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.

Credit/ Model Portfolio

Few major changes, but a few...

 The Euro, while it saw a huge move on no news today, leading some to speculate that the ECB may have intervened directly in the currency markets rather then with bonds on the secondary market, still there is a divergence as the Euro heads down from intraday highs and the S&P heads up from intraday lows, creating a dislocation.

 Financials, which early on were starting to show a little better performance have spent the afternoon running in the other direction, again creating a dislocation and suggesting the S&P/Market are being artificially moved, perhaps to try to fill the gap?

And while High Yield Credit didn't see a massive sell-off today, it did not perform like the market, it did not break above afternoon resistance at the red trendline and the difference between the S&P and credit markets, which lead equities) is becoming more apparent as we moved toward the close, once again suggesting we may get an opportunity to sell the market short on a dislocation and false or manipulated move. Here's to hoping!

It's been a tough month for the WOWS model portfolio, many of you have written me asking if I have capitulated on any of the short positions as the October rally was tough on them. I have not changed 1 single position and as I have explained individually in emails and collectively on the site, I have had enough experience with 3C and have been in much worse spots, but I trust my indicator, so even as price moved against my positions for a variety of reasons, I held tight and the model portfolio is in the green, but off the high water mark, however a few more days of market action like we have seen recently and I expect that the model portfolio will surpass the high water mark and be on track for a 200% gain since inception less then 4 month ago.

This week/month has been very good as the core positions that I have had faith in are performing well.

  A 23% return last week and a nearly 51% return for the month thus far.

This puts the weekly performance of the Model Portfolio in the top .0025% of over 5200 portfolios

The monthly performance puts the Model Portfolio in the top .0023% of nearly 18,000 portfolios.

I'll have more for you shortly. It may be time to start looking again at individual stock picks.

Just for you CNBC / Cramer Fans

"Out to help the little guy!"

The Street's FMCN Upgrade from hold to buy posted at 5:07 a.m. today.

The stock was halted for trade after falling over 60% in a single day, it has since seen a short covering rally, but if you are an avid Street.com/Cramer fan, you may be wondering if this was more then coincidental, long term members know what I mean.

The Perfect Storm

Just as the recent downside volatility in the market has retraced nearly 50% of the October rally in several short days, the NYSE releases the new margin debt totals.

Margin Debt jumped by $21 Billion which is the most since June of 2007 when it jumped by $25 billion.

When those margin calls start rolling in, it's going to be very ugly in the market, especially since short interest has plunged removing any natural bid to support the market once it starts falling

Just as in the US Circa 2008, So it Happens in Spain

Failing banks are never a good sign and governments taking them in to receivership is generally a worse sign, there is something to be said for letting insolvent banks fail so the money that is most needed can go to helping those that actually have a chance, but Spain did not learn that lesson from Lehman Brothers and just nationalized one of their failed banks.

• DJ Bank Of Spain Takes Over Banco De Valencia
• DJ Banco Valencia Has 0.74% Of Spain's Total Bank Assets
• DJ Bank Of Spain To Inject Up To EUR1B In Banco De Valencia

ES 3C indications

The 3C ES chart is inline with what we just saw on the market updates.

ES shows the earlier positive divergence as the intraday Inverse Head and Shoulders formed. Recently, like all of the major averages, 3 for ES has shown a negative divergence.


However we are going in to the most important hour of trade, so we'll want to pay attention, but at this point, just as with USO, I view any market bounce as an opportunity, not a reason for concern.

Market Update

 DIA short term intraday bounce failing under distribution

 Same with the IWM

 And the QQQ

 Earlier I said the price pattern implied target for the SPY was $120, look where it reached before reversing!

 SPY 1 min

 SPY 2 min-I still want to check my credit models

For now, CONTEXT

 The differential between the risk basket and the implied ES level and the actual risk basket is hitting highs of the days as ES diverges bullishly away from its implied model.

Here the model in green, as it has been all day, is much lower then ES, suggesting a reversion to the mean or ES/S&P falling to catch up to the model.

As I said, I want to check my own models as they contain more specific data, they are loading now.

For Those that Literally Want a Short to go for Broke, I present one AGAIN, JEF

I have made mention of Jefferies many times recently comparing them with the next MF Global. JEF stock is under attack and no matter how many explanations they give about their exposure or reduced exposure to European debt, the market is either not buying it or has set a bear raid upon JEF. While Lehman was in bad financial shape, it wasn't fundamentally in bankrupt shape until the market decided to go after them and at that point it didn't matter what they did, the market had spoken and Lehaman was going down.

