Daily Wrap

Well it was a low volume day as you'd expect with the bank holiday and the cash Treasury market closed. Oddly the move we'd like to see on the upside to create shorting opportunities and a head-fake move in the way of a bear trap, is very close in the R2K and the NDX, they are right at or just above the range, the Dow and SPX have some work to do before they get there.

At first I wasn't sure if the SPY Arbitrage was being used or if it could actually be used with the Treasury market (except for futures) closed, it seemed to me with HYG nearly tracking the market intraday, the VXX down neutral on the day (eyeballing it) and TLT pretty well hammered that the net outcome would be a SPY Arbitrage effect, but strangely that's not what the SPY Arb. model showed, at least not to any useful effect. There's the PPT and I suppose that's possible, but what has been working for most of the year has been finding a simple carry pair of the 3 main ones, really it could have been any of the 3 today because the Yen has been so weak since 11 p.m. last night (as I showed you earlier with the FXY vs the SPY), but it looks like EUR/JPY was the carry trade (carry the market) winner.

 This is from 8 a.m. to present and it shows the EUR/JPY cross (carry trade) vs ES (SPX Futures) in purple, note ES is following the fx pair pretty tight and when the FX pair tops and goes lateral, so does ES.

Honestly it doesn't really matter that the Euro and $AUD have negative divergences in them (all the carry pairings except for the $USD which is mildly positive), all that matters is the Yen as I showed earlier...

 When I showed the SPY vs. the Yen ETF, FXY and the correlation showing what was really moving the market today, I also showed that it wasn't likely to last as the Yen needs to be weak and there was a pretty large 1 min 3C positive divergence that could lift the Yen, send the E?UR/JPY or any of the other crosses down and the market with it. Since then the Yen's positive divegrence has only grown stronger, in fact this 1 min is impressive, but...

There was no leading positive 5 min earlier, the 1 min is difficult to hold together through overnight trade, but the 5 min is more significant, if these keeps up much longer, the Yen reverses and the market has downward pressure on it.

As I said above, HYG (High Yield Corp. Credit) and JUNK Credit kept pace with the SPX today, however the first place to look for trouble in institutional land is High Yield because of the liquidity, this is the one that has been strong pretty much since mid-September. Furthermore, don't let HYG's price alone fool you...

After a nice little short term accumulation base (rounding to the left), it looks like there's been no lack of seller in to higher prices and this is largely an institutional asset, how many traders do you know who trade credit?

 There's no one asset or indicator that can give us the entire story, but the strength in HY Credit relative to the SPX was "one" of the clues that allowed us to forecast the strong upside reversal on October 10th, with a good idea on October 8th of what was coming and a very strong idea on October 9th as we entered VXX Puts on October 9th, we were in them until 10:30 the next day on the market upside reversal and dumped them for a +40% gain in a mere 4 hours, it's a beautiful moment when everything comes together like that.

However if you look at the SPX (green) making its gains, it looks a whole lot like they tried to use that backdrop to sell HY Credit, now it's easy to knock it down trying to get out (that even happened to AAPL when it lost -45% as too many people tried to squeeze out the same door at the same time), or on the other hand, they just may not care and just want out of HY credit because they know they can't just hit the sell button like we can and expect to get a reasonable fill, they trade too big and there's too little liquidity, in other words, in a panic move, this could have been a whole lot worse like when it lost all of 2013's gains in a day and a half. Either way, I'm going to say, something is going on here that we need to take notice of.

Remember earlier I said the VXX isn't moving down as the natural correlation would have it? The VXX is being bid for protection, someone's scared and I'd invert the SPX scale so you can see it more clearly. Also remember all the divergence from 2-4 p.m. that got a whole lot worse?

On this chart I flipped the SPX's price mirror opposite, the VXX in blue should match up nearly perfectly, instead it refused to move lower, it was being bid, demand was overwhelming supply and holding price up, we saw it in the 3C charts as well, so I have no problem with the VXX calls added today.

I also showed you VIX futures themselves showing a more and more positive divegrence until the 5 min was leading from 2-4 p.m. today, a strong move in a short period, you can find them right here, 2nd and 3rd charts down.

