Daily Wrap

I just have to say this at the start of this post because I don't want to get lost in the lines or lead anyone else to that place where micro-managing and analyzing the market leads to forgetting what the very simple and effective trade is...

One member suggested we nominate this as, "Chart of the year" which was nice, but in reality, I posted it a few nights ago right after he said that because I'm so use to seeing the destruction and knowing how bad it is based on past experience, I think sometimes I don't do it enough justice with you and that may have a significant outcome on your decisions, so this is one of many charts, it's one of many indications or one of many pieces of the puzzle, but it is representative of what I've found for quite some time and as I have been trying to make clear the last couple of weeks , "We are not close to the big picture, we are in the big picture".

The unique feature of this chart is to the far right in the leading negative divergence that is almost uninterrupted on a 4 hour chart. I can't even describe the level of distribution taking place here because quite frankly, I haven't seen anything so severe before and that's likely because the entire rally from 2009 to recent highs has been built on a house of cards, F_E_D liquidity that is about to disappear.

There's no historical precedent for a market like this, not even 1929 because we didn't have a globalized economy with the rest of the world in as bad or worse shape, we've never seen F_E_D policy accommodation to this level before and while most traders know policy accommodation is easy to get in to and fun, few know how VERY difficult it is to exit, that's the really scary part to the F_E_D's experiment not to mention the probability of liquidity drying up when the HFT's just turn off as they have no legal obligation to provide liquidity as we have become so use to. No one knows what's going to happen, but it's pretty plain to see that there's nothing in place that will make things easier or better when the market takes a real tumble, every bit of structure of the market is set to make things worse, thus the reason for opening and having core shorts, even if we've had to sit on them for longer than we like.

I'd be remiss for not saying at least that much and that's probably the "pretty" way of describing it.

Now, as for today...

Honestly, things were much clearer going in to the F_O_M_C minutes than coming out of them, there's a lot of dust still in the air as you might expect with only 2 hours of data after such an event. I'm inclined to stick with the opinion given before the minutes and the probabilities expected over the last several days/week.

While I haven't read the entire minutes, I'm still very much of the opinion that the post minutes analysis found HERE are still very relevant which makes the market look one way to retail traders and another to the pros, although I'm surprised retail traders didn't take more comfort from the obviously more dovish tone this time around.

What I found post, minutes was that High Yield Credit, whether Corporate, HY or Junk, didn't bite on the intraday bounce from about 2:09 to 2:48 today, however the VERY oddly shaped and unusual "V" shaped reversal to the upside in HY Credit on the open yesterday is still leading the market and didn't give that distinction up. While this is not a higher high in HYG credit, the basic fact is credit leads equities and for HY credit to bounce at all means someone is expecting something on the bullish side, the fact HYG did this so quickly without any reversal process, seems to indicate something was known in advance of the release today, that something could have been the concessions the F_E_D hinted at regarding interest rates and when they'd move, both concessions or hints giving the market something it wants, but still just talk for now. As for anyone betting on the taper, the undisputed conventionally accepted wisdom was that September was going to be the start of the taper and it would be announced today, that fact alone that did not come to pass is information that is worth a leak, we just may not be seeing the outcome after 2 hours yet.

In addition to the VERY sudden change in HYG/Credit, this chart that we use for institutional sentiment as it is not correlated to the market in any way, is also very interesting, "To make money, you have to see what the crowd missed"...

Going from in line with the SPX to leading the SPX and about the same time as HY Credit made a "V" turn (which are exceedingly rare), this sentiment chart doesn't sit on the fence, it's clearly leaning toward a bullish event and has been a reliable Leading Indicator in the past.

None of these charts or any to come would really make a lick of difference if they weren't occurring over this backdrop (keep in mind that just about a week ago I couldn't find anything in Index futures that was even remotely bullish looking).

 The ES (SPX futures) chart started with a meager 5 min positive divergence, that was the initial clue a bounce may be coming, over the last 4 days or so it has moved out to a 60 min chart, that's about as extreme as the HYG "V" turn in terms of a rapid change. I highly doubt a divergence this large created this quickly almost out of a sense of urgency, goes by without making its presence known through a move higher in price.

At the risk of overstating the obvious,, what is one of the last things we see in a price trend (typically flat when it's under accumulation or distribution)  just before a reversal say to the upside in this case? The answer would be a head fake move or stop run, a move like today's and we see it in just about every reversal whether a 1 min intraday trend change or a 2 year double bottom.

