Market Wrap: A Bit Crazy

I'm going to go easy on the charts tonight, last night took hours to put those together.

Lets start with the NFP for September released by the BLS at 8:30, I showed a chart in the last post of ES this morning, it looks like ES, after seeing flat all night especially regarding 3c (doing virtually nothing) sees a tight range as if there was an order placed at a specific level that took 3 hours to fill right up to 7 a.m. with 3C showing accumulation and then the NFP comes out with a miss 32k, 148k vs consensus of 180k. We know for sure the BLS NFP data is leaked to Wall St because the BLS admitted i, that's why they are building a new media center because that's where the leaks come from, embargoed information reported use to file stories as soon as the data comes out, we suspected it long before the admission because of charts way more obvious than today's.

August was revised higher (that's a change) from 169k to 193k, but July went from a measly 104k to 89k!

The Labor participation rate was flat for September at 63.2% which is the lowest participation rate in 30 years. According to some research, the unemployment rate that dropped to 7.2% today despite the miss in the NFP, would actually be 11% if the, labor participation rate was accurate.

Private payrolls missed for the third month in a row, still the unemployment rate fell from 7.6% in June to 7.2% in September which is the same as November 2008 lows and very interesting as I'll cover in a moment.

Scotiabank released a piece today in which they said that traders have been programmed to believe that QE alone will send the market higher rather than economic growth, in fact, despite the lack of it. I think the biggest mistake anyone can make in this market is convincing themselves, "This time it's different". 

In a great 5 part video series that I recorded in 2007 and predicted many things that have happened since (unfortunately 2 of the 5 parts are missing as I put them on "Revver" instead of YouTube back then as they paid money" I covered all the major bubbles since the Dutch Tulip mania that was around 1637. It's one thing to report on a bubble from hundreds of years ago, but since getting involved in the market I'm on my 3rd bubble in real life (that seems excessive, especially compared to the historical average over centuries).

The one identifying feature of a bubble is the sentence, "This time it's different" and in many of these bubbles, they had a lot better reason to believe this time was different, but it never is. The second feature is that it's widely held as if it were the Gospel itself. I recall in 2007 while we were seeing signs of the market topping in a bubble I recognized as a home buyer on 2003, I recall distinctly the mood and this one interview on CNBC with the author of "Dow 20,000", I feel bad for anyone who spent their time reading that book. In any case, I can easily get off track here so let me get back on.

The market and I mean the QE addicted retail market (because I'm sure smart money has seen the writing on the wall as early as September of last year) sees Employment bad news as good news because they believe it will stay the F_E_D's hand on the QE taper, but the F_E_D didn't let the cat out of the bag about the taper for no reason. I recall a time when all the F_O_M_C would say was "We have more tools at our disposal and are ready to do whatever it takes", there was NEVER a hint of QE ending and when specifically asked about the exit plan, they'd say it was way too premature to even contemplate so to go from that to a taper is coming and June minutes showing "Several" participants wanting to taper then and there and "Half of participants" seeing QE3 wrapped up by year's end, that's a landslide change.

What many may not recall is that QE was at one point tied to the unemployment rate, this was highly subjective and the market (smart money) didn't care for it because before that, F_O_M_C guidance was all objective date defined, QE will start and stop here and rates will stay as they are until at least (usually 2015) 20XX. However, many have forgotten that the F_E_D's second mandate, maximum employment and the tying the unemployment rate to a QE taper or end was removed and was placed on what the market (smart money) are far more worried about, "When the first interest rate hike will be".

However, if you want to standby the old yardstick (which is now completely up to the F_E_D, they can taper any time, it no longer has anything to do "strictly speaking" with the unemployment rate), then take this in, the end of QE was originally tied to an unemployment rate of 7%, WE HAVE MOVED FROM 7.6% IN JUNE TO 7.2% IN SEPTEMBER! 

For retail money none of this matters, they just see bad employment news is good market news, they only read the head line "MISS" though, they didn't catch the falling unemployment rate. I personally think the F_E_D used unemployment because of the dual mandate and because employment data is so easy to fudge and goal seek which for the market that hates uncertainty, is much, much more subjective than a hard calendar date of say April of 2015. When all of this was changing in late 2012, I was pointing it out at every step, I called it the F_E_D changing the yardstick from objective to subjective or arbitrary. Interesting that retail missed all of that aspect, but smart money didn't as the U.E rate is tied to the first interest rate hikes and they fear that much more than they fear a QE taper.

