I collected a bunch of Leading Indicator charts before I had to leave around 2:30, but I didn't have a chance to post them. Many show the divergences that have served us so well and are the reason we use leading indicators are the first reason we started using these particular ones. Even a small 3 week dislocation of them led to all 9 of our Q1 2012 equity short positions making double digit profits within 5 weeks, we have a much larger long term and now short term has joined as well. We are at a moment that we have been waiting for for a long time, the market is at extremes, but that's always the case at reversals, look at the SPX new high at the 2007 market top, the market wants to shakeout every short before a move begins as they want every one on the other side of the boat and chasing to catch up, it's the chasing that allows Wall Street to make a profit on their positions, but we aren't chasing, we are following in Wall Street's foot steps, that is what Technical analysis was suppose to be until traders got too lazy and just assumed it would work forever and Wall St. wouldn't catch on, they caught on years ago and now use TA against traders regularly as do we. I talk about this in the articles linked on the member's site, "Understanding the Head Fake Move"
PART 1 and
PART 2.
So lets get right to it, I'll post the charts I captured earlier and the updated charts from the close. Although the close looked strong, you'll be surprised to see what was really happening, it's called "Banging the close", pretty typical after 3 p.m. on op-ex Fridays. As Marc Farber from Doom, Boom and Gloom said today,
"In the 40 years I’ve been working as an economist and investor, I have never seen such a disconnect between the asset market and the economic reality... Something will break very bad."
I've been using and learning from 3C for nearly a decade, so it's hard for me to remember a time when price ruled my emotions, but it's hard for me to relate to people who think this is a bullish market when there's a close of 0.43% on the SPX and speaking of volatility, compared to Wednesday's close, that's a gain of 0.06%, there's volatility, but that's not a bullish market by a long shot, but what really convinces me is not price action, it's what's below the surface, EVERYONE KNOWS WHAT THE PRICE ACTION IS,
there's absolutely no edge in that at all, in fact it tends to be one of the most deceiving things in the market.
I can hear the skeptics saying, "Yes, but price is what determines gains or losses", fair enough, but when there are this many negative disconnects in the market that are this big, it takes 1 gap down to wipe out 2-3 months of longs and the longs don't believe it will stick so they hold and you get real follow through with an even worse second day-we saw credit lose an entire year's (2013) gain in a 10day move! We saw over 2 months of longs stopped out already this year on 1/4 of the volatility we are at now.
These people won't be swayed by anything short of experience, once they have the experience, they'll understand what the 3C charts, market breadth and dislocations in leading indicators are so important. Then they become believers, so be it, it took me a while too to stop thinking like the herd as I learned like the heard initially.
Lets get to what really counts, that which the crowd missed...
First Leading indicators and I'll add the closing charts I captured obviously later.
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Remember all Leading Indicators are compared to the SPX in green unless otherwise noted.
Commodities intraday as of this afternoon
Longer term 15 min chart of Commodities showing the top at yesterday's highs that were so problematic, it looks like the PPT stepped in to save the market from something that we will never know how serious it actually was, but I pointed out in multiple posts last night how and why it could have been so serious and how seriously they reacted (in TLT) to stop it from happening-not to hold the market up, but to manage the decline.
This is the 30 min Commodities chart, note the negative divergence at September-that's QE3's arrival and when the F_E_D first started setting up their exit strategy. Look at the dislocation since, this is one of the largest ever seen, commodities are risk assets and as such should move with the SPX, this chart alone shows what kind of trouble this market is and it's not going to just be a 20% decline.
Daily chart shows Commodities vs the SPX, they moved right with risk /SPX for most of the 2009-present rally, what happened? Fundamental happened, no demand, manufacturing and economic contraction. It's a lot easier to manipulate some strangely weighted indices than to manipulate dozens upon dozens of commodities and when was the last time you read, "Commodity index hits a new high!"?