The NASDAQ 15 min positive divergence also started as a 5 min , this is one of the better looking price ranges as this is where accumulation most often occurs, the move below the yellow line would be the head fake, increased volume is a good sign confirming it as well as 3C accumulation of that volume, we see the volume increased as the stops were cleared out.

TF Russell 2000 futures is one of the sloppier charts, but it's positive.

It wouldn't be right to just show the probable upside without showing the more probable downside that would likely follow, so if you have a good idea that you'll see a bounce shortly and you already know that the bigger picture almost guarantees a horrible decline, what do you want to do with that bounce? This is why I call them "Market gifts", I want to use price strength to short in to charts with significant 3C weakness.

Remember, these are 3C charts, just of futures and they are 4 hour like the SPY above.

 ES saw very serious distribution at point "A", on the second leg 3C never even made it to the former highs although price exceeded them, that is strong distribution of the highs and the leading negative divergence at "C", lower than anything on the chart is one of the strongest signals the indicator can give.

 4 hour NASDAQ 100 Futures

4 hour Russell 2000 Futures.

The fact that these all look similar and that they look similar to the SPY despite being completely different asset classes is EXCELLENT confirmation of the divergence. This is why I've built long term core short positions and have kept them open, we already saw last week their relative performance vs. the SPX on a down move was about 600% better.

Carrying on... I've noticed several sectors seeing nice 3C divergences, Financials has been one I've talked about, but one of the tricks of getting a bounce to work is making it believable, for any old-timers familiar with Dow theory, they're going to be looking for transports to play along.

This 1 min chart is spotty enough, I didn't think I needed to point out the trends.

This is the 5 min, in line on the way down and leading positive, all about the right time as well.

Speaking of XLF, I also like FAS and FAZ for different trades of course.

 XLF is one of those 15 min charts that needed a move lower like today (discussed yesterday) to create a bigger footprint/base and more stable divergence so today's price action was exactly what I was saying  charts like this one needed to see.

FAS (Financials 3x long)  looks ready for a bounce move to the upside. Again, without a move lower today, this would be another "V" shaped reversal and they just aren't that common and they aren't well supported at all.

 FAZ (3x short financials) for a longer term bear position has a great rounding bottom, it's coming up to the breakout area and has a great 3C signal, but look closer at recent action.

This is the same chart, just zoomed in tighter, this should have no real impact on FAZ as far as the great looking chart above, but short term it does look like probabilities of a pullback or consolidation are pretty high.

Other than some individual charts I was thumbing through today, there's not a lot more to go on given we only had about 2 hours of data.

This is how the SPY reacted, the most detailed data will be the shortest timeframe 1 min, after that it takes more data for the longer timeframes to fill out, but generally speaking, they'll show where the heavier action was and a cleaner trend with less noise, but in this case we have to remember that there wasn't a lot of time after 2 p.m. for the longer charts to catch up.

 Yesterday had a clear trend toward the late afternoon of distribution, leading negative which gave the SPY the gap down I thought it needed, there's some light accumulation just before noon at lows and on the initial knee-jerk, this is heavier accumulation as you'll see with longer charts.

SPY 2 min

SPY 3 min as a longer chart, the early 12pm accumulation doesn't show up here as it's not strong enough.

The 5 min chart shows the same, so the post-mins. dip saw heavier accumulation of that dip.


I'll show 2 more things just because we are a little short on post minutes data today, first the index futures are seeing some unique 3C divergences tonight, I usually pay no attention to 1 min charts as they tend to move a lot over the long overnight session, but since they were unique, I thought I'd post them.

 ES 1 min leading positive

 A very clean NQ 1 min with similar signals intraday to the SPY and a leading positive divergence tonight.

R2K 1 min leading positive, also similar signals to the SPY around the minutes.

It is also looking like the Nikkei 225 is going to be due for a bounce as this 15 min chart shows.

Nikkei 225.


We'll try to get the best probabilities as always, but when I said "I don't blame anyone for sitting on the sidelines and just shorting a bounce if we get one because at this point, it's like chasing nickels and dimes in front of a steam roller", I meant it.


Divergences can get run over when everything goes to pot, that happened with AAPL just as every hedge fund out there tried to squeeze out of the same door at once leading to the darling of the market taking a -45% loss.

