Closing Wrap

If I was asked by a friend, "What happened in the market today?" my answer would be, "Nothing!" which is exceptionally ironic given that ES dropped about 50 points last night to limit down in one of the most volatile moves we have seen probably this entire year.

On Quad Witching Options Expiration, the market behaved EXACTLY as you'd expect for an op-ex Friday, stayed in a range and didn't deviate much from that range.

Now the very basics here are that there's long term weakness in the market, smart money has been moving out for sometime

Confirmation to the left, distribution from March to May 1, after the Seasonal Adjustment farce of early 2012, then the June 4th lows with a decent accumulation period (relatively speaking) that was sold in to higher prices the rest of the year. This last rally from November 16th is in a horrible position, there's much, much less long support for stocks than ever before through the entire year.

 So when a fundamental (real event) that the market has no inside line (inside information)  on, actually takes place and the market has to react instead of do what it usually does which is to move on an established course, the lack of support, the fact it happened during an illiquid period (after hours) and the fact that the rise of HFTs has nearly killed the traditional liquidity providers (I'm talking more about stocks now than futures) leaves you with one thing, a hollow shell that was monkey-hammered hard. What would you expect to happen?

 Look at that 50 point drop last night and then a range that lasted through the entire overnight session and today's regular session trade barely did anything outside that range. We had an early bounce that took ES 3 miserable points above the range highs ($1425) to $1428. On the downside nothing happened either.

Trying to get a half way decent 3C signal today was like pulling teeth, there wasn't a single signal among the major averages that I would have traded. As I said earlier, it seems that the PPT was holding the market together so op-ex on  quad witching didn't take the other half of BAC's market cap in lost contracts or algos were working or a combo of both.

The fact the signals were so small, so frequent and so short makes me think it was algos making a series of small corrections whenever need be to keep the market on a steady course just as you would as the driver of  car... slight corrections, no turns or U-turns.

I looked through a lot of leading indicators and assets, I did see AAPL looking a little like it got some short term wind under its wings, maybe to fill a gap? Also started acting better in the afternoon, but this was something we talked about in advance yesterday.

I'm not sure if this was  factor, but it did seem like ES saw selling at the weekly VWAP every time it came close or hit it (3 times)

If you don't believe the algos were running things, take a look at CONTEXT / ES...

ES clung to the CONTEXT model so tightly that the correlation was nearly perfect, just under 1.0

Leading Indicators on the day alone were dull, credit clung to the SPX which was to say did nothing, Yields were the same and Commodities did stand out to the upside.

Interestingly, the $AUD now has a nearly 2 trading week long negative divergence with the SPX and getting worse in intensity. Intraday it nearly went straight down while the Euro and $USD were much more flat.

I'll look around this weekend, I figure if I find anything it will be amongst a trend in stocks and ETFs, otherwise, today was the most boring day after one of the most exciting nights just hours earlier.

Have a great weekend, don't be surprised to see some posts up on ideas, trades,  and whatever I may find, perhaps part two of the "Head Fake Move".

AAPL

I just closed about half the AAPL Put position in total, I don't like a few intraday signals out to 5 min and here's a little profit there, hopefully I can maybe add back on some quick pocket of strength after this op-ex craziness is over.

They were filled at $31.35 so it's a slightly better return than what is shown above (+23.66%)

This is the chart -3 min, not a huge deal.

Dropping a little more AAPL Jan Puts

Market Update

I'm about to set off on my 100 charts in 30 minute marathon looking for that one clue that stands out. Today has been an enormous pain in the neck due to 2 things, 1)Scaling of the charts so they make sense to you has been very difficult and 2) the signals today have been really difficult, I am almost sure that the signals are difficult because algos are dominating the market to make minute adjustments in microseconds, one-one millionth of a second or if a microsecond was a day, 11.5 years.

In any case, I think signals have been exceptionally difficult because of algos trying to maintain price for Options Expiration.

This is why after tis update I'm going to look any and every where else as fast as I can- a good signal will jump off the chart so I'm use to looking at them fast.

Here's what we have as the latest batch of signals.

