Daily Wrap

I want to share with you an interesting email between myself and a member this weekend, in fact on Saturday. I had just finished explaining my view, the same I expressed on the site today, that institutional money isn't going to take large positions for a move to the upside, the danger of getting caught without a chair when the music stops is just not worth it for them, the point really was the same as what I said earlier, "Don't expect to see 15, 30 and 60 min positive divergences".

His response to me was:

"This suggests the bulk of the upside will have to come from a combination of upside biased HFT algos, short covering panics and, eventually, bulls jumping in long on the assumption the market has reversed. "

My response to this was the following:

"That's the obvious stuff, but I wouldn't be surprised if the F_E_D let a rumor slip, picked up by the WSJ that helps, remember they have a lot closer relationship than they disclose as evidenced by the minutes being emailed to 154 trading firms over a day early. They'd rather see them make money in the market than have to bail them out.

That's just one theory, but there could be numerous things along those lines."

So is it just coincidence that two of the F_E_D most Hawkish members came out today sounding like doves? It was Kocherlakota and Dallas F_E_D's Fisher.

Kocherlakota said, "There is a mis-perception in markets that the Fed has turned more hawkish."

This coming from a hawk! Fisher was also putting out similar dovish comments, again another major hawk. So was my weekend theory just a lucky guess, or does it really hold water? So far I have to say, I'm really surprised that this comment from Saturday has been as accurate as it has been, not Hilsenrath, not 1, but two F_E_D members and not doves, but the Hawks!

Time will tell on that one and I don't really think it will need very much time. This morning in the "Pre-Market Update", " I wouldn't jump to any conclusions to fast, "

Europe was down as could be expected after Asia, but a curious thing happened. Considering European stocks broadly were at lows for the year, you'd expect a flight to safety trade, but the Swiss 2 year yield jumped up over 10 basis points to a 22 month high (Yields move opposite the asset) so where's the Safe Haven trade today? I think al things considered, that's not only an interesting question, but perhaps not a very surprising development, money pretty much either flows to risk assets or to safe haven assets, there's what you might call a disconnect or a sort of dichotomy today.

In the U.S., it's hard for me to make the same comparison between say TLT (20+ year treasury bond fund) and the market because as I've been saying for well over a month, I think something big is happening in TLT and this is actually a position I was long and would like to be long again.

While I have no argument whatsoever with the market being "Done", in fact I said I thought it was done on May 22nd when we put in a One-Day Key Reversal (we haven't been able to make anything stick above that level for more than a day) and I've made the case for a lot longer than most with the charts to back it up, but things aren't always as simple as we suppose. We think the market is bearish, the market is about to drop like a rock and then we have expectations that it does so immediately, that's not how things work, so I would not judge this chart too quickly either, just as I said this morning when it was clear we'd gap down.

The daily SPX with a 100-day ma.a. and 2 strong bodied down days followed by a high volume (Friday) with support right at the 100-day, today's break below the 100 seems clean, technical text book, but this is exactly why I wouldn't pass judgement so quickly on this chart.

That was the exact same advice this morning...

We started the day with an overnight slide causing a nasty gap down, but after that the market didn't do much more on the downside, in fact it built a range and headed higher, the only late day resistance along the 10-min 100 bar m.a. at what I earlier called a bull flag- this wasn't a gap fill, which I'd feel less confident about.

Last night I showed you the 30 min negative divergence in the $USD, with the correlation the way it is now, that is bullish for the market in the near term, I will tell you though once you get to the heavier underlying flows like 60 minutes, it's exactly what I'd expect to see for a market on it's last leg (perhaps even pinky toe).

 The positive divergence I showed you last week and the week before in the $USD fired off just like 3C said it would, as you already know though, as it was doing so, the USD correlation flipped 180 degrees. That was then, this is now, a falling $USD raises the price of equities, Oil, most commodities and likely gold and silver as the historical correlation has been.

If you need to see the correlation with your own eyes, here you go.

This shows the mirror opposite or inverse legacy arbitrage (historical $USD) correlation since last week when it flipped, for goodness-sakes (I never thought I'd use that word), look at today's action alone!

Remember earlier I said the 1 min $U?SD chart was pretty much useless so I looked at the 5 min and said, "This is the near term path of highest probabilities, the $USD follows the larger trend of the 5 min $USD and falls" that's what allowed the market to make some upside gains off serious opening lows.

Following that logic as 3C divergences move from short to long and in a situation where the longer term is already in place, all they need to do is connect. So the 1 min moved based on the negative in the 5 min...

