Daily Wrap

I'm actually going to start in reverse order as the Japanese TOPIX 150 market opened down 3%, this is the crazy volatility I've been talking about, I showed it to you last night in the Nikkei 225. To get some idea of how volatile it is as I can't pull up TOPIX right now, just look at the USD/JPY which plunged on the Japanese market open, then look at the volatility after....

First a plunge with the stock market below the $101 support that has been holding, then a rip right back up above $101, this is similar to what the TOPIX is doing so it's rip-roaring volatility.

I said last week that we'd be using hit and run tactics this week because the volatility is so high, it's hard to hold any trade short term, today I even found that I had to close the NFLX call (at a profit) after being open less than 2 hours, that's volatility, that's fear, that's what leads to a water fall sell-off. I just hope the market can stay in control long enough for us to close calls/long trades and finish setting up core short positions.

The US Treasuries have been a source of a lot of this volatility over the last 36 hours or so, I said today, "Something doesn't make sense here, too many people on one side of the boat". Wouldn't you know it, yesterday's Treasury Auction of 2 year bonds was an utter failure, but today's 5 year auction was a success, it has a little to do with the issue/time, but more to do with sentiment changing as I believe TLT is going to surprise to the upside.

Now back to earlier data, Mortgage Applications are down over 8% this week and 23% over the last three weeks leaving a gulf between home sales and mortgage applications, see if you spot the problem...

Homes are becoming unaffordable for those who want to live in them, those who are buying them up (Hedge Funds) are part of the reason new homes aren't doing well or won't be as lumber doesn't lie.

These hedge funds buying 26,000 properties (in one alone) aren't interested in new homes, they're interested in picking up the cheap stuff and renting it, but here's the catch, some of the biggest hedgies in the real estate rental market have or are pulling out due to low margins, Och-Ziff pulled out already, Bruce Rose of Carrinton is doing the same and it will only be a matter of time before the grand-daddy of them, Black Rock is forced to do the same. 

All of the sudden, Home-Builders are looking like a VERY attractive short target with a bunch of inventory being dumped on the market and few normal people able to afford what's there now as you can see in mortgage apps and Lumber prices vs the SPX above.

Is it any wonder that home builders were the worst performing group today?

If that's not volatility, I don't think you've seen it before-but this is just a prelude, a red flag.

We'll take a look at XHB and some individual names and see if any set up without chasing them.

If the dam doesn't break, we'll have a chance...

 The 60 min chart doesn't need any of my scribbling, the 3C trend is clear.

The 5 min chart shows a range developing today as well as a 5 min positive, that's almost enough to get a bounce we can sell short in to so XHB and component stocks are on the radar as this trade just looks like a disaster waiting to happen-or actually starting to happen.

Transports are getting ugly too and why shouldn't they, FEDEX is worth a little time looking at. I recall not too long ago suggesting a replacement for Dow Theory, "Industrials/Transports" by modernizing it to FEDEX/ vs the R2K, we have 2000 companies of all sorts and a shipper that is more geared toward our economy and services rather than industrials which the US has clearly not been an industrial giant for decades, look at Detroit.

If I'm right about the market needing to put in that emotional upside move and my guess yesterday that we'd see a "W" base form today (which we have so far), then ES and VWAP as well as 3C action makes perfect sense and as long as the dam doesn't break, puts us way ahead of the curve in both short term option trades and longer term equity shorts.

EX...

 Here's a line chart of the SPY which is easier to see without all the gaps, this would be our "W" base and it would be large enough to support that emotional move-so long as the dam doesn't break first.

If my theory from yesterday about a "W" base was going to be correct,  then the first thing we'd need is a decline from the peak of the "W" put in on Tuesday, a decline today.

Now lets look at ES (SPX futures) both overnight and today.

 ES at midnight last night Tues/Wed. sells at the upper channel of VWAP, right where smart money or even market makers would want to sell or sell short for a short term trade. At 9:30 at the green arrow on the US open, we have a final sale at VWAP, which again is another target for selling. The buying would occur at the bottom channel of VWAP like we see at 11 a.m. today.

Remember these times.

Through normal market hours, ES sees a couple of possible accumulation spots to build the "W" base, 11 a.m. and 1 p.m. then around 2 p.m. moves up too high for accumulation and needs to be sent back down.

Now lets look at a basic 3C chart of the SPY today.

Look at that, 11 a.m. positive divergence and leading positive at 1 p.m. and then going negative at 2 p.m. on, not so negative as to be worrying, but enough to knock prices down to the accumulation zone at the bottom of  or at VWAP. Interesting huh?

As I said today, I saw a lot of single stock assets that looked like they were preparing for a move up, even XHB above seems to be starting to.

