Daily Wrap

Today was not as interesting as Friday, for me, there wasn't the urgency of re-posiitoning like we had on Friday, which by the way, if I were still treating positions like this as we have been, "Hit and Run" or "In and Out" because the market has been so choppy, we or anyone who did and I know a few of you did, would have had some nice gains on the positions from Friday as of the opening gap, easy money. However, since my overall expectation since the cycle started to set up on 8/16 is for a bounce in the market (and a set up since 8/16 suggests a fairly strong bounce- as I said earlier today these moves are not run just for the heck of it, they have a goal and typically they are pretty extreme to meet that goal such as changing retail bearish sentiment to bullish) I expected to hold many of these positions longer than a 1-day or half a trading day in and out move.

I was answering an email from a member this afternoon and mentioned that I didn't feel the urgency today to set new positions or additional positions (including adding to Friday's new positions) and 3C wasn't showing that urgency, the urgency that it showed Friday was played out on the open of Futures Sunday night right through this morning's open so those positions were correct, however as I took my dog for the "After the close walk" as she patiently waits during market hours, a couple of things clicked together quite easily.

You know I'm all about "objective data", not emotions of greed or fear, not what a bunch of blogs say, not the mass psychology of the sheep of StockTwits or even CNBC and the rest of the financial media which I never watch as I don't want any subconscious opinions to enter my analysis other than objective data, I do have gut feelings, but I try to disclose those as such and put them in to proper perspective vs. objective data.

The "Dog Walk Hypothesis" is really quite simple and I believe there's fairly decent objective data to back it up. We always have to guard against goal-sought data, which means there's so much data in the market, you can justify any point of view you want to take by simply making some adjustments to indicators, grabbing the data that suits your needs and disregarding or downplaying the rest, it's a very strong urge that we are raised with as soon as we enter school, the "desire to be right" and the market will give you anything you need to make whatever case you want. In truth our desire should be to make money and that doesn't always go hand in hand with "being right", it sounds counter-intuitive, but with enough experience you'll know exactly what that means.

I already had a lot of the parts of the hypothesis in place which is good because these were established BEFORE the hypothesis. First, last week I mentioned numerous times that Friday was going to be a slower than normal day on Wall Street because a lot of the players are off to the Hamptons to make a 4-day weekend out of Monday's holiday, those who can't afford to be in the Hamptons on Friday are on Wall St. working, but they aren't generally the type that are going to be able to make the big decisions, they're low to mid-level traders and IT people, so you probably recall me saying last week to expect Friday to be light because of the weekly op-ex and the extended Wall St. vacation these guys are known for.

The second part of this hypothesis was found directly in Friday's action which was confirmed by prices on the open of Sunday night futures as well as right through this morning's open, the positions we closed Friday like Silver/SLV puts, were up big when futures opened. A lot of the longs that were opened or new positions would have been at double digit profits if they were closed on the gap up this morning.

The point being as I mentioned in last night's post and Friday EOD post was Friday was a highly unusual day in that there was a LOT of underlying trade activity, I can't recall the last time I closed and opened so many positions in one day and it wasn't based on me, it was based on the charts of underlying activity.

This is what leads me to believe with about 98% certainty that elements of Wall St. knew what Obama was going to do re: going to Congress well in advance of the announcement during market hours Friday, that's what they pay professional networks for and that's why Congressional staffers tend to be some of the best traders out there, they have the inside line first and don't think a quick phone call to Goldman Sachs won't get one of these guys a new Porsche. 

Next, I found it interesting that the market today, was roughly headed to the close on Friday.

Futures gapped up Sunday night and held right through the open today, but as soon as we opened, you saw the charts, we had intraday negative divergences that sent prices lower today, ironically right around where the market left off Friday.

Here's an example from my first Market Update this morning...

 If we follow this SPY 1 min chart, we see a large change in 3C character Friday 8/30 with a large positive divergence, this is part of what kept me so busy moving, closing and opening new positions. However on the open today (and this was posted at 11:30 a.m.) there's a clear 3C negative divergence, which should pullback prices as we saw nearly all day.

You may also recall that the first Market Update was so late because I wanted to make sure everything was ok as HYG (High Yield Corporate Credit) gapped lower which is not a "Risk on" position for it to take. 

HYG gaps lower, not a positive development for a market bounce. As the day went on I became more comfortable as I saw HYG under accumulation in to lower prices....

I don't mind if HYG falls as long as it's under accumulation, my initial opinion was simply they wanted to buy more HYG (as HY Credit is a favorite risk on position for smart money). You can see here on a 2 min HYG chart as of the close that the 3C positive divergence built through the day, if it wasn't positive, I'd be really concerned about the possibility of our larger bounce, but other than, "Oh, they are just accumulating at lower prices as they won't chase prices", was about as much thought as I gave it.

The market averages were doing the same thing today led by the Russell 2000 which should be the leader of any bounce/risk on/rally.

