Daily Wrap

As was noted Sunday, it's not the "week Ahead", but the end of the month as there are so many cross currents from market closures for holidays that fall in the middle of the week which are likely to cause some of the fatter Wall Street cats to take a week or more in the Hamptons rather than the typical 4 or 5 day weekend. Volumes were another issue, especially considering the above, today's NYSE volume was -20% less than the day after X-mas last year.

The T+3 Settlement rule and how it applies to the largest Window Dressing of the year, both Q4 and the end of year as well as tax trades and many others create so many unusual cross currents, it's almost like a week and a half of a.m. trade.

However we did find some interesting things today, not what I was looking for or expecting, but along the lines of what our read has been on certain issues.

Primarily is the question of whether the F_E_D's taper was a taper as retail traders seem to look at it or indeed tightening policy as I suspected Institutional traders would view it, meaning every time they slow the purchases or taper, Wall St. views it not much differently than a rate hike which has profound effects on the market. How do we know that?

I've talked about the market being up the last several days like Quad Witching and on strong economic news when the truth is, good news is bad news for the market. You'd never know that by looking at today's Initial Claims which blew consensus out of the water and made multi-year improvements, the market of stocks didn't reflect that.

This tells me that window dressing and year end performance are all ruling the market right now, and today Window dressing is largely over because of the Trade+3 days equity settlement, HOWEVER IT WAS APPARENT IN OTHER AREAS. 

The 10-year yield which is a benchmark that sets all kinds of rates from mortgagees to lending rates and more, THE ONE THING THAT SCARED THE FED THIS SUMMER WHEN THEY FIRST PULLED OUT THE TAPER TALK and they saw the 10-year yield gain 100 basis points.

Well today's strong initial claims didn't go unnoticed by the market as the 10-year yield nearly hit 3% at 2.9905%, just about as close as you get.

The 10-year yield hit that earlier this year and before that on July 25th of 2011 which was a great trading time for us as the SPX lost nearly -20%, that's right, the 10-year yield was the culprit (the same way in which it was when we asked, "What is the F_E_D so Afraid Of?") and it looked like this.

The 10-year crosses the 3% mark and equities fall sharply, I recall this era keenly because from early August to early October we traded every single 2-5 day swing up and down with leveraged ETFs and made over 90% while everyone else was getting chewed up in a meat grinder.

The point is this, today we received definitive evidence that the market is looking at the taper as a policy tool and it's not "Taper", it's tightening, it might as well be the same as a rate hike which is something that would really send the market in to a tizzy.

The VIX was smacked down hard on the open today, but recovered more than I thought it would, here are some examples.

 VXX short term VIX futures vs the SPX (green) with the SPX's price inverted, you can see the VXX start to outperform the correlation around 1 p.m.

Also around 1 p.m. a strong 10 min leading positive divegrence just came out of nowhere, it's not the kind of signal that I would act on immediately, but it is a hint of something that needs to be watched carefully along with some other assets. Remember Gold as well today as some charts were posted and how gold has been trading almost opposite the market with some strong positives in the area.

The real VIX futures (1 min) also saw accumulation activity in one of the flattest ranges I've seen in any asset.

 The VIX futures charts are positive in numerous timeframes (15 min above).

Why a lot of analysts think the VIX was specifically whack-a-moled, I'm not so sure. Why wasn't HYG pumped to activate the positive arbitrage? Instead HYG was hammered as predicted just before the holiday.

Another possibility would be long positions sold for whatever reason (tax or otherwise) and the VIX hedges that accompanied them were no longer needed. Even with TLT smacked down, there was no positive arbitrage, just low volume which they should have been able to move HYG, but it was slammed as well. As far as the algos read it, it's cash on the sidelines because it wasn't put to work in a risk asset, HYG. Thus no Arbitrage.

No SPY Arbitrage at all today. In fact the CONTEXT model looks nearly identical.

So what was a mover, I figure 3 things, LOW VOLUME (extremely low), WINDOW DRESSING's FINAL DAY and the Smack Down in the Yen which was very suspicious as the BOJ minutes contained Zip, ZERO, Nada in the way of surprises, EXACTLY as expected, yet the Yen was popped.

 This is Spot VIX intraday and that boost in mid afternoon that created a bullish daily reversal candle  right at the support of the lower Bollinger Band.

