The SPY Calls are about the only position meant for an upside pop, other than a few assorted longs I like, the rest of the positions are geared up on the short side.
We have some decent positive divergences lined up on the 2-5 and even some 10 min charts which could give us that sharp pop that would make those January SPY calls worth some money, but the fact remains that the longer term charts and the length of the divergences on them are making this market like a very thin ledge that is cracking with each step. Today was just a warm up as was the 50 point drop in ES last week, that's why we put together short positions.
With all that's going on with the Fiscal Cliff, year end trade, low volume, etc, not to mention a long overnight session, I hate to try to predict how the market will look tomorrow morning, but from the charts I have, I'm going to say weak in the a.m., maybe a gap down, maybe something worse, but this market showed us one thing today and it's what I've said a number of times, "When this happens, it will happen fast" so we could easily pop up in a volatile rocket-like move, ultimately though, the charts are still very much on the side of, "The market owes downside".
Here are some example charts...
However, when considering those SPY Calls, we haven't seen a 5 min leading positive divergence like this since we first looked at that position, I'm guessing this is going to have something to do with that move.
I could post 6 charts in all timeframes for each of the averages and they'd all say the same thing.
You may recall what I thought was strange, accumulation in TLT, the flight to safety trade, well today may explain some of that on the intraday move, take a look now...
Accumulation in Treasuries in the 3 min timeframe, short term and we see the price pop today, but in to that we see a negative divergence so it looks like these were sold short term and if that's the case, the money would be heading in to stocks for a short term pop on the upside, it just so happens that the second chart of the SPY above shows that influx short term in to the market average.
If that were the case, then we'd expect short term volatility to die down as well and VXX/UVXY to head lower...
However as I've told you, there are 3 very clear trends and a 4th that looks to be real as well, I'm only addressing two as we don't need to be trading any further out than these two until they start to resolve. You must remember the second trend that is more powerful because the divergences are on longer charts and they have lasted longer, is a nasty downside one.
I'll of course keep an eye on all timeframes, I'm not married to my views, it's the market and what the market tells us that is most important and if that changes, I'll be the first to tell you. There's no shame in changing your views if the market gives you reason to and if there's a dynamic creature out there, it's the market.
In more simple language what I'm trying to get across is I'm not interested in being a guru who can foresee the market and Wow people, I'm interested in what the market is telling us, this isn't about me, it's about giving you the best edge I can.
Candlesticks... You know what I look for, reversal candles with increasing volume; today we saw Hammers (bullish reversal) on the daily of all the major averages and all with increasing volume, this has been a very reliable upside reversal signal, there's no time or target associated with these, but the next day we usually have a reversal so that's something else.
Other than what we've seen today and what's above, the only other interesting set of indications I haven't covered are our Leading Indicators, I'll keep it simple.
In credit land, the very liquid High Yield Corporate Credit moved with the SPX today which isn't much of a leading indication, but it is a confirmation of the afternoon recovery. In fact HYG closed in the green today where as the SPY closed just in the red. Junk credit also moved with the SPX and I think gave a decent leading intraday signal around 2 p.m. showing strength for the market ahead.
In currencies yesterday I showed some very short term loss of downside momentum in the $AUD, today it confirmed that and is giving short term positive market support, this pales in comparison to the bigger picture leading negative divergence in the $AUD that suggests the market see a new low, but that's what we expect to see.
The Euro is acting better than the SPX on an arbitrage basis, "if" there was a reversion to the mean, I'd guess the SPX would be headed to $1440-$1445 based on the Euro alone.
Yields closed before they could respond to the market recovery today so we'll have to see what they say tomorrow, but in general they are also pointing to a very fragile market with the ability to make a move higher before a nasty one lower.
Finally... Commodities acted well today and if you were watching them intraday, they also gave a positive indication in the afternoon suggesting the market recover (it's not like we didn't already have enough signals suggesting that).
So that will do it for now, I'll fill you in on any developments I may happen to catch before the open tomorrow.
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