Quick Note

I'll be looking at the charts and putting out a post in a few hours, unfortunatley my wife has what I believe to be bronchitis and is at the point in which she can barely breath so I'm taking her to an emergency clinic.

When I return in a few hours I'll have a wrap of today's events and any notes on what I think is the most likely course of the market in the near term. As most of you know (we do have some new members) the longer term 3C charts have deteriorated badly over the last few months and that deterioration is accelerating. I have not changed my position on volatility which at last check last week (using a volatility channel based on the market's ATR as well as some other indicators as there are many ways to measure volatility) is at last check over twice as high as it was in February, it is also 50% higher than 2 weeks ago at last check.

What this means...

Volatility is associated with tops, we are seeing extraordinary volatility as the market structure has changed over the last several years. This is why our short term options trades have been doing so well. As you are well aware, I've expected the market to continue to deteriorate as it has, but there's still that slow-boiling the frog effect. One notable change in character recently has been the market's inability to stage late day comebacks that made the market seem more bullish than it was, all of the downside volatility was on the gap down and the rest of the day, particularly after the European close, we would see a slow melt up. This had the effect of showing you hours of the market moving higher, yet the gaps down where actually moving it lower. This is also something we expected to keep the 'buy the dip" crowd in the game; all of that has changed. Why? As I have mentioned over the last few weeks and I believe AAPL is an excellent example, hedge funds are increasingly taking a "everyone for themselves" stance.

One of the reasons 3C typically shows such consistency in divergences among multiple market averages and industry groups as well as high profile stocks is because hedge fund managers are the biggest sheep on Wall Street. When AAPL disappeared from Dan Loeb's top 5 holdings and as of our analysis from April 10th on, I suspected AAPL would underperform the broad market, it did. Why? Hedge Fund managers, in my opinion, are all trying to squeeze out of the same small door at the same time. Loeb's holdings are very relevant for other managers who tend to piggy back his positions.

The point being, hedge fund managers are VERY well paid, their first and primary objective is to keep their job. As the flock moves together, no one hedge fund wants to stand out as underperforming the industry. If the majority of hedge funds are down 5% on the year, any single manager being down 5% is not viewed as a threat to their job. This is why they flock together and very few actually break from the flock to chase real returns for their client, it's about keeping their job and not standing out in the crowd.

APPL's performance relative to the SPX since April 10th

SPX green/AAPL red

ES after having put in an early relative positive divergence is not leading, but it is pretty close to in line, this is somewhat bullish near term as ES could be in the persistent negative divergence we have seen over the last several weeks. I'll have to see how trade size fared today to get a better feel for what's going on in ES.



I'll be back after I take my wife to the Doctor and bring you the market wrap.

Sectors/AAPL

 XLE 1 min, this is interesting as there seems to be an attempt to accumulate Energy, but still keep if below Friday's close, note every time Energy comes to resistance at Friday's close, there's distribution to keep it from moving above resistance. We can't rule out profit taking at resistance, but there seems to be more to it than just that.

 Energy saw a massive head fake Friday, this is when I sold the USO calls (early Friday for a profit), again, today's there's an apparent attempt to keep Energy below resistance, but yet we have a leading positive divergence going in to the close.

 The 5 min chart has less noise, but again, it is fairly bullish.

 Here's the multiple USO head fakes in yellow, today's 2 min USO is seeing a leading positive divergence.

 The 5 min USO chart looks even better when the noise is taken out with the longer chart.

 Financials as shown in the risk asset update were leaking off today, it is clearly shown on this 1 min chart, nearly all moves toward price strength seem to have been sold.

 The same is apparent on the 5 min chart which fits well with the sector rotation chart from earlier.

 Tech 2 min is still in a leading positive position

 AAPL saw a strong opening positive divergence, note the negative divergence RIGHT at resistance from Friday's close, interesting. This almost looks like they don't want longs jumping in here.

 AAPL 5 min shows the same with less noise

However the 15 min chart is starting to lead positive, most of the action in the late afternoon when smart money is most active.

GDXJ Options Trade

Strangely I had to go with a strike of $21.63 (?) There was no open interest in June where it was quoted in whole numbers. The expiration is May.

