EOD Wrap

OK, so we expected Trend #1 to be a sharp, strong move, but rather short lived compared to the trends to follow (which I won't get in to too much now), we have seen that sharp move up. I also said my gut feeling is we will see a sharp, fast reversal to the downside when trend 1 is done, I believe that is still true. Yesterday we didn't see much in the way of distribution because the S&P and Dow had yet to cross above resistance, they needed to do that to open up demand and higher prices, that's the point of this whole exercise. However as soon as resistance was broken late yesterday, today we started to see distribution. At first it was so small I apologized for posting it, but I wanted you to know what was going on. By the end of the day, we had a solid trend of growing negative 3C divergences. We also had an intraday positive signal, which is short term.

My gut is the signals are not yet bad enough to send us lower so we may hang in this area, bounce back and forth above and below the resistance breakout area or even move up a bit, but the underlying strength is fading so any move up at this point is a gift for short positions.

Earlier today I said tomorrow's Non-Farm Payrolls would be interesting to see how the market reacted as the F_O_M_C changed their yardstick for policy accommodation, now after the minutes were released and there seems to be a growing discontent with QE among the F_E_D, I'm thinking the market is going to want to see bad numbers from the NFP to try to justify the F_E_D staying the QE course, this may be an event in which if we don't get a bad report, the market could fall, the opposite of what you'd think. The tricky part though is the seasonal adjustments the BLS will be applying to the NFP, they used it last year arbitrarily to make reports look a lot better than they were, once we moved out of the seasonal adjustment period, the reports were 180 degrees to the negative and the market fell to the June lows from there, so seasonal adjustments to make government look good could actually end up hurting the market!

I have published some recent analysis on gold (From last Friday) and my opinion was we would see downside in the near term, the longer term looks less sure. Gold is one asset that is very QE/FED sensitive, beyond my analysis, take a look at GLD...

 Gold/GLD was sent lower intraday on the release of the minutes, obviously it didn't like what was said about QE, so the market would take it in much the same manner.

Understand that when I said Trend 1, a strong upside move, would be short lived, that was all based on analysis even before the Fiscal Cliff really started to become a big deal. It turns out the Fiscal Cliff was the "Apparent " catalyst and I say that because the financial media needs to feed people the reasons why the market did this or that today, which really doesn't matter if you weren't in front of the trade like we were on the move up and believe me, Wall St. doesn't mind one bit as it provides cover and people really believe the market is reacting to these things and doesn't realize that we predicted this move weeks ago based on underlying trade, Wall St. had it set up, thE resolution of the Cliff was just a convenient catalyst.

However what that also means is that the resolution of the Fiscal Cliff was priced in BEFORE we saw this pop, meaning the pop is all Wall St. manipulation and as far as they are concerned, it's a profitable venture, but it's not anywhere near fair value. Add in that Congress didn't take care of several other cliffs including the debt ceiling, and the resolution is actually worse than anticipated or at least hoped for.

Now throw in on top of that the F_E_D minutes with QE being openly questionEd by voting members for the first time (to this extent) since the program started in late 2008 and what did QE do for the market?

This rally or bull market is nothing more than a QE House of Cards, look at any of the areas in which the market lost momentum or declined and you'll see it's an area between QE programs when the market didn't know what it would get except for QE3 which was priced in to the market ahead of time starting around June of this year. As Warsh said (ex-F_E_D Governor), "Getting in to policy accommodation is the easy part, backing out is the tricky part" and it sounds like the F_E_D is starting to consider how it may back out and when, the when being a LOT sooner than any one thought. This all started in the last 6 months as the F_E_D went from a DATE BASED policy target to their new ECONOMIC DATA BASED policy, this is what the market didn't like, it's why the market didn't rally on the QE3 announcement and now these minutes are going to change everything as the yardstick change was just the initial step toward backing out of policy accommodation.

The bottom line is we need to rally pay attention to how smart money reacts to this over the next month or so because it will take them time to turn their very large ships.

As for today and tomorrow, the NFP tomorrow is now going to take on a whole new importance given the F_E_D minutes today, probably twice as important. My gut is a good number sends the market lower (at least for a bit) and a bad number holds it in place or rallies it.

Commodities are considered a risk asset, they should follow the SPX (green) which is also a risk asset, you can see they have been diverging negatively and really bad the last 2 days.