In any case, it seems to me that perhaps algos were loading up to sell in to the NFP, leaked or not. What is most interesting today is the momentum or market darlings got crushed this morning, look at AAPL, FB, TSLA over the last 2 days, PCLN and NFLX.

In the case of NFLX, none other than the Icahnator himself tweeted he sold 2.99 million shares of NFLX...

Icahn also said that NFLX is way undervalued because he supposedly still has a fairly large position left, but Icahn is slippery and lord really knows what he's truly up to. In addition where all these other stocks "presumably" crushed on nearly 3 mn shares of NFLX sold? 

Perhaps scariest of all is that the 3 million share sale collapsed NFLX's market cap by -20%

Also of note today was Stevie Cohen's SAC capital downsizing, closing the London office and said to have cleared out 5 U.S. managers and will be downsizing, these are Stevie's playground stocks, one has to wonder if SAC was behind some of these collapses.

To me what was the most credible and significant news of the day among funds is the $14 bn in Assets under management, Third Point fund run by Dan Loeb, he doesn't seem to have the same calculating, club wielding mentality as Icahn and certainly doesn't have the trouble of Stevie Cohen.

Third Point's Flagship fund has returned to investors an annualized gain of 24% since Jan 1 2009 and the leveraged Ultra Fund has returned +29%. Dan is the man who didn't have to say a word, he just sold AAPL and moved on and it crushed the stock as all the other hedge funds followed Loeb, except Loeb sold in to strength, they took a beating. I showed you what happened, it's a painful memory to me because I had a core short in AAPL days before that I closed to ride a small bounce higher and re-open the core short maybe 4 or 5 % higher when Loeb's holdings came out, that's what you get for trying to be too fancy in trading.

Unfortunately my charts can't go back that far anymore, but we had strong signals of distribution at the time, thus the core short, they were much more accurate timing wise than this chart, but just so you can see there was major distribution in to the top, here's the AAPL daily chart.

Daily 3C/AAPL chart and distribution in to the all-time highs.

Back on point... Loeb said that he's concerned with the Global economy and they had already lowered their exposure to equities significantly. He also said that he'd be returning 10% of client's money to them (this is money that is actually gains that have accrued in his AUM), but no matter where they come from, lets assume Loeb has a typical hedge fund payment structure of 2 and 20 (which I'd guess is actually much higher because of his performance), that's a 2% management fee per year and a 20% incentive fee on gains.

So with some rough math, in returning 10% of capital Loeb is losing $28 million a year in management fees assuming he's at the typical 2% (many are higher, like 3 or 3.5% a year) and $1,736,000,000 in incentive fees a year based on the lower 24% return and the unlikely, but bare minimum of 20% incentive fee and I used the NET investor return so in all reality, that's after the 2/20 fees!!!

I don't have all the details of the money being returned, what it counts and doesn't count, but as you can see, even if my understanding of what he's returning is flawed, he is giving up SIGNIFICANT profits and for the reason that he os concerned about global growth.

I've heard of hedge funds returning clients money if they think it's going to be a bad year, but this is a pretty big one.

As for the market, if there was a carry trade running the market today, the closest to that would have been the EUR/JPY.

Protection was definitely bid as the spot VIX closed up  +1.29% vs the SPX at +0.57% with the NDX closing at the lowest gain of +0.19%, in any case the VIX shouldn't be green with the averages green, this behavior started early Friday morning with VXX outperforming the SPX correlation and has just grown from there to the point where we now have a large leading positive VIX futures 15 min divergence, the first divergence there since just before Oct. 9th.

At one point last Thursday 3C was in line with price, there was no positive divegrence, Friday it grew exponentially and look how much was added just today alone!

Forget about the closing ramp, the VXX was all over the close.

The green SPX is inverted, VXX saw strength all day and especially in to the close, however it wasn't all lopsided.

Sentiment intraday looked much better...

Intraday sentiment looking pretty solid.

As you know Yields were pounded lower (they are already negatively divergence as a leading indicator and significantly worse than last night, imagine them acting as a magnet toward equities.

All other leading indicators looked basically the same as the intraday update.

One thing that stood out in my after market update was my scan for Dominant Price/Volume relationships. Yesterday there was a co-dominance, they were both volume down and split between price up and price down with price down just edging out price up. This on its own wouldn't have any real bias toward the market, Price down/Volume down is the thematic relationship of a bear market (that's not saying we are in a bear, just making the note), however today we did have a dominant relationship between all of the major averages except for the Russell 2000. In the other averages (Dow, NDX, SPX) the theme was at least half of the component stocks were Price Up/Volume up which is the most bullish relationship of the 4 possibilities, ironically though it often stands as a 1-day overbought condition and very often the market closes lower the next day.