Here's the Daily Spot VIX, the BB Squeeze still evident, likely still in effect and a bullish Hammer Reversal candle as the closing candle with the lower BB as support.

About that Yen and this is one to keep a close eye on as mentioned the last couple of weeks (regarding the carry trades and the Buy back of the Yen to close them)...

 Yen 15 min whack-a-mole today, but a strong leading positive divergence.

The same on the 30 min chart. We saw these divergences last week and just a few days later Bank of America comes out and says they closed their carry in the USD/JPY which can be confirmed from their 10-Q/10-K so I doubt they'd lie about it. That means the accumulation we were seeing in the Yen was most likely that of BAC's and there are a lot more to follow.

Overnight one of the most interesting markets to watch after the Yen was purposefully knocked lower in low volume on what we can only assume was a reaction to the totally expected BOJ minutes release, but it may just have been coincidence is going to be the Nikkei 225 futures, the SHCOMP in China was down -1.6% while the Nikkei was up 1% so this is where my interest is in overnight trade.

 Nikkei 225 futures leading negative 5 min chart.

As well as the 15 min and the 30 min above, I'm thinking the Nikkei is about to join, especially since the BOJ didn't have anything more dovish in the minutes, what real reason does the Yen have to be lower other than to cover the carry at better prices?

As far as market breadth, if you looked at the headline breadth charts there wasn't anything of interest or use, it's what you'd expect, but if you looked more carefully, the indicators that represent the Percentage of NYSE Stocks Trading 1 SD and 2 SD Below their 40 and 200 day moving averages (4 indicators), all saw an uptick today, more stocks traded below all 4 groups of 1 or 2 standard deviations BELOW their 40 and 200 day moving averages, not what you'd expect to see today.

The Dominant P/V is pretty easy to figure out being Tuesday was a half day, volume has to be higher on a full day even if it is 20% lower than this same day last year (after X-mas). However what was surprising was the second or co-dominant relationship in almost every average was Price Down Volume Up while the Dominant was Price Up/ Volume Up, the co-dominance was a surprise and in the Russell 2000 the Dominant relationship was Close Down and Volume Up.

The Russell's behavior today was also surprising, it didn't take long after the 1 min chart that was in line all week to fall out and send the R2K plunging as the worst relative performer today after being such a strong leader earlier in the week.

As for TWTR, it closed the way I'd prefer to see it close, a Hanging man.

And on increased volume, the body (open to close range) was almost nothing. So I'll look for a gap up because the strongest reversal confirmation candles must start with an opening gap up, but if it doesn't look like a confirmation of today's bearish candle, then I'll likely look for the exit, but the price and volume action both suggest TWTR has hit some sort of top.

Right now the Index futures are seeing negative 1 and 5 min charts and responding to them, the 5 min is much stronger to go through the night, here's ES.

Just after the close, a strong leading negative divegrence in SPX futures, interesting.

The Nikkei will also be of great interest as will be the 10-year yields, I think it's safe to say , "Now we know for sure Wall St. sees good news as bad news and the taper as Fiscal policy/Tightening" as today's weekly Initial Claims seemed to clearly prove.

OH GOOD LORD, THAT DIDN'T TAKE LONG...  In the time it took to capture the charts and post them , look at the Nikkei 225 futures, compare to the 5 min chart just above. It seems like we are getting our answers pretty quickly.

Nikkei 225 Futures taking a DIVE

Closing Thoughts

I have half size trading positions in FAZ and SPXU long, I've been patient in adding the other half, but have spent a good portion of the last hour trying to look at everything and decide whether to go forward, it didn't take much for the IWM to turn from leader to laggard as it only had a 1 min positive to lift it.

I decided, "today is the last day of window dressing, what can it hurt to wait to see what the tone of trade looks like tomorrow as a large dynamic in end of year trade goes from on to off."

I decided to wait, they are equity positions any way so the timing or if I lose a little of the move is not as important as it would be with options.

Intraday Index Futures Breaking Down

The 5 and some 15 min charts are already negative. I'm thinking we will see some changes

UNG / DGAZ Update

UNG is and has been for some time, one of my favorite long term long positions, it may even be a secular bull market for NG, however since it has made a significant breakout, it looks ready to correct which is actually good to see, a healthy correction. I've been trying to play the other side of that with a trading long in DGAZ (3x short Nat Gas). I can't add much to the trading position, nothing meaningful, but if I could I would.