You want to know what Commodities are doing? They are following their natural legacy arbitrage with the $USD which is seen in green, stocks aren't, but trust me, just like every bubble was "Different this time", things always revert back to the mean and usually overshoot when they do.
This is the close in commodities today vs the SPX, they were not interested in following the SPX higher, in fact the SPX was higher for one reason only, here it is...
I hope none of my members are sulking, saying, "But the market closed higher again!" Instead, find out why, find out if it's real or hollow, find out what it means for the market. 3C was named as such for a reason, a constant reminder to "
Compare, Compare, Compare" and that's where your answers and probabilities are.
If you want to know why no other risk assets followed the market in to what is known as "Banging the Close", it's because there was no real demand for risk, it's smoke and mirrors accomplished with manipulation of 1 asset, not 500 (the 500 stocks of the SPX-or the 2000 Russell stocks), it was done by manipulating the VIX. Look at the VIX in green vs. the SPX in red at the close today, this wasn't a day long move, it was minutes made possible by a rather small investment in manipulation of the VIX. The chart speaks for itself.
Now, what about the VIX, was it really such a pariah?
Well checking VIX futures and volume, the last candlestick was a bullish candle on extraordinary volume, someone found the VIX very compelling at these prices,
so no, the VIX ix not actually being sold, but here's confirmation of the VIX's true demand.
This is a good segue in to the VXX...VIX short term futures
Note how VIX futures trades in to the close, we already know these are 1 of 3 main market manipulation levers, it can't be any more obvious than those 3 charts.
Before hand the VXX was quite all day, not being used to manipulate much because I believe the Op-Ex max-pain pin was in effect today.
Longer term the VXX seems in line or naturally correlated at the green arrow, but it was actually stronger if you look close. In the green box the correlation was pretty close to normal, but look at demand for protection as of yesterday's 2 p.m. high, the problematic one that forced the PPT to step in
(see last night's posts).
VXX 10 min is clearly not moving down as low as the natural correlation, this is because of more demand for protection.
The 10 min shows VXX stronger in red, if you look at the red(SPX) trendline and the white (VXX) trendline, you see the SPX at a higher high, why isn't VXX at a lower low? DEAMND for protection-Smart money knows what is coming and buying protection.
3C VXX intraday today-again very little movement away from the correlation and 3C supports that.
However the larger underlying trend shows 3C agrees with all of the charts above showing demand for protection as it is in a huge leading positive divergence-that is solid accumulation.
And as for the close, well 3C shows accumulation of the VXX move lower-yes it was manipulated, but it was also bought-
it's not that much different than us shorting a head fake breakout-the head fake is manipulation, but it provides an opportunity or we do the same on head fake breakdowns with accumulation-THIS IS NO DIFFERENT.
The close was banged, but don't think for a second it was because of VIX selling/distribution-in fact the opposite occurred.
Other risk assets?
High Yield Corporate Credit-one of the biggest, most liquid credit markets available for trade. "Credit leads, stocks follow"
Today saw MASSIVE distribution in HYG,
this wasn't manipulation, this was as we have seen in different forms all week, smart money, running, not walking away from risk, that's the daily candle, as bearish as you get.
Look at the volume as HYG crossed below a support level, stops where hit in a huge way, but were they accumulated?
This is the near term dislocation of HYG that I needed to see, I don't think I need much more to start being aggressive in my short positing, not reckless, but
realizing when the time to strike while the iron is hot.
Within the longer trend, HYG is still dislocated and all in a single day, what does that tell you about risk next week?
Sure, it will bounce, Wall St. won't make it that easy for you, the 3 min 3C chart shows light intraday accumulation, enough to bounce HYG, but...
Where it really matters at 15 mins (a much stronger amount of underlying dollars flowing), we have a wickedly negative leading divergence. This shows you clearly how smart money sells in to price strength, this is not the same as asset strength and today's decline in HYG is what happens when you follow price only, it is meant to deceive.
