Daily Wrap

Where to start?

I think we have to start with last night and the night before. Overnight trade in ES (SOX futures) and NQ (NASDQ futures) was horrendous, Tuesday was saved with a ramp right at the open in the EUR/USD, I showed you yesterday, there's no arguing that the ramp in the currency pair was timed exactly to move stocks off the open which was not going to be positive.

Last night the futures looked even worse except this time there wasn't any price decline, I have no doubt there was selling in to them, but they kept prices up which is what you want when trying to sell. ES and NQ futures, even after today's drop, still look just as bad as last night.

Then came the GDP this morning, which Bloomberg called, "Shockingly Low", although tonight I see the apologists are out in full force blaming Sandy and the Fiscal Cliff, but that's why consensus was for a +1% print down from the previous of +3.1%, Sandy and the Cliff were already discounted in to Q4 GDP which by the way is the same time that most retailers turn profitable for the year. GDP missed huge at a -0.1% print, that's the first print of two consecutive needed to put the U.S. in to a recession, just like Germany last week! What happened to all these people saying the economy was getting better? Didn't anyone read the regional F_E_D surveys or any of the other economic data? It was there all along (maybe not the horrendous print, but certainly that the economy hadn't turned a corner).

If you had to guess what the market is about other than corruption and manipulation, would you say pricing an asset reasonably to its current value? The truth is the market typically tries to price assets to the predicted value 6 to 12 months out, that has all changed though and is only for middle school textbooks. The market is about sentiment, "FEELINGS" and the problem with the GDP print today is the forward looking aspect. Government spending is sure to be lower after the debt ceiling and budget, we already know that, tax rates are set to rise for 80% of Americans, we already know that, what is going to push GDP when government spending has been a huge part of it and its about to be scaled back lest we face another downgrade.

Then we had the F_O_M_C today which I found pretty boring, coupled with insanely low ATRs and volatility, maybe it shouldn't be a surprise we didn't get a knee jerk reaction. If I had to sum the F_O_M_C p, I'd say it was damage control from the hawkish sounding minutes from the last meting in which the efficacy of QE was openly questioned by a lot of members, not a single dissenter. The F_E_D basically said, "Well be there at least until unemployment breaks below 6.5%"

Here's the difference between QE1 / QE2 and QE3, the phrase, "Within the context of price stability". Anyone who remembers QE2 must certainly remember inflation and margin squeezes at manufacturing world-wide, the inflation exported to the BRICS and emerging markets, the blowback from China that changed the landscape of the balance of who owns and buys our debt.

QE3 is set to take inflation in to account and if it starts running hot, then they adjust the asset purchases, this is nothing like 1 or 2 where the dates were marked, the NY F_E_D completed POMOs on those days and there was no mechanism to consider "Price Stability". The problem with this and probably the reason QE3 hasn't done what 1 and 2 did is that huge funds dealing with billions in assets have to take positions based on what they know now, what they don't know is how inflation or even the unemployment rate are going to come in and either one could have an influence on the amount of $$$ the F_E_D pumps in to the system, that creates "Uncertainty" and there's nothing the market dislikes more than uncertainty, I think that's why the F_E_D was trying to smooth over some feathers in reassuring everyone asset purchases weren't going to disappear, but the yardstick is still there.

A for the market, we knew on Monday things were getting ugly (we've known a lot longer), but also knew through Treasuries short term charts that there was a little more time, it wasn't crashing Tuesday as you may recall from the TBT / Short Treasuries chart.

This was the chart that inspired the post about, "Don't rush, you have time" and the market was up, not down the next day, despite what had to be done to get it up after a nasty overnight session.

Today, this far it seems like the market was not pleased with Bernie, he didn't add anything to the party and the more bothersome news was GDP which again, Bernie didn't add anything to calm the fears there.

We had some near term records set today, for instance:

Would you believe the SPX saw its worst day for all of 2013 today at a measly -0.39% loss! I told you last night the ATR for the market has been dropping insanely and with that, volatility, but as you'll see, the volatility side of things seems to be taking on a new life.

