Daily Wrap

So far for the casual observer, september being the worst month for the Dow and generally not a good month, has been living up to its reputation, however few people would likely concede that the F_O_M_C's knee jerk higher and subsequent shakeout lower is behind a great deal of the poor price action and then the debt ceiling and "will they/Won't they shut down government?" is of course weighing on the market as the US fiscal year comes to an end.

I think to get members up to speed, I'd recommend this morning's first post and then a clarification this afternoon and then I think I could wrap it up with 2 if not one chart tonight, lets try the two ES/SPX Futures and then the single chart.

 All week I've said how nice the rounding bottom looked, but how weak underlying trade has been, today's 15 min Es chart saw a significant change in character.

You know what I expect from here. The next important chart which should fill in all the blanks in between and how we'd like to take advantage of all  of this would be a simple 60 min, longer, stronger ES trend.

ES 60 mins.
Any Questions?

I'm sure there are a lot of tactical questions.

I see Treasuries as very likely to come down more, that sends Yields up, yields pull on the market so there's an upside influence.

The SPY arbitrage should be activated (it was flat today) with further losses in TLT and VXX as it didn't hold up as it should have today.

Since VXX and the SPY (green) have an inverse relationship, I just invert the price action for the SPX and you can see where VXX "Should be", apparently there's not as much demand for protection as the VXX has been steadily trending down vs the SPX.

With VXX and TLT down, the SPY Arbitrage is activated and we have a second source of upward bias that has almost nothing to do with equities and real demand. The fact that the SPY Arbitrage and CONTEXT have been virtually neutral means anything stronger than this is going to exert short term bullish bias.

Then we have the 3rd engine, that of the Carry Currency, I've been watching and the winner, winner - Chicken dinner I think will be the AUD/JPY and here's why...

 The 30 min $AUD chart shows a clear transition from F_O_M_C distribution to current accumulation, that's the first half of the cross...

Then the 30 min Yen has a relative negative divergence, but even if it stays flat and the $UAD does the work, you still have a rising AUD/JPY, so the little parts are coming together after a week in which it seems the market has been nervous to make any real commitments, but suddenly today, something seems to have changed and it's more focussed on the SPX than any of the other averages, think Financials.

Then there's professional sentiment... this one hasn't been an issue, all it needs to do is maintain.

And I think it's very clear it's outperforming the SPX so long as you know the SPX is the green one.

 Yields lead the market so we follow them as leading indicators. Short term we have a couple of moves to "reversion to the mean, this is like CONTEXT hitting ZERO of 3C being in ling, today we saw yields bump which is upward bias on the SPX VERY short term- just remember the first two charts of ES and you pretty much understand how things should go down.

 This longer chart of Yields is like the 60 min chart of ES, it's clearly leading the market lower, but nothing just "ups and moves", there's plenty of time and room for a short term bounce before yields start exerting massive gravitational pull on the market.

When you think about it in those terms, you can almost figure out with certainty what each move is designated for unless you believe in random walk theory in which case 3C shouldn't be able to predict any better than about 10% (I know you'd think 50%, but there are way too many dynamics, no trade in the market can be successful or a loser based on two dynamics alone.

 I have talked a lot about High Yield Credit this week because this is illiquid, it panics easy, yet it has hung in there, it also happens to be an institutional asset that they use for risk on moves, note the character of the SPX vs. that of HY Credit. VYC has been so reliable at forecasting, we have been using it for sometime as one of our main Leading Indicators.

 This is the CBOE SKEW Index, the higher it is, the higher the probability of a black swan event or sudden crash, the normal range is $115, $130-$135 is elevates, it's only at $122, but I can see a fast ROC (Rate of Change), you'll get use to seeing it to, but for now, I simply added ROC to the index.

Here you see the fast ROC change in SKEW in orange, options activity is starting to act like it does before a sudden 1987 style crash, so we'll want to keep an eye on the absolute level as well as the Rate of change.

Finally, the single chart that I think represents short term and long term marker movement and how each should be played, if you understand our concepts, then this chart should tell you all you need to know about probabilities and what to do with them.

This is a 15 min 3C chart of the IWM, the market leader. The in line readings to the right serve as calibration and confirmation of the effectiveness of the indicator, the leading negative divergence in to the F_O_M_C confirms our "Knee jerk" theory. The bullish Ascending Triangle following an uptrend tells us what retail traders are looking for and where they have set their limit buys as well as their buy to covers. You know how hitting these levels creates a snow ball effect so you can probably guess what the next move for the IWM is and why, with the leading negative divergence, you can probably guess what the move after that is and what you should be doing with the first move so you are ready for the second move.

That's a lot of information for one chart, but it's based on proven concepts.

I'd say the only reasonable long area at this point would be a head fake break below the triangle's apex, that's the only good area I think to hitch-hike a long to the upside, it also gives the upside move the snowball effect re: momentum. After that, it's stocks like PCLN or FB which I almost put out there today as a trade set up idea, I'm just waiting for a little more development so I can see where the likely target area will be now that we are above the original IPO price and day that GS and MS got so wrong.

Remember that tomorrow is an op-ex pin Friday just like every Friday, but not Quad witching like last Friday. In general I've noticed that Friday's open isn't too far from Thursday's close and the pin is pretty tight until about 2-2:30 as brokers unwind remaining contracts that are open by hounding you with phone calls, after that, the market seems to stretch its legs a bit, but I haven't noticed any real correlation between late Friday action and Monday action, however the late Friday 3C divergences more often than not pick up where they left off on Monday so if we are in an accumulation phase late Friday, I expect to see more early Monday, that's a pretty well verified effect.

Beyond that, it's futures action tonight if anything pops up, I'll be watching ES and the 15 min chart specifically. Of course if there are any developments in futures, I'll let you know, but looking toward the AUD/JPY long about to come in to play if you trade FX.