Commodities slip into the Red

 Commodities which we leaking early today have diverged even worse from the S&P and have closed in the red for the day.

High Yield Credit which looking from a longer term perspective is severely dislocated, sold off today and particularly in to the close with the S&P making a minor move up in the red box and credit moving the opposite direction.

Here's USO

 USO volume picked up on the break of intraday support. MACD and RSI also warned of trouble for those using conventional indicators.

Here's the USO daily close, we have 4 days of no momentum (remember reversals are  process and rarely an event). With all that has happened in the middle east, it is surprising USO closed lower, there may be a lot bigger trouble in China then we know.

Speaking of China, here's the FXP (Ultrashort FTSE China) ETF on an hourly basis.

You can see distribution at the red arrows and boxes as well as accumulation at the white areas, the hourly chart here looks pretty good and seems that traders have been buying up shares of FXP for a while if we have positive divergence all the way out to 60 mins.

Last week I warned about GLD and a potential bubble forming there, it's in Friday's posts. Here's the updated GLD action and some other charts...

 The GLD short term chart has been telegraphing trouble since last week, now the decline sees 3C trading in line confirming the downtrend.

 The 5 min chart shows what a lot of other charts have shown and what I have suspected, that this bounce has been used to sell short in to, this chart would certainly suggest that as there's almost no confirmation and just 3C distribution.

 I covered the long term in more detail last Friday, you can see a list of the posts in the timeline to the far right of the site and down a bit. This hourly hart looks like GLD may have reached a top, whether it is an intermediate top or a bubble, I'm not sure, but I expect we will see the 150 day moving average fail, it's currently around $160.00

 The long term daily charts are what have me really worried about the long term prospects for GLD, that's a 6-day leading negative divergence, after what started out as decent uptrend confirmation, a top and now what appears to possibly be a triangle top forming.

 SLV has also telegraphed weakness recently on the 5 min chart, that has come out in a few parabolic moves up that failed, currently 3C is in line confirming downside price action.

 The more important 15 min chart confirms the same top area and is leading negative, that's a bit of a problem for SLV right now.

 The 30 min chart has nailed several tops and remains weak looking.

However, it's the 2-day chart that really shows problems in SLV, you can see accumulation in white and distribution in red, the red box is a leading negative divergence on a multi-day chart, which smoothes out the noise. I would be careful trading SLV long for anything more then a swing trade and only when the short term harts show some accumulation. Otherwise, I might consider shorting SLV on any strength.

Some other charts....

 Last week I mentioned keeping AAPL on your watchlist as a bearish ascending wedge formed, we know what happens with these obvious patterns, Technical traders expect them to break down so they are almost always head faked with an upside breakout, any shorts from the bearish wedge are squeezed and new longs enter thinking the bearish wedge is a failed pattern, this tends to be a high probability trade with good risk characteristics. One we have the false breakout, we look for distribution letting us know it's a false breakout and an order can be placed with a stop above the recent highs-NOT AT THEM where everyone else will place stops. You can also wait a bit for downside confirmation.

 The 1 min chart has suggested this breakout of the wedge is under distribution, thus a false breakout likely being shorted.

 Here we have some accumulation in white, shares are distributed on the way up and by the time we get the false breakout, Wall Street is usually short or shorting into that strength, this also seems to confirm we are looking at a false breakout of the wedge and the pattern is in fact valid.

The long term 60 min AAPL chart looks pretty bad so it's not hard to believe that this is a false move. If you are interested in shorting AAPL and want a second pair of eyes, ideas for entries and stops, just email me. Don't forget to check out Friday's analysis on AAPL and Tech (XLK) in general.

 Speaking of Tech, here's XLK.  The 15 min chart is inline with many other charts on this bounce, they all seem to suggest it's been used for distribution. You can see the white accumulation area at the lows and a current leading negative divergence that is lower then the late November lows suggesting a lot of distribution/short selling has been taking place in to price strength.

 The 30 min chart nailed the bottom with accumulation in white and several topping areas along the way, the indicator looks progressively worse.

