Daily Wrap

So it probably is pretty well known as to what caused the Yen to drop overnight, the carry crosses to pop and Index futures to rock, the PBoC injecting 75bn CNY in 7-day reverse repos and $180bn in 21-day reverse repos which expire right around the time some trusts and thus the shadow banking system are expected to FAIL.

As noted last night, I suspected the initial knee jerk to all that extra money sloshing around courtesy of the PBoC would give way to the question "Why" as they have been surgical in trying to manage real estate inflation, but apparently there are bigger fish to fry at the moment and we have been covering the interbank liquidity problems for a couple of months.

John Hilsenrath has conducted some interviews, presumably with F_E_D voting (F_O_M_C) members and has been sent out to warn the market that another $10bn will be tapered at the end of the month F_O_M_C meeting despite the absolute FARCE that is the unemployment rate. The excuse is they see the economy recovering, I don't know what their looking at, I suspect it has a lot more to do with the odd, (first time I ever heard of it) inter-meeting questionaire for voting members in which one of the concerns was capital losses at the F_E_D which is essentially what I've been saying for almost a year now, they are a strange corporation, but they are a for profit corporation with shareholders.  My gut feel is they'll taper no matter what happens and as long as Congress leaves the extended UE benefits out of the budget,, than the unemployment rate should fall well below the F_E_D's target of 6.5% (it's at 6.6% down from 7% as of the last month's Non-Farm Payrolls), the more people who drop off (somewhere around 3 million expected), the smaller the work force and lower the u.e. rate.

As far as what I'm watching for, it's more or less timing signals.

Here are a few examples.

 I've suspected since April when the BOJ embarked on their massive QE that the Yen would rise as the market falls, this is partly or initially due to the closing of carry trades, but I also think the BOJ's QE has gotten away from them, it was too large, too ambitious, time will tell, but the positive divegrence in the Yen 4 hour chart is plain to see.

Even on a daily chart it's leading positive.

Thus the continued downtrend in the carry crosses like USD/JPY and continued move up i the Yen will be important markers for the market's state (I do expect a lot of volatility at USD/JPY $100 as I think that is the line in the sand the BOJ cannot tolerate  being broken to the downside).

As noted many times though, because of the leverage used in carry trades, slight losses become huge losses and panic takes over as we saw Monday, Jan. 13th.

XLF/Financials are choppy in the 1-2 min timeframe, I'm looking for some clarity there as we move out to more important timeframes as early as 3 minutes, the 3C trends are clear.

 XLF 15 min and it gets worse.

Index futures have their own problems which are more detailed using the market averages, but we don't often see 1 hour divergences with futures (Index), the first one led to the drop at New Years as we had the worst start to January in 6+ years. The next one at the second "D" from the left led to that panicked Monday and now we have a new leading negative low and largest negative of the year. It's really a matter of the short term charts connecting with the intermediate and long term that gives us good timing flags as well as some market behavior like head fake moves.

 The 60 min Russell 2000 Futures don't look any better, you can see the negative in to the new year and a large leading negative currently with new 3C lows for the year and then some.

So the charts in the 5 -15 min range are important. I'll note that the Yen's 5, 15, 30 min positives saw no damage from last night.

 Charts/Trends like these Short Term VIX futures are impressive, like this 15 min.

 Or this 30 min.

We've always had very strong signals in VXX / UVXY before they are ready to make a move.

With the 5 min chart moving from confirmation to leading positive, we only need 1-3 min charts to fly and we have an excellent signal that should trigger the larger divergences above, remember the VIX trades opposite the market.

It seems there was an effort to bang the close today that I mentioned, it didn't work out too well, but they tried.

 In blue is HYG Credit (an arbitrage asset used for short term manipulation), it was pushed up in to the close, for the Arbitrage to work, VIX futures, VXX need to be knocked down.

It was obvious in the 1 min actual VIX futures that they were working on that in the afternoon.

This is the VXX vs the SPX (green) and while there was some weakness as VXX failed to make a higher high around noon and as the close saw it knocked lower, the SPZ didn't get that closing punch they were trying to create.

In fact there were some ominous signs today, Credit was not in a mood to take any risk today as it has been disconnected for some time.

Both HY and IG Credit were sharply lower in to the market's afternoon bounce we spotted earlier today.

Yields are also growing problematic as they tend to act like a magnet for equity/index prices.

Yields  (red) vs the SPX, there are a number of smaller divergences that are eclipsed and appear to be in line when this large divegrence to the right is scaled in, Yields haven't recovered since that panic Monday and Equities should revert to the mean as they have to the left.

As you probably know I've been following 20+ year treasuries (TLT) and 30 year T futures (ZB) for almost a year, there's something I see there that I don't in the 10 year and it looks like a long term trending trade, thus I've been looking for a pullback to look for a decent entry, I mentioned today that TLT has a 5 min negative divergence suggesting a constructive pullback. Take a look at the 30-year Treasury futures though.

