Following the Money

That's what we try to do here everyday any way, but I mean in a different way.

Index futures were up overnight, then if you follow the money, it's clear to see what happened. As an aside, the gut feeling of yesterday's action being pinned for January monthly option expiration seems to be pretty close to correct in all of the averages except the Dow as all are within yesterday's range.

 USD/JPY led Index averages higher overnight until 5 a.m., long before any US macro-economic data hit, you can see the clear negative divegrence. Remember this chart and compare to the ES chart overnight (below)...

The EUR/JPY (5 min chart) went nowhere, flat and volatile/choppy and then dropped with USD/JPY.

 AUD/JPY was even worse as it trended down all night and then fell, remember ES has been following the AUD/JPY correlation much of the week.

 ES 1 min overnight saw the same negative divegrence building IN TO the 5 a.m. hour, just like USD/JPY

As for the instigator or the most important leading asset in the carry crosses, the Yen.

 The Yen 5 min went positive again yesterday, this is only a slight flag pullback and then the move higher sending USD/JPY and Index futures lower this morning (5 a.m.)

 The Yen 15 min from a negative divegrence/pullback to a positive mid-week that kept building and then the tell-tale sign of a flat trading range with more accumulation, then up goes then Yen this morning (early)

The trend of price and underlying trade in the Yen looks very healthy, this is not good for the carry crosses, nor the Index futures, which may not be reflecting much early on as it's a monthly (and January) options expiration day which we commonly see a max-pain pin until about 2 p.m.

The 4 hour chart (I don't think coincidentally) shows a bottom right at the New Year as all window dressing is complete, the divergence here explains why the earlier timeframes remain so reliable in positive divergences even after pullbacks. This chart is like playing poker, but knowing the deck is stack and how it's stacked before the hand is even dealt.

 What's most important for many FX traders and scariest for carry traders is the 2014 trend, higher highs and higher lows, not a couple, but now an emerging trend.

ES 15 min, as I pointed out this week, there was no positive divergence at the "V": reversal which is inherently unstable to begin with, but the reason why is because there's no time for the reversal process to allow for accumulation. I stand by my theory that this is a dead cat move so middle men and liquidity providers such as HFTs (to a lesser degree) can recoup losses from inventory at higher levels before this week's plunge as the market looked bullish that morning with the NDX going green on the year just before the plunge.

ES 30 min shows the divergence in to that plunge which I pointed out Sunday night and the same type of divergence in to this dead cat bounce.

There are certain assets I need to see move before I'm willing to move on new positions, but I think that has been smart, this just looks like the volatility expected this week.

More to come...