Daily Wrap

Things were noticeably different in the charts today, something that is either very overt and obvious or something that is really nagging and sometimes a little scary (as each market is unique), today at first was the later and some visual descriptions had to suffice, the one you may recall is "Not just leading negative divergences, but instead of price moving up of flat as is normally the case, it felt like price was trying to climb a sand dune, while the sand underfoot was giving way".

Then this afternoon we got a JPM analysts Dow 20,000 target, sure I'm oversimplifying the exact details, but this was one of the things I remember so clearly about the 2007 top, the talking heads were talking about Dow 20,000 when everything we were seeing was arguing for a bear market which really makes you double check your math the first time that sort of thing happens. It happens this particular analyst had made a call July of 2008 for the 2008 SPX target when the SPX was $1200 and he was looking for $1450, then the 8 months of "FEAR" I talk about when describing how much faster a bear market falls then a bull rises, set in with 2008 closing 40% below his target. It's not so much the analyst as it is the sentiment whether the AAII spread posted last night or stuff like this-"Dow 20k", these sentiment extremes are good way points for the contrarian investor.

Not that this is part of my direct analysis, but I do consider the background and fundamentals like this doozy, the "French Labor Minister Says France Is Totally Bankrupt". 

The truth is there's already concern that Germany will put in a second consecutive quarter of negative GDP and enter its first recession since the Euro-area crisis started. All of the bailouts up to now, all of the programs with 4 letter acronyms as well as the countries like the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and all that has been done from replacing leaders with technocrats that use to or still are involved with Goldman Sachs, the bailouts and renegotiated terms, the ECB LTRO loans, all of these things that have been done have been to protect the core of the EU, which was considered France and Germany until France fell victim to the nasty "C" word, "Contagion", leaving only a handful of nations with their Aaa credit rating intact.

While history books likely won't teach it, the EU experiment and the real power behind the EU if you haven't figured it out already is all about and is Germany. One of the primary reasons for the EU was to create a free trade zone and then to bring in European and some former Iron Curtain countries in to the block once they had established their financial bonafides, in essence a credit check to make sure they can afford to pay for German goods as Germany is the manufacturer of Europe-this is really what the EU is mainly about. This French gaffe will not sit well with many that are already concerned that Germany will fall deeper in to contagion at which point there's really nothing to stop a German exit from the Euro-zone altogether. This is just something to consider when considering the important area the Euro is in right now and how transitional it can become which has dramatic effects on all world markets and the US potentially gets back the flu that it originally had and exported to Europe around 2008.

Picking up where we left off last week, Friday we entered leveraged long Tech in the form of TECL which was considered to be such a short term trade, I wasn't even sure if it would be entered and exited on Friday, but we left it open in to today along with a AAPL Call trade idea as well, also shorter term, but with enough room in case some signals that were borderline crossed the border and changed the nature of the trade there.

While the market's ATR has shrunk considerably in to 2013 (making it a little more difficult to generate the same returns one can make with a larger ATR), there are still opportunities, they just need the appropriate vehicle for the trade which generally means some leverage and a short duration.

Just to give you some idea of general volatility, I'm using a 10-day ATR (Average True Range) of the S&P-500, defined as the 10-day average of the daily high to low range; the narrower the range is, the harder it is to make money in general because there is simply less of a range available to pull money from with trades.

I also applied a 50 bar average of the 10-day ATR in yellow. In november the 10-day ATR for the SPX was $21.24 with the 50 bar average of the 10-day ATR being $13.22, basically there was a wider range in which to make money. At the far right we have a 10-day ATR of $9.23 with a 50 bar average at $13.82, the $9.23 10-day ATR is the second lowest since January 6th of 2011 with only 1 day since having a lower range, August 20th of 2012. This is only 1 of many ways to measure volatility, but you probably get the idea, this is why we take what the market offers and try to use the best trading vehicle for the current situation as once again, all markets are different and the market is as dynamic as any living, breathing, complex organism.

Considering the move above the major psychological level as well as centennial mark as well as the fact +1500 SPX was last seen on 12/10/2007 (over 6 years ago), this isn't what you'd call "Follow Through" and these are very basic concepts that have been abandoned in favor of the newest fad in indicators, but if you think about the concept of "follow through" of a breakout, a major psychological level or centennial mark or in this case both, just plain common sense will lead you to the reason why follow through is an important concept in judging the vitality of a move and the reliability, once you can make those out you can consider some of the other reasons the move may have been made.

With the S&P down today, it's not so much the percentage it is down that is important, it's the fact there was no follow through that is important, but I digress.

The point was, Friday we saw something brewing in Technology and AAPL with the Tech move expected to be like the other recent rotational moves, not only because that has been the recent trend, but because the 3C signals told us it was very high probability Tech is up today and outperforms, but very low probability that there's any staying power for the move-that's why a leveraged Tech ETF was chosen as the vehicle. As suspected, Technology outperformed:  Financials and Energy as well as Materials, Industrials, Consumer Staples, Utilities, Health Care and Consumer Discretionary; with the NASDAQ 100 outperforming the Dow-30, S&P 500 and the Russell 2000 and these were all simple signals from Friday, but had limits.

