Closing Wrap

Another day, another head-scratchingly low volume session with volatility dropping down to ridiculous levels, I'm almost amazed we've been able to put together double digit returns on the 1-day weekly options trades and honestly if we weren't super-specific about where the trades were closed, we wouldn't have been able to.

The move from the start of the year is strange enough when you see how narrow the Liner Regression channel is, but the ATR is super low as even a 2-day average represented by the red moving average in the bottom window is low, but the dates in yellow are far below that, for a few days we had some increased volatility that led to exactly what I thought it would, no price movement, actually a -0.12% loss, which is indicative of churning, but at least there was some range in the body of 18 points or so, the body range now is averaging 1 to 3 points for the SPX and ever since the volatility picked up, it's been solidly in the lower half of an amazingly thin channel to start with. Today's SPX close was a doji, yesterday's a star and Monday a doji.

The SPX futures are seeing distribution right at VWAP or the upper deviation if possible to hit that as we did on this morning's open, which was yesterday's trade plan all along, QQQ options trade from yesterday, in that post I said the following (which was yesterday)...

" I suspect they'd be sold early tomorrow a.m., keep it speculative and small, it's not worth taking big risks here on the long side."

The calls were opened at 3:55 p.m. Tuesday and closed by 10:15 today for nearly a 25% gain, which I think is pretty amazing considering the trade lasted all of 50 minutes and the range was so diminished today.

If the calls were held any longer they would have deteriorated in value due to time decay, if they were sold at almost any other time in the day they would have been at a loss or certainly not worth risking, but we could see this yesterday in the market.

ES and the SPY/SPX both revealed some interesting distribution at the exact same times...

 Looking at 3C distribution in ES, the red arrows show the areas.

 Remember what the institutional yardstick is for deciding whether a market maker or specialist did a good job filling an order sent in an asset they make a market in, it's VWAP (the Volume Weighted Average Price), selling at the middle line (VWAP) or at the 2nd standard deviation at the top channel is considered a decent fill, look at the 3C distribution areas and where they are vs. VWAP, the first as we suspected would be the strongest move of the day on the opening gap at the 2nd standard deviation, the rest fell right at VWAP on increasing volume in most cases (however increasing volume needs to be put in to context, the volume in ES this week combined on a 3-day basis has been the lowest of the last 6 months and that includes the holidays and half days around the holiday!).

The SPY showed the exact same pattern even though it's a totally different asset class and a different version of 3C.

I found this one chart interesting because although we've used High Yield Corp. Credit and divergences with the SPX as warning signs of wither bottoms or tops, I didn't realize the HYG implied SPY value, I've just known that when it's as dislocated as it is now, it never fails to be a red flag for the market...

HYG's SPY implied value is nearly 9 points lower in the $143 area with the last +3 sigma breaches correlating to some pullback, each one by the way we had called as such-the Q1 2012 core short area where we built short positions from March to May 1st and then the September 13th F_O_M_C QE3 announcement, while the motto was, Don't fight the F_E_D", we had 3C negative divergences as well as Leading indicators like credit as seen above.

As you know, yesterday I was expecting a gap up in the QQQ, last night I was also anticipating a close below today's, we didn't get that, but a nearly perfect Doji Star (loss of momentum and common reversal signal). I had been looking at the range in the QQQ since the start of the year and was shocked when I went to quantify it, from the first trading day of the year through 4 p.m. today, the Q's have gained exactly +1.15%, with a high to low range of 3% (if you bought at the lowest intraday point since the start of the year and sold at the exact intraday high, you'd make +3%.

I'm not going to offer an opinion, but just some food for thought, this range of possible gains among a very low volatility, dumb money friendly market with the consistiency of the trend sure gives the impression the market is a lot more bullish than it is, it has managed to finally -after years of retail leaving the market in droves, not only pull the back in, but at bullish sentiment levels that are at multi-year highs in some instances. I will not offer my opinion as I can't back it up, but with those facts I'd offer the saying and truth, "Price is deceiving" and let you think about the possible reasons why this could be occurring.

I also found it interesting (it's always the little things that I find to be of the most consequence at some point), that with 3 of the 4 major averages closing in the green (only the Dow closed red), that the VIX would be in the green today...

