Midnight Futures

It takes a while for futures to settle in after the close and AH trade, I check throughout the night, but usually by this time there should be something going on.

As far as Friday and I won't post this again, the Late day market update called for continued consolidation early this week (Monday) and that could be either through time or through price, honestly though with the negatives we had Friday (beyond 1 min), the consolidation is almost always going to be through price. I thought because of the stance of the 5 min chart Friday that the consolidative behavior wouldn't last long (as in most of the week) so today did pretty much what we called for based on Friday afternoon's signals. On the other hand, I wasn't particularly impressed with today's late day action, but timing something to the exact half a day is pretty tough. 

What drives me nuts is the Financial media or media in general reporting that the market did XYZ today because of XYZ, not one mentioned the doubling of Interactive brokers margin from 50% to 100% in two days, of course I understand that the majority of listeners wouldn't understand what that means and they have to dumb it down, but I just hope more sophisticated traders can make up their own minds and not fall for the dumbing down of Americans when it comes to Financial decisions.

Whatever the market was upset about today, you can be sure by this post from Friday, that it had already telegraphed it Friday and as nothing economic or on the government front happened today, you just can't blame that for today's action, especially when it was telegraphed before the bell even rang today.

In fact, in my estimation, there hasn't been any significant change away from the consolidative behavior today until tonight's futures and those are just getting started. You might ask, "Consolidative? The Dow was down 135 points or -.90%!?!?" However, when looking at the SPX we didn't make a lower low or new low for the consolidation area, the NASDAQ 100 closed within Friday's real body (above the open) forming a bullish Harami,  the $COMP stayed within the range and didn't make a lower low as Thursday is anchoring the range, the R2K was above Thursday's range low, as was the NYSE. While a nearly 1% drop sounds bad, it has to be put in context and from last Monday the SPX is only down -.33% (one third of a percent for the last week), the NASDAQ is even less at 0.09%.

Again, we take the information as it comes and do the best we can with it, but this is a really difficult area to trade and make money with any consistiency for the last week so we've been a little less aggressive.

This is the range on a four hour chart since last Monday, as you can see the trend is "lateral", literally sideways chop which is a very difficult environment to make decent trades in that don't need to be watched as if you were a day trader, but nothing lasts forever and it seems to be part of a process.

I thought there were some interesting candlestick patterns and just because they weren't absolutely text book doesn't mean the concept of the textbook version wasn't there and it doesn't mean it wasn't effective. Technical traders often suffer from thinking the market should look like that one cherry picked example they see in a book when in the real world you'd be lucky to see such a clean example 1 of 100 times, it's the concept that is important.

At #1, we don't have an official Harami bearish reversal and it's not an official "Hanging man" negative reversal, but it was close to both and had the same effect, a downside reversal in the range. At #2, that isn't an official "Falling Three Methods" bearish consolidation/continuation pattern, but the effect was the same and the 4th candle was the EXACT outcome the price/candlestick pattern should produce. #3 Wasn't a perfect bullish Harami reversal or even star for that matter, but again, the concept was close enough for it to be effective. #4 was "almost" a bearish Harami reversal or "almost" an "Evening Star" bearish reversal, but again the outcome was the same. The main point is momentum on the upside was very strong, the next day not only did momentum in the size of the range fail, momentum from open to close and lack of a follow through close failed as well, the market went from strongly bullish to indecisive and that's generally where reversals occur. Physical momentum is the same, as it wanes, it makes it much easier for a change in direction to occur.

As far as CONTEXT goes, I said that I thought we'd see some improvement (relative to early trade) in the afternoon.

There's no large 40 or 50 point dislocation, but there's a clear change of character and it takes place largely toward the close and overnight trade so lets look at the Index Averages.

 5 min ES / SPX Futures are negative in to Friday afternoon just as the averages showed and thus the afternoon EOD Update's directionality for the start of the week. Today 3C is in line as the consolidation takes place and tonight we have our first positive divergences since Friday's EOD post calling for early week, short duration weakness.

5 min  NQ / NASDAQ futures were negative in to Friday and in line today and are showing the first hint of a positive divegrence on a significant timeframe (1 min isn't significant overnight for futures).

5 min TF or R2K Futures  Show the same distribution Friday leading to the consolidation/pullback prediction or analysis is probably a better term, today and tonight we have the first sign of a transition and it's on track with Friday's EOD analysis.

Treasuries confirm Friday's analysis as well as today's fulfillment of that analysis.

