Daily Wrap

In the end, today was nothing to write home about, unless you are disturbed by blatant manipulation of the Italian Bond Auction, which was the catalyst for today's slight gains on significantly lower volume then yesterday. If you are one for creative thinking and want to give some thought to what unintended consequences may come from Germany's move to literally kick EU member states out of the Union, then today was interesting on that note. It seems like after the uncertainty as to whether Slovakia would pass the EFSF leveraging plan, which ultimately led to another government being pushed out of power by the EU, having nothing at all to do with the democratic process, just as we have seen in Greece and Italy this week as well; it would seem that the real power behind the EU (despite one country one vote) is fed up with that democratic process that was and for now, still is part of the EU charter, but apparently not for much longer as the CDU is drawing up plans as I write to reform the EU in the vision of its choosing.

As for the action today, as I posted yesterday to keep expectations realistic, it's very much in line with normal bear market (or a transitional move from a bull market top to a bear market decline) behavior.   Nothing technically changed, there were no surprises, just the process unfolding amidst what I would term an environment of growing distrust.

If you looked in the nooks and crannies that few eyes bother with, there were a few disturbing signs (as in disturbing for any one long the market).

One would be the total lack of performance from the NASDAQ 100 today.

With the S&P closing up +.86%, the Dow up +.96%, the Russell 2k up +.93%, the NASDAQ 100 stuck out like a sore thumb, closing down -.11% and about a full percent below the market on average in relative terms.

Look a little closer and Tech was completely left out of the rally.

XLK closed up a mere +.27%

And a little deeper, AAPL seems to be having problems and given its weight on the NASDAQ 100, it doesn't bode well for the NASDAQ moving forward.

 AAPL closes down -2.55% today on the fourth day of increasing volume.

 Here's AAPL vs the SPY on a 5 min chart with today highlighted in the red box, totally divergence.

Looking at AAPL's daily chart, the problems have been there for awhile and are manifesting now.

However, this is obvious stuff.

Commodities again, just like Tuesday, didn't participate in the rally either. This could just be weakness in market breadth and/or it could be indicative of the problems that are happening in China, no matter what data their opaque government releases.

 Here's today's relative performance between the CCI Index and the S&P, with the index closing down -.22%


And the S&P vs Dr. Copper which closed down .82%, but perhaps the most telling with regard to potential problems in China, KOL (coal) was down -.38%, so the market breadth was certainly not carrying commodities with it.

However that too is not too difficult to spot.

Maybe on of the more disturbing signs was that of credit markets which are generally where the professionals are making trades first in anticipation of problems in the market (Credit leads equities); here's a look a HYG.

 Looking back, you can see HYG (green) tracks the market (S&P-500 red) pretty well, except if you observe closely, it tends to lead it.

 For instance, in the 2008 model time period I have been using recently, credit tops in white while the S&P rallies on, credit diverges with S&P gains 3x before the market crashes 50+% lower.

 Recently at the bear flag retracement over the last week, credit doesn't follow the S&P in to the bear flag and good thing as it led to the biggest 1 day decline in about 3 months just yesterday.

 Here's a intraday look at that bear flag bounce and how credit sells off before the S&P and before the drop and if you look closely, it did the same thing today.

Here's a 1 min intraday basis of today, credit tops while the S&P moves higher, into the close, the S&P gets a modest lift while HYG continues to the lows of the day.

 As for the S&P itself, you an see the October rally rounding over (rounding top) and it stuck below the 50 ema on an hourly chart. While there will be volatility and bumps and dips, this rounding trend is leading to a more linear trend (down).


The 50 ema/hourly has held as support, we do have a small gap above in the yellow area, but I can't say whether it is filled or not, in either case,, it doesn't much matter, the trend is your friend.

So far in after hours, 3C is tracking ES well, here's an early look.

