Leading Indicators Update

As promised earlier, this was the one place that was giving a loud and clear signal of what to expect in afternoon trade and as promised, the 30 seconds that gave me a lot of insight in to the market's reaction to QE3.

 September 13th the F_O_M_C announces the long awaited QE3. Long term members are probably sick of hearing it, but you know it's true, "Almost everything F_E_D related sees an initial knee-jerk reaction that is almost ALWAYS wrong".

The market rallied on the 13th and for a bit on the 14th as QE3 was announced, but if you followed QE1, QE2, Twist, Twist 2.0, the market rallied after these policy announcements, it only did so for about a day and a half after QE3 was announced. Now to be fair it was probably already priced in and we had a strong 3C signal before hand suggesting that the market would not rally on the announcement...

This is one of many negative divergences in to the announcement, the shorter timeframes that better nail the timing can't go back this far. I remember there were a few members a little unsettled with my call for patience, not to close out shorts even though I said, "Emotionally I feel like we should close all shorts and go 100% long, but the data doesn't support that". So I got a lot of emails referencing, "Don't Fight the F_E_D", I wasn't, I was just going by the objective data and you can see what happened after, there was no QE3 announcement rally, but that's not the point.

This is the point, "Fleeting Glimpses". I just so happened to be watching Bernie give his press conference and watching the market for reactions, at the very minute he was asked a question that was something like, "Will you modify purchases under QE3 if inflation becomes a problem", Ben answered in a round about way with something like, "We'll have Very accommodative policy in the CONTEXT OF PRICE STABILITY". It was that answer that topped the market for the day in almost every asset class at that very minute. The F_E_D basically added something new, they'd adjust how much they buy if inflation became a problem. The market didn't like this and that's why it topped that minute, that day.

When the F_E_D started talking about changing policy guidance from calendar based to economic result based, the market went nuts again and hated this and still does. Now we have the minutes that are casting even more doubt on QE.

However the point was, I could stare at that chart all night, but if I had not seen the press conference and market reaction, I wouldn't have understood what the market was REALLY afraid of, it was revealed in 30 seconds and few caught on to it.

Now, Leading Indicators today were a lot less subtle than the 1 question asked of Bernie.  One theme was the EUR/USD which has been weak lately, last night I noted a change in the opening 3C chart of the pair in this post,

"I'm not going to read to much in to this as it is an early signal and the EUR/USD hasn't exactly been tracking the market recently, but there are some signs on a 5 min chart that the pair may look to head higher soon, that would be supportive for the market very near term, any further out and there's still a large divergence between the two that is more negative, but this could spell early strength for the FX pair that historically correlates to market strength-again we are talking about very near term...I may be getting a bit a had of myself, but Friday's late break above resistance certainly wasn't enough time for smart money to make any significant moves, some extra time and demand helps them, as I always say, "Price is Deceiving, and Friday as I also said, it's a gift for us as well."

The EUR/USD pait showing a positive divergence last night gained some ground which is supportive of the market overall.

It appears the pair lent some support to the market, but there's a lot more going on in the short squeeze area of the R2k and Credit, specifically HY Corporate.

Leading Indicators... (Comparison symbol is the SPX in green unless otherwise noted)

 Commodities finally moved with the SPX as a risk asset as they should, we saw a lot of negative diverging to the downside in commodities over the last several days as they followed the EUR/USD much more closely.

 This is what commodities looked like vs the SPX over the last several days, the divergence is still quite large despite today's move together. All in all as a leading indication, this is generally a market negative.

 Here we see commodities oddly losing ground with the $USD (green) early today and finally gaining ground with the market in the afternoon as the $USD flattened out.

This is the overall negative divergence between commodities and the SPX since the 11/16 cycle lows.

Credit

 I think there's a short squeeze in certain credit as High Yield was dead flat today, but...

 Junk Credit was giving early leading signs, it's little wonder the SPX tried to rally in to the close with Junk Credit making earlier higher lows.

 High Yield Corporate which is right at all time Short Interest highs also gave an early set of higher lows, hinting the SPX would follow as credit leads most often.

