Risk Asset Layout Update

I've been warning for the last few weeks that the FX legacy arbitrage correlation between the EUR/USD and the market as well as Yields have become problematic and bothersome with regard to a sub-intermediate (albeit very choppy) uptrend, which has the capability to end with a bang and short squeeze.

There are a few other items that are curious such as commodities in general and their outperformance. Last Tuesday the underlying tone of 3C changed very quickly, at first I suspected some inside information was being traded, I'm still not sure, but for some reason 3C was stronger than it should have been. We may say that the situation culminated in late week strength and thus has resolved, but there are still some nagging details that aren't exactly in place preventing that.

As for the charts...

Last week I talked about not getting too hung up on your analysis as the market is dynamic and we re-drew some trendlines. I think this is probably the most probable pattern traders are looking at now in the SPX, a rather large bear flag; similar to GLD. Perhaps we have a slight break below the flag and then a break above in a large Crazy Ivan shakeout. In any case, this represents the choppy, sub-intermediate uptrend which could also be seen as the very early stages of a primary downtrend (bear market). I think this will most likely be the pattern we'll need to be watching.

CONTEXT for ES has been pretty close and is now showing the model a bit richer than ES itself, however several key markets are closed, the point being is underlying risk assets that re in the model are trading fairly close to their correlation with S&P E-Mini futures.

 Commodities which have been lagging the market badly since the October lows last year and the subsequent rally off those lows, have very recently been performing much better than correlations with the SPX or more importantly, FX correlations would imply. I don't believe this is based on secret strength in Emerging Markets or China. Either there's some game playing which usually would not be this long lasting or something may be known by smart money that is being discounted. The only thing I can really thin of given the weakening 3C stance in the $USD (but still strong dollar prices) and a move higher than should be in commodities may be some inside information on a 3rd round of QE which has traditionally benefitted commodities. In fact once QE ended, that's when the severe commodity underperformance really became apparent (and of course weakness in China which we called weeks before the first hint came out last year).

 Even early in this latest move, commodities lagged badly, then they came in to line and now are starting to out-perform, I don't think this can be solely attributed to the risk premium in oil because of the Middle East situation/s.

 HY Credit was roughly in sync with the SPX today, this is one of the first choices of smart money in a risk on market with Investment Grade being the flight to safety trade.

 Credit which often leads the market, was looking a little worrisome in June, but since has come back strong and it is this strength(if it continues to hold) that keeps me believing that we probably will still see a short squeeze move before the primary down trend reasserts itself.

 High Yield Corporate of HYG is much more liquid as a hedge or investment vehicle, it clearly gave us a divergence that is in line with a small pullback of a day or slightly longer culminating today.

 The longer term view of HY Corp. Credit remains pretty stable and supportive thus far of grater gains in the overall market.

 Yields are an excellent leading indicator, almost like a magnet for the SPX, that is why the recent plunge in yields has been troubling, today's plunge is right in line with a sharp pullback in equities.

 The recent trend in Yields has not been supportive of the market, it' been divergent and it's strange to see this dislocation while other assets like credit remain strong, this also makes me wonder if there is inside knowledge about a specific F_O_M_C/F_E_D program.

 The $AUD took a big hit last week, but seems to be roughly in line with the SPX and supportive

 Longer term-this is one of my favorite leading indicators among the currencies.

 The Euro seemed to outperform the SPX today at least most of the day, I don't think it was enough, especially given the starting point or relative area the Euro is in, which has been another recent concrn with this layout.

 Longer term the Euro has hit 2 year new lows and is way out of sync with the market, this is partly why I expected (prior to last Tuesday) the pullback to be quite sharp as the two should revert to some mean. My best guess is that the overall trend coming up will see the Euro move up on some short covering while the market pulls back and they should meet in the middle (be sure to throw in plenty of market chop).

As for the major sectors, today actually looks stronger than it was; Financials look good, Energy and Tech as well. The flight to safety trades weren't doing as well as I would have suspected (Utilities, Staples and Healthcare).

From what I see here, short term a pullback looks reasonable, it also seems like something is going on in the market that is not made its way to public knowledge yet as these assets tend to trend together and that's not happening with the Euro and Yields vs. Credit, the $AUD, commodities, etc.  In the past we have had excellent divergences on this layout calling tops and bottoms, but all of the asset tended to move together, that's what is strange about the current market now. There are some strange 3C charts in the overall market, in currencies specifically, throw in some of the dislocations here and it seems there's something being acted on that is not public knowledge yet.

