Today's market action

I showed you several 1 and 2 min charts in which positive divergences were trying to lift the market, but negative sentiment had just been too strong, that is until late in the day when the Euro/$USD finally started losing downside momentum and allowing the market a break to lift it in to the close.

 Here's where the Euro finally let up enough to let the positive divergence that HFT/market makers, etc had been working on all day finally move the market.

Here's the regular hours ES positive divergence, it is going slightly negative in AH.

 Interestingly, they were able to lift the market right to the VWAP which is a tool institutions use to go short or buy long, they wouldn't want to go short earlier with the market down that much, but at the VWAP it would be a better entry, as you an see ES volume was very heavy yet ES could not move through the VWAP, suggesting that institutional clients probably were going short at the VWAP, that's the reason with all that volume ES couldn't break north of the VWAP (Volume Weighted Average Price.) Es is relatively flat in AH tonight.


The above chart makes sense as ES which was reacting quite emotionally and fearfully was selling below the risk model/Context, but now the two are converging loser to fair value.

I think my original thoughts about today were correct, seeing the SPY volume spikes and attempts to move higher on a positive divergence, but there seemed to be an emotional, fearful component that kept the market down most of the day, at least until the Euro's downside let up enough for the market to move up in to the VWAP.

I don't know whether they can fill the gap or not, but it does seem like a change of character is underway and the dislocations that we have seen between risk/credit assets and the market's joy ride north of those risk benchmarks is about to converge with a move (probably sharp) down in the market this week.

Vale Trade Idea (Short)

One of our members brought this one to my attention today, it's a mining play on China and it appears that 60% of their revenue stream is from China, plus the fact it already appears to e in trouble, it looks like a decent candidate on a nice tactical set up.

 This is a 5 day chart of VALE with a 50 bar moving average, note MACD and RSI are both negatively divergent .

 Here's the daily chart showing a top and a descending 200-day moving average, typical of a primary bear market. The top has already broke and saw the typical volatility dance so it looks to be pretty timely as well.

 This is my custom cumulative volume indicator on a 5 day chart so it is easier to see, the volume confirms a top as the volume dries up on rallies and increases on declines.

 This is my cross-over screen with a custom indicator and RSI to avoid whip saws or false crossovers, the signals have been good with two long and a current short signal, nice and clean.

 Money Stream is also in a daily negative divergence, which is now leading negative.

 The long term 3C 6 day chart shows confirmation in green and negative divergences in red, currently it to is in a deep leading negative divergence.

 All of the other timeframes are negative as well, the hourly...

 The 30 min

 The 15 min

 So now if you like the trade, it's just a matter of a high probability/low risk entry and the 1 min positive divergence may give us just that.

There's a gap in yellow, the positive divergence in the 1 min hart may move VALE in to that gap area, gap resistance tends to be some of the strongest resistance so  wouldn't anticipate a move above the yellow area, but if we an get a short term negative divergence on a little price strength, we may have the entry we are looking for in VALE and have a short that plays not only mining, China but Brazil as well.

The top formation's implied price target is $11.00 but these often overshoot to the downside and the 2009 lows are around $9.00, a break of those lows could lead to additional downside.

Put this one on your radar and email me if you have questions.

The Euro Decline

 It's little wonder that there was so much downside pressure on the market today, the legacy arbitrage relation between the Eur/$USD and the market has been fairly stable except for times when Central Bank intervention was in play, such as QE/QE2. This is today's Euro action alone, which should tell you something about confidence in Europe to find a solution.

 This is the triangle in the Euro from last week and the break below it I mentioned Sunday night as FX markets began to trade.

 If we consider the legacy correlation and the fact there's no real QE going on, we can see that the Euro has retraced the October rally and thus one would expect the market to be in close proximity to doing the same. My guess is that there's been manipulation to keep the market at loftier prices and probably not for bullish reasons when everything is put together.

 Here's the S&P-500 vs the FXE Euro ETF in red, this would suggest to me, the same thing I noted earlier when looking at the credit indicators, the market looks very close to closing dislocations it has with risk/credit assets that should have rallied with the market in a strong risk on environment, it's almost the same thing as weak market breadth or a poor A/D line, which are other subjects that I will look in to.