 You've seen the long term TLT charts, here's the 30 year Treasury futures long term daily chart with a huge leading positive divegrence, I'd probably take it here if I had no other choice, but I think we can get a better entry. As I mentioned with the TLT signal today...

The 5 min 30 year futures have the same pullback signal, not big enough to be damaging, but large enough to create a pullback which I suspect will be accumulated as it has been for the better part of 2013.

Today ES tracked the AUD/JPY carry cross,

 AUD/JPY (for obvious reasons with AUD being up on the PBoC action and the Yen being down), the FX pair are the candlesticks, ES is the purple line, a near perfect track, however like the other 2 crosses, since the new year, it has been a consistent downtrend.

AUD/JPY. I showed USD/JPY and EUR/JPY last night, all in downtrends with the Yen gaining off the New Year's low.

So, it's really watching for the timing indications, and where we can slip in particular trades at the right moment. MCP which is one of my favorite long term longs that isn't correlated to the market offered what looked like a decent option/call entry as I prefer to enter them on downside momentum with positive divergences as the premium tends to be cheaper. As for filling out the equity long trading position, I'd just like to see a little more of a reversal process in place as "V" reversals are not common.

Finally, after months of waiting, PCLN broke the $1200 mark which is what we've been waiting for.

It took 7 trading weeks to finally get there when PCLN has been a fraction of a percent away, only $1.50 at one point in December...

I wouldn't short PCLN yet, this is just the psychological level it was bound to break as well as a clear resistance level, it makes for the perfect head fake.

As far as why I'm interested in shorting PCLN...

 PCLN 4 hour

PCLN 1 hour

From the long term (very strong) 3C signals that move from perfectly in line or trend confirmation, I think the leading negative divegrence above on these two important charts are more than obvious.

 While there was accumulation of lows on this 5 min chart, it was never the divergences that had us expecting for MONTHS a move above $1200 where it would make for an excellent short, it was the concepts of the head fake and centennial numbers, clear resistance and other mass psychology concepts we use to set up trades in advance.

Here's the 1 min chart with decent confirmation today. Now it's just a matter of letting retail step in as smart money hands off their shares as they have been engaged in distribution for some time now. The candlestick and volume today suggest PCLN will see some more upside before it's ready, but we should start seeing clear distribution in to that upside and somewhere in the area we should find our ideal entry at the best price with the lowest risk. If the 60 min and 4 hour charts weren't there, I wouldn't even be thinking of shorting PCLN, but something was obviously drawing me toward it timing wise as I opened a half size put position Friday in anticipation of adding to it on a break above $1200.

It's the head fake at this point or the failed breakout that creates the steep downside momentum as $1200 has just been so obvious for months upon months.

As for less exciting, but still important indications, breadth indications today weren't bad, but the trend since the start of 2013 has been horrible.

There were no dominant Price / Volume relationships among the component stocks of each average so no short term 1-day oversold/overbought signals.

SKEW(the Black Swan Indicator)  is once again rising.

The 140 range historically according to the CBOE (they also put out VIX) has been where Black Swan market crashes have been noted, it's really the rate of change in price that has caught my attention even more so than the levels, "CHANGES IN CHARACTER LEAD TO CHANGES IN TRENDS".

Finally, as mentioned earlier, I like the 5 min Index futures to be clear as a timing indication for trades, they are only as clear as the confirmation between the 3 or 4 futures. Right now ES is leading positive a bit, NQ is almost perfectly in line and TF is leading negative a bit, it's not at all the quality of signal that stands out for me, but it is what it is and as such I want to be a bit patient until things like these charts all go clearly negative and others like VIX futures (VXX ) confirm by giving strong intraday leading positive signals as the more important longer term ones are already in place.

The Yen is obviously a big one to watch as well as the carry pairs in general, I'd like to see them maintain the downtrend started at the first of the year, although USD/JPY did break its uptrend in a more serious way when it took out the May 2013 highs. These are all hints of what smart money is doing and when they are in panic mode as we saw that Monday (Jan 13th), that's when you get gaps down that take out 3 or 4 months of longs in a single morning.

I'll check futures again later tonight to see if anything interesting has developed, but I think two things that are going to start weighing on the market are 1) the Chinese liquidity situation/inflation (watch for them to strike out with saber rattling toward Japan, they always do when they need to focus the population's discontent somewhere besides the government). 2) the probability that traders front run the F_E_D as it "seems" obvious they are unwinding QE, but that's not what the pros are really worried about, it's the initial guidance of rate hikes 6 months after QE is unwound and the 6.5% unemployment goal with the labor pool falling so fast and the unemployment rate dropping so quickly. 

Those are the conditions in which the F_E_D said they'd remove accommodative policy or actually they said they'd leave it in place until those targets are hit. For retail accommodative policy is QE, for smart money it's ZIRP, interest rate hikes and the fear of them are what has driven the 10 year yield above 3%, it happened once last year as the summer QE Tapering was very hawkish in the minutes and the time before wa late July 2011 followed by an almost instant -20% drop. We've been popping above and below the 3% mark for weeks now.