Daily Wrap

Today was not business as usual. As you know, last Friday something lit a fire under my butt in what looked like otherwise "normal" trade, but whatever it was, it was fast moving and hit the smart money markets first, the equity market last, was all one way directional and left me saying, "Smart money knows something that we don't and whatever it is, the market is not going to like it.

China...

Of course as you now know  it seems highly probable the the bi-weekly People's Bank of China's Open Market Operations / Reverse Repos (liquidity INJECTIONS in to the economy) were halted Thursday for the first time since July when the inflation tiger last threatened China. As a quick reminder from the linked post ahead, prices of homes rose year over year in 69 of 70 Chinese cities and Shanghai just saw a +12% jump in real estate prices in a single week!

China's largest banks are now writing off bad debt /non-performing loans at a pace 3 times faster than ever seen before, with rising real estate prices it seems very clear that the large banks are getting ready for a tidal wave of fresh defaults. The PBoC is doing its part by not only buying up "Hot Money flows" from $85 billion a month if $USD with a September purchase of $126 Billion Yuan in $USDs to get them out of the economy, but has also halted liquidity injections starting last Thursday with today making the third consecutive withholding of normal liquidity injections, this is clearly Chinese monetary tightening at a time when Chine desperately needs credit growth just to try to maintain their GDP as growth falls off.

Today's third lack of regularly scheduled (Tuesday and Thursday) liquidity injections shows that it's not business as usual, which is ironic with Dan Loeb essnetially giving up billions a year in profits because he's concerned about the global economy and doesn't see the oportunities, pretty scary for a guy who has an annualized NET return of +24 and +29% to clients since 2009 (the actual amount is much higher because net discounts the 2+% management fee and the 20-50% incentive fee in profits hedge funds collect).

Gross vs. Icahn

Also strange is the mild mannered or well mannered (from what I've seen) King of the bond market, PIMCOs Bill Gross crossing markets and taking it to the always entertaining market bully (but very smart one at that), Carl Icahn.

Here's Gross's tweet and notice it's not a personal account, but PIMCOs..

That's pretty brutal, "Leave AAPL alone smart guy, go do something useful with your brains and help other people rather than stroking your ego and bank account!"

I said I'm interested to see how the often spiteful Icahn intends to take on the main man at PIMCO, a firm that started this year with TWO TRILLIONS DOLLARS IN ASSETS, THAT'S MORE THAN HALF THE SIZE OF THE F_E_D'S BALANCE SHEET!

AAPL's strange AH print...

In any case, I don't know if this is a first shot fired across the bow, a bad print, consolidation of the tape or what, but it stood out like a neon stop sign in after hours.

You can see the lone print and huge volume right at $531.91, in fact the only reason I'm not spending anymore time on this is that the print is at AAPL's closing price, but look at that volume and in after hours. If anyone has different AH data send me an email.

Goldman on Gold....

Because we never miss the chance to learn from the Wall Street bandits, here's a look at gold. Yesterday I posted this update for gold and gold miners, this gist of the update being the following...

"My approach to all of them including a NUGT long and GDX November calls is longer term in nature and that goes for Gold/GLD as well. I honestly prefer to just let them do what they will do short term, if in fact the positive divegrence on the pullback looks strong, then I'll likely look for a tactical entry for new positions or add to positions. However as a longer term play, I'm not willing to try to trade around this right now, I don't see any reason to and there aren't strong enough signals to make that chance worthwhile in my view "

So while I don't have any gold positions other than GDX (Gold miners), I'm looking at them right now as longer term until they prove different with any short term opportunities that may come up taken advantage of as either "Add-to" or trading positions.

One of my favorite crooks on Wall Street is Goldman Sachs who has the nickname, "The Vampire Squid" because their prop trading is often in direct contradiction to what they tell their clients to do, in other words they are trading against their own clients. Furthermore we've seen 7 , 8 or 9 positions in a row they have recommended get stopped out, the last being the USD/JPY, but as I always make clear, I don't think they are wrong at all, I think they are creating opportunities for themselves and doing the opposite of what they say. 

So GS's latest call seemingly gone wrong was "Sell Gold, It's a slam dunk for the next year". That tells me that Goldman is buying any and all gold offered, but lets take a look.

 October 8th Goldman makes the "Sell gold for the next year call", almost the next day on October 9th as gold starts falling we see a 3C positive divegrence on the chart above, Dennis Gartman calls Gold a sell on 10/15 (which I think was just a bad call- we all have them) and on the 17th gold gaps up and has just made a month long new high.

However if you look at where GS said "Slam-dunk Sell for the next year" and where 3C accumulation started, that gives Goldman not only enough time, but enough supply to put together a pretty decent trading position and even if they started accumulating the very next day, even that gold would be at a gain today. Point taken? 

