Daily Wrap

While Friday's NFP is certainly the most important US macro data for the week, tomorrow's ECB meeting is probably one of the most anticipated events since the F_E_D ended QE, with the expectation among the "Buy the Dip " crowd or the "This time it's different" crowd, being that the ECB will pick up where the F_E_D left off, and run with the sovereign bond QE purchases, despite the fact it's against their charter. UYou'll get no argument from me that something needs to be done with the deflation monster, but ever since I can remember expectations being set, they have been set for the ECBat least making a clear hint of QE at the December meeting (tomorrow). However there seems to be a stand-off between Eu governments the ECB wants to make reforms that it believes are necessary for QE to be of any use (did I mention it is outside their charter?) and the governments themselves unwilling to make any changes, but of the opinion that Draghi should do his job regardless (despite the fact his job doesn't allow for sovereign QE). Recent Draghi and Constancio dovish comments and a lot of them have many thinking some kind of hint will at least be dropped, kind of like, "We're hiring Black Rock to advise us on sovereign QE purchases". However nearly all dovish comments made have plausible deniability, like Draghi recently saying they want to get inflation expectations back up to 2% ASAP, well the market takes that as QE is imminent as it has a tendency to cause inflation, however he's making a common sense statement that the market or elements of the market choose to interpret as QE and Draghi seems to be fine with that, his hands are still clean, he didn't say anything about QE in that statement.


The BOE also has a rate decision tomorrow, it is largely expected to be a non-event and I think there's a bit of a sneaking suspicion that the ECB meeting may also be a non-event, in which case it might actually be quite a market moving event. We'll see, but beware the knee jerk reaction as always, even though the half life of Draghi knee jerks reactions is down to about an hour now.

As for the market today, it's almost like "Second verse same as the first" with IWM outperformance as well as Transports again and NASDAQ underperformance again, but if you saw this morning Update, you can see why, there was simply no positive divegrence in NASDAQ futures unlike Russell and SPX futures, this is why I suspect the NDX's final chance to rotate in is left on the shoulders of AAPL and as far as I can tell, the AAPL charts are deteriorating much quicker and more dramatically than I expected as I was looking for a price/risk concession with a bounce in AAPL to short in to because it didn't have severe negative divergences, but that has changed over the last 2-days and if it gets much worse, the topic may have to be revisited.

The R2K managed to fill Monday's gap today, but both the NASDAQ 100 and Transports (believe it or not) still haven't filled Monday's gap.

In fact, looking at the daily closing chart of Transports above, considering how clean the "Shooting Star" reversal candle (yellow box) was and the following confirmation candle, it almost seems highly probable that the Dow-20 could put in a "Falling 3 Methods" consolidation/bearish continuation pattern. The only thing needed would be a real body (open to close) that remains within Friday's large bearish downside candle like the yellow one I drew in. This is a fairly common candlestick pattern, essentially a bear flag that ends as a bear flag should.

It's not as if the long term charts aren't there for such a move...

 60 min Trannies negative which is why I have left the IYT short open and on the shorter end of the scale...

The bounce divegrence is fading to negative as well, timing!

For more on Transports chart/set-up see yesterday's post covering them in greater detail...
Transports Trade Set-Up / IYT

I am a bit surprised we didn't have worse performance today considering the Dominant P/V relationship yesterday was the direct opposite of Monday's, not quite as strong, but still impressive.

Today we have no Dominant P/V relationship at all. We have 7 of 9 S&P sectors green which could be construed as slightly overbought , but yesterday it was 9 of 9. Today Materials led at +1.47% and Consumer Staples lagged at -.71%.

Of the 238 Morningstar Industry/Sub-Industry groups, 181 of 238 were in the green, that's close to yesterday. Still I would not call it an overbought condition, at least not next to yesterday's prints.

However it does appear to be quite clear that the levers we predicted that would be used for an oversold short term bounce on Monday, Meet Your Levers, which included USD/JPY (JPY pairs) TLT, Yields HYG, VXX, VIX and SPY Arbitrage, which all have been used yesterday and most today, are giving out and giving way.

I probably don't need to post the $USDX and Yen charts re: the USD/JPY pair (If you want another look at them, they can be found in the A.M. Update).

In fact the USD/JPY didn't ramp Index futures overnight like they did Monday overnight in to Tuesday morning, they didn't even have a correlation until the North American cash open and that only lasted until around the European close.

