The Week Ahead

I hope everyone had a nice weekend, not too hectic.

Honestly, when I look at the week ahead, it's really the rest of the month ahead, Wall St. types tale a lot of time where they can string days together. Being we have a half day Tuesday and a closed market Wednesday, I'd guess the higher ups left for the Hamptons last Friday and likely won't be back until the the following Monday (a week from tomorrow), the only problem with that is, will they come back for Monday and Tuesday when Tuesday is New Year's eve and Wednesday the market is closed again? The mid level people are likely going to cut out after Tuesday and be out the rest of the week.

I'm not sure whether to expect a very dull or very volatile rest of the month. If we go by the Spot Vix I showed Friday which has a pretty beautiful reversal process already in place and with the 4 hour leading positive in VIX futures that makes perfect sense with the VIX Bollinger Band squeeze, I'd guess that we are going to see big VIX upside volatility, which means downside market movement, however that runs counter to the "Santa Claus Rally" idea.

When I look at this market though, we had a knee jerk reaction (the market is all about perception- to what end is often the question) on the F_O_M_C day, we couldn't collect much data with Quad Witching (options expiration) this last Friday, only about 2 hours worth so this week I'll definitely be looking for the data as I don't just accept the "Santa Claus" rally, I accept it's traditional, but it's not all of the time and what matters to me is what the charts say, the same way when they announced QE3 everyone said, "Cover your shorts and run for the hills", but the knee jerk lasted about a day and the market went FLOP, the point, we didn't just accept conventional wisdom, but looked for the objective data.

Here's what I see so far...

 This is the spot VIX's Bollinger Band Squeeze that so far looks perfect and the last 3 days have created a nice reversal process. Considering the accumulation in VIX short term futures Friday (we bought calls and two hours later at the close they flew straight up) and considering the accumulation (that WAS NOT THERE before the F_O_M_C, thus we weren't long VXX, but we wouldn't short it either) on the 4 hour VIX futures, I'd lean toward the VIX flying (the market moves the opposite direction).

As for the SPX... Think about this logically or statistically...

 We have FIVE trading weeks in a range, that's 15 trading days and the market broke that range just enough to knock out the most probable max pain options play (the range). After 5 weeks of ranging, it doesn't seem strange that the market moved on Quad Witching when they try to cause as many retail contracts expire worthless as they can?

If that's not strange enough, consider the moves, none of which did much other than cross above the range where max pain would be for retail, but the R2K had to move +1.87% to do that, but still not far above the range, the Dow only had to move +.26% to do the same, just get above the range, that's a pretty large disparity, but the R2K has been underperforming for weeks so it had the most distance to go, the Dow had the least distance to cross the range. Both the SPX and NDX's gains where just enough to get them above the range and they didn't hold too well in to the close, WHEN ALMOST ALL CONTRACTS WOULD HAVE ALREADY BEEN CLOSED.

If that doesn't seem obviously planned out, I don't know what does and the funny thing is we saw it, we were long in to the F_O_M_C and then out that day, we weren't long the VXX until after most options would be closed on Friday and the only reason we weren't or were in VXX was the signals, not the timing, they just happened to coincide.

The SPX intraday falling off after 2 pm when most contracts are closed on options expiration and a nice rounding process. It's not the best chimney, perhaps an open higher tomorrow morning would create that, but I wouldn't panic if I saw that early in the day, I'd rather see it early than later.

As for the carry trades, FLAT, FLAT, FLAT tonight. As I said, the Yen looks like it's going to rally.

This is a 15 min leading positive in the Yen, RIGHT AFTER THE F_O_M_C, accumulation starts. To close the carry trades they have to buy the Yen, is it coincidence after what was likely a knee jerk F_O_M_C move like we always see, that the Yen was suddenly accumulated in to that move as if they were selling in to the knee jerk move and closing their carry positions at the same time, heck BAC said they are out of their USD/JPY and see a 97/98 downside target!

It just makes too much sense.

And how about the Index futures? Most of you know I won't touch a short TRADING position unless the 5 min Index future charts are negative.

 That's the 5 min ES/SPX futures chart, leading negative and you know we were entering some positions late Friday, whether long VXX or short the market in the trading portfolio, again ALL BASED ON SIGNALS OF EACH ASSET.

Even the 1 min chart doesn't look great, but I rarely trust these overnight, the 5 min chart though is a different story, it has been so accurate in predicting up and down moves as you've seen in the trading portfolio.

So the VIX futures just went positive after having been held down going in to the F_O_M_C as I commented that's what it looked like two days before the F_O_M_C and now after Quad Witching is out of the way, all of the sudden the 1, 5 and 15 min all went positive after what was almost 2 weeks of just being pinned.

