This Week

Pretty dull...

-High Yield Credit closed at the lows of the day, but held up slightly better than the SPX on the day.

-High Yield Junk Credit only lost about half of the SPX on the day, it traded much like the SPX intraday.

There are several notable features on JNK's chart, first a negative MACD divergence between July and present, I never use traditional indicators in traditional ways as there's no edge is seeing what everyone else sees, so the settings are longer (24/52/9). Wilder's RSI (short setting of 6) is negatively divergence as well when comparing the yellow trnedline on the indicator and price, RSI should be higher.

I often point out the reversal candlestick on volume concept that works so well on virtually any timeframe. At the green arrow we have a "Hammer" bullish reversal candlestick on increased volume, the next day a reversal (remember I always point out that there's no way to judge how long the reversal will last, it's just a reversal of at least a day). At the red arrow today we have a bearish "Shooting Star" candlestick on rising volume. To remember these candlesticks and their meaning, the hammer looks like  hammer and should be found after a trend down, "The market is hammering out a bottom". The "Shooting star" should come after  move up and as the Japanese say, 'A shooting star portends trouble overhead". Finally the body of the Shooting star is within yesterday's body which also makes it a bearish reversal "Harami" or what we call in the west, "an inside day", the Japanese call it, "Mother with child".

As for the EUR/USD...

 The Euro declined since 12 pm today, one way to get a feel for intraday trade would have ben to look at the Euro vs the SPX in which the SPX topped at 1:43 p.m. while the Euro remained in decline, without the support of the Euro or a weaker dollar, further upside in the market was not probable.

 On the week the Euro lost ground and closed just a few pips off the week's lows, in green is the initial knee jerk reaction to the Spanish 2013 budget, short lived.

As pointed out in last week's wrap, the Euro was just above resistance and not looking like it would hold, it closed back under resistance this week as $1.30 remains a key technical and psychological level.

Overall since the announcement of QE3, the Euro remains closely correlated with the SPX.

Yields which have been an excellent leading indicator topped out today about 30 mins. before the SPX topped out. Yields have also been closely correlated with the SPX since QE3, but they are significantly dislocated between August 16 and Sept. 14 (a month) with 5 year yields down -12.4% vs the SPX up +3.55%, this traditionally has been a strong reversal signal for the market.

Of the 3 most important industry groups, Tech, Energy and Financials, Tech had the worst week since last Friday, down -2.22% vs the SPX at -1.35%. AAPL closed near the lows of the day, and lost more in After-hours in the $666 area.

The defensive Utilities group was the only of the 10 major industry groups to close green on the week at +1%, you'd hardly believe QE3 was announced the way the market is trading.

Transports continue to suffer and diverge from the market, IYT closed within $0.15 of making a new closing low for the year.

Transport are the end of the line for manufacturing and thus paint a portrait, although not much can be as bad as the actual manufacturing data hitting 3+ year lows across the board.I know airlines are also facing trouble, Lufthansa had bad news today as their savings efforts have been thwarted by higher fuel costs and a weak economy (I actually like their airline, although the passengers are unruly in my experience).  Closer to home here in South Florida, American Airlines, the 4th largest private employer in South Florida has plans to lay-off about 1500 employees here.

We've heard from the world' largest shipper this week, Maersk and the news wasn't good as mentioned yesterday. The Baltic Dry Index, a daily index of the cost to ship dry goods is near 3 year lows.

There was a slight uptick on September 17th, but tht' fading already and I'm pretty sure we'll see new lows shortly.

The US Dollar index gained +0.75% on the week, with oil seeing a -0.90% decline as the two have an inverse relationship,the PM's, gold and silver actually closed the week just about unchanged, but there still appears to be some trouble coming for GLD.

The 15 min chart for GLD has worked very well, calling a negative divergence on the breakout above resistance that now looks like a head fake move on the 21st, it lost ground from that negative divergence and saw a deeper leading negative divergence the next two days and gave up ,ore ground on the 25th on a gap down. From there a relative positive that sent it higher, but in to higher prices, we now see one of the worst leading negative divergences.

It's a very strange market, it doesn't trade at all like QE3 had just been announced. I thought after the QE3 announcement one theme we might see is lower prices so institutional money can accumulate , preparing for a QE ramp, but we just haven't seen that anywhere consistently.