 From left to right on a 3 min IWM chart:
1) Friday's accumulation is unusual and causes the market to gap up this week. 
2)There's 3C distribution immediately on the open and the market moves lower most of the day toward Friday's price range, while 3C is "in line" at the green arrow.
3) in to intraday lows, 3C is showing accumulation of the intraday lows today and shoots higher with price in to the close.

IWM 5 min chart...

All of the same features are evident here as well as the other averages:

1) Friday's accumulation is unusual causing me to close many shorts and open many longs.
2) The market gaps up this week just as 3C was pointing to Friday and you may recall, I DID have a sense of urgency to move those positions Friday.
So far the evidence "seems" to point to insider knowledge of Obama going to congress, thereby putting any attack on Syria off for at least another 10-days, WHAT ELSE WOULD HAVE CAUSED THE MARKET TO ACT THAT WAY ON AN OP-EX FRIDAY THAT IS USUALLY ONE OF THE QUIETEST DAYS OF THE WEEK?
3) Distribution is evident at the open on the gap up. *Note distribution did not take place in the futures Sunday night or through Monday or overseas, it waited for the regular US market to open. 
4) Apparently today's initial distribution was meant only to send prices to lower levels as they were accumulated at the lows.

So far everything we see looks like Wall St. wants to add to their long exposure, retail is bearish and willing to sell the gap up short allowing Wall St. to absorb or accumulate the supply at cheaper prices. *Until now, I didn't make the HYG connection.

Treasuries were down and there wasn't anything that was going to change that, they were acting in a very "Risk on" manner for stocks, however as we know, the 3 arbitrage assets used to manipulate SPY prices down would be HYG down, TLT and VXX up, as mentioned TLT was out of the game and that wasn't changing, but HYG was down and VIX was moving up toward filling it's downward gap most of the day, between HYG and VXX, the manipulative effect on the SPY via arbitrage would be to pull it back, this is why I now believe HYG gapped down this morning with VXX moving up, it helped pull the market back.

Accumulation was pretty heavy in to the 2-p.m.-ish lows today.

 These are 5 min charts (pretty serious for intraday trade) and all of them show Friday's unusual accumulation, this morning's opening negative divergence and accumulation of the lows. Look at the size of that leading positive divergence in the SPY today!

 The QQQ negative at the open and accumulation in to the lows.

IWM on Friday, this morning's negative and a large positive divergence most of the way down.

So not only was HYG accumulated in to the lows of the day while it helped push the market lower off the opening gap up, but the market averages were under accumulation as soon as they came down to a more reasonable area around Friday's range.

We could say, "The market picked up accumulating right about where it left off Friday". If we consider Wall St. was likely largely understaffed of senior management as they were in the Hamptons, mid-level traders likely weren't going to be really aggressive without supervision, but apparently got started. Since there was no pullback to speak of since the Sunday night open of futures until 9:30 this morning after the holiday yesterday, my guess is Wall St. did get wind of Obama's concession to go to Congress, this bought the market close to 2 weeks before the "Uncertainty" issue re: Syria would become a problem again and gives the market a nice window to put in a solid upside move, the only thing is if it's a window larger than expected, you might (like me) want to have more exposure.

The thing I warned of several times today is Wall St. can't absorb too much supply too quickly otherwise they'll send prices higher and when they are trying to accumulate shares, that's the last thing they want to do.

However, accumulation judging by the 5 min charts was pretty heavy at the afternoon lows, it seems it was heavy enough to send prices higher, the supply/demand scale was tipped and what happened?

 At "A" we see the move lower after the 9:30 US open gap up, as prices come in to range we see 3C moving up indicating ES (the market) is being accumulated (buy low-sell high, Wall St. 101), however right around 3 p.m. the market moves higher, I'm guessing the supply/demand equation was thrown off as retail would be producing supply early in the morning as they shorted the gap up, by 3 p.m. there's not much reason for them to short so there's not much supply, any Wall st. accumulation then becomes demand heavy and sends prices higher.

But what happen s to 3C in to higher intraday prices after 3 p.m. (15)? We see distribution to knock prices down again.

If we look at the same chart with VWAP (Volume Weighted Average Price) we see price on the lower VWAP S.D. band, ideally that's where institutional money wants to fill their buy orders, at VWAP or below. They want to sell at VWAP or at the top band and this is how market makers and specialists are graded on how well they fill an institutional order, so as prices start rising toward VWAP at 3 p.m., some supply is let out to try to keep them in the accumulation zone.

This is market maker/Institutional order fill 101, buy at VWAP or below, if prices rise, let out some supply (distribution) until prices fall again and start accumulating the rest of the order.

I'd say today was a continuation of Friday, it doesn't matter that prices opened Sunday night on a big gap up and held most of it, it matters what happened when Wall St. was back and staffed and everything above from manipulation to send the market lower with HYG to accumulation of lows to letting supply out as prices moves up toward VWAP all smells of pure accumulation and a continuation of Friday.

In my End of Day Update today before the close,  my feeling about what to expect tomorrow and what I felt about what I saw to that point was this....