Options Model Portfolio Trade-GDXJ

I'm jumping the gun knowingly, but I have to make these trades when I have time, I'm going to enter some May or June Calls in GDXJ depending on the price and open interest, I'll be looking for a strike of $21. This is a speculative trade, looking for a volatility bounce in miners.

UNG Update

I have long suspected something is going on with Natural gas, long before this news of Egypt cutting off the Nat. Gas supply to Israel, which is another interesting macro story we'll have to get in to when there's more time.

Take a look at UNG,

 The volume alone suggests there's some kind of churning going on as UNG has broken multiple levels of support.

 A bearish descending wedge, the break below these two support areas was around the time Bernie was testifying before Congress when a congressional member (during the Superbowl of economic events being watched by everyone in finance) asked Bernie a rhetorical question about Nat. Gas, which was an obvious plug as Bernie has nothing to do with setting energy policy. The question was so out of place it was an obvious plant and if you remember, UNG rallied right after that with a positive divergence the day before-Congressional inside trading!

 Some recent volume in UNG, today it is moving up on the news from Egypt, but either that news was well known some time ago, or as I suspect, something more fundamental is going on with Nat. Gas. I just read an interview over the weekend with a large hedge fund manager, he was moving aggressively in to Nat Gas. All of the stop loss orders being hit would give these hedge funds easy shares on the cheap.

 The 1-day Trend Channel is showing what would be a short term trend change if it closes above the $15.30 level.

 UNG 60 min shows a strong leading positive divergence in to lower prices, remember this is what 3C is supposed to do, contradict price to show what smart money is doing and buying low is what smart money needs to do. The length of the divergence suggests this is about more than just the Egyptian news from yesterday, this divergence stretches back to March and the daily even longer. MArch also happens to be where an obvious support level was broken, stops would be triggered and smart money can easily accumulate without giving away their position as someone has to take the other side of the trade.

 The 30 min has a sharp leading positive right in the area of the 19th/20th, this I do not doubt was inside information on the Egyptian action, those decisions aren't made on a whim.

 The 15 min chart shows the same strong divergence in the same area, I have little doubt this was a leak of the Egyptian news.

The 2 min chart would be more along the lines of Specialists on the NYSE accumulating in expectation of a near term move higher, again, the news was probably well known on Wall Street late last week.

We'll see how UNG reacts to the upcoming EIA report, but long term I suspect there is an accumulation process going on here that is reminiscent of the accumulation of home builders during the 2000 tech meltdown-who would have thought in 2000 housing would lead the next bull market?

Wall Street.

To put it more succinctly, I wouldn't be surprised to hear within a year or so of a major policy change in Energy, the political situation in the MENA area (as I mentioned above, we'll have to address that) is likely a catalyst as everything we predicted about Egypt WHILE Mubarak was still in office, has come true.

Market Update

 DIA 1 min

 DIA 5 min-The Dow doesn't look to have the strongest underlying action, but one thing it is doing with the rest of the market today is managing to stay lateral, this is where we most often see divergence. IT is also not leading negative and showing strong distribution. It appears to me by the 1 min charts that there is some likely accumulation going on with the market intraday being knocked down a bit as it gets too high or too far away from the accumulation zone which would be at the lows or as close as they can get to the lows.

 QQQ 2 min, Tech still shows the best underlying action, this is a carry over from late Friday.

 Interestingly, the 5 min chart has had more then enough time to confirm the move lower, it hasn't, this is a sign of some underlying strength in the Q's

 The SPY, again seems to be knocked down and sees a positive divergence on the pullback lows, it appears there's an effort to keep the market relatively flat and stable and it also appears there's some accumulation going on here.

SPY 2 min is seeing a decent leading positive divergence.

I'll try to look at the 3 main sector with an emphasis on tech.

ES Update

ES is a bit higher than where I pointed out earlier, this is not a leading positive divergence, but on the other hand, it is not showing any extreme weakness here, taken with the risk asset update and the CONTEXT model, I would say there's upside potential here.

GDXJ Update

I'm liking the junior miners (GDXJ) better than GDX at this point. I'm close to considering some calls in GDXJ for a very short term trade based on the volatility shakeout concept. A break above $21.90 would probably clinch the trade for me, but it is only worthwhile using calls. This should certainly be considered a speculative trade.

 AS GDXJ pulled back, as we wanted to see, 3C is looking better here on the 1 min.