The negative divergence in ES is pretty clear, look at the almost instant drop and now 3C is leading negative.  We still have a long night, just like 3 am EDT shaped today, but the initial hints on such a modest day are not very bullish.

Merkel's CDU seeks to wield a club (both meanings of club)

Angela Merkel, probably the most powerful EU figure at this time and her Christian Democratic Union party are seeking to hange the EU treaties as mentioned yesterday in a shocker. Yesterday the wording was that a country that wanted to or could not abide by the common currency rules could leave the union, this has been clarified at the request of the CDU to read more like "Expulsion". The CDU is moving toward a mechanism and change in treaty rules that will allow them to wield a heavy club and throw out any country that they see fit, the problem with smashing a fragile union with a blunt club is the collateral amage, but it seems the German party is no longer seeking to "Save the common currency union at any cost" as was the line just a few short months ago, but rather to preserve Germany as they clearly see contagion spreading as has been predicted by the very acronym "PIIGS" (Portugal-check; Ireland-check; Italy-underway; Greece-double check; and Spain-half a check). They see the rating's agencies bearing down on France's coveted AAA as well as Austria's and they know that contagion is no longer a theoretical possibility of the worst sort, but a self-fulfilling reality.

Of course as with everything that is European Union related, this is not very well thought out, as it has been since the start of the experiment, why do you think England still uses the Pound? They have a little more common  sense and saw the potential pitfalls of not being able to control your own currency (such as deflate your way out of debt).

As I mentioned yesterday, assuming Greece alone is expelled (Italy because of the size of contagion would be a close second), all of that debt the ECB and other entities, including each country's banks would be exposed to massive losses. I suppose Germany is betting that they can take the hit and still survive, but where does that leave everyone else and what happens should France be downgraded by 1 notch? The EU would virtually consist of about 3 countries.

So to recap, today's development, the language has gone from implying a voluntary exit to a forced removal.

Market Update

 The 1 min chart has gone negative and the market has responded.

 Earlier I was concerned with the leading positive divergence in the 2 and 5 min chart, both of those are gone now, however neither is much more then in confirmation with the recent move down, which is to say there has been deterioration as they were leading positive earlier.

 SPY 5 min

Unlike earlier when the SPY was leading the Euro by a surprising margin, it is now in line, which is also some deterioration from the earlier updates.

I'll continue to watch for any changes as we are in the final hour of trade.

US 30 year Bond Auction Dismal

Today the Treasury auctioned off $16 billion in 30 year bonds, you may recall this is also about the duration that Operation Twist was to buy, except operation twist has been a dismal failure thus far.

I bring you this rather bore-some news for a specific reason, which I will get to.

According to Reuters

An auction of 30-year Treasury bonds on Thursday was met with the second lowest demand of the past year as historically low yields kept buyers away.


The auction of $16 billion of the bonds brought a bid-to-cover ratio, a gauge of demand, of 2.49, which was the lowest since a bid-to-cover of 2.08 in an August auction and the second lowest since a bid-to-cover of 2.31 in November 2010.


The auction brought a high yield of 3.199 percent, which was above where 30-year bond yields were trading in the "when-issued" market at the time of the sale


Further Internals


Dealers had to buy well over half again or 55.7% with Indirects taking a meager 28.4%, and the remaining 15.8% going to Directs,


 Perhaps the global banks, in an attempt to preserve the Ponzi one more time, pushed all their freely allocatable and repoable capital into Italy and had far less left for long US paper.


Here's the definition of the 3 bond buyers, Indirects, Directs and Primary Dealers:


1.  Direct Buyers: folks who buy straight from the Treasury, typically comprising a minor stake in US debt purchases

2.  Indirect Buyers: folks who buy LARGE chunks of US debt, typically Foreign Governments

3.  Primary Dealers: banks that HAVE to buy US debt to insure an auction doesn’t fail. You don’t want to see a lot of Primary Dealer purchases as this means that those who can CHOOSE to buy US debt DON’T want to.
 


