VXX / Market Update-

Is the VXX giving us some important timing information?

As most of you know, since the SPX's break of the 50 DMA on April 10th, we first suspected early in the day we would see a volatility bounce, later in the day we started to see evidence on 3C charts that the break of the 50 DMA was likely going to produce such a move. As we had been tracking volatility through several different measures (there are many ways to define volatility) which can simply be eyeballed through the daily ATR and the short term market trend, we found volatility doubled from the February uptrend, which while was lacking in volatility, it made up for it in consistency with few pullbacks and none of any consequence (this is not healthy market action). The last measure which was probably around the time time of mid-April, we found volatility had surged at least 50% in 2 weeks (this is also not healthy market action-especially given the trend since mid-March).

The VXX is a tricky trade, especially lately with this last volatility bounce from the April 10th lows, seeing trends last no more than 2 days with the exception of the last 4 market days. Since the April 10th theory of a bounce/shakeout and subsequent posts I have been looking for several themes, first increased volatility; this has been the trend and there's no reason to suspect this trend would not continue.

Without constructing volatility indicators (as there's no need to be to scientific on this point) a simple eyeballing of "seemingly" consolidative zones shows the huge increase in volatility recently.

In February the uptrend was considered to be stable, however as our breadth posts from that time showed, there had already been significant deterioration in measurable breadth in the most objective form possible; this fit with what 3C was showing. Despite price trends, the market was rotting from the inside out. Look at the consolidation areas in February compared to April, not only is the ATR much bigger now, but the intraday volatility is screaming with many days opening at the lows and closing at the highs only to see the next day open at the high and close at the low. In retrospect, it seems clear that the area in red was likely caused not by indecision as to what the move off the April 10th lows was truly about, but an effort to locate and pin the greatest number of options on op-ex Friday, which saw a huge increase in Calls over 2 days in the $138-$140 (SPY) level, the open interest in this timeframe a couple of days before op. ex. saw calls in some of those strikes jump from under 10k to over 250k in 2 days. The market apparently found max pain at the very specific pin of $137.93, strikes at $138 were useless, even for the put contract when transactions costs are factored in on a seven cent close below the strike. After the options buyers were taken out as is always the trend and usually quite predictable, the market went on to do what I believed from April 10th it was aiming to do, that was to shakeout the shorts, pull in the longs and use price strength to sell/short into.

Our minium target was to see the resistance area around $1390 taken out, this would discourage shorts expecting to see resistance hold and offer a second chance shorting opportunity. 15 years ago this would have been an ideal short selling area as Technical Analysis wasn't so pervasive and the nearly century long doctrines of TA still held water, but with the advent of the Internet and cheap online brokers, TA took off from Voodoo craft to mainstream, the market took notice and quickly adapted using all of the long held technical trading concepts against technical traders which as we see nearly every day is still happening. I believe Technical traders have not adapted to Wall Street's use of TA against traders for the very same reason traders were attracted to Technical Analysis once they started managing their own accounts through cheap discount brokers, PURE LAZINESS.

It is for this sole reason that I suspected we would see a volatility shakeout on the break of important support. To wit, this theory put forth early in the day before we had any evidence was based solely on the trends in Technical trading mentioned above. Once again, 15 years ago a break of the 50-day moving average usually was a decent short set up, maybe there would be a test of the 50 day that failed, but it use to work, it doesn't anymore and traders still fall for it 15 years later.

Our final SPX target was a break above $1400 as this is a psychological magnet for traders, $1400 holds no more analytical value than $1398.91, it is the centennial marks that traders are attracted to as can be seen in any retail outfit with "$.99" replacing "$1.00". Much in the same way traders have been conditioned to flock like moths to a flame at the 50 and 200 day averages which beyond  trading biases, have no more analytical value than a 39 day and 192 day moving average, it is purely psychology that makes these averages important. This is why we expected a move to SPX $1400 which we have attained.

In many, many years of trying to pick reasonable targets, the habits of traders and Wall Street's use of those habits against traders has made picking targets and knowing when to short or buy and when to be patient, easier than ever; one's predictability has made the other more predictable. Still there is one lesson I have learned many times over the hard way and that is the market is like a pendulum, if the middle represented logical fair value, the market almost always swings much further one way than logic would dictate and then much further in the opposite direction, just looking at the red box in the chart above should make that clear and that was is a consolidation zone, yet we still saw huge swings of over 1% each day which may not sound like a lot, but compared to this year's trend up, the swings were more along the lines of less than .50% and many days .15%.

On Friday I mentioned the DIA was showing signs of the 15 min chart starting to crack, I also mentioned if the market could move higher or even stay in the relative area, this 15 min chart would likely see a very deep and clear negative divergence which is what I'd ultimately like to see. There were some signs in AAPL which has been consolidating since jumping nearly 10% in a day (another theme we expected, AAPL to severely underperform early in the move and to be the signal in the market in a tech rotation late in the move) that is may be looking to put in a final blowoff move to the upside-this along with a decent move in the market would pull bulls in (being that the shorts have already been dealt with) and set them up in a bulltrap. The head fake moves are indispensable for market momentum, look at the price moves last week as the shorts found out for sure that resistance wouldn't hold, we broke $1400. This is encouraging to the bulls and any further moves higher will make it all the better as a bull trap would accomplish the same momentum to the downside when the market breaks that we witnessed with last week's upside as the bears were in a bear trap; it's the snowball effect and we see it on nearly every timeframe and in nearly every stock before a reversal.

