Bernie: Food for Thought

I think we can all agree that the F_E_D minutes and Bernie's Q&A later that day sounded very different.

For one the F_E_D minutes said "Several members" wanted to end QE right at the June meeting, they also said that "Half (6) of the participants thought it was appropriate to end QE by the end of this year".

I wonder if those several are part of that half? If not, then it seems to me there's a clear majority that wants to end QE "BEFORE" the end of this year. Not that F_E_D guidance matters, but guidance said that tapering would begin 6 months before the actual end (if we assume 2013 is the end, we are already past the 6 month point).

Bernie on the other hand said from what I recall that "accommodative policy wasn't ending". Like I said back then, I expected Bernie to say something to take the rough edges off the minutes, but it seems the market took his statement to mean that QE was not ending any time soon, I pointed out he is one of 12 voting members of the F_O_M_C and not a dictator and that in my view, "Accommodative policy" is ambiguous, it's kind of like the political "Plausible deniability".

Accommodative policy is in place so long as the F_O_M_C doesn't raise rates, it doesn't mean they can't taper or outright end QE, I think Bernie put it out there and let the stock market take it how they wanted, but he certainly could easily say, "We're not raising rates, that's accommodative policy" even with QE ending in September.

In any case we can go back and for about data dependency, costs/risks/unintended consequences, semantics, play or words, etc.

What I got from the minutes and what I've got from the F_E_D since September 13th 2012 is that they've been looking for a way out, I've shared that with you many times well before the "Taper" talk even began. What I got from Bernie was he might have been delivering his message to another crowd, a bigger crowd, the bond market.

The bond market is quite a bit larger than the stock market so not everything out of his lips is for our consumption.

I usually don't like reading too much about other opinions unless there's fact and unfortunately the full article that started this debate is chock full of both, but myself and a couple of members are kicking this around, basically it goes like this...

"The pain that banks have experienced can best be seen in the following chart showing the latest update in "Net unrealized gains (losses) on available-for-sale securities" from the Fed's weekly H.8....

• For the first time since April 2011, unrealized gains in AFS portfolios among the entire US banking sector became losses, and 
• The two month rate of loss creation in MTM exempt AFS portfolio soared to the highest in series history.

Now it's important to understand what an "Available For Sale" security is, it's not one that is held to maturity and it's not one that is held for trading, it is intended to be sold before maturity, but not quite traded.

In this case I think we are very clearly talking about banks' holdings of treasuries and how the spike in yield (treasury prices move opposite yield) has sent their "Portfolios" to a loss among these unrealized gains in AFS.

Since this is mostly fact, the argument here is,

"Two months ago Ben Bernanke, using his trusty mouthpiece Jon Hilsenrath, floated a trial balloon that a tapering of bond purchases is coming, necessitated by the drop in gross US TSY issuance and lower deficit funding need (maintaining the status quo ante rate of monetization would lead to even more deliquification in the bond market as Bernanke soaked up even more high quality collateral from the market). What happened next was not quite what Bernanke expected: a surge in bond yields " 

As I told you earlier, this is not a simple subject, it is not just the stock market, in fact it has more to do with the destruction in the prices of treasuries. I've heard some really good scenarios from members on the subject so I can't make a blanket statement,  but it would seem to me, if you needed to "A" get the price of treasuries higher and "B" perhaps end QE for other reasons such as unintended consequences, a market bubble, backing out of policy (nightmare), etc...

THE SIMPLE ANSWER IS TO END QE, LET THE MARKET DROP AND WATCH THE FLOOD IN TO BONDS.

That's a very simple approach to a very complicated problem, but perhaps what Bernie was trying to do more than anything in his post minute Q&A is reassure the BOND market that the conventional guidance of a rate hike 6 months after QE ends is not at all in the cards or to be assumed, "Thus accommodative policy remains" and let the (stock) market take it however it wants for now.

In any case, we'll be looking at this more closely, unfortunately I have a board meeting in 30 minutes (1x a month).

AS ALWAYS, WHENEVER ANYTHING F_E_D / F_O_M_C COMES OUT, I WARN...

"Beware the knee-jerk effect", it's almost always there and it's almost always wrong.

Perhaps this is why I have been seeing interesting things in TLT that have me interested in it as a long. Lets face it, something changed very quickly as I showed this weekend, but as far as the bullish underlying tone in TLT I've been noticing, if after a carry trade is closed (which the AUD/JPY was closed by all appearances and opinion) that means the stocks purchased with the leverage were sold, SEE MY BREADTH CHARTS FOR 2013, and the last thing you'd do other than setting up shorts would be to move money to the Flight to Safety Trade", Treasuries....

Again, please don't take this as the start and end of a complicated scenario, but it's one we need to look at and I'm just throwing out some very obvious solutions that all have their own problems, every one will.

Final Market Update -"Myopic?"

OK, this is basically a pretty good example of what we have going on for the most part.

First AAPL was the first indication that the market would see an intraday bounce based entirely on market psychology or how Wall St. uses Technical Analysis against traders who are expecting one thing because a hundred books have told them that is what is suppose to happen and Wall St. knowing it.

