ES best sums up the day

ES was the best representation of the market today, we started with some weakness, saw an early morning positive divergence and as prices went higher in to the afternoon on seasonally light volume, 3C showed a significant negative divergence. My gut feel is this is a set up moving in to the French Auction which will occur while most of us are asleep.

Does this chart look familiar?

A triangle and a breakout? This is the Dow Jones Copper index (JJC) and if you said it looks like FCX, you were right, except it is rolled back one day.

As for today, here's FCX vs. JJC

As for the case I made about FCX being in a head fake breakout and likely a decent short sale candidate, compare it to JJC's performance today, the copper industry as a whole broke down today for a loss of nearly 3%, which means FCX is likely a head fake and the price action today was used for the exact reason 3C suggested, to sell in to strength before a reversal. So all of the sudden, the FCX trade looks a whole lot better.

As for BAC...

 BAC did exactly what I said I hoped to see, it filled the gap and then went range bound. Compare to the SPY below.

After filling its gap, the SPY continued higher while BAC did not participate, something that makes me feel okay with have held the position overnight.

As you saw earlier, the NYSE TICK chart stayed very mellow today, there was no inherent strength/solid bias to the TICK hart today, making today a mediocre day at best, but every day is usually a set up for a coming move, my guess is the French Auctions won't go well as OATS leaked higher all day today in anticipation of tomorrow's auction and just wait until the S&P finally chimes in with their downgrades.

In a probably little noticed sign of market weakness, the IWM not only did not lead today, but was the worst performer on the day (S&P-500=+.01% , NASDAQ 100= +.31%, Dow-30=+.17% and the Russell 2000 -.66% on the day).

 Speaking of possible/probable head fake moves, here's the daily IWM. Not only should the IWM have led today, it should have shown follow through buying on a breakout, neither happened, a definitive sign of market weakness.



Intraday, the IWM didn't participate in the broad market's slow drift up, but couldn't even close the gap, which leaves open the possibility of a bearish breakaway gap, something we haven't seen much of lately, especially not in the averages.

Both High Yield Corporate Credit and High Yield Credit underperformed the S&P on the day as did the Euro. Commodities tended to outperform on the day, something that helps the FCX trade.

All in all, not the New Year's blast the market is use to seeing in the first week of trade.

FCX possible Swing Trade

For now, I would set up my risk management and position sizing in FCX as a swing trade, if it works and trends, you can add to FCX and introduce a trending stop. For more information on shorting a stock (specifically regarding adding to the position as it works in your favor and why short selling allows you advantages that a long trade doesn't) see my article from Trade-Guild.net, "Making More Then 100% on a Short" . The article was written a while ago, but is still relevant and may also give you some ideas as to the advantages of a real equity short over an inverse/short ETF (which is considered a long position in your portfolio). I think there are advantages to each and disadvantages, it's a matter of using the right tool for the trade.

If I was considering FCX as an options trade, I would buy March Puts and slightly in the money. Otherwise, I would consider the trade for a real equity short sale. The options are going to limit your time and you'll have decay. However if a head fake confirms, then options will give you leverage as well as pre-defined risk.

I talked about FCX last night, you may want to take a look at that article as well. As far as Trends in FCX, without going in to Dow Theory and using my simpler model of moving averages which works out just about the same, FCX is in a primary downtrend, a slightly positive intermediate trend and short term trend is flat.

 This s a 2-day chart just to give you an idea of where FCX is, the primary downtrend is obvious, so trading with the trend is a plus here.

 The triangle that has set up is a symmetrical triangle and carries no bullish/bearish implications other then the preceding trend. Some may look at the preceding trend as up and this would be advantageous in a head fake situation, longer term it's hard not to call the preceding trend down.

 Step 1 of any good head fake trade (and these trades tend to be ripe/ready and move quickly) is an obvious price pattern that traders will be aware of, we have that, step 2 is a breakout. For the size of the triangle, volume on yesterday's breakout is lacking and there's no reason a bullish breakout should be lacking at the start of the new year. The follow through today is also lacking in volume, but overall from a price standpoint, it looks bullish.

 When you look at the breakout on an hourly chart, all of the sudden it doesn't look so bullish. Volume is dropping off significantly and recent price candles have lost momentum, not what you want to see on a follow through day after a breakout.

 Here we see accumulation for the breakout, it's not a long period, but t is in the right place, at the low end of the triangle and in a flat trading range. Note however that the 10-min chart which has had plenty of time to confirm the price move, has not.

 The 5 min chart could have and should have confirmed the breakout yesterday, instead it is actually in a leading negative position, this would suggest distribution. Confirmation would see 3C where the orange arrow is.