HYG at the close,
did it show any inclination at all to go in on risk with the SPX as they banged the close?
HYG's closing 15 min chart. If I'm trading HYG alone, I look at the 3 min chart, I know an intraday bounce is likely, but I know that the larger trend is distribution, I want to be short HYG if this is all I'm trading, but not after a decline like today, I want to short strength, the opposite of what retail does-they buy strength. So the 3 min chart tells me an intraday bounce is coming, the 15 min chart tells me the highest probability for HYG is down, I want to sell short in to strength and the 15 min chart gives me the confidence to do that, even though it can be emotionally hard to short new highs.
I don't advocate randomly shorting new highs or buying new lows, but if there's distribution in to them and there's obvious resistance that has been broken and drawn retail in to the trade long, I have a VERY low risk, high probability, excellent entry.
Beyond all of that, remember Credit is much smarter that equity, what does HYG tell you about the markets when all charts are taking in to consideration? Or does the SPX's 0.43% gain on diminishing volume hold more weight with you?
I'm not trying to be smug, but you have an opportunity of a lifetime in front of you, you have all of the information to understand what is going on, can you use it to your advantage, think outside the box, break away from the herd mentality and think for yourself without Cramer telling you what to buy or sell? Most of you I have known a long time and I know the answer, but sometimes I think we need to be asked.
As for other credit, I had to borrow some charts as I don't have these and I need a better way to display the relative performance and these do a good job, you'll know then when you see them.
More Credit...
Junk Credit is by its nature, High Yield, it has to be considering its quality, yet trades remarkably similar to HY Credit (HYG). Here we have a negative divergence between JNK and the SPX right at Thursday's 2 p.m. SPX high that I have proven was hollow and falling apart badly, about to be annihilated by the advancing Treasury complex-the only asset that actually saw 4x higher volume on a small breakout when the Dow 15k or new SPX highs couldn't even register higher volume than the previous day; that was until TLT was manipulated, still JNK Credit shows the flight from risk VERY clearly.
The long term dislocation is even present.
And JNK at the SPX's closing punch up, risk as represented by
credit wanted nothing to do with this move which was not fueled by demand for risk, but as I already showed you, manipulation of the VIX, which actually had demand as it went lower.
HY Credit-DHY is a strange bird, I can't figure out how it's being used, but today it was flat, not doing much of anything, but it has been in line recently.
Earlier in the year, HY credit made a new low on the year in 2 days as seen above, there was heavy volume and massive selling, this is around the same time I proclaimed that the back of the snake had been broken (that it would still move-even more violently and unpredictably than ever and be more dangerous, but looking back a year from now, we'll see this as the moment when everything changed.
This is no small move in risk credit, it is VERY significant, but how and why did it head higher?
I can't answer that, but I can tell you this, I looked at the 3C trend and found something remarkable.
3C shows heavy distribution just before the plunge to new lows for the year in 2-days, since then it has been in an even worse negative divegrence, I assume short selling of a VERY illiquid market, making it ideal for a short that can move fast and hard.
As for other credit that I don't have...
US stocks in blue since May 1, Investment Grade Credit in brown, High Yield in red and HYG in green, what's the trend in credit tell you? If you don't know the answer it is probably because you've never heard the market maxim about credit, "
Credit leads the market, equities follow". Knowing that, what is credit's trend telling you about the near term trajectory of the market?
Over nearly s month we have US Credit which is both High Yield (risk on credit) and Investment Grade(quality Credit with lower yields), stocks represented by ES (SPX e-mini futures ) in blue. Any discernible trend?
Moving along... Treasuries. Yesterday the other levers were causing the SPX to feel major heat, TLT/Treasuries were used to save them even though the SPX still declined in to TLT weakness, but why did the PPT chose TLT? I think one reason is because they are leaving a small footprint, they know TLT will be gobbled up at those levels and thus they have done as little damage to market structure as possible, while still averting what could have been a circuit breaker decline in the market, this isn't what the government wants on the news over the weekend, they can't interfere to this degree to stop what's happening, if the F_E_D who literally grows money on trees can't hold it together, the NY F_E_D's trading desk can't either, but they can keep it reasonable.
