Daily Wrap

I still think there's more to be learned in overnight activity than usual. A lot of old tricks aren't playing out so well and a lot of old tricks are playing out exactly as they always have, what do I mean?

If you've been with us for more than 4 months then you know I ALWAYS warn to "BEWARE THE KNEE-JERK REACTION" whenever it comes to F_E_D, F_O_M_C or really any Central Bank news or policy.

QE3 released on Sept. 19 2012 rallied for 2 hours about and that was the high not to be surpassed until mid-January of 2013, the initial strong knee-jerk rally was just that, a knee jerk. Just as the ECB's Euro drop on their surprise rate cut which lasted less than a week was a knee-jerk and the WSJ article that sent the Euro lower lasted even less, maybe an hour or so, but the initial move (like the nearly 200 pips on the rate cut) look very strong, they are usually just wrong.

Don't forget what happened just previous to yesterday's Central Bank ramp, the ES futures fell 10 points overnight, it was not set to be a pretty day and it wasn't strong demand, it was instant discounting of unheard of news, "The ECB in QE".

The ECB ramp worked better for the market than it did for the Euro.

When the surprise ECB rate cut didn't hold the Euro down they tried some intense jawboning, the Euro is now at the exact level it was at just before the ECB/WSJ article came out, but note the negative divegrence in the Euro and keep the EUR/JPY's lifting capacity for the market in mind because, something happened with the Yen today as well.

This is around 2-2:30 today when several markets did some strange things like the VIX futures.

If these divergences play out as they look prepared to do, then Euro lower and Yen higher means

This general trend in EUR/JPY (candlesticks) vs ES (purple) changes, more than that, unless the $AUD and/or $USD are extremely strong, it knocks out those two carries as well, but they have been showing less and less correlation over the past week.

Other oddities around the same time...

 First the 1 min chart, then 2, and 3 min ...this is the 5 min VIX/VXX intraday chart. This is a 3C edge, you don't have to look for it, it jumps off the chart.

This is the 2x leveraged version of the above, it looks like it started earlier, but perhaps as Yellen finished and didn't surprise? A Leading positive divegrence took off from an "In line" status.

Check out Spot VIX...

My Custom DeMark inspired buy/sell indicator works great with the VIX, note the buy and sell signals. they aren't often, but they are impressive.

However what's impressive now is the directional move building in the VIX, look at the Bollinger Bands pinch. If that VXX / VIX futures divegrence keeps up, I think we know which way this breaks.

However many times in the past I've seen Crazy Ivans here, that's our term for a shakeout of both the up and downside, both get shaken before the trend emerges.

Remember how many times this week (and over the years) I said the range in the market (2.5 weeks of chop) still had not created a head fake move and in general and in any timeframe, we see a head fake move about 85% of the time just before a reversal.

You might remember when my forward trend analysis was a wide, choppy range? Well that went on for 2.5 trading weeks, it's way too obvious not to hut and the articles, "Understanding the head fake move" will clearly explain all of the reasons why or at least numerous ones. This isn't a coincidence it happens so often, it's not random, there's a reason for it and rather than memorize a price pattern, it's much better to understand the psychology and utility of the move.


I mentioned the intraday look in the averages today vs the charts just slightly longer, take a look.

 SPY 1 min almost perfectly in line overall since the ECB story in the WSJ yesterday

However the 5 min chart is not only in a large relative negative divegrence, but a leading negative that started... guess when? Right on the open today.

 This is the 10/9 cycle to present. It might surprise you to know that we predicted this move BEFORE we had any signals based on market behavior and our watchlist.

It might also surprise you to know there were 13 days of accumulation in to the 10/9 lows and a head fake move below the yellow trendline. The mark up period lasted approx. 2 trading weeks and the distribution period about 3 trading weeks, however the distribution period is often in to higher prices that aren't actually mark up. It appears we have a head fake above the yellow line just like at the bottom of the cycle and leading divergence in to both.

 QQQ 2 days intraday 1 min in line...

However just at 2 mins we move from in line yesterday to an almost immediate negative divgerence on the open and leading negative which is interesting because that's what we saw overnight in Index Futures (5 min charts).

 I think the intraday IWM 1 min needs no commentary or drawing, that's as clear as it gets and the only average to both close in the red today and to put in a Harami (bearish) reversal. 

And the IWM 5 min chart. I really expect, but REALLY hope that both the IWM and PCLN become textbook examples of Channel Busters, if so, although I've covered the concept many times, I'll put a full post and link on the site- they are just that predictable, you could run scans looking for Channel Busters and have a high probability bunch of winning trades.