However the long term 60 min chart, really looks bad with a new leading negative divergence low that is below anything we have seen all summer.

 Energy broadly (XLE) has also been telegraphing recent weakness and is now in a leading negative divergence hitting new lows on the 5 min chart (dates are at the bottom). This price pattern has the look of a small head and shoulders top and 3C looks right for the pattern as well.

 The 15 min chart shows accumulation at the October lows that kicked off the October rally, since we have seen a couple of tops in a larger top, remember that tops are a process not an event, in any case, the last bounce is showing a leading negative divergence in 3C.

 The 30 min chart shows more history and called the summer top that led to a nasty market wide decline, as well as the August and October bottoms. 3C clearly shows a rolling over of the top in XLE.

 The hourly hart shows even more history with accumulation in white and distribution in red. It looks pretty clear to me we are seeing a rolling over top in XLE and with the China data as well as PMI from multiple EU countries, it makes sense.

You've seen a lot of XLF-Financials, but the 15 min chart is worth a reminder.

Finally I want to address TLT or Treasuries, which we have seen some unusual trade, the last few days especially. Treasuries are a safe haven trade that traders buy when the market declines, so these charts showing accumulation are especially interesting to me,

 TLT itself in green has shown a bull flag which led to more upside as it should have and a recent pullback as the market has bounced, however the inverse correlation between the market (white) and Treasuries has been void the last few days with the market rising and TLT also showing 3 days of strength, this is not the correlation one would expect to see, the fact that TLT has been strong during the market bounce indicates to me that there has been some serious rotation in to safe haven assets like Treasuries.

 Look at the leading positive divergence/accumulation on a 15 min chart of TLT over the last few days, it's hitting new highs and seems to be under heavy accumulation.

 Even more impressive are the leading positive divergences in the 30-60 min charts above and below. These chart rarely make a move that leads in a day or two, just like I warned on Friday when the market averages where leading negative in a day on the 15/30 min charts, this would be the inverse or confirmation of the market action seen on Friday suggesting a weak market and a flight to safety.

I'm going out to celebrate my wife's birthday shortly, but I'll be looking at more charts later tonight and will bring you some more news as the S&P releases information regarding possible downgrades including a possible 2 NOTCH downgrade of France. This would be catastrophic fro any plans the EU comes up with and we have already seen French yields rising as the ECB is not allowed to buy French bonds on the secondary market like they do with Italy, Spain and Portugal, so the French yield is one of the true measures of risk and contagion of the core. Should they be downgraded, the bond vigilantes may step up attacks on France and we may see French 10 year yields hitting 6-7% and then it's game over, who bails out France?

S&P Casts A Wider Net

Bloomberg reported in a follow up of the S&P rating action, that all 17 Euro member nations will be put on negative credit watch.

Still France and particularly Germany are the main drivers of the afternoon slide. As mentioned earlier, the EFSF's credit is only as good as the nations backing it. For sometime the EFSF has been trading (yield-wise) as if it were a AA rated instrument rather then a AAa. So, what does that tell us? The Credit markets may very well have been ahead of the curve again, remember, credit leads, equity (eventually) follows and those dislocations between the two are out opportunity to go short or long the market, in the most recent bounce, it has been an opportunity to get short.

Overvaluation

Here Im going to try to give you an idea of how over-valued the market (using the Dow-300 is compared to the known historical correlation between the Dow-30 and the Euro.

First the charts..

 The Euro is in red vs the SPY in green, you can see the Euro did not move above Friday's highs while the SPY did, so we know there's a dislocation in value and the idea of a reversal is a return to the mean which usually is overshot to the downside as fear is stronger then greed, thus the reason markets fall about 4 times faster then they rise.

Here's the highs today in the Euro and the present price, we'll start with that. As of this capture we have a 92 pip move down in the Euro from the US open to the capture. That translates to a 184 Dow point decline from the highs. The DOW is actually pretty close at a 165 point decline, which says a little something about the change in character observed between the correlations which have been skewed the other way badly.

On a longer term scale...