 DIA 5 min represents the furthest the market could take underlying signals today, generally they are somewhat positive, in this case that may be algo support to hold the market in place, it's hard to say as this isn't an everyday occurrence.

 Most recent DIA 2 min is going negative

 QQQ 2 min with a decent positive divergence today intraday-remember intraday signals are not as strong as longer term, not even close.


 QQQ 1 min showing some negative action, but very small as of now, perhaps it grows.

 SPY 5 min with a slight leading positive divergence.

 SPY 1 min with recent deterioration to a small leading negative divergence.

Below are the S&P Futures (ES) 1 min for today.

 The green arrow is 9:30 a.m., if this looks like a mess, a tangle, incoherent, then that's exactly what I'm trying to portray to you, this is what the whole day has been like.

 You can find signals but they flip back and forth which makes me think algos are managing the market today as they move faster than a human possible can.

The most recent 1 min negative divergence in ES , like many of the averages above.

Financials Update

I'm trying to keep a close eye on these as I'm getting a lot of email interest in a Financial short like SKY of FAZ, I will say most of the day has been really dull with a few occasional signals that seemed like something bigger may be brewing.

At present, XLF and FAS (both long Financials) are showing the start of a new 3C intraday trend and that is negative.

 XLF 1 min negative

FAS 1 min negative.

I can't confirm a positive on FAZ yet, but it's 2x leveraged cousin, SKF is confirming.

MCP Update

You may remember yesterday's post about MCP's triangle and the break above that failed and me mentioning a break below that may also fail in a Crazy Ivan shakeout.

Well nothing on the 5 min chart or longer ha changed in MCP, the only thing that has changed is price dropped below as we suspected it might and the 1, 2, and 3 min intraday charts are all going in to positive divergences here, the 5 min and longer are already positive so if you are long MCP, it may be worth waiting a bit and seeing how this plays out, right now it's looking favorable

Volatility Indicators

I'll follow this up with something a bit more comprehensive, but near term trade looks ready to take a dip as VXX and UVXY are in an intraday afternoon positive divergence and XIV is in a negative.

RIMM Update- Amazingly Close To Our Analysis

I'm not talking about yesterday's analysis that suggested RIMM does make a move lower toward our pullback level set earlier in the week in this post...

If you look at the first post linked right above on Monday December 17th, it was clear I was expecting a pullback in RIMM, in fact the areas I highlighted as probable areas included the X-Over Screen's normal pullback area between the 10 and 22 bar (2 day) moving averages, which is where RIMM is between the two which are at $12.37 and $10.34 (RIMM at $11.09). I said specifically,

"Typically in a new trend the first pullback is to the yellow price moving average, the second is typically between the yellow and blue "

And that's EXACTLY where RIMM is at right now.

I also provided a Trend Channel stop for RIMM on Monday, it was...

"with a longer term trending stop around the $10 area, but never put stops at whole numbers like $10 or even close ($9.87 or $10.31 would be my choice and I wouldn't place it with my broker-just mental and on a closing basis only)."

So we got to the general area we were expecting a move to, albeit a lot faster than I'd have preferred, but we are there and RIMM still has some very bullish long term charts so we will be watching for signals suggesting a move down is coming to an end so those who want to get involved with TIMM long have a chance and those who I suggested on Monday consider taking some profits off the table, can replace the position at a better cost basis with those profits in hand.

I suspect it will take RIMM close to a week once it is ready to reverse to put in the normal reversal process as we almost never see a "V" shaped, next day reversal; it's more of a process. During this time we will also make sure that RIMM did not sustain any significant damage that changes the big picture.

Financials Update

If you missed the earlier post on Financials today you might want to reference it .

There's something I call, "Getting lost in the lines" which basically means you are looking at something so closely that you miss the bigger picture, it's also known as being "Myopic".

I don't want to nickel and dime a position in Financials (short) to death, I do want to see the best signals with the highest probability and that's what this is about. If I have to chose a position long or short Financials right now and can't touch it for 2 weeks, I take the short side, but my purpose is to give you an edge, not a gambler's best guess.