I saw a lot of interesting candlesticks on the daily close today, the increased volume tends to make any meaningful candlestick about twice as probable to do what it is expected to do, that's right, the key to high probability candlesticks is volume, in fact look at a 5 or 10 min chart of AAPL this morning and you should see a bullish hammer at the morning's lows with heavy volume and that hammer reversed AAPL to the upside and held as support all day. NFLX may have been among the most interesting of them...

If that's not a bearish engulfing candle that Steve Nison would consider adding to his book and releasing as a new edition, I don't know what would be.


Just thumbing through some others, AAPL was very close to a bearish Hanging Man with volume up, FSLR was almost a "bearish hHanging Man top, but it combined with yesterday's candle to form a "Tweezer Top" on increased volume, the SPY is a nearish reversal "Star" on increased volume, the R2K or IWM looks like a series of spinning tops, the Dow-20/Transports are very close to a text book bearish shooting star, IYT is a TEXTBOOK bearish "Shooting Star",  DIA is a bearish "Evening Star" on volume,  QQQ is very close to a nice bearish "Hanging man" on increased volume.

SRTY and SPXU have gone from real downside momentum to 3 small stars/dojis or what would be nearly the opposite of a bearish spinning top. FFIV is not perfect, but good enough for the criteria or psychology of a bearish "Hanging Man" and on volume. XLK/Tech has a Evening Doji star (bearish) yesterday and what would be a "Hanging Man" on significant volume, XLF/Financials is something like a "Hanging Man" with a couple of spinning tops, GLD and SLV both have longer upper wichs (higher prices rejected) in an area of resistance, JPM has a perfect DOJI and bearish confirmation, "Engulfing candle today, in fact, this is a pretty chart...

JPM with a perfect Doji yesterday and a perfect bearish engulfing pattern today which is a downside reversal confirmation pair.

FAZ has a small, but correct bullish hammer on large volume, looking like a bottom reversal candle while FAS has something very close to a bearish "Shooting Star. ERY, the 3x Energy Bear looks like a star bottom on large capitulation or exhaustion volume.  FDX is a picture perfect bearish "Shooting Star" or as the Japanese call it, "Trouble overhead , with increased volume.

*I say "near perfect" because I don't want a bunch of emails with the actual textbook definition, I know what they are, what people miss however when looking for the textbook pattern that is so rare to find and always cherry picked for the book, is the basic psychology of the candlestick pattern, it doesn't matter if there's a gap or almost a gap with a shooting star, the point is higher prices were rejected and the candle closed with a very small body, both bearish, add rising volume to that and you have a strong signal that shouldn't be disregarded because it doesn't look exactly like Steve Nison's book.

And the TICK Custom indicator looks like more stocks are falling behind as my histogram falls for this leg.

As of the 18th, the TICK started falling meaning fewer stocks closing higher and more closing lower in an uptrend, just like a lot of the charts we saw last night.

I'll say that between the internals, the dominant Price/Volume relationships, and most of all the candles on volume, I think we're likely headed for a lower close tomorrow. That's not what's really importnat, however it could be the start of something really important because as I was looking for last night and yesterday in Financials and the market in general was a head fake move, that Igloo with a chimney" and we saw a lot of those today.

I'll check futures tonight before I hit the sack and see if anything stands out, but from hedge fund activity and other signals we have been seeing since the 18th (I dare say some very strange) it feels like we're at a toppy area and with some of the distribution already in place, that could quickly turn very dangerous.

When I say, "Distribution already in place" and "Dangerous", this would be a good example of what I mean and this is not cherry picked, it was the first index/average open on my charts...

I didn't expect any strong 3C signal on the last run off the 10/9 bottom because I saw it as a utilitarian move to get stocks like PCLN, NFLX and GOOG above recent ranges, but make no mistake, that's a soft patch that could cause some major trouble as the SKEW Index remains elevated tonight.

ES Model

The night of October 17th, (last Thursday before all that strange behavior Friday the 18th) I had showed a CONTEXT ES model. Keep in mind that Capital Context is not a blog, not a website designed for people like us (that's why it's delayed 30+ minutes),  but rather it's an asset they sell to institutional or professional traders so they're not a joke, but after having watched them for a while and getting some information, we know a few things.

Here's the excerpt from that night's Daily Wrap with regard to the CONTEXT model for S&P E-mini futures (ES)...

