The Interesting stuff...

I hope everyone had a great weekend and you're all ready for the new week!

I often say, "Wall Street doesn't do anything without a reason", and there are distinct cycles that start days or even weeks (sometimes longer) ahead of time that are setting up the coming price action. One of retail traders' biggest misconceptions is that the market is acting and reacting like retail, as news and information comes in. Many retail traders scan all day for breakout volume spikes and consider that to be proof Wall Street is buying at that very moment, this in large part is why retail chases price because that breakout or volume spike to them is what they consider to be Wall Street taking action and thus confirmation. However as we have seen time after time, smart money is in a trade LONG before price ever moves; they are very quiet about their actions (if they weren't, they'd be front run by everyone and attacked by predatory HFTS) and play their hand like any good gambler, they don't show you the hand they've been dealt, just as we saw with the Goldman Sachs rec'd to short the USD/JPY on October 3rd which was stopped out Wednesday October 16th. There's a link to the entire trade from them and the stop out, just click it.

The point being is Wall Street only shows you what they want you to see and they aren't your friends as this being something like the 8th or 9th consecutive Goldman recommendation to be stopped out at a loss.

What I said at the time was (paraphrased), "We have 3C signals saying the $USD/JPY will head higher, the Goldman recommendation isn't confirmed by 3C, in fact the opposite, but don't think GS is dumb, they are not. GS doesn't spend millions on research to give away free trading advice to the very same people they are trading against, so we can assume that GS is buying USD/JPY"

If in fact GS was buying USD/JPY and then selling it as retail would have stopped shorting the FX pair as it neared its $98 stop, they not only would have picked up the pair on the cheap, but they'd have built in demand to sell to (by way of those acting on their recommendation). 

The important part now will be to determine what Goldman did with all of the long USD/JPY they picked up. If GS sold the trade, then we may assume that at least one of the 3 popular carry trades is dead and that is not helpful for the market. What interests me is the timing of this entire GS trade rec'd.  From the linked post above, here's a chart...

The short USD/JPY (which is the chart above) came Oct. 3rd, that gave retail enough time to act on it and GS enough time to accumulate it, I doubt very much GS would have accumulated the pair before then at higher prices, so the actual accumulation period from Oct. 3rd to the lows near the end of the day Oct. 7th, gave GS at most, 3-days to accumulate and probably more like 2. The point here being, the position, even for a firm as large as GS, couldn't be that bg due to the fact there are only so many shares available per day for them to accumulate and they can't just do it in big blocks without turning price and other traders against them, they can't show their cards.

October 9th was the market's bottom before it started the most recent leg up, which we already expected to be something coming as of and before October 3rd, even though we expected some more downside before this move up could start which was largely based in not only signals, but the foot-print size of the reversal process.  You may recall, we were looking for a wider foot print because a sharp "V" reversal wouldn't have had enough support to move the market higher.

So so far as the USD/JPY goes, without having the benefit of seeing the most recent single currency futures as the market isn't ope yet, seems to me as if it may be done. Goldman seems to have picked up a position just large enough for a swing trade and recently past charts showed what looked like $USD weakness which we saw and some JPY strength.

The $USD did flip correlations away from the recent carry trade in which an advancing USD and declining JPY were bullish for the market and switched very recently back to the legacy arbitrage of $USD weakness means market, commodity , oil and precious metal strength, that we saw too.

However if that correlation is in fact to hold as it has historically f much more often than not, then recent $USD signals on the $USDX futures from 5, 15 and even some 60 min charts suggest the $USDX is ready to make some upside move, a bounce, a swing trade- I can't say for sure other than to say that the charts of $USDX downside which has had a direct positive market correlation are now flipping to a more bullish tone for $USDX which would mean the opposite for the market, oil, precious metals, stocks, commodities, see weakness. This is a fairly broad generalization as we have seen gold also flip back and worth in the same week between a risk on asset to a flight to safety asset, but generally speaking, that is what the expectation would be.