In fact I was going to mention it last night, but decided not to for whatever reason, the Dominant Price/Volume Relationship  among the component stocks of all 4 major averages were ALL, Price Up / Volume Up, which is the most bullish relationship of the 4 possibilities, but almost always leads to a 1-day overbought condition with the next day closing down.

Today's relationship isn't dominant in all 4 majors, but 3 of 4, it is Price down./ Volume down which is the relationship with the least meaning and also the hallmark of a bear market (not saying we are there yet, just saying when we are, that's the most often seen relationship).

To me this doesn't create any problems for the market to finish its base and move so it's actually a good reading, remember these are the component stocks of each major average, not the averages' close and volume.

As for a few Leading Indicators (always compared to the SPX in green unless otherwise noted)...

 HYG (High Yield Corp. Credit) wasn't in free-fall today, in fact it was somewhat supportive of the market. However, if we do  get a bounce from this "W" base that is almost done and it gets emotional and feels like the market will never fall, book mark this page and look at the next few charts below.

HYG longer term-CREDIT IS DESTROYED AND CREDIT LEADS EQUITIES.

High Yield Credit ,ade a move to the previous lows of the year which in fact are the lowest lows of the entire year, they are reaching back to 2012 lows, so credit is screaming "This market is trashed!"

However again, near term/intraday Yields which are like a magnet for equities remain supportive of the SPX rising at least to reversion to the mean, but the market is like a pendulum and always swings to extremes.

Remember emotional responses are what the market is looking for, they are hard to deal with, but they are one of your best reverse indicators.

If the market plays out the way it looks to be setting up, it's a gift to us because we can make good $$$ on short term call positions and a few puts on corrections while having more time and the best entries to finalize our core short positions. Don't fear an emotional move higher, it's a gift, it won't last, but this is the market's job.

The $USD stayed flat today so it didn't pressure the SPX much at all.

And the Yen correlation is there, although the market was a bit stronger off accumulation points and moving higher, that's why the 2 p.m. negative divergence that started was needed.

VXX is trading almost perfectly according to its normal correlation

And the VIX, this is really interesting because it just barely closed outside the Bollinger Bands today, a close inside the bands tomorrow sets up a VIX sell as we can see in the past, which would make sense with the pop higher in the market off the "W" base, but this is such an ambiguous signal in the VIX, I read it as being enough short term for the bounce, but not enough to halt the downside slide.

I'm not saying the market will hold up long enough to see this "W" base play out, at least not all the way according to the measured move, but so far it looks like it wants to.

The accumulation in the averages is there, but it's VERY weak, this is nothing like short term bases in the past that we have bounced off, this is very delicate so we need to stay nimble, I don't mind taking some shorts knowing that I may have more draw down if the market can play out this "W" base, I'd rather have them with some draw down than be left without them when the dam breaks and with this volatility, that can be any moment.

To make matters worse, SAC capital (one of the largest Funds) is losing clients left and right, I believe they just lost BlackRock today, so they'll be selling a lot of assets (stocks) to meet the redemptions, that means any chance they get to sell in to strength, they will.

I have a list of their top 30 holdings, I'll have them all in a watch list tomorrow and we'll see if we can't find the edge that others are going to miss, just going short their holdings isn't going to work, Stevie Cohen is a lot smarter than that, but at the same time, he needs to raise the cash and 3C should be the edge to get us in at the right time.

I got out of AAPL today, I think VERY short term (maybe a partial day) it pulls back, but I think there's still good promise there, but why take a loss in the call when I can open a new one for less? This is what I mean by "Hit and run" and increased volatility.

I can't blame anyone who doesn't have the time, risk tolerance or the stomach to be taking these trades, but I'll offer them for those of you who do.

The real trade and set up (beyond these hit and run trades) is to fill out core short positions in to price strength so if you feel like sitting out the volatility, I'd just wait for the core shorts to set up. We have a number of plays identified and more every day.

As for futures tonight... most of the 1 min charts are pretty tame, there's nothing screaming, but all of the major averages have interesting 5 min charts, right at the timeframe this "W" base would be found...

Here's ES (SPX Futures)

Actually, forgive me, this is NQ, NASDAQ 100 futures, but they all look almost the same. At "A" we have the middle or top of the "W" and at "B" we have the second or last base of the "W" with a leading positive divergence right where it should be.

That's about the extent of it so I'll keep you up to date on entries for core positions which would be my main focus as these are the trades set up for taking advantage of the next MAJOR move (perhaps one like we've never seen before) and whenever it looks like there are some option trades we can take based on this extreme volatility and make some extra $ on the side, I'll throw those out too. I'd keep the speculative trades, speculative and the core positions I'd give a wide stop until we get through this volatility.