 5 min $USD

In similar fashion the building pressure on the 15 min chart should move the 5 min lower and link these timeframes up with the already leading negative 30 min posted above. That means a fairly significant $USD move down, you know the current market correlation, which just so happens to have confirming signals on the Index futures' 30 min charts as shown last night.

Interestingly, the same process described above for the $USD is playing out in the different timeframes in the Index futures like ES.

 ES 30 min leading positive, this is the highest probability, strongest trend for any upside move, it pretty much is capped here, but this can still produce a very respectable and scary move.

 The 1 min chart, like the $USD is almost feeling a gravitational effect from the 5 min, as the 1 min and 5 min strengthen, so does the 15 min which in turn pulls on the 1 and 5 min until the gap between 30 min and the lower timeframes is connected, this process shouldn't take long at all. In fact last night I said,  the following to give you some idea of what to expect...

"NQ 30 min shows the same, so in my view (same as last week), it's not really a matter of if, more when (which I think is just about anytime as the process is pretty advanced considering volatility) and the other question is "How", will there be a final head fake move, a gap up, something else? I'm pretty sure Wall Street isn't going to just make it easy unless they want to encourage retail to jump on the ship, if they make it easy, they are like the vampires inviting you to dinner, but we can still play the move."

 This is the 5 min ES chart, not only improving and exerting influence on the 1 min, but as usual, migrating to the 15 min, the connection is almost made.

ES 15 min

I don't want to make too many assumptions about what we see in Es's VWAP, but I can certainly see the argument made that this area that we have been seeing accumulation in since last week, could be considered to be confirmed by VWAP.

No market maker or specialist filling sell orders would have a job very long if they were filling at the lower ES S.D. and at VWAP as the best price. It could however be said that the middle man would be doing a damn fine hob in accumulating under VWAP, whenever the market moves to VWAP they work the bid/ask and maybe let out a little supply until they are at the lower S.D. of VWAP. 

As far as the late afternoon move today, do I think (by that reasoning) that's selling? I'd say if you looked at the divergences, where they started higher and how VWAP has been acting, I'd say this is the start of a move and not distribution at the upper S.D. of VWAP, for any price move to begin it has to cross the upper S.D.

So that's interesting too.

HYG (Credit) as well as the illiquid High Yield Credit and our sentiment indicator HIO (to a degree FCT as well) weren't leading the market lower as they'd usually do when a move lower is coming or a leg lower, they were nearly in lockstep with the SPX all day, for that matter, so were treasuries, but again I think something bigger is going on there and I think they'll head significantly higher so any chance to add to them down here being taken wouldn't surprise me.

In FX, the Euro and the $AUD were at least supportive intraday and moving closer to the correlation they use to have many, many months ago, in some cases they are leading the market a little so there's some supportive behavior there, although not jumping off the chart.

Yields also remain supportive and are at one of the larger dislocations they have been at. As a reminder, yields act like a magnet for equity prices, they typically revert to the mean and meet up with each other, that could happen by yields falling, but as I already said, most often it is yields that act as the magnet for stocks.

Yields in red and the SPX in green.

I've seen some people since the market close (mostly on Worden chat) noting that commodities were not showing the same relative strength as the SPX, or they were not as supportive as one might expect, but as we already know the $USD is going to be the main driver of price now, not the USD/JPY like this time last week. If we look at commodities vs the $USD, commodities acted EXACTLY as they should have today, there's no point taken away from commodities relative performance vs the SPX.

Commodities in brown and the $USD in green, a nearly perfect inverse (legacy arbitrage/historical ) relationship.

If I replace commodities with a specific commodity, oil (USO we see the same relationship occurring...

USO (brown) vs the $USD.

If we take that a step further (as you know I really liked what I saw in USO today)...

 USO 1 min

Migration through USO 3 min

A pretty strong 1-day move in USO 10 min.

If these divergences fire off and we have no reason to believe they won't, what does that tell us about the tight correlation of USO with the $USD? It tells us the $USD moves lower as the $USD futures show (and were shown last night) and what do we know about the market's most recent correlation with the $USD? It's inverse or opposite, therefore following the logic leads us to higher USO, lower USD and higher....SPX.

If that chain of events is correct, then we should see it in the averages, I didn't draw on these at all and remember I didn't expect to see much past 5 min, maybe 10 min here and there, but nothing in 15 min+.

(large 1 day moves on a 10+ min chart are indicative of strong last minute accumulation)

The DIA has been one of the standouts surprisingly to me, this is a 15 min leading positive, but the real story is the move in 3C made today alone.