Don't get me wrong, nothing moves straight up and I'm looking for a pullback to look at some new trading positions, maybe a gold positions as my exposure to the PMs is via gold miners and I'll tell you, it's amazing to watch the November GDX $25 calls go from -75 to -12% in a short period of time, this is one of the reasons I try to go with in the money and expirations that are quite a bit longer than I anticipate needing.

The Gold correlation or is there one? Typically gold is bought IN ANTICIPATION OF HIGHER INTEREST RATES, so the way gold acted (red) vs the SPY (green)  from the 2009 market bottom until early 2011 doesn't make sense other than the fact it was simply a risk asset because of QE like just about everything else.

 Then there are a few times when gold looks to be acting like a flight to safety trade and if you really want to see something...

 On an intraday or short term basis gold is reacting intraday as if it were a pseudo-flight to safety (opposite the market), yet the end result is both trend higher.

As far as my most recent position on gold, this 30 min 3C chart is impressive, there's a reasonable reversal process where accumulation took place and while there's a lot of gaps and probably a high probability of near term pullbacks that will provide tactical entry opportunities, until something changes I'd rather trade in the direction of the leading divergence's trend,  I think Silver can be treated in the same manner.

THE F_E_D AND CONCERNS OVER ...A BUBBLE?

Credit or Equities, in this case it's hard to separate them, just ask Carl Icahn, although equities were not specifically mentioned, the F_E_D is concerned about over-leveraged risk taking, sound like the market to you?

Here's Bloomberg with the full story...

AMZN Earnings...
The last story makes a nice segue to the next, as you know AMZN beat on revenues, but the expected $.09 EPS loss didn't change despite higher revenues. Remember AMZN is a company under the excellent management of Jeff Bezos , provided 9+ years of profit EVERY SINGLE QUARTER, today's earnings mark the 3rd loss in net earnings over the last year.

I hate to borrow charts, but if we are talking about excessive, leveraged risk taking and the F_E_D is clearly worried about it, then might AMZN's price be considered as such when considering the following?

 At least AMZN is contributing to lowering the unemployment rate.

However there seems to be a margin squeeze, this isn't a one-off event, it's a trend.

Op-Profits in the negative column

As to that margin squeeze ...

And Free cash flow, well at least Icahn won't be coming after them like AAPL.


Considering all of the above and the years included, this price chart should make things very clear

If the F_E_D is worried about over-leveraged bubbles, they really ought not go breaking the banks backs over it, what started in late 2009 and 2009? Yeah, the F_E_D doesn't have anyone to blame for "LAX Underwriting standards" when they themselves encouraged and made them possible. At least you get some idea of what an unwind of accommodative policy ends up.

The Market...
In any case, yesterday my opinion was the market had some upside today, but as far as meaningfulness, it was in my view going to be "Noise within the trend".

Today's trade was exactly that, no new high, now intraday new high, nothing about today would be classified in any kind of trend defining system as anything other than noise, however the 5 candlesticks in the yellow box look like what are knowing as spinning tops, it's a candlestick formation seen at tops frequently. The 10-day ATR at the bottom shows the Average True Range slid from $2.80 to just above $1.50, that's daily price range action being cut almost in half, not to mention volume.

There's a decent chance that today's close and the price range we are in now which is a trend, it's called "Lateral", are going to be related to an op-ex pin tomorrow, but we do have some earning EVENTS as well so volatility should be interesting...we'll get to volatility in a minute.

Today's closing candles, unlike yesterday which did suggest today would close up, but nothing significant, don't have any bias, in fact they are a loss of momentum, a sort of visual of indecision or transition.

The Dominant Price /Volume relationship today was almost absent, only the DOW, Russell 3k (which also saw a short squeeze) and the SPX had anything approaching a Dominant relationship and co-dominant at that.

The Dow came is at 13 stocks Closing Up with Volume Up, this is the most bullish of the 4 relationships, but often leads to a next day overbought condition (that's a bit hard to imagine with the DOW, but these are shorter term in nature).

The Russell 3000  was co-dominant, 825 @ Close up and Volume Up and 1011 at Close Up and Volume down, this isn't surprising given the little short squeeze today.

Finally, the SPX  at Close Up and Volume Down is the most bearish of the 4 possible combinations at 183 components.

It's hard to believe Transports were among the best performing today at +0.87% as the Baltic Dry Index made a new low on the month...

Down today over 4% with special weakness in the most important Cape-Class Ships. In my view, because of Dow Theory, when the market is trying to sell a rally they always work hard on transports even though it's a totally antiquated concept (Industrials and Transports confirming) as we haven't been an Industrial nation for decades.