About a week ago I mentioned the Rate of Change in the CBOE's SKEW Index, an Index meant to put a probability on an improbable event, or some call it the Black Swan indicator, basically it hovers around 115 most of the time, when its above 130, the market is discounting the fear of a market crash or a black swan, given the VIX movement and remembering that the ROC was pretty sharp, even though SKEW hadn't moved that much, I checked again after hours on my update, look what I found...

That's a big move and really fast.

I'm not saying a black swan is coming, it seems to me traders are buying protection from the government debacle, but there it is.

In any case, the Dominant Price/Volume relationship among the components of the 4 major averages told the story of exhaustion selling and our upside reversal last week, tonight we have a Dominant Price/Volume relationship among the 4 majors too, of the 4 possible combinations, all 4 averages came in at Price Closing Up and Volume Closing Down by a wide margin, I'll discount some of that due to the bank holiday, but I think it's wise to keep an eye on.

I'll likely check futures later tonight as I usually do once they have a chance to settle after AH trading, so far what I see is the 5 min Nikkei 225 with a crack in it.

This isn't horrible, but the last negative to the left gapped the Nikkei 225 down, we are now leading negative so it's not the best near term signal for the index or the overnight markets.

Although Treasuries were sold off (Futures) across the curve today with short term acting the worst for obvious reasons, the 30 year does show some signs of trying to repair itself, I'd watch this one for further development, I had a feeling last night that precious metals and Treasuries (20+ year) would alternate between the Flight to safety trade.

The $USD is also showing some initial signs that it's trying to get some legs under it, it's not a call I'd make yet, but it's on the watchlist for sure.

Gold was 3C positive Sunday night, it went up today until the market started taking over and then lost ground, it seems to be functioning as a flight to safety trade, but it's hard to tell, there are so many different correlations going around with gold now, it use to be QE and that was it. For now, I'd call gold futures neutral. I'm taking an early GUESS and I'm going to say my opinion, which isn't worth a lot to me vs. a chart, is that both gold and Silver are forming a base here they can work with, here's an example and both look similar.

Gold futures on a 30 min chart so that positive divergence isn't a joke, "IF" in fact this is a base forming then what we may be trying to peg as a correlation may simply be movement that is related to building a base, when they accumulate they do it at the lower end of a range, when prices rise too much they let out some supply and prices come back down so they can accumulate more, that price action would be base building and trying to draw a correlation is like looking at the clouds and seeing pictures.

I still like USO/Oil long a lot and in USO's case, I think one more move to the $36.50 area with a head fake move to run the stops below that range would be an incredible opportunity, all we'd need is the 3C confirmation, but that's an alert I'd set and keep an eye on.

As for the averages, each has a little different character, but none (short term) are impressing me much, take the Russell 2000 Futures and the SPX futures (1 min and 5 min respectively)...

 The price pattern alone in the R2K futures is looking a bit wedgy and the 3C chart not so good.

ES / SPX 5 min Futures show longer term damage, the kind that holds up overnight.

I'll take a look a bit later, I'm have long positions for the upside move which has been expected longer than this most recent pullback signal, remember those October XLF calls closed today, remember the upside gains last week. A pullback doesn't have to be a bad thing and I'm not heavily committed to it other than VXX calls, so 1 bridge at a time, lets see if VXX will pay out, if so, then we have a really good shot at adding some longer duration long positions, but ultimately the only reason we want to go to the top floor is because we know there's no place to go but down and they sell all the neat stuff at the top of the tower, I'd like to sell some to them and take the ride down (which is what we've been putting together with a portfolio Beta on down days of about 7:1).

I'll check in later, especially if anything has changed significantly.

Odds and Ends, XLF Calls P/L

Earlier today I closed the XOM Nov. $85 Calls and after that some XLF November $20 calls at a loss, but didn't have time to get the P/L out so let me clean that up and update XLF a bit.

