Friday Op-Ex Close

Yesterday I posted the Options Expiration analysis  the post ended like this,

"As always, it's a best guess and my best guess would be somewhere around >$120-$122+, a bit wider then past guesses, but there is a quarter of a million in open interest at $122."


The SPY close today? $121.98 which means after you figure in the premium and even if there was no premium, the transaction costs alone made the quarter of a million open contracts at $122 worth ZERO. 


So one again, we see the market do what it does best, take your money.


This is why I am not a big fan of options and if you trade them, you need to take a much different approach, lest you be part of the majority of option buyers who saw their contracts expire worthless.


Guessing the market pin and missing it by $.02, shows just how prevalent this practice is and why the markets were so flat and calm today.

Last Update

Nothing much has changed, the short term positive divergence could be an effort to hold the market here for the pin or could reflect a bounce, Credit if anything today has sold off a bit, but not by a huge amount.

I think the weekend will be volatile as usual with governments and banks hoping Germany will relent and allow the ECB to loan to the IMF so the IMF can loan to the EU, but Germany (I haven't covered the news yet) seems to be well along another path, one of becoming the EU's new dictator and the "decider" of who stays in the club and who gets the boot.

From everything I've seen, even if the ECB relents, it's good for a short term pop at most as other issues come in to play.

However it looks less likely, the louder the calls get.

I'll be posting more shortly.

Some News that Matters

It was just last week that one of our members in Italy said that to withdrawal more then $2,000 Euros from the bank, you had to place an order and then the bank would call you to tell you when they had the money and when you can pick it up, imagine that here in America!

As the member noted in his email to me, he didn't understand why the banks had no liquidity on hand.

This is called short term capital markets freezing up and is exactly what happened in the US that was partially to blame for bringing dow Lehman Brothers as well as starting unprecedented F_E_D_ liquidity operation to unfreeze the capital markets.

What causes this? In three words, "Counter Party Risk". This is what I described two weeks ago as mistrust and that is what creates the beginning of the end for markets. Banks routinely have overnight borrowing operations, but when one bank doesn't know what the other banks's true risks are, they are afraid to lend anything, even overnight, so banks end up without liquidity and we call that a short term credit market freeze. Little has been done to repair this and it seems other then outright monetization, little can be done, although the F_E_D has extended swap lines to Europe to try to help with dollar liquidity.

So last night I ran across this story, which explains exactly why our Italian member must wait to withdrawal funds until the bank has them. Comments to follow the article excerpts.

From the NYT Dealbook:

Banks in Italy Find an Unusual Liquidity Lifeline

The London Stock Exchange is becoming the lender of last resort for many banks in Italy as concerns over the country’s debt levels squeeze liquidity out of the Italian financial market.

Under terms of the deals, the clearinghouse, which acts as a middleman to guarantee trades between financial parties, is offering money to both Italian and European banks with a presence in Italy for up to three days.

The money, which comes from collateral that traders must put up to complete financial transactions, is deposited with the banks to cover shortfalls in liquidity. CC&G earns a profit by charging banks interest on the money that they borrow.

Previously, banks had used the so-called repo market, where banks lend capital to each other on a short-term basis, to meet their financing requirements. But fears about Italy’s ability to repay its debts has pushed up borrowing costs and reduced the ability of banks to access that market.

CC&G also doesn’t technically lend money to banks, but instead deposits the cash with them on a short-term basis. Under Italian law, this distinction makes CC&G a depositor with the banks, and places it ahead of other creditors looking to get their money back if any financial institution should fail.

The Italian business now represents 14 percent of the exchange’s overall income, compared with just 5 percent in the first half of 2010.

With so much news out there, it can get tiresome and everything just kind of blends in to a massive blur of news that leaves you asking yourself, "How is any of this relevant to me, why bother?"


I submit to you, this is one of the most under-appreiated and most dangerous stories we have seen this week.


