Daily Wrap

This afternoon I laid out a theory in the "Strategic Update post", you can check it out. Basically the theory was the market's sort of dull performance may in fact be to keep shorts in place as the market "slow boils the frog" to launch a short squeeze at higher levels. This is exceptionally hard to prove, but it makes some sense.

For a second day we saw mediocre performance with the S&P up again just under 1% a,most exactly like yesterday, I don't believe in "coincidences" in the market and as you well know this was something that was already at my goat yesterday, a second day of it seemed to be beyond coincidence.

Anyone remember my email response from Saturday to a member as to what the catalysts may be, I said I thought the usual stuff, buyt F_E_D rumors wouldn't surprise me, yesterday we got even better, we had two known F_E_D hawks talking like doves, for a 2nd day in a row we had another F_E_D hawk, Lacker, doing the same. How did I know that last Saturday? Well I didn't, but looking at the way the market is set up, it seems to me that something more than just a short squeeze would be needed to change short term retail sentiment and I figured some dovish F_E_D rumors would do it, I didn't expect 3 hawks to come out in 2-days and sing the doe song!

As a reminder, here's the exact email question and answer from Saturday (almost 5-days ago)...

Member: "This suggests the bulk of the upside will have to come from a combination of upside biased HFT algos, short covering panics and, eventually, bulls jumping in long on the assumption the market has reversed. "

My Answer: "That's the obvious stuff, but I wouldn't be surprised if the F_E_D let a rumor slip, picked up by the WSJ that helps, remember they have a lot closer relationship than they disclose as evidenced by the minutes being emailed to 154 trading firms over a day early. They'd rather see them make money in the market than have to bail them out.

That's just one theory, but there could be numerous things along those lines."

And here we are 3 days in to the week with not one, not two, but 3 known F_E_D hawks, talking down the QE Tapering fears, essentially talking the market up!


As far as some risk assets HYG High Yield Corp. Credit showed almost tick for tick relative strength vs the SPX again today, the important thing is it's not leading negative. DHY / High Yield credit and the first of the credit assets to run scared because of its low liquidity was actually putting on a show today, even more so than yesterday... take a look.

 HY Credit was positive yesterday, but today this illiquid credit that I don't think anyone would bid up without a god reason, was indeed bid up today which to me (considering the liquidity risks) means that someone see the bigger picture (I'm not talking about the ultimate big picture as in the market crashing) the next tradable trend which I believe we have started already (up) although I never believe nor have a often seen a market just move in one direction. I think people have a misconception when you say, "I think the market is going to see a strong move up", they expect that every day, every hour the market will do nothing but rise, that's just not true. For instance lets just take a look at a STRONG down trend.

Even knowing at the time this was a horrible period with 90 year old investment houses failing and inter-bank liquidity completely seized up and adding to that the benefit of hindsight, I think at first glance no one would argue this was a nasty down trend and I think few would think that they would have been shaken out of their shorts.

 Late 2008 in the SPY/SPX, I think if you asked most people "What would you have done, knowing the period was horrible at the time, would you have held your short?" I think most people with the benefit of hindsight would have said without hesitation, "YES, of course! Look at that down trend, there's nor reason the let go of a short there!"

However when looked at in a moire realistic way, forget about intraday volatility that just scrapes away at your nerves, just looking at the daily trend, let me give you some facts and see if your answer would be the same...

During this period we had 16 down days and 14 up days, it would have hardly felt like a downtrend when you are living at the right edge of the chart not knowing what comes next. And as bad as the down move was, did you know there were 3 days of approx. +2% gains, 1 day of 3% gain, 3 days of nearly 4% gains and 1 day with a +14.5% gain? Not knowing what was coming the next day or the next few weeks, do you still think you'd have the nerves of steel to hold a short as you watched the market march higher all day for a 4% gain on the day or a 14.5% gain? Looking back in hind sight and putting yourself in the moment are two very different things.

This is what I mean when I say, "Wall Street will never make it easy", I think you need to have an edge that you trust to get you through those 3 and 4% up days.

 As for sentiment, even though the EOD saw Street sentiment fade toward the EOD//close, it is still in an overall, very powerful place suggesting a strong move if you can live through the volatility.

HIO shows something very similar, both in the trend and EOD today. I'd suspect that tomorrow will see some downside moves to shakeout those who feel confident in a move higher (as few as that may be) and give confidence to the perma-bears.

Interestingly, on an intraday basis (Yields are still positively dislocated from the SPX when looking at a slightly longer term along the lines of a move up represented by 30 min positive divergence in the Index futures) Yields came down before closing early and not too long after the market came down in to the EOD, I do think this had a lot more to do with psychological warfare being waged at SPX $1600, but TLT is a known SPY arbitrage asset used for short term manipulation.

There it is, Yields intraday as a magnet would suggest we see downside early tomorrow or at least early tomorrow and maybe them some. I'm not going to get in to TLT here tonight, this deserves a post of its own.

