Today we had One Day Key Reversals in the NASDAQ 100, the Russell 2000, The NASDAQ Composite, the IWM, the SPY, the QQQQ, and a massive one in GLD (technically it missed the true definition by $.06 but the size I think qualifies it).
The Dominant Price Volume Relationship was Price Down, Volume up in all of the 4 major averages which is indicative of panic selling.
Overall, it was a day very much out of character for this market and days like this are worthy to take note of. Anytime a market has a distinct change in character, it's something to keep a close eye on.
The PM's (Precious Metals) were taken to the wood shed after the CME (Chicago Mercantile Exchange) hiked the margin requirements for Silver Futures Contracts by 30% from 5000 to 6500. Although only Silver Futures were hit with the increased margin requirement, gold seemed to fall in sympathy with silver as correlated markets often do. THIS IS ONE REASON I always say to watch the trades you have in your portfolio, that they are not to closely correlated. You wouldn't put all of your eggs in one basket would you? Trading highly correlated positions, even if you have 20, is like putting all of your eggs in one basket.
Earlier in the day I mentioned the summary of an article I saw that talked about the Fed wanting to kill gold and PM's apparently to try to push money toward other risk assets such as stocks, housing and junk bonds and away from the safety of Pms. Whether this is true or whether it has something to do with JPM and covering their short in Silver ahead of an investigation from manipulation in that market, who knows, but the CME (Chicago Mercantile Exchange) did exactly as they wanted as they have the right to do and increased the margin for Silver futures.
Regarding Gold, remember the rule of the Fed's unintended consequences. As I said last night, the move toward QE2 , although widely expected, has been widely criticized the world over and certainly here at home. Today even Fed Governor Kevin Warsh voiced his doubts about Quantitative Easing and Warsh VOTED for the $600 Billion in QE2! Perhaps in response to QE2, the President of the World Bank wrote a piece in the Financial Times essentially calling for a currency that is gold backed which sent gold soaring yesterday. This is a huge development and if it comes to pass, the entire monetary system will be turned on its head.
The Dollar which is largely inversely correlated with stocks and commodities has been on a tear lately, or more appropriately since the Fed is trying to kill the dollar (which by the way has many who have been labelled or nearly labelled as currency manipulators, up in arms over the Fed's hypocritical QE2 actions) the Euro really has been tanking against the dollar, but today we also saw the GBP fall fairly hard against the dollar as well, ahead of the UK's quarterly inflation report. The speculation regarding the Euro weakness is that this is about one or more of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), probably most specifically Ireland and Portugal. I personally never thought the Euro was a smart idea, maybe the Union in some form or fashion, but the US has undergone centuries of wars and transformations to arrive where it is today (as sad of a state of affairs as that may be). To take dozens of countries, all with different needs, products, exports, imports, cultures and economies and expect them to all act as one financially in such a short period of time seems unrealistic and there's no doubt that Greece would be better off had it never entered the union as it would be free to take actions that the Union prohibits, to help save its economy. The English appear to be pretty smart for not jumping on the Euro band wagon. In any case, it seems it's either going to come down to a few countries drag all down or the experiment is going to end; worse for some then others but badly all around. So the charts below are not so much a reflection of US dollar strength as they are of Euro weakness which is a trend that has been showing up in 3C on and off for several months now, but especially recently as I highlighted last night with the Dollar Index. Here are the FX charts of the EUR/USD:
This chart shows how quickly the reversal came about. Where you see the number "7" is the start of FX trading this week, currently the Euro is siting right at a support level from Oct 27/28.
This 5 min chart shows the downdraft in the euro since the start of the trading week at the red arrow.
Another key currency pair to watch is the Dollar vs. the Yen as this chart below shows, the dollar strengthened quickly today, almost parabolically against the Yen. We know that the BOJ is not shy about intervention, whether they admit to it or not.
This parabolic move has to have the Japanese government and Central bank a little concerned. If it continues, expect another volley of intervention from the BOJ.