I closed these because they expire this week, they had good momentum from today and they're at the point in which the time decay really is becoming a factor, XLF can actually be at a higher price tomorrow and these calls could be worth less so I figured I might as well take the loss here, but if it were a profit, I'd likely have done the same exact thing, it's all about forward looking and where I suspect I've gone as far as I'm going to go with the position.

The RT data for some reason doesn't show the original; fill took some research their was an original and an add-to for an average of $.385, at the fill above of $.34 the loss on this position was -11.69%.

As for why now, Financials had pretty good momentum today and I prefer to unload options in to momentum, there were also some 3C signs that were in line with the broad market, I figured even if we had a short pullback of a day and a half, between the drawdown and the time left, we'd need an explosive move just to get back to this area (contract value).

 This 1 min intraday chart doesn't give me a lot of confidence in the near term which is what really matters with options expiring this week, this is why I said I felt differently about a long FAS position, it can suffer draw down, but the theta isn't a problem like these options face.

There's something I like about Financials, you have to remember, even though I do expect a pullback in to regular hours and not just what we saw on the open of futures last night, I expect it to be constructive, meaning to help the market make a move higher. I'm under no illusions about that move higher, I think it's tradable from the long side, but I'm not bullish.

The 2 min chart was leading negative intraday as well, it seems the 1 min chart migrated over to the 2 min as both are leading negative today, the overall price pattern in this area is already in negative position if you look at the higher 3C reading to the left.

This 5 min chart though is the reason I wouldn't go short Financials and the reason I wouldn't mind holding FAS (3x long Financials ETF) right now, I think after a small pullback, the broad market and financials specifically have some upside.

The 5 min chart shows the F_O_M_C knee jerk reaction I always warn about and a positive divergence, but it's   stable for a decent base, it needs another leg of support and that's why a pullback could be helpful, right now I believe it would be helpful based on the charts.

 On this 30 min chart I show a positive divergence now, but also what I think a pullback might look like in price and 3C, I think the former F_O_M_C highs could be an easy target.

Long term though, I'd want to be selling short in to anything above that F_O_M_C high as long as 3C is showing distribution in to the move higher, this 1-day chart has significant distribution . As far as the price pattern I drew in, that's only a rough guess of a slanting H&S top, it could make a higher move and still be a bearish Broadening top, this is the end game, the trending trades that I don't think will need leverage.

Quick EOD Update

I'm going to update all my software and start the daily wrap after that. This is what I saw in to the close, what was interesting was earlier when I looked at the actual VIX futures, the intraday were positive and the 15 min were neutral coming from very negative so an improvement, the 5 min were pretty much in line though, it wasn't clear until after 3 p.m. that from 2-4 p.m. there was VERy strong accumulation there, futures' 3C signals don't hold the next day like they do in the market, overnight they tend to get lost if they are 1 min, this is why I usually don''t consider anything under 5 min, I was surprised to see this because it formed so quick almost out of no where, if you look at the market averages during that period, 2-4 p.m., you can see they get even worse, suggesting heavy accumulation of protection and distribution of risk assets, of course the bond market was closed today so while bonds were away, stocks could play, it will be interesting to see how that plays tomorrow, also the gold/Treasury flight to safety relationship, who gets the potato?

 VXX green / SPY blue, there should be a mirror inverse correlation here, you can see I tried to draw in what the VXX "should" have looked like, it refused as there was obviously a bid for protection.

This is the VIX futures I showed earlier, they went positive in the afternoon, but the more important 5 min chart...

Saw a huge, very fast leading positive between 2-4 p.m.

You notice that timeframe a lot, this is the VXX making a new leading positive in to the close and note the flat range we often see with accumulation.

UVXY also is giving a leading positive signal.

XIV is the inverse of VXX, it should give the exact opposite signal, its 3 min chart is leading negative so it confirms all of the charts above.

And intraday, leading negative at the 2-4 pm area.

The DIA leading negative intraday at a new low at the close

 IWM at a new leading low 1 min

look at the 2 min between 2-4 pm

And the SPY at a new leading negative at the close...

More to come after I update.

