ES Update

ES looks interesting tonight,

First, ES never went negative at the JPM debacle (yellow box), second it has found a floor as like last night before ES ran up, there's a 3C positive divergence, leading positive that hit new highs for the day.

Additionally, CONTEXT's model is building, basically ES is undervalued compared to the model.

I don't think the excitement is over just quite yet.

5 hours before Europe opens.

What JPM means for the market

First let me start by saying there's a difference between gambling- just betting everything on red and having an edge like say, card counting.

Either way you are still taking a risk, but the card counter is going to come out ahead more often than not and certainly more often than the gambler.

It all comes down to probabilities, the gambler relies on chance, the card counter relies on probabilities.

So as JPM goes and a market bounce, from the last post  looking at the JPM charts, the probabilities look like Smart Money was aware of JPM's trouble and trouble like that doesn't just pop up overnight or in a week, it occurs over time and there's a lot of chatter on Wall Street.

Just as an example, you have two long time friends, one works at JPM and the other at Goldman Sachs; they have lunch together and one of the buddies tells the other, "We're in deep #$%^ because of that jerk Bruno". If you are the GS employee, sure you want to be loyal to your friend, but you'd also like that new head trader spot opening up that pays an extra $50 million, with the information you have, GS could stand to make billions shorting JPM and you could that advancement and fat pay day. Where are your loyalties now? Furthermore, if you know anyone who has ever worked on Wall Street, these aren't exactly the type of people who you might characterize as "moral" for the most part. I'd say the 80/20 rule probably applies, but it may be more like 90/10.

There's a thousand different scenarios that could lead to a leak like that and from the looks of JPM's chart (I wish I had seen this earlier when I was looking for a financial to short) it seems Smart Money already knew, so who's getting burned right now? Probabilities say retail while Smart Money is most likely collecting a very fat paycheck. These are the realities of Wall Street, I've always suspected it, 3C has shown me this a thousand times over the years, Cramer himself admits to it and as most of you know, I've had several meetings with a hedge fund manager in the last several months, dozens of meetings with a decent size financial firm, and dinner with a 40 year Wall Street veteran and former head trader for Dreyfus from the Bronx who told us a lot of stories that surprised even skeptical me. That's only a few of the contacts I've had/have.

So my opinion is Wall Street isn't getting burned, retail is based on the probabilities.

The JPM 15 min chart didn't look like any of the other 15 min positive charts I posted last night. I'll let you put together the rest of the pieces from there.

As far as the bounce, setting aside the 15 min charts from last night, we have this bit of news today that isn't very surprising, but is important-NYSE Short Interest is at 2012 Highs.


The Short Interest is at 2012 highs for good reason as you all know, but that doesn't mean that it will stay there. As Jesse Livermore said (paraphrased), "It wasn't being right that made me money, a lot of traders were right on the market, it was the sitting that made me money".

To put that in context, a lot of traders understood which direction the market was heading and were positioned for it, however when a short squeeze would occur, they'd get scared and cover, Livermore's "sitting" means he wasn't afraid to hold his positions in the face of a short squeeze, he stuck with the strength of his convictions and ultimately it wasn't being right, it was being patient and not being run out of his positions as the difference was, a lot of people were right, but only a few capitalized on it.

The way I see it, with short interest as high as it is, this is even more reason to have that one last shakeout bounce I have suspected was coming. Because the market is always unpredictable, but especially since I have expected it to become more volatile and more unpredictable, I and many of you didn't waste the bounces and we started our short positions over the last several months.

A bounce doesn't mean that much to me as far as the few speculative longs I put on yesterday in the model portfolio in anticipation of a bounce, the bulk of the model portfolio is short, I only hope to see a bounce so I can fill out a couple of short positions already in place and add a few in different industry groups. If the bounce doesn't come I and most of you already did the work, we're already positioned.

If the bounce does come and I still (even after JPM) think there's a higher probability it does than doesn't, than it's even better and I won't be scared out of my positions, I'll be adding to them based on months of analysis.

A short squeeze right now is the perfect time.