 This is commodities vs the Euro (green), note how they follow the Euro almost exactly. It's not really because of the Euro, it's actually the $US Dollar is moving up and the Euro moves the opposite of the $USD generally, so higher $USD prices equals lower risk asset prices including stocks, but commodities are the only one following the correlation for one simple reason, the cycle of Trend 1 is a manipulation that was set up in advance and this is why we could predict it in advance. You know how infrequently I use options, yet I had 3 open options (Calls) for this trend specifically and they did excellent (Up to +224% in 2 days). At some point the stock market will fall to reversion to the mean with the Euro, it's just Wall St. can't have that now like commodities as the cycle for the move up was already in place and they rarely abandon a cycle once set up-there's too much money that has been moved around.

 Another look at Commodities vs the SPX, but a closer view of the last 2 days. This is a problem for the market.

 Here's the SPX (always green) vs the Euro, last week the Euro was positively divergent giving the market some underlying strength to lean on, now that has totally flipped. Note to the far left how they usually track together.

 The Euro vs. the SPX -closer view of last 2 days. The open Wednesday night in white told us the market was headed higher, but after that initial spike in the EUR/USD, it's been downhill ever since. It doesn't matter the reason, at some point the arbitrage algos take over and reversion to the mean becomes the game.

 Today I noted at the end of the day we had some 1 min positive divergences, this would suggest a move higher tomorrow morning or in the first half of the day, there's no strength beyond the 1 min chart so it's not anything that will stick, but it could lift the market and then lead us to a sell-off, it needs to be watched like a hawk tomorrow because there was some serious damage done today in 3C/underlying trade in a few spots.

 This is High Yielding Junk Credit, it was supportive of the SPX making the late Wednesday rally through resistance, but once that happened, you can see today it has diverged negatively away from the SPX. This isn't a huge flow out of credit, but like this morning's divergences in 3C, it's a start.


 High Yield Corporate Credit also diverged negatively from the SPX, look at what time it really took place, 2 pm, the release of the F_O_M_C minutes.

 Remember that late day positive divergence on the 1 min chart I told you about, look at the NYSE TICK Data in green vs the SPY in red, note they move together as they should all day until the end of the day when the SPY makes a new low in afternoon trade, yet the TICK data (all advancing stocks minus declining stocks) did not make a new low and instead moved higher to new highs at +1000. This also supports the idea of early strength in the market, but I'm thinking if we get it, it should probably be faded, we will confirm with 3C if we do get it. If this happens, it's a gift.

 Trend 2 or the longer term, higher probability trend is in a leading negative divergence on an important timeframe, this is part of the analysis that led to Trend 1 and Trend 2 (up strong and down stronger and longer respectively).

 As I said about the positive divergence on the SPY 1 min, there's no strength behind that, here's the 2 min chart proving there's no strength, in other words it looks like a set up in which some stocks were bought, they'll be sold in to some market strength and then the move up is faded.

 As for the QQQ, it was one o the worst performing as far as underlying tone, remember it was the first to cross resistance on the open Wednesday so it make sense it is the first to see distribution. This is a big picture chart of the 15 min with a leading negative divergence, this suggests a very strong downside move next.

 This is the 10 min chart, note how distribution picked up today vs yesterday with a leading negative divergence at a new low.

I think the QQQ were the only average to see a leading negative divergence intraday on a 15 min chart so there was some major damage done today.

We'll see how the NFP plays out, if it is negative in pre-market, I wouldn't assume that it will stay that way, that 1 min positive could be run over, but chances are better than 50/50 that they let that move up and then back down play out. If so, that's where we want to look at adding positions, like I said above, It's a Gift!

As for futures overnight, there's not much action, NASDAQ futures are a little lower than the 4 p.m. close. Es is exactly where it was at 4 p.m. right now.

What will be important overnight is the underlying 3C tone and whether it starts to influence the 5/15 min charts.

So that's it for now, today the market became much more complex with the release of the minutes. I wouldn't be surprised though if Wall St. had a heads up and this cycle that has been so strong to the upside is what I suspected the entire time, a place where demand and higher prices allow institutional money to sell and go short while retail sees higher prices and is left holding the bag, but that's gut feeling and initial indications, I rely on objective data just to be clear.

Have a great night, get ready for some fireworks very soon, if we can make over 200% in 2 days on a short trend, imagine what we can do with a larger, stronger one!