"Tonight we are at -45 points. I recall an ES model (CONTEXT) that was something like -44 points or so, then ES pulled back to something like 39 points, it was amazingly accurate so long as they don't have to make some adjustment for a carry trade"

After having seen CONTEXT models at something like +40 points (rare in this market) or -40 points, the next day there's be some reset and CONTEXT would be at -5 points or something like that so I and a member did some investigating and found out that they re-calibrate their SPY Arbitrage model every week, I believe it's around 10 a.m. Monday mornings and they recalibrate the CONTEXT model on an "As needed" basis. Because the assets that go in to the make up of the model are "institutional in nature", they aren't typically traded by people like us, they include: Interest Rates and Curves, Credit and Credit Risk, Currencies and especially FX Carry trades, Commodities and Precious Metals. The idea is to understand what is a risk asset such as high yield credit or an FX carry trade and what is a safe haven asset which in the past could be precious metals in an environment where market participants have an expectation of rising rates, however in a stable interest rate environment gold takes on a different correlation. Treasuries have long been considered a Flight to Safety asset, however the F_E_D's treasury buying (QE) has caused some distortions in the correlation of that market as well.

All of this is taken and combined and weighted in to a single model and that model should reflect the fair value or anticipated value of S&P e-mini futures (ES) so arbitrage trading desks or traders can say, go short E-Mini's if the CONTEXT model is at a negative value and sell the E-mini if CONTEXT approaches fair value or above ES. This is actually a very novel indicator and I created something very similar a while before I had even heard of Context, some of you may recall "The Miners Trading System", which I'm going to pull up and run some back tests and see how it has performed.

The construction of my system was based on two asset classes you'd never think of. Most people think gold or the differential between the value of silver vs gold vs the geological value, meaning the proven reserves in the ground and what each should be trading at based on that, which would see silver much higher in value, but you can take that up with JPMorgan's manipulation of the silver market after they acquired a huge silver short with Bear Stearns that they've been defending for 4 years or so. No, my model was based on the two non-fixed costs mining operations face. You figure their land leases are known and fixed costs, the machinery and depreciation are fixed costs, labor for the most part (unless there's an uprising) is a fixed cost. What I figured to be their two largest non-fixed costs were energy and changes in currencies as a good portion of these are worldwide, but gold is sold in $USD denominations. So if the value of their foreign currency vs the $USD changed, so did the value of their sales, labor vs. sales and energy as it too is $USD denominated across the world.

In some scenarios with changes in currencies vs the $USD, not only are they receiving less for the gold they sell, it can cost them much more in Energy and a variety of costs, this is where I saw the biggest fluctuation in profit margins for gold miners as a group and thus what my model was based on and it's difficult to weight just those two assets ($USD and Oil) so I understand how complex the CONTEXT model must be. 

In any case, as I said on the 17th, " it was amazingly accurate so long as they don't have to make some adjustment for a carry trade" or any number of flip-flopping assets. As if I had predicted the re-calibration, a couple of days later the model was re-calibrated and at something like -7 points from -45.

Here's an easy explanation of why it needed to be re-calibrated, although I have no idea of which actual asset/s caused the re-calibration.

 This is the SPY (SPX) in green vs. TLT (20+ year Treasuries) in red. Normally Treasuries would trade the exact opposite of the SPX/market, it's typically a flight to safety trade, but as you  can see above in this most recent leg up from Oct. 9th, TLT is moving like a risk asset and almost in perfect sync with the SPY.

I don't think this was the actual asset, I'm just showing an asset that most of us identify with as being a flight to safety asset acting in the opposite way, that would cause the model to distort and the correlation would have to be re-calibrated.

Since CONTEXT was re-calibrated (it doesn't happen that often) here's what it looks like now...

As of about 5:30 a.m. today the model was around -12 points, not a huge differential, but big enough for a pullback. As of 3:42 p.m. today that grew to a -40.63 ES points negative. 

I found this ES chart this morning to be rather interesting...

Non-Farm Payrolls, the most important macro economic data in the US right now as the F_E_D has tied the unemployment rate to their interest rate hike schedule rather than the former calendar based schedule  (for those that didn't notice it, although the NFP missed, the unemployment rate dropped, that does not make institutional traders happy because the lower unemployment is, the closer we are to a hike in interest rates which sends a market down). We know the BLS has admitted to leaks in their data and that's why they are building a new data center so they can prevent inside trading on advance knowledge of the report.