Honestly my biggest fear that could derail a bounce is the surprise news coming out of Europe, Wall Street can't discount it as they didn't expect it. What is happening politically there was in the hands of the population, not in the hands of a politician or central banker in which Wall Street could have had an inside track and all of the polling data suggested status quo would remain. Sunday night's elections were the biggest game changer for Europe since the crisis started and if anything derails a bounce, I suspect it would come from Europe and specifically Greece.

That being said, there's a certain amount of accumulation Wall Street needs to invest to get a bounce moving at least until the short squeeze takes over. Wall Street usually tries to see these things through once they've made a commitment to moving the market. The main obstacle to a bounce is the mathematics of whether whatever Wall Street has invested in manipulating the market to move it higher is worth sticking with or abandoning and that all depends on events that they have little control over right now-similar to the Lehman moment. This week I called the Greek elections, "Lehman X 1000".

For now, I'll keep holding the 3 short term spec longs I have in place. A bunch of new shorts chasing the market tonight in after hours only makes a short squeeze that much more appealing.

However I will not deny and I have said many times recently, the thin ledge the market has been standing on has broken, Wiley Coyote just hasn't looked down yet. I expected (as you know) the market to be more volatile as we continued forward and expected it to be more unpredictable, this is why any long position to play a potential bounce has been a speculative position, which means it's much riskier, risk management must be tighter. I deal with that in the same way I mentioned when I said I was taking on the positions, SMALL POSITON SIZE, basically speculative money.

So in conclusion, can we still bounce? Yes. Can the bounce be spectacular and scare even the shortest of shorts? Yes. Do I think JPM is a major factor in derailing a bounce? No. Do I think Europe is a major factor? I think ultimately it is the only factor.

While the market got pretty bet up in after hours, the Euro is still holding above the resistance trendline.

JPM Surprise Announcement All the Talk in AH...

I'll just copy and paste the story...

Out of nowehere, JPM announced 40 minutes ago that it would hold an unscheduled 5pm call to coincide with the release of its 10-Q. Rumors were swirling as to why. The reason is as follows:

• JPMORGAN SAYS CIO UNIT HAS SIGNIFICANT MARK-TO-MARKET LOSSES - "Fortress balance sheet" at least untilBruno Iskil gets done with it.
• JPMORGAN SAYS LOSSES ARE IN SYNTHETIC CREDIT PORTFOLIO - but, but, net is NEVER, EVER Gross.
• JPM WOULD NEED $971M ADDED COLLATERAL IF RATINGS CUT ONE-NOTCH
• JPM WOULD NEED $1.7B ADDED COLLATERAL IF RATINGS CUT 2 NOTCHES - how about three notches?
• JPMORGAN: MAY HOLD SOME SYNTHETIC CREDIT POSITIONS LONG TERM - "Level 3 CDS FTW"
• "As of March 31, 2012, the value of CIO's total AFS securities portfolio exceeded its cost by approximately $8 billion"

As a reminder, the CIO unit is where Bruno Iksil was making $200 billion-sized bets. Basically JPM has suffered massive losses at its CIO group most likely due to its IG/HY positions held by Iksil.

_______________________________________________________________________________________________

Naturally I'm always interested in whether the street was aware or not, I think 1 chart sums it up. You probably remember those 15 min charts from last night in a bunch of different stocks, all leading positive except TLT which was leading negative, well applying the same methodology to JPM...

To answer the question, was there a 15 min leading positive?

 Well, that answers that...

Now, as we know there aren't too many secrets on Wall Street so while retail is quite surprised, I suspect Wall Street is less so. Lets take a longer look and see when the news probably hit the street...

 I'm coming up with about March 26th or in the vicinity of the end of March.

If this was really bad then we should see it on a daily chart...

And there it is, leading negative ON A DAILY CHART! Timeframe? Right around the end of March.

Of course it's not a rigged market! Of Course there's no trading on inside information.

My question relates more to Jamie Dimon's close relationship with Uncle Bernie, what if anything comes out from Uncle Bernie? After all, Jamie did a lot to help Bernie in 2008.

AAPL Close Chart Request

 AAPL intraday 2 min, there's an arrow which would represent a relative positive divergence as price levels were nearly the same and a box which represents a leading positive divergence, similar to what was seen in the DIA around the same time.

