The Yen, Breadth and the VIX

All 3 of the above mentioned are intriguing in very subtle ways, but many subtleties (like UNG or the first FB long) have turned in to pretty big deals.

First the Yen, as you know I've been watching currencies and noticed irregularities, these in many cases have led to changes in trend since, in most cases these changes are not supportive of the market moving higher. Here's what FX markets look like on this week's opening.

 The EUR/USD daily has broken the trendline which is absolutely out of the normal market/FX pair correlation, essentially the movement in the pair is associated with a market moving down, not up, however as bad as it looks here, a shorter term chart shows it in better detail and shows what we initially saw as a change in character which led to a change in trend.

A series of lower highs and lower lows, we saw this well before the trend was established and suspected this might happen.

The pair as of tonight's open and showing the plunge on Friday's NFP, there's not a lot of movement here.

 The EUR/JPY trend is also recently broken on the daily chart, this is also not supportive of the market moving higher.

 A closer look shows the trouble that was developing there, at the orange area is a triangle price pattern, technical analysts would expect this to lead to a new leg down, instead it looks like a short squeeze as it breaks through the channel, but hasn't re-established the trend.

 The pair opening tonight looks weaker than the EUR/USD, which means it's likely the Yen is gaining strength, something I talked about earlier today, this is definitely not market supportive.

 The USD/JPY looks similar to the above chart on the open, so it seems the movement is in the Yen rather than the Euro or USD.

 The AUD/JPY looks the same, so I confirmed it by looking at the Yen futures tonight.

 Here's the open of futures for the new week.

The 5 min chart of the Yen has a strong leading positive divergence suggesting the Yen move higher, I suspected this Friday as the Yen hit a low on a positive divergence at the same time as the NFP release.

The significance of the Yen moving higher has to do with Carry trade funding, the extreme leverage used in FX trading and how quickly FX can move when a carry trade starts going against you, the reasons why are yet to be determined and we are very early in the process, but we were early in the EUR/USD process as well and called that correctly. The effect a carry trade going south has on the market is very negative as well, also very fast. Well see how the Yen develops, you know what I suspect and some of the reasons why thus far, it has a lot to do with China as Japan leads th way in currency debasement and has elected and nominated officials both political and at the BOJ who would se this process accelerated with additional asset purchases sending more hot money in to China and stoking inflation that China is already fighting as they just recently started taking money out of the market after 8 months of pumping it in, with all of these other Central Banks buying assets, China doesn't need to, in fact they need to react to stop the adverse effects of too much hot money and they are-Watch the situation between Japan and China, I'm quite sure it's going to get a lot worse if Abe is able to put his agenda in to action at the BOJ and with China being the world's growth engine, the effects of them pulling growth back to idle to fight inflation will have worldwide consequences (ugly ones).

As for market breadth, the averages are weighted in such a way that breadth is very difficult to discern from the averages percentage movements, but as I have been posting for well over a month now, breadth is deteriorating badly, meaning even with the Dow hitting new highs, fewer stocks are participating, it's a matter of smoke and mirrors in average weighting.

Some examples...

*Green is the breadth indicator, red is the S&P-500

 Percentage of all NYSE stocks above their simple 40-day moving average- As you can see we went from a healthy move in the SPX and breadth to the upside together as they should move until the indicator topped out at 85% of all stocks trading above their 40-day moving average, since then it has fallen to less than 50% as the market makes new highs, this is a very basic average that a large majority of stocks should hold with the SPX making moves like this, they aren't. There's no interpretation or guessing here, these are hard numbers.

 Percentage of stocks 1 standard deviation above their 40-day moving average- These are higher momentum stocks or stocks that have been in a long lasting up-trend, they fell from a peak of 71% down to 20%, which is when I posted that the breadth condition was way oversold and to look for a bounce, still stocks are at 50%, 21% lower than when the SPX was about 4% lower, I fully expect a turn down creating a downtrend in the indicator.