HYG saw its largest 1-day drop in 4 months on heavier volume, taking out the last 17 trading days. Today's drop alone took out nearly 2 weeks of trade.

The last time we saw such a low 1-day drop it was right after QE3 was announced and the market only rallied for about 1.25 days, volume was higher today as well.

Junk Credit saw an even bigger move down -.87% for the biggest 1 day drop in almost 8 months. Junk Credit made a new low for 2013 after making a new high only 3 days ago, this was also the heaviest volume move for the year by far. The difference between the move down in Junk credit today vs the last time it made a lower low was the last time was a capitulation move at June 1, 2012 with the market posting it's yearly low on the 4^th of June.

You expect heavy volume and a big drop at capitulation, especially capitulation that big which started a new uptrend in the market, today's move was VERY different from that last move.

The VIX hit it's highest close since 1/3/2013 as it broke above the 14% mark today on a +6.31% move. A couple of things notable about the VIX move is that there's a broad move toward protection at the same time the SPX has been rallying over the last 6 days or so and the VIX continued to see protection bid after the F_O_M_C which is very different than bidding protection before the uncertainty of the F_O_M_C.

 Here's the broad trend that is disconnected from the SPX, remember our buy signal in the VIX ?

Here's the buy signal and we have one of the largest volatility moves in a long, long time as seen in the Bollinger Bands.

We've been seeing signs of this in the intraday VIX futures (VXX/UVXY) as mentioned in a follow up post yesterday and today right at the F_O_M_C we saw accumulation and confirmation.

 Recent strong positive divergences on a 30 min chart and price responding to them.

A 1 min intraday positive divergence right at 2:15 and confirmation of the move up.

Transports had their worst day since November 14 2012, but on a lot worse volume and once again, the previous low was again a capitulation day.

Big volume on a capitulation day is bullish, big volume on a day like today unless you can show me the charts of it being accumulated, is not a good thing, but as Dow $14k was being targeted, having the transports confirm is about as old a theory and well known as Technical Analysis. We all saw the drop in rail traffic about a week or so ago and I asked the question, "How long until this hits transports?".

The IWM had its biggest 1 day drop since 11/14/2012, another capitulation move exactly 2 days before the November 16^th bottom that started the current cycle. In the process the IWM took out the last 6-days of trade in a type of bull-trap. This is one reason I prefer to phase in to positions and have partial positions until I feel its time to load up the truck. Most days in the market are simple noise and there's only a handful of days that really contribute to the trend.

Why did the R2K perform the worst on the day? That's a good question, I'll tell you most traders don't trust a move up that isn't ld by the IWM and Bernie himself used the Russell as an example when he was testifying before Congress regarding the wealth effect, I'd thin the S&P would have been a more appropriate average to mention, but I have a feeling he slipped on old habit as he too probably understands very well the IWM is watched as a measure of the quality and breadth of a rally.

A fair portion of the damage in the R2k/IWM was already done by the time the F_O_M_C came out so I have to assume it was more GDP related. The IWM was one of the averages that has seen more recent  strong downside leading negative 3C momentum, but I'm not sure it was worse than the other averages, except the Dow. That being the case, I suppose you could explain it as more of a small cap/ large cap flight to quality or the more speculative stocks comprising the IWM as compared to the Dow's blue chips and lastly the difference in moves between traders (The Russell) and investors (primarily the Dow), but that's just some thinking out loud.

 IWM 10 min leading negative and a really nice rounding top, actually it's picture perfect so technical traders may have been a bit spooked by it, I doubt it holds this symmetry though, I'd expect some volatility both up and down to chop up that textbook rounding top.

The 15 min chart's recent "Even deeper" leading negative divergence. We as independent and small traders sometimes forget that for institutional money to move millions of shares and not take a loss doing so, they have to do it a little at a time and they need to do it in to demand. This is one of the more extreme charts I've seen, but I keep going back to the comments before the up move of trend #1 even started, "It's likely to be stronger than anything we can reasonably imagine" and so far it has fit the bill.