Here's the Dow. If the pattern of past dislocations plays out, we should expect to see a pretty linear drop, most of the prior dislocations didn't fool around too long in retracing back to the risk/credit mean once they got started.

This is why I said today that I would consider using ANY market price strength to add or initiate short positions as it seems we are close to an unwinding of the dislocation. The 1 min chart today in the SPY showed several attempts to move up on the 1 min positive divergence, they appeared as spikes in price which failed quickly, usually in a minute or two so there appears to be some real selling pressure going on and that would make perfect sense to me considering how the EU blew it once again and the future of the Eurozone seems to be more unpredictable then ever. In a few short months we went from the threat of contagion among other PIIGS countries to signs of contagion directly in the core AAa rated countries, which now face imminent downgrades from at least 3-4 different ratings agencies, as well as a downgrade of the Euro-zone and the bailout mechanisms and lets not forget the banks.

Things certainly are moving at a brisk pace. Last week the underlying assumption was the EU would agree to treaty changes that would give the ECB room to print, not only Britain, but several of the stronger northern AAa rated countries that are key to making donations to the ESM bail out mechanism are either not happy about the Mer-Kozy plans or have vetoed them outright. What is most striking about all of this is that the ECB has made clear it won't print, however the market expectations were that treaty changes could lead to that eventuality, yet we find out today that Draghi himself was surprised to hear that the market and probably the EU/Germany/France had reached that conclusion. The market can be excused to some degree as they may very well have thought that there was good communication between Germany/France and the ECB before proceeding with the failed summit, however it is much harder to excuse Germany and France of misreading the situation so badly and it still amazes me that the fate of the entire Eurozone rests with guesses and assumptions. It's almost hard to believe that they can be this incompetent and one almost wants to believe that they actually do know something that the rest of us don't, although with umpteen failed summits, it wasn't too hard to figure out that this one would be a failure too, even though you have this gut feeling that there must be some level of competency that moves these summits forward, apparently there is not. As I have said on the site and in many emails with members, if the EU knew how to make 2 and 2 equal 4, it would be done by now, there's no point in waiting until 4 credit ratings agencies are moving toward downgrades of AAa status.

To make things even more unpredictable, as I noted, the front runner in French elections (it's not Sarkozy) has made clear he will abandon the EU treaties and agreements thus throwing everything the EU has done (which isn't much) in to total disarray and makes the literal point of several wasted years of  EU plans.

We also now know that the very opaque Chinese government is fessing up to contraction, inflation and a housing bubble. Any reasonable person MUST question how much worse the Chinese economy is as the Centrally planned country has more often then not, been much less then forthcoming with the truth, several degrees more then our own government who may fudge the numbers, but usually corrects them through revisions, even if it takes 2-3 revisions to get there (they know that the market is only interested in the now so revisions won't harm anything as the market has moved past them).

All in all, I've never seen anything like this, the pace at which things are moving and that too makes sense as the world grew a lot smaller over the last few decades through trade agreements and organizations to create a truly globally linked economy, something we never saw before so it only makes sense that the pace at which things are deteriorating is understandable as we are seeing for the first time what happens when not a country goes in to recession, but when the entire world is on the brink.

What is truly scary is to think about what the end of the story will really be and it reminds me of the white paper I read last week by one of the major banks that said, invest in metals, "gold, canned food and small caliber guns".

Market Update

 The 1 min chart has had several positive divergences that haven't been able to get off the ground, however as mentioned earlier, I can't remember the last time recently that the market has left a gap unfilled, so I'm guessing it will try to fill this one.

 However for all the positive action in the 1 min chart, very little ha leaked over to the next timeframe at 2 mins.

 The CONTEXT model still shows all assets selling off, but significantly more fear in equities then credit, even though credit hasn't performed well at all today.

 The 1 min ES chart has been reliable, I am very surprised we didn't see an earlier effort to fill the gap, maybe overnight?

However the 60 min ES chart has also been pretty reliable and it is showing a longer term situation in which it is leading negative. So as I mentioned earlier, any short term intraday strength, considering our credit/risk indicators and the severe dislocation between equities and them, would have me looking at any price strength in the market as a possible place to add or initiate as it seems it is getting close to a rollover.