Think about this, the traditional source of bank liquidity have either dried up, they don't trust each other or the rates to borrow money over very short terms are so high that it is prohibitive.


Now imagine this was happening in the USA and keep MF Global in mind at all times. The credit markets freeze, GE can't make payroll because their (hypothetical) bank, Bank of America has no money to give GE come Friday (and this situation DID happen with GE in particular in 2008). So the New York Stock Exchange takes money, maybe traders margin money, maybe money that has been used to buy 1000 shares of APPL (after all there is a Trade + 3 day settlement rule) and the NYSE lends money to Bank of America at an interest rate for 3 days which is convenient with the T+3 rule.


That is how bad the situation across Europe is, the London Stock Exchange is using their client's/trader's money to lend to EU banks and make a % on each loan.


Now imagine because of Bank of America's huge exposure to Greece, they go bankrupt as Greece defaults on all debts, guess what? The NYSE, even though it has first lien position, just lost a sizable amount of the trader's capital, just like MF Global.


This is how bad the situation is and how desperate banks are to find any kind of money available to them!


This would also explain why in Italy you must wait for your money as it is being lent at an interest rate, they don't want to order any more money then absolutely needed otherwise they pay interest on capital that may not be used.


This is astounding news and introduces a whole new lass of moral hazard and as usual, incredibly dumb decisions taken by everyone in the EU with little thought, except this isn't out of survival for the London Stock Exchange, it is pure greed.


When I said we would see things we can't even imagine and the consequences will be beyond our imagination, you just saw one of those things.

SPY Target

So far,  the SPY has been hovering right above $122, which is what I said yesterday in my Options Expiration "Market Pin" guess. There was some large open interest in the SPY $122 puts, which means to make those expire worthless, the SPY needs to close at $122 or slightly above.

That seems to be the action today as credit is not gearing up for another leg of risk thus far. The other concept which is familiar to most members is that once a serious level of support is broken, the market tends to linger or test that former support level or "kiss it goodbye", it's just the market's way of keep people uncertain.

Here would be a couple of guesses as to what any bounce might look like, if we get such a thing.

Quite a few members wrote me today hoping for a bounce to establish short positions feeling like they missed the bus, when looking at the intermediate term or a 60 min chart, clearly you haven't missed any bus, but a bounce would reduce risk on new short positions.

 The market broke below the triangle, however the lower end of the triangle still provides some support as you can see by the lateral trendline, that's exactly where the market is.

Looking at 60 min bollinger bands, a I see two possibilities if the market did bounce, 1 would be the 20 bar moving average in white, which would be a reversion to the median or the second would be to bounce to the top of the falling upper bollinger band, which would also be in the area for the "Kiss goodbye".

Risk Basket

Guess what, no surprises here!

 Commodities have leaked lower today.

 The market hasn't moved out of line with the Euro today

 Financials have also started to slightly underperform

 High Yielding Corporates have actually leaked lower

 High yield  has leaked lower today.

Yields have moved up slightly today, but nothing that is really worth commenting on.

Market Update

Today's market action seems VERY much like an Options Expiration "Pin". Yesterday I speculated n some levels for the market to close today as option contracts are pinned to cause the most contracts to expire worthless as professionals largely write the contracts and retail (amateurs) buy them. Pinning the market to a certain level ensures that the maximum number of contracts expire worthless, allowing the pros who wrote them to keep the premium profits. The levels I speculated for an OP-EX pin today where from $120 SPY to around $122 SPY, a much wider spread then usual, but there were some large outstanding positions or open interest at levels that would make a move to $122 worthwhile potentially.

Here's the most recent update and I am changing my template back over to the new Risk Asset/Credit template right now to see if there are any underlying changes in the credit, commodity , rates markets, etc.

As of this morning's open, the theme between 3C and the broader risk markets was nearly identical, some hints of very short term bullishness while the longer term trends are solidly implying a VERY bearish environment that should lead the market lower, by both the Credit market and 3C standards, which is a new form of confirmation to add to the many we already use.