EOD Update

I have to make this quick, but negatives in all of the market averages have accelerated, positives in VIX/VXX have accelerated, the same trend we have seen in 3C all day. I have no problem with the IWM short and VXX long, I'll show you after market, but no problem at all.

URRE Quick Follow Up

Last week we bought URRE and the next day had a monster move of something like +20%  about an hour and a half after we bought it.

I'll get some charts up, but near term it looks like it's digesting those gains, longer term charts are still in the pocket so I will continue to hold URRE, although probably not add to it yet.

 15 min

60 min

NO WAY I'M LETTING GO OF THAT!

Yen

None of the carry crosses are that strong, but if you look at the Yen and it's correlation to the market, you can see a carry cross (I haven't changed my set up this late in the day to figure out which one, is driving the market, but the Yen downside that drives the market is starting to fail.

For instance.

 This is today 1 min with the Yen in red and the SPY in green, yen weakness=market strength, usually through a carry pair, but you can see the obvious correlation, later I'll invert it so you can see how close, so Yen moving up= market weakness.

This is the Yen intraday single currency future, it went 3C negative before the open and allowed the market to fill the gaps and then some, now it's going 3C positive, which takes away the engine that's been driving the market intraday.

VXX still looks good and is standing on its own feet so that position is staying where it is.

Market Update

I'm going to load up the L.I. template as it's late in the day and it should have something to say.

Interestingly, even though this is lagging by 30 mins or so, the CONTEXT model is just about right back to where it was as we were at this level Friday.

 After the reversion to the mean with the market/ ES gap down, CONTEXT was close to flat, but now with this intraday move, it's back to about -14 points and this is delayed.

Also interestingly, VXX is not making new intraday lows with the SPY making new intraday highs, that tells you something about the bounce intraday, someone is bidding up protection from market downside.

 DIA 1 min intraday is clear.

As is the 2 min

 IWM 1 min intraday pretty clear

IWM 3 min intraday/ These are all suggesting any upside intraday in the market is being sold/shorted.

QQQ 1 min intraday, the Q's look better than others relatively speaking.

SPY 1 intraday

 And 3 min leading negative.

VXX 1 min leading positive, which confirms the above charts.

3 min looks ready to go.

I'll be back after checking Leading Indicators, but I already know VIX is being bid by price action as well as 3C

Don't forget, this is not a big move to the downside or a long move I should say, short in duration is how it has been described since day 1

SRTY (long) 3x Short IWM / VXX (long) Long Short Term VIX Futures

I gave some alternative trade ideas for each of these like UVXY long instead of VXX or IWM puts instead of SRTY (3x short IWM ETF)..

Here are the charts...

 IWM 1 min intraday positive on the open for a gap fill, you can see where the Friday close was exceeded and since the leading negative intraday has been growing deeper.

The IWM 3 min intraday is a pretty clear signal for the pullback move imagined.

SRTY 2 min moving to a leading positive divegrence

There's migration of the divergence as it is leading on the 3 min as well.

And the 5 min, the typical shakeout below support (yellow trendline) is something we see quite often before a reversal.

Even out to 10 mins, SRTY is leading positive, not in a huge way so again I don't think this is a long duration position, but that does help.

VXX (Short term VIX Futures)

 The positive divegrence Friday sent it higher and gapping higher on the open, the intraday high is about where the market turned to the gap fill moves and since it has begun to lead positive again suggesting the market's intraday move is about done.

This is the VIX 2 min with the gap fill reversal area (remember VXX trades opposite the market). 3C is leading positive here as well.

 VXX 3 min signals have been spot on and are leading positive now as today's intraday divergence locked in as 3C turned up.

VXX 10 min is very similar to SRTY in the same timeframe, although they are very different assets, they tend to confirm each other.

These are the actual VIX Futures

 The intraday has turned to a leading positive divegrence, but also notable is the fact no damage was done to the chart at all, even on an intraday basis as the market filled gaps.

The 15 min chart is only notable if you recall how negative it was last week, if so, then the current in line position is a huge change. As you can see, price did respond to the very negative divergences that were on this chart, so there's a definitive change in character, even if it only is neutral.