Another Water-Shed Event

Remember I've been saying the $USD has made a huge base, it pulled back right as it completed the base and I've been saying the pullback is ending, today it ended and the $USD is breaking out.

The $USD typically has a reverse or inverse correlation with risk assets such as oil, stocks and often precious metals.

 Dollar intraday vs the SPX (red), this isn't the normal correlation which is usually mirror opposite, but you can see a few areas where the USD weakness helped the market or pressured it, but a breakout from a large base is a whole new game.

The daily chart showing the second bottom of the "W" and the move to the top of the base, then a pullback and now breaking out.

Here's a closer look at the same, note the positive divegrence at the reversal of the pullback.

This close up shows the breakout of the $USD from the large "W"W base today, this can be a game changer as well.

Daily Wrap

Yesterday's Update regarding HYG and the market today was probably the most important event from my perspective, the update I'm talking about from Monday is this one...

I posted them earlier, but I'll touch on the key points again.

For HYG which there was "Light accumulation" in, this told me a few things, 1) with the absolute beating HYG (High Yield Corp. Credit, which is the most liquid way to trade credit since the banks started getting it off their books after the 2008 financial crisis) took the last several days, which is a signal I have been waiting for that looks like this...

there was no way HYG was under accumulation as in buying the dip. This is what I said about HYG in yesterday's market update during market hours...

"if we follow the AAPL theory, then the market should get 1 last move to the upside, HYG will support that move..."

We already know that HYG, TLT and VXX are the 3 assets used to move the market, to move the market up, VXX and TLT need to be pushed down and HYG needs to be pushed up.

As I was saying, there was no way that was accumulation to go long HYG Credit, it was light accumulation to move HYG Credit to move the market and that's what it did.From yesterday's post linked above...

"although not strong, we do have an HYG positive to 5 mins, at 10 min it stops completely, no hint. What does that tell you about HYG? As a lever, it is being prepped"

Do you think after predicting this yesterday, this move right off the open is a coincidence?

SPY (green) vs HYG (red), note HYG falls and the SPY loses all momentum, but the EOD push needs HYG's help to get it moving.

Most importantly from YESTERDAY's post...

"I would say one of the most important things to watch for is HYG to make its move, that should (with TLT and VXX lower and under accumulation) allow the market to make that move up I envisioned in AAPL-IF THE MARKET MOVE OR ESPECIALLY HYG ARE SOLD PREMATURELY (NEGATIVE DIVERGENCES-EVEN PRICE FALLING) I THINK WE WILL KNOW THE MARKET IS ACTUALLY MAKING THAT CRACKING SOUND."

I think this qualifies fro the above action I thought to be most important in both ways-3C and price...

HYG's 3C chart was negative right off the opening move higher and in line as it fell with only some late day accumulation to help ramp the market.

I know a lot of people think the market is run up by POMO which usually ends around 11 a.m. and today was a big POMO day, but the correlation today and the accumulation yesterday suggest HYG was the real driver and nearly all the major gains were complete well before 11 a.m.

However there is something I find strange, High Yield Credit is Institutional money's way of expressing a risk on position, for such a "Risk on" day, don't you think it's strange that they would have abandoned their money making positions? For example...

 HYG Credit was the only in any position to benefit, but it was moving down well before there would have been a chance to distribute a large position at a reasonable price and we already know from the 5 min (but not as far as 10 min) positive HYG divergence on Monday, that the position wasn't very big.

 Junk Credit above is by nature High Yield because of its risk, it too was in no place to take advantage of today's move in stocks, in fact look at the two assets' direction in the red box.

 High Yield Credit which strangely made a new and significant low for the entire year in 2 days on volume, has been sticking right there with the market ever since, but not recently, HY credit ran the other way and had no time to benefit from today's move in the market at all. Why stay for so long and then abandon ship right when the decent gains come in?

 As far as other types of credit vs ES in blue, Investment Grade in brown, HYG in green and HY in red  all fell today well before they could have made a red cent from the market's move, again, why would institutional money move out of their asset of choice to express a bullish position on the day when they could have benefitted most?

