Market Wrap

Hopefully I don't have to go back and show you all the reasons and hints we have been gathering every day as to why this market is in big trouble, but for some of our newer members (And we are totally full, we'll be getting a new website soon as we can no longer accept new members or at least not many), we were tracking these changes before anyone because "Changes in character lead to changes in trend", so before these were screaming problems like they are now, they were clear hints of problems and taken with numerous 3C charts, market breadth, mass psychology, Remember all of those new dumb money bullish sentiment extremes like the 18 point bull/bear spread on the AAII weekly Investor's sentiment poll? The list doesn't stop, but perhaps the most important and everyone was so busy saying, "Don't fight the F_E_D" that they missed the message the F_E_D was clearly telegraphing since Sept 13th 2012 and particularly the day before the January minutes were released last week.

Many of you know one of our key tools and proprietary indicators is 3C, what you may not know is that the name 3C, while not powerful like the "Elder Ray", is a constant reminder to all of us to, "Compare, Compare, Compare" which is some of the best advice I ever received from one of my favorite, "Street Smart Traders", Don Worden.

For newer members, here's a VERY brief review of some of the things that were setting off alarm bells and red flags and why I have the faith to stick to the courage of my convictions and trust what my indicators are telling me after years of using them in some of the most difficult market environments.

Worden T2 Series Breadth indicators (green vs the SPX in red)-Breadth doesn't lie

 The McClellan Oscillator, one of my favorite ways to use this is as a divergence indicator, you could see the divergence earlier, but by Feb 1, everything was coming together.

 The Percentage of ALL NYSE stocks above their 40-day price moving average taking a dive from about 85% to 50% now, this is unspeakable horror, but also likely an indication of an oversold condition which would only be good news for us or those who want to set up shorts in to price strength rather than chasing them.

 The higher momentum stocks that are represented by the % of stocks trading 1 Standard Deviation above their 40 day moving average, from + 70% to 21%, but the trend was visible long before the trouble, in a healthy market this indicator would be moving higher.

 The momentum stocks, % of stocks trading 2 standard deviations above the 40 day moving average, from 44% to less than 5% today.

 The 4 week New High/New Low Ratio, obvious trouble there.

Now the first indicator I ever won an award for, inspired by the Turtle Traders and trend trading, my Trend Channel which takes the recent behavior of a stock and creates a channel "X" standard deviations around the mean, a break below the channel is a stop out and stocks/markets rarely come back from these. However for a Trending trade, there's no guessing about where the stop should be, there's no arbitrary stops, it's based on real data and many trades I would have exited at a 30% gain went on to make 4 times that because I followed the evidence rather than my opinion or emotion.

 Also in the bottom window is a 10-day ATR (Average True Range), the EXCEPTIONALLY low volatility that was sen during the melt up was as I said at the time, "A Dumb Money friendly market environment", sentiment indicators proved this as well, dumb money entered on an easy market with no volatility and CNBC talking every night about new highs even though they were often 0.10% to 0.30% moves!!!  As I said back then, smart money needs dumb money in the market to hand off the shares/risk and sell short to and Dumb money came in to the market in droves.

 The SPX 2-day Trend Chanel that held the entire trend until just the lat 2 days, a clear stop out. This doesn't mean the market can't move a bit higher, it means in my experience, trying to capture those minimal gains is the highest risk environment, it's almost ALWAYS best to exit the long that wait weeks or months through insane volatility and maybe capture another 3% is you time the trade perfectly.

Currencies and the CARRY TRADE-If yo want to know what Hedge Funds are doing, follow the FX Carry trade or the baskets of several FX pairs. Remember the leverage here can be astronomical so as long as the carry is working, they are making money, but one bad day can send their entire move in to a loss as we will see happened today.

 The EUR/USD daily chart, remember the pair moves with the market, the $USD moves against the market, the break of the trend line on the daily chart has been coming and we have been tracking it for weeks.

 This is the 5 min chart of the same pair, note the lower highs and lower lows, this is the definition of a downtrend, but few watching the daily chart would have seen this, when the Euro is down and the $USD is up like we see here, it's only a matter of time before the market move down to the correlation.

Here's one of the carry pairs, the EUR/JPY (Japanese Yen)

 The daily chart is just now showing the break of the trendline, but the evidence was there long before.

