Daily Wrap

There's a ton of good stuff on last night's Daily Wrap, it's worth a read because a lot of good signals played out just as they should. For instance, take Wednesday's Dominant Price/Volume Relationship...

"As for Leading Indicators on a near term basis, tonight we have a Dominant Price/Volume Relationship, in most averages it is (by average components), Price Down and Volume Up which is a short term "oversold" condition and we usually close higher the next day."

Or our Sentiment Indicator (part of our Leading Indicators)...

"While not a huge signal, our sentiment indicator (blue) vs. the SPX (green) is slightly bullish, not nearly enough to change the primary underlying trend, but enough to cause a short term corrective bounce."

Or even our seemingly long term 5-day Trend Channel breaking on the SPX, that's a big picture negative, but if you've read my comments on how price responds after a Trend Channel stop out, there's information that is relevant to near term trade. Also from last night's Daily Wrap...

"The big picture shows the SPX stopped out at my award winning Trend Channel, the first stop in the trend. However as I have posted numerous times, after the initial stop you are usually better off just exiting the market (long positions), but there is typically choppy volatility and you may see a move higher, in fact you usually do, but it's not a move typically worth chasing (on this timeframe) as it's very volatile, choppy and rarely is anything more than open market risk or opportunity cost. However we are looking at trading a shorter trend than a 5-day chart."

Or our currency analysis, this from short term Yen signals last night and yesterday...

"The 1 min Yen chart is going negative so we should expect Yen weakness and likely USD/JPY and market strength "

Or the $USD...

" After a choppy sideway trend, we are getting a clear 5 min positive divegrence, confirming the Yen's 5 min negative."

Or our Gold Futures analysis last night after opening a GLD Put yesterday...

"As mentioned last night, gold (YG gold futures) moves opposite the market so the 5 min chart's negative divegrence suggests a move lower in gold (thus the gold put), by correlation this is just more confirmation of a market bounce."

In fact I didn't post the P/L from the GLD Put position that was closed in 2 parts today.

I split this up in to 2 parts in case we got some more downside later in the day, but I wanted to catch the initial downside momentum as GLD was down as the charts were pretty clear about yesterday by -2.20% today. 

In both cases the first fill of the two transactions was the same,  $3.85. The first one I took most off the table, 60 of 80 contracts .

The second transaction I closed the entire position with the remaining 20 contracts. Since the cost basis was the same at $3.15 and the fills were the same at $3.85, the total P/L came to +22% or a gain of $5600.

I also posted this 60 min (and daily) chart of the NDX-100 so you could see the "U" shaped rounding/reversal process.

 Last night's 60 min chart and as you know, the right side of the "U", especially after a head fake (in this case a stop tun) tends to see more vertical momentum.

Here's today's 60 min chart of the NDX-100. This does look like a complete reversal process, but I have a feeling we have a little more time in the range that we called last Friday as being the expected defining feature this week which would be used as a base to launch a solid bounce.

There was also the CONTEXT model for ES that had a top positive target of 15 ES points, Wednesday's 4 pm print was $1770, today's 4 p.m. print was $1785, 15 ES points.

I also posted the primary trend charts showing how much damage there was in the major averages, but also the shorter term charts (multiple timeframe analysis)...

"However, between now and then, we have plenty of short term bounce signals, not at all on the same scale, but enough."

The point being, there were a lot of great charts and signals in last night's Daily Wrap, there often are and we can learn something from them, even from the failed ones so it's worth going back and taking a look once in a while, here's the link again to last night's Daily Wrap.

As for tonight, I want to start in the same place, what I think is the most important place, the USD/JPY and individual currencies. The carry cross has been taking some shots as Emerging Markets get clobbered, EMs had been pumped like the US markets from hot money flows caused by the F_E_D so with tapering chugging along, these countries are seeing a lot of outflows and their central banks are taking action to try to stabilize their currencies. Yesterday Turkey and South Africa both took tightening actions that initially sent their currencies higher and then there was a total FAIL and they fell below pre-CB action. EM is going to be a defining theme for the next several months, but most importantly this is ANOTHER HUGE CHANGE IN CHARACTER AND AS ALWAYS, "CHANGES IN CHARACTER LEAD TO CHANGES IN TRENDS".

