Daily Wrap...

It has not only been a strange week, but it has been strange since window dressing ended around Dec. 27th. At first I thought it was one of those times when the market is just opaque that lasts a day or two, but this is obviously something different.

A few things occurred today toward the end of the day and I looked at the market in a totally different way.

I was chatting with a member and said, "Don't expect Wall St. to show their cards on the NFP print, they aren't that dumb and logistically we are essentially jet skis that can turn on a dime, they are super tankers that take 2 miles to come to a complete stop. Their reaction to the NFP will be seen in felt in the coming week/s and I don't think it will be good.

I think I've just scratched the surface of a change that has occurred in 2 weeks that introduces a whole new dynamic. Putting the pieces together is going to take a lot of study and some time, BUT I CAN TELL YOU THIS, IT'S IN THE AREAS WE HAVE BEEN WATCHING CAREFULLY, BONDS, BOND YIELDS, CARRY TRADES, THE YEN, MARKET CHARACTER AND NOW THE SHIFTING OF THAT CHARACTER.

Many members have asked about "blow-off tops" and the like, yes they occur, but for this to work for Wall Street, they aren't going to send up a flare letting everyone know that things have changed, they''ll be like a thief in the night and looking around today as you saw in several charts, we are not only past that point in which a flare would go up, we are on the slippery slope of the right side of stage 3 in more assets than I imagined simply because using the market itself as a map is a flawed concept.

All of the above was from Friday's EOD Post and there's a lot more there, ironic huh?

As I often say and we have all seen, "Wall Street will never make it easy", or as it was put Friday (above), "for this to work for Wall Street, they aren't going to send up a flare letting everyone know that things have changed, they''ll be like a thief in the night" 

Watching today's action I saw several small divergences try to get a foothold and they were crushed. There are a few things here and there, but a big part of me thought all day about 2011 which looked like this and this was much like now, one of the last times the 10-year yield was above 3% as it has been popping above and below recently and the divergence for this move was there, but no where near the size of now.

Fear is stronger than greed, 7.5 months of gains taken out essentially in 5 days.

As for the averages today, by far the worst showing of the year and keeping the averages in the red for the year...

 SPX Bear Flag break

Dow Bearish Descending Triangle break

NDX takes out 2014 low and closing low

IWM (I had a bad print on the R2K chart) with another bear flag break.

Some of these patterns are textbook technical analysis, that's not normal for this market that has been characterized by head fake moves, but as I've thought for a long time, quickly figuring out the new dynamics is going to be key to being on the winning side of what will most certainly become a difficult, but likely very rewarding market.

Safe haven treasuries, in fact short term Treasury Bills saw so much action today as a flight to safety that the Yield went negative, people are paying to protect their money as they rotate it out of stocks.

There was a clear Dominant Price/Volume Relationship today, Close Down/Volume Up which is the most bearish of the 4 possible relations, but also often signals a 1-day oversold event.

The Dow had 22 stocks in this category, 7 in Close Down/Volume Down and only 1 of 30 in the green, MRK at a +6.48% gain.

I suppose it wouldn't be surprising to know that the Investor's Intelligence Sentiment Survey had the largest bullish reading ever. Another site that we get periodic sentiment updates on, Investor.com was bearish, but the comments from our resident sentiment follower said this today,

"This is the tone today:

"No action in the markets at all today #boring"

Investor.com is really bullish at only 54% bears, haven't seen it this low all last year!" 

12:30 p.m. today

As far as the rest, I thought I'd just take you on a tour of some charts...

First the Carry Trades, USD/JPY which has broken its uptrend and EUR/JPY.

 A closer view of EUR/JPY Daily with 3C.

USD/JPY daily with 3C (yellow line is the May highs that were taken out today, breaking the up-trend.

Daily chart of the Yen, note all of the small bodied candles as downside momentum failed in to the end of the year, leaving the door open for a reversal which we have been tracking on 15 and 30 min charts.

Speaking of which, the Yen 30 min, Enormous volume on Friday, I mentioned something on Friday about the reaction to the NFP print, but it wouldn't be seen immediately, it would come this week, however it looks like they were busy covering their carry trades Friday.

Some of the averages, note what looked like a very strong divegrence last night now looks almost puny compared to today's action.

 SPY 5 min, the leading negative divegrence at the red line is today's action only. As of last night the previous divergence looked substantial.

 SPY 15 min, at the yellow arrow is today's action only.

SPY 30 min, at the yellow arrows are 1-day moves, to the right is today only.

 SPY 4 hour, in last night's post I mentioned that this entire cycle looks like one large rounding process with the Chimney and all, the 4 hour chart along with the others, seems to agree.

 QQQ 5 min

QQQ 10 min

QQQ 30 min

QQQ 4 hour, very similar to the SPY.

 IWM 2 min

IWM 5 min

IWM 15 min

IWM 2 hour, note the hammer at the yellow arrow, a short term support candlestick.

As for VIX futures, it is one of the key assets I've been watching for a change in character. The character of the market moving forward is something I think is essential to understand, whether the same concepts hold or as I suspect, fear changes everything.

