Daily Wrap

Pre-Futures activity...

First I want to show you something that applies more to long term investors, but there are some concepts that apply to all.

On 5/22/2013 we had a 1-day Key Reversal, back then I recall saying, "This is the day the market's back was broken".

First there's the "Channel Buster" concept, they always seem bullish (in this case), with a downside channel and break, they seem bearish, but the concept of, "Changes in character lead to changes in trends" applies here more than anywhere.

The upside Channel Buster on May 22nd (yellow and red) "seemed" to be a bullish day, this is why getting lost in the lines or paying too much attention to intraday or day to day trade can be dangerous. 

The break above the channel was also where we found the Key 1-day reversal which is a serious technical price pattern. As an investor, the easy money is now over and staying in the market after this point is dangerous and usually not worth it for a long term investor. The maximum SPX gain that could have been made from that day would have been +4.24% "If" you sold at the EXACT top, otherwise, locally it would have been about +2.5% which is not worth it to most people considering the huge increase in volatility and market unpredictability. 

The gain from 5/22 to today would actually be a loss of -0.02%, or almost dead even, so you have roughly 4.5 months of market exposure for a probable gain of about +2.5%, this is why the top and bottom 10-20% are the hardest and most dangerous gains to try to make while the 80% in the middle, the trending area of stage 2 mark-up, are the easiest. FROM THE START OF THE CHANNEL TO 5/22, THE GAINS WERE +22% WITH LITTLE RISK.

Over the next few days I'll show you the only trading system out of hundreds I have tested (including every one I could program from every Technical Analysis book I've read) which is a VERY simple system with approximately 1-2 trades a year and a gain that out performs over 90% of the 20 and 2 Hedge funds (20% incentive fee and 2% of AUM management fee). YOU'LL BE SHOCKED HOW SIMPLE IT IS, HOWEVER MOST PEOPLE CAN'T FOLLOW THE SIMPLE RULES AS WE LIKE TO TINKER OR GET BORED EASILY.

After the upside "Channel Buster", the same thing that almost always happens, happened- price quickly dove to the bottom end of the channel and broke through the bottom, once again, "Above all, price alone is deceptive". 

Technical Traders expect a "Kiss the channel goodbye" bounce, which is a bounce that fails at the lower resistance of the channel; this is the Technical Dogma, but in reality Wall St. knows that's what traders are looking for so a vast majority of traders are head faked when price doesn't fail at resistance, but rather moves inside the channel as a shakeout, new longs enter as they believe the trend (channel) is still active. This move is effectively a"short" stop-run or BTC and a limit buy for bulls. This move then fails and we are closer to the collapse of the cycle that was in stage 2 before the Channel buster and is in stage 3 distribution/top after it. 

The new site has an expanded risk management section that identifies different risk including exposure risk, opportunity risk and many other forms, I think it's essential to know what kind of trader you are and what types of risk you are willing to accept vs. the probable limited gains.

Moving on... ***All Leading Indicators we use are compared to the SPX in green unless otherwise noted.

 Sentiment: Wile price action today was record breaking in many ways, it was also deceptive in many ways. This sentiment indicator has been the least forgiving and the most accurate, today is probably the first time in weeks that it posted positive sentiment (this is NOT retail sentiment).

 For the second day, Yields posted a positive dislocation vs the SPX, Yields act like a magnet for the market and tend to pull prices toward them.  This is yesterday's positive Yield  indication.

 Today's was so large that it obscures yesterday's.

This is the VXX (Short term Volatility  vs. the SPX), I inverted the SPX price scale so you can see the typical correlation which should see both moving in tandem. Instead you see VXX leading the market to the left, in line and then failing late today, a transition.

 TLT, 20+ year treasuries also failed to keep up with its normal flight to safety correlation showing less fear in the red section. Taken with HYG (HY Credit), these assets for the basis of the SPY Arbitrage algos and Wall St. use to determine fair value, as I showed yesterday, for the first time in days the SPY arbitrage was going positive which means it is supportive of the market although it may not have looked that way today.

You may recall seeing this earlier today with about a +$.40 positive arbitrage value, it ended near $.80 today, clearly a change in character is taking place.

 The NYSE intraday TICK (All advancing NYSE stocks for that time frame/bar minus all declining issues gives you the TICK). Today we saw some extremes mostly on the bearish side of -1000 and a few beyond -1250, but notice there was very little trend vs. price today.

