Rise of the Machines

When looking back to yesterday's expectations, it was for an early move higher in the market-thus the weekly AAPL/BIDU calls, in fact at one point earlier today, at least the AAPL $665 weeklies were worth 22.5%, sold near worthless.

We did get the move higher on the open

And in AAPL

 I know early the $665 AAPL weeklies were worth at least 22.5%, I didn't see BIDU's $115.

and BIDU...

Yesterday I said I suspected you'd have to move fast on these, but this fast? Even expecting a knee jerk reaction from the Bernie speech, this move came very fast. I thought about taking the 22.5% in AAPL but didn't.

The signals yesterday for a move up today were fulfilled overnight as the ES and NQ contracts were leading positive almost all night and the only really strong signal was in the early pre-market and a.m. trade.

Both Futures (the S&P E-mini and NASDAQ, "NQ") changed character dramatically from the overnight session which lifted them giving us the gap up open and the main signal was after the post Bernie decline/bounce as you can see here...

and here is NQ.

After that it seems like real traders were off to the Hamptons as the market seemed to trade in arbitrage mode which has not been typical for this market, turning on some arbitrage programs would take care of that.

Here's what I mean...

 If you look at $AUD over the last day and a half, the SPX mimics the currency nearly exactly, I found this strange today and commented on it.

Considering the $AUD looks like this longer term (negatively divergent and no where near arbitrage)...

 Only today has the look of arbitrage trade.

Looking at the Euro the effect is similar

 The Euro as mentioned also today has been leading the market by about a day, from left to right a positive divergence on an arbitrage basis which sent the market higher (yellow box), followed by a negative Euro arbitrage divergence sending the market down in the orange box. There was a jump in the Euro at the second white arrow and a range followed by another move lower in the Euro followed by a move lower in the SPX. In the green box this is the first timeframe in which they trade almost perfectly together in real time, this is indicative of an arbitrage trading system which use to be more common, but I haven't seen it happen for quite some time, I don't even recall the last time.

Here's the same chart without all the annotations, you can clearly see the change toward real time arbitrage at the white box.

This may be because of the long weekend and Wall Street carbon life forms with a pulse are taking a long vacation weekend as is typical, usually volume falls off, but rarely are arbitrage systems turned on.

Of course I can't say for sure, but that's what it looks like.

As for CONTEXT, the SPY shows some arbitrage measured by Capital Context's SPY arbitrage model

In red is the SPY, in green is the arbitrage model, the histogram shows the difference between the two.

The CONTEXT ES model is a different system entirely and shows a multitude proprietary of weighted risk assets whether ES is overvalued or undervalued compared to how these other risk assets are trading.

Note that overnight ES and the model are trading in near perfect unison, by the late morning trade and throughout the afternoon ES was significantly overvalued.

Many of our own risk asset leading indicators told the same story. For example...

 Yields were off intraday, you've seen how far they are dislocated over the last 10 days or so, the $AUD as a leading indicator as well is severely dislocated, these have been VERY reliable in calling turns in the market as I posted yesterday.

$AUD showing the carry trade is off, meaning institutional risk is off.

Today however was the last day of the month in which 89% of hedge funds are trading down. The last day for window dressing trades would have been Tuesday, 8/28 as the T+3 rule exists (trade plus 3 days).

As far as what ES and NQ look like on an hourly basis, very similar...

 NASDAQ Futures

S&P Futures. The yellow box is what I suspect was the actual reversal point/top.

Which also look very similar to the SPY and QQQ hourly

 QQQ 60 min leading negative

SPY hourly leading negative.

Unfortunately the futures don't have as much history, but the signals in the futures and the averages are nearly identical, all leading negative.

The Euro got a boost this morning from some rumors regarding the ECB, this also sent European markets higher, however the sovereign bond yields went the opposite direction as they climbed higher, this is a bit strange as falling yields have been the catalyst to send European markets higher, bond traders are much better informed than equity traders, the fact the European markets were up while sovereign yields moved much higher seems like the European equity markets were being manipulated. European equities were acting as if they believed the ECB will do something, sovereign bond markets were acting as if they don't have any faith in the ECB; between the Euro and sovereign yields, the bond market is much more important, again it seems like there was an FX legacy arbitrage component at work in the European stock markets as well.

Something else I have been watching is the SKEW Index, this is a CBOE index that attempts to predict the chances of a Black Swan Event occurring, in the past when it has predicted Black Swan crashes, they have come between 4 days and several weeks after SKEW peaked, SKEW is derived by options (in simplistic terms, near term strikes vs further out strikes).

 A Black Swan event is a sudden crash in the market, SKEW's normal range is 115, anything above that and the chances of a Black Swan rise. The last time SKEW went up the market fell 10% , but the March highs were the top. We are not as high in the recent spike, but well in to the red zone.