TLT v SPX is at a normal correlation at the green arrow, the red box shows TLT moving up with the SPX-highly unusual and only happens when there's more demand for safety than there is for risk, yesterday that changed as TLT was manipulated with a 5-10 min negative divergence all at once, it did the job, but didn't damage the nearly 6 month long accumulation of Treasuries, after all, the F_E_D will need some demand when they unwind their balance sheet.
Look at the SPX and TLT at point "A" and "B". if the natural correlation existed, TLT would be well below the white arrow, it isn't because of real demand,
this is VERY rare to see in the market, no manipulation, no underlying setups, just real demand and the emotion that created it is the most powerful in the market, FEAR.
Look at the 5 min TLT chart as of 1:30 today, the lows in TLT are under accumulation.
Look at the end of day move, while the SPX bangs in to the close, TLT actually sees a move toward protection-total opposite forces, but one as we know (the SPX's close) was from market manipulation of VIX, the other is real demand.
Look at the same 5 min 3C chart by the close, what do you notice?
Yields-the magnet for equities.
Yields were supportive of intraday trade today because of what happened to TLT.
However, even with that, the long term dislocation is staggering in its size and to the left yields predicted the market rise, but look at the difference in size and how far the market went on a much smaller divergence. Now imagine the possibilities ahead.
The SPX in to the close did nothing but revert to Yields intraday position-again, there's always reversion to the mean.
I thought I'd show you SPY Arb and CONTEXT (the ES-SPX futures model).
CONTEXT for ES is strangely positive by about 8 ES points, I figured the reason for this-CONTEXT is not the same 3 assets that SPY arb is, it is yields, carry trades, treasuries, and many more assets. I think it looks like this because of the remarkable moves in FX this week and in Treasuries-thus yields. These have been the biggest moves all year and probably that I've ever seen-not to say there haven't been larger, but from my recollection, thus things are skewed-especially treasuries and yields.
The SPY Arb is at the most negative I have ever seen it, it is $1.75 lower than the SPY, meaning the SPY is $1.75 too rick vs the correlations in HYG, TLT and VXX.
If the SPY moved to the model's fair value, it would erase all of this week's gains in the SPY and close even lower!
Single Currencies..
FXA-$AUD-Australian Dollar The $AUD is considered a risk positive currency, it typically moves with the market.
In the recent past a positive divergence between the $AUD and the SPX would be a leading signal that the SPX was going to move higher, likewise a negative $AUD vs. the SPX would signal early that the SPX was soon to fall lower. This has been one of my favorite leading indicators among the currencies, the Euro was better for intraday or trend confirmation, but the $AUD was better for predicting changes in the SPX's trend. Recently a series of RBA cuts in Australia have sent the $AUD lower, it was recently tracking the SPX better than the Euro, but now it is at a huge dislocation with the SPX, I can't imagine this is anything but bad for the SPX's longer term trend and even intraday.
AUD/FXA intraday shows some confirmation at the green arrow, but at the end of day SPX ramp, the AUD wanted nothing to do with additional risk exposure, this is because the SPX specifically was targeted for manipulation using the VIX as shown above,
the AUD would not be effected by that manipulation and therefore confirms there was no real uptick in real risk sentiment at the closing ramp.
Near term trend dislocation, if I saw this a year ago, I'd be fully short the market, however this is extreme, I believe the market will have to revert back to the mean, but it gets much worse than this and in the past smaller AUD divergences have led to multi-month downtrends,
This is the longer term dislocation, it is extreme, this is a sign of how overvalued the market is and how much excess has to be wrung out of it, this 1 reason I believe the PPT is not trying to push the market higher, only manage carnage because the potential for carnage is so high.