 A closer view (zoomed to show intraday movement) shows 3C moving lower in to higher prices, this is part of the reason Wall Street runs head fake/false breakouts, they have demand (bulls buying) to sell in to at higher prices rather then crash prices by trying to sell in to a market lacking a bid.

 The 2 min chart also shows accumulation in white to prep the breakout, again, note the accumulation near price lows and in a flat range (these are signs of institutional money at work-most traders look for volume spikes and such, but Wall Street does their buying and selling in boring, flat areas and usually on light volume, they don't want to attract attention while they are accumulating/distributing as that would drive prices against them).

The 1 min hart confirms everything seen above, it is in a leading negative position.

Furthermore, as I showed with the Credit/Risk basket, commodities are frothy compared to their FX correlations and the macro environment for many commodities is not good with China's manufacturing sector in decline.

If you like the trade, a phased entry could be used with a partial position here or you could just wait on confirmation of a head fake, if I used options, I would prefer confirmation of the head fake.

URRE Update

I know some of you are long URRE and yesterday I posted some analysis on it and said to look for some follow through today. While we aren't quite yet at the kind of follow through I'd like to see, URRE is definitely improving today as the day wears on.

Make sure to see yesterday's update if you didn't.

SPY/BAC/IWM

 This is the SPY (green) vs the IWM (red), small caps really should have led any advance, instead they are rangebound and leaking lower, all of the averages moved up except the IWM.

 SPY 1 min continues to fall apart in to higher highs.

 And that has moved to the next timeframe now.

 As for BAC, I said earlier I wanted to see it fill the gap and then go sideways, it has done exactly what I was looking for and really hasn't responded to the broader market pulling away to the upside in the last hour or so. I like BAC for this particular kind of trade, it offers better returns on these short trades.

 Now the BAC 2 min has seen the 1 min deterioration bleed in to the next highest time frame.

On a longer term basis, the 15 min chart, which is much more important, has a nice negative divergence in BAC.

BAC Trade

I don't really like putting the trade on this late, but I think I'm going to go ahead and use puts again with BAC. BAC and the IWM really aren't responding, financials in general aren't responding, it's not a good sign with the S&P moving.

I'll send out some charts in a minute, but I think BAC Jan $6 Puts will be the trade again, of course I'm keeping these at a semi speculative level and investing about 10% (before margin) in the trade.

Intraday Market Update

The market has really mellowed out here, I'll show you that in a minute. One of the things I was thinking for today was some range bound trade, it seems we are in that now.

 Here's that range/consolidation I mentioned earlier.

 The 1 min SPY chart continues it's march down.

 ES is starting to look kind of bad with the divergence there.

Here's what I meant about the market being mellow, the NYSE TICK chart is in a narrow range, unlike yesterday.

We are just getting some action now in the market, this may be the prelude to the set up I've been looking for.

As for longer term trades, FCX is looking really questionable here, I'll post an update on that one soon.

European Update

The big loser in Europe today is Unicredit, down 14%. Financials are getting hit hard, although it is mostly showing up in credit or at least it is more acute there.

As I reminded you, France has a big auction of debt tomorrow and French Yields are rising pretty dramatically today ahead of the issuance. As mentioned last week, Thursday will be important for Europe and France in particular. The ECB's inability to support OATS in the secondary market makes French debt the real barometer of what s truly going on with regard to contagion.

The Euro is on a little counter trend bounce right now and that is likely the support the US markets have seen thus far today.

It will be interesting to see how the Euro reacts after the EU close through the New York close with the French auction tomorrow.

Market Update

There's definitely some short term momentum loss, but I'm inclined to sit still for a bit longer.

 This XLF 1 min chart is an example of what the averages are looking like on a 1 min scale, this is a leading negative divergence and has slowed the upside momentum as most of the averages have filled most or all of the gap.

 There is some weakness bleeding in to the more important 2 min chart, but I just don't feel like we are at a reversal here yet, this could still very well be a consolidation or even a intraday trading range developing.

 BAC 1 min from positive divergence to some distribution on the 1 min

 The 2 min though is not seeing that weakness bleed through yet.

 DIA 2 min losing some momentum as 3C has the first negative divergence.

 The SPY is more or less in line or confirming thus far.

 There's a little weakness in the Q's but not enough to be actionable.

And the IWM is pretty much in line as 3C moves a bit lower with price. The IWM remains the only of the averages that hasn't filled the gap yet.

WOW, that happened fast-BAC fills the gap and then some.

If you are looking at this trade, just be patient now and wait for the distribution signal.

