Possible Scenario

This possibility was building since early yesterday starting with the USD/JPY. We already know that equities and retail bag holders are more than happy to chase any ramp or buy any dip, just like any bubble, there's always a sense among those participating in it that, "This time it's different" and so long as the F_E_D was able to back-stop the market and print unabated, that would be true, but they can't do that forever, even if the spent 4 years convincing the market they could and would if need be. Those days are over as we are well in to the taper and inflation is carrying us much faster than expected toward a rate hike, I had said this on the CPI data a day or two before the June F_O_M_C, JP Morgan just moved their rate increase date up 2 quarters (6 months) this week, for the same reasons I cited, INFLATION.

For those who haven't seen a F_E_D Funds rate hike and the effect it has on the market, this should give you a pretty good idea...

The Tech Bubble was popped as rates were hiked by the F_E_D and make no mistake, while we are talking about when the "first" rate hike will come, there will be more than 1, that is evidenced by the committee's estimates of where rates will be at the end of 2015, 2016, etc, that means multiple rate hikes.

It seems Yellen is trying to inoculate the F_E_D from blame for the coming bear market by saying, "It's not the F_E_D's job to burst bubbles", but when we have prices move up like this, whether due to dot.coms or housing prices during subprime, inflation rises and it is the F_E_D's mandate (one of only 2) to keep prices stabile, so while Yellen says it's not the F_E_D's job to burst asset bubbles, the asset bubbles are typically what causes inflation so in a round-a-bout kind of way, she is being disingenuous. We all know without any hesitation this market was of the F_E_D's making so it's the F_E_D's job to intentionally create asset bubbles as Bernanke liked to call them, "The Wealth Effect", but not to pop them when inflation gets out of control?

That being said, as the Central Banks' Central bank, the "Bank for International Settlements" (BIS) recently said in their annual report, not only has accommodative policy been ineffective, it has created nasty side effects that will likely cause more trouble and in the end the central banks' policy will have gained them nothing which couldn't be more timely after 5 years of F_E_D balance sheet expansion of nearly 4 TRILLION dollars to buy themselves the worst quarterly GDP print of the last 5 years, one more and we are in recession. And on recession, the BIS noted that the "Leading" central banks (read as F_E_D) are stretched so thin, it's unlikely they have the resources to deal with even a garden variety recession, but this looks much worse. 

In the 1920's the F_E_D engaged in QE as recession hit hard, the policy was successful at first causing the "Roaring 20's" and assets went sky high, QE was still ongoing in 1928, just a year before the 1929 crash as the market was , well, a bubble. However this time what did QE buy? The economy hasn't recovered, the only way to get the unemployment rate down is to have a record number of Americans not counted as part of the labor force rather than unemployed,when they are in fact unemployed- 91 million right about now which is the highest ever. As soon as you fall off unemployment benefits, if you don't have a job, you are not counted as unemployed, you are not counted at all, you are no longer part of the labor force so of course the unemployment rate drops. Three million more Americans are set to fall off unemployment benefits for 2014 alone, shrinking the labor force and sending the U.E. rate lower. 

But what does the F_E_D really have to show for $4 trillion in money thrown at the economy? Inflation and a high probability of recession with the economy NEVER having recovered.

The reason I have said for years that I think this bear market will be the opportunity no one alive has seen if you are on the right side of the trade is because it is unprecedented in scale. The US faces a "Spent" F_E_D while it is inches away from being hit hard with Stag-Flation, economic stagnation and price inflation which is already evident in falling REAL WAGES and CPI/Inflation trending higher, especially in food and energy which the F_E_D doesn't like to count. We have a globally interconnected economy like never before and there are few countries any better off than the US. China is in trouble, Japan is in more trouble than ever, Europe is in trouble, South America is in trouble. Talk about the butterfly effect! And we have central banks that not only have blown most of their dry powder or as much as they can (remember the F_E_D is not a government agency, it's a bank issued exclusive rights to print money and make policy decisions within a certain framework, which only Congress is suppose to do. The F_E_D has shareholders and is a FOR PROFIT corporation with a quasi/public/private twist, but they aren't going to threaten their livelihood.