On a 5 min chart of the same pair, we see again lower highs and lower lows until the Euro broke the trendline and sent the Yen soaring as the Carry trade was in huge jeopardy and carry traders like hedge funds rushed to close out the carry which means closing out the stock positions they financed with the gains from the carry trade.

Take a look at today for a clear view of what happens when a carry trade goes wrong and remember for each pip the currency moves against your position, that can be 200x leverage!

 Remember last night the EUR/USD opened flat and then overnight was sent higher presumably on Italian exit polling data that was completely wrong compared to the results reported later in the day, in any case, the FX pair lifted the SPX and NASDAQ futures and the market gapped up on the open, apparently CNBC was doing their "DOW, ALL TIME NEW HIGHS IN SIGHT" on the open, soon after though the pair reversed and took the market down with it.*This is where I see some initial evidence of a reversal brewing in the FX pair and the SPX/NASDAQ futures as posted after market.

 This is the daily trend of the Yen which has been under a policy of total debasement by the Japanese government in order to make exports more competitive as China has boycotted Japanese exports in a feud over a couple of uninhabited islands.

Look at the daily close for the Yen today!!! This is a total reversal, a +2.29% gain, what's going on? It's the Carry trade.

Here's the Yen via the ETF, FXY intraday vs the SPY in red, the Yen opened lower as we saw last night on the UBER-SUPER-Dovish nominees for leadership positions at the Bank of Japan, however as the SPX fell more and more, the carry trade had to be closed out which means buying Japanese Yen, note the last plunge in the market around 3 p.m., this sent the Yen soaring, I doubt it's going to be a good night for the Nikkei.

As for the US, the fastest way to hedge exposure when you are a huge find and can't sell in to a declining market is to take out protection and it was bid today, take a look at the VIX.

 Look at the daily price candle of the VIX today! However this should have been no surprise at all. As far as Technical Analysis goes, the price pattern with the descending wedge suggested the VIX fall further and market rise higher, but we had warning weeks and even months ago as for 1, I told you the positive daily divergence in the VIX is the largest I have seen since the VIX was re-worked to include the SP-500 components in 2003.

But even more convincing...

My DeMark-Inspired custom buy/sell indicator gave a but signal in green, the Bollinger Bands went from huge volatility to a narrow pinching suggesting a highly directional move was coming.  At the time of the BB pinch I said, "I'd expect the VIX to hang around this area for a little while, crossing above and below the centerline moving average", in essence throwing traders in to a blender, then as predicted at the buy signal and the Bollinger Band pinch, the highly directional move over the last several days, but today especially.

Another area I look for confirmation is in TLT, the long bond ETF, this is also an important lesson on 3C and why I wait for 3C signals to engage the trade. TLT is a flight to safety when the market goes in to risk off mode as it did today, so if I'm getting distribution signals in the market, I should be getting accumulation signals in the safe haven assets like TLT.

 The SPY in but one of many confirming charts, from left to right: Green=3C/Price trend confirmation, red arrows=distribution and on this timeframe, it's heavy. The white arrow=accumulation which happens to be at the market wide 11/16 new cycle low, which saw a head fake move to a new low after several weeks of accumulation so it was set long before price moved a usual and that's our edge. As I always remind you,"PRICE IS DECEIVING", as you can see the new price highs off the 11/16 cycle low were not only negative divergence with the price trend, but lower than the 3C readings at the September top, which just so happened to be the same time QE3 was announced-that's right, we had a negative signal at the announcement of QE 3 and I had a number of emails telling me not to fight the F_E_D, but a day later and the market maxed out and headed down from there.

With a negative divergence in the SPX, money should be coming out of risk and in to the flight to safety trade, TLT.

Here we see a number of smaller negative divergences at tops and then a strong relative and leading positive divergence that was accumulated between the prices of $118 when the divergence first started to $116 at the lows in price.

I have told you often that in my experience, wherever yo see a divergence start, such as $118, the asset is typically going to surpass that point, so even if you were to buy at $118 and again at $116 on a continued positive divergence, the average is $117 cost and TLT moved not only through the average, but past where the divergence first started ($118) to close today at $119.33.