 One of the reasons I'm interested in quickly determining the character of the market and whether there are changes and what they will be is because we already have a strong VIX futures just like we have weak Market  Averages and Index Futures. I would normally expect some sort of process, but I can't say that the process isn't already in place above.

Furthermore, you have seen between Friday's post from above and the 2011 chart, Fear moves much faster than greed, that doesn't leave much time for a "Process".

 VXX 3 min giving the kind of signal I've been looking for, but does the parabolic move come down and scratch out a wider short term base? For now I'm content to let the short positions work and that means the VXX/UVXY long positions to do the same, but I'll be watching for underlying trade/divergences that may tell us something is coming.

UVXY 5 min, this could very well be considered the "Process", they are usually in proportion to the preceding and proceeding trends.

 VXX 10 min in a similar situation

And the 2x leveraged UVXY just because I haven't adjusted my VXX chart for the split.

Between the market averages and charts like this above, Friday's commentary that I took some excerpts from at the top of this post, seems to be timely.

While I can't go through each group and each asset, I figured I'd show you FAZ (3x short Financials which we have a position in) vs XLF, the financial sector (3C divergences should be opposite each other on the two different assets just like price).

 FAZ (short financials) 30 min

XLF Financials 30 min

FAZ 15 min

XLF 15 min

FAZ 10 min

XLF 10 min

FAZ 2 min

XLF 2 min.

The degree of the divergences and the degree of confirmation among these two assets that are completely different in volume and thus 3C signals would only confirm if there were similar activity in both, is staggering.

There are quite a few charts for you to go over, I'm just kind of shocked at Friday's EOD commentary and today's action.

I'll check futures later to see if anything interesting pops up. It seems like both EUR/JPY and USD/JPY are finding some support for now.

EOD Market Update

For now I have no plans to change anything, just let the short positions sit and work.

HYG is now starting to fall apart so the arbitrage hold-out looks to be about to disappear.

This market feels a lot like the July/Aug 2011 market that I mentioned last night when 1- year yields were above 3% and the market fell like a rock losing nearly 20% in a snap.

There's an obvious change in character, fear is truly palpable, divergences that start are getting run over.

This isn't to say there won't be volatility, but as I was saying Friday, "In many assets we are coming down the right side of a top", that's how the market is behaving.

So any trades will be based on the merit and open positions allowed to work.

I'll post some charts after the close, but tremendous amounts of damage were done today. A few assets here and there look like they want to try to retrace some of today's decline, but I've seen enough get run over in the last 48 trading hours that I'll believe it when there's significant confirmation.

MCP Getting There (Long Trade)

We've been paying a lot of attention to MCP today not just because it has changed character and the pullback seems to be ending and a basing/reversal process is being put in and not just because I like this one long term, MCP has enormous potential as a long and there aren't many of those left, I like to theoretically have a portfolio that is leaning short with 75% shorts and 10-25% longs, maybe some cash, but I prefer not having all my eggs in one basket.

Earlier I showed a lot of very strong signals from 15-60 minutes that were added to today alone. I also showed an ascending triangle that I thought was coincidental and a 2 min negative suggesting that the base/reversal area become stronger, it appears that's exactly what is happening so I suspect MCP will be a long position within the next day so you may want to consider that if you like it and maybe need some room.

 This is MCP pulling out of the pullback channel, that ascending triangle that is out of place and transitory or coincidental as it looks like a move to the white trendline is probable, a head fake move at the yellow area is possible, but the bigger picture should be the next leg higher for MCP as it competes this pullback in a very healthy way (I won't repost the strong charts, I have posted them several times today).

 The 2 min negative which isn't a big deal as far as distribution, especially when the 60 min chart gained on the upside in half a day today, but does suggest the wider foot print on this reversal process, really a nice looking set up.

The fastest chart, 1 min shows that in to the intraday pullback that the 2 min chart called, there's accumulation of the pullback which means that it is building that stronger foot step as suspected and hoped for.

I'm likely going to take an oversized trading position on this one once its ready, maybe even additional calls if there's a head fake move that reduces call premiums.

I'd set price alerts for a move to the recent intraday lows, that's where we'll be looking at a possible entry or an eventual entry.

Leading Indicators

There's still an obvious Arbitrage set up in play (HYG/VXX).

The SPY Arbitrage model is at +.70, the bulk of that as you can see is the dislocation if the SPY (red line) while the arbitrage component (green line HYG/VXX) remains fairly neutral, which is the same situation we saw on Friday.

As far as Leading Indicators, they seem to indicate as I said before, a panic more than anything.

 HYG outperformance vs SPX

Here I've inverted the green SPX price so you can see the relative performance of VXX, the correlation would normally be 1.0 so they'd move together, VXX is lagging the SPX a bit which isn't surprising if it goes to broaden out a short term reversal base/process as as been mentioned several times today.

Sentiment as I pointed out in last night's post is getting chilly and was leading the SPX, they've caught down to each other in a short term reversion to the mean.

I also mentioned last night how Yields which are an excellent leading indicator were dislocated to the downside and they act as a magnet for equity prices which fell right to the short term regression to the mean, longer term the SPX has quite some way to go on the downside before catching down to Yields.