After we saw the huge multi-year Bollinger Band Squeeze in the VIX, I said I thought it would loiter in the area for several days, this just goes to show you once again as my theory is proven right again and me wrong, that whatever you think is a reasonable amount of time, double or triple it, whatever you think is a reasonable market move (up or down) double it or triple it-just above the QQQ's minuscule move for the year is probably surprising some considering the sentiment, even among ourselves.

With so little happening, other than the 3C signals I posted earlier today that are jumping off the chart and some interesting movements that have broken trends in the FX market, there's not much more to glean from today. There was no dominant Price/Volume relationship in the averages, although the closest thing to one was the SP-500 with the component stocks posting 165 at Price Up/Volume down, the most bearish of the 4 relations, but again hardly dominant.

Since the only interesting thing this week is exactly what I suspected last week and Sunday night in the "Week Ahead" post is the carry trades in the FX market, I'll wrap up tonight's wrap with the main pairs that are most relevant right now.

 EUR/USD longer term with what seems to be Draghi's limit of $1.35 in the pair, from there someone from the ECB tends to come out as Draghi did last week and another did today and jawbone the Euro down. However the trend marked by the green arrow is what is of immediate concern as this is helpful to the market bulls.

 Taking a closer look, keep in mind the month of February, we see some interesting changes in a lot of places-for instance market volatility first picked up the first trading day of Feb. Here we see the Euro making lower highs and lower lows, defined as a downtrend and not at all helpful for market bulls, in fact quite the opposite.

 The British are coming, the BOE's King made some noises today to keep Cable moving lower to stay in the currency war fray.

 The Carry pair of EUR/JPY, the yen has been steadily rising, helpful to the market, something happened in Feb. though.

 A closer look at the pair shows higher highs and lows in the pair and then something changed, a series of lower highs and lows, at best a lateral trend rather than an uptrend, again not helpful to the market.

 The USD/JPY longer term trend is changing... since the $USD wasn't strong at all of the points in which it rises against the Yen, that mans the Yen was weaker than usual, however something is changing recently.


 Again the higher highs/higher lows have been replaced with lower highs/lower lows and at best a lateral trend.

 The simplest market correlation is the $US Dollar vs the market, when the dollar is up risk assets like oil, credit, and stocks are under pressure, usually moving the opposite direction, something changed in February as the $USD or in this case, the US Dollar Index makes a move higher, the modified clear method swing system shows 5 of 7 days contributing to the trend.

Also as the trend in the USD changes, note the increased volatility in the US Dollar Index.

It bears repeating, there are many things that influence the market, few realize how much the currencies and carry trade influence the market until something goes horribly wrong, it doesn't happen often as the trade is controlled pretty effectively, but recently it has begun to become unruly in the face of a global currency race to the bottom. The reason I'm making a bigger deal of it than I ever have before is that these changes that at best put many important, market bullish pairs, in a lateral trend from a clear up trend means something is happening and I suspect part of that is hedge funds and other carry traders are closing their trade while others are hoping it will survive. 

Once again, at typical minimum leverage of 10:1, even a slight move in the basket can turn a profitable position in to a losing, margin calling position overnight. With others running leverage that can be as high as 200:1, the possibility of a cataclysmic event over night is very real and I'd rather you understand that now than me trying to explain what's happening should something like that take place and send futures limit down and trip market breakers.

For tonight I'm not going to try to divine any more from the market that really didn't give us much today, but I will remind you of some ugly signals I posted earlier. These signals didn't pop up overnight or even since February, most have been with us longer than that, so when you consider the question I posed above...

"I'm not going to offer an opinion, but just some food for thought, this range of possible gains among a very low volatility, dumb money friendly market with the consistiency of the trend sure gives the impression the market is a lot more bullish than it is, it has managed to finally -after years of retail leaving the market in droves, not only pull the back in, but at bullish sentiment levels that are at multi-year highs in some instances. I will not offer my opinion as I can't back it up, but with those facts I'd offer the saying and truth, "Price is deceiving" and let you think about the possible reasons why this could be occurring."

Keep in mind the 3C charts and the currency pairs.

As for futures, it's very early and the overnight session is just getting started, there are intraday 1 min positives in ES and NQ,  I don't make much of them as they aren't that large and it's very early.