 This is the Euro today vs the SPX, the Euro which has recently been weaker was showing 3C positive divergences last night, those held up and the Euro outperformed the SPX on a correlation basis, but the Euro has a lot of catching up t do to revert to the mean of equities.

 FCT which just happens to be a decent leading indicator showed early strength, but by the end of the day wasn't looking quite so hot as it was unable to hit the a.m. highs.

 This is a longer look at the Euro vs the SPX, you can see it was supportive at which dates? That's right, the same we saw over and over again today in to late December, then after that the Euro just fell apart, that is what commodities have been tracking the last several days and why they are so out of sync with the market.

 Yields didn't do much and aren't giving any signal as they tracked the SPX all day.


 One of my favorite leading currencies, the $AUD is still at an overall negative divergence, but showed good catchup momentum today.

Note where the $AUD started the day and where it finished relative to the SPX and itself. This seems to suggest some more short term strength in the market which is what I have been looking for as Friday break above local resistance is an integral part of a downside reversal, but to do that it needs to spend more than 30 minutes up there.

As for futures, as of this moment there's a 1 min negative divergence in ES and NQ futures (S&P and NASDAQ) , I suspect it has something to do with a negative divergence in the EUR/USd on the same timeframe.

 EUR/USD 1 min negative divergence

 ES negative divergence

NQ negative divergence.

I'm not going to read too much in to these as we have a long overnight session and a lot coming up this week, but I will keep an eye on them for any migration to longer timeframes.

As for the averages, in to the close the DIA showed some distribution on the intraday timeframes, perhaps we see a gap down in the a.m., but there's still some support there in the 5 min range (overall a leading negative divergence, but within that there has been a positive divergence develop today), so that could lead to some upside late in the day so long as it holds which we'll watch as well.

The SPY also showed some light distribution in to the afternoon ramp attempt, the negatives stopped pretty early at 2 mins and there's a relative positive divergence in the 5 min timeframes, again within a larger leading negative position. The 10 min in the SPY is flat out negative, no ifs ands or butts so any strength in the market, even at new highs in some of the averages is unlikely to hold with those heavier negative divergences bearing down.

The QQQ also saw end of day selling in the 1, 23 and just made it to the 3 min chart, yet there is a positive divergence, again within a larger leading negative on the 10 min QQQ, this is why I suspect better relative performance from Tech tomorrow.

Just to show you what a positive divergence within a larger leading negative looks like, because I know it sounds confusing, here's the 10 min QQQ mentioned above.

The longer term and larger signal is negative, it has hit leading negative lows, yet there's a local positive divergence, essentially this would suggest a near term move, but one that doesn't hold, it can still be a fairly decent move (this the AAPL calls today). However unless there's a major change in character, ultimately the larger negative divergence trumps the positive and caps it's effect on the upside.

As for the IWM, there was lighter distribution in the short term timeframes at the end of day as compared to the other averages, however the IWM has some pretty heavy longer term negatives like this 15 min.

As for the volatility ETFs like VXX and UVXY, they saw some in line 3C movement today as prices moved lower, I believe this is an effect of hedges being moved out to March and beyond in response to the debt ceiling fiasco. I think it's a short term move as the more important charts there have very positive divergences suggesting volatility lifts which means the market moves down, that I believe is part of our "Trend #2".

Finally Treasuries aren't showing any really strong indications short term which makes some sense with the way the market acted today and if we are to get some more short term market upside, there's still a huge 15 min leading positive divergence that looks like someone built a flight to safety position there, again I think attached to trend #2 (down). However near term signals are mushy, I think the market would have to pop above the SPX's Friday intraday highs before we started seeing really strong negative divergences in the averages and strong positives in Treasuries in the faster charts )1-5 min).

That's it for now, I'm still looking for some more short term upside that can be used to set a bull trap in essence, that leads us in to trend #2.

as always though, I'll be looking for the message of the market in underlying trade and bring you any changes that I see that I think are material.

Have a good night, I will update is anything changes.