Politics and Wall Street-This post will make you question the relatonship

We all have probably heard about the returns Congressional Staffers and Congressmen have made in the market, of course due to inside information or in this case disinformation.

I noted in nearly every post today how the market was totally disconnected from any environment that would signal a risk on rally. If you look at the "3 Pillars of the Market" (although there are 10 main industry groups, the market can't go far without these 3: Tech, Financials and Energy) Energy got hit on a double whammy, both the petroleum/crude report which showed a build (not good for energy/crude prices) and the dollar strength via Euro weakness. XLE closed down -.59%, Tech/XLK was up but by a meek .35%, the driver today was financials, XLF closed up 1.35%. In other words, financials drove the market higher (in a few cases), but well off the a.m. lows.

Why?

Yesterday, the F_E_D apparently handed in a white paper to Congress saying that the GSEs (Fannie Mae/Freddie Mac) could help the housing market and a rumor got started that Obama in an election year would be starting a massive mortgage refi program through the GSEs. This story struck me as bunk as Congress (remember the GSEs were taken over by the government) has been trying to distance themselves and funding for these two monstrosities. The chances of a bill like that passing, especially being that it would be an election year perk and face heavy opposition from Republicans, in my view was a total non-starter, but it was enough to get a few of the banks with the most exposure to underwater mortgages to pop nicely, take BAC for example, up 8.61% on the day. When I announced I was going with March 7 Puts on BAC today, this whole myth played in to my thought process and that's why I went a little longer on the expiration, to allow enough time for traders to realize the issue would be a non-starter.

Well it didn't take long and I expect I'm going to have some very handsome gains on the BAC trade come tomorrow a.m. As of now BAC is down nearly 3% in AH. Why?

Because it didn't take days to debunk the myth, it took 7 hours and interestingly, right after the market close. Remember there are still a lot of hedge funds out there that appreciate any strength in BAC to unload their huge positions.

As Bloomberg reported about an hour ago... (actually, very conveniently at 4:10 p.m., 10 minutes after the close)

White House Said to Have No New Plan for Refinancings

The White House has no plans for a new mass mortgage refinancing program, an administration official with knowledge of the matter said.

This is what sparked the BAC rally and what will kill it

Bank of America Corp. (BAC) led a surge in shares of U.S. lenders today on speculation that the Obama administration might provide more aid to distressed homeowners.

And there it is...

Of course some lingering questions remain about White House / Wall Street ties, the rumor's timing and  the denial's timing. 

The head fake concept...

In an earlier post re: the Ascending Wedge Head Fake

Here are the key take aways...

An Ascending Wedge is a classic chart pattern and they get manipulated a lot because of that, normally they form, traders expect them to break down and retrace their base so many will short the wedge as it comes to its apex, then Wall Street shakes them out with an upside break out, and then the wedge usually falls apart and prices come back down as the wedge originally implied, it's just the shakeout feature Wall Street has added because of the predictability of traders and they can see the full open book of orders and know when traders take the short bait.


a fully formed wedge and the pop straight up out of it is usually the shakeout we see as the shorts now think the bearish wedge is a failed pattern. It doesn't stop there though, the Dogma of Technical Analysis in hundreds of books over the last century has taught traders that when a pattern fails as the ascending wedge right now appears to have, then they should close their position (cover the short) and take the opposite side of the trade (in this case go long). However the head faked wedge, ultimately (usually) does fail, making those traders 2x losers on the same pattern.


And an example of this in the DIA today...

*** The above was posted before any of this started and thus far it has played out as outlined above. Note first the wedge breaks out to the upside, then it moves below the apex, this is the second time the pattern appears to traders to have failed, the first being a break out from a bearish wedge and the second when they reverse to a long position on what they believe to be a failed bearish wedge. Look at the volume spike right under some local support as those long traders got stopped out-probably for the second time.


Most of the averages are losing ground now in AH. The IWM is at $74.55 putting it at virtually unchanged below yesterday's close of $74.61.


The DIA is at $123.73, putting it below yesterday's close of $123.96.


The SPY is at $127.79 just barely above yesterday's close of $127.68


The Q's are at $57.49, for a gain over yesterday on about .60%


All of the averages (ETF) are trading lower in AH. The IWM is notably below afternoon support, the DIA is about at the same place, the SPY is below afternoon support (all of these levels being lower then the wedge's apex or the area in which the upside head fake would be confirmed) and the Q's are only about $.05 above that critical level.