 The same with the 2 min

All of the smaller intraday 1-2 min divergences are accumulating on the 5 min chart which is leading positive, this is what I was hoping to see and why I would consider a long Call GDXJ position -probably May expiration and slightly in the money.

Risk Asset Layout

There are a few interesting developments on these chart.

 First commodities (brown) vs the SPX (green) and the $USD (blue). Note as the dollar weakness as it usually does after the EU close commodities are showing better relative strength, pretty much an arbitrage trade, than the SPX, there's room for the SPX to move higher based on the dollar weakness, commodities are taking advantage of that more than equities, but most of that is in Energy. There's a chance the SPX is being kept a bit lower than the arbitrage correlation for accumulation at lower prices, but that will have to be verified in the next market update.

 Longer term, don't get excited about the SPX, commodities are way out of line on this 60 min chart, again a lot of this is Chinese manufacturing weakness, but that will effect the US markets, especially with today's data showing Germany falling behind.

 I don't know why the CONTEXT ES model is showing such a short timeframe, but the model is higher than ES, suggesting ES has room to move higher.

 While this isn't a screaming positive divergence, High Yield Credit is holding up reasonably well, pretty much still in Friday's range, this is a slight positive in the very near term for the SPX again in green as always.

 Longer term of course there has been huge de leveraging in HY Credit as it hasn't made a higher high since Feb. 6th, "Credit Leads, Equities Follow". The odd thing is the Credit markets want to have nothing to do with a risk on move that Equities had been involved in and HY Credit is an extremely cheap way for mart money to play a risk on move, so the signal since Feb. 6th has been quite accurate as we watch the SPX weakness unfold.

 Yields near term were negative on Friday, they tend to pull stocks toward them, we expected to see the divergence in any market strength in any case, I suspect even if there is a 1 or 2 day risk on bounce, Yields will continue to negatively diverge. There's some slight weakness in Yields intraday.

 The $AUD which has been an excellent leading indicator for the market is almost in perfect sync with the SPX intraday.

 On a 15 min chart, there are several negative divergences in $AUD depicted in red bringing the market lower as carry trades are closed out, however there is some slight positive bias at the white arrow between the SPX and $AUD. I do not think this is indicative of the carry trade being restored, but it may be enough support for the market to continue a few more days  with volatile chop.

 Longer term, $AUD shows a huge negative divergence starting just before the SPX started to top, there should be some reversion to the mean as the SPX breaks down when considering the bigger picture beyond intraday and day to day moves.

 The Euro is also nearly in perfect sync with the SPX intraday.

 Again, there's a longer term negative divergence in the correlation, but near term (and I wouldn't go betting the farm on the SPX as a long), but the Euro does have a relative positive divergence between the two yellow trendlines with the PX.

 The Yen is doing exactly what it should intraday for the most part, the SPX is actually a little stronger here than it should be vs the Yen believe it or not.

 The rise in the Yen is a clear indication of carry trades being closed out, this is a market negative. Whether the BOJ intervenes in the currency or not is anyone's guess, but their interventions have not been effective in the past.

 High Yield Corp. Credit shows a negative divergence right about the time the SPX turned down from the intraday high, Credit here intraday is a bit weaker, but this all changes very quickly.

 Mid term on a 15 min chart, you can see the negative divergence and sell-off in Corp. Credit leading the SPX lower, there is an interesting divergence though in place in the white box where Credit is actually holding up better.

 Longer term, game over. Credit is in a clear down trend, however as pointed out above, tight now, it is holding up better than equities, which is a market positive in the near term, note the relative areas at the white trendlines.

 Financial momentum vs the SPX was horrible Friday, it was very strong earlier today and gave out a little recently, but all in all, this is a slight positive for the market near term.

 Energy looked bad on Friday too, early today it was leading, it has since given up some momentum, at least as of this capture, but still remains supportive.

 Tech was a mess Friday, it is leading just as all of the tech stocks and the QQQ updates have shown, this appears to be where any market strength is coming from, Financials and Energy are helping, but as we saw on Friday, it appeared Tech wants to rotate in.

 Sector rotation since Friday... Energy is the obvious outlier in terms of strength, the Defensive sectors picked up as they should.

In afternoon trade, financials (at least as of this capture) were losing some momentum, the Defensive sectors were also losing momentum, indicative of some risk appetite here? Note Tech especially gaining ground late in the day.