Market Wrap

Today was really about one particular pivot, you might say AAPL, but AAPL was yesterday, we took our profits in the calls, expected AAPL to not do so good and expected the NASDAQ to take a hit as well, this wasn't arbitrary opinion, this was in the AAPL and QQQ charts. I didn't expect this much of a dive in AAPL or the Q's for that matter, but first thing this morning we could already see that the Q's were going to try to fill some of the gap, in fact last night we could see that in the NASDAQ futures as the 3C chart was positive.

However, the markets have recently become quite comfortable trading in dislocated fashion: NASDAQ 100 -1.40%, Dow-30 +0.33%, Russell 2000 +0.38% and the S&P-500 +0.03%. Sector rotation? Hardly. We got pretty good at predicting which index was going to do what last week and that has continued as they are giving pretty clear signals, but it's a far cry from the normal correlated risk on or risk off that we are use to seeing, that's because the market is dynamic, things change quickly and over the course of a couple week a new and profitable resistance area is formed, while al the other averages moved through theirs, it wasn't until yesterday that the QQQ moved through its-after more than 2 weeks! Does that seem strange to you that the Q's couldn't reach this goal until the day before they were to plunge?

 There's the range/resistance and it matters because why? You can review the first two parts of the 3 part series I'm finishing up or if you haven't read them yet, they'll help you understand why it was so important for the Q's to break above a range of 14 days (almost 3 trading weeks) before it was to take a tumble.

Part 1: "Understanding the Head-Fake Move: How Technical Analysis Went From An Asset to a Trap"

Part 2: "Understanding the Head-Fake Move: Motivation"

Some may call this skeptical, some may call it paranoid, some may understand that this is years of work and research and bigger than that, putting aside all that I knew about the market to open my mind up to a fresh perspective that was fact based.

During the range, the 60 min QQQ chart ( a very strong timeframe for underlying institutional trading) was also range bound and not doing much until just before yesterday, we see a fairly strong accumulation move at the white arrow (institutional short term traders buying the Q's) and then a strong distribution cycle starting yesterday in to higher prices (institutional short term traders selling the Q's  at a profit and likely shorting it as well.

That's the evidence, it doesn't matter what I think, it's right there for everyone to see.

I digress... The driver of action today in the averages that didn't have a nearly 20% weighting in one component stock of 100 (AAPL and the NASDAQ 100) were largely moved by this pattern that I have been talking about for over a week and have been saying the last few days that it's coming to a head.

 Here's the large triangle in the EUR/USD that formed after two vertical runs, then just went in to consolidation, forming one of the best known price patterns ever, the symmetrical triangle. The Technical expectation of this pattern forming after the preceding trend is that of a consolidation/continuation pattern, meaning it is expected to break to the upside and that it did, but as I pointed out earlier, "Assume it was going to ultimately break to the downside, they'd absolutely take advantage of traders' biases and run the orders/stops above the triangle".  There is an event coming up that would cause a consolidation, in fact, ironically after today's breakout the event is tomorrow, but this consolidation is way too large for even that, however it's not unusual to see a flat price range like this during distribution.

This was the pivot for the market today, not AAPL as it has been for years.

 Being we are so close to the apex, the range to break the support of the triangle is only about 80 pips, so as I said numerous times today, "I don't expect this to be a clean cut affair, I expect lots of game playing" and the support and resistance areas are close enough now because of the mature apex that this becomes a practical possibility.

 As for the Euro driving the SPX, just take a look, the SPY in green and the Euro in red-that's a pretty tight correlation right up to the point in which the market took a dive around 11 a.m. However as I pointed out in real time, the 2 pm countertrend move to the upside in the market had its roots in the Euro and not so much in any kind of positive divergence.

 Here's the 10 min SPY 3C chart showing the top of today's move at a negative divergence or distribution and then seeing  leading negative divergence, essentially strong distribution which is part of the reason the correlation with the Euro was broken, but we did see that end of day move back toward the FX arbitrage correlation.

However, even on the fastest, most sensitive 3C chart (1 min.) there's no sign whatsoever of a positive divergence to turn the market up in to the late afternoon, that was first led by the EUR/USD and then momentum as the SPX crossed above yesterday's close to the green zone which brings its own momentum. Before this even happened it was predicted to happen, not because of any special knowledge other than basic market behavior.

Just as AAPL and the Q's rallied yesterday before they were to dump on disappointing AAPL earnings, the move in the EUR/USD also seems interesting as tomorrow before most of us wake up; I know there are those of yo in Australia, New Zealand, Japan and Europe, but for those of us on the left side of the pond, the market may look very different by the time we wake up. Why?