For example, here's the IWM in AH and note there's some significant volume not only for AH, but compared to regular hours.

The light shaded area is after hours, the trendline is below the apex of the wedge and represents last ditch support before the bearish wedge (presumably) fulfills its target which in this case would be a retrace to approximately $73.60 or near today's lows. The dark blue volume is difficult to see, but other then at the very end of the day when the tape is consolidated, they are the biggest volume spikes on the entire chart which covers regular trading hours to the left.

Market Move vs. Correlation

I brought this up earlier today, the lack of correlation in this market move, but it's now becoming increasingly more visible. Correlation between risk assets is like the health of the move, when there's low correlation between risk assets, there's usually something not right in the market. A risk on move, produces a risk on effect through various asset classes.

 Yesterday commodities were the strength that underpinned the market and allowed the market to close the gap, today they are selling off to new lows. Commodities are essentially the fuel of the economy, when we first saw weakness in commodities, I thought, "Trouble in China", 2 weeks later both services and manufacturing PMI printed below 50 showing both to be in contraction. Commodities gave us an early heads up that there were problems in China and thus with global demand.

 While the context model is a mix of the different risk assets, it does have some of the credit markets that can be accessed through a Bloomberg terminal, which we can't. Look at how the model of what risk assets are showing ES fair value is, diverging at an increasing rate. As I said earlier, equities are off on their own without support of the broad risk market.

The long standing traditional legacy arbitrage between the Euro (weak) and the market is completely broken today. This mean the $USD is stronger and stocks usually go down on dollar strength. We are seeing that happening in crude oil today as I just posted.

The ascending wedge that was very visible today in all of the averages itself is a sign that something isn't right with the move.

Furthermore the market's usually move together, the lack of relative strength in both the S&P, but more so the Dow at a current loss also suggests there is no broad risk appetite. It looks more like a set up then anything else at this point.

AAPL worth keeping an eye on

Even if only as a market barometer.

 AAPL trade (range) has been thin, there's an October breakaway gap in yellow that was left open, it looks like AAPL has been trying to close that gap.

 Intraday it has started on a move of lower highs/lower lows, the next move could create the next lower low which would be significant for the short term and may have some longer term implications.

The most damning chart for AAPL remains this 15 min which has shown accumulation areas in white and distribution in red, currently the status is leading negative. AAPL has a lot of weight on the NASDAQ 100, the most and for that reason alone, changes in character of AAPL re worth noting as it relates to the broader market.

I can't believe I missed this one-USO

 USO goes negative right at a head fake at the gap fill.

USO 2 min

This is holding XLE back today at a .75% loss.

This is a pretty significant short term change for USO.

This opens the door to a downside gap fill move and with the Euro not providing support, it makes it worse.

Watching the QQQ and volume

This trendline roughly corresponds with the wedge's apex and the point in which a head fake breakout would have occurred. We also see some support in the area, a break below that level on some increased volume would be a good indication that the trap/head fake worked.

FCX Follow Up

 For a triangle this size, a real breakout in FCX or a strong breakout should have shown a significant increase in volume, yesterday should have been a follow through day with increasing volume.

 Here's FCX vs the DOW Copper Index, note FCX just managed to close the gap roughly today.

This is the time period of the breakout, it was actually pretty negative at the highs already. A stop an be placed just above the recent highs or you might consider waiting for a break below the apex of the triangle around $36.50 or below.

Market Update

It looks like that QQQ wedge/head fake was the real deal. Here's the update for the averages. By the way, FCX (short) doesn't look bad here either.

Although none of the averages confirmed the move and it was way out of sync with correlations (making it suspicious to start with), 3C has turned worse.

 DIA 1 min

 IWM 1 min at a new leading negative low.

 QQQ 2 min at a new leading negative low.

 SPY leading negative.

And XLF leading negative and getting worse.

ES is also putting in a negative divergence as well.

BAC Trade

I'm going to put on another BAC trade, March $7 put, I'm going a bit longer on this one.

This Wedge Looks Dangerous

This is the QQQ which has been running ahead of the market.

An Ascending Wedge is a classic chart pattern and they get manipulated a lot because of that, normally they form, traders expect them to break down and retrace their base so many will short the wedge as it comes to its apex, then Wall Street shakes them out with an upside break out, and then the wedge usually falls apart and prices come back down as the wedge originally implied, it's just the shakeout feature Wall Street has added because of the predictability of traders and they can see the full open book of orders and know when traders take the short bait.