 DIA 1 min showed some late day positive divergences yesterday as the market flattened out, there have been some negative divergences since and a lot of confirmation (green arrows), currently there's a small negative leading divergence in the DIA 1 min chart.

 The 5 min DIA shows in line status from late yesterday, and pretty much in line most of today, the fact there are no significant positive divergences seems to underpin the idea that the market may under the influence of an Op-Ex pin.

 The 10 min chart shows some slight positive action.

 The long term 60 min is very negative.

 IWM 1 min showed a small positive divergence yesterday afternoon, followed by a negative divergence and we have had two recent consecutive, but small divergences, today, the first negative, the second positive, which also seems very mixed and no real underlying theme except that of a potential market pin.

 The 5 min IWM showed a mild positive divergence near the close yesterday, and a small leading positive today, but thus far it has failed to capitalize on that divergence and has moved back to in line status at the green arrow.

 The 10 min chart, other then showing the negative divergence that took the market down yesterday, is in line with no divergences to speak of today.

The longer term IWM 30 min chart is leading negative and near new lows, confirming credit and suggesting the emerging "forest" view, rather then the "trees" is quite negative for the market, despite any short term volatility.

 QQQ 2 min shows the negative divergence causing the market to fall over the last several days, with a late day positive divergence yesterday, these positive divergences "may" just be enough support to keep the market from continuing to fall, given the option expiration today.

 The 10 min QQQ chart also shows a modest 10 min positive divergence.

 However once again, the long term trend is leading negative, the worst kind of divergence and has been for some time, the market has finally started to catch up to the underlying action 3C has been showing.

 SPY 1 min shows a late day positive divergence yesterday and thus far today is trading nearly perfectly in line.

 The 5 min chart showed the most robust of the 5 min positive divergences from yesterday, there hasn't been much of a price move, which lends some credibility to the theory that the positive divergences are just there to keep the market from falling much lower on an Op-Ex day.

 The SPY 10 min is in line and flat, usually we'd expect to se some strength build in on the next longest timeframe, thus far none.

 And the long term SPY 3C chart, hitting new leading negative lows.

The TICK chart, which is very odd today, reflects a flat trend as many of the 3C charts above have shown, this is very rare to see in the NYSE TICK chart and again, I assume it is due to a potential market pin, neither letting the market fall or rise to pin it at a certain level to cause the options to expire worthless and put all the premiums in Wall Street's pocket.

I'm VERY pleased to bring you this USO Update

To date I still do not have a clue as to why USO broke 180 degrees with it's $USD correlation, after all, crude is traded the world over in $USD. When the $USD falls, crude moves up to compensate, when $USD strengthens as we have seen recently, crude moves down to compensate, it is one of the most predictable FX correlations out there, so why the disconnect? I have no idea, but through it all, 3C signaled distribution in to higher prices and finally USO has felt the gravitational pull of that distribution.

Recently I have pointed out the bearish ascending wedge in USO and 3 days ago we had a very reliable Japanese Candlestick "Evening Doji Star' reversal pattern, it worked perfectly and USO confirmed with a major break yesterday and continues to move lower, which made some members a decent chunk of change in the last 2 days. This is why the market action that you can see, can rarely be trusted and why we put so much emphasis on the underlying action that shows us institutional money's footsteps in the sand.

Here's an update for USO today.

 This is a daily chart of USO, at the green arrow is the bearish ascending wedge (that's right, even with climbing prices, the wedge makes the pattern bearish and the initial downside target is usually the base of the wedge around $34 in this case, but often a reversal like this is more significant). The white arrow shows the bearish evening star doji, which also broke out of the ascending wedge, something the dogma of technical analysis says it should not do, the volume was very heavy so many technical traders likely bought that breakout thinking the wedge was a failed pattern and this is likely where smart money dumped their entire position and went short, leaving retail traders holding USO at the highs at a significant loss. The two red arrows are very bearish candlesticks that are confirmation of the evening star reversal. Remember volume analysis, that doji, evening star was on heavy volume, but intraday it closed exactly where it opened, which is a sign of churning or strong hands selling to weak hands. Even simple volume could have helped tell the story of what happens next.