What this means to the market:


First as pointed out just about a week or so ago when the F-E-D released their custodial foreign accounts, they showed, as I have been making the case, that European governments and especially banks, the Indirect Bidders (#2)  have been selling anything not nailed down to meet the new capital requirements they have been ordered to meet. 


Because the EU banks are trading at less then half of book value they don't want to issue new shares and they would almost certainly be locked out of the capital markets any way. So these foreign entities have been selling everything that is not nailed down and especially in the $USD denominated space as evidenced by the huge plunge, first in the PRIMEX index and secondly by the F-E-D's foreign custodial account which showed a record number of sales as EU banks desperately try to recapitalize to the tune of almost 100% more then their current market cap. 


Foreign entities, Indirect Bidders, can't be liquidating US treasuries and expected to be buying them at the same time. Furthermore, Congress recently threw a bee-hive in to China with the currency manipulator legislation, so China, an indirect, is not likely to be an active bidder if for no other reason then pure spite.


This, I hope, demonstrates the lack of capital at EU banks with unknown exposure to toxic debt as well as an unknown amount of CDS they have written. You would think the first thing the EU would do would be to get a grasp on the size of the problem they are dealing with, but to date, none of the stress tests have included CDS so long as they are kept in non-trading accounts, this is what endangers the AAA credit rating of Austria as their main bank, ERSTE, had to come clean about how much liability they are exposed to due to CDS alone that they did not declare during the stress tests (2 of them!).


It's no wonder that US Treasury auctions look horrible and that is not likely to change any time soon, it is bigger then US problems such as the idiots in the super committee (this will be the next US financial crisis). However, it is more indicative of the trouble Europe is in, and perhaps it may indicate that China, besides being spiteful, may have some problems of their own as recent data has suggested.

EFSF is DOA, that leaves the ECB and they have something interesting to say

Being the ill-concieved notion of leveraging up the EFSF has yet to gain ANY traction at all, countries are looking at the ECB as the 'lender of last resort", ironically after today's "grey intervention" in Italian debt, the ECB releases this according to Bloomberg:

ECB’s Policy Makers Say They Can’t Do Much More to Stem Financial Crisis

Some excerpts:

“Not much more can be expected from us, it’s up to the governments,” Governing Council member Klaas Knot, who heads the Dutch central bank, told lawmakers in The Hague today. Three other policy makers have also publicly rejected calls for more ECB intervention and two further officials, who spoke on condition of anonymity, said the central bank has no plans to make its purchase program unlimited.

In addition, the ECB has so far bought 183 billion euros of government bonds from debt-strapped nations, purchases is says are aimed solely at ensuring its interest rates are transmitted on financial markets. To prevent the purchases from fueling inflation, it sterilizes them by draining the same amount of money they create from the banking system.

Knot said the ECB can maintain its bond buying as long as it can continue to remove the same amount of money from the system. “The bigger the portfolio, the more difficult that becomes,” he said. “Interventions can only have a temporary and very limited effect,” Knot added.

Rabobank economist Elwin de Groot estimates there is a “natural limit” of 300 billion euros in government bond purchases the ECB can sterilize.

Bond buying with the aim of bailing out a government is monetary financing and prohibited by the euro’s founding treaty, Bundesbank President Jens Weidmann said this week. He cited Germany’s experience of hyperinflation after World War I as a reason why such action should never be contemplated again.

The debt crisis is pushing the economy into recession. The European Commission today slashed its euro-area growth forecast for next year to 0.5 percent from 1.8 percent.

Market Update

 The 1 min chart has led the market lower, but

 There remains a leading positive component in the 1 min and 5 min chart below, until these turn south, I won't be convinced of weakness.

 The 50 bar 5 min chart shows support in the area.

 The 50 bar 60 min chart has been broken and this is important, but does volatility from the break cause the market to peak above it.