I'll be adding any new information I dig up over the weekend, in the meantime, enjoy your weekend!

Glad I closed the majority of URTY when I did

That was a nasty little close. In any case, on a day when not much happened in the market, it was nice to make a few percent.

As a few asked today what I'd be doing with URTY, my answer was, "If there's not a strong enough signal to entice me to buy it, I have no reason to hold it".

Market Update-The Averages-Unimpressed

If these charts look rather dull and uninspiring, that's because that is what they are, perhaps the holiday week, perhaps Friday, perhaps hesitation to take on risk over a weekend. One thing I try to tell members using 3C is, "Don't torture the charts looking for a signal", it's either there or it isn't, you can always find some little jiggle and call it a signal, but a real signal, a high probability signal is the one that jumps off the chart, for example...

FB This is the same 60 min chart, just a wider view and a closer view.

 With the long positive divergence on a strong 60 min timeframe, FB accumulation was a strong signal worth taking, FB ran up  and then gave another signal last week.

A closer look at the same 60 min chart reveals a negative divergence in to higher prices on an important timframe-60 mins, this was impossible to ignore, it's why I posted last week that FB would pullback even before it started and as it was making higher highs in price, that's a hard signal for some to take as they are making money, but it was the correct call and there was no searching the chart for the signals, they were clear as day.

Perhaps in addition to the other things I mentioned above about weak signals today (as already seen in futures), QE3 may be causing confusion among traders as for the first time in QE history, the F_E_D was front run, the market priced in QE months before it was ever announced, at ;east 3 months which never happened before.

Now that we have two QE's under the belt, we know that it can push asset prices up, but it has little effect on the economy. The banks that will be selling the MBS to the F_E_D may not be in the best shape and "may" not act like they did in QE1/QE2, they may retain capital. Lastly as we saw with QE1, the effect on the market is dynamic, QE1 started out as a failure as far as asset prices were concerned, it was only months later when the F_E_D upped the ante and added more MBS purchases and for the first time Treasuries that QE1 started to move asset prices. QE 2 started with a bang before it even started as Bernie told the world it was coming at Jackson Hole months before it came, but before the program ended, the market already was selling off so the QE effect is not a constant and there are many ideas as to the effectiveness of giving up al your surprises, going all in and many other issues like dividends being lower now, P/E ratios being much higher (stocks are more expensive), earnings disappointing , a manufacturing recession and likely a GDP recession soon. Stocks aren't cheap, one could say they are in a bubble.

If the market and economy were very healthy in 2004-2005 supported by huge consumer spending which came from the value of rising homes and employment was at the F_E_D's mandate, then consider the economy now vs then and asset prices between a healthy, humming along economy and one that is on the edge worldwide.

Does anyone really think we can compare the economy back in 2004 to the economy now and reasonably expect asset prices in the SPX to be 34% higher?

To be clear I'm not advocating selling the market on common sense principle, that's not how things work. If the market wants to give, then we should take no matter how unreasonable it may seem, the market  long ago ceased to be a discounting mechanism of value. However, when a bubble forms, you are well advised to take advantage of it, but to be cautious and to never try to convince yourself, "This time it's different" as centuries of bubbles, all the way back to the 1600's Dutch Tulip Bubble have shown us time and time again.

In any case, I've ventured off the path.

Here's the market update.

 The DIA believe it or not is one of the better looking charts intraday, but that's not saying much. There's a leading positive position on the 1 min above yesterday's readings.

 A closer look reveals an early positive and that leading positive we saw form quickly before noon time and pretty much in line since then. There are several short term signals that look like a rally in to the close to fill today's gap looks likely. Still, this isn't the positive divergence that would be expected as the point of a constructive pullback.

 DIA 3 min positive yesterday around the Spanish budget details in the a.m., negative at the highs and leading negative toward the afternoon. There's nothing to see today.

 DIA 5 min, again the same principles described above for yesterday, today a market that is just moving to fill a gap more or less, nothing special here at all.

 IWM 2 min with distribution yesterday, an early positive today and that leading positive before non, since a relative negative , again, the point of a constructive pullback in the case of a bounce like this is to bring prices down to a lower level and aggressively accumulate them, carving out a larger positive divergence.

