Minutes

This is a tough post to try to put together, when you see things in bits and pieces it's difficult to try to see how they all fit together. Beyond that the market is do complex and dynamic, any one of the topics or assets I'm going to touch on could have pages written about it, but hopefully you'll get a composite picture. *Let me just say as well, I'm not married to analysis or opinions, if there's a good reason to change it or data changes, I have no problem changing it.

The F_O_M_C's September policy meeting minutes were the attraction of the day, but I wonder how many average people in the market really dig in to it like the pros do, they notice and analyze changes in where comas are placed. I was actually surprised today, to me the minutes said a lot more than I thought they would. 

Before the minutes were released in this post I posted some commentary from a Goldman Sachs analyst, not usually my favorite, but he had said some things that I and many others have been thinking or noticing. Within the opinion that QE3 was priced in to the market before it was announced (and this is the only QE in which the market was announced and wasn't at a significant low), "Front running the F_E_D". Whether correct or not, F_O_M_C members validated that line of thought in the minutes as follows...

"Some participants thought past purchases were useful because they were conducted during periods of market stress or heightened deflation risk and were less confident of the efficacy of additional purchases under present circumstances.

The GS analyst went on basically to say with QE already discounted it would take economic data to move the market higher, essentially the market appreciated so much during bad economic data it had already priced in QE and we're pretty much even-Steven so now it's about the data, from his report...

"But history also suggests that equities could make further progress as long as the macro data surprise to the upside. We likely need to see similar improvements in the cyclical data now as well to see another leg higher in markets."

Within the minutes there are several ideas floating around and a few debates along these lines...

Again from the minutes...

A number of participants questioned the effectiveness of continuing to use a calendar date to provide forward guidance...

Many participants indicated a preference for replacing the calendar date with language describing the economic factors that the Committee would consider in deciding to raise its target for thefederal funds rate.

It was noted that forward guidance along these lines would allow market expectations regarding the federal funds rate to adjust automatically in response to incoming data on the economy.

I've talked about the nervousness I saw in the market when Bernie was asked in the press conference what would happen to QE policy if inflation picked up, his answer was basically there would have to be an adjustment and with that, the market couldn't be sure they'd get QE as laid out if changes in inflation could provoke changes to the program.

Today more uncertainty was added in the discussion above from the minutes, a date is as certain as you get, that's why the market started to deteriorate before QE2 was over, they knew the date when it would end when the program was announced. Open ended QE3 seemed to do away with that, the guidance of ZIRP years out took away uncertainty. However tying policy to economic data (which is perfectly logical) also takes away the certainty. I think whatever tomorrow's NFP number is, we'll see this effect in the NFP since the market knows the F_E_D is already thinking along these lines-CERTAINTY hasn't been removed yet, but the mere talk of it removes certainty and there's nothing the market hates more than uncertainty, just the very question asked of Bernie mentioned above put in a top for the market that day at that exact minute-2:26 p.m.

To introduce even more uncertainty in the minutes, the idea of using economic data for policy response had its own uncertainty tied to it, again from the minutes...

"However, reaching agreement on specific thresholds could be challenging given the diversity of participants’ views, and some were reluctant to specify explicit numerical thresholds out of concern that such thresholds would necessarily be too simple to fully capture the complexities of the economy and the policy process or could be incorrectly interpreted as triggers prompting an automatic policy response."

This is probably too forward looking, but may be material, as ex-F_E_D governor Kevin Warsh said and as we have seen with the popping of the Tech Bubble and probably the housing bubble too, "Entering policy is the easy part, it's the exit that is the 4 letter word"

Again from the minutes...

"A few expressed skepticism that additional policy accommodation could help spur an economy that they saw as held back by uncertainties and a range of structural issues. In discussing the costs and risks that such a program might entail, several participants reiterated their concern that additional purchases might complicate the Committee’s efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so, raising the risk of undesirably high inflation in the future" 

I'm just wondering out loud if some of this uncertainty being created in the minutes wasn't specifically there to cause traders pause, no one wants to be the guy who buys and then have policy shift or change. Or in other words, is the F_E_D using some of this uncertainty to try to de-program the "Buy the dip" mentality to try and avoid further asset bubbles and inflation?