The QQQ above on an intraday chart of today has a fully formed wedge and the pop straight up out of it is usually the shakeout we see as the shorts now think the bearish wedge is a failed pattern. It doesn't stop there though, the Dogma of Technical Analysis in hundreds of books over the last century has taught traders that when a pattern fails as the ascending wedge right now appears to have, then they should close their position (cover the short) and take the opposite side of the trade (in this case go long). However the head faked wedge, ultimately (usually) does fail, making those traders 2x losers on the same pattern.

FX Correlation

 Commodities are not playing along today with the SPX, instead they are following the FX correlation that equities normally observe to a large extent.

 Earlier the market was pretty much in line with the EUR/USD pair as is normally the case, today it is way off.

Long term the correlation from September through October has totally broken down (Euro in red).

Typically the correlation equals 1 pip move in the EUR/USD= 2 Dow points in the same direction. This would be a VERY severe dislocation.

Ascending Wedge

Most of the market looks pretty wedgey (or wedgie) here, take the SPY for example..

As you probably know, it's not a good sign as far as the health of the move, a healthy move looks more like a channel.

Considering all the disconnects today and the move, especially in financials, I have to wonder (I already had doubts about this move) whether what one member just emailed me might be n play, a set up for a disappointing NFP tomorrow. It's not like the reports haven't been leaked before.

Update

As the averages either near filling the gap or fill it, here's what's going on...

 The Dow which seemed to start the gap fill move is the furthest away from actually filling it.

 The IWM just filled the gap

And the SPY is close, the Q's have filled it and then some.

 Commodities which were leading the market yesterday are underperforming today, it seems the FCX trade idea was fairly well timed as of now.

 The market is off on its own, unlike previous sessions in which the Euro led the market, today the Euro remains flat. If I have the time, I'll try to count how many Dow points there are in this dislocation from a pretty strong correlation between the two assets.

 Credit remains near the lows of the day and there appears to be no risk appetite there.

 The XLF/Financials which have been a major market mover today are still refusing to confirm on even the fastest timeframes (1 min above and 2 min below).

Of what I call the 3 pillars of the market, because these 3 groups are usually needed to sustain any move, XLE/Energy is down on the day around -1%. XLF which has been a leader s getting wedgey around a .75% gain and Technology is still red on the day, but near unchanged. It seems XLF is the one to watch moving forward.

IWM, uglier then it first appears

The IWM/Russell 2000 at first glance doesn't look all that bad, but dig down a little deeper and an ugly trend is taking place and to a degree, already been in place.

At first glance, there doesn't appear to be anything of particular note, nothing ominous any way.

 Draw in some trend lines and the bullish ascending triangle, which we talked about a few days ago and I suspected would likely see a head fake breakout that would fail, added the first component, the breakout (at the yellow arrow).

 On an intraday chart, one could argue the most bullish case, there was no follow through on the breakout due to a gap fill yesterday, however with the gap filled now, the IWM is clearly below the triangle's apex ( a position that would suggest the breakout has indeed failed).

 Today on a gap fill on light volume, the IWM also is maintaining the long tradition of kissing the pattern goodbye.

 Today on the 1 min 3C chart, as the IWM tries to close the opening gap on declining volume, 3C has also gone negative.

 The 15 min chart is pretty deeply negative and leading as the recent breakout attempt would have made the highest high on this chart, another seeming false breakout.


The 30 min chart which went positive before the October rally began has also gone deeply leading negative.

Although the SPX is always quoted among traders and the DOW in the media, the Russell 2000 is of critical importance and is the index that the F_E_D quotes and measures the "Wealth Effect".  Because of the number and variety of issues in the R2k, it actually may be the most important average for us to watch and as you can see, looking a little deeper doesn't boost confidence in the average.

Financial's Parabolic move

Earlier I looked at 3C and didn't see anything interesting in Financials/XLF, now there's some development. Remember for 3C to register a signal, we need underlying action to take place and for the best signals, we need a lot of it. There isn't always a trend on Wall Street so there's not always a great signal, but when there is, those are the trades we want to look at seriously.

Any way, here's XLF

 We have 2 parabolic moves in XLF, I don't are which way parabolic moves are, up or down or even benefitting my position, they always cause me doubt as they often reverse in a parabolic fashion. I seriously doubt we are seeing short covering in financials, so I assume there's some set up taking place.
3C is obviously not confirming the move up.

