals to engage the trade. TLT is a flight to safety when the market goes in to risk off mode as it did today, so if I'm getting distribution signals in the market, I should be getting accumulation signals in the safe haven assets like TLT.

 The SPY in but one of many confirming charts, from left to right: Green=3C/Price trend confirmation, red arrows=distribution and on this timeframe, it's heavy. The white arrow=accumulation which happens to be at the market wide 11/16 new cycle low, which saw a head fake move to a new low after several weeks of accumulation so it was set long before price moved a usual and that's our edge. As I always remind you,"PRICE IS DECEIVING", as you can see the new price highs off the 11/16 cycle low were not only negative divergence with the price trend, but lower than the 3C readings at the September top, which just so happened to be the same time QE3 was announced-that's right, we had a negative signal at the announcement of QE 3 and I had a number of emails telling me not to fight the F_E_D, but a day later and the market maxed out and headed down from there.

With a negative divergence in the SPX, money should be coming out of risk and in to the flight to safety trade, TLT.

Here we see a number of smaller negative divergences at tops and then a strong relative and leading positive divergence that was accumulated between the prices of $118 when the divergence first started to $116 at the lows in price.

I have told you often that in my experience, wherever yo see a divergence start, such as $118, the asset is typically going to surpass that point, so even if you were to buy at $118 and again at $116 on a continued positive divergence, the average is $117 cost and TLT moved not only through the average, but past where the divergence first started ($118) to close today at $119.33.

What about Gold? This was one of the day's best performing assets as ALL 10 S&P sectors closed in the red. Anyone who knows me knows that despite some of our biggest % gaining trades being in gold, I actually hate to analyze gold and silver because of the insane manipulation of both, however something moved me last week as I posted several posts and positions WAY out of character for me just in the last week or so.

Adding 50% to GLD Calls, Probably at $150 Strike Feb 21st @ 3:40pm

GOLD-LONG!  on Feb 22 at 2:13 p.m.

"I still like GLD March Calls here, you can even go with GLD long or some leverage, but I prefer the March monthly calls.

Take a look, I'd consider adding here again."

Honestly, does that sound like me, excited about gold?

Then... Gold/GLD is Definitely Looking GREAT here on Feb 22 at 2:29

Then a few minutes later...New GLD Call Position and tell me this sounds like me!

"I know this is not good risk management and I don't encourage it, but I feel I have to go for it.
I went with April 20th (Friday 19th) monthly expiration, long $150 calls, full size."

What could make me so bullish on gold/GLD that I was willing not only to trade it, but to violate risk management rules, to add a bigger position than speculative, in fact full size and THEN, ADD A SECOND FULL SIZE POSITION VIOLATING EVERY RISK MANAGEMENT RULE I HAVE LIVED BY?

Here it is...

 From a Technical analysis point of view, GLD was in a down trend, then formed a bearish continuation triangle, it broke below the triangle on what I think is a head fake move and then broke below last support, volume jumped as stops were hit, a perfect environment for smart money to accumulate in size, at cheap prices with plenty of supply. I suspected this was a head fake move from the triangle developing, everything since has been in line with that theory.

There are a lot of positive divergences, this is an hourly leading positive. 

Basically, someone knew something ahead of time and set up a position in which Technical Traders would fall in to the trap and give mart money their shares on the cheap and in the kind of supply they need to accumulate, we took advantage of that and now the April position is at a 34% gain in a day.

Leading Indicators-As you know they have been signaling red flags for some time, some have been more subtle like the intraday FX charts not seen n the daily, others like Credit have been screaming.

I'll post a few...These are all vs the SPX in green, make sure to look at the timeframe or dates.

 High Yield Corp. Credit, since the Credit markets are bigger and smarter than equities, we say, "Credit leads, equities follow".

The negative divergence in Credit vs the SPX (in a healthy market Credit should lead or at least stay in line) has been extraordinary, we see it so often sometimes we forget how much it means.

 This is HY Corp. Credit with 3C, as I suspected, the yellow arrow on the chart above this one is a short squeeze, you can see distribution now.

 Yields are like a magnet for stocks, here yields stopped moving higher with the market, another red flag.

 The $AUD, one of my favorite leading indicators among the currencies has a massive leading negative divergence vs the SPX.

 The Euro vs the SPX, these two should move together, the divergence is obvious.

 Here the Yen was showing trouble, but unless you looked close you didn't realize the trouble it was in.

The $USD is breaking out, this is bad for almost all risk assets, especially stocks.

As you know, I don't generally believe in "V" reversals and a straight reversal tomorrow would be that, although it depends on how futures perform to some degree tonight. So far we have a little consolidation in the Euro and ES, but now the 5 min charts are even starting to move in a positive direction so we'll be patient, we closed out several good trades from Friday, we could have day traded the market today, but I wouldn't have felt good about holding overnight so it wasn't worth it to me, I'd rather wait for a nice set up.

Finally...I just can't restrain myself, I wonder what his rap was on Mad Money tonight...