I hope you were able to see last night's very late night post regarding Tom DeMark's signals, while I try not to follow other people's opinions and analysis (especially anything on CNBC or from Wall Street analysts, especially Goldman unless it's used as a reverse indication) as I believe it can skew your own analysis, I do feel better being on the same page as DeMark; just because I don't closely follow him doesn't mean I don't have great respect for him based on objective data.
In any case, as we had been looking for all week last week, we finally got the move above the Jan. 4th S&P highs. I had said many times last week that I didn't think we'd see much movement in 3C until we were above those levels as they do serve a purpose as I have elaborated on many times.
Sure enough, as we moved above that area, we started seeing more 3C signals and action, skewed toward the negative as expected.
The VIX has been very interesting lately and exceedingly volatile, I would say it's pretty clear that rather than using highly weighted stocks among averages, it seems that the VIX is being used to move the market, some of this I think is natural movement rolling hedges out past the debt ceiling deadline, which the VIX wouldn't show or at least it would be skewed as those hedges would be out to March and the VIX is a 30-day expectation of volatility.
The recent volatility in the VIX is probably record setting in some ways, the December action looks very different from even the first trading day of January and I'm pretty sure that was hedges in December against long positions as volume was so low there was little way to reduce exposure for big funds with big positions. The change in January seems to be more about the Fiscal Cliff hedges being rolled out to the Debt Ceiling debate, but among all this action there's likely an opportunity to use volatility to move the market as needed.
The VIX is now at intraday lows that haven't been seen since 2007, this is extreme complacency which historically has been a turning point in which the market declines.
On a 60 min chart (VIX green/SPY red), you can see areas where the VIX seems to have been sold which pops the market up, many times this has happened in to the close or late afternoon trade, in any case, I thought we needed to see the SPX above the Jan. 4th levels and whether the VIX is being used to manipulate short term moves in the market or not, we are above that level all the same.
We can't see intraday readings on the VIX itself, but on the daily we have the largest positive (leading) divergence in the VIX since before 2009.
Looking at the short term volatility futures like VXX which we can get intraday 3C signals, there's a clear change in character to a very positive leading divergence, it's so clear I didn't think I needed to draw on the chart (2 hour), this would seem to suggest someone or a group of someones have been building a large long position in volatility, especially when it's cheap. Remember the VIX and VXX move opposite the market so if this positive divergence fires and it is the largest I can see on an intraday chart, that would suggest quite a dramatic plunge in the market, similar to DeMark's findings.
As for the open in currencies (FX trade) for the new week...
The EUR/USD has gapped up, but not by much. Goldman has a long call on the pair, the last 3 Goldman calls have been pretty major reversals, remember they are giving away information that they presumably pay millions of dollars to come up with, many would say GS trades against their own clients so I take their free information with a grain of salt, if not fade it-like I said, the last 3 calls we picked up were all reversals moving opposite GS's call (think about why they might do that beyond the obvious).
Take a look at a bigger view of the EUR/USD and then take a look at the same chart of the EUR/AUD below...
The $AUD is one of my favorite leading indicators among the currencies because it's such a popular carry trade currency, divergences (negative) between the $AUD and the market have had a very good success rate of calling reversals to the downside and vice-versa.
Here's the $AUD in red (about the same timeframe as above) vs the SPY, you can see the negative divergence at the red arrow sent the market lower, it looks like another is starting and judging by the chart above this, it appears the $AUD is being sold or the carry trade is being closed which is typically negative for the market as risk exposure is being dialed back.
A for the futures tonight...
We do have an intraday (or night as it were) negative 1 min divergence in ES (S&P E-mini futures), I take this with a grain of salt as we have a long overnight session with a lot of markets still closed.
However one thing I take more seriously are the following longer term charts. I said after trend #1 )the pop to the upside) started that I'd be looking for the ES 5 and 15 min charts to go negative, that didn't happen for several days, but it did very recently as the market moved above the level I said we'd likely see more 3C action. This is the 5 min ES chart with a 3C negative divergence.
This is the 15 min chart with a negative divergence so both have moved to the negative, this doesn't mean there's an impending downside reversal tomorrow morning, but I can't see a reversal without these charts first having gone negative so it's kind of a part of the process that is playing out and right at the area in which I suspected it would. This would also fit by the way, with the $AUD (FX) charts as well as many others. The main thing I'm looking for now is worse 3C signals and leading indicators to go very negative, especially credit.
This is the 30 min ES chart that has been negative since trend 1 started, this tells me that trend 1 (the move up) is likely a strong head fake move as it was always expected to be even before it started, however the short term charts needed to go negative and meet up with this 30 min which is what is happening above.
As far as indications for tomorrow, I'd still expect some more upside or at least loitering in this area above the Jan. 4th highs, there's a reason for that, if you read the "Understanding the Head-Fake" articles, you probably understand why, if you are a long term member you definitely understand why and have seen it play-out so many times before, about 80% of the time before all reversals.
Friday gave no great hints, volatility was low, volume was low, it seemed like an op-ex pin, yes even on the weeklies; there was no hint whatsoever of a dominant Price/Volume relationship that would give a hint and that's no surprise as the NYSE TICK data was about as interesting and active as a market that was closed save for some late day volatility.
Ultimately though I do think things are moving as expected, things that should happen in the process are happening, so we'll be looking at more opportunities this week, stocks that are in good position now.
This all should be a nice edge for us as the spread in the bull / bear AAII weekly sentiment has most of retail (actually at a spread that is historically correlated with reversals) on the long biased side. In fact the magic number between the spread is 18...
Not only are we beyond 18 (currently 19.5%), we are seeing increasing bullishness and diminishing bearishness, being on the other side of retail historically has been a pretty good place to be. However this is just another interesting little piece of information, what strikes me is everything we have been looking for we have published about a week before it happened and it has been happening as we have been expecting so it seems we are very much on the right track.
All that's really left is to continue following the message of the market, although it's a message that few others know of, but like they say,
"To make money you have to see what the crowd missed".
The one gut feeling that I have had (which I cannot back up with data other than some hints like credit still holding up) is that when the market is ready to reverse, it won't be the normal "process", it will be an event, as I said last week and several times before, I wouldn't be surprised if it all happened in 1 day, from an extremely bullish move to an extremely bearish move.
Have a great week ahead, I'm thinking it may be a very interesting one.