Or could it be that today's market gave them cover to move out of the rest of their positions? This would be interesting because smart money is fabulous at buying without driving price up or selling without driving price down, in fact selling in to higher prices. The only real way price would fall in credit on selling would be under the laws of supply and demand, if they put more supply on the market than there was demand, prices would naturally fall (granted we don't see real supply and demand moves often-but again AAPL's decline was a great example and TLT and VXXs' refusal to make lower lows are another good example). Given the declines and the unwillingness to stick around for the gains from the market, one could be forgiven for wondering if they were moving as fast as possible out of any remaining credit positions.

Another Interesting item is Index futures relationship with VWAP and today's ES average trade size and volume.

This might be a little confusing at first, but here's ES with 3C showing the divergences and VWAP and ES's relationship to VWAP.

If you know anything about VWAP, you probably know it's one indicator that both retail and smart money use, albeit for different reasons. The NASDAQ has Market Makers and the NYSE has Specialists, one of these middlemen specialize in a stock or sometimes a couple and they match orders and step in when there's no one to take the other side of a market order (this is why I never use limit orders in a position I want filled-by law they don't have to fill it, they do have to fill a market order-be careful that you know the spread and volume of the stock). 

These two middleman also fill institutional orders in stocks they specialize in because who knows the stock and all of the players in it better than the middle man? If a Hedge Fund has a large order to fill-say a buy, then they grade the market maker/specialists performance on where the average order price was filled compared to VWAP-"Volume Weighted Average Price". 

When buying, the market maker needs to fill at VWAP or below, when selling the market maker needs to fill at VWAP or above if they want future business.

 The green and red arrows mark the regular New York hours, 3C in light blue is VERY obvious in its signal, but VWAP is what is interesting. Looking at price vs. VWAP and 3C, price is above VWAP and for part of the day at the standard deviation upper channel of VWAP-the perfect selling spot, the rest of the day it's above VWAP. No institutional money is going to be a large buyer above VWAP, they're going to be sellers; 3C obviously feels the same way.

But that's not all...

This is the "Average Trade Size" and Volume for ES on a daily basis.

Today's AVERAGE TRADE SIZE WAS HUGE compared to normal, the volume was a bit above average.

So if indeed there was the selling that VWAP and 3C both suggest and what I suspected and saw today with HYG, then it suggests they were moving fairly large positions.

If we look at the SPY Arbitrage Model from Capital Context, we see something else interesting.

The only time the SPY arbitrage, which uses only 3 assets: HYG, TLT and VXX; was above zero was slightly after the open, what was going on then before it started falling through the rest of the day?

That's the same time HYG was up strong, the same time the market made most of its gains and note HYG falling through the rest of the day as the SPY Arbitrage does the EXACT same.

In fact the only time the Arb moves toward the positive is toward the close, the exact same time HYG sees a small positive divergence and also moves higher.

What other assets acted in a similar manner? Sticking with SPY Arb assets first...

 TLT made a new low right at the same time, although it was accumulated and..

VXX did the same.

I mentioned currencies as well...

 The $AUD

And the Euro...

There were others as well, currency pairs, assets like AAPL were trying, I showed a few buttons being pushed in this post..."Desperation".

As to some of the other Leading Indicators...

 Commodities also interestingly didn't want to play along today, but it's more serious than that, retail can't bid these up, large funds bid these up and they had no interest in taking on risk in the commodity sector, even though it's a risk asset that use to move in lockstep with the SPX.

 Longer term commodities vs. the SPX, this is a massive dislocation, what this is telling us is that the goods needed to produce items aren't in demand, this tells you something about the global economy and what will happen long before the F_E_D cuts back QE3, the selling on the knowledge they are going to do that could come any moment at this point and it has been getting progressively worse after each LSAP program, not to mention this one would be the unwind of 4+ years of balance sheet expansion.

Here's a  look at the increasing downside front running of the end of QE (this was when the end was known in advance-not knowing is uncertainty and the market hates nothing more).

QE1's deccline (left) wasn't that sharp, QE2's decline started well in advance of the end of QE2 and was much sharper, QE3 hasn't had an official date or anything really other than letting everyone know it's coming before Bernie leaves in 2014. 

The market will front run the F_E_D for a few simple reasons...
1) The market ALWAYS front-runs the F_E_D
2) Price is more disconnected from Fundamentals now for each stock
3) Price is more disconnected now from ?US-Economic/World Fundamentals which were improving in QE 1 and 2, but declining in QE3.
4) Fear of the unknown, no one knows what will happen, when and how or how the rest of the world will react, the average Hedge fund or Mutual Fund (forget large banks) portfolio can't be positioned to move out from risk in days or weeks, it takes months.


