A whole lot of Bad in a wishful market

With so many emails and comments and trying to catch up from yesterday, I have some real catching up to do. Yesterday's "U" shaped or rounding reversal looked quite nasty, even if it was not reflected in the daily close to any significant degree, it just looked like another day up. However, whenever we have a Star like we saw yesterday or a shooting star, it is showing us that intraday, higher prices were rejected.

Here's the rounding top yesterday with 3C.

The vertical line is the open of yesterday, this is the SPY 5 min chart. There are no ifs, ands or buts about the negative divergence at the top, and from there into a leading divergence as price finished higher, but 3C was quite a bit lower. Compare the two horizontal arrows to see the difference. This is a leading negative divergence.

The next chart shows a second vertical line which is today. It did not tart out well. However around 1 pm you can see a positive divergence building which finally took shape around 3 pm.

To keep this in perspective, as I mentioned last week, the shorter time frames were going very negative, I said if it kept up we'd see it on the longer timeframes.

Here is the 10 minute... SPY

The 15 min DIA

30 min QQQQ

All in all, yesterday seemed to be an important day.

The VIX divergence is getting stronger, note the last VIX divergence and how small it was relatively, but it led to quite a move down in April.

XLF did show some 3C strength today, although it is still negatively divergent.

FAZ showed likewise some weakness in the 15 min chart today, but still is in a positive divergence.

The strength in FAZ is especially evident on the 60 minute chart-the higher the time frame, the more important the divergence.

GLD 10 min

As you can see 3C has called the divergence/reversals on the 10 min chart. I know it gets a bit confusing, but lets just focus on today.  The day started out with a negative divergence, GLD pulled back a little from there, then we saw the green arrow (confirmation as we saw higher prices into mid afternoon, By late afternoon we were still seeing higher prices, but the confirmation ended with a negative divergence as prices made a new high and 3C started stepping down lower.

This same behavior can be seen on a 1 min chart.

The USO chart has been in confirmation mode mostly until today, as I mentioned in an earlier update. Keep in mind both USO and financials went against the grain of higher Euro prices which is a little strange. I added a couple of indicators that are similar to 3C, I don't like them as much, but they roughly show the same thing.

The green arrows are confirmation, red negative divergences. I'm not quite sure if this is a pullback as USO approaches resistance or the start of something else.

Now some of the underlying fundamentals.

One of the biggest surprises to me this week was Janet Yellin more or less seemingly trying to lower expectations for QE2 and attaching a lot of conditions we haven't heard before. someone of this stature isn't out there as a lone wolf describing her opinions, she certainly had the blessings of BB and this was probably the first of the relevant Fed members to say such things. Bernanke's speech tomorrow should be very enlightening. One thing to remember though, when then Fed talks, the initial reaction to what is said is almost always the wrong reaction. It usually reverses within a a day to a couple of days. If you've been here long enough, you have seen this in action.

Another hot topic is inflation. The Fed seems to think it's a necessary evil to get jobs rolling, but the again it's a catch 22 as it hurts the economy. From the minutes released, they wanted to gear up some inflation, but all of the sudden they got it without any policy changes, I doubt this sits well with the Fed at this point. It wasn't expected, they assumed they could use a controlled burn to produce the right amount and now it's off on it's own doing it's own thing. More QE2=more inflation.

The Fed/Treasury/White House's Chinese Finger Trap that is "Fauxclosure". Don't forget who owns these toxic assets. The problem all comes back to the MBS scandal, as these loans were sold from one to another, any signature that was skipped, automatically throws the loan into question and in some cases a lot more then question. MBS has come back to haunt the banking system, do not underestimate the pile of carp that this is going to create. Why do you think BAC suspended foreclosures the day after the President pocket vetoed the bill that slipped through congress on the ultra-lube express that would have allowed these fraudulent signatures to be recognized in court? It seems everyone who is up for re-election including Senator Harry Reid is now calling for a halt to foreclosures in their respective states-some 40 state's Attorney Generals, Congressman, and Senators. They know the public perception of bailing out the banks once again is not going to go over well with an irate public. On the other side of the coin, if you can't prove who owns the note or there are discrepancies, no title company will write insurance-bye-bye to housing sales (as an aside, this may be why new home builders are looking better on the 3C charts).

So what will the government do? Probably side with the banks in saying it will hurt the housing recovery...which is where? In any case, remember who owns trillions of dollars of assets that are, toxic loans that are being foreclosed on. So where exactly will the bid come from, I personally am looking for a home, but I'm staying away from all foreclosures or bank owned. Remember, these are all part of structured assets as well. Add to that the fact that the banks REO portfolios have in some cases doubled in size, they have a huge problem here. However, this is a post that could take up pages.

Treasury auctions to say the very least ARE NOT going well. Read about the ones this week alone.

Watch for reality... yesterday the headline "JPM Earnings BEAT! 3Q earnings rise 23%"

And look what happened to financials today. Heck, look at JPM today... 3C caught this one right on.

Down nearly 3 % today,  WFC down 4.11%,  BAC-4.29%,   C -4%,  GS -1.93.  With the market headed higher, this is a little warning that ought to be watched pretty carefully.

There's a lot more-Unemployment is not better it's worse. As I predicted and showed you the U6 number jumped big time. The headline U3 number may make it seem not so bad, but the truth, the literal truth is not only bad, but worse and the size of the jump was astounding.

I could keep on going and going, but ultimately, Friday is going to tell the story. There's a whole lot of bad and a market way higher then when it believed there was a whole lot of good.

Yet the markets drift higher on what they believe will be QE2, which is not even confirmed at this point-I fall back to Yellen's speech. Tomorrow Bernanke will speak, the market is high right now as you can see in after hours, but I'm willing to bet that QE2-if the market even gets what it thinks, is going to be a lot different then QE1.

We'll see tomorrow.