The initial reason I suspected a market move higher before I had any hint of such a move was because my watchlist had hundreds of pre-qualified shorts that were sooo close to being near perfect set-ups and for reasons that Wall St. needs, it didn't make sense to me that they'd let this very helpful opportunity slip away when the move for most of these stocks was so small (again take DE or NFLX for example. The head fake move that they need because of their position size, was just too close to walk away from.

After having posted that expectation which was totally based on our market concepts which can be found in the two articles I have mentioned so many times this week, "Understanding the Head Fake Move" parts 1 and 2, the 3C signals started coming in to confirm the thoughts which can be seen in the development of our outlook as I just posted (from Oct. 3rd to the 9th). The point now being that in many cases a lot of these stocks on the watchlist have made their move, the move we expected based on Wall St. and Technical traders' behavior.

However, there's still a reversal process and usually it's a bit wider on top reversals than bottom reversals, so my normal expectations for a reversal process in a few assets would look like this...

 This is the daily IWM chart. The SPX has not been above resistance as long, in fact only about a day and a half. There's a reason that there's a reversal process and there's a reason that they most often are proportional to the preceding reversal and leg up/down. This is the character of the stock or asset and it's size gives you some idea of how long moving an institutional size position takes. Obviously a stick that trades 150k shares a day and has made a short duration swing will not have as long of a reversal process unless it was coming out of a huge base. Something like the major averages though will have much larger positions and thus seem to take longer, but there's almost always a certain proportionality to each individual asset or what I call a stock's character. The Trend Channel is based 100% upon each individual stock's character and a Standard Deviation multiplier, this is different from say an envelope channel which is just set to a pre-determined number of bars but they have nothing to do with the stock's character.

An example would be Bill O'Neil of IBD's famous 8% stop. An 8% stop may work beautifully for a DE or a Dow-30, but for a momentum stock that can swing in its daily ATR (Average True Range) 7 or 8%, this is hardly fitting. The point is, the 8% stop for any/every stock is like saying a size 10 sneaker fits all men, it's completely arbitrary.

In relation to the character of a head fake move, the most important thing about a head fake move is that it is believable just like a bear market counter trend rally and that's why they are such strong rallies.

While a break above obvious resistance or a moving average, a price pattern, a new high, etc. may immediately set off limit orders and force BTC orders by the shorts, the initial volume spike did do it's job and trigger those orders, but typically there's also the reversal process which is there for a reason which is directly related to the time it takes to swing from one position to another (say from long and selling to short). During this time, it's crucial to keep the bag holders interested.

So taking the SPX out of the equation for a moment because the R2K is generally the leader of a risk on move and because it has spent more time in the zone...

 This 60 min chart of the IWM shows in white the reversal process, if you go back and look at posts before the Oct.9th bottom (which you can see in the last post), you can see how I had drawn in similar white rounding bottoms and said, "I think this needs a little more time to establish a bigger foot-print which is the reversal process".

Just judging by the size of previous moves and their reversal processes and the fact that bottom reversals (to the upside are generally smaller) I could "Guestimate" the size of the reversal process from here, assuming that we know it has started.

However if I consider how tight the last bottom reversal was (which has a lot to do with the fact that the decline was smaller than other moves, but not entirely because it is a bit tighter than I'd expect), it would be fair to draw/expect a tighter reversal process such as that above.

While I believe and often say and show you that a reversal is MOST OFTEN a process and not an event (meaning more of a "U" or "W" shape rather than a "V" shape), one of the features of a head fake move is the failure. I also often say this phrase, "From a failed move comes a fast reversal".

So if we were to see a very sudden failure under support where the stops are piled up (which is usually the previous resistance area before price broke through), those stops get hit and a snowball process of more and more longs stopping out starts which effects the supply/demand equation and attracts more short sellers which also puts more supply in to the market, this is why failed moves reverse so fast, think of a Channel Buster", this is a perfect idea, they typically fail fast and reach the opposite channel or blow through it very fast.