A buddy pointed this out on ES, but it works for any major index, this is called "Walking the Bands"

This is the daily SPX-500 with Bollinger bands (20/20), also note our DeMark inspired buy/sell indicator with a huge sell in the bottom window. However what I wanted to point out was the SPX in the red box as price walks the lower band, this is considered to be a very strong trend, I give it a little leeway (meaning don't take it quite as serious) as it just popped out of a pinched BB so the bands have to expand with the price drop, but when you see a major stock market average walking bands like this for a week or two, it's a very strong trend.

For now, I don't have any evidence to change the short term expectation of a bounce and I don't think much will repair the big picture damage, this is why I haven't put out any new positions the last day or two (right now they'd be short term longs for the most part with leverage), the real prize is shorting in to price strength, it;s a market gift, as we don't want to be chasing prices lower with ever-widening risk.

I figure if we get the bounce that puts us in great position, if we don't, the core shorts will keep making money and we'll have a chance to set up again.

If I see anything irregular in futures later tonight when I check, I'll post them.

Initial Closing Chart

It's time to update the systems, all the breadth, internals, etc, but when I said the bounce back move from the 2:09 SPX lows today wasn't that strong, there were several indications of it, but the easiest for you to see would be a simple NYSE $TICK chart.

The red line is -1000 and the white is +1000, the NYSE TICK chart takes every stock advancing that bar and deducts every stock declining for that bar and that's the TICK reading.

The initial release of the minutes saw the most extreme at -1595 which is very extreme, the top of the snap-back bounce was +1340, the decline off that bounce was solidly in the -1000 area which isn't extreme for a quick pop, but for about 25 minutes, it was pretty ugly.

I wouldn't read too much in to it yet, and I'd be hard pressed to call this a real knee-jerk reaction, although with the changes in character it may be, I personally would expect more volatility not less.

Quick Update

The bounce off the 2:09 lows this afternoon was not as strong as you might think, take a look at a NYSE TICK chart (intraday 1 min), 3C shows the same.

I'm going to do some checking around, the one saving grace for a bounce (because that counter bounce wouldn't convince me if that were the only metric to judge by), is still the longer term 15+ min Index futures and their leading positive divergences plus some of the averages in similar timeframes.

I want to check some of the more obscure data that most people miss or don't know about, just make sure there's nothing sneaking up here.

GOOG Call / Update

The GOOG call opened Friday that was up nice on Monday, but I decided to give it more room since the positive divergence was large and I was convinced GOOG was an early Bellwether for a broader market bounce is doing even better, just up over 40% recently is still looking decent for a hold, but I want to really push home the prize trade in GOOG and it's not an options position and not a long.

 GOOG 5 min positive divergence still seems to have more upside in it with few problems short term.

 However at 15 mins the character changes dramatically, this is why GOOG is a core short and why when the upside hitch-hiking ride is over, I'd be looking to short/add to a GOOG short position.

To really put it in perspective...

There's not much stronger than a daily chart, the 2009 accumulation is seen to the left, basically a lot of price / 3C trend confirmation in the middle and to the right, well I think you can figure out the severity of that divergence.

Early Arb. Data Looking Like a Bounce

There's a lot of data coming in, some in the averages, some in arb, etc, but I think our "theory" on how this would play out is pretty close, our theory on what the minutes would (a few bones for Wall St. and easing on the Sept. Tapering language) and would not (tone done the hawkishness, likely not give a date for tapering) contain, seems pretty right on, I don't think Bernie liked having to do damage control 2 hours after the mins. were released last month.

Here's what I have so far, remember that VXX (VIX Futures) would need to come down, HYG (High Yield Credit or risk on asset) would need to move up and TLT coming down would be best, but it could be done with HYG and VXX if TLT were relatively still.

 VXX (VIX Short term Futures) would need to come down for the SPY arbitrage to positively effect market prices, we'd be looking for negative divergences in to the release of the minutes or in the case of a leak, since before 2 p.m.

1 min VXX is negative at the knee-jerk pop at the release.

The larger, more important signal is the 2 min chart because it clearly shows there's a negative divergence right in to the intraday highs (sell the highs) , I suspect Wall St. got wind of the minutes at least 24 hours in advance as I said yesterday based on the extreme nature of the charts.

