5 years ago
Thursday, April 12, 2012
Asia moving the market
Volatility, sentiment, etc...
There are a lot of ways to represent volatility, Bollinger bands aren't my favorite because the use the close, not the actual intraday volatility, so here's another way to represent volatility.
You may recall that my belief was this would be a very volatile bounce precisely because of increased volatility, which is something typically seen at tops, in fact optically it's pretty easy to eyeball.
This is a 10-day average of volatility, but not like BB's that measure the close. Note the two areas in the boxes, one the price candles are very small in their daily range, the second the price candles are 2-3X larger.
I have one member that reads all of the trading sites, as I don't typically have time for that he updates me periodically on what traders in general are thinking and most importantly, "Feeling". Here's his update for me today...
"Hi Brandt, It's working and the bulls looking to get back in and it's killed all
those who bought puts thinking plunge to 1350. "
Here's some excerpts from Tuesday's market update
On a 60 min chart the top formation is much easier to see than a 1 day chart, so is the break. This is an important break. It has been our experience market wide that any break of important support almost always sees a strong volatility shakeout move. Technical traders will be expecting a test of former support, now resistance at the trendline. However our experience has been that rarely happens and the test will look like it failed as the market moves above resistance, this would keep the "Buy the dip" longs in the game as most people are pre-dispositioned to being long the market. With volatility increasing it would not surprise me to see a move above the trendline, it may take more then a day, but it wouldn't surprise me.
Think about the psychology of this, bulls feel like the top broke and the break was a failure, they feel safe to buy. The shorts ask themselves, "Why won't this market hold its losses? This must be a correction and not a top". This is exactly what Wall Street wants, to keep everyone guessing, to keep everyone moving in to trades as most traders chase the market and then see those same trades stopped out. This is all to Wall Street's advantage. So while I can't point to a strong enough positive divergence as of yet that would suggest such a move, that has been my experience. I have little doubt whatsoever we are witnessing a top breaking apart, however for the market to do what I mentioned above, volatility must increase. Over a week ago I said, "Watch out for increasing volatility".
The excerpts above were posted as the first hints of short term accumulation were forming for a bounce, later in the day they were clear. It kind of cracks me up that the talking heads attribute the move to the trade deficit, even though Initial Claims made the pre-market action look like today was going to be a flop. The truth is Wall Street works pretty far out in advance of price action. The dovish blabber from Yellen and Dudley probably did help today, but that switch back and forth every week and curiously it seems to be dovish when Wall Street has set up a bounce move like this in advance and hawkish when the move is failing and heading lower as we saw on Tuesday with the SPX breaking both the small H&S top trendline and the 50-day average-both important breaks as noted above.
Looking back at what has happened since Tuesday, the above excerpts from Tuesday's market update are right on track. Judging from sentiment on the blogs and financial sites, the move is having its intended effect. As I mentioned, there's no purpose in even bouncing the market if it isn't going to sway emotions, knock out shorts and give the bulls something to get excited about.
As for today's action, we saw pretty decent signs of distribution showing up in the negative divergences in the market averages as well as ES. We didn't see the same thing yesterday because there simply wasn't enough of a move to sell in to.
Some members have asked about the possibility of a pullback before the market moves higher, which as I mentioned in the last market update today, I think it will. A case can certainly be made for a pullback, but the point of such a bounce is to sway emotions and the stronger the bounce looks, the more effective it is in swaying emotions.
I've mentioned it a few times and it makes sense to me, a rotation in to tech. The last bounce we saw before the SPX broke below the 50-day m.a., the SPX and Dow moved first while the NDX and Russell 2k were flat, the next day they switched. With the positive divergence in AAPL toward the end of the day, this theory makes even more sense. In light of that, we may see financial shorts set up before Tech and I'll be on the lookout for that tomorrow.
Interestingly the dominant Price/Volume relationship among the averages' component stocks was solidly in the Price Up/Volume down camp, which is also the most bearish of the 4 price/volume relationships believe it or not.
