MARKET WRAP

Where to start? In case you didn't catch it already, I think last night's post, "The Week Ahead"  is a good place to start because it lays out expectations, many of which started playing out today even though today's market was exceptionally thin as the bond market was closed which kind of makes today more difficult to put in to context with one of the most important asset groups and their relationship with stocks totally missing.

In any case, several assets that I expected "near term or short term" upside in, but needed to consolidate to build those divergences, did that today. These stocks/assets are important because they can and do move the market, so in a way, they are a market indication as well.

Lets look at a few talked about last night.

 First this indicator is AAPL's close within the daily range, we haven't seen trouble like this since they had good earnings that were sold in to , the point really is this is just another change in character in AAPL's behavior.

Last night I mentioned I was looking for AAPL to consolidate with a positive divergence to make a 3rd shoulder in a complex H&S price pattern it is nearly done with, I said if I got the chance to enter some calls for a short term long trade on this 3rd shoulder, I'd take it and I opened an October $645 Call position in the options model portfolio this morning. Ultimately though, I'm looking to re-open the short closed a couple of weeks ago at a small loss as this pattern started to unfold, so I'll be looking to re-open that short AAPL position on AAPL price strength / 3C weakness.

After the negative divergence in AAPL (3 min chart) coming off the second right side shoulder, today's positive divergence is what I was looking for.

Oil was another, this for a move up that may last a bit longer and I wanted to use a little less leverage and not worry about time decay/expiration so I chose UCO long today to play this move I'm expecting to the upside in USO, but again, we needed the same kind of chart patter as above.

USO gave us a nice leading positive divergence today on this 10 min chart, this is what we often need, consolidation, for these divergences to form.

As for the averages, there was more diversity there than I would have thought, the SPY seemed to be the best looking and after weeks of the DIA having solid underlying trade, today it was very weak.

 Intraday the SPY 5 min put in a leading positive divergence, so this is what was expected last night for the very short term (a move up of a couple/several days).

 The zoomed out version of the same chart (trend) also shows why I'm not expecting a strong lasting move in the SPY/market any time too soon, that's the same 5 min chart in a leading negative divergence, longer term damage has been done, but that doesn't mean the market can't bounce short term and that is what last night's gam plan for this week was all about, using short term price strength to enter longer term short positions for now until we see something different.

 Within the SPY's channel (15 min), the last 2 days look like a bear flag, although the SPY seemed to find support at the bottom of the channel. A bear flag breaking to the upside would make for a decent head fake move that would give the market some extra lift without accumulating too much, just let the shorts do the work on a little squeeze, therefore, it's always possible for a head fake move below the flag to get shorts to commit on confirmation of the flag as well as the channel.

I mentioned the DIA looking quite weak today...

 The trend of the 2 min chart saw early positive divergences, but quickly went to a leading negative position. I have some theories on why, but I'll hold off until I can confirm and until they are useful.

 For context, this is the DIA 5 min trend, also leading negative like the SPY. The release of the minutes last week seemed to unnerve the market and there were some things in there that would give good reason to, for an overview, see this post, "Minutes"

 QQQ was better as expected with AAPL expectations...

 A QQQ 10 min intraday leading positive divergence, this alone is probably enough to get a bounce move going, however in trend context, these aren't as strong as they look today, longer term damage is done.

Gold-

 In GLD I was expecting that we see a little upside, maybe fill some gaps, but I don't expect it to hold very long. Longer term I don't have an opinion on GLD yet, but a nice pullback with good accumulation would be one thing I would be on the look out for. The intraday GLD chart (3 min) did put in a positive divergence as expected, I didn't expect it to just jump up today without some consolidation first.

 The larger trend in GLD (15 min chart), is still a lading negative divergence and that's why i think GLD pulls back a decent amount before any sustainable real moves higher.

Energy, Financials and Tech...

 As expected last night, a nice intraday positive divergence developed here intraday (5 min chart). I do expect Energy and Oil to make a decent move higher, especially after the beating crude has taken lately.

 Financials  like many assets didn't have good signals during the period in yellow around the dates, this was before the minutes and it seemed like the market was nervous about them and not making any major commitments, it seems the market did have good reason to be nervous about the minutes as we have the first really unmistakable divergence after the minutes came out and it's quite negative. Intraday Financials didn't do a lot, they did keep pace with price, but I wouldn't say they were positive, just more in line with the price trend today. Again, the longer term trend represented here is not a positive one so again I'll be watching for price strength with 3C weakness to maybe enter some trades there.

 Tech as might be expected with AAPL expectations, did put in an intraday leading positive divergence (3 min chart) today.

As you can see on this 5 min Tech chart, during that period before the minutes, there were few signals, after the minute Tech went negative, but quickly held a leading positive divergence, I think this has a lot more to do with AAPL expectations than anything else.

EUR/USD, $AUD and Carry Trades...