Commodities tried to put on a brave face today, but despite the gains in gold and silver, crude just wouldn't allow much wiggle room which is probably part of the reason transports did as well as they did.

 Commodities vs the SPX intraday

Yet the true value in commodities as a leading indicator is using them as such, they lead the market to the upside, why would we discount them leading the market to the downside?

HYG Credit has to stay pinned to the SPX as it is some of the only support (I also showed you the SPY arbitrage supporting the market today as predicted yesterday and the AUD/JPY did for a bit too), but it's JUNK Credit that almost always trades exactly like HYG, yet has no manipulation effect/correlation that showed some fear later in the day, I'm guessing on the F_E_D's comments and Junk credit failed to hold out and closed lower on the day, first time in a long time it has diverged from HYG.

Sentiment was also pretty positive today making it look like we;d see at least some continuation of today tomorrow morning, but sentiment also fell off in the afternoon, again I assume that was on the F_E_D's comments.

This is another sentiment indicator doing the same.

As mentioned a short Squeeze in the Russell 3K was obvious even before I looked at the Most Shorted Index (MSI) as the diagonal uptrend today with no significant pullbacks and low volume is the definition of a short squeeze or the picture of one.

The Most Shorted Index is red, the R3K is green (a member pointed out earlier that URRE was the symbol in the corner, true, but it is not URRE on this chart. I have 7 different charts on this layout and whichever is the active symbol appears in the corner, but the MSI and R3K on this chart are locked so no other asset will appear). If you look close you can see not only the squeeze in the MSI, and the resulting move in the R3K, but you can see it diminishing as the day wears on, if it were represented by a histogram like MACD, the bars would be moving lower as price moves higher and that went on until the squeeze broke down in to the close.

Speaking of Histograms, I do use conventional indicators, but in unconventional ways.

Above is the SPY on a 60 min chart showing the entire trend from 10/9, the momentum indicator in the window with the SPY has obviously given out, Wilder's RSI (not RSI-which is a different indicator) is used with about half the normal period, 6 and we have a divergence there. In fact even though indicators like MACD are used at crossovers or the start of a reversal in bars, I find them to be most useful as divergence indicators. My MACD is Ultra-long compared to the normal 12/26/9 setting, I use 26/52/9 or sometimes 52/104/9. As you can see, MACD is clearly negatively divergence, I find 3 successive divergences in MACD appears to give the most reliable timing/signal.

I also use Stochastics in a different way, I don't look at oversold/over bought and I use a long 50 period, sometimes 100. I've found and even backtested a trading system, when Stochastiscs is embedded (oversold or overbought above 75/80 or below 25/20, these tend to be excellent long (for overbought) and short (for oversold) trend signals, once Stochastics goes divergent as it has here make a lower high, then it's time to tighten the trailing stop. If you used Stochastics in this manner with this trend you'd have all the meat in the middle and avoid all of the volatility with the smallest gains at the bottom and top.

I've used my Trend Channel (60 min) from thee start of this move, it's at a stop of $173.94 on a closing basis, but as I have mentioned it self adjusts to the character of each asset, it locks in gains every day and it allows for consolidations, as long as they don't violate the character of the stock which issues a stop. We have (for all intents and purposes) 3 days of consolidation or lateral trade and the Trend Channel has allowed it without stopping it out yet, I don't know of many other Channels that will do such a thing without excessively wide channels/stops.

Since Junk credit is HY and trades like HYG, but is not used for any manipulation as it has no arbitrage correlation, I took a look at it as a purer signal with no interference from other motives, here's what I found...

 First, JNK did seem to react to the F_E_D statement today.

A larger view however shows it has been in distribution since the 18th, the same time HYG went in to distribution rapidly.

And the longer term charts are in a pretty bad place.

Why does this mater? "Credit leads, equities follow", this is why Credit is part of out Leading Indicators.

HYG can get manipulated here and there as it is an arbitrage asset, but when in doubt or to remove the noise, go to the longer charts where the underlying flow is larger. At first HYG was negative on 1-5 min only, I mentioned the start of 30 min a couple of days ago, but now it's getting clear ad this is a serious timeframe.

HYG 30 min 

The averages weren't all that surprising today except for late day QQQ.

 IWM 5 min seemed to weaken as the MSI broke the short squeeze today.

This 30 min chart of the IWM couldn't be clearer about the trends, it's really beautiful, excellent confirmation on the upside, clear distribution in to the top.

This is what I meant about the QQQ near the EOD.

Like the SPY though, get to the institutional timeframes in scale and they look very similar.

Speaking of which, the SPY intraday also seeming to break down a bit in this bear flag looking pattern.

And the 5 min chart.