The IWM 10 min is also leading positive, you can see where it went negative (distribution) before prices fell.

The QQQ 5 min isn't as strong of a timeframe, but the divergence certainly is strong and long enough to be a serious contender.

And the SPY 10 min leading positive, again the main story here from a 3C perspective is the speed and size of a 1-day move on a 10 minute chart.

The overall message is that which we'd expect from following logical correlations should show certain divergences in the averages, there they are, they're in the Index futures as well.

I'm not going to chase down all these stocks to make the point, but they are in the bellwether stocks as well. As I showed you earlier today, AAPL didn't see that much volume on the break below the two triangles, it did see it on the break below the psychological level of $400 which I posted about before it happened today, look what they did with the volume (and this speaks to the NDX-100 because of AAPL's weight).

Not only did the 10 min 3C chart fly, but the volume that hasn't bee there for a stock as large as AAPL, showed up today below $400.

That's going to be it for now unless I see something crazy in the futures. As I said, the market is not going to make it easy for anyone long or short. If you were short this morning then you started off very excited and then grew more and more worried as the day went on, I felt it as I closed half of a +22% gain in a core short, IOC; when I closed IOC it was down over 7% intraday, it closed just over -5%, so I made the right move at the right time. The point is, the market will try to scare and shakeout longs and shorts alike, those guys on Wall St. have expensive cars and homes in the Hamptons as well as some things I won't mention here, to pay for, it doesn't matter to them where the money comes from, it's a zero sum game so taking it from longs or shorts is irrelevant.

I'd just remind you of the volatility, just like this morning and today's market, "Don't judge too quickly), including the SPX just under ,the 100 day and try to make decisions and analysis objective, not emotional which is as subjective as you get. You get paid to take risks, they should always have probabilities and an edge, we aren't gamblers, but it's not really accurate to assume everything moves as you expect (actually it may move as you expect, just the way it does it may throw you for a loop).

Right now, the intraday 1 min ES and NQ futures are leading positive, the $USD is leading negative and the Nikei futures look decent right now.

Final Update

After looking at the charts, L.I's, and especially 3C and TICK, this move looks like a REAL (believe it or not), consolidation (bull flag).

That would be the flag on an intraday 5 min chart of the SPY. I can update my system and get the internals and have a better idea.

The closing candle is a star after a hammer with decent volume on both.

The DIA's closing candle was even nicer looking,a Doji on increased volume (which isn't surprising as the DIA actually looks even better than the other averages.)

The Q's and IWM both put in Stars with nice long upper and lower wicks. All of these candles from the last 3 days in all of the averages are a perfect break under the 50-day moving average which is easily the best known average, even for new technical traders, this is the place most consider an asset either a buy or sell and interestingly the volume looks exactly how you might expect for a break under the 50 m.a. and the 3C charts in the area look like I would expect them considering everything else.

 The daily QQQ with a 50-day moving average-note the volume as price is under the average.

Now I tried not to draw on this chart, except to highlight the last 3 days.

QQQ 5 min 3C during the same period.

If you recall in an earlier post my, "Thinking like a crook" section, it's really just understanding the logistics and difference between trading 100 lots and institutional size positions, they have to do a lot more than just decide what stock they want.

I'll have more after I look at the updated  data and hopefully after I see futures

This is EXACTLY the time the NYSE TICK chart is invaluable.

We went from the trend up, hitting extremes of +1500, then a channel down and right now the TICK is borderline about the break above the down channel, you can see about 3 higher lows and highs and just outside the top of the channel.

*Market Update

This is just part of the update, but keeping in mind the last post (FX) as that was part of the update as well, lets take a look at what we have.

The SPY is the most obvious and where did I mention we'd likely see some congestion or noise earlier after sharing retail's sentiment with you (Thank you Sam), "Sell the rip"? Right at first resistance which is Friday's close.

 When a 1 min chart looks like this it's a 50/50 toss up between a consolidation through time and a correction through price. We need the 2 min chart to determine the more likely.

Right now other than telling us, "It doesn't really matter what happens between now and the close", the 2 min chart can't settle this, if it were clearly intraday negative than a correction through price would be high probability.

The DIA had a 1 min intraday negative, no 2 min though.

The QQQ charts are not telling us anything about a pullback, but the IWM 2 min is, although the 1 min is in great shape.

Next the Tick chart (at this point this is academic as I see price pulling back right now).