 I din't annote this chart, I think it's clear enough, this is the same 2 min, but the trend

 The intraday 3 min

 The 3 min trend

And the 15 min is probably pretty fresh in everyone's memory, although it looks a bit different now (more as it should) with the last 2 days of price action.

As a reminder, we were expecting a rotation in to tech the week of April 20th, Mon/Tues (23rd/24th) we saw the 15 min leading positive divergence BEFORE AAPL reported after market on the 24th. As we have seen on many other charts, there was distribution in to AAPL's earnings gap up in 3C. Since this 15 min leading divergence has been building every day. As AAPL looks a little more like some kind of lateral consolidation, the 15 min positive leading divergence looks more realistic.

However, don't forget the 60 min chart, this is the most important chart and why I've been short AAPL (other than some short term speculative calls for a bounce opportunity).

AAPL had decent trend confirmation on the 60 min chart until March, at the highs AAPL was already in a leading negative divergence, that was the ideal place to be selling AAPL short. The leading divergence has only grown deeper as time has gone on, the 15 min chart's positiv divergence has been enough to throw a little wiggle in the 60 min chart, but that is not going to overcome the depth of that leading negative divergence. I really hope to see a decent AAPL bounce, I'll be filling out my short position on such an event.

ES/FX Update

 After bouncing off the intraday low in ES on a 3C relative positive divergence, ES just hit a new leading high for the day. I considered waiting to post this chart until I see what is going to happen with the Euro, but I think it may be worthwhile to post it now and of course I'll follow up.

The diagonal line is the downtrend that has been in effect mot of the week and today's break above that downtrend line, which is the first time the Euro has broken above the resistance zone and held it the entire day. The Triangle should be obvious, I'm sure it's very obvious to FX traders as the $1.30 level is just above and this is the most important level in the near term. Thus far the Euro has completed what could be a head fake, it' pretty common in stocks (maybe 80+% of the time).

I'll update you on both situations and the rapidly unfolding EU situation.

What Tsipras Has In Mind

I wish his name was easier to spell, the one Greek politician, head of Syriza, that few have probably ever heard of may be the most important player right now in all EU politics and the future of the EU.

Sunday night the investing world was stunned when Syriza knocked PASOK out of second place and changed the EU overnight. Everyone expected The New Democracy and PASOK to place first and second giving them the seats they needed to form a government and nominate Samaras the next PM. What I find so interesting in all of this is that the biggest problems facing the EU came from one of the most insignificant countries, the election that changed everything was because a party few people have ever heard of won second place and blocked a Pro-Bailout government, the possibility of Greece actually defaulting may come down to a little over $400 million euros. This is the kind of stuff that fits in the "Truth is stranger than fiction" category.

When I posted last on Greece I said it gets better. Well it looks like new elections in June (which will leave Greece without a government during two of the biggest decision points that need to be made (whether they will or can afford to pay the $400+mm international law bond and the austerity cuts demanded by the Troika) will cement the anti-bailout movement's leadership position. However, between know and then, the 1 tiny and 1 larger issue could both through Greece in to default, taking down numerous creditors/banks across the EU and world. When I said, "This is a Lehman x 1000 moment" I meant it, I just didn't realize it could be even bigger than that.

In any case, it's probably good to get to know where Tsipras is coming from and what his goals are, no where will you find a more brutal assessment than in his letter sent today to the Troika, this is a man who knows he holds all of the cards and he just put the Troika on notice.

(Google Translation-Bold highlights by me)

Letter from the President of the Group SYRIZA MCM , A word Tsipras

the European Commission President Jose Manuel Barroso
the President of the European Council Van Rompuy
the President of the European Parliament Martin Schulz

Notification:

President of European Central Bank Mario Drago
President of the Eurogroup Jean-Claude Juncker

Athens, Thursday 10 May 2012

Dear Mr. President,

I am sending you this letter after receipt of the exploratory mandate from the Greek President to ascertain the possibility of forming a Government enjoying the confidence of Parliament, under our Constitution. This letter builds upon the previous letter I sent on 21 February.