Then market breadth by way of the NYSE TICK Index was showing an intraday reversal was likely.

Then some of the arbitrage assets (HYG, VXX and TLT) started showing some intraday divergences suggesting they'd be used to help the market with an intraday bounce and then the SPY Arbitrage chart/model started showing the same.

Around the same time as the arbitrage model and signals, we started getting signals in the market averages, I'll admit that they were very late to come, had I not been watching all of the above, I'd probably be telling you about the halt of downside movement just as it began.

With 3C, any new divergence starts on the earliest/fastest timeframe, 1 min so if we are going to go from a negative (3C in line) signal like this morning...

Note 3C went negative, price followed and 3C confirmed the downside in price.

A bounce (intraday or larger) or even just a consolidation, will begin on the 1 min chart. This is why we look for migration through longer timeframes.

If the 1 min positive divergence (in this case) is strong enough it will move to the 2 min chart and the probabilities will go from a simple lateral consolidation to a higher probability of an intraday bounce (meaning not a bounce of days). If the 2 min is strong enough, the 3 min will go positive and so on and so forth.

Now if that positive divergence is starting to lose support, the first place you'll see it is once again in the 1 min chart where the former positive 1 min will show a negative divergence and if it is strong enough, it will flip the 2 min and then the 3 min and when those charts link back up with the next longest negative (assume the positive divergence for a bounce only made it to a 3 min chart and the 5 min stayed negative), then by the time the 3 min chart is negative and reconnects the chain from 1-5 min and beyond, the probabilities become bearish again. If we can see this process and get in to a position while it is still higher from the intraday bounce, we are in good shape.

XLE, the Energy sector is one of the assets showing this today. The difficult part is it took nearly half the day, maybe more for the positive intraday divergence to show up on 3-5 min charts, by the time the first negative shows up we won't likely get our next confirmation at the 2 min chart for another hour or two based on today's pace.

 XLE 1 min goes negative, price follows and it wasn't until 1 pm that the first positive divergence was in, while it was 10:45 a,m, when the first signs of such a day started to form in AAPL.

 A 3 min positive divergence (still quite small in terms of what's already in place (bearish XLE) didn't form until 2 p.m. So we didn't have decent confirmation for a couple of hours and at least an hour between the first divergence and a 3 min chart.

So toward the end of the day we had several assets giving off 1 min negatives, these could easily tear right through the 2, 3, and 5 min timeframes and put us in a very bearish market considering what I saw this morning on quite a bit of market support. The point it, the time was nearly 3:30 here so figure an hour to confirm and that puts us in to tomorrow.

Here's the 10 min chart, all of the charts above this mean nothing compared to this and this is why I wonder if I'm being a bit too myopic at times. this and the chart below show strong weakness in XLE, the intraday charts are great for timing and getting the best entry, but if you wait too long you can end up missing positions.

I figured with Bernie out tomorrow after his last stunt, it's better to be safe than sorry and decided to wait for the signals to better confirm and align.

There is a VERY interesting issue that I want to discuss, it's too complicated for me to get out tonight I believe, but I'll try to get the gist of it started in the next post.

Opening 1/2 Normal TECS Long

This is a 3x TECH short ETF, XLK (TECH) is one of the assets that is positive on charts like 2 min, but the 1 min is now negative. I can't get a true read until there's migration over to the next timeframe, but overall TECS looks good, it's in a good spot, I'm putting in a reduced risk size.

If I had other charts like 2 and 3 min confirming (this is so new), then I'd go for an XLK Put.

Liking USO here as well

Again I'm already set with USO puts from yesterday and DTO long from late last week, but if I were looking for an entry or an add-to spot (considering how speculative oil is with fundamentals in Egypt), this is the area I'd be taking action.

 USO 15 min negative so the overall timing is in the right area.

USO 1 min is an example of one of those charts where the intraday 1 min (where ALL new divergences start) has turned quite negative.

The 3 min chart never even really even went intraday positive so I don't think this looks good for USO near term.

5 min crude futures saw an intraday positive as far out as 1 min, but given what we see on USO and...

given there's nothing positive on the 1 min intraday crude futures, this isn't looking very good either.

And the 15 min Crude futures were never effected by today's intraday activities, it just keeps heading lower.

IYT Position

I'm already set, but if I wasn't or wanted to add to IYT short / puts, I'd probably be doing it right in this area about now.

There are several charts that are seeing 1 min negatives, this means the earlier positive intraday divergence that made it to 3 and 5 min charts, "may" already be seeing a negative divergence to turn those assets back down as any new divergence, even intraday, will start on the 1 min chart first.

If I just looked at 2, 3 and some 5 min charts, I'd say the market has more of a bounce to go, but these 1 minutes are raising some question as to whether they are simply an intraday jiggle or they are starting to tear down the earlier intrraday positive we had seen first in AAPL's price behavior and then in arbitrage assets.

DDD Trade Idea

This is a trade that should come to us which is exactly what we want, it would be either a short or a Put position.

Here's the set up.

 The 5-day chart is a little Apple-esque in a few ways.