What about Gold? This was one of the day's best performing assets as ALL 10 S&P sectors closed in the red. Anyone who knows me knows that despite some of our biggest % gaining trades being in gold, I actually hate to analyze gold and silver because of the insane manipulation of both, however something moved me last week as I posted several posts and positions WAY out of character for me just in the last week or so.

Adding 50% to GLD Calls, Probably at $150 Strike Feb 21st @ 3:40pm

GOLD-LONG!  on Feb 22 at 2:13 p.m.

"I still like GLD March Calls here, you can even go with GLD long or some leverage, but I prefer the March monthly calls.

Take a look, I'd consider adding here again."

Honestly, does that sound like me, excited about gold?

Then... Gold/GLD is Definitely Looking GREAT here on Feb 22 at 2:29

Then a few minutes later...New GLD Call Position and tell me this sounds like me!

"I know this is not good risk management and I don't encourage it, but I feel I have to go for it.
I went with April 20th (Friday 19th) monthly expiration, long $150 calls, full size."

What could make me so bullish on gold/GLD that I was willing not only to trade it, but to violate risk management rules, to add a bigger position than speculative, in fact full size and THEN, ADD A SECOND FULL SIZE POSITION VIOLATING EVERY RISK MANAGEMENT RULE I HAVE LIVED BY?

Here it is...

 From a Technical analysis point of view, GLD was in a down trend, then formed a bearish continuation triangle, it broke below the triangle on what I think is a head fake move and then broke below last support, volume jumped as stops were hit, a perfect environment for smart money to accumulate in size, at cheap prices with plenty of supply. I suspected this was a head fake move from the triangle developing, everything since has been in line with that theory.

There are a lot of positive divergences, this is an hourly leading positive. 

Basically, someone knew something ahead of time and set up a position in which Technical Traders would fall in to the trap and give mart money their shares on the cheap and in the kind of supply they need to accumulate, we took advantage of that and now the April position is at a 34% gain in a day.

Leading Indicators-As you know they have been signaling red flags for some time, some have been more subtle like the intraday FX charts not seen n the daily, others like Credit have been screaming.

I'll post a few...These are all vs the SPX in green, make sure to look at the timeframe or dates.

 High Yield Corp. Credit, since the Credit markets are bigger and smarter than equities, we say, "Credit leads, equities follow".

The negative divergence in Credit vs the SPX (in a healthy market Credit should lead or at least stay in line) has been extraordinary, we see it so often sometimes we forget how much it means.

 This is HY Corp. Credit with 3C, as I suspected, the yellow arrow on the chart above this one is a short squeeze, you can see distribution now.

 Yields are like a magnet for stocks, here yields stopped moving higher with the market, another red flag.

 The $AUD, one of my favorite leading indicators among the currencies has a massive leading negative divergence vs the SPX.

 The Euro vs the SPX, these two should move together, the divergence is obvious.

 Here the Yen was showing trouble, but unless you looked close you didn't realize the trouble it was in.

The $USD is breaking out, this is bad for almost all risk assets, especially stocks.

As you know, I don't generally believe in "V" reversals and a straight reversal tomorrow would be that, although it depends on how futures perform to some degree tonight. So far we have a little consolidation in the Euro and ES, but now the 5 min charts are even starting to move in a positive direction so we'll be patient, we closed out several good trades from Friday, we could have day traded the market today, but I wouldn't have felt good about holding overnight so it wasn't worth it to me, I'd rather wait for a nice set up.

Finally...I just can't restrain myself, I wonder what his rap was on Mad Money tonight...

Futures

We may get a fresh lesson as to why we don't chase the market, but rather let it come to us on our terms.

The EUR/USD leading positive divergence is holding up, as I mentioned there were early signs ES was picking up on it as well.

 EUR/USD today

 ES after hours is leading positive


A closer look at ES from in line to a leading positive divergence. Most technical traders chase price and call it confirmation, then they wonder why they get whipsawed out of positions the next day or so. We let price come to us on our terms with a better entry and lower risk.

I'll just add this-You'll want to See it

Since I'm seeing this now, I'll put it out there. The thing that lifted the futures overnight was the EUR/USD pair because of Italian exit polling, when the hard data came out it was very different from the exit polling and the EUR/USD dropped taking all risk with it, however we have another change developing now, why? I don't know, but it will like effect ES and NQ as it already is showing signs of...