BAC Update

Everything I said about the IWM applies to BAC, this is the second 1 day or less trade in BAC using puts in the last week, the first made nearly 30% and today's made 57% on the trade, I'm treating them as semi-speculative trades and not swinging for the fences, generally using about 10% of portfolio value for the trade (before margin). So in essence, I'm using these options trades on a very short time frame (1 day or less). I'd like to see BAC close the gap and hopefully go flat for a bit, that's where I'd be looking for the next trade.

As for longer term positions, I still think BAC breaks below $5.00 and I have longer term positions that I'm leaving alone, but when these opportunities come to hit a single or a double, I think they are worth the swing.

Today the IWM and BAC are what I'm most focussed on, but I suspect there will also be some commodity related opportunities as well.

 The 2 min BA chart suggests it has enough support to fill the gap, more importantly the Industry group shows the same support-XLF below.

Notice how similar XLF and BAC look? XLF showing the same 2 min positive divergence intraday, so I think we can get the gap fill. On a side note as I have mentioned many times, there are very few break away gaps like the one in GLD, the market has been filling the majority of gaps, so that actually works to our advantage here, but just like the Cats and Dogs trades, you have to take the profits on these particular trades pretty quickly. Any time I have 1 day double digit profits in a speculative trade, I almost always take enough off the table to guarantee at least a break even trade and often will just take the whole trade off.

You can go broke taking too small a profit, but n this case the exit strategy has to fit the trade strategy.

The Plan for Today

Here's the way I see it best captured by the IWM/Russell 2000...

I'm using the R2k/IWM as an example because it is the average that should, in a risk on environment, be leading, instead it is the biggest laggard and it has the features that I think define the overall market scheme of things right now.

 Here's a bullish ascending triangle, assumed by technicians to be a bullish continuation pattern, assumed by me to be a head fake set up to trap longs. Yesterday we saw the breakout, today there's no follow through at all, not bullish!

 On an intraday chart, you can see what I believe to be the head fake breakout yesterday because 3C didn't confirm in any of the averages or the main 3 industry groups. The IWM found some support right at the lower triangle trendline and there's a gap at the white box. The market has been very predictable lately in filling gaps and I'm thinking this one will be filled or at least an attempt.

 This is the bigger picture, the IWM 15 min hart is leading negative, I can't see this in a bullish light and in fact looks to set up at least a swing trade, so this is the strategic view, now for the tactical entry.

 These are the short timeframe 3C charts with no confirmation from yesterday, 5 min.

 2 min

 1 min

However zoom in on the 1 min and you an see the relative positive divergence that found support at the triangle's lower trend line and there's a leading positive divergence that has since formed, but only on the 1 min chart, this suggests a gap fill attempt. I'll wait for that to occur and then look for the negative divergences once it does, that's where I'll be looking to lock in some short trades. The IWM is probably one on my list and if BAC sets up again, it will be the second. I'll keep using what has been working, short term puts to get some leverage. If a bigger trade sets up then I'll use longer expiration puts.

For now, watch for the gap fill in the IWM.

Credit/Risk Asset Update

 Commodities are holding up better then the S&P

Here are commodities vs the Euro, there's a clear disconnect and I may take a look for a trade there on the short side. The UUP/$USD hart is confirming what we are seeing on this chart, commodities are stronger then their correlation, I'm guessing due to the Iran/Citi news, but I'll dig a little deeper.

 Even the S&P is stronger then the correlation with the Euro thus far, so I'll be watching for an opportunity to maybe set that BA trade up again on some market strength so long as the Euro remains under pressure.

High Yield Corporate Credit has sold off below yesterday's lows and is underperforming the broad S&P Index, credit tends to lead.

All in all, it looks like the environment for another BAC or commodities related short trade is setting up.

BAC 1 Day Trade=53% profit

Taking BAC profits, may re-establish another trade later.

Citi Says Gold correction has run its course...

Whenever banks/investment banks start handing out free advice like, "The gold correction is over", I always assume they are doing the opposite, like selling gold. Since when do these banks spend hundreds of millions of dollars on research to give it away freely?

While I'm open to any changes and will revise my outlook based on those changes, I just don't see it yet.

Here's GLD's reaction to the Citi analysis just released.

 Another sell the news initially...

 Longer term, I have been split as to whether gold may be in  bubble or is at an intermediate top, in any case, the top formation suggests a pattern implied target of about $134.00

 GLD 1 min

 GLD 2 min

 GLD 5 min

GLD 15 min.

To say the least, I would wait for a pullback to look and see if gold is being accumulated, otherwise I wouldn't take any action based on the Citi note.