This 60 min chart is really where the trade comes from, that's a deep negative, but even better...

The 4 hour trend is VERY clear and the only divergence on the chart is the current negative, no others were strong enough to make it out this far.

 As far as swing timing, the 15 min chart is ready to go.

It's only the intraday charts, just like the market that are the hold up, but I'm glad they are rather than just keep falling as I know some of you are still looking to add or fill certain positions and this actually helps that process.

I'm taking a wild guess, but I'd have some alerts set for price in the area of the 60-min 50 bar moving average, that's where I'll set them to look for a reversal short term as everything else is ready to go.

This is how the trade comes to you, it's already in bad shape and giving you a better entry with less risk.

Market Update 2

Since there are way too many timeframes in the 4 averages (charts to post) I'll use the strongest, IWM as an example and show a few in the other averages either showing some of the intense action or the intraday positive that held the market up, then it's back to looking for positions.

 IWM 1 min fast deterioration

IWM 3 min trend leading negative

IWM 3 min intraday to show how fast and strong the recent divergence has been

IWM 5 min leading neg., again very fast, deep and strong.

IWM 15 min, the 8th pops up again as where it seemed the original plan was modified, otherwise leading negative.

IWM 60 min leading neg.

IWM 2 Hour.

DIA 1 min shows nasty downside and the relative positive divergence now. This is partly what we are waiting on in some positions, for this to turn back negative as it is a timing key.

 DIA 10 min, very extreme

DIA 60 min

QQQ 3 min shows the intraday positive

QQQ 15 min trend, leading negative

QQQ 15 min intraday sharply leading negative on a longer term timeframe, these 15 min. charts don't usually move that fast or nasty.

SPY 10

SPY 30, another very fast move for a very long chart.

Market Update 1

I'm going to have to show you a few different updates, there's a lot to cover, First I want to show you what's going on right now, maybe what kind of time we have and the positions as of right now, I'm interested in (the ones I've been going over the last 90 minutes)

First as I suggested AAPL was a Bellwether for a market bounce, but I also thought the SPY arbitrage assets would come in to play and they have or "they are".

First the assets (this is not complete and there are some I'm leaving off), basically most either need some short term charts to turn or need a little more work on a long term chart, that would happen during a market period like this (for shorts)..

USO or DTO although I think it is speculative.

XLE Puts or ERY long

XLK Puts or something like TECS long (3x)

XLF puts or FAZ long (SKF for 2x leverage)

GS is starting to look interesting, almost didn't make this list as it has more work.

GOOG looks to be getting very close, essentially 1 more chart for me (short)

UVXY or VXX either calls or long equity positions

XOM (short)

NFLX (short)

Not sure about the PM's, right now I wouldn't tough them.

There are more and the other obvious plays would be the averages short with Puts of ETFs like SRTY, SQQQ, SDOW, SPXU.

As far as the bounce I was looking for earlier and started, their looking for arbitrage help as predicted well over an hour (maybe 2) ago.

 SPY Arb went from negative to positive

 HYG 1 is leading, but this is a 1 min chart, this is the arbitrage I said would be needed and there was evidence of it.

HYG 2 min has seen some migration, still we are at a 2 min intraday timeframe.

HYG 3 min is negative so it hasn't gone that far and a decisive negative here starts at 10 min so the point is the short term is short term, the longer term is negative and HYG looks to be well on its way down.

UVXY needs to move down to help the positive SPY arbitrage or VXX rather (their the same except for leverage).  1 min negative

2 min negative

like HYG there is no 3 min negative, but rather in line, so still a very small divergence.

UVXY 5 min is clearly leading positive so they're not going to get too far trying to move this one down or at least the accumulation built up isn't moving.

 TLT as I showed earlier, 3 min

At 15 min it is solid positive and well beyond to the 4 hour.

The AUD/JPY was lending a hand to stem the downside, here the AUD 1 min is about in line, but...

At 5 min it is turning negative so the pair should drop.

At 30 min it is very ugly.

Now I want to give you an example of what the market looks like

MCP UPDATE

When I'm quiet like this, I'm flipping through hundreds of charts, the intraday bounce gave me that time which is one reason I was hoping for it. I'll tell you some of the positions I'm looking at in a subsequent post, some I like a lot right here and it's just a matter of intraday charts turning back around, some need a little more longer term chart work which could happen during this period right now.

As far as MCP, the impression I get is MCP has 1-more move in it and then is likely yo pullback, I think the pullback would be enough that I'd rather try to take gains on a final move and re-enter when MCP is at a lower level with stronger charts. If you just want to hold MCP as a long term long position, which I was going to do, the daily chart will show you that MCP has a lot of forward looking potential.

 1 min positive, some was used already on this move intraday

 2 min positive

3 min positive so we are establishing healthy migration of the divergence.

5 min is seeing positive flow

Even the 15 min is seeing positive, but it's larger trend is overall negative or a pullback.

This is the daily chart, I think MCP is easily a long term hold, a position that can just be put to the side and not obsessed over every day. It should have plenty of room on the upside over the next several months or so.