Market Update

Despite all of the macro fundamental messes building all over the world from credit freeze, liquidity lock ups, the largest Weekly Equity Fund outflow in 2 years, Emerging market outflows, some apparent banking liquidity problems that have resulted in some attempted cash controls, deflation, and just about everything else that could go wrong including countries on the edge of civil war (Ukraine), the market continues to act exactly as we have been forecasting. If you read yesterday's analysis through the day and yesterday's Daily Wrap, we are exactly where we expected, right at the bottom of the range. 

One chart I did want to show you before I forget...Insider Selling

That green peak would be insider selling...

Today is an op-ex Friday (weeklies) and they have proven to be just as much of a pain in the butt as the monthlies with maximum pain pins that typically last until about 2 p.m., by that time most contracts are wrapped up and the market starts moving as it wishes, the price movement the last two hours is fairly irrelevant, it's the 3C movement the last two hours that is important, one week ago today it was that movement that allowed us to forecast (while the market was in the middle of a mini-melt-down) that this week would see range bound trade and that trade would likely act as a base to launch a bounce/rally from, so far that has been exactly correct because unlike price, 3C signals pick up where they left off on the next trading day (even over a 3-day weekend).


As for overnight action, I'm not too concerned with fundamental developments because they are so arbitrary as the monikers of "Good news is bad news " or "Bad news sent the market lower", the one thing that hasn't been arbitrary and has forecasted the market long before any of the overnight news came out was underlying trade that 3C picks up as well as other indicators we use.

So lets start with really the only thing that ultimately matters, the carry trades which I've just narrowed down to USD/JPY as it tens to be the main pair (although the other two take control here and there).

 While the 2014 USD/JPY downtrend is still intact, we do have a consolidation that is very similar to the range in the markets this week. In the red box is the overnight decline in the USD/JPY that we expected or numerous reasons which took Index futures down overnight for our gap down opening.

 That USD/JPY move down came on Yen positive divergences and eventual Yen upside, but as you can see this morning those 3C signals are now tracking negative so it looks like the Yen upside is going to falter soon creating more chop as the USD/JPY stabilizes and potentially heads higher taking the market along with it.

 The 5 min Yen chart isn't outright negative, but it doesn't look great either. The 1 min chart will likely migrate over to the 5 min chart as it gets worse.

While the $USDX 5 min chart (1 min is in line)  looks pretty good so a little Yen weakness changes the USD/JPY dynamic and supports the averages at the bottom of the range which is where we thought they were heading yesterday, or a potential stop run below the range as it is pretty defined and stops should be piling up right below support. A Head Fake / Stop run is an excellent timing marker that tells us an upside reversal is imminent so long as 3C verifies it's a head fake move by showing accumulation of the stops or a positive divegrence.

 The 30 min chart is where the accrued action from this week is building and the Yen (although it has been a champ through 2014 so far) looks ready to take a breather allowing the market to bounce.

As far as targets, I can't say with any certainty, just the larger the base is, the further or longer the move can last. If you saw last night's Daily Wrap, you may recall a chart of the SPX that looks a lot like a H&S top missing a right shoulder. I figured a right shoulder might be worth approximately 35 SPX points on the upside (conservatively).

 On the other side of the carry trade coin, the $USDX's 30 min chart looks great, that's all that's needed, $USD upside and Yen weakness and we should have our bounce. Both charts look pretty mature and this is a significant change in character for the 30 min Yen chart that has been leading positive all of 2014 which has caused the USD/JPY down trend and market weakness through January.

 This is the 1 min USD/JPY right now, not only is price's ROC picking up as the pair starts to move more lateral from the overnight downtrend, but 3C is also showing a more positive signal in the area.

 This is the same asset on a 5 min chart, we can see yesterday's negative divegrence clearly which is a big part of why we were looking for downside today, it's the main reason I closed the GLD puts as Gold has been moving opposite the market and I'm glad I closed them yesterday.

We can also see the start of a positive divergence this morning on the 5 min USD/JPY chart.

 As the USD/JPY goes, so do the Index futures. Here we can clearly see ES (S&P E-minis) with a weak 3C signal overnight during the downtrend, then a transition to an inline or trend confirmation status which in this case is an improvement and then a positive divegrence at the lows.

 The 5 min ES chart shows the chop from most of this week and a positive divegrence developing as well.

TF (Russell 2000 Futures) is one of my favorite assets (r2K/IWM) for a bounce and you can see the relative outperformance of 3C this morning on the TF 1 min chart.

ES 15 min shows the accrual of all the action during the range this week and as I'd expect to see, we have the strongest divergence right now as it is leading positive while ES is near the bottom of the range, this is where smart money accumulates so the strong signal there is encouraging as far as our outlook goes, but remember it's a bounce, a tradable bounce, but still a bounce. If I had only 1 trade I could make it wouldn't be longs for the bounce, it would be selling shorts in to the bounce/price strength where I can get the best entry and lowest risk, that's the real big picture. The long trades I've been putting together are just hitch hiking on the way to add a few extra % to the portfolio, they aren't the big picture.

 And of course the 60 min charts leading positive for Index futures suggests we see a strong bounce and there's no other reason to set up a bounce unless it's going to be strong, it is there for a specific purpose and to fulfill that purpose it needs to be strong, convincing, it needs to get dumb money bullish and buying. Should things go the way we expect, I'd expect the following week's insider selling to be even higher.

The IWM is one of the best looking charts and cleanest. This is the 1 min chart showing the negative divegrence yesterday in to the highs, telling us the market is likely going to head down to the bottom of the range. We had a number of other indications as well, but this is a clean picture of underlying flow.

Smart money doesn't accumulate chasing price higher, they knock it down and accumulate on lower prices, they sell in to higher prices.

Here's the IWM 5 min with this week's range in yellow, the negative divegrence preceding the range is clear as is the positive divegrence in the range, exactly what I wanted to see.

 SPY 1 min with light distribution at yesterday's highs to knock prices back down to the accumulation zone.

And the same in the QQQ.

You might have noticed as well that most 1 min charts today are showing confirmation. That confirmation will likely continue with a few adjustments here and there as the max pain level is moved around a bit as the day goes on, by 2 pm we are usually done and that's when we really want to watch the divergences.

I'll be looking around for actionable assets, there are bound to be more than a few. So far, so good.