I don't understand why more people don't use the intraday NYSE TICK chart, if you were panicky this morning, all you had to do was look at the TICK and it was telegraphing and upside reversal by 10:30 a.m. As you can see, the up channel which hit +1500 so we are seeing extreme moves that are scaring bot shorts and longs, clearly turned down, but all you needed was the initial break out of the channel to get early warning.

The Index Futures are showing the same as the 1 min SPY, they are more clear about a pullback, but their 5 min charts are looking stronger, so again I'm not too concerned with a normal intraday occurrence right where it was expected.

Looking at 3, 5, 10 and even some 15 minute charts, this is just Wall Street, being Wall Street. I'm not concerned about the charts/market direction as these other longer term charts (just like the 1 and 5 min $USDX example) point the way to the path of highest probabilities.

So that leaves 2 things, 1) When does this change (the intraday move) and 2) are there any opportunities this opens?"

I'll be on top of both and let you know.

FX

There are a lot of things that move the market, most are pretty well correlated so if you find one, you've likely found a bunch, but it's essential to look at as many as possible.

Last night I posted this 30 min $USD chart and told you what it meant to me.

30 min $USDX

Earlier today I posted this 1 min USD chart and the 5 min, I told you the 5 min is where we are going, even though the 1 min doesn't reveal that yet. Ultimately we should be heading to the 30 min $USD chart.

 1 min $USDX didn't tell us itself which direction was the highest probability, but the next timeframe of 5 mins, did...

The 5 min chart making it pretty clear a break was coming to the downside for the $USD.

Since then, here's the current $USDX 1 min chart...

 Since the earlier post this morning (above) of the 1 min chart, the 5 min chart was correct in giving the highest probability to the 1 min chart breaking to the downside as it has done.

Remember I said just about 1 or 2 posts ago that first resistance is coming up at yesterday's close (red arrow)? Well you can see the 1 min 3C losing some intraday momentum as we near the area, but just like the 5 min $USD chart told us what the probabilities were, so does the SPY 5 min chart.

SPY 5 min chart, so this tells me whatever intraday noise or emotional shake-up we see near resistance (even the 1 min $USD is slightly more positive suggesting some volatility) from the 1 min chart of the SPY above, is pretty insignificant as this 5 min chart is where the probabilities are.

This is the same situation as earlier today with the currency direction/probabilities.

Remember the 30 min Index Futures leading positive and the $USD 30 min leading negative. If you want to know what the 1 min's ultimate probability is as well as the 5 min chart, it's right there on the 30 min posted last night and seen above.

Like I always say, the market isn't going to make any of this easy for anyone. The short term shorts are not happy right now with the market coming off its lows, they are emotionally scared. The short term longs were scared this morning, it doesn't matter which side you are trading, they'll go after you all the same.

The thing that gives out edge and confidence to stick it out is unbiased, objective data.

I just posted a bunch of it, not only what is likely to happen, but the results of what I said was likely to happen just a few hours ago as we were at the lows of the day.

Retail Sentiment

The retail crowd is bearish, their motto changed from "Buy the dips" to "Sell the rips", the market can't be dumbed down to a simple light switch mentality, that's what humans have done through history when we didn't understand the complexities of something, we made very simple ideas that would give us comfort in a situation we felt we had little control of understanding, we're still doing it today, CNBC is a great example. "The market was up today because of the Initial Claims beat this morning" or "The market was down today because of the Initial Claims miss this morning".

In any case, this is the rip most will be looking to sell first.

First resistance is yesterday's close. Watching how the market, leading indicators, volume and underlying trade behave in the area will tell us a lot about  what to expect.

For a wider perspective, look at the daily chart...

First we have a "Crazy Ivan" shakeout around the triangle. Secondly we have the last two days seeing capitulation-like volume (short term, not primary) and moves off the lows. There's a distinct change in character on this chart alone not counting everything else.

You saw the Street's sentiment earlier today with the FCT chart I posted as well as Credit.

Equity Long in GDX / NUGT (Gold Miners)

For an equity position, I still want some leverage so I chose NUGT which is 3x long GDX. I think this may have a better chance for a longer trend, thus I don't think I need the same amount of leverage.

 NUGT 2 min

NUGT 5 min

15 min

And even positive 30 min, thus the possibility of a longer trend looks better here.

GDX Also Looks Great

This is Gold miners, there's the 3x leveraged long, NUGT that will also work.

I may open this as an equity long.

Opening GLD July $123 Calls

Basically the same idea applies to GLD as SLV.