 Short term 3C 2 min charts also showed a very negative divergence (distribution) at the doji star reversal and since USO has moved down over the last 2 days, 3C has confirmed the downtrend as being strong thus far.

 The longer term 15 min hart went negative in late October and USO did fall briefly, that is when it reversed correlation to the $USD and started forming the bearish wedge, that entire period remained negative in 3C's view, showing us likely distribution in to higher pries,such is the way of Wall Street. The downside negative divergence in the red box, further confirms the strength of the downtrend.

 The long term trend represented by the 30 min chart showed, just like all the other 3C timeframes, that this was indeed a distribution event with those who chased USO higher, taking on losses or soon to be taking on losses as USO moves lower. There's also more downside confirmation in the red box.

 Here is the daily chart compared to the Euro, USO should trade almost exactly like the Euro, instead it broke the FX correlation right as it formed the bearish wedge. Again, as for volume analysis, the doji star and volume on that day at the red arrows, told us it was very likely that bearish churning was under way. Sometimes it is very difficult to believe the charts showing the underlying action (I've had years of experience with them and have trusted them even in situations like this where there seems to be no rationale to the price action), but when we look back at this a month from now, it is highly likely that those who entered USO short will be glad they did.

As far as my stop or where I consider USO to be beyond the point of no return, I have maintained the $36.50 level and my Trend Channel is at that exact spot, so a break of that level may offer another opportunity to short or add to USO shorts. There may be short term volatility in the area, but that may be useful in getting better positioning.

Risk Indicators

From last night's post... As I mentioned last night, on a short term basis, the markets fell to roughly in line with what the credit and other risk markets had been predicting, on a longer term, those credit/risk markets still show the S&P overvalued compared to their lead. Here's the updated look for this morning, but first here's the market overnight action in ES (S&P E-mini futures) as well as FX (currencies).

 Over night we saw a positive divergence, lkely based on renewed rumors in Europe of the ECB lending to the IMF so the IMF can in turn lend to the EU, yes it is circular and doesn't make a lot of sense as to why the European Central Bank wouldn't lend directly to the EU, but they are prohibited from doing so, so this is the work around that the banks are hoping for, this rumor was floated last week and promptly shot down in the very article/interview with an ECB member ver the weekend.

There have been some negative divergences since, likely on the ECB/German rebuttal of those rumors and ES is off the best levels from premarket trade and roughly in line with 3C.

 A closer look as of the 9:30 New York open shows 3C is in fact in line with ES, there are no positive divergences, so this again appears to be a strictly news driven event on this chart.

 Here is how the Euro opened at 9:30 EDT

However, since yesterday's close, this is what happened on the rumors last night.

Here are the new indicators from last night. First the macro view, then the micro.

 Commodities as pointed out last night have underperformed the S&P

 Again this morning so far the S&P is outperforming commodities, so the "risk on cycle" is not a full risk on, as commodities refuse so far to make any higher highs and are rangebound.

 High yield Credit has also underperformed the S&P refusing to follow the October rally in making a higher high, remember that credit has led equities as you can see to the left, just before the July sell-off.

 This morning high yield opened higher, but promptly gave those gains back to near the worst levels of the morning while the S&P outperforms HY.

 This is the Euro open which is significantly higher today because of the overnight action.

 On a longer term bis though, the market has quite a bit of downside left to catch up to the natural arbitrage relationship between equities/the Euro/The $USD.

 On a tit for tat scale, the market is roughly following the micro moves of the Euro -2 minute chart.

