Risk Asset Layout Update

I'll try to make this short.

The Euro and the $AUD both were in pretty strong correlations today with the market, they don't offer any insight's today other than the fact the Euro has broken an important support level, is probably filled to the gills with shorts and there's a reason we don't short the first break of major support which was the $1.30 level for the Euro (currently at $1.2716), the reason is there's a long standing trend of Wall Street shaking out shorts that enter on the break of important support, the ICA trade idea today is meant to capitalize on that trend.

The GLD trade which came after over a month of analysis is another example.

You may recall we wanted to buy GLD at the 150 day moving average which has held as an excellent buy since April of 2009 with at least 9 buys at the average that all worked beautifully. September of 2011 we had our chance to buy GLD at the moving average, we passed on it as the decline from the August highs was way out of character and we suspected something wasn't right with GLD. Sure enough  large triangle top formed, the "buy at the 150 day m.a." trend was over. Some of us shorted GLD as it broke below the triangle, but we have seen the shakeout bounce too many times and while that trade made money, the shakeout move can happen a day after the break of important support or weeks after. I prefer to let the shakeout move occur and let the trade come to us, it requires patience, but the entry, the risk and the probabilities of letting the trade come to you are much higher than chasing the trade. GLD was a great setup, we stalked that trade. We saw the 3C weakness in GLD above the horizontal trendline representing the triangle's apex, but also saw a clear resistance area and had a good feeling GLD would make a head fake move above that area (white trendline) which it did and we placed or Put trade at the white arrow for a +215% return in about 3 days. I closed the trade because I was using options and I want to exit options trades as soon as possible with a reasonable gain. GLD was choppy over the next month and while hindsight is 20/20, we live at the right edge of the chart.

This is the same concept as the Euro breaking the $1.30 area, probabilities are it stages a short squeeze shakeout. I do feel the day will come in which the character of that trend changes and is no longer reliable, but with short interest so high, I'm not quite sure we're there yet and if we are, we still should all have decent short coverage.

The $AUD has seen a fierce downtrend since late April and the $USD an equally fierce uptrend, nearly parabolic. We know the market is like a pendulum, swinging way too far one way and then way too far the other, over the years I've tried to pinpoint where I think a move will reverse and then double that as that is the nature of the market, it has to be as the market in its simplest form is Fear and Greed, the further the market can stimulate those emotions, the bigger the swings are.

Yields which are like a magnet for stocks (and often give excellent divergence signals before a turn in the market) are now flashing a bullish market signal, this has been a very reliable leading indicator.

For example, Yields failed to confirm the SPX's higher high at the red arrow, the market dropped. At the red box, yields were leading the market lower, the market dropped, but the last 3 days they have put in one of the largest positive divergences I have seen, I believe this to be supportive of the market, supportive of a short squeeze shakeout.

XLF and XLE's momentum relative to the SPX was in line today with Energy looking worse than financials, at the end of the day Tech diverged positively-you saw the EOD move in AAPL.

High Yield Credit has held in a range for 3 days now, not making lower lows with the SPX, Credit leads, equities follow. I still have some concern about the quality of Credits' signals with all forms of credit being effected with the JPM situation.

High Yield Corporate Credit (HYG) moved with the market today, long term it is flashing major trouble signals, however between 4/10 and today, the SPX has made a new low, HYC Credit has held at the 4/10 support level and hasn't made a new low. Because of its liquidity and relative cheapness, HYG is being used more in credit markets so my concerns over JPM are even more valid there as there are many situations that can effect HYG prices that have little to do with the normal correlation of HYG and thus effect its usefulness as a leading indicator, we just don't know to what degree HYG is caught up in the various schemes related to JPM. For now, all I can cay is based on what is observable, HYG is more supportive of a bounce than not.

Commodities held up very well today (DJP closed up +.76%) vs the SPX and vs the $USD correlation. Similar to Yields, commodities stabilized on Monday and have been trending up in  positive divergence the last 2 days (closing up .51% yesterday and more today). Again I have to ask the question, "Does someone know something we don't related to the Euro/Dollar that will positively effect the market?"

That's about it for Risk Assets, our version of Context. Speaking of CONTEXT, as mentioned, early in the week the model for ES was DEEPLY negative, that's not the case now.

CONTEXT is actually supportive of higher ES prices; at the start of the week it was about as negative as I've seen it.

Keep in mind as well, ES broke its 50-day moving average yesterday, while many traders see this as bearish confirmation, we have seen it used against them so many times that you almost have to expect a shakeout in ES. This all goes back to Technical traders doing the same things they have done for nearly a century, the problem for the is that Wall Street knows exactly how they think, what they'll do when presented with a price pattern or the break of important support/resistance and Wall Street uses trader's predictability against them, so much so that most of our successful trades have been in some part based on this concept alone.

More to come...