Daily Wrap

Today was really quite simple, if you followed Monday's posts then there weren't really too many surprises.

Monday there was a pretty clear sign that money was moving and had been moving for a while in to the safety of treasuries as profits are taken and longs closed, the money goes to a less risky asset, this may be part of the pre-F_O_M_C ramp, but if it is, that's only part of the story as all the trend 2 indicators were there before a F_O_M_C ramp would have started and remain, if anything they significantly deteriorated around what first appeared to be yesterday, but in looking around it seems late Friday was the real start.

Here's the September Pre-F_O_M_C ramp that preceded the announcement of QE3, it started right after the green arrow, the F_O_M_C announced QE3 (something the market had been crying for), then note the action after the announcement and remember the warning I ALWAYS give pre-F_O_M_C, "The initial knee-jerk reaction is almost always wrong".  As you can see the knee jerk reaction was to rally the market, the next day (red-September 14th) started with a continuation of the rally, but faded. As the market chopped sideways for the next month I kept gathering data as the signal at the time of the QE3 announcement was a clear negative. As the data kept coming in it became clear that signal was correct which took us down to the November 16th lows which started a new cycle.

As mentioned, Treasuries gave up a pretty big clue...

 TLT's 60 min chart was and is leading positive which confirms the negative market signals as money is moving out of them it is moving in to safe haven assets like Treasuries-"The Flight to Safety".

 What was interesting was the shorter term signals were getting stronger as mentioned yesterday, it almost became a call that I really didn't want to make as it would have been very rushed. Luckily I checked the inverse of TLT, TBT and saw something that told me, which I told you, "Don't rush, you have some time".

 Here's the time I was talking about, this is only a 2 min chart, but there's a positive divergence which is short term money flows in to risk on assets, this is why I said you have some time, a couple of you played TBT long today and did well, that's what I like to see, taking the analysis and working it in to trades that fit your style.

TBT long term though is confirming TLT's signal as there's a nasty leading negative divergence in the same area as Trend #1 and the same area as risk assets and the averages, TBT would be considered a risk asset.

However in pre-market this morning, things weren't looking good for the market, ES had seen a negative divergence overnight that sent ES lower and was sending the entire market gapping lower.

 From about 11 p.m. Monday night to 1 a.m. Tuesday morning there was a nasty 3C negative divergence in ES as it pushed higher, from there it lost about 8 points to hit the new week's low around 6:45 a.m. (EDT). The green arrow is the European open.

This didn't make a lot of sense to me initially looking at it because when we have signals in something that closes at 4 and doesn't trade overnight, those signals are almost always played out, so how were the TBT 2 min positive divergences going to play out with ES looking the way it did? I figured it might be the typical reverse ramp we see on the open from time to time, but it became very clear how the market was going to be turned around... Use the legacy FX arbitrage correlation of the EUR/USD/SPX

 Right in and around the open the EUR/USD ramped from green arrow to green arrow in a very short period of less than 30 minutes, after that the pair was largely lateral or consolidative the rest of the day, but that ramp as well as an early one in volatility did the trick. By 9:54 a.m. today I had already posted it and shown you what happened in another form of manipulation, if this happened 4 hours earlier maybe we'd not call it that, but happening right at the open, it was clear. In any case, this made the TBT signal from the day before whole again and there was time as the market wasn't going to break down immediately as I said Monday afternoon.

Just while we're at it, this is ES as of right now, it is a negative divergence, but it's still very early in the overnight session.

I mentioned the VIX was used as well in the early ramp, but like yesterday it couldn't be harnessed all day unlike the recent past in which pushing on the VIX was the easiest way to send the market higher rather than even fooling with heavily weighted stocks within each market average and it had the added bonus of taking advantage of traders moving their hedges out further toward the Debt Ceiling debate.

 This is the VIX (green) vs the SPY (red), early in the green box the VIX was pushed on which helped risk assets move to the upside, but later in the day the VIX was moving with risk assets as protection seemed to be bid up in front of the F_O_M_C, the second day in a row they haven't been able to push the VIX down like the first two weeks of the year.

 Here's the VIX's daily close, today is a little more bullish for the VIX (VIX typically trades opposite of stocks) as fear pushed the VIX off the lows, but still managed to close yesterday's gap entirely. We had actually seen real time evidence of this shift, I just hadn't put 2 and 2 together at the moment, but it was in the VXX and UVXY intraday charts...

 VXX with a positive divergence and most of it taking place between 1 and 2 pm, the same time the VIX turned away from the pressure on it to help the market and moved up starting at 2 pm.

UVXY, the leveraged version of the VXX (Short term VIX futures) gave an almost identical signal at the exact same time.

Important Leading Indicators/Risk Assets also continued to diverge significantly from the SPX today, the biggie was a continuation and acceleration in the divergence in Credit, the saying goes, "Credit leads, stocks follow".

 High Yield Corporate Credit fell yesterday, but really put in a quite noticeable decline today.

 Junk Credit was even worse with a one day move taking out at least 3 days of gains.

The asset, FCT, which works for whatever reason, remained negatively divergent in a large channel and headed down before touching the top of the channel.

So tomorrow is the F_O_M_C, there's two events, the 12:15 policy statement and the 2:15-ish press conference, each can move the market and in different ways as I have seen in the past. I don't think the market has any great expectations for policy changes, but any talk about changing or re-examoning the efficacy of Quantitative Easing may very well spook the market as this has been slowly rolled out over the course of the last 2 meetings and minutes as if the F_E_D is starting to think about policy normalization or the end game way before anyone expected, we'll see tomorrow if they continue to prepare the market for the end game or whether they have a renewed vigor as the economic data has been coming in in poor fashion despite what the mainstream media would have most think.

Get some sleep, tomorrow is a big day and remember, "Beware of the knee-jerk reaction", I know it's hard when you see a big move, but go back to the September F_O_m_C I posted above and you'll see as long term members have seen nearly every time, initial reactions are almost always wrong.