 IWM 5 min, I had hoped this would hold up and not see deterioration, but it has during the day to move in line with price rather than showing a positive and holding up.

 IWM 15 min  shows an intraday negative divergence as price moved higher on an intraday basis today. Still this chart alone doesn't look that bad and if the shorter timeframes looked better, I'd say it's capable of supporting further upside on a bounce, but they way the 5 min chart went, it almost looks more likely that deterioration will migrate here, this is one of the reasons for closing the 3x long R2k position.

 QQQ 2 min with a negative yesterday, early positive today which really was just enough to move prices as they did today and an inline status.

 QQQ 5 min, negative yesterday, the same small positive in the a.m. which is enough fuel to move the Q's intraday as they have.

 QQQ 10 min, that noon time leading positive today, but nothing else.

 SPY 1 min is leading negative here

 SPY 3 min is negative at the afternoon highs

The 10 min chart does look decent, but again from today's behavior, it's more likely to see negative migration unless Monday we see accumulation on the short term timeframes.

As it stands now, I'm deeply unimpressed and don't see any reason on these charts to expect a big move on Monday to the upside, at least not based on anything that happened today.

URTY position

I will be closing 75% of the URTY position before the close based on no clear signal to keep it.

Futures Update

As futures lead the market and are a larger market where most traders are on the institutional side, I've found they have helped our analysis tremendously since we started covering them, although they need to be viewed in a different way than the stock/ETF/market averages as futures trade 24 hours.

So we'll look at futures and then look at the averages and see where we are on the continued  bounce or anything else that may have developed.

First the S&P e-mini futures and then the NASDAQ mini futures in the 1, 5 and 15 minute timeframes for each.

 ES 1 min as of the 9:30 NY open, a positive divergence at the lows in the mid morning trade sending ES higher only to see a negative/leading negative divergence in afternoon trade just before 2 p.m. which I am not passing judgement on as I had hoped to see prices stay subdued while positive divergences built, if we were going to carry on with the bounce.

 The ES 5 min chart negative yesterday as we well know and nothing better than in line with price today, no positive or negative divergences here.

 ES 15 min with confirmation of the move up at the green arrow, confirmation ended as a negative divergence set in yesterday taking the market lower, an excellent signal and the 15 min chart is lagging price today. This is less positive than I had hoped to see if we were to continue our bounce.

NASDAQ futures.

 1 min as of the 9:30 NY open were mostly in line with price until the negative divergence just before  2 pm and on the pullback intraday the chart is inline.

 NQ 5 min with a very nice leading positive divergence Wednesday which fit all our short term analysis from 3C to dominant price/volume relationships for an oversold corrective bounce; that move was sold in to yesterday at the red arrow/negative divergence and thus far 3C is in negative territory vs price, no positive divergence here, certainly nothing like Wednesday.

NQ 15 min going positive Wednesday right on the open and throughout much of the day, then confirmation at the green arrow and as seen market wide yesterday, a negative divergence, the relative positioning tight now appears to be slightly positive, but it's actually closer to in line.

The bottom line for today is it appears there has been very little activity in institutional trade which is not unusual for a Friday and holiday week (Jewish holidays).

Now to take a look at the averages as they will give signals that will typically be picked up the next trading day.

Today's Important data

For the most part the data I bring you is to understand future moves and likelihood of future moves as well as any fixes or problematic policies as well as exposing some truth in a very deceptive market.

On the Inflation front and especially in a sensitive country like Spain, today's inflation data was well above consensus of 2.8 (previous of 2.7) and actual 3.5%. This i very bad news for a country with 25% general unemployment, 50% youth unemployment and as of yesterday, a country ready to hike taxes, undertake labor reforms and mess with people's pensions (meaning changing the terms and using the money-can you say, "Lock-box"?)

Also in a bad sign which was probably initiated at the same time the EU decided on a Spanish Banking bailout of $100 bn Euros, well more than any estimate of their needs were at the time and presently, however the trouble we spotted immediately was that it would come from the ESM bailout mechanism which still has not been ratified, but told bond traders something they didn't want to hear, all debt would be subordinated to the ESM, meaning the ESM gets paid before anyone including the bond traders who had been buying Spanish debt and supporting yields, right after that is when Spanish yields soared over 7.5%, totally unsustainable until Draghi jawboned them down. Now today from Spain we get information on Spain's sovereign debt secondary market trade data, the trade volume in Spanish debt has dropped nearly in half since this time last year, actually a 40% decline as bond traders are afraid they won't be repaid because of their positions being subordinated by the ESM.