Finally on the F_O_M_C minutes, I wondered what the real concern was, financials maybe? The real concern may indeed be financials, but more directly connected to structural problems and even more importantly, Europe.

From the minutes...

"participants also observed that significant risks related to the euro-area banking and fiscal crisis remained, and that a number of important issues would have to be resolved in order to achieve further progress toward a comprehensive solution to the crisis."

I think it would be fair to say that the problems started in the US and Europe, already weakened by their structure, caught the bug. We have seen the market come unhinged over Europe, it only makes sense that the F_E_D is worried about what will come back across the Atlantic as the Euro Financial risks play out; the world has never been this small during any previous downturn in any country so there's no model to look to. Something is causing the F_E_D great concern as Warsh said, the policy wreaked of panic.

If any of this is even partly correct with regard to how the F_E_D measures policy response via Economic Indicators, then the market may have some real concerns. I'm not going to go in to an exhaustive list, but just mention a few things that hopefully will ring some bells and you can flesh them out: Manufacturing problems and specifically problem with input costs or inflation; valuations now vs. past valuations during prior easing periods as voting members voiced concerns in the minutes about the same, earnings problems with negative pre-announcements now at the same area as 2009; Chinese problems (as evidenced by Australia's RBA rate cut this week) and many more indications going back to 2011 on these pages; EU problems and specifically the largest domino, Spain (again as evidenced with surging sovereign debt yields just today in Spain and Italy); the fall of the BRICS that were supposed to be the life-line; Structural government problems (remember we may be downgraded again very soon); Geo-political problems (just this week Syria and Turkey were hurling artillery at each other not to mention China/Japan and the radical Islamists who are on the scene again. Those are just a few, but in general, the macro-economic data world-wide.

I can't cover everything I've seen today in charts, but let me touch on a few near term/longer term assets in no particular order.

AAPL-not just because it's a trade I'd like to re-open soon, but because it's the single most significant stock that acts as a barometer of the market.

AAPL had a parabolic move through 2012, I've showed you the gains since the 1980's and how huge they have been compared to the gains of 2012 which have been significant, but unless you are using a log chart, it's deceiving. I said that I thought AAPL would see a "U" shaped reversal from the parabolic move and considering the size of the move and the price pattern on the chart below, this is a tight "U" shape. This isn't the best annotation, but...

This looks to be a H&S top in AAPL, I've shown you volume is correct for a H&S top. My gut feeling is that although AAPL could break down here and be a Broadening top instead (as mentioned, every H&S top starts as a Broadening top first), I don't think it's done; I do think there will be more symmetry and I'm looking to open a short on one more shoulder around the $680-$690 level.

AAPL 1 min intraday, 3C worked perfectly on every reversal intraday.

The 3 min chart called the 2 main reversal, down in the a.m. and the typical afternoon rally which didn't go as well today as previous days, but the 3 min chart is still in a leading positive position for now, so with what I have in front of me, I'm going to say I don't think AAPL is done.

Longer term (and I have looked back at longer term 3C charts during QE and they've worked fine), the 60 min chart shows something interesting. If we apply volume analysis of a H&S top to the 3C signals, then it's near perfect. At this point in the pattern the worst should be coming off the right side of the head (the move down) and that's where we have the lowest leading 3C reading. At the end of a complete pattern, the final right shoulder should look the worst.

Zooming in on the same chart (the right side of the had at the far left, the positive divergence looks to be there to form the final shoulder/s and this is also what makes me think AAPL isn't quite done. It should be remembered this chart looks more bullish than it is because of the zoom applied, the chart above is more in context.