I can't say whether there was a leak or whether there was a decision to run the flag up the pole no matter what as yesterday I clearly expected a move like this, in fact I predicated a Financial short position on this happening. 

If you look at the ES chart above and 3C, after doing nothing all night, we have a 3 hour, very flat range (typical of accumulation in this position) and 3C showing accumulation as the range went on, then up and away as the 8:30 NFP came out.

If you look at the CONTEXT chart...

The changes started around 8:30 as the differential expanded, but one thing I've noticed about CONTEXT is the angle of the green model. The differential can expand just because ES moves higher while the model is totally flat, in my view that does not suggest institutional selling in to the event, it suggests institutional assets remain constant and only the higher ES price creates the wider differential, today you can see that's clearly not the case as CONTEXT was heading down suggesting institutional assets were not only not buying this NFP move, they were selling in to it. However we could have guessed they were worried about the market just by the spot VIX being in the green +1.29% while the SPX was up +0.57%, the reach for protection.

In any case, I thought I'd point out this CONTEXT chart as it looks much more credible with institutional selling in to higher prices and a wide differential with a freshly adjusted model.

QUICK EOD Observation

VXX just went green on the day, that's not very helpful for an EOD ramp. Just the VIX green alone today is worth looking in to

Opening Positions

I'm going with a spec size XLf December $21 Put (this is about 1/3rd the size of a normal full position for me or about 5% of portfolio value before any margin).

I'm also going to go with a half size equity long in FAZ.

Trade Idea Follow Up: XLF / FAZ (Financials)

Yesterday I was looking at XLF as a Put option (short) or FAZ (3x short Financials ETF) as a long position, the only thing I wanted to see was a head fake move above the recent highs with 3C signals showing it was likely a head fake move, I'm satisfied with that.

Here are the current XLF (Financial Sector) 3C charts, I will be opening a position this afternoon...

 XLF 2 min intraday shows no sign that today's move up was anything other than a head fake/bull trap move.

The 3 min chart could be leading positive before 11 a.m. if there were real strength there, I don't see it.

The 5 min chart goes from down trend confirmation to accumulation in to the 9th and a leading negative position.

The important 15 min chart is in deeper leading negative position today. The "Igloo with a chimney" is exactly what I described I'd be looking for today, that's exactly what we have above.

Head fake moves are often EXCELLENT timing markers, they tend to occur just before a reversal and the reasons why are in my two part article linked at the top right of the member's site, "Understanding the Head Fake Move" parts 1 & 2.

The 30 min and 60 min charts make sense as well, the move above the former high is one thing I was looking for in this move, the move above $21 was something else I was looking for and we have that.

Both FAZ  and XLF have daily Doji star reversal candles as of right now.

I will be entering a Financial short position either in XLF puts or FAZ long, I might even look at both.

The ATR for FAZ over the last 10-days is $1.12 as best as I can figure it, I'd probably base my stop off some denomination of the ATR, a full $1.12 risk would be what I mean, whether you apply that to today's low or present price would be individual preference.

I'll let you know what I go with before I open it, remember I already have SPX short and IWM short exposure using 3x leveraged ETFs, SPXU and SRTY respectively.

Leading Indicators

First for those of you who know of Dan Loeb of Third Point, he's returning 10% of client's money, he's essentially saying the market is dead, the global economy is dead. If you don't know who Dan Loeb or Third Point is, let me just say there are two packs of sheep, the retail sheep that follow price and the hedge funds that follow each other, none willing to strike out on their own because they have a fat paycheck they don't want to lose. To underperform the S&P is apparently acceptable, but to underperform the pack is not. Dan Loeb is one of those who strikes out on his own and the pack follows him.

If you need proof, look at the -45% loss opr -390 point loss AAPL took, one day AAPL was the darling of the market and could do no wrong (we already had severe distribution signals in AAPL and had a core short there) and the next day all the hedge funds were trying to all squeeze out the same tiny door all at once, the reason.... AAPL was no longer on Third Point's top 5 holdings.

That's who Dan Loeb is. In addition to returning 10% of client capital he also said they have been selling equities. I think last night's post was perfectly times because the longer term breadth indicators proved that more stocks were falling below their moving averages as the market averages went up, that only happens when there's serious selling and those are the same 3C signals we've had for some time. Another fund recently said, "We have been selling anything not nailed down for the last 15 months", again market breadth doesn't lie. The 3C signals have been there just like they were there in AAPL when this happened.