The vote of the Greek people Sunday May 6th nullifies/delegitimizes/makes illegal the political Memorandum of Understanding / Memorandum of Economic and Financial Policy signed by the previous Papademos government and the leaders of two political parties that had guaranteed the parliamentary majority of his government. Both parties recorded a loss of roughly 3.5 million votes, totaling 33.5% share of total votes.

Please note that before this, the MoU / MEFP had already been delegitimized in terms of its potential for economic success. But it's not just that the Memorandum of Understanding / MEFP failed to achieve its own objectives. It has also failed to address the structural imbalances and inequalities of the Greek economy. SYRIZA noted over the years the inherent weaknesses of the economy. All governments who work closely with the European Union ignored our recommendations for specific reforms.

Please also note that because of the policies of the Memorandum of Understanding / MEFP, Greece in 2012 is the only European country to endure its fifth successive year of deep recession during peacetime. Moreover the Bond Exchange Program (PSI) has failed to ensure the long-term viability of Greek debt which continues rising as a share of GDP. Austerity can in no way be the cure to recession. Therefore the immediate, socially just, reversal of the continuous decline of our economy is imperative.

We must urgently ensure economic and social stability in our country. For this purpose, we must take every political initiative to reverse the austerity and recession. Because apart from the lack of democratic legitimacy, continuing a program of internal devaluation is leading economy to catastrophy without creating conditions for recovery. The internal devaluation tends to lead to a humanitarian crisis.

Thus we need to rethink the entire context of the existing strategy, since it not only threatens Greece's social cohesion and stability, but is also a source of instability for the European Union and the EuroZone itself.

The common future of the European peoples is under the threat of such catastrophic choices. It is our deeply held belief that the economic crisis is of a European nature, and thus the solution must be found at the European level.

Sincerely,       

Alexis Tsipras

President K.O SYRIZA

Vice President of the European Left Party

Charts...

 The DIA 1 min was the first to go positive since the break below the triangle in the Euro

 This is the backed out DIA 1 min trend, it's added quite a bit since late yesterday afternoon.

 The DIA 2 min has been leading as the Euro/Triangle Apex has been reached, remember the DIA has looked the worst the last few days, I think it has the most catching up to do.

 The DIA 2 min bled to the 3 min as well

 IWM 1 min trend has also added quite a bit on the upside leading in the last day and a half.

 The 3 min trend has less noise and is clearer, it also added to the leading position today.

 The QQQ 1 min is in leading position, but pretty quiet intraday.

 QQQ 3 min added quite a bit to the leading positive today.

 SPY 1 min is almost in perfect confirmation of price.

 The 2 min is not as impressive as the DIA was toward the EOD, but it ticked up.

 The 3 min trend added quite a bit to the leading position (all of the white box is today)

And the 5 min trend keeps moving to higher lows.

This is the most recent capture about 4:0, ES firt responded with a tick up in 3C about the same time as the DIA, as price hit an intraday low, 3C made a higher low and ES has moved up off that divergence.

The Euro is hanging right where it was last, it hasn't moved lower, hasn't moved higher yet. Right now, the Euro is the chart to watch. I'd like to see it pop over $1.30 tonight and gap the market tomorrow a.m., I think that would be the most effective.

Waiting for charts to upload

While I wait, the DIA 1 min and ES 1 min are the first to respond positively, I'll have the rest up as soon as they upload

Euro Update

Here's the EUR/USD triangle/consolidation that I showed before and probably the most important chart right now. I mentioned in an earlier update that the pattern of the triangle is so obvious that it may see a downside head fake move before an upside breakout. Thus far we have the downside move, now to see if it is the head fake move these usually are and a move above the triangle.

More on Greece Where the action is

I've found it strange that first the New Democracy which had 3 days to try to form a coalition government gave up after 1 day, then Syriza, the party that shocked the investment world by coming in second place in the vote with their anti-bailout theme was given 3 days, they too passed the baton to the third place party, PASOK.

If a coalition government can't be formed, there will be new elections mid-June. I think the ND gave up because they saw the tak as hopeless as 60% of the country voted for anti-bailout parties and even as the ND was the largest party, they are pro-bailout, it makes it hard to form a coalition government, PASOK has less chance, but why did Syriza give up so quickly?