 This is bothersome, the SPY dropped, the Euro didn't

AAPL is off over 3% by mid day, but it might be time for a bounce.

PMs Update

For now, these are the two most important charts in GLD and SLV and hopefully if you were long you DID have a trailing stop in place as recommended.

 GLD 15 min leading negative divergence

SLV 15 min leading negative divergence.

I'm not sure what is driving trade in these two PMs, a weaker dollar should have them up on the day, for now it seems they are playing perhaps the role of "flight to safety trades", when the flip flopping will stop, I have no idea, but I am starting to suspect there's something unseen at work in the PM's. For now, until they can convincingly show strong accumulation, I would not be a buyer of either yet.

Market Update

So far there's not too much that's very telling yet, I suppose it has to do with rapidly changing events.

 The open was not confirmed and thus the market dropped as 3C was negative on the open, there has been a positive divergence, we usually see one this time of day lately and thus far some negative divergences, whether they are all that remain is too early to say.

The 2 min chart reflects the same opening conditions as well as a positive divergence and current in line trade.

Just as a reminder of what even some of the nastiest downtrends look like on a daily basis...

 July/August 2011 fall, there are down days, flat days and even up days.

June/July 2008, Here's you see even a more mixed market of day to day swings from down to flat to down to up, but the trend is what is important.

This is just a reminder to keep expectations realistic and remind you to concentrate on the trend and the important technical action.

And The ECB's Meddling IS All For Naught

Greece, Italy, Greece, Italy, Ireland, Greece, Italy, Italy, Spain, Portugal, Italy, Austria, Hungary, Belgium , France ! WHAT? 


How many fires can you (the ECB) put out? Ironically, dousing one sends hot embers drifting over Europe to only start a new fire in the direction of the prevailing winds.

Draghi may have a red phone straight to his former home and one Bennie B., but it seems his helicopter has too many destinations, especially today, whereas Uncle Bennie's only has 1.

Yes, the spike in the markets (no doubt front run by those who colluded with the ECB on Operation Italy this morning) have lost that loving feeling as well as the massive green gains of +3% that should have been printing by now.

Why? French Bunds just hit a new record spread over rumors that the only rating agency out there that seems to act in a useful and timely manner, Egan-Jones, will be eyeing France for a downgrade review.

And that's not all.... Furthermore, Austria (remember I'm a card carrying member of their lying/exposed mega-bank ERSTE) will have a visit from Moody's in 2 weeks to asses the situation on the ground and possibly downgrade Austria's AAA rating status which makes them eligible for the time being, to fund the EFSF, however, anything less then the coveted AAA, which is now seemingly in danger (ERSTE probably wasn't helpful in this situation), takes Austria off the list or the hook depending on where you stand and puts more pressure on France and Germany, but France as explained above may face their own rating's problems, putting all of the pressure on Germany, which by then, may also come under scrutiny. Hungary and Belgium are on the list as well.

Meanwhile it is looking like the ECB's only fallback will be to print (and if Draghi is consulting one Bennie B, it is likely that is the advice he has been given). It's already been proven that the ECB has been doing exactly that, much to the dismay of Germany who still recalls what printing and hyper inflation can do by example of one Weimar Republic. It appears at least $970 billion Euros have already been freshly printed by the ECB, which Germany (and this is part of the Merkel-Sarkozy disagreement) is adamantly opposed to having had first hand experience with the effects of printing and hyper-inflation and this may just be the reason why the ECB is a lot less German then it was not too long ago with the resignations of Weber and Stark and why the ones that are still left, are saying Germany has had just about enough of it.

Just today, Germany's Bundesbank reports,

*BUNDESBANK SEES NO SIGNS OF CREDIT CRUNCH IN GERMANY

If the ECB continues down this path, perhaps the Wikileaks cable released last week may be more accurate then the news from yesterday of a new EU, one that has far fewer members. Perhaps as Wikileaks suggested, actually Germany suggested and Wikileaks just passed along the intercepted cable, that Germany is considering exiting the EU altogether and going it alone.