USD/JPY

 The 1 min USD/JPY has a negative divergence suggesting a downside move which should take the Index futures down with it, I suspect we'll remain within the range established this week, but don't forget we have a weekly op-ex pin tomorrow.

The 5 min USD/JPY has a positive divegrence in white that lifted Index futures and the market today and a negative divegrence in place now, for me that's enough to suggest tomorrow will see some downside which is really just more of the same of what we predicted almost a week ago for this week, " A wide, volatile, choppy lateral range".

 This is the 60 min USD/JPY with the first serious downtrend since the carry pairs were activated around the November 2012 lows. So far we've made lower highs and lower lows, the recent test did not make a lower low and this is why I think we are likely to see one of the stronger bounces in the overall market of 2014, but still not a change in probabilities. The ornage box is what I predicted Sunday night would be the minimum move in the pair which would lift Index futures and the overall market; I think the chop in the FX pair represents the same thing as the market, a base of sorts to launch a stronger bounce.

Take a look at the SPX.

 Many have been wondering what a bounce might look like if this plays out as expected, the larger the base, the more it can move and in my view when you have bearish undertones starting to sweep through Emerging Markets as well as every other asset class, there's only 1 good reason for a bounce and that's the same reason you see them in a bear market and I expect it to be strong for the same reason Bear Market Rallies are some of the strongest you'll see, THEY NEED TO SHIFT SENTIMENT TO BE EFFECTIVE.  Smart money can't sell or sell short without demand and they can't get the kind of demand they need in the size they need without changing sentiment so a strong looking move is the way to get it, I am not a believer in oversold bounces and overbought corrections, we've seen too much. These moves are set up in advance as we were able to predict and for a reason.

So what does the SPX look like? That might give you a hint a to where a move might go, but I'd think it would have to be fairly vertical on the upside and I doubt we get that on an op-ex day when the market needs to be pinned most of the day.

I always say you should verify any such H&S-like formations with volume analysis to distinguish it from a random price pattern. I created a quick custom indicator to help us do that quickly, we are looking for declining volume on rallies and advancing volume on declines and the effect should be in play by the head and grow stronger in to the right shoulder.

So far, so good.

Now,  the Yen... A quick way to think of the Yen's correlation to the market is opposite, the market moves opposite the Yen when carry trades are in play.

 The 1 min Yen was slightly positive earlier, recently tonight it has gained some momentum which is a negative for the USD/JPY and a negative for Index futures. I closed the GLD Puts today because gold also moves opposite the market and there were some things I saw that suggested gold moves higher thus the market lower so taking those gains was the right thing to do.

The 5 min chart which went negative yesterday and last night allowed the market to put in some nice gains today, volatility is getting more extreme. DOES ANYONE REMEMBER THE MONTHS UPON MONTHS OF NEW HIGHS ON GAINS OF 0.10%!!! IT WAS PATHETIC. Now we are seeing some real volatility, but it remains in this range we expected this week.

The Yen is obviously stemming downside momentum and opening itself up to a push higher which would bring the market down again and continue this chop in the range.

The $USD 5 min was positive allowing the market to move up on the carry pair correlation, but as you can see, it too is losing momentum, just upside momentum.

THIS VERY MINUTE THE $USD IS TRADING SIDEWAYS WHILE THE YEN IS ADVANCING, THIS IS SENDING THE USD/JPY LOWER AND THE UINDEX FUTURES ARE FOLLOWING THE CARRY TRADE LOWER, NOT A SURPRISE, THIS IS WHY I CLOSED THE GOLD PUTS CONSIDERING THEY TRADE OPPOSITE THE MARKET.

 The 15 min Yen chart shows a new positive divergence developing tonight and this was captured at least an hour or so ago so it is even more positive now.

 At the same time the $USD has seen a halt to upside momentum and a negative relative and a small negative leading divegrence are in place as of this capture, the current divergence is a bit more negative.

The Yen 30 min is a longer trend and it is still leading negative, I associate this more with the expected bounce out of this range, but it's not ready quite yet in my view, as I said several times today, "There's not much to do, but on a pullback tomorrow there are shorts that we can take profits in and some long positions we can open for a trade, not anything more than a trade.