This 5-day chart shows the decline in AAPL, that's a -390 point move in 8 months of nearly half of AAPL's value, -45% and all started because of Loeb although we had clear distribution signals and even a core short at the time (which I got too fancy with trying to trade around it when the Loeb news came out and the panic selling started).

Last night's charts are a good reference.

As for today, the SPX is up +.55% while the spot VIX is up almost 1%, something not right with that picture? I have to say I'm getting killed on some VXX calls, but it is sure tempting here to either go for a UVXY long equity position or a December VXX call.

 If I invert the green SPX price, VXX should move exactly the same or below the green line if it is weaker, obviously it is stronger as it has been for several days, that's why the Spot VIX (which moves opposite the market normally) is up vs the market.

This chart of 15 min VIX futures also tells us why, instead of making new lows as you'd expect, VIX futures are making a nearly perfect and large rounding bottom, the 3C leading positive has been added to aggressively today, pro's are reaching for protection, hedges or straight up long trades.

While we are on Leading Indicators, some other things to note...

 I showed last night in the post linked above how commodities were a Leading Indicator vs the SPX here in green, once again today commodities  are underperforming and continue to work on that leading negative signal, there was a positive leading signal in to the 10/9 lows.

 Sentiment as shown last night in several different timeframes is leaking off again today rather than follow equities.

One of the most effective Leading Indicators, Yields gave a strong leading positive signal as we were looking for right in to the 10/9 market lows, the leading negative signal of the last several days just got a lot worse today with a new leading low, well below the levels that called the October 9th bottom in the market.

 It's hard to say where you might consider a reversal process to start, I thought the numerous odd/bearish signals on Friday Oct. 18th was an obvious place, I used a simple indicator that you can improve upon almost any indicator by simply applying it, but it's not in fashion with all of the latest stuff out there to sell books, but a simple ROC (Rate of Change) shows the change in character in the SPY both at the leading positive low/bottom and recently.

You know I look for a reversal process, I don't believe in or at least I know that the majority of the time the market doesn't just reverse, there's a process and it is proportional to the stock's trend, previous bottom and character. One of the big things we look for is the head fake move as a timing indicator, it usually occurs 80/% of the time just before a reversal. Yesterday I thought the Non-Farm Payrolls this morning could give us that head fake move which I describe as looking like an Igloo with a chimney, like the white line I drew in above. I was looking for the exact same thing in the XLF/Financials short yesterday as you can see here. From this post yesterday...

"I'm not going to add any more exposure, especially a time sensitive option position without a concession from the market to reduce the premium and the risk on the position, that means an upside head fake move and I think there's time for one" 

We'll take a closer look at Financials shortly.

 This is my custom NYSE / SPX TICK Indicator, I have the entire cycle/trend from the 9th, it should see the TICK histogram rising early on and toward the end the same falling as we see starting right around the 18th, so I think it's fair to draw in the start of the reversal process right about where it is.

As for my DeMark inspired custom Buy/sell indicator, with simple yes/no signals, this daily chart of the SPY shows past cycle tops called, we have one now too, but how serious? Remember the IWM/Russell 2000 should lead all risk on moves, in fact whole retail thinks and media would have you believe the S&P 500 is the bench mark, if you listen to Bernie's Congressional testimony, he constantly refers to the Russell 2000, I think it's an obscure index for those who are not familiar with the market, but his use of the R2K I think was not a slip of the tongue, but habit.

I've considered the R2K's performance in an upturned as a leading indicator, it was only in the last year I found out that Bernie too pays the most attention to the Russell 2000.

This is a 9-day chart of the Russell 2000, the longest I can go before a monthly chart. Note a serious buy signal at the 2002/2003 lows that started the 5 year bull market, the last bull market that had rising volume with rising price. There are a number of smaller sell signals that correspond with rather large corrections (remember each bar is 9-days). The 2007 top is called twice in succession, that's a lot better performance than the Hindenburg Omen. Then the 2011 -20% decline in the market, it is interesting just how large the current sell signal is, I have found these do have some correlation to the following trend.

I think that this is probably not quite over, right now I think the tactical entries are the most important part of this phase, which means signals have to scream.

I'll update you on what those are. I have no intention of closing the SPXU, SRTY trading positions, nor the VXX calls.

NUGT Follow Up

There are some short term intraday signals that look like a pullback is coming in NUGT/GDX and we covered this yesterday as well in the GLD/Gold/GDX/NUGT post.

Here's the P/L for the NUGT trading position.