1929 was bad, but the world was never as interconnected as it is now, this is part of the logic of why I think this will be one of the greatest opportunities ever seen if you are on the right side of the market and from what I see now, very few on the retail side even know the market has two sides.

Looking more closely at what we are dealing with, I'm sure you noticed a trend in the MOMO stocks that I posted last night as potential trade set ups, we just need to let the trade come to us. Of those stocks, how many have already hit their top and are already moving to lower highs? Almost all of them and this is the dominant theme among my watchlists.

In yesterday's, A.M. Update I said,

"US Index Futures have a slightly weaker tone, don't forget the Dominant Price Volume theme that I track which was the most bearish of the 4 possibilities last night, Price Down/Volume Up, however this can create a short term oversold situation with the market bouncing the next day (today)." 

Remember, last night we had the same Dominant P/V relationship giving stronger evidence that the market is either in HUGE trouble right now or it is in a very strong short term oversold condition, we'll know soon by intraday 3C charts (if they continue to act like yesterday).

Just minutes after the open yesterday I posted, POSSIBLE EARLY HINT in which one of the market manipulation levers and part of the SPY Arbitrage market manipulation lever were acting better than should be very early right after the open, so much so it stood out enough to warrant a post. 

What would smart money need to create a bounce that can be sold/shorted in to? They'd need lower prices as they aren't going to accumulate (intraday) to kick start a market move higher (a short squeeze should do the rest, you saw our Most Shorted Index being smashed lower, it's ripe for a short squeeze). The USD/JPY did that pre-market yesterday with the break under the 200-day moving average.

As I said in a market update yesterday, "Look for lateral trade, if you see it you can nearly be sure it's being accumulated intraday", we got that and we got the positive divergences expected to be seen with lateral trade as the losses to the downside were stemmed. 

During the early afternoon hours I posted, Important Market Update,

"The last market update I warned to watch for lateral (sideways) price movement and that would very likely indicate positive divergences building, well both have happened since my last market update....this bowl shaped intraday bottom may turn down to form a larger "W" type base which would give the base a greater ability to sustain a longer move. How long in duration? I can't say, I'd guess if it was a full "W" maybe a day and then a day of reversal process, but the minutes could be a fundamental game changer as they "shouldn't" be discounted, but as we all saw, the F_E_D itself leaked the minutes about a year ago to 154 of the largest institutional and private equity firms via email almost 2 days ahead of the release. "

Then I posted this around 2:30, MARKET UPDATE/ LEADING INDICATORS, FX...t

This showed the USD/JPY as well as Yen and $USDX futures in line with our short term theory and how we could use it covered in last night's Daily Wrap with a half dozen momentum stocks that have topped and can be entered if our theory is correct at better prices and much lower risk, let the trade come to you. It also showed a number of our Leading Indicators either cooperative or at least not standing in the way of a bounce, which we still have to confirm, but that's the working theory and if there is one, I suspect the F_O_M_C minutes were leaked AGAIN.

What do we need today to get a short term market bounce? Simple, the same thing I was talking about yesterday...

A few charts from MARKET UPDATE/ LEADING INDICATORS, FX...t yesterday...

 TLT /Treasuries would need to move down, the 10-year has sold off consecutively over the last 10- F_O_M_C minute releases, as of yesterday, 20+ year treasuries were going short term negative for a move lower which is what we'd need for a bounce, this morning so far...

They are within the range still and adding to the short term negative divegrence which would send them lower for a market bounce if not help perpetuate it through the SPY Arbitrage scheme.

However as shown yesterday, this is more than likely a short term move, which is why I'd want to use it as the stronger underlying money flow for TLT looked like this as of yesterday....

 15 min , strong positive divegrence. In fact...