 High yield corporate did open higher then the S&P this morning, remember on a short term basis, the fall in the S&P the last several days brought them in to line with each other.

 The financials indicator on a longer term view showing the serious under-performance of financials vs the market.

 This morning they are in line with the market, not out or under performing.

 As far as Rates go, the market tends to move toward rates as they are a leading indicator, the longer term picture of course is clearly ugly for the market.

Short term today, rates moved higher on the open, however looking at the chart above this one, while it may seem to be a big move, it isn't even perceptible on the longer term hart above this one.

So that's the opening indications, we'll watch for developments.

Early Update

Some of the early optimism I saw late yesterday in the 5 min chart, which caused me to speculate we may see a gap up this morning, has started to fade, but of course it is early and it is Op-Ex Friday.

It seems the catalyst for the move has been centered on renewed rumors of the ECB lending money directly to the IMF and the IMF acting as the bailout mechanism for Europe as the ECB has its hands tied by law and convention treaties as just how far they can go.

The split between those who want massive printing and monitization of EU debt (that crowd includes France and just about every bank that has exposure to Europe and that is a very high % of banks) and those who oppose it (the Germans who hold all the money and now most of the power in the EU) is coming to a crescendo.

The possibility that Germany simply walks away or continues with treaty reforms to kick out countries from the monetary union, which could include recent secondary EU super power France, is gaining traction in Germany and plans for this eventuality seem to be much more advanced then Sarkozy new as Merkel may have been buying time in the Mer-Kozy phase of cooperation to keep working on Germany's super secret weapon.

So the rumors have come this morning, they have been dismissed, but they are still sticking. I have some interesting perspectives to share with you, but for the moment, the initial strength that was developing late yesterday, has begun to moderate.

Here they are

Just remember my central thesis, the game is about putting as many pieces of the puzzle together as you can and then making a decision based on the information you have. These comparative indicators (I tried several ways of creating actual indicators, but in all but 1 case, comparative indicator were easier to read). That being said, no 1 indicator by itself is the answer, it's taking the sum of them, 3C and other analysis and finding the sweet spots where agreement is high probability.

Here's a first look.

First commodities, they are a risk asset and should follow the market pretty closely, divergences can show that a risk on trade has limited breadth and I suspect this will also be a good indication of the Chinese economy moving forward.

 This daily chart points out commodities giving early warning at the QE 1 top and made for a good short trade from the SPY's (always green) top. Commodities also gave at least 1 month of early notice of a new uptrend before equities or while equities where bottoming. In 2011, they pointed to the top right before the July crash, right now they are significantly underperforming equities, suggesting this is indeed a top.

 On an intraday scale, they pointed to a decline as the market went higher, a good short entry and now on a short term scale equities have caught up to the risk off in commodities, but the daily divergence still remains wide, suggesting more downside and that this is a top, there's also obvious implications for the world's largest commodity importer, China and as such, the global economy as well as acute issues such as the EU.

The Euro. Over the last few years the Euro which is more indicative of the dollar relationship, has been somewhat meaningless because of QE1/QE2 where Fed monetization via the primary dealers drove all risk assets up as the PDs took billions in middle man profits and put them to work n the market, but not that QE/POMO is over, the FX correlation is taking on renewed meaning.

 Here we see several small divergences that would have worked for quick short sales to the left, the bigger issue is now with the dollar moving higher, the Euro lower and risk assets haven't moved much at all, there's an expectation for reversion to the mean and risk assets to eventually catch up to the fall in the Euro, again suggesting we are in a topping process.

 Very short term, there's an uptrend in the euro in white that led the market higher and several dislocation is equities that have led to sharp sell-offs, these dislocations, when taken with 3C and other indicators make for good short sale entries. Short term risk assets have fallen to catch up with the already low euro, but the chart above this shows there's more downside to cover in equities.