Probably one of today's most scathing interviews regarding QE2 and
“Parabolic moves have Parabolic corrections. This is going to end bad. It is not a matter of if, just a matter of when. This is going to be the ultimate bubble, this is going to make 2000 look like a cakewalk. This is going to be the bubble of all bubbles."”
You can watch the interviews here:
Back to the market....
Here's what the charts looked like today. This is an example of a key reversal day.
A One day Key Reversal Day opens above the previous close in an uptrend, makes a new high and then closes below the previous day's low, usually on increased volume. This is similar to what is known in Japanese Candlestick charting as a Bearish Engulfing Pattern. Note the increase in volume. Throughout the day it looked like the volume component would not be present, but it picked up substantially toward the close.
Here's what the SPY daily chart looked like today, (remember that daily timeframes are the slowest to move but are the most significant signals for longer term moves).
Note that 3C which is already in a negative divergence also made a move lower today.
Strangely SLV's negative divergence made it all the way to the 15 minute chart meaning there was some heavy negative divergences in SLV today. The top ended with a candle with a tail. My guess is that smart money knew that the CME move was coming and was distributing into strength before the announcement. The charts I posted earlier in the day showed a divergence that looked like it could go negative and I mentioned that early on, but this did go quite negative and pretty quickly.
Buying the pullback? Here's the 5 min 3C chart which clearly showed the negative divergence after a very nice confirmation of the uptrend at the green arrows.
As you can see by this 5 min chart, there does not appear to be any positive divergences at this point.
GLD is showing roughly the same thing, but as I mentioned early this morning, GLD does not or did not, probably still does not look as good as SLV does/did. You can see there was no confirmation on this 5 min chart prior to the easily seen negative divergence leading to the fall in GLD.
And again, there does not appear to be any sign of a positive divergence yet suggesting any real accumulation at this point.
A I showed you last week, TLT is taking a beating, there was negative divergences on the daily charts of the long end treasuries and TMV was a suggested trade intraday, the day before it took off (11/02/2010)
today TMV broke out with no question on good volume and a strong gain/candle. I expect we'll see more gains in this inverse ETF.
TMV may present a good trend trade.
As for tomorrow, XLF took a beating today, but tomorrow the Fed's POMO schedule will be released for QE2. I'm expecting the bulk of it to be front loaded before too much dissent or new voting members that oppose the idea of QE come into voting circulation next year. In any case, XLF was taken down pretty hard today and I think rightfully so with all that's going on in the banking sector. However, XLF did end on a positive note with 3C showing a positive divergence into the close.
Spy showed several smaller negative divergences throughout the day, much like yesterday. It did not end with a positive divergence, but it did end with at least confirmation of the EOD move up which you can see in the red box.
While the DIA daily continues to linger in a negative divergence as seen below
It did show an impressive end of day positive divergence.
The Q's have also shown a very negative divergence and one that I think played out to some degree today, meaning smart money was moving out before today as you can see below..
The 1 min chart did not show a positive divergence but t did show confirmation of the end of day move up.
It was not impressive, but it was an attempt.
Since the close, the Dollar hasn't done much, but as we have seen, it can move a lot overnight and it's near a critical resistance level/support for the Euro. If this level is broken, I'd expect to see some meaningful trend develop along the lines of what I showed you last night in the Dollar Index. Asian and European-especially Great Britain markets may have very meaningful consequences on tomorrow's open.
Remember, this is an extraordinary volatile market. Where in not for QE, I think days like today would be more frequent and would have made meaningful trend reversals a log time ago, but QE is here and there are a lot of wild cards out there, especially as it pertains to currency retaliation. QE2 may not be as smooth as QE1 or QE lite. In any case, no matter which way this thing goes, there are good trade setups popping up nearly every day on both the long and short side. For instance, BAC seems to have given us a beautiful short set up within an established downtrend. Even if you're wrong, the positioning is so close to a objective stop out level (using risk management) there's very little to lose in taking a shot at it, unless some huge surprise comes out, but still prudent risk management can handle that.
So we'll be watching for a possible reversal in a number of markets (currency, commodity, equities)-remember-CONFIRMATION is the name of the game right now. Price is always the final arbiter of market action and trends.
