Daily Wrap

This afternoon was different than any post-pin iop-ex Friday I can recall in some time, usually the market is moving up, especially in to a long weekend, but not so today, it followed the 3C indications. There was a clear rotation in to bonds.

All of the carry pairs since the start of the year have and continue to make lower highs and lower lows, we know that last week the USD/JPY uptrend broke, but now we have clear evidence of a downtrend, so far it's short term, but that's just a function of how much time has passed. I don't think it is coincidental that they topped right in to the end of 2013 and have been trending down since.

The Yen, by price only, seemed fairly flat, but 3C is showing something else altogether and it is as has been suspected as we have watched at least a 30 min positive divergence in the Yen all year (2014) which pressures the carry crosses down, which sends the Index futures lower as we saw overnight as they were up until 5 a.m. and then fell to open and trade within yesterday's range as we suspected the lack of movement yesterday was about the January op-ex monthly pin.

I have a few assets I want to show, but the only one that really matters in my view is the Yen, everything else is flowing from that.

I already posted the HYG and PCLN charts, both are or would be at a gain (puts opened yesterday and HYG was suppose to open today, but didn't fill).

Other positions like another of our long term favorites, URRE has a position gain of +14%, PCLN puts from yesterday nearly +14% on the day, MCP (another long favorite) looks like it is doing what we expected when it hit a lot of stops this morning and the new trading position just opened is still in the green by +2.5% while the core position is up nearly +14%. The recently opened IWM puts (this week) are moving in to the green .

Here are the charts that I think are important other than the already posted HYG.

 MCP's recent smaller base within a much larger one "W", 2 is the breakout and a is a pullback, a1 is the base or reversal process for the pullback and HF is this morning apparent head fake move and I'll show you why beyond the volume RIGHT UNDER the trendline as stops were hit, yes, if you place an order (limit/stop) they can see it and they'll go after it if it's worthwhile; I keep all of my stops mental and always on a closing basis unless I have good reason to act sooner.


Here's this morning's break/stop-run/head fake move sending volume up as stops are predictably placed right under support. The "U" shape price action is what I'd like to see with positive divergences confirming the head fake, at this pace, I'll be ready to add to MCP or put it out as a new trading position (long).

This is the accumulation I want to see in to a head fake move, that's half the reason for a valid head fake move.

 And it is migrating to longer timeframes.

As for the IWM puts or just the market...

 Again we are getting large leading negative moves, this is a 1 min chart of today only.

This is a 2 min chart, so underlying trade is showing distribution on at least a short timeframe, but the size of the divegrence makes it more serious, but it doesn't stop there.

The 5 min chart is hitting a much more vertical new leading negative low

And the 10 min chart is nearly where it was when prices bottomed on Monday, except price is still flat and significantly higher considering, that means the damage is that much worse right now.
 It's little wonder we saw yields tighten up as treasuries gained today.

 SPY 2 min with significant damage done this afternoon intraday.

The 5 min, again another leading negative move at a new low with significant afternoon only damage in addition to other recent damage, today looked a lot worse.

SPY 15 min which never confirmed, just tried to move in line is done and back to moving lower.

 The same can be said for the 30 min chart.

These are just examples, but this is a market wide trend in averages, Index futures, VIX, but positive (and this is so close to a screaming divergence) as well as Industry groups like Tech and individual stocks (take PCLN).

This is what really matters, we identified the Yen as THE asset to watch weeks ago and have been right on as carry crosses make lower lows and lower highs, a downtrend and the Yen is the leading indicator for those pairs.

While the Yen 30 min chart looks flat, remember what I say about quiet markets, "They are like the kids in the room next door being a little too quiet, you know they are up to something". In this case, we don't have to guess, the 30 min chart which has led the Yen all year from the start of the year lows, is now ready to make a new leg higher as 3C is CLEARLY positively divegrence and in some size, much bigger than what led to Monday's market sell-off.

There are a lot of positions I was considering today, there's just a few things I want to see that are almost there, like VIX futures screaming, they are yelling now, but you know what they look like when they are going to move, I'd say we are more than halfway there over the last two days and from the halfway point, the other half is exponentially faster to build.

I like our positioning overall, it's just a matter of adding to or adding new positions.

As you know, I try to keep track of our core position performance vs the SPX, you can say the beta of our positions, this isn't like a trading portfolio, it's just about every core position that we have opened and remains open, meaning it is susceptible to underperformance due to over-diversification, but in a sign of good stock picking and excellent entries, the performance of the shorts (Core positions) is between 7 and 9 times the market's, so if the SPX is down 1% for the week, the core portfolio of dozens of stocks (over 20) is performing at a gain of +7-+9% on a -1% move in the SPX, that's Beta of 7-9 while the volatile PCLN's beta os about 1.5.

That's pretty exciting.

The market will be closed Monday in observance of Martin Luther King day, we'll be open Tuesday.