I have recently compared the environment now to that of the beginning of the end in 2008, MFG being the Bear Streans of 2011 (of sorts) and JEF being the Lehamn of 2011 (of sorts).

For those of you who can take the volatility, JEF may be the go for broke trade as things are quickly unwinding over there.

A 62% loss since the new year with 50% of that coming since July 15th shows events are moving much faster now and perhaps out of JEF's ability to control them (damage control).

 Here JEF was able to do some short term damage control, but it quickly failed as distribution of the highs shows the market is out to take JEF down. There's a chance for a bounce and that is what I would want to see to lessen risk in entering a short here.

 Intraday, JEF has made some gains today in to the green, once again they are being sold.

Looking from a longer term perspective, my crossover screen has JEF as a short, many times it has bounced to the blue 22 day moving average which is around $12 right now, that is where I would prefer to enter JEF, although they also could be entered on a phased in basis of maybe 25% at a time until the full 100% position size is filled out, just in case they don't make it to the 22 day average.

THIS IS NOT A TECHNICAL TRADE, THIS IS A CRISIS OF CONFIDENCE TRADE AND IT IS WHAT MARKS THE CURRENT ENVIRONMENT AS ENTERING THAT POINT OF NOT RETURN.  Wall Street smells blood and whether JEF deserves it or not fundamentally, I would be very surprised if we go into the first month of the new year with JEF still being a viable company.

A pure equity short like this can profit more then 100%, which would be JEF hitting $0, as profits from a true short are added to your account for immediate use (unlike long position profits which cannot be used until you sell the position), this allows you to pyramid the position and you can absolutely make more then 100% on the trade if you do that.

If you want, at my free site, www.Trade-Guild.net, on the left side about midway down there's a section called, "Resources and Concepts" with a lot of links to articles I have written over the years. Look for "Making more then 100% on a short". If you have trouble finding it, email me and I will send you the link.

USO Update

 The USO daily chart with a bearish ascending wedge that started on the first 3C negative divergence, it also is the place in which Crude/USO broke it's long standing correlation (inverse) with the $USD in what is now appearing to be one of the biggest head fakes I've seen in USO, unless there is still an underlying fundamental reason that we are unaware of ( like plans for Israel to attack Iran). With very simple volume and candlestick analysis, the top in red was called a "top" on that day, large volume and the inability for USO to close any higher then it opened suggested large scale bearish churning, or institutional money dumping their shares to dumb money, who are now at a sizable loss.

 Here is USO compared to the Euro, it should track nearly identically, again you can see where the long standing correlation was broken, the same spot as the original 3C negative divergence and it is where the bearish ascending wedge started to form.

 On an intraday basis, the Euro has rallied, pulling commodities or at least crude up a bit off the lows as the correlation should.

 The long term moving average defining the trend has been broken to the downside on increased sell-side volume, much of it likely from buyers trapped at the $39+ level.

 The 1 min 3 hart has gone from slightly positive to slightly negative.

 The longer term chart shows accumulation that started the USO uptrend in white to the left and distribution throughout the bearish ascending wedge, the exact reason these price patterns form. There is some recent 15 min. strength and for those who want to add to USO shorts or want to establish a new position, we may get a good, high probability/low risk opportunity soon. Just as I never chase longs out of greed, I don't suggest chasing shorts out of greed, a little patience will often get you the exact position you want.

 Here I can see the probability for USO to move at least to the 10-day yellow moving average, that would be an "okay" entry on the short side, but not a great one.

 A 50% retracement of the fall, would make for a good entry near $38.50 for 2 reasons, the 50% retracement being the first, the kiss of the ascending wedge's apex "good bye" being the second, this would offer a high probability, low risk short side entry and chance to add to a USO short through leveraged inverse ETFs like SCO or DTO.

 The 30 min chart, which is more important because of the longer timeframe suggests massive distribution in USO, which means to me, if I'm holding a short in USO, I don't mind letting USO rally a bit to add to my short or start a new short at better, less risky levels. The fact the 30 min chart is so negatively divergent gives me some comfort in holding my current USO shorts or in starting a new short position as the distribution seen on this hart is very serious and points to much greater downside risk in USO, so a counter trend rally for me is a chance, not a concern.

 The short term 2 min SCO (UltraShort Crude) chart has seen a few counter trend moves on negative divergences, I would hope to see a deeper pullback then the last negative divergence to add to this position or DTO or if you don't have a trade on, it is worthy of consideration as a new trade once it gets in to a bit less risky position with much higher probabilities of success.

As for SCO, the 60 min chart has had a solid bullish crossover on my custom screen, a pullback to the $40 level would be an area in which I would start paying attention and looking for an entry (long SCO/DTO --- short USO).