Daily Wrap

Despite the first day of the new year being one of the better performing days historically, we took the signals Tuesday (despite the EOD ramp job) and went with it and were rewarded this morning as Asian futures were down handily last night, I had little doubt we'd see the same in the US.

Today we had some intraday divergences, positive, but this isn't of any concern, I just hedged the trading portfolio with AAPL and DGLD rather than close anything as I don't feel it's wise to run against the major signals right now.

I also opened a couple of calls, most of you know I use options as a tool, not a trading methodology, the right tool for the job and in this case, my concern is that any longs are going to be short lived in duration so the leverage of options makes the trade worthwhile on the profit front.

Today was the largest first trading day of the new year since that nasty year remembered as 2008 when it all just seemed to fall right in to.... the gutter.

Even though intraday charts were moving toward what looks to be either a little more lateral (process) or a move higher, maybe to fill the gap, maybe something else, the distribution today which has some momentum from earlier in the week really stood out, thus the reason I didn't want to close any trading shorts.

To give you a feel of the true underlying trend...

 This is the SPY 15 min chart from the Oct 9th cycle lows (there was about two weeks of accumulation before 10/9 and the low of 10/9 formed a small island bottom as well as a head fake to the downside before moving higher). There's distribution in to late November/early December and then a very small accumulation patch and what I consider a head fake move above the range from November, remember a head fake move is proportionate with the preceding trend and the bigger it is, the more effective it is.

In yellow, we see a leading negative divegrence from late last week/early this week, it's 3 days (yellow), the leading negative divergence in ornage, that's all today alone!

Take a look at the same divergence without all of the scribble on the charts and remember the deeper, single divergence is today alone on a 15 min chart!

 That's a new leading negative low that stretches back at least 4 months.

On a 30 min chart looking at the same period/cycle we see the same divergences, except the yellow leading negative is 4-days and the second part of it is today alone, it's rare for a chart as long as 30 minutes (even 15 minutes) to lead so much in one day.

Again, look at the 30 min without all the scribble...

That new leading low in a singular line is TODAY alone. You can see that there was serious distribution in to Tuesday's EOD ramp job, so as I often say, "Price is misleading", you have to be careful of how much weight you give it. You can't judge the market by price alone, we look for as many pieces of the puzzle as we can. 

While we can see a move up a half a percent and feel, "When is this ever going to break", I've seen the market take out several months of longs on an a.m. gap and there's nothing they can do about it.

As for Index futures, there's information there too.

 ES/SPX futures, intraday/1min showing distribution late Tuesday in to the close and the same this morning, you'll see when VWAP is applied as well. Later in the day some light, "Steering" accumulation. Note the head fake move below the yellow trnedline, I'm telling you, these are great timing markers because we see some form of a head fake move in about 80% of all reversals, it doesn't matter the time frame, but as mentioned above, they are proportional so you can get a feel for what we are looking at, 

 The stronger and much more important 5 min ES chart shows strong (considering the volume) distribution Tuesday afternoon, thus I'm perfectly happy with the decision to add to shorts and to close the AAPL hedging long. Note the increased distribution in to the EOD ramp job. Like I often say, price can do anything over the next day, a holiday or the weekend, but 3C most often picks up right where it left off and in this case it left off with distribution in to the close which led to a gap down, not a move higher in price.

Otherwise, 3C is in line or trend confirmation.

/TF, the Russell 2000 Futures on a 1 min intraday chart show the same distribution late Tuesday, then accumulation today (note that it's in a flat range and again there's a head fake move).

 Looking at a longer chart, as I said earlier this week, it's not as common for Futures to see long term divergence migration, but here we have a 60 min leading negative in the one average that should lead the market in any risk on move.

AGAIN, note the smaller accumulation and HEAD FAKE move toward the left before price made a move higher, then a large relative negative divegrence and a large leading negative divegrence which is once again, characteristically in a flat trading range, THIS IS WHY I WARN TO BE ALERT DURING DULL MARKETS LIKE THIS RANGE, IT'S OFTEN WHERE THE MOST ACTION IS OCCURRING.

Like the SPY, we have another leading negative divegrence striking a new low. this is the kind of detective work I'm talking about when warning against basing opinions, trades and emotions which are the root of everything, on price alone. I just showed you completely different markets showing the same exact signals, that's called probabilities and that's the best you'll ever get in trading without breaking the law.

Here's the intraday ES/VWAP (Volume Weighted Average Price). VWAP is an institutional tool that market makers and specialists use or have their fill for an institution or fund essentially graded, if they fill a buy at VWAP or below, they'll likely bet more business, if they fill a sell or short sale at VWAP or above, they are likely to get more business.

I marked "S" for areas of selling and "A" for areas of accumulation as seen above in both the ES and TF 1 min charts.

And the catalyst, I doubt you'll here it on CNBC (feel free to email me and tell me why they are saying the market was down today), as I have been talking about a lot, "Watch the Yen, Watch the Carry Trades"

 5 min accumulation sends the Yen higher, but there have been larger positives in play, we saw them last week and then we heard from BOFA that they covered or closed out their USD/JPY carry trade, apparently one of the reasons we saw accumulation in the Yen. This shorter term accumulation sent the Yen higher as carry trades were likely closed, as far as the short term intraday positives we say, it may VERY well have to do with a loss of momentum in the Yen's upside and a negative intraday divegrence, but this is temporary unless the BOJ intervenes, watch USD/JPY $100 for BOJ intervention.

