First, the major story in my mind is Janet Yellen, the Vice Chairman of the Fed speaking out or rather front running the release of the minutes today. It seems rather obvious that she was trying to wind down expectations regarding QE2 and to do so before the release of the Fed minutes. This was the #2 at the Fed not a local president or non-voting member.

Of course the economy and the market are dynamic so changes effect policy, but since the original talk of QE2 in the Fed minutes we have seen jobs deteriorating and a self creating risk of inflation, not one in which the Fed needs to move toward creating. Again, the more money you pour into the system, the worse the inflation will be and with no sight of the jobs situation getting better, there's a real risk there when basics such as food and gasoline start inflating with so many Americans jobless or underemployed-nearly 1 in 5. 

I think Yellen addressed that in a round about way as it would pertain to commodity, food prices, oil and gas prices and perhaps the market itself. To me, deciding which is the more important of the Fed minutes and the Yellen address, it is definitely the Yellen address as it was timed before the release of the minutes and seemed to try to bring expectations down a bit after so many Fed members have played up QE2, some recent development seems to have them trying to tone down expectations or at least let people know this will be different.  Some of the systemic risk she may be talking about could very well have to do with “Fauxclosure-gate”. Yet the market rallies on the release of that which was already known. Although a .07% gain in the Dow is hardly something to get excited about.

More on Yellen:

From Bloomberg http://www.bloomberg.com/news/2010-10-11/fed-s-yellen-says-accommodative-policy-may-prompt-excessive-risk-taking.html

"Janet Yellen, in her first public remarks as the Federal Reserve’s vice chairman, said low interest rates may give firms the incentive to engage in excessive risk-taking.

“It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system,” the 64-year-old central banker said in a speech today in Denver. (She's starting to sound like Hoenig)

“Our goal should be to deploy an enhanced arsenal of regulatory tools to address systemic risk,” Yellen, the former president of the San Francisco Fed, said in a luncheon address to the National Association for Business Economics. “We need macroprudential policy makers ready to take away the punch bowl when the party is getting out of hand.”

“We know that market participants won’t take kindly when limits are set precisely in those markets that are most exuberant, the ones in which they are making big money,” she said. Even so, “discretionary interventions will inevitably play a part in macropruential supervision.”

END...

The Fed minutes show that they were not happy with the direction the economy was heading. There was some concern about inflation being lower then their mandate, however, since then the worm has turned with capacity utilization on the rise recently which may affect core CPI or... (inflation). With regard to QE itself, there were some members willing to act sooner then thought, although obviously more data gathering and deciding how big QE2 should be won out. So the obvious, that which was pretty much already known, was released. The Fed members who have spoken out publicly have all but revealed the minutes anyway. Yellen's speech was the first to seem try to hint that the party is over regarding speculative asset classes and that QE2 would be different then QE1, the fact that the market didn't pick up on that today leads me to believe, among other things, that institutional money has not been very active in the market today, other then HFT and black-box systems which in my opinion were primed and ready to go on the release of the minutes leading retail investors into the market. Remember earlier in the day I said that 3C was pretty much in line with price, that's what I'd expect to see when the main participants are retail or at least when smart money is just going along for the ride.

Other highlights included lowering expectations for real growth the rest of 2010, something which many think was leaked to Pimco as comments were made about it live on CNBC several weeks back. They also reduced next year's growth projections slightly.

As usual Hoenig dissented in gist saying keeping rates artificially low for an extended period of time may cause other asset bubbles and create a situation like the one we are trying to get out of. He favors deleting the language about low rates for an extended period, then lifting the rate closer to 1%, then evaluating. He also does not think the Fed should continue to invest SOMA principal payments.

Other NEWS, NYSE released the short interest for the end of September.

NYSE short interest barely moved from the second week of September, precisely when long versions of 3C showed distribution and between the end of September. The actual reduction in short interest between those two timeframes

As for technicals...

Tonight I'll lead off with PVT (Price Volume Trend). It's an indicator that I rarely show because it's usually in-line with price. PVT combines percentage price change and volume to confirm the strength of price trends or through divergences, warn of weak price moves. Unlike other price-volume indicators, the Price Volume Trend takes into consideration the percentage increase or decrease in price, rather than just simply adding or subtracting volume based on whether the current price is higher than the previous day's price. PVT is an indicator that almost always mirrors the underlying market action. A divergence in PVT is rare, but when they form, they're not to be taken lightly.

Here are today's PVT charts:

QQQQ 5 min chart with a serious negative divergence today.

QQQQ Hourly chart-another divergence

The SPY 5 min chart diverging

The hourly DIA in a relative divergence.

No matter what time frame I use, or which average it is negatively divergent. This is something I've only seen a handful of times.

Also, while we can sometimes be myopic about price moves and what is what, this is a clear picture of the Euro vs. the Dollar.

Clearly the trend line has been broken. This also the first time in this rally that the 50 moving average is under the 100 and the 100 is under the 200. There will always be bounces, but for accurate technical description, the uptrend in the Euro and downtrend in the Dollar has been broken, something 3C has been picking up on recently.

As for breadth, one of the most under-rated technical tools:

This is the entire NASDAQ Composite, look at the price in red at the August highs and compare the green indicator (Advance/Decline line) with the current higher highs; they are virtually the same-this is a horrible reading.

Stocks 2 S.D. above their 40 day moving average are lower now then they were at the top of August's rally.

Here's the Russell 2000 Advance /Decline line. The Russell in red is at new highs as far as rally tops go, the advance decline line is at new lows. 

The Dominant Price Volume relationships showed a bit of this today. While Price up, Volume up (bullish) was the leader, the second dominant P/V relationship was price down and Volume up-(indication of panic selling).

As for today's closing 3C charts... All went negatively divergent into the close, which is something I probably could have predicted based on TICK volume. This was the strongest divergence of the day.

Here's the TICK VOLUME which most of you should have on basic charting packages, this is a very useful tool.

I drew trend lines, I always draw trendlines and watch for a break, which usually will signal a change in the direction of the market. The triangle trendlines were during the advance, that is why I was suspicious of the advance, they should have been trending up. When you see them trending down , that's around the time 3C went negatively divergence.

I don't want to skip GLD which closed down today and seems to be stuck lately. This probably has something to do with the dollar.

As you know, 3C has been showing negative divergences in GLD. 

Oil has also lost momentum at a crucial resistance point.

USO Daily

3C 15 minute and shorter caught onto this, but there's not much after the 15 minute so I'm not sure if this is a temporary setback/consolidation or something big is about to change here. We'll have to see if it spreads to the longer charts.

As for my position on the market, 3C is obviously showing what is there. I think if the shorts were retail shorts it wouldn't be showing up on 3C like it is, just like the retail buying isn't showing up except in a few isolated cases like today, but I think there were HFT type firms in play at the EOD today as well and this is on 1 min charts.

So the verdict, something still doesn't smell right and there are too many pieces of the puzzle fitting together. Until the big picture is revealed, concentrate on risk management/position management if you are short. If you are long, there are many ways to develop objective stops, I'll be glad to discuss them with you if you email me.