With a cost of $47.25 and a fill of $54.06, the gain comes to +14.4%

The reason I like NUGT is it has more leverage than GDX which has none as you know, but it's not over-leveraged like options would be and I believe this will be a longer term trending position and I don't like options for those kinds of positions especially when you really get in to a trend and have to deal with pullbacks that may be a couple of weeks, but the 3x leveraged ETFs hold up reasonably well as long as you don't get caught in a big choppy range.

 This is the NUGT 15 min 3C chart, a huge leading positive divergence so I would absolutely consider buying NUGT on a pullback.

Right now we are using the 60 min X-Over System that has all 3 indicators long. The first pullback is almost always to the 10-bar yellow average as we see above and the second and subsequent pullbacks are typically to the 22-bar moving average, that would also fill the gap (orange).

There is another gap lower, if we got to that area, then I think a double bottom "W" would be likely in NUGT, short term that wouldn't be good for trades, but longer term that would be great for a long term trending position.

Right now I have the Trend Channel set up for a 60 min trailing stop, the 60 min bar must close under the lower channel currently at $45.45, you can see it held the downtrend well. If you don't have the Trend Channel, a 50-bar 60 min moving average works fairly well, it won't work as well as the Trend Channel which will continue to lock in gains and even allow NUGT to consolidate without stopping it out.

Trade Action: Closing out NUGT Trading Long

I'm going to exit NUGT (3x leveraged version of GDX) for now and hope to re-enter on a pullback to fill the gap around $48-ish.

Put PCLN on the Radar

Around and just before October 3rd I had posted numerous times there were hundreds of pre-qualified shorts that looked good strategically, but they were falling just short of the head fake move that Wall Street usually needs and that makes such a great entry when done right, in other words the tactical side was missing, which as you've heard probably for the 12th time now, led to an expectation of a strong market rally; not for the market averages, but specifically to move these hoards of positions above levels that were so close any way, I had even said "I just can't believe that Wall St. would walk away from all the goodies just right above".

Of a watchlist of literally hundreds, PCLN was one of those and for whatever reason, the high price, hatred for William Shatner (not from me, I love Star Trek), whatever the reason, there's a lot of interest in shorting PCLN. I'd be VERY careful as it does not have any kind of developed top, but it could be put in to a channel busting column, a bit different than usual.

In any case, here is why I'd have PCLN on the radar, I can't even say that I wouldn't enter a partial short here with room to add on, but as always when we phase in to a trade, adding on at better levels HAS to be part of your risk management BEFORE you enter the trade, Dollar Cost Averaging is rarely a good idea and a terrible habit. The only reason I say I'd consider a partial position is because PCLN made the break out move to the area I was expecting and it's above the ultimate psychological level of $1000 which was a must in this case. For a new position, I personally would not go much more than 1/3rd of the intended full position and likely closer to 25%, I'd want to try to enter that as close to the recent highs as possible.

 This is the breakout area I was hoping to see. Honestly I think PCLN needs a clear Channel Buster or a more lateral move (a topping pattern), but this is more because of the process than being able to say, "Look, there's an XYZ top!". The trend here has been strong, I think the final sell/short signal needs to be just as clear.

This is a 15 min chart, this doesn't show the long term 3C trend, but it shows some great stuff like a gap that was sold in to, price trend confirmation (green arrow) and the negative divegrence on the breakout above the previous high so it looks clear this is a bull trap, it's just not clear that it's done.

 This stronger 30 min chart shows the same thing, distribution signals on the first top to a smaller degree and stronger on the break above that area recently.

Even the 60 min chart is now showing the same which would tend to confirm that there's some pretty heavy action going on there, but for me to enter a full position all at once here, that 60 min chart would need to be leading negative close to a new low on this chart. The intermediate and short term charts would need to line up as well.

I would keep an eye on PCLN and maybe set price alerts at the top of the recent highs and as I said, I may phase in to a position in small pieces if that's feasible for you'r portfolio size, but I would not enter the bulk of the position until those other signals are in place.

In any case, PCLN is in the right area.

GOOG is another to put on the radar.

Market Update

This is from yesterday's Trade Idea: XLF / FAZ

"Here's XLF/Financials where I'm interested in a possible put position if we get a head fake move. Typically we see head fake moves about 80% of the time, in this case it might look something like a new high above the rounding top, I often describe it's look as , "An Igloo with a chimney"."

This is a typical formation for a top including the often seen head fake move.

 This is pretty much what I described above for the XLF set up, the Igloo with a Chimney".


This is the same pattern in the averages, I'm using the QQQ here. However if you look at the last candle, it's not a hammer, but it did reject lower lows on volume, often an area to expect a bounce.