The $AUD is just starting to diverge a bit from the SPX, this has been an excellent leading indicator, but for me, looking at the market at the end of the day and trying to decide where we are in the process, the divergence simply was not as sharp as it should be, I expect it will become more divergent.
High Yield Corporate Credit looks supportive of the market's bounce, however upon closer inspection, HYG seems to simply be clearing out shorts as it has made a lower low (mentioned earlier in the week).
High Yield Credit, which is very cheap vs the SPX did rally today, it would seem silly not to use HY Credit's cheapness in a bounce, however it is diverging compared to yesterday.
Yields have started to diverge today as well, another excellent leading indication and they've done so at the right spot, again, it wouldn't have made sense yesterday as the market was fighting some headwinds.
For the moment, there's not much to do but watch the market for signs of a reversal, that's where I want to back up the truck. The emotional damage that will come out of a failed move this volatile will be pretty heavy and being we've already broken the SPX's 50 day moving average with volatility as high as it is, the reversal back down should be uglier then the move up is impressive, but that's not a new concept, Fear is always stronger then Greed/Hope and that's why markets fall faster and harder then they rise.
If anything interesting develops before I go to bed, I'll make sure to post it.
You may recall that my belief was this would be a very volatile bounce precisely because of increased volatility, which is something typically seen at tops, in fact optically it's pretty easy to eyeball.
I have one member that reads all of the trading sites, as I don't typically have time for that he updates me periodically on what traders in general are thinking and most importantly, "Feeling". Here's his update for me today...
"Hi Brandt, It's working and the bulls looking to get back in and it's killed all
those who bought puts thinking plunge to 1350. "
Here's some excerpts from Tuesday's market update
On a 60 min chart the top formation is much easier to see than a 1 day chart, so is the break. This is an important break. It has been our experience market wide that any break of important support almost always sees a strong volatility shakeout move. Technical traders will be expecting a test of former support, now resistance at the trendline. However our experience has been that rarely happens and the test will look like it failed as the market moves above resistance, this would keep the "Buy the dip" longs in the game as most people are pre-dispositioned to being long the market. With volatility increasing it would not surprise me to see a move above the trendline, it may take more then a day, but it wouldn't surprise me.
Think about the psychology of this, bulls feel like the top broke and the break was a failure, they feel safe to buy. The shorts ask themselves, "Why won't this market hold its losses? This must be a correction and not a top". This is exactly what Wall Street wants, to keep everyone guessing, to keep everyone moving in to trades as most traders chase the market and then see those same trades stopped out. This is all to Wall Street's advantage. So while I can't point to a strong enough positive divergence as of yet that would suggest such a move, that has been my experience. I have little doubt whatsoever we are witnessing a top breaking apart, however for the market to do what I mentioned above, volatility must increase. Over a week ago I said, "Watch out for increasing volatility".
The excerpts above were posted as the first hints of short term accumulation were forming for a bounce, later in the day they were clear. It kind of cracks me up that the talking heads attribute the move to the trade deficit, even though Initial Claims made the pre-market action look like today was going to be a flop. The truth is Wall Street works pretty far out in advance of price action. The dovish blabber from Yellen and Dudley probably did help today, but that switch back and forth every week and curiously it seems to be dovish when Wall Street has set up a bounce move like this in advance and hawkish when the move is failing and heading lower as we saw on Tuesday with the SPX breaking both the small H&S top trendline and the 50-day average-both important breaks as noted above.
Looking back at what has happened since Tuesday, the above excerpts from Tuesday's market update are right on track. Judging from sentiment on the blogs and financial sites, the move is having its intended effect. As I mentioned, there's no purpose in even bouncing the market if it isn't going to sway emotions, knock out shorts and give the bulls something to get excited about.
As for today's action, we saw pretty decent signs of distribution showing up in the negative divergences in the market averages as well as ES. We didn't see the same thing yesterday because there simply wasn't enough of a move to sell in to.