 Here the 2 min chart is in non-confirmation as well. Both timeframes are short enough to move fast enough to confirm.

The bigger picture on the 15 min chart is definitely that of a negative divergence like we saw previously, the effects of the first divergence on the chart are pretty clear.

Market Update

As the Euro continues trading below $1.28 the DIA and DIA only shows a short term intraday positive divergence suggesting it will try to fill the gap and likely take the rest of the market with it. There are no similar positive divergences in the SPY, QQQ or IWM, although ES is in line, something most other averages haven't even managed.

DIA 1 minute positive divergence and the gap area.

Market looks set for another gap filling mission

EIA shows build across all 3

EIA Petroleum Status Report

Released on 1/5/2012 11:00:00 AM For wk12/30, 2011 Prior Actual Crude oil inventories (weekly change) 3.9 M barrels 2.2 M barrels Gasoline (weekly change) -0.7 M barrels 2.5 M barrels Distillates (weekly change) 1.2 M barrels 3.2 M barrels

USO's initial reaction...

We'll let that sink in for a bit and see if any trades come out of this.

This one didn't slip by...

Just within the last hour or so, the biggest news of the New Year regarding Europe's eventual demise just came out.

From Reuters:

Greece EU/IMF aid schedule pushed back three months

Here's the news which s akin to a game of chicken or maybe skydiving without a parachute.

BRUSSELS – Greece’s entire schedule of emergency loans from the European Union and International Monetary Fund is being pushed back by three months because of a delay in the payout of a tranche in 2011, the European Commission said on Thursday.

The next 5-billion euro tranche for Greece that was originally scheduled to be paid in December 2011 is now to be paid out in March 2012, Commission spokesman Olivier Bailly said.

A further 10-billion euros that Greece was originally to receive in March this year, will now be paid only in June and all of those sums can also be delayed if inspectors judge Athens is failing to deliver promised fiscal reforms.

“That cannot be changed,” Bailly said, referring to the three month rhythm in paying out tranches of the first Greek rescue program.

And this is why this is potentially the house of cards coming down...

As per the WSJ yesterday:

Greek PM Says Country Faces Risk Of Disorderly Default In March

ATHENS (Dow Jones)--Greece faces the risk of a disorderly default in March if it doesn't complete negotiations for the country's second bailout starting later this month, Prime Minister Lucas Papademos said Wednesday.

In a copy of his comments made in meetings with employer and employee groups, Papademos said the coming weeks and months are "exceptionally crucial" for the country as Greece needs to secure funding from European peers and the International Monetary Fund. Among the financial pressures faced by the heavily indebted government are EUR14.5 billion of bonds expiring in March.

"As a result of our actions and decisions in coming weeks, everything will be decided," he said.

His comments are in line with stark warnings from other government officials stressing the gravity of talks with representatives from the European Commission, International Monetary Fund and European Central Bank on Greece's second bailout worth EUR130 billion.

Details of the deal, which comes after a first EUR110 billion bailout in May 2010, remain unsettled, particularly a provision calling on creditor banks to write down a significant portion of their Greek government bond holdings.

If we put 2+2 together, apparently L. Papademos must have seen this coming, if not then this is bigger trouble then we can imagine. In essence, if Greece doesn't get the bailout tranche soon, they default in March. A 3 month delay=default. Default in Greece= house of cards comes tumbling down.

What in the heck are the EU/IMF doing?

Italy's Unicredit now down 17%

ES Overnight

This should help with perspective.

Last night I showed the ES chart in a negative divergence, it's very reliable.

I marked yesterday's market hours and overnight, you an see the ES negative divergence sent ES leaking lower, at the yellow arrow ES fell apart as the European markets opened, at the white arrow we saw a temporary boost from the ADP/Initial Clams data, and at the blue arrow, the market squarely focussed back on Europe.

Risk Basket

 Commodities are finally breaking down vs the S&P.

 FCX is moving lower, this is what we want to see, I know some of you have already entered a short there.

 Here's FCX vs the Dow Jones Copper Index, as you can see copper is down again today.

 The market's frothiness compared to the Euro is being sorted out today.

 On a longer term basis, the S&P has a wide dislocation from the Euro correlation and plenty of room to fall.

High Yield Corporates are selling off in tandem with the market, remember yesterday credit was warning.