The current chart has a slight positive divegrence forming, but still in leading negative position, it's like a wave rolling up the beach as the tide goes out.

 The 30 min $USD has a strong leading positive divergence, this suggests that after we get through with another move lower inside the range (more volatile chop) as that appears to be the case (although a bit mellow in signals for this move), we should see the range resolve with a strong upside move, take a look at the SPX daily chart and you can get some rough ideas if a H&S is what we are heading toward which would make sense. Thirty SPX points on the upside would not be out of the question at all.

Remember the Trend Channel break, it's just like any other channel buster and what typically happens (there's a break in a trendline channel of the SPX too), technical traders expect a failed test of the lower channel, but more often than not we see a move right back inside the channel stopping out a lot of retail.

 The Yen 4 hour chart is very strong. I have said since April and you can check in the two posts linked on the members' site, "A Currency Crisis" that the Yen would rally as the market broke down, well there's a STRONG leading positive divegrence on a strong timeframe.

This is why I can easily tolerate bounces, even volatile ones because I have a lot of evidence of what the true big picture probabilities are.

 Interestingly the $U?SD also has a similar leading positive divergence. The reason I think they are both leading positive is that the Yen will be moving up for several reasons, I think the BOJ totally lost control of their QE and thus the whispers of them looking for an exit strategy when they are only about 30% through the intended program will be one reason. I think the carry trades will all be covered by the time the market really moves lower and a 4 hour chart isn't that far away. Remember, to close a carry trade the last thing that has to be done is to buy the Yen back sending it higher. At 100:1 leverage, with the market sinking fast, all carry trades will see a rush of buying to close them out ASAP as every pip equals 100 pips in leverage against their position.

By that time, the carry crosses will be done and the $USD will move back to its historical Legacy Arbitrage correlation, a strong dollar equals weak stocks. Essentially the $USD correlation will have flipped as the carry trades are no longer a factor.

The daily Yen chart has a very strong leading positive divegrence, the daily $USD looks very similar so I think we are closer to a huge downside move than most are prepared for, a 4 hour chart isn't that far away and the correlations flipped at 4 hour and on longer charts would suggest that strong downside move  in the market would be the reason they are flipped.

As for Index futures, there are some changes on the 1 and 5 min, but I think we can still use what we have from earlier.

 The Russell 2000 Futures 5 min chart is leading negative suggesting a move down toward the lower end of the range, maybe even a more pronounced head fake move below the range, although we do have an op-ex pin tomorrow that should hold until about 2 pm unless something really breaks in fundamentals in which something hits the wires that the market has not discounted. For now I expect a downside move in to tomorrow, again this is why I closed the Gold Puts today and took the gains.

The 60 min NASDAQ 100 futures like the other Index futures have a leading 60 min divergence, this in my view is a direct result of the range this week, the lateral trade is needed as part of a reversal process and it is one reason I suspected we'd see it this week almost a week ago now.

The Yellow area is this week's range, significantly different than the preceding trend and it is as we expected, sloppy, volatile, large swings, but a range. This allows the market to accumulate and the 60 min charts are showing us that accumulation which should be for the bounce I expect out of the range and likely we'll see it move up those 30 or so SPX points, that may even be conservative (however the damn can only hold so long now that EMs are seeing massive outflows, the bull story is over).

As for some other indications, I said I thought the Nikkei 225 would see a bounce as well, lets take a look...

 I'm starting at the 15 min chart because I'm skipping ahead of the range, we can see part of the range this week in yellow and a strong 3C positive divegrence, this suggests the range has been used for accumulation (they are almost always used for accumulation or distribution).

The 30 min chart shows the negative that sent prices lower and the positive that started the range and the leading positive as it continues to develop.

The 60 min NKD (Nikkei 225 futures) shows the negative divegrence that sent it lower and in yellow the range this week and a huge, very strong leading positive divegrence. All of the Index futures are in line with this chart and all of the FX/currency and carry trade charts confirms the same. As I said last night, "It's very hard to look at these 60 min charts and say there won't be a strong bounce", but people get too hung up on the word bounce, this is a very damaged market, when I hear bounce in a market like this all I think of is opportunity because selling short in to apparent price strength but true underlying weakness is a market gift.

