Daily Wrap

Well it was a low volume day as you'd expect with the bank holiday and the cash Treasury market closed. Oddly the move we'd like to see on the upside to create shorting opportunities and a head-fake move in the way of a bear trap, is very close in the R2K and the NDX, they are right at or just above the range, the Dow and SPX have some work to do before they get there.

At first I wasn't sure if the SPY Arbitrage was being used or if it could actually be used with the Treasury market (except for futures) closed, it seemed to me with HYG nearly tracking the market intraday, the VXX down neutral on the day (eyeballing it) and TLT pretty well hammered that the net outcome would be a SPY Arbitrage effect, but strangely that's not what the SPY Arb. model showed, at least not to any useful effect. There's the PPT and I suppose that's possible, but what has been working for most of the year has been finding a simple carry pair of the 3 main ones, really it could have been any of the 3 today because the Yen has been so weak since 11 p.m. last night (as I showed you earlier with the FXY vs the SPY), but it looks like EUR/JPY was the carry trade (carry the market) winner.

 This is from 8 a.m. to present and it shows the EUR/JPY cross (carry trade) vs ES (SPX Futures) in purple, note ES is following the fx pair pretty tight and when the FX pair tops and goes lateral, so does ES.

Honestly it doesn't really matter that the Euro and $AUD have negative divergences in them (all the carry pairings except for the $USD which is mildly positive), all that matters is the Yen as I showed earlier...

 When I showed the SPY vs. the Yen ETF, FXY and the correlation showing what was really moving the market today, I also showed that it wasn't likely to last as the Yen needs to be weak and there was a pretty large 1 min 3C positive divergence that could lift the Yen, send the E?UR/JPY or any of the other crosses down and the market with it. Since then the Yen's positive divegrence has only grown stronger, in fact this 1 min is impressive, but...

There was no leading positive 5 min earlier, the 1 min is difficult to hold together through overnight trade, but the 5 min is more significant, if these keeps up much longer, the Yen reverses and the market has downward pressure on it.

As I said above, HYG (High Yield Corp. Credit) and JUNK Credit kept pace with the SPX today, however the first place to look for trouble in institutional land is High Yield because of the liquidity, this is the one that has been strong pretty much since mid-September. Furthermore, don't let HYG's price alone fool you...

After a nice little short term accumulation base (rounding to the left), it looks like there's been no lack of seller in to higher prices and this is largely an institutional asset, how many traders do you know who trade credit?

 There's no one asset or indicator that can give us the entire story, but the strength in HY Credit relative to the SPX was "one" of the clues that allowed us to forecast the strong upside reversal on October 10th, with a good idea on October 8th of what was coming and a very strong idea on October 9th as we entered VXX Puts on October 9th, we were in them until 10:30 the next day on the market upside reversal and dumped them for a +40% gain in a mere 4 hours, it's a beautiful moment when everything comes together like that.

However if you look at the SPX (green) making its gains, it looks a whole lot like they tried to use that backdrop to sell HY Credit, now it's easy to knock it down trying to get out (that even happened to AAPL when it lost -45% as too many people tried to squeeze out the same door at the same time), or on the other hand, they just may not care and just want out of HY credit because they know they can't just hit the sell button like we can and expect to get a reasonable fill, they trade too big and there's too little liquidity, in other words, in a panic move, this could have been a whole lot worse like when it lost all of 2013's gains in a day and a half. Either way, I'm going to say, something is going on here that we need to take notice of.

Remember earlier I said the VXX isn't moving down as the natural correlation would have it? The VXX is being bid for protection, someone's scared and I'd invert the SPX scale so you can see it more clearly. Also remember all the divergence from 2-4 p.m. that got a whole lot worse?

On this chart I flipped the SPX's price mirror opposite, the VXX in blue should match up nearly perfectly, instead it refused to move lower, it was being bid, demand was overwhelming supply and holding price up, we saw it in the 3C charts as well, so I have no problem with the VXX calls added today.