While most everything was just loitering around Friday's levels or lower, with the recently hammerd AAPL which was also a Friday pick, up +2.21%.

Some subtle hints and so not so subtle signals were to be found in Leading Indicators today, here are a few...

 Really since Trend #1 took off, commodities as a risk asset, have been much less optimistic about the market and I think the state of the economy, of course this can't be specific to the US, but worldwide. However when looking at the US and the Industrial production as we saw misses in 4 out of 4  F_E_D regional surveys on manufacturing with contraction, it only makes sense that the raw materials that go in to the manufacturing process are in less demand, it's not exactly what you'd call a recovery.

 You may recall I first became concerned with the Euro when these two nearly vertical price moves were put in as they almost always tend to end badly, then the Euro failed to follow through and consolidated sideways for sometime as Goldman had put out a long EUR/USD call (the last 3 calls they put out before this were all exactly wrong, it's not Goldman not knowing what's going on, in fact quite the opposite, just consider though how much money they pay analysts and whoever else they get information from, they then package it all neatly and hand it to you for free so you can trade against them-make sense?).

The breakout in the triangle of the FX pair was expected, what is also expected is that it will not be a clean simple affair in which, "The Euro has broken out, here we go for the next leg up". In fact one of the most common distribution areas is a flat range like this triangle, coupled with Goldman's call, I'm guessing GS had some EUR/USD to sell or was looking for demand to short in to.

Interestingly today, the pair put in another even tighter triangle...

This is the start of FX trading for this week at the green arrow and note the triangle formed up as we went in to the close today. If I had to guess I'd guess before it does anything else, it breaks out to the upside because that is what 100 years of Technical Analysis have told Technical traders to expect and most will only commit to a position upon confirmation of the price move they expect, it's what happens after that where we most often see Technical Analytical concepts used against technical traders which is the clear majority of retail traders since the advent of the Internet.

 Remember the post today near the end of day that talked about long dated treasuries or TLT and the positive divergences there, suggesting money was moving from the risk of stocks to the safe harbor of Treasuries?

That post was followed by a post on TBT, the inverse of TLT (Short Treasuries) and the very short term 1 and 2 min charts that suggested there may be some early upside or relative strength in the market that should give you a little more time to enter short positions if you chose to rather than be rushed.

Well above we have High Yield Corporate Credit, a rise asset that "should move up with the SPX, today it didn't perform so well vs the SPX, but it did show a very late day, very short duration move to the upside, the exact kind of move that can be used for a quick buck like we have been doing the past few weeks whether it be from one average to another or industry group like Tech Friday and today to another. Put more plainly, the bigger picture of HYG's action throughout the day was very much on the bearish side, whereas the very late day action of very short duration was on the short term bullish side just like the TBT post linked above.

A member told me about FCT and how it acts as a leading indicator via divergences with the SPY, I backtested it and found it to work well, here we see FCT in a negative divergence with the SPX through a good portion of last week and continuing through today.

You've heard me say many times that among the leading indicators and specifically the currencies, the $Aussie or Australian dollar is one of my favorites based on past experiences because of its association with hedge fund financed carry trades that they use to generate liquidity when they want to buy (risk on) and that trade being closed when they are reducing exposure in a risk off sentiment.

The $AUD has been looking horrible lately...

Here's the $AUD vs the SPX, the signal here with the $AUD alone would signify that the carry trade is being closed which is negative toward risk sentiment in the market.

However one of the main currencies that forms the other half of the carry trade is the Japanese Yen which has been in free fall due to Japanese policies which have sought to devalue the Yen to make exports more competitive, we just saw last week though that that hasn't happened as exports were atrocious, probably in large part to Chinese boycotting Japanese products in a row over a small uninhabited island chain they both claim to own, but Japan has actually claimed it with boots on the ground, which has led to a series of not only verbal jousting, but naval and air "close calls" as the situation escalates.

This extreme weakness in the Yen has kept the AUD/JPY looking strong and like it's in a risk on move, note that it did go risk on just before the market's November 16th low, the same one we have heavy market accumulation in to as the start of the next cycel up in the market.

 The pair goes risk on at before the 11/16 lows which we also show big accumulation just before, however the pair is now starting to look wobbly.

 A closer look shows the former momentum fading.

And since trade opened this week for the pair, it's looking even worse.

Here you see how bad the Yen has been falling, you'll understand this is a rare circumstance of an extreme nature, but the pair moving to the downside is inherently risk off for the stock market.

Other than what has already been posted today in successive market updates in which a theme clearly developed, the VIX's intransigence was notable, the days of volatility being used to ramp the market seem to have ended today with the smack of a brick wall.

Here's the normal VIX/SPX correlation...

Today other than an early correlation, the VIX broke free from the chains it's been held in recently as it has been used to ramp the market.

The intraday VIX was like many of the other assets that saw an increased rate of divergence.

 Intraday 3 min VXX exploded  sending recent divergences looking like they were flat because of the scale.

 The 60 min intraday VXX 's trend...

 However look at the 60 min move in VXX today alone, something was certainly different about today.

Remember the buy signal in my custom DeMark inspired indicator on the VIX last week, well it's off to a good start.

The VIX is VERY close to breaking out of the range, not exactly where you'd expect it with the recent SPX 1500 is it?