I'd also be on the lookout in the weeks ahead for a new UNG long entry on a pullback.

Here are the charts.

 UNG 2 min, these are my favorite divergences, they are confirming a trend and then they show a divergence, soon after price starts to follow, to me they have a lot of credibility.

 UNG 10 min, I think UNG sees a sharp pullback, but I'm betting it accumulates in to the pullback which would make DGAZ long a great play in to the pullback and then take profits there and enter UNG long after it has proven itself to be a constructive pullback in which you enter at a discount with low risk.

UNG 30 mins is another one of those charts, the accumulation is clear, the confirmation of the uptrend is clear and  then 3C has something else to say, price in UNG is obviously responding.

DGAZ has the same type of chart, confirmation of a trend and then something changes and price is responding already as a reversal process is clear in the "U" shape from a diagonal downtrend.

Here are several divergences, all worked perfectly so I think UNG gets a decent pullback which makes DGAZ an interesting play on the UNG pullback. I'd say I consider DGAZ a swing long and then UNG should make a core long.

MCP Follow Up

For those of you who are in MCP, would like to be in or add to, the action there today is quite impressive. Remember this was one of the few stocks that was headed up last Friday as the market was selling off in to the close, in other words, MCP has interest that is stronger than the "Rising tide lifts all boats. Ebb tide lowers all boats" normal market magnetism.

 There's a lot to follow there if you want to to better understand 3C and MCP, the main point right now is to the far right.

The big picture is nice and clean, 60 min.

MCP is still very low in a LARGE rectangle base (use to be a large ascending triangle), so if it makes you feel more comfortable, a move above $5.50 in my view is still an excellent, low risk entry.

Market Update

There are a lot of interesting things gong on today, no doubt because of the last day of window dressing. The IWM underperformance after such outperformance and after we noticed the 1 min chart finally break this morning is interesting in itself.

The VXX is something I didn't expect to get a good signal on today, I figured as long positions are being closed, their accompanying protective hedges are being removed (thus VXX down), but out of the blue activity there is picking up quickly.

TWTR is getting far more interesting, I'd caution you to think about the use of options, I chose not to, there's a lot more to this one than just picking the directionally correct option, implied volatility is a huge part of understanding the trade, we have members who bought puts earlier and even though the underlying price is up significantly and you'd think that their puts should be underwater, they cashed out at a profit as the implied volatility is through the roof.

This is turning out to be much more interesting than I suspected considering the day after X-mas stuck between a weekend.

Index futures intraday are interesting as well, as you might imagine the SPX futures (ES) look the best intraday 1 min, and the R2K / TF futures obviously look the worst and I mean very obvious, in fact take a look, the NDX / NQ futures are somewhere between ES and TF, leaning quite a bit more toward TF.

 Intraday TF / Russell 2000 futures, what a nasty looking chart, this was an obvious change in character early this morning after the last several days were perfectly in line.

 The 5 min chart's which mean a lot more to me, TF 5 min

As for breadth, ny Custom NYSE TICK v. SPY, you can easily follow market breadth here.

This was unexpected, a leading positive, interestingly about halfway through the day before it started, but on a 10 min timeframe, even this leading positive building this quick is interesting and telling us something is going on, some kind of move from window dressing to perhaps something else.

I noticed VXX when compared to the inverted price of the SPX, started outperforming at 1:30 which confirms what we see in VIX futures / VXX.

The VIX futures intraday are confirming and showing there's a bid picking up.

 Gold which has been trading opposite the market has caught my attention recently and this 15 min positive is quite interesting. There's a gap and most gaps get filled, but recall what I said about a gap up as an essential element in a bearish candlestick confirmation signal.

XLF/Financials, this was seen before X-mas as well in individual names such as GS, JPM and some others.

XLK isn't very different (Tech)

TWTR I wasn't even basing the trade on 3C, but pretty quickly it has gone from nearly perfectly in line to an institutional timeframe (5 min) leading negative as it has crossed below the stop level, I'd like to see that hold on a close.