This is the EUR/USD pair, it moves with the market, the negative divergence seen at the high led to the pair falling (negative divergence=distribution), we had a relative positive divergence earlier, a leading positive divergence like the one in the white box is a much more powerful divergence and it is positive so it looks like the FX pair is going to be putting in a low and with that likely Futures, although it's a long night ahead of us, this is a significant find.

Last Market Update From Friday

Ended like this...

"I think we are in a great position to take advantage of short term movements and next week we should be in EXCELLENT position to enter new shorts, add to existing ones and basically be in the right spot at the right time as everyone else gets whipsawed in some extreme volatility!"

As I'm waiting to hear Boehner and watch the market's reaction in futures, I'm FORCED to watch CNBC, they were just saying they thought the Dow was going to hit all time new highs being something like 84 points from that mark.

Friday we held calls, looking for early price strength in the market this week, we got it on the open, we got out at exactly the right time and now the volatility and the real danger of the snake swinging violently from left and right is more important than ever ESPECIALLY with BERNIE in front of Congress tomorrow, today is not the day I want to chase ANYTHING; if it's not in place by now, then we missed some serious red-flags, but I do think those who need to get repositioned will have time.

 Remember, we never chase, we never have chased and there's good reason for that, we let the trade come to us. Bernie is going to want a controlled burn so if he comes out tomorrow and reassures the market, we may have a 200+ point move to the upside which is EXACTLY what we want to short in to- chasing takes away your edge and puts you in danger of being on the wrong side of a move like that which is entirely possible, this is why we build positions when we see the red flags.

I think there are a few things we need to look back on that led to this which is the breaking of the back of the trend.

That is the SPY's back broken.

There are a ton of reasons and red flags, but some of the more recent include the fact that we KNEW as of Sept. 13th when the F_O_M_C announced QE3, that there was something different, that there was something the market didn't like and unlike the previous policy accommodations, this one had already been priced in.

Very recently the change in volatility, this was one of those things that few people notice, but it is always the things the crowd misses that make you money.

Of course the leading indicators, credit especially have been flashing red lights, but the worst most recent event and this goes straight back to September 13th, were the F_O_M_C January minutes as we expected.

In any case, it's easy to get all worked up about a day like today, just remember in a down trend you'll have just about as many up days as down days, it's the few big down days like today that make the trend. Also in a bear market you will see some of the sharpest counter trend rallies you've ever seen so we have to be prepared for all of that.

For now I wouldn't pop the corks on the champagne, I wouldn't take victory laps, I'd continue to be cool, unemotional, look at the data, look at where the opportunities are and take those trade (which are always the hardest, they'd be like buying today which I would have if I had any signals that said to do so), but that's when you have the best positioning and the least amount of risk.

For now I'm updating the day's data, taking a look around as usual, going for a walk if need be to clear my head or any emotions because a day like today does feel good after building the case for so long, and remembering that we are in a VERY volatile area that can and most certainly will swing both ways violently.

As I've told many of you individually, most of the time you don't even realize you are in a bear market until after looking back.

Boehner Speaks after the Close

Comments shortly... futures should be interesting.

On another note, this is why we build positions as they come to us rather than chase them.

The tracking portfolio which is nothing like a model portfolio as I would never kill performance with more than 6 or so positions, still did awesome today... These are the core shorts that have been under construction while everyone else chased the NASDAQ 100's +1.32% gain for the year.

Today's movement only in equity positions

This is a 5+% gain over the entire tracking portfolio for the day alone and ranking at 37 of 1051

Still not chasing

Looking at volatility, protection is being heavily bid, this is the exact opposite of the manipulation of the VIX we saw all year to melt the market up slowly, but I suspect this is probably more genuine.

 A huge move in the VIX today, don't worry though there are still a lot of good looking shorts.

 The VXX is intraday negatively divergent which isn't surprising on the parabolic move.

The same is true of the much improved UVXY.

UNG Update

For newer members, UNG is one of my favorite long term, nearly secular trend assets right now; there are a ton of reasons for this, but we have been following UNG and building positions, moving around a little here and there for over a year now and it hasn't even begun a move to stage 2 "Mark-Up".

Today UNG is up over 4%, but again, this is one we may get an opportunity with. We played some options about a week ago just to juice the return on a good signal and did well, if we can get a little pullback it will make for either a nice entry for a longer term equity position or it may even offer another options trade which I'm inclined to take until we cross above the breakout to stage 2 in which case this is a purely trending long equity trade.