Finally the 4 hour chart shows what we should see in a H&S top, the head should be the worst, there's no positive divergence in this chart because it wouldn't be large enough to show up here as it wouldn't be true accumulation, just enough to halt downside pressure and get another shoulder formed.

I'll be looking for that shoulder and the signals to try to open a position at its top. Please consider AAPL as more than just 1 stock, remember the weight it holds on the NASDAQ (about 20%) and how correlated all risk assets are.

Gold... I don't have a long term opinion yet on gold, I'd assume any dollar debasement would make it an attractive asset, but while it has been one of the better performers since QE3 was announced, I don't think it has done anything like what most would have imagined on QE3 so far.

GLD has shown at least 2 head fake moves already from this tight range, I suspect today's move is also "part" of a head fake move, I don't feel extraordinarily confident that it is done as they can last more than a day, or else I would have said so today as part of a quick trade.

GLD's 3 min chart didn't act well all day, it wasn't alone though.

YG or Gold mini-futures showed very similar behavior in a totally different asset (futures vs an ETF) and with a slightly different version of 3C, this is a 5 min timeframe; both charts look like the distribution we'd expect to see in a false breakout.

I'm not reading any further in to this than the timeframe and time of day suggests, but there is a clear negative divergence at the release of the minutes on a slightly faster chart-2 min. I'd just say as an asset very sensitive to QE, the minutes probably were not well received by the market-no long term predictions or anything more than what I just said. I think the market price action would suggest the same as today could have been very different on the release of the minutes.

USO/Oil...

Yesterday I talked about USO looking like it wanted to move up, but would likely need some lateral price action to accumulate enough to make the move. Yesterday USO had a bad reaction intraday to the Syrian/Turkish skirmish and others claim the inflationary pressure in Iran which is extraordinary, yet today USO did move up to the closing price of the second of Oct.

As USO moved down yesterday I pointed out the continuing positive divergence in USO and felt it would move higher, at the end of day today it saw what looks like profit taking, maybe it pulls back a bit, but I also think USO is not done on the upside.

The 10 min chart in USO is in line and leading positive, a pullback would be a nice place to enter a quick trade, maybe a leveraged ETF or some calls.

The 30 min CL (Crude Futures ) chart looks almost exactly the same as above.

The Euro

 Here's the Euro in orange vs the SPX in green, note the channel and the break of the channel in the Euro at exactly 2 p.m., that was a bit of $USD strength, the same is seen in the $AUD; a small hint, but it's often the little things that give us fleeting glimpses of important information.

 FXE/Euro 2 min chart was used to predict today's early market direction using the positive divergence as the market averages were not giving good signals until today, I think it was uncertainty over the minutes. In any case, the Euro saw weakness in underlying 3C action and in price at 2 p.m.

The 3 min chart shows the same. If we didn't have the NFP tomorrow, I'd guess that the Euro would see downside and the market with it, things as they are, the NFP will be the dominant theme tomorrow.

The market-SPY, ES, QQQ, NQ...

The market has been HIGHLY correlated, there was a time when you could find sector rotation even on risk on or off days, there was a time when you could find real hedges, but that hasn't been the case since 2009 and QE. I'm still leaning more toward a bifurcated market and not one based on what use to be sector rotation or safe haven assets, but one based more on value as I have elaborated on recently so despite whatever major market themes emerge, I do think there will be a wild, probably never seen before to this degree, bifurcation of the market where there will be longs that perform in a down market and shorts that perform in an up market. However, we have to make the best decisions with the information we have which is why I've been trying to collect as much as I can and am still writing this post nearly 3 hours after I started.

SPY

 On an intraday basis, the 1 min chart shows clear negative underlying action at the 2 pm mark-the release of the minutes. There's a clear triangle in place and all things equal, even with a negative divergence, a move out of the triangle to the upside would be my expectation, even if it turns out to be a head fake move which the intraday action seems to support. All things aren't equal tomorrow with the increased importance on macro-economic data after today and with the Non-Farm Payrolls tomorrow morning. Still, based on the chart, I'd expect a break out of the triangle and to see negative action in to that. If that does occur, especially on a bad NFP, I'd likely enter a short position taking in to consideration the intraday trade/charts.