Some members have asked about the possibility of a pullback before the market moves higher, which as I mentioned in the last market update today, I think it will. A case can certainly be made for a pullback, but the point of such a bounce is to sway emotions and the stronger the bounce looks, the more effective it is in swaying emotions.
I've mentioned it a few times and it makes sense to me, a rotation in to tech. The last bounce we saw before the SPX broke below the 50-day m.a., the SPX and Dow moved first while the NDX and Russell 2k were flat, the next day they switched. With the positive divergence in AAPL toward the end of the day, this theory makes even more sense. In light of that, we may see financial shorts set up before Tech and I'll be on the lookout for that tomorrow.
Interestingly the dominant Price/Volume relationship among the averages' component stocks was solidly in the Price Up/Volume down camp, which is also the most bearish of the 4 price/volume relationships believe it or not.
The $AUD is just starting to diverge a bit from the SPX, this has been an excellent leading indicator, but for me, looking at the market at the end of the day and trying to decide where we are in the process, the divergence simply was not as sharp as it should be, I expect it will become more divergent.
High Yield Corporate Credit looks supportive of the market's bounce, however upon closer inspection, HYG seems to simply be clearing out shorts as it has made a lower low (mentioned earlier in the week).
High Yield Credit, which is very cheap vs the SPX did rally today, it would seem silly not to use HY Credit's cheapness in a bounce, however it is diverging compared to yesterday.
Yields have started to diverge today as well, another excellent leading indication and they've done so at the right spot, again, it wouldn't have made sense yesterday as the market was fighting some headwinds.
For the moment, there's not much to do but watch the market for signs of a reversal, that's where I want to back up the truck. The emotional damage that will come out of a failed move this volatile will be pretty heavy and being we've already broken the SPX's 50 day moving average with volatility as high as it is, the reversal back down should be uglier then the move up is impressive, but that's not a new concept, Fear is always stronger then Greed/Hope and that's why markets fall faster and harder then they rise.
If anything interesting develops before I go to bed, I'll make sure to post it.
GOOG Earnings...
Well I'm glad I didn't put out an earnings call on GOOG, either way.
The last time we had an earnings call on GOOG it was right on, but as mentioned, the signal didn't come until 15 minutes before the close. GOOG was running up like it did today at the end of day, but there was clear distribution in to the move up, that didn't happen today.
The last time we made an earnings call, price was going straight up, 3C was going straight down, that was an easy call.
However GOOG still has some longer term issues that were seen on the 60 min chart and they are obvious on the 1 day chart.
The earnings in GOOG were interesting and threw a few question marks in the mix.
For the headline numbers, “Adjusted” earnings came in at $10.08 per share, above consensus of $9.65. Net income was $2.89 billion, above last year’s $1.8 billion. On an adjusted basis, it was $3.33 billion, above consensus. Revenue was $10.65 billion, up 24% from a year ago.
Here's the potential monkey wrench...
And this is what MSFT's growth has looked like after a dividend was declared...
However the monkey wrench doesn't stop there, the dividend isn't what you'd normally associate with a dividend, it’s not a cash dividend, it’s a 2-for-1 stock split that’s going to result in the creation of a new class of non-voting stock.
Straight from GOOG-
"Today we announced plans to create a new class of non-voting capital stock, which will be listed on NASDAQ. These shares will be distributed via a stock dividend to all existing stockholders: the owner of each existing share will receive one new share of the non-voting stock, giving investors twice the number of shares they had before. It’s effectively a two-for-one stock split—something many of our investors have long asked us for. These non-voting shares will be available for corporate uses, like equity-based employee compensation, that might otherwise dilute our governance structure."
What this means for GOOG going forward... We'll see. However for our purposes, GOOG is up in After hours. Perhaps this will cause a rotation to tech that I speculated about earlier?
The last time we had an earnings call on GOOG it was right on, but as mentioned, the signal didn't come until 15 minutes before the close. GOOG was running up like it did today at the end of day, but there was clear distribution in to the move up, that didn't happen today.
However GOOG still has some longer term issues that were seen on the 60 min chart and they are obvious on the 1 day chart.
