Daily Wrap

Today wasn't a huge macro-economic day for the US so there weren't too many undertones there, Europe was closed so there wasn't much coming from that corner either.

It seemed like today was a stop run...

Stops hit at local resistance this morning at the yellow arrow and a little market paranoia after a Republican press release shifting the burden of action to the Senate (orange arrow).

At year end there are so many undertones all playing out at once and amid very low volume. I'm still onboard with a quick upside move (thus the leveraged call position in the SPY), but I expect that to be short lived.

As I have said numerous times, I think the market still owes downside from the November 16th cycle or rally; I'd expect a new low below the 16th.

As far as charts today, there wasn't too much in leading indicators other than some interesting closing action in credit and a few other things...

 As the SPX (green) was seeing some downside that I warned about as 3C intraday negative divergences were forming beforehand , interestingly High Yield Corporate Credit made a push in to the close.

 Junk Credit which also was giving a little advance warning regarding the late afternoon drift down also saw a push in to the close. I would take both events as very short term positives, however within the context of a market that was half closed and the other half that was open across the pond saw dismal volume.

 Treasuries, the "Flight to Safety" trade give us some insight as well that falls in line with near term market outlook. TLT saw some distribution on this 3 min intraday chart, price fell a bit before a positive divergence formed Monday sending TLT a bit higher this morning, we saw one more positive divergence around the time of the market downdraft late this afternoon as the Fiscal Cliff came up.


 Longer term on the 15 min chart, which is much more important than a 3 min intraday chart, we've been seeing a leading positive divergence that has pulled TLT/treasuries higher and I believe this is the flight to safety that is being prepared in response to that market downside I believe the market still owes to finish the cycle started on 11/16.

 This is the SPY with accumulation on a 60 min chart leading up to the 11/16 lows and the bounce/rally from there, however there's been a rather large leading negative divergence in the SPY (red box) that I have said makes this market extremely fragile (recall the 50 point ES drop last thursday to send Futures limit down). This would also represent the market downside that I still expect to finish the 11/16 cycle.

There are other longer term trends that could play right off a new low below 11/16, but we need to deal with that when we cross that bridge. So for the immediate future, I'm looking for a quick move up, perhaps filling Friday's gap and maybe then some followed by a move down which I wold expect to make a new low below 11/16.

Volatility seems to confirm this as well.

 VXX very short term intraday (1 min trend) went negative and saw selling this morning around 11 a.m., it started to see heavier 3C distribution signals and the only thing that pulled it up was the negative divergences seen in the market in the afternoon which I already mentioned and since VXX trades opposite the market it saw a positive divergence right about the same time sending VXX higher as the market moved lower in to the close.


 If we go out to a bigger picture trend on the 10 min chart there's a decent negative divergence in place, this is along the lines of that quick market pop to the upside that I started preparing for Monday and today. However to see a real change in character...

 Move out to the VXX 60 min chart with some of the largest leading positive divergences it has seen in some time, this is along the lines of a new low in the market as smart money knows they can't unload large long positions in to this thin market so they are bidding up put protection for hedges.

Again, look at the 3 timeframes here and you'll see the same next 2 trends I'm looking for, a quick pop to the upside in the market (see VXX 10 min) and the bigger picture, a new low below 11/16 (see 60 min chart above).

Those are only 2 trends, there are at least 4 very clear trends that are developing and they all seem to fit together and work together well, but I don't want to overwhelm anyone right now so I'm trying to stay focussed on the next 2 as the first (up) is much shorter in duration than the second (down).

I could add a bunch of charts of the averages, charts of leading indicators, etc., but I don't think it would make the scenario any clearer, it would just add confirmation to the signals already in place.

As for commodities today...

 This is commodities (brown) vs the $USD, you can see how commodities as well as stocks and almost all risk assets have an inverse relationship to the $USD (green), as the USD comes off the a.m. lows commodities as a group falter in near mirror reversal. The Euro accounts for 50% of the $US Dollar Index and as such, it tends to move with commodities and stocks so often it is easier to use to spot divergences.

Speaking of which...

We have one heck of a consolidation in the EUR/USD thus far, it's almost a symmetrical triangle. Actually as I write, it's just starting to break north of the range, this (if it holds overnight, through the European open and US pre-market) would give the market support and perhaps kick start that pop higher that those SPY calls are there for.

Right now in futures, ES has a very small positive divergence, it's not big enough that I believe it to be material at this point, but if it grows I'll post it later. NASDAQ futures are moving pretty much in line with 3C (1 min intraday), no divergences there yet except on the longer term 5 min chart and even some hints on the 15 min chart.

We do have this newer leading positive NASDAQ E-mini divergence, it will be interesting to see of this can build a bit overnight, that may just be the signal for the quick pop to the upside. I do want to point out that I keep using "Quick pop" to the upside, I am referring to time, I am not referring to intensity; with the market in the condition it's in right now volatility is to be expected - I wouldn't have considered the SPY call trade if I didn't think it could be worth the while.

So there's not much more as of right now that we haven't already covered, if anything rears up in futures trade I'll be sure to bring it to you.