 Percentage of stocks trading 2 standard deviations above their 40 day price moving average- Again, either strong momentum / leader stocks or stocks that have been in a long uptrend that is now failing. Note how the indicator moves up with the SPX at first as it should, 31%, then 44%, then it falls off to 38% and at a new local high all the way down to 18%, this told us at this new local high, there was a lot of selling in individual stocks, on a slight pullback the reading dropped to 5%! At a new higher high we are at 28%, less than when the trend started at 31% as the SPX is 8% higher.

 Percentage of all NYSE stocks trade 1 channel BELOW their 40 day moving average- Here as the market moves higher, the percentage of stocks falling significantly below their 40-day moving average has shot up from 6% to 32% and at 21% at a new local high, nearly 4x more than January.

 Looking at longer term trends, Percentage of stocks trade 2 standard deviations BELOW their 200 DAY MOVING AVERAGE,  this is a longer term change in character, not just a passing phase or blip. From 2% moving to 6%, even as the market heads higher, more and more stocks are falling deeply below their long term 200-day moving average, again suggesting single stocks are being sold sharply while the magic of market average weighting conceals the process or the real health of the market, THIS IS WHAT CNBC SHOULD BE TELLING ITS VIEWERS IF THEY WANT TO LET THEM KNOW WHAT THE TRUE CONDITION OF THE MARKET IS.


As for the  VIX... We saw the VIX well bid in an attempt to hedge positions, something interesting has been happening though.

 The SPX is green, the VIX red, strangely as the SPX makes these moves higher, the VIX is failing to make the kind of moves you'd expect to see, Only when you understand the breadth situation above can you understand the following, it looks like hedges are being unwound as long stock positions are being closed out, it's not the highs that are of interest here in the VIX, it's the lows.

Finally my custom-Demark-inspired "Buy/Sell" indicator is giving a strong long term signal on a monthly chart...

There have been 5 signals since 2006, the sell in 2007 was pretty close to the top, you;d be in a storm of volatility to try to chase a few percentage points if you played it near perfectly. The 2009 buy was right at the bottom, now we have a sell signal from around September 2012 when the market dipped after QE3 was announced and another signal right now, what is also interesting is the MACD Histogram below, it is giving the cleanest negative signal (cleanest of any signal) on the entire chart.

This is why I don't think we are heading toward a small event, a pullback or correction-in fact the total lack of healthy corrections in the SPX since the new year is a disturbing red flag, the only correction seems to be more of a breaking of the back of the trend.  As I said back then, the back of the trend can be broken, but it's very much like the back of  snake being broken, this is when they can swing around the most violently and with the most volatility -essentially when they are at their most dangerous.

As I showed you in Friday's recap post, Monday of last week and all through last week I posted that the amplitude (size of the swings) and duration/length looked as if it it would be growing, almost like a sine wave not only growing larger from top to bottom, but from side to side.

Finally the lost art of volume analysis, many a H&S rice patterns have been found to be random by volume confirmation/non-confirmation, Technical Analysis has been dumbed down to simple price patterns with no volume confirmation, look at what volume tells us about the SPX (This is a custom cumulative volume indicator I created- volume should move up with price and down with consolidations).

In January volume moved up with price as it should, it fell down in lateral movement or areas of no gains-THESE ARE NOT CORRECTIONS OR HEALTHY CONSOLIDATIONS. The Yellow arrow shows the first sign of trouble as volume fails to make a new high with price. After that volume falls as price becomes volatile and the ATR becomes higher, even on up days, then volume rises as the market barely moves, then we see the volatility event that I believe was the breaking of the back of the trend, since then the red arrow shows volume falling off in to a new high advance which is very bearish and happened right after the "breaking of the back" period. All of this taken together has a bad smell to it, the SPX alone isn't acting healthy, volume there isn't healthy, there's no healthy correction at all, market breadth is extremely bad and there's the possibility of a currency event that hits squarely in the middle of the carry trade, something that could send everything in to a deep tailspin. 

I'd spend less time paying attention to the headlines about the market that even my mother who has never seen a chart in her life knows EVERYTHING about and spend more time looking at what the crowd is missing, with a low volatility melt-up, one big volatile day down can wipe out well over a month of market gains easily, at this point a couple of days could take out the entire year.