The Rate of Change is a bit disturbing as well. Today a member commented that his October BIDU puts were moving up in value while the stock itself gave no reason for the rise in the value of the October Puts, this is SKEW activity.

As you know, there were a few things I was looking for to happen, gold was one of them, specifically a high above recent resistance.

The reason? The market has been largely held up by the hope QE3 was coming, Jackson Hole today was one of the possible chances for it to be announced, but any QE3 looks very unlikely this year, for a good reversal, we usually need a good head fake, that's why I've been waiting nearly a week for such a move in GLD.

We got that move today...

 There's the move above resistance, $162.50 was the area I was hoping to see, we got that and some.

 However the short term 5 min chart didn't confirm such a strong move today

 Here's the longer term 5 min chart

And the bigger picture 60 min chart.

I'll have a lot more to post this extended holiday weekend, but many of the things we were looking for came today, not exactly at the levels we were looking for, but the trends were all there, the jump in the market, the extreme intraday volatility on the F_E_D knee jerk reaction, the move in gold, the move in miners and DUST (although they fella bit short of our targets-GLD was a bit above our target), but the trends expected played out pretty well.

Transports continued to diverge from industrials

Especially today, but the larger trend is more important, again it is the worst in the area I suspect is the top that's already in.

The same is happening with Dr. Copper

Thi is another example of how the June rally "looks" to be a counter-trend bear market rally, as I have explained it can't be classified as such because of the price trend, but the underlying weakness everywhere from Risk Assets, to 3C to charts such as transports and copper all give the impression this move is a counter-trend bear market rally.

It can easily be argued that price doesn't show anything like that, however when you consider the move in prices and the probability of a strong head fake move, it portends a very negative reversal. If you think back to our expected trend assumptions, we expected a pullback followed by a VERY strong rally that would likely make new head fake highs, followed by a new leg lower. We didn't get the smaller pullback trend, but the second larger trend is exactly as described in June.

There are many more angles and individual stocks to look at, I'll be bringing you those posts this weekend.

In the meantime, enjoy your long Labor Day holiday weekend.

End of Day post coming, I was just working on it when we lost power. This is from my cell, expect power in 45 mins

Did I speak too soon?

Too Quiet

Even with 90% of Wall Street unpacking their suitcases right now in the Hamptons, it is too quiet.

If yo have kids or a dog like mine, you know what I mean.

UNG Update

I'm not saying UNG will keep this up without a consolidation or correction (I hope it doe consolidate/correct, as long as it's a healthy move, these are essential to a strong trend in not getting overbought), but thus far there's very good confirmation and this in an interesting study in what a healthy move looks like compared to many other charts we have seen.

I'm sure you'll spot the difference immediately.

 UNG 10 min price trend

 UNG 1 min chart, white for accumulation, green for confirmation.

 2 min-also leading positive

 5 min

15 min also leading positive.

Notice the difference?

GDX/GLD/DUST

We are not quite at the target levels in GDX/DUST but pretty close.

As we move closer to the target levels there's a change in character.

 GLD looks to be turning in this area, it would be interesting to have a bearish daily candle with volume up.

 Not at the GDX target level, but interestingly close.

 Changes in GDX character.

 Not at the DUST target level, but close to another support area not far above the target area.

Changes in character in DUST near that level.

This is why I prefer phasing in to trades in situations like this.

GDX/DUST

Both are near the posted target areas, keep an eye on them. Charts coming.

AAPL/BIDU Weekly Update

I'm very much hoping that these signals forming in both stocks are preparations for a late day move in the weeklies, if so, be prepared to work as fast as an HFT.

 AAPL 1 min

 AAPL 2 min

 AAPL 15 min

 BIDU 1 min

 BIDU 2 min

 BIDU 3 min

BIDU 5 min

HFT Trades

This is a little example of how fast the new liquidity providers (formerly the primary job of market makers and specialists) work and why institutional positions have to be kept quiet as these HFTs are so fat they are predatory on actual institutional trades by front running them and causing an institution to get a horrible price fill once the HFT pings and finds an iceberg (an institutional order that is hidden as it is executed in smaller pieces-the HFT identifies it and front runs it). These HFTs have set a new record that is actually FASTER than the speed of light called Fantaseconds, NANEX who specializes in identifying such anomalies writes about the new barrier in speed, faster than light, how? Read on.

Luckily for us, these are the new scalpers, replacing the former scalpers known as day traders. These HFTs don't tend to be position traders, that's not where their edge is, their edge is in milliseconds or fantaseconds, they could care less about holding a trade from a high to a low over a period of days, weeks or months.

NANEX shows the trading today on the Bernie news over a period of 20 milliseconds (1 millisecond is 1/1000th of a second). Take a look, you might be surprised to see trades executed and timestamped before the bid/offer were even available.

This is 20 milliseconds of trade, NASDAQ bid/ask spread is the shaded grey with actual trades in black dots, the NY-Arca bid/ask is red shades with red dots being actual trades, note how the trades lead the bid/ask.