*NOTE THE WHITE ARROW, RECALL YESTERDAY I SAID VXX LOOKED LIKE A GREAT SHORT TERM CALL TRADE, IT SEEMS IT WOULD HAVE BEEN. Did anyone take this trade? (Email me please).

Even more damning for the fairness and even playing field concept of Wall Street is this 10 min VXX chart, it clearly shows a leading negative divergence on a strong timeframe at the red arrow.

 The 2x leveraged version of VXX, UVXY confirms VXX, yesterday's accumulation for a short term pop higher which would have been a great call position. and UVXY already leading negative by the release of the mins.

 3 min UVXY also damning as far as a level playing field, there was clear distribution in to the highs and we had seen this before, this is one of several reasons I expect a bounce.

HYG (High Yield Corp. Credit) which is one of the largest credit assets traded, THIS WOULD NEED TO MOVE UP TO SUPPORT THE MARKET, this is why the "V" shaped upside reversal in HYG so abruptly had me thinking there was a leak of the minutes yesterday or before.

HYG 2 min is leading positive in to the release of the minutes, it's not a long timeframe, but we need more time for the longer timeframes to register, for immediate signals we need the fastest timeframes.

 HYG 5 min seems to indicate accumulation at the intraday lows, which is exactly why I said I think the market needs to pullback today and create a larger base or footprint to bounce from, also allowing stronger accumulation at lower prices.

The fact it is positive on a 5 min charts at the 2 pm release suggests it was under accumulation long before the mins. were released today.

TLT as I have said looks like a great long as this 15 min chart shows, I'm not sure what it does short term, if it falls, then it helps the market through SPY Arbitrage, if it holds still, then HYG and VXX's trajectory will move the market higher with SPY Arbitrage.

In any case, TLT is a separate issue and a position I like as a longer term long which is another post.

I'll try to get a market update out, but I also want to see if there are any positions setting up, I'm glad I had my positions for a bounce set up already.

And there goes the market!

July Minutes More Dovish As Predicted

The initial knee-jerk move is in (as expected) and I was surprised that Steve Liesman (or whatever his name is) pointed out as well that the initial reaction to the minutes is just a bunch off black-boxes and you can't really take initial trade too seriously as very few "humans" are trading on the information.

Overall, this statement had a MUCH different tone than the previous statement that was almost belligerent, this was much more carefully worded and much more dovish and the clear signal is a September Taper IS NO WHERE NEAR ASSURED, BUT THAT'S NOT THE BONE THE F_E_D THREW THE MARKET.

I wish I had the time to go through the 10-page minutes, but what I hear and need to get the exact details where the two things Wall Street is really concerned about (only retail is concerned with when the tapering begins-Wall St. knows it's coming no matter what), Wall St. is more interested at this time in guidance on WHEN INTEREST RATES MIGHT BE HIKED. 

Conventional wisdom is rates are hiked about 6 months after QE ends. In the July minutes, I heard there might be a "Lower unemployment threshold before raising rates", essentially saying "We were going to raise rates when unemployment hit "XYZ", but now we are willing to think about lowering the unemployment threshold giving you more time before we raise rates".

The second thing I heard that I didn't catch clearly, but was an obvious bone to Wall St. was they would hold off on interest rate hikes based on some inflation floor that could be put in to place.

Not only is the F_E_D throwing Wall St. a few bones that Wall St. is very much interested in, but they are making these new bones (still under consideration) MORE OBJECTIVE rather than the subjective yardstick that has been adopted since September of 2012 which gives Wall St. more certainty about guidance of future actions which is something the F_E_D stripped away since QE3 was announced.

I THINK THIS IS EXACTLY THE KIND OF STATEMENT THAT CAN DO WHAT OUR WORKING THEORY WAS, INITIAL KNEE JERK LOWER FORMING A LARGER BOUNCE HIGHER.

CONTEXT and SPY Arbitrage

I've had a couple of questions about the CONTEXT model for ES and SPY Arbitrage model as a possible engine for the market.

First not too long ago (several days) CONTEXT was at a 50-60 point positive differential which  strongly hinted that ES was undervalued by about 50 to 60 ES points.

I could not find any risk assets that would drive the CONTEXT model up that high and speculated it's the falling treasuries which normally move opposite the market, but have been moving with the market since early August.