The earnings in GOOG were interesting and threw a few question marks in the mix.
For the headline numbers, “Adjusted” earnings came in at $10.08 per share, above consensus of $9.65. Net income was $2.89 billion, above last year’s $1.8 billion. On an adjusted basis, it was $3.33 billion, above consensus. Revenue was $10.65 billion, up 24% from a year ago.
Here's the potential monkey wrench...
The board gave the green light to a dividend proposal. Yo may recall AAPL recently did the same, it hasn't been trading so well since then. However the probably more relevant historical precedent can be found in MSFT.
This is what MSFT looked like BEFORE a dividend was announced...
And this is what MSFT's growth has looked like after a dividend was declared...
Straight from GOOG-
"Today we announced plans to create a new class of non-voting capital stock, which will be listed on NASDAQ. These shares will be distributed via a stock dividend to all existing stockholders: the owner of each existing share will receive one new share of the non-voting stock, giving investors twice the number of shares they had before. It’s effectively a two-for-one stock split—something many of our investors have long asked us for. These non-voting shares will be available for corporate uses, like equity-based employee compensation, that might otherwise dilute our governance structure."
What this means for GOOG going forward... We'll see. However for our purposes, GOOG is up in After hours. Perhaps this will cause a rotation to tech that I speculated about earlier?
Market Update
I'm still not seeing the short term distribution in to GOOG's run higher. There are obvious divergences as we should see in to strength, but looking at the Risk layout, I'm not seeing the kind of divergences in Credit and yields that have marked the end of a bounce in the market.
Usually when you see it, it's pretty obvious and while there's been strong deterioration, I'm not seeing that obvious set of signals that says this run is done.
We are seeing a lot of talk about how strong this bounce is and it should be with volatility up as much as it is, this was the point of the bounce.
Bottom line, I'm not convinced this is done. I am convinced it is unravelling, but not convinced it is done.
Usually when you see it, it's pretty obvious and while there's been strong deterioration, I'm not seeing that obvious set of signals that says this run is done.
We are seeing a lot of talk about how strong this bounce is and it should be with volatility up as much as it is, this was the point of the bounce.
Bottom line, I'm not convinced this is done. I am convinced it is unravelling, but not convinced it is done.
A look at GOOG
We have caught leaked GOOG earnings in the past, but it was the last 15 mins before earnings. Here's a look at the chart...
the 60 min has been pumped with accumulation to send it higher, it looks like strong distribution in to that move.
The 15 min chart has seen similar activity with distribution at the March peak, there's a small positive divergence, but it is still within a leading negative position.
Here's where GOOG gets tricky, the 5 min chart saw accumulation with the market and it is almost in line, but not quite.
Today it looks like GOOG was accumulated short term in to a flat market and it ha run up since in a parabolic manner.
The same is true of the 1 min chart, it looks like short term accumulation to push GOOG higher. I would feel good about making a short call on GOOG IF I saw distribution of this move higher. We may still see it, the last time we got GOOG earnings right, it was 15 mins. before the close. I'll keep an eye out.
The same is true of the 1 min chart, it looks like short term accumulation to push GOOG higher. I would feel good about making a short call on GOOG IF I saw distribution of this move higher. We may still see it, the last time we got GOOG earnings right, it was 15 mins. before the close. I'll keep an eye out.
Market Update
It's getting a bit tricky here...
The DIA 5 min has fallen significantly today in a negative divergence...
So has the SPY...
I mentioned I think a rotation in to tech is a possibility, the 1 min QQQ chart shows the kind of late day positive divergence we saw in the SPY/DIA yesterday.
The 2 min is slightly leading negative, but within that there's an intraday positive divergence.
The same goes for the 5 min chart.
This is speculation, but I'm thinking based on what I see, that the S&P and DOW may fall off tomorrow in the leadership role and the Q's may take over to continue to move the market a bit higher a I would suspect.
This raises some questions for me, like whether I want to start a short position in financials or the SPY/DIA.