Wouldn't that be something, especially if they were the only AAA country in Europe left.

As I mentioned 2 nights ago, these are the signs of the end of the party, rumors and rumors of rumors and accelerating rumors and news, all leading to massive distrust between the key players. We are there.

The PEIX Trade

I know at least someone caught this one, remember, "Keep PEIX on your radar-look for an entry on a pullback to the 10-day moving average"?

If you bought near the 10-day m.a. on the recent pullback we expected, you made 35% in less then 2 days! I would keep an eye out for any additional pullbacks to the yellow 10-day moving average.

The post I've been putting off

I've been meaning to write this post for over two hours now, I haven't done so because I didn't want to come off in an immature light, but it's a topic that really bothers me.

I started Wolf on Wall Street to help traders who wanted to help themselves to better understand how upside down and corrupt this market is. I taught Technical Analysis at the County Public school system for 3.5 years, only being paid for the 2 hours a night that I taught, but each class I customized to the current market conditions, so I had an extra 6 hours of prep work, again it wasn't for the money, but because I have a terrible dichotomy, I hate unfairness and I love the market. So I suppose the things I've done have been my way of coming to terms with that dichotomy.

Yesterday an Italian bond sale was scheduled for today at 3 a.m. EDT, which I believe is about 8 a.m. local.  With the Italian bond market upended yesterday, I figured, "They'll probably cancel the sale, just as the ECB and Germany recently did due to "unfavorable market conditions", but they didn't; they went on with the sale of debt as planned.

Here's what has had me stewing for the last few hours.

The Italian government auctioned off $5 billion Eur. of 1 year bills at a yield of 6.087% which is high, it's the highest they have been in about 14 years and nearly double what they auctioned off for just a month ago. The disgusting part is that just minutes before the sale, in the secondary market the same bills were trading at  much worse yield of 7.75% which is about 175 basis points higher then the auctioned bills.

Why in the world would anyone buy a new issuance that is no different then the secondary but in effect, pay a higher price and take on more risk for the same thing they could buy in the secondary? The yield in the secondary is so high because it reflects the risks in Italy, so why?

It is known that the ECB went in and bought in the secondary market minutes after the auction to bring the yield down to 7%, which has since risen again, which looks like a very sloppy and very illegal event transpired. Just like in the US (F_ED), the ECB is prohibited by law from participating in the bond auction, they can participate in the secondary, but why any bank would take such a wide risk I think can only be answered by a deal the ECB cut and monies transferred to the bidding banks to keep this auction from becoming the next event to send shock waves through Europe.

While we are on the subject, what about Democracy? We have seen G-Pap forced from his post in Greece and whether he deserved it or not (which most would agree he did) Berlusconi was forced out in similar fashion as it was just this weekend that the ECB, not so subtlety said they would stop buying/supporting Italian debt if "major changes didn't take place", as soon as Berlusconi is gone, the ECB is there buying up bonds illegally somehow in the primary market and cleaning up the secondary market, a far cry from their weekend stance, the only thing having happened was a non-democratic transfer of power or at least Berlusconi swearing to step down.

Furthermore, from the information I have, likely the same banks that participated in this illegal or VERY GREY event, likely front run the market, here's what I mean.

 This is ES overnight, there's a strong positive divergence right up until about 2:15 a.m. at 3 a.m. at the blue arrow, the "successful bond auction" was conducted, so the banks had hours to front run the event that they knew would push ES higher and ES moved higher exactly at 3 a.m. (blue arrow).

Here's the Euro/USD and it taking off at 3 a.m. EDT at the red arrow, exactly when the bond auction took place.

The only thing that gives me any satisfaction at all is seeing the market collapse from the opening gap as it would seem investors were hip to the shenanigans going on with the ECB, now led by a former F-E-D official.

I feel disgusted by this all.