 GLD 2 min'

The size of the range and the depth of the break below it & volume lead me to believe this could be a significantly more powerful move than SLV

Opening SLV July $19 Call position

I expect this will likely be a fast trade, perhaps a day or two. If it wants to go further than I'l cross that bridge when we get there.

SLV 2 min leading positive

Glad I Took Some IOC Off the Table

That was about a 22% gain, but I believe IOC has a lot further to go on the downside over the coming months. I'd put IOC on your short watchlist, whether an add-to position or a new short position, I think it will be a nice trending trade.

Intraday these are some of the momentum indicators I use, you can use them on any timeframe really. There's "Momentum" in the price window, under that is Wilder's RSI, not to be confused with the "Relative Strength Index" (two entirely different indicators), RSI is set to 6 period, about half the usual setting.

I have nothing against a MACD histogram, I just don't want to use the same thing everyone else is looking at, I use a setting of 26/52/9 rather than the typical 12/26/9. Sometimes I go even longer to 52/104/9. These longer period reduce a lot of noise and display the trend more clearly and very few people are seeing what I'm seeing with my settings.

Finally at the bottom, a simple Stochastics, but again, rather than use a 12 or 14 period, I go with a much longer 50 period and I look for embedded Stochastics, if it's embedded like it is at the red area, for me that is NOT an oversold / buy signal, that is a short or rather "Stay short) signal. When the first divergence (in this case a higher low) appears, I start looking at the exit.

IOC's big picture 4-day 3C chart

Imagine the move of 22% coming from that little area in the red box, now look at the long term range and 3C showing long term/heavy distribution. If I go by the price pattern implied target alone I still come up with a downside target of, somewhere in the mid to low teens. So keep in mind, if you like IOC, this is an energy related stock so you might want to plan ahead so you don't end up with too many positions that are all highly correlated (like several energy shorts). If you know you like IOC, you might consider it over another energy stock.

USO (Long) and VXX / UVXY (short) Charts

Here are the charts. I was talking with a member about 3C over the weekend and I explained that I would not expect to see any counter t rend (like market up) moves see large positive divergences in the 15, 30 or 60 min range.

If I'm thinking like a crook, then most of my portfolio is already and has been positioned to the short side, (again I'm thinking like a crook), I have a large fund, large AUM and it takes me a while to enter any position or close a position, I want to enter say a short, as the market is moving down or sideways after a move down because that's where I can find the supply to accumulate from sellers and short sellers.

However, I'm expecting a massive flush in the market after this move, I can't be sure who in the Hedge fund heard might break ranks first and be an all out seller in to any strength and I don't want to be caught with a large position that I not only can't sell in to higher prices and demand, but I don't want to be caught trying to offload a large position in a market that is nothing byt asks, no bids- I'd only see my position drop in a big way. So, while I'll play the move (bounce), I'm not committing to anything I can't easily unwind quickly. Thus, I don't expect to see larger positions accumulated which would be on 15, 30 and 60 min charts.

 USO 2 min with a  large leading positive divergence, this makes the drop in USO look like a sucker's move, a head fake, it created supply on the market that could be accumulated and that's what it looks like they did, seemingly very purposefully, planned last week or well before.

 3 min is spectacular in its leading positive to a new high for the chart as prices are near the lows of the chart, that's a LARGE positive divergence.

 5 min chart leading positive, for the 3rd time today I'm showing you a concept we have held for a long time, accumulation after a down move tends to happen in a fairly tight and flat price range, if you don't understand why, think about all the logistical issues with trading a several hundred million dollar fund, even multi-billion. Also consider the market makers and specialists that fill these orders as they know the stock better than anyone a they make a market in it every day all day. They are judged on the position price they put together by VWAP, so they want to accumulate near VWAP and knock prices down when they move too far from VWAP, they have no problem buying under VWAP (that's even better), however other professionals see the flow and they are doing the same thing so in this case, there is an economics 101 principle of supply and demand, demand is what gives the range support.

VXX short or UVXY short, you can also play the same position by going long XIV, although that is not leveraged (like VXX), but volatility or VIX futures are very volatile so they need the least leverage of most risk assets.

 VXX intraday going leading negative, again for the 5th time today, note the range in price as distribution occurs, the same logistical principles apply, only in reverse.

 VXX 5 min leading negative, there's been damage here well before today, it just seems today there;s an understanding prices won't be at this level for long so there's a lot of movement which shows up on these shorter intraday charts as extremely impressive looking divergences.

 UVXY is the 2x leveraged version of VXX, again the idea here is short UVXY or long XIV, but it doesn't have the 2x leverage.

UVXY with a large relative negative divergence and a leading negative as well.