Important Market Update-Looking At A.M. Trade, Looking Forward...

As I said last night and almost every Friday, "It doesn't matter what price does, especially after 2 p.m. on an op-ex Friday, it matters what 3C does and 3C action almost always picks up right where it left off on the open of the next trading day (today)".

So far that's what we have seen. I'll get to charts in a minute, but first some events. 

*PLEASE CONSIDER ALL OF THE CHARTS AND INFORMATION BELOW WITHIN THE CONTEXT OF OUR MARKET EXPECTATIONS FOR THIS WEEK WHICH ARE ROUGHLY A BOUNCE IN TO WEDNESDAY-ISH (DEPENDING ON THE KNEE JERK REACTION TO THE F_O_M_C MINUTES WEDNESDAY AFTERNOON AND OUR EXPECTATION OF CONTINUED DOWNSIDE THROUGH THE LATER PART OF THE WEEK, ESPECIALLY KEEP IN MIND FRIDAY'S NON-FARM PAYROLLS WHICH WILL HAVE THE BIGGEST EFFECT ON PERCEPTIONS TOWARD THE NEXT F_O_M_C MEETING AND ANOTHER POSSIBLE TAPER ( READ AS POLICY TIGHTENING WHICH THE MARKET WILL REACT VIOLENTLY AND NEGATIVELY TO.


In similar fashion to China's overnight miss in Services ISM (coming just after a miss in Manufacturing ISM), the US just saw a nearly identical chain of events with this morning's 10 a.m. release of Services ISM seen below with commentary from Bloomberg.

Released On 1/6/2014 10:00:00 AM For Dec, 2013

Prior Consensus Consensus Range Actual Composite Index - Level 53.9  54.8  53.9  to 55.1  53.0

"Highlights
New orders moved suddenly into reverse for ISM's non-manufacturing sample, pulling down the index by 9 tenths to 53.0. New orders, the leading indicator in this report, fell to 49.4 from 56.4 (Any reading BELOW 50 equals CONTRACTION) in November. This is the first sub-50 reading for new orders, which had been especially strong through much of the second half of last year, since July 2009.

Other readings include a second straight contraction for backlog orders, a slight rise for input price pressures, and a slowing in export orders.

But coincidental and lagging indications are positive including a steady reading for business activity and a big bounce back for employment, up 3.3 points to 55.8. (This may be VERY important for Friday's Non-Farm Payrolls, Remember the F_E_D's taper which is being read as a policy tightenting tool by Wall St. is llargely dependent on employment readings, a stronger reading makes it MORE likely the F_O_M_C will taper again, which the market views as tightening, the market WILLnot react well to a strong NFP on Friday nor another F_O_M_C QE Taper).

Today's employment reading may lift expectations for Friday's employment report but otherwise the report hints at an early 2014 slowdown for the economy."

***The key take-away here is underlying economic weakness for Q4 as we saw Q3 was stuffed with inventory, the natural expectation was the higher Q3 GDP print due to inventories would naturally cause a lower Q4 GDP print as they fall off which is what they appear to be doing, in addition New Orders or current business conditions are dragging lower. Economically this isn't good for the US, but what everyone is most concerned with is the taper. 

The fact that the Employment Sub-Index was strong, points to the probability of a strong Non-Farm Payrolls print on Friday, at least that's the perception. Good news in the NFP employment situation is bad news for those looking for the F_O_M_C to hold off on further Tapering, now seen as being worse than just a taper and lack of QE, but being read by Wall St. as actually policy tightening which Wall St. has never reacted well to.***

The USD/JPY "mini ramp that occurred from Bernanke's Friday speech was short lived...

Here we see the Bernanke ramp in the carry cross and the loss of that ramp overnight.

It seems S. Korea is once again vocally protesting the Yen's weakness as it causes trade export difficulties for S. Korea.

The Wall St. Whisper Consensus is that the BOK (S.Korea's Central Bank) may cut interest rates by 25 basis points as early as Thursday.

This would have the effect of sending the Yen higher and the need to cover carry trades would be even greater, it would almost be like a short squeeze in the Yen except when dealing with carry trades, the leverage is enormous, from a very conservative 10x to 100x and in some cases even more so a 1 pip (very minor move) in the currency could have the effect of a 100 pip move quickly sending carry trades in to the red, causing a violent squeeze to cover the trades.

***Once again, the Key Take away is the timing with regard to our expectations this week. A move higher in the Yen later this week or just around Wednesday/Thursday where we expect market weakness to resume, would have the effect of sending the carry trades lower and the market with them.

It's the timing of these events in concert with the expectations we already had from the charts. The only big surprise I can see is the market discounting all of this before it happens, in which case it would have the effect of running over the short term bounce expected early this week****


Gold's inverse correlation to the market and this morning's Flash Crash...

 It's not like we didn't expect a move lower in gold as we expect early strength in the market this week as the two have an inverse correlation. As of last night I didn't have the Gold Futures evidence for a move lower, I did in GLD, but as of this morning it's right there on the 5 min chart. Again the start of this weakness plays perfectly in to our expectations or market scenario for this week.

 This morning's flash crash in gold futures is ASSUMED to be a "Fat Finger " trade, they always assume a fat finger when they can't explain or understand it, I'm not so sure as we had expectations as late as Friday that gold would move lower, hence our long in DGLD (3x short gold) as a short duration trading/hedge position.

However, I only expect a pullback as the strength on the 60 min chart of GLD suggests, any pullback is likely to be short lived, again consider the inverse nature of gold's correlation to the market and our expectations for the week as well as timing, the charts above fit like a glove.

The Yen
While the short term Yen chart suggests one thing for near term trade, the 30 min chart's very positive character and essentially a consolidation right now, fit perfectly with a possible BOK interest rate cut and a squeeze in the Yen which fits perfectly with downside market expectations for later in the week.

As for the market itself, the early weakness I can't explain other than where we left off on Friday with 3C charts.

 As mentioned last night, the EOD action in the 1 min 3C charts was negative, AS I SAID LAST NIGHT, I EXPECTED EARLY WEAKNESS IN THE MARKET BECAUSE OF THESE DIVERGENCES AS 3C TRADE PICKS UP RIGHT WHERE IT LEFT OFF FRIDAY AT THE CLOSE.

THE QQQ SHOWED THE SAME FRIDAY WEAKNESS

AS DID THE IWM.

However the 3 min SPY chart still suggests early strength this week even after the initial weakness. *Overall, the SPY looks the best, the QQQ and IWM don't look impressive at all, If it weren't for the SPY and several other areas that O posted late Friday, I would feel differently about the market very short term.


So far ALL of our expectations for all markets from gold to futures, are right on track for opening trade. The next thing we are looking for is short term strength to be replaced by market weakness, in fact it may be severe weakness given the NFP and F_O_M_C minutes this week.

This is EXACTLY why we put on and left open the positions we did last week (Friday), we saw what the expectations were and prepared for them in advance.

The REAL surprise factor and d anger this week is that Wall St. sees all that we see and more, they may move to discount the information long before any market moves are made (the divergences get run over). The only way I see this as being mitigated is if Wall St. NEEDS the early week strength for positioning, otherwise it makes sense to be the first to sell...

"HE WHO SELLS FIRST SELLS BEST".

More analysis and trade management/ideas on the way. So far we are off to the expected start for the week which is good, it means our signals from last week were right on.