This scenario would look more like this...

Other than the strange events of Friday, the gap up in the R2K leaves it looking exposed, it's not a true bearish "Hanging Man" reversal, but the gap up is similar, the much smaller body than Thursday's daily candle is similar, and the lower wick, although it would need to be about 2x longer, is similar. This goes back to my warning of not looking at charts and looking for text book patterns because you'll rarely find them, but to understand what the psychology of the pattern/candlestick means and look for that.

Either way, other than the gap, I wouldn't call the candle close enough to draw those kind of conclusions or even serious speculation.

What I do find very strange was how the market went from a pretty uneventful op-ex Friday to giving small signals that just kept growing as the day wore on and some were extremely sharp.

First I want to talk about 2 things that we didn't cover in great detail on Friday. One was obviously the very uncharacteristic slow down in High Frequency trading. HFT accounts for about 70% of the market's liquidity and yes it's full of games and there are dozens of different systems from scalping and acting as a market maker to preying on institutional orders called "Icebergs" and extracting their profits from the institutional order being filled simply because they are faster. In any case as NANEX showed and I posted Friday, HFT activity dropped off to a 3-year low on Friday which sounds very uncharacteristic considering where the market is, it would seem this is where they'd be more active, but I'm not an expert on HFT, I just know a 3-year low on the same day as a number of other odd instances may not be unrelated coincidence.

This is another oddity, but I'll add a caveat at the end. Friday there was some strange activity in SPX calls and there was strange activity in VIX, specifically, someone put on a VIX February spread (a bullish trade) in which they bought 160,000 VIX (bullish) contracts that expire in February and sold the same amount of VIX Feb. $29 Calls. The Feb. $24 calls cost $.90 and the Feb. $29 calls brought in $.40 for a bullish spread that cost $6.7 million dollars. The spread would pay-off if the VIX doubled from Friday's close by the Feb. expiration, the maximum profit would be reached if the VIX hit $29.

Here's the caveat, one has no way of knowing whether this trade was a bullish VIX trade, a VIX Hedge against a current long position or something else entirely like Cramer describes in the only interview I think he's ever given that was truly insightful to the Street.com where he talked about how he would buy a bunch of AAPL puts and spend $5-$10 million doing it, float rumors that the I-Phone wouldn't be ready by Mac-World and do all of this to CREATE A NEGATIVE IMPRESSION, WHILE HE WENT LONG AAPL. The money spent on the AAPL puts is just the cost of doing business to create fear in the market that someone knows something and thus there's this huge Put position open and rumors the IP isn't ready and that AT&T doesn't want the phone.

Cramer gave the interview to the Street.com and said, "This is never anything I'd say on MadMoney, but at the Street we don't toe the line". He also said this is common practice throughout the hedge fund industry and IF YOU AREN'T WILLING TO DO THIS, YOU SHOULDN'T BE IN THE GAME. What "This" is, is straight market manipulation 101.  So again the point is, no one can truly know what that position means, it's just another oddity on Friday.

As for what we saw with our own eyes, I was in touch with a trader friend of mine who works for a big investment bank, I can't say who he is or where he works as I don't want to get him in any trouble (they're funny about employees trading their own accounts and for good reason". I simply asked, "What did you think of the market Friday?". I didn't tell him anything we saw, I just asked that. His response was that his portfolio was in the red and that was probably biasing him (essentially), but he's say Friday was a top. This is not what I found interesting, this guy is a damn good trader, what I found interesting was he didn't mention any of the things we saw. This may be because he trades a totally different way, it may be that he did see some of it and the form of communication we were using wasn't the kind where a detailed response would be common, who knows, but I have a lot of respect for him and found it odd he didn't mention these things as they really stood out to not only me, but quite a few members who sent me emails about these things as I was writing posts about them so they had confirmed seeing the same and it being odd and I didn't even see the emails until I had posted the same.