Lets see if 3C picks up where it left off over a 3-day weekend, if so...

It should be a very exciting week. Hopefully Wall St. doesn't take ANOTHER extended holiday.

Speaking of which, enjoy yours.

HYG / PCLN PUTS

Well every once in a while this happens, the HYG put didn't go through, but here are the charts that I really like.

 HYG 2 min

HYG 3 min

HYG 10 min so there's some major movement today

HYG 15 min which has been in some trouble, that's too bad, but maybe I'll get another shot.

Even if I have to close PCLN sooner than anticipated if it finally makes that +>$1200 run, it has still been worth it with today's gain already at +14%.

 PCLN 5 min seeing a dramatic 1-day shift in the institutional intraday timeframe, 5 mins

There's migration as well as you can see by this 10 min chart.

I suspect I'll probably have to close it for a counter trend bounce at some point if not the $1200 move, but again, these kinds of charts are just hard to ignore when you see them and so far a +14% 1-day gain isn't bad.

HYG Position Ended up w/ Mar. $93 Put

Some Charts

These are what I'd consider to be in the early stage or about 1/3 to half way to the kind of charts that I will often say, "I can't ignore this" and take a position. The thing in, once they get started (if they are the real deal), they move VERY fast so you don't have a lot of time to wait and see.

***I am going to open an HYG in the money (probably Feb.) put.

HYG just hasn't been effective in arbitrage, there's been distribution, it's at a high level and I don't think it's going to last long.

 IWM 2 min intraday was already slipping, added a lot today thus far.

IWM 5 min

IWM 15 min is right on the edge of falling to a deep leading negative

QQQ intraday

SPT intraday

SPY 5 min

VXX /UVXY- these are the kinds of signals I wait for before entering positions, it is just getting started as well.

5 min too so it's not just intraday fluff

And the long term is already in place with a large rounding bottom.

XLK Tech

XLK

TF 5 min

NQ 15

Most importantly the Yen 30 min looks ready to go.

Remember there's often price action after 2 pm on op-ex that doesn't end up meaning much, however the 3C signals almost always pick up where they left off the next trading day, even over a weekend.

I'll see if these get more extreme, but I'm going for a full size HYG put now.

Market Update

I've been watching the market change character for the worse as we approach the 2 p.m. hour which is usually when things change on an op-ex Friday as most of the contracts are closed.

I'm not impressed with leading indicators, but beyond that, there seems to be a lot of damage being some intraday in the averages moving toward 2 pm and the Yen looks stronger and stronger for its next leg up.

I hate to open a new position right as we get the pin/unpin moment in the market on op-ex, but some charts are just falling apart that fast.

I'll leave PCLN puts at the same size for now, but am considering adding to IWM puts, I have good exposure, but if I didn't I'd be thinking about longs in SQQQ, SRTY, SPXU , VXX or UVXY.

I'm going to try to pay attention a bit more and I may make some quick calls. The signals I look for in VXX are coming together and of course more importantly, the Yen is really looking like it's ready for a new leg higher which is bad news for the market.

Trade IDea: Filling Out DGAZ Long Trading Position

So far what I've expected to happen which is a multi-year concept, not anything specific to UNG, has occurred and I feel comfortable filling out the DGAZ trading position which is close to full size any way.

You might get a gap fill and a little better position, but because I'm not using options as the tool (using DGAZ long), a slight savings is not as important to me as filling out the position and moving on.

 The main idea on this chart (UNG daily) is that there's a small H&S top pattern which I think is part of a reversal/pullback in UNG, it shouldn't effect UNG longer term as it is a long term long position, but for trading purposes, this is one of our textbook concepts for trading H&S tops.

I've already used volume and 3C analysis to confirm the characteristics of a H&S top. From experience there are only 3 areas I'll short the price pattern, at the highs of the head, the highs of the right shoulder, (unlike what Technical Analysis teaches I WILL NOT short the break of the neckline which is considered by TA as H&S confirmation) and then after initial shorts are sucked in, time after time we see them knocked out of the trade as they place stops just above the neckline, as the market creates a "volatility shakeout" with a run back above the neck line (taking out the new shorts) and creates a sort of head fake move which we see in the yellow box.

Additionally from a daily candlestick perspective, we knew UNG's shakeout was in the area for a reversal as a move just above the right shoulder tends to get all of the stops, the Dark Cloud Cover (bearish reversal ) was formed yesterday and followed up today with a gap down. It is the gap in which you may find a slightly better entry in the inverse, DGAZ which may be filled.

 I suspected yesterday's EIA Natural Gas report would be the final event before we were ready to proceed and even though we had a record drawdown, I suspected that the head fake move itself was the discounting of what was bound to be a strong draw on the EIA report, thus it becomes a "Sell the news" event.

 This is the full H&S on a 30 min chart, 3C is negative through the top, but not horribly so, which fits with a UNG pullback rather than a severe distribution event, it's still tradable in my view.