The CONTEXT model would pick up falling treasuries as bullish for stocks, but they are all falling together on taper concerns so it seems Capital Context has made an adjustment to their model as they often have to when a correlation breaks, here's the new Context ES model.

Negative almost 12 points.

As far as SPY Arbitrage to move the market up, HYG needs to move up and VXX and TLT need to move down, I think HYG will, I think VXX even might, I'm not sure about TLT, but for now there's no arbitrage 

This may all change on a knee-jerk reaction.

Some Interesting Assets

As far as assets that look like they could bounce and with that bounce, create a shorting opportunity:

XLF / FAS
AMZN
GS
IOC
IBM
URTY
DDD
PCLN
DJ-20/IYT Transports

Some interesting looking longer term shorts to diversify in to Europe: EWG, EWP (there are likely better tactical entries)

Some longs that look like they have a decent shot at standing on their own feet, at least for a while: URRE, UNG, MCP, AMD (possibly- not sure about staying power).

I'd prefer to enter any long positions whether short term or longer on price weakness and short positions on price strength.

Market Update

I don't intend at present to take any further actions beyond the short term calls and puts already in place unless something is screaming.

I went through the watchlist and will provide you with some of the symbols that have either short term interest or any short term move that will lead to longer term or "Big picture" interest.

The general feel is that of a divergence that is too young and needs more time to base, but the averages did do what I had hoped to see today as far as building out that base, that is to pullback and now they are starting to show positive divergences in to that pullback.

The Index futures continue to make the best argument for a bounce, the averages make the best argument for using the bounce to sell short in to price strength.

My initial feelings about what I see on the charts alone re: the F_O_M_C minutes to be released in under an hour is the knee-jerk reaction is a poor reaction in price, followed by a stronger reaction to the upside, perhaps our bounce.

There are a few reasons I say this, 1) the divergences as I said are immature, this may be the market changing character or it may be my theory above.

2) The movement in 3C on the $USD and Yen charts suggests the USD/JPY pulls back soon, starting almost now, but then sees a stronger upside move.

Also the HYG credit chart is not losing strength, but gaining on the pullback, a further pullback on initial knee-jerk weakness will likely set up quick long trades.

This is the working theory based on the charts, I provide all the charts to back up my reasoning.

The averages... I said I thought they needed to pullback and create a bigger base footprint to support any reasonable bounce and in to the pullback we'd need to see some accumulation of lower prices.

 The IWM is not showing anything intraday, but the 15 min positive is still in place

QQQ 3 min pulled back in to a positive intraday divergence.

 As did the QQQ 5 min which is even stronger.

The SPY 2 min did the same thing

As did the SPY 10 min

The 15 min remains in place leading positive.

Index Futures...
There are longer divergences in each of these except ES, but I chose the best depiction of the situation.

 ES 60 min shows a clear trend in a flat range of a leading positive divergence, a head fake move below the range on an initial knee-jerk reaction would likely set up some decent long plays, but very short term and speculative.

 NQ/NASDAQ Futures 15 min with a great flat range and leading positive divergence, I don't think these are coincidental at all.

TF/Russell 2000 futures 15 min are choppy, but leading positive.

Look at the NYSE Tick's intraday character over the last few days, from very negative to very positive to fairly positive today considering a pullback.

HYG 2 min intraday is showing accumulation in to its pullback.

The 10 min HYG chart is leading as are longer timeframes.

This is where I get the possible timing of bad initial reaction followed by larger upside bounce.

The $USD 1 min is turning negative intraday, this is not good for the USD/JPY pair and thus the market

 The $USD 5 min suggests we should expect early downside in the $USD

 However, the 15 min $USD is positive and flying, this is the larger picture and highest longer term probability over a day or so.

The Yen 1 min is confirming $USD 1 min weakness with strength, suggesting the USD/JPY pulls back and taking the market with it.

The 5 min is in line so it's not positive or going to be much trouble, it's up to the $USD to bring back the strength from the 15 min chart.

Yen 15 min is negative confirming the $USD 15 min.

This would mean the USD/JPY which would push the market higher on a move higher pulls back right in to the release of the minutes, likely a little longer based on 5 min charts (the knee-jerk reaction), and then the 15 min charts kick in pushing the USD/JPY higher, allowing the market averages and HYG, etc to dip lower and accumulate more, filling out the divergences.

This is what I'd expect if the market character hasn't significantly changed.