According to our oscillator which is at an even correlation or the normal around the zero line, you can see that at the res trendline, the Euro has gained until now, 117 pips or 234 Dow Points. The Dow over the same period has travelled 740 points, meaning the DOw-30 according to the historical EUR/DOW-30 correlation is overvalued by 506 points or should be trading around 11,547! This is a rough correlation, but does a pretty good job in telling us just how far off equities are. Here's what current fair value according to the correlation would put the Dow if the Euro stayed put and didn't move.

The Credit/Risk indicators have shown very large dislocations between traditional risk assets and the move in equities, so this "fair value" isn't that hard to believe and again, that assumes the Euro were to stay put at these levels.

Interesting European Analysis back and forth with a connection to my gut feeling of last night.

Deutsche Bank's Dominic Constam has been advising clients to put on a "Risk Off trade ahead of the December 9th EU summit". Risk off could include moving to safe haven assets like treasuries or it could be more aggressive and short the market.


Here is his reasoning...


We think it is too early to return to “risk on” trades.


In the short run, European “fiscal integration” means “fiscal austerity”.


We think the current track of European policy is not credible in that austerity ultimately undermines the banks, increasing the need for recapitalization and asset liquidation, and threatening a vicious circle.


We view 2012 as a year of two distinct halves; the first of which is “risk off”, the second of which is “risk on”.


The transition from the first to the second will be marked by central bank (read: ECB), catch up.


We continue to expect 10y Treasuries to trade to 1.75% early in 2012, with the curve flattening, spreads widening, and LIBOR pressured higher.


In essence he is saying the market will or needs to Swan dive before the ECB can do what they have been saying they won't do, print and monetize EU debt.


Now, here comes the retort from the ECB's (European Central Bank) own Jens Nowotny,

• NOWOTNY FEARS MERKEL/SARKOZY PROGRAM WON'T BE ENOUGH
• NOWOTNY SAYS EUROPE CAN SOLVE CRISIS ITSELF (1)
• NOWOTNY SAYS NOT NECESSARY THAT USA `HELP OUT' EUROPE (1)
• NOWOTNY SAYS SMP CAN'T BE COMPARED TO FED, BOE PROGRAMS (1)
• NOWOTNY SAYS SMP HAS TIME LIMIT
• NOWOTNY: DEBT CRISIS MUST NOT BECOME BANKING CRISIS AGAIN

If my read on this is correct, the ECB is saying despite whatever sugar rush high may or may not come from Friday's EU summit in which this time they will have the "REAL GRAND FIX", unlike the seven or eight previous grand fixes, the last being the leveraged EFSF which has been a total failure and will become a foot note in the history books should any of the AAa rated countries that back it, especially France or Germany be downgraded as the S&P said they may as of just an hour ago. I digress, my read is that the ECB may be telegraphing that they may do more, now does this mean print and monetize debt? I don't know and he seems to try to make distinctions between the F_E_D's approach and the ECB's approach.

Now the red #1 footnote markers are EXACTLY what I said today. Last night Die Welt's story of the F_E_D financing the IMF to bailout Europe seems to me (although this didn't strike me until I was laying in bed, but mentioned it today) to be a rub or a slap by Timothy G. and the US administration which has been putting maximum pressure for the ECB to do exactly what the ECB says it doesn't want to do, print and monetize debt. It seems the gut feeling I had about this being more show and a way for the US to embarrass the ECB in to action by saying, "If your own central bank won't do what is needed, don't worry, ours will (ADD LOTS OF SARCASM)" From Jens' comments in red #1's, it seems that was his read on the rumor as well.

For instance, his response that the EU doesn't need US help would have to be highly coincidental to come 12 hours after the F_E_D rumor was floated. He also says the EU can solve the crisis itself, and that ECB programs shouldn't be compared to F_E_D programs.

It seems last night's rumor of the F_E_D financing the IMF to bailout Europe hit the very nerve the US was trying to stimulate.

In the meantime, if you take DB's analysis in to consideration as well, the ECB may need Europe to fail with the grand plan and for markets to fall apart before being able to justify doing something they said they wouldn't so, of course Bernacacide also testified to Congress that the F_E_D would NOT monetize the debt, that didn't matter.