The really scary part is trend 2 gave indications that it was and is much bigger in size and scope than trend 1.

In the more immediate future...

One scenario I might watch for would look something like this although there are several variations of a channel buster.

First how many trends have you seen this clean on such incredibly low ATR and volatility? If that's not engineered to suck dumb money back in the market, I don't know what is: a clean trend, stable, low volatility, no pullbacks or corrections and of course CNBC trumpeting every half hour, "DOW 14,000" as if it were a movie trailer for a Tom Cruise Spy movie.

In any case, one scenario is a break below the channel that looks pretty strong, followed by a kiss of the channel which more often than not creep back in to the channel, followed by something rally ugly. That's just a scenario I've seen many times, it's a great scenario for setting up positions.

As for futures, 

I tracked ES around its VWAP, obviously the GDP sent it to the lower channel, but after the F_E_D today it was hugging the lower standard deviation, that kind of momentum is hard to hold.

ES has started to cool its heels tonight...

ES 1 min

The 5 and 15 min charts over the last 2 days have been very extreme like many of the market averages I commented on as well, I'm not sure what to make of this 5 min chart until I see overnight trade, but I can tell that the 15 and now 30 min charts and the shift in momentum isn't a good sign for the market.

 5 min... possible positive divergence?

 ES 15 min leading badly to the downside, for the first time in a long time the 30 min is involved as well.

And the signals of underlying trade are pretty darn clear there, that's cause and effect.

The only other issue would be currencies so tomorrow will be of interest to see how the carry pairs react or act overnight. My main interest right now is in the following two pairs which is more or less like saying the $USD, however Europe does have its own issues as we saw with Italy's market seeing the biggest drop in 6 months and well before the F_E_D.

Credit in the US as you saw above is getting, scratch that, is ugly. You think credit doesn't matter?

Here's the European example; as they say, "Credit leads, stocks follow".

As for the FX pairs, keep an eye on these two, movement to the downside will be telling...

 The longer term chart of the USD/JPY.


 The longer term of the EUR/USD

And the EUR/USd intraday, you can probably see where I marked the F_O_M_C.

I'll post anything new that comes up if it happens while my eyes are still open.

FB Earnings

They beat on revenues and EPS, users are up 25% y.o.y.

Right now they are trading down about -7%, but it's very early.

Guidance is going to be key.

Volatility

I showed you the charts, how they all had the same signals, the Bollinger Band Squeeze in the VIX which can also be a short term area for loitering, I'll show you.

 The daily chart is looking good in the VIX. The VXX and UVXY have so far seen confirmation on the afternoon moves.

 Note that protection continued to be bid after the F_O_M_C.

As the BB's pinch, it makes a good area for a head fake move below the band, but at this time I'm more interested in the highest probability trade which is a move toward trend 2 (down) so any short term strength will be used for tactical purposes.

AMZN

I think AMZN sees a short term move, it's most likely part of the slop in the area.

I know some of you like to play these really short moves with weeklies, it's not my cup of tea, but...

 The positive developed later in the afternoon, it's on some longer 2-3 min intraday charts.

 5 min shows overall damage, but they always need to sell in to higher prices.

Then there's the 15 min, etc that are all ugly.

Definitely a speculative position.

FB Reports AH

I'm not a fan of FB in this area, we followed it and I was a big fan in the $18-$22 area, but I personally don't want to be holding FB in to earnings.

I do still like ZNGA long term.

Israel Attacks Inside Syria

Leading Indicators Update

I think my initial gut feeling about an initial knee jerk move up and then following the probabilities back down is still a decent possibility, I'm still leaving BIDU calls open, however the longer term Leading Indications are now comfortably in the realm of deep divergence with the market except for a few. While I have expected a quick reversal when it comes, the truth is topping or bottoming is a messy affair, it's rarely a "one day you're up in a trend and the next you're down in a new trend", there's that chop and volatility to keep everyone guessing.