 The $AUD use to lead the market in even subtle divergences, you could count on a solid month long move from a 3 week divergence, this is a much larger (in time and scope) divergence-while most don't realize or even care to, all of these assets are connected to each other. Thus far its only stocks that are whistling past the graveyard, almost everything else is prepared for a decline.

We see the same in the Euro that use to track the SPX nearly tick for tick.

As pointed out before, TLT (Treasuries/Flight to safety) have a huge daily positive divergence, but we knew they'd be coming down weeks in advance of the actual move, note the market shoot up at the same time-this is an example of TLT, VXX and HYG strong influence on the market and why they are levers.

As for TLT's position, if you are moving your portfolio from risk to safety, wouldn't you rather buy at the lowest prices for safety and be able to sell risk at the highest?

TLT's long term divergence... I'm just showing what has happened thus far, I'm not saying TLT will remain the choice for safety.

 Daily Leading

4-day Leading...

VXX

 Again, back to the notion of real supply and demand, everyone knows the VIX (and pretty much VIX futures) normally move opposite the market, so why then have VIX futures put in a bottom and are seeing enough demand to offset algo-correlation selling? For a Mutual Fund that can't go short, they might want to buy VIX futures for protection.

After some relative quiet, the VXX is used as a lever to help move the SPX higher, but there's a difference in amplitude, VXX is holding up much better than it should,  this might be why...

I don't think I need to point out the obvious on the VXX chart.

One last thing, how quickly we forget...Does anyone remember just a few short months ago the Spot VIX was hitting 7 year new lows? This happened a multitude of times, not just once. Does anyone find it interesting that this hasn't happened lately?

In fact...

 The last time the VIX hit multi-year new lows-these were 7+ year new lows (vs the SPX in red)

In fact, the intraday VIX vs the SPX (red) looks oddly much stronger than it should, it should be the mirror opposite.

Here's the VIX spot vs. the VIX Futures (VXX red), VXX dipped in to the close because it is used-not the VIX, to move the market, but remember that dip was also accumulated.

Just to give you a few oddities to chew over, for now at least I have seen what I expected yesterday, HYG to lead the market higher and as I said yesterday in bright red, capital letters...

"IF THE MARKET MOVE OR ESPECIALLY HYG ARE SOLD PREMATURELY (NEGATIVE DIVERGENCES-EVEN PRICE FALLING) I THINK WE WILL KNOW THE MARKET IS ACTUALLY MAKING THAT CRACKING SOUND."

If you feel a bit nervous about the market and your short positioning, then Wall Street is doing its job because most of you have more insight in to how the market really works than a dozen retail Technical traders combined and you aren't easily emotionally moved, but as I said last night, there are no oversold/overbought moves, everything Wall Street does is for a reason and we are at a very extreme point in the market where Wall St. doesn't want anyone on their tail, they don't make money trading with you, they make it trading against you. Emotions tend to be one of the greatest reverse indicators, you know all of those option trades we entered and were knocking everyone out of the park were all entered at the most difficult spot, the difference though between just being contrary and what we are doing is overwhelming evidence, we don't make any trades based on gut feeling or emotions.

Futures are coming, right nowES and TF are not looking good.

 ES 1 min- I didn't want to draw on these charts, you know what they mean and me drawing on them would only distract. I do want to note 3C is at a new leading negative low while price is in a tight range.

TF (Russell 2000 futures)

IOC Charts-Trade Set Up ***

This is truly a beautiful short position for the long haul. My last major update that would explain enough of what we were waiting for to add to IOC which was already in the green as a short, would have been this one from Thursday, May 2nd 2013. There's a link at the top of that post that takes you back to an earlier, more comprehensive post, but one of the beautiful things about IOC is it has huge opportunity on the downside. The other thing I LOVE about IOC is it telegraphs its moves so well, we were patient with IOC waiting for it to break in to this area, we had signals that it would and it did.

*If you are new to the trade idea or considering it, please make sure you read the larger updates linked above.

First, IOC is a major H&S top and it is confirmed by volume analysis, it's not just a price pattern that looks like a H&S top. We entered near my favorite place to short a H&S and today was my second favorite place.