Here's one thing I didn't see until after the close as it's published after the close, the CBOE "Black Swan" or SKEW Index had mellowed out a bit late last week, Friday it popped again and the higher it is, the more probable a "Black Swan " event is to occur.

The SKEW drops about 6 points and then makes a new high virtually in a single day. As a reminder, $115 is the average area, above 125-130 is elevated risk.

Among the averages, there were some late, very sharp declines in 3C among averages that already have strong long term or strong distribution signals in to them.

 IWM 1  min saw a sharp decline early afternoon to mid afternoon.

IWM 15 min chart has the look I'd expect from a move like this because it's not a true accumulation move, it's a move that is there to perform a function just like Cramer's AAPL puts were not there as a trade to make money, but to perform a function to facilitate a bigger picture trade.

 It's not the second (longer chart of each of the averages I'm interested in, I've known this), by themselves, it's not even the short term intraday action, although I'd certainly have made note of it , it's all of it together.

SPY 5 min with a very sharp leading negative divergence, this may be distribution above the former resistance level or it may be something more specific to Friday, in any case, there were a few assets showing hints as early as 11 a.m. so this could fit the bill, although it seems to me equities were the last to get the message.

 Leading negative 4 hour SPY with higher highs and 3C lower highs/lows.

QQQ 2 min Friday

QQQ intermediate 10 min chart leading negative on the last un off Oct. 9th lows.

DIA 2 min leading negative, pretty ugly as well.

And the 60 min DIA leading negative, the previous run up was leading negative, this one just has a much worse signal, like distribution through the entire run.

There was action among the Index Futures as well, I don't even need to mark it, but at this point numerous timeframes are looking bad.

TF/Russell 2000 futures... 1 min

The futures are open now and they don't look like anything surprising is going on just by price alone, The volume in the middle is Friday regular hours.

 NQ/NASDAQ 100 futures 5 min, I mentioned that 1 min charts were again migrating to longer charts like 5 min.

And ES/SPX Futures 60 min which I told you about around mid last week as these had jumped from 5 min negative to 15 min, 30 min then 60 min. I'm wondering if it goes as far as 4 hours?

High Yield Credit (as a support mechanism for the market) was one of the bigger surprises...

I was feeling adrenaline kicking in when I saw this chart as it had been pretty dull, but HYG just kept getting worse and worse and at some point ti was evident it wasn't coming back Friday.

These aren't open yet, but VIX futures were interesting because it was the 15 min chart before October 9th and the VIX sell signal (market bottom) that was clearly negative. This 15 min chart stayed in line with VIX futures since the reversal until Friday or at least that's when it became clear.

What's unique here is that the signal went from in line to a very strong leading 15 min almost on a dime, also the strength of the signal for a 1-day move, it's not like it can't be done, but it's not common.

Similar strange activity was seen in short term VIX futures, VXX.

The clear positive divegrence there was not just building up energy, on a day when the VXX should have been making a new low, it went green, above the previous day's close as I have that marked on the chart.

This was one of the earliest signs, I inverted the SPX (green) price so you can see how VXX should have moved, exactly as the SPX.

The normal correlation with the SPX inverted is to the left, Friday was showing something strange early.

Yields still remain significantly dislocated and they have been giving great leading indications.

High Yield Credit (which was one of the bullish signals for me before the market bottomed October 9th) had been leading the SPX positively, you can't see it here because of the scale so I can show you recent behavior, but around that time before the 9th and from Oct 1 or so, I posted the HY Credit chart almost every night. Remember the Wall Street maxim, "Credit leads, stocks follow", that was correct for the market on this move up, HY credit was leading positive, then...

 HY credit on Friday gave out around the sme time the HYG 3C negative divegrence got serious.

Longer term, HY credit's leading positive dislocation above the SPX ended at the highs of the 10th.

I'm sure there's more, but I think that's enough for the moment.

Futures are open, there's nothing extraordinary right now, I'm going to have some dinner and let the market settle in a bit and take a look at futures in a bit, if I see something you can be sure I'll let you know.