Daily Wrap

I'm not sure there's much more to say except I think the lesson of today is similar to the lesson of September 13 2012, which was when the F_O_M_C announced QE3, I had more emails that day telling me "Don't fight the F_E_D", and if I were to right in my trading journal, I would have said,

"With QE3 announced today and the market's initial knee jerk reaction to the upside, I'll admit I was very tempted to close all shorts, go full long and call it a day, but those were my emotions and conventional wisdom talking, objective data said something very different, it said hold the shorts, stay where you are for now"

No, I'm not immune to emotions of a trade, but I've had enough experience to know that Wall St. often moves the market just to touch on emotions to get you to do something they want, this is why I always look for objective data. I had a lot of emails last night and this morning asking if I would bail on short positions given the gap up, my answer was, "I wouldn't do anything until I saw objective data, otherwise I'd just be acting out of highly subjective emotion and that's not good decision making in the market"

And what do you know, as soon as regular hours open at 9:30 we see the largest move down since futures opened for the week and things didn't get any better from there.

Just like when QE3 was announced and 3C was clearly negative, over the next 2 months the market drifted LOWER, not exactly what conventional wisdom would say and the market lost about 8% in to the November 16th market low when carry trades were fired up a week before and there was accumulation in to the low, so the shorts were the right move for the time and that was a hard decision because of emotions, but it was a good decision because it was based on something more objective than my fear.

So what can I add to today that I haven't already said? Not much, we say the damage and signs of it last night, this morning on the open it was immediate, it didn't get better no matter what metric you used.

HYG, VXX and TLT in the very short term along with 1 min charts are indicating a bounce higher, thus far seemingly based on SPY Arbitrage, since they are only 1 min charts I don't know if they can hold up through the night as they typically don't, there's no strength to the divergence beyond 1 min charts and in fact quite the opposite, the longer charts are very negative and not much longer, 2 min through 5 min and with confirmation in VXX as well as VIX futures and Index futures.

If I had to guess, I'd say the VIX accumulation is directly attributed to the F_O_M_C meeting starting tomorrow and the policy statement at 2 pm on Wednesday.

Some of the most damning information came from the charts (broadly speaking including futures), VIX futures as well as VXX, but the big one was High Yield Credit, as mentioned I wouldn't expect HYG to reflect the same as it is one of 3 assets that need to be manipulated to cause SPY arbitrage manipulation which is short term like the 1 min positive divergence forming in the late afternoon.

The CONTEXT ES model is simply stunning, if they don't adjust it and it's still -70 ES points negative tomorrow, I think we may have to rethink he timing of a major downside move. Still HY credit is standing out, there's no correlation with HY credit that can help the market so there's no manipulation there, that's the really disturbing part as far as the market and downside goes, the CONTEXT Es model's extreme reading of -76 points is just making that downside move scarier.

As far as the F_O_M_C, the consensus is they';; float a trial balloon and announce a gradual/minor tapering and gauge the market's reaction, I agree with that, but at the same time I think the F_E_D is in this position because they have some real balance sheet problems and need to wean Congress off infinite money printing. The further they go down the rabbit hole, the worse it is to try to come back up.

I don't have anything else to add beyond what we've already seen expect to say again, I'd be very concerned if I were long when you look at all of the market breakdowns recently, what happens when HFTs shut down and all liquidity does as well, I can see these markets breaking on a near daily basis, something is not right here and I see it as a major red flag for the market when true panic sets in.

Other than that, all I can do is watch futures tonight and see if the 1 min charts can actually hold up overnight to produce a short term positive divergence that does something tomorrow, I don't think it's much longer than that being VIX futures are being so heavily accumulated someone knows something is up beyond the 2 pm Wednesday policy statement.

We may very well get some last minute chances to jump in new or add to positions, but you can see why I wanted to wait today with the EOD positive 1 min divergences forming.

I'll update again later if the futures are acting in a way that suggests they are able to hold on to the EOD positive divergence, it's nothing to fear, it's more of a short term market gift if you know what it is, if you are just chasing price like so many in pre-market this morning, you're in trouble.