Risk Asset Close and Take on the Spanish BB

I was interested in how the risk asset layout would close, especially high yield credit. There's not much point in positing all of the charts as there's not much to see.

Commodities were in line with the SPX almost all day, they actually tracked the SPX much closer than the EUR or $USD as the Euro managed to close close to its 11:30 a.m. intraday lows, while commodities and the SPX closed at their lows.  Since the market outperformed the Euro substantially Friday and the market underperformed the Euro substantially today, it puts the two pretty close to reversion to the mean with the Euro just a tad lower since Friday's action.

High Yield Corporate credit which had held up better than High Yield Credit earlier in the day, saw downside action in the afternoon closing at it's lows for a -.58% loss on the day, both HY Crop Credit and the SPX have also reverted to their mean, meaning they are roughly in the same place.

High Yield Credit didn't improve at all, which is a bit scary, but it's also 1 day and it's impossible to know how the JPM unwind of the whale trade is effecting credit, but we can't deal in speculation, HY Credit was ugly today taking out the 6/7 lows while the SPX remains just above them.

Yields closed off their lows of the day, but also closed an hour earlier than the SPX.

Financials were hit harder on the day, but didn't have the same downside momentum as the SPX over the last two hours of the day. Energy gave up its relative burst of momentum vs the SPX from 11:30-1 p.m. and closed just a little worse than the SPX at -1.36% vs. -1.27 for the SPX. Tech also gave up its better relative performance seen in the morning and closed down -1.45%; APPL's last hour or so of trade had a direct impact on Tech as you would imagine (AAPL down -1.52%)

The Euro gave up a lot today...

 All of the opening gap gains were lost and then some.

The major resistance area which the Euro gapped above was lost, the short term uptrend (green) was just barely broken, while it remains above the May 1 downtrend (blue).

All in all, a schizophrenic market action from over-joyed to manic. I was happy to see the Euro up last night, but the reality of the incompetence of the EU Finance Ministers had me concerned with the lack of details. I suppose I'm a little surprised as well at how fast the details emerged, but to be fair that sword cuts both ways. The EU tried today to stick save some of the damage done in a not so well thought out plan.

I certainly have no illusions about the course of the EU and how things will end, but in the interim, right now they are brainstorming to find a way to undo some of the mess their Spanish Banking Bailout plan caused, THEY HAVE TO, otherwise the Spanish banking bailout will quickly turn in to a Spanish sovereign bailout. This is the law of the EU's unintended consequences. The consensus was Spanish banks may need $60-$80 bn Euros, the Fin Mins thought they'd blow the market away with their $100 bn Euro Bazooka, they apparently just didn't look at the details and in the process went from creating what they thought would be well received by the market to a bigger mess that could precipitate not only a Spanish Banking Bailout, but a sovereign one as the ESM senior debt scheme sends sovereign debt creditors heading for the exits en masse, which means Spain could be locked completely out of the debt markets and then the bailout will be much, much bigger.


So long story short, look for more announcements from the EU trying to remedy this mess, they actually took a bad situation and made it a lot worse, PAR FOR THE COURSE!

ISDA Unlikely to Trigger CDS in Spanish Debt Subordination

Last night my Week Ahead post was sarcastically titled,

Europe is "fixed" (sarc.), at least long enough to likely pull our short squeeze move off...

Here are a few excerpts:

"Another thing to watch are Spanish bonds as the 3% loan is far lower than the 6+% Spain is paying on 10 year debt. There are some initial report that the banking bailout via the ESM (which ironically was never supposed to be used for a direct bank bailout) may not be without conditions and those conditions may subordinate Spanish debt holders. In short, there's a strong possibility that the seeds have been sown in Spain for a Greek like PSI debt restructuring in which none other than you know who gets stiffed, the Spanish debt bond holders."

"While I don't believe for a minute that anything is even closer to begin fixed in Europe and I don't believe this Spanish bailout will be nearly as smooth as initial Sunday opening trade indicates over the next few weeks, the market is about sentiment and headlines and this weekend provided them." 