The Australian Dollar which is part of a carry trade used to finance rallies and sold when the market is unwinding shows longer term (4 hour chart) since the October 2011 bottom; there's mostly confirmation of the price trend with a couple of negative divergences at a spike in late 2011, then at the March-April reversal to the downside and again now it's in a large leading negative divergence, I talked about this last night and how it was a measure of the carry trade and by extension, what smart money was doing in the market (de-leveraging risk).

 The AUD/JPY Carry trade...

 This chart shows (as did last night's) the carry trade being unwound, typically stocks are sold as the trade is unwound, it topped and failed to make a higher high as it has been doing since the 6/4 lows on 9/14, the day after QE3 was announced. Why? What does this mean? We've discussed quite a few possibilities, but in the past at QE, the carry trade was being put on, not taken off.

Euro

While the $AUD is more predictive as a lading indicator than the Euro, the Euro is a good confirmation/non-confirmation indicator as it has a close relationship with the stock market. Today we did see a leading positive divergence (5 min chart) which would suggest $USD weakness coming and that helps the market near term, as expected in last night's post and late last week.

Intraday the Euro (orange vs the SPX in green) shows several areas where stocks got ahead of the correlation and you can see risk in stocks pulled back toward the Euro's flatness on the day, still the positive divergence suggests the Euro moves higher in the very short term which would benefit the market by way of $USD weakness.

 Commodities can also be a useful tool (seen here in brown vs the SPX 1 min chart), in white commodities are showing better relative performance and the market follows, in red weaker relative performance and the market follows them down, today, they are nearly perfectly synced.

Using that same concept on a daily chart of commodities vs the SPX, you can see where commodities called the 2010 QE1 ending top before the SPX, also the QE2 Jackson Hole market run in white before the SPX, they also called the 2011 reversal (down -20%) before the SPX and are severely dislocated at the 2012 reversal to the downside and remain severely dislocated. However, even at these lower levels, they are hurting many businesses via inflation/input costs, which is a whole other post about the F_E_D minutes and their possible new yardstick for QE-some of you know what I'm talking about as I have addressed this before and after the minutes were released.

Credit...

As they say, "Credit leads, stocks follow"

 High Yield credit which is used to express a bullish sentiment saw a nice positive divergence today with the SPX, suggesting upside in the market to follow shortly.

 High Yield Corporate Credit (HYG) also acted a bit better at the end of the day and was in line the rest of the day rather than negative.

 However on a longer term chart (60 min), HYG called the 2011 downside reversal and it is dislocated from the SPX now, again these two charts fit with last night's, "Short term up, longer term down" theory for set ups this week.

Junk Credit also performed better at the end of the day, obviously it is high yield (1 min intraday chart vs the SPX).

So everything went pretty much as expected today except the weakness in the Dow's underlying trade.

I'm trying to understand why the DIA looked so bad today, the only thing I can come up with so far is over the last week or two, its underlying action has looked better than all of the other averages, after Friday and last week's release of the F-O_M_C minutes, it may be that there were some drastic re-adjustments that needed to be made in the DIA and quick, thus today's ugly charts.

I also suspect that the Dow's underlying trade looked better generally because I think with earnings and P/Es being ahead of themselves, basically an asset bubble in stocks, how can it not be when compared to 2005 levels and the economy back then? So I think it's going to be more of a stock picker's market to the extreme, no one wants to be the last to buy the high flier at a 50+ P/E and then have the F_E_D switch over from date guidance on rates and policy to economic conditions? The dates are very predictable, the F_E_D says ZIRP to 2015, institutional money can plan and count on that, but the F_E_D says, "Asset purchases will depend on the economic reports" and all of the sudden any kind of security of knowing what the F_E_D will do is totally gone and you're not as willing to take risks when a string of good reports "may" cause the F_E_D to dial down asset purchases and "may" is all that is needed, they don't even have to do it, but if the market thinks there's a chance, it's going to be a lot more cautious.

This is why I think the minutes are so important as the F_E_D introduced this idea there and it almost seems like they are trying to contain an asset bubble as they have record setting policy accommodation, at some point they have to wind that down and if the market is much higher or even here, it's going to be a crash like we've never seen before, so they may have purposefully put that in there to avoid asset bubbles and inflation associated with QE, while still giving the banks their money.

 The question is why are they giving banks money? I have a feeling the US financial sector is way more exposed to Europe than anyone is admitting and they are nervous about that. If housing could do what it did to the banks, think about all the assets, sovereign bonds, etc they own and their branches or units in Europe, something spooked the F_E_D in to major policy action, but at the same time they seem to want to try to control the negative QE effects and I think they realize an asset bubble and inflation in commodities is not going to help, but hurt, so introduce some uncertainty in the market and let it start acting cautious.

In any case, that would explain the recent better behavior in the Dow as asset allocation moves towards larger companies that aren't as over-valued, that have a dividend instead of chasing the momentum stocks like previous QE episodes. Just a best guess, but a lot of things line up and make sense in that light and some of these I was speculating about before the minutes and it turns out they talked about them at the meeting as per the minutes.