The Yen is of great interest, considering BAC has put out two notes, one of which they closed their USD/JPY carry, makes the divergence on this 15 min chart very useful, like the divergence we saw before BAC announced they just closed their USD/JPY position (the divergence I'm sure was BAC), this proves to be a very useful way to close the carry by being able to buy the Yen at an extreme discount.

In other words if I had an open carry trade that I knew had to be closed soon, I'd be hard pressed not to take today's discount to do so and the 15 min chart looks like some big players took up the gift to do exactly that.

Yields have started turning sour and they have been a spot on leading indicator for as long as I can go back on an intraday historical basis.

I'm going to see what else is happening and if there's anything that is worth taking a chance on (I don't care for end of the year trade as it's very deceptive whether tax based selling or Hedge fund performance, there are too many transient factors, but if it is jumping off the chart, it's worth a look.

TWTR Charts

I'd say TWTR is a very speculative position, I'll likely keep a tight leash on this one, but depending on how it closes, I'd be okay with a gap up in the morning tomorrow, it's really the closing price and candlestick that I'm looking to here.

The reason I want to keep a tight leash on TWTR should be obvious, but the reason I'm willing to sit through a "possible" gap up in the morning, is because with the candlestick in place now, a "Hanging Man" which is a bearish reversal candle with a significant gap and change in character, any decent confirmation candle of the reversal candle on a daily chart is going to start with a gap up, such as:

Bearish Engulfing, Dark Cloud Cover, maybe even a Doji Star.

Here are a few charts, most of you know I don't trust parabolic move in either direction, they are one of the few price trends that do not need any significant reversal process and a such, are the closest to a "V" reversal as part of their normal character. Still there tends to be a very tight "U" shaped process, but far smaller than what proportionality of a normal process would look like on a move like this.

In addition, I LOVE gaps and I'm very sad that the market over the last several years has been so efficient in filling them, they use to tell us so much. Today for instance with increasing volume (which is still useful on a bearish candle like a hanging man) it raises the probabilities of the candle being what it looks like by a factor of at least 2:1 as the gap looks like a traditional "Exhaustion Gap".

 This is a what use to be considered a very typical/textbook bearish "Hanging Man" with increasing volume which is still useful in determining the probabilities of a successful candlestick signal, the gap alone is somewhat dangerous for the stock, but that small daily range that creates the "Hanging man's " head, is where the real trouble is in the psychology of this candle.


At "A" we have a nice, stable and strong uptrend, the pullbacks are consistent and healthy, price is near the top of the Bollinger bands and nothing stands out as troublesome.

Then between "A" and "B" note where the moving average goes flat and the Bollinger Bands pinch, this is indicative of a highly directional move, THIS IS THE SAME KIND OF SET UP IN SPOT VIX RIGHT NOW.

At "B" we have the breakout, I can't say there's anything really ringing any cautionary bells, but at "C" the increase in the ROC of TWTR is cause for some concern as the character of the stock has changed significantly and it's now walking the upper Bollinger Band, a sign of strength (especially when seen in a market average), but also a change in character and you see this kind of behavior in so many assets as they near the end of their run, whether to move to a reversal, a flat period or a top, they almost always have increased ROC on the upside.

The individual candlesticks in that area are also bothersome if you look close, upside and downside volatility have increased, there are a number of indecision candles with small ATRs or real bodies.

The 10 Minute Trend Channel has held the run on the upside, there's not a single stop out of the entire run, however the ATR just dropped off to the far right and the Trend Channel's stop is around $72.50, it should continue to climb do to the previous momentum. I'll be looking for a break of my Trend Channel and/or the channel going flat or turning down.

If I were a long swing/trend trader in TWTR, I'd be running a trailing stop since that gap today, I of course prefer my Trend Channel, it won't get you out at the top, but it will allow you to catch the meat of the trend without arbitrarily trying to decide where to take profits.

If you are interested, I'd set some alerts for a move under $72.50, that doesn't mean a clean turn down, but with a parabolic move like this, it sure does increase the chances of one.

Trade Idea:

I'm going to open a short term trading position in TWTR (Short). Be careful about using options as it seems the implied volatility is off the charts.