The US open (green) and European close (red), otherwise ES (purple) was disconnected from the USD/JPY, however EUR/JPY seemed to be a better match, (recall I said that the levers would include "JPY pairs") as there's some apparent trepidation before tomorrow's ECB meeting causing the EUR to lose ground vs the $USD. However as mentioned regarding levers, there are negative $USD divergences I expect to bring USD/JPY down, perhaps EUD/USD as well depending on the ECB tomorrow.

Also among the weakness witnessed in levers...VXX...

 VXX acted better than it should have,especially at the close where the SPX ramping in to the last hour "should" have sent VXX well below the red trendline.

You can get a lot more on the VXX lever update in today's post, Levers Update

 VIX (spot) was hammered at the close, just like yesterday, nothing new there.

However, despite the fact I'd much rather see the VIX close BELOW the Bollinger Bands and then back inside, a strong upside signal, the fact remains we have a buy signal and only 3 signals in a year and a half in VIx, the last two were right on and in addition we have pinching volatility via the Bollinger bands indicative of a highly directional move (90% to the upside, which means the market moves the opposite direction).

As for other levers, they were also covered in Levers Update today, but for a closing update, HYG High Yield Corporate Credit ...

 HYG appeared to support the SPX intraday near perfectly, but take a step back and...

HYG's support is falling off rapidly since the Monday morning flame out or short term capitulation event that produced this bounce as seen above in the SPY, DIA, QQQ and IWM charts. When we have HYG divergences, it's best to heed them. Look at the last one Friday and what it led to.

If that doesn't move you, how anyone can ignore the big picture HYG divegrence is beyond me, we rarely get these jewels of Leading Indicators and never have gotten one that screamed like this.

 HYG's 5 min chart is what I said I'd be watching for its failure and today it started a clear negative.

 Meanwhile the intraday chart was even more clear as to its distribution.

The non-,manipulated (not a lever) High Yield credit is also SCREAMING and this doesn't happen often... 

HY Credit selling off through the day today,  ask yourself why institutional money would be selling a risk asset if they thought there was something to this bounce or even the larger stage 3 top area?

 Again HY Credit gave warning Friday for those watching it which led to Monday's sharp decline and it's no better since, just much worse.

On the entire October trend, you can't ignore this kind of divergence between risk assets (HY Credit and the SPX).

PIMCO's High Yield Bond Fund is also giving similar signals with a warning Friday, a bounce yesterday and a warning today.

TLT I covered today, but it's another lever giving way...

 First it dropped sending yields up as predicted as a lever to help the market, but as of today, that's over...

Take a closer look...

 TLT rallying wit the SPX, a Flight to safety Trade which changes the lever of yields and their dynamic.

TLT's longer and shorter term charts are now coming together in positive divergences and I expect additional upside which is why I posted the TLT long trade idea today, TLT Long Also Looking interesting here

The effect on yields which tend to be a magnet for equity prices was as follows...

 AGAIN the 30 year yield warned clearly as it diverged with the SPX Friday, this is why I was so shocked as there was so much action Friday when I thought it would be a quiet day.

As TLT fell, yields lifted supporting the market yesterday, but today as bonds started to come back...

Well you can see Yields now leading the SPX lower intraday, which I expect to continue. The 30 year yield closed below 3% today.

 Another lever bites the dust and with VXX, TLT and HYG out of the game, so is the SPY Arbitrage.

Pro sentiment sold of in to the day as well, especially the close...

Again if you were paying attention, this Leading Indicator gave warning Friday as to what was coming Monday morning and now it's even more clear with a much larger divergence than this (what you see on the chart above-I'm just trying to deal with specific timing of the oversold bounce/gap fill).

As mentioned above, there wasn't much to internals today, the Dominant P/V theme, maybe a little something to the S&P and MS sectors. Mostly it's the very same leading indicators or more specifically levers that were predicted to be the support mechanism for an oversold / flameout Monday morning that are now turning away from that support with most having filled the gaps except Trannies and the NDX which was our initial contention, at least the gap would be filled.

I'll be checking futures again tonight as usual and will post anything that pops up. As these signals are getting much more clear (2 days ago I wasn't sure what TLT was doing and knew it needed a little time to straighten out, today it's clearly doing what was expected), the signals for trades in assets are much more clear. You probably have a pretty good idea of what I'm looking at and I know exactly what I'm looking for.

Have a great night, again, if I see anything standing out in futures tonight, I'll post it.