Also mentioned last night was not so much the level of the CBOE SKEW INDEX, but the Rate of Change. The CBOE's SKEW Index tries to predict unpredictable or unlikely events such as a "Black Swan" or sudden 1987-type crash.

$115 is the safe or normal zone, above $130 and it starts to get troublesome, $140 and it's in the red, but it has picked crashes in the $130's.

Now both the ROC and level are getting worrisome.

I decided to hold GDX/GLD for a bit longer, the reasons (although a tough choice) can be summed up in two charts each.

 3 min GDX looks negative and likely a gap fill pullback, but...

 There was no negative migration to the next timeframe, 5 mins which remains leading positive suggesting any pullback would see another leg higher. If GDX pulls back, we should confirm intraday positives, but it looks like a good area for a GDX call option or a 3x leveraged long, NUGT.

GLD is the exact same situation...

 Toward the end of the day several timeframes went very positive like this 5 min, again around the same time as VXX or the Yen or HYG.

The 15 min is still leading so I'm still thinking any correction will see a leg higher. I do think GLD is not done yet with its final pullback before a strong up trend, but this is tradable.

In Leading Indicators there were almost no surprises, things looked like the 1 min charts of the averages, only in a few places are they odd.

Take Yields...

Yields (red) vs SPX (always green) recently converged or reverted to the mean as the market chop ended, however now yields are heading lower and they tend to act like a magnet for equities until they revert to the mean and touch. Long term there's a huge dislocation.

High Yield Credit (Credit leads, stocks follow) was not playing along today.

Not only did HY Credit not play along, it closed right off its low of the day and on just about 2x volume.

HYG Credit is an arbitrage (manipulation in this case, but typically short term ) asset because algos read HYG up as institutional money in risk on mode so it often is lifted to create an algo driven rally, in fact Capital Context's SPY Arbitrage model only uses 3 assets, TLT, VXX and HYG.

While HYG was in line with the market...

 3 min went leading negative around the same time VXX went leading positive and the Yen changed as did many other assets, something around 1-2:30 today

Since the 5 min chart (even though the reversal process was very close to a "V") is still not that far out of line, I expect it will take a little more time (and it's hard to get any changes on Op-Ex Friday until after 2 p.m.) for this to go negative and thus be out of the game, however maybe it does move during the pin.

We had a Dominant Price Volume Relationship in EVERY major average except the Russell 200 which only diverged because it closed down.


These are the component stocks in each average, not the averages themselves.  The Dow, SPX, Russell 2000 and NASDAQ 100 all closed: Close Up / Volume Down, this is the most bearish of the 4 combinations and it was so dominant that it accounted for more than half of each index.

Typically this is amn overbought condition or a market losing support for higher prices, typically the next day closes down, HOWEVER TOMORROW IS THE TYPICAL MAX-PAIN OP-EX FRIDAY, which means until most contracts are closed around 2 p.m., the market doesn't do much of note. AFTER 2 p.m. price will do whatever it wants, it usually has no value for next week analysis, but the 3C signals in to the close almost always pick up on Monday right where they left off Friday regardless of what price does.


USO is one I like and last I updated it I said I thought it had a little more lateral reversal process, I think it's pretty close to done- THIS IS NOT THE SAME AS THE ENERGY GROUP, it's a part of the group, but only a part.

 The long term 60 min set up from distribution to lower prices to accumulation and a bottoming process, I think USO can make it back inside the channel before heading lower.


The 15 min chart is going from in line to a clear positive divegrence and that lateral, wider reversal process I thought we should expect to see, but from here I think it's very close to a strong counter trend rally on the upside of course.

Finally here are Financials as I already covered Tech.

 In my last Financial update, I wanted to see XLF>$21 before considering a short/put and FAZ <$24.

This is the entire cycle from 10/9, significant accumulation, distribution and the move above $21 with a leading negative divegrence, there's serious damage in place everywhere.

 Inrtaday, XLF saw strong and clear distribution

The 5 min chart shows the positive where I called a "mini cycle" and now a clear leading negative in to the move above $21 which is what I wanted to see to consider adding to FAZ long or for an XLF Put option. I'll be watching for an opportunity if anyone is interested and I'd be interested in a put.



As for Index futures tonight, they moved up last night and then were nearly unchanged at this morning's open. The same nasty 1 min negative divergences are in place and the 5 mins are moving in place as well. Last time this happened Tues.-Wed. overnight in to Wednesday's open, ES lost 10 points in the overnight session before the ECB news sent the market knee-jerking higher. It will be interesting to see how this resolves, I wish it weren't an op-ex Friday tomorrow.

 ES 1 min

ES 5 min

NQ 1 min

NQ 5 min

I'll let you know if anything changes.