 "ES seeing 3C confirm the uptrend all of Friday and a 22 point opening move Sunday night above Friday's already impressive move. Although we still have a long night which I'm sure more details on the Spanish bailout will emerge on the European open in a few hours"

"Just remember the market is not going to make this a cake walk, but when in doubt, go to the big picture."

Sure enough, the word "Subordination" was what all the hoopla in the market was about today. I won't go in to details as to why the temporary EFSF is not likely to fund a Spanish banking bailout and I won't go in to much detail about the permanent ESM mechanism that probably would be used, even though Germany is yet to ratify the mechanism. I will say that IMF funds which will not play a role in the bailout are not legally senior to other debt, although they are given preferential status. However, the ESM has in its treaty, law that subordinates all other debt, meaning the ESM gets paid back before any other creditors.

This is what has caused a lot of trouble for the not so well thought out Spanish Bank bailout announcement that committed $100 bn euros of money (that isn't actually reality yet as the ESM has not been ratified by Germany) over the course of a 2 and a half hour teleconference. How long did it take Greece to negotiate a bailout again? 

As mentioned last night and we saw early today, Spanish sovereign debt was being sold hand over fist as creditors realized they were being subordinated and may indeed face a Greek-like debt restructuring deal; their only protection in such a situation is CDS (Credit Default Swaps), a kind of insurance that pays out if the country (Spain) defaults on their payments to sovereign debt holders because the ESM debt has legal seniority.

The ISDA is the committee that determines whether an actual "Credit Event" has taken place and whether the CDS insurance policy pays out. Today in a Reuters article, the IFR weighed in and the consensus was, the CDS would not be triggered, thus stiffing Spanish Bond holders again for the second time in 24 hours.

 ESM loans unlikely to trigger Spain CDS

Just for good measure, the ISDA came to the same conclusion 

Spanish CDS Trigger Unlikely on Subordination, Says ISDA *Dow Jones

The market's reaction around that time...

Another brilliant meeting of the EU Finance Ministers, hoping to give the market a Bazooka and instead giving it a wedgie.

FB pulls back $.08 from our target

Earlier today and in a subsequent update the charts showed what seemed to be a pullback in FB, we had a target for the pullback and FB closed within 8 cents of the target, down -.33% today vs the NASDAQ 100 at -1.66%.

I'd really like to use a wider Trend Channel stop on FB, but there's not enough historical trade for a daily channel, so the 60 min channel has had to do and it held today as well. The bottom line remains, despite near term volatility, I still really like FB's signal. The last trade with such a strong signal (not even as strong) was GLD which made some members 200+% using calls as GLD traded up for its biggest 1 day gain since 2009.

These are the kind of signals 3C was built for, these are the trades with a real edge.

A quick look back on what happened with FB as there are some principles that were in play that can be applied to nearly any asset in any timeframe.

 Today's triangle in FB wasn't huge, but for those trading it, they noticed. If you are pretty knowledgeable about these price patterns from technical analysis principles, than you have a pretty good idea of what they represent and what traders expect; the market just so happens to use these patterns against traders more often than not. The triangle broke to the upside as the price pattern implied (which would bring longs in who were waiting for confirmation of the price pattern-however few that may be), then the typical head fake move. For newer members, FB's price pattern, according to technical analysis suggested a consolidation that would break out to the upside and start the next leg up, it's just traders are so predictable (and just about anyone can view the book in level 2 or Totalview) that the pros take advantage of their predictability. In FB's case, the longs who bought the triangle of the breakout from the triangle were at a loss when FB moved lower, this creates selling and a snow-ball effect to give  reversal more momentum, it's seen on just about every stock with an obvious technical price pattern and in every timeframe from 1 min to monthly. Note the tw0 light blue hash marks next to price, that shows the bid/ask for FB in after-hours.