The Basics.. A Large H&S top of over a year.

 "A" is the left shoulder, "B" is the head, "C" is the right shoulder and what we have been waiting on and "D" is the neckline.

Looking at the right shoulder we noticed a while ago an ascending triangle which is a bullish continuation price pattern. For those who didn't look at the chart with a 5-day chart, they may have not noticed the larger H&S, however for those looking more closely, the run from the neckline to the top of "C" and then a bullish ascending triangle suggests IOC makes a new leg higher, it first made a head fake / shakeout move below the triangle (I always say head fake moves are some of our best timing signals), the next day the breakout of the triangle started. We already knew this would be a head fake / failed breakout, but we waited on it because short term charts were showing accumulation for a move higher.

The only move higher that will draw in more buyers and create the demand and volume Wall Street needs to sell or sell short (both are selling) in to would be a new high or rather a higher high so that's what we wanted to see, a higher high above the $82 area, today provided exactly that on earnings.

The intraday move is already showing good confirmation as a head fake move, but we could almost assume it was going to be when looking at the overall picture. Here you see accumulation for the move higher (I have no idea if earnings were leaked, I do think this had more to do with the set up though).

The red trendline is the area price needed to pass above and show distribution in to that move, we could have guessed at that by the long upper wick as higher prices were rejected today.

 The longer term chart pattern with distribution in to the head and then in to the right shoulder and today in to the move to the area we were looking for and waiting patiently for.

Note that as far as head fake moves go, IOC put in a nearly identical one at the top of the head (first yellow arrow) and another similar today.

With that price move to the exact area we have been patiently waiting for with distribution in to the move, this is now a high probability, VERY low risk, with an excellent entry-short position.

I hope those of you who have been following and building a position in IOC had a chance to look at it today. If we get some loitering around the area we'll check it for new positions if any one is interested.

We Got the Move in IOC

IOC is a longer term equity short position, we've been waiting to fill it out until it moves above a triangle in the right shoulder of a H&S top, today it did that. I'm going to bring the IOC position up to 2/3rds or so of a full equity core position.

Desperation

They are pulling out ALL of the stops, this should tell you something about the condition of this market.

Other than the currencies I already told you about, look at the few assets I found just in the last minute since the last post...

 Even though HYG is having trouble holding on to breakeven on the day, the last few minutes there's an effort to lift it.

The same is going on in AAPL

And even with accumulation of TLT moving lower, at the same time as they tried to move HYG, they try to move TLT down (HYG up/ TLT and VXX down is market supportive)

And VXX is seeing accumulation as well, but the exact same time they're trying to move that to influence the Arbitrage.

Market Update

I just realized I haven't shown you intraday charts, so you have no idea what I'm looking at when
I say, "The Q's are fighting"...

First I think we can look at today's move, the action in the 3C charts and safely conclude we have a head fake move today, which with the HYG information may in fact be our timing signal.

It's hard to watch every asset, I've seen them try to kick start AAPL which would be most helpful for the Q's, I've seen the normal levers, but the arbitrage is so deeply red now it's silly and right now they are just moving to the currencies and lifting those, the problem or interesting aspect is while the $USD falls and the risk currencies rise, the Yen is rising too, so I'm wondering how much the Yen negates. This is not a market having an easy time right now.


Lets start with the Q's...

 QQQ 1 min intraday leading negative, when 3k was lost you saw the positive intraday divergence come out.

2 min QQQ is really not showing anything positive so there's not that much willingness to take on risk. Remember how the market got here, I'll prove it to you after market, it wasn't demand, it was HYG.

DIA 1 min leading negative-not fighting like the Q's

 DIA 2 min is worse.

The IWM 1 min is showing some fight.

2 min is pretty far gone, this confirms the head fake on today;s move, a good day to enter shorts/puts on price strength and underlying weakness.

SPY 1 min is leading negative and not fighting.

2 min is similar.

To prove there's no demand for risk, look at the TICK today, even with this big move, the TICK has only been over 1000 a handful of times, 1000 should be the mean on a day like today with +1500, but there aren't that many stocks advancing compared to the move, again proof of HYG's involvement.

You can see the back and forth in TICK at the EOD, right now it's showing a bit more strength, but this is a market struggling severely, I don't know what it will be able to do if it loses HYG.