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.