 The much more serious 30 min Yen futures has a large leading positive divegrence, note once again the "W" reversal process to the far right before the Yen gained and right before the move, the head fake move hitting stops.

 The result saw the carry cross of choice heading nearly parabolically vertically down, this can be another reason for the short term positives as parabolic moves (think about our trade/short in TWTR that we covered on the 30th, that entire trade was based on the parabolic effect.

 The USD/JPY also lost ground, a move below $100 is where the BOJ gets upset and may try to take action to halt the rise of the Yen.

This shows EUR/JPY in red/green candlesticks and ES in purple, you can see that the carry pair still has a correlation, albeit negative this time and ES actually underperformed even the carry pair today.

 Here we see that accumulation in VIX futures even though earlier this week and last week they pinned VXX with small steering distribution to keep the market from falling on Quad witching, Window Dressing and apparently End of Year gains.

Note the congestion today taken with the small positive divergences in the averages, that makes the move we prepared for today more likely.

 Spot VIX and its Bollinger Band Squeeze look to be VERY much still in play. As suspected, the Hammer which is a candlestick denoting support or an upside reversal, that held at the lower Bollinger Band has seen a move higher as the demand for the protection of VIX futures ran counter to the market correlation, I mentioned early this week that it's unusual for there to be a reach for protection as Window Dressing was over and there were only a couple hours left in the year, why would anyone need to hedge their longs for the end of year? Well I don't think that is what it was.

On a short term basis, Tuesday's candle, even though it was stronger than the correlation by closing higher, did leave a long upper wick which shows some resistance and today the candle formed a star which is a loss of short term momentum so a slight pullback here would make sense with what we saw in the averages and Index futures as well as VIX futures, but over the bigger picture, I think we'll see the VIX shoot vertically higher as the market moves in the opposite direction, just go back and look at the SPY 15/30 min charts and Index futures 60 min charts.

Early today the benchmark 10-year yield (not the bond above) was over the 3% line in the sand, this causes mortgage rates, car loans and many other interest rates move higher.

You may recall early this week and late last week it was my opinion that in the short term, we'd see treasuries move higher and yields lower, the 10-year closed below 3% today as the 10 and 30 both rallied higher as you can see, but the 3C divergence doesn't look good for continued upside strength.

There are longer term positives in both the 10 and 30 year treasuries, but I think charts like this 15 min negative are migrating out to longer timeframes which means it is likely that we hit 3+% and it becomes a problem for housing/mortgages and other rates, but we were right on in calling a bounce in treasuries which lowered the yield much to the F_E_D's relief I imagine.

As for Leading Indicators...

 This is HYG (High Yield Corp. Credit, an arbitrage asset) seeing a strong move higher at the EOD, which fits perfectly with our observations and positions opened today.

This is the 3C chart, it's in line, but not much more.

And the long term HYG chart leading negative and especially recently breaking away from the SPX.

Intraday High Yield Credit also makes perfect sense with what we saw and prepared for, THIS IS WHY I SAID I LIKED THE VISIBILITY IN THE MARKET TODAY.

However on a slightly longer timeframe, it's clear HY Credit is not taking the bait.

Long term like HYG, Credit has been selling off all year, where credit goes, equities will follow.

 Our professional sentiment indicator intraday also went positive, expecting the same short term move we are.

However long term, there's no doubt where sentiment stands.

I'm not sure if HYG is being used as an arbitrage asset for tomorrow as VXX is right in line with the SPX which has price inverted on this chart to better judge the correlation. However as seen above, VIX futures look a little sloppy and range bound so we may see some deterioration short term in VXX to activate the arbitrage scheme, the market doesn't have much else as the Yen advances, but recall that the very short term looks like a small pullback there too.

Yields are in line, reversion to the mean so they are not of much help to the SPX.

As far as futures, Asia looks to be in the same trouble as the US. this is the 4 hour Nikkei 225 divergence

Not good news for the Nikkei 225 futures, but again short term...

We see the same distribution late Tuesday and some accumulation today, I'm not sure if it's enough so we may see Asia turn down first.

Remember the China trade we are watching for an entry, FXP/FXI.

Other than that, in futures right now, the Index futures aren't looking great on 1 min charts, but they rarely hold overnight, they just don't look good right now, I do suspect though that this is transitory as we have enough confirmation for a short term move.

The thing is, when things like the carry trade go against you and you are running 100:1 leverage, the market can just run over these divergences that are on intraday charts, if you are seeing your leverage funding going against you, you'll close any longs and close the carry in an effort to save your portfolio which can get out of hand real quick, this causes a snowball, cascading effect which is the reason I hedge trading shorts rather than close them and go long for a short trade, you have to keep those probabilities in mind.

If anything changes later, I'll update again.

Some of you have asked about TWTR, we opened that short at the top and covered on the 30th at the bottom, a fine trade, I see a bear flag, but I suspect it gets head faked, then I think we'll have another shot at TWTR short, the long term charts are negative, but the last trade was based 100% on the parabolic failure effect, that's why we have concepts and use them.

Have a great night!