As for the short term, right now and going in to tomorrow...

 Today during regular hours the intraday chart (1 min) of the NKD went very negative (distribution), but still on a short term timeframe, we can see the result of that now as the Nikkei futures have moved lower and 3C is confirming the move down.

However the 5 min chart is holding up so far, this would suggest there was just enough distribution to get the futures moving down toward the bottom of the range where they are accumulated and it appears the price weakness is being accumulated.

We'll have to see what the signals are tomorrow, but just like last Friday afternoon we called a range that would likely form a base, I suspect signals will confirm that next week we'll get the upside resolution.


AS FOR THE BIG PICTURE AND WHY I WANT TO SHORT IN TO ANY PRICE STRENGTH, THE NKD 4 HOUR CHART...

The little white box is 2014, you may recall I said the last week of December that there were huge changes in character and since, January has been a horrible month, the Carry trades are in downtrends, the market is holding up a bit better, but it will revert to carry weakness and likely in one fast move.

The leading negative divergence in Nikkei 225 on a chart this strong spells nothing but trouble, this is why I have no worries about a bounce, no matter how strong it may look and why I would use that move to short in to with stocks like PCLN which we waited for patiently to cross above $1200, now we are there and the market is setting up a beautiful entry. GOOG is another, FB, AMZN, AAPL, etc. There are a lot of stocks that need this move to open great looking shorts.

As for shorter term indications, the Dominant Price Volume Relationship today is exactly the opposite of yesterday, Price Up / Volume Down, the most bearish of the 4 possible relationships and it is dominant with 19 of the Dow, 62 of the NASDAQ 100, 767 of the R2K and 288 of the SPX.

This relationship has the exact opposite effect as yesterday's, a 1-day overbought condition;  most of the time the next day sees a close lower.

Other short term indications...

 HY Credit made a move lower as the SPX hit intraday highs today suggesting a move lower very near term, but it's not a very strong signal so it kind of fits with many other signals for a short term move lower and that move staying somewhere around the bottom of this week;s range. A head fake move or run on the stops would be a high probability event, especially with a defined area of support and we see that about 80% of the time before a reversal and in this case a move out of the range and to the upside, but still this does not suggest the market is going to just break down, it's a moderately bearish short term signal.

 Interestingly as HY credit moves fairly extreme, it has been very tame in the range area (red) and has been in line with price, this is not common for HY Credit, especially with TMs selling off, but I think they know a bounce is coming.

High Yield Corp. Credit (HYG) is also tracking the SPX well, but also went negative at the intraday highs suggesting a short term pullback (as in tomorrow).

Looking at the larger view, note HYG went negative just before the SPX fell, also note it has a psoitive divergence in the range at the white arrow.

Yields which act like a magnet for equities are lower today suggesting the SPX reverts to the mean.

You can see how Yields have led the chop of the SPX in the yellow range.

 Here on a 1 min chart of VXX (short term VIX futures) I inverted the SPX's price so you can see relative performance, VXX outperformed the correlation today suggesting it was being bid, but still a small signal in line with a move down Friday.

And the 3C chart of VXX went leading positive at the EOD today, I probably would have traded some calls for a 1-day trade in VXX had I seen it earlier, again suggesting a move lower Friday.

That's about it for now, we'll see what tomorrow brings, but I suspect this range is about to wrap up. Tomorrow is the last day of Jan so it would be conceivable that they try to close the market green for the month, but I don't see strong signals of that or any really.

There are some really interesting set ups in GOOG, FB, AAPL, FSLR and a few others I'll touch on tomorrow.

Also UNG is looking like it is going to see that pullback as the charts continue to deteriorate (but short term, I still love UNG as a long term trend long), the CME also hiked Nat Gas margins twice this week (20% and 26% tonight), so that should weigh on UNG.

UNG's large relative negative divegrence and a recant large leading negative divegrence.

There are a bunch of other interesting charts, but again as I said numerous times, a pullback would be where we''d take action so long as the charts confirm.

That will do it for now, I'll see you in the a.m.