AAPL Update-Short Trade

AAPL is probably a decent short here, even with the intraday move down.

AAPL hasn't been giving great signals lately, I speculated some time ago before it stopped giving signals that the accumulation phase in AAPL was large and done and we shouldn't expect to see much in the way of positive divergences, it turns out that warning was accurate.

 1 min trend is negative and leading negative here.

1  min close up

 3 min neg. divergence

 5 min negative divergence, at this point AAPL is in line with most of the market for a move down near term.

 This is where AAPL saw a lot of accumulation in the white box and what has supported its move higher, we are seeing some negative tones coming in to play recently.

 15 min leading negative, this looks worse than most of the market.

However, at some point I think AAPL will still have another shot at an upside move as the 5 hour chart has gone through confirmation, distribution and long term positive momentum, this is a longer term trend down the road, we need to see the damage on the 15 min repaired before we can talk about this move.

Went with UVXY Aug $9 Calls

This is for a short term trade, it should be along the lines of a near term pullback in the market, we didn't get much information from the market today I think because of Bernie's testimony tomorrow, but I'm thinking we probably have at least a day if not 2 of corrective pullback.

Going to enter VXX or UVXY

Just like many of the market averages seem to be pointing to a move down VERY soon, but probably not that bad as the divergences aren't too bad on the 15 min charts generally, the ETS VXX and UVXY (based on the VIX) which move the opposite of the market look like they will see a quick, but worthwhile move to the upside. I'll probably look at some Call options if I have time, but again this is a nimble, hit and run trade idea which I think should certainly be viewed as speculative for risk management purposes.

 VXX 1 min leading positive

 VXX 2 min

 VXX 5 min

 At 15 min there's some question, much will depend on how the 5 min reacts as to what this move ultimately looks like, but I like the short term long trade here and if it offers more, then so be it.

 UVXY 3 min

UVXY 5 min

Quick Market Update

In this morning's first post, I said this with regard to today's market action,

"The market overnight has been pretty quiet overall and will probably remain somewhat quiet as the market waits for Bernie's semi-annual Congressional Testimony tomorrow."


Thus far that's what we've seen, but there is an ascending triangle forming through intraday trade today that I'd think everyone notices on such a dull day. With many indicators pointing toward near term downside, the bullish nature of this triangle could very well lead to a set up trapping some technical traders, especially if it breaks out to the upside and then moves lower. Today it seems that even when the market looks like it is doing nothing, it is still up to something.

 SPY 1 min chart inside the bullish ascending triangle, this bullish triangle could trap longs on a move lower. The 1 min chart hasn't done much of anything of note today.

 The 2 min chart is in leading negative position, it hasn't done much on an intraday basis, but the fact it's at a second day in a leading negative position would tend to argue for a move to the downside as we have seen in several different assets.

 The 5 min chart's negative divergence

The 15 min chart's negative divergence isn't that bad, so some of the charts such as the Euro/$USD that suggested a quick move down seems to be in line with what we see here.

IOC Possible Trade

"Let the trade come to you", IOC gained 7+% today on no news, in fact the only thing that looks like it may be responsible for the move is a technical breakout, but there's not enough 3C support to rule out a head fake move, in fact it looks pretty likely.

You really don't have much to lose on this one as you can wait for the failed move, remember, "From failed moves, come fast moves" as a buddy of mine says; it's just the head fake/snowball effect.

For the charts...

 These two trend lines show the former closing high and the former intraday high, today IOC moved through both.

 There was an increase in volume when the closing high was broken earlier in the day, but the volume increase on the move above the intraday high is vey clear, a very technical move as the orders were sitting there ready to go as soon as price crossed above that level and again on no news that I can find, thus it looks like a VERY technical move that Wall St. will at least make the volume rebate from if not use the volume to sell in to and set IOC p for a head fake reversal. All you really need to do is watch IOC to cross down below these two levels (volume on the break below wold be helpful) and we can check 3C again before a trade is entered, but it seems it would be fairly high probability if those levels are broken to the downside.

u

 Note the triangle that formed right at the intraday high's resistance level before the breakout, this was a real technical trader's trade.

 I wouldn't jump in right now without some near term confirmation, the longer term seems to be offering it, but the 1 min chart for now is pretty much in line with price.