And we wonder why volatility has picked up intraday.

I personally can't wait for an SEC commissioner to be appointed who sets a rule that every trade must be executed by a human hand and billions of dollars worth of fiber optic cables, mainframes and such find they no longer have any use except as scrap.

My cousin works on a private black box system out of Atlanta, they rented office space next to the major exchanges for incredible sums of money to reduce latency by a few milliseconds, that is how fast this war of speed between these High Frequency trades actually is. Whoever can route the volume (and hitting stops creates volume) collects the volume rebates offered and there's a lot of money to be made there alone, probably even more in front running the printed bid/ask order, fractions of pennies add up when you can create millions of them in a day.

Risk Asset Layout

This update takes time, but there are few updates that are more important and although I need to be watching everything in the market today, ignoring this layout would be a very bad idea.

Here it is with some recent questions and perhaps answers, this also is in a place that makes an ugly downside reversal, worse than the May 1 reversal by far.

Here are Yields, I describe yields as being like  a magnet for equities so when they diverge from the SPX in green, they have always called a reversal since we have used them.

 TodayYields look worse than the market, a trend that has been seen recently, I believe yesterday I showed you historical divergences in yields and the resulting reversals in the market (in this case to the downside).

 Longer term they have been divergent since mid August, this is one of the largest divergences and implies a larger reversal.

 The Euro has been interesting this week, what is happening with the ECB drama especially today is very important and we need to take a closer look at the Euro as 3C has called the moves in the Euro and the Euro has led the market by about a day, it's pretty close intraday to the SPX, white is more positive, red is more negative, green is in line.

 More interesting though is the $AUD tracking the market nearly perfectly. There's only 1 reason I could think of for this and that's the other side of the FX pair, the $USD.

 The $AUD has also called many reversals as shown yesterday I believe, this is very negative, this means the carry trade to finance risk on moves in the markets is being unwound, with that risk on moves in the market tend to fail.

 Here's the $USD vs the SPX, the inverse relationship is why I usually use the Euro to show divergences, but if you look closely, the $USD has been tracking the market nearly perfectly today, explaining the $AUD.

 As far as Industry groups, Energy was about in line yesterday, nothing too special, it was in line earlier this morning, right now it is a bit more positive than the market-this is price momentum of Energy vs the SPX, not a 3C chart.

 Financials showed a lot of relative strength yesterday vs the SPX, today, not so much.

 Tech has been in line pretty much all day, right now it is a bit more positive in momentum than the SPX, if there's any sector that is more positive, I want it to be tech today. I'll take a look at underlying trade.

 Sector rotation matches up pretty well, Financials are off, Tech, Basic Materials and Energy are up, Industrials and the flight to safety trades are off, healthcare, Staples and Utilities. I wonder if Tech will lead the market in a late day swing?

Here's where I have had questions, every Risk Asset leading indicator is negative EXCEPT credit.

Here's High Yield, one of the simplest divergences indicators in the world and much more effective than indicators that claim to track accumulation/distribution like OBV, yet Technical Traders forget about this very simple indicator as they chase all the hottest new indicators. Just apply Rate of Change to price and you have an effective divergence indictor. The one thing I notice about the Credit averages is that they are all near or at a breakout point which brings up the question of a head fake move, we've seen it before in High Yield Corporate Credit, from ROS it looks like High Yield is divergence as it just passes resistance-it worked at the last high.

High Yield Corporate Credit also just passing resistance today, also negative on the ROC signal, just like the last high / resistance level.

And Junk Credit, also just below resistance and going negative on ROC just like the last downside reversal. This is a very easy indicator to construct, no one looks at it, I'd use it if I were you and you can apply it to other indicators to get advanced signals from them as it shows changes in character before you'd otherwise notice them, it turbo charges any indicator you apply it to-One of my TEACHING SECRETS.

Remember High Yield Corporate Credit and me mentioning we have seen a head fake move in the past? As it moved down in this channel, telling us the SPX new highs were to be shorted, it made  move above the channel, a breakout, that failed and look at the resulting waterfall sell-off, so head fake moves do occur in credit. Luckily I have the correct version of 3C that showed this in the past.

3C on HYG

 30 min chart, negative, but first enough accumulation to push it just above resistance,

 Here's the longer term 30 min chart, the channel it broke out of (not drawn well with arrows) and 3C negative at the breakout, this is a leading negative divergence. Note the parabolic lows in Credit late last year were accumulated and then sold in to strength.

 15 min chart with lows accumulated and the area just below resistance to push HYG above resistance in to distribution.

 The 5 min chart confirming the move up and then going leading negative, other than a small accumulation zone at new lows below local support.

 3 min chart leading negative on the move today above resistance

 Same on the 2 min chart.

This may be our answer as they get the most out of credit positions/shorts before a potential large scale downside reversal.