 The pullbacks I mentioned on the X-over screen above are rough estimates, but typically pretty close, I thought the dark blue 22 bat (60 min) area would be tagged, FB closed within 8 cents of that level. The only thing I don't like here and reason I'd rather use a wider daily stop is the trend is very defined and that up-trendline (not drawn here) would be another shakeout target. Wall St. firms also make money via volume rebates by creating volume by hitting limit orders/stops.

 The Trend Channel (used on a closing basis) held the pullback, this is a 60 min, there's not enough trade data in FB to create a wider daily channel yet, which would be my preference.

 The 5 min FB chart showing accumulation at the lows and a negative divergence recently, a pullback probably wasn't such a stretch to call here.

 The intraday mechanism on a 1 min chart for the pullback shows the breakout of the triangle seeing distribution in to the move, thus what was suspected to be a head fake move early today before it started was confirmed by 3C. Toward the end of day there's a small positive divergence forming which is what we want to see in to pullbacks when we're long the stock.

 The longer the 3C chart timeframe, the more important the signal, this 60 min chart needs to annotation, the change in character from confirming the downtrend to a leading positive divergence is clear, this is a VERY strong bullish signal.

 Money Stram is even giving a 3 day positive divergence in FB, also the candlestick pattern on this chart tells us something about the change in character in FB's trade.

I still like the position.

Market Update

A Quick review of the averages shows it likely we'll see a bit more of a pullback, but it doesn't look very dangerous, there are already some timeframes that seem to be accumulating in to the pullback. I'll post the charts after hours.

GLD-long term-short term

For years gold has been the trade/asset everyone has been talking about, which always raises the question of a bubble and I know all the bullish arguments, they are no different than any other bubble, "This time it's different" and I can't say I disagree with a lot of the arguments, but they are similar to all bubble arguments. As I have noted, I use my friends as a bubble gauge, when their wives became real estate speculators (most were home-school moms), then we are nearing a bursting bubble. Now they are gold and silver coin buyers and in causal conversation they just can't wait to tell you about what they recently bought and all the reasons why. I have even found several fake silver coins in a friend's collection (they shouldn't have a seam that indicates two sides of a coin were put together). Try throwing a garage sale and several days before you'll have weekend gold speculators looking for jewelry before the garage sale.

In any case, several months ago it was confusing as to whether gold was acting as a risk on or flight to safety asset as it had done both, we realized gold is now a Central Bank easing sentiment indicator as gold has a lot to gain from CB easing (like QE3), which makes today's trade in GLD thus far kind of interesting.

Last week we saw a lot of assets fall including currencies when the Chinese eased and everyone remembered the November globally coordinated easing that started with China with the F_E_D and ECB to follow about an hour later. Needless to say, some of the downside in the risk asset layout indicators came directly from last week when China eased and Bernie testified on the Hill, but didn't allude to any concrete hints of easing to come. Strangely the night before the F_E_D's #2, Janet Yellen had been in the press sounding ultra-dovish as were several other F_O_M_C members, which made Bernie's lack of easing talk very strange indeed, I'm pretty sure Yellen knows what Bernie is thinking, at the time I suspected a good cop/bad cop routine that in effect was the equivalent of "Greenspeak", when Greenspan would talk for hours and at the end no one had any idea what he was thinking.

Any way, after looking at today's interesting trade in GLD I took a little longer perspective view, this isn't a comprehensive look at the longer term in gold, but it's about time we start looking at that soon.

 Here's GLD in green today trading WITH the $USD instead of against it as is typically the case. This leads me to believe either there' some tactical arrangement going on or there's some QE/easing sentiment today, I haven't seen anything in the news, but haven't checked all that close either.

 The 1 min chart today since the negative at the open has been in line most of the day with a slight negative building is, this could lead to consolidation, a pullback or continue to grow, right now it's pretty minor as GLD passes the a.m. highs.