Quick and Interesting Market Update

I'm not sure if I calculated the final window dressing day for orders to be in considering the T+3 (Transaction plus 3-days) settlement rule, considering the half days here and there, however I'd say I'm 98% sure today is the last day for window dressing as today's equity settlement falls on December 31'st (next Tuesday) in which the market is open, the following day (New Year's day) the market is closed, so I think that is all correct.

Window Dressing is always a big event at quarter's end, even at month's end as many funds report monthly on performance now. However at quarter and year's end, Window Dressing is taken to a new art, the "Art of Looking Smart".

In any case with the IWM breaking this week's intraday character, I thought there were a couple of interesting things like HYG, the market arbitrage asset used all week, but at the same time seeing distribution all week to the point in which I said 2-3 times Monday/Tuesday "I'd like to short it", but the beta is just too low for me. HYG stands out today.

I described the strength in the averages as "Skin Deep", the IWM is the perfect example, take a look as of today.

 Near perfect confirmation in the IWM 1 min intraday chart, it went negative Tuesday afternoon and continued this morning.

Just a little deeper and stronger underlying flows, this 3 min chart is much different, this is why I said it seems market makers/specialists are guiding trade this week and it has to do with filling orders for Window Dressing.

QQQ 1 min intraday losing its luster, note the options price pin the day before quad witching and that area just exceeded, Max Pain.

Yet just beyond at the 2 min chart a darker picture emerges.

SPY 1 min, I never said this was the leader, but it's strength here is relative to what is below...

2 min, note the op-ex Max Pain pin and the pop just above a 5-week range and underlying trade since.

I said all this week, HYG is being used to prop prices up in an algo arbitrage scheme, but it's very weak in underlying trade, this is the same concept as the IWM and other averages.

Look at the drop today, we would have been right to short it or buy puts.

The 15 min chart was telling the tale with highest probabilities long before anyone knew it would fall today.

Despite whatever else you might glean from the action above, the reaction in credit is one thing you should not dismiss and should give that the weight and respect it deserves, Credit markets are far better informed than equity markets, thus the phrase, "Credit leads, equities follow".

Even though I'm not crazy about the Beta, in retrospect I should have opened a short duration put option this week.

IWM Intraday Break

The intraday charts are generally those from 1-3 minutes that guide the course of intraday trade, when they are in line, the trend that is in effect is assumed to be confirmed and stay in effect until there's a divergence, it's what we call "Confirmation of the trend", which is what the 1 min IWM chart has shown all week, well it started to weaken Tuesday toward the close of the half day, but today it confirms that break in confirmation.

IWM 1 min chart this week.

Just as I posted this in the last post I notice the IWM's price breaking up right now.

Two Sided Coin

Good morning, I hope everyone had a nice holiday, it seems like many of you are still on holiday, cheers!

As trade and futures resumed it seems like a small tail of two cities. The Nikkei gained +1% after the Yen dropped on the release of the BOJ minutes which contained nothing new at all, it's still full-steam ahead with monetary policy on the same course set so why there was a discount to the Yen is beyond me, the minutes were exactly as expected.

However the Shanghai Composite (China) was down -1.6% (now we have global index dispersion), this apparently coming on Chinese reports that growth in China is expected to have slowed this year.

Initial Claims in the US (seemingly under the spell of the seasonal adjustment) posted the largest week over week decline since 2006, while Continuing Claims hit the 3rd consecutive / week of higher prints, overall for the 3 week period, the largest 3 week surge in 5 years.

This morning really feels like a story of heads and tails.

With Seasonal Adjustments now upon us (especially BLS data) and the number of people counted in the work force about to be cut by over a million people as lawmakers allow extended benefits to end next week with no replacement program, the unemployment rate should start sliding to mind-boggling lows, the situation on the ground will be exactly the same, all the magic is done in the corridors or power and their computers, but it seems if the F_E_D wanted to tie their exit from QE and the start of rate hikes to low unemployment, they could not have started the taper at a better time than December with at least 4 months of seasonal adjustments ahead and millions falling off the official tally of who is considered to be in the labor force. It almost has to make one wonder.

I didn't think it probable, but volume today is far lower than it was at the same time Wednesday, far, far lower.

Also of interest, the 1 min IWM 3C chart that was exactly in line with price both Monday and Tuesday's shortened session and kept prices stable and climbing intraday, while longer timeframes showed distribution, has finally broken.