This low level of secondary market activity is actually the lowest since before Spain joined the Euro, back to 1996!!!!

To add to their worries, in yesterday's Spanish 2013 budget presentation, it looked very likely that holders of corporate credit/debt in bad banks, would likely take severe losses. In addition, it looked likely that sovereign debt holders (bond traders) may face a Greek-like debt restructuring that robbed Greek bond holders of 50-75% of the value of their holdings, even though it was billed as a 1-time event, it' looking more likely that the "Haircut" will hit Spanish bond holders which means expect the secondary market to dry up even more and oon the primary market-Spain's only way to finance deficits short of a bailout may soon also come to a grinding halt. After all, it was just this week that Germany, the strongest bond in Europe saw it's 10 year auction of $5bn Euros go down the tubes with offers on $3.5 bn only, a failed auction in the strongest EU nation, what of Spain? A bailout may be needed sooner than most expect and Spain is still unwilling to accept the bailout terms, whatever they are, Spain has said, "No CONDITIONS!".



In the US, Chicago PMI was released today...
Released On 9/28/2012 9:45:00 AM For Sep, 2012

	Prior	Consensus	Consensus Range	Actual
Business Barometer Index - Level	53.0	53.0	50.2  to 54.0	49.7

PMI-manufacturing broke below 50-contraction in manufacturing, but in this particular report, this is the first time this has happened in 3 years, that's right, September 2009 was the last sub-50 print and quite a miss of consensus of 53!

The devil in the details, the F_E_D's new QE3 mandate, employment suffered a the employment index hit a 30 month low! New Orders and Deliveries saw the 3 month moving average at the lowest since mid 2009. Capital expenditures on equipment hit a 17 month low. Although we have been seeing this trend world wide in maufacturing and none should be a surprise, it's still hard to believe that input costs or "Prices Paid" soared from 57 to 63.2.

To summarize, the trends in manufacturing have been a lack of new orders, higher inventories, slower shipments (see the transports index), sliding employment, lower capacity utilization due to high inventories and a lack of new orders/deliveries and finally, rising input or material costs. This report today was important as it confirms almost EVERY SINLGE manufacturing report not only in the US, but worldwide. When input coasts rise and bottom line profits fall, they call that "Stagflation", stagnate growth combined with rising inflation. This almost guarantees Q3 GDP will be horrendous as we just saw the final Q2 GDP reading yesterday and that wasn't pretty.

The first Q2 GDP print was, then revised to a higher 1.7 with the final reported yesterday at a very grim 1.25%, this was lower than even the lowest consensus estimate of 1.4% and the lowest print since January 2011.

Now for perspective, follow the trend in GDP across the quarters: Q4 2011: 4.1%; Q1 2012: 2.0%; Q2 2012: 1.25%

I wish I was better with excel so I could provide an info-graphic, but I think the trend from 4.1% to 
1.25% is quite clear and obviously heading for recession.

I would guess that Bernie had advance knowledge of this data before starting QE3, but as usual it seems the F_E_D is a bit behind the ball, but at least know we know why the F_E_D pulled a panic move in what otherwise to that point had been a non-panic environment. I just wonder if there' more we haven't heard of yet?


Not that it probably matters much, but after Spain was cut to Junk credit yesterday, Fitch warns that the UK is likely to lose their AAA status next.

And the dichotomy between inflation driving unemployment and every other metric in manufacturing showing no signs of improvement that would be even a start towards more hiring and the F_E_D's inflationary QE3 policy come crashing together and seem to make things worse, not better. As I stated when QE3 was announced, the employment cover story (as QE has never been shown to help employment) was likely nothing more than a cover story as the F_E_D probably had data on something much worse and didn't want to start a panic. Now at least we know the employment theme likely was a cover as Q2 GDP hit the skids massively and we see GDP go from 4.1% 2 quarters back to 1.25% for Q2, we are probably only 1 or 2 quarters away from a recessionary print. Still the question lingers, "Is the F_E_D aware of something even worse?"