 3 min today, negative on the open and in line on the move up, although 3C should be a bit higher. I noticed there was no positive divergence which leads me to believe (taken with the move against the correlation in the $USD) that there may have been some dovish talk somewhere.

 However when looking at the 3 min longer term and not just intraday, the positive divergence on the 5th was a clear set up for a gap higher on the 6th which saw selling in to the gap, since there has been another positive divergence on the 7th/8th and 3 min 3C is nearly in a new leading high.

 The 15 min chart shows the strong positive divergence inside the bearish descending triangle (downside continuation pattern that was head faked as usual). I didn't take the trade, but many members did and some made over 200% with calls as I believe that was the biggest 1 day move up in GLD since 2009. The distribution in to the gap up in the red box is pretty clear and GLD formed a sort of bear flag that looks to be breaking to the upside a bit today.

 Longer term on the daily, the 150 m.a. has been excellent support and a great buying opportunity over the last several years, we were waiting for that pullback, but the way it pulled back from the August highs didn't look good and we skipped the trade at point "A" as it seemed something had changed. GLD went on to make a massive triangle, when they are this big they are usually tops or bottoms, depending on the preceding trend, this would indicate a top and GLD broke at point "B", but I never like to short the first break as we almost always see a volatility shakeout and I don't like chasing. At point "C" we got the chance to short GLD on a head fake move above some resistance that made for a nearly 215% put trade in about 3 days. At point "D" we had a bearish price consolidation with 3C positive signals making for another 200+% call trade. Note how many head fake moves there were of some consequence just on this chart. While the head fake move on obvious price patterns is common, it is also common for the price pattern to be a real (in this case point "D" bearish) or legitimate pattern-you jut have to watch for the head fake.

 Long term 3C on a 6 day chart shows confirmation of GLD's uptrend and then going significantly negative.

MoneyStream shows the same signal on a daily chart.

The daily 3C chart shows the negative divergence at the Aug. highs mentioned above, a positive on the break below the triangle that told us we'd see an upside move, and the head fake move that we shorted from there. Since then the bearish descending triangle with a positive divergence for another 200+% call trade, this time to the upside.

I'm starting to wonder if the F_O_M_C may introduce some easing at this month's meeting, it would send gold higher, but it doesn't necessarily remove the bubble aspect, just kicks the can down the road a bit further.

We'll be watching GLD very carefully over the next week or two in to the F_O_M_C. Something seems a bit off here and may make for a very good trade, it may also adjust our tactical planning with regard to our strategic view.

FB Update

FB looks to me to be ready for a bit of a pullback, I suspected we may see an upside head fake and in my last update today I suspected a pullback. I know at least one of our members used that information to cash out on June calls and is looking for an opportunity to add July Calls in to a pullback, he used the head fake breakout I said I thought was likely as the price pattern was too obvious to sell in to some strength. I don't view any of this as effecting the bigger picture in FB (by bigger I mean  move up of some significance before the next leg down).

Lets take a look...

Here's today's intraday symmetrical triangle, for technical traders this suggests an upside breakout, but as we see so often these obvious technical price patterns are manipulated more often than not, especially in a closely watched stock and a clean pattern like that. The yellow box shows the head fake breakout, at least that's what it appears to be.

 There are tow common pullback areas early in a new signal on this screen, usually the first several pullbacks are to the yellow 10-bar m.a (remember this is a 60 min. chart), then subsequent pullbacks are a bit deeper to the 22 bar m.a. in blue. I made a mistake in coloring RSI red, it should be white meaning the long signal is still in effect. The red box on the price window shows a probable pullback area that is around the 22 bar as well as the inverse H&S pattern's neckline (now support).

 The 1 min chart positive on Friday at the 1 p.m. lows and FB heads higher and a negative divergence in to the breakout of the intraday triangle.

 The 5 min chart positive for more than a week, the uptrend line which if it is hit, it is still within the Trend Channel. These are shorter term intraday or day to day moves.