I think we now have the answer, it's the new elections. Since the election Sunday night, things have changed radically and according to polling data, upon a new election, Syriza would gain just about as many parliamentary seats as New Democracy and PASOK combined. With the other smaller parties being overwhelmingly anti-bilout, Syriza, a party few ever heard of before the elections that surprised the investing world, would easily be able to put together a coalition government and sidetrack the Troika imposed sanctions and bailout. It now seems obvious that Syriza is just waiting for new elections.

The problem that one little bond issuance and one little country could create that not only causes Greece to default, but to reshape the entire EU and send many of it' banks in to total insolvency, a $410 million dollar bonds payment due on May 15th, this is a PSI holdout, meaning they own international law bonds with stronger protections for the bondholders and DID NOT take the new PSI Greek debt which cost those who did well over 50%. Should Greece have no government a it looks like it will not when the payment is due in mere days, and should they not make the payment, Greece WILL be in default over a little over $400 million dollars!

While the world has watched extraordinary measures and huge sums of bailout money in the multi-billions go toward saving Greece from a default, it could all come down to a $400 million dollar International law bond! These are the things that defy imagination, how a splinter could take down an entire continent.

It gets even better, but I'll cover that later.

Out of Europe

Remember the days when the G-20 demanded the EU come up with a solution to their problems and they cam up with that gem of an idea, "Leveraging the EFSF" to over a trillion dollars, yet while they announced it and the market went nuts for a few days to the upside, the more reasonable people asked, "How?" After all, the EFSF has been a failure since day 1, how do you take a failure and leverage it to over a trillion dollar rescue fund? Being the EU couldn't even cover a $3 bn Euro issuance for the EFSF, a trillion seemed unlikely. The answer? "CHINA!"

That worked for a week or so until China started denying they would sink money in the hole that is Europe. Well China has made it official, they have given up on their #1 trading partner.

From Bloomberg:

CIC Stops Buying Europe Government Debt on Crisis Concern

Gao Xiqing, president of China Investment Corp., said the nation’s sovereign wealth fund has stopped buying European government debt on concerns about the region’s financial turmoil.


You can read the rest of the article in which they are looking for opportunities in Africa now, but I think the above says enough. Lets just hope for the Euro's sake it wasn't China defending the Euro $1.30 mark and was the BIS instead.

The EUR/USD Consolidation

The Euro consolidation has taken on a more familiar shape. The diagonal line is the downtrend line from Monday that the Euro broke above today, in green we have a symmetrical triangle right below the $1,30 level. A breakout to the upside here wold be very bullish. Although it doesn't happen in currencies as much as equities, usually we'd watch for a head fake downside break right before an upside break to shakeout any long positions.

Market looks to be consolidating

I would think the market is consolidating here based on a couple of reasons, 1) the Euro consolidation, a break out and move above $1.30 would be bullish for the market. 2) There's a good deal of resistance in the immediate area, traders seeing that resistance hit and price back off from it would likely become emboldened to short the market which ultimately would be helpful for any bounce as they are squeezed.

Here's what the intraday action and the longer near term trend look like...

 10 min SPY chart, Tuesday formed a bullish hammer support zone, Wednesday the market closed above that support zone. Today resistance is around the yellow area, both gap and overhead, the market is likely to hold off and consolidate until the Euro makes its move. A break above $136.75 would be the start of a move higher.

 Here's the 5 min consolidation, note volume is in a consolidation phase as well.

 The 1 min intraday chart has shown positive divergences near the lower end of the range, as prices approach resistance, negative 1 min divergences set in, this is consolidation behavior.

The overall trend on the 5 min 3C chart looks good here as you can see price remains conolidative, but 3C continues to lead higher.

I would guess the first sign of a move will be preceded by a breakout in the Euro's consolidation.

Risk Asset Layout

First of all the 3C indications are improving o the intraday charts.

I didn't find everything I thought I might in the Risk Assets, but I found enough.

What is lacking thus far is a bullish move in Credit, the credit markets are much larger, much better informed, they either aren't buying the bounce as we have seen them negatively divergent at every previous bounce attempt that has failed or they simply haven't moved up yet, ultimately even if they do improve, they should be negative as a bounce matures. Credit leads equities.