"It's very interesting, the 2 pm-ish lows got a real boost, a lot of 3 min charts are flying, there's positive momentum in to 5 and 10 min charts as well intraday. That's the afternoon low accumulation mentioned above.

I'd think we'd see early strength in the a.m., it may be worth taking some call profits if we get an early signal that looks like we get another day like today (Pullback with positives). I think all of this is pretty close to right on except the early a.m. action, I didn't see ES, just the averages and ES was showing light distribution, just enough or the kind I'd expect to see to move prices back to the accumulation zone near the lows of the day.

I have a feeling we'll see 1 more run at support, maybe a head fake break below and a move higher.

If I had felt the same urgency as Friday I'd say we might just be on our way, I saw positions I liked, but not that urgency which makes me feel a move is imminent as in tomorrow morning and especially after seeing light distribution coming in to VWAP on the ES chart. To me that looks like they'll do what I said in the rest of the paragraph, "MAYBE A HEAD FAKE BELOW THE RANGE AND THEN A MOVE HIGHER, TO DO THAT WE HAVE TO MOVE BACK TO THE RANGE.

That's my take right now."

So that is my take, it looks to me that we'll get one more run like today, maybe part of the day, maybe the whole day, but likely accumulation around the range of Friday to today's lows, a head fake move below that range and that would be where I'd really have a sense of urgency to be in place or getting everything in place at break-neck speed.

One other thing that initially scared me a little, but now makes sense after seeing the last hour in ES with 3C and VWAP...

HYG got slammed again, but with ES moving to VWAP, what's a quick way to use arbitrage to slow it down, HYG lower just like this morning. 

 HYG in blue vs the SPX slammed lower near the close, right around 3 pm when the market was lifting to the upside toward VWAP.


If there were real fear then the VIX futures would be bid, they weren't, they were moving down with 3C confirmation, not accumulation.

VXX shows the same thing.

Risk Sentiment improved just like it did on Friday, most importantly in to the lows and close.

Risk sentiment vs the SPX (always green when looking at Leading Indicators) moved up in to Friday's close, you see what happened to the SPX with a healthy gap up and today the same thing happened, I'm not saying we gap up tomorrow morning, but this is definitely positive for our risk on scenario.

The skittish, High Yield Credit (less liquid) was also encouraging as it has been...

 High Yield Credit the last week plus moving up vs the SPX.

HY Credit moving up today even more, Credit is important because HY Credit is what institutional money uses to take advantage of market upside, how many retail people do you know who trade HY credit? Thus the saying, "Credit leads, stocks follow", it's a much smarter crowd.

All in all I feel good, I think the market feels better about less immediate uncertainty re: Syria and it's a window for the market to rally, it seems by Friday's action that Wall St. knew ahead of time what Obama was going to do, the action was just too strange to say it was a normal day and I think they're willing to take on more risk because that uncertainty has been pushed back.

On another note, some of you have asked me about Gold Miners, as you know I closed DUST long (Gold miners or GDX short) Friday for a +27.5% gain, I didn't open a long miners position because the short term charts look uncertain right now and that's not an edge. I do see GDX and NUGT (3x long Miners) with an interesting 30 min positive divergence.

NUGT 30 min with a negative and head fake in the red box sending NUGT lower and DUST higher and a current 30 min positive. There aren't any other timeframes intraday that connect this chart so until I see the data, for now I have to assume this is a possible move for after a market bounce and on a market decline, it depends on when the short term charts move and they haven't done that yet.

Looking at the limited data in DUST as well (part of the reason I closed it was the charts and because PMs are acting defensive when we had an offensive day Friday in underlying trade, but from what I do have, this could be exactly what's happening.

 The DUST 93x short gold miners) has a strong 15 min positive, it's just slightly negative, enough to expect a consolidation and in the red box we have a triangle like consolidation so DUST may be a long to continue this move up during a market bounce.

The problem is the short term charts are not great, this 1 min is about as clear as they get and there's no edge there. If this chart and the 2, 3 and/or 5 min go positive tomorrow, I'm buying DUST or shorting GDX (PUTS), but until I see high probabilities on timing, I'm going to wait.

I'd think PMS would behave in similar fashion, I posted a SLV/Silver update today, I'll post GLD/gold tomorrow. but I can tell you from eyeballing the charts, GLD/gold looks like it has near term downside as there was distribution in to the move higher, there may be a position thre tomorrow.

Longer term it has some positives and the PMs have been acting as a "Flight to safety trade", so a market bounce should send them down and when the market reverses to the downside, as long as the correlation holds and from what we saw in silver today, I'm guessing they are a flight to safety trade and run up.

SPY green/GLD red 15 min, just look at today, the SPY moving down and GLD moving up, at the EOD they switch.

That's it for now because I don't think much has changed, I'll be watching the futures tonight and let you know if anything pops up, the only interesting thing right now is some $USD underlying strength and continued JPY weakness, that can be an engine for the market, both overnight and the days ahead.