 The daily chart shows the long term base of about a year as an ascending triangle, we had a head fake move or false breakout that we identified at the time in the yellow box, my thought was and still is that UNG was going to be accumulated more before making a move in to stage 2, smart money wants to be in place long before they take it to stage 2, "Mark-up".

 The 4 hour 3C chart (which is a huge sign of underlying flows by mart money) shows the negative divergence that helped us identify the false breakout as that and not as a real breakout, some of us decided to take some off the table with significant gains and enter at a lower area, some chose to just ride it out. At the bottom of the pullback the two white areas are accumulation areas as 3C goes in to a stronger leading positive divergence. However at all 3 key areas, the yellow arrows represent head fake moves that are sen just before a reversal, typically a break of some well known support or resistance level, range, price pattern, new high/low, etc.

 Intraday as 3C was moving up, momentum continued, as 3C stopped, UNG went in to more of a consolidation. I'd prefer to see a pullback in to the gap, price moving up is great for our positions, but a pullback offers some new opportunities.

This is the area I'd watch for a pullback, if we get strong positive divergences in to a pullback, we may be able to pull off a call trade or even just a straight equity long.

Continued Market Update

There will be more, I have to put out these shorter updates because things are moving faster than I can cover in 1 update.

First I want to show you the typical Put position signal in SPX and NASDAQ futures we have been taking using weekly options in trades that last 1 to 2 days max and have been hugely successful.

 This is today's 5 min SPX futures chart with a negative divergence, the reason I didn't want to enter weekly puts is #1 I don't want to be day trading them, I want a signal strong enough to give us at least a 1- 2 day move as the probabilities are higher. Now compare the above 5 min ES chart to the one last week in which we did take out some weekly puts.

 This is from last week, the divergence is bigger, it is in to rising prices so it's giving a better signal, higher probabilities and we entered SPY puts as you can see at this link. 

 The 5 min NASDAQ futures 3C chart, it does look good for a day trade, but those are not the probabilities I want to chase and chase you would.

Last week's clean signal of a negative 5 min 3C divergence in to rising prices, not at an apex turning point.

So we'll see what the market gives and what we can take from it, but today just feel like a lot of "First day of the week" emotional volatility.

As for the futures intraday...

 If you look above at today's 5 min 3C charts for ES and NQ, they have a leading negative position so  as of this moment, the highest probability trade is to short price strength. The 1 min ES chart above shows 3C making a relative positive divergences, this isn't a huge or strong signal, but it's a change in character and that's what is important.

The NASDAQ 1 min futures 3C chart also has a relative positive divergence, I would suspect there would need to be some lateral consolidation rather than a "V" shaped reversal, but I do think this is a change in character and if I had taken the Put/short trade early this morning, I'd be closing it now.

As for the averages, again these are not strong signals that I would trade, but they are changes in character which precede changes in trends. Note some of the charts below and the 3C signal on the 19th of last week when the SPY Puts (weekly) were opened, there was good confirmation.

 DIA 1 min intraday showing some strength late Friday as we expected an early pop on the open this week to sell the calls we held over the weekend in to, the first red arrow from the left is the negative divergence this morning, a clear signal to sell those calls. It's not what you see in the DIA presently, it's what you don't, 3C and price have synced up, 3C isn't more negative than price.

 DIA 5 min chart shows the negative divergence shown above in the futures, this is good confirmation for a high probability trade, then the 21st a leading positive divergence, we were in Calls I believe by then, definitely on Friday and a large relative negative divergence at this morning's highs, another clear signal to close the calls at a profit.

 QQQ 2 min chart, also showing the negative divergence o the 19th as above in the futures, we see this morning's negative at the intraday highs and a current relative positive divergence, a definitive change in character, not one I'd trade, but a change.

 This is a closer look at the same chart above.

SPY 5 min also going negative in to the 19/20th and positive in to the 21st as well as late Friday, this is why we held, to sell in to some more strength which we saw this morning, the SPY is in line or maybe a bit better so this is not a market I want to short right now with term trades and it isn't providing the price strength either yet to short in to for longer term trades, this is just a market to gather information and be patient, things can change on a dime.