The Yen is still strong, but on an intraday basis is parabolic, it looks over-extended and it wouldn't be surprising to see it correct which would fit the SPY Arbitrage set up and many other indications today, THIS IS WHY WE DON'T CHASE PRICE AND DON'T MAKE LONG TERM DECISIONS BASED ON SHORT TERM ACTION.

USD/JPY has made a new low at $102.84 from over $105 on Friday, that's a lot of distance to cover in 1 trading day. The BOJ will start becoming more and more concerned the closer the pair moves toward 100 and may step in with some intervention which has either had a very short half-life in the recent past or has not been effective at all.

It does look however, as if there's a consolidation area intraday in this pair and EUR/JPY which hit a new low for the year today at $140.48

Both VIX Futures and VXX or UVXY have seen continued, extra strong leading positive divergences today, it would be great if the price action created enough of a lateral range/base for price to give the same support as these leading positive divergences and a market intraday bounce could achieve that.

The thing that we now need to add to the list of "Things to watch" is now market character and behavior. We know how it has acted in the past with proportional reversal processes, head fake moves, etc. We need to see if there is a new dynamic in play, if so, figure it out quickly and adjust. I doubt things change too much, but I do expect volatility gets really silly.

As for the averages, the earlier 1 min mostly and one 2 min chart positives that were starting to form in the averages are completely washed away.

Index futures on the 1 min chart are a mixed bag, there's nothing there on the positive side that I'd relay on or even post as an intraday update.

This is exactly the dynamic that I described Friday in my complete unwillingness to even consider a long position or a hedge for the trading portfolio which is leaning strongly bearish.

MArket Update / TLT / TBT Update

We have some small intraday positives developing which is completely normal, nothing moves straight down or up.

So far I have 1 min positives forming in all of the Index Futures and on 1-2 min SPY, probably a 1 min on the IWM, it's a bit different, but I suspect that's what it is. There's nothing on the Q's.

The TICK data also looks like there's some attempt to relive the downside pressure. If you consider your correlations like VXX / UVXY and them coming down and broadening out a base as I mentioned a few posts back, this would actually be helpful and give us a stronger set of probabilities to work with.

Today's TICK trends, early very mellow and the downside is appropriate with the move as we have an extreme of -1400, that's 1400 more NYSE stocks trading down than trading up. You can see TICK has popped out of that channel, it may not be done, it may come back down a bit and then move to the upside a bit, but there's a lot of damage from today and as you can tell from the update, even the intraday divergences aren't any further out than 2 min and there aren't any on other averages like the NDX/QQQ.

Treasuries (at least longer ones like TLT) looked a little like a small pullback was coming last night, but overall look strong.

The TLT charts are interesting, it should pretty much move opposite the market so a pullback here would also fit.

I think the TLT charts look better right now than the TBT charts and since TBT is the actual short term trade, I'll probably wait it out and see if it strengthens up. You'll also note that TLT's 5 min isn't negative and that's usually my standard for a short term trade, divergent out until at least the 5 min chart, otherwise, the signals are interesting.

 TLT 1 min, very sudden ben in 3C, already relative negative

The 2 min is really beautiful, if the 5 min chart looked like this, I'd be on TBT right now.

3 min TLT chart looks as it should, migration is making its way through the timeframes, but this is the hang up below...

TLT 5 min, not what I'd need yet.

The 30 year Treasury futures are also negative as they were last night in the short timeframes, 1-15min.

MCP Follow Up

I know it sounds strange to be considering a long position while the market just got real ugly, but there will be bouts of ugly then a test of your patience and belief and then something else. This is why I try to follow objective evidence such a signals and use the concepts we have to put together the trade.

MCP has seen additional strengthening today, the 1 and 2 min charts are still not on board and I consider those important as timing indicators because when they really fly and jump off the chart, there's a good chance what you are seeing are middle men like specialists taking on their own trading positions as they know when an order has been filled and is ready to go as they either filled it or because they're experts in watching the tape, knowing who has been doing what.

My "guess" is that MCP will likely make a pullback on an intraday basis, maybe a head fake move, but it shouldn't be too big or too long considering the preceding trend (pullback). I've considered entering a partial trading position, but right now I think it's critical that resources are both deployed and protected in the right places and at the right times.

 We've definitely broken out of the channel and have that lateral movement that is associated with a reversal process so that's good. I'm not sure the ascending triangle means anything here, it may just be a coincidental pattern, it's really not in the right place any way.

The 15 min

30 min

and growth today all the way out to the 60 min intraday, today alone, so good things happening with that lateral turn out of the downtrend/pullback.

This 2 min chart is similar to the 1 min except has an actual signal that looks like a "W" will be formed which also opens up the higher probability of a head fake move that is just a run of stops below support, although the probabilities aren't especially high, the support has to be noticeable enough for traders to not only be bullish on the asset, but to place stops below the support level and/or shorts with limits below.

I'm going to hold out as there's still an active core position, this is consideration for a trading position and if we get a head fake move, an add-to or new options call position.