Here are the DIA and AAPL charts.

 AAPL very short term 1 min intraday chart shows the initial gap up in AAPL saw distribution as 3C failed to move higher with AAPL, this is to be expected given the clues we have seen in hedge fund holdings and AAPL's disappearance from the top 5 holdings from one month to the next. Again, whether AAPL deserves it or not, the hedge fund managers are flocking together so no one fund stands out as a disproportionate under-performer which would cause very well paid managers to lose their job. A move higher in AAPL has but one purpose for institutional money at this stage and they would be counting on retail to chase the move to facilitate their re-positioning.

 You may remember April 24th and even the 23rd as the day (the 24th specifically as it was before AAPL earnings which came after market) we identified the rotation to tech that we had been looking for. I find this 15 min chart's positive leading divergence that developed VERY fast to be beyond coincidence. If AAPL earnings hadn't been leaked (which they might have been with all of this institutional movement of billions of dollars), I am fairly confident the Wall Street propaganda arm would have found some way to spin the earnings as positive, which they actually were not when the most important aspect of earnings is taken in to consideration-GUIDANCE, which AAPL actually fell short and disappointed there. However as we almost always see, once Wall Street has committed to a cycle, they rarely let anything come in the way of that investment. There's some slightly positive movement on this 15 min chart as AAPL dropped to new lows in the consolidation.

 The 60 min chart is far more valuable as to determining the longer term trend for the stock and what is actually happening in underlying trade, this is a huge leading negative divergence, it was very sharp right at AAPL's top and has done nothing but lead lower since; 3C is now below the October lows and with price sitting where it is relative to October, this looks very bad for AAPL.

 The DIA's 15 min chart is the first to show a real changes in 3C momentum. The overall divergence is fairly large on relative terms, the leading negative component that we are looking for as to timing was quite sharp to the downside on Friday and almost all of that was in a matter of several hours later in the day. I would expect any further strength in the market, whether it be a day or 3 days, to see this 15 min chart deteriorate at an even faster pace.

When looking at the longer term trend of the 15 min chart, it is severely leading negative, much of this damage was done on the last several bounce attempts on March 13, 23rd and 29th leaving the DIA in the very low leading negative divergence it finds itself in now, this was also expected.

Now as to the point of this post, the VXX can be a very effective trading tool with volatility running this high and especially on a sharp break in the market, that is why I find these charts to be on interest when considering what we are seeing in the DIA and in may other averages, stocks and out Risk Asset Layout (not to mention market breadth).

 This is the VXX 15 min chart, price is near support levels from the last decline in March and 3C is significantly higher. Since the VXX will move inversely to the market (as it has done since April 10th), the positive divergence here fits well with the DIA's negative divergence. What is surprising to some extent is the fact that the VXX is primarily used as a short term trading vehicle to trade volatility. This 15 min chart seems to indicate a fairly large position is being accumulated, but being VXX is quite volatile, I would have expected this to be done at the very last minute in a very strong move. The only explanation I can think of is the long position is so large that it could not be done quickly without sending volume and price through the roof.

 The 5 min chart shows a very sharp leading positive divergence and it is in the area of support which is still a bit lower. The shorter term charts are often signs of market maker/specialists loading up inventory at low prices in anticipation of a move higher, they don't want to carry a large directional position because of market risks they can't predict (some unexpected fundamental news such as the Japanese Earthquake, etc.) so again, the strength of this 5 min leading divergence (note it too saw the strongest move late Friday like the DIA) is very strong considering it appears from the AAPL chart that we ill see one last move higher. Once again the only explanations I can think of is that we are closer to the breakdown than the AAPL chart suggests or for the amount of inventory they want to stock, they need to get started earlier.

 The 3 min chart's longer term trend is much like the 15 min chart, it never moved lower to confirm the move down, which is a leading positive divergence.

For a more detailed view of Friday's action we can see some positive movement on Thursday late in the day, but again, Friday afternoon saw even stronger movement.

I'll be watching the VXX as a trade on the long side, but more importantly as an indication of timing for the overall market.

The FX and Futures markets have opened, I'm going to let them develop a bit before updating on them, but thus far the S&P futures gapped up and have since lost some ground and look to be consolidative , but still about 2 points above Friday's 4 p.m. New York Close and about a point higher than ES's Friday close.

The Euro has moved a bit lower from Friday's close, breaking some initial support areas which is probably what is putting some pressure on the S&P E-mini futures. The ES CONTEXT Model is severely in the red, indicating that the underlying risk assets, credit, etc is much more sanguine than equities, but this is to be expected on a volatility shakeout move that has nothing whatsoever to do with discounting the market, but rather is simply a set up/trap.

There have been some fantastic articles this weekend, I hope to be able to get in to them sometime this week. There's a must read slap-down of the F_E_D, inside the NY F_E_D by a guest speaker, a journalist in fact from the Economic Policy Journal  that I think would have made Ron Paul himself green with envy. There have been a number of other great articles mostly centered on F_E_D policy, some comparing Austrian Economic Theory which has been much more on the ball in predictions.

That's it for now, I'll be updating as events develop.