 The 5 min chart's negative position is why I feel that way.

 Longer term many of us remember the June 4th head fake lows on a bearish price pattern, we knew in advance that there was accumulation and the break was an excellent spot to go long, you may recall I added a bunch of leveraged longs to hedge core short positions I didn't want to close at the time. You can see that very positive divergence on this hourly chart, both relative and leading positive. "If" we go with the "Front running the F_E_D's QE3", then this likely would have been the spot it started. The chart has a leading negative divergence and doesn't look good from here. I don't think a collapse is imminent in the next days or week, there's a positive divergence within the leading negative that perhaps will form a large triangle or some other pattern.

 Here's the 6 min chart zoomed in, as you can see it's not so much a positive divergence as it appears above, but an in line or trend confirmation signal, I'd expect this goes negative before any real strong downside enters the average. That being said, while rare, we have seen 60 min charts move to a positive or negative position in a single day. This also tells me something about the tone of the market, there isn't a large or any positive divergence, I think after QE3 has been announced and prices have fallen, that is significant as to the market's outlook and probability of QE3 already priced in as the F_O_M_C minutes suggest from "some participants" (see above in the minutes quotes).

 The 4 hour chart shows confirmation early in the year and a negative divergence from March through April 1, this is when we opened the core shorts. There's a relative and leading positive divergence at the June bottom and that same look of selling in to price strength we see above on the 60 min chart leading to a nasty leading negative divergence much bigger than the top earlier in the year.

ES-S&P mini Futures...

 We see in a different asset class with a different 3C, a similar negative divergence today in the futures.

 The 30 min chart shows a negative at Sept. 14th and a leading negative in the range before the futures fell, we have a small positive divergence and recently more negative action. I find the SPY/ES charts similar in look and expectations based on the divergences to AAPL.

 The daily Futures chart is a significant timeframe, they also show the confirmation early in the year, the March-May 1 negative divergence sending the market lower as well as the leading positive divergence at the June 4th lows and a leading negative divergence in to higher prices, or distribution in to higher prices. These charts are remarkably similar.

QQQ... A brief look at the bullet points in the Q's and the NASDAQ futures and that's it for tonight finally!

 Intraday, the same negative reaction in the QQQ on a 3 min chart as the QQQ and AAPL tried to run in to the close.

 Jumping to the 4 hour chart, we have a different ETF, all different stocks and a different version of 3C, but the same signals: Confirmation of the early 2012 uptrend, distribution in to March-May 1, a leading positive divergence in to the head fake move that ended on June 4th as a bottom and a leading negative divergence currently.

NQ-NASDAQ mini Futures

 The 15 min chart shows the same kind of negative divergence as the other charts (SPY/ES) in the same area.

The 1 day NQ chart shows a little different, but all the same features as the others, confirmation of the early 2012 uptrend, March-May 1 distribution, a leading positive divergence in to the June bottom and a very ugly leading negative divergence now.

Sorry for such a long post, believe me, my two pointer fingers hurt more than you can imagine, but I hope this gives some ideas and perspective.

Have a great night, Friday and weekend. See you soon.

Closing Market Update

It's clear the market didn't like what it head from what we can observe with some real signals finally, but at the same time price hasn't moved all that much, this means to me that there's still a decent chance to get in to some positions on the short side in to some strength, I'll also be covering some long positions as soon as I start my scan after the close.

 DIA

 IWM

 QQQ

SPY

NFP, USO and Patience

As the F_O_M_C minutes read (at least what I've seen), that would suggest that macro economic data is going to have a lot more pull moving forward, the F_E_D just went from a time/date to a quantitative analysis method or at least that's what they'll be trying to do.