The 60 min chart is now leading positive at a new high, above even where FB started trading on the 18th (28 % lower from the 18th's close), so this is a significant signal. I'd be using the shorter term 1-5 min timeframes to set up tactical entries, the strategic view at least for the near term over the next several weeks, looks very bullish for FB.

No changes to the options model portfolio Call positions in FB.

Energy, Tech and Financials

I've tried to prepare you with what to expect or at least what the highest probabilities are based on not only market behavior, but the charts (all of them), you probably remember the post about "Anchoring expectations" as the market won't make anything easy whether you're a bear or a bull (for some of us that depends on what trend we are looking at).

The area we are in now is the area I warned about last week at least a day before we even came near it and marked it as an area where you should expect volatility and game playing, it the major resistance area for the SPX and I've tried to explain many times how the market uses the predictability of Technical traders against them.

So far what I see in the sectors suggests that game playing is continuing, I believe the object is to bring price in the area of resistance, have it pullback from resistance which is a classic TA short set up and with those new shorts, the market is primed for a squeeze, so long as Europe doesn't hit us with a black swan. Longer term or Primary trend, as I posted last week and have posted for many months is just about as ugly as anything I've seen.

Some of the charts of sectors from the last post are confirmed by 3C in this post. I also see GLD and to a lesser extent SLV are making some interesting intraday moves despite the $USD.

 Looking at our daily bear flag, we saw a Crazy Ivan shakeout, a failed move on an upside breakout which brought about the downside move below the pennant which was also a failed move or a head fake, so far so good, this is what we expected. Then in my post about anchoring expectations, it was this exact area I warned of, I said technical traders expect a failed test of resistance and Wall St. may even throw them that bone, which could be used as a primer in a short squeeze., the red trendline is the important level where a short squeeze makes or breaks, the trade thus far in this area is not surprising to me, it is what I was trying to prepare you for.

 Energy, remember in the last update the recent momentum change in Energy, well on the 1 min chart we have the same negative divergence on the open as we see everywhere, but a decent positive divergence in the a.m. leading to  a move higher and a current leading positive position.

 The 2 min chart has almost the same features, the only difference is the 2 min chart is in a leading positive divergence, but hasn't made taht new high like the 1 min, so it seems the 1 min had or continues to bleed over to the 2 min.

 Energy on a 15 min chart shows the backing off from the resistance area the SPX has approached, the current 15 min positive divergence looks much stronger here that at the last test on the opening of the 7th.

 Energy on a longer term 15 min chart with several larger positive divergences before and as Energy hit its lows, it is in a leading position right now, but the choppiness is obviously coming from the backing off from the tests of resistance in the market.

 Financials interestingly intraday are shaping up on the 1 min with a leading positive divergence at new highs for this time period.

 The 2 min chart is seeing that 1 min strength bleed through.

 Even the 5 min chart is seeing the same positive divergence today come through, note the 5 min did not see a negative on the open which makes me question the strength of the opening negative divergence, again it would appear that this i not organic market action, but manipulated; if so, the implications here are suggesting the market or specifically financials are getting ready to make a real run at resistance. All 3 sectors would be needed to sustain any type of decent move (Tech, Energy and Financials).

 Financials on a 15 min chart positive at the lows, in line on the move up, if not leading positive and the negative divergences are all in areas where the market is backing off from resistance or tests of resistance.  The price action at these levels is definitely sending a message to bears as it is quite volatile, but this 15 min chart doesn't look like anything is quite ready to collapse and the shorter timeframes look like Financials may be gearing up for a real run at resistance.

 Tech showing the same 1 min intraday negative on the open and a positive leading divergence since late morning.

 The 2 min chart looks especially good.

 The 5 min isn't in the best place relatively speaking, but seeing a positive divergence bleed through intraday.

 Longer term 5 min positive at the price lows and again backing off in the areas where the market tested resistance, but these are relative negative divergences, they aren't the type of strong leading negative divergences wed expect to see on strong distribution in to resistance, thus it appears this has been the game playing I warned of in the area.

