Daily Wrap

Is the phrase, "Head-fake" some conceptual idea that sounds good, but you've never really felt like you witnessed?

Well the last 2 days in the DOW and SPX have been the best 2-day period of the entirety of 2014, in fact the best in 4 months, GUESS WHAT? YOU JUST SAW A HEAD FAKE MOVE IN ACTION!

In case you missed my articles or want to brush up on them again (often you find a new meaning to certain concepts once you have some experience to relate to)...

Understanding the Head Fake Move 

Part 1 

Part 2

Earlier this week I said we were setting up one as we broke below last week's range. Take a look...

 While it would take too long to explain all the concepts that are in the articles, first is the rectangle range that is considered to be a "Consolidation/continuation " pattern and a bearish one because of the preceding trend, down. Retail technical traders will short it, but usually on confirmation which is a break under the range at the yellow arrow.

The next day we put in the start of a "W" base and a closing bullish Harami reversal candle, Wednesday we finished the "W" base and put in a bullish Hammer candlestick (bullish reversal).

We know it's a head fake if we see accumulation which we did at the "W" bottom. The first day's move above resistance (Thursday) or back inside the range is where a lot of shorts would have placed their stops quite predictably. Today was nothing short of a short squeeze and that's one way a head fake move creates momentum or the snow ball effect. "From a failed move comes a fast reversal", to technical traders the break below the range became a failed move Thursday and it created a fast reversal.

 There's the SPX "W" bottom this week, there were plenty of 3C charts showing accumulation as I posted, I have RSI downstairs.

 Still don't believe it? This is the USD/JPY in the candlesticks vs ES in purple, look how ES underperforms the carry cross until regular hours open and then ES/SPX takes off and leaves the USD/JPY correlation in the dust, Why? The head fake created so much momentum it created a short squeeze and that's the head fake move.

If you're still not convinced, look at ES vs the CONTEXT model, only stocks among risk assets were ripping, they left a nearly 25 point gap between ES and risk assets that should have moved with ES, but there was no risk on move in these assets, just an equity short squeeze born from a head fake move.

As far as other assets, we saw some real fear enter the market in VIX futures which oddly we did not see on the way down, TLT or Treasuries also saw a flight to safety...

 VIX futures 5 min with a clear negative made VXX puts a decent play, but now the divergence has reverted to price, however the 1 min futures divegrence is very positive as is VXX, see my late day post for some of those charts...End of Day Charts

This morning around 11 a.m. I said this about VXX,

"I'm liking this more and more. Just looking at the chart, it just looks like price needs to finish a reversal process." 

Well above you see the correlation of VXX vs the SPX (SPX price is inverted so the correlation is clear), at the end of the day we not only had a reversal process fairly well in place, VXX started outperforming the SPX!

TLT is also outperforming its correlation with the SPX, showing some near term fear or flight to safety, it seems like the late day post showing continued negative divergences in the averages and positive in VXX, UVXY and VIX futures seem to point at a quick move early next week (likely starting Monday), I'd guess the 200-day would be the target.

As pointed out earlier, one of my favorite among leading indicators is Yields, they just pull the market to them like a magnet... Wednesday's Daily Wrap had a a section about Yields as a leading indicator, here's an excerpt...

Yields are one of my favorite Leading Indicators because they are so effective and consistent and in any timeframe. Here's a macro view of Yields going negative vs the SPX and the resulting fall in the SPX until the two revert to the mean (green box), then a change in trend often takes place.

At our "W" you can see Y's are positive between the two "W" bottom lows or leading positive and even during this afternoon's flat trade area we see Yields continue to lead higher. Yields are like a magnet for equities, so this appears to be a bullish indication of not only the base low, but what came after.

---------Getting back to today....

 Yields were negative yesterday, they were leading negative today, the short term implication is the green SPX reverts down to Yields in red.

Here's the complete picture with the "W" base, the pop up and reversion this morning and a lower Yield indication or leading indication.

As for currencies, not a lot of movement, the market blew out its correlation to the upside so the SPX/ES should revert back down to the USD/JPY, in the mean time the Yen was working on a positive divegrence today which is a short term negative for the market as they trade opposite.

Yen 1 min 3C futures with a clear negative just before this morning's Non-Farm Payrolls volatility and a positive divegrence the rest of the day despite what the SPX was doing.

You know what out 10-30 and 60 min charts look like and what that means for the market and you know what early next week should look like as this post shows where 3C left off today as it almost always picks up where it left off even over a weekend, so we may have some unique opportunities to A) clean up some trading shorts and B) add to some trading longs (I'm already full).

As for positions cleaned up today (I didn't post yesterday's SPY and QQQ positions either),

The QQQ $85 calls filled at $2.40 for a gain of +27.6%

The SPY March 175's filled at $4.99 for a gain of +19.95%

The Feb IWM 109 Calls filled at $2.61 for a gain of +13% 

The IWM March 109's filled at $3.84 for a gain of  +12%

And the HYG March 93 Calls filled at $.75 for a gain of +15.4%

Again as for Monday/Early next week's bias, just review the EOD signals with good VVIX confirmation.

Have a GREAT Weekend!