Chart Request, BBY (Best Buy)

BBY is coming out with earnings after market. I don't know if there's a leak here, but there are a few strange incidents on the charts.

 The 1 min hart shows several parabolic spikes that have negative divergences in to them that sent them all lower, we have a positive leading divergence today, but BBY is still below Friday's close.

 The 2 min chart shows a few accumulation areas meant to send BBY higher, maybe for distribution purposes? In any case, the negative divergence is clear here and at the same area as the parabolic rallies that have failed.

 Here is a close up of the 5 min, again showing negative divergences at the parabolic intraday rallies.

 The same chart zoomed out also shows a negative leading divergence.

 The 15 min chart has been falling apart, that's not a positive divergence to the right, just in line trade.

 The 30 min chart doesn't look great ether, it is leading negative.

And the 60 min chart is nowhere near in line and is also leading negative.

I'm not making an earnings call here, but if I HAD to bet, I would say the reaction to earnings would not be favorable over the next few days.

VIX/VXX Volatility

Some people have noticed the VIX hasn't moved much today...

 The VIX (vs the SPY in red) is also sometimes called the fear index and historically it has an inverse relationship with the market, so a low VIX reading typically would indicate complacency and is associated with the market topping while a high VIX reading would indicate fear and the market bottoming. Bak in the late 1990's and early 2000, the VIX was very reliable, the range was usually 20-40 and when you hit one or the other you'd see the market move, I personally have seen some pretty bad extremes that are multi-year lows that didn't move the market much, it could be QE at the time or it could be it is simply not as useful as it once was. In any case it hasn't moved much today, but the closing candles, if it closes this way would form an upside Harmi reversal pattern and upside in the VIX would mean downside in the market.

 I can say that the VXX intraday volatility indicator has been looking pretty bullish on important timeframes, it also has an inverse relationship with the market so a move up as 3C seems to be indicating with positive divergences would be bad for market prices. 2 min chart.

 Positive 30 min chart.

Positive 60 min chart.

European Credit is even worse

Here's the S&P/SPY rally from the 11/25 bottom to the 12/7 top.

So far the market has retraced about 33% of the move, which also "kissed the triangle's apex", a typical test after a serious break, in this case failed as it only kissed it good bye, it didn't breakout above it.

Looking at European Credit markets, Financial Credit has retraced 2/3 of the same rally, the European high yield credit index (XOver) has retraced 50% of the same rally/bounce. European Investment Grade Credit (MAIN) is starting to drop badly.

This chart is a bit harder to follow, but the dark blue line is the European equity index (like US equities, it is lagging the credit markets, but seemingly getting ready to follow credit lower). Light Blue is Subordinated financial credit (those who own subordinated credit are second to get paid on any claims, senior credit holders are the first to get paid, so senior is a stronger credit asset then subordinated. Look at the move in light blue vs the dark blue equities over the last 2 days as subordinated financial credit sells off, obviously there's fear of a credit event in financials. The Black line is XOver (high yield credit mentioned above). The red line is Senior Financial Credit which is notably also selling off .

What we are seeing in Europe is the same dislocation we are seeing in the US, although we are looking at some different asset classes as I don't own a Bloomberg Terminal (YET!).

Furthermore, as to the EU summit which by all accounts was the Final, Final chance to save the single currency union (Kind of like Cher's farewell tours), there's little doubt that market participants "thought" a new treaty in the EU would untie the ECB's hands and allow them to print and buy up all the debt out there, especially Italy's, however ECB head Mario Draghi said, according to Bloomberg" that he was "kind of surprised" by the market's interpretation. So not only did the summit fail, but whatever it was reaching for, apparently wasn't going to produce the results they expected which still leaves me scratching my head ('m sure with hundreds of thousands of others) as to why communication in Europe is so badly flawed that an entire summit was focussed on an outcome that would likely never have materialized in the first place, thus the utter disappointment in the markets and just wait for Moody's and the S&P to chime in with downgrades.