As far as other findings...

 First commodities vs the SPX (SPX is always green unless otherwise noted). It looks like commodities are finally consolidating in a triangle, the currency charts will shed more light on this, but mainstream technical traders should interpret this as a bearish continuation triangle, it almost certainly isn't, therefore a breakout of the triangle should force a short squeeze in various commodities, remember yesterday we saw a pretty good looking FCX/Copper chart in which 3C was looking very much like a bullish reversal was near. A short squeeze would give commodities extra upside momentum.

 One of the bigger finds was in yields which went negative when we identified the last bounce failure on May 1st, since then Yields (which are like a magnet for stocks) have made a higher high and are leading the SPX, this is supportive of a bounce higher.

 The EUR/USD or Euro, has finally broken above the downtrend line that has been there since Monday.

 A closer looks reveals what looks like a small triangle-type consolidation, I suspect the Euro is trying to get some momentum to make a run for the very important $1.30 level which someone has been supporting for months, (perhaps the Chinese to keep exports affordable in Europe?).

 The $AUD is an excellent currency as a leading indicator, you can see how it broke down first before the SPX on the last bounce on May 1st to the left, it now looks like an inverse (bullish) H&S pattern and a likely breakout higher, which is supportive of the market in the near term.

 Intraday the $AUD has kept pace with the SPX fairly well.

 The Euro also broke down before the SPX on May 1st to the left and has reach short term reversion to the mean this morning, although the SPX is ahead of the Euro this a.m., I suspect the market is discounting a likely break of $1.30 as the Euro has already broken the downtrend line.

 Intraday the Euro has kept up well with the SPX, it is still lagging a bit, but as mentioned, I believe it is because it is consolidating for a move through $1.30.

This is GLD in green vs the SPY in red, you can see GLD has tracked the market at least directionally pretty well, so as I pointed out in yesterday's GLD update, GLD was looking much better for a bounce move yesterday, it would make sense that it moves with the market at least directionally, although relative strength will probably waiver depending on the sentiment toward Central Bank easing whether in the US, the ECB or something coordinated. It's important to distinguish between sentiment and probability.

 Here are the many gaps in GLD, the market trend has been to diligently fill gaps, so there are quite a few gaps to the upside that would be puling on GLD.

 GLD is also consolidating in a triangle, likely because of the arbitrage correlation to the EUR/$USD or more specifically the $USD, but the EUR/USD is a perfectly acceptable proxy.

 Yesterday I showed you a number of positive divergences in GLD, today it has gapped higher and during the consolidation the 1 min 3C chart is leading positive, suggesting an upside breakout.

 The 2 min continues to build and is leading positive currently.

 3 min GLD is leading positive during the consolidation

 The 5 min is as well

 And like all of the other 15 min charts shown last night, add GLD to them in a bullish leading positive divergence, suggesting a decent bounce here as well.

Finally, as shown also last night, the 15 min chart of TLT/Treasuries, which has been a flight to safety trade as the market has declined this week, is now even deeper in to a leading negative divergence, it seems they are abandoning the flight to safety trade and turning toward a risk on trade for our bounce.

ES Update

 After a premarket negative divergence at the highs ES with most of the market pulled back in morning trade, I've already received a couple of emails from people who track trader action and sentiment, one of my better sources sent me this:

"I'm following a bunch of traders on twitter, they were short into EOD

yesterday stopped out this morning on the gap up, they went long and now got stopped out on the long.  Now they are switching short again. Guess this is how wall street makes good money and when the bounce comes I think it's going to really catch the shorts off guard since this is bearish price action and honestly I would have gone fully short if it wasn't for 3c."


As explained yesterday, a short squeeze would be a key component in to any bounce and as I always remind you, "Price is deceiving".  This kind of reaction to the market is EXACTLY why we don't chase trades, but let them come to us.

The CONTEXT ES model is very supportive of higher prices and growing, I'm very interested to see what our "Risk Asset Layout" which is a more detailed form of CONTEXT has to say and where the underlying strength is coming from that is apparent in the CONTEXT MODEL. I'm going to take a quick look.