My custom SPX v. TICK indicator/Histogram is going positive today as you can see TICK's linear regression is flat vs. price which gives a positive histogram reading similar to a MACD histogram and used the same way.

Credit, the real insight in to Institutional money...

 High Yield is a "Risk-On" asset, the move in green in confirmation, the move in red is HY signaling a loss of market momentum and the white is a positive divegrence as credit is acting better than the SPX, this is a change in character that is very different than price action alone.

JUNK Credit is also HY Credit and used to express an institutional risk on posture.

 Note today's VERY positive credit activity vs the SPX.

Since HYG is the most liquid of the HY Credit assets, it is the most important and goes in to the construction of the SPY arbitrage as well as the ES CONTEXT model.

HYG (High Yield Corp. Credit) was much more positive than one would expect given price action. For those who saw the action in credit today, they saw something that most traders don't and received an insight few traders received as the focus their sentiment on past events (chasing price).

All things above considered (without even considering futures), it's no surprise the CONTEXT SPX futures model was so positive and increasingly so.

Actual ES activity is in red, the ES model is in green and the Histogram is green below which is indicating that as of 7:05 p.m., ES looks relatively cheap, by approximately 25 ES points. This model is based on institutional assets including treasuries, carry trades, credit, CDS and other assets that retail rarely trades.


Also suggesting the market is nearing an upside reversal (beyond today's exhaustion or capitulation move) is DOMINANT PRICE / VOLUME RELATIONSHIPS AMONG THE AVERAGES.

HERE'S WHAT THEY TOLD US ABOUT TODAY...

 Of 500, 372 SPX component stocks finished the day with a relationship of price down and volume up, THIS IS USEFUL BECAUSE IT IS DOMINANT AS ARE THE OTHER AVERAGES.

 25 OF THE 30 DOW-30 FINISHED @ PRICE DOWN/VOLUME UP.

And 96% of the NASDAQ 00 finished lower on higher volume.


Of the 4 possible relationships, today's dominant relationship was a lower close on increasing volume which is actually the second most bullish of the 4 relationships as it represents short term capitulation or a selling / exhaustion event.

As far as Futures indications from earlier (after the close, but more than an hour ago)...

 1 min. ES or SPX Futures show a positive 3C divergence which is not surprising as many of the averages showed the same intraday as did numerous assets and industry groups, thus the entries today in FAS long, XLF Call options, URRE long, XOM long as well as market averages or leveraged ETFs.

5 min ES is showing increased positive activity since late Friday's negative

 NQ 5 min is seeing positive activity as the chart is seeing positive migration to longer NQ/NASDAQ100 charts, even as price seems so very bearish. The increased volume also suggests a short term selling climax / exhaustion.

TF- Russell 2000 Futures.

 TF 1 min intraday is positive.

As is TF's 5 min chart that started the new week with a late Friday negative defining early week price expectations.

TF, the R2K, which should lead risk on moves is also the only of the major Index Averages to go positive as far out as 30 min charts as above and a leading positive divegrence at that.

Earlier today I showed the currency movement and carry pairs that have been directing market activity, last night and even before that it was plain to see that the JPY would see downside pressure allowing the carry crosses to help support market averages. The AUD/JPY was the dominant carry cross pair to lead ES/SPX activity. FEW TRADERS REALIZE HOW MUCH INFLUENCE CURRENCIES HAVE ON THE MARKET...

ES=purple and AUD/JPY=red/green candlesticks. The degree of correlation today is no mistake or coincidence. The carry trades held the market up overnight as the JPY weakened enough to allow the USD/JPY, AUD/JPY and EUR/JPY to support the market.

However as of a bit over an hour or so ago...

 Only the 1 min $AUD single currency futures was still positive, it has gone negative since.


The 5 min AUD/JPY suggested the pair would pick up and have more upside to go, since then the 1 min chart has gone negative and ES is moving higher than the carry pair as you can see on the chart above this and the next.

1 min AUD/JPY went negative and thus has allowed the Index futures to break away with a more positive bias.

 As seen last night, the weakness in the Yen is what allowed the carry pairs to advance and support the market. The Yen has seen even more distribution since last night as seen above on this 60 min chart.

The $USDX 15 min is leading positive, I suggested the $USD/JPY was a likely pair to lead the market higher.