Maybe later I'll post some reasonable examples, for now though the leading indicators which are telling us a lot on their own.

 The speed, depth and momentum in the decline of High Yield Corporate Credit which is VERY liquid and therefore a favorite as a risk asset that is used for risk on moves, is stunning , today's move alone has eclipsed the past few days of decline.

Junk Credit has been even worse to the downside, these are the types of strong divergences with the SPX we see at reversals and where we have become pretty aggressive with our shorts and rewarded.

 The $AUD

 FCT which has worked well...


Commodities are one of the only other than the Euro that are holding on and guess why?

In green you are now looking at commodities vs the Euro.

I'm going to do more research there (EUR/USD), energy would be the natural play on a turn there.

Market Update

There may be two different moves forming, although it is very early to tell. The first may be the knee-jerk reaction a I'd say we really haven't seen one yet and the second would be more in line with the last post.

The intraday NYSE TICK (all NYSE stocks ticking up less those ticking down) has just broke -1000 for 1 minute or less, this is still not an extreme number by any stretch of the imagination. In fact looking at the TICK and momentum indications it looks like an intraday reversal is coming.

However the Futures may be adding something to the analysis today which has been centered on what would normally be the bigger picture, however with many of the charts in this class moving very fast lately, it may also indeed be more of an immediate indication than otherwise thought.

Because these are a bit longer and the F_O_M_C was less than an hour ago, they'd need some more time to reflect any changing sentiment regarding the statement, but if the statement didn't change anything, then the current trend would likely continue and maybe even accelerate know that they know what the F_O_M_C has to say.

 NQ 5 min leading negative, this time through the day though, not just night session and larger.

 NQ (NASDAQ Futures) 15 min leading negative

 ES 5 min S&P futures leading negative 5 min

ES leading negative 15 min

Again, the big picture may be the smoking gun

Especially as the leveraged ETF below not only hasn't made a new low, but also because of the compounding effect, these often see movement late in the game before a move. Most interestingly is the confirmation between the non-leveraged intraday volatility futures (VXX) and the leveraged (UVXY) as well as the comparison to the SPY all in the same time frame. These are totally different assets, they trade totally different volume and underlying trade and other than actual price which tends to be inversely correlated (volatility moving opposite the SPY), the signals are exactly the same which there's no reason for whatsoever unless the underlying trade was showing that.

(These are all the same timeframe-30 min which is a strong chart/signal and the exact same dates).

 VXX leading positive

 UVXY leading positive

SPY leading negative


Bonus charts-just because...

 DIA leading negative

QQQ leading negative and at a head fake move as well.

F_E_D Analysis

I'm trying to watch the market , think about what was said and refer to notes and put some of this together.

This isn't a very volatile initial move, it is a bit negative, but the TICK Index isn't all that negative, it's around -750 which is the low end of the median, no where near extreme.

I didn't hear much in the way of policy adjustments, what I did notice was a decidedly less hawkish tone than the last F_O_M_C minutes, it seems they tried to tame that down.

It also seems there's more of a shift toward employment as the metric for QE, the yard stick that was troublesome for the market was somewhat appeased in their language about purchases going on as until unemployment drops below 6.5%. I think the "In the context of price stability" is still a little sticking point as we all have seen how inflationary QE can be.

All in all it seemed like a little moderation of the minutes from the last meeting which came off as the F_E_D was wavering on the value or benefits of QE, here they seemed to leave that debate behind, but until we see the minutes, we won't know for sure.

BIDU Calls

I decided to keep the BIDU calls open as my gut is a knee jerk to the upside even though price action didn't look great, check out the improvement, possibly a sign of my earlier gut feeling?

 1 m

 2 m

5 m

GLD & SLV follow up

Both GLD and SLV look like they want to pullback short term, perhaps ill some gaps and they as of now, still have some positive longer term charts, this may very well be a decent opportunity to buy a pullback. I'll keep an eye on both, this is along the lines of what was said about Gold last night.