I also showed you VIX futures themselves showing a more and more positive divegrence until the 5 min was leading from 2-4 p.m. today, a strong move in a short period, you can find them right here, 2nd and 3rd charts down.

About a week ago I mentioned the Rate of Change in the CBOE's SKEW Index, an Index meant to put a probability on an improbable event, or some call it the Black Swan indicator, basically it hovers around 115 most of the time, when its above 130, the market is discounting the fear of a market crash or a black swan, given the VIX movement and remembering that the ROC was pretty sharp, even though SKEW hadn't moved that much, I checked again after hours on my update, look what I found...

That's a big move and really fast.

I'm not saying a black swan is coming, it seems to me traders are buying protection from the government debacle, but there it is.

In any case, the Dominant Price/Volume relationship among the components of the 4 major averages told the story of exhaustion selling and our upside reversal last week, tonight we have a Dominant Price/Volume relationship among the 4 majors too, of the 4 possible combinations, all 4 averages came in at Price Closing Up and Volume Closing Down by a wide margin, I'll discount some of that due to the bank holiday, but I think it's wise to keep an eye on.

I'll likely check futures later tonight as I usually do once they have a chance to settle after AH trading, so far what I see is the 5 min Nikkei 225 with a crack in it.

This isn't horrible, but the last negative to the left gapped the Nikkei 225 down, we are now leading negative so it's not the best near term signal for the index or the overnight markets.

Although Treasuries were sold off (Futures) across the curve today with short term acting the worst for obvious reasons, the 30 year does show some signs of trying to repair itself, I'd watch this one for further development, I had a feeling last night that precious metals and Treasuries (20+ year) would alternate between the Flight to safety trade.

The $USD is also showing some initial signs that it's trying to get some legs under it, it's not a call I'd make yet, but it's on the watchlist for sure.

Gold was 3C positive Sunday night, it went up today until the market started taking over and then lost ground, it seems to be functioning as a flight to safety trade, but it's hard to tell, there are so many different correlations going around with gold now, it use to be QE and that was it. For now, I'd call gold futures neutral. I'm taking an early GUESS and I'm going to say my opinion, which isn't worth a lot to me vs. a chart, is that both gold and Silver are forming a base here they can work with, here's an example and both look similar.

Gold futures on a 30 min chart so that positive divergence isn't a joke, "IF" in fact this is a base forming then what we may be trying to peg as a correlation may simply be movement that is related to building a base, when they accumulate they do it at the lower end of a range, when prices rise too much they let out some supply and prices come back down so they can accumulate more, that price action would be base building and trying to draw a correlation is like looking at the clouds and seeing pictures.

I still like USO/Oil long a lot and in USO's case, I think one more move to the $36.50 area with a head fake move to run the stops below that range would be an incredible opportunity, all we'd need is the 3C confirmation, but that's an alert I'd set and keep an eye on.

As for the averages, each has a little different character, but none (short term) are impressing me much, take the Russell 2000 Futures and the SPX futures (1 min and 5 min respectively)...

 The price pattern alone in the R2K futures is looking a bit wedgy and the 3C chart not so good.

ES / SPX 5 min Futures show longer term damage, the kind that holds up overnight.

I'll take a look a bit later, I'm have long positions for the upside move which has been expected longer than this most recent pullback signal, remember those October XLF calls closed today, remember the upside gains last week. A pullback doesn't have to be a bad thing and I'm not heavily committed to it other than VXX calls, so 1 bridge at a time, lets see if VXX will pay out, if so, then we have a really good shot at adding some longer duration long positions, but ultimately the only reason we want to go to the top floor is because we know there's no place to go but down and they sell all the neat stuff at the top of the tower, I'd like to sell some to them and take the ride down (which is what we've been putting together with a portfolio Beta on down days of about 7:1).

I'll check in later, especially if anything has changed significantly.