Financials-XLF

 The long term-"Big Picture" 60 min chart shows Financials being heavily distributed in to the 11/16 rally. This means the uptrend has very little institutional support, it's likely that institutional money is short financials and that the real trend that should make the most money is going to be down.

 Financials at a closer look-although we can see what we see above, that doesn't guarantee a successful trade without a good entry, trade management and exit, that's the purpose of these charts. XLF was in a flat range of 12 cents while it saw a leading positive divergence, not huge, but strong enough to take financials on a breakout above the 2012 resistance level right after, that was the point. Once we get that breakout we are looking for distribution and we see the 5 min chart as shown earlier, giving us that signal.

 Intraday today, the 3 min chart is in line, it's not giving us an edge right now, but rather saying the current intraday trend has nothing stopping it so higher prices intraday are possible.

FAS (3x Bull Financials)

 The 15 min chart here, like XLF is also in a negative divergence since the break above resistance, that's good for the trade shaping up, but it doesn't give us the tactical entry.

 Again the 3 min chart, just like financials is in line, there's no short term edge in making an entry right here and now.

FAZ (3X Bear Financials)-

 This is the ETF I'd like to enter/add to at the right time, the 15 min chart is leading positive as it should be as it is the opposite of XLF and FAS above.

However the 3 min intraday chart is leading negative a bit suggesting lower prices are the highest probability intraday today, I want to enter at the lowest price possible in FAZ while having excellent 3C signals.

The one thing to think about is "What does the market do Monday?" after a long weekend of a lot of talk. Financials could plunge with the entire market so I'm hoping we get a great signal before the close, but you may want to look at the first chart, the big picture and consider whether you want some exposure to Financials short here just in case.

No one knew for sure what would happen last night in ES after the vote, so along the same lines, we don't know what will happen over the weekend, but the bigger picture has a solidly negative bias.

Charts

 DIA 3 min leading positive divergence-this is still intraday, but it seems as if a stronger intraday position has been accumulated at the lows for a bigger intraday move.

 The DIA has also been showing the best relative 3C performance vs the other averages lately, the IWM showing the worst. This isn't to say the DIA has been showing positive performance, just better vs the other averages. Here we have a 5 min leading positive divergence.

 IWM 1 min actually showing a negative divergence in to yesterday's close, the recent new high in 3C today while price is not currently at a new high is what makes this a leading positive divergence.

 The IWM 10 min chart is interesting because it shows on more important timeframes, where it really counts beyond intraday or day to day noise, there's no improvement at all.

 QQQ has also been one of the better 3C performers today with a clear leading positive divergence.

 That migrated to the 2 min chart which also went leading positive, it seems there was accumulation around the 12 pm area.

 QQQ 15 min shows near term reversion to the mean on a leading negative divergence, however if this were scaled out to the longer term trend, the QQQ would need to be close to the $61.25 level to meet the divergence as it stands today assuming it didn't get any worse-please don't take that as exact science or price targeting, I'm just trying to give you an idea of scale.

 SPY with the early positive divergence and also a noon-ish accumulation area and a leading positive divergence. To be clear, these are NOT, clean, crisp, clear divergences, except maybe the QQQ 1 min., these have been struggling as I suspect there are  lot of undertones pulling in diffrent directions.

 SPY 5 min shows a small positive leading divergence, it's clear the afternoon trade seems to show more accumulation than the a.m. trade.

VXX showing a new leading negative divergence, I had to draw a trendline on price to show the new low in 3C was not accompanied by a new low in price, thus the negative divergence, the point again being these are not clean, strong, clear divergences.

Market Update

There are several signs, although there's a lot of pressure on the market, that still suggest the market is getting ready to make an intraday move or the next leg up intraday.

The Q's are showing this, the SPY, the DIA and to a lesser degree the IWM which has been the weakest in underlying trade for days now.

Also short term futures are indicating the same.

I'll have charts out shortly, I wanted this update to reach you ASAP.

Volatility

I was looking for the post I put out or at least I think I put out showing the short term Volatility Futures with a substantial positive divergence where it counts. This is important because it tells us what Smart money is doing and it fits our model of what we expect and have seen them doing. Since I couldn't quickly find the post, I just recaptured the charts.