Now the 60 min $USDX positive has migrated all the way to a 4 hour chart.

This is very bullish for the Carry, Currency crosses and as such, as an engine to support the Index futures.

As already posted, yesterday's long position in AA for the kick-off of  earnings season has seen AA post a beat on both revenue and EPS, despite lower expectations. As of now AA closed at $8.18, making yesterday's purchase at $7.85 now a +4.2% profit in AA with no leverage for a single day, not bad.

As far as current Index Futures action, ES is positive on the 1 , 5, 30 and 4 hour.  NQ (NASDAQ 100) has a lot more work to do as mentioned, it is positive on the 5 min chart. TF or R2K futures are positive on the 1, 5 and 30 min charts, a lot of progress from Friday.

Currently ES has gained about 5 points of CONTEXT's roughly +20 points since the 4 p.m. close.

NQ/NASDAQ futures have gained nearly 7 points since the 4 p.m. close.

And TF/Russell 2000 futures have gained about 10 points since the  4p.m. close!

TF 15 min

We needed to see the overnight 3C positive divergences hold overnight and in to regular hours, they did both and they continue to gain through early overnight action.

I'll check up on futures later tonight and let you know if anything has changed. Thus far our analysis since Friday afternoon, through Sunday night, Monday, Monday night, early Tuesday and Tuesday regular hours, has been nearly 100% accurate.

AA Beats

Earnings season kicks off with AA's after hours earnings, beating on both revenue and EPS, not sure about guidance, but AA which was bought yesterday as an earning's play, is up 1.5% in AH and about +3% since picking it up late yesterday around 3:30 just barely breaking above the range of the last 5-days.

Not much changed today since yesterday's analysis in which nearly every timeframe confirmed at the exact same places.

The only thing I'd add is this chart (intraday) from today in to the late afternoon.

AA intraday positive divergence in to the close.

I haven't heard guidance and I usually don't care too much about AH trade, it will be regular hours tomorrow that determines how well the position did and that will largely depend on guidance.

Did anyone else take the position? Maybe using leverage?

Adding 30% to FAS long trading position & bringing XLF October (monthly) Call to speculative size

This is still well below a full size position in the equity and a very small Call position in XLF.

 FAS 3 min positive

 5 min FAS

15 min FAS

XLF 15 min positive with the "Upside down Igloo" price pattern (head fake)...



FAZ 3x leveraged bear Financials intraday negative

3 min negative

Adding 25% to URRE Long Trading Position

 URRE 5 min

15 min

30 min is VERY impressive as is the 60 min below.

60 min.

Leading Indicators Improve

Yesterday I was kind of underwhelmed with late day improvement market wide and as posted several times, the last being in the Midnight Futures Post last night...

"In any case, the point being that today as mentioned several times during regular hours, I was not impressed by afternoon trade, it looks a bit better in the overnight session, but that needs to stick in regular hours. Leading Indicators were no exception, but there were still a few interesting signals."

Today there's noticeable improvement, some effecting Capital Context models, one being VERY interesting, in fact so much so it makes today look like a final flush before an upside move.

 Sentiment today has improved noticeably.

Yesterday we saw the first positive Yield dislocation pretty much since this range started, with today violating the range, but the Yield indication being a lot stronger than yesterday and if you recall, yields tend to attract price (SPX in green) toward them.

 HY Credit has held up well too overall

 We don't want to forget what the primary mission here is and a look at the daily chart of HY credit vs the SPX should give you a feel for the long term trouble the market is in.

Commodities improved yesterday, even more so today.

Finally and most importantly, the institutional asset, High Yield corporate Credit which is used in a number of algo-driven arbitrage trading black boxes, held up fantastically today. Whatever the market is feeling today, HY credit is not worried about it. As a result, SPY Arbitrage is being moved to a positive/supportive position as the only 3 assets in the model are TLT, VXX and HYG.

 We saw this start to flip to positive yesterday, today it's at +.60 meaning the SPY is undervalued by at least $.60 as of right now, but this is also delayed 15+ mins.

The institutional risk assets that make up the CONTEXT ES model are showing the same, there is a building discrepancy between ES and what the model considers fair value, first seen yesterday, now at a nearly 18 point positive dislocation.

HYG credit is definitely the surprise that I'm glad I saw today.