I'm going to take a look at the risk layout, but what would make the most sense to me is a final blow off top, perhaps tomorrow. We are clearly seeing the negative divergences I expected to see in to market strength and we are getting the kind of volatility that I'd think we should be seeing, however the market almost always moves in extremes and one of my biggest lessons has been that of patience as the market almost always moves further then you expect.
We do have GOOG earnings tonight and the talking heads are saying this rally is all about China's overnight economic data-we know that is not the case, however both could add some gas to the rally, especially if GOOG beats and Tech does come in to rotation.
This is speculation, but I'm thinking based on what I see, that the S&P and DOW may fall off tomorrow in the leadership role and the Q's may take over to continue to move the market a bit higher a I would suspect.
This raises some questions for me, like whether I want to start a short position in financials or the SPY/DIA.
I'm going to take a look at the risk layout, but what would make the most sense to me is a final blow off top, perhaps tomorrow. We are clearly seeing the negative divergences I expected to see in to market strength and we are getting the kind of volatility that I'd think we should be seeing, however the market almost always moves in extremes and one of my biggest lessons has been that of patience as the market almost always moves further then you expect.
We do have GOOG earnings tonight and the talking heads are saying this rally is all about China's overnight economic data-we know that is not the case, however both could add some gas to the rally, especially if GOOG beats and Tech does come in to rotation.
XOM moving close to the target area
The 1 min chart is showing a negative divergence
EDZ / TZA
I was asked about these two so I figured why not post them.
The bullish descending wedge-I already covered wedges' behavior, so this chart should be no surprise as it appears EDZ (3x leveraged short on Emerging Markets) appears to have transitioned from a solid downtrend to a lateral base.
Recent action on the 15 min chart is encouraging, there's a strong leading positive divergence in place, however this ETF is going to act exactly the opposite of the market.
Here on the 5 min chart we see the negative divergence sending it pulling back and the start of what looks to be a positive divergence.
EDZ 2 min shows the negative divergence in to the pullback and a quite strong leading positive divergence forming, this is a form of confirmation as to what we are seeing in the broad market today.
The 1 min chart is also leading positive.
TZA is a 3X leveraged short on small cap stocks, think Russell 2000, we see the same wedge activity and basing.
The 30 min chart shows good positive divergences.
The 2 min chart shows the pullback and a leading positive divergence today.
The 1 min chart also shows a leading positive.
I take this as market confirmation.
I take this as market confirmation.
RISK Asset Layout
Both the $AUD and Yields are starting to diverge with the SPX.
In addition, the divergence between ES and the CONTEXT Es model is also growing more divergent as suspected.
The pieces are starting to fall in to place. I am going to watch financials closely as a rotation in to tech makes sense to me and this may be an area where I want to consider starting to phase in to some financial shorts. I prefer using FAZ for an initial break in the market until sector rotation becomes clear and individual names start to make more sense for the longer term.
In addition, the divergence between ES and the CONTEXT Es model is also growing more divergent as suspected.
The pieces are starting to fall in to place. I am going to watch financials closely as a rotation in to tech makes sense to me and this may be an area where I want to consider starting to phase in to some financial shorts. I prefer using FAZ for an initial break in the market until sector rotation becomes clear and individual names start to make more sense for the longer term.
AAPL Update
Guess who is still underperforming? AAPL, red on the day, but that may be about to change and I hope it does so I can re-position. Remember, in the Financial post I said I thought a rotation to Tech is very well possible.
This move in AAPL below support obviously triggered some stops and maybe some short trades, this is an ideal place for AAPL to bounce from and shakeout those pesky shorts. Remember that nearly all reversals start with a head fake move and this break below support and move back above qualifies.
Look at the 1 min chart since the break of support, and why not, all of those who were stopped out gave their shares to Wall Street on the cheap and whoever shorted will just be fuel for an upside move.
AAPL 2 min shows 2 positive divergences.
Longer term the 5 min chart is quite negative. I suspect there's a wholesale shift in hedge fund positions in AAPL going on.