 The 2 min (above) 3 min and 5 min (below) charts are all negatively divergence on this parabolic breakout move. I rarely trust these parabolic moves in the first place.

 5 min

 Looking at the breakout area on a 30 min chart shows there's MUCH less 3C support now than there was at the last high that reversed, we have a long term leading negative divergence in place. Strategically this looks like a good short, it's just a matter of the tactical entry.

The 60 min chart shows the same leading negative divergence and total lack of 3C support on this move.

I'd keep it on your radar.

GLD Follow Up

As mentioned, I feel the probability of a near term pullback/correction in GLD is fairly high, I probably would not cut the position size/risk on this alone, but with Bernie speaking tomorrow in front of Congress for his semi-annual brief, I view this as a real wild card event, thus I'd like to have some exposure, but that with the probability of a correction makes me want to lower exposure there. Whenever there are wild card events like these, you have no control whatsoever of the probabilities of what will happen, at that point your odds are more like Vegas rather than good analytical positioning.

If I feel very uncertain of direction or a wildcard event like this, I don't want to hope I get lucky and hit it big, I want to reduce or eliminate my risk.

GLD charts...

 This Aug. $152 Call position was opened Thursday and is up over 18% which is not the triple digit gains you commonly hear options traders talking about, but this is also not the kind of market that allows for those kind of gains, it's very choppy and being nimble is all important. Lowering the risk and re-entering the other half of the trade on some price weakness makes sense to me, I still view $162.50 as the likely target area, however time decay, volatility, etc all play a part in the value of an option, it's not as simple as a long position.

 I don't ever expect anything to move straight up or down, but up with a correction and then up again, it's the Bernie testimony tomorrow that makes this a little more important, otherwise I'd likely not change anything right now.

 In the near term this GLD 3 min negative divergence in a flat trading range looks like a pullback/correction is high probability.

 The longer term 5 min chart looks good for the envisioned move to $162.50 (area-the top of the bear flag).

 This is I believe about the 5th or 6th profitable GLD trade, the 15 min chart along with longer charts had us trading GLD exclusively from the short side as these longer term charts were negative and thus the direction of least resistance. Recently we have seen some positive changes in these charts and this is the first long position we have taken in GLD. As you can see, there's a change of character in 3C on an important timeframe from June to July.

 15 min chart close up looks good today for our longer term view of a move to the $162.50 area.

Even the 60 min chart is showing a positive change in character.

This is beyond the scope of this post, but there are signs that the daily chart may be shaping up as well. Last year as GLD topped we were looking for at least an intermediate down trend, that has been fulfilled. Now it seems we may be getting ready to see gold enter another move higher as the daily chart shows. Finally the intraday charts are cooperating.

It's way too early though to think about trading that trend, I just wanted to remind you that it is developing.

Closing 1/2 of GLD Aug $152 Calls-Will re-enter

Charts coming up. It is a difficult decision to make as the calls are August and I think they can be held through a short term pullback which is what I think is coming, but I've decided just to close 1/2 the position in front of the Bernie testimony which should be gold moving.

The Currency Angle....

Last week the Euro/Dollar currency analysis suggested more strength in the Euro (market supportive) and weakness developing in the dollar (market supportive).

Looking at today's charts, my impression is some quick downside followed by some more strength in the market, which isn't too far off the 5 min negative charts and the 15 min "not as negative" market charts.

First the Euro (positive divergences suggest the Euro goes up which is market supportive, negative suggest down and that hurts the market.

 Euro 1 min relative negative divergence, not as strong as a leading divergence.

 2 min Euro, slight negative leading divergence.


 3 min overall trend is leading positive in a nice trend, it almost seems as if any short term negative price action would be confined to the range the Euro has been trading in as part of a base.

 Euro 5 min chart appears to be making a base from which to rally from, market supportive.

The 15 min chart looks the same, possibly any Euro downside would be within the yellow area which would keep the Euro within a consolidative base formation.

Now the $USD

 2 min trend is leading negative, this is market supportive

 Intraday the 5 min chart has a leading positive divergence, this would be in line with $USD near term price upside/Euro near term downside as suggested above, but nothing more than that (from this chart).

 $USD 3 min trend is leading negative, suggesting a substantial move down, again, perhaps any Dollar upside near term is contained to this rounding top like pattern within the yellow area, or even a possible head fake move.


$USD 15 min chart looks like the Dollar wants to move down substantially which would be market supportive.

This is bigger picture trend.