In any case, it s now been reported fairly extensively that not only are some of the biggest corporations in Europe getting ready for a collapse of the EU by moving head quarters to northern Europe, sending cash to Germany, but it seems as well that Ireland is making sure they'll have access to printing presses should they need to issue their own currency! Furthermore British banking regulators (there's an oxy-moron) are telling British banks to prepare for a 'Disorderly" break up of the union or exit of multiple countries as reported by Reuters.

On Britain, Cameron has said today before parliament in explaining his veto that has Sarkozy fuming, "I went to Brussels with one objective: to protect Britain’s national interest. And that is what I did"


Not exactly a vote of confidence, but Britain has been one of the few large EU nations that has kept the Euro at arm's distance so we can at least give them credit for that and maybe infer they know a bit more about the situation then we do.


Throwing more uncertainty on the fire, Sarkozy has a tough election ahead of him and his main opponent, Hollande who is leading,  has come out today and said that he will not honor the EU summit agreements and essentially unwind everything the EU has done up to this point. He may very well get elected on that platform.


furthermore after Moody's credit rating agency spoke out today implying downgrades were coming, after the S&P last week, guess who else has jumped on the bandwagon, FITCH! And why do I use an exclamation point? Fitch is based out of Paris!


Bottom line, CREDIT STILL LEADS and equities still follow. Nothing in this post should be taken as market positive.

Risk/Credit indicators

Now this (TODAY) is the reason I created these indicators as markets follow credit and when there are dislocations between equity and risk/credit markets, that's an ideal time to look at a trade as equities have "Over reacted", whether that be for a long or short trade (short in this instance).

The short term risk/credit assets confirm CONTEXT as they have sold off sharply today, but intraday are a bit stronger then equities, again seemingly indicating that equities are panicked.

 Here intraday commodities sold off, but are a bit stronger then equities.

 Longer term, these are the dislocations that make bounces/rallies like this lower risk to short as commodities have not confirmed the risk on rally in equities and in fact have behaved terribly and the S&P looks like it is getting ready to close that dislocation gap between the two.

 Intraday yields are up a bit, even though they also sold off, longer term they are dislocated as well.

 The market is tracking broad weakness in the Euro and as I said on Friday's late strength, "I don't trust it, it looks like a trap or traders switching position on disappointment with the EU summit/ECB response'.

 Longer term, you an see what kind of trouble the Euro is in and it is reflecting the EU risk as it just took out the bounce low and is close to taking out lows from the early October rally. The S&P is severely dislocated and look at what happens when it is in such a state, the last time we saw a quick drop, but this is even worse.

 Long term rates in white at October lead the market higher and again in the second white box, but they have been dislocated bearishly for the market 2x now and this time they are making lower lows.

 High Yield Corporate sold off, but like CONTEXT is a bit stronger then equities intraday, not so longer term.

Financials failed to confirm Friday's rally at the EOD, part of the reason I said I didn't trust it and it was correct. There's a slight bit of strength in financial momentum vs the S&P, but all in all, I would say that any strength that may materialize, may be your last chance to add or initiate shorts according to these charts. It doesn't look like the market has long before it follows risk/credit's lead.

More coming....

Market Upate 2

Even ES has a positive divergence, actually 2, the first went nowhere.

 ES 1 min

Even though ES and context are both selling off, there's almost a look of panic in ES as compared to context.

I'm pulling out risk/credit layout up now.

Market Update

The SPY has an interesting dichotomy, it wants to fill the gap, that has been the M/O of the market lately, but it's having trouble as you can see below, it may be moving closer to the point in which the market makers lose control and we get breakaway gaps that they can't fill, that's when real downside starts.

 From the first positive 1 min divergence I pointed out (this use to be the timeframe of market makers and middle men, now it seems to be more HFT momentum chasing robots, but with the same reasons for wanting to fill the gaps). In each case the market made an attempt that was quickly put down, see the red boxes.

 Now the 2 min chart is showing a slight positive as it seems they really want to fill the gap, but take a look at the 5 min below...

That's a huge leading negative divergence to be put in for a single day that is not even over. It seems the  "fast money" like HFT/momentum chasers and middle men are having it out with larger institutions that are providing overhead resistance by continuously dumping or selling short today. Today is definitely an unique day and possibly an important change in character.