A closer view of the 5 min shows two positive divergences, again, an ideal spot for AAPL to stage a rally after several days of underperformance, which certainly would effect long's perception of AAPL.
Longer term, the 30 min above and 60 min below look the worst I have ever seen them in AAPL, once again suggesting hedge funds (like Loeb's I mentioned) are moving out of AAPL.
I'm a bit anxious to get a pop in AAPL, I'll be looking to sell that short with Puts, I also think if there is rotation in to tech, AAPL will likely be the one stock that we can look to for timing the end of the bounce.
I'm a bit anxious to get a pop in AAPL, I'll be looking to sell that short with Puts, I also think if there is rotation in to tech, AAPL will likely be the one stock that we can look to for timing the end of the bounce.
Full Financials Update
Since I expected Financials to be one of the primary drivers of this bounce, what happens there is important, just as important as the market updates. I will say though that rotation in to another sector like Tech may very well occur before we are done with this move. So far Financials are blowing Tech out of the water.
Lets look at Financials and the leveraged long and short financial ETF's as this gives us a better sense of confirmation.
As far as technical concepts go, this bearish ascending wedge, according to decades of technical analysis books is supposed to break down as the wedge reaches its apex, we haven't seen this happen in years, yet technical traders still believe and follow their dusty TA textbooks. Instead, while the larger pattern is still valid, we almost always see a head fake move that runs counter to what technical analysis teaches, in this case instead of breaking down at the apex, we see a breakout. According to technical analysis, this means the bearish ascending wedge is a failed pattern and traders jump in long as they are taught to do on failed technical patterns.
a closer look shows a strong breakout day from the wedge, that removes any bearish bias and tells traders the pattern is failed. However, Financials didn't do much after that breakout and instead went largely lateral, the small red trendline is where the wedge fails and the rule of wedges is "they retrace their base". Note the bounce in financials came right at that important trendline. What I consider to be the larger part of a head fake top has the support line at the large red trend line, this is where I think Financials are headed (above the TL). XLF made it through gap resistance and the upper yellow trenline would be an ideal target.
Long term, the daily Money Stream chart shows Financials are in longer term trouble, QE1/2 masked that weakness by pumping liquidity in to risk assets, the divergence at Q1 2010 sent financials lower, the leading negative divergence through 2011 sent financials lower and now we have an even deeper leading negative divergence in 2012.
Daily 3C shows a similar situation.
The XLF 5 min chart remains in line with trade thus far.
The 1 min is already showing a negative divergence
And that has flowed to the 2 min. As the 2 min becomes weaker, it will flow to the 5 min.
This is a 2x leveraged inverse (short) ETF, SKF. The 5 min chart is still in line, but...
The 2 min chart above is FAZ, a 3x leveraged Inverse bear financials ETF, it is already showing signs of positive divergences. Remember that Wall Street's positions are MUCH larger then ours and thus they have to start accumulating earlier, they can't put in a 10 million share order right at a reversal without sending FAZ flying.
Note the 1 min chart is in 2x leveraged Financial short, SKF is stronger then the 2 min below, it is flowing in to the longer 2 min chart, also note when the divergence started, similar to when the negative divergence in the market started.
SKF 2 min
FAZ, (sorry for the charts not being in sync, they uploaded this way) 5 min is still in line like XLF, so the divergences are starting and they should continue to progress. A positive divergence in a bear financial ETF would confirm a negative divergence in XLF or a bull financial ETF.
Speaking of leveraged Bull financials ETFs, here's FAS 3x leveraged long, it, like XLF is showing a 1 min negative
The 2 min negative is just starting
The 5 min remains in line.
The bottom line, all the charts are confirming each other, we have the start of negative divergences in financials and positive divergences in bear financial ETFs. This also confirms the broad market averages' action.
Lets look at Financials and the leveraged long and short financial ETF's as this gives us a better sense of confirmation.
The bottom line, all the charts are confirming each other, we have the start of negative divergences in financials and positive divergences in bear financial ETFs. This also confirms the broad market averages' action.