This means the market is likely going to try to front run the F_E_D again, if macro-economic data is the yard stick, then tomorrows Non-Farm Payrolls will be the first big event of this new outlook. I would say be patient, we'll get some ideas up tonight and how to play them.

USO really looks like it wants to correct to the upside despite the recent troubles, it's having more today, but I would still urge patience, I think there's still an opportunity there, in fact I think a whole new range of opportunities is about to open up.

USO charts...

 USO 60 min went negative fast and hard in a small space, it has a relatively large positive divergence looking like it really wants to correct to the upside.

 Intraday 2 min is negative probably on some dollar strength

 3 min is as well

 5 min is in line so this may very well offer a pullback in which there's less risk on a long position.

AAPL Not Reacting Well Either

I'd still prefer to try to hold off for a move in AAPL higher that forms a shoulder, but since it tried to move higher post the minutes, it's ran in to trouble.

IBM

If I had time, I'd be looking to add a bit to IBM short, there's a little triangle between the 1st and the 4th so I'd leave enough room for a possible break above the triangle on a head fake move.

Subtle Changes

To make money, you have to see what the crowd missed.

There are subtle changes underway, here are a few- they aren't bullish.

 High Yield Credit is the usually the choice of traders when looking to express a bullish opinion, it's significant that its down today vs the SPX, but more so that it didn't mov at 2 pm today.

The $AUD as a leading indicator among currencies, dropped exactly at 2 pm.

  This doesn't look like much, but remember the Euro analysis yesterday to see which way the market would open today? At 2 pm exactly the Euro dropped, which means the $USD gained, that's not bullish for the market/risk assets.

 Here's the 3C chart (2 min) for FXE/Euro, not looking too good there is it?

 migrtion to the 3 min chart, considering it has only been 1.5 hours, this is on track.

 The $USD after falling all day jumps up even a bit, EXACTLY at 2 pm.

 $USD 5 min 3C chart, relative positive on the open, leading positive in the afternoon.

GLD, no matter what price is doing, the 3 min chart keeps digging lower in a leading negative divergence, the 10 min chart is starting to lead down too, almost every timeframe on a trend basis is already negative.  I'll gladly hold GLL.

Small Caps

I had a member question about small caps and they are an interesting group I think worth looking at. Keeping in mind we only have an hour of post minutes data I don't want to jump too fast to conclusions especially as I haven't had a chance to look at a lot, but I can see Credit is starting to fall apart which is big when combined with what we have already.

Here's TNA which is in a very common set up that you'd expect to see break out to the upside, even if it was on total distribution, which is still very much a possibility and possible trade.

 Since TNA formed a bearish daily candle on the 14th (almost a shooting star) with increasing volume (a great reversal signal), it has formed a range, this isn't or isn't meant to look like a bear flag as it doesn't slant up and volume hasn't fallen off. The range is so obvious that a break above it is a VERY obvious target even if only for HFTs looking to make money on the order flow they get from creating volume. Lets be clear, small caps are a juicy target for an upside breakout, which is not to say a Bullish upside breakout as most shorts we've entered we have entered on this exact kind of move with the 3C trade negative.

 There was 1 positive divergence that halted the downside and put small caps in a range, only today did the 10 min chart put in a positive leading divergence as if they are getting ready to break these out to the upside and there's a lot of momentum stocks and high beta stocks in there, the typical QE stocks.

 Longer term on a 30 min chart you can see the underlying trade hasn't been all that bullish, in fact leading negative so even on a breakout I'd be looking for confirmation to short the breakout as a head fake move.

 The 60 min chart is also leading negative after having been in line since the positive divergence at the June 4 lows.

 However today after the minutes at 2 p.m., the 1 min (divergences HAVE to start somewhere) went leading negative.

The 2 min chart followed. I suspect this will probably continue based on what I've seen thus far.

I'll also be watching for a breakout as that zone is too obvious, if there's confirmation, then TZA would probably be my choice (long)