Finally the 60 min Tech chart, this is a significant time frame, negative during March when we were building core short positions, negaitve in to one of the last days we were adding core short position on May 1, and a pretty decent change in character with the Tech going from downside confirmation (green arrow) to a positive divergence before the lows (in the bear flag/pennant) and stronger at the lows, currently in line. The shorter 30 min is much better than in line, it' leading positive, but I wanted to show how far out the positive divergence has gone and 60 min is a significant timeframe, only the negative on the daily trumps it and that is the primary trend.

Risk Asset Update

We have a mixed bag, credit is starting to concern me a bit. All in all, the Risk Asset Layout is at the point where it is negatively divergent, not all assets are so negative (thus the mixed bag), but it will need to get back in line soon.

 Commodities intraday vs the SPX (green) are starting to see some better relative momentum, the Energy sector seems to be picking up, it's outperforming USO.

 This is the positive divergence in commodities as the market made its recent lows below the bear flag/pennant, but commodities are now in an overall negative divergence, they'll need to get back in line soon if this bounce is going to continue and continue in a more stable manner.

 This is the most threatening chart in the risk asset layout today, High Yield Credit took a plunge around 11:30, it had been pretty supportive recently, I'm not sure what this is all about (I would think there are still distortions in credit markets from the JPM whale trade), but I don't like the looks of this with regard to the intermediate or sub-intermediate trend expectations.

 HY Credit was positively divergent at the SPX lows, a great signal that was helpful, it's hard to view this as anything other than what it looks like, bad news. However the day isn't over and HY Corp. credit isn't reflecting the same.

 Yields intraday are moving with the market, however...

 Just as they gave a bullish divergent signal at the SPX lows, they are now in an area which is starting to look negative. They aren't so far gone that they can't flip back in line and they are moving with the market right now rather than against it which is  the only silver lining.

 The $AUD is one of my favorite leading indicators among the currencies, it is showing better relative momentum than the SPX today-see what I mean about a mixed bag?

 The Euro was showing a bit better relative momentum earlier, now it's nearly perfectly in line with the SPX.

 You may recall last Friday the Euro took a deep tumble on the open, but managed to move in the same direction all day with the SPX, showing the market was a bit more resilient than the correlations would have otherwise suggested Friday, still this will need to get back in line and to really accomplish that the EUR/USD resistance will have to be broken definitively to the upside to get the thick shorts in the Euro to cover, at least in the near term-you know what the longer term or primary implications look like-BAD.

 Here's High Yield Corp. Credit today showing much better relative momentum than the SPX and contradicting the move in High Yield Credit, I'm interested to see where these will close today.

 Overall, High Yield Corp. Credit doesn't look as good as it did when the SPX was hitting its lows, but it doesn't look horrible either, it needs to make that new high.

 This is Energy's momentum vs the SPX which has picked up recently today.

 Longer term though Energy has a ways to go to get back in line, agin, a Euro short squeeze would do it, but for now it seems the Euro moving to resistance and failing (3 times on Friday and gave up a breakout today) is keeping bearish sentiment alive and well as they see this as failed tests of resistance. We expected some game playing as we approached these areas, but at some point we'll have to make a call between game playing and a divergence. This is what happens when the market hits extremes, it's not like the nice clean signals of March-May 1

 Financials are showing a lack of momentum vs the SPX, but may have found some support, we'll see shortly.

 Tech was outperforming earlier, it's still in a stronger position vs the SPX relative momentum, but in a holding pattern here.

Sector Rotation since Friday, you can see the opening gaps in early sector movement, Financials are falling off along with Basic Materials and Discretionary. The flight to safety trades are in rotation in Utilities, Staples and Healthcare. As you can see, Tech isn't looking all that bad in rotation and Energy is also coming in to rotation as seen above. I'll have to take a closer look at the sectors themselves with 3C.