It was a good thing we closed the leveraged TLT trade as it came down, but now we have a leading positive 60 min chart and even a head fake move (yellow arrow) seen before a reversal 80% of the time, this tells me that any move down in TLT will likely be short lived and the market typically trades opposite TLT.

From yesterday, HYG....

 

a 5 min positive divegrence which we'd need HYG to move up to support the market via the SPY Arbitrage manipulation scheme as well as TLT and VXX down, this short term divegrence seems to indicate just that.

Why would there be such a clear, strong divergence in such a short term if the market had no idea of what the minutes said or didn't plan to shape the knee-jerk reaction? As you saw in the trade set ups from last night, such a bounce would be just as useful (more so) to them as it would be to us.

 However, also shown yesterday HYG's longer term 60 min chart with a leading negative divegrence at a toppy area, this is what we'd expect to see, HYG and the market moving down as the bigger picture, the bounce just sets up the trades for that bigger picture and I'd think probably the last time before the multitude of H&S tops break below their necklines as many have already broken below the top of the right shoulder as seen in many of last night's trade ideas.

Also from yesterday's post linked above, VXX which would need to move down, guess what? It already has started today.

 This was yesterday's short term negative divegrence and this morning VXX followed 3C's forecast or at least the underlying trade 3C was depicting from yesterday (short term distribution).

However, once again...

The longer term, stronger charts in VXX as well indicate a strong base area being created for an upside move in VIX, just remember VIX moves opposite the market so short term VIX down for a market bounce and longer term (as in after the bounce) market down on a larger scale if for no other reason than where we are in these toppy price patterns in the biggest momo stock names.

As for today, what I suspected we'd see is a move back toward yesterday's intraday lows where smart money will accumulate on the cheap, they won't chase prices higher. As of now, IWM, QQQ and DIA intraday charts have negative intraday divergences in them suggesting they hold here and move no higher or more likely they come down a bit.

The overall short term condition/divergence however is what is most important as to whether we get a bounce and that is most easily seen when prices of the averages fall and we see if 3C shows accumulation of lower prices, but it seems we don';t have long unless the minutes are part of what sends them lower?

Index futures are hinting at lower intraday prices, I imagined something like a "W" base between yesterday and today, here are the current Index futures...

 ES with a relative negative divergence since the open.

NQ accumulated the lows and headed higher in to a relative negative divegrence at intraday highs thus far, this is the weaker form of divergence and a weak one at that, however if the short term goal is accumulation (2-days), then you don't want to put out too much inventory that you've accumulated to send prices lower, only the bare minimum needed.

And TF with an early a.m. positive divergence sending it higher and a relative negative divergence since the open.

The plan would be this, if we see lower prices intraday, we need 3C confirmation that those lower prices are being accumulated. A "W" like base would be probable, but a head fake move below it would be just as probable so it would look something like this...

The SPY 2 min chart. First we'd need price to move lower, likely toward yesterday's intraday lows and we'd need to see 3C accumulation, if it's not there, then the chances of a lower low in the market rise substantially and the bounce idea goes out the window.

However as you know, before a reversal to the upside off a "W" type base formed over yesterday and today would almost certainly see a head fake move/stop run (yellow), this is where 3C would have to be positive as well as accumulating stops is the easiest, fastest and quietest way to accumulate for a bounce. I'm thinking the initial knee jerk volatility on the initial release of the minutes could cause such price action, but that's just a gut feeling, we need to confirm.

If we can confirm the following, then I'd look at some short term Call plays on the market averages, as of yesterday I liked the Q's and IWM, but we'd check to see which looks best.

The calls are only a short term hitch-hiking play, the real trade is to short price strength as we confirm 3C negative divergences (distribution) in to higher prices on the bounce, that's the idea in every one of the trades presented last night in momentum stocks.

So, 1 step at a time, but remember for the release of the minutes, anything F_E_D / F_O_M_C related almost always sees a knee-jerk move and that move is almost always the wrong move that is retraced or reversed as I showed last night we can already see that in the Russell 2000 since the 6/18 F_O_M_C as well as credit and Yields.

More to come as the market moves...