As for that IWM intraday signal...

The IWM usually leads so I guess this shouldn't be too surprising.

As I wrote last night, volatility is the name of the game today, the market just showed us.

It feels a bit early to lock in to anything, but I'm going to look as close as I can to the internals, Leading indicators, etc and see what we have going here, but we very well may have our head fake move.

I think the important thing about the September Non-Farm payrolls the retail market missed as they were so concentrated on the miss was the unemployment rate dropping, that's what the F_E_D_ has tied interest rates to and that's all that smart money cares about, they know QE3 is a dead man walking, it's rising rates that they are truly afraid of and with rates connected to the unemployment rate, today's improving unemployment rate despite the NFP miss is what smart money will react to.

Quick A.m. Market Update

So far most of the averages are in line on the 1 min chart, that however would not include the IWM, it is now much worse than say the SPY which looks like most of the other averages intraday (1 min charts).

 SPY 1 min was in line, intraday confirmation and is still pretty close like most other averages, but...

The IWM 1 min is not looking nearly as good or at least in line (good might be too strong of a word for an intraday chart).

The NYSE TICK is also not looking very good, this looks like a Ginger-Bread advance.

We hit +1000, decent, but nothing to get overly excited about and now TICK is trending down.

I'd suspect we'd see another leg or more, it's still very early even for a.m. trade.

I wouldn't go making any big decisions just yet.

XLF, SKF, FAZ Trade update

Yesterday I was hoping early NFP volatility would send XLF above the $21 level, but that just looks like a tough nut to crack as the best we've seen this morning is $20.96. The idea being to just wait through the mid to early afternoon and by then we'd have decent signals as to whether the move was being distributed or of it was confirming/in line.

 Daily XLF, you can see why I'd rather wait for a head fake move with that VERY clear resistance area, that's just too juicy of a target to send a head fake move above, but that would be too juicy of a trade set up to not be paying attention to.

Since I started the post, now we have $20.98, so we're a bit closer, we are above technical resistance, it's the psychological resistance of the whole number $21.00.

That doesn't mean XLF would be a short at $21.01 because once the psychological level is broken, so is the taboo so to speak and other buyers will come in, that's when we want to be watching for distribution or strong hands exchanging shares and rotating to weak hands.

We still have quite a bit of time, but I'm surprised we didn't get more bang out of the NFP. There's also a perception with JPM's latest $13 billion government fine that government is coming after banks to extract a pound of flesh and a lot of capital, in Jamie Dimon's case for speaking out againstDodd-Frank  when he was Obama's most favored banker, perhaps that's why JPM just received a record penalty of $13 bn, but BAC, CITI and others are on the chopping block as well.

You may not remember it, but I predicted or "Thought" this might happen as Wall St. DID NOT turn out with cash for Obama's re-election campaign, I said at the time, "They better hope he doesn't win because if he does, Chicago-style payback is coming".

In any case, I'm going to be patient, see what we get out of this because I do like the banking sector as a longer term play, I think the lawsuits are just getting started, ironically some 5 years AFTER the crime, but only shortly after O's re-election.

Ooppp, there's $21, keep an eye on volume and see if anyone is biting.

NFP- Hilarity

Last night's post ended with this paragraph:

"Either way, between all of the charts above and the BLS employment data at 8:30, I suspect it will be a volatile day which is great for setting up positions. I'd like to see a head fake move on the upside in Financials/market and see distribution in to that, if we get that, I'll add XLF puts or long FAZ or SKF and maybe add other positions as well.

I'll check in if futures act up, but I doubt they'll do much (just like today( in front of tomorrow's BLS report at 8:30 a.m."

Well the disappointing September Non-Farm Payrolls at 148k on consensus and about average of 180k was sufficiently bad enough news to be good news and no the market didn't do much of anything overnight up until the NFP.

What ZH has caught is truly remarkably finny as the number of full-time workers vs part time has been on a downward trend for some time but accutely the last 5 or 6 months as Obamacare is blamed. So if you skip over the BLS Household Survey at 133k and look at the breakdown of Full/Part time employment, somehow the BLS has magically (once again) taken 594k part time workers and rotated them in to 691k Full time jobs and adding 100k to the employment report in doing so. We always knew the BLS NFP was a "Goal-seeked" number, but in such political fashion as to give Obamacare cover from criticism that it's costing full time jobs?

WOW...

In any case, we have the first part of the volatility needed for a head fake move in Financials and some others look better, we'll see if there's the distribution to confirm it...