Things are getting interesting and I suspect they are about to get a lot more volatile.

Market Update

Well I captured them, might as well post them...

 SPY 5 min divergent at the highs today.

 As shown on Friday, there's a lot of damage to the 15 min chart in a short period of time.

 The DIA started the day with no confirmation and went south from there.

 The same happened on the 2 min, a longer intraday timeframe, as it has seemed obvious and as I have stated last week, this bounce seems to be all about short selling in to strength, otherwise, why weren't other risk assets, especially oil which has good reason, not participating?

 DIA 5 min, down the drain.

 And as pointed out Friday, the 15-30 min charts have fallen apart VERY quickly. These are the charts that most often signal sub-intermediate trend changes.

 Very weak QQQ 1 min

 The QQQ 2 min was leading negative before the announcement was made! Leaked?

 And the longer term problems on the 15 min chart.

 XLF as you remember from an earlier update as well as many other individual financial stocks looked the same.

 Another longer XLF intraday chart, leading negative divergence, the worst kind.

As per Friday, XLF 15 min, major problems apparent.

Friday said it all

As you may be aware, the market just took a little swan dive lower on news that the S&P ratings agency (most likely in a bid to regain credibility as Egan-Jones is eating their lunch) just came out with the following via the FT, but before we go there, lets go back to Friday's last post on where the market stands, "It's Not A Good Sign When...."

That post went on to show how quickly the 15/30 min charts deteriorated in a single day, making me question whether the S&P action was leaked last week. I concluded the short post with the following,

"This is when intraday charts can bounce around as much as they like, but it's pretty hard to overcome a 15/30 min leading divergence that forms in a single day."


Earlier today there were numerous warnings from the Credit/Risk Basket post  to the Financials post to the action in commodities and the Euro which have dominated many of today's updates. I have several charts I was going to post that show 3C  deteriorating ever more as the day went on, but you have seen them for the most part, just suffice it to say, that I would lean toward this S&P action was probably leaked sometime last week judging by how the 15/30 min. charts went down hill Friday.


Now, the FT article excerpts...

S&P ratings warning to top euro nations

Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc.

The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days.

It warned all six governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts. Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question. This in my opinion is BIG news, Germany? Wow! They'll be scrambling at this week's summit, but not before trying to put the S&P rating's agency through an Inquisition.

S&P told the six governments it would conclude its review “as soon as possible” after the summit. It told governments: “[I]t is our opinion that the lack of progress the European policymakers have so far made in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union.”

Governments worry a downgrade would make it harder for the eurozone bail-out fund, the European Financial Stability Facility, to raise financing in the markets for its rescue packages of Ireland, Portugal and Greece as it is underpinned by guarantees from the six nations rated triple A . Those countries also fret that it could raise their own financing costs.

The stuff just got real

Credit/Risk Basket Update

 Commodities today vs the S&P (Always Green), no surprise here after the earlier post showing Gold, Silver Copper and Oil all heading lower, risk off in commodities.

 The wider view, is this and this is where we look for dislocations between risk assets like commodities that should be in sync with a risk on equities move, but aren't. In the past, even smaller dislocations have led to some signifiant "getting to know gravity" in equities.

 High Yield Credit "seems" to be in sync with the S&P today... seems


 We just need to step back and see that High Yield credit hasn't moved above the highs of several weeks ago while equities certainly have-dislocation #2.

 Here's the Euro today vs the S&P, you all pretty much know by now that they tend to travel almost in lock step with each other, not today.

 And on a longer term basis, not through this entire bounce, Dislocation #3 -see what the last dislocation brought, a sharp 9% decline.

 High Yield Corporate Credit... Here you can see the history of several dislocations and the S&P's response shortly thereafter...

 And Yields are in line today?

Zoom out a bit and you can see they haven't been able to break above the highs at the first day of the bounce, another dislocation. The idea here is risk assets should rally in a risk on rally in equities, when they don't, that rally becomes questionable.