The ECB's Long Term Repo Operation, better known as LTRO. tomorrow the European Central Bank will release data on early repayment of LTRO loans, you may remember the operations in which the ECB took increasingly junky collateral from banks in exchange for 3 year 1% interest loans in what Sarkozy thought would spark a carry trade with sovereign debt as the buy. The idea went something like this, the ECB gives out the loans at 1% interest for 3 years, the banks take the money by putting up A rated (the second LTRO took less than A-rated) collateral for an interest rate of 1%, then the banks would buy sovereigns like Italy, Portugal or Spain yielding between 5 and over 7%, thereby driving down the borrowing cost for the sovereigns and preventing more bailouts.

Did that happen? NO! Instead what happened was the banks parked the money in the ECB's vaults at 0.75 interest to the point that the ECB's deposits reached an all time record high as the banks were willing to carry a -0.25% loss just to have access to the liquidity, forget the carry trade.

Tomorrow the ECB will tell us how many of these banks and to what tune, have made early repayment on the loans, the thinking going something like this:

1) If there's not enough repayment the market will take that as the banks still have a liquidity/capital problem and the market and EUR could suffer because of it, which could send the Euro down tomorrow and of course the market tracks pretty well with the EUR/USD meaning the market is at equal risk.

2) This is where it get funky...Too much is paid in advance creating a disparity between the ECB and F_E_D's balance sheets, driving the Euro higher at first. However the real reason there's fear over tomorrow is because Italy and Spain were among the biggest borrowers using their sovereign debt as collateral in LTRO 1, but since then their debt (collateral placed with the ECB) has rallied so if they choose to repay the LTRO loans early, they can benefit by getting their collateral back which is now worth more because it rallied and then cash in on it by selling it. If this happens, the fear is that it will renew upside pressure on peripheral bond yields as there's now more supply in the market, reducing demand, raising yields and making it all the more difficult for the sovereigns to issue new debt as their yields rise, perhaps to unsustainable levels which is the reason all of the PIIGS countries that have received bailouts needed them in the first place - their yields were too high to borrow in the open markets.

So the market is looking for repayment around $100bn Euro, any more or less and the market might not like it. My opinion, considering Draghi is an ex-Goldmanite (as are most of the power players in Europe) is that Wall Street already knows, hence Goldman's Euro $1.40 call (Goldman has some Euro's to sell apparently); if that be the case, it's little wonder the Euro moved above resistance today to hit orders as it would be moving below support shortly, within days.

Leading Indicators...

As far as risk assets go, the first half of the day High Yield Corporate and Junk Credit refused to follow the risk on move in the market, they stayed flat like they have been nearly all week, but for whatever reason toward the close both HYG and Junk credit did rally, High Yield itself did not, so I'm not sure what to make of that.

The $AUD dropped pretty hard right off the open and also didn't play along with the market in the early move up or really at any part of the day so that's a negative leading indication, Yields moved in line with the SPX nearly tick for tick intraday, but are severely negatively dislocated longer term, so that's another negative indication. Commodities had very little interest in taking a risk on approach early today or at any time today, gold and silver are still feeling negative pressure.

Futures...

Strangely we have some interesting activity tonight in the S&P and NASDAQ futures, when I see it I think back to my gut feeling since day 1 that trend 1 (the move up) reverses very fast, intraday most likely whereas reversals are normally a process, I have felt strongly this would be an event and a volatile one, so I don't know what the end looks like until we see the underlying signals, but the futures tonight are interesting in that context.

 Since the day session  ES has put in an intraday leading positive divergence, I'd think it plays out overnight, but who knows, maybe even in to the European open?

And the NASDAQ futures which I really think want to fill the gap, maybe get that chance as they are leading positive overnight. What's interesting is this seems to be a manipulated set up as no major markets or bond markets are open, but it is nice low volume and easy to manipulate, this is the perfect time. I'm very interested to see how this develops and where it fits.

The overall trend today in 3C was that of negative divergences adding to the already negative stance. The averages all have a sell signal on my custom indicator which gave a buy on the VIX yesterday, today was the first day the VIX didn't fall lower as the market moved higher, this was a clear break with recent trend behavior between the market and the VIX.

Past sell and buy signals in the VIX and yesterday's buy, no one who watched the VIX over the last week can argue against the much improved tone and reversal of trend in the VIX to the bullish side. The scary thing is all of the averages have sell signals like the orange that cover the entirety of trend #1, I've found the larger the signal (within a reasonable area), the more powerful the drop...

I'll update futures if anything exciting happens.

Lots of interesting things going on the last 36 hours.