F_O_M_C in 15-20 mins.

Then I'll be able to turn off CNBC finally.

Remember that there's almost always some insane initial volatility, also the initial knee-jerk reaction is almost always wrong-at the Sept. 13, 1012 QE3 announcement the market rallied after the announcement until Bernie answered the wrong question which I think is going to be the focus of the market, "How is the F_E_D feeling about QE? Still starting to doubt it like we saw in the last minutes? Or does the GDP negative print change the whole game?"

There's been very little movement in underlying trade, much like the market averages themselves, however the movement there was did early damage that is still visible. The overnight ES and NQ longer term charts were negative the entire night and still are.

HYG credit has continued to make lower lows today as has Junk Credit.

The Euro remains nearly completely flat after an overnight run.

Financials

I was putting together a post for financials, it started with every timeframe negative in FAS (3x bull financials), then I added 4 or 5 charts from XLF (Financials) and FAZ (3x short/bear Financials) as confirmation.

Since There's already a decent size FAZ long open, I was considering filling it out, but it's already a decent size so I'd really be interested only if I could get it at a discount and from an early gut feeling I've had and knowing the volatility in the market on F_O_M_C days, I figured, if XLF can break above this resistance area around $17.50 on an intraday volatility move, perhaps right off the announcement, I'd do one final check, wait for the reversal to look like it's in and add there.

Here's where it is and you'll see why I picked this area.

You know the concept and that's pretty definable and at a heavily trampled psychological level of $17.50 rather than $17.17 which no one would gravitate to.

If the trade comes to us, all things considered, then I think it's worth the shot as long as everything still looks good.

This is also the reason I'm leaving some of the short term longs like BIDU calls open for the moment, if there's a knee-jerk to the upside, then they are a hedge, they make money, and allow positioning of new shorts when the knee-jerk is nearly over. If there's just plain old downside, the skew toward the bearish side is going to be at a large profit and those can simply be closed.

If I do see something before hand that is very specific to the individual trade, then I'll show that and take appropriate action.

There, I just saved you about 15 chart.

Going to Fill out AMZN equity short

At a -2.65% position loss and a 1/10th of a percent of a portfolio loss, I don't think it's much of a risk here, but keep in mind it's the risk management that makes it possible.

Protection is Bid

It's not surprising, but while the SPX is down 0.07%, the Dow flat at +0.02% and the NDX at +0.07%-Essentially a flat market, the VIX is bid with a +4.58% gain. The more interesting thing may be the daily Bollinger Bands which I was going to feature last night, but figured they wouldn't be so close to be relevant quite yet, I was wrong.

 The daily VIX.

 The daily VIX with a 20/20 Bollinger Band with huge volatility narrowing down to a squeeze which typically indicates a highly directional move coming, remember the VIX trades opposite the market normally. Also the buy signal so far has worked, the signals on this chart in the past have led to more substantial moves than what we have seen thus far.

The VXX is catching a bid as well with a new leading high on a 60 min chart...

Just nervousness in front of the F_O_M_C?

Looking for the smoking gun

The last time we caught an apparent F_E_D leak, it was so apparent that we immediately opened trades about 2 hours before the F_O_M_C, they were right on and this wasn't an ambiguous signal, it was screaming.

So in looking for the same today in a lot of averages, I kind of just thought about the original premise of trend 1 and 2, checked again to make sure there are enough charts to back a trend 2 still and then took a step back and wondered if the smoking gun is right in front of us-this would be the most obvious place for the highest probability moves and the largest underlying activity.

A simplified perspective that doesn't break down short term or intraday results, but may be more than just a future promise as to what is going on inside this trend, they are the long term charts (10-60 min)

DIA

 10m

 30m

 60m

QQQ

 60m

 30m (yellow denotes head fake areas)

 15 m

SPY

 10m

 15m


30 m

Not that I've given up on looking for that smoking gun, we caught GOOG earnings 15 minutes before the close and earnings, so I'm still looking about.