 Treasury (30 year) futures have been moving opposite the market so a positive divegrence Friday leading to price upside today fits perfectly, tonight's signs of distribution are right on time as well

The 15 min chart shows the same thing, accumulation Friday (as it should be the opposite signal that is showing up in Index Futures) and a negative divegrence tonight and this is a more significant timeframe.

As for the Nikkei 225...

The NKD 225 Futures are not screaming upside, but the 15 min chart has a decent process in place with increasing accumulation.

As far as currencies go, all of them held up in to the close ($AUD, EUR, even the Yen and USD) vs the SPX, so it seems likely that Interactive Brokers margin hike of 200% over 2-days was likely the culprit in today's late day trade. I'm not saying the market would have had some positive or even green close otherwise, it's just helpful to know what fundamental events transpired and if they are transitional or trend changing, I'd call this one transitional.

I talked about the USD/JPY former carry pair looking like it would reverse to the upside soon and provide the market some support, here are the charts for $USDX and Yen Futures.

 For the USD/JPY to help the market it must rise which means the second ticker in the pair, the JPY (Yen) must drop and it is showing a  5 min negative which is good for timing if there's a longer divegrence already in place.

 This 60 min Yen (I mentioned as being negative today which was a big move from the 15 min chart) is very significant for the pair as they have a lot more influence than most traders realize on the market averages.

For the pair to make a move higher though, it takes two to tango, the USD being the first ticker on the pair must rise.

The $USDX 15 min chart not only went positive at the week's lows, but reversed price and headed higher and we are still leading positive suggesting more, which should move the currency cross and give the market support. All of these smaller events have to be examined for trends and when patterns start confirming, you start to get a higher probability composite picture.

As I said and I will show you the NASDAQ 100 tomorrow because it REALLY looks horrible, it will be near the top of my list for assets to short when the time is right, which is not far away and I may even look at a short position even sooner with some kind of hedge to protect the position in case it's a little early. At this stage of the market, I think it's not such a bad thing to be a little early as long as you have allowed enough room on your stop. 

By the way, the new site is nearly finished and this is what one of the new additions will look lie, the RISK management calculator that gives you the stop for the 2% rule as well as the maximum percent of portfolio position size.

 You put in your portfolio value (all data is private and can't be seen by anyone including me), you put in the cost of the shares, your intended stop and your maximum position size as a percentage of portfolio, I usually use 15% which is the only real protection against gaps. As a general rule, I wouldn't invest any more than 20% of portfolio in any one stock, I prefer 15%, that's plenty of diversification. By law, Mutual funds can't put in more than 5% of portfolio in to any one position meaning they have to have at least 20 positions by law, which is a performance killer or over diversification in my opinion.

Then chose long or short trade and Hit the submit button and...

You get the number of shares the 2% rule will allow based on your portfolio size, the cost of the stock, your stop, etc. You also get max position size, the lesser of the two is your max. shares. The wider your stop, the better chance your trade works, but the fewer shares, the tighter your stop, the larger your position size can be, but sometimes a tight stop can allow for 100% of a portfolio to be invested and we never want to do that so there's the maximum position size as a percentage of portfolio rule as well. There are a lot of other new features and resources that I'm really excited to share with you.

In any case, the point being that today as mentioned several times during regular hours, I was not impressed by afternoon trade, it looks a bit better in the overnight session, but that needs to stick in regular hours. Leading Indicators were no exception, but there were still a few interesting signals.

 Yields are for the first time for only the second time in this range, leading positive.

 Commodities are showing some relative strength vs. the SPX.

Here's a close look.

And while HY credit is not making the same intraday higher highs it was making last week, it is still positively dislocated and leading the market which is a little rare for HY credit, but it has been a great leading indicator in the past.

So that's about it for now, we'll see if the overnight futures solidify in to tomorrow, that would be about the right time as far as expectations from Friday were concerned. Not much happened today that alters that in any meaningful way.

As I did say though, I do want to show you the NASDAQ 100 and just how bad it looks, you'd probably not think so based on price action relative to the Dow, but it is really looking bad. There's a chance it improves for the near term, actually I think a decent chance, but there's such significant damage already done that it has to be near the top of the short list.

I'm not up[dating futures again tonight, but I will in the morning.

I may also show you some more features of the new site which I'm really excited about, we've actually been working very hard on it, although it has taken far longer than I suspected, I think ultimately it will be worth the wait.