There's just too much lined up and we're not even considering Credit and Leading Indicators.

The low volume volatility though and the vacations make me wonder what this is all going to look like. We couldn't collect any data right after the F_O_M_C because of the Quad Witching a day and a half later, but the last two hours of Friday after op-ex is effectively done, the signals start flying.

I'm fine with the positions entered Friday, but I WILL absolutely be collecting data and making sure we're on the right path rather than resting on what we already have which is pretty overwhelming. There's also year end performance, window dressing which if I have counted right means with the T+3 rule, Thursday is the last day for Window Dressing for year end, the "Art of looking smart".

There are a lot of cross currents, a lot of potential for very low volume and very high volatility, although I feel good about the positions Friday and the bigger picture, this week and especially after Thursday are the first time since last Wednesday that we can get real market data, I SUGGEST WATCHING THE YEN AND THE CARRY TRADES VERY CAREFULLY.

If those Yen divergences (positive) that started building right after Wednesday's F_O_M_C knee jerk are correct (and that may have been BAC that we saw as they came out late last week and said they are OUT of the carry) then that means firms are unwinding leverage and getting ready for something ugly unless I'm missing a Japanese policy component, they're going to want the Yen weak, but closing the carry will cause it to rise, that's those positive divergences and as I said, tonight, all of the carry positions are flat as a board.

The only other thing that stood out that I haven't mentioned in futures is oil looks like it's coming down (that pullback I've been looking for that has just been a lateral consolidation thus far)...

There are so many things converging right now, from the chart end of things, it doesn't look good for the market, but 5 weeks of ranging doesn't look good by itself, add everything else and it looks like an airtight case, but I'm always looking for the latest data and will continue to do so. Monday will be the first full day (Friday after 2 pm gave us 2 hours of data) we get with no F_O_M_C knee jerk and no Quad Witching Op-ex max-pain.

Friday's Dominant P/V relationship was Close Up/Volume Up which often acts as a 1-day overbought condition. From a market Breadth p.o.v., the NYSE's Advance/Decline line (even with Friday) STILL hasn't broke the October highs, that's clear trouble and not by any interpretation, by hard numbers.

Both the NASDAQ 100 and Composite's A/D lines STILL have not broken their November highs, even with Friday. The EXACT SAME can be said for the Russell 1000, 2000 and 3000 EVEN with the R2K's +1.87% Friday move (which you can't look at without looking at the Dow's +0.26% move and where they all ended up and how they closed).

When teaching Dow Theory, which can be challenging for people who have never seen it before, one way I use to give them to get a "quick and dirty" feel for whether a market, Industry group or stock is in a Primary, Intermediate, Sub-Intermediate and short term bull or bear trend was by using different length moving averages, for a Primary market, whether it was above or below the 200-day and which way the 200-day average was pointing (up or down), of all NYSE stocks, only 52% are above their 200-day moving average, at any other time in history, this would be considered and look like a clear bear market. The question now is how much did the Taper change things? Some think not much, some say it's the new "Tightening" policy tool and when the F_E_D tightens, the market drops, look at the past bear markets.

Even stocks above their 40-day (which we'd consider Intermediate trend) are at a lowly 52%.

Even worse, other than the 5 Hindenburg Omens clustered, look at the SKEW Index from recently as I have pointed out (the trend) and what it did Friday!

ACCORDING TO THE CBOE'S RESEARCH, THE HIGHER THE SKEW, THE MORE LIKELY A BLACK SWAN MARKET CRASH, THEY IDENTIFIED THE MID 140'S AS THE LEVEL WHERE THEY SEE VERY HIGH POTENTIAL FOR A MARKET CRASH.

Look at what the SKEW did last week (I pointed it out several days), Friday though, it moved from 137 to 143+!

Honestly, I have nothing to gain from being bullish or bearish on the market, I'm not on the sell side of Wall St., I want to be on the right side of the market. I've never seen so many red flags waving, but then again, we've never seen a market this extreme propped up by nothing more than a F_E_D balance sheet that is now being "tapered". The closest model I can find is the 1920's when there was a depression, then the F_E_D stepped in with several years of QE (just like the last several years since 2008), but the difference is, the 2910's recovered and were ROARING, then... You know what happened in 1929, the most epic equities crash the market has seen.

The thing is, this isn't a great model because we never recovered, the world was never in such bad shape and so tightly connected via globalism. This is one "Butterfly effect" I don't think anyone can model, but everything from globalism to HFT's have made this market more susceptible and fragile.

I'm going to leave it at that because you know what we have, for me, I need to find out what we look like moving forward and always have to stay open to all possibilities for what I do. As a trader and individual, I have a much stronger opinion that is backed by solid data.

Have a great week!