 Most of you know the VIX, most of you also know the VIX of the late 1990's and 2000 is not the same VIX of today as the index was re-worked in 2003 to allow for a broader range of input data using the S&P-500 whereas before the data used was much more limited. It's often called the "Fear Index" as a rising VIX indicates traders are more fearful, a low VIX indicates traders are complacent.

The VIX represents an estimate of 30 day forward looking S&P volatility, there are measures for the NASDAQ and Dow as well (VXN and VXD). Today's jump in the VIX represents that fear, but there's more to the story.

 A pop outside of the daily Bollinger Bands is often considered a significant event, although the bands were rather narrow the last several days.


 As you can see intraday, the VIX has seen a little move to the downside.

However what may be the most important information here is the grab for protection via Options hedging, which is one reason the VIX is higher today, this is not a new event that just occurred today as I'll show you.

If large funds have long exposure they think they can't unwind fast enough without suffering horrible fills on their orders, an alternative is to hedge those positions. A very simple example is you are long a stock that you fear may go down over the next few weeks or so, your position is so large that if you tried to sell it quickly you would put so much supply on the table that every shark watching the tape, market maker, specialist, and certainly HFTs would know what you are up and to and they would front run your order causing you to get a very low price execution. When dealing with positions that are hundreds of thousands if not millions of shares, this is a problem that we don't face or understand unless we get involved in some very low volume positions (typically under 100k shares a day) so buying a protective put to hedge downside in the stock is an option; for whatever you lose in the actual stock, you make up for in the Put, thus you are hedged, but there are many different themes and complex strategies involved and I'm just giving a very broad, simple example.

 Since I can't use 3C on the VIX intraday, only daily, I use the short term VIX Futures represented by VXX or the leveraged version, UVXY-this gives me an idea of what is going on below the surface of price.

I rolled this 15 min chart of the VXX back to yesterday's close, at the bottom right corner of the chart in the red box you can see the time and date (12/20/2012 4:00) so you can see what was going on BEFORE last night. The important thing here is the 15 min positive divergence in the VXX, this is very large, very strong, the recent lows were accumulated heavily as you can see by both a large relative positive divergence and the ;leading positive divergence, protection was cheap and it was being accumulated in a way we haven't seen recently.

Beyond that, look at the 2 hour chart of the VXX, note the general confirmation with the price trend to the left and then a huge leading positive divergence on an extremely long and important timeframe. The 2 hour chart tells us this is huge accumulation and that the highest probabilities are in the direction of this accumulation and since the VIX and VXX trade opposite the market, it implies a massive market decline which is what I have been talking about. Remember I said that I think the transition is going to be very fast from up to down, how much faster and more extreme could ES (S&P) Futures going limit down on a 50 point plunge last night actually be?

The point here being, the short term timeframes are interesting and useful for timing, for tactical positioning, to understand what's happening short term, but the longer charts are where the probabilities and big picture of what is really going on can be found. This is telling us smart money is afraid, things may be happening faster than they expected and they are apparently reaching out to try to cover their butts.

Financials

Financials are the one place we haven't opened a short trade (Energy, Oil,  QQQ, IWM, SPX, Volatility-long, AAPL, etc.) but Financials just haven't given us the signal the last few weeks and good thing too.

However, BEFORE last night's Mayan-like apocalypse in the S&P Futures (as well as others) Financials were just starting to go through the process of giving us that signal-they weren't all the way there (except very big picture), but progress was finally being made.

I'll show you the charts, whether I'd choose to open a Financial short her or not would depend on how Financials continue to develop as well as the broad market. Ideally Financials at least fill the gap today to give us a better entry, however I think if you look at the bigger picture a couple of percentage point won't be a deterrent.

Not too surprisingly, the signals started developing as soon as Financials crossed above 2012 resistance Tuesday of this week. If you think about that for a minute, underlying trade turns negative as price crosses a major resistance level, I think you might understand why these things happen, what their true bullish/bearish nature is and how you can use the information to your advantage.