The shakeout move to the far right saw slightly higher prices, yet a lower 3C reading which helps confirm its head fake character.

This is the actual shakeout move from below the neckline and accumulation to feed the move to the actual move and distribution going in to Wednesday and certainly on yesterday's report (you may recall I had decided to wait for the EIA event, not because of the uncertainty effect, but because I felt it would be a better timing marker so I can get the best timed entry.

DGAZ has a strong leading positive 10 min chart so all in all, it should make for a decent Swing-type move (long).

I'd say the probability of a gap fill in both UNG/DGAZ from today's gap is about 70%.

MCP Update

Earlier in the week I opened a Half size Trading position in MCP. I was hoping MCP would pullback a bit and allow me to fill out the rest of the position which has happened thus far. We have a small trading range that would normally be considered the reversal process of the pullback and just moments ago a move below that range that hit a large number of stops (possible head fake move). The 3C 1 min chart is where any new divergence will start and it appears that the range is a reversal process and that the move below this morning on heavy volume is a head fake process.

Right now, the next thing to do is confirm that the move below the range is a head fake move in the reversal process which would be an excellent add-to area as well as an call option purchase area, but since it just happened, we need a little time to confirm that the move under the range in being accumulated, if so, then the head fake acts as a excellent timing marker as we see head fake moves in 80% of reversals no matter the timeframe and they often occur right before a reversal (to the upside in this case) as they allow last minute accumulation in size, they wipe out the weak hands (longs) and the head fake process has a lot to do with creating snow ball momentum to start the reversal so MCP is high on the list today.

*MCP is not a barometer of the market as it moves on its own.

 The hourly chart gives a strong positive feel with a lot of accumulation in the large base area which is very low in the extended base.

The 15 min chart shows pullbacks and accumulation and pullbacks.

The 3 min chart shows the flat range that has been in effect for a day, this is roughly proportionate to the preceding trend and thus likely or rather the right size for a reversal process.

The move below support hit stops as a head fake move is meant to do, it allows accumulation of a large number of shares at once, but doesn't seem to cause any suspicion as few people think about who's on the other side of the trade, also the shares are acquired at a better price.

This is the 1 min chart showing the most recent action (underlying 3C) in MCP, it does appear this is a reversal process, we just need confirmation that the break below just minutes ago is a head fake move. In this case I would add to both the trading long and Calls out to February/March.

Following the Money

That's what we try to do here everyday any way, but I mean in a different way.

Index futures were up overnight, then if you follow the money, it's clear to see what happened. As an aside, the gut feeling of yesterday's action being pinned for January monthly option expiration seems to be pretty close to correct in all of the averages except the Dow as all are within yesterday's range.

 USD/JPY led Index averages higher overnight until 5 a.m., long before any US macro-economic data hit, you can see the clear negative divegrence. Remember this chart and compare to the ES chart overnight (below)...

The EUR/JPY (5 min chart) went nowhere, flat and volatile/choppy and then dropped with USD/JPY.

 AUD/JPY was even worse as it trended down all night and then fell, remember ES has been following the AUD/JPY correlation much of the week.

 ES 1 min overnight saw the same negative divegrence building IN TO the 5 a.m. hour, just like USD/JPY

As for the instigator or the most important leading asset in the carry crosses, the Yen.

 The Yen 5 min went positive again yesterday, this is only a slight flag pullback and then the move higher sending USD/JPY and Index futures lower this morning (5 a.m.)

 The Yen 15 min from a negative divegrence/pullback to a positive mid-week that kept building and then the tell-tale sign of a flat trading range with more accumulation, then up goes then Yen this morning (early)

The trend of price and underlying trade in the Yen looks very healthy, this is not good for the carry crosses, nor the Index futures, which may not be reflecting much early on as it's a monthly (and January) options expiration day which we commonly see a max-pain pin until about 2 p.m.

The 4 hour chart (I don't think coincidentally) shows a bottom right at the New Year as all window dressing is complete, the divergence here explains why the earlier timeframes remain so reliable in positive divergences even after pullbacks. This chart is like playing poker, but knowing the deck is stack and how it's stacked before the hand is even dealt.

 What's most important for many FX traders and scariest for carry traders is the 2014 trend, higher highs and higher lows, not a couple, but now an emerging trend.

ES 15 min, as I pointed out this week, there was no positive divergence at the "V": reversal which is inherently unstable to begin with, but the reason why is because there's no time for the reversal process to allow for accumulation. I stand by my theory that this is a dead cat move so middle men and liquidity providers such as HFTs (to a lesser degree) can recoup losses from inventory at higher levels before this week's plunge as the market looked bullish that morning with the NDX going green on the year just before the plunge.

ES 30 min shows the divergence in to that plunge which I pointed out Sunday night and the same type of divergence in to this dead cat bounce.

There are certain assets I need to see move before I'm willing to move on new positions, but I think that has been smart, this just looks like the volatility expected this week.

More to come...