 This is one indicator, not comparison, that may serve as a model indicator for others, it is the difference of performance between financials and the market, not financials vs the market. In other words, it is the spread between the market and financials, almost like replacing MACD's short and long term moving averages with the SPY and XLF instead. In 2007 it was very early in warning of the top

 At the 2011 top, it was also an early warning of the top and currently is warning again that we are at another top.

 Here it shows on an intraday basis, several good short sale entry points and the market saw sharp 1-4 day drops from each point, it continues to suggest more downside is coming.

 Here is the SPY vs high yield pointing out the 2000 tech bubble top and also giving at least 3 months early notice of the new bull market bottom before the market moved.

 It gave the same early warning in 2007 while CNBC pundits were still calling for Dow 20,000 and also gave early warning at the 2009 market bottom 3 months before the market bottomed.

 In 2010 after QE1 the market made a top before QE2 was announced, this gave nearly a full quarter or 3 months early notice of that top and again was trending up nearly 3 months before the market started on it's next QE2 leg up, a great time for investors to have accumulated at the market lows and with intraday information, the timing probably was superb.

 Here's warning of the 2011 top just before it crashed in July if anyone remembers that horrible rash, also early warning on the October rally, the same as 3C. Currently it is short of equities and seems to be warning of another top right now.

 For intraday use, it nailed the exact top of the October rally.

 On even shorter timeframes, entries can be optimized as several warnings have led to sharp and quick equity sell offs.

 This is high yield corporate credit vs the SPY and on a daily basis also warned of the QE1 end/top as well as early warning of the new QE2 uptrend, again about 3 months early, It also shows the 2011 top.

 On an hourly chart, HYC started topping and broke down before the market's sharp break of the last few days, this would have warned as far back as the 8th of a coming fall in equities.

 On a shorter term chart, it gave a buy signal for a sharp equity move up as well as 3 sell signals for sharp moves down, and all of this in a lateral market that most people would otherwise have a very hard time making any money.

 On an even shorter chart, the same signals are there, the signals are in the boxes, the move in equities are represented by the arrows.

 This is interest rates and warning of the 2000 tech bubble top as well as confirmation of the ongoing downtrend-you'd known to stay short.

 Here's warning of the 2007 top and it shows how serious the market fall would be long before the fall got serious.

 Here's the 2009 bottom and a good 2 months of early warning, while most expected the market to break to new lows.

 Here's very clear warning of the 2011 top as well as how serious the coming July fall would be. Once again, it refuses to move higher, indicating that we are currently at another top in the market.

 On an intraday basis, it gave several buy signals that would have been confirmed by 3C and a sell signal right at the very top of the October rally, recently it has suggested more downside and recently we have seen that since Friday's pop in the market, which was an excellent entry.

On a 5 min chart, there's a buy signal for a quick move up and at least 2 short term sell signals that the market reacted to very quickly and a larger sell signal that we have seen play out over the last few days. These signals are excellent and would have made money, and that's not easy to do with the market having been in a lateral consolidation recently.


Right now in the short term equities have moved lower as credit and the other measures have indicated, longer term, there's still apparent, significant downside. Taking with 3C and using multiple timeframes of each of these, we can lock in to excellent entry points and even get an idea of how serious the coming move will be.

3C for ES tonight

 Above was Thursday early am action that went negative and you can see the rapid fall in price today, toward the EOD it went slightly positive and ES moved up, in after hours it went negative and ES moved down.

This was the last capture of ES with Es responding to each of the divergences.

3 a.m. will be the start of a new day, I can see the probability of lateral action or even a bounce, but the longer term implications continue to suggest we are in a top.

As for tomorrow...

 Long term trend, 3c is showing not only the top, but significant downside ahead.

Short term 5 min, it looks like a bounce to start the day, how it ends remains to be seen and the credit indicators will likely give us a good indication as well as 3C. This divergence could also represent a consilidation as we saw through the afternoon and the early lift in ES after hours.