Monday's Wrap

The market is slowly shifting away from the sugar high news and focussing on what I have termed, the important news or the Forest rather then the trees.

In the very short term, equities have caught up to credit, and now we have a small gap above, it seems like a decent time for the market to fill that gap, if left unfilled, then we are a lot closer to coal stuffed Christmas stocking. Volume is light and will remain so, giving the market the ability to become very volatile and move in contradiction to most implied correlations. Now that the market has as I said, caught up with credits SHORT TERM downside, it may be time for another "Dislocation" which for us, is an opportunity to enter shorts at better prices with less risk.

Let start with our Credit indicators.

 In the short term equities have fallen in sync roughly with commodities and they are moving slightly up off the lows together today.

 Long term you an see dislocations that are bearish in red and the effect they have had on the S&P sending it lower and bullish in white sending the market higher, we still have a long term dislocation and I think this tells us that China is not so well off. There may be a trade there.

 Short term the market has aligned with the Euro, although today we did see the market move up out of sync with the Euro, which suggests it wants to move in to dislocation again as we have seen recently in the red boxes, which have quickly shot the market back down.

 Here's a daily chart of the S&P vs the Euro and several bearish dislocations and 1 inline point at the start of the October rally in green.

 Longer term the Euro was in sync with the market until QE 1 ended and QE 2 brought the F_E_D's POMO operations which sent the market up no matter what the Euro did, now that is over, the correlation is coming back, but the Euro is still significantly lower then implied prices in the market, the white trend line would put the market in sync with the Euro, that's a decent fall and assumes the Euro doesn't move lower.

 High Yield Credit has fewer major dislocations, but offers excellent timing opportunities to get short the market, right now HY seems to want to move higher, it did today and that may move the market to fill today's gap.

 Longer term there are some excellent signals for decent swing trade moves of around 15% or so.

 High Yield Corporate had fallen and sold off, the market's recent sell off has just caught up short term, I don't expect them to stay in sync, but rather dislocate again. Even in times of good correlation in the green box, there were still short term trading opportunities and I think we'll identify some this week.

 Recent short term action was in sync, dislocated with some sharp market moves down and is close to in sync, but the market is still a bit rich to HYC, that doesn't mean it can't move to a larger divergence, which is a better opportunity for us.

 Longer term we have a synced market in green, a bullish signal from credit in white and several bearish signals that have defined the top and sent the market lower, right now they are very close to synced short term.

 Yields have led the market, both up and down and according to yields, the market has plenty more room to fall, that doesn't rule out counter trend  corrections along the way.

 Long term yields are VERY bearish for the market and suggest a significant fall to near $100 SPY, or about a move down of 20% from current levels.

 XLF started with some early momentum and ended with the market showing better relative strength or at least momentum. Financials of all sorts should continue to underperform and in my opinion, a long position in FAZ should be a must have position.

Long term the weakness is apparent in financials.

To 3C charts...

 This is the daily Dow-30, it looks the worst today of all the averages, there is no gap to fill and today's price candle isn't very bullish, it's mediocre and ambiguous.

 The short term 2 min chart does show a slight positive divergence.

 The hourly chart shows how bad a shape the Dow is in, right now it looks worse then before the July fall of some 16%.

 The NASDAQ 100 has a bullish closing candle today which is called a hammer, it is typical of a short term bottom, there are no target or time implications, just suggests the current trend will change, that can be from down to up or even sideways, the yellow area is the gap I suspect will be filled.
You can see other similar candles in white boxes, each was a short term reversal to the upside.

 The QQQ has a decent positive divergence on the 5 min chart, so I would guess there is an attempt to fill that gap.

 The 10 min chart is only slightly positive, which caps the move as the longer term charts imply longer term moves, this doesn't imply much as for a longer term move.

 The 60 min chart shows how bad the QQQ looks and those leading divergences tend to pull price to them.

 The SPY also has a bullish hammer closing candle today and there are several other examples, you can see they can lead to moves of several days or a single day, the candle itself only suggests a short term reversal, it doesn't imply anything about strength. In yellow, there's a small gap that will likely be filled.

 The short term 5 min chart is slightly positive.

 The 10 min chart is only in line, so it doesn't appear that there is any big move coming, but filling the gap seems reasonable.



Of course the 3 am EDT Euro open can change a lot and very fast, so while ES is higher right now as the charts suggest it would be, who knows what happens when Europe opens. I've never seen a market that was so moved by the European open and that is where the heart of the trouble is.

The US Super Committee has failed, it will be interesting to see how the market discounts that as everything has ben about the EU lately.