Market Update-Consolidation

As I stated when the averages first started leading positive before noon, I'd rather have seen a slower forming, larger base. As we see some slowdown in 3C and price, I suspect that may be what is happening.

Similar signals are in all of the averages as well as futures o I'll use the SPY as an example.

 1 min SPY has lost intraday momentum here, this could be a lateral consolidation or as I would have preferred to see, perhaps a deeper consolidation. I hoped to see something more along the lines of this...

 more of a rounding or lateral consolidation with 3C improvement.

However from where we are now, we could still consolidate sideways a bit and add to positive divergences or pullback in a small "W" like price formation, as long as the pullback saw 3C moving higher, then the bounce continuing would still remain the most likely outcome.

 The 2 min chart of the SPY, which was lagging this morning, even saw a fast leading positive divergence, it has given up some of that.

As long as the 3 min chart holds up, then this is just intraday volatility and not a big deal, but should the longer timeframes start to deteriorate then the second option I mentioned this morning as the least likely, deterioration of the bounce, would be a concern for the near term.

We do have to consider it is quarter end and there's window dressing and the likes going on.

FB seeing intraday profit taking

I now some of you are trading around FB so today's nice gains are something you'd probably like to hold on to, there's a negative divergence, likely on profit taking as FB hits resistance.

FB 1 min intraday

FB Amazingly on track

The bottom line is FB's base is looking very good.

On the 24th this week I updated FB, the first link was to a post the previous week in which I warned FB was about to pullback. 

In fact, I even showed a chart of what I expected to see in FB on the pullback in the update (first link).

This is the chart from that post and below is the commentary that went with this chart.

"Although an ugly day, it doesn't do much damage to the base we expected to form back at the start of August, in fact thus far it's quite a bit bigger than I thought it would be. Today's price action introduces a bit of symmetry in what appears to be a H&S bottom with the right shoulder starting today."

Now we know what we expected to see, a second shoulder as part of an inverse H&S base, here's how things turned out...

The symmetry mentioned in the earlier update is now in place as FB moves up nearly 8% today on a longer term base we have been interested and invested in.

The other charts...

 The right shoulder area on a 30 min chart shows a gap that may cause some resistance/volatility in the area as we approach it, above that is the base's neckline.

 Intraday 1 min, FB looks a bit frothy at a +7.8% gain on the day, but keep going...

 The 10 min chart shows a negative divergence from last week which is the one in which I warned about last week, we see a positive and then leading positive divergence as the right shoulder is formed exactly as expected.

 The 15 min chart shows the same trends with a very strong leading positive divergence.

This keeps our base looking very strong as you can see its entirety on this 4 hour leading positive chart.

The bottom line is you can trade around FB, but I rather just hold the long and let it develop, FB has surprised many before and we caught that move to the upside, it also move on its own against or with the market, it's full of surprises and I suspect this base will provide the next big surprise for the FB haters.

Spanish Banking Shortfall comes in right at consensus

$60 bn, as expected. It's hard to say a $60bn deficit is good news, but the fact it wasn't worse than consensus could very easily be spun in to positive market propaganda. They have a webcast going now, we'll see how the market decides to twist this data, from the very fast positive divergences, I suspect the data was in the market before we heard about it.

Market Charts

I went ahead and added that half URXY Russell 2000 3x long ETF back, although I'll be keeping  close eye on it especially with the Spanish banking review due out any moment.

 The DIA 1 min moved quite fast to the upside, this makes me a little nervous as I'd rather see a broader base put in, but perhaps something is known in the market about the Spanish review already.

 The DIA 10 min is still in positive position, thus the pullback today looks like a good opportunity to add some long exposure to play the likely upside reflected on this chart.

 IWM 2 min moved very fast as well, leading positive.

 The 10 min chart is like the DIA 10 min.

 QQQ 2 min also moved to a leading position very fast.

 Here's the bifurcation seen in the market since QE3 was announced, the SPY is not showing the same momentum, although it doesn't look bad here either.

The 10 min chart is still in leading positive position making a continued bounce likely and today's dip a good way to get some long exposure without too much downside risk on the pullback.