 We have a positive divergence from last Friday on this 5 min chart (remember divergences that are getting stronger will migrate from shorter timeframes to longer ones-the shortest timeframes will be the sharpest) and then a negative divergence STARTS Tuesday as Financials cross above resistance. Think about what happens when major resistance is broken, think about how traders react, how price and volume reacts and think about how Wall St. could use that against those normal reactions because Smart Money doesn't make money trading with you, they make it trading against you-It's a Zero-Sum game.

 The 10 min chart was going negative too (don't even look at anything before today).

 And the longer 15 min chart was moving to a relative negative divergence, as you can see the 5 min is the worst, the 10 min not as sharp and the 15 min even less sharp, but as the divergence gets stronger, these charts will look worse and migrate to longer timeframes like 30 min.

 The 30 min has a small negative divergence (I tried to isolate trade before today because that's what we are looking at).

The long term big picture on the 4 hour is horrible for Financials and the market, a lot of people don't understand how the market can move higher and look this bad, it's simple really, Smart money is using price strength to sell their positions in t, this is why they can't open or close a full position all at once or they would send price way against them, they have to do it in to a favorable market and a little at a time so they don't push price against them.

In any case, I'll keep an eye on financials and see if there's a high probability area that develops despite today.

Earlier AAPL Put Closed

Earlier I suggested maybe using this morning's downside volatility to your advantage and consider taking some profits on some options trades, I closed a partial  position in the Jan. AAPL $535's which cost $25.15 and were filled at $34.45 for about a 35% gain, still keeping the majority of that position open for now.

Market Update & Leading Indicators

After a quick look at early leading indicators I think the case can be made that short term (as in today) they try to move the market as close to yesterday's close as possible, but I'm sure they have taken out some insurance policies of sorts at the lows of the day that can make up for any miss of yesterday's close (in other words if they have a loss on options they wrote because of the severe decline, they could have been buying ES all night and any upside will lessen their losses on contracts they wrote and the buying at lower levels through the night with a move up-even if it misses yesterday's close- should cover most of their losses).

In any case, I'd look at at any near term upside as a gift, just as taking profits on highly leveraged positions first thing this morning was a gift (as you can re-open them at higher levels).

Leading indicators seem to agree with the general idea of what was stated above as far as today goes while many are in a very negative place for the bigger picture and many more are set up perfectly to put in a negative signal, although it's not quite there (at least not as big as it could be the way they are set up now).

 $AUD already at a bad leading negative divergence with the SPX, any additional ground the SPX gains makes the divergence worse.

HY Credit at a negative divergence with the SPX, even though short term intraday it's up a bit, as long as the trend stays down, the divergence is locked in, any additional ground the SPX gains makes it worse.


All it takes is for the leading indicators to stay at the lows they are at and the SPX/market to move up, then the larger divergences are in place. SKEW will be updated after the close tonight by the CBOE so we'll see what's going on there.

If anyone is watching some of the bigger names like AAPL, GOOG, BAC, etc, it would be interesting to know if you are seeing any large buying of puts out in to Jan., Feb., etc. as there are likely still quite a few funds trapped with longs that they just can't get rid of here, thus they need to hedge with protection and Puts are one way of doing that.

The intraday charts so far are moving along this theme...

 SPY 1 min-the last update I said I thought the 3C signal on the 1 min would lead to a consolidation, thus far it has.

 The 2 min chart was trying early to move the SPY up, the consolidation is in line, which is what I suspected it would be, however...

At the 5 min chart, bigger blocks are moving, Institutional money seems to be using any strength it can find to move out of long positions.


Above I gave an example of how Wall St. can lessen losses by buying ES at the overnight lows and selling them in to higher prices, but that's a very general, broad concept. Thse guys have HFTs executing in micro-seconds so there's likely a lot of trades being executed, they could have several hundred trades in the same stock going long and short all within the same second if there were enough room in the bid and ask.

I think the takeaway right now is the longer term trend. I'll keep updating and throwing any ideas out to you as the opportunities arise.

This is why I prefer leveraged ETFs for moves that are fast and may last weeks or a month or so and why we have been putting these positions together lately.

I think we are about to see the next leg up judging by ES futures/3C