I'm not sure if the "Bear flag " floats with most traders, but the channel will, so I'd expect stops and orders on either side of it as it's well defined, I'd set alerts on both sides, and I'll be looking for distribution above the channel (A Channel Buster) and confirmation below the channel, but after 2-days of definition, it will play some role.

The CBOE Black Swan or SKEW Index remains elevated so we're at an increased probability for an improbable event, a black swan.

 Lastly, VIX which I think probably defines near term and longer term action for the market.

 The VXX back in line with the SPX, or neutral.

I find this VXX 60 min chart to be a probable outcome as it trades opposite the market. The oct. 9th VIX sell signal is the top, since downside momentum has faded as evidenced by ATR from $.48 40 1/4 of that at $.12, I think like the market it's just completing the reversal process, it's larger than two days ago when we had a clear head fake (Igloo with a Chimney) so I wonder if it will see another in line with the new size, but it looks really close, I'd guess early next week we'll be managing short positions. I doubt anything on the downside comes during op-ex tomorrow because of the pin.

In my view, Tuesday would be ideal as that would likely be the 4th refusal of the PBoC in a row to inject liquidity and few would argue they are tightening monetary policy.

The VIX futurs 1 min look very strong and at the right place considering the averages and credit 3C charts.

The 5 min is coming out of a rounding bottom and also positive

And the 15 min has remained leading positive, it should see new 3C highs with the 1 and 5 min charts looking like they do.

As usual I'll check futures before I turn in and update if there's anything there. Right now I'm expecting an p-ex pin, of course AAPL could get very interesting. Time for dinner.

AMZN Position Management

If I'm correct, AMZN reports after the bell today, I recently added to an AMZN core short position because AMZN was in the area I had hoped to see.

I hate holding positions in to earnings, but AMZN is a longer term position so eve a short term move in earnings wouldn't trouble me too much unless the market was giving strengthening signals. Furthermore I never react to after hours price action with earnings, it's typically retail and you don't know what the pros will do until regular hours when there's liquidity.

I don't see any signs of a leak in AMZN either way, this is an example of what I see...

 One of the key signs of an earnings leak is an area of unusual accumulation (often at odds with the market at the same period) and pretty close to the earnings date, one year we caught GOOG 15 mins before they closed/reported.

This area from yesterday was just part of the same look in the overall broad market and therefore doesn't stand out.

This longer chart does show a fairly large accumulation area, this is the one I suspected was designed to lift AMZN above the $300 mark where retail buyers would step in with some size.

However that accumulation period is so far back it wouldn't be relevant to a leak. The price move off that accumulation period is about right in size, considering the size of the accumulation zone, the resulting price move is proportionate and about what I'd expect it could support, the more recent signals as AMZN made a jump higher where the last add-to position was added shows a negative divergence which is about the right time and place judging by the size of the accumulation period.

I hate holding during earnings, it's a wild card. Remember though it's not whether they beat or miss, it's guidance, it's not what they did, but what they are expected to do moving forward. I'd much rather have evidence of a leak, but barring that, I don't have objective evidence to exit the core short.

Good luck to all, and unless it's really advantageous to you to act in AH, I personally always wait for normal hours.

Opening a Small AAPL Dec. $535 Put

WOW

As soon as I pushed post on the last most, the MSI (Most Shorted Index) I use for the r3K just collapsed nearly instantly.

Between that and the carry pair falling apart, I need to look quickly as I think we may see a very sudden shift with 2 of 3 of the market's legs of support just kicked out.

Small Cap Short Squeeze, market noise

With some of the other signals such as the market averages and their signals intraday (negative), the VIX signals (positive) some of the individual stocks, etc. my thoughts last night that we'd see higher prices today likely facilitated by a SPY Arbitrage activation and as such not anything of real substance (manipulation intraday isn't of substance), my opinion was today's higher prices would be largely noise in the trend.

So here's what's driving the market (and I show you this because in my view it highlights the weakness if the market needs all of this to move up)...

 As suspected last night in the daily wrap, SPY arbitrage was activated and helping the market.

The Most Shorted Index (R3K) vs the R3K is seeing a squeeze which is giving this flag-like price pattern that distinct short squeeze look (bno significant pullbacks)...

In addition, a carry trade...

This is the AUD/JPY in candlesticks vs ES in purple, note the carry trade is peeling of to the downside and ES will lose support from this asset.

And the single currency future, $AUD and you can see why the carry cross is failing as the AUD has a 3C negative divergence turning it down and with it the AUD/JPY, it's not so much JPY strength as AUD weakness.

So that being the case, I'm looking toward a put/leveraged short, but will remain patient until I have a signal that just can't be ignored, as always, Probabilities are not the same thing as a high probability trade.