Commodities didn't work with the SPX again this week, but rather (unlike the SPX) followed their legacy arbitrage correlation with the $USD, the SPX is actually stronger than the $USD correlation would normally allow for, take that, take sentiment above, take HY credit, especially HY (illiquid) leading positive and you have some very bullish undertones in the market and seemingly institutional money aware of what to expect which thus far has been the same as what we've expected and as for the 3 F_E_D hawks, turned Doves this week so far, again as I made clear on Saturday in my expectations for this week, I DON'T THINK THERE ARE ANY COINCIDENCES AT WORK HERE!

I mentioned above the possibility or even probability of some downside tomorrow, but at the same time I've shown you several assets above that argue for a bigger move, just like the 2008 chart I showed you (the downtrend), nothing is as easy as it sounds, it takes faith and faith is only differentiated from hope by objective data.

Take VXX for instance, short term as in perhaps tomorrow, we have an intraday positive building, since the market moves opposite the VXX, that would suggest that VXX moves up and the market down.

 VXX 2 min leading positive this afternoon, but remember this is only a 2 min chart, still enough to move the market tomorrow in a way that might make you doubt your data and probabilities,  but if you go to where the stronger probabilities are (just like the 30 min positive Index futures across the board and consider Credit above, and the other things I've pointed out so far, then...

This 10 min leading negative of VXX would suggest the highest probability trade here would be to sell short VXX or buy puts in to any short term strength as this chart makes clear a leading negative 10 min (institutional timeframe) divergence that fits well with all of the other information we have. These are hard moves to make, selling short in to strength, but we need to look past intraday action, we need to look at data objectively and put emotions aside, the hard trades to enter are often the best performers.

As far as confirmation in the SPY, take a look.

 The 2 min chart, like VXX is not exceptionally strong in its negative posture, but it's enough for a short term move which could be part of the day, maybe the entire day, but again if we come bask to the higher probabilities and in this case I could go to 5 or 10 min charts, but I don't have to...

A simple 3 min chart, stronger than a 2 minute shows a strong relative positive and leading positive divergence with NO DAMAGE done to it today at all, suggesting whatever short term weakness may be there, is capped at a very weak 2 min chart (at least in the context of the overall data we have).

Take the Q's as a confirming example...

 The 2 min QQQ again has a negative divegrence at the EOD, it's probably enough to have an effect on the market tomorrow, but once again, I don't have to go far to see where the probabilities are (just like that SPY downtrend I showed you, you can think of these 2 min charts as the chop up and down, but the main trend of a loss of -26% in the example above is on the higher probability charts and again I don't have to go far to find it.

Another 3 min chart leading positive at a new leading high!

I said I didn't need to, but I can go to a longer chart like 5 min and see very strong probabilities, so as I have said before, you have to be careful when you watch the market all day, every day ,not to "GET LOST IN THE LINES", in other words, get so emotional about intraday and day to day volatility that you miss where the trade is like the -26% move down in that short period of 2008.

Tonight's Dominant Price/Volume Relationship in all four major averages (this is the relationship between price and volume for all of the component stocks that make up and average like the Dow-30 or NASDAQ 100-NOT the average's price and volume itself) is in line with what we see on the 2-min charts, the Dominant (meaning overwhelmingly obvious) relationship in all 4 averages is the most bearish for the short term (as in the next day), of the 4 possible outcomes, the dominant relationship for all 4 averages is Price Up / Volume Down.  More often than not, this is one of the best indications of a 1-day overbought market, I use overbought very loosely because the price/volume relationship is a lot more elegant than a simple "overbought/oversold.

As far as Precious metals go, a strong divergence doesn't just fade away that easy, just like a 4% move up in the 20098 SPY downtrend didn't change anything in the trend, I don't think last night's move in precious metals as China opened will have any lasting effect on the expected trend and outcome for Silver and gold (SLV and GLD). For example...

 This is the Silver 5 min 3C futures, very positive on today's move

And the longer term or highest probabilities on a 30 min Silver futures is pretty clear as well, this is why I don't panic over a move like last night's.

 This is the Gold 5 min futures, it looks almost exactly the same as Silver's.

And the 30 min gold futures, it's not just the quality of the divergence, it's the confirmation between the two assets as it remains the same (both positive) as it was Tuesday.

As for tonight,  the Nikkei futures look strong, however the 3C charts in the 1 and 5 min timeframes aren't supporting price so I don't know if the Nikkei will end the day on a solid note, I personally wouldn't put money on it because that's not where the short term edge is.

This is only a 1 min chart, but as I said, the 5 min isn't backing price either.

Of course it's very early in the night and a lot can happen, but the divergence on the 1 min chart in the Nikkei futures have been right on, both positive and negative so despite price seeing a parabolic move up right now, this isn't the edge that we look for, this is the kind of position that we pass up (unless this were to change and give us a real solid edge).

ES has a similar negative 1 and 5 min, as does NQ and TF (the 1 min in this case is much worse than the 5 min, the Nikkei they are about the same). However where it really counts at the 30 and now even the 60 min charts, all Index futures are still on very solid footing, there has been no damage whatsoever to those charts and for me, that's all I care about in the current positions and even more as a means to an end, the BIG PICTURE, setting up shorts for a primary trend down.

That's going to do it for tonight, I'll be back in the a.m. to check the futures, we'll see if there are any overnight surprises, with volatility as high as it is, I wouldn't be the least bit surprised. It's the 30/60 min charts that are the anchor that relieves me of surprises.