The green arrow is the November 16th cycle low when all the Carry Trade currencies were used and we had a month or thereabouts of accumulation in to the low.
Look at where the AUD was vs. SPX price at the left compared to where both are now, are you getting a feel for how serious this market is dislodged from reality?
FXE-Euro
The Euro is also a risk on currency that tends to move with the market, you use to be able to know exactly where the SPX would be by looking at the Euro or EUR/USD, they tracked that closely.
On a day to day basis and intraday, the Euro moving up can still be market supportive and down can be market negative, but that usually is because Euro down means the $USD is up and that is a market negative.
Intraday the Euro and SPX start out in line, then at the early a.m. SPX lows, the Euro is supportive and the SPX moves up from there, this is not due to the Euro alone, but so many other correlations ARE CONNECTED TO EACH OTHER. At the 11:20 a.m. highs the Euro is negatively divergent and the SPX falls, the Euro is positively divergent at the 12 pm market lows and the SPX heads higher in to the afternoon (this is until about 1:30 p.m.).
This shows what happened after, again the two are moving together in to the early afternoon,
but the EOD SPX ramp higher is not followed by the Euro, in fact so far we haven't found anything that moved higher with the SPX, only the VIX has a similar correlation, but the mirror opposite because the VIX is what was used to send the SPX higher, not buyer demand, simply algos following their programming.
1 min longer term you can see the negative divergence in the Euro that coincides with the market's Thursday 2 pm top, since, the Euro has moved drastically lower than the SPX, a very negative correlation that should pressure the SPX lower.
Even longer term on a 10-min chart you can see the massive dislocation between the two, this in the past would be a market mover to the downside, I still believe it will be, but much larger than anything we can imagine right now as it is a new phenomena.
Look at the negative divergences in the Euro sending the market lower, look how much bigger this is and it is actually lower than the one to the left, even though the SPX is significantly higher than 2011, this makes it a larger divergence than we can comprehend on this chart.
UUP-$US Dollar
As mentioned, the $USD moves opposite risk assets., the dollar moving up send the SPX down as seen generally in the red box, but the dollar losing ground sends the SPX higher as generally seen in the white box.
The $USD has been moving higher against the legacy arbitrage correlation at the white arrows.
Here's the large "W" bullish $USD base I talk about and the yellow pullback, we are now coming out of that pullback to a breakout from the base, a VERY negative event for all risk assets including the market.
FXY-Japanese Yen Typically the Yen moving down lately is market positive and up is market negative because of carry trade correlations. There's a big move in the Yen to the upside brewing, I believe it will devastate the market.
Look at the Yen at the SPX's Thursday 2 pm top, the market should have gone flying higher, why didn't it?
Here at A the Yen declines from BOJ QE policy, at "B" it starts building and accumulating a base, "C" I believe is a head fake and I think the next move in the Yen will be much higher, you can see the correlation between the yen and SPX, now imagine the Yen moving much higher, I've written a lot about this in "Currency Crisis".
As for the market's tone in 3C at the close...
IWM
The intraday 1 min IWM shows distribution in to the EOD ramp.
The 2 min confirms this and shows even heavier distribution.
QQQ
QQQ 1 min positive divergence at 12 pm, it also saw distribution at the closing ramp.
The important 15 min chart is leading negative through the entire week and then some-the longer term trend is even worse.
SPY
the 1 min chart is inline with the close, but...
The 2 min chart shows leading negative distribution in to the ramp.
Again, the important 15 min chart is leading negative all week.
All this week we have seen a serious flight to safety in VIX futures and TLT-The flight to safety asset, this was going on for a lot longer than this week, but this week was VERY intense.
We see the end of day pump was distributed, it wasn't followed by any risk asset and even traders didn't want to buy it or even hold it as they sold it as 3C shows.
I'll show you more this weekend with futures, but the theme is the same, it's not my view, it's just the evidence.
