Daily Wrap

This will be a quick one. Today I think it was clear that there were some confusing signals, the DIA particularly didn't look good while some averages did, Futures were split too, I figured it's this dysfunctional rotation we've been seeing, but today was the third Hindenburg Omen. The practicality of what a H.O. really is, is a mass of confusion in internals between highs/lows, advancers/decliners, in the past it has had a good record for sharp declines and even during QE the last two clusters made significant corrections, now we have a cluster of 3 which perhaps makes some sense with what we were seeing in the market today. 

It wasn't 3C that was off or funky, it was actually the market and I'm seeing the same thing in to tonight's futures. So what are the probabilities, well short term it's a toss up, if I don't start to see short term probabilities improve significantly, I'm taking the trading portfolio and going to cash, I see no reason to stick around if there's no reason to stick around. 

Big picture probabilities are clearly to the downside so I'd probably move in to some positions on the short side in the trading and other portfolios.

Here's what I mean about Index Futures tonight, just remember that last week when we closed trading longs and went long in the trading portfolio, almost all of the Index Futures had at least 5 min positives and some 15 min positives, that was GOOD reason to work toward a bounce which we saw start today, but since (today), things have gotten messy and with no apparent reason other than where the market is, this is the definition in reality of a Hindenburg Omen so I feel good that I'm not missing something in the charts and I'd rather err on the side of caution if I need to err.

VXX was interesting in after-hours trade tonight.

It ran higher, into an intraday negative in AH, but higher. Remember I would NOT short the VIX last week even though it should move down with a market bounce. Earlier today I showed the VXX's relative strength vs the SPX, it was much stronger than expected.

VIX futures are positive on the 1, 5 and 15 min timeframes, NOT shorting VIX derivatives was the best idea of last week.

As for Spot VIX, as I suspected, even in a bounce, protection is well bid as it closed higher and that Bollinger Band squeeze's highly directional move after a pullback to the 20-day as we expected, is REALLY taking shape.

VIX since the BB squeeze.

Correlation last week said go short VXX, 3C said, don't and so far 3C was right.

As for ES...

 1 min, as seen in the SPY, there was intraday late strength on the 1 min in the SPY.

The longer intraday charts though showed some damage had already been done, distribution in to strength, but not that bad yet, the 5 min ES chart is showing the same.

The 15 min that was so strong and a good reason for moving trading positions net long still looks like it has plenty of gas in the tank for a move higher, but if deterioration continues like the 5 min chart, it will be seen here as early as tomorrow morning.

As I recall, the NASDAQ 100 was also showing late day intraday strength, similar to tonight's 1 min chart in NQ, but everything else is in line only, if the charts in NQ looked like this last week, I would not have entered any NASDAQ longs.

 I usually don't pay much attention to 1 min charts overnight, but this one looks like it's preparing for a move higher soon.

The 5 min above and 15 min below were positive last week, now they are simply in line. If these go negative, I have to reduce long exposure.

15 min NQ.

Now to confuse things real good, that is what a Hindenburg Omen is in the context of breadth and advance/decline/new highs/lows, confusion rather than a clear trend.

 Remember, the Russell 2000 tends to lead the market, especially in risk on moves, but this 1 min intraday chart looks like TF is about to drop overnight while the NQ chart looks the exact opposite.

Moreover the 5 min chart looks like its also prepared for a sharp drop. You may recall my interpretation of these charts before I knew there was a Hindenburg Omen today was that a short gap fill (maybe on the open ) would be likely and then strength moving the market higher, it's still a possibility, but I think the charts were not reflecting that so much as the confusion of the Hindenburg Omen or the trading action in the market that creates it.

The 15 min chart is still positive, any damage done today or distribution hasn't been strong enough to make it to the 15 min chart, but as you may recall, my gut feeling was any bounce would likely end before the 2 p.m. Wednesday F_O_M_C, it may run right in to it and then drop right before, but I think it does go risk off and the VXX flies right before so WE'LL BE LOOKING FOR THE LONG ENTRY IN VXX OR UVXY REGARDLESS OF THE MARKET, AS LONG AS THE SIGNALS ARE THERE.

We did have a Dominant Price/Volume Relationship across all the major averages, it was Close Up/Volume Up, in the Dow there were 20, the NASDAQ 100 saw 45, the R2k, 775 and the SPX 248, definitely a dominant theme.

Close Up / Volume Up is the most bullish of the 4 possible price/volume relationships among the component stocks of the averages, however this can often mean the market is at a short term overbought inflection point and many times the market closes down the next day, but I find it hard to say we have an overbought situation with our first day up of the move and it wasn't like a +3% day so maybe we should just take it as a bullish signal for now.

Looking at Breadth Indicators I don't see anything today that is inconsistent with the gains seen in the averages, in fact they look exactly as I'd expect, but the trend in the SKEW Index (although not at an extreme) has gone a bit unnoticed as we have focussed on the actual number rather than the trend, this is a CBOE indicator like the VIX comes from them and it tries to put a probability to an improbable event, specifically a Black Swan or sudden market crash. The Index is normally at 115, when it's in the 130's it's elevated and chances rise of a Black Swan, it's really the sharp and clear trend that is a bit alarming in the SKEW.

SKEW vs SPX (red), the trend is very clear.

Other than that, I guess we need to see what tomorrow brings. The probabilities were good for a bounce, we've seen the start of a bounce, last night's futures behavior suggested accumulation of the lows and a move higher today after that 10k block of ES contracts sold all at once and we were right on in that case.

As long as there's a reason to keep those long positions open, I'll do so, but once there's no reason, then there's no reason to have them open. I'd rather be in cash than in limbo. However we did have some interesting moves like PCLN documented earlier today that would suggest the original bounce theory plays out, perhaps it's what comes after the bounce that is ugly, disjointed and falling apart at a rapid pace.

Either way, we'll be watching the probabilities and making adjustments based on that. Thus far I can't complain about taking short profits last week in the trading portfolio and opening longs, the trading portfolio now has a 15% + total gain in about 10-days since inception, that''s already more than two times better than the average of hedge funds for the year.

See you soon